Author: Max Tomlin

An enticing citizenship destination

Posted on by Max Tomlin

For many, the politics of one’s home country constitutes an obstacle to freedom of movement. While this is an imperfect state of affairs, a second citizenship can give this demographic the chance to become global citizens. This is an opportunity that should be granted to every individual, but unfortunately is often restricted to those who have the means to make large investments.

Foreign investment has contributed to the rapid development of the economy, resulting in Antigua and Barbuda having one of the highest GDPs per capita in the sub-region

That said, second citizenship can be surprisingly good value for money. What’s more, in addition to mobility, citizenship and residency, investment programmes afford families better security, access to education, quality of life, stability and diversification of wealth. Those seeking second citizenship face a dizzying array of choice, from Malta to Austria, Cyprus, Bulgaria and Saint Lucia. Each location differs in terms of the freedom of movement they offer and the minimum investment outlay, as well as the various rules surrounding mandatory travel and due diligence.

New kid on the bloc
Having been established five years ago, the Antigua and Barbuda Citizenship by Investment Programme (CIP) is still a relatively new entrant to the economic investment arena. Despite this, it has become very popular with investors, owing to its straightforward and transparent application process, fast turnaround and the quality of real estate offerings in Antigua and Barbuda. What’s more, since August last year, a reduction in processing fees has given the programme an additional competitive edge.

In fact, Antigua and Barbuda was recently ranked number one in the region and number four in the world by citizenship expert Henley & Partners on account of its culture of efficiency, robust due diligence process, transparency and accountability.

The key benefit of Antigua and Barbuda as a choice for second citizenship is that it enables visa-free access to more than 135 countries, including the UK, the Schengen Area, Hong Kong and Singapore. In addition, there are no restrictions on dual nationality, and applicants can receive citizenship for life once the residency requirement is met. Another key factor for many is that new citizens can add dependents after approval. The recent elimination of personal income tax makes it even more attractive.

After Hurricane Irma devastated Barbuda, the smaller and less populated of the two islands, in September 2017, a further decision was taken by the government to decrease the National Development Fund (NDF) contribution for a limited period. This, the government felt, would allow for the allocation of an estimated $200m needed to rebuild a stronger, greener Barbuda.

Investment requirements
Antigua and Barbuda’s citizenship scheme requires the applicant to commit to one of three investment options. One option is to make a contribution of $100,000 to either the NDF or an approved charity.

The second option is to make a real estate investment, whereby applicants purchase a property valued at a minimum of $400,000 in a preapproved real estate development area, which must then be maintained for a minimum of five years. This option includes any fees for property registration, processing fees and taxes.

The third option open to applicants is to invest $1.5m to establish a business. This can be a joint investment comprising two or more people, as long as each person contributes at least $400,000, and the total joint investment comes to a minimum of $5m.

A Caribbean gem
Home to more than 100,000 people and blessed with 365 powder-white sand beaches, Antigua and Barbuda is revered as one of the most beautiful places in the world. Dubbed the ‘heart’ or ‘gem’ of the Caribbean for its strategic location in the middle of the Leeward Island chain, the independent Commonwealth state of Antigua and Barbuda comes close to many people’s idea of paradise. Its ideal geographic positioning makes the tropical twin-island a regional travel hub, with excellent air links to both North America and Europe.

The initial introduction of the second citizenship scheme dates back to harder times. Like many countries around the world, Antigua and Barbuda was adversely affected by the 2008 economic crisis. Tourism, the main driver of the economy, experienced a decline from the country’s source markets, namely Europe, the UK and the US. After considering various options to jumpstart the economy, the government saw the CIP as the most effective way to bring back foreign direct investment, renew interest in the real estate market and spur investment in the economy.

Bolstered by generous government incentives, foreign investment has contributed to the rapid development of the economy, resulting in the country having one of the highest GDPs per capita in the sub-region. Aside from the hiccup during the financial crisis, Antigua and Barbuda has historically experienced continuous growth in foreign direct investment, owing to its attractive tourism and real estate sectors; while more recently, financial services, tertiary education and e-commerce have also become significant contributors.

Antigua and Barbuda, along with seven other states, is a member of the Eastern Caribbean Currency Union, a development of the Organisation of Eastern Caribbean States, which uses the Eastern Caribbean dollar as its currency. The Eastern Caribbean dollar has been pegged to the US dollar for the last 40 years, which has contributed to its long-term financial stability.

As far as innovation is concerned, Antigua and Barbuda was the first Caribbean nation to permit investment in approved businesses, an initiative that other jurisdictions are only now copying. What’s more, Antigua and Barbuda has maintained a strong presence in the high-end tourism sector for more than four decades. Since it has long had basic infrastructure in place, the country has now become an attractive portal for those seeking to invest in real estate and business.

The CIP unit has also been very visible in the international community as it has attended and presented at various industry conferences, as well as having established a strong presence in a number of high-quality publications.

Nuts and bolts
The only residency stipulation for the programme is that new citizens spend at least five days in Antigua and Barbuda in the five years following the granting of citizenship. The other potential hurdle for applicants is the restricted country list, which comprises Afghanistan, Iran, Iraq, North Korea, Somalia, Yemen and Sudan. Nationals of these countries are eligible to apply for citizenship in Antigua and Barbuda only if they meet additional criteria.

Beyond restrictions, there are a few important factors that have contributed to the rapid success of the programme. For one, the programme’s workforce is highly competent, comprising mostly private sector individuals. With a turnaround time of about 60 days, the CIP unit quickly became one of the most efficient units – if not the most efficient – in the region, surpassing countries that had been in the industry for far longer.

In addition, as one of the youngest second citizenship schemes in the world, the twin-island state has had the unique opportunity to learn from already-established programmes and model its real estate offerings and escrow arrangements accordingly. In order to give investors the confidence that developers will deliver on their promises, the unit exerts a certain level of control over the management of escrow accounts.

A greener future
Since the programme’s launch, Antigua and Barbuda has seen a resurgence in its real estate sector, as well as renewed interest in the hotel sector. This economic boost has created the fiscal space for a number of environmentally responsible projects to be developed, such as solar energy and reverse osmosis. The local population has also benefitted from direct contributions to social development schemes through charities and the NDF.

Looking to the future, the country anticipates that revenue flows from the CIP will assist in fostering cottage industries such as agro-processing, further improve the agricultural sector, and support the creation of new industries, which will provide a source of diversification for the economy. Furthermore, the construction boom that is anticipated as a result of the programme is set to create even more employment opportunities and other spillover benefits, ultimately improving the economic livelihood of all citizens that are lucky enough to live in paradise.

Private enterprise flourishing in Eastern Europe

Posted on by Max Tomlin

It can sometimes be forgotten that private real estate developers and investors provide a vital public service. By constructing, renovating or managing properties, they deliver the residential and commercial infrastructure that is necessary for the creation of a thriving local economy. For Dana Holdings – BK, this certainly rings true.

The Karić family helped shape the financial landscape in Serbia, other parts of Eastern Europe and even China

As an award-winning developer that has completed more than 1,000 projects, covering over 10 million sq m, Dana Holdings – BK has helped build high-quality urban environments for countless individuals to live and work in. With projects receiving praise from many quarters, it was no surprise when Dana Holdings – BK was listed on the World Finance 100 in 2017 in recognition of its impact in the real estate sector. For Bogoljub Karić, Dana Holding – BK’s Chairman of the Board, the positive work being undertaken by the business represents the culmination of a long personal and professional journey that has taken him from a small city in former Yugoslavia to the upper echelons of Serbian politics.

New beginnings
Karić, the youngest son of Danica and Janićije Karić, was born on January 17, 1954, in the town of Peć, located in what was then known as Yugoslavia. The Karić family come from a long tradition of entrepreneurialism that would no doubt have made a strong impression on the young Bogoljub. In fact, records of the family’s work in handicraft and trade sectors can be traced all the way back to 1763.

Private enterprise in the Socialist Federal Republic of Yugoslavia, however, was not easily pursued. Although the post-war period did see a reduction in the state management of enterprises, unemployment remained rampant and much of the country’s labour force emigrated to find work abroad. These difficulties, however, did not prevent Bogoljub, his brothers Dragomir, Sreten and Zoran, and his sister Olivera, from pursuing their entrepreneurial instincts.

In the 1960s, after further legislative changes, Bogoljub and his siblings founded the first private factory in Eastern Europe and, in doing so, they became pioneers of private business; not only in former Yugoslavia, but in Eastern Europe. Using credit obtained from the International Finance Corporation, the family was able to produce a number of vital tools that had previously been missing from the local market, including tractors, axles and cogwheels. In doing so, the factory enabled the foundation of many other private companies in the region.

Within 10 years, the factory grew into a thriving, multi-faceted business. The family’s BK Group soon encompassed an industrial network of 400 sub-contractors, applying western standards of management, responsibility and remuneration to its workings. The group became a phenomenon in the communist world, with both Pravda in Moscow and Renmin Ribao in Beijing writing disapprovingly about the restoration of capitalism in Yugoslavia. Despite the reproach, the Karić family fully believed in its work.

“My family knew that criticism from powerful local individuals stemmed from concern that the old power structures were fading away,” Karić explained. “We responded by renewing our commitment to private enterprise, understanding that it would not only benefit ourselves but also help the wider economy.”

Giving back
Although the success of BK Group has brought Karić and his family significant wealth, the Serbian businessman has been keen to use his financial clout to help others too. Through his founding of the Centre for the Development of Small Enterprises, Karic´ has played a key role in fostering private enterprise in the region.

The establishment of the Karić Foundation in 1992 helped provide assistance to refugees, orphans, schools and hospitals through its branches in Moscow, Vienna and London. Similarly, the Karić Brothers Award was established in 1998 to celebrate work in the fields of art, journalism, science, economics and humanitarianism. The reputation of previous laureates is testament to both its national importance and international prestige. The award aims to both celebrate past achievements and inspire new ones.

“I had a dream of creating a new generation of brilliant minds, inspired by contemporaries who have selflessly devoted their work and life to their homeland,” Karić told World Finance. “That is how the idea of the award originated two decades ago. After all these years, the laureates represent a family of great people brought together by the Karić Award.”

The businessman’s desire to safeguard Serbia’s future was also demonstrated when he established the Alfa BK University – the first private university in Eastern Europe – in Belgrade in 1992. Alongside his brother Dragomir, Karić also founded the International University for Business and Management in Moscow as the first private university in Russia.

Over the years, the BK Group has also provided a number of essential services for the Serbian people. Through the creation of TV BK Telecom and then EUnet, the first domestic internet provider, the group helped connect Serbians with each other and the wider world. Similarly, the establishment of Mobtel, the first mobile telephony company in the region, indicated that the BK Group was not afraid to pioneer new services.

“The world around us is constantly changing and businesses must be able to react swiftly to new developments,” Karić said. “At the BK Group, we are always alert to new technologies and services that could deliver value to our customers. We aim to be proactive, rather than reactive.”

The Karić family also helped shape the financial landscape in Serbia, other parts of Eastern Europe and even China where they became pioneers of private business when they started activities 30 years ago through their company in Hong Kong. The Karić Bank, later called Astra Bank, opened its doors in 1990 in Belgrade as the first private bank in Eastern Europe. Affiliate banks were subsequently opened elsewhere in the country and abroad, which continued to provide valuable financial services, even as Serbia faced crippling economic sanctions. It was the only private bank that survived the financial chaos that engulfed the country during the 1990s, and in doing so even managed to enhance its reputation.

By supporting charities and businesses alike, the BK Group has played a vital role in stimulating the domestic economy, helping to improve the fortunes of many Serbians. “The creation of just one job is the greatest act of patriotism that anyone can commit,” noted Karić. “Everyone who does this for their country is a hero who deserves the greatest recognition.”

Building a better future
Today, BK Group is one of the largest construction companies in Europe, with current projects valued in excess of €20bn ($24.74bn). As one of the first foreign investment and development groups to recognise the potential of emerging Eastern European markets, BK Group’s Dana Holdings has successfully completed more than 500 projects since its inauguration and is on track to deliver a number of significant mixed-use schemes over the next few years also.

In Belarus, as with so many other Eastern European markets, the pathway to sustainable growth begins with a full and productive workforce, although suitable infrastructure is also a major driver. According to Colliers International, the estimated market value of all the projects in Minsk is $3.95bn, while total net operating and sales income is $7.2bn.

Minsk World, which is Dana Holdings – BK’s largest development, is a three million sq m mixed-use scheme that is located in the heart of the city, on the site formerly occupied by the Minsk-1 Airport. Construction of the complex started immediately after both the presidents of Serbia and Belarus participated in a groundbreaking ceremony in November 2015.

On a site of around 400 hectares, the new Minsk World project is one of the largest mixed-use construction developments in existence in the world today. Upon completion, the project will comprise 30,000 high-quality residential units and villas, along with 305,000 sq m of gross leasable area (GLA) of Class A office space, all within a new international financial district that will attract numerous new investors.

There will also be: conference, event and leisure centres; schools; lakes and green spaces within a new metropolitan park; and a 120,000 sq m GLA shopping, entertainment and leisure centre. The residential segment of the development is ahead of schedule, while the entire project is on track to be completed by 2029. The project offers strategic benefits for Belarus and will help the country become a regional leader in business and finance, similar to Singapore, Dubai or Hong Kong.

Furthermore, Dana Holdings – BK is working in Belgrade to imple­ment its two million sq m Tesla City project, designed to be the leading energy-efficient city- within-a-city development on the planet.

There’s also the Astana Royal, which is currently in development. This is another city-within-a-city development that heralds a new centre for living, working and recreation for residents of all ages in Kazakhstan’s capital. Such projects are in addition to the many completed projects that the BK Group has worked on across the former Soviet Union. In fact, during 40 years of operations, the company has worked in more than 18 countries.

There is still more work to be done, however. States in Central and Eastern Europe require an estimated €615bn ($760bn) of investment in transport infrastructure just to catch up with countries in the West. For Karić, this shortfall only makes him more committed to future projects, both in his native Serbia and elsewhere. In any case, for the many reasons mentioned above, the Karić brothers have become synonymous with the success and development of private business in Yugoslavia and Eastern Europe.

“At Dana Holdings – BK, we only invest in the best,” Karić said. “Whether our partners are based in manufacturing, telecoms, finance or any other industry, we give them support, but also freedom to be creative. In this way, we are helping to change the world, one project at a time.” Indeed, thanks to all they have achieved, the Karić brothers have become synonymous with the success and the development of private business in Yugoslavia and Eastern Europe.

Saudi Arabia to open first commercial cinemas in almost four decades

Posted on by Max Tomlin

On April 4, American cinema chain AMC announced it will open the first commercial movie theatre in Saudi Arabia in more than 35 years. The Saudi Ministry of Culture and Information granted the licence, which is consistent with Saudi Arabia’s Vision 2030 plan to modernise its economy.

AMC said it plans to open between 30 and 40 new theatres in 15 cities around the country in the next five years

This follows the announcement in December that the country’s long-standing ban on cinemas was to be lifted, opening the way for commercial enterprises to set up in the kingdom. AMC, which is the biggest cinema chain in the world, is the first entrant into the Saudi market and plans to open its first cinema in the country by April 18.

“The granting of the first licence marks the opening of very significant opportunities for exhibitors. The Saudi market is very large, with the majority of the population under the age of 30 and eager to watch their favourite films here at home,” said Awwad Alawwad, Saudi Arabia’s Minister of Culture and Information in the statement. “The aim of Saudi Vision 2030 is to improve the quality of life for Saudi families by providing an array of entertainment opportunities. The restoration of cinemas will also help boost the local economy by increasing household spending on entertainment while supporting job creation in the kingdom”

In a separate statement, AMC said it plans to open between 30 and 40 new theatres in 15 cities around the country in the next five years. Eventually, it plans on establishing between 50 and 100 venues in 25 cities by 2030.

This is a significant cultural development for Saudi Arabia, which outlawed movie theatres in the 1980s following a resurgence of ultra-conservative religious sentiment in the aftermath of the Iranian Revolution. Saudi’s young crown prince, Mohammed bin Salman, has been making bold moves to modernise the nation’s culture and economy through the framework of Vision 2030, including lifting the ban on women driving. The sweeping, ambitious and forward-looking nature of the Vision 2030 is both facilitated and hindered by the kingdom’s status as an absolute monarchy.

Top 5 most interesting mergers and acquisitions of the past year

Posted on by Max Tomlin

The past 12 months have produced a seemingly endless string of mergers and acquisitions (M&As). Over $3.5trn worth of deals were made worldwide, marking the fourth consecutive year the $3trn benchmark has been passed.

As competition across multiple sectors heats up and is disrupted by new entrants and technology, companies are taking dramatic steps to cement their positions and secure their industry futures. M&As, whether horizontal (buying the competition) or vertical (buying up and down the supply chain), can drastically improve a company’s strategic standing in its market.

Here, World Finance lists the five most noteworthy M&As of the past year. They may not necessarily be the biggest, but they have already made waves that are well worth following in the years to come.

Companies are taking dramatic steps to cement their positions and secure their industry futures

1 – Amazon/Whole Foods Market – $13.7bn
In perhaps the most visible deal of the past year, the e-commerce behemoth Amazon stepped out into the real world last August with a major acquisition of the brick-and-mortar food retail company Whole Foods Market. On paper, Amazon and Whole Foods don’t seem like a natural match: Amazon is known for its absurdly quick turnover of inventory and its logistical mastery. Whole Foods, on the other hand, gives off the vibe of a local artisanal food shop where time and effort goes into everything. The effects on the food retailer have been quick, with lower prices and Amazon lockers in stores within the first few months. The changes are likely to attract a new customer base that has avoided Whole Foods because of its niche reputation and relatively high prices.

2 – Disney/21st Century Fox – $52.4bn
In a real shake-up of the entertainment business, Disney announced it would purchase the entertainment assets of Rupert Murdoch’s 21st Century Fox in December, for a mammoth $52.4bn. The deal brings together two of the biggest entertainment companies in the world, and future-proofs Disney’s vast empire. For avid movie fans, this deal means the possibility of seeing lucrative franchise crossovers. X-Men, The Fantastic Four and Deadpool may finally team up with their Marvel brethren in Disney’s Marvel Cinematic Universe. Through this acquisition, Disney is also doubling its stake in the streaming service Hulu, which solidifies its position in the streaming market, especially given its planned direct-to-consumer streaming service, which is set to launch in 2019.

3 – CVS/Aetna – $69bn
In what is sure to rock the US healthcare market, CVS – the biggest pharmacy chain in the country – announced the purchase of the fifth-largest health insurer for $69bn in December. So significant is the deal, in fact, that the American Antitrust Institute has lobbied the US Government to block the deal, arguing that it would leave other players in the market with little or no incentive to compete. The deal comes as industry titans are feeling threatened by major players like Amazon, which is also poised to enter the market. CVS’ merger also put pressure on other significant players in the market to make bold moves; health insurer Cigna bought prescription benefit management company Express Scripts in a $67bn deal.

4 – Intel/Mobileye – $15.3bn
Intel – which was recently overtaken by Samsung as the world’s largest chipmaker – has made a major move into the autonomous driving space with its acquisition of Israeli visual sensor company Mobileye in August. Through the merger, Intel is looking to position itself as a leader in what is undoubtedly one of the hottest fields in tech right now. The companies are already in partnership with German automaker BMW on a fleet of 40 self-driving vehicles, which will hit the road in the second half of 2018. Mobileye’s technology is already used by a number of players in the market, most notably Tesla, which has perhaps the best-recognised automated driving programme in the car industry.

5 – Verizon/Yahoo – $4.48bn
Anyone old enough to remember the internet in the late 1990s will remember Yahoo’s digital dominance. It was the most popular starting point on the web in 1998, before the burst of the dotcom bubble – and, more importantly, Google – violently wrenched it from its perch. Verizon, the American telecommunications conglomerate, finally ended Yahoo’s tenure as an independent company last June with a $4.48bn purchase. Yahoo’s glory days may be long over, but its recent history has not been underwhelming: in 2016, Yahoo was the world’s sixth most visited site. The company now operates under Oath, Verizon’s digital content subsidiary, which also controls AOL and Huffington Post.

Stopping counterfeit drugs in their tracks in the Philippines

Posted on by Max Tomlin

In the midst of a drug war in the Philippines, President Rodrigo Duterte has announced a crackdown on the illegal sale of counterfeit over-the-counter medicines. On March 28, Duterte ordered police to arrest anyone involved in the manufacture, import or distribution of falsified pharmaceuticals. The command followed a public warning made by the Filipino Food and Drug Administration (FDA) and United Laboratories, which highlighted the difference between real and counterfeit medicine – in this case, Biogesic 500mg paracetamol tablets.

The FDA has continuously warned of the risk of counterfeit medicines to the economic and public health of the Philippines

The warning advised the public to identify modifications in the pill colour, foil patterns and illegible batch number markings on the packaging. Counterfeit medicine, however, is not exclusive to the Philippines: the World Health Organisation (WHO) estimates that in low and middle-income countries, one in 10 medical products are falsified, which are classified as non-FDA approved or intentionally misrepresenting an active ingredient.

Counterfeit crackdown
The FDA has continuously warned of the risk of counterfeit medicines to the economic and public health of the Philippines. Some headway has been made to reduce their availability. In January, the FDA and the Philippine National Police seized over PHP 3m ($57,570) worth of counterfeit medicine in Sampaloc, Manila. The confiscated goods included 15 different brands of over-the-counter medication, which were manufactured by an unidentified local drug company.

Rae Ann Verona, a journalist covering Filipino domestic news, told World Finance that confiscation is not enough: “It’s a start, but they have to get to the source and look at the reasons why counterfeit medicine manufacturers, importers, and distributors are thriving.”

In November 2017, the WHO estimated that counterfeit medicine accounts for 10 percent of a $300bn industry in low and middle-income countries. Salvador Panelo, Chief Presidential Legal Counsel, recently suggested that the percentage could possibly reach an alarming 70 percent in developing countries. According to the FDA’s Regulatory Enforcement Unit, seized products that have been imported from China or India are sold, directly or via online transactions, at a low cost in order to reel in unwary small-time dealers. The counterfeit pharmaceutical industry in the Philippines is clearly lucrative, while the importation of fake drugs through various channels is an added burden for authorities.

Public threat
Supply and demand is a key factor in driving the low price of counterfeit medicine compared with authentic drugs. “Counterfeit drug makers and suppliers will continue to distribute and manufacture as long as affordable medications are needed,” explained Verona. This is because affordable yet authentic medication is hard to find in the Philippines. Since 1985, drug prices have risen at a faster rate than in neighbouring countries like Thailand, Malaysia and Indonesia. Furthermore, a 2008 study stated that 12 percent VAT and public pharmacy mark-ups, some as high as 30 percent, contribute to the unaffordability of generic medication.

Jovencio G Apostol, a professor of pharmacology at the University of Santo Tomas, observed: “Health insurance coverage of Filipinos is one of the lowest in Asia.” As such, pharmaceutical products comprise 64 percent of out-of-pocket expenditures in Filipino households. Counterfeit drug manufacturers have exploited this need for affordable medication to satisfy their own money-making objectives.

Verona further explained that falsified medicine has an especially detrimental effect in developing countries: “Fake drugs deliberately cheat the public, which is dangerous in all countries, but especially for countries like the Philippines where an unfortunate number of people still lack access to clean water and sanitation… [This] makes them susceptible to bacterial diseases, for example.” Counterfeit drugs or poor-quality medicine may add to antibiotic resistance, which threatens the development of life-saving drugs in the future.

Fighting back
The Filipino Government has implemented various policies over the years to reduce prices and increase the use of generic medicine. These include: the Generics Act of 1988, the 2000 Half-Priced Medicines Programme and the Universally Accessible Cheaper and Quality Medicine Act of 2008. However, these measures have not resolved the problem – mainly due to rigorous marketing strategies executed by dominant manufacturers and importers of branded generic medication – as prices have remained among the highest in Asia.

As long as Filipinos demand affordable medication, the manufacture and distribution of counterfeit and substandard drugs will continue. The public is becoming more aware of falsified drugs, especially with the recent case of fake paracetamol, which may reduce the sale of counterfeits. However, it is unclear how much of a difference that will make to the overall industry. The government is tackling the issue by arresting those involved but, in order to stop the circulation of fake drugs, it needs to regulate the exorbitant mark-up of authentic medicine.

Plugging the cannabis knowledge gap

Posted on by Max Tomlin

The legal cannabis industry is a unique prospect for those looking for a potentially lucrative investment opportunity. In 2017, sales in the US state of Colorado reached $1bn in just eight months, a 21 percent increase from the same period in the previous year. According to Statistics Canada, Canadians spent around CAD 5.7bn ($4.5bn) on both medical and non-medical cannabis in 2017, with numbers expected to swell when the latter is legalised in July this year.

Given the lack of significant cannabis management expertise in the industry, having an experienced team really sets MJardin apart

Canada being the first major economy to make cannabis federally legal is huge news for this high-value commodity. A 2016 report by Deloitte estimates that the market, which includes tourism revenue, licence fees and business taxes, will be worth in excess of $22.6bn once the legislation comes into effect.

While the potential opportunities are obvious, the realisation of them is complex. This is particularly the case in the US, where cannabis is legal in a number of states but rules differ from one to the next. Adhering to a stringent regulatory framework, given the variance across the country, is why a rising number of growers and dispensaries are seeking the help of a third party.

Cannabis management companies can help such firms achieve maximum yield of top-quality products, all the while staying within the necessary legal parameters. In light of the market’s continued expansion expected over the coming year, World Finance spoke with Rishi Gautam, Chairman and CEO of MJardin, a leading cannabis management company.

Jump-starting success
MJardin manages licensed cannabis cultivation and processing facilities, together with retail dispensaries throughout the US. It also manages services, such as compliance, finance-related services, human resources software and intellectual property. “We don’t touch licences directly in the US, as we have separate licence holders who deal with that side of things. In Canada, however, we [attend] to our own licences and operate facilities as well,” said Gautam.

James Lowe was a pioneer of the cannabis management business when cannabis became legal in Colorado around 10 years ago. He and his team formed an initial management company to provide design services, and eventually cultivation management services, for newly licensed facilities. “In 2013, I met Lowe, as well as the other founders of MJardin, who were working in this management company format in the Denver area. We created the MJardin platform to basically institutionalise the work that he had started in the area of cultivation expertise,” said Gautam. “MJardin started officially in 2014; fast-forward four years to today and we are managing more than 30 cultivation, processing and retail facilities in five US states, and we’re making a large, aggressive push into Canada as well.”

In 2017, Gautam decided to become fully active in the business, taking the position of chairman and CEO. With a background in investment management, one of his first moves was to create a capital vehicle for the company to make strategic investments and take ownership stakes in various assets. “It’s a fairly new subsidiary but it has already proven to be quite effective, because the combination of capital combined with MJardin’s operating expertise allows us more powerful ownership in our managed assets.”
This permanent capital vehicle is a crucial part of MJardin’s strategy to both operate and invest in infrastructure assets in Canada, which will be facilitated further by its recent partnership with Bridging Finance, a leading private credit fund in the country. “We’re looking at Canada and other federally legal markets to make such owner-operated positions,” Gautam added. “A couple of years down the road, we see MJardin playing an integral part in the development of new markets.”

Knowledge is power
Another key thread to this strategy is maintaining a high level of expertise. “We have a team that has dealt in the production of legal cannabis for many years, and we’ve also created proprietary software and standard operating procedures, as well as other techniques, that have proven to be quite effective in numerous facilities across many different operating environments,” Gautam explained to World Finance.

Given the lack of significant cannabis management expertise in the industry, having an experienced team really sets MJardin apart from others in the space. There are states in the US, for instance, that have only been growing cannabis within a legal framework for less than five years. “MJardin has a head start, so to speak, because our senior operations team has been operating within a legal cannabis framework for a lot longer than five years, so they’re very familiar operating within a regulated environment,” Gautam explained.

As senior operators at MJardin have worked in the regulated environment for numerous years, they know exactly how to follow protocol and how to pass testing requirements. “This is crucial, because growing this plant in a very large-scale facility is not easy,” Gautam noted. “There’s always considerations to be made about the environment, the structure of the facility, plant health and so on, so we’ve created a solid system through training, software and standard operating procedures to minimise the risk of facility operations as much as humanly possible – that has been our goal since day one.”

Thriving through technology
Constant progress and innovation is vital for any high-value product, and this is certainly the case for cannabis cultivation. “We have a full-time research and development [R&D] team that focuses on improving and advancing cultivation techniques – from lighting systems to different soil media – in multiple facilities,” said Gautam. It’s important to note that MJardin’s R&D is production-focused, as opposed to being therapeutic or medical-focused. Gautam added: “This type of R&D has proven helpful because it allows us to retool and optimise our existing processes in a live facility – as opposed to a lab or some theoretical model. We’re fortunate to have several active facilities that produce and harvest plants – all within a cultivation R&D mindset.”

In a bid to further improve its systems and processes, MJardin is making ardent use of data tracking. “We have compiled what we consider to be the largest database of cannabis production history out there, which is all stored within a single server – and that data is very powerful,” Gautam explained. “We have thousands and thousands of harvest data, including different strains of the plant, the different performance of each strain, production metrics like grams per square foot, etc. We have all of that plus raw data.”

At the centre of this is MJardin’s proprietary software, GrowForce, a cannabis management platform that tracks, corrects and analyses all of the data collected. “We continue to automate more and more of our processes through mobile applications and other digital forms.” He continued: “We’re in the process of digitalising our facilities so that everything is done through the app or the software; all that data is then fed into the server, which provides analytics across all of our facilities and hundreds of thousands of pounds of production of cannabis product, in a very robust framework.”

MJardin University
Given MJardin’s inclination to use technology to continually improve its processes, it comes as little surprise that the company has developed an innovative training platform for its employees. “MJardin University is a proprietary online learning management system that we created to help support the development and continuing education of all individuals within the organisation, from the hourly facility positions all the way up to senior operations managers,” Gautam explained. “We also have fast-track programmes to bring on managers who come from different industries, but have no cannabis experience. The online learning system complements on-the-job training; once you do a particular course online then you have to perform such tasks in front of a supervisor in the facility.”

Gautam added: “MJardin University is something that we’re very proud of. It’s a testament to the strength of the team we have, but also to our continuing development. As the space develops and new techniques emerge, we’re very much on top of all the advancements in the industry, and we have a scalable system internally to educate and train everyone.”

When asking Gautam what he considers to be the most important factor for investors looking into the space, the theme of having the right expertise again arose. “It’s obviously a very bullish market – there are plenty of companies taking themselves public, plenty of licences being acquired, facilities being built; there is a lot of activity in a very early stage of this fast-growing industry. New markets are opening up and cross-border deals are happening, but I think the most important thing for investors to realise is that the production of this plant today, on an ongoing basis, is not a commoditised process like tobacco, tomatoes or other cash crops.”

Indeed, cannabis is a speciality commodity: the production of this plant on a mass scale and in a regulated environment takes a lot of experience, and a lot of skilled labour. “More large-scale facilities are being developed, but skilled operators need to be used to minimise the risks involved. Indeed, that skilled operator needs to not only have the knowledge, but also the right people to manage these facilities.”

World Finance Wealth Management Awards 2017

Posted on by Max Tomlin

If the mood at the end of 2016 was to be distilled to a single word, it would surely be ‘uncertainty’. Shocking election results in the US and UK, accompanied by the emergence of AI-powered technologies, had investors and wealth managers wringing their hands. Governments, businesses and the media dissected the potential impact of these forces, leaving many leaders trapped in a state of indecision. However, as we make our way further into 2018, the skies look far clearer than they did 12 months ago. The threats of doom and gloom have not yet come to pass, and may never do so if trends continue.

Wealth managers have to examine markets critically and remove themselves from the temptation to look only at short-term problems; considering the bigger picture is the only way to successfully do business

Identifying real threats and ignoring irrelevant noise will be of increasing importance for wealth managers as the industry grows. According to a 2017 report by PwC, titled Asset & Wealth Management Revolution: Embracing Exponential Change, the total amount of global assets under management will double by 2025. This means an increase from $84.9trn in 2016 to $145.4trn in 2025. “Asset managers can take advantage of this massive global growth opportunity if they’re innovative,” said Olwyn Alexander, PwC’s Global Asset and Wealth Management Leader, at the release of the report. “But it’s do or die, and there will be a great divide between few haves and many have nots. As a result, things will look very different in five to 10 years’ time, and we expect to see fewer firms managing far more assets significantly more cheaply.”

To successfully navigate 2017, wealth managers had to examine markets critically and remove themselves from the temptation to look only at short-term problems; considering the bigger picture is the only way to successfully do business. The winners of World Finance’s 2017 Wealth Management Awards have deftly navigated these market challenges and avoided the pitfall of indecision. Where many panicked, these leaders acted with confidence and ensured they took full advantage of what the year presented them with. With increased competition between firms expected in the coming years, only the most successful will survive.

Unstable market, stable gains
The trend of uncertainty failing to hurt the world’s economy is perhaps best illustrated by the performance of the US market. The Dow Jones broke its own closing record 69 times in 2017, surpassing 24,000 in December. While the Dow is by no means a thorough tool for measuring the performance of an economy, its success was echoed in other measurements. The Chicago Board of Operations Volatility Index hit its lowest point ever in November, adding to evidence that the worst-case scenario expected by many will not come to pass.

The US was the ultimate leader in global wealth creation, continuing a surge of gains as post-financial-crisis growth continues. The US added $8.5trn to global wealth during 2017, according to Credit Suisse’s 2017 Global Wealth Report; more than half of the world’s total growth. “So far, the Trump presidency has seen businesses flourish and employment grow, though the ongoing supportive role played by the Federal Reserve has undoubtedly played a part here as well, and wealth inequality remains a prominent issue,” said Michael O’Sullivan, Chief Information Officer for International Wealth Management at Credit Suisse, when the report was released. “Looking ahead, however, high market valuations and property prices may curb the pace of growth in future years.”

While not as dramatic as the US, Europe also posted consistent wealth growth. In absolute terms, Germany, France, Italy and Spain made it into the top 10 countries with the biggest gains. According to Credit Suisse’s findings, the biggest winner was Poland: it posted an 18 percent increase in average household wealth gain, a rise that was driven mainly by equity prices. Asia also saw significant growth as the region started catching up to the more developed economies of the West. This continued wealth growth will fuel the global wealth management industry and act as the catalyst for the industry’s expected surge.

Technologically difficult
Apart from the growing market that is placing increasing pressure on smaller wealth management players, technological change is also accelerating competitiveness in the industry. One significant development pertinent to the wealth management industry is the ability of robotic process automation (RPA) to reduce costs, particularly as regulation makes business-as-usual more expensive.

According to Capgemini’s Top 10 Trends in Wealth Management 2018 report, the automation of basic, repetitive and time-consuming tasks can speed up processes by 60 percent. The tools are also easier to implement than ever before; RPA does not require existing computer systems to be rebuilt and can be done step by step, even without programming knowledge. Client on-boarding, back office operation automation and regulation compliance are just a few of the many ways RPA systems are being utilised. Compliance is particularly notable, as it is set to dominate the costs of many companies in the near future.

Also noted in Capgemini’s report is the tremendous scrutiny the wealth management industry has faced on the back of the global financial crisis, with regulations changing at a tremendous pace. In 2016 alone, Thomson Reuters Regulatory Intelligence tracked more than 52,000 regulatory updates divided among 500 regulators across the globe. Many changes relate to increasing transparency, drawing clearer distinctions around conflicts of interest and providing greater consumer protection.

Adding to the already tremendous challenge facing wealth management companies is the fact that regulations are going in very different directions across regions, particularly when it comes to new technology. Of particular note is Europe’s incoming General Data Protection Regulation, which will likely require a significant update of computer systems in many wealth management companies. The firms that will succeed in this environment will be the ones that find ways of doing business more efficiently while still meeting the strict new regulations that continue to emerge.

Innovate to differentiate
One potential benefit of all this change is the opportunity for enterprising wealth management firms to differentiate themselves from their competitors, something many have often failed to do. Capgemini noted that other sectors of the financial services industry are well ahead in this regard, and there is plenty of opportunity for the wealth management sector to catch up. Differentiating products and services from competitors will be necessary as automation and regulations make competing solely on price far more difficult. As high-net-worth individuals demand greater customer service, communication will be a deciding factor in many clients’ decisions.

Saying firms need to integrate more innovation into their business models may be a cliché, but doing something truly unique is still the best way to stand out. Though tremendously difficult, the current landscape of the wealth management industry necessitates that companies do exactly this to survive.

These forces will push the wealth management industry to achieve bigger and better things in 2018. The winners of World Finance’s 2017 Wealth Management Awards are the firms that have shown the aptitude and skill to examine a financial landscape that is becoming more competitive every day.

World Finance Wealth Management Awards 2017

Europe
Andorra

Crèdit Andorrà

Belgium

Belfius Bank

France

BNP Paribas Banque Privée

Germany

Vontobel Wealth Management

Greece

Attica Wealth Management

Italy

Mediobanca

Luxembourg

Banque Pâris Bertrand Sturdza

Portugal

PT Golden Visa

Switzerland

Kaiser Partner

The Netherlands

Rabobank

Africa
Ghana

The Royal Bank

Mauritius

MCB Private Banking

Nigeria

Standard Bank Wealth and Investment

North America
Bermuda

Clarien Bank

Canada

Scotiabank

US

Citizens Bank

Latin America
Argentina

Puente

Bahamas

CIBC FirstCaribbean

Brazil

BTG Pactual

Middle East
Kuwait

KFH Investment

Qatar

QInvest

UAE

FGB Wealth

Asia-Pacific
Armenia

Unibank Privé

Australia

Westpac Private Bank

India

Kotak Wealth Management

Malaysia

Maybank

Taiwan

King’s Town Bank

Thailand

Kasikornbank

World Finance Corporate Governance Awards 2018

Posted on by Max Tomlin

Corporate governance is about effective management, upholding a certain level of moral and ethical integrity, and building relationships with company stakeholders. It also requires strong leadership and a commitment to making the right decision – not necessarily the easy one.

The relative economic prosperity delivered by 2017 did not always produce the most favourable conditions for corporate governance policymakers. Falling unemployment, persistent growth and buoyant stock markets may have made for a healthy business climate, but success can sometimes cloud judgement. It is much harder to introduce – let alone adhere to – strict rules and regulations when the going is good.

When it comes to corporate governance, companies will need to think carefully about both their present-day image and their long-
term reputation

So, although 2017 brought financial stability, it was also notable for a number of corporate governance missteps. In the US, Equifax faced accusations of insider trading, while Steinhoff, one of South Africa’s leading retailers, struggled to explain accounting irregularities. Perhaps worst of all was Uber’s decision not to disclose the data breach it suffered in 2016, an act that even raised eyebrows among those who had grown accustomed to reading about the company’s many indiscretions.

The past year also brought the issue of sexual harassment into the spotlight. Following allegations made against producer Harvey Weinstein and a number of other high-profile Hollywood stars, the ‘Me Too’ movement soon spread to other industries – and the finance sector was no exception. In light of the testimonies of countless women, many businesses are rethinking their policies on sexual harassment and taking a closer look at gender imbalance in the workplace.

The World Finance Corporate Governance Awards celebrate the companies that are not simply reacting to shifting attitudes, but are being proactive in driving positive change. By maintaining the highest possible standards of transparency, sustainability and inclusivity, these organisations have proven themselves to be worthy recipients of this year’s awards.

Taking responsibility
Maintaining the status quo is easy, but it can lead to stagnation. In 2018, a growing push towards greater corporate responsibility will make it difficult for businesses to simply continue as they were. The Harvard Law School Forum’s Global and Regional Trends in Corporate Governance for 2018 report sees board quality and composition as one of the biggest developments to take place this year. Increased gender diversity is sure to be a key focus area, with institutional investors showing a greater willingness to vote against nominating committees if they feel female members are underrepresented.

Similarly, companies will find themselves expected to create a positive working environment. Reports of sexual harassment need to be thoroughly investigated and gender pay gaps swiftly closed. Accountability will surely be high on the corporate governance agenda this year, with board members no longer able to plead ignorance regarding harassment, whether it discriminates against any gender, sexuality, race or creed.

If creating a more transparent working environment helps organisations deal with toxic cultures, it will also help them with financial disclosure. Across the world, pressure is mounting on firms to ensure their pay practices are as fair as possible. In Germany last year, the Transparency of Remuneration Act came into force and, more recently, an updated version of the Markets in Financial Instruments Directive (MiFID II) was implemented across the EU. The individual accountability of management body members will be heightened as a result of MiFID II, and employees will surely agree it’s about time, too.

In 2018, management will be placed under greater scrutiny than ever before when it comes to their corporate governance policies. Whether this relates to human capital, investor stewardship or remuneration, companies will need to think carefully about both their present-day image and their long-term reputation.

Technological trouble
The world of technology changes rapidly, creating new business opportunities and unforeseen problems. For corporate governance policymakers in particular, technological developments can prove to be something of a headache. Throughout 2017, high-profile organisations – including the likes of Equifax, Verizon and the UK’s National Health Service – suffered cyberattacks that disrupted operations and fractured customer trust. Although cyberattacks are, to a certain degree, unavoidable, the ways in which businesses react to them will determine the extent of the damage caused.

The threat posed by cybercriminals certainly isn’t going away, which means that businesses of all sizes will need to make a renewed effort to improve their defences in 2018. Technical solutions will, of course, be important, but better corporate governance will also prove vital. Companies must ensure that cyber-risks are conveyed to all members of staff – from new recruits to c-suite executives – and not simply left to the IT department. Board members should also make cybersecurity discussions a regular part of company meetings in order to discuss the legal and financial implications of an attack.

The formal adoption of the General Data Protection Regulation (GDPR) in May this year will also have a substantial impact on corporate governance worldwide. GDPR will significantly change the corporate landscape, forcing companies to take personal privacy and data collection more seriously. Some organisations are likely to increase their investment into employee training, while others may choose more technical solutions. Whichever approach is taken, businesses need to act sooner rather than later.

Looking long term
Sustainability is a corporate governance concern for businesses around the world. In the EU, concerns over corporate contributions to climate change achieved mainstream acceptance a number of years ago, but more work needs to be done. In particular, better corporate planning for the two-degree scenario, which aims to limit the average global temperature increase to two degrees Celsius, is of paramount importance.

In the US, the Task Force on Climate-Related Financial Disclosures aims to support better access to corporate data so climate-related risks can be assessed, priced and managed more effectively. Although corporate attitudes towards environmentalism are a little less clear-cut following President Donald Trump’s decision to pull out of the Paris climate accord, local governments and many private businesses have subsequently come out in support of the agreement. As in the EU, there is currently no requirement for a US organisation to appoint a climate change expert to its board, but this is certainly something for forward-thinking companies to consider.

Of course, sustainability concerns can cover more than just the environment. Long-term planning and honest appraisals are often seen as the minimum requirement for good corporate governance, yet some companies have still failed to achieve this. Notably, the collapse of Carillion in the UK showed what happens when governance fails. Consistent board effectiveness reviews and regular, impartial auditing are needed if an organisation is to deliver sustainable success in the best interests of all its stakeholders – not just its managing directors.

Organisations now have more channels through which to communicate with investors and members of the public. What’s more, they have access to corporate data in greater quantities and at higher levels of accuracy. With this in mind, there is little excuse for companies that continually fail to deliver the high standards of transparency and accountability expected in the modern business world. To celebrate those who have shown a willingness to embrace these values for the good of their employees, customers and industry, we present the World Finance Corporate Governance Awards.

World Finance Corporate Governance Awards 2018

Angola

Banco de Fomento Angola

Bahrain

Batelco Group

Bermuda

Arch Capital Group

Canada

Nutrien

Chile

IPAL

China

HNA Capital

Colombia

Tecnoglass

Cyprus

Bank of Cyprus

France

Unibail-Rodamco

Germany

Metro Group

Greece

TITAN Cement

Iran

MAPNA Group

Italy

Telecom Italia Group

Jordan

Jordan Islamic Bank

Kenya

KCB Group

Mexico

Unifin

Nigeria

Zenith Bank

Norway

SalMar

Peru

InRetail

Philippines

PLDT

Poland

PKN Orlen

Portugal

Millennium bcp

Saudi Arabia

SABIC

Singapore

CapitaLand

South Africa

Kumba Iron Ore

Spain

Amadeus

Switzerland

LafargeHolcim

Thailand

BCPG

UAE

Dubai Electricity &
Water Authority (DEWA)

UK

De La Rue

US

Twitter

How Nordea Life Assurance’s evolution allows it to succeed in the life insurance sector

Posted on by Max Tomlin

In the once quiet and stable life insurance sector, the transformation of business practices and customer expectations is now well underway. In a marketplace where customers expect detailed insight and a highly personalised service, the models and procedures of the past are now severely lacking. By modernising, particularly through digital services, insurers currently have an opportunity to differentiate themselves in a crowded market. According to Deloitte’s 2017 Insurance Outlook report, operators in the life insurance and annuity sector have a significant growth opportunity by making products that are more straightforward and relevant to individuals’ needs. For a product like life insurance, which is not often at the front of people’s minds, the opportunity to engage customers is a thrilling possibility.

The stakes are high with every customer interaction. Through social media, customers can and will let their opinion of a brand be heard loud and clear

However, the difficulty is meeting the steep expectation customers now have for service. This greater demand is evident in customers’ increasing interest in add-on services for insurance, as Pekka Luukkanen, CEO of Nordea Life Assurance Finland, explained in an interview with World Finance: “Customers are no longer satisfied with just having an insurance product – customer-specific needs arise after the product has been bought, and customers will increasingly emphasise the personal benefits they gain from their insurance solution.”

In order to have the flexibility to offer these services to customers, Nordea Life Assurance has undergone significant changes over the last few years in order to propel the company to new heights. On its journey of continual improvement, Nordea Life Assurance is now looking to what the future holds and how this can benefit customers.

Faster and nimbler
The success of Nordea Life Assurance is built on a clear and far-sighted strategy that has been underway for years. “Last year’s successful implementation of the key target in Nordea Life Assurance’s previous strategy period, namely the migration to a single core insurance system, gave us a unique competitive edge in the market,”
Luukkanen said.

This change in process will do more than just make Nordea Life Assurance faster and more nimble than its competitors. Luukkanen explained: “A single insurance system will simplify the company’s operations, as every change needs to be implemented only once, unlike in a situation where we have multiple systems. The existence of a single, modern system also makes digitalisation development easier as it would be extremely difficult and expensive to build new service concepts into the old systems.”

To get the most out of this model, Nordea Life Assurance has implemented industry-leading processes. The process-driven operating model and quality system the company developed was awarded a quality certificate by Lloyd’s Register Quality Assurance in 2015. The certificate, based on the ISO 9001 standard, was most recently renewed in June 2017. “This means that Nordea Life Assurance Finland continues to be the only life assurance company certified in this manner in the Nordic and European markets,” Luukkanen explained.

The process-driven operating model has been integral to the continued improvement of quality at Nordea Life Assurance. Luukkanen said: “It has enabled extremely predictable and effective risk management because it is very clear to the personnel how responsibilities are divided and how various things are measured. Moreover, process-driven operations enable all of our processes, including the targets set for personnel and how these targets are measured, to be communicated effectively to everyone working at the company.”

For Nordea, efficiency has also been key. Nordea Bank, the business’ distribution channel, has given it tremendous reach with maximum efficiency. The company has also been able to adjust its operations to meet recent challenges of the business environment, including the implementations of Solvency II regulations. Utilising robotic automation has also helped speed up business, with the company now automating 20 process phases. Luukkanen explained: “These phases enable high quality, shorter delivery times and the automation of routine work phases, which improves the meaningfulness of work. This perfectly supports our goal of automating the company’s processes in order to foster growth and improve customer and employee satisfaction.”

The employee experience is another significant achievement of Nordea Life Assurance. In February 2017, the company received the Great Place to Work Finland accolade, and a survey reported 89 percent of employees consider Nordea Life Assurance an excellent place to work. This is tremendously important for Luukkanen, as employee retention is integral to the company achieving its goals. He declared: “We believe that the great employee experiences will ultimately benefit the customers and, consequently, lead to good owner experiences, enabling long-term development in the future.”

The customer of tomorrow
For the next stage of Nordea Life Assurance’s quest for quality, the focus will be on improving the customer experience. This will be the primary goal of the company through to 2020. Today, customers in any field expect greater ease of use as well as outstanding personalised experiences. The stakes are high with every customer interaction; through social media, customers can and will let their opinion of a brand be heard loud and clear.

Luukkanen recognises that customer service is a differentiating factor across brands in the entire life insurance industry, and defines what products are offered. He said: “[Customers] want a full-service package that is available at any time, in any place. There will no longer be any demand for traditional service concepts in insurance solutions that are not deemed absolutely necessary. In this type of a competition, the winner will be the service provider that not only exceeds customer expectations, but demonstrates clearly to the customers the benefits available to them.”

Understanding the changing needs of customers and making sure every interaction with a company is positive is both difficult and rewarding. Luukkanen explained that a brand is no longer something you project through advertisement, but something you co-create as an experience in interactions with the customer. He said: “At Nordea Life, just as at Nordea, this primarily means using each and every interaction to support our strategic intent of being easy to deal with. Studies indicate that simplicity is a factor that customers value in their service providers – for instance, the customer effort score has been proven to be a better indicator of customer satisfaction than the net promoter score.”

Ironically, being easy to deal with has never been so hard, as Luukkanen observed: “We are living in the era of the customer, and companies are continuously making their services better and better. Therefore, from the customer’s perspective, something that was considered easy yesterday is considered outdated and difficult today.” He added: “At Nordea Life, we want to be the best in supporting our customers’ day-to-day lives, which means we need to understand our customers’ true needs and create products, services and ways of operating that cater to those needs.”

One way this can be achieved is through digitalisation, allowing customers to perform insurance tasks anytime, anywhere. This requires a careful simplification of services to ensure that they are easy to use. Successfully doing so can allow for personalised services, the likes of which were not possible before. “Digitalisation creates the expectation of the possibility for customers to personalise the service experience, which means we are no longer able to serve customers with exactly the same concept, as many companies have done with traditional service models in the past,” Luukkanen said. Nordea’s digital development allows the company to achieve its mission of fostering outstanding, lifelong relationships with customers.

Doing so will ensure Nordea Life Assurance can face the challenges that are not directly within its control. Luukkanen explained that, in general, it can be said that the prolonged period of low interest rates is making it harder to gain returns in the investment markets with high capital efficiency, forcing many insurance companies to develop their operations and expand their business into new areas. He said: “Challenges to our operations are posed by stricter regulation which, despite its commendable aims, does not always improve the protection and service experience of the customer but instead makes operations more complex, increasing costs for insurance companies.”

Demographic factors, such as an ageing population and longer life expectancies, also have an effect on operations. “This, coupled with the sustainability gap in public finances, will increase demand for risk life assurance policies and the indemnity costs for certain types of cover,” Luukkanen explained.

But in terms of the factors that are within Nordea Life Assurance’s control, keeping customers pleased with simple yet dynamic products, and maintaining a satisfied workforce, will let the company keep its competitive edge. Its digital transformation is at the core of this. Luukkanen observed: “Life business is IT business. Players that really understand the meaning of that phrase will win. The implementation of increasingly complex regulatory requirements is a huge challenge for all players in this sector. But in this race, the size of the company together with a simple and agile operating model are key competitive advantages for Nordea Life.”

Foreign investment is carving out a new landscape in Pakistan

Posted on by Max Tomlin

The Pakistani property market has seen growing interest in recent years, largely due to close international ties between China and Pakistan. In 2013, Chinese President Xi Jinping announced the China-Pakistan Economic Corridor (CPEC), a $62bn project to develop Pakistani infrastructure and energy. With better access to cities across Pakistan, investors are seeing more opportunities to build on the land near these new developments. CPEC projects include the $2.8bn Peshawar-Karachi Motorway, set to open in August 2019, and the construction of the East Bay Expressway in Gwadar Port in the south, due to be completed later this year. Both will dramatically help to facilitate real estate developments on previously barren land.

With a population of almost 200 million people, Pakistan is suffering a shortage of 12 million houses

Rather than building in megacities like Karachi, investors are taking their money to more peripheral locations in order to create urban clusters on formerly agricultural ground, which is known as ‘peri-urbanisation’. “The landscape has visibly changed with the proliferation of housing societies and gated housing enclaves moving along highways towards secondary cities,” according to Anjum Altaf from the Lahore University of Management Sciences. As a consequence, investment in residential property increased from five to seven percent between 2015 and 2016.

Luxury appetites
Pakistan’s growing middle class is a major driving force in the rising popularity of these gated housing communities. Luxury development projects, carried out by companies like Bahria Town, DHA City and the Fazaia Housing Scheme, for instance, are some of the most sought-after by those who can afford them.

The rising number of luxury developments, however, is not solving the housing gap currently bedevilling Pakistan. With a population of almost 200 million people, Pakistan is suffering a shortage of 12 million houses. Karachi, with its behemothian population of 16.6 million, has an annual shortage of 300,000 houses. “It’s not about the catering to actual demand or housing shortages. It’s much more about the tastes of richer Pakistanis,” Aisha Ahmad, a research student from the University of Oxford, told World Finance. 

Lucrative real estate
Real estate has become an attractive option for investors: numerous housing schemes are launched with the promise of 10 to 40 percent returns. Meanwhile, FDI has also been made easier as a result of measures introduced by the government in 2013. These include a new open entry system, which waivers pre-screening and government permission for investment into real estate. Furthermore, investors are no longer limited on the transfer of ownership or entitlement to lease land unless they breach Federal or Provincial regulations.

Real estate has become an attractive option for investors, given that numerous housing schemes are launched with the promise of 10 to 40 percent returns

These measures have encouraged foreign investors, and Pakistani expats in particular, to pour money into the housing sector. At present, much of this FDI comes from Egypt. Serving as an example of this is a new $2bn real estate development just outside Islamabad – the first of its kind from Egyptian billionaire Naguib Sawiris. Once finished, the complex will cater to every need of its occupants, from luxury housing units and schools to hospitals. “That’s what every Pakistani housing scheme coming from FDI looks like. They all tout the same thing: the American dream for Pakistani citizens,” Ahmad explained.

Rocketing prices
In the past six years, average house prices in Pakistan have more than doubled. This exponential rise can be linked to file trading – the documentation of un-plotted barren land that does not give ownership rights. According to Ahmad: “Most real estate agents and property dealers are not selling people homes – they deal with each other. They sell each other files, and they’ll buy up an entire block in a housing scheme that’s yet to be announced, or even developed on. So when investors come in, prices are already pretty high.”

Consequently, foreign investors remain keen on Pakistan’s real estate sector. According to data from Business Recorder, FDI in Pakistan increased by 132 percent to $340.8m in February, compared with $146.7m 12 months prior. The largest segment of FDI – $86m, to be exact – was pumped into the construction sector, which is hardly surprising given the attractive returns on investment.

Thanks to Chinese funding in roads and motorways, investors now have access to untapped plots of land upon which residential property can be built. As such, this trend seems set to continue in the near future, thereby facilitating the continued growth of Pakistan’s burgeoning real estate sector.

Alecta recognises the benefits of actively managing institutional capital

Posted on by Max Tomlin

At present, there is a great deal of work being carried out by both national and international parties in a bid to achieve a more sustainable European economy. The EU has undertaken much of this work, with the commission’s High-Level Expert Group on Sustainable Finance (HLEG) being key in developing more sustainable financial markets in the region. Sweden, France and the Netherlands are early adopters of the development, but market stakeholders from various countries have been quick to catch on too.

There is no conflict between achieving higher-than-average returns and investing in a sustainable pension system

In recent years, there has been a significant increase in the number of sustainable investments being carried out. In 2015, the UN’s Principles for Responsible Investment Initiative announced that its signatory base represented $59trn of assets under management, marking a year-on-year increase of 29 percent. We’ve also seen increased interest in the sustainability initiatives and reporting of listed companies. Meanwhile, institutional investors are increasingly investing in green bonds, and impact investments are becoming popular with all investors. The most recent trend concerns social impact bonds; there have been some pioneering activities in the UK, and more regional attempts in Sweden, but that particular financial instrument is yet to mature.

Investor duty
One of the most important insights of recent years is that future pension systems must incorporate sustainability completely in order to procure maximum long-term value creation for beneficiaries. To achieve this, it is necessary to ensure that institutional investors, such as pension funds, fulfil their duty to beneficiaries, a responsibility known as ‘investor duty’. Before this can begin, such duties must be clarified and an active management model must be implemented.

At the beginning of the 20th century, Sweden’s white-collar workforce wanted to create a better future and ensure their financial security in old age through a pension system.

With this goal in mind, plus a strong understanding of what a sustainable pensions system really is, Alecta was founded in 1917.

Today, occupational pensions are one of the most important sources of pension benefits for Sweden’s white-collar workers. Consequently, capital from pension accounts form a substantial portion of institutional capital in the country. According to HLEG’s Financing a Sustainable European Economy report, the insurance sector is the largest institutional investor in Europe, accounting for roughly 60 percent of the EU’s GDP. The financial risks taken by pension funds must generate the highest possible returns without ever jeopardising clients. Therefore, investor duty must include sustainability.

Establishing a framework
In the HLEG report, it is stated that investor duty is often misinterpreted, with a common belief being that its sole focus is on maximising short-term returns. HLEG proposes that a single framework of principles should be established to outline what investor duty actually involves. It is equally important that regulatory authorities make clear to all involved in the investment and lending chain that the management of ESG risks is integral to fulfilling fiduciary duty, acting loyally to beneficiaries and operating prudently.

Future pensions are in fact a form of life insurance based on actuarial calculations. Collective belief and scalability is what makes pension capital different from any given savings account. As such, insurance risks need to be managed in a way that ensures insurance commitments can be fulfilled. That said, it is important to reiterate that there is no conflict between achieving higher-than-average returns and investing in a sustainable pension system. However, the investment model needs to be an active one.

At present, more players are advocating for passive management or index investments as a model for long-term asset management. In a conservative financial industry, it’s commendable to raise initiatives on sustainability. However, we need to depart from the idea that all sustainability initiatives should be praised and rewarded. Instead, we need to consider what kind of sustainability work is actually the most beneficial; this can only be done effectively through stock picking.

Active management
The asset management model used by Alecta is unique in the sense that it is based on active management of an equity portfolio of about 100 holdings and a corporate bond portfolio with equally few issuers. This means that the company has an in-depth understanding of every company it invests in. In addition, as it focuses its investments on just a few companies, it is able to influence their decisions in a sustainable way. A fund manager with a larger spread of holdings wouldn’t be able to achieve the same level of influence.

Alecta’s model allows an investor to assess the sustainability of a business model and its compliance with ESG criteria. At the same time, it allows an investment that might temporarily reduce the sustainability of the investment portfolio, say by increasing the CO2 footprint, if the company or industry is likely to disrupt unsustainable
business models in the long term.

Contrary to popular belief, active management doesn’t need to be more expensive. In fact, an in-house team dedicated to keeping costs at a minimum can achieve a sustainable portfolio that focuses on low fees and high returns. Today, Alecta is the third most cost-effective pension company in the world, as ranked by the Centre for Evaluation and Monitoring. Alecta manages its customers’ pension capital itself and only engages in active asset management. As such, it isn’t constrained by the need to track an index. What’s more, each investment is the result of thorough internal analysis. Alecta believes that clearing out hundreds of companies from an index is an ineffective and poor use of customer money.

The HLEG report states that the assets of pensions funds should be less prone to short-term financial risks. However, they are potentially more exposed to substantial long-term risks related to the real economy and the environment. It also states that the interplay between governance and sustainability is key to ensuring that those who lead institutions become fluent in sustainability risks and opportunities. While active responsible ownership is now being exercised by a growing number of investors, much more could be done.

Alecta’s vision for a future society is built on an inclusive society with safety and flexibility for all. It contributes to this vision by working for sustainable pensions so that people, the environment and society can thrive in the long term.

Taking shortcuts is never the sustainable option. Passive capital management can achieve excellent returns, but if the institutional capital wants to deliver on its fiduciary core duty, the solution is qualitative hard work – knowing your investments and respecting your beneficiaries – otherwise known as active management.

Cooperative model
A prime concept in the establishment of Alecta was that pensions should not be seen as a gift from management – a token of gratitude for long and faithful service. Instead, pensions should be a natural part of an employee’s compensation package. Around the same time that the business was founded, there were some far-sighted industrial owners and managers who understood the benefit of having a flexible solution that allowed employees to keep their pension benefits even after they changed employer. This counteracted the slow employee turnover in the labour market and made it easier for industrial companies to recruit the right talent.

Following Alecta’s inception in 1917, this smart concept spread quickly throughout Sweden. This model, which involves cooperation between the labour markets’ various parties, became a central aspect of Sweden’s economic success throughout the 1900s. Today, 2.3 million Swedish employees are beneficiaries of the pensions that Alecta manages. Through collective agreement, these individuals have a pension solution that provides them with security in the event of ill health and old age. In addition, they can also receive compensation for their family members in the case of death. For these reasons, the occupational pension is the most important source of pension benefits, and the very foundation upon which Alecta operates.

US and South Korea agree exemption from Trump tariffs

Posted on by Max Tomlin

The US and South Korea agreed to a revised trading relationship on March 26, in a deal that has been welcomed by both countries. Notably, the proposed changes to the US-Korea Free Trade Agreement (KORUS) will grant South Korea an indefinite exemption from President Trump’s recently announced steel and aluminium tariffs.

Although the renegotiated trade deal favours the US, South Korea will be delighted to become the first US ally to avoid Trump’s newly enforced tariffs

The concessions have come at a price, however, with the US imposing new quotas on South Korean steel exports. Shipments from the Asian country will now be limited to 2.68 million tons, a figure equivalent to 70 percent of the average annual Korean steel exports between 2015 and 2017. US tariffs on South Korean pickup trucks have also been extended by 20 years until 2041, while US carmakers have had their export quotas relaxed.

Although the renegotiated trade deal appears to heavily favour the US, the South Korean Government will no doubt be delighted to become the first US ally to avoid Trump’s newly enforced tariffs. The South Korean economy relies heavily on exports and benefitted from $119.3bn of bilateral trade with the US last year.

“We had heated discussions,” South Korea’s trade minister Kim Hyun-chong told a media briefing in Seoul. “The latest agreement removed two uncertainties,” he explained, referring to the steel tariffs and the revised KORUS deal.

Since its introduction in 2007, KORUS has had more than its fair share of critics. Recently, US opponents have been particularly vocal, with Donald Trump describing it as a “job killer” last year. Despite the fact that South Korea’s trade surplus with the US has declined slightly over the past 12 months, it still stands at around $18bn, with the majority stemming from the automobile sector.

Trump’s hardcore support may be disappointed that he has already begun granting exemptions to his protectionist policies, but close ties between the US and South Korea are of particular importance at this moment in time. Although Trump is set to meet North Korea’s supreme leader Kim Jong-un in the coming months, a strong relationship between Seoul and Washington remains crucial to maintaining civility in the region.

Innovative banking is laying the groundwork for economic recovery in Greece

Posted on by Max Tomlin

Following seven years of recession, the Greek economy is finally showing signs of recovery. Amid a number of structural reforms, GDP stabilised in 2016 and is on track to have grown by 1.1 percent in 2017, according to the Organisation for Economic Cooperation and Development. This upturn includes progress in the labour market and a gradual increase in investment.

Eurobank has made a strategic choice to embrace technology in order to become the premier digital retail bank in Greece

Although challenges are ongoing – especially with regards to high public debt – Greece is slowly getting back on track. Local banks are working hard to reduce the high percentage of non-performing loans (NPLs) and recover a significant volume of deposits. World Finance spoke to Iakovos Giannaklis, General Manager of Retail Banking at Eurobank Ergasias, to find out how the sector is addressing Greece’s persistent economic issues, and how the bank is preparing to lead the way in the digital era.

How did Eurobank Retail Banking tackle the crisis in Greece?
In an unstable economic environment, Eurobank’s retail banking arm has focused on the needs of its customers in order to develop a relationship based on trust. The bank has made constant efforts and taken various steps to counterbalance the effects of the crisis. For instance, the bank has increased household deposits to ensure liquidity, safeguarding and better profitability. Moreover, Eurobank has supported innovative enterprises, and has focused on strategic sectors of the economy through customised financing programmes and dedicated propositions.

Furthermore, Eurobank has been keen to back the expansion of SMEs abroad. Specifically, the bank opened a new digital gate that allows firms to access global trade and business networks, and has been further enhanced by a strategic agreement with Banco Santander, named the Trade Club Alliance. The alliance is supported by a customer-centric model and our new, modern branch-operating strategy, which is based on the micro-market approach, along with the rationalisation of our network footprint.

What are the main challenges the Greek banking sector is facing at present?
The high percentage of NPLs, the recovery of deposits and achieving steady profit are the three main challenges facing the banking sector in Greece. Our main goal is to reduce the NPLs portfolio. To do this, we are cooperating with our customers, both individuals and businesses, to find viable solutions. Eurobank aims to provide the most efficient and effective troubled assets management service in the country by employing best-in-class strategies, along with human capital. For us, enhancing the bank’s profitability is not detached from being socially responsible.

The return of deposits remains one of the key hurdles for the banking system in Greece, which is now working hard to rebuild stable funding lines in the wholesale market. Beyond this goal, Eurobank seeks to further encourage business banking and fee business, while meeting customer needs by taking advantage of the recent shift towards electronic transactions.

How do you support customers facing difficulties?
Eurobank successfully managed non-performing exposures throughout the prolonged recession. Since the beginning of the crisis, the bank has supported customers facing difficulties by providing them with personalised solutions, which in turn ensured the affordability of their loans. The in-depth interviews we carry out with our customers are not only crucial to understanding the reasons for their financial difficulties, but they also enable us to give invaluable advice going forward. Based on the information they provide, we recommend long-term restructuring programmes that match with their financial capacities and assets. We address every case with sensitivity, respect and appropriate attention, all in accordance with the legal and institutional frameworks.

Helping customers cope with their financial difficulties is just one side of the story. On the other side are ‘strategic’ defaulters who decide to stop paying their debts, despite having the financial capability to do so. At present, we are accelerating legal action against these borrowers to recover funds from them.

How has Eurobank’s Retail Banking transformed over time?
Since its inception, the bank has been a pioneer in the Greek market in terms of operating models. We were the first to introduce the segment-orientated approach in personal and small business banking services. This model has been implemented in our operating structure, as well as in the set-up of branches and the financial plans we create for our customers. Recently, we implemented a new branch operating model, which is the basic ingredient for upgrading the bank’s customer service model.

What are the benefits of the new operating model?
Over the last few years, the bank’s branch network has been reformed. New infrastructure was put in place to upgrade our customer service system. The new model is based on the concept of a micro market: a defined geographical area, composed of a small number of efficient bank branches, which allows for better rationalisation in operating costs. All of these efforts have resulted in a client-centric bank, with all personal banking and small business banking relationship officers centralised in main branches. We are conscious of the integral role our employees play in helping the company achieve its goals, and so we spend time training our staff on customer-centric approaches and service methods, with a focus on providing customised solutions to clients.

How does the bank’s client-orientated approach affect its strategy and daily work?
The bank’s strategy is summarised by its motto: “Putting you first.” By providing customers with top-quality services and the latest technological solutions, we are able to cultivate a stable, long-lasting and mutually beneficial relationship with them. Cooperation, empathy and trust, along with innovation and dynamism, are the values we follow in our relationships with customers.

What customised solutions does the bank offer to each segment?
To begin with, in the small business banking segment, Eurobank offers SME customers the technical expertise needed to help them achieve higher turnover and a better cross-sale potential. The bank recently made a series of strategic choices that have enriched its approach. For example, Eurobank introduced a virtual banking service, a first in the country, which allows customers to hold conference calls with their business banking consultant, wherever they are, whenever they want.

What does the bank offer in the affluent and mass segments?
Regarding affluent banking, we aim to provide top-quality customer service. In 2017, our dedicated personal banking relationship managers served more than 100,000 customers in this market segment. Services such as monthly informative communications and tactical economic reports were provided to our clients, along with special services in travel and real estate.

Eurobank’s mass segment represents the biggest number of customers – approximately 4.5 million. In order to meet specific needs, we have subdivided the clientele base into groups: high-net-worth individuals, salaried employees, pensioners, professionals and youths. We have developed different bundling products for each group.

An increasing number of tourists are visiting Greece. What products and services do you offer the tourism industry?  Greece has seen a tremendous increase in tourism in recent years (see Fig 1). Eurobank is supporting the burgeoning industry by working with professionals and SMEs in the tourism industry, and even those that simply operate in areas that receive a significant number of tourists.

We offer a customised package that covers businesses’ daily transactions and operational needs with our existing financing products and consulting services. Finally, the bank, in cooperation with specialised partners, offers players in tourism the possibility to take advantage of social media by promoting themselves and creating networking opportunities on media platforms.

One of the main challenges following the crisis in Greece is the return of deposits in the banking system. Have you seen an increase in household deposits?
We have seen an increase in household deposits, which is very positive considering unemployment is still high and the accompanying tax burden reduces people’s capability to save. Despite this, depositors’ trust is increasing, resulting in a partial return of deposits into the system. This is in part due to banks’ multiple efforts to incentivise household deposits with specific products and services.

In the case of Eurobank, our new offers are designed with a forward-thinking approach and aim to support the bank’s future development in relation to deposits. The strength of our campaign has already seen a positive result; the bank’s market share for deposits increased in the first half of 2017, as did the number of salaries and pensions among its client base.

What are the digital tools you offer and how do they engage customers?
Eurobank has made a strategic choice to embrace technology in order to become the premier digital retail bank in Greece. With this goal in mind, we launched a three-year programme that aims to fully digitalise basic processes to ensure efficiency and give our customers an omni-channel experience.

As part of our digitalisation process, we’ve recently introduced tablets in all branches to ease signature procedures when carrying out transactions. The e-signature service will soon include contracts too. Furthermore, we have extended our ATM network across Greece, and increased the number of automated payment system machines in our branches. Eurobank has also improved the mobile app it launched in 2016. New features include innovative tools like peer-to-peer payments that make it possible to transfer money without an account number. With all of these innovative services, and those that are still to come, Eurobank is ready to lead the way as the bank of Greece’s future.

Droughts in Argentina and South Africa highlight the economic importance of water

Posted on by Max Tomlin

Argentina, the world’s largest exporter of soymeal, is suffering its worst drought in at least a decade. Meanwhile, on the other side of the world, South Africa has declared a national disaster as extreme drought ravages the Western Cape region.

The effects of water scarcity on a country’s agricultural sector can send ripples across domestic economies, and are reflected in national economic indicators. In the case of a major agricultural exporter like Argentina, a drought can also reverberate across international markets as global commodity prices react to changes in production.

According to Christopher Decker, a research fellow specialising in economics and law at the University of Oxford, the economic effects of drought can depend on a number of factors, including: how much of the country’s GDP is composed of water-intensive industries; the amount of stored water that can be tapped into in times of scarcity; and how water users adapt their behaviour in response to drought.

The cases of Argentina and South Africa bring into sharp focus the need for policymakers to shield the economy from future droughts, particularly given the threat of a changing climate.

Damaging Argentina’s cash crops
Agriculture is a crucial pillar of Argentina’s economy. Soybean meal is Argentina’s top export, followed by corn, soybean oil and raw soybeans. Together they made up 38 percent of all exports from Argentina in 2016, making the economy particularly vulnerable to extreme weather. As a result of the current drought, the government’s budget forecast of 3.5 percent growth may actually be be significantly lower.

In the case of a major agricultural exporter like Argentina, a drought can also reverberate across international markets as global commodity prices react to changes in production

As recently as October, Argentine farmers were expecting to expand their corn planting, but are now braced for the worst harvest since 2009, which at the time was heralded as the worst drought in 100 years. This year, Argentina has registered between 100mm and 400mm less rainfall than the post-1973 average, worse than in 2009. In the area around Marcos Juarez, a city in the corn and soy-producing Cordoba province, only 22.4mm of rain had fallen by the end of February.

In January, the US Department of Agriculture (USDA) lowered its estimate of annual soy production in Argentina to 54 million tons, a two million ton decrease from its previous projection of 56 million. This also represents a fall from 57.8 million tons in 2017. The Buenos Aires Grain Exchange is more pessimistic, putting the figure at 50 million tons.

Corn production, meanwhile, is expected to fall by 12 percent relative to last year, according to USDA. Each hectare of land is predicted to yield 6.92 tons, a decrease of 17 percent year on year.

“Drought during a critical time in the growing season can lead to famine and other issues,” said Brian Fuchs, Associate Geoscientist and Climatologist at the National Drought Mitigation Centre at the University of Nebraska. “Even with irrigation, there is a level of vulnerability due to the fact that the water shortages, which are usually associated with droughts, can impact irrigated agriculture as well.”

While famine is not a risk here, the drought has severely impacted farmers’ growing schedules. Keeping to a timetable is crucial to a good harvest, as planting is synchronised to coincide with seasonal weather at important stages in the crop cycle.

12%

Fall in corn production this year compared with 2017

7.8 million

Decrease in amount (in tons) of corn this year compared with 2017

During normal years, corn planting in Argentina begins in September, with the late corn planted by December. It is done in this way to take advantage of the abundant summer rains in December and January, with harvests scheduled to take place between January and April. Likewise, the first of the soy is usually planted in October and the late crop is planted in December, with harvests between March and May.

This year, both soy and corn have suffered severe delays that have been the worst in recent memory. As of January, only 72 percent of the 44.7 million acres in the country dedicated to soy crop had been planted. Corn saw similar delays, as the lack of moisture in the ground prevented the planting of much of the late crop.

While the financial impact on individual farmers has been significant, it has been slightly blunted by President Mauricio Macri’s incremental elimination of export controls on agricultural products. Export tariffs on most products were scrapped entirely shortly after he took office, but reduction schedules for soy were delayed due to tight fiscal budgets. Tariffs are now on track to reach 18 percent by the end of 2019, down from 35 percent when Macri was inaugurated.

Corn and soy may be the most impacted crops, but damage from drought is not isolated to the agricultural sector. “A key point to emphasise is that in addition to the direct effects of a drought, there are obviously indirect spillover effects as well between sectors,” said Decker. Both corn and soy are important sources of animal feed, so a shortage means higher costs of production for meat, poultry and dairy products. This in turn has put a roadblock in Argentina’s plan to rein its stubbornly high inflation rate.

While drought punishes Argentina, however, competitors are taking advantage. As global importers are shifting demand away from the South American country, demand from North American markets is increasing. Grain prices in US are going up, leading farmers to sell their stockpiles to capitalise on better returns. Corn sales from US growers to foreign markets over the past two months have exceeded 12 million tons, levels not reached in over two decades in that short window of time. Global prices will also depend on what kind of yields will be seen in neighbouring countries like Brazil, which is stepping up to fill the production gap left by Argentina.

The Theewaterskloof Dam at its lowest usuable level, Western Cape, South Africa

All trouble in the Western Cape
The drought plaguing South Africa’s Western Cape region has diminished its projections of agricultural output by a fifth compared with last year. This translates not only into decreased macroeconomic revenue, but also into employment losses, as smaller harvests means less labour.

“Early assessment of the socioeconomic implications shows that the Western Cape agriculture and agro-processing sector will suffer an [almost $500m] loss in output and lose as [many] as 30,000 jobs in the current season because of the current drought,” Sifiso Ntombela, Head of International Trade and Investment at Agbiz – an agricultural business chamber for South and southern Africa – told World Finance.

“At a national level, this will have negative consequences because [the] Western Cape is a main producer and exporter of agricultural products likes fruits and beverages. The province accounts for over 20 percent of national agricultural GDP, which suggest the county will be significantly affected by the drought,” he told World Finance.

Water is such a basic resource that its presence is taken for granted, but its absence is felt very strongly

Wheat production is especially hard hit, with yields projected to almost halve, from 1.1 million tons in 2017 to 586,000 this year. This will also cause South Africa to increase its wheat imports to 2.1 million tons in 2018, up from 935,000 tons 2017. The increased imports will widen what is, as of January, the largest trade deficit in the country’s history.

South Africa is also the eighth-largest exporter of wine in the world, but is on track for its lowest production since 2005. In January, the dams that supply irrigation to the vineyards in the Western Cape were at 24 percent capacity, a fall of almost 50 percent year on year. This means the vines do not have enough water for a proper harvest, and the grapes that are produced are smaller and have less juice, affecting a major regional export.

The effect of the drought is perhaps crystallised in Cape Town, the biggest city in the country, where water scarcity became so severe that the city was predicted to run out altogether unless citizens stuck to strict rations. While the prognosis has improved, Cape Town is still in danger of running out of water early next year if rainfall is insufficient.

The prospect of a metropolis running out of water should be a wake-up call, not just because of the economic impact – which would be severe – but also because of people’s basic need for water. “It is difficult to predict [the impact], but the economic implications could be significant given the reliance on water as an essential service, and its critical relationship with human health and wellbeing,” Decker told World Finance.

30,000

Potential jobs losses in the Western Cape due to drought

514,000

Projected reduction of wheat yield (in tons) this year compared with 2017

“If an urban area runs out of water completely, then in terms of economic implications there will be a need to source water and food from elsewhere, which will raise costs. For example, there may be a need to tanker in water from elsewhere,” Decker said. “Moreover, some sectors and activities such as schools and hospitals may have to shut down, which will have wider spillover effects on economic growth.”

Additionally, water is crucial for generating electricity because of its extensive use as a cooling agent in power plants. This is especially true for coal power, which provides around 77 percent of South Africa’s energy. If reduced access to water translates into reduced electric capacity, the economic effects are multiplied.

Mitigating future impact
In the midst of a drought, the need for policy solutions is brought into sharper focus. Governments must prioritise the mitigation of such scenarios, particularly if the economy is agriculture dependent or if water infrastructure is underdeveloped. Having a plan in place to lessen the impact can prevent the worst of the economic damage that would otherwise be inflicted.

“There is a need for some governments to take a more risk-based approach to drought planning and management,” said Decker. “Put simply, they need to move beyond being ‘reactive’ to drought, to being more ‘proactive’. This is easier said than done, as risk-based planning can sometimes involve more investments in infrastructure, which can be expensive and politically unpopular.”

The threat of drought is compounded by the spectre of a changing climate that will make water scarcer and render larger swathes of land increasingly inhospitable to crops

The revamping of outdated water infrastructure is also crucial, particularly in a region like the Western Cape which is both an economic engine and prone to dry climates. “The primary lesson for policymakers is that current water infrastructure in [the] Western Cape and other provinces in the country needs urgent expansion to meet the growing population,” said Ntombela. “It must be emphasised that current water infrastructure in the country is old, dating back to 1960s, and it was not designed to service 6.4 million people in Western Cape or 55.6 million people nationally.”

The threat of drought is compounded by the spectre of a changing climate that will make water scarcer and render larger swathes of land increasingly inhospitable to crops. “As we see temperatures increase, the frequency and severity of drought does appear to be increasing,” said Fuchs. “It is too early to tell if this is a cycle we are going through, or something which is transitioning to a more permanent basis.”

Assessments from South Africa are less equivocal. “Climate scientists report that both the frequency and severity of climate-induced disasters are increasing in the Western Cape,” said Ntombela. “They have warned that the Western Cape is set to become relatively drier and will experience moderate to strong warming in the next 100 years, which will affect the agriculture sector the most.”

Water is such a basic resource that its presence is taken for granted, but its absence is felt very strongly. As climate conditions change, and in many places worsen, water security becomes an increasingly crucial issue.Governments need to take the lead in planning and prevention, but individual users also have an important role to play in managing a country’s water resources.