Max Tomlin | World Finance

Saint Kitts and Nevis continues to prove an alluring choice for second citizenship

Posted on July 25, 2018August 1, 2018 by Max Tomlin

What options are available to those people limited by the nation in which they were born? They may seek to relocate through their career or, in some cases, attempt to trace their family tree and obtain rights to an alternative citizenship. For those unable to follow these more traditional paths, however, citizenship by investment delivers a ready-made solution.

While gaining citizenship to Saint Kitts and Nevis is certainly contingent on an investment, it is, above all, conditional on the applicant’s good character

Citizenship by investment is the process of obtaining citizenship by making a significant contribution to a nation’s economy. The process is forward-looking, with applicants contributing to the future prosperity of a country, rather than demonstrating a historic link to its people or institutions. One nation in particular can be credited with the conceptualisation, development and extension of citizenship by investment: the Federation of Saint Kitts and Nevis.

A twin-island nation located in the Caribbean Sea, Saint Kitts and Nevis launched its citizenship by investment programme in 1984 – one year after obtaining full independence from the UK. Since then, it has refined its offering, providing a second citizenship that is widely recognised as the platinum standard by investors around the world.

Consistent evolution
Saint Kitts and Nevis has been leading the economic citizenship segment for more than 30 years, yet at no time has its citizenship process been more appealing than it is today. Previously, aspiring Kittitians and Nevisians could donate to the Sugar Industry Diversification Foundation – with donations starting at $250,000 for a single applicant – or invest $400,000 in pre-approved real estate to be held for a minimum of five years.

As of March 29, however, these programme staples have been surpassed in popularity by two new options: a $150,000 contribution to the recently established Sustainable Growth Fund (SGF) or a $200,000 joint investment in pre-approved real estate valued at $400,000 or more.

The SGF option is particularly noteworthy, as it aligns Saint Kitts and Nevis with the UN’s Sustainable Development Goals and seeks to redirect funds to projects fostering climate resilience, education and medical advancement, among others. It also caters to large families, with each family member requiring a $10,000 contribution. The sole exception to this rule is the investment required from the spouse of the main applicant, who must contribute $25,000.

Checks and balances
While gaining citizenship to Saint Kitts and Nevis is certainly contingent on an investment, it is, above all, conditional on the applicant’s good character. Saint Kitts and Nevis is famed for its extensive security and vetting procedures, with due diligence performed by both the government and independent specialist risk analysis firms at every stage of the multi-tiered process.

Files are also reviewed by international law enforcement agencies and checked against a number of sanction lists. Further, there is room for economic citizens to have their citizenship revoked if they are later found guilty of providing misleading information or committing crimes at odds with the government’s rule of law.

By these methods, Saint Kitts and Nevis has safeguarded the reputation of its programme, its people and its future citizens. The security and subsequent strength of the citizenship by investment programme is also apparent in the diplomatic relationships that are continually being forged by the Federation to ensure its people have the greatest possible mobility.

True citizens
In addition to strict due diligence and safety guarantees, Saint Kitts and Nevis promises applicants a straightforward – yet sophisticated – application process with prompt turnarounds. Applications typically take around three months to be actioned, but a commitment to meeting the market’s requirements can expedite the process.

Unlike any other jurisdiction, Saint Kitts and Nevis also offers the Accelerated Application Process (AAP), which ensures all steps for the acquisition of citizenship – including the issuance of a passport – are completed in 60 days or under. Furthermore, there is no need for investors to reside in the Federation or speak English, and applicants are not required to be familiar with the local history, traditions or customs.

Saint Kitts and Nevis regards foreign investors as essential cogs in the engine of its development and, as such, puts economic citizens on par with those who obtain citizenship by birth, marriage or lengthy residence. Economic citizens who choose Saint Kitts and Nevis, therefore, are choosing a strong government with an equally robust legal system, sound investment opportunities in a thriving economy, and a peaceful home in paradise.

Kamakura Corporation champions a holistic approach to credit risk modelling

Posted on July 25, 2018July 31, 2018 by Max Tomlin

To measure and manage your risk, you need to do three things well: define and quantify a company’s financial distress; understand the time horizon of the risks you’re taking; and understand the drivers of potential default. At Kamakura Corporation, we are strong advocates of using quantitative tools to answer these questions. Specifically, we use reduced form models, which provide easy visualisation of everything you need to know.

Kamakura’s Risk Information Services monitor a global index that contains over 38,000 businesses spread across 62 countries to analyse default probability reports and other financial predictions

Financial distress is defined as the elevated probability that a firm will fail to meet its financial obligations, but elevated probability isn’t a very helpful measure when you’re assuming some of the risk. To quantify the distress level, you can use a variety of tools, including fundamental research, credit scores and reduced form models.

Many of these tools have their limitations. Credit scores have an ambiguous time frame and do not answer the question of what is driving the default risk. Forecasting introduces biases. Financial information, while useful, is backwards-looking.

Looking forwards
When you’re driving, you use your rear-view mirror frequently, but you spend most of your time looking through the windshield. Identifying and quantifying financial distress should be a similar process. That means you need a tool that can incorporate history, while also focusing on forward-looking factors. Reduced form models, like Kamakura’s Risk Information Services (KRIS), allow you to do this. KRIS can be used to monitor a global index that contains in excess of 39,000 businesses spread across 68 countries. With such a wealth of data to draw from, it is easy to analyse default probability reports and other financial predictions.

Risk managers, investors and financial experts can then examine this sophisticated analysis as a key part of their decision-making process. It is, therefore, an essential tool in understanding which businesses to support and which ones are too risky to back. Crucially, a reduced form model like KRIS is sophisticated enough to incorporate a complete set of inputs and can provide a probability of default that corresponds to specific time frames.

Logistic regression models allow the user to calculate the most accurate predictions of default probabilities for a given set of inputs. The Kamakura models use company-specific information as well as macro variables (company accounting and market-based variables, along with interest rates and indicators of macroeconomic conditions) to deliver a default probability that can be used to directly assess a company’s risk. Further, a nested family of logistic regressions produces a highly accurate term structure of default.

Our current version of KRIS is version 6.0. This version benefits from the addition of nearly 500,000 observations compared with the previous database. The addition of more than five years worth of incremental data in the aftermath of the credit crisis has dramatically enhanced the insights that our models bring to users. Observed company failures, for instance, are 31 percent higher than with our previous model.

The credit crisis that occurred between 2006 and 2010 was the most severe crash to occur during the span of the Kamakura modelling database; the data shows that financial institutions and other highly leveraged firms were the most vulnerable in a crisis. Moreover, the search for yield over the past years has led many investors to high-yield investments and longer durations, which necessitate improved risk management practices by portfolio managers. We encourage our clients to utilise KRIS as much as possible so they can understand how reduced form model tools can help them to evaluate historical inputs and forward-looking inputs, and their various correlations to default risk. You can also analyse all these variables within a specific time horizon.

Finding fault
Before you perform any in-depth analysis, it is helpful to know which firms have already been identified as having an elevated probability of failing to meet their financial obligations. At Kamakura, we use a ‘troubled company index’, which shows the percentage of 39,000 public firms with a default probability of more than one percent. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

Of the firms in our coverage universe, 10.63 percent had a one-month default probability of more than one percent as of April 3, 2018. As credit managers, we want to be forward-looking. We use analytics to create an expected cumulative default rate, and we have further refined the list to focus on the rated companies in our coverage universe. Interestingly, our analysis shows that while the risk of financial distress in the short term has been low and stable, the default risk in the five-to-seven-year period has been growing.

Defaults can occur for any number of reasons and certainly aren’t limited to young, inexperienced firms. Aggressive expansion leading to financial instability is a common cause, as is relying on revenue streams from volatile, rapidly changing industries. Poor management at boardroom level can also be a factor, while macroeconomics issues beyond a company’s control can push organisations towards the edge. Although the reasons behind a default may be varied and difficult to pin down, data analysis will usually reveal some telltale signs.

Using Kamakura’s default probability solution, investors and creditors can assess a variety of different factors to achieve a predictive power that is unmatched anywhere else in the market. Transparency, of course, is paramount, so we ensure that nothing is withheld from our clients. This allows our service to be as comprehensive as possible, while still complying with all the credit modelling requirements stipulated under the Basel II provisions of the New Basel Capital Accord.

Company-specific risk
Corporate credit managers and traders may focus on shorter-term risks, while lenders and investors are more concerned with the longer-term risks of a counter-party. The time horizon that is most relevant will vary with every business and every lending or investing situation. Therefore, not only do you need to define the most relevant time horizon, you need the ability to measure the risk and the drivers of the risk over that period.

We will use the Noble Group as an example (see Fig 1). Noble is a commodities trader and was once one of the largest in Asia, but the firm defaulted on its obligations in March. The graph makes it clear that this should not have been a surprise: notice how the quantitative default probabilities show an increasing risk of default for the company in both the one-month and the one-year categories. You can see that in May 2017, both default probabilities jump up, and the expectation of default within the year begins to be significantly higher than the probability of default within one month. Given the announcement by the firm last month, this analysis proved to be very accurate.

The second thing to know when dealing with distressed firms is what is driving the default probabilities. KRIS reveals the drivers of default. In our Noble Group example, net income, oil prices, market volatility and the company’s stock volatility combined to drive the increased risk. KRIS combines both forward and backwards-looking factors, allowing us to quickly understand what needs to be monitored, including the absolute and relative levels of default probability.

You need this information to make an informed decision about a distressed company. It helps you determine whether to take the risk of extending credit or to pursue a range of alternative options, such as avoiding the risk, shorting the risk or hedging the risk. As Professors Robert Jarrow and Arkadev Chatterjea wrote in their book An Introduction to Derivative Securities, Financial Markets and Risk Management: “We live in an imperfect world, in which it is hard to find perfect hedges.”

One of the goals of a risk management system is to answer the question: “What is the hedge?” If there were a single source of risk and a single measurement to quantify it, the answer would be easy, but of course, that’s never the case. The strength of the Kamakura approach is that we offer an integrated measure of all the risks and their sources, with a definitive time horizon for each. Finally, you cannot consider the time horizon without addressing the debate regarding ‘point-in-time’ and ‘through-the-cycle’ credit indicators.

The reason for the debate is the vagueness of the maturity and default probabilities for a specific company at that point in time. When you use a quantitative default probability, the debate becomes meaningless as the default probability has an explicit maturity with a defined meaning. All default probabilities that exist today at all maturities are point-in-time default probabilities, while the longest maturity default probability for a given firm is the through-the-cycle default probability. When you’re dealing with a distressed company, you can’t afford to leave any stone unturned.

Banco Mercantil Santa Cruz succeeds by putting its customers first

Posted on July 24, 2018July 31, 2018 by Max Tomlin

While Bolivia’s economy expanded at a remarkable rate over the past year, the pace of growth in the financial system was slower than in prior years. Despite this, Banco Mercantil Santa Cruz (BMSC) reached a milestone of over $5bn in assets and led the local banking industry in both net income and asset growth, once again proving its leadership in the sector. These results reflect BMSC’s ability to create value even in a year that was full of new challenges, demonstrating that the consistency of our strategy delivers results in different environments, even with continuous change.

BMSC performed well over the last few decades by combining its risk-centred culture with an aggressive appetite for growth in the country

Throughout its history, BMSC has provided quality financial services. It performed well over the last few decades by combining its risk-centred culture with an aggressive appetite for growth in the country. In 2017, the bank completed the acquisition of Banco PyME Los Andes Procredit to continue diversifying its risk portfolio and better serve the SME sector. Today, BMSC is the largest bank in the country, and enjoys a successful history of satisfied customers.

Prioritising the customer
BMSC has put significant resources towards improving customers’ experiences of its products and services, in addition to creating a tailor-made solution for customers. The star product, Super Makro Account, has performed outstandingly in the market, even prompting competitors to replicate it. In addition to traditional features, the product offers a competitive interest rate and the benefit of weekly cash prize draws.
Furthermore, we have developed a new brand aimed at younger generations, called Banx. After two years, Banx is very active in high schools and universities as a result of promotions and campaigns, but most of the business is done with clients in our targeted age range of between 26 and 35.

BMSC is committed to the people of Bolivia, and to this end it has promoted growth in social housing loans and productive sector loans. These loans allow families to achieve the dream of home ownership and contribute to the growth of their businesses.

The bank also supports efforts to develop a more inclusive financial system that provides greater access to financial products, services and capital for low-income communities and individuals. In line with this commitment, we were the first bank to grant loans with 100 percent financing for social housing, a product that enabled a large portion of the Bolivian population to access their first home.

To reinforce the country’s small producers, which in many cases do not have the opportunity to access traditional financing, BMSC has created a unit to look specifically at structured loans. This product allows the small producer – with help from a large company – to access loans that were previously unthinkable.

Refining a digital strategy
Internet banking was formally introduced to our corporate customers to improve customer experience. This new channel was redesigned under a modern technology platform to be friendlier and safer, with the aim of improving functionality to allow transactions 24 hours a day, 365 days a year.

The BMSC mobile banking app allows our customers to make enquiries and financial transactions from their mobile phones. Our app has become more popular in the past year as more operational improvements have been released, such as facial and fingerprint recognition. Both our internet and mobile channels are continually improving to make customer transactions and questions easy to resolve.

The bank is also working to update its core banking system, a project that began in 2015. The project, which represents a massive investment of time and money for any bank in the financial system, will give BMSC a world-class core system and allow it to be more competitive in the market.

Nevertheless, the most important achievement in 2017 was the acquisition of Banco PyMe Los Andes Procredit. This was the most significant deal to have taken place in the country in the past 10 years. In December 2016, BMSC acquired 100 percent of the company’s shares, and the integration was completed by August 2017. After this transaction, BMSC consolidated its position in the market as the largest bank in the country, not only growing in traditional products, such as housing loans, but also improving its position in the SME sector.

As a result of continuous efforts of the main directive and all employees of the bank, total assets reached $5bn this year, growing by $925m since 2016. Furthermore, the bank maintains important funding in public deposits, reaching 91.59 percent of the total liabilities as of December 31, 2017.

Throughout the years, BMSC has demonstrated a commitment to its customers by constantly investing in technology and innovation and providing an excellent service designed to meet the needs of its customers.

China demonstrates grand trade ambitions through New Silk Road

Posted on July 23, 2018July 31, 2018 by Max Tomlin

Between the second century BC and the end of the 14th century AD, the Silk Road enriched the many empires and dynasties it travelled through. As a direct result of trade, people gained access to goods, ideas and technologies that had been developed thousands of miles away. It represented an early form of globalisation, long before the term had been invented.

Although the route facilitated economic and cultural exchanges between many countries in the East and the West, modern depictions of the route predominantly focus on the transportation of Chinese goods such as gunpowder, porcelain and, of course, silk. Today, the government in Beijing has plans to recreate this corridor of influence. Once
complete, the network will cover 60 percent of the world’s population, 30 percent of global GDP and cost more than $1trn.

The New Silk Road will not be built upon the mettle of intrepid merchants, but through huge infrastructural projects and closer economic integration

Unlike the original, however, the New Silk Road will not be built upon the mettle of intrepid merchants, but through huge infrastructural projects and closer economic integration. Along the way, key transit hubs will play a vital role in managing the flow of goods – that is, if they are up to the job.

Concerns are beginning to grow that some of the most critical sections of the New Silk Road are not developed enough to cope with the increased demands that will surely be placed upon them. One such area that is coming under close scrutiny is the Brest-Małaszewicze crossing on the Belarus-Poland border. It is a feature of almost all rail routes linking China and Europe, and yet it also provides the biggest potential stumbling block to the continued expansion of this vital trading network. Along the New Silk Road, a bottleneck is starting to emerge.

Bumps in the road
Just as the original Silk Road was not a single route but a network of trading paths stretching through Eurasia, so too is its modern iteration. Today’s version has been formally dubbed the Belt and Road Initiative and encompasses the Silk Road Economic Belt, its overland component, and the 21st-century Maritime Silk Road.

60%

The proportion of the world’s population the New Silk Road will cover

30%

The proportion of the world’s GDP the New Silk Road will cover

$1trn

The projected final construction cost of the New Silk Road

The project was officially unveiled by President Xi Jinping in late 2013 and has so far augmented Eurasia’s pre-existing infrastructure with numerous investments. Nevertheless, China is not always the main funder, and it is far from the only beneficiary. Completed projects such as the Kouvola-Xi’an rail link and the China-Kyrgyzstan-Uzbekistan railway have significantly reduced transit times for people and goods, and promise to boost economic growth.

For the New Silk Road to achieve its full potential, however, it will need to do more than simply connect previously disconnected places. The Eurasian landmass is already crisscrossed with thousands of miles of roads and railways, and updating the many transport links that exist in a state of decline should be a priority. A good place to start would be the Poland-Belarus border.

Up until now, the rapid growth of railway container traffic between China and the European Union has been managed fairly effectively. Between 2011 and 2017, traffic grew from 7,000 forty-foot equivalent units (FEU) – a conventional measure of cargo capacity – to 131,000 FEU. But with expansion predicted to continue, inferior capacity at crossing points along the EU’s external border could cause significant issues in the future.

In particular, the crossing point between Brest in Belarus and Małaszewicze in Poland is set to become extremely problematic. Today, the Polish side processes between nine and 10 trains a day, already below the negotiated figure of 14. Evgeny Vinokurov, Director of the Centre for Integration Studies at the Eurasian Development Bank, believes delays occurring here greatly impair the competitiveness of the route.

“Infrastructure bottlenecks in Poland have resulted in up to 3,500 cars having been detained at the Brest-Małaszewicze crossing point,” Vinokurov said. “Several major consignors, including Hewlett-Packard [HP], have expressed grave concerns about that crossing point. According to HP representatives, the company’s trains running from Chongqing [in China] to Duisburg [in Germany] may have to wait for the crossing for two to three days, while trains running from other Chinese cities may be delayed by five to six days.”

Infrastructural problems are partly to blame for the bottlenecks and further investment is certainly needed, both in Poland and Belarus, to modernise this section of the New Silk Road. Better management of current traffic levels would also help alleviate some of the strain. Despite the fact that there are four terminals at Małaszewicze, each capable of handling 10 trains daily, they are often underutilised. Some of them only process one or two trains a day and some do not accept traffic from Asia at all. Before more money is thrown at the infrastructure at the Poland-Belarus border, inefficiencies must be dealt with.

Finding order in chaos
Given that the New Silk Road traverses numerous countries, each with its own established way of doing things, it is no surprise that the route lacks cohesion in places. Language barriers and administrative discrepancies can make the transport of goods across borders far from simple.

Digital solutions should be pursued to simplify the customs procedure, helping to facilitate more consistent documentation between countries

Where Poland meets Belarus at the EU’s eastern border, these problems are perhaps at their most pronounced. Differences in track gauges used by EU nations (1,435mm) and Russia, Belarus and Kazakhstan (1,520mm) mean unconventional approaches, including the use of automated gauge conversion technology, may need to be employed. EU speed limits, which are much lower than those of Eurasian Economic Union states, are another factor that adds to the complexity.

Regulatory divergence provides yet another headache. In Poland, technical regulations stipulate train lengths cannot exceed 600m. In Belarus, this limit is 910m, while in Russia it is higher still. This means if a 65-car cargo train arrives at Brest, it will need to be split in two before it enters Poland, with a 45-car train allowed to cross the border while the remaining 20 cars are left until they can join a later train.

Thomas Kowitzki, Head of China Rail and Multimodal Europe at DHL Global Forwarding, told World Finance that this lack of synchronisation is also found in terms of end-to-end train configuration. “Take, for example, a Chinese province announcing a new direct rail connection from Shenzhen to Hamburg. Instead of one direct train, this rail connection is likely to consist of three separately operated trains with multiple rail wagon sets [that] use multiple locomotives from various rail operators.”

Every time there is a change of train operator or regulatory standards, the potential for delay increases. And delays can have financial ramifications. “If a container train suffers an excessive delay when crossing the border,” Vinokurov explained, “the operator may indemnify the consignor at the expense of the railway company that caused the delay.” Although some delays are unavoidable, when they occur over a sustained period they can cause the profitability of foreign trade to plummet to unsustainable levels.

But just a few hundred miles from the Brest-Małaszewicze crossing, a new development is underway that could help alleviate some of the logistical challenges. With the slogan ‘time is money, efficiency is life’ appropriately hanging outside its entrance, the China-Belarus industrial park is beginning to take shape on the outskirts of Minsk. Initial proposals for the park focused on turning it into a free customs zone, but in 2017 the emphasis moved towards large-scale logistics for Chinese cargo.

Three 17,000sq m warehouses and a 22,000sq m open container terminal have already been completed, with much of the funding being supplied by China Merchants Group. As a focal point for export-orientated production, the park will mean some goods produced by Chinese businesses and destined for the European market will no longer have to travel distances that are quite so vast. It should also improve the efficiency of cargo processing along the route, reducing the pressure for urgent infrastructural development.

Coming together
Given the number of issues that need to be resolved before container traffic can reach the desired levels, it might be tempting for businesses to find alternative ways of getting their products to EU customers. However, while 90 percent of the world’s traded goods travel by sea, it is not ideal for all types of cargo or for all destinations. As Kowitzki noted, rail transport along the New Silk Road “fills a gap between sea and air freight. It is cheaper than transportation by air and faster than sea transportation”.

Encouraging funding from Chinese businesses into Silk Road projects is one way of plugging the investment gap; greater international coordination of investment policies is another

If rail remains the most viable option for some Chinese producers, perhaps an alternative route could deliver a more efficient passage to the EU. Again, this is unlikely to be the case. The only other prospective route would go via Ukraine, but the unstable political situation in the country is pushing Chinese investment towards its neighbour to the north. The Brest-Małaszewicze crossing is also strategically located along the E20 rail line – the key eastern entrance into the European market.

What’s more, plans are already underway to address some of the major challenges at the Poland-Belarus border. Investments totalling $2.5bn were made between 2011 and 2017 to improve capacity across Belarusian rail lines, and proposals are afoot to modernise signalling and communication devices before 2020 ahead of launching a high-speed service. While this will improve transit conditions along a small section of the New Silk Road route, further enhancements will be needed.

For a start, the Polish Government could attempt to match the investment being made on the Belarusian side of the border. Currently, most of Warsaw’s resources are being directed at railway routes connecting Baltic ports in the north to countries in Southern Europe. Encouraging funding from Chinese businesses into Silk Road projects is one way of plugging the investment gap; greater international coordination of investment policies is another.

If funds are increased, they must be used in a targeted manner. Digital solutions should be pursued to simplify the customs procedure, helping to facilitate more consistent documentation between countries with different administrative methods. Money should also be concentrated on the most severe bottlenecks first, starting with the Brest-Małaszewicze crossing before plans for new routes begin.

Just like its ancient forebear, the New Silk Road promises to usher in an age of closer cooperation between countries separated by huge distances. In order for it to be successful, unified standards will need to be employed across the route, particularly with regard to legal and administrative issues. It does not really matter whether countries choose the Convention Concerning International Carriage by Rail, favoured by EU states, or the Agreement on International Goods Transport by Rail, preferred by China and a number of other nations east of Poland – what’s important is finding a consensus for the entirety of the route.

Reducing bottlenecks along the New Silk Road will not only benefit Chinese companies or, indeed, local businesses found in proximity to the route. By encouraging investment in infrastructure that has long been neglected, it will drive economic growth in Poland, Belarus and many of the other 50-plus countries it passes through.

FXTM continues to thrive in the unpredictable world of forex trading

Posted on July 23, 2018July 27, 2018 by Max Tomlin

Financial market observers hardly need to be told that recent years have been among the most volatile in memory. With ongoing political tensions in the Middle East, post-Brexit uncertainty in Europe and the US president discussing foreign policy and sparring with political peers on social media, currencies and commodities have been on a non-stop roller coaster since 2016. Prices have been determined by single tweets, and each week has brought new and unexpected events.

FXTM’s vision is based on three pillars: superior trading conditions, advanced education and state-of-the-art trading tools

At the same time, the foreign exchange market is undergoing its own seismic change, most recently with the introduction of the MiFID II framework in January 2018. MiFID II aims to ensure the best, most transparent conditions for the industry and its traders. With technological advancements changing the way traders and the wider industry interact with the forex market on a daily basis, it’s more important than ever that the regulatory framework evolves in tandem.

Above and beyond
In the ever-changing regulatory environment, certain brokers stand out from the crowd. These institutions are recognised for the solid roots they have put down, as well as their consistent dedication to their clients and to improving services. As the proud recipient of the 2018 World Finance Award for Best Trading Conditions, FXTM is one of them. The company has received awards across multiple categories for four consecutive years, having also won World Finance awards for Best FX Broker in Asia and Best Customer Service in 2017.

This recognition is the culmination of years of hard work from a dedicated and talented group of people who put their customers at the heart of everything they do. As a young and flexible company, FXTM is able to quickly identify what its clients need and provide them with the service and safeguards they desire. FXTM has achieved great things in the seven years since the company was founded: since 2011, it has established an online presence in 135 countries across the world. Many traders have benefitted from FXTM’s global presence, as products have been localised to the conditions of their markets.

FXTM’s vision is based on three pillars: superior trading conditions, advanced education and state-of-the-art trading tools. Each pillar informs the way the company operates. Its slogan, ‘Time is money. Invest it wisely’, underpins its business philosophy and is recognition of the fact that, in the fast-paced industry in which FXTM operates, time often determines the success of trading decisions.

Setting the standard
MiFID II was brought into play at the start of the year to provide traders with better, fairer and more transparent conditions. When first introduced more than 10 years ago, MiFID focused only on equity markets, but the European Union’s ambitious update expanded the rules to all asset classes, including foreign exchange. Since MiFID II was enforced on January 3, forex companies have been held to a significantly higher standard by European regulators. FXTM is proud to have implemented many of the client-protecting policies required by MiFID II before they were mandated. The company continues to maintain full compliance with regulatory updates, ensuring clients are protected to the fullest extent.

For FXTM, 2018 marks another memorable year, as the Financial Conduct Authority (FCA) in the UK issued the company with an important operating licence. Discussing this achievement, Martin Couper, one of FXTM UK’s directors, told World Finance: “In a relatively short period of time, FXTM has managed to establish itself as an authority in the industry, and I look forward to seeing our brand enjoy further success as we continue our expansion. As a company, FXTM has developed a reputation of trust, transparency and exceptional service.”

Global Head of Currency Strategy and Market Research at FXTM, Jameel Ahmad, added: “It is a very proud moment in the history of FXTM to receive our FCA licence. FXTM has delivered sound and stable growth since our company was founded; our commitment to developing long-term relationships with clients has contributed significantly to our overall success. FXTM is known for its superior trading conditions and localised product offerings, and we can’t wait to enhance this reputation as we continue our global expansion following receipt of the FCA licence.”

The FXTM brand is authorised and recognised by a number of financial regulators, including the Cyprus Securities and Exchange Commission in the EU and the Financial Services Board in South Africa. The new licence allows FXTM to service a broader market, as well as honour its commitment to being fully localised in key financial regions.

Empowering traders
With world-renowned trading expert Andreas Thalassinos at the helm of FXTM’s educational offering, the company constantly seeks to empower traders through knowledge. It ensures traders are not only well informed about the risks of trading, but are also poised to reap the benefits. Speaking about FXTM’s dedication to educating its clients, Thalassinos said: “Giving clients the foundations they need to enter the financial markets with as much knowledge as possible has always been one of FXTM’s core values. As a company, we are always on the lookout for more ways to educate our traders and investors in order to match their learning styles, needs and knowledge levels.”

Such efforts do not stop there. In addition to providing traders with the tools they need to understand a complex financial world, FXTM also provides breaking news and analyses on the latest market trends and insights. Led by Ahmad, the market analysis team comprises leading financial experts positioned in key locations across the world. The team is dedicated to the timely dissemination of market news and insights, all of which serve to equip traders with the information they need to make informed trading decisions.

In 2018 alone, FXTM held 100 client educational events across 10 countries, attracting more than 2,000 attendees. This included a hugely popular Global Financial Market Outlook 2018 seminar led by Hussein Sayed, Chief Market Strategist at FXTM. The market analysis team also produces a hugely popular webinar series hosted by London-based research analyst Lukman Otunuga.

As an innovative and ever-evolving broker, FXTM prides itself on offering trading accounts that suit the needs of any investor, from novices to experienced traders. This includes two types of accounts: standard and electronic communication network (ECN). Standard accounts allow traders to trade in ‘standard’ currency lots, or amounts, while ECN accounts allow FXTM clients to receive liquidity from the biggest market participants.

Traders are able to make deals on MetaTrader 4, an industry-leading forex trading platform that can be downloaded onto desktops, laptops or smartphones to enable trading at any time and from any location. Traders can deal in more than 50 pairs of foreign currency contracts for difference (CFDs) as well as CFDs on spot metals, shares, commodities futures and indices.

Customer-first approach
A dedication to the customer sits at the heart of FXTM’s values. There is a high level of risk involved with trading leveraged products such as forex and CFDs. As such, the company strives to demonstrate commitment, appreciation, respect and responsibility in everything it does – something reflected in its outstanding customer service team. FXTM offers multilingual customer support through fully trained customer service representatives and personal account managers. FXTM works to ensure friendly, transparent and expert help is always at hand.

Transactions are executed immediately at FXTM, and the company endeavours to provide customers with swift access to funds, with more than 84 percent of funds processed within five minutes. The firm pays close attention to its clients’ personal preferences, and knows each client feels comfortable depositing and withdrawing money with their preferred method. This means it continues to work on developing as many deposit and withdrawal methods as possible, to satisfy each customer’s needs.

Tight spreads are another key prerequisite when choosing a forex broker. The fact that FXTM offers these to all clients – as well as even spreads starting from 0.1 percent pips, depending on the account type and market conditions – gives each trader a distinct advantage from their very first executions.

No dealing desk (NDD) technology allows FXTM’s clients to execute trades without human interaction. All orders are matched automatically without human intervention. NDD allows the broker’s clients to execute their order without dealer oversight, as orders are executed directly with ECN. Through this technology, FXTM offers deep interbank liquidity, giving direct access to rates that can be instantly executed.

FXTM is built around its traders. A recent customer satisfaction survey indicated that an overwhelming 90 percent of participants were happy with the company’s services – an achievement that FXTM is proud to include alongside its 2018 World Finance Forex Award for Best Trading Conditions.

To learn more about FXTM, visit their website

How Inversiones Security is fostering transparency in Chile’s banking sector

Posted on July 20, 2018July 31, 2018 by Max Tomlin

Chile is ranked as a high-income economy by the World Bank and is considered to be South America’s most stable and prosperous nation. It leads Latin American nations in competitiveness, income per capita, economic freedom and low levels of perceived corruption. Although Chile has high economic inequality as measured by the Gini index, it is close to the regional mean.

Chile has a market-oriented economy and a reputation for strong financial institutions. Its sound economic policy has given it the strongest sovereign bond rating in South America

Chile has a market-oriented economy characterised by a high level of foreign trade and a reputation for strong financial institutions. It also enjoys a sound economic policy, which has given it the strongest sovereign bond rating in South America. Exports of goods and services account for approximately one third of GDP, with commodities making up some 60 percent of total exports. Copper is Chile’s top export and provides 20 percent of government revenue.

Attractive markets
Chile deepened its long-standing commitment to trade liberalisation when it signed a free trade agreement with the US, which came into force on January 1, 2004. Chile now has 22 trade agreements covering 60 countries, including agreements with the EU, Mercosur, China, India, South Korea and Mexico. In May 2010, Chile became the first South American country to join the Organisation for Economic Cooperation and Development (OECD).

According to the OECD, economic inequality in Chile is a major problem. The country’s Gini coefficient value stands at a record 0.5, one of the highest in the world. In 2014, former president Michelle Bachelet introduced a profound tax reform aimed at fighting inequality and providing improved access to education and healthcare. The reforms are expected to generate additional tax revenues equal to three percent of Chile’s GDP.

Chile’s capital markets are well developed and open to foreign portfolio investors. Capital markets are structured into three major sectors, with each regulated by a different oversight agency. Pension fund management companies receive the money of workers (or affiliates) and offer these resources to the market, mainly through the purchase of bonds, other debt instruments, equities or alternative instruments. The Superintendency of Pension Funds is the regulatory body that oversees these companies.

Banks receive money from depositors, provide the market with capital – mainly through credit or loans – and are regulated by the Superintendency of Banks and Financial Institutions. The securities and insurance market, meanwhile, includes all the institutions that trade public securities. The Financial Market Commission regulates this.

In 2010, the Chilean Government enacted Law 20448, also known as MKIII, which introduced several changes to Chilean capital markets. This legal amendment was aimed at encouraging liquidity, financial innovation and integration with international markets, and was part of the continuous modernisation process of the Chilean capital market, which began with MK in 1994.

In a recent analysis of 20 emerging markets, Chile was found to have the highest quality rule of law, very low corruption and a superior quality of regulation. Still, it ranked less favourably in terms of shareholder protection, corporate governance and transparency. However, the public’s perception of the strength of shareholder protection is below the OECD average and the country has the most opaque corporate sector of all emerging markets. Although the discrepancy between the general quality of Chile’s institutions and its disappointing levels of corporate governance and transparency certainly stems from more than one cause, the prevalence of conglomerates and highly concentrated ownership levels are possible contributing factors.

An enticing destination
The Chilean Stock Exchange is the third-largest exchange in Latin America and, as of March 2018, its market capitalisation stands at $217.85bn. The market-capitalisation-to-GDP ratio, which when compared with the historic ratio indicates whether a market is over-or undervalued, stands at 80 percent.

In terms of the fixed income market, Chile stands out as the second-largest in Latin America, with a total traded value of $745bn for the year ending December 2017. The financial services industry accounts for five percent of the country’s GDP and is made up of more than 200 local institutional investors, banks, insurance companies, asset managers and pension funds, in addition to 25 brokerage houses. By the end of last year, the local industry of mutual and investment funds reached $78bn in assets under management, accounting for 36 percent of Chilean GDP.

Chile is an attractive destination in Latin America for investors who value its open market economy, the richness of its natural resources, its well-developed institutions, its juridical security, its low levels of risk, the high quality of its infrastructure, and its strong rule of law. The government’s positive attitude towards foreign direct investment (FDI) is another advantage, as is the fact that Chile’s legal framework for attracting and protecting FDI is solid.

The Foreign Investment Promotion Agency, created in 2015, provides services for FDI in four categories: attraction, pre-investment, landing and aftercare. Very few restrictions exist around FDI. Chile’s conversion and transfer policies are similar to those found in highly developed countries, such as the US: Chile has 41 bilateral investment agreements in force, in addition to 24 other investment agreements, including the investment chapter of its free trade agreement with the US. A US Chile bilateral treaty to avoid double taxation was ratified by Chile and is currently awaiting ratification in the US Senate.

The flows of FDI in Chile, which peaked in 2012 at $27bn, have now returned to pre-2012 levels. In 2016, FDI flows reached $11.3bn. According to the United Nations Conference on Trade and Development’s World Investment Report 2017, Chile is the third most attractive country in South America in terms of FDI, after Brazil and Colombia. The country ranks 55th out of 190 countries in the Doing Business 2018 report, issued by the World Bank. Chile’s new president, Sebastian Piñera, has announced his desire to attract financial support, particularly with regard to the mining industry, and to streamline the country’s investment process.

The tech effect
Following the presidential election of December 2017, in which Piñera was elected, various sectors have been exhibiting encouraging signs. This should foster more foreign and local investment, which will lead the economy to a rate of growth not seen in recent times. However, it is undeniable that the Chilean economy is embedded within the global context, hence the direction of world growth also impacts the local economy. It is for this reason that the market and its authorities are monitoring commercial tensions between the US, China and Europe very closely.

As countries mature, the factors that boost growth in the early stages start to lose their potency, fuelling the search for new sources of productivity and growth. Here, financial markets play a key role in paving the way to becoming a developed country. Inversiones Security is a leading player in wealth management, brokerage and asset management, and is intent on playing a key role in Chile’s financial development. As the sixth-largest brokerage company and the fifth-largest asset management company in the local market, we’ve set ourselves the goal of improving the finance industry’s entire value chain from start to finish.

Given the highly personalised service we offer to our private banking clients, we have chosen to focus on a number of key strategic areas within the value chain. Customer service and business intelligence are both essential. Our customer service and quality assurance group works in close coordination with our business intelligence group to ensure our clients are fully satisfied and that feedback is collected so performance can be reviewed. By taking operations, IT and compliance into consideration, we also ensure that new software, systems and workflows are implemented in an appropriate manner.

Our three investment factories (mutual and investment funds, international asset classes and local direct asset classes) help us to produce suitable products for our clients. Our department of research, meanwhile, provides us with the macroeconomic guidelines that enable us to build a solid and well-diversified asset allocation for both our clients and the rest of the market. In terms of digital transformation, we have worked with innovative local players, while maintaining a global perspective.

With our comprehensive understanding of the global and local technological landscape, alongside our emphasis on customer experience, we have initiated a transformation roadmap that allows us to incorporate new technologies in phases. This ensures that our different client segments have access to the digital solutions that are right for them.
Regarding wealth management, the decision has been made to incorporate the new functionalities that clients are demanding in the digital age, such as increased transparency, accessibility, mobility and information. At the same time, we aim to enhance the personal relationships and advice that our dedicated bankers can provide.

The first stage of this transformation was launched in February with a new, fully responsive website, which has been developed in accordance with the needs of our clients, strict local and global benchmarking, and which provides us with a platform capable of incorporating new technological improvements periodically over time. For 2018, we have a demanding and exciting project portfolio, with an open mind for new incoming developments and client needs.

China assumes the mantle of green energy leadership

Posted on July 20, 2018July 31, 2018 by Max Tomlin

The Chinese economy has long been dominated by heavy industry, the export of manufactured goods and the development of infrastructure, all of which have significantly contributed to the country’s greenhouse gas emissions. In fact, China is the world’s largest producer of greenhouse gases. It is therefore surprising that China is also the global leader in renewable energy development.

China is in the process of a transformative re-orientation of its economy, with its focus shifting increasingly towards technology and a service-based economic model. Despite coal making up the largest part of China’s power consumption, the government has very consciously been shifting away from it, shuttering mines and cutting around 1.3 million jobs in the sector in the past few years. One of the primary motivations behind China’s push for renewable power has been the country’s toxic level of air pollution. As recently as 2016, the World Health Organisation estimated that more than one million people a year – or just over 2,800 people a day – die in China as a result of overexposure to polluted air.

“Domestically, China is battling for better air quality. Cleaning its energy mix is a key solution which will bring co-benefits for air quality and climate change,” Min Yuan, Energy Research Analyst at the World Resources Institute, told World Finance.

Taking the helm
The geographical balance of renewable investment has shifted. The bulk used to belong to developed nations; Europe in particular. Now the ground has been ceded to developing nations, with China at the helm. In 2017, China invested $132.6bn into renewable energy, accounting for almost 40 percent of the total global clean energy investment, as well as 46 percent of the world’s new installed capacity.

When President Donald Trump pulled out of the Paris climate accord, there were fears that countries that looked to the US for leadership would take a more lax approach to the agreement. The opposite, however, was true: many countries have doubled down on their commitments, with China rushing to cement its position as the global leader in green energy.

“With the US recently becoming more economically insular and withdrawing from the Paris Agreement, China clearly sees an opportunity to dominate in clean energy markets around the world,” Simon Nicholas, Research Analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), told World Finance.

Stellar growth
According to data from the International Renewable Energy Agency, China’s total renewable capacity has been growing at an average rate of just over 15 percent annually for the past decade – almost twice as fast as the global average. Furthermore, China’s growth rates for hydroelectric, solar and wind power have all been between two and three times that of the global average over that same time period.

In total, Chinese renewable capacity has seen a 255 percent increase in the past 10 years. By comparison, the EU and the US have only seen a 105 percent and 97 percent increase respectively. Since 2008, China’s capacity in terms of hydroelectric power has increased by over 97 percent, while wind capacity has grown almost twentyfold.

The most remarkable growth, however, has been in solar capacity. Just 10 years ago, China accounted for less than one percent of the world’s solar capacity. By the end of 2017, it accounted for one third. The growth of China’s solar capacity has been exponential; on average, it has more than doubled every year since 2008. The average yearly solar growth in the US and EU in the same period has been 44.6 percent and 32.6 percent respectively.

In 2008, China’s solar installations produced just 113MW of energy, whereas at the end of 2017 they produced 130.6GW – 1,156 times as much. According to a report by the IEEFA, China now also produces 60 percent of the world’s solar cells.

“Solar power’s rapidly declining cost has driven growth in solar installations worldwide. This can be attributed [in large part] to the big Chinese solar module manufacturers that have ramped up their production capacity,” said Nicholas.

Forecasts suggest that China will take the lion’s share of renewable power capacity growth by 2022. The country will be responsible for 58 percent of global growth in solar capacity, as well as 60 percent of wind growth and 65 percent of hydroelectric.

More than generation
China’s efforts in clean power extend beyond how it is generated, also affecting how it is stored, transferred and used. The country used to lose more than eight percent of its wind and solar power as it was transferred back from energy farms to population centres, but has since taken steps to curtail that loss. These steps include the expansion of transmission networks and the prioritisation of clean energy transfer over conventional power. Between January and October of last year, the loss rate was cut to 5.6 percent.

Energy storage is another area in which China is leading. By 2020, China is projected to have four of the six largest battery factories in the world. The fastest-growing battery factory in the world, Contemporary Amperex Technology, is set to overtake Tesla’s Gigafactory in terms of battery production, despite the latter’s monopoly of media attention.

Japan and South Korea have historically led the battery manufacturing industry, but Chinese companies are being propelled by heavy subsidies and restrictions on foreign competition. Additionally, there have been reports of Korean battery companies being on alert for Chinese firms using high salaries and compensation to poach engineering talent.

China is also home to the world’s largest electric vehicle (EV) market. In 2017, the country produced more EVs than the rest of the world combined. Domestically, Chinese EV firms face little foreign competition as steep tariffs make imports too expensive for a mass market. China is also consolidating control over the supply of raw materials, such as nickel, lithium and cobalt, which are used for the development of batteries and other related technology.

The push for EVs has come about mainly because cars are one of the largest sources of pollution in the country. Allowing Chinese car companies to scale up in an environment unencumbered by foreign competitors will allow them to become strong exporters in the future.

“Going forward, even if your EV isn’t Chinese, its batteries very likely will be, as will the solar panels on your roof that charge it. China is moving into position to dominate clean energy markets worldwide,” said Nicholas.

In December, China launched the world’s largest cap-and-trade system, in which companies will have to pay for the right to release greenhouse gases. Under a cap-and-trade system, companies will have a cap on emissions, and can sell their unused capacity to other companies that need to exceed their cap. This system provides not just a regulatory penalty to exceeding the limit, but a positive financial incentive to minimise emissions.

In the past, renewable energy targets were typically only related to power generation, but China is now in the process of establishing quotas for green energy consumption as well. This is aimed at solving the problem of curtailment. Provincial power grids will be required to consume a minimum level of renewable energy or be penalised. This is likely to encourage grid networks and provincial governments to take steps to make energy transfer more efficient and reduce curtailment.

Green finance
In theory, there is a significant amount of capital floating around China that can be drawn for renewable projects. The big four commercial banks – the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China – are among the largest commercial banks in the world.

“The country is also home to very large funds that are increasingly seeking infrastructure investments, including China Investment Corporation (China’s sovereign wealth fund), the National Social Security Fund (China’s national pension fund) and China Life Insurance Group,” said Nicholas.

Some speed bumps remain, however, that may impede the speed of China’s continuing renewable growth. The cost of obtaining capital for renewable projects remains higher than traditional energy projects by about 20 to 30 percent.

Private companies are especially disadvantaged, as state-owned companies are regarded as being more trustworthy by banks, and are therefore given unsecured loans. Private companies, on the other hand, typically have to put up factories or other real estate as collateral. Risk and reward calculations are also more difficult for banks to make, as renewables are a relatively new asset class. Financing for projects in Northern and Western China can also be tricky, as inefficient energy transfer infrastructure leads to the curtailment of energy by the time it reaches the power grids in other parts of the country.

Restructure and expansion
Last year, the Chinese Government began restructuring many state-owned power companies. This was done in order to create companies with more diversified asset bases that could move them away from coal. For example, the China Energy Investment Corporation (CEIC) was created when Shenhua Group – China’s largest coal mining company – was merged with China Guodian, one of the country’s five largest utility companies. With an installed capacity of 225GW, CEIC is now the world’s largest power company.

The merger means that Shenhua’s resources can increasingly be redirected towards renewable technology. This is possible because having Guodian’s renewable assets at its disposal means it would no longer be entirely reliant on coal. Up to 90 percent of Shenhua’s generation capacity came from coal, whereas CEIC will generate close to a quarter of its power from renewables.

In addition to being aggressive in its domestic clean power growth, China is also a major patron of overseas renewable projects. According to the IEEFA, Chinese investment into large clean energy projects abroad (defined as exceeding $1bn), amounted to $44bn in 2017. This represents a 37 percent increase from 2016, which was also a record year. Projects abroad receive substantial support from multiple institutions, including the Export-Import Bank of China and the Asian Infrastructure Investment Bank, in which China has tremendous influence and will subsequently aid China’s Belt and Road Initiative.

“Some companies, such as hydropower manufacturers, have seen domestic opportunities dry up and are looking overseas for projects. Chinese solar module and wind turbine manufacturers naturally see opportunity overseas as the declining cost of the technology drives renewable installation globally,” said Nicholas. He added that support from the Chinese Government means companies can focus on gaining a share of foreign markets without profit being an immediate concern – a luxury that international competitors do not generally have.

Nicholas added: “Chinese renewables companies are also very active across Latin America, including just over the border from the US in Mexico. Chinese power transmission companies, led by State Grid Corporation, now dominate Brazilian power networks, putting them in an influential position when planning future capacity installations.”

China’s drive towards renewable energy is not simply an effort to combat climate change or to reduce pollution. There are strong geopolitical advantages to leading in this field, just as the history of oil and other hydrocarbons has consistently had a strong correlation with regional power dynamics. The strongest players in energy markets have always had outsized economic and political influence. The continuing fall in the price of solar power, which is set to decrease by a further 60 percent over the coming decade, will
only extend China’s lead.

The planet’s power supply has long been dominated by fossil fuels. It seems inevitable, however, that eventually the majority – and then all – of the world’s power will come from renewable sources. When that time comes, the economies that lead new energy markets will be in a position of power. China’s titanic effort to develop renewable energy is therefore an investment not just in public health or symbolic environmental leadership, but also in its future geopolitical and economic prominence.

Working towards the next economic paradigm

Posted on July 19, 2018September 11, 2019 by Max Tomlin

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Guaranty Trust Bank is harnessing technology to drive inclusivity

Posted on July 18, 2018July 31, 2018 by Max Tomlin

For decades, one problem in particular has plagued developing economies: namely, how can we bank the unbanked? After years of searching, a cloud is shifting and the answer is becoming clear. Effectively, technology is the key to solving financial exclusion once and for all.

For every country, financial access is the very foundation upon which economic development can occur

For every country, financial access is the very foundation upon which economic development can occur. Without it, citizens cannot open bank accounts, which impacts their employment opportunities. They cannot start a business, which affects their livelihoods. They are denied insurance, as well as the chance to securely build savings for expenses, such as a child’s education. Banking services are therefore critical at every level of society. But how can financial institutions cross the gap between the banked and unbanked population, no matter where they are located nor what their circumstances may be?

Fortunately, we now have a bridge, and it comes in the form of mobile technology: through innovation, banks in Africa are finally able to reach people in the most remote parts of the continent. It is no wonder then that the continent is at the forefront of the digital banking revolution.

“Without a doubt, the easiest and most effective medium for financial inclusion is mobile technology,” said Segun Agbaje, Managing Director and CEO of Lagos-headquartered Guaranty Trust Bank (GTBank). “Mobile technology has had a tremendous impact on driving financial inclusion across several countries, starting with Kenya and more recently extending to Ghana. In Nigeria, the impact has been just as significant. With more than 140 million active mobile phone users in Nigeria, financial service providers have utilised mobile technology in order to reach the unbanked adult population, which, 10 years ago, was almost 70 percent of the population. Today, it is less than 50 percent.”

Thanks to USSD
Essentially, the use of mobile technology to deliver financial services is one of the biggest developments in banking that Africa has ever seen. Indeed, it has permitted banks to offer far more value to their customers, while also enabling them to extend their products and services to the unbanked.

Elaborating further, Agbaje said: “Take GTBank, for example. Prior to the advent of mobile banking, financial services were not very accessible to most people outside the major hubs of city centres. They were largely unaffordable for the majority of the population too. But now, due to innovations in mobile banking, not only have we successfully reduced the cost of onboarding, we have also reduced the cost of banking for our customers, particularly those in the retail segment.”

Given the increasing importance of this trend, banks are now swiftly moving away from brick-and-mortar branches in a bid to acquire new customers and provide an ever-expanding list of services via mobile phones. This in turn has made banking services cheaper, faster and more accessible to more people across the continent.

Among the most important innovations in mobile banking is the introduction of unstructured supplementary service data (USSD). The technology is making waves across the African landscape for its ability to increase access to financial services. Using USSD, which is a global system for mobile communication technology, banks are able to exchange text data between application programs within their network and their customers’ phones. Applications can range from mobile chatting, such as WhatsApp, Line and KakaoTalk, to pre-paid roaming, payment and location-based content services.

Crucially, unlike SMS messages, USSD messages are sent via a real-time connection. This enables a two-way exchange of data that is far more efficient and responsive than SMS communication. At present, USSD is the best available communications technology that delivers mobile financial services to lower-income customers and unbanked segments of society. It is unsurprising, therefore, that in developing nations the majority of large mobile financial services deployments are now using USSD as their primary communication tool.

Yet even with the adoption of this technology, hurdles remain. “The cost of data and smartphones remains a challenge to the widespread adoption of internet banking in Africa, even in spite of the fact that most people have mobile phones,” said Agbaje. “Nevertheless, I believe this cost will become less of a challenge as data becomes a commodity and the price of smartphones continues to fall.”

According to Agbaje, another major challenge is the control that telephone companies exert over USSD communication. “These organisations need to see themselves more as providers of the technology, instead of as competition to banks,” he explained. “I strongly believe that all parties involved can reach an outcome that works for everyone, though this may require some regulatory coordination.”

Aside from mobile banking and USSD technology, GTBank is making bold investments in data analytics, which is best seen in the organisation’s new, cutting-edge data centre. “Running on a 10G network capacity, this centre empowers us with the information we need to assess both how and when we can best serve our customers. Essentially, it guides us in making the important decisions that drive the success of the bank,” Agbaje told World Finance. “We are also developing and deploying interactive and intelligent bots, which will help us deliver banking services that are not only faster, easier and cheaper, but also more personal and tailored to the individual needs of our customers.”

Moving up
As with any major market shift, teething problems are inevitable. In the financial industry, for example, banks must now contend with a constantly evolving set of customer requirements, together with a necessity to move quickly and invest heavily in new technology – all the while complying with increasingly stringent banking regulations. And yet, despite such unavoidable complications, GTBank has made some major breakthroughs in recent years. “There has been a very significant transformation in the bank; we have transitioned from a high-end wholesale bank with two million customers some six years ago, to a robust retail business with more than 12 million customers,” said Agbaje. “Today, we have evolved into a wholesale bank that is powered by a very strong retail base.”

Banks must now contend with a constantly evolving set of customer requirements, together with a necessity to move quickly and invest heavily in new technology

Making this move has not been easy; it has required time and careful planning. As such, at the centre of the bank’s retail growth strategy is an unwavering goal to digitalise financial services on the continent. “Today, we aren’t just serving our retail customers through digital channels – we are going one step further by building a platform that connects businesses with consumers. We are also integrating additional services into our value offering,” said Agbaje.

When asked about GTBank’s biggest achievement to date, Agbaje replied: “The fact that we have, through sheer determination and an overriding commitment to create sustainable value for all our stakeholders, built an enduring institution that epitomises best practices of transparency and governance. It’s one that people all over the world are proud to identify with.”

He continued: “I am also proud of the fact that over the years we have built a very robust retail business, which is not only driving the progress of the bank, but also playing a fundamental role in deepening financial inclusion across the country. Another area that I think you’ll see us become stronger in is our SME business.”

GTBank’s 737 USSD banking service has also had a significant impact on how the organisation serves its customers. By leveraging the growth of mobile penetration in Nigeria, GTBank has been able to provide customers with simpler, cheaper and faster ways to bank, while significantly reducing the cost of serving them as well. “We continue to lead the industry in mobile technology by constantly expanding the products and services we provide to our customers,” Agbaje explained. “We have been the major drivers of mobile banking in Nigeria, with our 737 USSD-based service leading the way in enabling Nigerians in every part of the country to open accounts, transfer funds, purchase airtime, pay utility bills, withdraw cash and so much more using their mobile phones. We are also working with major stakeholders in the financial sector to develop more superior solutions to tackle what is the last major challenge facing financial inclusion, which is deposit taking.”

In addition to making considerable headway in terms of mobile banking, GTBank’s growth plans have been sustained. Indeed, its expansion in Africa continues to positively impact its profitability, as well as its brand equity. In December 2017, for example, the bank commenced business operations in Tanzania, which became the 10th African nation in which the bank has a footprint.

Looking forward
Today, technology is central to the financial industry – not only in Africa, but all over the world. “While it is universal, I think that what is unique about the role of technology in Africa’s financial landscape is that, up and down the continent, people are leveraging it to create innovative financial solutions. These solutions can overcome legacy challenges, such as our inadequate infrastructure, and solve age-old problems, like the low levels of financial inclusion. Ultimately, it is going to become difficult to separate these solutions from the technology that delivers them,” said Agbaje.

In developed economies, there has been a lot of noise around fintech firms, as well as, in some cases, a phobia of them. “Despite all the talk, fintech companies haven’t necessarily had the big impact that many expected,” said Agbaje. “They look to improve and provide basic financial services, which banks have traditionally done and continue to do well. In my opinion, I see more collaboration and partnerships with fintech firms. In our bank, for example, we have an in-house fintech team that is continuously exploring new opportunities to work with fintech firms and adopt product offerings that fit with our own vision.”

This kind of thought process is what enables GTBank to keep looking ahead – so much so that, when asked about the future of banking, Agbaje replied: “For us, the future is already here.” He continued: “We’re aware of the potential threat posed by non-bank digital players on traditional retail banking revenues. But even so, we are enthusiastic about the amazing opportunities birthed by the digital revolution.”

To this end, GTBank is investing significantly in its digital capabilities, not only to mitigate possible threats but to also unlock new and exciting opportunities. For example, in the past year alone the bank has developed two new mobile applications and launched its aforementioned state-of-the-art data centre. It also carried out several extensive upgrades and optimisations to its existing digital solutions.

“Building these digital capabilities has allowed us to offer our customers banking services that are not only faster, easier and cheaper, but also more personal, smarter and readily accessible anywhere, anytime and from any device. More importantly, though, it sets us up for the future of banking: this is something we believe is a single integrated platform that connects customers not just to core banking offerings, but also to everything that they need to thrive, whether they are business owners, service providers or end consumers,” said Agbaje. “We are determined to lead this future; it informs our decision to go beyond being a bank to becoming an e-commerce and financial services platform that is focused on integrating value-added services into our core banking offerings.”

With innovation being central to its culture, GTBank is always working on something new. Currently, it is leading a project to use digital devices, such as wearables, to deliver banking services. Another project underway involves reviewing how machine learning and artificial intelligence can improve the processing of the bank’s most vital services. Finally, Agbaje and his team are engaging in more partnerships and collaborations with other service providers in order to find new ways of adding value to the bank’s existing services.

Community drive
There has never been a wider divide in wealth distribution, making it even more important for organisations to invest in the communities in which they operate. “At GTBank, corporate social responsibility (CSR) is the underbelly of our operations, and we approach it not just as a form of philanthropy, but as a core part of how we go about our business,” said Agbaje. “For us, CSR is fundamentally about touching lives. We always ensure that our programmes and initiatives have a real and positive impact on improving lives and uplifting communities.”

In developed economies, there has been a lot of noise around fintech firms, as well as, in some cases, a phobia of them

GTBank’s CSR is supported by four pillars: education, community development, arts and the environment. The team believes these to be essential building blocks for the development of communities, in addition to being prerequisites for economic growth. To support the first, the bank funds programmes that increase access to quality education and improve learning outcomes for students. Another focus involves initiatives that encourage young people to stay in school.

“In terms of community development, we champion causes, support people on the margins of society and work with organisations that share our core values to bring much-needed positive change to our host communities,” Agbaje explained. “We see art as an avenue for unlocking people’s creative potential, we support several initiatives through which we not only connect with, enrich and educate individuals, but also promote cultural exchanges that break down societal barriers and build global relationships.”

When asked what Agbaje himself is most proud of in terms of the bank’s CSR initiatives, without hesitation he replied that it was GTBank’s work around autism. “Our programmes on autism have helped more than 14,000 people learn and understand how to manage and care for people living with autism,” he said. The bank has also provided free one-on-one consultation services to more than 3,200 children, and has led an ongoing campaign to tackle the stigma facing those living with autism.

GTBank also hosts football tournaments, which engage more than 70,000 young people all year round, keeping them in school, teaching them the values of excellence and fair play, and creating an avenue for the discovery of young talent and future professional footballers.

“I am also very proud of what we are doing with the GTBank Food and Drink Fair and the GTBank Fashion Weekend, through which we offer free business platforms to small business owners so that they can connect with consumers and business experts from around the world,” Agbaje added. “One of the most exciting things about these events is the remarkable stories we hear from small-business owners, which include testimonies about how rewarding our free business platforms have been for them.”

Given the bank’s dedication to such initiatives, it is clear that community is at the heart of GTBank’s operations. “We have tried to create an oasis in the continent,” Agbaje explained. “We like people to see us as an organisation that does things properly. This doesn’t mean we don’t make mistakes, but we won’t go out of our way to do things improperly. In everything that we do, we want to be known for our integrity, hard work, discipline, transparency and as a platform
for enriching lives.”

Crucial talent
As any successful organisation knows all too well, talent is the foundation upon which everything else can be built. But the mere act of hiring well-educated, experienced members of staff is only the first step on a long and critical road. “Talent is important in every industry, but talent in itself is never enough,” said Agbaje. “The world is littered with people who have abilities, but who actually end up achieving very little. With talent, you need passion, hard work and discipline, and these are values that we cherish and live by every day at GTBank.”

For GTBank, it starts with selecting people who have studied at the best academic institutions, as this is a key indicator of their underlying commitment and work ethic. “We also recruit from every academic discipline, because we believe in the diversity of thought and experience that people from different academic fields bring,” Agbaje explained. “We are always helping to train, improve and develop our people from the moment they set foot into the bank and right through the course of their careers at GTBank.”

The bank achieves this by ensuring that its employees are empowered with specialised skills. “We also teach management skills; we do this in-house, online or in collaboration with other universities around the world. All this is done with the objective of creating an organisation that is truly first class,” Agbaje told World Finance. “We first pursue excellence, discipline and hard work; by putting these things at the forefront of our operations, we believe we will always achieve equality. We strongly believe that people should be judged on the basis of what they can offer and not by their gender or tribe.”

It is this ethos of equality and meritocracy that keeps GTBank disciplined in its mission to promote financial inclusion in Africa. With major banks steaming ahead with this mission, each day it is becoming clearer that the future of banking in Africa is bright. “We are nowhere near maturity, and Africa has a large population that provides far more opportunities than challenges to growth,” Agbaje noted. “That said, over the past decade alone, the banking sector in Africa has witnessed a steady rate of expansion in reach and depth, and it will continue along this route as we take greater advantage of mobile and digital technology.”

It is for this reason that Agbaje believes he hasn’t even begun to scratch the surface in terms of what the bank can achieve. He said: “As we start to migrate from traditional banking to becoming a digital solutions platform for e-commerce and financial services, we will have the scalability needed to drive exponential growth.

“I also believe that we will continue to lead the future of banking, not just because we will continue to pursue technological advancements and digital capabilities that keep us ahead of the curve, but because we will always stay true to the values of hard work, transparency, integrity and putting the customer at the heart of everything that we do.”

An enticing citizenship by investment opportunity in the Caribbean

Posted on July 18, 2018July 31, 2018 by Max Tomlin

The Commonwealth of Dominica, not to be confused with the Dominican Republic, is a small island in the Lesser Antilles archipelago. While renowned for its idyllic beauty, untainted waters and verdant rainforest, Dominica is much more than just a picturesque holiday destination with tranquil scenery. The Dominican people are entrepreneurial in their approach, and the island has the international network to prove it.

Dominica’s second citizenship programme allows for visa-free travel to more than 120 countries, including key business hubs around the world

Since 1993, Dominica has been home to one of the world’s first citizenship by investment programmes, offering international businesspeople the opportunity to benefit from the island’s increasingly global perspective. Furthermore, due to the Programme’s longevity and accumulative experience in the investor immigration market, Dominica has continued to refine its second citizenship programme, simplifying processes and strengthening due diligence to ensure that investors from around the world can profit from the country’s ambition.

Business beyond borders
Over the past decade, the investor immigration scene has grown rapidly, with many countries around the world offering citizenship (or residency) by investment programmes in an attempt to attract more foreign direct investment. Simultaneously, the appetite for gaining second citizenship by means of investment has burgeoned, as high-net-worth individuals have sought to increase the wealth and mobility of their businesses and families. The political and economic tension between certain nations has only acted to intensify this interest, with clients seeking investment opportunities in countries with growing economies and stable governance.

$100,000

Minimum investment threshold per applicant when gaining Dominican citizenship

120 Minimum number of countries allowing visa-free travel to Dominican citizens

Although Dominica’s government doesn’t reveal the precise number of applications it receives to its second citizenship programme each year, the publicly available yearly budgets indicate that the offering continues to gain in popularity. This success can be attributed to the country’s efforts towards creating smooth processes and improving its vetting and security concerns, as well as the programme’s affordable price point. In recognition of the island’s efforts, Professional Wealth Management, a subsidiary of the Financial Times, ranked Dominica’s citizenship by investment programme as the best in the world.

A global community
Following last year’s difficult hurricane season, Dominica has emerged as an image of resourcefulness and resilience in the face of adversity. Now, with the intention of further embodying the values displayed during such a challenging time, the country’s Citizenship by Investment Programme has launched its Global Community initiative. “We are a nation deeply rooted in community values and a mind set of reciprocity,” said Dominican Prime Minister Roosevelt Skerrit. “For this reason, we invite individuals and families from around the world to invest in our country. In exchange, we promise to provide you with citizenship of the Commonwealth of Dominica – a status that comes with [myriad] opportunities aimed at transcending borders in a continually globalising world.”

While the investment threshold to gain second citizenship in Dominica remains the same – $100,000 per applicant – the Global Community framework enables clients to see the offering as more than just a citizenship or a right to apply for a passport. Instead, applicants become part of a global network that offers new opportunities for both professional and personal development.

Greater mobility is also a key draw for those from countries that hold fewer formal diplomatic ties, with Dominica’s second citizenship programme allowing for visa-free travel to more than 120 countries, including key business hubs around the world. Further, the programme’s lack of residency obligations allows economic citizens to continue living their busy international lifestyles uninterrupted.

Sustainable outcomes
Late last year, Skerrit vowed to make the island the first completely climate-resilient nation in the world. Geared towards harnessing green energy and building infrastructure that will withstand future climate-change-related events, Skerrit’s approach has been applauded by UN Secretary-General António Guterres and continues to receive support from the Clinton Foundation.

This attitude towards sustainability is reflected in the country’s citizenship programme, which invites individuals and families to be a part of Dominica’s enterprising future. Through the programme’s property options, investors can even get their hands on a piece of prime Dominican real estate while gaining citizenship. Luxury hospitality brands, such as Hilton, Kempinski and Marriott, have also sought to capitalise on Dominica’s eco-tourism potential, establishing a presence on the island in order to make the most of its progressive government policies and growing international presence.

While Dominica’s serene landscapes are not to be overlooked, the Caribbean island has far more to offer than first meets the eye. In fact, Dominica has become a global network of internationally minded businesspeople, offering new investors the chance to buy into a sustainable future – and reap the benefits of one of the world’s longest-standing second citizenship programmes in the process.

Russia’s stagnating economy

Posted on July 18, 2018July 31, 2018 by Max Tomlin

The world was a very different place when Vladimir Putin first came to power in May 2000. Facebook and Twitter did not yet exist, euro banknotes had not entered circulation, and the Nokia 3310 mobile phone was still a few months away from launch.

For a country that must always have one eye on oil prices, economic sanctions imposed by the West have provided a welcome scapegoat for the Russian president

Earlier this year, Putin was re-elected as president for the fourth time, which – when combined with his premiership between 2008 and 2012 – will see him extend his control over Russian politics beyond the two-decade mark. For some of the individuals who voted for the first time in that election, Putin is the only political figurehead they have ever known.

Even if some of the ideologies that make up Putinism have remained constant over the years, economically speaking, there have been notable shifts. Putin’s embrace of liberal reforms initially helped pull Russia out of its 1990s slump, but he has displayed a more cautious streak recently when confronted with economic challenges.

For a country that must always have one eye on oil prices, economic sanctions imposed by the West have provided a welcome scapegoat for the Russian president, even as they have compounded his domestic problems. While Putin remains in charge, however, the likelihood that the government will initiate the much-needed changes to the country’s economy remain slim. Where his continued presence once provided stability, it is now only delivering stagnation.

The great reformer
When Putin first became president, he inherited a country in the midst of a financial crisis. Following the fall of the Soviet Union in 1991, efforts were made to normalise the Russian economy by stimulating the private sector. Unsurprisingly, transitioning to a market-based economy after almost a century of communism proved difficult. While Russia was able to successfully privatise 70 percent of its economy by the middle of the decade, between 1991 and 1998 it saw its GDP decline in real terms by 30 percent. The 1997 Asian financial crisis and the subsequent fall in oil prices delivered another blow.

30%

Amount Russia’s GDP declined by between 1991 and 1998

1.5%

Russia’s predicted growth rate over the next five years

14%

of Russia’s population lives below the poverty line

In order to get Russia back on its feet, Vladimir Putin implemented a number of changes shortly after taking office, introducing a flat income tax of 13 percent and simplifying business regulations. On the surface, the reforms appeared to have worked: during Putin’s first two presidential terms, real incomes increased by 250 percent, real wages tripled and poverty was reduced by more than half.

Putin’s actions in the early 2000s stand in stark contrast to many present-day depictions of him as an opponent of economic liberalism. Still, not everyone is convinced he should be given credit for Russia’s economic revival. The devaluation of the ruble in 1998 strengthened domestic producers, while rising crude oil prices boosted state coffers – two factors that he had no control over. Alexander Libman, a professor of social sciences and Eastern European studies at the University of Munich, doubts the economic growth of the 2000s was a product of Putin’s economic policy.

“A more likely explanation for Russia’s economic turnaround is a combination of several factors: devaluation of the ruble at first and growing oil prices later,” Libman told World Finance. “In the early 2000s, the Putin government did indeed implement some important economic reforms, especially in terms of tax and in the area of jurisprudence and property rights. However, the reform drive had stopped by 2003 to 2004. Putin did not improve the economic fortunes of Russia – he just happened to be president of Russia when it started to grow.”

Perhaps some credit should also be attributed to Alexei Kudrin, Russia’s minister of finance between 2000 and 2011. As a champion of free markets, he played an integral role in liberalising the economy and using oil revenues to set up stabilisation funds in case of future crises. After Kudrin’s resignation in September 2011 and Putin’s return as president in May 2012, the direction of economic policy has been less consistent and, crucially, has failed to address the country’s longest-held problem.

Oiling the wheels
With Putin currently in the early months of his fourth presidency, he finds himself faced with some familiar problems. The ruble has depreciated in value by around 25 percent against the US dollar since January 2016, economic expansion is predicted to average just 1.5 percent over the next five years, and the population living below the poverty line stands at 14 percent.

Although these figures are healthier than they were in 2000, they are hardly inspiring. Growth rates in particular are far below the global average of three percent, suggesting that the quality of life for many ordinary Russians will not improve significantly for some time. As a developing economy, the country should be performing much better than it is.

With the Russian Government happy to continue its oil addiction, investment in other parts of the economy has remained anaemic

These problems are proving difficult to shift, partly because Russia has been unable to wean its economy away from its oil dependency. During Putin’s first two terms, when prices per barrel soared above $100, the country could simply spend its way out of trouble, but a rise is always followed by a fall. When prices crashed from $114 in June 2014 to $27 in 2016, Russia’s finances collapsed. Even today, oil prices remain way below their peak at around $80 per barrel.

According to Lilit Gevorgyan, Principal Economist for Europe and CIS at IHS Markit, increasing Russia’s economic diversity depends on reducing political risk in the country. As such, it is contingent on building stronger relations with the West – a prospect that looks unlikely for the foreseeable future.

“Russia’s attractiveness will improve if there is a clear vision for the country’s economic and institutional development,” said Gevorgyan. “This vision needs to answer vital questions as to how the economy is going to diversify further from its current dependency on the energy sector, how to deal with population decline, the negative impact of long-standing underinvestment in the energy sector, [and] how to reduce an ever-widening wealth gap and reduced consumer purchasing power. Ultimately, Russian policymakers need to clarify if they are seeking to have an open and globally integrated economy or focusing on import substitution and regional issues.”

The oil and gas industry accounts for over 60 percent of Russia’s exports and contributes to 40 percent of Russia’s federal budget. This is certainly not surprising – it is among the top three oil-producing countries in the world – but by failing to use these funds to boost other sectors and diversify the economy, Russia has been left subject to the whims of the oil market. Putin’s inconsistent economic performance stems from the fact that the Russian Government spends when oil prices are high and tightens the belt when they are low. A longer-term approach could help avoid such volatility.

Too much of a risk
With the Russian Government happy to continue its oil addiction, investment in other parts of the economy has remained anaemic. Low levels of technological innovation, an ageing workforce and widespread corruption make it difficult to attract support from businesses abroad. The problem of attracting foreign direct investment (FDI) has been exacerbated by economic sanctions imposed by the US, the EU and many others following Russia’s military intervention in Ukraine in 2014.

FDI inflows fell by 92 percent year on year in 2015 (see fig 1), although they have since picked up (largely due to the partial privatisation of state-owned oil giant Rosneft), the imposition of new US sanctions in April has caused further anxiety for potential investors. Lower oil prices and economic sanctions have both hit the economy at roughly the same time, making it difficult to quantify the impact of the sanctions alone. However, they have certainly increased risk for potential investors.

“The most important effect of economic sanctions in Russia is an indirect one: sanctions create uncertainty and thus reduce the confidence of foreign investors and trade partners of Russia,” Libman explained. “The development of the sanction regime is unpredictable and makes firms – even those that do not operate in sectors or with partners under sanctions – cautious about dealing with Russia. Besides, sanctions restrict access to new technologies, which harms growth in the long run.”

With Russia losing friends in Europe and the US, Putin has increasingly looked to China for support – a country where his strongman politics are likely to be more warmly received. When compared with the same period 12 months ago, trade between the two countries increased by about 30 percent in the first quarter of 2018 and is predicted to hit $100bn by the year’s end. Still, Russia’s pivot to the east will not be without its difficulties.

In May, the purchase of a $9bn stake in Rosneft by CEFC China Energy collapsed amid reports that the government in Beijing was investigating the firm’s rapid expansion. Although the Qatar Investment Authority has stepped in to save the deal, the uncertainties that continue to surround the cancellation add more doubt to an increasingly cloudy investment landscape. What is clear is that China has countries all over the world lining up to be part of its investment proposals, whereas the political risk inherent in the Russian market is unlikely to place it at the front of the queue.

Moscow is making efforts to broaden its economy through the launch of a National Wellbeing Fund that diverts oil revenue into long-term reserves when prices rise above $40 a barrel. While this will lessen the state’s oil dependency, it will do little to boost private enterprise, particularly when foreign businesses remain banned from investing in more than 40 industries for national security reasons.

In a sorry state
Although Putin’s Russia bears little resemblance to the communist society of the Soviet Union, it has retained one of its principal features: the dominance of state-controlled business. An early indication that Putin would reassert the power of the state came in 2003 when the CEO of Yukos, then one of Russia’s largest companies, was arrested on tax evasion charges. The company was subsequently broken up and its assets obtained by government-owned oil firms. Estimates indicate that state-owned enterprises (SOEs) now account for anywhere between 25 and 70 percent of the country’s GDP.

Putin’s inconsistent economic performance stems from the fact that the Russian Government spends when oil prices are high and tightens the belt when they are low

Putin’s version of state capitalism, or ‘dirigisme’, has concentrated wealth in the hands of his political friends while destroying commercial competition in the country and stifling innovation. In most parts of the world, new ideas cause some companies to rise and others to fall over time; the three most valuable companies in Russia today have held those positions for more than a decade.

Increased state ownership has also rendered attempts at institutional reform largely pointless. If corporate leaders have close ties to the president or his inner circle, there is little reason to do things by the book. In Libman’s view, this has created a hostile environment for private sector operators, making it difficult for the economy to move away from its public sector dependence.

“Increasing the role of the private sector would certainly be highly beneficial for Russia: it would increase the efficiency of the economy and create preconditions for growth,” Libman explained. “To achieve the last goal, however, increasing the share of the private sector is not enough: one also has to improve the environment it operates in, particularly with regard to property rights and the quality of bureaucracy. This does not appear to be likely today.”

Throughout the first half of 2017, the Russian Finance Ministry revealed that 42.5 percent of all procurement contracts awarded by government-owned businesses were allocated without any competitive procedure taking place. Sheltered from market forces, Russia’s SOEs have become breeding grounds for corruption and inefficiency. This discourages entrepreneurs, both Russian and those based elsewhere, from doing business in the country.

Gevorgyan believes that while Kudrin remains influential – he has just been given a senior position within the Audit Chamber of Russia – there is hope that state ownership can be stemmed. “However, beyond academic discourse, there are no signs thus far that the private sector will be expanding again,” Gevorgyan noted. For that to occur, Russian citizens may have to wait for a seismic political change, the likes of which have not been seen since the year 2000.

Beware the bear
If Putin’s domestic economic policies have become steadily more passive, this has certainly not been the case regarding his international actions. Russia’s increasingly antagonistic approach to geopolitics has only been made possible by a bolstering of the country’s armed forces. Between 2003 and 2013, the country’s military expenditure doubled, eventually reaching 4.4 percent of GDP. A 10-year state armament programme, launched in 2011, further reinforced Putin’s commitment to modernising Russia’s military technology.

A powerful military adds credence to Putin’s strongman persona and gives weight to his nationalist speeches

A powerful military adds credence to Putin’s strongman persona and gives weight to his nationalist speeches. During his time in office, he has also demonstrated that he is willing to flex his country’s muscles when he deems it necessary, notably during the 2008 Russo-Georgian War and the 2014 annexation of Crimea. And while Russia’s foreign policy is criticised abroad, it receives significant support at home: in 2014, following Russia’s military intervention in Ukraine, the president’s approval rating increased by almost 10 percent.

“Certainly, Russia actively uses alleged foreign policy successes to ensure that people pay less attention to domestic difficulties,” explained Libman. “Russian foreign policy is not only driven by these diversionary concerns (Russian leadership is indeed genuinely concerned about what it perceives to be its geopolitical interests – and is willing to pay a high price to achieve them), but domestic rally-round-the-flag effects caused by this policy are also valuable for the regime.”

In 2017, however, Russian military spending fell by 20 percent (see Fig 2), the first decline since Putin took power. The Kremlin has committed to lowering its defence budget to just three percent of GDP by 2023, suggesting that internal issues may finally be taking priority.

If the strain of Russia’s military expenditure is becoming too much of a burden, then there may be less opportunity for flag-waving and more time for reflection on a deteriorating domestic situation. This will only serve to weaken Putin’s support, regardless of how strong it remains for now. In fact, there are small indications that the tide of public opinion may already be turning: a survey published by the Levada Centre shortly after his election win in March found that 45 percent of respondents hold Putin responsible for a failure to reduce wealth inequality in the country.

A shift in focus towards domestic matters is also an indication that things cannot go on as they are. Russia is a country of great potential, with vast natural resources and a population of 144 million, and is already the sixth-largest economy in the world by purchasing power parity. By 2050, it is predicted to move up to fifth place, making it Europe’s largest economy. Instead of depending on rising oil prices for growth, significant reforms are needed.

During Putin’s inauguration speech in March, he said: “It is not a question of someone conquering or devastating our land. No, that is not the danger: the main threat and our main enemy is the fact that we are falling behind. If we are unable to reverse this trend, we will fall even further behind.”

To arrest the decline, Putin could set about overhauling the domestic economy, encouraging diversification and private investment. Equally, his words may turn out to be little more than a smokescreen, and he could return to blaming the bogeyman of ‘the West’ for his country’s problems. After all, Putin is an unpredictable operator – that has been one of the few constants across his long reign.

MFD Group continues to excel in freeport development

Posted on July 17, 2018July 31, 2018 by Max Tomlin

From its base in Port Louis, Mauritius, an island 2,000km off the coast of South-East Africa, MFD Group has built up the largest and most comprehensive logistics platform in the Indian Ocean. The island nation offers a freeport scheme, meaning incoming goods are not subject to customs duties, and goods that are sold from Mauritius are not subject to VAT. As MFD works to meet the demands of regional clients, the company is also targeting growth further afield.

Mauritius has emerged as a natural business hub for international trade thanks to its ideal location, political and social stability, and its ever-expanding infrastructure system

MFD Group first opened its doors in 1998. Hans Herchenroder, the firm’s chief commercial officer, told World Finance the company has not stopped growing in terms of size and quality of service since. It was not always smooth sailing for the logistics business, though. “When we started out, the local and regional markets were not open to outsourcing their logistics requirements,” he said.
But through “hard work and sheer determination”, Herchenroder explained how the company went on to build the largest third-party logistics firm in the region. “We went through very difficult times but have emerged stronger than ever and with a clear vision.”

An exciting market
With that impressive title under its belt, the company is now looking to expand into Africa, which Herchenroder said was a natural next step: “Our business model is ideally suited for most markets in Africa, where we intend to be an industry leader.” Mauritius has emerged as a natural business hub for international trade thanks to its ideal location, political and social stability, reliability, and its ever-expanding infrastructure system.

Herchenroder elaborated further: “Given the developed state of the economy as compared with other countries in the region, Mauritius has a very competitive logistics sector. Be it in warehousing or other links of the supply chain, Mauritius has a very satisfactory level of service.”

The country’s special economic zone is another obvious benefit for a logistics company like MFD. Herchenroder said the freeport regime means a zero percent tax on corporate profits, 100 percent profit repatriation and no exchange controls. It also means access to regional trade agreements, like the Common Market for Eastern and Southern Africa and the Southern African Development Community, as well as to international trade agreements such as the Cotonou Agreement and the African Growth and Opportunity Act. “And, finally, being part of the most exciting place on Earth right now: Africa,” Herchenroder added.

A turning tide
The market for container-based logistics is growing more vibrant all the time, according to Herchenroder, with container terminals receiving upgrades to boost efficiencies and with larger vessels calling at Indian Ocean ports. “We also see more sophisticated demand emerging for supply chain services,” he said.

However, it is the rapid development of a middle class in Africa that is the most exciting change. According to a 2017 report by the African Development Bank, the continent’s population has grown to one billion since 2010, and its middle class has surged to 350 million. As the population continues to grow, consumer spending is projected to rise from $680bn in 2008 to $2.2trn by 2030.

“This creates market opportunities for value-added logistics services,” Herchenroder told World Finance. MFD sees this concept of ramping up the services provided by carriers as a key moneymaker going forward. He added: “The local market is limited and we don’t expect to grow in a major way in Mauritius organically. We see a demand for more sophisticated services and value-added services, and we intend to fully meet these demands.”

Looking to the future
MFD is currently seeking to expand its capacity to service clients, with the firm taking its concept of ‘all services on one platform’ to Africa. MFD’s one-stop shop already includes a variety of premises and equipment for storage, manufacturing and management, including 65,000sq m of ambient temperature warehouses, 16,000sq m of cold rooms, 6,500sq m of office space, a container park, a transport fleet, and 24-hour security.

MFD is also developing new logistics platforms inland in Mauritius, as well as at the airport. Herchenroder said the use of airfreight cargo is taking off, as more capacity is now at hand and demand is rising for fresh products, driven by more wealth. He added: “The major developments in Mauritius are the Riche Terre logistics zone and the airport cargo zone. MFD will play a major role in these two projects. We intend to keep our position of number one in Mauritius and in the region.”

The petro-yuan could usher in a new era for global energy

Posted on July 16, 2018July 31, 2018 by Max Tomlin

March 26, 2018 may go down in history as one of the most significant days in world finance. At 9am local time, the first trades in crude oil futures denominated in yuan – China’s currency – appeared on the screens of the Shanghai International Energy Exchange. Overall, 15.4 million barrels of crude oil changed hands through the new contract. Oil trading powerhouses Glencore and Trafigura participated in the trade, lending their gravitas to the nascent market. The petro-yuan was born.

Dollar still king
The petro-yuan is the youngest sibling of the petrodollar. During the oil crisis of the early 1970s, Middle Eastern oil producers made an agreement with the US to use their proceeds from oil sales to purchase US Treasury bonds. This process, known as ‘petrodollar recycling’, has enabled a series of US administrations to finance growing deficits, as the dollar’s role in the energy market consolidated its place as a global reserve currency. If oil is the product that makes the wheels of the global economy turn, the dollar is the hard currency that keeps the tills ringing. Not coincidentally, the two most significant oil benchmarks – Brent Crude and WTI – are priced in US dollars, which unequivocally remains the world’s dominant reserve currency.

If oil is the product that makes the wheels of the global economy turn, the dollar is the hard currency that keeps the tills ringing

The arrival of the petro-yuan has already caused a stir. Chinese and Russian media rushed to announce the demise of the petrodollar, while the Danish investment bank Saxo Bank predicted in its Outrageous Predictions for 2018 report that the new contract will be a “raging success”. China has grand plans for its currency, according to Professor Keun-Wook Paik, Senior Research Fellow at the Oxford Institute for Energy Studies: “Beijing will aim to challenge the US dollar’s dominance as a global reserve currency. The petro-yuan will be an effective tool to demonstrate Beijing’s stance.”

The end of the dollar’s dominance has been announced many times before. Other countries have permitted issuance of oil futures in their own currencies, but with little success so far. India introduced crude oil futures denominated in rupees in 2006; although still used locally, the petro-rupee hasn’t come close to undermining the dollar. Russia, a major oil producer, tried something similar in 2016 with disappointing results.

China, the world’s second-largest oil consumer, stands a better chance of supporting its petro-currency. For instance, Chinese authorities may force state-owned companies to purchase oil in yuan-denominated contracts. Foreign companies may feel the pressure too. “China has a long track record of conditioning foreign sales and investments in its market on various requirements, so I would not be surprised if China conditions access to the Chinese crude market on a requirement to benchmark some volumes against the Shanghai price,” said Craig Pirrong, Professor of Finance at Bauer College of Business, University of Houston and leading expert in commodity finance. China also has leverage as the world’s top US Treasury bond holder. According to Paik: “Beijing could try to boost the petro-yuan by diverting its sizable funds from US Treasury bonds to loans for oil-and-gas-based upstream development in Russia and Iran. If a timely triggering point is provided and they do that systematically, the petrodollar’s dominance will be questioned sooner or later.”

A decrease in demand for the petrodollar would have dire consequences for the US economy, resulting in higher inflation and a difficulty to finance deficit spending. But not everyone is convinced that the petro-yuan poses a major threat to the dollar. “It’s a fantasy. There is a huge coordination issue to get everyone out of the dollar simultaneously,” said Pirrong.

The oil industry is notoriously risk-averse and wary of innovation; barring a major crisis in the US economy, it will take decades before traders abandon a practice that has been tried and tested. The dollar is historically considered a safe haven currency, whereas the yuan is still not completely convertible into other currencies and represents a tiny fraction of foreign exchange reserves.

A first step for the yuan would be to establish its place in the Asia-Pacific region. “The renminbi will not overtake the dollar tomorrow, but it could gain reserve currency status in Asia-Pacific very quickly. The oil contract is a large cog in the big strategic plan to pivot away from the dollar to renminbi,” said Hayden Briscoe, Head of Asia-Pacific Fixed Income at UBS Asset Management, Hong Kong.

Playing the long game
China has been contemplating the launch of the petro-yuan for a long time. It was the financial crisis that convinced the government to take action, explained Briscoe: “During the financial crisis, China realised that it had lost control over both its food and energy security, as well as, to some degree, its imports and exports, primarily because everything was settled in dollars. Ever since, China has sought to abandon settlement in dollars in favour of the renminbi by internationalising its currency.”

The first time China issued a domestic oil futures contract in 1993, the experiment came to an abrupt end due to extreme price fluctuation

To achieve this goal, Chinese authorities followed a piecemeal approach, starting with offshore trading of renminbi in 2010. A few years later, China opened its bond markets to international sovereign bond funds and banks. However, the timing of the petro-yuan’s launch has raised some eyebrows: recent tensions between China and the US over tariffs imposed by the Trump administration has prompted many analysts to ask whether China is sending a message to the US. However, China is not interested in theatrics, according to Paik: “China fully understands that this is not a short-term play.”

From a macroeconomic perspective, paying oil producers in its own currency is a rational policy for a country that became the world’s top oil importer in 2017. China’s crude oil imports nearly doubled from 4.8 million barrels per day (BPD) in 2010 to 8.4 million BPD in 2017, whereas US imports dropped from 9.2 million BPD to 7.9 million BPD over the same period due to the domestic shale oil boom. BP expects Chinese demand to rise by around 30 percent by 2040.

The petro-yuan may also help China eliminate the so-called ‘Asian oil premium’. Currently, refiners in Asia pay up to $6 more per barrel than their counterparts in the developed world when importing oil from the Middle East, as WTI and Brent are based on oil grades widely used in the US and Europe. China’s new contract is based on a basket of Middle Eastern and domestic oil grades that are in demand in China and Asia and include more than 40 percent of global oil production. “It makes sense to establish a regional oil benchmark that reflects Chinese consumption and more broadly Asian demand patterns, instead of being dependent on the price discovery in the North Sea of Brent Crude or at Cushing, Oklahoma, the delivery hub for WTI crude oil futures,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank.

A geopolitical pawn
The petro-yuan can also be seen as the latest move in a broader geopolitical tussle between the US and China, reminiscent of the 19th-century struggle between the UK and Russia over the control of routes to India that historians named ‘the Great Game’. For example, it fits into China’s One Belt, One Road initiative to develop ties across Central Asia. With gas and oil imports from Turkmenistan, Uzbekistan and Kazakhstan on the rise, China can use the petro-yuan to tie these countries to its macroeconomic cycle. “When the influence of the petro-yuan grows, Central Asian republics will take a more balanced stance towards China, even though their concerns over its economic dominance will not disappear easily,” said Paik.

4.8m

Barrels per day of crude oil imported by China in 2010

8.4m

Barrels per day of crude oil imported by China in 2017

30%

Predicted increase in Chinese demand for crude oil by 2040

9.2m

Barrels per day of crude oil imported by US in 2010

7.9m

Barrels per day of crude oil imported by US in 2017

The new contract may also bring China closer to several US adversaries – including Russia, Iran and Venezuela – that are big oil producers and would be happy to ditch the dollar. Russia has already moved in that direction, settling a part of its oil exports in yuan. “They had difficulty in settlements because they were stuck in the dollar world, but now they have an alternative. By adopting the petro-yuan, these countries are more aligned with the Chinese macroeconomic circle,” said Briscoe.

In the Middle East, the petro-yuan suits Saudi Arabia’s plans to diversify its investment portfolio overseas, while China seeks to attract Middle Eastern investors to its capital market and participate in Saudi Aramco’s forthcoming IPO. A plan to issue loans denominated in yuan was part of the agenda in the China-Saudi Economic Forum last year. “In the Middle East [the petro-yuan] has been welcomed as a positive development, as it provides additional liquidity for long-term loans, market access to the major Middle East oil exporters, and also a benchmark currency for downstream Chinese petrochemical projects, reducing exchange risk volatility,” said Dr Mohamed Ramady, an expert on energy finance in the Middle East.

As for the Asia-Pacific region, China’s own backyard, the rise of an Asian oil benchmark could mark the tipping point in an ongoing process of economic integration, said Briscoe: “Asia has re-regionalised. It has moved up the value chain very quickly and has become less reliant on the rest of the world. Many companies don’t have to look outside Asia for finance.” The Chinese central bank is already the largest liquidity provider in the region, easily overtaking international institutions such as the IMF. China is also the largest trading partner of most South-East Asian countries, including Vietnam and Malaysia.

Teething problems
The first time China issued a domestic oil futures contract in 1993, the experiment came to an abrupt end due to extreme price fluctuation. Nearly two decades passed before Chinese authorities hesitantly started toying with the idea again in 2012. Eventually the China Securities Regulatory Commission approved the launch of the petro-yuan in 2014. A new contract came close to entering the market three years ago, but a crash in the Chinese stock market in the summer of 2015 temporarily stalled the project.

Many things have changed since 1993. From a tiny player in global trade, China has transformed into a manufacturing powerhouse and the world’s largest oil importer. Its financial sector, although still largely controlled by the government, is more resilient than ever. According to Briscoe: “The sceptics will say that the oil contract has been tried before and failed. But it failed before the renminbi was tradable and it did so at a time when China was not fully integrated into the global financial system. It’s different this time around. It’s the first time that a government is seeking proactively to internationalise its currency.”
Cautious to avoid past mistakes, Beijing has sought to keep speculators away by setting oil storage costs for the new contract considerably higher than international ones. However, the measure may put off some legitimate investors too, says Professor Jian Yang, Founding Director at the Center for China Financial Research at University of Colorado Denver Business School: “As high storage cost could prevent the necessary arbitrage between cash and futures markets, it will prevent a certain type of foreign investor from conducting cash-and-carry or reverse cash-and-carry arbitrage.” High storage costs may also have the adverse effect of increasing price volatility, making the contract vulnerable to “corners and squeezes” that will “undermine the utility of the contract as a hedging mechanism”, according to Professor Craig Pirrong, known for his Streetwise Professor blog.

From a tiny player in global trade, China has transformed into a manufacturing powerhouse and the world’s largest oil importer

China needs foreign investors to participate in the nascent petro-yuan market to achieve minimum levels of liquidity. A major concern for them is the lack of market data, as well as possible manipulation of the yuan by Chinese authorities, since the currency is not freely convertible in global markets; a government-led devaluation of the yuan led to capital flight just three years ago. This will not change in the near future, according to Hansen: “The government and President Xi are unlikely to give up their control over the currency anytime soon.”

Another concern for foreign investors is their vulnerability to any intervention by the Chinese Government that may affect capital flows related to oil futures, including temporary terminations of trade. That being said, in April the People’s Bank of China announced measures aiming to attract more foreign investment in the financial system. However, the country still utilises capital controls to curb capital flights.
Perhaps the biggest challenge for the petro-yuan is what Yang calls “bad liquidity”. Although Chinese mom-and-pop investors can provide sufficient capital volumes to provide liquidity, they typically hold shorter positions than other traders; in extreme market conditions, this can cause a liquidity crisis. “Such ‘bad liquidity’ does not help improve the price discovery and hedging functions of the market, which determines the long-term success of a futures market,” said Yang.

In contrast to the US, China currently lacks a large number of producers or traders that could use the new contract as a hedging tool. “The well-known oligopoly problem of the oil spot market in China, dominated by three state-owned integrated oil companies, may lead to fewer independent oil and refinery firms, and as a result, fewer domestic hedgers,” said Yang.

Risks on the horizon
The rise of the petro-yuan marks the culmination of China’s attempt to ride on the wave of economic globalisation. For the first time since the Chinese emperor capitulated to the demands of European colonial powers in the 19th century, the country is opening up its commodity markets to foreign traders.

Historically, countries that open up their financial markets see large capital inflows that can lead to asset price inflation and housing crises, said Briscoe, suggesting that Chinese authorities should tread carefully: “The risks associated with large capital inflows have yet to be resolved. With around $3trn of inflows making their way into China, the response of regulators and policymakers will be very important.” Briscoe is confident though that Chinese policymakers know what they are doing, as he added: “In the West, we spend a lot of time on developing policies before implementation. China tends to do the opposite. Typically, it adopts a bottom-up approach by beginning with lightly regulated policies, which are tested and adjusted over time. That’s why things happen faster there.”

Temenos extols the need for technological adaptability in the banking space

Posted on July 16, 2018July 31, 2018 by Max Tomlin

“If the rate of change on the outside exceeds the rate of change on the inside, then the end is near,” Jack Welch, the former chairman and CEO of General Electric, once said. Nearly 20 years on, this observation seems more and more applicable to the banking industry.

Technology has created a new norm: Start-ups have attracted significant investment capital, and have entered the market offering technology-led and customer-centric banking services

Since the global financial crisis in 2008, banks have faced a perfect storm. Historically, they would have recovered the six percent loss in return on equity (RoE) in the few years following 2008. The fact that this hasn’t happened is due to two factors: regulatory changes that have resulted in more capital being needed for a certain volume of business, and a fundamental shift in technology.

Technology has created a new norm. Emerging financial technology players have attracted significant venture capital, and have entered the market offering technology-led and customer-centric banking services. These offer a superior customer experience, low (or zero) fees, and a simple product set targeted at delivering customer value. They are able to do this by integrating data-driven customer and mobile-first technologies. Barriers to entry are almost non-existent, bringing Bill Gates’ 1994 statement that “banking is necessary, banks are not” closer to reality. While banks need to respond to this shift in the landscape, investments in technology offer almost the only way to return to pre-2008 RoE.

New way forward
All is not lost for banks, but big changes within them tend to be longer term. Banks still have millions of customers keeping their money with them; they are also regulated, and this reassures customers their money is safe and that they will be treated fairly. Bank executives also understand the nature of providing services on a continuous, 24/7 basis, which is what customers require. Nonetheless, banks must respond to the ongoing shift in customer requirements, and quickly, so that they can take advantage of the opportunities it offers as well as the threats it introduces.

This is where digital banking comes in. However, digital banking is more than just developing a mobile app and connecting it to the bank’s existing back-office applications. The ability to conduct transactions over mobile and internet channels are prerequisites for doing business today, but they are not differentiators and do not allow banks to use the lessons learned from fintechs.

A modern digital bank, as demonstrated by new start-ups globally, can expect to achieve – on average – 25 percent less from a cost-income perspective than traditional banks, which are incumbent in the same market. To achieve this quantum leap in lower cost and higher revenue requires a re-imagining both of the customer experience and of operational processes. This involves very high levels of automation based on data-driven and highly integrated front-to-back application technologies.

Open banking has the potential to tighten the competitive noose even further as customer relationships and client data become available to third parties, even as customer data privacy becomes more important and high profile. Collaborating with third parties has the potential to recover another 6.3 percent points in RoE by establishing an ‘ecosystem’ platform that taps into new business models. Highly complex, fractured legacy environments designed around lines of business and products, supported by significant manual intervention, are simply not fit for purpose in 2018.

Commencing transformation
To transform into a truly digital business, an integrated front-to-back, data-driven banking platform is the foundation. According to Celent, banks currently spend somewhere between 70 and 80 percent of their IT budget on the maintenance of their current systems, just to keep them compliant and operational, leaving 20 to 30 percent for innovation. But this does not support participation in a fast-moving and competitive landscape.

One approach is to create a separate ‘digital challenger’ bank, which eliminates the constraints imposed by existing complex legacy technology, as well as the legacy internal mindset of how banking should be. Freed from these constraints, a bank can focus on the customer and the value that can be delivered using integrated customer-centric applications and embedded analytics to drive a relevant contextual customer experience and smart, automated operations.

This is called a ‘build and migrate’ strategy, and creates a parallel digital business environment into which the bank can then migrate its customers, employees and other stakeholders over time. This puts the customer at the centre of the bank’s universe – an outside-in approach to banking.

That said, a build and migrate approach may not be suitable for all banks. A more traditional approach is an in-place incremental progressive transformation, where customer segments, or lines of business, are progressively migrated to a newly integrated digital banking platform. The same outside-in management thinking needs to be applied as the bank progressively transforms to the new business model. Whatever the approach, a policy of doing nothing seems more and more risky. The world is moving, with customer expectations changing, and the technology used by banks to serve customers must keep pace.

Could a crypto comeback be on the cards?

Posted on July 13, 2018July 31, 2018 by Max Tomlin

“All money is a matter of belief” is the aphoristic phrase attributed to Adam Smith, the father of modern economics. Whether Smith really said it or not, the meaning behind the quote remains as relevant as ever today, in an age where the very definition of money is rapidly evolving. The introduction of digital currencies in recent years has reignited the age-old debate of what constitutes money, and whether these cryptocurrencies are the future or simply another failed experiment.

After the value of most significant coins rose astronomically throughout most of 2017, prices peaked towards the end of December and subsequently plunged back down as the euphoria faded

In terms of price action, the past few months have been a turbulent ride for the cryptocurrency market, to say the least. After the value of most significant coins rose astronomically throughout most of 2017, prices peaked towards the end of December and subsequently plunged back down as the euphoria faded.

Everybody knows bitcoin; what everyone doesn’t know is that bitcoin was merely the 14th-best-performing crypto-asset in 2017, having surged ‘only’ 1,318 percent, according to data by CoinMarketCap. The best performer was actually Ripple, the value of which rose a whopping 36,018 percent in a single year, before collapsing in early 2018 alongside virtually every other cryptocurrency.

Behind the scenes
Bitcoin was the first cryptocurrency ever created, back in 2009 – though the broader public did not really catch up to the concept until 2017. It’s no coincidence that prices started to skyrocket right around the time when the public spotlight fell on cryptocurrencies. In fact, when comparing how frequently the term ‘bitcoin’ was searched on Google with bitcoin prices, one can immediately spot a correlation: public interest in the coin rose in tandem with its price, and declined alongside it as well. The obvious conclusion is that the crypto-rally in 2017 was largely fuelled by retail investors stepping into the market, encouraged by a plethora of headlines around the subject and a fear of missing out on future gains.

As for the price slump that ensued (see Fig 1), it can be traced back to a regulatory crackdown of cryptocurrencies, predominantly in Asia. China is set to block all websites related to cryptocurrency trading in an attempt to limit financial risks, while regulators in South Korea, Japan and India have also tightened their grips, albeit not as severely. News that Google and Facebook plan to ban crypto-related advertisements didn’t do prices any favours either, as they likely reinforced scepticism around digital coins, curbing interest among small investors.

Signs of life
Notwithstanding the collapse in prices over the first quarter of 2018, the sector is showing signs of life once again in the second quarter, with most major coins staging modest recoveries. Looking at the total market capitalisation of the cryptocurrency market, it currently stands at $426bn, after touching a low of $248bn earlier in April. For comparison, the high point back in January was $829bn, according to CoinMarketCap figures.

While the catalyst behind this rebound is far from clear, market chatter attributes it to reports that major institutions – such as Barclays and Goldman Sachs – are considering launching cryptocurrency trading desks, amplifying speculation that institutional investors may be gearing up to enter the market. Meanwhile, the latest Thomson Reuters survey suggests that one in five finance firms are considering trading cryptocurrencies within the next 12 months, adding further credibility to such expectations.

One of the biggest risks on the horizon, according to popular belief, is increased regulation. From Asia to Europe to the US, policymakers are assessing the risks emanating from cryptocurrencies and their potential remedies. These include establishing protections for investors, clamping down on money laundering activities and curtailing financial stability risks, among others. Should such policies be implemented, they may indeed spell bad news for the asset class over the near term, as rising compliance burdens would likely make it more difficult and expensive (on average) to engage in activities related to digital coins.

In the grand scheme of things, though, increased regulation may not necessarily prove harmful. Stricter laws do raise costs, but they also make for a safer environment, something that could draw in large investors that were previously hesitant to add cryptocurrencies to their portfolios as means of diversification. It follows that if institutional money flows in, that would also improve liquidity in the market, reducing volatility and limiting the abnormally large price swings that have become a daily phenomenon for cryptocurrency traders. Ultimately, more regulatory scrutiny may help increase the legitimacy of digital coins as conventional investment products, potentially eliminating the market’s reputation as the Wild West of the finance world.

Rules and taboos
Staying on regulation and liquidity, a major theme in the cryptocurrency market – and specifically in bitcoin circles – is whether bitcoin exchange-traded funds (ETFs) will be approved by regulators, particularly by the US Securities and Exchange Commission (SEC). A bitcoin ETF could add liquidity to the market by providing traders with another method of speculating on bitcoin prices. Investors currently require wallets to trade bitcoins, but an ETF would allow them to trade the coin directly on brokerages that are more secure overall, thereby also decreasing the risk of fraud.

While the SEC had previously rejected bitcoin ETFs, citing a lack of investor protections and arbitrage issues due to low liquidity, it has recently indicated it is considering a rule change that would legalise ETFs tracking bitcoin futures instead of spot prices. Even if it is rejected this time around too, it appears to be only a matter of time until an ETF is eventually approved, as the industry matures. Although it seems certain that an ETF on bitcoin would be the first of its kind, since bitcoin is the largest cryptocurrency, it is unlikely to be the last, with other major coins like Ethereum next in line once bitcoin paves the way.

Another fascinating theme is how cryptocurrencies would fare in a future recession. This topic is rarely touched upon, as even discussing a potential crisis is seen as something of a taboo during good times. To be clear, there are no signs of an imminent recession on the horizon, and economic data continue to paint a rosy picture for the global economy. Still, the fact that we are entering the late stages of the business cycle, and that this is already one of the longest economic expansions on record, suggests the possibility of a downturn over the next few years should not be dismissed.

With that in mind, it is interesting that there is no empirical evidence of how cryptocurrencies behave in an environment characterised by fear, as digital coins were invented only after the 2008 crisis. And while some pundits previously pointed to bitcoin and other coins as being safe-haven assets, since they are not centralised and their supply is theoretically fixed, that has not been apparent in recent years. For instance, unlike gold, bitcoin prices barely responded to the Brexit referendum, the geopolitical risks on the Korean Peninsula, or the escalating trade tensions between the US and China.

That said, the fact that digital coins remained unfazed by geopolitical and trade woes does not mean the same will hold true in a crisis, as there may be vastly different drivers at play. For instance, financial crises are often accompanied by government-imposed capital controls, meaning that money does not pour out of the country, which in turn makes a downturn more severe. Iceland, Greece and Cyprus are some recent examples, though China has also been doing so for years now. We can contrast this with flows into cryptocurrencies, which can hardly be controlled in such a manner. Therefore, digital coins may be one method of evading capital controls, allowing users to transfer funds abroad even in such circumstances.

Another consideration is how central banks will act. The last time around, all kinds of unconventional monetary policy tools were utilised, ranging from negative interest rates to quantitative easing. One of the biggest side effects of such policies was a marked depreciation in the respective currencies of those nations. Should the same tools be used again, a strong argument can be made that the price of digital coins may shoot up, as the value of conventional currencies is eroded through money printing.

On the whole, several factors continue to create significant problems for the cryptocurrency market, ranging from a lack of regulation and sub-par liquidity to hacks and outright fraud. However, taking a step back, it’s breathtaking how far digital currencies have come in just a few years, and how rapidly the landscape around them is evolving and improving.

Although this article focused on the actual coins, the other theme that is increasingly grabbing attention is the blockchain technology behind these tokens, which appears set to disrupt several industries over the coming years – for instance, by helping entrepreneurs raise capital to finance new projects. While the coming years may be bumpy for the cryptocurrency world as crucial issues are ironed out, the bigger picture is one where the industry continues gaining legitimacy and popularity, potentially ushering in a brave new world of digital coins.

60%

The proportion of the world’s population the New Silk Road will cover

30%

The proportion of the world’s GDP the New Silk Road will cover

$1trn

The projected final construction cost of the New Silk Road

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$100,000

Minimum investment threshold per applicant when gaining Dominican citizenship

120

Minimum number of countries allowing visa-free travel to Dominican citizens

30%

Amount Russia’s GDP declined by between 1991 and 1998

1.5%

Russia’s predicted growth rate over the next five years

14%

of Russia’s population lives below the poverty line

4.8m

Barrels per day of crude oil imported by China in 2010

8.4m

Barrels per day of crude oil imported by China in 2017

30%

Predicted increase in Chinese demand for crude oil by 2040

9.2m

Barrels per day of crude oil imported by US in 2010

7.9m

Barrels per day of crude oil imported by US in 2017

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