Year: 2024

The future of digital corporate banking

Posted on by itsupport

The digitalisation wave has set in motion a fundamental and inevitable change throughout the globe, triggering disruptive growth throughout all aspects of business in the corporate world as it accelerates. Corporate banking and finance services have significantly benefited from this trend alongside the growth in the global demand for innovative solutions that more effectively address the evolving needs of businesses and corporations.

Digital corporate banking is revolutionising the way businesses manage their finances. Thanks to these brilliant digital solutions, businesses can benefit from a variety of tailored banking services and financial tools via innovative, centralised, and secure digital platforms that are easily accessible around the clock and from any place with internet access.

Such banking solutions pave the way for banking providers to build dynamic and highly customisable financing products that best fit different market sectors. ICSFS has been serving the financial and banking industry for many decades, observing and supporting its customers’ transformation journey.

From the early adoption of online and mobile banking to the modernisation of core banking systems, ICSFS has been at the forefront, enabling clients to evolve into true global digital banks through its innovative solutions such as ICS BANKS Global Transaction Banking (GTB). This is our powerful online service which allows corporate banking customers to access their accounts, initiate payment instructions and use other vital banking activities in a secure and agile way, anytime, anywhere.

This next-gen finance management platform is designed on a digital 360° architecture infrastructure to work harmoniously within the modern payments landscape. It also comes packed with intelligent features that encompass transaction capabilities that are not normally found in standard online banking systems.

These clever features cover the entirety of corporate finance tools like cash management, remittances and transactions, standing orders, time deposits, trade finance, reports and analytics, liquidity management, merchant management, corporate setup, and liquidity management services to streamline working capital and maximise ROI.

The appeal of digital corporate banking
The corporate world is no stranger to the monumental benefits of digital transformation. Companies and businesses from across the globe have always been at the forefront of the digitalisation movement. So it is only natural for new banking technologies that are capable of addressing the specific requirements of corporate financing and finance management to garner a great deal of interest from a wide range of corporate customers regardless of their type, size or sector. Large and multinational corporations can benefit greatly from the automated and streamlined processes, detailed reporting and financial planning tools that are offered by these platforms.

With digital banking, businesses have 24/7 access to their accounts and financial services

On the other hand, start-ups and SMEs benefit from digital corporate banking too. These smaller businesses stand to gain value from unrestricted access to the advanced tools and different facilities offered by corporate cash management platforms, including enhanced account management, credit facilities, payments and more.

In addition, tech-savvy managers, financiers and CFOs are especially drawn to the sophisticated capabilities of digital corporate banking, making this an attractive solution for any business looking to improve financial management and operational efficiency through digital means.

What are the advantages of digital corporate banking?
There are countless ways digital corporate banking can transform how businesses manage their finances. Companies that switch to digital corporate banking platforms like ICS BANKS Global Transaction Banking will experience a significant boost in operational efficiency.

With these technologies, routine tasks like payment processing, payroll, account reconciliation and cash management are automated, freeing up valuable time which can be better utilised for strategic growth and innovation. Additionally, with advanced analytics and reporting tools, companies gain real-time insights into their financial health, helping them make smarter, data-driven decisions.

Enhanced customer experience is another significant advantage. With digital banking, businesses have 24/7 access to their accounts and financial services, making it easier to manage finances on their own schedules. This is particularly beneficial for global operations that need to navigate different time zones.

ICS BANKS GTB also offers a high degree of flexibility and parametrisation, enabling businesses to tailor services to meet their unique needs. Features like personalised dashboards, customisable alerts, and integrated financial tools enhance user satisfaction and engagement, whilst opening up new opportunities and revenue streams for the banking provider.

What are the drawbacks of digital corporate banking and how is this being addressed?
Despite the many benefits of digital corporate banking, there are still certain challenges that may arise. Perhaps the biggest drawback is the security risks. For example, if the user neglects to follow cybersecurity protocols and recommended practices, it may expose the company to serious damage including financial loss, cyber-attacks, identity theft, data breaches, and fraud.

AI and ML can enhance various aspects of corporate banking, such as fraud detection, risk management, and customer service

Addressing this issue correctly requires a collective effort by everyone involved to mitigate possible risks. ICSFS places great importance on security: all ICS BANKS systems, modules, and components go through rigorous and thorough scrutiny regularly, with ongoing releases of security updates and patches, and scheduled security audits with all of our clients.

Technical issues and system downtimes are also drawbacks that come with any digital solution, as technology is inherently not immune to outages, glitches, and maintenance periods. Such unavoidable disruptions can come at a time of inconvenience to the user. To mitigate this, ICSFS works on implementing emergency plans and using different system deployment methods to minimise these disruptions and ensure high availability and uninterrupted access, on top of continuously refining ICS BANKS solutions and improving their resilience and reliability.

Is digital corporate banking safer?
Modern technology is certainly capable of offering enhanced security measures that far exceed traditional paper-based methods in any process – and even more so in banking technology in light of continually emerging technologies such as blockchain, RPA’s, Big Data, and AI.

However, technology being inherently more secure doesn’t necessarily mean it is always ‘safer.’ Several key factors must be considered before deeming a system to be safe. These include encryption and authentication procedures, fraud detection and prevention measures, compliance with data privacy regulations such as GDPR and CCPA, cybersecurity and attack prevention, and last but not least, human error.

The takeaway here is that while digital banking technologies do offer a much higher level of security, it is ultimately up to the users to follow best practices and remain vigilant to ensure the safety of their transactions and financial activities. As a global banking technology provider, ICSFS allocates a substantial portion of its resources and manpower to the continuous fortification of its security infrastructure and procedures.

The latest of these endeavours is the acquisition of the Information Security Management System (ISMS) ISO/IEC 27001 Certification for the Data Centre, IT Department, and ICS BANKS Banking & Digital Software Solution Services. Furthermore, ICSFS conducts regular and rigorous security audits of all its systems, as well as closely monitoring all client systems and performing regular updates to their different security and data protection protocols.

What is the future of digital corporate banking?
The future of digital corporate banking is set to be shaped by rapid technological advancements and evolving business needs. One significant trend is the increasing integration of Robotics, artificial intelligence (AI), and machine learning (ML) into banking platforms.

AI and ML can enhance various aspects of corporate banking, such as fraud detection, risk management, and customer service. For instance, predictive analytics powered by AI can help businesses forecast cash flows and manage liquidity more effectively. Chatbots and virtual assistants, driven by AI, will offer more personalised and efficient customer interactions, addressing queries and providing support in real time.

Blockchain technology is also poised to play a transformative role in digital corporate banking. By providing a secure, transparent, and immutable ledger, blockchain can streamline processes such as cross-border payments, trade finance and compliance.

Smart contracts, which execute automatically when predefined conditions are met, can reduce the need for intermediaries and enhance the efficiency of complex transactions. As more banks adopt blockchain, the industry can expect faster, more secure, and cost-effective services, benefiting businesses globally.

ICSFS had the foresight to adopt blockchain technology a few years ago, setting a regional precedent on the commercial use of blockchain technology and demonstrating its benefits in cross-border transfers. The rise of open banking is another crucial development. Open banking allows third-party developers to build applications and services around the financial institution, using APIs to access banking data.

Blockchain can streamline processes such as cross-border payments, trade finance and compliance

This fosters greater innovation and competition, leading to a wider range of financial products and services tailored to specific business needs. Companies can benefit from improved financial management tools, better lending options, and enhanced integration with other business applications.

One of the brightest features of ICS BANKS Banking Solution is that it is built entirely on an open banking backend, offering a rich and diversified catalogue of APIs which allows ICS BANKS solution to communicate clearly and easily with virtually any system. As regulations around open banking continue to evolve, ICS BANKS is fully capable of adapting to any changes quickly and seamlessly, driving further advancements in the sector.

Overall, the future of digital corporate banking will be characterised by greater automation, enhanced security, and increased collaboration. These advancements will not only improve operational efficiency and customer experience but also create new opportunities for businesses to optimise their financial strategies and drive growth.

Maritime trade is sailing to a tipping point

Posted on by itsupport

They are known as ‘choke points,’ the canals and rivers through which the world’s trade is transported by ships of all kinds and sizes. And suddenly they are under threat. In fact, two kinds of threat. Missiles fired from Yemen have dramatically cut traffic in and out of the Suez Canal via the narrow Strait of Bab-el-Mandeb in the Red Sea, a historic choke point between the Indian Ocean and the Mediterranean Sea. It may be years before maritime companies feel safe sending their ships through this route.

Simultaneously, long-running tensions between Iran and neighbouring states continue to jeopardise passage through the Strait of Hormuz, the only sea passage from the Persian Gulf to the open ocean. The importance of these straits can be gauged by the fact that more than half of the world’s total shipped crude production passes through Hormuz, Bab-el-Mandeb and the Suez Canal. That’s quite apart from a huge variety of other cargos. While relief to these sea passages can only come through peace, the Panama Canal and other great waterways face a threat that cannot come through politics.

It is the existential risk of record-breaking droughts that affect the Rhine, Mississippi, Mekong and other waterborne trade routes. The prevailing situation proves the vulnerability to terrorism and climate of the supply chains that have evolved over many years, in some cases over centuries.

A thousand ships
To take the Panama Canal first. In more normal times about 1,000 ships go through its locks each month, carrying some 40 million tonnes of goods. As the International Monetary Fund explains; “The Panama Canal can reduce the sailing distance from the Atlantic to Pacific and vice versa by a vast 8,000 nautical miles. Its efficiency and time-saving nature make it a crucial resource for the shipping industry, with an estimated six percent of global trade passing through it.”

Climate change is now threatening the shipping lanes that underpin global commerce

But when slots are in short supply, ships that cannot book one (or cannot afford to do so) must find a different route. In times of peace this would be the Suez Canal, which typically transits 12 percent of global trade, worth around $1trn a year. But with no other option available the shipping giants have been sending their vessels around Africa’s Cape of Good Hope, which extends the voyage by up to two, often extremely rough, weeks of sailing. This raises fuel and operating costs, causes delays and increases the price of the landed goods. According to consultant LSEG Shipping Research, the transit times from diverting a tanker from Asia to northwest Europe via the Cape of Good Hope have doubled to 32 days and added nearly $1m for each voyage. The extra costs for a container ship are less but still significant.

Happily, there has been some relief in the Panama Canal. The restrictions on passage have been progressively eased – but not lifted – as the El Nino-triggered drought throughout Central America goes on its way. In mid-April the hard-pressed Panama Canal Authority approved the passage of up to 32 ships a day including those with deeper draughts of nearly 14 metres. At the height of the drought in early 2024, approvals had been roughly halved. Some vessels could scarcely clear the bottom of the canal. The resulting disruption to supply chains was profound.

Due to restrictions, tonnage passing through collapsed by a third, according to maritime consultancy Clarksons Research. And although the drought is lifting, if the rainy season is late then restrictions could return.

Golden waterway
In the meantime, major natural waterways are at risk and the economic implications are profound. Dubbed China’s ‘golden waterway,’ Asia’s longest river, the Yangtze, which ferries some three billion tonnes of a hugely diverse range of products in a good year to about 100 countries, suffered a nearly cataclysmic drought in late 2022 that made the shipping world wonder about the river’s future navigability. And it still does.

Water levels at one of the giant ports on the 3,915-mile-long river fell to the lowest level since records began in 1865 as simultaneously depths at the river’s many tributaries followed suit. Although officials preferred not to tell the worst, the truth is that the Yangtze was reduced to half its normal width. If another drought hits the region, nobody knows how low the Yangtze could go.

Other logistically important and historic waterways like the Rhine, Mississippi and Mekong are also under threat. The Mississippi, which also experienced drought-induced bottlenecks in 2022, ranks second globally in inland waterways in terms of freight carried, with 600 million tonnes a year, while third-ranked Rhine carries 300 million tonnes.

The Mekong, the longest river in Southeast Asia along which some 60 million people live and work, has suffered increasingly severe droughts for two decades. Although it is floods that make the headlines as houses, cars, cattle and people are swept along a muddy torrent, it is droughts that create the most damage. “Unlike flood, drought only brings socio-economic hardship to riparian countries, especially riverine communities,” notes the multinational Mekong River Committee, pointing to ruined crops, fresh water shortages and disappearing fish.

Considerable uncertainty also hangs over the war-torn straits. If peace is restored, which looked unlikely in mid-April, their militarily strategic position in an increasingly volatile region makes the case for alternative supply chains even more urgent. Supply chains have many elements and, as Oxford-based PortWatch explains, delays in these choke points lead to further disruption all along the route, including ports that depend on the smooth functioning of the canal. Most of the research points in one direction. In early 2024, a report by the Atlantic Council, a respected US think tank, feared that “climate change is now threatening the shipping lanes that underpin global commerce.”

Citing a massive imbalance in the way that weather works, the report said; “The disruption to the way water moves between the Earth and the atmosphere – the patterns of rain, evaporation, condensation, and runoff that affect how much water flows through the world’s waterways – appears to be here to stay. Global supply chains depend on these waterways. With climate change expected to make extreme weather more frequent, a big rethink of how goods move around the globe is necessary.”

Beached business
Others express similar concerns about future disruption to the world’s complex highways to the sea. “Pressure on global shipping routes is creating stress in global supply chains again, soon after the acute disruption experienced in the pandemic,” insurer Swiss Re noted in a much-quoted February 2024 report. Entitled Navigating shipping disruptions: signs of rougher seas ahead, the author more or less echoed the Atlantic Council: “More frequent droughts are likely to jeopardise transit volumes in the Panama Canal, and climate change is already affecting river shipping, as seen in the Rhine and Mississippi. We view these as headwinds to the long-term resilience of global shipping trade.”

A big rethink of how goods move around the globe is necessary

But what can be done? Some have suggested shallower-bottomed vessels, others deep dredging. While the first is practicable but would send half the world’s river-going fleet to the scrap yard, the second is routine on most of the great waterways but on nothing like the required scale. Then there are ‘road bridges,’ basically overland transport by trucks and trains that would supplement or even replace waterways when they become impassable.

The boldest alternative by far would be another canal connecting the Pacific and Atlantic Oceans through Nicaragua. A Chinese company established by a certain Wang Jing, supposedly having ties to the Beijing government, has claimed a 100-year concession and a 173-mile route has been drawn up for a waterway that would take far bigger vessels than the Panama Canal, in fact ships like giant bulk carriers with depths of 26 metres. But the project would cost $40bn and would pass through pristine Lake Nicaragua, rainforest and wetlands, not to mention a geophysically unstable region.

As the Smithsonian magazine reported in 2014 when digging was supposed to begin, “the canal route lies in the middle of a hurricane belt.” Other more definite initiatives should help plug emerging gaps in the global supply chain. Abu Dhabi has signed a preliminary deal with Iraq to jointly develop a strategically located new port on the northern tip of the Persian Gulf near Basra. Named Al-Faw Grand Port, it is expected to open by the end of 2025 and link ‘east and west,’ according to its supporters. It will be big enough to take containers, dry bulk and tankers.

As war disrupts sea routes in the region, new supply chains are emerging. In early 2024 Turkey and Iraq unveiled a 1,200-km, $17bn road and rail link project – a land bridge, in short – that will connect Iraq’s main port to the Turkish border and then into Europe.
Ominously for Egypt, it will avoid the Suez Canal entirely.

The global race for AI regulation

Posted on by itsupport

EU negotiations are known for dragging on too long, with deals often struck after midnight, products of exhaustion and relentless horse-trading. The one the European Council and the EU Parliament struck the night between December 8 and 9, 2023, was no different. Its final product, the EU AI Act, is the first major piece of legislation governing artificial intelligence (AI), including ‘generative AI’ chatbots that have become the Internet’s new sensation since the launch of ChatGPT in late 2022.

Just two days later, Mistral AI, a French start-up, released Mixtral 8x7B, a new large language model (LLM), as the computational models behind generative AI are known. Although smaller than proprietary equivalents, it is in many ways superior due to its idiosyncratic setup that combines eight expert models. More ominously, its open source code is exempt from the Act’s stricter rules, posing new problems to regulators.

Mixtral’s disruptive potential is emblematic of the difficulties facing regulators who are trying to put the AI genie back in the bottle of the law. For its part, the tech industry thinks it knows the answer: self-regulation. Former Google CEO Eric Schmidt has argued that governments should leave AI regulation to tech firms, given their tendency to prematurely impose restrictive rules. For most policymakers, however, the question remains: how do you regulate something that changes so fast?

Laying down the EU law
Coming into force in May 2025, the AI Act represents the first attempt to answer that question. By covering nearly all AI applications, it aims to establish a European, and possibly global, regulatory framework, given the bloc’s reputation as a regulatory superpower. “Large, multi-jurisdictional businesses may find it more efficient to comply with EU standards across their global operations on the assumption that they will probably substantially meet other countries’ standards as well,” said Helen Armstrong, a partner at the law firm RPC. It is also the first stab at dealing with foundation models, or General Purpose AI models (GPAI), the software programmes that power AI systems. The act imposes horizontal obligations on all models, notably that AI-generated content should be detectable as such, with potential penalties up to seven percent of the miscreant’s global turnover.

How do you regulate something that changes so fast?

The Act follows a tiered approach that assigns varying levels of risk and corresponding obligations to different activities and AI models. GPAIs are classified into two categories, those with and without systemic risk, with the latter facing stricter rules such as being subject to mandatory evaluations, incident reporting and advanced cybersecurity measures including ‘red teaming,’ a simulated hacking attack. What constitutes ‘systemic risk’ is defined according to multiple criteria, two of which are the most crucial: whether the amount of computing used for model training is greater than 10^25 ‘floating point operations,’ an industry metric, and whether the model has over 10,000 EU-based business users. So far, only ChatGPT-4 and possibly Google’s Gemini meet these criteria.

Not everyone finds these criteria effective. “There could be high-capacity models that are relatively benign, and conversely, lower-capacity models that are used in high-risk contexts,” said Nigel Cannings, founder of the Gen AI transcription firm Intelligent Voice, adding that the computing criterion might encourage developers to find workarounds that technically comply with the threshold without reducing risks. Current AI research focuses on doing more with less by reducing the amount of data required to produce acceptable results. “These efforts are likely to break the compute barrier in the medium-term, thus making this regulation void,” said Patrick Bangert, a data and AI expert at Searce, a technology consulting firm, adding: “Classifying models by the amount of compute they require is only a short-term solution.”

The Act’s final draft is the product of fierce negotiations. France, Germany and Italy initially opposed any binding legislation for foundation models, worrying that restrictions would hamper their start-ups. As a counterproposal, the Commission suggested horizontal rules for all models and codes of practices for the most powerful ones; the selected criteria were a middle-of-the-road compromise. “There was a feeling that a lower threshold could hinder foundation model development by European companies, which were training smaller models at that moment,” said Philipp Hacker, an expert on AI regulation teaching at the European New School of Digital Studies, adding: “This is entirely wrong, as the rules only codify a bare minimum of industry practices – even falling short of them by some measures. But there was a huge amount of lobbying behind the choice of the threshold and hence we have an imperfect result.”

Others find the Act’s purview too sweeping. “It’s far more effective to regulate use cases instead of the general technologies that underpin them,” said Kjell Carlsson, an AI expert at Domino Data Lab, an AI-powered data science platform. Many European start-ups and SMEs have said that restrictions could put them at a disadvantage compared to their competitors. Compliance is easier for foundation model providers that invest vast sums in training data, amounting to just one percent of their development costs according to a study by the Future Society, a think tank studying AI governance.

For sceptics, the solution chosen is another brick in the EU’s regulatory wall, stifling innovation in an area where Europe badly needs success stories. The bloc has produced few AI unicorns compared to the US and China, while lagging behind in research. Nicolai Tangen, head of Norway’s $1.6trn sovereign wealth fund, which uses AI in its investment decision-making processes, has publicly expressed his frustration with the EU’s approach: “I am not saying it is good, but in America you have a lot of AI and no regulation, in Europe you have no AI and a lot of regulation.” Hurdles European firms face include a fragmented market, stricter data protection regulations, and challenges in retaining talent, as AI professionals are drawn to higher salaries and funding opportunities elsewhere.

The Act may make things worse according to Hacker, because of its undeserved “bad reputation”: “It is not particularly stringent, but there has been a lot of negative coverage and many investors, particularly from the international venture capital (VC) scene, treat the Act as an additional risk. This will make it harder for European unicorns to attract capital,” he said. Not everyone agrees with this assessment. “For VCs, it is only a new criteria to add to their assessment scorecard: is the company developing a model or product that is and will remain EU compliant, given the Act’s guidelines?” said Dan Shellard, Partner at Breega, a Paris-based venture capital firm, adding that regulation could create opportunities in the regtech space. Some even think it will foster innovation. “Forcing companies to work on problems where they have to be more transparent and responsible will likely unleash a different wave of innovation in the field,” said Chris Pedder, Chief Data Scientist at AI-powered edtech firm Obrizum.

Julian van Dieken’s work made using artificial intelligence is part of the special installation of fans’ recreations of Johannes Vermeer’s painting Girl with a Pearl Earring

Another problem is that technology is evolving faster than regulation. The release of open-source models like Mixtral 8x7B is expected to enhance transparency and accessibility, but also comes along with significant safety risks, given that the Act largely exempts them from regulation unless they constitute systemic risk. “There is a wider range of compute capabilities available to the open source models – a big chunk of users will be playing with local compute capability rather than expensive cloud-based compute resources,” said Iain Swaine from BioCatch, a digital fraud detection company. “Malware, phishing sites or even deepfakes can be more easily created in an environment that is no longer centrally controlled.”

Divided America
On the other side of the Atlantic, the US remains a laggard in regulation despite its dominance in commercial AI. Its regulatory landscape remains fragmented, with multiple federal agencies overseeing various aspects of AI. An executive order has tasked government agencies to evaluate AI uses and forces developers of AI systems to ensure that these are ‘safe, secure and trustworthy’ and share details about safety tests with the US government. Without the backing of the Republican-controlled Congress, however, it may be doomed to remain toothless, while Donald Trump has vowed to overturn it. Congress has launched its own bipartisan task force on AI, but this has produced little so far. Partisan splits make any agreement before elections in November unlikely. US regulation is expected to be less strict than its European counterpart, given that US governments traditionally prioritise innovation and economic growth.

In America you have a lot of AI and no regulation, in Europe you have no AI and a lot of regulation

“AI will be an area in which both Congress and the executive branch take a very incremental approach to regulating AI – including by first applying existing regulatory frameworks to AI rather than developing entirely new frameworks,” said David Plotinsky, partner at the law firm Morgan, Lewis & Bockius, adding that states may fill the vacuum. The risk, he added, is a “patchwork of regulations that may overlap in some areas and also conflict in others.”

The debate is informed by apocalyptic forecasts that the advent of an omnipotent form of AI may pose an existential threat to humanity. Some, including Elon Musk, have even called for a halt on AI development. However, more prosaic issues seem more urgent. A major concern is the rise of monopolies, particularly in generative AI, although the emergence of several competitors to ChatGPT has allayed concerns that a monopoly of OpenAI, the company behind ChatGPT, is inevitable. “Given the industry’s high barriers to entry, such as the need for substantial data and computational power, there is a real risk that only a few large incumbents, such as top big tech, could dominate,” said Mark Minevich, author of Our Planet Powered By AI.

Policymakers are also mindful of the impact of legislation on US competitiveness, as AI is increasingly seen as an area of confrontation in the troubled relationship with China. US President Joe Biden has directed government agencies to scrutinise AI products for security risks, while another executive order directed the Treasury to restrict outbound AI investment in countries of concern. “The US will wind up needing to adopt some sort of risk-based approach to foundation models,” estimated Plotinsky, who has served as acting chief of the US Department of Justice’s Foreign Investment Review Section, adding: “Any risk-based approach would also need to take into consideration whether the foundation model was being developed in the US or another trusted nation, as well as what controls and other safeguards might be necessary to prevent potentially powerful technology from being transferred to countries of concern.”

The Chinese puzzle
China’s ambitions justify such concerns. Its government aims to make the country an AI leader by 2030 through massive government funding. China is already the largest producer of AI research. Its Global AI Governance Initiative, a set of generic proposals for AI rules beyond China’s borders that include the establishment of a new international organisation overseeing AI governance, is indicative of its aim to influence global regulation. The initiative also includes a call to “oppose drawing ideological lines or forming exclusive groups to obstruct other countries from developing AI,” perceived as a reference to US legislation aimed at curbing US investment in China’s AI industry. “In international forums, China wants a seat at the table and to have a say in shaping global development of AI regulation,” says Wendy Chang, an expert on Chinese technology from the think tank Mercator Institute for China Studies. “But domestically, there is the additional task of maintaining Beijing’s tightly run censorship regime, which comes through sometimes quite explicitly such as requiring generative text content to ‘reflect socialist core values’.”

The EU has fired the first shot in the race for global AI standards

These values may hamstring China’s bid to become a global leader in AI, although the government wants Chinese firms to develop Gen AI tools to compete internationally; both Chinese tech giants Baidu and Alibaba launched their AI-powered chatbots last year. The initial draft of the country’s rules for generative AI required developers to ensure the ‘truth, accuracy, objectivity, and diversity’ of training data, a high threshold for models trained on content gathered online. Although recent updates of the regulation are less strict, meaning that Chinese firms are no longer forced to ensure the truthfulness of training data but to ‘elevate the quality’ and ‘strengthen truthfulness,’ barriers remain substantial. One working group has even proposed a percentage of answers that models could reject.

Given the tendency of chatbots to come up with disinformation, such rules may force Chinese firms to use limited firewalled data to train their models. Currently, Chinese firms and citizens are not permitted to access ChatGPT. In one case, the founder of the AI company iFlytek had to issue a public apology when one of the firm’s AI tools produced text criticising Mao Zedong. “Beijing’s need to enforce information control domestically is a big Achilles heel for its AI development community,” said Chang. “Compliance would pose large hurdles for tech companies, especially smaller ones, and may discourage many from entering the field altogether. We already see tech companies veer towards more business-oriented solutions rather than working on public-facing products, and that is what the government wants.”

The Chinese government has rolled out detailed AI regulations, with a comprehensive national law expected to be issued later this year. Its regulatory approach focuses on algorithms, as shown by its 2021 regulation on recommendation algorithms, driven by concerns over their role in disseminating information, a perceived threat to political stability and China’s concept of ‘cyber sovereignty.’ Crucially, the regulation created a registry of algorithms that have ‘public opinion properties,’ forcing developers to report how algorithms are trained and used. Its remit has recently expanded to cover AI models and their training data, with the first LLMs that passed these reviews released last August. China’s deep synthesis regulation, finalised just five days before the release of ChatGPT, requires that synthetically generated content is labelled as such, while its cyberspace regulator recently announced similar rules for AI-generated deepfakes.

Who owns this picture?
Another emerging battlefield is the ownership of the intellectual property for the data that power foundation models. The advent of generative AI has shocked creative professionals, leading to legal action and even strikes against its use in industries hitherto immune to technological disruption, like Hollywood. Many artists have sued generative AI platforms on the grounds that their work is used to generate unlicensed derivative works. Getty Images, a stock image supplier, has sued the creators of Stable Diffusion, an image generation platform, for violating its copyright and trademark rights.

 

AI poses new challenges for financial regulators

Finance is one of the sectors where the use of AI poses grave risks, with areas like risk modelling, claims management, anti-money laundering and fraud detection increasingly relying on AI systems. A 2022 Bank of England and FCA survey found that 79 percent of UK financial services firms were using machine learning applications, with 14 percent of those being critical to their business. A primary concern is the ‘black-box’ problem, namely the lack of transparency and accountability in how algorithms make decisions. Regulators have noted that AI may amplify systemic risks such as flash crashes, market manipulation through AI-generated deepfakes, and convergent models leading to digital collusion. The industry has pledged to aim for more ‘explainability’ in how AI is being used for decision-making, but this remains elusive, while regulators themselves may fall victim to automation bias when relying excessively on AI systems. “Transparency sounds good on paper, but there are often good reasons that certain parts of certain processes are kept close to a financial institution’s chest,” said Scott Dawson from the payments solutions provider DECTA, citing fraud prevention as an example where more transparency about how AI systems are used by financial services firms could be counterproductive: “Telling the world what they are looking for would only make them less effective, leading to fraudsters changing their tactics.”

Another concern is algorithmic bias. The use of AI in credit risk management can make it more difficult for people from marginalised communities to secure a loan or negatively affect its size and conditions. In the EU, the proposed Financial Data Access regulation, which will allow financial institutions to share customer data with third parties, may exacerbate the challenges facing vulnerable borrowers. The EU AI Act tackles the problem by classifying banks’ AI-based creditworthiness operations and pricing and risk assessments in life and health insurance as high-risk activities, meaning that banks and insurers will have to comply with heightened requirements. “New ethical challenges are triggering unintended biases, forcing the industry to reflect on the ethics of new models and think about evolving towards a new, common code of conduct for all financial institutions,” said Sara de la Torre, head of banking and financial services at Dun & Bradstreet, a US data analytics firm.

 

In response, the platform’s owners announced that artists could opt out of the programme, tasking them with the protection of their intellectual property. Such legal action has sparked a debate on whether AI-generated content belongs to AI platforms, downstream providers, content creators or individual users. Suggested solutions include compensating content creators, establishing shared revenue schemes or using open-source data. “In the short term, I expect organisations placing greater reliance on contractual provisions, such as a broad intellectual property indemnity against any third party claims for infringement,” said Ellen Keenan-O’Malley, a solicitor at the law firm EIP. So far only the EU has taken a clear position; the AI Act requires all model providers to put ‘adequate measures’ in place to protect copyright, including publishing detailed summaries of training data and copyright policies. “An outright ban on using copyrighted images for AI training would ban AIs that mass-produce custom art,” said Curtis Wilson, a data expert at the tech firm Synopsys. “But it would also ban image classification AI that is used to detect cancerous tumours.”

A shattered world
As the next frontier in the race for tech supremacy, the deployment of AI has geopolitical repercussions, with Europe and China vying for a chunk of America’s success in the field. Hopes for a global regulatory framework are perceived as overly optimistic across the tech industry, given the rapid development of AI models and the different approaches across major economies, meaning that only bilateral agreements are feasible. A recent Biden-Xi summit produced an agreement to start discussions, without any details about specific actions. The EU and the US have agreed to increase co-operation in developing AI-based technology, with an emphasis on safety and governance, following a similar pact between the US and UK to minimise divergence in regulation. The first global summit on artificial intelligence, held in the UK’s Bletchley Park last November, issued the Bletchley Declaration, a call for international co-operation to deal with the risks of deploying AI. So far, this has not translated into action.

For the time being, the prospect of common regulation for AI seems to be distant, as policymakers and tech firms face the same headwinds that are leading the global economy to fragmentation in an era of rapid deglobalisation. The EU has fired the first shot in the race for global AI standards, opting for horizontal, and for some overly strict, rules for AI systems; the US, hampered by pre-election polarisation and the success of its AI firms, has adopted a ‘wait-and-see’ approach that practically gives the tech industry a free hand; China, true to form, sticks to censorship domestically while trying to influence the emerging global regulatory framework. “The challenge going forward is not allowing China to dictate what standards are or promote policies regulating AI that favours them over everyone else,” said Morgan Wright, Chief Security Advisor at SentinelOne, an AI-powered cybersecurity platform.

A bigger challenge, however, remains catching up with the technology itself. If the advent of loquacious chatbots in 2022 caught the world by surprise, the next waves of AI-powered innovation have left even experts speechless with their disruptive potential. “The field is moving so fast, I am not sure that even venture capital firms not deeply immersed in the field for the last decade fully understand AI and its implications,” said Alexandre Lazarow, founder of the venture capital firm Fluent Ventures.

For regulators, things may be even worse, according to Plotinsky from Morgan, Lewis & Bockius: “The technology has evolved too rapidly for lawmakers and their staffs to fully understand both the underlying technology and the policy issues.”

The private equity storm

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On April 22, Nathanaël Benjamin was in an ominous mood regarding the state of the private equity (PE) market. In a speech delivered at a Bloomberg event, the Bank of England (BoE) Executive Director for Financial Stability Strategy and Risk was blunt when bringing attention to the industry that has grown in size, complexity and interconnectedness. From the speech titled ‘Not-so-private questions,’ it was crystal clear that regulators are reaching convergence: the PE industry has ballooned to levels that could pose threats to the global financial systems, yet it continues to operate in opacity.

“Shining a light on the current dynamics in the private equity market is crucial at this juncture, given the important role the sector plays for the real economy,” said Benjamin. He added that making sure the financial system evolves in a way that is conducive to safe and sustainable financing practices is essential for durable economic stability.

For Benjamin, a member of BoE Financial Policy Committee, current realities facing the PE market have converged to present the ideal moment to focus the spotlight on the industry. Notably, recent developments have the potential to disrupt the supply of funding to real economy companies. Besides, they have the potential to cause systemic institutions, including banks, to experience significant and correlated losses due to exposures linked to private equity.

“These dynamics, as well as exogenous shocks, could all be amplified by vulnerabilities in this sector, such as opacity and interconnectedness across institutions and markets. So this is typical financial stability ground. That’s why we care,” he stated.

Clearly, these are not the days when regulators turn a blind eye on the PE market. Having achieved exponential growth over the past two decades, the industry is floundering. Up until two years ago, the PE market had managed to thrive riding on a model built on cheap financing and leverage. However, the confluence of higher borrowing costs, market volatility and economic uncertainty has brought about considerable challenges for the PE ecosystem. These challenges have regulators ringing alarm bells.

“Clearly debt markets have impacted returns,” says Mike Donaldson, CEO at South Africa-based RMB Corvest, a pioneer in private equity that is 100 percent focused on equity investing, with PE being its primary asset class. He adds that while PE has encountered headwinds in recent times, what is indisputable is that PE has matured into a multi-trillion-dollar industry that is absolutely critical in driving growth of businesses and job creation.

The PE growth trajectory
That PE has achieved phenomenal growth is evident. Data indicates that globally, assets under management in the private equity sector have increased significantly over the past decade from $2trn in 2013 to $8trn in 2023. The industry, however, remains relatively small compared to the public equity market, whose size stands at $100trn and banking sector balance sheets at $98trn.

The vibrancy of capital markets is facing real threats from Private Equity firms

In the US, PE firms generate vast economic output. They create 12 million jobs and contribute 6.5 percent of the gross domestic product, amounting to $1.4trn. In the UK, the sector plays a crucial role in funding businesses, with around $313bn actively invested in companies. British Private Equity and Venture Capital Association data show that last year, UK businesses backed by PE and venture capital (VC) employed 2.2 million workers (1.9 million are PE-backed only), collectively earning $94bn. More notably, suppliers to these businesses employ an additional 1.3 million workers. Overall, this is comparable to the entire education sector’s workforce.

The situation is similar across other regions including Asia-Pacific, Latin America and Africa. In Asia-Pacific, for instance, PE investments have been on a growth trajectory, hitting a five-year high of $244bn in 2021 according to KPMG. In recent months, however, investments have plunged to $84.7bn. In Africa, the PE industry has emerged as a lifeline providing alternative routes to growth for companies that may otherwise have struggled to achieve the requisite scale. PE and VC investments in Africa soared 66 percent in 2022 to $7.7bn according to S&P Global Market Intelligence data, the highest aggregate value for the region.
“The flow of PE investments has been healthy in Africa and continues to facilitate growth for many businesses for which bank credit was not easily accessible,” notes Paras Shah, Managing Partner at Bowmans Kenyan office. He adds that the majority of the deals in the continent are relatively small, ranging between $15m and $25m. This, however, reflects the small nature of the market.

Visibly, PEs have unleashed their pooled financial war chest to snap up valuable companies in pursuit of handsome returns within the shortest period possible. Companies in industries like software, communications, IT and media, semiconductors, health and pharmaceuticals, renewable energy and agriculture have attracted massive investments across the globe. It has been a similar case for sectors like financial services, transport, fast moving consumer goods and tourism and hospitality.

The growth of the PE industry and its expanding tentacles of influence is also bringing about another phenomenon – migration of highly qualified professionals from industries like banks and insurance to PE ventures. Banks, in particular, are feeling the weight of the exodus with erstwhile employees now becoming direct competitors or clients. More alarming, however, is that banks are witnessing an increase in default rates of leveraged loans. Though unclear how deep the malady runs, for banks that are overly exposed the risks have the potential to blink red.

Into the unknown
After years of sustained growth, the PE market has over the past two years been sailing in uncharted waters. The rosy growth that had been witnessed in prior years started to crash in 2022, and continued last year. The root cause of the crumble: the Fed’s rapid increases of interest rates, the sharpest since the 1980s. The Fed’s aggressive approach to arrest stubborn inflationary pressures has had contagion effects, instigating hikes across the globe.

“The strong growth and attractive returns of the private equity asset class over the last 10 years has occurred during a period of low interest rates. However, since the start of 2022 interest rates have increased substantially,” observed Benjamin. He added that markets are not expecting for the foreseeable future a return to the low levels seen in the recent past.

High borrowing costs have inevitably exposed the PE industry’s soft underbelly. Apart from sapping the confidence of investors, it has brought about excruciating challenges. Evidently, it has been a season of slump across all matrices for PE cutting across fundraising, dealmaking and exits. The ripple effects are being felt across the whole ecosystem. Desperate companies – a majority being small and medium-sized companies (SMEs) – in need of growth capital cannot attract financing.

General partners (GP) who manage funds are feeling the squeeze in terms of management fees and carried interest dry up. Limited partners (LPs), the investors into the private equity funds who include sovereign wealth funds, insurers, pension funds, foundations, and wealthy individuals, among others, are in a state of despair, with funds returning the lowest amount of cash since the financial crisis 15 years ago. The “majority of PE houses have not realised their core investments during these cycles and have chosen to hold for longer,” explains Donaldson.

Global consultancy firm Bain & Company’s 15th Annual Global Private Equity Report clearly captures the reality of the PE industry in recent times. The report contends that echoes of the 2008 global financial crisis have reverberated loudly. However, the industry has never seen anything quite like what has happened over the last 24 months. “The sheer scale and speed of rate rises last year, and the uncertainty around that, was a shock for the industry in 2023,” said Hugh MacArthur, global private equity practice chairman at Bain & Company.

Confidence was the first casualty of the Fed’s jacked rates, something that left the PE industry gasping for air in terms of investments, according to the report. In 2023, buyout investment value dropped to $438bn, a 37 percent nosedive from 2022 and the worst total since 2016. When compared to 2021’s peak, it was 60 percent down. Overall deal count dropped by 20 percent to around 2,500 transactions. Against 2021 highs, deal count was down 35 percent. The malaise infected regions across the world, with North America, Europe and Asia-Pacific experiencing significant declines. While dealmaking was badly off, exit activity fared even worse as rising interest rates and macro uncertainty left buyers and sellers at odds over valuations. In fact, exits have propelled to the pinnacle and have become the PE industry’s most pressing conundrum. Apart from seizing up and stanching return flows of capital to LPs, they have left GPs sitting on an aging $3.2trn of unsold assets. This accounted for a staggering 28,000 companies in which PEs cannot exit.

The sheer scale and speed of rate rises last year, and the uncertainty around that, was a shock for the industry

Notably, the median holding period for a buyout has also increased and now stands at 5.6 years, way above the industry norm of about four years. In 2023, the businesses that held for a lengthy four years or longer comprised 46 percent of the total, the highest since 2012. The plunge in exit activity saw buyout-based exits drop by 44 percent to $345bn by value globally. The number of exit transactions fell by 24 percent to 1,067 during the year. A drop in exits was recorded across all geographies.

“Breaking the logjam will need GPs to take charge of their destiny in terms of how they can manage portfolios in order to generate increased distributions for LPs,” noted Rebecca Burack, head of the global private equity practice at Bain & Company.

This is critical, and somewhat urgent coming on the backdrop of PE funds returning the lowest amount of cash to investors last year. Data by US-based investment bank Raymond James Financial shows that distributions to LPs totaled 11.2 percent of funds’ net asset value. This was the lowest since 2009 and stood well below the 25 percent median figure across the last 25 years.

No way out
Inabilities by PE funds to exit and return capital to LPs had a battering effect on fundraising. The silver lining is that new fundraising contributed an impressive $1.2trn to the stunning $7.2trn in fresh capital the industry has accumulated since 2019. That, however, was the only positive. This is because the amount raised last year was actually the least the industry has pulled in annually since 2018. More tellingly, it was down 20 percent from 2022 totals and almost 30 percent off the all-time high in 2021.

The biggest contributing factor in fundraising plunge is that low returns have prompted LPs to become overly selective on any new redistributions. In essence, LPs are opting to carry out thorough due diligence seeking to zero in on GPs that have over the years demonstrated resilience in returning capital. “Assuming patient capital, the returns should materialise once markets re-rate,” explains Donaldson. Investments, exits and fundraising challenges have put the PE industry at a crossroads. The situation has been exacerbated by a whole basket of dry powder that cannot be deployed due to slowdown in dealmaking. According to S&P, global private equity dry powder soared to an unprecedented high of $2.5trn in 2023 from $2.3trn in 2022, an eight percent increase. Notably, 25 PE firms held 21.8 percent of the dry powder, 19 of which were headquartered in the US. Apollo Global Management led all other firms, with $55bn in uncommitted capital available to its private equity strategies. Other firms sitting on record levels of dry powder include Blackstone, KKR, Carlyle Group, CVC Capital, Warburg Pincus, Brookfield, Bain Capital and Advent International, among others.

“The accumulation of dry powder is an indication that firms have been facing challenges in looking for deals. There haven’t been that many targets,” notes Shah. He adds the economic uncertainties have created a scenario in which investors are more restrained and selective. The dynamics have also been complicated by the valuation gap, which has been one of the primary impediments to dealmaking in recent months. Due to high interest rates, vintage PE assets have faced the risk of valuation mismatches at exit. To a large extent, this explains the increase in the median holding period for a buyout.

The valuation quagmire has forced GPs and LPs to seek solace in the secondary market in pursuit of liquidity. Yet even here, increased supply has put downward pressure on the prices and valuations. Research by US-based financial services firm Jefferies shows that secondary volumes stood at $112bn in 2023 compared to $108bn in 2022, representing a four percent increase. Robust buyer demand, significant supply of both LP portfolios and GP-led opportunities and stabilising market conditions drove secondary volume higher. Of importance to note is that although pricing overall had improved due to rising public valuations, only one percent of LP interests were priced above the net asset value (NAV) of the company portfolio.

“Sustained high interest rates in 2023 altered investors’ required return on capital and limited their use of leverage, resulting in a mere one percent of funds pricing above NAV, and many older, tail-end interests trading below 75 percent of NAV,” states a report by Jefferies.

Undoubtedly, it has been a turbulent period for the PE industry on all fronts. This, however, did not stop the execution of some earthshaking deals last year. A majority of the top deals closed were valued at below $1bn. Only about a quarter were valued at more than $1bn, according to Pitchbook.

The $13.5bn acquisition of Japanese conglomerate Toshiba by PE firm Japan Industrial Partners stood out among the topmost deals. The transaction was nothing short of groundbreaking. It marked the end of a 74-year era for Toshiba as a listed company. It also gave the struggling conglomerate a new lease of life. Toshiba was just one of a growing number of take-private deals.

Others included Silver Lake with the participation of CPP Investments paying $12.5bn to acquire Qualtrics, an experience management company, and Stonepeak paying $7.4bn to acquire Textainer, one of the world’s largest lessors of intermodal containers. Other notable deals in 2023 included Roark Capital paying $9.5bn to acquire Subway, one of the world’s largest quick service restaurant brands, and Apollo agreeing to buy out the shareholders of Univar Solutions, a commodity and speciality chemical distributor, at a cost of $8.1bn.

The fact that PE firms are increasingly becoming vultures devouring publicly listed companies is among the reasons why regulators are shining the spotlight on the industry. Globally, the vibrancy of capital markets is facing real threats from PE firms. A survey conducted by US-based multinational law firm Dechert last year paints a clear picture. In the survey of 100 senior PE executives in the US, Europe and Asia, 94 percent said they have plans to pursue take-private deals. In 2022, only 13 percent had take-private ambitions.

The enormity of PE devouring publicly listed companies is unprecedented. Over the past three decades or so, the number of listed companies in the US has plunged by more than half from about 8,000 to less than 4,000 currently. A large number have been taken private by PE firms. In the first quarter of this year alone, there were 21 take-private deals according to audit firm AY. “This underscores the degree to which PE firms continue to perceive opportunities and mispricings despite tremendous recent gains in public equities indices,” stated Pete Witte, EY Global Private Equity Lead Analyst.

The end of the tunnel
Unplugging companies and taking them away from the hawk-eyes of regulators and public scrutiny is fuelling the culture of opacity in the PE industry. The effect is that concerns are now mounting that this has the potential to cause tremors, even quakes, on the global financial systems. PE cross cutting links with the banking sector, insurance, pension, sovereign wealth funds, private credit markets and leveraged lending is adding to these fears. “This intricate web of connections adds to the notable lack of transparency, making it difficult to assess financial stability risks,” noted Benjamin.

Over the past three decades or so, the number of listed companies in the US has plunged by more than half

PE portfolio company bankruptcies is another area of grave concern. The devastation of high interest rates has extended to portfolio companies. In the US, for instance, S&P data show that bankruptcy filings by PE and VC-backed companies surged to 104 last year. This was the highest annual total on record, representing 174 percent growth over the 38 filings in 2022 and accounted for more than 16 percent of all US bankruptcy filings. Bankruptcies in the healthcare sector were among the highest, totalling 17.

That the past two years have been distressing for the PE market is not in dispute. The industry, however, is starting to see some light at the end of the tunnel. Easing borrowing costs and a renewed interest from lenders has resulted in a rebound in activity. The trend is projected to gain pace in the coming months. “With rates set to moderate in coming months there is a greater sense of stability,” noted MacArthur. He added that despite the positive signs, cautious optimism overrides prospects in the immediate and medium term.

The first quarter of 2024 offers a glimpse. S&P data show that PE and VC deal value stood at $130.6bn during the period compared to $124.3bn for the same period in 2023, representing a 5.1 percent increase. With 60 percent of GPs expressing optimism on 2024 prospects compared to 34 percent last year, the industry believes the worst is behind it, and probably over.

It has been a turbulent period for the private equity industry on all fronts

The PE industry is looking into the future with renewed potency. Generative artificial intelligence (GenAI) is already shaping up as one of the game-changing tools that are bound to define how the industry operates. The rate of GenAI adoption is proving to be phenomenal. Some 74 percent of PE-backed firms are currently either using AI solutions in their transaction processes or are piloting potential solutions. These cut across making investment decisions, carrying out due diligence, analysing market trends and patterns, streamlining back-office functions to enhancing privacy and safeguarding against cybersecurity.

For the PE market, adoption of smart technologies is not the only necessity. The lessons of the past two years have shown that discarding the principles of measured risk in pursuit of short-term profits can be counterproductive. This reality, coupled by regulators’ resolute view that the PE market must grow in a safe and sustainable manner, is bound to force the industry to change its modus operandi. What will not change, however, is the foundation under which the industry stands – private.

Building climate-proof portfolios

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Whether it is wildfires, rising sea levels or catastrophic storms, climate change is leading us into a new and terrifying territory. People, communities, ecosystems, and economies are already battling with the continuous onslaught of climate change, which is putting immense pressure on all fronts. In response, increasing investments in renewable energy, sustainable infrastructure and climate resilience are looked at in order to limit the damaging effects and defend the future of our planet.

There is now, more than ever, a serious demand for climate resilient investments which have the potential to greatly influence the course of business and industries globally. However, there is still a need for awareness and attention to ensure that these investments are being appropriately prioritised and implemented across all kinds of industries.

In a world where a lot of the time incentives are vital to action, building frameworks that support sustainable practices and investments on a larger scale relies heavily on the engagement of governments and policymakers. Opting for easy investments may supply quick profits in the short term but taking on climate resilience is an investment for the sustainable abundance of our planet and its inhabitants, in terms of environmental health and financial stability. At present, only two percent of private climate finance is going into resilience. Which, ultimately, is not enough to deal with the threats of climate change, where greater resources and attention are needed. To really face the climate crisis, we have got to look at the bigger picture, beyond just acknowledging existing threats like carbon emissions. This involves examining every angle of these risks, while enforcing strategies which will lessen the threats brought about by extreme weather and physical hazards.

The world needs policies that work, and not only work but encourage businesses to invest in ways to withstand climate challenges, which means having a true understanding of what those challenges are.

Neutralising the threat
It is difficult to ignore the massive risk carried by climate change in today’s financial world. It is not just an environmental issue anymore; rather a threat to the stability of our entire financial system. Imagine if something happened to disturb large agricultural regions that cause food shortages and price spikes, and how this would impact a variety of industries affecting supply chains, consumer spending and thus the global economy.

Investing in resilient operations is critical for ensuring assets and investments are fit for purpose

According to the intergovernmental panel on climate change “the magnitude and rate of climate change and associated risks depend strongly on near-term mitigation and adaptation actions, and projected adverse impacts and related losses and damages escalate with every increment of global warming.” Supporting this observation, an alarming report, backed by 243 scientists from over 60 countries, warned that even with substantial reductions in greenhouse gas emissions, we are on course to witness a temporary 1.5°C increase in temperature within the next two decades. It is these figures that make you realise how easy it is for our world to continue on its current course without any adaptation or strong mitigation initiatives and eventually crumble. Climate-smart economies offer us a chance to avoid a bleak future by being prepared for any situation, while knowing how to deal with the consequences.

Reports from the 2023 Edelman Trust Barometer survey confirmed that 93 percent of respondents from 14 countries agree that “climate change poses a serious and imminent threat to the planet.” So, although it is obvious there is an awareness of the need for climate resilience, the current state of climate-resilient investments shows a contrasting picture. While a number of regions have seen considerable progress in renewable energy infrastructure and sustainable agriculture, there are still many challenges remaining for research, development and support. Financial incentives are weak, access to climate data and risk assessment tools is limited, there are uncertainties over regulations, and we lack benchmarks for evaluating and comparing climate resilience across different investment opportunities.

These concerns persist due to a combination of factors. Often, the reason for poor financial incentives is because governments and organisations prioritise other sectors or lack the necessary funding. A lot of the time climate data and risk assessment tools have limited access because of the little investment in research and development of data collection infrastructure. Regulations are unclear as a result of complex policies and the differing agendas of various stakeholders, while the lack of benchmarks is often because frameworks are either not widely acknowledged or there is difficulty in maintaining consistent resilience indicators. Neglected issues like these make it problematic for investors when assessing the potential risks and returns of climate-related projects, making for an even less likely investment.

However, among challenges lies opportunity. According to a report by the Boston Consulting Group (BCG) and Global Resilience Partnership (GRP) it was said that for every dollar a company invests in resilient operations and adaptation it can result in financial benefits ranging from twice to 15 times the initial investment. All things considered, taking climate resilience into account with investment decisions means investors would contribute to the sustainability of our environment where it is highly valued while also having a chance to improve their financial performance in the long run. World Finance spoke with the Chief Investment Officer of the Pollination Group, Diana Callebaut, about the current state of climate resilience and the role of finance in combating these atmospheric threats.

“Investing in resilient operations is critical for ensuring assets and investments are fit for purpose for the impact of climate change. There is no drawback for long-term investors and only benefits, ensuring assets are able to continue operations,” Callebaut explains.

In recent years, more corporates, financial institutions, and institutional investors are starting to look more closely at the physical and transitional risks associated with climate change. They are publishing climate transition plans with a goal of reaching net-zero emissions while factoring the transition risks into how they decide where to invest their money.

Callebaut continues; “The prevalence of dedicated climate resilience private funds is relatively limited; however there is a significant amount of investment on an asset look through basis in thematic and/or diversified private market funds. For example, owners of infrastructure assets such as airports and ports are aligned with ensuring the longevity of their assets adapting to the impact of climate change. Nice airport has parallel runways, partially built in the sea, making them vulnerable to rising sea levels and rough seas during storms. The operator proactively completed maintenance capital expenditure on existing embankments and sea dikes to strengthen and protect the airstrips on the maritime side of the airport.”

Suggested by Callebaut, there have been proactive measures taken by asset owners to adapt to the impact of climate change and protect their assets from risks such as rising sea levels and storms. However, even with this progress, there are still issues preventing us from investing more money in transitioning to low-carbon economies effectively. Co-ordinating global carbon pricing remains a challenge, and while initiatives like the Task Force on Climate-related Financial Disclosure (TCFD) is making headway in improving disclosure standards, these hurdles with data gaps, analytical tools and inconsistent metrics still exist.

Going forward, the financial system appears to need a thorough reset in order for it to incorporate climate risks and opportunities into central banking, regulation and market practices. Financial markets have the ability to help fuel the transition to a low-carbon, sustainable future by aligning market practices with climate goals.

Clean energy and climate technology are only receiving a tiny fraction of early-stage investments

In fact, we have already witnessed a number of initiatives which have been effective in incorporating climate risks into their strategy. These include creating green bonds, which finance eco-friendly projects, evaluating the resilience of financial institutions’ portfolios against climate-related risks through stress tests, and considering environmental, social, and governance (ESG) factors when making investment decisions.

A wise investment in resilience now is expected to pay dividends for later years by allowing investors to protect the environment and reap significant financial rewards, especially in light of the growing financial costs associated with climate change and natural disasters.

The climate financial outlook
In the words of the Pollination Group, “Climate investments seek to slow the pace of climate change whereas climate resilient investments focus on adaptation and mitigation of the impact of climate change.” It is for this reason that both are so important to take into account when it comes to protecting our planet and preventing any further irreversible damage.

The Global Landscape of Climate Finance Report from 2023 provided information on how proceeds from green bonds are used in a variety of industries, including waste management, buildings, infrastructure, forestry, and other land use. Following a 28 percent growth, reaching $173bn between 2021 and 2022, the question remains, where do these proceeds really end up? Looking at how funds are used to address severe environmental issues more closely, let’s consider how these resources have been distributed among these sectors and what areas warrant more attention.

Funding disparities in agriculture: Despite their potential to reduce emissions, agriculture still receives disproportionately low funding, comprising less than four percent of total mitigation finance.

Allocation of mitigation finance: In recent years, mitigation finance has made great progress, amounting to a total of $1.15trn between 2021 and 2022. According to the report, transportation projects seem to benefit the most from investments, receiving 29 percent, while energy projects account for 44 percent of the total.

Challenges with adaptation finance: Despite reaching a record high of $63bn, resources for adaptation are still far short of what is expected to be needed. The majority of the funding for adaptation initiatives comes from governmental sources, with minimal contributions from the private commercial sector.
Deficiency of AFOLU sector financing: The AFOLU sector, which is very vulnerable to the effects of climate change and has a desperate need for adaptation measures, has a financing deficit, with an aggregate total of just $7bn.

After examining how these funds are allocated, it becomes clear that there needs to be a more equal distribution of resources and a concerted effort to give priority to sectors with the biggest potential for impact, to appropriately address environmental concerns.

Private and public financing
According to Evergreen Climate Innovations, when it comes to receiving capital from private and public sources, there is a seemingly big gap in how it is distributed. Despite the organisation’s efforts to support impactful technologies and businesses, clean energy and climate technology are only receiving a tiny fraction of early-stage investments, a contrast to the $40bn invested in climate technologies through private funding back in 2021. It is hard to know for sure why this growth hasn’t continued a steady increase, but it might be that investor priorities have shifted, or the returns may not have been consistent enough and the easy option is favoured.

Although the amount of public investment allocated to climate change varies enormously depending on government priorities, policies and budgets respective of their region, many countries have been providing more funding to climate-related matters with some allocating large amounts of their budgets to initiatives such as renewable energy development, climate adaptation projects and research on climate change mitigation strategies. As of right now, the largest channels of international public finance supporting climate resilience and mitigation, particularly in developing countries, include the Green Climate Fund (GCF), the Global Environment Facility (GEF) and the World Bank-administered Clean Technology Fund (CTF).

While public investments for climate change are making a difference, advocates push for greater private investor involvement. Deloitte’s Centre for Financial Services FSI Predictions 2023 Report estimated a $2trn private funding shortfall for next-generation climate technologies to reach the target of capping global temperatures at 1.5°C above pre-industrial levels by 2030 (see Fig 1).

In a conversation with World Finance, Climate Safe Lending Network shared its views on what collaborative efforts are needed to effectively address climate challenges.

“During our Banking on Climate Justice initiative – which helped in part outline the rationale for why integrating a climate justice lens into climate transition planning is a non-negotiable component for any climate action given the systemic nature of the challenge – we noticed that cross-sector partnerships were the most effective mechanisms for addressing climate justice and therefore the climate crisis.

Building relationships between traditional and non-traditional financial institutions, as well as with the public sector, can help create new avenues for financial flows, and enable money to get where it is needed, when it is needed, for the true length of time it is needed – collaborating to overcome barriers such as loan term lengths, investment size, interest rates, etc.”

Climate finance hotspots
Geographically, developed economies continue to account for the majority of climate finance mobilisation, with the US, Canada, Western Europe, East Asia and the Pacific leading the way. China in particular has demonstrated exceptional efforts in mobilising domestic climate funding, outperforming the combined efforts of all other nations.

In terms of government involvement in market sector investment, initiatives are underway to collaborate with industries and communities to broaden viable possibilities. In fiscal year 2022, FEMA in the US pledged around $3bn for 748 resilience projects across states and territories, corresponding with international standards. Similarly, the UK government set aside £5.2bn for flood and coastal projects, as well as £750m for the Nature for Climate Fund, which intends to better resilience to climate change. Meanwhile, in Australia, the federal government is driving investment partnerships with large companies such as IAG and National Australia Bank.

While private finance accounts for nearly half of total climate finance, the volume and speed of private investment falls short of what is required. Developed economies have shown greater success in mobilising private finance compared to emerging markets and developing economies. Essentially, there is a real need to narrow the distance between existing funding and the growing demand for climate finance, particularly in developing and low-income economies, to address the challenges of climate changes successfully.

Climate resilience efforts for disclosure
As investors, stakeholders, businesses, and regulators recognise the financial implications climate change could cause, they are pushing harder for transparency in how institutions handle climate risks. Undoubtedly, climate change threatens to drain billions from global economies in the forthcoming decades, primarily through wreckage inflicted by extreme weather events. With that, it is becoming clear that the economic toll of physical climate risks will far outweigh adaptation risks irrespective of scenario or timeframe.

Together, we must make sure our communities are equipped to handle whatever nature throws our way, pressing us to look beyond the world’s carbon fixation. Despite its importance, focusing solely on carbon reduction may overshadow other aspects, such as investing in strong, safe infrastructures to cope with such extreme weather events.

Just as no two snowflakes are alike, climate change affects different regions and communities in completely different ways, which means there is no one solution.
Solutions need to be developed and customised to the needs of each community to adequately address the challenges they face. Building resilience starts at a local level, which means it requires a collective effort from all areas to develop and invest in robust infrastructures that protect lives and businesses.
“For us, one of the more tangible realities of where we believe greater attention and resources need to be directed are on local climate resilience efforts and the reality of how climate justice needs to be seen as a necessary integration into core strategic designs for societal and financial stability.

Practically, this means investments that support people currently most impacted by climate effects, prevent future societal and environmental damage, and shift towards locally centred, climate resilient economies,” shared the Climate Safe Lending Network, on the need to increase attention and resources for local efforts.

One of the biggest problems standing in the way of action on climate change is that uncertainty surrounds the issue. We are uncertain about data collection, the nature of the Earth’s climate system, predicting scenarios and decision-making when it comes to the socio-economic and political aspects. However, it is not just about the uncertainties themselves, as it is human nature to fight against uncertainty. The real challenge is about communicating these uncertainties and recognising the tools we have at our disposal or tools we may need to produce to limit the effects of climate change.

Proactive policies and incentivising strategies are essential in overcoming these uncertainties by providing us with a clear direction and motivation for collective action towards a more sustainable future. Governments can implement measures that encourage investment in resilient infrastructures and promote sustainable technologies. For instance, offering tax breaks or financial incentives for climate resilient projects can spur private sector involvement. Additionally, public-private partnerships can streamline financing and implementation processes for resilient infrastructure.

According to the Climate Safe Lending Network, policies are necessary because of the current inadequacies in the structures of financial institutions, which fail to incentivise climate-resilient measures. Through their network they have actively collaborated on a range of policy recommendations aimed at expediting climate resilience through initiatives like Banking on Climate Justice and an open letter to the Basel Committee on Banking Supervision. Most of these recommendations revolve around ensuring that policy is used not only to accommodate but also encourage new investments in climate resilience at a local level. The multi-stakeholder organisation emphasised the necessity of ensuring that all existing financial activities and investments do not exacerbate environmental deterioration and climate risk without transparency.

“Despite the reality of the need for policy, it is important to recognise this should never be used as an excuse for inaction within financial institutions, particularly given the undeniable realities of climate risks institutions face to their own financial stability and that of the clients they serve. Furthermore, given the political influence of many financial institutions, they have a responsibility to leverage their influence in supporting, rather than opposing laws and regulations that foster climate resilience,” commented the Climate Safe Lending Network.

The technology outlook and solutions
With technology taking the fast lane, there is a big demand for its role in managing climate change. While some technologies aim to cut emissions and prevent the climate crisis from worsening by using renewable energy sources like solar power, hydropower and wind energy, others are geared towards pre-emptively protecting against potential climate change impacts. These solutions include the development of early warning systems, sea walls and the cultivation of drought-resistant crops.

According to the IPCC’s Climate Change 2022 report, digital technologies hold promise in supporting the fight against climate change and meeting sustainable development goals. With this, the report explains how climate technologies like sensors, robotics and artificial intelligence have the potential to reduce the consequences of climate change by improving energy management, increasing energy efficiency, and promoting the use of clean energy sources, creating more economic opportunities.

When we look at technological developments within fields like water resource management, agriculture, and urban planning it is clear that solutions like rainwater harvesting, green infrastructure, sustainable transportation systems and efficient irrigation systems are instrumental to economic growth, social equity and environmental preservation.

Developed economies have shown greater success in mobilising private finance

There was fear that development for climate technology investments might come to an end when the world hit a storm with Russia’s invasion of Ukraine, the accompanying energy crisis in Europe, global economic turbulence, and market decline. Yet investments in climate technologies were growing in spite of the difficulties. Global investments in clean energy technologies are said to have hit a record level, with a substantial amount of funds going toward energy storage technologies, renewable energy projects, and the construction of sustainable infrastructure.

However, while technology appears to play a vital role in improving the impacts of climate change, that’s not to say it doesn’t bring its own challenges. For instance, the use of digital technologies and devices contributes to more e-waste, which can in turn lead to further environmental hazards; automation of certain tasks by technology causes job losses in traditional sectors, adding fuel to the fire for socioeconomic disparities. Another pressing concern is the widening of the digital divide, further marginalising communities with limited access to technologies. With this in mind, the use of technology to address current climate issues must be properly governed to prevent exacerbating them.

As the climate crisis is a multifaceted challenge, our response must be too when formulating a plan of action. The Paris Agreement, aimed at limiting global warming to well below two degrees, is proof that we are serious about confronting climate change. But now it is time we moved from rhetoric to action, as our actions today will determine the future we leave behind for generations to come.

From disparities in climate finance to the need for progressive technologies and resilient infrastructures, the solution lies solely in the collective efforts of individuals. If governments create policies and incentives for sustainable investments, businesses reduce their carbon footprint and invest in renewable technologies, investors choose green investments and communities engage in climate education and awareness, together these small actions will account for a substantial reward. One is a healthier planet and another, a greater long-term financial stability with less risk of major financial losses. Once financial endeavours are entirely aligned with climate objectives, we will witness a whole new dynamic between our economies and the environment.

Like how dropping a pebble in a pond creates a ripple effect, over the course of life, every variable and action influences the outcome, which makes it all the more important to be mindful of our choices and the impact they have on our planet. The sooner we realise everyone plays an equally important role in mitigating the effects of climate change, the sooner we can combine efforts to write our future as we envision it.

Ticking time bomb of debt

Posted on by itsupport

One way of measuring global policy-makers’ concerns about the unprecedented increase in debt around the world is the number of times the subject is raised at high-level conferences. And it comes up practically every week, most recently when Kristalina Georgieva, managing director of the International Monetary Fund, told the Atlantic Council in April about her fears that the current decade could be remembered as “the turbulent 20s.”

While prefacing her remarks with observations about some of the things to be thankful for, notably falling inflation, she got onto the urgencies; “The sobering reality is global economic activity is weak by historical standards. Prospects for growth have been slowing since the global financial crisis. Inflation is not fully defeated. Fiscal buffers have been depleted. And debt is up, posing a major challenge to public finances in many countries.”

Debt, the main subject of this article, is certainly up. The numbers ring alarm bells. In the so-called OECD area covering 38 member nations, gross borrowing jumped by exactly $2trn in 2023, from $12.1–$14.1trn. It will get worse; in 2024 the OECD predicts a further increase of $1.7trn. Although the US was the chief culprit, borrowing nearly two thirds of 2023’s $14.1trn, it clearly puts pressure on the global debt markets, whose capacity to issue debt is not infinite.

Overall, the markets are awash with debt. The total borrowings – technically ‘outstanding marketable debt’ – of the 38 governments is expected to hit $56trn in 2024. If that is a thought-provoking figure, consider that it will have increased by $16trn in just the last five years. Needless to say, that will be a record.

Perhaps more disturbing, the average debt-to-GDP ratio is also off the scale. In real pre-inflation terms it is up from a pre-Covid 73 percent to about 83 percent in 2023. And it’s certain to rise higher by the time 2024 is out. In the meantime, the cost of new borrowing is rising, with interest rates approaching three percent of GDP.

More trillions
Emerging markets are taking a beating. In the so-called EMDEs (emerging market and developing economy) nations, in 2023 alone nearly an extra $1trn of sovereign bonds were issued, now up to $3.9trn. Although it can hardly be called an EMDE, China has a voracious and rapidly growing appetite for this kind of debt. In 2021 its share of emerging nations’ bonds was 15 percent; now it is 37 percent. That is a number that is sowing alarm among many issuers inside and out of China.

Unsurprisingly, as EMDEs borrow more against less – because their economies are not growing fast enough – the credit ratings are deteriorating with a commensurate increase in the cost of debt. In the category of low-income and lower-middle-income countries, which counts some 130 nations with average per capita GDP of $12,300, there were no less than 24 downgrades against six upgrades, reports the OECD.

The unhappy result is that outstanding sovereign debt has been pushed to unprecedented levels. Although these ratios look better when inflation and longer repayment times are taken into account, the debt still has to be repaid. For many nations it is a ticking time bomb.

It is not just the volume of debt that matters but also its composition. As the OECD explains in its annual review of global debt, the US, the world’s biggest economy, faces the prospect of renewing no less than a third of government debt during 2024. That is a small matter of $11.3trn. No doubt the US Treasury will handle the task but, as the Peter G. Peterson Foundation, an economic ginger group, points out, that is equivalent to nearly $103,000 for every single American.

America’s debt burden has been growing for years; “a mis-match between spending and revenues,” summarises the foundation, citing the cost of an ageing population, underfunded services and other long-term contributory reasons. At least the US can carry its debt. “In emerging markets decisions on debt composition become even more intricate,” notes the OECD. This is because they have to navigate growing volatility, or what the Paris-based body describes as “exposure to fluctuations in global risk sentiment in an increasingly shock-prone world.”

Another policy-maker to voice her concerns – frequently, in fact – is Indian-American economist Gita Gopinath, the IMF’s deputy managing director. In late 2023 at a conference in Washington entitled ‘Fiscal Policy in an Era of High Debt’, Gopinath cited alarming figures about the long-run – and accelerating – growth in public debt levels. “Since the mid-1970s, global public debt has tripled to reach 92 percent of GDP by the end of 2022. So, debt levels had been rising for some time.”

Albeit in sober economic terms Gopinath painted a bleak picture, especially for economically weaker nations; “Rising deficits and debts in countries such as the US have serious ramifications for emerging and developing economies, who are hit by rising rates and weaker currencies. And many economies, particularly low-income countries, are already in debt distress.”

“The combination of record-high global debt levels, higher for longer interest rates, and weak growth prospects poses a triple challenge for policymakers. In a shock-prone world, very few countries will have the fiscal space to support their economies,” Gopinath continued.

Fracturing fiscal rules
So there is a mounting problem. One of the many complexities of reducing global debt is that the old, more comfortable rules have been broken for several reasons. One is the 2008 global financial crisis (GFC) that overnight brought unprecedented levels of quantitative easing – central banks printing money and lending it at rock-bottom rates to the financial sector to prop them up.

Former FTX chief Sam Bankman-Fried

Another is that while most nations have their own fiscal rules, they find it increasingly hard to stick to them and resort to issuing more debt to keep the economy moving. “Deviations from the rules are frequent,” regrets the OECD. “Few have contained debt since the GFC.”

The OECD’s solution is more discipline buttressed by a kind of fiscal police. “We need rules that respond to shocks but with clear mechanisms to correct for non-compliance and that are anchored on spending targets,” it suggests. “Independent fiscal councils can also enhance checks and balances.”

Meanwhile others see the need for a new kind of economics. “Dependence on credit to boost demand imperils the world economy, so we must correct the underlying imbalances,” warns Atif Mian, professor of economics, public policy and finance at Princeton University. In an article in the prestigious Finance & Development magazine, he goes on to call for a “long-term balance between what people earn and what they spend.” Until then though, we have what he calls “a massive debt supercycle that threatens the global economy. Breaking that cycle is one of the most pressing challenges of the 21st century.”

Before that can happen though, habits have to change. Led by largely thriving economies such as the US, government (or sovereign) borrowing has become almost obligatory. And when governments such as Britain sought to reduce its debt in the wake of the GFC, it was widely lambasted for ‘austerity economics’ by citizens who expected continuing largesse from a nation that could ill afford it. France repeatedly runs into the same problems – in fact riotous protests – when the Macron government attempts to follow other nations and slowly increase the age for pension payments, which are steadily undermining the entire economy.

Debt build-up
Debt sprees have been on the rise for well over half a century, starting around the time that the miseries of the great depression began to fade. For example, in the US total debt stood at about 140 percent of GDP between 1960 and 1980, but has since more than doubled to 300 percent of GDP (see Fig 1). And the world has learned from the American example.

As Professor Mian explains; “Not even the great recession of 2008 [the result of the GFC], which in many ways was a result of the excesses of borrowing, could put a dent in debt’s relentless upward march. It would be a mistake to think that 2008 reflected merely some unfortunate policy misstep. The build-up in debt that led to the 2008 crisis stemmed from deep structural imbalances in the economy. Those imbalances persist, as do the dangers associated with them.”

IMF Managing Director Kristalina Georgieva

But where does all this debt and dangerous imbalance come from? Most researchers agree that, paradoxically, it derives from a glut of savings by rich people and rich countries. There is no doubt that the rich are getting richer, as in fact they generally have in historical terms. The top one percent of individuals have been accumulating more and more wealth for more than 40 years, many of them by capitalising on the digital boom. And so have certain countries got richer, notably China, whose rising prosperity ends up in domestic banks and other savings institutions much more than in wealthy western countries. Between them, they claim a disproportionately greater share of global income, which in turn creates financial surpluses that fuel the ‘global debt supercycle.’

Unfortunately, much of this avalanche of debt is ending up in the wrong place because the financial sector – the man in the middle – has been missing its targets. Professor Mian continues; “A well-functioning financial sector would channel the financial surpluses toward productive investments, such as building and maintaining infrastructure and developing technology. Any debt resulting from such productive lending would naturally be sustainable, because returns from investment would pay it off.”

Mian adds; “Unfortunately, a key feature of the debt supercycle is its failure to finance productive investment. For example, even though total debt as a share of GDP has more than doubled, real investment as a share of GDP has remained stagnant, or even fallen over the past four decades.” The alarming conclusion is that around half of the trillions of new debt issued during the past two years is being wasted. Instead of financing investment, which would help create wealth, it has gone to the debt unproductive consumption by households and governments.

Naturally, collapsing interest rates only feed this cycle. Those with long memories will know that in the early 1980s, the US 10-year real interest rate hovered around seven percent. More recently, it’s plummeted as low as below zero. As these rates flow into consumer finance, it prompts ordinary people to spend rather than save.

Crisis management
Behind the scenes, almost oblivious to the general public, there have been debt-related crises.

As the custodians of financial stability, central banks have had to manage upheavals in the rapidly growing non-bank financial sector that could easily have spread more widely with dire consequences. Only adroit and largely anonymous crisis management avoided the worst.

“These [non-bank] institutions have grown in significance across a range of markets, including those that households, businesses and governments use to borrow, save or access financial services,” explains the Bank of England’s Nick Butt, head of the future balance sheet unit, in a recent speech. Pretty much from a standing start, in 20 years Britain’s non-banks have snapped up roughly half of all UK’s financial assets including corporate lending. Other European countries have seen the same developments in what amounts to yet another threat to financial stability.

Why? Because non-banks in Britain, but also elsewhere, are big holders of gilts (sovereign bonds) and routinely resort to the gilt repo market. Although its workings are little known outside financial circles, this is where the Bank of England buys and sells gilt-edged securities. Established in 1996, it is a huge market where billions are transacted every day for the purposes of keeping the banking system liquid. Echoing what other central banks are saying, Butt notes; “The implications of the rise of the non-banks are far from theoretical and have given rise to new vulnerabilities and sources of liquidity risk that have all too real a potential to cause financial instability and impact the broader economy.”

Some might say more actual than potential. In March 2020 the state of the UK government’s bond markets deteriorated rapidly in a general rush for short-dated, cash-like instruments in the middle of the Covid lockdowns. There was a dash for cash right through the financial sector as banks of all types sought to meet their own liquidity obligations. The big dealer banks pumped in around £50bn through the gilt market to help out the central bank but, in a demonstration of the nervousness lurking beneath a highly indebted market, it was barely enough.

A key feature of the debt supercycle is its failure to finance productive investment

The money markets held their breath but got through it. Another crisis in Britain two years later in the immediate aftermath of short-lived prime minister Liz Truss’ shock ‘go-for-growth’ economic policy hit the long-dated gilt market in particular, once again exposing what Butt called “vulnerabilities in liability-driven investment funds” that posed a threat to the country’s financial stability.

It is all about liquidity, especially when the non-banks get the dreaded margin call as their own creditors hear the alarm bells. Right now, central banks and global regulators are working hard on plugging these holes before they get too big. As recently as 20 years ago, life was easier for the likes of the Bank of England, the US Federal Reserve and other major institutions when they had only to worry about the big retail and investment banks. And when global debt levels were not so high.

Better big banks
On the bright side, most of the world’s big, systemic banks are safer than they were before the GFC. Following the lending excesses exposed by that crisis, they hold more capital – the funds that stand first in line to bear losses – and are in a better position to protect depositors. Most countries have enforced these regulations developed by the Bank for International Settlements, albeit with local variations, and global regulators are breathing much more easily about the giants of the financial sector.

Reforms are continuing, currently through what is known as Basel 3.1. As Bank of England governor Andrew Bailey explains, “the key thing here is that across jurisdictions it is implemented faithfully, neither more nor less.” This doesn’t necessarily mean in a highly illiquid world that the threat of bank failures has been extinguished. In early 2023 alone the US, supposedly the bastion of regulation, saw three failures – Silicon Valley Bank, Signature Bank and First Republic – while Switzerland’s once-mighty Credit Suisse had to be rescued before it collapsed. Following a mire of shoddy regulation and inept management, the Swiss government arranged for rival UBS to buy the failed institution for $3.25bn, a transaction completed in June 2023.

It’s not just the volume of debt that matters but also its composition

There are concerns that social media will contribute to the risk of bank failures through a much-feared run. “The sudden withdrawal of bank deposits – accelerated by digital technology – contributed to the failures of these banks,” notes a thought-provoking study by leading European bankers, citing the speed at which news travels, even if it is wrong. This was not the case even during the disastrous bank runs leading up to the GFC when, the study argues, “social media and mobile banking apps were unheard of or barely existed.”

As they conclude; “As events in 2023 illustrate, the risk of sudden bank runs may generally be affected by advancing digital frontiers in banking.” In short, something else for regulators to worry about.

Crypto craziness
They were certainly worried by the lemming-like race for alternative currencies that was symbolised by the collapse in November 2022 of Sam Bankman-Fried’s cryptocurrency exchange FTX and its affiliated hedge fund, Alameda Research. The exchange folded in days after clients learned that Alameda’s losing bets were being covered by the customers of FTX, unbeknownst to themselves.

In a salutary lesson for proponents of ‘metaverse’ currencies, Bankman-Fried has been sentenced to 25 years in prison and ordered to repay over $11bn. Long before FTX went under, central bankers had been warning against plunging into this wild and unregulated market. However the subsequent flight from crypto currencies does not spell their end. Central bankers see a lot of sense in alternative forms of payment and many are developing them. But they will be run under strict controls and regulations.

So what now?
The tight-rope act requires that global debt be steadily reduced and that it is invested much more wisely – that is, in the corners of the economy that will create the right kind of growth. Most economists continue to favour GDP, albeit a more enlightened and nuanced version that focuses on what is good for people and the planet. Good growth, in short. Some, however, argue that growth – and especially the debt-funded version – has passed its time. The ‘de-growth lobby,’ whose figurehead is Greta Thunberg, argues that modern capitalism has got it wrong by focusing on GDP and that living standards are already good enough.

Few outside academic circles buy that argument because ‘good growth’ improves lives. However, as the IMF’s latest World Happiness Report, the 10th iteration of this enlightening study, shows, economic growth isn’t everything. In fact, some of the poorer nations are the happiest.

“When we juxtapose GDP per capita with happiness scores from the report, it becomes clear that while GDP per capita is a significant predictor of happiness, it is not the only factor. As the report outlines, other variables, such as social support, life expectancy, freedom, generosity, and the absence of corruption, also help explain varying levels of happiness between countries,” said the IMF report.

In short, behaviour as well as GDP. This is why Costa Rica, famous for its economic concept of la pura vida, which seeks to take everybody’s wellbeing into account, ranks a high 6.61 on the Happiness Index with a GDP per capita of just $20,000 while extremely prosperous Singapore ranks just below. Strikingly, poor nations like Kosovo (6.37 at $11,690), Nicaragua (6.26 at $5,842) and Guatemala (6.15 at $8,262) rank just below Singapore. However it is unlikely that lowest-ranked Afghanistan (1.86) and Lebanon (2.39) would line up behind the de-growth champions.

IMF First Deputy Managing Director Gita Gopinath

The IMF’s Gopinath, a strategic thinker, sounds a warning to high-borrowing, spendthrift nations. “In today’s environment – where it is politically difficult to cut spending or raise taxes – debt-financed spending may still seem tempting. But that would be a grave mistake, setting debt on an unsustainable trajectory as borrowing costs rise sharply. Governments need to rethink what they can and cannot do. They cannot be the insurer of first resort for all shocks. Revenues also need to keep up with spending,” Gopinath said.

Overall it appears to come down to living within your means.

How Guyana became Latin America’s leading development lab

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Guyana is on the cusp of a profound socioeconomic transformation unlike any seen in Latin America and the Caribbean. Despite its small population of roughly 800,000, it boasts the world’s fastest-growing economy. According to the World Bank, its GDP per capita, which surged by 62.5 percent in 2022 alone, now exceeds that of major Latin American economies like Mexico and Brazil. Guyana’s economic boom is fuelled by its vast oil reserves, estimated to exceed 11 billion barrels.

After more than doubling its oil output in 2022, the country is on track to produce more than 800,000 barrels per day by 2025. To put this in perspective, Guyana’s oil production is on par with those of much larger countries like Colombia, which has a population of 52 million. Guyana is also expected to overtake Kuwait and the other Gulf countries and become the world’s biggest oil producer per capita.

But Guyana is taking a unique approach to its newfound oil wealth. Under the leadership of President Irfaan Ali, the Guyanese government aims to leverage its fossil-fuel windfalls to combat poverty and accelerate its clean-energy transition. By investing heavily in renewable sources like hydro, solar and wind power, the country aims to reduce its dependence on hydrocarbons, lower energy costs, and attract industrial and agricultural investments. With its proximity to the equator and low population density, it has the potential to become an attractive destination for international investors. To achieve Guyana’s social development goals, the government is investing heavily in education, healthcare, housing, water and sanitation. However, the country urgently needs an influx of migrant workers to meet the labour demands of its numerous construction and infrastructure projects.

A guiding force in Guyana
With more than 85 percent of its territory covered by tropical forests, Guyana is the only Amazonian country with minimal deforestation. Moreover, roughly 15 percent of this territory is legally owned by indigenous communities. Recognising the importance of environmental conservation in achieving its social goals, Guyana initiated its low-carbon development strategy back in 2009. The current administration has since bolstered this effort, effectively positioning the country as a nature-positive economy.

Guyana offers a promising model for other oil-rich countries

To reduce its dependence on hydrocarbons and foster green job creation, Guyana must accelerate its energy transition and invest in conservation, sustainable housing and clean transportation. By capitalising on its nature-positive status to guarantee that green projects in Guyana generate greater environmental benefits than other locations, the country could establish itself as an attractive destination for environmental, social, and governance (ESG) investments.

Drawing inspiration from similar programmes in Colombia and Mexico, Guyana aims to promote green growth and boost employment by developing a comprehensive system of economic transfers. At the same time, the government could foster green cities through accelerated urban development.

To be sure, Guyana faces significant economic hurdles. To keep pace with development and maintain its current growth momentum, the country must adopt immigration policies that would enable it to attract the workforce required to complete existing construction projects, expand its financial services sector, and establish an industrial and entrepreneurial base. These steps are crucial to achieving full employment and facilitating rapid expansion of the middle class, thereby preventing civil unrest and political instability.

Safeguarding Guyana’s democracy is particularly critical in the face of Venezuelan President Nicolás Maduro’s threats to annex the oil-rich Essequibo region, which accounts for 75 percent of Guyana’s territory and has been part of the country since it was still a British colony. The steadfast support of the US, the UK and the international community has been crucial to neutralising Maduro’s threats and averting a military conflict until the International Court of Justice decides which country the region belongs to.

Owing to its effective leadership and leveraging of hydrocarbon profits to drive socioeconomic change, Guyana is now the leading development laboratory in Latin America and the Caribbean. Its ongoing commitment to sustainability and environmental conservation provides ample opportunities for investors, positioning the country as a key hub for climate-related financial instruments.

Moreover, Guyana offers a promising model for other oil-rich countries. With the support of the international community, major investors, multilateral institutions, and private firms, Guyana is demonstrating how developing countries can harness both renewable and non-renewable resources to escape the poverty trap.

Pioneering innovation and sustainability in Dominican banking

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Can you outline the bank’s strategy and explain how you have navigated the challenges and opportunities presented by the current economic climate?
Banco Popular’s strategy is based on innovation with a sustainable vision and a customer-centric approach. Our main objective is to deliver a unique experience by offering services and products that match customers’ needs and preferences. Banco Popular caters to all segments of the economy with a differentiated commercial, product, and advisory offering. For corporate and middle market customers, we provide innovative loan, cash management, and capital markets products, supported by relationship managers and specialists tailored to the company’s needs. For SMEs and retail customers, we base our offering on relationship managers who can advise customers and leading electronic channels where they can complete all their transactions and product services.

Our digital transformation and commercial strategies are based on an innovation culture. We are constantly looking to transform delivery channels to create value for customers while redesigning and streamlining internal processes to increase speed of response and capture efficiencies.

The core elements enabling this transformation at the bank are: 1) A state-of-the-art IT infrastructure that leverages leading technologies and cloud applications for fast development, scalability, and reliability; 2) Data analytics and AI models as key differentiators in our decision-making process; 3) Operational efficiency based on agile processes adopted throughout our organisation; 4) Best-in-class talent and an innovation culture that is continually evolving; and 5) Analytical and predictive risk management practices that anticipate the risks we face as a bank, including cybersecurity. This strategy is supported by our sustainable vision; we are leaders in the country in ESG practices.

The Dominican Republic has enjoyed a positive economic environment in recent years, but like everywhere else, the pandemic posed difficulties that required firm actions. During that period, the CEO led the bank to overcome challenges and seize opportunities in topics such as: 1) in collaboration with monetary authorities and the government, Banco Popular strongly supported individuals and companies in all economic sectors, such as tourism, which faced severe challenges. This backing was essential for the sector’s revival, making it one of the fastest in the world to recover from the pandemic; 2) Acceleration of digital transformation to serve customers remotely. Today, 88 percent of transactions and over 25 percent of product sales are conducted through electronic channels; and 3) Internal process automation and robotisation to improve delivery and efficiency, during the past five years the bank’s efficiency ratio improved more than 1,300 bps.

At present, the country is experiencing a positive economic climate that has stimulated growth and attracted investments. The IMF expects the Dominican Republic to grow 5.4 percent in 2024. This positive economic outlook brings opportunities, and the CEO is leading the bank to have a robust and sound growth in our loan portfolio and continue to drive innovations introduced to the market to maintain our market leadership and improve customer satisfaction.

The strategy Banco Popular has adopted led to very favourable results. In 2023, our assets grew by 19 percent, and we closed the year with a ROA of 3.30 percent and a ROE of 22.85 percent. This growth was achieved with a very sound loan portfolio, with past due loans at 0.86 percent of our portfolio and a reserve ratio of 3.2 times past due loans. Moreover, we have a strong capital, with a solvency index of 14.8 percent.

How did the bank contribute to the advancement of sustainable and responsible banking practices in the Dominican Republic?
Today’s banking landscape requires sustainability and responsible banking as key components. At Banco Popular, sustainability is part of our DNA, and we have continually reinforced this vision. We became the first bank in the insular Caribbean to join the United Nations Principles for Responsible Banking as a signatory partner, an international coalition of banks launched in 2019 to align banking services with the Sustainable Development Goals (SDGs) and the Paris Climate Agreement, thereby supporting social and sustainable development. We are also part of the Partnership for Carbon Accounting Financials (PCAF), which develops the Global Standard for Greenhouse Gas (GHG) Accounting and Reporting.

To promote sustainable development and clean energy, we lead green financing in the country, with more than $600m in loans for various clean energy projects, including a recent $100m loan to build the largest solar park in Central America and the Caribbean. Additionally, we offer retail customers and SMEs the ‘Hazte Eco’ solution, the first green programme in the country to offer advisory and financing (including green leasing) services to promote sustainability initiatives. Moreover, in 2024 we issued the first green bond in the Dominican Republic, which will be allocated to fund loans from our green portfolio to support the country’s transition to a low-emission economy.

Internally, we aim to reduce our environmental impact through initiatives as installing solar panels, implementing efficient lighting and water control systems, and running recycling programmes for employees and customers. Our employees have planted more than 1.2 million trees in different areas of the country. We consume more than 8MW of clean energy, partially produced by solar panels installed at our branches.

How does Banco Popular plan to take the business forward over the next few years?
In the coming years, our business will be driven by innovation and a mandate to promote financial inclusion. This innovation will cover products and services to meet customers’ needs and expectations; advanced analytics and AI models to enhance decision-making; and internal processes and risk management practices to achieve efficiency and agility.

We are leaders in digital transformation, enabled by agile methodologies, and offer the most advanced financial services and products in the market. For example, our new app ecosystem features four specialised mobile applications that enable online customer onboarding and cover everything from personal financial management solutions to corporate banking, remittance reception, and the renovation of the Popular App – the most downloaded mobile financial application in the market. In 2023, the Banking Superintendency recognised Banco Popular as the best digital bank in the Dominican Republic for the third consecutive year.

Analytics and artificial intelligence are reshaping the financial sector and will have a major impact in the coming years. We envision a future where our interactions, insights, and solutions for customers are influenced by these technologies. We established the Digital Centre of Excellence and the Data and Analytics Centre of Excellence several years ago to enhance our capabilities. Today, we have a world-class team that keeps Banco Popular’s innovation on par with the most relevant global players in the industry. This Centre of Excellence has implemented different analytics use cases along the customer’s lifecycle such as client acquisition, next best action, client satisfaction, and churn prevention, among others.

Artificial intelligence will continue to change how we communicate with customers and operate internally. At Banco Popular, we use AI solutions for fraud prevention, code development, and cybersecurity. However, we believe that generative AI, combined with our analytics expertise, will revolutionise how we engage with and deliver value to our customers. Therefore, we are developing internal skills and in partnership with Microsoft creating generative AI models focused on client acquisition, client satisfaction and internal processes.

How is digital integration incorporated into business strategy?
Innovation is a core value of our organisation. Digital transformation is an important part of our business strategy. The bank has always been a pioneer in innovation in financial services, consistently introducing new solutions to the public. We believe that our ongoing digital transformation is a key advantage, helping us strengthen our market leadership and achieve high customer satisfaction.

As I mentioned earlier, digital transformation has revolutionised our channels, providing customers with the ability to conduct all their transactions securely and conveniently on their computers or mobile devices. Today, 88 percent of transactions and over 25 percent of product sales are completed through electronic channels. Our goal is that soon, customers will be able to perform 100 percent of their transactions, services, and product purchases through our digital channels, all while enjoying the exceptional customer experience and convenience they expect.

Digital transformation has impacted not only our customer-facing channels, but also internal processes. We recognise the importance of having fully automated, end-to-end processes. To achieve this, we have implemented strategies such as digitalisation, automation, and robotisation of processes, enabling fast, reliable, and efficient delivery to customers.

To support this digital transformation, the bank has made substantial investments to modernise our IT capabilities with a flexible architecture based on microservices, enhancing our agility and the reliability of innovations. Our data centre was certified as Tier III Design and Facility by the Uptime Institute, the only financial institution in the Dominican Republic with this achievement. Additionally, we have adopted cloud infrastructure and applications, enabling faster deployment, scalability, and efficiency.

What specific support does your bank provide to the tourism sector, given its significance to the economy of the Dominican Republic?
The tourism sector is vital for the Dominican economy, directly and indirectly influencing the country’s economic activity and employment. For over 30 years, Banco Popular has firmly supported this sector, earning the reputation as the ‘Tourism Bank.’ Our strategy focuses on maintaining long-term, sustainable relationships with all customers and stakeholders in the tourism industry, acting as an enabler of its growth. This commitment extends beyond having the leading tourism credit portfolio in the country to offering a comprehensive range of specialised products, including cash management, project financing, and merchant acquiring services tailored to the needs of tourism clients.

Banco Popular understands that each project has unique features, strategies, and requirements, and we adapt to support customers in their hotel investments and operations. In 2023, we financed projects investing over $500m in the country. For 2024, we have approved facilities for projects exceeding $700m, impacting over 4,600 rooms. Our tourism credit portfolio exceeds 40 percent of the banking loan portfolio to the sector. Over the years, this support has strongly incentivised foreign investment, resulting in the construction of over 26,500 rooms and the creation of more than 33,000 jobs in the country.

Banco Popular recognises the sector’s significance to the country and the importance of co-ordination with the government and tourism associations. As a result, we participate in all major tourism fairs to promote the Dominican Republic and its investment opportunities. Additionally, we sponsor, in collaboration with ASONAHORES, the main tourism study conducted in the country to assess tourism’s economic impact. More than 20 years ago, we established a specialised business area in the bank to oversee the tourism sector.

What measures has Banco Popular Dominicano taken to ensure financial inclusion across various demographic groups in the Dominican Republic?
Banco Popular was founded 60 years ago with a mandate to promote financial inclusion in order to assure economic and social growth in the country. One of our main objectives is to facilitate growth to all Dominicans in a sustainable way. Without a doubt, through financial education and inclusion, we support the country’s socio-economic development.

Banco Popular’s strategy involves socially responsible initiatives to expand access to financial services for the unbanked and underbanked. These initiatives include tailored products, accessible channels, and comprehensive financial education. Our deposit products, such as ‘Cuenta Digital Libre,’ along with bancassurance options and remittance services, are designed to meet the financial needs of this population simply and effectively.

Our channel offerings have expanded to reach more people with specific needs, incorporating innovative initiatives. Our APP ecosystem promotes financial inclusion and education with specialised applications: GNIAL for young people entering the financial system, YAVA for customers receiving remittances and accessing banking products, and Comerza for small merchants to transact with customers using QR codes. Additionally, we have ‘Subagente Popular,’ a network of merchants where customers can perform regular transactions conveniently and efficiently. These include hardware stores, pharmacies, grocery stores, and as well as other locations. The ‘Subagente Popular’ network currently includes about 2,000 affiliated stores.

In financial education, Banco Popular has helped over 200,000 SMEs and individuals. For individuals, we have a digital academy that offers free courses, workshops, and tools to help users manage their personal finances, through an online platform and in-person sessions. And for SMEs, we have Impulsa that gives guidance to small businesses to boost their competitiveness and enhance their financial management. Impulsa has a dedicated website and the most relevant SME conference that takes place annually.

Additionally, we offer a scholarship programme that covers the full cost of university education for low-income students. This scholarship has benefited more than 650 students who after graduating have gone on to work at leading companies in the country.

How does Banco Popular Dominicano plan to address the challenges posed by digital security and data protection in its operations?
One of the main challenges we will face in the coming years is cybersecurity and data protection. Financial institutions are encountering increasingly sophisticated attacks every day. Additionally, the emergence of artificial intelligence is providing new tools for cybercriminals to target our infrastructure and customers with fraudulent transactions.

At Banco Popular, we have recognised these risks and developed a robust cybersecurity strategy focused on cyber protection, monitoring, and fostering a cyber-aware culture among employees and customers.

In terms of cyber protection, we have implemented advanced security tools (EDR, NGFW, PAM, WAF, IDP, etc) to safeguard our data, infrastructure, and networks, both on premise and on the cloud. We protect customers with strong authentication protocols, including biometric authentication for high-risk transactions.

For monitoring, our Security Operations Center (SOC) utilises various tools (network detection and response, SIEM, automated response, etc) and AI models to detect potential breaches across channels, networks, emails, servers, and endpoints.

We understand that the awareness and readiness of employees and customers constitute the last line of defense against cybercriminals. Therefore, we have implemented a highly effective strategy to build a strong cyber culture among our employees, which includes certifications, frequent reminders, and ethical phishing campaigns. This awareness extends to our customers through campaigns via direct mail, radio, and social media, providing information on common attacks and tips on how to protect themselves.

 

For more information: https://popularenlinea.com/personas/Paginas/Home.aspx

 

Paris set for Olympics hosting gold

Posted on by itsupport

Holding an Olympic Games means evoking history,” said Pierre de Coubertin, the founder of the modern games as we know them today. On a fateful evening in 1894, Coubertin proposed a revival of the ancient sporting event, which had been confined to the history books for nearly 1,500 years. Setting out his vision to unite the world through sport, Coubertin imagined a future where the world’s major cities would step forward to host the competition – and in 1896 his hopes became reality. The Olympic Games were reborn in Athens, and sporting history was made.

Since then, 23 cities have played host to the summer Olympic Games. The appeal is plain – hosting the Olympics is a surefire way for cities to announce themselves on the global stage. For a few short weeks every four years, the eyes of the world are focused on one specially selected location, giving nations a prime opportunity to showcase their culture, traditions and perspectives to the world. In 1988, the Seoul Olympics helped to accelerate South Korea’s transition to democracy, while the 1992 Olympics completely revitalised the city of Barcelona, creating two miles of beachfront and a five-kilometre seafront promenade which have come to define the modern Catalan capital.

Staging the Olympics can have a truly transformative impact on cities. When managed well, hosting the games can increase tourism, boost local economies, and create a sense of community cohesion and wellbeing. Poorly managed events, meanwhile, can push host cities into fiscal black holes. Over the past few decades, escalating costs have somewhat dampened interest in hosting the games, with some cities dropping their bids after closer inspection of the anticipated balance sheet. There is no doubt that hosting the games comes with a hefty price tag, and cost overruns have become par for the course. The Olympics is in real danger of losing its appeal to potential host cities – and it is clear that something needs to change. That is where Paris 2024 promises to be different.

Breaking the bank
A century has passed since Paris last hosted the Olympic Games, and the city of love is once again gearing up to welcome another summer of sport. As final preparations are put in place, the French capital appears to have pulled off the impossible – it hasn’t blown its budget.

The growth of the competition has put increasing strain on host cities

By minimising new construction and maximising the use of existing infrastructure, the city is on track to deliver the cheapest Olympic Games in decades. Most of the games’ events will be held in existing stadiums, all of which are well served by public transport, reducing the need to undertake costly and time-consuming construction projects.

Elsewhere, historic sites will be temporarily repurposed into sporting venues, with Les Invalides set to provide a stunning backdrop to the event’s archery and para archery competitions, and Place de la Concorde to play host to BMX freestyle and skateboarding showdowns. A temporary outdoor arena will allow the Château de Versailles to host the games’ equestrian events, and beach volleyball will be played at the foot of the Eiffel Tower. In total, an impressive 95 percent of events will take place in existing or temporary structures, as the city looks to establish a new model for the Olympic Games.

This radical, low-carbon, low-build approach is a deliberate departure from previous events. For many, the Paris approach represents a much-needed reset for the games. Over the last 50 years, the cost of hosting the Olympic Games has skyrocketed. Spending has spiralled out of control, and host cities are too often left burdened with debts once the Olympic torch has moved on.

There are a number of factors behind these ballooning budgets. The first is quite simple – as the games themselves have grown, so have the costs. Over the past half a century, the number of teams and athletes attending the Olympics has almost doubled, and the number of events has steadily increased. At Tokyo 2020, 339 gold medals were up for grabs across 50 sporting disciplines – a far cry from the 43 gold medals and 10 sporting events at the first modern Olympics back in 1896. More competitors ultimately means more people to house and more mouths to feed, with athlete villages coming to resemble small cities in their own right.

The addition of new sporting disciplines has made the Olympics a more inclusive place, opening up the door to athletes from less mainstream sports, and boosting female participation in the games. But these new sports – competition climbing and skateboarding among them – also require high-quality specialised venues, which most host cities will need to construct from scratch.

More athletes and more sports might make for an entertaining Olympics, but the growth of the competition has put increasing strain on host cities. Here, Paris is once again determined to be different. The city will be reducing the number of events held over the course of its 17-day games – marking the first reduction in Olympic events since 1960.

The security bill
For many, the Olympic Games symbolise peace and global unity. But the high-profile nature of the competition has sadly made it a target for terrorism. In 1972, tragedy unfolded at the Munich summer Olympics, when gunmen killed 11 members of the Israeli national team. The incident had a profound impact on the approach to security at the games, and made event organisers acutely aware of the threat of terrorism at large-scale sporting events. In 1996, the games were once more devastated by violence, when a pipe bomb exploded in a crowd at Atlanta’s Centennial Olympic Park, killing one person and injuring over 100 more.

The terrorist attacks of 9/11 raised the threat of terrorism around the globe. Security at global mega-events suddenly became paramount, and spending on Olympics safety precautions quickly began to escalate in the post-September 11 era. In 2012, London’s security bill is thought to have ballooned to over £1bn, as event organisers initially underestimated the number of staff needed across its venues. More than 2,000 army reserves were called in to beef up security, with over 23,700 security staff ultimately needed to police the event. Since then, host cities have routinely racked up significant security bills, as threat levels remain high.

In addition to terrorism and potential violent disruptions, event organisers are now facing a new security risk: cyber attacks. During Tokyo 2020, security staff thwarted more than 450 million attempted cyber attacks, while a successful incident at the 2018 Pyeongchang Winter Olympics came close to shutting down the opening ceremony. Large-scale sporting events have become prime targets for cyber threats, due to both their global profile and their increasing reliance on digital infrastructure. Venue Wi-Fi networks, app-based ticketing systems and credential scanners are all vulnerable to attack, and if compromised, could bring an event grinding to a halt. Such an attack – as narrowly avoided at Pyeongchang – would prove as costly as it would disruptive.

Paris is on high security alert ahead of the Olympics. The French capital has experienced some of the most deadly terrorist attacks in modern European history, and the 2015 Bataclan musical hall massacre looms large in the national consciousness. April’s IS-claimed concert hall attack in Moscow has further added to security concerns, while recent threats made on a pro-IS media channel have caused growing unease. Amid these mounting anxieties over safety, the President of Paris 2024 has sought to reassure attendees that security is the games’ top priority. In an interview with BBC Sport, Tony Estanguet stressed that the event will be taking place under an “unprecedented” security protocol, with over 2,000 private security agents joining 40,000 police and gendarmes to provide enhanced protection across the games.

While Estanguet insists that the budget remains balanced, this additional security comes at a cost. Paris 2024 will be spending £320m on private security – but delivering a safe and secure summer event may ultimately prove priceless.

The good, the bad, and the costly
For better or for worse, each Olympics host city leaves its own lasting legacy. Some go down in history for all of the right reasons, while others live on in infamy due to mismanagement, corruption and controversies. Sydney’s Olympic legacy continues to live on, almost 25 years after it pulled off one of the best ever games. Montreal, meanwhile, is routinely held up as a cautionary tale for prospective hosts, after the 1976 games left the Canadian city $1.6bn in debt.

When Montreal’s winning bid was announced, confidence was high. With the initial budget coming in at a modest £65m, the city looked forward to an economic windfall during the games. Montreal mayor Jean Drapeu even claimed that “the Olympics can no more lose money than a man can have a baby.” This early optimism was profoundly misplaced. Construction costs quickly ballooned, and poor project management resulted in lengthy delays to the erection of the Olympic Park. Union strikes and cost inflation further slowed delivery, and the opening ceremony was forced to take place in an incomplete stadium. When construction finally completed, Montreal’s Olympic budget was 13 times more than originally predicted. The city was saddled with $1.6bn in debt, which took until December 2006 to fully pay off. In the years that followed, a number of fraud and corruption charges were brought against top officials and contractors, and an official inquiry was launched into the disastrous costs of the games.

To this day, Montreal continues to feel the effects of the summer 1976 games. Public services suffered for decades as the city grappled with the Olympics debt burden, with city hall pushed to the brink of financial ruin. The ‘Big O’ Olympic stadium has become an undeniable feature of the Montreal cityscape, but costs C$32m each year to operate and maintain. Earlier this year, the Quebec government announced that it would spend a further C$870m to repair the stadium’s dilapidated roof – a mammoth renovation that will take four years to complete.

Montreal may be the most infamous example of Olympics mismanagement, but it certainly isn’t the only host city to struggle to balance the books once the games have moved on. The final bill for Athens 2004 is thought to be an eye-watering $11bn, and helped push Greece towards bankruptcy in the wake of the global financial crisis. Rio de Janeiro’s 2016 summer games left Brazil with a $32m debt pile – which has risen to an astonishing $113m in the years since.

We want to demonstrate that Paris and France can deliver a games in a different way

According to research carried out by Oxford University, the average Olympic Games experiences a cost overrun of 172 percent, with inadequate cost estimates, poor contingency planning and mission creep all contributing to skyrocketing final bills.

For many cities, the financial burden of hosting the games simply outweighs any short-term benefits it might bring. Interest in holding the prestigious competition has waned in recent years, and public spending has grown ever more constrained in a post-Covid world. Rome, Hamburg and Budapest all withdrew their bids to host the summer 2024 games, leaving Paris and Los Angeles as the only remaining candidates. As bids and enthusiasm dwindle, the Olympics desperately needs to find a path to profitability – and the solution may not be as complex as commonly supposed.

Going for glory
After the financial debacle of the Montreal 1976 Olympics, hosting the games became an unpopular gig. Los Angeles was the only city to bid for the 1984 event, and despite the doubters and naysayers, the city achieved the seemingly impossible – it pulled off the first profitable Olympics since 1932. The city’s strategy was simple: low build, low spend and hefty private sector investment. Most events took place in existing venues and facilities, with the famous Pasadena Rose Bowl and majestic LA Memorial Coliseum both reused after featuring in the 1932 LA Olympics.

Just two new venues were constructed specifically for the 1984 games, and were made possible by generous corporate sponsorships from 7-Eleven and McDonalds. The private sector picked up the tab for the state-of-the-art communications infrastructure required for the summer’s events, and broadcast deals brought in a healthy stream of income for the city. The organising committee sold the television broadcast rights to ABC for $225m, marking one of the most expensive deals in the history of televised entertainment.

While critics at the time bemoaned the over-commercialisation of the Olympic Games, the private sector support at Los Angeles 1984 saw the city turn a tidy profit of $223m. The Olympics windfall allowed the organising committee to establish the LA84 Foundation, a non-profit that promotes youth sports opportunities across Southern California, ensuring a lasting legacy for the event.

The Paris approach represents a much-needed reset for the games

But the impact of Los Angeles 1984 extends much further than the city itself. The event showed the world that a profitable Olympic Games is possible – it just requires a different approach. The Los Angeles model for success embraces private sector sponsorship, but also rejects excess in favour of using existing venues and infrastructure. It shows that spending big is no guarantee of success, and that hasty, expensive construction projects are often more trouble than they are worth.

In the years that followed, however, the world turned its back on the Los Angeles Olympics blueprint. Overspending once again became the norm, with cities falling back into the trap of white elephant vanity venues and poor legacy planning. That is, until Paris. The French capital is looking to reverse the trend of cost overruns and blown budgets, and is wholeheartedly embracing private sector funding. In total, private funding will cover an impressive 96 percent of the cost of the Paris Olympic and Paralympic Games, with public authorities left to cover just four percent of the bill. With the French state well cushioned against costs, this could be the first Olympics to officially break even since the year 2000.

A new era
In 1896, a millennia-old tradition was revived and reinvented for a new age. In 2024, the Olympic Games are undergoing another profound transformation. The days of pure spectacle and excess are over, replaced by a new focus on financial, social and environmental sustainability.

“We want the legacy to be different,” Olympics Chief Tony Estanguet explained in an interview with Time. “Not a legacy of having fantastic venues, but how this project can help a population.”

Just two new purpose-built venues have been constructed for the Paris Games, and both are specifically located in lower-income areas of the city. The Porte de la Chapelle Arena, known as the Adidas Arena after its corporate sponsor, has been built in one of Paris’ most deprived neighbourhoods. Far from the bustling tourist hotspots of central Paris, the Porte de la Chapelle sits to the far north of the city centre, and has long been associated with drug dealing and crime.

The new stadium is a key part of the Olympic Committee’s urban regeneration strategy, and looks to kick-start a programme of further renewal and redevelopment in the disadvantaged neighbourhood. New apartments are set to be built in the area, with 35–50 percent of units earmarked for social housing. Once the games have moved on, local schools and clubs will be able to make use of two onsite gymnasiums at the Adidas Arena, in an effort to boost sports participation in the area.

Over the past few decades, escalating costs have somewhat dampened interest in hosting the games

A few miles north, on the other side of the Paris périphérique ring road, a state-of-the-art aquatics centre has been built in the low-income neighbourhood of Saint-Denis. One of the poorest départements in the Greater Paris area, over a quarter of Saint-Denis residents live below the poverty line. The regeneration of this much-maligned area was at the very heart of Paris’ winning bid to host the Olympics, and many have high hopes that the games will help to fast-track further investment into the neighbourhood.

Along with the new, eco-friendly aquatics centre, Saint-Denis will also be home to the Olympics Village, welcoming 14,000 athletes over the course of the games. And once the Olympic torch has moved on, the village will be transformed into housing for up to 6,000 people – with a quarter of those homes reserved for public housing.

This programme of regeneration and investment may not be a silver bullet for Paris’s poorer neighbourhoods. But it does demonstrate a clear ambition to leave a lasting legacy of inclusive growth – and the games could prove to be a much-needed catalyst for change. Aside from its commitment to urban renewal, the Paris Olympics Committee is also dedicated to delivering the ‘greenest-ever’ games. Organisers have promised to halve the carbon footprint of previous games, and have vowed to double the amount of vegetarian food on offer at venues, in a sustainable approach to feeding athletes and spectators. The games’ limited construction has primarily used natural, bio-based building materials, and the Olympics Village will be powered by geothermal and solar energy.

“We want to demonstrate that Paris and France can deliver a Games in a different way than in the past,” Estanguet said in an interview with BBC Sport. Paris is setting the stage for a new wave of cost-effective, low-carbon and low-build Olympic bids. Its slimmed-down approach has, so far at least, proved better for the budget and better for the planet, and its legacy planning seeks to kick-start positive change for the city’s most disadvantaged citizens. As tourists flock to the French capital in their millions, Paris could take in up to $12.2bn over the course of the event, according to predictions by the International Olympic Committee. If it is able to pull this off, the city may just turn the Olympics from financial burden to economic boon.

The stage is set for a truly momentous event. And away from the excitement and spectacle of the medal ceremonies, the city of Paris may just emerge as the greatest winner of all.

The world cannot afford to ignore the poorest countries

Posted on by itsupport

They are home to a quarter of humanity – 1.9 billion people. They possess prized natural resources, including one-fifth of the world’s copper and gold reserves, as well as many of the rare metals essential for the transition to clean energy. Their working-age populations are set to expand for the next five decades amid demographic decline nearly everywhere else. Yet a historic reversal is underway among the world’s 75 countries eligible for grants and low-interest loans from the World Bank’s International Development Association (IDA).

For the first time this century, the income gap relative to the wealthiest economies is widening in roughly half of IDA countries. And while these countries are midway through what could be a lost decade, the rest of the world is largely averting its gaze. IDA countries have an extreme-poverty rate eight times higher than the global average. They account for 70 percent of all extreme poverty, and they are home to 90 percent of people facing hunger or malnutrition. Many of their national governments, meanwhile, are paralysed, and half are either in debt distress or at high risk of it.

The flow of foreign capital has largely dried up for IDA countries. In 2022, for the first time in 16 years, private creditors took more in principal repayments than they put in via loan disbursements to IDA governments and government-guaranteed entities. Financing from foreign governments dwindled to an 11-year low. The remaining lifeline has been multilateral development banks, especially the World Bank, which provided more than half of the $26bn in loans that IDA governments received from multilateral creditors in 2022.

We are witnessing a dangerous retreat from the principles upon which much of the global economic architecture was built after the Second World War. Back then, the wealthiest economies wisely recognised their interest in improving the welfare of the weakest. The 17 donor countries that made their first financial contributions to the IDA in 1960 believed that an acceleration of “economic and social progress in the less-developed countries is desirable not only in the interests of those countries but also in the interests of the international community.”

The global prosperity that followed validated this insight. Three of today’s global economic powerhouses – China, India and South Korea – are former IDA borrowers whose growth has transformed them into important IDA donors.

The path to prosperity
Of course, the path to prosperity is rarely linear. Progress often occurs in fits and starts, with some countries advancing and then regressing. But there is no doubt that the IDA’s consistent support for the weakest economies has done immense good for the world. In all, 36 countries that were once IDA borrowers no longer depend on it, with a dozen ‘graduating’ in the last two decades alone.

Today’s IDA countries account for a mere three percent of global GDP. Yet their economic potential is considerable, owing to the demographic dividend inherent in their population growth. These countries will have deep reserves of young workers at least through 2070, long after working-age populations in other countries have dwindled.

The flow of foreign capital has largely dried up for IDA countries

IDA countries are endowed with a trove of mineral deposits that are crucial for the world’s transition to clean energy – including silicon in Bhutan and manganese in Ghana. Most IDA countries are also well placed to take advantage of solar energy, with long-term daily generating potential among the highest in the world. But IDA countries will enjoy neither durable growth nor stability unless they can make productive jobs readily available for young people entering the workforce, and that will require substantial investment in health and education. Moreover, lasting benefits from their natural-resource wealth will remain out of reach without government institutions capable of nimbler economic management.

Ensuring that IDA countries achieve their full potential will require a concerted effort involving vigorous domestic reforms and stronger financial and policy support from abroad. South Korea, India and China have shown that when countries undertake the ambitious reforms needed to accelerate investment, a kind of economic magic occurs: productivity surges, incomes rise, and poverty falls.

Investment needs in IDA countries are immense. In some, improving access to electricity and basic sanitation facilities will require infrastructure investments exceeding 10 percent of GDP. On average, each IDA country today has succeeded at least once over the past 50 years in achieving sustained investment acceleration. But that is only slightly more than half the average of earlier groups of IDA countries. To raise their game, today’s IDA countries will need to bolster fiscal and monetary frameworks, ramp up cross-border trade and financial flows, and improve the quality of institutions.

Global assistance will also be essential. IDA countries deserve financial support from abroad and fresh policy solutions to make the transition to clean energy. Already, climate change is making them pay a steep penalty for others’ sins. They also need an improved global debt-restructuring system. The current framework consigns them to an indefinite purgatory. And they need global help to tackle food insecurity, especially now that faraway international conflicts and trade disruptions have added to the problem.

In the coming decades, the world will need to summon every available reserve of economic potential to achieve universal peace and prosperity. It simply cannot afford to turn its back on a quarter of its people.

Germany needs another miracle

Posted on by itsupport

In what must now seem like Germany’s halcyon days of 2015, then chancellor, Angela Merkel told a press conference in Berlin “I am happy that Germany has become a country that many people abroad associate with hope.” It was a statement recognising Germany’s commitment to those seeking asylum and the additional $6.7bn needed to accommodate the system during the height of the migrant crisis.

How heavily those words must weigh on her successor, Olaf Scholz, and indeed, on his compatriot and President of the European Commission, Ursula von der Leyen, in 2024. While Germany may still hold the hopes of migrants in its hands as applications rose to 2015 levels last year, hope must be in short supply in its halls of power. For Germany as an economic power and figurehead of the EU finds itself somewhat beleaguered these days. Long have the Germans been the adults in the room, shouldering the responsibility not just for a nation but the EU too.

As Merkel herself said in the same speech, helping others “is something very valuable, especially in view of our history.” And it is perhaps towards history that Germany must now turn in order to find a path forwards out of its current slump.

By the end of the Second World War, Germany was, in essence, a ruined state with much of its population displaced and malnourished, its buildings destroyed and its economic infrastructure collapsed. It became known as Germany’s ‘Stunde Null’ or ‘Zero Hour,’ a blank slate as it were, a place from which everything would have to be built anew. Its people seemed to be facing a bleak and uncertain future, but by the time the Berlin Wall fell in 1989, Germany had the third largest economy in the world, and still holds onto its top three position today. The country needed a miracle in order to recover and it got one.

Germany did not invest enough money into the electricity supply system for many years

According to Eichengreen and Ritschl in their LSE working paper Understanding West German Economic Growth in the 1950s, the country’s remarkable turnaround reflected its “convergence to the productivity frontier, a process during which investment and growth were higher than normal.”

The effect was so pronounced that the Germans coined a word for it: ‘Wirtschaftswunder’ or ‘economic miracle.’ In reality, regaining control over inflation, as well as efficient labour practices, was what helped to create the conditions needed for productivity. But productivity relies on industry and industry requires energy, in all its forms.

Energy independence
During a recent speech to the German Chambers of Industry and Commerce, Reuter’s reported Scholz saying “the German economy has faced unprecedented challenges over the past two years or so since Russia’s invasion of Ukraine.”

Germany’s over-reliance on relatively cheap Russian energy was just one of several major problems it has needed to address in recent years. Out of the G7 economies, Germany’s was the only one to shrink last year, with an aging workforce and underinvestment counted among the reasons why.

Germany’s economic advisors have cut growth projections for 2024 to 0.2 percent. In the last quarter of 2023, the economy shrank 0.5 percent. As the IMF reports: “with this cheap gas no longer available, the German manufacturing model does not work anymore,” and as of last year, Germany’s manufacturing sector has slipped into recession.

A new deal was brokered with Qatar in 2022 for two million tons of liquefied natural gas (LNG) each year starting from 2026, but this alone is not enough to solve Germany’s energy crisis. Markus Krebber, the head of RWE, a German multinational energy company, said in a recent interview: “the root cause for our problems is that Germany did not invest enough money into the electricity supply system for many years.” In order to achieve this, investment and expansion in renewables must be a priority. Krebber goes on to say, “Germany, with its energy-intensive industries, should have started to take action in this regard 10 years ago or even earlier.”

From this perspective the way forward seems to be: invest in renewables, the lights stay on in the factories and everything else falls into place. But is it that simple? Unfortunately not.

According to the IMF some of Germany’s problems are temporary and some are structural, but wholesale gas prices are now back to 2018 levels, so while energy will always be a factor in production costs and overall competitiveness, it is not the only factor.

A temporary issue such as higher inflation has caused consumers to hit pause on purchases and in order to counteract inflation, the ECB raised interest rates, which in turn caused depression in interest-sensitive areas such as construction. The more fundamental structural issues are productivity growth and an aging workforce (see Fig 1).

Making more market miracles
The German economic miracle following the end of the Second World War was achieved via the introduction of the ‘soziale Marktwirtschaft’ or ‘social market economy,’ which finely balances free-market capitalism with social policy. Germany’s remarkable recovery from the ravages of war was forged in a liberal market economy and returning growth to productivity now could also benefit from less government interference and a ‘Goldilocks zone’ of regulation that balances fair competition and the welfare state.

We need factory workers, engineers, doctors, care workers

In terms of the workforce, the IMF also believes that “over the next five years, the growth rate of Germany’s labour force will drop by more than in any other G7 country.” This, they say, is a result of baby boomers retiring and the current migrant wave coming to an end. Solving this issue could be achieved by raising immigration levels, but regulating immigration is an incredibly difficult balance to strike, as Scholz says himself in an interview with Der Spiegel in October last year.

“We must be firm in cases where someone does not have a right to stay. But at the same time, we have to be open and modern, because we need workers from other countries.”

The chancellor is well aware that Germany needs more workers and more immigration: “Around 13 million citizens of Germany – affectionately referred to as the baby boomers – will soon be heading into retirement. That is why we need factory workers, engineers, doctors, care workers.”

In fact it is clear from his Der Spiegel interview that the chancellor recognises the maladies of Germany’s structural issues and how to treat them, but the world is a changed place, made evident by the rise in popularity of right-wing populist parties such as Germany’s AfD, who are in direct opposition to Scholz’s Social Democratic Party (SPD).

The task ahead of Scholz is not for the faint of heart and I believe that this has as much to do with addressing Germany’s temporary and structural issues as it does with handling the insecurities and anxieties of Europe’s citizens. Kicking off the EU election campaign in Hamburg in April, Scholz rallied behind the SPD with the mantra: “we need hope.” We sure do.