Helen | World Finance

Saudi Arabia tackles its oil dependency

Posted on January 12, 2016January 20, 2016 by Helen

The current oil price slump began in June 2014, and has since sent ripples throughout the global economy. For Saudi Arabia, the world’s biggest exporter of the commodity, the impact has been direct and palpable: given that more than 80 percent of government revenue is earned through its petrochemical sector, over the past year the nation has amassed a budget deficit of around 20 percent of its GDP. And yet, despite the drop in income for the Saudi state, spending did not slow in 2015 – in fact, in some areas it even increased.

According to figures published by the Stockholm International Peace Research Institute (SIPRI) in April 2015, Saudi Arabia has become the world’s fourth biggest military spender, having increased its defence budget by 17 percent between 2013 and 2014. The annual $80.8bn that the country now spends on arms can be attributed to worsening levels of security in the region and a sustained military campaign in Yemen, both of which show no signs of abating. What’s more, spending elsewhere also continued at a fervent pace last year, not only on state infrastructure and large-scale projects, but also on what some may consider unnecessary endeavours: one such expenditure that received widespread criticism was the coronation celebration for King Salman bin Abdulaziz Al Saud, which totalled a mammoth $32bn.

Saudi Arabia’s rising deficit, together with its spending sprees, has led international onlookers to make downcast predictions about the kingdom’s economic wellbeing and future. In October 2015, the International Monetary Fund (IMF) estimated that Saudi Arabia would be bankrupt within the next five years, a suggestion that saw a horde of media outlets echoing the prognosis. While it is true that the state’s foreign reserves have fallen by around $72.8bn, the reality of the state’s economic situation is far more complex – and far less dire – than is presumed in the IMF’s forecast.

The Saudi Arabian economy has weathered similar storms in the past – more severe ones, in fact – and survived intact

Overstating implications
While it was presenting its bankruptcy predictions, the IMF failed to include a number of crucial details regarding Saudi Arabia’s current monetary policy and the robustness of its economy. “These expectations are not only exaggerated, they are outright wrong”, said Jan Dehn, Head of Research at the Ashmore Group. “Saudi Arabia used the oil boom of the past decade to pay down its debt. As oil prices fell last year, it had one of the lowest debt levels in the world (a low single digit figure as a percentage of GDP). It had also established a huge stock of forex reserves. This has given [the country] considerable room to manage the adjustment to lower oil prices in a gentler manner than other countries that had prepared themselves less well.

“[Saudi Arabia’s] initial response has been to sustain domestic demand by issuing more debt and running down forex reserves. However, since the currency is pegged to the US dollar and unlikely to change, it will ultimately have to bring down domestic demand to be consistent with lower external revenue. This points to a gradual reduction in domestic demand stimulus – but bankruptcy is simply not on the books.”

Diminished foreign reserves are mostly responsible for the bankruptcy prediction made by the IMF and other media outlets, but what many did not make clear is that, rather than spending this capital, as was widely presumed, around $71bn of the $72.8bn had actually been transferred. As a precaution, the Saudi Arabian Monetary Agency (SAMA) reinvested foreign capital into less volatile and lower risk products. “It is public information that Saudi Arabia’s reserves have been declining. Oil revenues are lower, and [the government] has chosen deliberately to sell reserves in order to maintain the import levels associated with the recent levels of domestic demand. However, this policy is obviously not sustainable and Saudi Arabia is likely to move to more debt issuance and gradually lower domestic demand in order to stabilise reserves”, Dehn told World Finance. Furthermore, last year the government introduced a series of departmental and ministerial budget cuts in addition to tightening the management of its finances and eliminating discretionary spending at one stage. Likewise, infrastructure spending has been reviewed, resulting in the extension of various large-scale projects, such as the Riyadh and Jeddah metros, and the postponement of others, including the construction of new sporting stadiums. Such moves indicate that the government is in fact taking measures to curb its spending until oil prices increase once more.

Naturally, one downside to this necessary strategy has been a reduction in confidence in the country’s private sector, as it still relies largely on government expenditure. And yet, interestingly, Riyadh has actually begun working towards the privatisation of state-owned infrastructure facilities and enterprises, starting with the sale of its stake in the National Commercial Bank.

Long-term strategy
The state’s deep-seated economic transition does not stop there. At present, Saudi Arabia is implementing a long-term holistic strategy to create the much-needed diversification that its economy requires. Being so dependent on one sector is not conducive for the sustainable economic growth of any country, and this is a fact that the Saudi government is all too aware of. As such, its focus on helping the development of other industries, such as mining, automobiles, plastic and pharmaceuticals, is enhancing swiftly. Moreover, the nation’s financial sector is better positioned than many would assume, with a consistently low rate of non-performing loans, while bank reserves remain high (see Fig. 1).

In order to help lower the budget deficit, Riyadh began issuing domestic bonds last summer. Of course, diversification is needed in the long-term so as to maintain adequate levels of available liquidity for private sector loans, but the decision certainly helps somewhat in the immediate-term as well. Likewise, the government has also decided to participate in the international bond market for the first time, which is expected to take place in January. This is another prudent move, as tapping into international debt markets can help fund government spending without resorting to the absorption of bank liquidity.

Also during the summer of 2015, Saudi Arabia opened up its stock exchange, the Tadawul, to foreigners for the first time in the country’s history. The decision to do so again plays a big role in the government’s wider strategy to diversify the economy away from oil. Although a flood of foreign capital was not witnessed from the outset, an increasing flow can be expected as international investors realise the potential of many of Saudi’s non-oil markets. Moreover, in two to three year’s time, the kingdom is expected to achieve the MSCI ‘emerging economy’ status, which will not only encourage foreign investment considerably, but will also fully immerse the state into the global community of emerging economies.

A clearer understanding
Again, the Saudi economy is one that is often over-simplified and understated. Certainly, there is much work to be done before Saudi Arabia can be said to have reached the next stage in its economic development, and while oil prices remain low, the nation’s oil exporters continue to face a significant hit. “SAMA can only do so much”, Dehn explained. “Changing the composition can only affect the level of reserves at the margin. Perhaps more important for the level of reserves are (a) oil prices, (b) Saudi’s current account and the factors that drive domestic demand, including fiscal policy and exchange rate policy, (c) Saudi’s capital account – here the government is gradually opening its market, which could result in inflows – and (d) global exchange rate movements – for example, reserves can change even if there are no flows at all. Ultimately, I think the level of reserves is mainly decided by the oil price and by broader government policy, particularly exchange rate policy and the management of domestic demand. This is outside of SAMA’s remit.” Yet the low oil prices of present are only a small glitch in the wider scheme of things.

It is worth noting that the Saudi Arabian economy has weathered similar storms in the past – more severe ones, in fact – and survived intact. During the recession of the 1980s and 1990s, Riyadh faced far greater fiscal challenges than it does today: its cash reserves were only 25 percent of its GDP, in comparison to being 100 percent in 2014. Furthermore, the nation’s budget deficit rocketed to 52 percent in 1983 and then climbed to its highest ever level of 77 percent in 1991, yet once again, the economy prevailed.

In the years since, the government has set itself on a path of market diversification and greater participation in the global economy. Additionally, the country’s levels of inequality and unemployment have improved significantly over the past decade. As such, Saudi Arabia is still in the process of undergoing a transformation that will improve its social capital and encourage more parties to participate in its growing private sector. Of course, these measures take time, particularly as they are tied to social status and cultural perceptions – but what is important is that they have begun.
As for the issue of bankruptcy, given the reserves that the state accrued during the years of the oil boom and the discernible financial steps that it has taken over the past year, this scenario is simply not on the cards.

China’s urbanisation developments cause mass movement of people

Posted on January 12, 2016January 21, 2016 by Helen

For thousands of years, the vast majority of Chinese people lived in rural areas. While the emperors held their seats in powerful cities, the ordinary people toiled in the countryside. Rural China was also instrumental in the official story of how the Chinese Communist Party assumed power, with Chairman Mao’s strategy being to build up strength in the countryside before surrounding the cities. Now, however, it is the cities that are increasingly surrounding the countryside.

Chinese urbanisation has triggered the biggest movement of people in history. Rural to urban migration has been a constant in all industrialising economies – from the forced enclosures of early modern Britain, to the creation of slums rimming Latin American cities in the 20th century – but never has such a large wave of humanity departed the countryside for the city as in China in recent years. When China’s Communist Party leaders assumed power in 1949, only 12 percent of the population lived in urban areas. Since the gradual liberalisation of internal migration and economic growth since the 1980s, just under half of China’s billion-plus population has become urbanised.

300 million more Chinese citizens are expected to join them by 2030 – a figure which will require nearly 1.5 million people, roughly the population of Estonia, to become urbanised every month. Chinese urbanisation, however, is not as straightforward as simple rural to urban movements: while old cities are absorbing China’s newly urbanised population, and new cities are springing up, China is seeing urban growth in other, less conventional ways. There are many aspects of China’s urbanisation to consider when trying understanding the astronomical figures.

Nation reclassification
A large part of the urbanisation that China is experiencing is not coming from any migration at all. Of the hundred of millions of Chinese people that have become urbanised in the past few decades, many have become so through the reclassification of Chinese land. Of the projected 300 million new Chinese urban dwellers, 40 percent are expected to become so without having to leave the area in which they live.

Never has such a large wave of humanity departed the countryside for the city as in China in recent years

As Wade Shepard, in his book Ghost Cities of China, noted, this method of urban development in China is known as ‘chengzenhua’, or townification. This, Shepard wrote, is the “transformation of an existing town or village into a small urban centre. It is not urbanisation in the sense of the creation of a city, but the legal reclassification of an area once classed as rural into urban”.

According to The China Story, chengzenhua urbanisation consists of four major components, as sanctioned by the state: “Converting collective land ownership to state ownership; converting the rural household registrations of villagers into urban registrations; reassigning social services provided by village collectives to selected municipal bureaus; and redeveloping villages according to the urban spatial planning regime.”

While this sort of urbanisation is much less intense than that associated with images of concrete tower blocks being erected at breakneck speeds, it is – and will be – much more widespread and in many ways is more experimental and radical. “Rather than migrating to the cities, the cities will literally come to them”, Shepard observed. “This is perhaps one of the largest social experiments that has been played out in human history.”

Cities within cities
Another unusual aspect of Chinese urbanisation is the creation of what amount sub-cities, within the boundaries of existing cities. These new outskirts cities are often larger than many major cities in the West.

For instance, Zhengdong New District is an urban area the size of San Francisco. By 2020, Shepard noted, it will be home to five million people. Founded at the start of the century, and kicked off with $25bn of state funding in 2003, Zhengdong New District seems to have all the hallmarks of an emerging city. Yet a city, in the traditional sense, it is not. Rather, it is an appendage of an even larger city, Zhengzhou, the capital of Henan province.

Zhengzhou is a city of 11 million people and is growing by nearly 10 percent every year, largely as a result of China’s great rural to urban migration. The city itself is old, although it has gone through a number of transformations over the centuries. As this historic city is stretched to its limits, new urban areas such as Zhengdong New District offer an opportunity to relieve some of the pressures of constant expansion. According to Shepard, such new areas on the outskirts of historic cities are acting “as modern, better functioning, car-friendly complements of existing cities”.

Shepard added: “Municipalities all across China are doubling down and building newer versions of themselves.” For instance, Shanghai has developed Pudong, home to five million inhabitants, in a similar fashion, while Tianjin has its Binhai New Area and Changsha has its new eco-city Meixi Lake City. In China, a “twin city paradigm” is emerging, according to James Von Klemperer, designer of Meixi Lake City.

As noted, the increased strain on old cities is seeing these new zones spring up on municipal outskirts. However, it would be a mistake to think of these areas as the sites of migration for new populations pouring in from the countryside. Rather, it is the wealthy citizens in the old historic centres who are moving out to the new urban developments, leaving the crowded centres of historic cities to incoming migrants.

Land grab
China itself isn’t exactly lacking in land, but, as Shephard noted, “along with manufacturing new cities, China is also manufacturing the land that some of them are built on”. For instance, the city of Gansu Province in north-west China, home to over three million people, is sandwiched on narrow 50km strip of land, between the Yellow River and a mountain range. According to News China Magazine, this has caused trouble for its expansion: “It has been suffering from a severe shortage of usable land for years. The city’s airport, for example, had to be built 75km from the downtown area.”

“At present, only 1.3 square kilometres of land is available each year for urban construction in Lanzhou, the smallest area of any city throughout the country. Given the current pace of urbanisation, Lanzhou will have no land for construction within five years”, Li Changjiang, Vice-Director of the Lanzhou Land Resources Bureau, told News China Magazine. As a result, the city has been engaged in a number of plans aimed at levelling and reclaiming land from the surrounding mountains. At the same time, Chinese urbanisation is reclaiming land from the sea. One example among many is Nanhui New City, a new urban area being built within Pudong that is planned to be complete by 2020 and is already home to over half a million people. Built at the tip of the peninsula between the Yangtze and Qiantang rivers, a large part of this new urban development was reclaimed from the sea.

Future towns
Many of China’s new urban builds have been mistakenly labelled ‘ghost cities’, due to the relatively small number of people currently populating them. Reporters from various news outlets have ventured into recently built urban districts or cities, filming eerie footage of seemingly abandoned and uninhabited neighbourhoods. Gazing upon the formidable tower blocks and lonely, wide streets, with scarcely a person in sight, the conclusion is often that China’s urbanisation efforts are in serious trouble.

Yet, in reality, these new cities are not ghost cities: they are yet to be inhabited. These new urban centres are expected to eventually be filled up with new dwellers, looking for city-style homes and lifestyles. Construction on many of these only began in the 2000s; just a decade ago they did not exist. Most of those currently unoccupied were always expected to be so at this moment in time. Most outlines for the construction of new areas put the timeline for completion at 19 to 22 years, noted Shepard. As a result, many are only at mid-development level. As Shepard wrote: “All of the new cities, towns and districts that have been heralded as ghost cities in the international media are just that: new.”

China is in the midst of an extraordinary transition in many ways. Since the 1980s, the country has racked up a number of impressive achievements: the largest amount of people raised out of poverty, unprecedented levels of economic growth, and the largest movement of people from countryside to city – and on the back of all this, it is undertaking the greatest urbanisation project in human history. By 2020, one in eight people in the world will live in a Chinese city.

Addressing the youth unemployment crisis through externships

Posted on January 12, 2016January 21, 2016 by Helen

When it comes to introducing fresh faces into the workplace, one often-heard complaint is that secondary and tertiary education offers little-to-no experience of the skills that are required in industry. With this in mind, alternative forms of employment have emerged as a means of easing new candidates into the workforce – and though the pay is less, the insight into any one particular field of work is invaluable for jobseekers.

Internships, for example, have enjoyed a sudden surge in popularity in recent times. The model is not without its critics, however: ‘exploitative’, say some, and ‘menial’, say others. Indeed, the promise of valuable experience has been obscured somewhat by employers who see the system as little more than a way of accessing cheap – or even free – labour. But irrespective of its critics, the fact remains that ideas like this hold the solution, at least in part, to a youth unemployment crisis in Europe, the US and beyond (see Fig. 1). As such, externships have re-emerged recently as a means to this same end.

Rise of the externship
In short, externships give students and workers an opportunity to shadow an experienced professional, usually over a much shorter timeframe than an internship or apprenticeship might. While internships usually last upwards of four weeks, externships typically range from one day to two weeks and involve far more observation than they do hands-on experience. With less practical work on offer, the nature of the process means that the level of commitment is less for both the student and the company in question.

“Externships serve as valuable opportunities to become immersed in a host’s (and hosting organisation’s) daily activities in order to gain a better understanding of a particular career field”, according to Melissa Schultz, Associate Director of Gateway Programme and Graduate School Advising at Lafayette College. “While traditionally observational in nature, some opportunities may allow for the extern to gain hands-on exposure to work tasks. Through externships, students are often able to attend meetings, tour the workplace, visit with clients and meet with other members of the organisation.”

Externships have been welcomed by employers, as well as students, as a means of plugging the skills gap that exists in certain industries

Those in favour of externships usually hold the opinion that graduates are of limited use to employers without at least a brief stint of practical training, and so learn-and-earn programmes could play an important part in preparing workers for a particular career. “Learn-and-earn is important in today’s increasingly competitive and turbulent work environment, particularly for low-income or under-skilled workers who seek better jobs, a better standard of living and a potential for career success”, according to An analysis of US learn-and-earn programmes, a report published by Michigan State University’s Collegiate Employment and Research Institute.

Keith Bevans, a partner at Bain & Company and leader of the firm’s global consultant recruiting, told World Finance, “At Bain, externships have been a part of our professional development offering for a really long time. I think the surge [in popularity] is felt more by companies that have not thought about it as part of their employee development toolkit. Many young professionals are interested in validating the career vision they have. For us, allowing them to do externships has been a great tool for them to ‘scratch the itch’ while staying at Bain.”

Getting a head start
Mentoring and networking are invaluable aspects of the experience, and an opportunity to preview a field of work can offer a real and intelligible insight into what exactly the job demands of entry-level candidates. Those involved in the scheme often report that the process leaves a long-lasting impression on them during their time in work and, crucially, their decision over which field they would like to work in. “Students benefit from externship opportunities in a myriad of ways”, Schultz told World Finance, “including gaining a realistic understanding of a career field, exploring career options connected to their major, learning about the daily activities of an occupation, gathering information and advice by asking questions of their host and colleagues, and gaining insight that allows them to plan for future courses, internships, and other ways to explore their career interests.”

Schultz told Forbes in 2013 that 86 percent of the students in a Lafayette survey reported that they had stayed in touch with their extern host. What’s more, 99 percent said that an externship had helped them to clarify their career goals, and as many as 93 percent of the hosts surveyed confirmed they would participate in the programme again if given the opportunity.

“For some students, an externship may be their first exposure to a professional setting, which can also help them to gain first-hand experience with standard business practices, professional etiquette, and the culture of the organisation and/or industry they’re exploring”, she told World Finance. “Each of these benefits translates into allowing them to launch professionally (upon graduation) with greater confidence and clarity around the alignment between their skills, abilities, and interests with the professional pathway they are exploring.” However, placements like this are not always the responsibility of the student, and a number of schools and universities are fast beginning to realise that too many students are graduating ill-prepared for the working environment. Discerning institutions, therefore, are forming partnerships with major industry names in the hopes that doing so will smooth their transition into the workplace. “Our education system can no longer afford to wall itself off from the world of industry”, wrote Ayesha Khanna, Co-Founder and CEO of The Keys Academy, in a Project Syndicate opinion piece.

Youth unemployment
The resurgence of the externship concept, which first appeared in the Merriam-Webster dictionary of 1945, at this moment in time is no coincidence: with the issues that are currently plaguing the labour market, both in the US and across Europe, an extra bit of experience can make all the difference.

Looking at figures compiled by the International Labour Organisation (ILO) in its Global employment trends for youth 2015 report, the youth share of global unemployment stood at a worrying 36.7 percent in 2014, and deficiencies in job quality are troubling developed and developing markets alike. On a smaller scale, youth unemployment in the Middle East, Asia and North Africa worsened in the period through 2012 to 2014, and two thirds of all European nations were found to have an over-20 percent youth unemployment rate, with 35.5 percent of that sample out of work for a year or more.

Looking at the period spanning 1991 to 2014, the youth labour force has declined by approximately 29.9 million people. This was during a time where the youth population expanded by 185 million, representing an 11.6 percent decline in the youth labour force. To compound the problem, and underline the case for externships, the reason for the decline is due, partly at least, to greater engagement in secondary and tertiary education – and while it is true that improved education amounts to a positive development, the suggestion that these institutions are largely isolated from the workplace looks only to exacerbate the central issue of youth unemployment.

“Youth employment is now a top policy priority in most countries across all regions, and at the international level is being translated into the development of a global strategy for youth employment and embedded into the 2030 development agenda”, according to the report. “With a growing multitude of country-level initiatives involving many actors and institutions from the public and private sectors, focus now turns to forging partnerships for policy coherence and effective coordination on youth employment.”

An externship, while not necessarily the solution to a gathering youth unemployment crisis, is simply one way of preparing today’s youth more effectively for the demands of the modern-day workplace. Additionally, while much has been made of the obstacles standing in the way of graduates and well-paying jobs, this isn’t to say that there aren’t benefits for employers seeking new talent. Although the issue of recruitment is secondary to that of youth unemployment, externships have been welcomed by employers, as well as students, as a means of plugging the skills gap that exists in certain industries.

Skills shortage
The issue of youth unemployment boils down to much more than there being fewer jobs than there are candidates in the labour market: in fact, McKinsey figures show that a quarter of European employers were struggling to fill vacancies in 2014. Rather than a simple shortfall, there is a mismatch in many parts of the world between young people’s skills and the specific needs of employers.

Figures cited by The Economist, for example, show that 70 companies – not least Microsoft, Verizon and Lockheed Martin – are working with schools to redefine vocational education and cherry pick what skilled employees they find. Likewise, IBM’s Pathways in Technology Early College High School combines high-school education with community college courses and, again, with paid work experience.

Employers, as much as prospective employees, stand to benefit from externships, and should the scheme bridge the skills gap at all, we can expect to see them grow in popularity even more than they already have done. “As employers are seeking to secure interns earlier and earlier in their academic training, the externship programme can often allow the employer to “test” the fit of a potential intern through the shorter-term externship. It also allows employers to showcase their culture and brand to prospective interns or staff members”, according to Schultz.

With students on the one hand struggling to lock down a permanent position, and companies on the other struggling to attract the right candidate, an externship arrangement means that both parties can finally begin to act on the issues dogging the labour market.

Does IKEA truly deserve its non-profit status?

Posted on January 12, 2016January 20, 2016 by Helen

Despite having a reputation as a store that people loathe having to visit, IKEA has established itself as the world’s premier place for all manner of cheap furniture. It has expanded rapidly over the last few decades, becoming the natural first suggestion when anyone says they need a new piece of home furnishing.

With reported global sales of €26bn each year, the company is far and away the largest furniture retailer in the world. It now has around 135,000 employees spread across 44 countries around the world, and whenever a new store opens, its presence is seen as a signifier of a newly gentrified region.

However, thanks to a somewhat unique corporate structure, the company has managed to position itself as a non-profit organisation that doesn’t play by the same tax rules as its rivals – indeed, IKEA is reported to have managed to pay around 33 times less tax than its rivals. While charitable organisations are rightly given tax exemptions that enable them to continue to do their good work, it is somewhat questionable whether a company the size of IKEA – which is unrivalled within its marketplace – deserves such a status.

Charitable CEO
Swedish businessman Ingvar Kamprad founded the firm in 1943. Though official figures are hard to come by, Kamprad claimed in 2013 that his wealth was a mere €108m, a disclosure that was forced from him after he chose to move back to Sweden from the tax haven of Switzerland. However, despite his claims, it is thought that he is worth considerably more, with some estimates putting his empire at around €43.2bn and the value of IKEA itself widely thought to be around €66bn. In fact, Kamprad is considered to be the eighth wealthiest person in the world. However, according to a 2014 article in Australian Financial Review, the 89-year-old Kamprad insists that he gave away all his wealth to charity back in 1982. The main charity in this case – a Dutch institution called the Stichting Ingka Foundation – was set up with the intention of “safeguarding the future of furniture”.

Kamprad has recently begun paying normal taxes in his homeland of Sweden, having lived outside the country for more than 40 years: he fled in 1973 to avoid paying the high levels of tax that the government of the time imposed, and has lived in Switzerland for much of the time since. This is despite his passion for his homeland, with all of his stores proudly promoting a variety of Swedish products, including food.

Part of the reason for his move back to Sweden is the new, lower tax rate that the country is offering. However, despite this relocation back to the company’s homeland, the Stichting Ingka Foundation continues to enjoy a non-profit status, resulting in minimal tax levels for the whole company. This fact comes in spite of its position as the leading furniture retailer in the world, operating within a marketplace full of privately run businesses that are required to pay normal levels of tax.

€26bn

IKEA’s reported annual
global sales

375 Stores worldwide

884m

Store visitors every year

Not for profit
IKEA has taken pains to position itself as a caring, sustainable and environmentally conscious firm in recent years. Investments in renewable energy schemes have come alongside a series of community projects and plans to encourage people to save on energy and waste in their homes. The firm’s not-for-profit status has partially come as a result of its stated ambition to provide cheap and affordable furniture to aid living standards, with its mission statement claiming that it wants to “create a better everyday life for the many”. In the same statement, the company claimed: “Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

“Low prices are the cornerstone of the IKEA vision and our business idea. The basic thinking behind all IKEA products is that low prices make well-designed, functional home furnishings available to everyone. We are constantly trying to do everything a little better, a little simpler, more efficiently and always cost-effectively.” However, critics across the globe are beginning to question whether this is in fact true.

Despite the caring demeanour, the finer details of IKEA’s corporate structure suggest that it isn’t quite as generous as appearances might suggest. The Stichting Ingka Foundation is reported to have made billions of dollars in profit, but has donated relatively small amounts to actual projects. Indeed, 10 years ago the foundation was estimated to have accrued around €33.5bn in funds in a report by The Economist, which made it the world’s wealthiest charity at the time. The article went on to point out just how stingy the foundation was, giving comparatively little to projects or other charities while paying considerable amounts to the Kamprad family itself.

Instead of pouring its resources into charitable projects, the foundation owns Dutch company Ingka Holdings. This firm in turn owns the IKEA Group, which operates all of IKEA’s global retail stores. Such a complex structure isn’t entirely unheard of, but in this instance, the fact that Ingka Holdings is owned by a non-profit foundation means that it has been able to secure far lower tax rates than its competitors. However, the structure of the company gets even more convoluted: the ‘IKEA’ trademark itself is owned by yet another company called Inter IKEA Systems, which is based in the tax haven of Luxembourg. This firm takes care of the franchising side of the business, while Ingka Holdings is in charge of operations.

In response to the article by The Economist, Kamprad did make an effort to change the structure of the foundation in the Netherlands so that it would contribute more of its resources towards fighting child poverty around the world – however, many global firms run charitable programmes without qualifying for non-profit status, and as a result, questions still remain over whether IKEA’s corporate structure truly warrants this designation.

As recently as November, the company was doing battle with a US tax authority, when a much-delayed store being built in Memphis, Tennessee faced challenges from the Shelby County tax assessor over a $9.5m tax break that IKEA had received from the local government. While IKEA’s store is highly coveted in the area, signifying gentrification and bringing in much-needed new jobs, concerns over a major corporation receiving such a generous tax exemption are understandable.

Green fingers
The company has been doing its part in certain areas, however. Its sustainability efforts have been widely praised; in particular, its determination to run operations using almost entirely renewable energy sources. Earlier this year, the company unveiled a massive campaign to highlight its green credentials, dedicating a huge amount of money to making its retail stores and factories more energy efficient.

Thanks to a somewhat unique corporate structure, the company doesn’t play by the same tax rules as its rivals

In an interview with innovation website Co.Exist in June, IKEA’s Chief Sustainability Officer, Steve Howard, spoke of how the company is committed to fighting climate change through its business practices. Having pledged €1bn towards renewable energy and climate change combatting schemes, Howard spoke of how the business community was only now beginning to take climate change seriously: “We looked at this issue and said there hasn’t been enough positive advocacy from the business community. It’s only now that we’re starting to see more businesses step up in this space.”

While many other firms have invested considerable sums of money into existing renewable projects, or have taken stakes in other schemes, IKEA’s approach has been to wholly own the projects they’ve invested in. The company currently has around 23 wind farms and 700,000 solar panels around the world, according to Howard. He told Co.Exist: “We’ve said we’ll go a little bit further and directly own and operate the renewables ourselves. We haven’t got a specialist, dedicated team who manages our wind operations worldwide – we’re an independent renewable power company at the same time as a home furnishings business.”

Part of the reason for purchasing its own renewable energy infrastructure was to insure against an uncertain future for the global energy market, said Howard. “I’ve often said that, from a sustainability point of view, you can always construct a business case for doing the right thing. This delivers a deep return on investment. But it’s also the most enabling thing we can do to help grow renewable energy production worldwide at a time when we need to really rapidly decarbonise our energy systems. It’s a meaningful thing that we can do at scale.”

While IKEA has pressed ahead with many of its renewable partnerships, in November it was reported to have cancelled a large deal with Hong Kong-based Hanergy Thin Film Power, a solar panel maker that is currently under investigation for questionable accounting policies. While IKEA didn’t use the panels itself, it has sold them within its stores.

The company’s pledge of €1bn for renewable technologies and its stated commitment to powering all stores using renewable energy by 2020 are certainly laudable. However, questions remain about whether such promises are mere window dressings for a hugely profitable company that has come under intense scrutiny in recent years for its tax affairs.

Saudi Arabia’s energy reforms could save billions

Posted on January 11, 2016January 21, 2016 by Helen

On December 28, 2015, Saudi Arabia introduced energy subsidy reforms that were expected to save $7bn a year. Released by the Finance Ministry, the reforms, along with spending cuts aimed at raising tax revenues, marked the biggest reorganisation of the country’s economic policy for over a decade. However, Saudi Arabia’s cradle-to-grave welfare state has bred a society that is reliant on subsidies, and so, while the reforms may be necessary to stabilise the economy, they face the challenge of public opposition.

Last year the world’s top oil exporter posted a record budget deficit of $98bn – 15 percent of GDP – while the total cost of energy subsidies was estimated at $61bn. Due to a $123bn fall in oil revenues, income for the year dropped to $162bn, the lowest since the global financial crisis. Over the last decade, oil accounted for an average of 90 percent of total revenues, yet looking at last year alone, this figure dropped to 73 percent.

Public backlash

The IMF has estimated that energy subsidies have cost Saudi Arabia $107bn, an extortionate amount that is massively in need of a reduction. In the state’s budget report, energy subsidy reforms were central to reducing the pressure on the country’s economy.

According to Jadwa Investment, direct savings from the price hike on diesel are estimated at $2.75bn. Gasoline price rises are expected to save an additional $2.5bn. The rest will come from price hikes on natural gas, fuel oil and propane.

It is clear that these reforms are essential for nurturing the Saudi Arabian economy: the former Saudi petroleum ministry senior advisor, Dr Mohammed, told the BBC that they are “necessary, and not a luxury”. However, with the cradle-to-grave welfare state mind-set ingrained in the country’s economic policy, a negative popular reaction is expected to hinder the reforms. Such drastic alterations have the potential to provoke a social backlash, especially if the rulers ignore the people’s most basic requirements.

At the risk of agitating the population, King Salman nonetheless announced the first subsidy price rise in the budget, and so the price of cheap petrol increased by 40 percent overnight. It was also announced that there were more changes to come, with plans to decrease other subsidies, reduce the growth of public sector salaries and limit the country’s dependence on oil in the pipeline.

There are already people opposing the energy subsidy reforms: Saudi Arabia’s oil minister, Ali al-Naimi, disagrees with the subsidy lifts. “You only go back and take away assistance if you are in dire need. And, fortunately, Saudi Arabia is not today in such dire need”, he told a forum in Riyadh.

The reforms may have a substantial impact on the population’s wellbeing, and will therefore likely prove unpopular, but the state has set in place other measures so that residents are not left in financial jeopardy. According to the Financial Times, a senior official said that the government plans to extend welfare payments, such as unemployment benefits, so that the country’s poor and middle-classes are not as largely affected by the subsidy cut. He also said that businesses affected by the rise in expenses would be offered cheap loans in order to lessen the impact.

Leading the rest of the region

If the economic improvements outweigh the social repercussions of the energy subsidy reforms, it could potentially create a knock-on effect throughout the rest of the Gulf region. In a press release in November, Christine Lagarde recommended a course of action for the GCC on how to move beyond the oil drop, saying that “the main elements are common across countries: an expansion of non-oil tax revenues; raising energy prices which are still well below international norms; firm control of current spending, particularly on public sector wages; and a review of capital expenditures. Reforms to strengthen the fiscal frameworks would support these consolidation efforts.” The IMF stated that it expects the Arabian Gulf states to move faster on spending cuts rather than introducing taxes in the face of massive budget deficits.

Kuwait has shown its intentions to proceed with subsidy cuts. But as the state also has a large population that is dependent on government support and subsidies, the reforms face the same social obstacles as those in Saudi Arabia.

With oil accounting for more than 90 percent of Kuwaiti revenues, the Kuwaiti leader, Sheikh Sabah al-Ahmad Al-Sabah, called for “urgent measures”, one of which was to adopt economic reforms. Last September he said, “The decline in global oil prices has caused state revenues to drop by around 60 percent while spending remained without any reduction, leading to a huge deficit”. He added, “I also call on every citizen to realise the importance and usefulness of these reforms.”

However, these reforms are easier said than done: Kuwait already attempted to lift energy subsidies last year, on both kerosene and aviation, and both came up against a public backlash. Strikes occurred, and the government began making exemptions for particular groups. As such, further spending cuts to electricity, water and petrol subsidies could create further agitation among the Kuwaiti population.

There is no doubt that to alleviate the pressure of the oil drop, spending on energy subsidies needs to be significantly reduced, yet implementing these reforms without consequence for the population at large is unlikely. The process needs to be handled carefully. The UAE this year managed to lift subsidies on petrol with no public backlash, if Saudi Arabia can do the same, then the rest of the Gulf region may follow.

Chinese business leaders continue to disappear

Posted on January 8, 2016January 21, 2016 by Helen

Today the fashion label Metersbonwe informed investors and the press about the disappearance of the company’s founder, Zhou Chengjian. Metersbonwe also requested that the company’s shares be suspended from trading on the Shenzhen Stock Exchange, in an attempt to protect investors’ interests.

Zhou is the latest in a string of high-profile disappearances across mainland China and Hong Kong, including that of Guo Guangchange, the chairman of conglomerate Fosun International, who was taken away by police at Shanghai Airport in mid-December. He eventually resurfaced a few days later.

The recent spate of arrests and missing people reports are a consequence of the ramping up of Chinese President Xi Jinping’s anti-graft campaign, which targets government and military figures, state-owned company officials and business leaders suspected of corruption.

China’s Secretary for Financial Services and the Treasury, Chan Ka-keung, informed businesses that Hong Kong’s regulators have the power to come after firms that fail to disclose company information to them.

“Where the Securities and Futures Commission considers that there appears to be a delay in disclosing inside information, it will take appropriate action to promote compliance and enforce the relevant disclosure requirements, which may include making enquiries of the relevant listed corporation, issuing a guidance letter or, in very serious cases, taking enforcement action,” Chan explained in an interview with the South China Morning Post.

Many expected the anti-corruption campaign to slow down, but as a result of stock market crashes seen both last summer and at the start of 2016, local regulators have ramped up their efforts to crush incidents of insider trading.

China scraps its circuit breaker mechanism

Posted on January 8, 2016January 21, 2016 by Helen

Chinese regulators have axed their bourse’s new circuit breaker less than a week after it came into effect. Introduced on January 4 in response to the turmoil of China’s stock markets in the summer of 2015, the trading curb was intended to provide stability to the market and prevent the wild swings in prices that were seen throughout 2015.

After the circuit breaker triggered a suspension of trading for the second day in the first week of its implantation, China Securities Regulatory Commission held an internal meeting and decided to suspend the new mechanism.

The circuit breaker was designed to trigger a 15-minute suspension of trading whenever there was a five percent drop in the CSO 300 index. A dip of seven percent or more would result in trading shutting down for the remainder of the day.

The first day of trading on January 4, 2016 saw the CSI 300 Index fall by seven percent, followed by a 7.2 percent dip on January 7, leading to the closure of markets for both days.

While most indexes have a circuit breaker mechanism, China’s circuit breaker has been criticised for being too restrictive. As Bloomberg noted, “In the US, trading is halted temporarily after declines of 7 percent and 13 percent in the Standard & Poor’s 500 Index, and only suspended for the rest of the day if losses reach 20 percent.”

The new regulation has been accused of creating greater instability, as investors look to sell shares in greater numbers and quicker, for fear of getting ‘locked in’ in the event of a trading suspension. And, in a self-fulfilling prophecy, the subsequent dip in prices from the increased volume of sales means the circuit breaker being triggered becomes even more likely.

Tapping into the potential of the Serbian insurance sector

Posted on January 8, 2016January 20, 2016 by Helen

In December 2014, a new Serbian insurance law was introduced. When this legislation formally came into effect in June 2015, it marked another important step taken by the Serbian Government on its road to reforming and restructuring the country’s economy.

After labour, company and real estate property law – plus numerous interventions made in relation to the banking sector, particularly with regards to non-performing loans – insurance law is one of Serbia’s most revolutionised sectors of late. The sector has been deeply altered and enhanced in order to prepare it for future challenges, with a particular focus on Solvency II requirements.

The new insurance laws stipulate that life and non-life insurance must exist as two separate entities: all new entries to the market must exist as specialised and separate companies, while existing insurance companies in Serbia are required to clearly separate their respective assets. The law also saw the introduction of several other policies, including dual system boards; tighter controls over guarantee and technical reserves and strengthened capital adequacy in line with Solvency II regulations; the approved sale of new life products, including those directly linked to the financial market; improved consumer protection through increased transparency of insurance products; continuous and compulsory training for intermediaries and actuaries; the possibility of selling insurance policies through post offices; and a significant speed increase in the claims handling process, with the added possibility of complaints being reported directly to the National Bank of Serbia.

Non-life claims
The Serbian insurance market, with a total life and non-life premium value of €700m and GWP penetration sitting at less than two percent of GDP, is still one of the smallest in the region. However, with such outstanding possibilities for growth, the country is a land of opportunity within the Eastern European insurance sector.

Motor Third Party Liability (MTPL) insurance, at 40 percent of total premium, is currently the only line of business that is directly aligned with its regional counterparts in terms of volume and penetration. Over two million Serbian drivers are now covered by a compulsory third party responsibility policy, with an indenisation limit of €1m and a comprehensive bonus-malus system in place.

Generali Serbia
in numbers

21%

Growth in Serbia’s life insurance division in 2014

34.6%

Generali’s share of the Serbian life insurance market

1.4m

The firm’s client base, 2015

Furthermore, an increase in natural catastrophes as a result of climate change is causing a new awareness of the importance of insurance to spread throughout Serbia. In 2014, severe floods occurred across the northern and central regions of the country, causing what has been estimated at €2bn worth of damage. It was this disaster that caused the Association of Serbian Insurers to prepare a proposal that would offer widespread home cover at competitive rates.

It is the association’s hope that the fiscal incentives of this scheme will encourage the private sector to protect its own properties without relying on government support, which is inherently limited as a result of a lack of financial resources.

The process of improving insurance awareness is a long one, and implies that a new culture of protection – shifting from the old public mind-set to a new, private one – is gradually on the rise. This mind-set shift will also hopefully touch on the health and accident subdivisions; two branches that are at present a long way away from being in line with average European development.

A growing market
In addition to serious advances being made within the non-life division, there are also signs of fast growth occurring among life insurance policies: in 2014, the sector’s growth rate hit 21 percent, with interest rate reduction, together with banking systems offering fewer competitive financial products, pushing the sale of life policies.

The market currently allows life investments to be made both in Serbian dinars and foreign currencies such as euros, US dollars and Swiss francs. However, due to the strong performance of the dinar – something that has been highly supported by a judicious foreign currency policy adopted by the National Bank of Serbia – investments made in the local currency are generally far more profitable for customers. The success of this endeavour has been a major contributor behind a fruitful drive to rebuild trust in the Serbian currency.

Additionally, low inflation levels and a stable foreign exchange rate – two factors that largely occurred over the last two years – have had a positive impact on public opinion of the Serbian Government and financial sector at large. The Serbian population has also seen a tangible increase in purchasing power, with the current average annual income standing at €4,600.

Serbia has also developed a new role within the international arena: with its sights continually set on gaining EU membership in the future, the country has dedicated itself to maintaining amicable relationships with its EU, US and Russian cousins. Its link to Russia, particularly with regards to religious and energy supply ties, is considered to be especially vital. Renewed global attitudes towards former Yugoslavian countries have boosted Serbia’s profile as a peace-keeping and stabilising agent within the Balkans, with the country’s prime minister having shown a moderate and diplomatic attitude towards many unresolved issues within the region, with particular regards to Kosovo: since last summer, Serbia has displayed several acts of goodwill towards the disputed state, with the hopes of settling the pending issues.

Furthermore, Serbia’s increasingly positive relationships with Middle Eastern countries – the UAE in particular – have been spurred by growing investments from oil-rich countries into Serbia, which considers itself to be by far one of the friendliest countries in the world with regards to foreign investment. 2016 is set to be another record year for foreign relations, with the influx of investment expected to exceed €1bn for the fifth year in a row. Should Serbia meet this target, it will signal yet another important phase in the development of the country’s economy. Within this positive scenario, Serbian GDP has increased by one percent this year, with an even brighter prospect set for 2016.

In 2014, the Serbian insurance sector’s growth rate hit 21 percent, with interest rate reduction pushing the sale of life policies

Industry leader
Generali Serbia, a key driver in the Serbian insurance market, enjoyed a record year in 2015, with non-life premium growth hitting 20 percent and life premium growth reaching 31 percent; double the average market growth. The firm is also retaining an indisputable first-rate position in the life insurance market, where one in three customers now prefers Generali products – an impressive increase from the figure of one in six only four years ago.

This rapid growth has mainly been the result of the introduction of a new direct sales network composed of over 900 well-trained salespeople. This network operates from seven regional centres located across the country, with over 60 points of sale in total.

The impressive growth seen within the non-life subdivision was the highest recorded since Generali Group extended its presence to Serbia in 1996. Additionally, while retaining first position in health, travel and agricultural insurance, we also hold second place nationally in motor and property insurance. The exceptional growth rate has not impacted profitability, however, which also improved in 2015. This success has been partially as a result of the implementation of a Generali Group-wide strategy aimed at increasing cash generation and dividend payment.

Over the next 12 months, Generali Serbia will be launching new initiatives based on implementing customer centricity programmes. With more than 1.4 million customers across the country, the firm will continue to be a resilient and dynamic company, ready to achieve new highs and deliver exceptional satisfaction to its shareholders and clients during 2016.

The rise of the Millennial entrepreneur

Posted on January 7, 2016January 20, 2016 by Helen

Known for their innovative approach and the mark they have made on the tech space, a number of Millennials are inspired by their families and the many opportunities available to them today. This generation is more inclined to start their own business and to take on professional risks. In fact, female entrepreneurs are among those most successful, often outperforming their male counterparts, despite the fact that they are still often overlooked in the world of business.

The success of these women is rooted in shaping their respective businesses with a clear strategy and strong leadership – as indicated by the results of the latest annual Global Entrepreneur report by BNP Paribas Wealth Management. World Finance spoke with Beatrice Belorgey, CEO of the French private bank BNP Paribas Banque Privée, about the highlights and key trends for 2015 that were captured by the report’s findings.

Behind the Global Entrepreneur Report 2015

The Global Entrepreneur Report highlights again how entrepreneurs have wide diversification in their investments between various assets. They ask for a global approach, combining both professional and personal wealth. That is why BNP Paribas Banque Privée set up a dedicated organisation for entrepreneurs located in France, consisting of highly-qualified private banking experts and both local and international networks, including Business Centres, Corporate & Institutional Banking (CIB) services and Entrepreneurs Centres – known as Maisons des Entrepreneurs. They can count on more than 110 dedicated private bankers in France that work closely with a pool of experts who have a deep know-how in fields such as wealth management, investment solutions, real estate, art and philanthropy. This specific approach is one of the keys of the success of BNP Paribas Banque Privée, the number one private bank in France in terms of assets under management.

What are the main differences in BNP Paribas’ second annual global entrepreneur report from its first?
In the first edition, we focused on the business owners’ approach to success and on the diverse paths of entrepreneurialism. In this second edition however, we tried to identify which geographical areas and which industries many entrepreneurs favour, and the way that they manage their personal wealth. There is also a special attention given to ‘Millennipreneurs’ and women because we believe these two entrepreneurial profiles will have major influence in the coming years.

How do you define Millennipreneurs?
The Millennipreneurs are the generation of entrepreneurs currently under 35 years old, born between 1980 and 1995. In our view, these individuals represent a new type of business leader. They have drawn upon the influence of older generations, especially their parents. Notably, many of these parents are from the baby boomer generation and have run successful enterprises on their own. It’s interesting to compare Millennials and baby boomers. For instance, 78 percent of highly successful Millennipreneurs have a family history in business, versus 46 percent of baby boomer entrepreneurs.

Millennipreneurs started their first business earlier, at the average age of 28 years, against the average age of 35 for baby boomers. Millennial entrepreneurs are also more active, with an average number of launched businesses double than that of the previous generation at 7.7 percent against 3.5 percent.

Why do you expect Millennipreneurs to have a major upcoming influence?
Millennipreneurs grew up in an environment that prepared them to launch their own business. That influence was useful because the annual turnover of businesses run by Millennials outperforms those owned by baby boomers by 43 percent. The successes of Millennipreneurs at a relatively early age marks them out for even further greatness. The gross profit margin target of Millennials stands at 32.6 percent in 2015 to 2016, against 27.5 percent for companies led by baby boomers (see Fig. 1).

Surprisingly, Millennipreneurs are not exclusively focused on dotcom operations – far from it. The top three primary industry sectors for successful Millennial entrepreneurs are retail, professional services – such as accountancy and law – and technology. They are not that different from those of the baby boomer generation, whose primary industries include professional services, retail and real estate. Additionally, the future industry hotspots for Millennipreneurs include financial services, social media and eCommerce, while the baby boomers are more focused on travel, hospitality and leisure, eCommerce and professional services.

Do female entrepreneurs outperform men?
The role of women as successful entrepreneurs has been historically overlooked, with the assumption that men are more able to take risks. The reality is quite different: women have achieved major triumphs in terms of financial success and business legacy over several decades. Our study shows that the average turnover of companies led by female entrepreneurs was nine percent above the overall average, and the outperformance of female Millennipreneurs is even more impressive – at close to 22 percent. The bullishness of women is more pronounced when considering the expected gross profit levels – female entrepreneurs count on an average target of 30.8 percent, against 29.1 percent for male entrepreneurs. Furthermore, this profit target rises even higher to 34.9 percent when considering the female Millennial entrepreneurs, which is over five percentage points above the overall average.

What could many female entrepreneurs be driven by?
A number of female entrepreneurs consistently remark that their decision to pursue an entrepreneurial path was mainly driven by their willingness to write their own rules in regards to running their own business. Therefore, they could take more direct control in their ability to achieve their potential. And when it comes to success factors, female entrepreneurs are not significantly different in their assessment criteria from male colleagues – making a profit on the initial investment is at the top of the list, followed by a number of important factors including transferring a business to the next generation, making a social impact, breaking even on the initial investment and taking a business public.

What influences a decision to launch a business, and how is it funded?
Almost two thirds of successful female entrepreneurs today have a history of business ownership in their family – this is a significant factor. They estimate that the major things that influenced their success is firstly, advice from friends and family, following by the advice from other entrepreneurs, then that of financial and corporate professionals. Educational seminars and networking also play a big role.

Aside from family history, these factors are closely considered by BNP Paribas Wealth Management when offering support to female entrepreneurs, such as the Women Entrepreneur Programme that took place last July at the at Stanford Graduate School of Business. The programme was tailored to meet the needs of highly accomplished business women, with a mix of knowledge, skills and development, in order to facilitate the acquisition of efficient management practices, and to identify external growth opportunities. The event also provides an outstanding opportunity for cross border-discussion and global networking.

Where are the world hotspots for entrepreneurs in general?
The US, China and Germany have been voted as the top locations for setting up a business. Entrepreneurs in China, India and Turkey had the best year in terms of improved profits compared to all countries surveyed. While Germany, the Netherlands, Switzerland and the UK potentially offer the greatest opportunities to first generation entrepreneurs, namely those who don’t have a family history in business. Poland, Spain, China, Luxembourg, the UK and Italy on the other hand appear to be the most active in terms of female entrepreneurship, with Poland being particularly interesting, since there are proportionately more successful female entrepreneurs than men.

Are entrepreneurs focusing on their core business in terms of wealth management?
In our study, entrepreneurs have increased the volume of their investments globally by 12 percent in the past 12 months, probably as a result of good business performance. The current allocation of their financial portfolio shows that only 20 percent on average is invested in the core business, meaning that the global average has decreased slightly from 25 percent in the previous year. As many entrepreneurs have strong profit performance in their core business, they may be reinvesting these profits into other asset classes in order to diversify their portfolios.

How do entrepreneurs manage their wealth outside of their core business?
The major part is dispatched between different asset classes, with proportions varying from one country to another. For instance, British and French entrepreneurs have the highest weighting towards real estate, while the Gulf countries have the largest holding in cash and fixed income. Meanwhile, the US has the most important weighting in stocks and the Dutch top the list in terms of private equity. Finally, Luxembourg’s entrepreneurs are the most engaged in SRI, and Italians in hedge funds.

What about entrepreneurs in France, the market you are in charge of?
As their British counterparts, French entrepreneurs show the strongest preference for real estate in their financial portfolio allocation. Conversely, they hold only nine percent in cash, which is six points lower than the global average. French entrepreneurs are among the oldest to start a first business, with an average entry age near 34. However, this is not a handicap for success since 50.5 percent of them have experienced a profit increase in the last 12 months. They are also among the more bullish global entrepreneurs, expecting on average a 31.3 percent gross profit margin for 2015 and have founded 7.1 companies on average. It is also worth noting that French female entrepreneurs have even higher profit margin hopes, at 35 percent for 2015.

In spite of economic uncertainty, Peru’s banking sector is finding new strength

Posted on January 7, 2016January 19, 2016 by Helen

In recent years, Peru has been making a concerted effort to align itself with global standards, with a particular focus on achieving fiscal transparency. In the last two years in particular there have been important changes to the country’s fiscal framework, relating to both local and global investments. These changes seek to not only foster greater transparency, but also to improve tax collection through simplified processes.

One additional outcome that has come from these new fiscal regulations is a reduction in taxes on foreign income, shrinking from up to 30 percent to only five percent, so long as the investment is made through the local stock exchange or through a local investment vehicle, such as an onshore mutual fund or structured product. This arrangement has created a significant opportunity for firms to develop and market global investment products in the local platform – something that financial services companies have previously tried to exploit to the benefit of their customers.

During the past two years, Banco de Crédito del Peru (BCP) has worked tirelessly to establish a series of international investment products in onshore markets, and has successfully launched eight global mutual funds and over 50 structured products on international underlying assets. World Finance spoke to Patricia Dibos, Head of Private Banking at BCP, to learn more about how this lucrative market has developed.

What is driving the need for a holistic approach to wealth management?
The needs of high-net-worth individuals and families typically extend beyond the boundaries of investment and financial advice. Holistic wealth management embodies much more than just these aspects: it also embraces all other relevant aspects, such as succession and estate planning, lending and insurance solutions, and multiple-jurisdiction tax advice. More importantly, by taking into account the peculiarities of family dynamics, holistic wealth management also works towards ensuring the emotional satisfaction of the whole family.

With this in mind, in 2011 we expanded our advisory process to look beyond investment products and more into the long-term objectives of our clients. This initiative led us to set up a financial planning area with experienced advisors in mature markets. Through this service, we place strong emphasis on the adaptation for the local market, as well as on the construction of integrated wealth plans that include succession planning, goals-based portfolios, family cash-flow analysis and multi-generation assets transfers. In recent years, we have expanded this service to include estate planning and insurance solutions. This new service offering has led us to form alliances with world-class fiduciaries and insurance companies that provide multijurisdictional solutions to meet the varying needs of our clients.

1889

Year BCP was founded

$202.9bn

GDP of Peru, 2014

10.7%

Peru’s bank capital to assets ratio, 2014

This holistic service provides our clients with better chances to achieve the asset growth and wealth protection they require, and gives them access to a broader range of professional services to satisfy their particular lifestyles. In doing so, this holistic approach can set our clients up for a more satisfying future.

Peru is going through a political rough period. Has this had any ramifications for your industry?
Peru will hold presidential elections in April 2016, and, as might be expected in the context of political uncertainty, the country’s economy has slowed down in the past months. This scenario is really not new to Peruvians: we seem to go through the same situation every five years, whenever we hold [an election]. As a result, consumer and business confidence, which had boosted domestic consumption and investment during the past few years, are both hovering at five-year lows. This time, however, the situation is somewhat graver because lower global commodity prices, which affect the country’s main exports, have also decelerated economic growth.

As a result of this, the Lima Stock Exchange endured strong losses and Peru’s credit risk premium rose over 100 bps in 2015. These events, coupled with the relative illiquidity of our market, have underlined the need for Peruvian investors to diversify their investment portfolios in global assets. Luckily, this time around current tax regulations have allowed us to complement and round out our local product offering with a wide range of dual-currency international assets, and we’re putting a great deal of emphasis on educating our clients on the benefits of global diversification.

How do you ensure that your clients remain at the heart of your business in both the long- and short-term?
We think that BCP is a bank that does things differently. We believe that private banking is mostly a science in human relations – of course we need a solid investment advisory process and a strong team of investment professionals, and we most certainly need a competitive product and service offering, but we’re convinced that what has really made us successful is the client trust and loyalty we’ve been able to achieve through long-term personal relationships based on a deep understanding of the individuals and families we serve.

We deal with people’s wealth, and we understand that wealth is a very emotional issue for most. It has usually been passed on through generations, or been earned through a great deal of work and sacrifice. Because of this, we believe that clients look for more than just an investment proposal: they value an advisor that makes them feel comfortable, that creates empathy, that takes the time to comprehend their goals and motivations; an advisor that listens, understands, asks and, most importantly, knows how to challenge their opinions for the sake of their best interest. Above all, we believe that clients treasure having a long-term relationship with their advisors.

Naturally, in order to be consistent with this client-centric view, all our compensation schemes point in this direction, seeking to balance income and assets under management growth, as well as quality of advice and performance, with overall client alignment and satisfaction. We have also worked hard in creating a long career path for our private bankers and investment advisors, and in giving them the best all-around training we possibly can.

We have more than 25 years [experience] in the business of private banking, and this is the culture we have always stood by and the one that we convey to our team. [This mentality] has worked very well for us through all these years, and we don’t plan on changing it.

What developments have you noticed within the industry and what actions are you taking to stay up to date with them?
We believe that the drive to increase fiscal transparency will persist, and that the changing and intricate regulatory environment will continue to affect the industry significantly. Major global players have had to rethink their international business strategies, driven by increased compliance costs and regulatory issues, seeking to improve their efficiencies and focus on profitable markets. We have observed that a number of them have closed down rep offices in our region or significantly rotated their staff. We have been prime benefactors of the region coming out of favour for the larger global banks, since we remain fully focused on our market. And naturally, due to the nature of our high net worth clients, who are globally focused in terms of their lifestyle and wealth distribution, we’ve also had to align ourselves with international regulatory and compliance standards, and will continue to do so.

We have also observed a significant shift in focus towards the client and less towards the product – [a shift] towards advisory and less towards brokerage. Wealth management firms are today, more than ever, concentrating on goals-based asset allocation and integrating investment management with broader client objectives. What we find most significant about this trend is that it entails a stronger alignment with clients’ interests, which we believe will be very positive for our industry. As I mentioned earlier, we have always been a very client-focused private bank and we have reaffirmed our commitment to always better serve our clients by offering them a holistic approach in our advisory process, which is competitive in today’s marketplace.

Another major trend we have observed in the industry is the surge in technological platforms that enhance the advisory relationship with clients and make it possible for them to be more involved throughout the investment advisory and execution process. Technological tools have also become much friendlier, and are more accessible through different devices and links. We recognise the need to have the latest technology in order to remain competitive in this industry, and so in 2016 we are engaging in a major investment to revamp our core and investment management systems, as well as to develop a new state-of-the-art online platform that allow us to communicate, manage, execute and report in a manner that keeps us competitive in this new world standard.

What does the future hold for BCP?
BCP posted record earnings in 2015 and, despite Peru’s economic slowdown, we remain optimistic for the future. We believe that the country’s medium- and long-term macroeconomic fundamentals are solid, and that the economic growth rate will accelerate once political uncertainty is resolved.

We also commemorated our 125th anniversary recently: as one of the country’s most longstanding names and most trusted banks, we celebrated this occasion with a rene wed commitment to our clients: to keep serving them with excellence and superb leadership for the next 125 years. As part of this commitment, and looking towards the future, we are also embarking on a number of initiatives to enhance our relationships with our clients’ children. [For example], in 2015 we hosted a family education workshop in Urubamba, Cusco that was directed towards our second generation, or even third generation, clients. We believe that by engaging with these generations many years before transitions happen, we can better serve our clients’ families while getting an early start in developing the close personal relationships that have given us one of our most important competitive edges.

The changing face of European taxation

Posted on January 7, 2016January 19, 2016 by Helen

In keeping with much of Europe, Belgium’s tax system has been subject recently to a shift of important proportions, as policymakers there look to boost entrepreneurship and reduce the financial burdens weighing on lesser earners. The “Belgian tax shift”, said Thierry Afschrift, Partner and Founder of the Afschrift Law Firm, is a package of measures designed to do just that, “by means of enhancing private initiative in the process of funding newly incorporated companies”.

Founded in 1994, Afschrift Law Firm seeks to advise and defend taxpayers in its native Belgium, the financial hubs of Europe, and beyond. This is all the more important now European and Belgium tax systems are home to far-reaching and radical reforms. Aware tax law is a constantly evolving discipline, the firm’s professionals go above and beyond to ensure their clients are kept in the loop about any developments. The association will be of vital importance in the near future as individuals and companies come to terms with the latest changes.

“I believe that these measures will have an impact on our business”, said Afschrift, “as, for the first set of measures, hopefully taxpayers will be willing to take advantage, in order to optimise their tax situation. In order to do so, they will need advice concerning which rules apply to their situation and the actual implementation of the operations.”

A Belgian transformation
Under this framework, the so-called Cayman tax has been introduced into Belgian law. Under cover of this law, patrimonial structures with no legal personality (such as trusts, foundations, etc) and those subject to extremely low tax (under 15 percent) will be seen as transparent, said Afschrift. Any owner will be taxed on the resulting revenue as if the income were received, even if, in fact, they received nothing.

“On the other hand, it is obvious that the measures taken against structures such as trusts, most of the time legally incorporated and sometimes even approved by the tax administration, have caused a real earthquake”, said Afschrift. “Very often, taxpayers’ tax optimisation and (more often) estate planning operations have become ineffective from one time to another: under these circumstances, it has become urgent to find solutions in order to limit or prevent damages for our clients.”

Far from the only change to the system, the government has also decided to tax ‘speculative’ capital gains at a rate of 33 percent. Speculative capital gain is to be defined as shares (and in principle, stock-options) that have been sold less than six months (individuals) or one year (companies) from the date of acquisition. “On the contrary, and in any case, capital losses remain non-deductible”, said Afschrift. “The new tax will be withheld: if the sale takes place through a Belgian bank, the tax will be withheld by the bank and be considered as liberatory; on the contrary, if the capital gain occurs at the intervention of a foreign bank, the debtor will have to declare the capital gain in his tax statement.”

Any owner will be taxed on the resulting revenue as if the income were received, even if, in fact, they received nothing

Speaking about whether the move amounts to a positive step at all, Afschrift said, “implementing a new tax is rarely a good option”, and doubts both its effectiveness and the “good sense” of such a system.

Afschrift pointed out speculative capital gains were already taxed under Belgian law if the tax administration could prove the speculative intent of the investor. “Under the new set of rules, given the choice on an objective criterion, a private investor could be taxed even if he had no intention at all to speculate, just because he has decided to sell within the six months of the acquisition (and without taking into consideration the reasons of such transaction).

“Furthermore, most of the taxpayers possibly concerned by these measures will only have to wait until the expiration of the delay before selling. In my opinion, this rule will not apply very often and, when it does, will sometimes penalise normal, and exempt any kind of speculatively intentioned, operations.”

Another development of note is the ‘tax shelter for starter’ measures, which aim to find new ways of financing companies, primarily through crowdfunding. In it, the investor provides the company with cash under whatever form they see fit and receives in compensation shares of the company.

Under the new regime, individual taxpayers (companies are excluded) investing in the frame of the new regulations will benefit from a (federal only) tax reduction, should they subscribe to the capital of a newly incorporated company or a capital increase of an existing company. This is provided the increase takes place within the first four years of the incorporation and under the condition that the shares have been fully paid up.

Other measures have been put in place, including a partial withholding of the income tax for wages, the exoneration of the individual’s income tax, and a withholding tax, concerning the interest that an individual can receive when lending to an eligible company.

“In this way, as has been wished by economists throughout the EU, taxes are used as drivers for the reallocation of funds”, said Afschrift. “By encouraging and enhancing the investment in the capital of starter companies, companies find access to liquidities, while private investors are directly implicated in the economic life of the country, resulting in a win-win situation.

“Entrepreneurship is thus encouraged through private initiatives, which means cash flow needs are met more easily while banks take less risks, the whole situation being highly beneficial for the creation of jobs.”

The European climate
Afschrift saw overregulation at all levels, both national and European, as a major issue for lawyers, especially for those specialising in taxation. As a result, the margins in which to manoeuvre narrow as it becomes increasingly difficult for lawyers to serve their clients’ legitimate interests. A similar problem arises from the fact that private life and individuals’ rights are restricted.

“The economic crisis, combined with the application of VAT on lawyers’ fees, had huge repercussions on the capacity of the clients to face their financial obligations towards their lawyers, while, in the meantime, they had to exercise their right to be properly advised and, more importantly, defended”, said Afschrift. Lawyers in the EU therefore face more competition than before, as the private sector and certain associations, helped by the internet, propose – sometimes illegally – services previously restricted to lawyers.

“As always, difficulties create opportunities, and the first advantage is that difficulty pushes lawyers to raise the quality of their services: they become, or in any case should become, better”, said Afschrift. “It is obvious that overregulation and pressure from governments and international organisations creates a more pressing need for professional help. Furthermore, the impact of EU regulations on the different national legal systems puts EU lawyers in a position to work in many countries and collaborate on a solid basis with foreign colleagues.”

In doing so, firms can exchange ideas and put in place more effective means and systems of defence for their clients, notably, but not exclusively, by taking advantage of the tax competition that exists between EU member states.

Afschrift summarised the current trend of EU institutions as: “Standardise, discover, tax and collect.” EU institutions, he said, “actually confirmed their wish to achieve equitable taxation, by implementing measures which will supposedly lead to the total elimination of tax competition between member states (notably by eliminating, to the extent possible, the differences between national law systems) and enable the member states to achieve two main targets: eliminate secrecy and fight against aggressive tax planning”.

Elsewhere, considerable emphasis has been placed on the need to optimise the effective collection of taxes, notably by developing exchange of information procedures.

“Of course, if the targets seem legitimate, the means used in order to achieve them are very often inadequate or disproportionate and may thus lead to a restriction of taxpayers’ rights, and especially their right to privacy”, said Afschrift. “Furthermore, a ‘standardisation’ of national tax laws and regulations would likely lead to inequalities, plus or minus identical rules would apply to taxpayers who are in different situations. In any case, this trend seems, unfortunately, irreversible; therefore, taxpayers will have to fight more vigorously in the future if they want to preserve their fundamental rights.”

As the founding and managing partner of the firm, Afschrift’s intentions are to continue providing the same level of service to clients, “while absolutely respecting the attorney-client privilege and, at the same time, respecting all applicable laws and regulations, as fraud is not an option”.

To achieve this target, the association’s first priority is to continue innovating (innovation is the trademark of the firm) in order to give clients secure and legal solutions. “On the other hand”, he said, “we intend to respect our commitment to defend the taxpayers before any kind of national or European jurisdiction, in order to enforce their rights, currently too often violated.

“In other words, we need to remain committed to excellence in order to serve our clients’ interests in the best possible way: this is our sole ambition.”

The future of Belarus is brighter than ever before

Posted on January 7, 2016October 27, 2016 by Helen

As one of the first foreign investment and development groups to recognise the potential of emerging Eastern European markets, Dana Holdings has successfully completed over 500 projects since its inauguration and is on track to deliver a number of significant mixed-use schemes over the next few years. In Belarus, as with so many other Eastern European markets, the pathway to sustainable growth begins with full and productive employment, although suitable infrastructure is also a major driver.

Dana Holdings is a leading, fully integrated real estate, investment and development company that specialises in residential, industrial, commercial, educational and mixed-use projects, as well as PPP investments in emerging markets. According to Boyan Karich, Vice President for International Affairs and Development at Dana Holdings, the words that best sum up the firm’s focus for 2016 are ‘Minsk World’. He told World Finance, “We are very proud of our international winning bid for the development of the old Minsk Airport in the centre of Minsk”.

This new Minsk World project is one of the largest mixed-use construction developments in existence in the world today. The gross building area (GBA) of the project will be three million sq m on a plot of 380 hectares, and upon completion will comprise 30,000 high-quality residential units and villas and 305,000sq m gross leasable area (GLA) of Class A office space, all within a new international financial district. There will also be conference, event and leisure centres, schools, lakes and green spaces within a new metropolitan park, plus a 120,000sq m GLA shopping, entertainment and leisure centre.

Operations in Belarus
With a string of reforms in the pipeline for the coming months and years, Belarus promises to realise a series of broad-based and sustainable gains that will positively affect business and consumer response. Writing about the country’s up-and-coming reforms and their potential impact on the economy, the World Bank’s Country Manager for Belarus, Young Chul Kim, was optimistic about the country’s future: “The purpose of a comprehensive reform is to remove the structural constraints which have prevented the Belarusian economy from realising its maximum potential. If the set of key reforms being considered can lead to efficiency, profitability [and] sustained technological progress at all levels of the production sphere, there is no reason why we cannot expect to see Belarus’ per capita income double in the medium term.”

These reforms, coupled with the work of companies like Dana Holdings, have done much to inspire confidence in the country’s future prospects. A mere look at some of its upcoming projects is proof enough that Belarus is headed in a positive direction.

44th

Belarus’ position on the World Bank’s ease of doing business index

$76.14bn

Belarus’ GDP, 2014

$25bn

The current value of Dana Holdings’ full portfolio
of projects

Dana Holdings’ largest development is currently Mayak Minsk, a one million sq m mixed-use scheme that is adjacent to Minsk’s iconic national library. As of December 2015, the project was more than 60 percent complete, and is still developing significantly above target. A new education facility, a major part of the project that was developed jointly with the government, is the largest in Minsk and is already operational. The residential segment of the development is ahead of schedule, while the entire project is on track to be completed by 2017.

A major part of Mayak Minsk is Dana Mall, a 50,000sq m shopping and leisure complex. This is due to open in March 2016, and so is currently the firm’s main focus. However, a team of international real estate experts led by Karich is on hand to ensure that the centre will be delivered on time. Dana Mall’s unique selling point is its ability to surpass the experiential expectations of its guests. “By closely following international standards and mature market tenant expectations, putting strong emphasis on leisure and entertainment, we greatly add to the overall customer experience, increasing dwelling time and additional spend potential”, according to Karich. “As the first truly ‘lifestyle’ mall in Belarus, it’s a classic case of ‘build it and they will come’, and we are pleased to say that international brand names are coming to Dana Mall.”

Inspirational infrastructure
The Minsk World project, meanwhile, is the pinnacle of 40 years of successful developments for Dana Holdings. The firm first began developing industrial buildings in Eastern Europe in the early 1980s, before it progressed onto the construction and renovation of offices and residential buildings across much of the former Soviet Union. Minsk World, as an urban regeneration of the former Minsk Airport, has drawn inspiration from local Belorussian culture and history, but also serves to bring the rest of the world closer to Minsk.

One of the main features will be a beautifully landscaped 50-hectare metropolitan park, which will act as a venue for music festivals, art festivals, equestrian events and many of the other outdoor activities that Belarusians love. Minsk World’s architecture draws inspiration from many of the world’s leading capitals, with the business centre in particular bearing similarities to elements of London’s Canary Wharf. The focal point of this business hub is the new international financial centre, the concept of which was based on the overwhelming success of the Dubai International Financial Centre.

A $5bn investment was required for the creation of Minsk World, which – with the added potential of the financial and business centre – could contribute an additional six to seven percent to Belarus’ GDP growth. This is a game-changing development for Dana Holdings and for Minsk itself, which is at present the third-largest city in the region of Commonwealth of Independent States, behind only Moscow and Saint Petersburg.

Leading the pack
In addition to the projects already mentioned, Dana Holdings is also working in Belgrade to implement its two million sq m Tesla City scheme, designed to be the most energy efficient city-within-a-city development in the world. “As an entrepreneurial developer, we are always adapting to market conditions and seeking new opportunities”, said Karich. “[As such], our projects in Moscow and Baghdad are lower on the radar for the time being. That said, we are currently exploring a mega development opportunity in Havana.”

Naturally, it is important to deliver high-quality spaces while simultaneously utilising the company’s vast experience in order to bolster the market as a whole. To this end, Dana Holdings actively employs experienced workers from both Belarus and a variety of mature markets in order to ensure that the firm’s malls, offices and residential spaces are suitably prepared for what the emerging market is going to be, rather than what it is currently; effectively future-proofing its assets. This is also true of its commitment to the country at large and the good of the infrastructure industry as a whole: this is why Dana Holdings is the driving force behind the new Belarusian Council of Shopping Centres, as well as the lead sponsor of the inaugural North Eastern European Real Estate Awards Expansion and Investment Forum in Minsk.

As a company, Dana Holdings aims to strengthen the international investment potential of any market that it enters, which is why it has led the way in many Eastern European countries, including Belarus. It is interesting to note that the World Bank recently announced that Belarus is now the 44th best country in the world in which to do business, while the European Bank for Reconstruction and Development has just announced that it will also increase investment in Belarus, following the lifting of EU restrictions in October 2015.

Dana Holdings is confident about the future of Belarus: the IT sector in the country is currently at an all-time high, having recently seen growth 10 times higher than the global average, and it is extremely positive to see US companies flocking towards the nation, such as General Motors, which recently announced that it will be constructing a Cadillac Escalade manufacturing plant just outside of Minsk.

It is a reasonable assumption that other EU and US companies will follow suit by delving into the Belarusian market, just as Dana Holdings has done, thereby further contributing to the country’s economic success. Belarus now has the potential to follow the economic path of its neighbour Poland, which would see it moving from an emerging market to an established one within the next three to five years.

Over the next 12 months, Dana Holdings will be present at the majority of key industry events, including the CEE Retail Awards, the Global RLI Awards, MIPIM and MAPIC. Karich said, “Dana Holdings is changing the world, one development at a time. However, we could not do so without the absolute commitment and dedication of our staff – this is why we invest in our people, because at the heart of every great company are great people who make concepts become a reality.

“We face many exciting challenges and opportunities at the moment, but our immediate focus is the launch of Dana Mall in March 2016, which will deliver a premier shopping centre to the people of Minsk. [We also continue to work] on the designs of Minsk World Mall, which will be the biggest shopping, leisure and entertainment scheme in the region.”

Tackling the issue of Australian underinsurance

Posted on January 6, 2016January 19, 2016 by Helen

In contrast to other regions, the Australian life insurance industry is rather unique. Firstly, it has a high rate of underinsurance. Multiple reasons for this exist, including a culture that is resilient, optimistic and tough, even in the most trying of times; the ‘she’ll be alright’ attitude. While this may be admirable, it can also be an impediment where insurance is concerned, and may be the cause of high levels of underinsurance.

Australia is also a unique market for insurance, in that the country’s superannuation industry, while not unique, is more considerable than average. This differentiates the Australian market from others in the region. The unbundling of products and the inclusion of insurance as a standalone product has been the largest driver of growth over the last decade, and will continue to create opportunities to address underinsurance in the market. World Finance spoke to Phil Hay, Head of Life Insurance at BT Financial Group, to see how his firm is addressing Australia’s problem of underinsurance, as well as how the company’s innovation and product offers have allowed it to stand out in the market.

How has Australia’s insurance market evolved over the years?
The Australian life insurance market, like other markets around the world, has continued to evolve. In the last 30 to 40 years, major changes include the unbundling of life insurance products, with a move towards a clear separation between investment and insurance-only products, the demutualisation of life insurance companies, and the introduction of superannuation, with the inclusion of risk protection forming part of the superannuation offering.

Today’s life insurance products are designed to protect Australians against the financial and emotional impacts of a range of possible occurrences, including death, disability, loss of income and critical illness – both temporary and permanent. Consumers have a wide variety of ways in which they can purchase insurance, ranging from full-service financial advisors and risk specialists, aligned financial planners, bancassurance models, and direct distribution with products sold over the phone or online.

The Australian life insurance market is continually evolving. As the needs of our customers and their expectations towards protection change, the solutions we are able to provide to our customers also need to adapt. At BT, we are focused on understanding these changes, leading the way and driving new developments to offer the best products and services to our customers.

Most Australians have access to nominal amounts of insurance as part of their compulsory superannuation savings. However, Australia still has high levels of underinsurance

What are the biggest challenges and opportunities for the insurance sector?
The high level of underinsurance across the Australian population is one of the main opportunities. Most working Australians have access to nominal amounts of insurance as part of their compulsory superannuation savings. However, Australia still has high levels of underinsurance. The perception of being ‘covered’ is one of the biggest challenges life insurers are currently facing. Consumer education is absolutely critical to help Australians understand how life insurance can provide real protection for them when they need it most. We see the role of the advisor as the main driver of this – helping customers to place a value on not only creating and managing their wealth, but also protecting it in case the
unthinkable happens.

One of the main challenges in the Australian market is the deterioration in claims experience on disability products and in the group insurance segment. This has required the industry to review its pricing, product and service models. The service provided by an insurer at claim time is a critical element of the insurance value chain. As insurers, we have a duty of care to ensure our customers are given a better quality of life and an ability to return to as much pre-disability wellness as possible.

Tell us about BT’s growth and how it is you’ve achieved such outstanding results
First, I must attribute our growth to our people. It’s their passion and commitment to our customers that is the driving force behind our success. Following this, the strategic direction we have chosen for our business is also important. Product innovation that meets a need and service excellence have been the key drivers of our strategy, and much of our success can be attributed to them.

From a product perspective, six years ago we embarked on a customer-centric design process, with the aim of making our products and customer service as transparent, simple and accessible as possible. From this, we launched Protection Plans in 2011 to the open financial advisor market. This decision enabled our insurance solutions to be sold as standalone products, as part of our leading platform offer, or flexi-linked inside and outside of superannuation. We were not content with just launching our new solution, but have continually sought to innovate and provide more cover to more Australians, such as income protection for homemakers and key person income insurance.

How important is innovation in the insurance sector?
At BT, we see innovation as key to the insurance sector. BT is driven by innovation, but not just for the sake of it. We are focussed on delivering new and improved products and services to maximise the best outcome possible for our customers. Of course, it’s not just about creating new product benefits. We continue to innovate across different parts of our business, including the introduction of tele-claims, simplified underwriting processes and faster turnaround times. I don’t think that is something that will ever stop. I only hope that other insurers also follow this approach.

How has BT employed innovation through products, services and people?
In 2012, we identified the need to provide greater protection to the non-working members of a household and were the first in the market to introduce income protection for homemakers. At the same time, we extended insurance to older working Australians and those working in the mining sector. We also launched BT Reserve for high-net-worth customers. In 2014, we introduced Key Person Income, which is Australia’s first income protection solution for small businesses. We have also been able to introduce Protection Plans for Mortgage Customers to our banking customers. This new provision allows customers taking out a home loan peace of mind for their mortgage repayments.

The experience our customers have at claims time is another area that has been driven by innovation at BT. We were the first life insurer to launch a tele-claims service. At first, our focus was just on income protection, but we have since expanded this to cover key living insurance (trauma) claims as well. Now, 25 percent of claims can be resolved over the phone without any forms, meaning our customers have access to financial support quicker and more efficiently.

To support our customers who have claimed, we have developed a comprehensive health support programme. This initiative uses a bio-psycho-social approach to a claimant’s rehabilitation, which is planned and monitored by medical experts alongside our claims consultants. We have also introduced a health outcome measure, based on the same principles, to measure their progress and an index to establish an industry benchmark. It’s not just about paying out a claim, but ensuring the customer has the best long-term outcome.

As far as driving innovation through our people, I can, very proudly, refer to the number of individuals looked to as key industry influencers and presenters at key industry conferences. They are profiled within the broader Westpac Group and recognised with industry awards.

Can you expand on your personal leadership approach?
My approach is simple – I want our business and the people who work in it to be driven by a higher purpose. By that, I mean we all have a clear understanding of the role we play in being there when our customers need us the most. It should be what motivates our people and their decisions. I know that this creates a place where people want to come to work, because they understand the importance of what they do every day, and how it makes a difference to the lives of our customers.

This is backed up by investment in development initiatives to maintain professional skills and a high-performance culture. This is something I focus on with my leadership team – understanding what drives their people, ensuring they reach their potential, and have clarity about their role and career development paths.

We work in such an important industry, providing financial comfort to people in their time of greatest need. I’m extremely proud to have such a strong and dedicated team, who go above and beyond to support our customers, day in and day out.

What are BT’s plans for the future?
Our strategy has been developed with a long-term view and remains the same. Our aim is to build a sustainable company that is absolutely committed to being there for Australians and their families when they need us most. We know what we do has a profound impact on our customers’ lives, and we will continue to focus on them as our absolute priority.

Why the MENA region is becoming a hotspot for foreign investment

Posted on January 6, 2016January 19, 2016 by Helen

With a number of markets still at nascent stages, rapid growth can be seen across the Middle East and North Africa in numerous industries. As such, the region has started attracting the attention of international investors from around the globe. The growing potential of various countries is enhanced further by a big governmental push to diversify their respective economies and invest heavily in infrastructure. Having recognised the area’s vast opportunities, some key players in investment and asset management are rapidly growing their networks and scope, capturing increasing foreign investment along the way. One such group that is currently sending ripples across the pond is Al Masah Capital.

A leading investment management company in the MENA region, Al Masah Capital provides a range of alternative and tailored solutions for asset management, private equity, real estate consultancy and market research. By specialising in education, healthcare and food and beverages, the company is able to offer its clients a wealth of expertise, which has enabled it to grow rapidly in the space and outdo many of its peers. Having an ethos of constant development, the firm is now extending its focus into the energy and logistics markets, which is opening up new doors and industries for both Al Masah Capital and its partners.

Innovative business design
Established in 2010, Al Masah Capital has quickly become the fastest growing alternative investment company in the region. Within five years, the group has raised more than $1bn in funds, of which $350m is directed towards private equity businesses. With offices now in Abu Dhabi and Singapore, as well as its headquarters in Dubai, the company is able to spread its reach across the whole of the GCC, and now Southeast Asia too.

Founder and CEO Shailesh Dash puts the group’s success down to offering something both specialised and unique: “From the very beginning, we’ve always tried to innovate and be different than other equity players”, Dash recently said in an interview with Gulf News, CEO REPORT – Gulf 2020. “Because we were a new company, despite the fact that the members of the team have extensive background in the industry, it was hard to convince the institutional investors to support us. This is where innovation and strategy becomes important.”

Despite the numerous challenges facing the company, it quickly overcame them and surpassed all expectations through its prudent understanding of the markets it operates in. “Many opportunities still exist, this region remains one of the most exciting places in the world, and regional investors are becoming smarter and more sophisticated – meaning they are looking for investment managers that are dynamic, focused, result orientated and deeply in tune with investor needs”, wrote Dash in Al Masah Capital’s 2014 annual report.

Rapid growth can be seen across the Middle East and North Africa in numerous industries

The group’s healthcare investment arm Avivo Group, formerly known as Healthcare MENA, was established in 2011 with the aim of creating a new and innovative platform for primary care and diagnosis centres across the region. “Our healthcare platform has grown rapidly and now we are looking at a 2016 trade sale or IPO that will further crystallise shareholder gain”, commented Dash in the company’s most recent annual report.The focus of Avivo Group’s investment strategy entails carefully assessing both the location and the profitability of each new healthcare asset in order to ensure that it has significant growth potential. At present, Healthcare MENA’s assets include 14 medical centres, eight premium dental centres, six pharmacies, two diagnostic centres and two hospitals, which collectively see and treat more than 1.3 million patients a year.

This number is set to grow considerably over the course of 2016. Last November, Al Masah Capital announced its plans to invest around $300m over the next two years in the expansion of the Avivo Group throughout Oman and the entire region. This surge of capital will enable the group to open up a new string of healthcare facilities, as well as create more than 1,000 jobs.

“The opportunities are immense”, said Amitava Ghosal, CEO of the Avivo Group in an interview with Thomson Reuters Zawya. “Healthcare spending in Oman is expected to increase. The private sector is already playing a key role in providing healthcare to Omani citizens and residents. This is a market that is expected to grow 8.9 percent between 2015 and 2018 to hit $3.1bn by 2018.” By investing heavily in the Oman’s medical sector, Al Masah Capital is tapping into one of the biggest economic drivers of the Sultanate, and one of the biggest medical networks in the region. Being undersupplied at present, the company is capturing a market at the precipice of rapid expansion, thereby making the healthcare industry in the GCC extremely promising for investors.

Education is key
Since it was established in 2012, Al Najah Education has expanded at an exceptional pace, which can be largely attributed to its steadfast focus on addressing today’s social and economic challenges through education. The objective of this segment is to enhance the platforms for pre-primary, primary and further education across the entire MENA and Southeast Asian region. In 2014 it was a year of particular success for Al Najah Education, having successfully acquired nurseries in Abu Dhabi, Singapore and Oman, in addition to the Drama Scene, a professional acting academy in the UAE. Then in 2015, it broadened its network further with the purchase of My Little Campus in Singapore and the Horizon’s Kids Nursery in Al Safa, Dubai.

The company’s education platform also forms an important aspect of the group’s corporate and social responsibility values. Its altruistic initiatives include its partnership with Dubai Cares, a philanthropic organisation that strives to improve children’s access to primary education in developing countries. In support of the charity, Al Masah Capital has placed donation boxes across many of its restaurants and healthcare facilities.

Another widely successful division of Al Masah’s investment portfolio is Diamond Lifestyle, a hospitality company that was founded in 2013 to focus on food and beverage markets. Although the company is still young, the Diamond Lifestyle team has a shared experience of 200 years in the luxury hospitality sector, thereby ensuring an excellent experience for customers together with high returns for investors.

In 2013, the subsidiary secured the franchise rights of the restaurant chains La Porte des Indes in Dubai and Abu Dhabi, in addition to Café Rouge in the UAE. Then last year, Diamond Lifestyle hit another milestone through its acquisition of 14 Johnny Rockets restaurants across the UAE, as well as the rights to develop the chain in Oman. The decision to takeover the American style premium burger franchise has already begun paying off, with the restaurant generating 86 percent of net sales in the first half of 2015 alone.

The latest addition to the Al Masah Capital vision is Gulf Pinnacle Logistics (GPL), a transportation and logistics private equity initiative that was established in May 2014. In its very first year, GPL acquired a 75 percent stake in the Abdul Muhsen Shipping Company and an 87.5 percent stake in the So-Safe Logistics Company – both profitable and experienced firms in their own right. With a scalable business model based on basic logistics services, the group is confident that it will mirror the success of its other segments in its latest venture.

Al Masah Capital’s rate of expansion and success illustrates the power of the right people working together with a visionary strategy for a region that is ripe for investment. “Our private equity verticals target specific sectors because each sector carries inherent opportunity based on unique regional demographics and disposable income. Healthcare, education, food, beverage and logistics, historically, form the bedrock of any emerging or growing economy.

“They are not only defensive sectors in developed economies but in a growing economy they offer higher rates of returns and greater dividend income”, Dash wrote. “Each of our platforms reflects this trend”. With a string of acquisitions and growth returns under its belt for 2015, only time will tell what Al Masah Capital can achieve for this coming year also.

Kuwait’s economy extends beyond oil

Posted on January 6, 2016February 19, 2016 by Helen

A robust and highly regulated banking sector has helped a great deal to support Kuwait’s economy, which has been severely affected by the declining price of oil. Without a solid banking sector, the Kuwaiti economy would likely struggle to negotiate the pitfalls that have so characterised its past. Now, a burgeoning banking sector is supporting not just economic, but social developments in an economy that has been stymied by a new low-oil-price environment. Within a banking sector boasting a number of prominent institutions that serve a range of needs, one bank has risen to prominence on the Islamic banking front – Kuwait International Bank (KIB).

Incorporated in 1973 and originally known as Kuwait Real Estate Bank, since 2007 KIB has operated according to Shariah law, and has demonstrated time and again that banking has an important part to play in Kuwait’s development. Known for its operational excellence, customer focus, innovative products and outstanding service, KIB has been instrumental in the development of the banking sector at large, serving as an active participant in the economic and social development of Kuwait. Far from alone in this regard, KIB is only one name, albeit a major one, in Kuwait’s fast-growing banking sector.

Going beyond individual banks, the country’s central bank has been instrumental in keeping the sector robust, having introduced prudent regulations in line with international best practices, in a bid to mitigate the risks born of a low oil price environment. As a result, the Kuwaiti banking sector accounts for upwards of 80 percent of the country’s financial system, and its well-capitalised and profitable operations have created an environment wherein local businesses can rely on banks to provide credit and keep pace with the evolution of international banking standards like Basel III.

Looking at the country’s economic performance over the past few years, the sector has been especially influential in drumming up much-needed funding for development projects and in boosting employment. What’s more, banking has supported entrepreneurship wherever it can by creating tailored products and services for SMEs and inviting locals to participate in businesses of their own.

Apart from the sector’s influence on the economy, the prosperity of any non-oil sector is important for Kuwait in that it reduces the country’s singular reliance on oil. Banking, therefore, is something of a safety net for the Kuwaiti economy, should oil decline further than it has done in recent months, and, aside from the issue of diversification, the sector has boosted financial and social wellbeing, all while creating new opportunities for local businesses.

The issues plaguing Kuwait’s economy, at a local and international level, are incentives to pursue genuinely innovative advancements and find inventive solutions

Up to October 2015, Kuwait awarded projects worth $30bn, up around $6bn on the whole of 2014. In February 2015, Kuwait’s National Assembly approved a five-year development plan that envisages spending $112bn between the 2015/16 fiscal year and 2019/20. Projects planned include a metro system at $18.5bn, a railway project as part of the GCC railway link at $6.6bn, and a power plant at $8bn. Contracts worth $13bn were awarded to foreign firms during third quarter of 2015 to build a 615,000-barrel-per-day refinery.

Oil low
All this isn’t to say that there aren’t still challenges for the local economy, and a new low oil price environment has placed an additional burden on the government. As recently as March 2012, Brent crude oil prices stood at $128.14 per barrel, so it’s understandable that a new sub-$50 price has inflicted major pains on oil producing nations, not least Kuwait.

Having posted an 11.7-percent surplus in 2013/14, the country racked up a 4.4-percent fiscal deficit the following year – excluding income derived from investment and a 25-percent contribution to the Future Generations Fund. Effectively, the fallout has reduced the country’s real GDP growth to zero, although capital spending plans for development projects have been largely unaffected. This is true not just for today but also years past, and lower oil prices have rarely influenced government or private expenditure by any significant degree. As far as the short-term fiscal deficit is concerned, $16.4bn of government money is parked with local banks, and this, together with financial reserves equivalent to almost 300 percent of GDP, should offset any shortfall.

Looking at the figures for 2013, government and private sector consumption expenditure represented 41 percent of GDP, whereas the hydrocarbon industry accounted for 55.9 percent of total output and 93.6 percent of government revenue. Oil prices, therefore, go some way towards determining the government’s fiscal balance, and price movements are sure to have a material impact on bank deposits. However, excess funding among Kuwaiti banks means that the consequences of a price swing are less than they could be.

Although the consequences of a short-term price drop are few, the issue underlines the importance of fiscal consolidation in Kuwait, as the government continues to implement far-reaching reforms. In light of the oil price slump, more progress has been made on this front, not least in 2014 and 2015, when the government started to rethink the introduction of corporate and value added tax, and initiate a series of subsidy reforms. On this same point, the National Assembly has launched a wage bill reform initiative, to give the government more control over the wage bill and in capping annual salary increases, as well as initiatives to enhance PPPs, private sector development and SME support. Nonetheless, there is a great deal more to be done if the country is to increase the private sector’s contribution to economic growth and diversify its economy.

Returning to the ways in which local businesses might be affected by economic uncertainty, it’s true that higher oil revenues of years past have facilitated additional government and private expenditures, which have, in effect, facilitated higher growth rates. The situation described here has created a growth-enabling environment, and this, supported by a formidable banking system, has resulted in fertile ground for local businesses. Encouraging business regulations together with impressive infrastructure have allowed local businesses to operate both locally and internationally, should they choose to take advantage of a stable economic and financial environment and a promising outlook for the local economy.

A strong real estate sector
Aside from banking, real estate has played a major part in Kuwait’s economic progress over the past few years. The sector contributed an impressive $16.1bn in sales and represented 7.7 percent of GDP in 2014. As a result, the real estate and construction sectors account for over 31 percent of credit facilities extended by local banks.

Results for the real estate sector are not all bright, however; the figures for the opening nine months of 2015 show both the count of deals and total sales volume are down relative to 2014. However, a thought should be spared for the fact that returns and prices were not greatly affected until recently, and an economic uptick in the coming months should positively affect the performance of real estate for the year. This could serve as a window for real estate investors to take advantage of valuations and compensate with above-average returns in rental yields.

Into the future
Although the challenges for Kuwait look considerable, those in banking, not least KIB, anticipate a brighter future in the months and years ahead. For KIB, the issues plaguing Kuwait’s economy, at a local and international level, are incentives to pursue genuinely innovative advancements and find inventive solutions. The bank has set a positive outlook for Kuwait’s economy, and sees the slump in oil prices as an opportunity for policymakers to introduce much-needed reforms and accelerate economic developments. Indeed, in terms of the fiscal reforms initiated by the government, the bank expects to reap the rewards in the coming years, and expects the improved economic climate to benefit the banking community at large.

Looking at the steps taken by the country’s central bank and other regulatory authorities, the financial system is in better shape today than perhaps it ever has been. KIB has decided, therefore, to set out a strategy for 2015-20, not to mention a long list of ambitious targets, as it looks to become the fastest growing bank in Kuwait and the first choice for the country’s youth. Should the bank’s plans succeed, they will benefit customers and investors both, and reinforce KIB’s status as a financial institution of significant influence on the local economy.