#213 - December 2018

DECEMBER 2018 | ISSUE 213 MIDDLE EAST

DECEMBER 2018 | ISSUE 213

HARNESSING COLLABORATIVE OPPORTUNITIES OPPORTUNITIES Faisal Al Haimus, Chairman & President of Trade Bank of Iraq

HARNESSING COLLABORATIVE OPPORTUNITIES Faisal Al Haimus, Chairman & President

A CPI Financial Publication

great US experiment 18 The

about the workers?

34 What

of trade finance underway, despite geopolitical concerns 42 Digitalisation

FDI Forum 62 Sharjah

Dubai Technology and Media Free Zone Authority

Faisal Al Haimus, Chairman & President of Trade Bank of Iraq

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EDITOR’S NOTE

T

wenty eighteen has been eventful. Overshadowed by Trump and Brexit, we may have forgotten that the year began bullish with the S&P 500, Dow Jones industrial and Nasdaq on a high. The ecstasy came down in February as markets started showing signs of normalisation. Plagued by issues surrounding trade, taxes, interest rates and inevitably, oil price volatility, 2018 was a rather challenging, continuing the spell for a third year in a row.

The local sentiment on ground is slightly upbeat for 2019 compared to the corresponding period last year for 2018. Economies in the GCC (despite some that have suffered a considerable hit) have managed to stay resilient as they continue to demonstrate willingness to align itself with global markets. Although fairly sluggish, a slew of progressive policies and initiatives have been announced, with some already implemented this year. This is an indication of an increased level of openness and genuineness in fiscal and economic transformation, boding well for foreign investment.

In our final issue of the year, we provide both a review of 2018, as well as key areas to focus on for 2019 both in terms of investments and operations.

Our cover this month is Trade Bank of Iraq (TBI), a financial institution that has achieved measurable strides throughout

the year—from building partnerships in its aim to play a crucial role in the Iraqi economy, to becoming the first bank in the country to receive an official rating from an international ratings agency.

TBI has been assigned long-term issuer default rating of B- with a stable outlook

by Fitch Ratings.

Some of the obvious issues to keep an eye on for 2019 include, uncertain trade policies, a chaotic Brexit, a lagging global (and US) growth, slower Federal Reserve rate hikes, continued market and oil price volatility, and closer to home, geopolitical instability and the efficacy of budgetary and economic reforms.

This edition will guide you through the multiple facets of developments that are impacting our industry both externally and internally; from Saudi’s recently announced budget, to taxes and technology, trade finance and investment trends, human capital as well as an overview of GCC economies this year.

A wake-up call for oil dependent states, 2018 was a year that was much needed to ensure a sustainable economy for the future. Here’s to a better 2019.

Have a productive read and a Happy New Year.

Nabilah Annuar EDITOR, BANKER MIDDLE EAST

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CONTENTS

DECEMBER 2018 | ISSUE 213

NEWS 10 Saudi Arabia 2019 budget 14 News highlights

THE MARKETS 18 The great US experiment

LEGAL PERSPECTIVE 22 Taxation and technology

COVER INTERVIEW 26 Harnessing collaborative opportunities

REGIONAL ROUNDUP 34 What about the workers?

ISLAMIC FINANCE 38 Better operating conditions

TRADE FINANCE 42 Digitalisation of trade finance underway, despite geopolitical concerns

INVESTMENTS 44 UAE millennials prefer sustainable investments 48 Empowering women through finance in the Middle East

HUMAN CAPITAL 50 Digitalising the financial landscape in the UAE

18 6

26

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HARNESSING COLLABORATIVE OPPORTUNITIES OPPORTUNITIES Faisal Al Haimus, Chairman & President of Trade Bank of Iraq

50

WEB EDITOR JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

about the workers?

34 What

of trade finance underway, despite geopolitical concerns 42 Digitalisation

Dubai Technology and Media Free Zone Authority

A CPI Financial Publication

great US experiment 18 The

FDI Forum 62 Sharjah

NOVEMBER 2018 | ISSUE 212 MIDDLE EAST

NOVEMBER 2018 | ISSUE 212 A CPI Financial Publication

Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait

36 Lebanon Special Report

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Trade Bank of Iraq: Growth 66 Supporting

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TRANSFORMING KUWAIT Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait

TRANSFORMING KUWAIT GDPR compliance framework security technology 18 with

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HARNESSING COLLABORATIVE OPPORTUNITIES Faisal Al Haimus, Chairman & President Faisal Al Haimus, Chairman & President of Trade Bank of Iraq

OCTOBER 2018 | ISSUE 211 MIDDLE EAST

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EDITORS MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716 WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718

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60 JTB inaugurates the first branch for financial inclusion in Lebanon 62 Sharjah FDI Forum

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ANALYSIS

SAUDI ARABIA S 2019 BUDGET Ehsan Khoman, Head of MENA Research and Strategy at MUFG Bank, breaks it down

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BALANCING REAL GDP GROWTH WITH FISCAL PRUDENCE audi Arabia’s 2019 budget released by the Saudi Ministry of Finance (MoF) on 19 December 2018 appears to have struck a fine balance between focusing on stimulus to drive economic growth on the one hand, and fiscal prudence in accordance to its mediumterm balanced budget by its terminal date of 2023, on the other hand.

At face value, the 2019 budget is pragmatic, real GDP growth enhancing and maintains the government’s strategy of a focus on fiscal stimulus rather than austerity. In a first for the Kingdom, the MoF held a budget forum held on 19 December in Riyadh which included a degree of openness to questioning some of the finer details of current assessment of the state of the

(PHOTO CREDIT: HANSMUSA/SHUTTERSTOCK)

economy, highlights the lengths and seriousness the MoF is willing to go in order to provide a transparent level of forward guidance to markets on its comprehensive fiscal and economic framework over the medium term. This is a clear testament to the energy, vigour and accountability surrounding the broader reform programme.

NARROWER DEFICIT IN 2018 For 2018, the Kingdom registered a narrower deficit of $36.1 billion (4.6 per cent of GDP), compared with a budgeted fiscal deficit of $51.9 billion (6.6 per cent of GDP), and an actual deficit of $63.6 billion (9.3 per cent of GDP) in 2017. We take comfort from the improvement which demonstrates sound fiscal judgement, notwithstanding this was fundamentally due to a 39.3 per cent increase in oil revenues.

2019 BUDGETED FIGURES ARE OPTIMISTIC For 2019, the MoF’s forecasts are for the Kingdom to record a narrower deficit of $34.9 billion (4.3 per cent of GDP), owing to revenue growth exceeding expenditure growth. Specifically, the budget statement did not reveal what oil prices the budget is centered on, it appears that the authorities are relying on optimistic assumptions for oil prices, with the MoF’s projections for oil revenues being nine per cent above the 2018 oil revenues outturn figures.

FOCUS IS ON HIGHER OIL REVENUES DESPITE THE PRECIPITOUS FALL IN PRICES For 2018, the outturn suggests that total revenues were 14.2 per cent higher this year at $238.5 billion (30 per cent of GDP) against $208.8 billion (27.1 per cent

of GDP) when this year’s budget was announced at the outset of 2018. For 2019, the MoF’s forecasts suggests that total revenues will increase by nine per cent to $260 billion (32.7 per cent of GDP) next year.

For non-oil revenues, the MoF plans to raise these earnings, mainly through higher expat levies which are expected to double in 2019 to yield an estimated $15 billion (1.9 per cent of GDP), from $7.5 billion in 2018.

Meanwhile, VAT revenues are projected at $12.5 billion (1.6 per cent of GDP) due to a widening in the scope of the tax generated from corporates.

Of noteworthy importance, the MoF specified that $13.3 billion (1.7 per cent of GDP) in graft investigation proceeds were included in the 2018 budget, though there was guidance for 2019.

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ANALYSIS

SAUDI TOTAL REVENUES, EXPENDITURES, FISCAL BALANCE (USD BN AND % OF GDP)

SAUDI TOTAL REVENUES: OIL AND NON-OIL (USD BN AND % OF TOTAL)

SAUDI GROSS FINANCING REQUIREMENTS (USD BN)

SAUDI REAL GDP GROWTH (%)

Source: Bloomberg, CEIC Database, MoF SAMA, MUFG MENA Research

Given the inclusion of these proceeds for this year’s calculation, we view that this raises the prospect of weaker non-oil revenues going into 2019. Indeed, as ever before, the developments in oil markets remain critical for the fiscal revenue outlook over the medium term.

HIGHER EXPENDITURES SUGGESTING AN EXPANSIONARY BUDGET TO SPUR ECONOMIC GROWTH For 2018, the outturn suggests that total expenditures were 5.3 per cent higher this year at $274.7 billion (34.5 per cent of GDP) against $260.8 billion (33.9 per

12

cent of GDP) when this year’s budget was announced at the outset of 2018.

For 2019, the MoF’s forecasts suggests that total expenditures will increase by 7.4 per cent to $294.9 billion (37.1 per cent of GDP) next year.

Under the theme of efficiency and sustainability, the 2019 budget is targeting to improve the quality of expenditures by slowing the growth in current spending by 4.2 per cent to $229.3 billion whilst raising the allocation to capital expenditures by 20 per cent to $61.2 billion.

Importantly, the 2019 budget statement continues to point to certain belt tightening measures, in coordination with the

Spending Efficiency Rationalisation Centre (SERC), which aims to prioritise capital expenditures by focusing on the quality and efficiency of project spending, as well as efforts to rein in current expenditures, with a further reduction in energy subsidies (notable increases in prices of gasoline, diesel, fuel oil and electricity tariffs).

BULLISH FISCAL BREAKEVEN OIL PRICE ASSUMPTIONS As has historically been the case, the MoF did not reveal in the 2019 budget statement what oil prices the budget is centered on.

Our calculations suggest that the budget for 2019 assumes a bullish average Brent

price within a range of $78-80/b which we model based on (i) published data for oil revenues; (ii) certain assumptions for the effects of subsidies; (iii) assumptions for the effects of oil production in conjunction with this month’s OPEC+ 1.2 million b/d production cut agreement; and (iv) no amendments in the payout rate by Saudi Aramco to the MoF. The MoF’s estimated oil price assumption of $78-80/b for the Saudi budget in 2019 is considerable above what the current implied future curve is trading (around $60/b) and our own oil derived modelling oil price scenario for forecast purposes of between ($66-68/b).

Separately, but in similar vein, crucially, the MoF’s quarterly fiscal data for the first three quarters of 2018 has demonstrated a robust increase in public spending which has more than offset gains in non-oil receipts, pushing the Kingdom’s breakeven oil price higher.

We expect this trend to continue, as the Kingdom draws on firm oil receipts and ready access to funding to boost historically weak levels of economic activity.

DIVERSIFIED FINANCING STRATEGIES AVAILABLE FOR THE KINGDOM The 2019 budget statement projects a fiscal deficit of $34.9 billion in 2019 and within this forecasts that debt issuance will amount to $31.5 billion (historically this has broadly been one-third international debt issuance and twothirds domestic debt issuance) taking the total debt stock from $149.3 billion (19.4 per cent of GDP) in 2018 to $180.8 billion (22.7 per cent of GDP)—note that the MoF has its own self-imposed debt ceiling cap at 30 per cent of GDP as stated in the National Transformation Programme (NTP) 2020.

On the whole, we expect the authorities to finance the $34.9 billion in fiscal deficit next year through a combination of a (i) drawdown of SAMA and banking deposits, (ii) the issuance of domestic and external debt, (iii) the issuance of

SAUDI KEY FISCAL AND ECONOMIC INDICATORS

* Latest available data as of October 2018 Source: Bloomberg, CEIC Database, MoF SAMA, MUFG MENA Research

syndicated loans, as well as (iv) raising financing through privatisation in order to release value from existing state assets and to promote private sector activity.

OUR FORECASTS SIGNAL A WIDER FISCAL DEFICIT Whilst we view that MoF’s forecasts for next year as pragmatic with the large fiscal stimulus enhancing real GDP growth in 2019, we view that the oil revenue figures are based on optimistic assumptions for oil prices—which as noted above, we calculate assumes a bullish average Brent price within a range of $78-80/b. Based on this, and under our oil modelling scenario of $66-68/b for 2019, compared with the MoF’s fiscal deficit projection of $34.9 billion (4.3 per cent of GDP) next year, our estimates imply a fiscal deficit of $54.3 billion (6.8 per cent of GDP) in 2019.

REAL GDP GROWTH TO RISE BUT REMAIN BELOW THE LONG-RUN EQUILIBRIUM RATE We take comfort from the MoF’s fiscal stimulus strategy to spur real GDP growth to 2.6 per cent in 2019 from 2.3 per cent in 2018. However, even at these levels it does remain below Saudi’s long-run equilibrium real GDP growth

rate of 4.0-4.5 per cent as the economy continues to address structural challenges to meaningfully alter the model away from the cyclical nature of the reliance on oil receipts.

THIS TIME IS DIFFERENT We continue to view that this time is genuinely different for the Kingdom and there is a strong basis, under the new leadership of Crown Prince Mohammad bin Salman, that the country continues to move towards a period of meaningful structural change away from the cyclical reliance of hydrocarbons.

On the whole, diversification will be slow and will take years to deliver on the pledges set out in Vision 2030, and it is likely that some of the delivery of reform may fall short of ambitious targets set.

To an extent, the uneven progress underscores the complexity and scale of the reform programme which makes rapid gains difficult to deliver.

We remain optimistic, however that the reform agenda—should it bear fruit—to not only boost Saudi Arabia’s potential growth rate over the long-term, but also to structurally transform its economy away from hydrocarbons, with longstanding impediments to investment and productivity being reversed.

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NEWS HIGHLIGHTS

Saudi Arabia targets $32 billion of bond bales to plug deficit gap Saudi Arabia intends to issue around SAR 120 billion ($32 billion) of bonds next year to help finance its deficit, with plans to tap international markets in the first half, Finance Minister Mohammed Al-Jadaan said.

The Kingdom is considering international bonds in dollars and other currencies. The exact timing of the issuances will depend on market conditions. The minister did not break down the total into local and international debt, reported Bloomberg.

“We now have access to a wider network of investors in the US, which is the primary market, but also in Europe and Asia,” said Al-Jadaan. “So we are expanding and we are likely to go to the international markets early next year.”

The world’s largest crude exporter on Tuesday released its budget for 2019, with expectations for a deficit of SAR 131 billion, or 4.2 per cent of gross domestic product. Saudi Arabia issued international bonds for the first time in 2016 as part of Crown Prince Mohammed bin Salman’s economic overhaul to prepare the kingdom for life after oil.

The budget included a seven per cent boost to spending and extended extra benefit payments for government employees worth billions of dollars for another year. It projected revenues of SAR 975 billion next year, with SAR 662 billion coming from oil.

The revenue forecast surprised some analysts who said it was based on a relatively high price of oil at a time when crude prices are falling.

The projection defies “the laws of arithmetic,” said Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics, who estimates the government’s calculations may be based on a crude price as high as $80 a barrel. The global Brent benchmark traded below $57 on Wednesday.

Al-Jadaan said Saudi Arabia cannot disclose its oil price assumption, but said that he believes “the numbers that we have in the budget are reasonable.”

The minister said energy prices other than for quarterly-reviewed gasoline are unlikely to change in 2019. Increases in the last two years had a greater than expected impact on consumption, he said. Lowering energy subsidies is a key part of the Crown Prince’s reform plan.

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UAE President orders reshuffle of CBUAE’s board of directors The President of the UAE, HH Sheikh Khalifa bin Zayed bin Sultan Al Nahyan has issued a federal decree ordering the reshuffling of the central bank’s Board of Directors retaining the Governor, according to local newswire, WAM. Mubarak Rashed Khamis Al Mansoori, the Governor of the Central Bank of the UAE (CBUAE) has been reappointed for the next four years.

In pursuant to the federal decree, the Board of Directors of the CBUAE shall be reconstituted for a period of four years by the following Hareb Masoud Hamad Al Darmaki as the Chairman and will be deputised by Abdulrahman Saleh Al Saleh.

The other board members include Younis Haji Al Khoori, Khalid Mohammed Salem Balama as well as Khalid Ahmed Altayer and Ali Mohammed Bakheet Al Rumaithi.

Nasdaq Dubai to launch MSCI’s UAE Index futures in January

Mubadala, EGA and Dubal Holding to develop water and power plant UAE’s Emirates Global Aluminium (EGA), Mubadala Investment and Dubal Holding have announced plans to develop a power and water desalination plant at EGA’s smelter in Jebel Ali in Dubai, reported Reuters. The 25-year agreement is worth more than AED 1 billion ($272.5 million).

The trio will instal a combined cycle power facility at EGA’s Jebel Ali site capable of generating over 600 megawatts of electricity.

Nasdaq Dubai has announced that it will launch futures trading in MSCI’s index of UAE equities on 15 January 2019. The index currently comprises 11 constituent companies that are among the largest and most liquid in the UAE including DP World, Emaar Properties and First Abu Dhabi Bank.

In a statement, Nasdaq Dubai stated that the move will open a new route for investors to gain exposure to the performance of UAE companies.

Hamed Ali, Chief Executive of Nasdaq Dubai, said, “Launching contracts on MSCI’s highly respected UAE equity index is an important step in the rapid expansion of Nasdaq Dubai’s equity derivatives market.”

By trading the index futures investors can hedge their positions, make use of leverage to magnify the outcome of their trades, and make gains whether the index is rising or falling.

The futures on the UAE index will be launched under a licence agreement agreed in 2017.

SOVEREIGN RATINGS AS OF 1 DECEMBER 2018 Issuer

Foreign Currency Rating

Last CreditWatch/Outlook Update

1 Bahrain

B+/Stable/B

01-Dec-2017

2 Central Bank of Bahrain

B+/Stable/B

02-Dec-2017

3 Egypt

B/Stable/B

12-May-2018

4 Iraq

B-/Stable/B

03-Sep-2015

5 Jordan

B+/Stable/B

20-Oct-2017

6 Kuwait

AA/Stable/A-1+

20-Jul-2011

7 Lebanon

B-/Stable/B

02-Sep-2016

8 Morocco

BBB-/Negative/A-3

06-Oct-2018

9 Oman

BB/Stable/B

11-Oct-2017

10 Qatar

AA-/Stable/A-1+

08-Dec-2018

11 Saudi Arabia

A-/Stable/A-2

17-Feb-2016

12 Abu Dhabi

AA/Stable/A-1+

02-Jul-2007

13 Ras Al Khaimah

A/Stable/A-1

05-Dec-2018

14 Sharjah

BBB+/Stable/A-2

27-Jan-2017

Copyright © 2018 S&P Global Ratings. All rights reserved.

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NEWS HIGHLIGHTS

Aktif Bank and Afreximbank sign $1 billion trade agreement Turkish-based Aktif Bank has signed a $1 billion trade agreement with the Afreximbank, according to local newswire, Anadolu. Under the agreement, Turkish exporters will be provided with $1 billion in financing.

In a statement, the Turkish private bank stated that exporters will be provided with $1 billion in financing by 250 lenders from 50 countries.

Muzaffer Suat Utku, the Deputy Head of Financial Institutions unit of Aktif Bank, said the bank visited 15 countries in Africa and met with 162 lenders to mediate with 200 firms for $600 million foreign trade in a short period.

Dubai Investments Park plans Sukuk issuance Dubai Investments Park Development Co., which develops and manages property for the holding company, is also working with First Abu Dhabi Bank PJSC, Emirates NBD PJSC and Dubai Islamic Bank PJSC to place the five-year notes, said the people, asking not to be identified because the information is private. The sale could raise about $500 million, one of the people said.

“The DIP Sukuk 2014 is maturing in February 2019 and DIPDC is considering refinancing the Sukuk through various means including a potential Sukuk issuance,” Khalid Bin Kalban, chief executive officer and managing director of Dubai Investments, said in an emailed statement without giving further details.

Dubai Investments, whose businesses span realestate, manufacturing, financial services, healthcare and education, posted a 13 per cent decline in nine-month profit to AED 724 million ($197 million), reported Bloomberg.

Dubai Investments PJSC’s property unit hired HSBC Holdings Plc and Citigroup Inc. to sell Islamic bonds early next year as it seeks to refinance an existing Sukuk, according to people with knowledge of the plans.

Sales of Islamic bonds in the six-nation Gulf Cooperation Council, which include the two biggest Arab economies of Saudi Arabia and the United Arab Emirates, have declined 22 per cent this year to $17.4 billion, according to data compiled by Bloomberg. Still, Middle East Sukuk have returned 0.9 per cent so far this year, compared with a 0.1 per cent return for conventional bonds, according to JPMorgan Chase & Co. indexes.

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Saudi’s PIF and SoftBank funds 200 gigawatts solar plan in the Kingdom Saudi Arabia’s Public Investment Fund and private sector will fund renewable energy projects in the Kingdom.

Saudi Arabia’s Energy Minister, Khalid al-Falih, said that the Government is already started implementing an agreement with SoftBank Group’s Vision Fund to provide 200 gigawatts of solar power.

The Kingdom’s sovereign wealth fund agreed to invest $45 billion in the giant tech fund led by SoftBank and the duo is working with other parties on a number of largescale, multi-billion dollar projects relating to the solar industry, reported Reuters.

Dubai’s TVM Capital widens fund focus after Abraaj collapse

DGCX and FXCM to collaborate on new FX products The DGCX has signed a MoU with FXCM Group, agreeing to collaborate on launching new and innovative foreign exchange products on the DGCX. The collaboration with FXCM Group will contribute to the Dubai Gold and Commodities Exchange’s (DGCX) global offerings.

Les Male, the CEO of DGCX, said that collaborations like this one must appeal to local banks and trading houses too not only our international participants, FXCM is an international provider of online foreign exchange trading such as CFD trading, bitcoin and related services.

“This partnership will expand both companies’ footprint in this region and will allow its members to experience the many benefits of trading with DGCX,” added Mario Sanchez-Wandemberg, Managing Director, FXCM Group.

Dubai-based private equity firm TVM Capital Healthcare hopes to close a $250 million global fund next year after the collapse of Abraaj, one of the Middle East’s biggest buyout firms, hurt investor confidence in the region.

Abraaj was one of the most high-profile private equity companies in the Middle East until its dramatic collapse earlier this year.

Fund-raising, which started last December, has been delayed by about a year and the fund will target companies in developed markets seeking to grow in the Middle East North Africa, Turkey, South East Asia and India, as well as investing directly in emerging market firms, Chairman and Chief Executive Officer Helmut Schuehsler said in an interview with Bloomberg.

“We had good fundraising in the first quarter but then things pretty much came to a standstill and it was difficult to have conversations with investors,” he said. “Obviously the problem in Abraaj hasn’t done the industry at large any service, but things are beginning to get better now.”

Abraaj was one of the most high-profile private equity companies in the Middle East until its dramatic collapse earlier this year. The firm is now undergoing a court-supervised restructuring after it was found to have borrowed money from some of its own funds to meet operating expenses without investors’ consent, people with knowledge of the matter have said.

“Although Abraaj by definition was seen as a global emerging market player, its headquarters are in the Dubai International Financial Center so it is largely seen as a Dubai and UAE-based business and that has not been helpful,” Schuehsler said.

TVM Capital Healthcare has shortlisted 12 to 14 companies in countries including Canada, US, Germany, England, Switzerland and Austria to invest in, as well as fast-growing markets in Southeast Asia and MENAT. Some investors “feel better protected if we make a couple of investments in the US, Europe or Canada and mix that into the Middle East and South East Asia,” he said.

If fund-raising is successful in the first half, the firm plans to invest about $100 million in 2019 and a further $100 million in 2020

bankerme.net

17

THE MARKETS

THE GREAT US EXPERIMENT Richard Carter, Head of Fixed Research at Quilter Cheviot, shares his two cents on US policies and the risks they bring 18

T

he US looks like one of the more interesting areas to watch in the coming year. The country is currently in the middle of three great experiments, concerning the economy, trade, and monetary policy.

Economists will be talking about the results for decades, with Trump’s first experiment, the decision to boost US growth by reducing tax rates, having come at what traditional wisdom would say is exactly the wrong time.

For investors, tax cuts have created a positive backdrop, allowing companies to return more money to shareholders while strong earnings growth has led to fairer valuations for US businesses.

(PHOTO CREDIT: IN GREEN/SHUTTERSTOCK)

GLOBAL INVESTORS SHOULD ALSO THINK ABOUT WHAT THE FED’S STANCE MEANS FOR THE US DOLLAR. Richard Carter, Head of Fixed Research at Quilter Cheviot

US equities should be set up for a reasonable year in 2019, and we remain over weight the region, particularly relative to domestic UK companies.

TRADE TARIFFS COULD BITE IN 2019 Investors are having more difficulty judging the risks around Trump’s second experiment—the attempt to change the trading relationship between the US and China. So far, the administration has imposed tariffs of 10 per cent on about half of China’s annual exports to the United States. That rate was due to automatically rise to 25 per cent on 1 January 2019, but the administration announced a ninety-day delay following the G20 summit in Argentina.

Up until now, the economy has been able to absorb the rise in tariffs. But if the rate rises automatically to 25 per cent next year, industrial companies may have a harder time of it. If Trump expands the net further, it’ll be American consumers who start to feel the impact. That should be manageable so long as consumer incomes keep on rising, but it will be something to monitor carefully over the coming 12 months.

WILL HIGHER INTEREST RATES UNNERVE INVESTORS? The third and final experiment concerns the Federal Reserve, which is now a significant part of the way through unwinding its postcrisis support to the economy.

US investors can now get a return on cash above the rate of inflation, giving them an alternative to investing in the stock market. In theory, that reduces the amount of money flowing in, as fewer investors are forced into equities to get an above-inflation return.

The issue for next year is how many times the Fed raises rates. The market is expecting the central bank to raise interest rates just once, having grown more pessimistic on US growth in 2019. While the Fed has said it remains data dependent, it could surprise the market, particularly if US economic data holds up as it is currently doing. It’s possible that the Fed still chooses to raise interest rates to deliberately slow the economy.

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THE MARKETS

Jerome Powell, Chairman of the US Federal Reserve, and other policy makers continue to see a 'solid' outlook for the US economy, while noting that interest rates are 'just below' the so-called neutral range. (PHOTO CREDIT: BLOOMBERG)

This would be a more assertive policy stance, and one that could lead to higher market volatility. However, it’s only likely to happen if growth remains robust, and that is of course good for investors.

Importantly, the Fed is also reducing its holdings of government bonds, pushing yields up even as the federal government is trying to issue more bonds to finance Trump’s tax cuts. So, while US government bonds are known as a safe haven, they have not been as defensive as they might otherwise be this year.

HOW WILL ALL THIS AFFECT INVESTORS? When thinking about these three experiments, investors must distinguish between what the impact on the economy might be and that on individual asset classes.

20

A RETURN TO MORE NORMAL MONETARY POLIC Y MEANS WE’RE LIKELY TO SEE HIGHER VOLATILITY ACROSS ASSET CLASSES BUT INVESTORS SHOULD NOT BE UNNERVED

BY THAT—IT’S AN IMPORTANT PART OF RETURNING TO NORMAL MARKET CONDITIONS. Richard Carter, Head of Fixed Research at Quilter Cheviot

Global investors should also think about what the Fed’s stance means for the US dollar. You would expect higher US interest rates to support a stronger dollar, and this is largely what has happened throughout 2018. But markets are always forward looking, and if the Fed starts to step back from its tighter policy, we might not get as strong a dollar as we might have expected at the start of the year.

Clearly, none of these experiments can be looked at in isolation, making it important to keep an open mind about how you think the world will evolve over the coming year. A return to more normal monetary policy means we’re likely to see higher volatility across asset classes but investors should not be unnerved by that—it’s an important part of returning to normal market conditions and growth remains robust for now.

New ADSS Banker ME OCT2018 Ad 210x270mm.indd 1

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LEGAL PERSPECTIVE

TAXATION AND TECHNOLOGY Jane McCormick, Global Head of Tax & Legal at KPMG International, provides a brief insight into tax implementation in the region and the way forward

22

H

ow has the implementation of the VAT in UAE and KSA assisted in raising the profiles of these two countries in the global context?

The implementation of VAT came about partly in response to recommendations from the IMF and is really about modernising and diversifying the economies in the UAE and KSA regions.

The implementation of VAT elevates these countries on the global stage.

VAT is the fastest growing tax to roll out around the world, starting in a handful of countries in the 1950s and sweeping across the globe to the point where more than 190 countries collect VAT today. It’s about increasing transparency in that the information collected through this process gives governments more insights into organisations.

LEGAL PERSPECTIVE

Jane McCormick

Are there any international tax updates that this market should be aware of?

Tax is always evolving, so there are endless updates to be aware of, but what I would highlight for this region now is the increasing call for transparency around the world, particularly in two areas.

The first is transparency in relation to individuals, particularly through the common reporting standard. Although we’re not quite there yet in terms of these being globally-accepted, the standard is taking hold across many jurisdictions and I expect we will see even more of this, and eventually global acceptance of the common reporting standard and crossborder reporting of information.

The other side of that trend is corporate transparency as we see pressure in many regions around the world for multinational organisations to publish more of their tax information, and that will undoubtedly have an impact in this market as well.

What is the future of taxes and how do you see this impacting the region?

The world of tax technology is a big one and it’s growing. On the one hand we have advances in technologies on the

24

WITHIN ORGANISATIONS, WE INCREASINGLY SEE TECHNOLOGY BEING USED TO HELP STREAMLINE AND IMPROVE COMPLIANCE PROCESSES, AS WELL AS INNOVATIVE TECHNOLOGIES FOR DATA AND ANALYTICS, ROBOTIC PROCESS AUTOMATION AND EVEN ARTIFICIAL INTELLIGENCE USED IN CREATIVE WAYS WITHIN THE TAX FUNCTION. Jane McCormick, Global Head of Tax & Legal, KPMG International

tax authority side, which is streamlining reporting processes and making tax collection more efficient. I expect we will continue to see more of that around the world.

Within organisations, we increasingly see technology being used to help streamline and improve compliance processes, as well as innovative technologies for data and analytics, robotic process automation and even artificial intelligence used in creative ways within the tax function. Within KPMG, we’ve invested heavily in these areas.

In relation to VAT, for example, we can increasingly automate the processes around this, and apply data and analytics for realising more value from the data already on hand in the organisation. As advances like artificial intelligence and robotics are increasingly applied to tax, we are able to automate and augment a range of highly standardised tax compliance and reporting activities, freeing tax teams from routine compliance tasks to focus on value-adding activities, such as highlevel oversight, process improvement and strategic and reputational analysis activities, for example.

When we look to the future, as a result of the evolving role of the tax professional and the automation of tax collection and reporting, a broader skillset becomes increasingly important.

In-house tax professionals may do less routine tax compliance work, but they will face new demands to improve data collection processes across the finance organisation and to work with data and analytic tools to turn financial information into actionable insight.

Technology will be a big part of that, and so the future of tax is one in which we see a new type of tax professional with expansive knowledge of technology, tax and accounting, and an enthusiasm for contributing to their organisations’ data quality and decision making.

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COVER INTERVIEW

HARNESSING COLLABORATIVE OPPORTUNITIES In an exclusive interview, Faisal Al Haimus, Chairman & President of Trade Bank of Iraq, takes a deep dive into the crucial role that Trade Bank of Iraq plays in the country’s financial landscape, and unearths budding opportunities within the Iraqi economy

H

ow has the year been for Trade Bank of Iraq thus far?

Trade Bank of Iraq (TBI) is the most profitable and wellcapitalised bank in the Republic of Iraq. The bank grows from strength to strength each year, and this year has been no exception. In line with the Iraq’s national strategy to improve the power infrastructure, TBI issued letters of credit (LCs) to Siemens worth EUR 105 million. Another feather in the cap was a five-year funding arrangement with Euler Hermes, a German export credit agency, for EUR 100 million under which Commerzbank would fund LCs for German and European exporters.

On the retail banking front, TBI had a healthy 56 per cent growth in the number of accounts since 2017 and continues to

26

attract new customers through innovative products and state of the art services.

Additionally, to empower women in the country, a woman-only branch was also introduced this year to exclusively serve the female population.

TBI was also the first Bank to launch the Dananeer Fund, in association with DIFC-based Alpen Capital. The fund is a bespoke US dollar mutual fund for both local and regional investors. The bank also had a strong performance this year with an increase in bottom line figures while maintaining healthy liquidity ratios.

Throughout the year we continue to be recognised with various awards and accolades, including Best Trade Finance Bank and Banker of the Year awards by Banker Middle East.

THE YOUNG DEMOGRAPHICS IN THE MENA REGION IS SEEN AS AN OPPORTUNITY AS THESE COUNTRIES POSSESS ALL THE INGREDIENTS THEY NEED TO LEAPFROG INTO THE DIGITAL FUTURE. Faisal Al Haimus

Faisal Al Haimus

bankerme.net

27

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What are your views on the development of the financial sector in Iraq?

The restructuring of the banking system in Iraq has had positive results not only in terms of numbers, but also towards the general perception of the role and potential that the industry has on the country’s economic growth.

TBI is a leader in banking and trade finance, and has made tremendous strides in the last two years with its strategy deeply aligned to the vision of the Republic of Iraq and its nationals.

To rapidly move ahead towards a reform for the banking sector, the mindset of the population needs to change as the traditional way of holding money as physical cash/asset is a real challenge for the industry. In addition, there should be no restrictions on the government and state-owned agencies including their

Trade Bank of Iraq has

25

branches and is looking to expand significantly.

employees in dealing with private sector banks to create a competitive playing field.

Going forward, the financial system will need to continuously evolve and adapt to areas of organisational structure, IT infrastructure, risk management and banking supervision. Increasing the dialogue between the Iraqi authorities and the banking system, as well as introducing best practises in terms of human resources, audit framework, accounting and performance is vital for the sustainability and solidity of this sector.

TBI constantly engages in dialogue with decision-making authorities and adopts best practises to continuously create new benchmarks in products and services, essentially raising the bar for itself and its peers. TBI’s involvement as a co-arranger in the launch of the Republic of Iraq’s sovereign $1 billion bond issuance in 2017 and proposing hedging solution to the Ministry of Oil are amongst a number of forward-direction initiatives undertaken by the bank.

In your opinion, what are the biggest challenges for banks right now?

For banks around the world there are a number of challenges which include, demanding regulations, legacy systems, disruptive models and technologies, new competitors and an often-restive customer base with ever-higher expectations.

Trade Bank of Iraq plans to open a full branch in Saudi Arabia early next year to facilitate trade and corporate finance business in addition to correspondent banking services.

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COVER INTERVIEW

Therefore, banks need to be focused on accelerating their transformation into more strategically minded, digitally connected, and operationally agile institutions to be better equipped to maintain market leadership and continuity in a rapidly evolving ecosystem.

The banking industry, like many other industries, is poised to experience unprecedented change as it moves towards a digital industry. While most bankers have already begun to embrace a digital landscape, the future of banking will include a number of new ideas and methods for accomplishing tasks on a grander scale; and perhaps most importantly, changing customer dynamics will be at the forefront of this transformation.

Today’s average banking consumer expects more, demands faster service and expects better results. Banks that are unable to compete with or meet these demands to improving customer retention will likely struggle to remain viable in the long term.

Fintech companies use software to provide financial services and are gaining popularity and disrupting the way traditional banking is done. This creates a big challenge for traditional banks because they require swift adjustment to these changes—not just in technology— but also in operations, culture, and other facets of the industry.

Banks can learn from fintech firms, which have set a new benchmark in exceeding customer expectations in financial services.

However, even though financial institutions are likely to maintain their dominance due to their scale of operations and regulatory compliance, they still need to be aware of the need to rapidly change.

Meanwhile, regulations continue to be more stringent and banks are forced to re-think traditional strategies and instead spend a large part of their discretionary budget on being compliant and building systems and processes to keep up. Basel III regulations which are being made mandatory, are restrictive and controlling leading to requirements of higher capital, extra provisioning and stressing liquidity.

At the end of the day, despite the headlines about banking profitability, the fast-changing landscape in the financial environment does not allow banks and financial institutions to achieve adequate return on investment or return on equity that shareholders demand.

What are your projections on the MENA market for 2019?

The outlook for growth in MENA is expected to improve slightly to an average of 2.8 per cent in 2019 and 2020 propelled by steady growth in private consumption, infrastructure and investment programmes. After a 1.6 per cent growth in 2017, this year has fared much better as oil producers benefit from firmer oil prices and implementation of revenue-enhancing measures, such as VAT and energy subsidy reforms.

Risks to the outlook are diverse; key downside risks include renewed volatility in oil prices, an intensification of geopolitical tensions, and a slowerthan-expected pace of reforms. However, fav able spillovers from stronger than expected activity in key trading partners and recovery in war-torn areas are positive factors that cannot be ruled out.

AMONGST THE OIL PRODUCING COUNTRIES IN THE REGION, IRAQ STANDS OUT AS HAVING TREMENDOUS POTENTIAL FOR GROWTH GIVEN ITS MEGA OIL RESERVES. IN COMBINATION WITH ITS YOUNG POPULATION, THE COUNTRY HAS THE RIGHT DYNAMICS OF PROPELLING ITSELF INTO A MAJOR ECONOMIC POWERHOUSE. Faisal Al Haimus

30

Al Haimus positively believes in the burgeoning potential of Iraq.

Domestic reforms to increase revenues and contain public spending, such as in Saudi Arabia, will also contribute to overall growth in the region. Meanwhile oil importers are expected to benefit from reforms to manage public expenditures, rising trade internationally and financial inflows from MENA oil exporters.

Egypt’s growth is expected to reach 5.8 per cent in 2020 driven by a reform programme that has included the liberalisation of the exchange rate,

OTHER OPPORTUNITIES OF GROWTH ARE IN AREAS OF URBAN INVESTMENTS, IMPROVED TRANSPORT CONNECTIVITY, SHIFT TOWARDS PREVENTIVE HEALTHCARE AND RISE OF NEW COMPETITION. Faisal Al Haimus

rationalised energy subsidies, and increased social protection for the poor. Overall, many countries in the MENA region are pursuing broad-based reforms that should eventually improve productivity, though growth continues to be challenged by geopolitical tensions and fiscal adjustment.

Amongst the oil producing countries in the region, Iraq stands out as having tremendous potential for growth given its mega oil reserves.

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COVER INTERVIEW

In combination with its young population, the country has the right dynamics of propelling itself into a major economic powerhouse.

This is clearly a great opportunity for investments by sovereigns, institutions and the private sector, both regional and global.

The young demographics in the MENA region is seen as an opportunity as these countries possess all the ingredients they need to leapfrog into the digital future. To accelerate growth and create jobs for millions of unemployed youth, MENA countries need to pursue and develop a digital economy that leverages its young and educated workforce rather than the traditional path of reliance on manufacturing and exports.

Other opportunities of growth are in areas of urban investments, improved transport connectivity, shift towards preventive healthcare and rise of new competition.

Looking to the future, what would you say is the biggest threat to financial institutions?

Cybersecurity continues to be a primary risk focus for financial institutions. With more technology upgrades and workflow changes to implement and monitor each year, banks need to be extra vigilant to avoid creating new entry points for cybercrimes.

With all the data breaches and cyberattacks that the financial sector has suffered recently, it is no surprise that cybersecurity is now seen as the top concern.

With banks’ increasing reliance on third parties, downstream risks are becoming a larger issue. Third-party risks do not stop with the primary partner and it is indeed difficult to follow the trail far enough to ensure that proper security measures are in place through the entire chain.

GOING FORWARD, THE FINANCIAL SYSTEM WILL NEED TO CONTINUOUSLY EVOLVE AND SWIFTLY ADAPT TO AREAS OF ORGANISATIONAL STRUCTURE, IT INFRASTRUCTURE, RISK MANAGEMENT AND BANKING SUPERVISION. Faisal Al Haimus

How has TBI grown in the Middle East and what are the company’s plans moving forward?

The Trade Bank of Iraq is growing organically within the country and is looking to establish itself within the Middle East.

Domestically, TBI has 25 branches and is looking to expand significantly.

In the region, TBI has already launched a representative office in UAE at the Abu Dhabi Global Markets and is presently upgrading its licence to conduct asset management business.

TBI plans to open a full branch in Saudi Arabia early next year to facilitate trade and corporate finance business in addition to correspondent banking services. Going forward, there are other expansion plans in the region either through acquisitions or banking licences.

How do you envision banking and finance in the next five years?

In the coming years we expect a lot more mergers in the local and regional markets as regulatory capital becomes increasingly scarce. Small to mediumsized banks have little option but to consolidate in order to be able to conduct business given the stringent regulations and accounting standards that needs to be complied with.

IN THE COMING YEARS WE EXPECT A LOT MORE MERGERS IN THE LOCAL AND REGIONAL MARKETS AS REGULATORY CAPITAL BECOMES INCREASINGLY SCARCE. Faisal Al Haimus

32

On the trade finance side, as importers and exporters become more sophisticated in their demands, their trade business will flow to banks that can offer innovative and betterintegrated trade finance solutions and clearly those banks able to deliver such results, while containing costs, will protect and grow their revenue stream. Trade finance banks will need to have the capability to work within multiple time zones and currencies and have on-the-ground experience of their markets and counterparts to be able to offer seamless transactions through the use of the latest technologies, including blockchain.

More importantly, banks will need to keep abreast of the developments in the fintech industry which is evolving with the latest technologies encroaching upon established markets leading with customer friendly solutions developed from the ground up and unencumbered by legacy systems. Meanwhile, customers have had their expectations set by other industries—they are now demanding better services, seamless experiences regardless of channel, and more value for their money.

It is therefore imperative for banks to move away from their traditional mode and swiftly embrace technology that cater to new channels such as mobile technology and digital-only banks and the usage of biometric technologies, blockchain and artificial intelligence to cater to the behavioural pattern of customer’s requirement of product and services.

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REGIONAL ROUNDUP

WHAT ABOUT THE WORKERS? Rising oil prices could be a mixed blessing for Gulf countries. While it will relieve pressure on public purses, it could dampen recent enthusiasm for economic reform 34

(PHOTO CREDIT: TANARCH/SHUTTERSTOCK)

O

il still pulls the strings in the GCC, hoisting economies up when prices rise and dropping them down when they fall. Since 2014, GCC countries have become more serious about cutting their dependence on oil, however a rise in prices would be a test of that commitment. “Gulf countries have implemented some not able reforms in recent years, including the rolling back of costly and distortionar y subsidies,

the implementation of a VAT, and business environment and labour market reforms,” said Issam Abousleiman, World Bank Country Director for the GCC. “But it is critical that GCC countries stay the course, not least because any loss in momentum could hinder their ability to draw in long-term investors, that are crucial for diversification efforts.”

To the casual observer, higher oil prices translates as good news. In 2017, economic growth contracted for the first time in a decade—in 2018 higher oil prices have powered positive growth.

Economic growth for the GCC region is expected to reach two per cent in 2018, up from negative 0.3 per cent in 2017, according to World Bank forecasts. Saudi Arabia emerged from recession in the first quarter of 2018, and Kuwait in the second quarter. The UAE, Oman and Bahrain posted positive economic growth rates in the first half of the year.

With fiscal and external imbalances narrowing, the region has largely shrugged off the financial volatility that blighted other emerging market economies in mid-2018. The World Bank expects economic growth for the region

to strengthen gradually in the medium term to 2.7 per cent by 2020 as high energy prices and rising government spending lift output and sentiment.

External and fiscal imbalances are also expected to narrow, with Saudi Arabia and the UAE achieving near fiscal balance by 2020 and, along with Kuwait, returning to current account surpluses during 201820, according to World Bank forecasts.

This is largely thanks to the neartripling of oil prices from their trough in January 2016, following three years of persistent weakness. Additional support has come from rising oil production, and a slower pace of fiscal consolidation as government revenues have increased.

Oil is unlikely to slip in 2019. The overall decline in production over the summer helped drive the price up above $80 in September. Even though the price is softening again, the year as a whole is likely to average higher than expected prices, according to one PwC study. The World Bank recently revised its oil price forecasts from $60 a barrel for 2019-20 to $72 a barrel for the same period.

“We’ve been witnessing significant developments in the Middle East over the past few months,” said Richard Boxshall, Senior Economist at PwC Middle East.

Economic growth for the GCC is expected to reach

2% -0.3% in 2018 up from

in 2017

IN 2017, ECONOMIC GROWTH CONTRACTED FOR THE FIRST TIME IN A DECADE – IN 2018 HIGHER OIL PRICES HAVE POWERED POSITIVE GROWTH.

“One highlight for Saudi, as well as other oil exporting countries, is the impact of higher than expected oil prices on public finances, that is expected to boost government expenditure and economic growth.”

JOBS FOR THE BOYS The biggest risk to GCC economies is that higher oil prices could slow the pace of reforms. GCC countries have so far avoided trimming their public wage bills and implementing employment reforms which would foster fiscal sustainability and improve service delivery; however, this should now be their priority.

The World Bank recently warned that business environment and labour market reforms are needed to increase private investment, to foster job creation, and to ensure that Gulf nationals have the skills required by the private sector.

Gulf countries have long kept their citizens happy with a cast-iron social contract. Public sector jobs have been guaranteed for vast swathes of the population—over 90 per cent in some cases, according to PwC. However, this is not sustainable.

The shock of the oil price crash in 2014 spurred action in some countries, including wide-ranging reviews of salaries and benefits. However, there is a risk that the rebound in oil prices will slow the momentum behind structural reforms, which could create problems down the line, a PwC study recently warned.

Aside from the burden on the public sector, a failure to reform salaries and employment will continue to distort labour markets and make it hard for companies to achieve ambitious nationalisation targets.

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REGIONAL ROUNDUP

The Gulf states are particularly young, with between 30-39 per cent of national populations under the age of 15 and 17-28 per cent older than 40, according to Moody’s. Competition for jobs has intensified as new entrants have swelled the market and only modest numbers of workers retire. As cultural norms gradually shift, more women entering the workforce will exacerbate the issue.

A recent IMF paper noted that public spending on salaries in the region, which is high relative to peers, does not correlate with good services—in part because performance is not incentivised—and attractive public sector jobs distort the private sector labour market.

High rates of population growth amongst Gulf nationals also mean that the existing system of public employment is steadily becoming less fiscally viable for all, but the very wealthiest states, PwC warned. It costs nearly a fifth of GDP in some states, double the OECD average.

Gulf countries are implementing a variety of reforms to tame their wage bills.

For example, the Kuwaiti Government initiated a civil service wage review in early 2016. The IMF estimated that implementation of the reforms will increase spending by about $1 billion in the first year, as grades and benefits are unified, but thereafter it could make savings by holding annual increases below inflation, with potential savings equal to 2.3 per cent of GDP by 2022.

However, PwC warned that these optimistic forecasts could be held back

by Kuwait’s culture of industrial action, which is more common than in other Gulf countries. In 2016, oil workers went on a successful strike over concerns that the salary review would end their guaranteed bonuses and annual increments.

Moody’s warns that nationalisation strategies can have both credit positive and negative implications. Large increases in public sector wage bills for the government to accommodate an increasing number of nationals in

36

the administration would reduce fiscal flexibility, and in some cases weaken fiscal strength.

“Bans and quotas could raise labour shortages while increases in labour costs as the private sector at least partially closes the wage gaps with the public sector in order to employ nationals would hamper competitiveness,” the rating agency said.

According to a Moody’s report, countries’ labour market nationalisation policies are also likely to raise labour costs and hamper diversification.

“The size of the challenge is greatest where nationals comprise a relatively large share of their total populations, unemployment is relatively high, and there is less capacity to absorb new entrants into the public sector,” said Thaddeus Best, a Moody’s Analyst and co-author of the report. “Amongst the GCC, these conditions apply to Saudi Arabia and Oman in particular.”

LOCAL HEROES Infrastructure projects present a golden opportunity for GCC countries to build not just cities fit for the future, but local jobs for local people. Saudi Arabia is likely to spend $1.1 trillion from 2019-38, while the UAE is expected to invest $350 billion over a similar time frame on infrastructure projects, according to a Strategy& Middle East study.

INFRASTRUCTURE PROJECTS PRESENT A GOLDEN OPPORTUNITY FOR GCC COUNTRIES TO BUILD NOT JUST CITIES FIT FOR THE FUTURE, BUT LOCAL JOBS FOR LOCAL PEOPLE.

The World Bank expects economic growth for the region to strengthen to

2.7% 2020 by

as high energy prices and rising government spending lift output and sentiment

To capitalise on this, governments are crafting local-content policies to ensure that much of the spending goes to local providers. These large development schemes can allow local companies not just to substitute imports, but also to grow non-oil exports by enhancing their capabilities.

Dr. Raed Kombargi, Partner, Strategy& Middle East said, “The trend toward local content requirements reflects an increasing recognition that the trillions of dollars that governments spend on mining, oil and gas, power, water, and transportation infrastructure could potentially fuel economic growth, create jobs, and support broader national strategies. However, many local-content programmes fall short of their objectives because policies are affected by the conceptual biases of policymakers.

“By understanding and addressing these biases directly, developing countries can ensure that they retain the bulk of the economic gains from the coming wave of infrastructure spending.”

GCC governments need to think logically about how they balance the need to localise manufacturing while pursuing sound economic policies, the study warned.

There are many capabilities that the region simply doesn’t have because of its small size and will need to import to build infrastructure.

Additionally, policymakers need to stress the importance of economic openness and free trade given the region’s need to export. However, many governments have a sense of urgency that, although commendable, can lead to short-sighted and counterproductive policies.

Governments should also note that spending better rather than spending more will likely be the key to unlocking productivity gains from infrastructure spending, the World Bank said.

WELL OF HOPE However much of a threat black gold poses to economic reforms, rising prices can still be harnessed for the greater good. One sector thriving on higher oil prices is the banking sector. Moody’s recently affirmed GCC banking systems as stable, reflecting their improving o p e r a t i n g c o n d i t i o n s , we a ke n i n g but still solid loan performance and strong capital.

“Current oil prices will support increased government spending, and stimulus packages such as UAE’s Expo 2020, the Saudi National Transformation Plan and Qatar FIFA 2022, will underpin banks’ stable financial performance,” said Nitish Bhojnagarwala, a Moody’s Vice President Senior Credit Officer.

In Moody’s view, a return to rising oil production after production cuts in 20172018 will drive real GDP growth to an

The World Bank has revised its oil price to

$72 2019-20 a barrel for

WHILE LOWER OIL PRICES WERE ONCE THE GREATEST THREAT TO GCC ECONOMIES, IT SEEMS THAT, IN AN IRONIC TURN OF EVENTS, HIGHER OIL PRICES NOW REPRESENT THE GREATER DANGER.

average of around 3.3 per cent, from one per cent in 2017, easing fiscal pressures as well as keep government spending plans on track.

Banks in Kuwait, UAE and Saudi Arabia will remain resilient, while fiscal pressures will weigh on banks in Oman and Bahrain, where oil prices will remain below the fiscal breakeven level, the rating agency said. Fitch noted that profitability remains strong in all countries and most banks benefit from cheap funding.

Moody’s expects credit growth to recover as government spending underpins economic activity and spurs private-sector growth, Moody’s. Lending growth in 2019 will range from four per cent in Saudi Arabia to between six per cent and seven per cent in Kuwait, Oman and Bahrain. Lending to construction and real-estate sectors will increase.

Qat ar and Oman are the only countries with an average loans/ customer deposits ratio above 100 per cent due to small domestic deposit bases, according to Fitch. Kuwait, Saudi and Bahrain have a ratio below 90 per cent. Ratios have fallen with low loan growth and increased liquidity owing to higher oil prices.

Problems loans will continue to rise due to the lagging effect of the economic slowdown in previous years. Moody’s

expects nonperforming loans to stand at a still good three per cent of total loans at the end of 2019.

However, Fitch warned that asset quality deteriorated in 2017, with rising impaired loans ratios in four of the six GCC countries. This would have been even higher without large restructuring and write-offs. The Saudi banks’ ratio remains well below the GCC average, and that of UAE banks is well above.

The average reser ve coverage of impaired loans is comfort able in all countries.

GCC banks will continue to exhibit large loss absorption buffers against sudden asset quality deterioration, Moody’s said. Capital will stay broadly stable, benefitting from modest credit growth and stable bottom-line profitability.

Profitability pressures are expected to ease, with net income to tangible assets remaining strong at around 1.5 per cent to 2.1 per cent. Banks have adapted their cost base to the slowing economic environment, maintaining strong efficiency. Consolidation will ease competition and also alleviate some pressure on profitability, explained the rating agency.

Governments’ willingness to support GCC banks remains high and their capacity to support is strong, with the exception of smaller GCC economies, such as Oman and Bahrain. Fitch noted that the region’s flagship banks are typically amongst the best performers, indicating the benefits of special links with the governments to get cheap funding and lower-risk large deals.

While lower oil prices were once the greatest threat to GCC economies, it seems that, in an ironic turn of events, higher oil prices now represent the greater danger. While higher prices may support the regional economy in the short term, if they are allowed to blot out government-led reforms, oil will come to represent a black spot on the region’s future.

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ISLAMIC FINANCE

BETTER OPERATING CONDITIONS Higher oil prices in 2019 are set to drive improved GDPs in the region, financing growth and stability for Islamic banks in the region

T

he Islamic finance sector continues to demonstrate positive growth. Fitch Ratings’ 2019 Outlook: Gulf Cooperation Council Islamic Banks report has forecasted a stable outlook for GCC Islamic banks, reflecting stronger economic growth due to higher oil prices, which is expected to significantly contribute to credit fundamentals.

Islamic lenders are slated for weaker credit growth averaging at five per cent, which remains above financing growth levels for conventional banks. Islamic banks’ credit growth is set to increase in most countries that offer Shari’ahcompliant financial products.

Redmond Ramsdale, Head of GCC Bank Ratings at Fitch Ratings, said, “Fitch forecasts a more stable operating environment for GCC Islamic banks in 2019 as higher oil prices support growth and maintain strong liquidity in the region.”

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There is an expectation that the asset-quality metrics of Islamic banks will deteriorate slightly, however the liquidity of Islamic banks is believed to remain strong. The ratings agency expects capital levels to remain mostly unchanged in 2019.

GCC Islamic banks have achieved sustainable improvements in their credit risk profiles in the previous years and these improvements are supported by the banks’ better underwriting standards and risk management practises, a more diversified loan book, as well as higher profitability rooted in their operating environments. Earnings are set to remain high in the upcoming year, benefiting from increasing interest rates in most countries.

UAE’s Abu Dhabi Islamic Bank (ADIB) raised AED 1 billion through a rights issue aimed at supporting the bank’s growth strategy in November 2018.

September saw the announcement

(PHOTO CREDIT: BLOOMBERG)

of a potential merger between Abu Dhabi banks, Abu Dhabi Commercial Bank (ADCB), Al Hilal Bank and Union National Bank (UNB) to form a new Islamic lender after the consolidation of ADCB and UNB’s privately-held Al Hilal Bank.

FITCH FORECASTS A MORE STABLE OPERATING ENVIRONMENT FOR GCC ISLAMIC BANKS IN 2019 AS HIGHER OIL PRICES SUPPORT GROWTH AND MAINTAIN STRONG LIQUIDITY IN THE REGION. Redmond Ramsdale Head of GCC Bank Ratings, Fitch Ratings

REGULATION Regulation amongst Islamic lenders in the GCC differ from one country to the other. However, there is a push towards standardisation of Shari’ah-compliant products. Standardised supervision of Islamic banks should lead to greater market confidence but pose challenges in terms of implementation and adoption, particularly in realigning existing products, said Ramsdale.

The joining of forces between the AAOIFI and the IFSB, which have traditionally worked separately on their respective mandates in the past will create an enabling environment for the growth of Islamic lenders in the GCC. The AAOIFI focuses on accounting and auditing standards on one hand, while the IFSB develops prudential rules in areas including capital adequacy and disclosure requirements.

The stable outlook on all rated Islamic banks in the GCC predominantly reflects stable state ability to provide support to domestic Islamic banks in the region. The UAE set an example in the region towards much-needed standardisation in the Islamic finance space by the establishment of the Higher Shari’ah Authority. Overseen by the central bank, the Higher Shari’ah Authority is a national regulator entrusted with overseeing the Islamic financial sector, approve financial products and set rules and principles for banking transactions in accordance with Islamic jurisprudence.

The national regulator will approve new products that have already received approval from individual Shari’ah boards.

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The Higher Shari’ah Authority has since ordered the Shari’ah boards of financial institutions in the UAE to apply the Shari’ah Standards issued by AAOIFI as of September 2018. According to Fitch, all issuer default ratings (IDRs) assigned to Islamic banks in the GCC are investment grade, 89 per cent of which are driven by potential sovereign support and 11 per cent by the banks’ standalone credit worthiness.

SOVEREIGN DRIVEN ISSUANCE The Saudi Arabian Monetary Authority’s (SAMA) debt management office completed its first Sukuk issuance under the primary-dealer programme on 26 July 2017. In the new primary-dealer system, the Saudi debt management office appointed five local banks to act as primary dealers for local government securities, namely National Commercial Bank, Samba Financial Group as well as Saudi British Bank, Bank Al-Jazira and Alinma Bank.

THE AVAILABILITY OF SHARI’AH-COMPLIANT LIQUID INSTRUMENTS IS SAID TO REMAIN A CHALLENGE IN 2019, HOWEVER, THE SITUATION IS EXPECTED TO IMPROVE OVER TIME. Jonathan Parrod, an Associate Analyst, Moody’s

FISCAL BREAK-EVEN OIL PRICES Express in Brent Terms

a Fitch Ratings forecast b Source: IMF - REO

Source: Fitch Ratings

GDP GROWTH PER COUNTRY

a Fitch Ratings forecast

Source: Fitch Ratings

Jonathan Parrod, an Associate Analyst at Moody’s, said that the issuance, which totalled at SAR 3.5 billion is positive for the development of Islamic debt capital markets in Saudi Arabia, because it broadens the investor base for government Sukuk securities in the primary market and supports liquidity in the secondary market. The availability of Shari’ah-compliant liquid instruments is said to remain a challenge in 2019, however, the situation is expected to improve over time. Fitch noted that SAMA’s Saudi riyal-denominated Sukuk programme in 2017 was a positive development for Islamic banks.

THE OUTLOOK Higher oil prices in 2019 are set to drive improved GDPs in the region as well as financing growth. According to Citigroup, oil prices are set to increase for the rest of the year as demand from refineries rise

in November and December. The outlook comes as OPEC and its allies send mixed supply signals to the market, with Russia suggesting it could push output to a record and an OPEC committee signalling that the group will cap supply again in 2019. In November, oil reached an average price of $80 a barrel, with spikes up to $90; it could have touched the $100 mark if further disruptions worsen a supply crunch amid rising consumption, suggested Citigroup.

Additionally, benchmark Brent crude topped at $85 on concerns that US sanctions on Iran would create a shortage but the prices have since dropped back to $65 a barrel. The positive GDP growth forecast across GCC has been projected at three per cent in 2019 due to oil output increases, and higher oil prices are likely to result in moderate government spending, which is a major source of growth in the GCC.

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TRADE FINANCE

DIGITALISATION OF TRADE FINANCE UNDERWAY, DESPITE GEOPOLITICAL CONCERNS Olivier Paul, Head of Policy at the International Chamber of Commerce (ICC) Banking Commission, expands on the opportunities for Middle Eastern banks to leverage the growing digitalisation of the trade finance sector

T

rade finance is being transformed, not least because banks are finally making headway with respect to one of the sector’s most longstanding objectives—the removal of paper from trade finance processes.

Results from the ICC’s 10th Global Survey on Trade Finance back this up— revealing that banks in the Middle East are also embracing the move towards digitalisation. The survey, which gathered insights from over 250 respondents across 91 countries, highlighted the particular optimism of banks in the Middle East with respect to tech, despite

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reservations regarding both geopolitical applicability and the technological innovations underway.

Encouragingly, some 47 per cent of banks in the Middle East would already class their implementation of technology solutions as “mature”. What’s more, 44 per cent of respondents in the Middle East indicated the development of digital trade and online trade platforms as a strategic priority for the next one to three years.

With almost 80 per cent of all global trade now taking place on open account, only six per cent of banks in the Middle

East believe traditional trade finance (TTF) processes—such as the use of documentary letters of credit—will remain a priority in the next three to five years. Instead, focus is shifting towards the use of supply chain finance (SCF) processes, which are far more open to the adoption of digital provision (perhaps via online platforms).

Yet familiarity with traditional trade finance methods has resulted in slow progress. Surveyed respondents in the region claimed that over 80 per cent of new clients onboarded in 2017 still preferred to use TTF over SCF. What’s more, only five

per cent of existing clients exhibited a shift from TTF to SCF. Nonetheless, over 60 per cent of respondents in the region anticipate revenue growth from SCF in the next three years.

Certainly, banks in the Middle East remain optimistic about the integration of technology solutions into their offerings, with 50 per cent of respondents regarding emerging technologies—such as distributed ledgers—as an important focus for the next three to five years.

Meanwhile, 59 per cent of respondents believe in the potential for digital channels to impact sales volumes, while over 70 per cent of banks in the Middle East are planning the implementation of technology solutions into their trade finance offerings.

GEOPOLITICAL SETBACKS As for concerns, geopolitical tensions certainly trigger bank’s fears with respect to their expected impact on stability and growth in the Middle East. The US withdrawal from the Iran nuclear deal earlier this year caused significant disquiet, for example. With fears of oilprice volatility, due to the renewal of sanctions, banks in the Middle East have become particularly concerned about their ability to provide adequate trade finance

INCREASED CHOICE IN TRADE FINANCE PROVIDERS WILL HELP IMPROVE CAPACITY AND PROVISION TO THE MARKET, MOST AGREED, WITH SMALL AND MEDIUM-SIZED COMPANIES (SMES) TO BE THE MOST LIKELY BENEFACTORS. Olivier Paul

Olivier Paul

in support of cross-border trade. Results from the survey reveal that 40 per cent of respondents in the region were already concerned that such volatility could become a major obstacle to growth in the sector, even before the withdrawal.

Another concern is the impact of protectionist and trade-restrictive measures. Indeed, 67 per cent of banks in the region indicated concern over the negative impact of such measures, while 20 per cent of them stated they were “extremely concerned” about the potential repercussions of protectionist policies on growth for the sector.

OPPORTUNITIES AHEAD That said, banks are persevering with the shift towards paperless trade.

Digitalisation of the trade finance sector is forecast to help accelerate growth in the sector, increase efficiency, decrease costs and improve market capacity. Yet the shift is unearthing its own challenges, to which banks are having to overcome and adapt to.

One example is the fact the emergence of fintechs and non-banks within the industry is conflicting banks. While 82 per cent of participants in the Middle East said they were concerned about competition from these new entrants, 43 per cent of respondents also agreed that forging alliances with such companies should be a priority in the next three to five years.

Increased choice in trade finance providers will help improve capacity and provision to the market, most agreed, with small and medium-sized companies (SMEs) to be the most likely benefactors.

Certainly, as digital trade finance revolutionises processes, SMEs will no longer be reliant on banks, which should help improve access to trade finance for smaller borrowers and help reduce the trade finance gap.

Indeed, requests from companies in the Middle East have been especially prone to rejection, with around 18 per cent of all requests being denied. This is the second highest rejection rate surveyed, behind Asia-Pacific’s rate of 21 per cent. However, the use of new technologies, such as distributed ledgers, and the move towards open account trade, is forecast to help to increase approval rates by decreasing risk and increasing transparency.

The development of proprietary trade finance platforms—a popular choice for banks diversifying into SCF—has also faced challenges. A lack of common standards and regulations have led to interoperability issues between online systems, with over 30 per cent of respondents worldwide complaining about such difficulties. Yet their deployment will help reduce the use of paper in trade finance processes, as well as lessen the burden of bureaucracy and decrease the overall cost of transactions.

Despite the challenges, therefore, Middle Eastern banks are embracing the move towards paperless trade. Yet it remains to be seen whether their clients will adapt to the transformation with similar gusto.

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INVESTMENTS

UAE MILLENNIALS PREFER SUSTAINABLE INVESTMENTS Sustainable investing enables millennials in the UAE to select investment portfolios based on values and personal priorities.

T

he concept of sust ainable investing—an investment approach of ‘doing well by doing good’—is gaining ground across the globe.

Investors around the world are increasingly convinced that robust returns and a positive impact are not mutually exclusive.

DEMOGRAPHICS A Schroders Global Investor Study 2018 report revealed that 86 per cent of investors across the UAE say sustainable investing has become more important to them over the past five years. However, a lack of information on sustainable investments limits the feasibility of it in the UAE. Of the staggering 86 per cent saying they are currently engaged in sustainable investments, only 16 per cent can provide an accurate definition, a number which demonstrates a limited understanding of what it sustainable investing entails as well as the returns and impact it can achieve.

The UAE’s demographic—which largely comprises of millennials—has a majority of investors who have increased their exposures to sustainable investments over the last five years.

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Schroders stated that 71 per cent of 18-24 year-olds and 75 per cent of 25-34 year-olds have increased diversification of their sustainable investments. The group of investors who considered themselves to have expert levels of knowledge revealed that they invest 54 per cent of their investment portfolio sustainably to enhance diversification.

Source: Schroeders

THE MILLENNIAL CUP OF TEA The demand for sustainable investments is being driven by millennials globally, particularly and in the UAE. This demography prefers investments that are aligned with personal values, and as a result, fund managers are increasingly allocating resources to develop products and capture this emerging client segment.

Source: Schroeders

According to an EY report, The Experience Factor: The New Growth Engine in Wealth Management, when assets change generations, firms typically lose 70 per cent to 80 per cent of those assets. The trend can also be confirmed in the UAE as most asset managers are now encouraging socially responsible investment across many fields including digital disruption.

Additionally, thematic investments encourage sustainability and they are seen to be increasingly popular with the millennial. According to the Cambridge Institute of Sustainable Leadership,

Source: Schroeders

thematic investment amongst millennials has been found to be the investment strategy of selecting companies that can be classified as falling under a particular investment theme. This type of investment strategy covers areas like water distribution, agriculture as well as low carbon energy, pollution-control technology, healthcare and information technology. As a form of socially responsible investment (SRI), thematic funds tend to cover a variety of sectors and pick companies within these sectors that are relevant to the theme.

Thus, a millennial investor interested in healthcare, invests in pharmaceutical companies, hospital companies, health insurance companies, nursing homes, surgical equipment manufacturers and hi-tech and infotech companies that support any of the former.

In fact, UAE investors are more interested in healthcare, recording a 73 per cent majority in comparison to the global average of 66 per cent, according to findings from Schroders. Thematic funds focus on companies that are active in particular areas. Majority UAE millennials are said to hold great appeal for expertise, particularly those who feel they have a higher level of investment knowledge in their fields of interest.

Millennials who incorporate environmental, social and governance (ESG) factors into investment decisions choose to invest in companies, organisations and funds with the purpose of generating measurable social and environmental impact alongside a financial return.

NURTURING A CONDUCIVE ENVIRONMENT According to EY, with an estimated addition of two billion people by 2050, global demand for food, water and energy will drive the need for innovative improvements in infrastructure to

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INVESTMENTS

address the resource demand associated with a growing population. The UAE government has made significant strides in creating an investment ecosystem that attracts environmentally sustainable investment, clean water and sanitation, innovations in energy generation and distribution, as well as improved health care. Additionally, efficient transportation systems also provide an abundance o f o p p o r tu n i t i e s fo r s u s t a i n a b l e investment growth.

These investment sectors continue to display a track-record of market outperformance, investors of all types including millennials, in particular, are demanding their wealth and asset managers to provide products that not only outperform but also align with their values.

In contrast to previous generations, millennials consistently select investments that align with their values. Globally, the opportunity to maintain strong financial performance coupled with values-based investing is extremely attractive to many types of investors, especially millennials.

As Millennials begin to engage with wealth and asset managers, financial analysts believe they will continue to disrupt the industry due to their sizeable population, family inheritable wealth and preference for digital channels of communication. Millennials are the investors of tomorrow and firms should shift strategies to incorporate the desires of these socially responsible investors.

Globally, asset management firms are witnessing an industrial shift from a passive investor population, which is dependent on the income from defined benefit and pension plans to a population that is self-funding via their defined contribution plans. UAE millennials are taking a more active involvement in their own investments as they wish to be more actively involved in controlling their own destiny and this group of investors believe that their investment decisions can influence the issues they care about.

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Source: Schroeders

INVESTMENTS

EMPOWERING WOMEN THROUGH FINANCE IN THE MIDDLE EAST

By Shanu S.P. Hinduja, Chair of Hinduja Bank, Chair of the Hinduja Foundation US, and Co-Chair and Director of Hinduja Global Solutions Inc.

Shanu S.P. Hinduja

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W

e n e e d m o r e wo m e n entrepreneurs. As the female chair of Hinduja Bank, being outnumbered

by Y chromosomes in a boardroom is an experience all too familiar for me.

But surely, unlike the traditional, maledominated financial industry, other sectors—like tech start-ups—are doing better in advancing equality of opportunity?

It is not quite that simple. Across the world, leadership in the start-up scene remains largely off-limits to women. For instance, they account for only 10 per cent of internet entrepreneurs, by some estimates.

A REGIONAL BRIGHT SPOT FOR WOMEN BUSINESS LEADERS Surprising as it may seem, however, it is the Middle East that displays some of the most positive figures: it has been calculated that a third or more of tech entrepreneurs here are women. That is a greater share than in Silicon Valley. In the United Arab Emirates alone, over 30 per cent of businesses set up and run by women generate revenues worth greater than $100,000. This compares with just 13 per cent in the US. The region is also home to the highest proportion of women entrepreneurs who are the sole owners of their company.

They account for 40 per cent of Lebanese

female business leaders; in Bahrain this figure rises to 60 per cent.

Overall, the annual growth in the number of Middle Eastern start-ups over the past three years has been calculated at 46.2 per cent—with a quarter of these new firms being founded by women.

IN THIS PART OF THE WORLD, WOMEN REMAIN SEVERELY UNDERSERVED BY THE FINANCIAL SECTOR; THEY ARE ALREADY OVER-REPRESENTED AMONG THE WORLD’S “UNBANKED”. WITHOUT SUSTAINED PROGRESS IN FINANCIAL INCLUSION, WOMEN RISK MISSING OUT ON THE REGION’S GROWTH POTENTIAL.

GOOD FOR THE ECONOMY, GOOD FOR EQUALITY Such figures are doubtless promising indicators of gender equality. They point to the private sector’s ability to bring about hard change in the real economy.

After all, while every new business supports the creation of jobs, more women-owned companies would help to balance out the workforce, which— particularly in the Middle East—remains far from a 50:50 split. More female entrepreneurs will serve as role models for girls and daughters to look up to, gradually breaking down social pressures against working women.

More than that, of course, it will put money in their pockets, making them less dependent on their husbands and families, and allowing them to be more active contributors to the local economy.

As the countries of the Gulf in particular, seek to diversify their economies away from a reliance on oil, any largescale transformation will depend on empowering women from the ground up.

Overall, the positive effects on employment and economic development could be considerable. Some estimate that if women continue to enter the workforce at the current rate, they could add some $600 billion to regional GDP over the next decade, boosting it by over 47 per cent.

Hinduja Bank recognises the region’s potential for dynamic productivity and wealth creation—it is why we insist on calling it a “growth” rather than “emerging” market. In line with our own guiding philosophy of connecting markets, the Middle East serves as a perfect springboard for women entrepreneurs to launch their businesses to other parts of the world.

FINANCE NEEDS TO HELP MAINTAIN MOMENTUM Challenges remain, however. Last year, almost 70 per cent of women-led startups in the Middle East were denied funding. Female entrepreneurs need access to finance if they are to unlock the potential of their businesses and, in so doing, encourage other budding women business leaders to follow their success.

We need a change of mindset from the financial sector. A woman may know that she can lead a profitable venture; her company and colleagues may know it too. But investors and banks—which hold the keys to the funding that will allow her business to grow and thrive—must do more to open up to the idea.

We also need the banking industry to ensure that financial inclusion continues to advance in the Middle East. In this part of the world, women remain severely underserved by the financial sector; they are already over-represented among the world’s “ u n b a n ke d ” p o p u l a t i o n . W i t h o u t sustained progress in financial inclusion, women risk missing out on the region’s growth potential.

Some institutions are doing vital work to support investment in women’s businesses in the Middle East—such as the Global Women’s Fund, and the Cherie Blaire Foundation, for instance.

And I am proud that at Hinduja Bank Middle East, we are keen to show— f r o m o u r l e a d e r s h i p d ow n — t h a t we are committed to furthering the empowerment of women entrepreneurs.

The promising steps taken in the Middle East are vital to improving women’s clout, respect and agency across the region. It is hard evidence that women they are finding the means of winning equality, both in the boardroom and in the home. But the financial sector needs to step up to the plate and do more to support such progress.

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HUMAN CAPITAL

Noura Abbas

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DIGITALISING THE FINANCIAL LANDSCAPE IN THE UAE Noura Abbas, Director of Training at Emirates Institute for Banking and Financial Studies (EIBFS), underlines the crucial importance of learning and development in the UAE banking sector

N

ew technologies today are changing the face of the banking and financial landscape at a rapid pace. Such dramatic transformation can put considerable strain on banks and other financial institutions, especially in qualifying their cadres to meet the demands of an increasingly digitalised environment.

In a 2017 global survey conducted

by Capgemini’s Digital Transformation Institute to find out how various industries performed in terms of hiring digital talent, banking fared the worst. Sixty-two per cent of the banking professionals surveyed said that the talent gap in the fast-evolving digital space had widened over the past two years, compared to 55 per cent of respondents across industries.

AS IN ANY LEGACY SYSTEM, MANY WORKERS WILL HAVE APPREHENSIONS ABOUT NEW TECHNOLOGY. HOWEVER, THEY NEED TO DECIDE WHETHER THEY WISH TO BE PART OF THE CHANGING LANDSCAPE OR NOT, AND IF THEY DO, TRAINING WILL BE ESSENTIAL. Noura Abbas

Among the 12 most important challenges financial organisations face today, four are related to technology— digitalisation, blockchain, artificial intelligence (AI), and data and analytics, according to a 2018 report published

by PwC. And in tackling these issues, companies are rightly revisiting their business strategy.

Some banks are more aggressive in their digital transformation than others. In the UAE, which boasts a highly tech-savvy population, banking customers embrace revolutionary technologies across the board.

Blockchain and AI, for example, are already playing a pivotal role in various sectors. The Dubai and the UAE governments have announced plans to use blockchain for all their transactions,

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HUMAN CAPITAL

and national banks are not far behind.

Emirates NBD and Emirates Islamic were among the first financial institutions in the country to adopt blockchain in a bid to prevent fraud. Furthermore, a consortium of banks is working with the Central Bank of the UAE to leverage the distributed ledger technology to devise a smart ‘know your customer’ (KYC) solution.

Applying AI in areas such as big data analytics also bring tangible benefits. Banks process millions of transactions every day.

Understanding such enormous amounts of data not only helps develop innovative products and services and, consequently, gain a competitive advantage, but is also useful in other areas of the business, including risk management. In fact, bankers in the UAE have reported that AI, including chatbots and even robots, made interaction with customers easier, and transactions faster and smoother. Commending UAE banks for their sweeping digitalisation and implementation of AI, HE Abdul Aziz Al Ghurair, Chairman of the UAE Banks Federation, said that such technologies could reduce operational costs by 50 per cent.

As the banks continue to implement their digital transformation strategies and drive business forward, it is critical for them to realise that the fight for digital talent transcends industries and borders— and therefore, they must look within.

This means making the entire workforce aware of the disruption technologies will create—if they have not already done so—including robots replacing certain employees. There is no need to gloss over the fact that some redundancies are inevitable, especially for jobs that involve repetitive tasks. If this is done right, the staff will be ready to embrace the changes that digital transformation brings with it and be prepared for reskilling and upskilling.

As in any legacy system, many workers will have apprehensions about new technology. However, they need to decide whether they wish to be part of the changing landscape or not, and if they do, training will be essential.

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AS THE BANKS CONTINUE TO IMPLEMENT THEIR DIGITAL TRANSFORMATION STRATEGIES AND DRIVE BUSINESS FORWARD, IT IS CRITICAL FOR THEM TO REALISE THAT THE FIGHT FOR DIGITAL TALENT TRANSCENDS INDUSTRIES AND BORDERS— AND THEREFORE, THEY MUST LOOK WITHIN. Noura Abbas, Director of Training, EIBFS

In a country such as ours where there is a scarcity of talent, we must look for skilled personnel abroad, it is imperative that we train the existing banking workforce in emergent technologies, starting with the current members of the banks’ IT teams.

To achieve this priority, Emirates Institute of Banking and Financial Studies (EIBFS) has launched the Fintech Training Lab, comprising a series of courses that will be delivered by fintech experts of banks over a period of two days.

To keep pace with the latest developments and global best practises across the board, the Lab will invite international experts to hold workshops for banking professionals in training. In addition, there are plans to establish an innovation incubator for the banking sector.

Bank employees outside IT departments should also be aware of the new applications and their impact on dayto-day operations that involves optimising processes and driving efficiencies, as well as early detection of risks and fraud. In the context of achieving a paradigm shift in the customer interface that the latest technologies have already introduced and are set to intensify, it is crucial for the front office as well as the back end to understand the operational value of implementing these applications. This understanding will, in turn, ensure the adoption of a more agile and collaborative approach in their functions.

With our government at the forefront of embracing new technologies, as evidenced by the appointment of a minister of artificial intelligence, it is vital that we nurture an interest in this dynamic field among UAE nationals. Talented young college-going Emiratis who are eager to know more about banking and finance technology should have access to relevant professional training. Banks in the UAE have a special role to play in this regard, and as a banking training institute, EIBFS is keen to develop national cadres wellversed in these cutting-edge applications through its Fintech Training Lab.

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TECHNOLOGY

BANKING TECHNOLOGY— DECODING TRUE BENEFITS A five-pronged approach by V. Ramkumar is a Senior Partner at Cedar Management Consulting International

E

ven as the banking industry in Middle East is bracing for the winds of change driven both by market forces and a number of consolidations across the region, the impetus observed in technology upgrades—both by large and mid-size banks alike, is hard to miss. And this is not without reason. The spate of innovations that are declared almost every-day around the world, thanks to the emerging new world of fintech and an equally active regulatory demand across markets, have had its own imprints in the boardrooms of Middle East banks, both in terms of direction and also in the emphasis of their IT plans.

Technology, at the end of the day, is only but the means to a larger end.

While there is always an almost insatiable appetite for enlisting innovations and their related use-cases in and around the region, it is important to view them from an angle of what these initiatives are looking to address, and where the primary focus areas are required to be. From a strategic perspective, there are five critical focus areas that have a serious implication for any bank, when it comes to evaluating the eventual benefit that any IT investment can bring in.

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FOCUS AREA 1: ENHANCED CUSTOMER EXPERIENCE Almost inevitably, every innovation that is driven by the new splurge in fintech investments will need to pass the litmus test of “what it means to the customer”.

Having a best-in-class CRM system or a great digital channel offering with a best-inclass UX, is a given for any bank that seeks to stay relevant across the spectrum of segments it seeks to serve. However, their legitimacy is accrued only when they make a real difference to experience of the customer. Be it the innovations in payments, omni-channel experience, real time credit decisioning or in enabling a

customised digital transaction banking offering, the underlying theme of any new IT investment in this space is consistent: you got to deliver superior experience to the customer from what it had been.

FOCUS AREA 2: HIGHER OPERATING EFFICIENCIES When banks look to move into the cloud or when robotic process automation (RPA) is introduced to replace manpower, initial skepticism notwithstanding, the inevitable question that any CIO would need to demonstrate is the efficiencies they got bring about in the overall cost footprint.

V. Ramkumar

Even in the case of recent IT innovations enabled by blockchain or Artificial Intelligence and Machine Learning (AI/ ML), where there may not necessarily be significant short-term savings or quick benefits, they will ultimately still need to translate into savings in the medium term. Sustainability of any efficiency enabling IT initiative is directly correlated to the degree of dollar savings, eventually propelling the scalability across other similar areas.

FOCUS AREA 3: IMPROVED RISK MANAGEMENT Driving IT investments in machine learning or predictive analytics driven real-time risk management systems, or the interesting areas of biometric driven security standards, are no longer esoteric and are much beyond being a fashion statement. Smart banks have understood the sophistication manifested in the more recent frauds or cybercrimes and realised the need to keep with changing times. Dollar spend that are made in cybersecurity, for example, are akin to an insurance. It is a hygiene factor in the digital world, and increasingly perceived as being a component of the cost of doing business.

FOCUS AREA 4: RENEWED OPERATING MODEL Digital banking is the new order—be it a brand positioning, subsidiary offering or a full-fledged pure-play digital banking model. Yet, there is more to it than meets the eye. While the core of the model yet remains in the products offered to customer, the mantra of renewed operating model is in integrating with new age open banking APIs and collaborating with external players for continued innovation and participation in the market-place.

This also means revisiting the customer journey from a digital perspective, and the delivery framework aligned to the operating model. Quite obviously, this calls for a sustained investment of effort, time and money to keep the wheels of digital innovation moving, and the courage of conviction to the cause may well be the critical differentiators between those who succeed and those who also ran.

FOCUS AREA 5: BUILDING STRONGER FOUNDATIONS No matter what the application layers visible to the external world are, the stability of the technology architecture

is always dependent on its core foundation. Banks can ill afford to ignore the need to keep its transaction banking and core back-office platform to be outdated. Even while large number of IT investments are driven towards online, digital and the cool fintech initiatives, the single most important investment that banks yet need to make—both in terms of size of investment and criticality of its purpose, is the core banking platform, the backbone that keeps the bank running.

It is therefore not a surprise then, to see quite a number of Middle East banks looking to upgrade their core banking systems.

A t y p i c a l b a n k i n g t e ch n o l o g y architecture includes channels, front, mid and back office, data and analytics, support, payments as well as the integrator—while these are all critical, ensuring they remain contemporary is a key pre-requisite to remain competitive.

Adapting to change is not just about driving products and services that meet the needs of the new age customer, but also ensuring that the underlying technology platform is aligned to deliver on the above focus areas. As we know, it is not the fittest or the strongest that survive, but the most adaptable to change that does. And as banks embrace the need for change, technology investments follow suit, and the key would be to stay focused on the above five areas.

V. Ramkumar is a Senior Partner at Cedar Management Consulting International. Cedar has successfully assisted 5 large integrations across 10 leading banks in the region. Ram can be reached at v.ramkumar@ cedar-consulting.com

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TECHNOLOGY

THE BUSINESS OF INFORMATION

By Tim Ayling, Global Head of Fraud Prevention Solutions, Kaspersky Lab

(PHOTO CREDIT: VS148/SHUTTERSTOCK)

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T

he relentless march of technology innovation shows no sign of halting. Recent history points to a future of technology, with the continued proliferation of social media, internet of Things, and artificial intelligence all threatening to change our landscape for good, and the winners in this new landscape will understand and prepare for the implications of this technology.

The massive increase in cybercrime and fraud over the years has highlighted the challenges businesses face across all industries.

The rise of information technology in the early 1990’s promised massive efficiency savings and competitive advantages that we had not seen before.

In reality, organisations of all shapes and sizes invested heavily in technology and waited for the benefits. Undoubtedly this investment did provide efficiencies that are rightly celebrated. Those that did not invest in technology often died, with widely quoted failures including Blockbuster not buying Netflix when they had the chance, and ToysRUs outsourcing their internet sales to Amazon—ensuring the consumer became used to purchasing toys online.

PEOPLE NOW SEE INFORMATION AS THE NEW OIL. Tim Ayling

However, while efficiencies were created, competitive advantages often did not materialise. Why is that? Well, it’s because organisations ignored the fact that Information Technology wasn’t just about Technology—in other words, they forgot the I in IT. In recent years we have seen the rise of the information age, where giants of the industry are informationbased, rather than relying on technology.

Tim Ayling asserts that compromising on cybersecurity will not only result in monetary losses but can also damage brand reputation and affect consumer loyalty.

You’re probably thinking of Google and Facebook as good examples of this, and you would be right. However, there are other examples that are not instantly recognised. Amazon house huge amounts of data on customer preferences, Uber know all about your movements, Airbnb know your favourite type of holiday and what you will typically spend.

Hence, people now see information as the new oil. Financial entities have also capitalised on this concept. Today online banking has become a norm, according to our Consumer Security Risks Survey 2017, 76 per cent of UAE residents regularly bank online. Consumers seem very happy to share personal information online for the convenience of being able to pay bills, transfer money and conduct other financial transactions online. This surge in online transactions bring along many online dangers with it, new Kaspersky Lab research shows that banking Trojans are actively targeting online users of popular consumer brands, stealing credentials and other information through these sites. Kaspersky Lab technologies detected 9.2 million attempted attacks by the end of Q3 of this year, compared to 11.2 million for the whole of 2017.

This abundance of data online is definitely not going to decrease, as internet of Things is becoming the norm, with Gartner predicting 95 per cent of manufactured goods will be connected to the internet by the end of 2020. Of course, security will not be part of the design for the majority of these goods as the rush to release new products tends to trump security.

Compromising on cybersecurity will not only result in monetary losses but can also damage brands reputation and affect consumer loyalty. Companies with a strong cybersecurity strategy in place will be fit to defend themselves against any possible threats and in the end, the fittest will survive.

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TECHNOLOGY

A DIGITAL ECOSYSTEM Sandeep Chouhan, Group Head Operations and Technology at Mashreq, provides an exclusive on the bank’s digitisation initiatives and his views on various technological advancements

H

Sandeep Chouhan

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ow much has digitisation helped in improving processes within the bank?

Technology has revolutionized the way we do banking and digitisation have enabled us to reconfigure bank’s process design. We at Mashreq are now combining customer self-service channels at branches and automated decision-making RPA systems at backoffice to eliminate manual processes.

We are spearheading and embracing the revolutionising technology of Artificial Intelligence, Robotic Process Automation & Cognitive opportunities in this region.

What started as a project, is now the way of life at Mashreq. We have seen 60 per cent increase in our productivity at the agent level, with cost savings of up to four times. There has been significant reduction in customer complaints. We are very much benefiting from the various digitisation initiatives across the bank.

How do you see Open APIs impacting payments and customer-related experiences moving forward?

Digital economy has created this new business model of a collaborative ecosystem. The good part is that the Dubai Government is leading the way in creating such an ecosystem for businesses with governing standards and regulatory

framework for a smarter city. All enterprises has to participate unanimously in such market places where banking services are vital to facilitate the commerce and this requires API-enabled services.

We will see an emergence of radically transformed bank models. Open banking will lead its way and make it easier for banks to collaborate with non-traditional alliances and fintech leaders, which will lay down superior standards of next generation financial services by providing instant fulfillment to customer transactions.

Has the bank implemented cloudprocessing systems? How has it assisted in payments management?

Cloud has opened up a wide range of services beyond Infrastructure (IaaS) to on-demand Platform (PaaS) and Software services (SaaS). These are intelligent services, which can compute mass amount of data at fraction of cost and time compared to traditional on-premise technological services.

SWIFT has made significant advancements on its infrastructure and Mashreq is the first bank in the region to join SWIFT’s Global Payment Innovation (GPI). The innovative, cloud-based payment tracker ensures that counterparties receive confirmation in real-time when the supplier or beneficiary is credited. Mashreq have also partnered with Microsoft for specific usages of analytics and translation services.

Mobility and wearables have been a trend in banking over the past few years. How do you see this developing for Mashreq next year?

Mobility is not a trend anymore. It’s an essential service. Continuous evolving client habits driven by the adoption of mobile apps and superior service expectations are dramatically impacting the traditional banking processes.

The power of convenience, superior user experience and security have benefitted both customer and staff experiences. Mashreq have rolled out

WE WILL SEE AN EMERGENCE OF RADICALLY TRANSFORMED BANK MODELS. OPEN BANKING WILL LEAD ITS WAY AND WILL MAKE IT EASIER FOR BANKS TO COLLABORATE WITH NONTRADITIONAL ALLIANCES AND FINTECH LEADERS. Sandeep Chouhan

mobile only digital bank “NEO” for the retail clients apart from the existing award winning and world class mobile banking solution for retail and corporate clients.

We have also introduced mobile enabled apps empowering the salesforce and relationship managers to view customer 360 degree portfolio to track and solve customer queries, offer advisory services and portfolio insights on real-time basis. Wearables in its basic form are offering very limited services.

New use cases are emerging as the wearable technology evolves.

What is in the pipeline for 2019?

The creation of a digital ecosystem will drive open API which will put pressure on enterprises to enhance data quality and resilience of platforms. We are looking forward to collaborating with fintech and government agencies to create the marketplace. Blockchain is another area which is expected to be more main stream. Mashreq is already in the proof of concept phase with two other banks.

With an increase in cybercrimes and the rollout of new digital technologies, a new breed of sophisticated tools is the need of the hour.

What do you identify as the main challenges for next year?

Continued cyberthreats and data privacy will remain a challenge. The very innovation that drive customer service and business growth also creates first order cyberthreats for the banks and their customers. Cyberthreats, while not at all new, has rocketed up the list of leading issues for banks.

The challenge is in satisfying both the need for participating in open platforms and protecting customer data at the same time. As the technology has evolved, attack vectors have also become more sophisticated. There is a need to also be constantly vigilant and resilient in face of evolving data thefts, fraud and security breaches.

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EVENTS

JTB INAUGURATES THE FIRST BRANCH FOR FINANCIAL INCLUSION IN LEBANON Jammal Trust Bank (JTB) will go to infinite ends to reach out to those that do not have any prior banking relationships and cater to their financial needs

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ammal Trust Bank (JTB) has inaugurated its first 'Infinite Branch' for Financial Inclusion in Sohmor village, West Bekaa, Lebanon, on Tuesday 18 December 2018, under the patronage of the Governor of Banque du Liban, Dr. Riad Salameh, represented by his First Vice-Governor Raed Charafeddine, in the presence of the Chairman and CEO of Jammal Trust Bank, Anwar Jammal.

Mr. Jammal launched the opening with a speech, where he emphasized on “the importance of Financial Inclusion, the need for the banking sector to cover the needs of all members and segments of society, with the aim of improving their living standards by offering them banking services, which in turn, will boost the Lebanese Economy.� said Jammal.

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He also confirmed that JTB will be opening numerous “Infinite Branches” for its financial inclusion initiative in Lebanese regions, where residents have not yet been introduced to the banking sector. The name 'infinite' comes from limitless and endless in space. The branches were named as such as a reference to JTB going to 'infinite ends'

to reach out to those that do not have any prior banking relationships and cater to their financial needs.

The First Vice-Governor at Banque du Liban, Raed Charafeddine, congratulated Jammal Trust Bank for its efforts and success of adopting the Financial Inclusion Strategy, considering this as the first step towards achieving the

The event was attended by First Vice-Governor of Banque du Liban, Raed Charafeddine, several board members of JTB, as well as community leaders in the region.

THERE IS A NEED FOR THE BANKING SECTOR TO COVER THE NEEDS OF ALL MEMBERS AND SEGMENTS OF SOCIETY, WITH THE AIM OF IMPROVING THEIR LIVING STANDARDS BY OFFERING THEM BANKING SERVICES, WHICH IN TURN, WILL BOOST THE LEBANESE ECONOMY. principle of parallel development, which is of paramount importance to Banque Du Liban, as it supports all banking initiatives that advance this idea. Mr. Charafeddine, also highlighted on the economic situation in the Bekaa and the importance of providing special care to this area in order to reduce the social, economic and humanitarian gap and to benefit from its economic potential.

The event was attended by several board members of JTB, community leaders, reporters, residents of Sohmor and surrounding villages in the region.

JTB’s efforts align with Banque Du Liban’s principles of parallel development.

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SHARJAH FDI FORUM 2018 UAE’s FDI ecosystem to lead future global trends

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HE Juma al-Kait, Assistant Undersecretary for Foreign Trade at the Ministry of Economy

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harjah hosted the fourth global forum on Foreign Direct Investment (FDI) under the theme, Global FDI: New regulations and Business Trends. The UNCTAD’s Global Investment Trends Monitor report stated that global FDI flows fell by 16 per cent in 2017 to an estimated $1.52 trillion, from a revised $1.81 trillion in 2016. The steep decline in global FDI trends has been attributed to policies of protectionism, economic fundamentals as well as value chains and other factors that have dominated the world economic stage. A -27 per cent slump in FDI flows to developed countries was also fingered as the principal factor behind the global decline.

A strong decrease in investment flows was reported in Europe as well as in North America, mainly due to a return to prior levels of inflows in the UK and the US after spikes in 2016.

On the contrary, FDI in developing economies remained stable, at an estimated $653 billion, two per cent more than the previous year. Flows increased marginally in developing Asia and Latin America and the Caribbean but remained flat in Africa.

The Middle East and Asia regained positions as the largest FDI recipient regions in the world followed by the EU and North America. According to HE Marwan bin Jassim Al Sarkal, t h e E xe c u t i ve C h a i r m a n , S h a r j a h Investment and Development Authority (Shurooq), the UAE government has been supportive through the enacting of laws and regulation that seeks to boost FDI. UAE FDI ECOSYSTEMS The President of UAE, HH Sheikh Khalifa bin Zayed Al Nahyan recently issued new investment laws which is believed to boost and retain foreign investment for the UAE to lead the FDI sector by 2071.

The Emirates shrugged off the negative trend in global FDI by achieving a 7.8 per cent growth in FDI inflows in 2017 totalling $10.4 billion.

Looking to the future, authorities seek to focus on manufacturing , transport as well as renewable energy, agriculture and water sector in the short term to attract FDI. HE Sultan bin Saeed Al Mansouri, the UAE’s Minister of Economy, said that the new FDI law will be integrated with several supplementary laws and a list of incentives to lead future FDI trends with an aim to reach between $11-11.5 billion.

The UAE expects the implementation of FDI to boost non-hydro economic growth. An array of measures meant to attract investment to the country were introduced this year. These included visas for people with special skills and student undertaking studies, 100 per cent ownership business ownership among others.

With an expat population of about 80 per cent, the UAE introduced a new visa in September which will allow foreigners to obtain extended residency after they retire, a major policy shift designed to give expatriates a bigger stake in the economy and foster longerterm growth.

HE Marwan Bin Jassim Al Sarkal, the Executive Chairman at Sharjah Investment and Development Authority (Shurooq), HH Sheikh Sultan bin Muhammad Al-Qasimi, the ruler of Sharjah and member of the Federal Supreme Council of the UAE and HE Eng. Sultan bin Saeed Al Mansouri, UAE Minister of Economy, during Sharjah FDI Sponsorship Awards.

The new law comes into effect in 2019, where a retiree must either have a property investment worth at least AED 2 million ($544,500), savings of no less than AED 1 million or a monthly income of no less than AED 20,000. HE Juma al-Kait, Assistant Undersecretary for Foreign Trade at the Ministry of Economy, said that the UAE expects up to 15 per cent growth over the next year attributing this projection to Federal Law No. 19 of 2018, which was recently issued by a presidential decree.

The granting of long-term visas to the country’s largely expatriate population will benefit investors and people with specialised expertise like doctors,

THE UAE EXPECTS UP TO 15 PER CENT GROWTH OVER THE NEXT YEAR ATTRIBUTING THIS PROJECTION TO FEDERAL LAW NO. 19 OF 2018, WHICH WAS RECENTLY ISSUED BY A PRESIDENTIAL DECREE. HE Juma al-Kait, Assistant Undersecretary for Foreign Trade at the UAE Ministry of Economy

researchers and those in the technology field. The UAE introduced support for the industrial sector by agreeing to reduce electricity fees for UAE factories. Under the plans, larger factories would receive a 29 per cent reduction in tariffs while small and medium-sized units would have fees reduced by between 10 and 22 per cent.

THE OPEN MARKET SYSTEM The UAE is moving towards an open market to encourage foreign investment to compete with the local market but at the same time measures are being put in place to protect Emirati firms. However, the UAE is also proud to see local

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HE Eng. Sultan bin Saeed Al Mansouri showing HH Sheikh Sultan bin Muhammad Al-Qasimi one of the real-estate and property projects by Eagle Hills Sharjah called Mariam Island.

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THE UAE GOVERNMENT HAS BEEN SUPPORTIVE THROUGH THE ENACTMENT OF LAWS AND REGULATION THAT SEEKS TO BOOST FDI. HE Marwan bin Jassim Al Sarkal, the Executive Chairman, Sharjah Investment and Development Authority (Shurooq)

companies leading the global market--DP World has operations in 40 countries and operates 78 marine and inland terminals fulfilling the cooperate social responsivity of the firms. On the other hand, Emirates operates 52 group of companies across the globe, among them Destination Asia and Emirates Leisure Retail in Singapore and in Australia.

In the first half of 2018, in a bid to become a pioneer in blockchain technology, the UAE launched the UAE Blockchain Strategy 2021, in accordance with a resolution to which 50 per cent of government transactions will be conducted using blockchain technology by 2021. To solidify its vision, the UAE also issued regulations on the use of crypto assets, blockchain as well as cryptocurrencies.

The UAE is among the first countries in GCC together with Bahrain to introduce a digital currency friendly economic environment which in turn is expected to be a boost, as majority global economies now prefer to operate in countries which are not restrictive to technological innovations.

In an exclusive interview with Banker Middle East, HE Marwan bin Jassim Al Sarkal, said that technology is the future.

“Technology is like electricity back in the days and the UAE is the first country to have a Minister of Artificial Intelligence in light of the need to fully invest in the digital industry,” Said Al Sarkal.

In June 2018, Abu Dhabi Global Market (ADGM) launched a framework to regulate cr yptoasset activities,

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including those undertaken by exchanges, custodians and other intermediaries in ADGM, was followed by the launching of a blockchain-based digital wallet called e-Mal was launched in UAE. The economic systems and legislation adopted by government directly affect the attractiveness of investments, and it is the UAE’s vision is to transform the country into a knowledge-based economy. This is not only aimed at attracting investments but also to ensure their sustainability.

The UAE has many economic laws and regulations that deals with investor rights, guarantees property rights as well as arbitration law, insolvency law and corporate law, added Al-Kait. Additionally, the UAE also has advanced infrastructure such as free zones and ports that are spread across the country, well-established road networks and faster communication systems, all of which are technologically advanced to harness competitiveness and attractiveness for investors.

Technology is changing the pattern of FDI and countries in developing economies are being urged to use technology to their advantage. While the UAE has adopted a development, vision based on a free-market economy and the promotion of the private sector, it also recognises the Government’s fundamental role in ensuring the efficiency of doing business. The introduction of Smart UAE also means that it is now easy to register an investor’s company which is a positive development for the economy.

GLOBAL FDI Countries that witnessed a decline in the volume of FDI last year, such as the US, China as well as Canada and a number of European countries, are also among nations that are facing a decline in various aspects of their socio-political and economic relations.

The factors hindering global FDI growth include the ongoing trade war waged between the Trump administration and the Chinese government, currency wars

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Global flows of FDI fell by

16% $1.52 $1.81

in 2017 to an estimate d

trillion, from a revised

trillion in 2016 Source: UNCTAD

between the US and Turkey, BREXIT and restrictions as well as slow developments in digitisation. “The economy today is operating in a village like set up because we are operating on a global scale,” added Al Sarkal.

Brexit dealt a blow to Britain’s financial-services industry which saw a drop in foreign investment while some of its European counterparts enjoy big gains. In a report, EY stated that that foreign investment into Britain’s financialservices firms fell 26 per cent in 2017 and in contrast, Germany experienced a 64 per cent increase, while the figure for France more than doubled.

Speaking on the side lines of the Sharjah FDI Forum, Harald Djedka, the Senior Investment Policy and Promotion Officer at the World Bank Group, said, “That the reason for the fall of foreign direct investment in many developed nations over the past two years has been negative economic policies and protectionism in many countries.” London still attracted more inward investment in financial services than any other EU city, but the gap with Paris, Frankfurt and Dublin is said to be closing.

Brexit is threating jobs of around 750 000 people and the existence of companies in Britain after March 2019, with global conglomerates like Tata Motors and Airbus already looking for

alternatives in the event of pulling out of the UK. Additionally, Goldman Sachs announced that it would be will shifting jobs away from London while adding several hundred in Europe.

Effects of protectionism policies Moreover, trade wars between developed economies impacts FDI in both emerging markets and developing economies. The 10 per cent levy that President Donald Trump imposed on aluminium imports as part of measures designed to protect US industries has had a snowball effect across all aluminium exporting countries. The tariffs which fall within policies of protectionism affected global companies like London-based Rio Tinto which operates aluminium smelting plants in Canada.

The unfavourable market conditions also impacted on the UAE’s Global Aluminium, which produces about four per cent of the metal globally. The effects of policies on FDI will not be explained enough without mentioning the raging US-Sino trade war. In September President Trump ordered his administration to levy 10 per cent tariffs on about $200 billion in Chinese goods and there is room to increase the rate in January 2019 to 25 per cent if Beijing refuses to offer trade concessions. In retaliation, China hit US goods, ranging from wheat to textiles, with five per cent to 10 per cent tariffs.

Policies of protectionism are hurting FDI in both the developed and developing economies. However, the UAE is coming up with a number of open market policies which are meant to invite foreign investors to compete locally, at the same time the Government is also encouraging local companies to compete globally. The on-going trade war between the US and China is hurting global FDI, European countries among other emerging countries are no longer feel safe doing business with China because they are afraid of being penalised by the Trump administration.

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