Author: Helen

Turkish mining hopes to strike gold

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

Top 5 ways to boost employee engagement and commitment

Posted on by Helen

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

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

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

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

 

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

 

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

 

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

 

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

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

 

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

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

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

Is a new debt crisis mounting in Africa?

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The importance of guiding customers through the onboarding process

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Exness redefines transparency with its innovative new products

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Malaysia’s journey to become the next Asian superpower

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How China uses infrastructure as a means of control

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kaiser Partner is a reliable companion in testing times

Posted on by Helen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The economics of Korean reunification

Posted on by Helen

Considering North and South Korea are still officially at war – the armistice signed in 1953 brought an end to hostilities but did not deliver peace – relations between the two countries have been surprisingly cordial of late. Since April 2018, three inter-Korea summits have been held involving the South’s president, Moon Jae-in, and the North’s supreme leader, Kim Jong-un.

Most significantly, the April summit saw the two heads of state sign the Panmunjom Declaration, which called on both leaders “to jointly endeavour to strengthen the positive momentum towards continuous advancement of inter-Korean relations as well as peace, prosperity and unification of the Korean Peninsula”. It no longer seems as outlandish as it once did that the two Koreas could become one in the foreseeable future.

Except, nothing is straightforward when North Korea is involved. Although the three 2018 summits were promising, in May of this year Kim oversaw new ballistic missile tests that some have adjudged to be an act of provocation. With such a leader in charge, it will remain difficult to predict unification with much certainty.

Putting political obstacles to one side, the economic difficulties of uniting North and South Korea remain significant

Putting political obstacles to one side, the economic difficulties of uniting North and South Korea remain significant. Disparities in wealth and productivity are substantial and bridging them is likely to be burdensome, chaotic or both. Equally, the enduring economic benefits that would become available to the Korean peninsula may make such short-term pain worthwhile. So far, the pros and cons of unification are merely hypothetical talking points, but they may not stay that way forever.

When two become one
Ever since the Cold War split Korea in two, people have been making noises about how it might be put back together again. Those noises have been getting louder of late; back in April, President Moon declared that he was ready for a fourth summit with Kim.

The talks would primarily focus on curtailing the North’s nuclear weapons programme, but Moon also declared his hope that they would become “a stepping stone for an even bigger opportunity and a more significant outcome”. Such ambitions are to be applauded, but they do not necessarily mean unification is just around the corner.

“I think in the near term, the likelihood of unification is very low,” Troy Stangarone, Senior Director at the Korea Economic Institute, told World Finance. “Essentially there are three different ways unification could come about: one would be through the collapse of the North Korean regime; another would be through a gradual, consensual process that would take place over time; and the third would be if war was to break out.”

Currently, both collapse and war appear unlikely, although reports of food shortages and Kim’s volatile personality mean that neither can be completely ruled out. However, if the dialogue between the two countries continues to strengthen, economic engagement could be ramped up and, eventually, a move towards a unitary state may not seem so far-fetched. It is likely to be a decades-long process, but it is one that is arguably already underway.

One of the positive developments to come from recent summits is a commitment by both Korean states to revamp the North’s ramshackle transport infrastructure. In late November, a train carrying a railway inspection team travelled from Dorasan station, just 650m from the Korean Demilitarised Zone, into North Korea in order to begin a joint survey of around 1,600 miles of the North’s railways. It was the first train journey between the two countries for a decade, and will hopefully act as a prelude to reconnecting transport links between the states.

A few weeks later, an official groundbreaking ceremony took place at Kaesong, North Korea, to mark the start of greater infrastructural engagement across the Korean Peninsula. But for now, that’s as far as the two countries can go: UN and US sanctions mean the actual reconstruction work that railways in the North desperately need is prohibited.

Economic alignment
The economic ramifications of Korean unification would depend heavily on how, and how quickly, the North and South were reunited. Ideally, the process would be a gradual one that is underpinned by bringing the two countries’ respective economies into closer alignment.

Although economic data for North Korea is scant, estimates by Trading Economics put the country’s GDP at $16.12bn in 2015, significantly smaller than the South’s $1.38trn in the same year (see Fig 1a and 1b). Structural differences in the two nations’ economies may be even more challenging to overcome: while South Korea boasts a market-based economy governed by internationally recognised standards, North Korea has multiple economies.

There are informal markets known as jangmadang that developed during the famine of the 1990s; according to the Institute for Korean Integration of Society, they account for approximately 60 percent of the North’s economy. Alongside these is an authorised state economy that largely consists of exporting raw materials, like seafood, coal and iron ore, to China. This part of the economy has been hit hardest by economic sanctions: last year, North Korea’s exports to China fell 88 percent, while total exports dropped by 63 percent in 2017 (see Fig 2).

The two North Korean economies, however, are not entirely distinct from one another. A lot of resources used by the jangmadang are informally lent from state-owned businesses in exchange for a portion of the profits. According to a recent paper by Hwang Jin-hoon of the Korea Development Bank in Seoul, “state power and the up-and-coming capitalists have formed a symbiotic relationship” that has blurred the line between private enterprise and the centrally planned economy. Still, more needs to be done if North Korea is to complete a formal transition to a market economy. This must occur before any unification efforts can proceed, and South Korea may need to lend a helping hand.

The South certainly has a great deal of knowledge concerning economic development. When the Korean peninsula split in the 1950s, both the North and South had similarly sized economies. Today, as well as being home to world-famous businesses like Samsung, South Korea has the 11th-largest economy in the world. It would surely take a hands-on role in preparing the North for economic reintegration.

“The hope would be that unification would take place over time, and the South would invest in things like upgrading the rail network, repairing the roads and rebuilding the energy infrastructure,” explained Stangarone. “Of course, alongside South Korea, the US, China, Japan and others may also contribute. Regulatory issues need to be addressed to start opening the economy up, and South Korea could provide the capital and advice needed.”

Previous South Korean leaders have shown themselves to be more than willing to offer assistance to North Korea’s ailing economy: Lee Myung-bak, South Korea’s president between 2008 and 2013, had ambitions to raise the North’s per-capita income to $3,000 a month and, going further back, President Kim Dae-jung’s Sunshine Policy was aimed specifically at reducing the economic gap between the two nations. More initiatives like these will need to be implemented by Moon and his successors if there is to be any hope of creating a single Korean state.

If the dialogue between the two countries continues to strengthen, economic engagement could be
ramped up

Better together
While it would undoubtedly create difficulties in the short term, a united Korea would eventually become a major player on the world stage. A 2009 Goldman Sachs report predicted that the GDP of a unified Korea would exceed that of all the current G7 nations except for the US within 30 to 40 years. Despite the economic chaos that currently exists in the North, its supply of cheap labour and raw materials would provide a growth boon when added to the existing infrastructure present in the South.

“South Korea would be able to provide capital investment and managerial know-how to the North,” Stangarone said. “From the perspective of the South, the North brings a few different things to the table that would be advantageous. One would obviously be a lower-wage workforce that would help to deal with rising wage pressures. Also, a lot of the natural resources on the Korean peninsula are actually on the northern half, so whether it is coal, iron ore, rare earth minerals – essentially all of those minerals are in the North.”

In the years that follow reunification, it is highly likely that North Korean wages would rise substantially, creating a larger consumer market on the Korean peninsula. Collectively, the population of a combined Korea, based on current demography, would total roughly 75 million, creating a sizable domestic market for private businesses to target.

The restructuring of both states’ economies would also help remove a number of structural inefficiencies. Military spending could be significantly reduced, as well as diplomatic expenditure. A large number of citizens would be freed from relatively low-productivity jobs in the armed forces and released to take up employment that contributes more heavily to the national income and tax receipts.

Today, growth appears to be the number one goal for most economists and government ministers. Despite the South’s many successes, a slowdown is predicted in the near future, driven primarily by low productivity and an ageing population. In the North, moves to modernise the economy have had only limited impact – unification would certainly be one way of delivering growth for the entire peninsula.

Sharing the spoils
It’s easy to get carried away with headline-grabbing GDP figures, particularly when they do not tell the full story. While reunification would provide a boost to the Korean peninsula as a whole, individual Koreans will not necessarily benefit.

How the economic spoils will be shared is sure to depend on how unification is handled politically, but if the free movement of labour is allowed – or if South Korea’s chaebols are able to relocate to the North – then low-wage South Koreans will suddenly face a lot of added competition. This would create significant downward wage pressures that businesses would benefit from, but employees might not. These challenges would also have wider ramifications.

“Unification would place a significant economic strain on the South Korean state and would occur at the same time as the country’s population gets older,” Stangarone said. “South Korea, similar to Japan but to a lesser degree, is going through its own demographic changes. It’s going to be a super-aged society in the near future and it also has the highest level of old-age poverty in the OECD, with 45 percent of South Koreans over the age of 65 living below the poverty line. Taking care of the elderly is going to cause a lot of strain in the next few decades. So, there is going to be a potential resource conflict over how you take care of older South Koreans while investing in the North at the same time.”

Numerous studies have been authored looking at how North Korea’s economy can be brought closer in line with its partner to the south. Often a 60 percent per-capita income target is deemed to be an appropriate goal, but even this would require significant financial expenditure on the part of South Korea – upwards of $1trn. Alternatively, if income convergence were to be achieved purely by labour migration, three quarters of all North Koreans would have to move south of the border.

How exactly the government of a united Korea handles this strain will be vital. It could choose to reduce government spending by cutting back on welfare programmes, or at least restructuring them, but there is no guarantee that either method would alleviate the predicted social problems. Politicians should prepare for a backlash from those set to lose out as a result of unification.

The balance of power
Uniting the Korean peninsula would have impacts that stretch far beyond its geographic vicinity. It would remove a buffer state from the Chinese border and raise questions about what a unified Korean state would look like in terms of its foreign and security policies. It also poses questions for Japan, which has historically had a tense relationship with Korea.

Beyond China and Japan, Russia, the US and many other states would also have a stake in what sort of country a united Korea would be. This would not only have an impact on what kinds of economic priorities a united Korea would hold – it would also affect who the country is able to trade with.

If income convergence were to be achieved purely by labour migration, three quarters of all North Koreans would have to move south of the border

“From a geoeconomic standpoint, a unified Korea starts to change things,” Stangarone noted. “Firstly, Russia, which has long looked to be able to sell a lot of its resources from the Russian Far East, would now have the ability to do so. At a recent summit, [Russian President Vladimir] Putin and Kim talked about this – running a pipeline down to South Korea and eventually exporting to Japan as well. So, you would create new energy link-ups. There’s also been talk about an East Asia energy grid that connects the entire region – so you could mix in not only fossil fuels but renewable energy as well.”

Taking an even broader look, a unified Korea would have vastly increased potential in terms of imports and exports. Connecting the peninsula by rail would allow goods to be shipped all the way from Busan to Rotterdam unimpeded. Equally, such a move would open up what other countries could ship to the region and enable North Korea to become integrated within regional supply chains. Unification would recalibrate the entire economic architecture in the Asia-Pacific region.

Speculate to accumulate
Understanding how a united Korea would fare is an impossible task with so many variables to consider. To give it their best shot, many analysts have looked at how previous unification efforts from around the world have unfolded, including Germany and Vietnam. Such comparisons, however, are only of limited utility.

Relations between the two Koreas are far more acrimonious than they ever were between the Federal Republic of Germany and the German Democratic Republic. There was no German civil war and, although tensions between the two parties did abound, East Germany was far less economically isolated than North Korea is today. What’s more, in relative terms, North Korea’s economy is much worse off than East Germany’s was in 1990.

“I think the comparisons are useful in the sense of getting a general idea of the sort of things that the two Koreas should be considering,” said Stangarone. “If unification was to occur, [would] North Koreans effectively be second-class citizens in their own state or will the South try to make them as equal as they can as quickly as possible, at least in terms of benefits, access to capital and things like that? There is also the question of how to deal with state-owned enterprises. What sort of things do you want to do to reform the markets and integrate them into the broader economy? Comparisons with Germany are useful for identifying the kinds of challenges that are likely to arise, even if they don’t tell the whole story.”

Instead of looking at Germany, Eastern European states that have transitioned from communist, state-run economies to market economies may work better as proxies for what North Korea is likely to go through. North Korea is essentially a post-industrialised or deindustrialised state: a significant part of the population (about 60 percent) is actually living in urban centres. This is why comparisons with Vietnam often fall short.

Vietnam was a rural economy at the time when its northern and southern halves were reconnected. In fact, Vietnam is still more rural than North Korea. Other than the fact that both were Asian, communist states, the similarities start to fall away after a little probing beneath the surface. Every country faces its own unique challenges, which is exactly why the Eastern European economies provide such useful test cases for North Korea. They also went their own way, to an extent, and some proved more adept at transitioning to a market economy than others. Each provides a case study worth considering.

Perhaps the biggest hurdle to unification is the Kim regime and its volatile figurehead, although another is that, while many Koreans are sympathetic to reunification, it is not a priority for everyone. For the young, who have always known a divided peninsula, it is far less important than tackling unemployment figures or living costs. In fact, according to surveys by the Asan Institute, around a quarter of South Koreans in their 20s have little interest in unification.

Nevertheless, those in power do. For South Korean President Moon, any progress he makes towards reunification would cement his place in his country’s history. More than that, if he or any of his successors do manage to bring the two Koreas together, they will have a huge impact on the millions of North Koreans currently living in poverty, the families on either side of the border that thought they would never be reunited, and the economic landscape across the Korean Peninsula – and, indeed, the entirety of Asia.

Why GDP is no longer the most effective measure of economic success

Posted on by Helen

At the World Economic Forum’s 49th annual meeting in Davos, New Zealand Prime Minister Jacinda Ardern revealed that she would create the world’s first ‘wellbeing budget’ in order to prioritise the health and welfare of her country’s citizens. She said: “We need to address the societal wellbeing of our nation, not just the economic wellbeing.”

Economic growth – and, by proxy, wellbeing – is currently measured by gross domestic product (GDP). As the framework upon which governments build countless policies, GDP aims to track the production of all goods and services bought and sold in an economy each year.

The measure has become a critical tool used by economists, politicians and academics to understand society. It has been labelled “the most powerful statistical figure in human history” by author and lecturer Philipp Lepenies, and named “one of the great inventions of the 20th century” by the Federal Reserve Bank of St Louis. Today, however, GDP’s purpose is being called into question.

GDP is not the precise and flawless figure that many believe it to be – it is
merely an estimate

Coming up short
Having become such a familiar macroeconomic metric, it is easy to forget that GDP is a relatively modern invention. The framework for monitoring economic growth was created for the US Government by Russian-born economist Simon Kuznets in the aftermath of the Great Depression, before modifications made by British economist John Maynard Keynes turned it into the indicator we know today.

In an independent review of the UK’s economic statistics published in 2016, Sir Charles Bean wrote that GDP is often viewed as a “summary statistic” for the health of the economy. This means it is frequently conflated with wealth or welfare, though it only measures income. “Importantly, GDP… does not reflect economic inequality or sustainability (environmental, financial or [otherwise]),” Bean wrote. What’s more, GDP is not the precise and flawless figure that many believe it to be – it is merely an estimate. “This uncertainty surrounding official measures of GDP is inadequately recognised in public discourse, with commentators frequently attributing spurious precision to the estimates,” Bean continued.

Sarah Arnold, Senior Economist at the New Economics Foundation (NEF), told World Finance that GDP as a measure of economic activity is simply a means to an end: “It has become so synonymous with national success that the rationale for pursuing economic growth in the first place seems to have been long forgotten.”

Putting the flaws highlighted by Bean and Arnold aside, GDP is still an inaccurate measure of prosperity, as it fails to convey much of the value created in the modern world. GDP was developed during the manufacturing age and, as David Pilling, Africa Editor of the Financial Times, wrote in his book The Growth Delusion: Wealth, Poverty and the Wellbeing of Nations: “[GDP] is not bad at accounting for production of bricks, steel bars and bicycles.” Where it struggles, though, is with the service economy, a segment that accounts for a growing proportion of high-income countries’ economies (see Fig 1). “[Try GDP] out on haircuts, psychoanalysis sessions or music downloads and it becomes distinctly fuzzy,” Pilling wrote.

GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology. Where disruptive innovations have made life easier for consumers – allowing them to book their own flights rather than paying a travel agent, for instance – GDP only sees a shrinking economy. “Lots of what tech is doing is destroying what wasn’t needed,” Will Page, Director of Economics at Spotify, told Pilling. “The end result is you’re going to have less of an economy, but higher welfare.”

Countless free online services have moved outside the realm of economic activity measured by GDP, including Google, YouTube and Wikipedia. In the eyes of GDP, innovation – even if it means a better quality of service – is often a detractor of economic growth. Elsewhere, valuable areas of work have always existed outside of the GDP framework, including housework, caring for sick family members or friends, and volunteering. The impact of this work is unaccounted for simply because no money changes hands.

In a 2014 speech, Andrew Haldane, Chief Economist of the Bank of England, said the economic value of volunteering could exceed £50bn ($63.7bn) per year – and that is before tallying up the impact on the volunteers’ wellbeing, which includes reducing stress, improving physical health and learning new skills.

The bigger picture
In 1968, Robert Kennedy, the brother of US President John F Kennedy, criticised gross national product – a similar measure to GDP – by saying it “measures everything, in short, except that which makes life worthwhile”. Arnold believes this observation is still true today: “GDP is not a particularly useful measure in and of itself because it doesn’t tell us much about the direction of our economic activity or help us to determine how to govern it.”

The NEF believes there are five indicators that GDP doesn’t take into account that could help measure national success more accurately: job quality, wellbeing, carbon emissions, inequality, and physical health. “We know what a good economy that allows people to flourish should be,” Arnold said. “A good economy meets everyone’s basic needs; it means people are healthy and happy, and it does not stoke potential long-term trouble, such as extreme inequality.”

The World Bank has also created a more robust measure of economic growth: comprehensive wealth. Comprehensive wealth, it argues, takes into account both income and associated costs in a number of areas, providing a fuller picture of economic wellbeing and a more sustainable pathway for growth. “Used alone, GDP may provide misleading signals about the health of an economy,” the World Bank’s The Changing Wealth of Nations 2018 report read. “It does not reflect depreciation and depletion of assets, whether investment and accumulation of wealth are keeping pace with population growth, or whether the mix of assets is consistent with a country’s development goals.”

For GDP, which does not distinguish between good and bad production, bigger is always better. “GDP includes activities that are detrimental to our economy and society in the long term, such as deforestation, strip mining, overfishing and so on,” Arnold said. Wars and natural disasters, too, can be a boon to GDP as a result of the associated increase in spending. Comprehensive wealth, on the other hand, accounts for all of a country’s assets, including: produced capital, such as factories and machinery; natural capital, like forests and fossil fuels; human capital, including the value of future earnings for the labour force; and net foreign assets.

GDP’s neglect of natural capital in particular has received more attention in recent years. Natural assets, such as forests, fisheries and the atmosphere, are often regarded as self-sustaining, fixed assets. In actual fact, all of these resources can be – and are being – depleted by humans. Since the 1990s, economists have looked into the possibility of putting a price tag on natural resources to ensure their value is taken seriously. Ecological economist Robert Costanza published a paper entitled The Value of the World’s Ecosystem Services and Natural Capital in Nature in 1997 that valued the whole of the natural world at $33trn. While Costanza’s research was highly controversial, the idea of accounting for natural depletion within the landscape of economic growth is becoming more common. As Pilling wrote: “If you don’t put a monetary value on something, people tend not to value it at all.”

The price of happiness
Experts are working to pin down a number of intangible qualities that contribute to the health of an economy, such as happiness and knowledge. Several indicators have been developed to provide a means for countries to monitor their progress in these areas. One such example is the UN’s Human Development Index (HDI), which evaluates a nation’s citizens in terms of their health, knowledge and standard of living. To do this, it tracks achievements in areas such as life expectancy at birth, years of schooling and gross national income per capita.

The UN admitted its index only provides a window into human development and fails to account for aspects such as inequality, poverty, human security or empowerment. But since its development in 1990, the UN has also introduced other composite indices, including the Inequality-adjusted HDI, the Gender Inequality Index and the Gender Development Index. Other surveys and indices, meanwhile, aim to measure the even more subjective quality of happiness: Lord Richard Layard, a professor at the London School of Economics, has been a pioneer in this area, and believes the government should prioritise policies that boost happiness over growth. His research has gone on to influence international efforts to track happiness, such as the UN’s World Happiness Report, which provides an annual snapshot of how happy people around the world perceive themselves to be.

New Zealand’s wellbeing budget is not perfect, but it is a clear step away from a purely growth-driven view of success

Arthur Grimes, a professor of wellbeing and public policy at Victoria University of Wellington and a former chair of the Reserve Bank of New Zealand, pointed out that these lists still show some correlation between GDP and happiness: “It’s very rare to find a country that, overall, has higher wellbeing that isn’t rich.”

According to the 2019 World Happiness Report, the top five happiest countries in the world are Finland, Denmark, Norway, Iceland and the Netherlands. South Sudan, the Central African Republic, Afghanistan, Tanzania and Rwanda, meanwhile, sit at the bottom of the list. Grimes told World Finance that the top-ranking countries on happiness lists tend to be wealthy nations with a welfare state, adding: “Unfortunately, we’re all in that situation where you do have to keep up on things like GDP. But you shouldn’t focus on that solely.”

While GDP does have a part to play, other aspects that contribute to the World Happiness Report’s ranking include social support, healthy life expectancy, the freedom to make life choices, perceptions of corruption, and generosity. These traits provide pockets of insight often missed by other metrics, helping to explain why the US and the UK, which rank among the top five richest countries by GDP, sit 15th and 19th on the list in terms of happiness, or why Costa Rica, which ranks somewhere in the 70s in terms of GDP, wound up in 12th place.

“There are some rich countries that aren’t quite as happy as the others,” Grimes said. “They’re still in the top 20 in the world, [but] that measure is a really useful one because it does say, in countries like the US and the UK, there is something going a bit wrong there – they should be happier than they are.”

A New (Zealand) approach
While countries such as the UK, France and Australia have long been driving the conversation on welfare, New Zealand’s wellbeing budget – the specifics of which were unveiled in May 2019 – has been recognised as one of the first attempts to explicitly zero in on wellbeing across different parts of society.

For example, the budget set aside NZD 1.9bn ($1.25bn) for mental health initiatives in a bid to address New Zealand’s youth suicide rate, which is among the highest in the world. Spread over five years, the funding will establish a universal frontline mental health service aimed at helping the more than 300,000 people with moderate mental health and addiction needs in the country. “Mental health is no longer on the periphery of our health system,” Grant Robertson, New Zealand’s Minister of Finance, said at the budget’s unveiling. “It is front and centre of all of our wellbeing.”

In terms of mental health, Grimes said the budget has delivered above expectations. It also performed well in areas such as family violence and sexual violence – other categories New Zealand has typically struggled with in comparison to other developed countries. A record sum of NZD 320m ($210.6m) was announced for reducing domestic violence, while NZD 1bn ($656.3m) was earmarked to help vulnerable children.

Despite these positive steps, Grimes criticised the budget’s lack of concrete targets, with the exception of child poverty: “We have some major new expenditure initiatives, but they lack a corresponding set of outcome targets, making it difficult to evaluate whether the programmes are effective or not.”

New Zealand’s wellbeing budget is not perfect, but it is a clear step away from a purely growth-driven view of success. In order to accurately measure an economy’s health and wellbeing, and to change the way we think about prosperity, a range of robust indicators is needed. As Arnold said: “We pay attention to what we measure. Headline indicators that are widely reported shape the way we think about what it means to be successful.”

While GDP provides important insight into a country’s economic position, it is far from the whole picture. Armed with a clearer understanding of where true economic value is created, policymakers and business leaders will be able to determine new pathways to success.

Top 5 financial services that are ripe for automation

Posted on by Helen

Barely a day goes by without the launch of a new report extolling the potential benefits of artificial intelligence (AI) and automation in the financial services industry. These reports often refer to the potential for cost reduction, increased operational efficiency, improved customer experience and, ultimately, bottom-line growth. Indeed, analysts predict that AI will deliver a 22 percent reduction in operating costs (a saving of more than $1trn) across the global financial services industry by 2030 as business leaders look to transform both front and back-office functions.

Demand for AI is coming from both ends of the market: established banks are recognising the need to respond to huge sector-wide disruption and to develop more agile operations in order to compete, while smaller fintech firms are looking to AI and automation as a way to scale quickly while keeping costs down.

The scale of the opportunity is so vast that it can sometimes be a challenge for banks and insurance firms to know where to start or how to identify the process automations that will deliver most value. With that in mind, here are five processes within the financial services sector that are ripe for automation.

AI will become the catalyst for innovation, growth and genuine differentiation in the market: that’s where the real value of the technology lies

 

1 – Anti-money-laundering analysis
Currently, banks spend huge amounts of money resourcing teams of anti-money-laundering analysts to investigate post-transaction alerts. One bank Thoughtonomy recently spoke to had an anti-money-laundering bill of £1.2bn ($1.5bn) per annum. It employed more than 1,500 analysts and investigated 60,000 transaction alerts every month.

The challenge for analysts is that much of their time (up to 50 percent, according to our research) is taken up collating data on suspicious transactions rather than actually investigating them. Often, an analyst will need to collate data from five or six different systems before they can begin conducting any kind of analysis. This is hugely time-consuming, costly and tedious. In addition, banks have a significantly high turnover of analysts – up to 25 percent per annum, in some instances. This compounds the existing cost with an additional cost of hiring and training.

Using a virtual workforce, banks can substantially reduce the time taken to investigate transactions. Virtual workers have the capacity to collate the various pieces of required information at machine speed, meaning analysts can focus on value-adding activity and, ultimately, process many more transactions. Given that virtual workers work 24 hours a day and up to five times quicker than a traditional worker, we estimate 15-fold productivity gains in this area.

 

2 – Know Your Customer checks
As with anti-money-laundering analysis, financial firms have to conduct lengthy background checks on their clients. These are currently completed by large teams of Know Your Customer (KYC) analysts and are often structured and repetitive in nature – for example, checking sanctions reports, government databases and other key regulatory sources. Just like anti-money-laundering checking, banks have historically thrown people at the KYC problem, but as the regulatory grip begins to loosen, they now have the opportunity to review the efficiency of these processes.

Using a multi-skilled virtual workforce, banks can automate a large percentage of the KYC process. Virtual workers are able to access systems and applications in the same way as humans do, reading documents and data sources and making rules-based decisions accordingly. Banks are able to set rules so that if certain criteria are not met or a case seems sensitive or unusual, virtual workers can flag this to a second-line KYC analyst to review in more detail. What’s more, banks can drastically increase the frequency with which they conduct repeat KYC checks, allowing virtual workers to execute on a periodic, out-of-hours basis.

 

3 – Claims processing
Typically, insurers will have teams of people reviewing claims and making subjective decisions on whether or not to pay out. As the process is typically manual, the time to complete trend analysis against previous, similar claims is often exhaustive, and therefore rarely gets completed. This increases the possibility of fraud and ultimately damages insurers’ bottom lines.

By employing a virtual workforce, insurers can significantly increase the number of claims they are able to process, while also identifying fraud at a much more granular level. Virtual workers are able to extract information from claimant documents and compare this data with previously submitted claims. They are then able to identify any irregular activity and flag anomalies to relevant parties where appropriate. When the claim is a valid one, virtual workers can cross-reference against procurement contracts in order to prioritise the order of payment based on the agreed rebates.

 

4 – Policy quote generation
If a customer is looking to get a quote for car, home or phone insurance, they typically need to fill out multiple forms in order to provide information to their chosen insurance prospect. This takes time and effort, and often customers will drop out half way through the process – a lost sales opportunity for the insurer.

One of our clients is using virtual workers to make the process a much simpler one. Instead of re-typing information from their policy document into a quoting system, our client allows customers to send existing policy documents directly to a team of virtual workers, which can then extract the relevant information and process a quote. If the quote is more competitive than the existing policy, a new policy is generated immediately, seizing the opportunity while the client is still paying attention. If the quote is more expensive, the information is directed to an internal marketing intelligence team. The result is a much smoother and more painless customer experience, a lower cost to serve and a greater level of insight into market competitiveness.   

 

5 – Shared services
Finally, when virtual workers aren’t interacting with the end clients or ensuring that regulatory compliance is upheld, they keep themselves busy with the tedious back-office tasks that are such a drain on staff productivity and morale. Basic processes such as financial reconciliations, employee on-boarding, periodic screening, reporting, data re-entry and mid-term adjustments are just a few of the processes that virtual workers manage across the back office.

What’s more, because virtual workers are multi-skilled and agnostic to the processes they execute, they can work across the entire business, completely breaking down the siloed functions that still exist in many financial organisations.

What’s really causing the slump in US gun sales?

Posted on by Helen

Barack Obama was once deemed to be the best gun salesman in the US. Under his presidency, firearms purchases reached record highs as Americans became increasingly concerned that he would push through legislation restricting gun ownership. Such legislation never came to fruition, but it certainly was mooted – enough to cause a surge in sales, anyway.

Under President Donald Trump, the industry has a very different complexion. Last year, gun sales fell by 6.1 percent – the second straight year of decline. While it would be easy to interpret this as a sign of an industry in crisis, in reality, it is likely to be little more than an overdue market correction.

The political climate in the US has always had a huge bearing on the firearms market, but that doesn’t mean firearms suppliers have reacted with complacency to the recent downturn. Attempts to broaden the customer base have largely proven effective, particularly regarding female buyers. In fact, in spite of lower sales figures, the firearms industry has demonstrated remarkable resilience over the past few years: it remains a $28bn industry, and it doesn’t look to be going anywhere just yet.

Another way of viewing falling firearms sales is simply as a form of normalisation after years of politically motivated growth

The Trump slump
Given that gun culture in the US stands apart from that of the rest of the world, it is tempting to view any drop in sales as evidence of the country finally falling in line with everyone else. Whenever mass shootings occur – which they do with lamentable regularity – an outpouring of support for stricter gun controls usually follows. At such times, it seems inevitable that the US will lay down its arms – or some of them, at least – sooner rather than later.

Certainly, some businesses have moved in that direction. In response to the February 2018 shooting at Marjory Stoneman Douglas High School in Parkland, Florida, Dick’s Sporting Goods announced that it would no longer sell assault-style rifles and would stop selling guns to anyone under the age of 21. Other organisations, including cybersecurity firm Symantec and airline Delta, announced that they would cut ties with the National Rifle Association (NRA) in the aftermath of the tragedy.

In reality, though, these approaches are likely to have little effect. In fact, they may cause pro-gun citizens to double down, making additional firearm purchases and boycotting the brands that have spoken out. In any case, the long-term impact on sales is likely to be minimal. “We are definitely in a business cycle,” Jurgen Brauer, Chief Economist of Small Arms Analytics, told The New York Times. “For those who have been around for 30 years, this [sales dip] is old hat, and you just deal with it.”

Rather than being indicative of a long-term sea change in attitudes towards gun ownership, recent sales trends are more likely being driven by the current occupant of the White House. Donald Trump, like many Republican presidents before him, is viewed as being sympathetic to the rights of gun owners, so demand naturally tapers. “You have organic growth and then, historically, the industry has always had peaks and valleys that are driven by political pressures going on domestically,” Larry Keane, Senior Vice President and General Counsel of the National Shooting Sports Foundation (NSSF), told World Finance.

“Leading into the election of 2016, there was quite a bit of concern among consumers that if [Hillary] Clinton won, they would be facing significant additional gun control legislation. Whenever there is concern among [consumers] that their Second Amendment rights are likely to be restricted or impinged upon, the market responds. It has occurred in the past, so what we saw in 2016 was far from unique.”

Another way of viewing falling sales, therefore, is simply as a form of normalisation after years of politically motivated growth. When the industry is analysed over a prolonged period of time, its performance leaves little to be worried about.

Bulletproof industry
More than anything else, Keane believes the recent dip in sales should be viewed as a market correction: “Long term, the growth of the industry is very healthy. The market now is down, relative to the peak leading into the 2016 presidential election, but it is levelling out at about where sales were in around 2014. So, if you look at the long-term growth of the industry in sales, you’ll see that it has substantially increased over the past 10 or 15 years. The long-term trends are very positive. Everybody understood that the peak levels observed a few years ago were not sustainable [in the] long term.”

And while there are certainly good arguments for curtailing gun ownership in the US – the country has by far the highest rate of gun-related violence among developed economies – the industry does provide economic benefits. “The impact that firearm and ammunition companies have on the US economy is huge,” explained Amy Robbins, CEO and co-founder of Alexo Athletica, a US-based ‘carrywear’ brand. “Not only was it responsible for about $52bn in total economic activity in 2018, but it even has a broader impact on business seemingly unrelated to firearms. From job creation to tax, the firearms industry’s impact is huge – providing good jobs and paying significant amounts in state and federal taxes [see Fig 1].”

Even if sales are lower than they have been of late, the economic impact of the US firearms market has continued to grow: in fact, according to the NSSF’s Firearms and Ammunition Industry Economic Impact Report 2019, it has risen from $19.1bn in 2008 to $52.1bn in 2018. Between 2017 and 2018, total industry-related jobs grew from 310,908 to 311,991. These are often well-paid jobs too, averaging $50,400 in wages and benefits. Aside from direct sales, the firearms industry also supports supplier firms and a number of other ancillary organisations. What’s more, by providing a number of jobs – from California to New York – it indirectly generates business for industries far removed from the firearms market.

Shifting targets
One of the ways in which the US firearms industry has been able to maintain its economic impact even in the face of downward market pressure is by diversifying its customer base. Traditionally, the firearms market has centred on men, but this is something that the industry has been working hard to change.

According to a Harvard-Northeastern study, the percentage of women owning guns rose from nine percent in 1994 to 12 percent in 2015, with handguns proving particularly popular – in fact, 43 percent of those who only own handguns are female. A cultural shift appears to have occurred – one where women feel more comfortable using firearms for protection. Between 2012 and 2014, the percentage of women who believed that owning a gun was more likely to protect someone from crime than endanger them rose 11 percentage points.

In addition, the way that firearms manufacturers and related brands have marketed their wares has changed. Not so long ago, women had to make do with youth-model guns; now, companies are creating firearms and accessories that are specifically targeted towards the female customer, whether they want a gun for recreational target-shooting, hunting or self-protection.

“Based on our research, we have tapped into a market by connecting to a deeper message that supports women’s right to choose how they want to defend and protect themselves,” Robbins said. “As more women are deciding that a firearm is the ultimate equaliser and tool of choice for themselves, they are looking for brands to provide functional options that make it easier to live this lifestyle. We were the first company to do this in the activewear space by creating a lifestyle brand of carrywear for the modern woman.”

Women in the US are looking for good carry options that ensure they don’t have to sacrifice their current lifestyles. They are flocking to brands that make carrying a firearm comfortable and convenient, as well as stylish and safe. Concealed carry is a very personal choice for women and more brands are beginning to reflect this, with organisations that make it easier for women to carry a firearm in a variety of different situations experiencing a significant uptake from consumers.

A cultural shift appears to have occurred – one where women feel more comfortable using firearms for protection

Keane is eager to point out that the stereotype that only white, middle-aged men living in rural America are still purchasing firearms is not reflected in the customer data: “We are witnessing the changing face of the consumer – the demographics are shifting and you are seeing a more ethnically diverse customer base. We are also seeing more urban purchases.”

Programmes like the NSSF’s First Shots initiative have proved hugely effective in getting new customers interested in firearms. It’s an approach that will have to continue if the industry wants to maintain its long-term growth.

A long shot
For the US firearms market, the priority is finding a way to continue generating the kind of organic growth that can insulate businesses from the inevitable dips in demand arising from political developments.

“There will always be spikes in demand that are driven by external factors – that is the reality of the market,” Keane said. “The product is not merely a consumer item – it is protected by the Second Amendment of the US Constitution and so the market is fairly unique in that regard. There aren’t many products that are constitutionally protected. It makes it challenging for the industry to manage sales peaks and troughs, which are generally unpredictable.”

Organisations like the NRA and the NSSF should continue to structure their marketing activities in such a way that ensures the industry appeals to as broad a spectrum of customers as possible. This has proven effective at changing the image of the typical gun owner, particularly among female customers. American Outdoor, a firearms and outdoor sports brand, spent $56m on marketing and PR in 2018 – approximately 78 percent more than it did five years ago. Marketing helps to prop up sales when times are tough.

Approximately three in 10 Americans own a firearm – down from historic peaks – so it seems that more guns now reside in the hands of fewer individuals. What’s more, it is not completely out of the question that further restrictions on gun ownership will one day be implemented (legislative differences already exist at state level), and while these may cause a short-term sales boost, they will dent revenue in the long term. According to the Pew Research Centre, almost 60 percent of US citizens believe that gun laws should be stricter: these are things that firearms firms will have to keep in mind.

For now, though, the industry’s long-term growth looks promising, driven by a diversified customer base that, to some extent, reflects changing demographics in the US population as a whole. As the country starts preparations for the 2020 presidential election, sales may well fluctuate again, making the industry’s most recently acquired customers of particular importance: they will be needed to maintain the firearms industry’s momentum, regardless of whether the next president is a Republican or a Democrat.

Why the race to a new digital taxation model is endangering the marketplace

Posted on by Helen

The fast-growing, highly adaptive global digital economy (GDE) is like an elephant. The way policymakers, legislators, economists, business leaders, consumers and other stakeholders are approaching the inevitable taxation of the GDE calls to mind the ancient parable about the elephant and the blind men.

After their very first experience touching an elephant, each blind man comprehends the large mammal in starkly different ways: the man who touches the flanks describes an animal as powerful as a wall; the man who grasps a leg believes the elephant resembles a massive cow; the man who touches the trunk describes a snake; and so on. Given the speed at which the massive GDE is changing and the long-term need for new digital taxation models, it would be wise for global tax policymakers to consider a constructive pause before proceeding with additional proposals and laws, regardless of whether they are unilateral or multilateral in nature.

The looming – and natural – decline of the currently extended supercycle also supports the idea of having digital taxation stakeholders work towards a more unified perception of the GDE – and, as a result, a more sustainable and beneficial approach to digital taxation and alternative business models.

As society advances with developments in public finance and countries modernise their revenue streams, governments need to redesign tax policies in response

Trunks, tails, tusks and taxes
The story of the blind men and the elephant is said to have originated in India, although other countries have claimed it as their own and different versions exist. In one telling, the blind men become so angry at their counterparts’ ‘dishonest’ accounts that they argue heatedly and exchange blows. This makes the story an even better fit for the GDE, as none of us have witnessed the likes of it before and it has been sparking increasingly heated arguments regarding the taxation of digital transactions since its appearance.

The GDE is often misinterpreted by policymakers, lawyers and even economists. Although online transactions have been increasing for over a quarter of a century, many economists are only just beginning to understand the intricate mechanisms of the phenomenon and its interconnectivity to global operations. As explained in the IMF’s 2018 Measuring the Digital Economy staff report, the GDE and its disparate implications, behaviour and multiplied functions complicate fiscal policy and global tax regulation.

We’ve only recently begun to map, correlate and quantify the intricate networks created by the extraordinary rate of innovation and market penetration that has, at times, caused speculative valuations of digital goods and services. Additional complexity stems from the impact of digital transactions on numerous microeconomic sectors, as well as how these are impacted by additional circumstances. For example, instead of the orthodox, linear, trade-based economy of past centuries, the GDE has created a vastly complex and interactive network of economic actors and network agents that enhances and monetises value at various levels of the economic and business activity chains, both vertically and horizontally. This adds to the complexity for fiscal policymakers as they decide how much, where and when to tax certain virtual business activity. Thus, when we ask what is ‘value creation’ and where is it created for purposes of discerning taxing rights and profit allocation to the ‘proper’ jurisdiction, errors and miscalculations may occur and result in policy and economic distortions.

As the IMF report explained, we already know that the complexity of the GDE makes economic forecasting extremely challenging. These interactions create additional secular trend activity that eventually affects the GDE. Accordingly, the long-term implications of flawed fiscal policy being ratified too early will produce disruptive and economic outcomes to a still-infant economy, long after seasonal effects and the ebb and flow of business cycles have passed. These echo effects will undoubtedly produce unintended and unforeseeable consequences, as well as incongruent aftershocks throughout the global marketplace.

A matter of when, not if
Many global tax authorities prefer not to wait to understand and evaluate the GDE’s longer-lasting impacts before overhauling traditional taxation systems. Last year, the EU attempted to establish a digital services tax (DST), and this year, the Organisation for Economic Cooperation and Development (OECD) – together with a growing number of individual countries – is forging ahead with its own proposals for digital taxation. The UK, which was the first country to unilaterally propose a DST, has yet to enact official legislation, pending the adoption of a precise international standard. The OECD expects to finalise a new digital tax regime next year.

Not content to wait for the OECD, earlier this year, France introduced a new DST of three percent that will apply to companies with over €750m ($839.4m) in annual revenue. The government also indicated that it intends to eliminate this tax when the OECD finalises its own. In April, the French Parliament voted to approve the new tax – however, at the time of World Finance going to print, only the lower house of the French Parliament had voted in favour of the proposal. The UK’s digital tax rule is also set to take effect next year, while Germany – among other EU member states – is considering similar moves.

It is clear that French Finance Minister Bruno Le Maire views the GDE differently to other global stakeholders. Earlier this year, Le Maire told The Wall Street Journal: “These [technology] giants use your personal data and make significant profit from it, without paying their fair share of tax.” US Government officials, for example, see the GDE as being broader than the handful of massive technology companies headquartered in its country: when France proposed its new DST, Chip Harter, Deputy Assistant Secretary for International Tax Affairs at the US Treasury, indicated that his team was researching whether the “discriminatory impact” of France’s digital tax ran counter to World Trade Organisation rules.

Before policymakers create and advance digital tax proposals, they should consider whether their proposals are timely and judicious

That’s not to say that a new approach to digital taxation is unnecessary. As society advances with developments in public finance and countries modernise their revenue streams, governments need to redesign tax policies in response. As such, we need new approaches to taxation and matching tax types that not only impose levies on a transaction’s event, timing, place and value exchange, but upon emergent technologies, digital applications and direct-use advertising and promotional value.

Successfully replacing long-standing fiscal policy attitudes and inefficient international tax standards is a complex undertaking. It requires replacing traditional forms of economic thinking with a more adaptive approach better suited to the 21st-century GDE. To accomplish this, it is essential to shift our energies towards understanding the behaviour of dynamic economic systems and adapting to their intricate, separate parts.

Tortoises, not hares
It takes time to replace outdated methods of taxation with regimes that effectively avoid – or at least limit – market and economy-wide distortions and other negative externalities. Before policymakers create and advance digital tax proposals, they should consider whether their proposals are timely and judicious. On this count, the OECD deserves credit for taking its time, while seeking input from many stakeholders, to design what will be a complicated and disruptive tax proposal.

Unfortunately, it appears that the race to unilaterally tax the digital marketplace is on. This pace limits the amount of systemic consideration that should be devoted to the minimisation of government intervention as the GDE expands. This flawed market intervention may become another trade barrier: though unilateral digital taxation rules are intended to preserve tax bases while sustaining regional economies, they may have the opposite effect.

Many country-specific DSTs could result in an inefficient imposition of tax, regardless of whether they are levied against revenue, income or profits, because they only address tax compliance requirements while neglecting potential social costs. Additionally, there’s the inconsistent and unilateral assessment of transactional cost, and the slippage (or cost differences and spread) between jurisdictions. To avoid additional errors and distortions impacting certain sectors, a precise fiscal policy balance must be fostered between all market participants.

Double (or triple) taxation also represents a major risk. The mechanics and effect of adverse differential taxation could create a consolidated tax situation in which a taxpayer is subjected to tax twice or more on the delivery of the same digital goods and services in different jurisdictions.

This is not to say that a multilateral, globally uniform digital taxation standard will be easy to design and implement. The OECD’s recommendation for an aligned international standard could accomplish this, although developing nations may be best served by assessing and adopting the UN’s own proposals first. Either approach requires extensive wrangling among different tax authorities, and the outcome could feature at least some of the negative impacts that unilateral approaches are more certain to inflict.

As the increasingly unilateral moves to adopt new forms of taxation in the past year confirm, digital taxation is no longer a matter of if, but when. Given the risks involved in getting digital taxation right, all stakeholders should consider the benefits of delaying that looming ‘when’ until we can reach a shared agreement of what the GDE looks like today – and how we want to see it thriving in the future.

For more information:
www.vertexinc.com

A glimpse into the future of banking in Brunei

Posted on by Helen

As one of the largest banks in Brunei and a key player in the global banking industry, Baiduri Bank has enjoyed several years of growth. Not content with resting on its laurels, though, the firm is now looking to build on its successes via investment in new technologies. From contactless payments to digital wallets, technology is rapidly changing the banking landscape. Furthermore, as customers are increasingly embracing mobile and internet banking, banks are pressured to adapt to their customers’ evolving needs. As a consequence, institutions are turning towards new technologies.

“With Brunei having one of the highest internet penetration rates in the region, the young, tech-savvy generation expects on-the-go services as their default option. This also applies to how they perform their banking,” Ti Eng Hui, CEO of Baiduri Bank, told World Finance. He added that while the brick-and-mortar branches are still generating continuous traffic, there is an upsurge in the amount of time that customers are spending on online and mobile banking platforms. “Though certain services still require a personalised touch through face-to-face interaction, we have seen a significant increase in the amount of transactions taking place online.”

Digital drive
As a result of this trend, Baiduri Bank is also actively engaging its audience through social media. Today, the bank uses various social media platforms to enter into conversations with its customers and potential clients, swiftly responding to any queries and posting regular, informative content. “For Brunei’s young generation, traditional banking services no longer fully meet their evolving financial needs for a multitude of reasons, such as time constraints or other lifestyle factors. Convenience is now the main differentiator, with the youth expecting a comprehensive banking experience from their smartphone or laptop as an option.”

Brunei plans to diversify its economy away from the oil and gas sector by placing greater emphasis on the development of local businesses

Touching on the bank’s digital banking initiatives, Ti said: “Today, with the internet and the smartphone being a daily necessity for many Bruneians, Baiduri Bank has developed a comprehensive and user-friendly mobile banking app in keeping with the digital banking trend. We will also continue to further develop our electronic payment capabilities and e-banking services.” Initially released in 2013, Baiduri’s mobile banking app, Personal i-Banking, has undergone two major enhancements in recent years, with new features and a more intuitive user interface in keeping with customers’ evolving needs. Meanwhile, Baiduri Finance – a subsidiary of the bank – has also recently launched a mobile app. The Baiduri Finance mobile app is further proof of the bank’s efforts to provide the highest level of convenience for its customers.

Baiduri Bank was also the first – and, to date, the only – bank in Brunei to provide MerchantSuite, an online platform for merchants that facilitates card payments without the need to have a dedicated (and often costly) website. This eliminates a major barrier for sole proprietors and microenterprises, which often do not have their own websites but do have access to social media. It also makes their businesses more accessible to a wider audience. “This feature allows for quick and efficient transactions, and provides a convenient alternative for our customers who prefer to make online purchases,” Ti added.
Furthermore, Baiduri Bank also has a dedicated internet banking platform, known as Business i-Banking, which provides a modern, user-friendly and secure channel for businesses to manage and conduct their banking efficiently.

Among the bank’s other digital innovations was the introduction of Brunei’s first online securities trading platform. “Through our subsidiary Baiduri Capital, we provide the opportunity for our customers to invest in major stock markets, including Singapore, Hong Kong, Malaysia, the US and China,” Ti explained. “Our secure online trading portal also allows our customers to obtain quotes, place orders and review their account status and balance at their convenience.”

Finding the right tools
Being a local bank, Baiduri’s primary focus has always been on the Brunei market. Starting out as a commercial bank that catered to corporate and private banking clients, Baiduri Bank’s core business now includes retail banking, corporate banking and consumer financing. Baiduri Bank also offers a wide range of financing products for local businesses to aid in their cash-flow management and to support their growth. Other products designed to serve micro, small and medium-sized enterprises (MSMEs) include financial advice and corporate credit cards. This coincides with the country’s current economic plans: with its long-term development programme, Wawasan Brunei 2035, in place, Brunei plans to diversify its economy away from the oil and gas sector by placing greater emphasis on the development of local businesses.

In 2015, Baiduri Bank also set up its Business Hub, which serves to complement the corporate banking department by tapping into non-borrowing and small-borrowing accounts. “We set up the Business Hub to act as a focal point for our current and future business customers. The purpose of the Business Hub is to provide information and advise our businesses on the types of services and offerings that are suitable for their unique needs,” Ti told World Finance.

“In line with Wawasan Brunei 2035, we have taken a proactive stance to help local businesses by providing the tools that will help them achieve their goals,” Ti added. To cater to the wide variety of businesses in Brunei, Baiduri Bank also launched a micro account, which caters to smaller businesses that do not meet the requirements of a normal business account. The micro account also enables MSMEs to subscribe to the MerchantSuite service and enjoy the associated benefits.

Furthermore, Baiduri Bank has partnered with Brunei Shell Petroleum (BSP) to offer financing to local businesses under the BSP Credit Facility Programme. “This programme allows us to fast track the reviewing process of BSP contractors and make swift decisions on their respective credit applications,” Ti explained.

More recently, as a result of the government’s diversification efforts, Brunei has seen a sharp increase in the number of MSMEs being created. “With better tools and education at their disposal, there has been an upward trend among the Bruneian youth to venture into entrepreneurship,” said Ti.

Among the myriad ways that Baiduri Bank contributes to this cause is through the Junior Achievement Brunei programme. This after-school initiative sees Baiduri Bank staff take on the mantle of facilitator and mentor for schoolchildren, helping them start and run their own microenterprises. “We have collaborated with the Ministry of Education to run this programme for the past five years. This first-hand exposure to running a business and all that comes with it will help open the doors to more growth opportunities in the future,” Ti told World Finance.

Awareness and inclusion
A vital factor for Baiduri Bank to consider in order to remain competitive in a rapidly changing and progressive society is the increasing importance placed on financial planning. “Baiduri Bank provides a variety of tools and services to help educate our individual customers on understanding their options and how best to take control of their finances,” said Ti.

Beyond the regulatory rules to control individuals’ indebtedness, Baiduri Bank has a number of safeguards in place to ensure customers are not over-indebted. These include comprehensive guidelines on clients’ eligibility with regards to various financing products.

Ti also noted that financial planning should be brought to light at all levels of society. He said: “As part of our commitment to educating the general public on financial planning, Baiduri regularly holds talks on the subject for schools, various government departments and private organisations. We also conduct mandatory risk-profile assessments on our customers before they sign up for any of our wealth management products. This allows us to recommend the most suitable product that is both within their means and best matches their attitude towards investments.”

He continued: “At all of our branches, as well as at our dedicated Wealth Management Centre, we provide complimentary financial planning consultations. We firmly believe in the old adage that preparation is the key to success.”

In addition, both Baiduri Bank and Baiduri Capital regularly host investment seminars in a bid to educate their customers on the latest market trends. “We partner with various experts from across the region,” Ti told World Finance. “This is part of our continual efforts to keep our customers well-informed and to facilitate them in strategising their investments.”

With the growth of financial awareness and inclusion in Brunei coupled with the increasing demand for digital alternatives to banking, Ti feels that Baiduri Bank is able to make a significant difference to banking in Brunei. “In today’s highly educated and tech-savvy society with a heavy reliance on mobile services, there is a growing need to develop or adopt new technologies.”

Permanent player
Baiduri Bank has positioned itself as the leading conventional bank in Brunei. With high liquidity and a strong credit rating of BBB+/A-2 from Standard and Poor’s, Baiduri Bank has recently purchased HSBC Brunei’s retail and commercial banking portfolio. This comes in addition to the recent acquisition of United Overseas Bank’s retail portfolio. “These strategic moves have helped us secure a competitive position in the economy,” Ti explained.

Speaking about the digital transformation currently being witnessed by the banking industry, Ti said: “Baiduri Bank has taken steps to not only accommodate the current needs of our customers, but to also anticipate their future needs. That’s why the bank has invested heavily in data security and newer technologies to provide an enhanced banking experience.”

There will undoubtedly be obstacles and challenges to overcome in this constantly evolving marketplace. But with a focus on developing the local economy and its three main core businesses already doing well, Baiduri Bank has secured its place as an integral part of Brunei’s financial landscape.