March 2021
Issue 21 Volume 17
UK £4 Europe ¤5.35
www.internationalfinance.com
US $6
Embodying Qatar National
Vision 2030
A conglomerate is building up the nation’s non-oil competitiveness Hungary’s power market hotspot
Britain is on a green mission
What is next for African VCs?
International Finance | March 2021 | 1
MARCH 2021 VOLUME 16 ISSUE 21
EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE
Amid the pandemic ...
A
s bitcoin gain prominence every day, it is now competing with other cryptocurrencies as the coin of the digital realm. While the big question being asked today is whether bitcoin is the future of conventional currency? There is enough anticipation that bitcoin could climb to $1 million in five years to become a global reserve currency. However, bitcoin will definitely have challengers. Meanwhile, Qatar is on track to achieve its targets set out in 2008 as per the Qatar National Vision 2030. Amid this, Qatar gears to host the FIFA World Cup 2022 and is expanding its tourism offering as it prepares to welcome fans from all over the world. As China continues to create global noise, European nations are shifting focus. Germany, for the first time, endorsed the concept of Indo-Pacific, highlighting the country’s approach in dealing with China’s growing influence in the region as well as global trade. The shifting geopolitical power structures in the Indo-Pacific not only Germany but the whole European region. The pandemic may have battered economies across the globe and led to billion-dollar losses for various industries, it has also become a catalyst for some. In Japan, robots are playing a crucial role in curbing the spread of the virus, thus giving the robotics sector a timely boost. In this edition of International Finance, we also explore innovation in global finance, the attractiveness of Cayman Island for hedge funds as well as performances of global stocks.
sabraham@ifinancemag.com www.internationalfinance.com
International Finance | March 2021 | 3
INSIDE
IF MARCH 2021
18
IN CONVERSATION CURRENT STATE OF 26 THE TRADE IN AFRICA Technology will play a huge role in revitalising the African business
PERFORMANCE 56 RECORD ON GLOBAL STOCKS
The best performing Chinese stocks were a mix of energy and tech stocks
PREPARING FOR SUCCESS Power International Holding is expanding its work horizontally and vertically into diversified sectors in Qatar and regions of the world ENERGY
BANKING
26 ANALYSIS
12 Are private-public alliances the
34
46
way forward?
40 What makes Cayman Island so
HUNGARY’S POWER MARKET HOTSPOT
BRITAIN IS ON A GREEN MISSION
popular for hedge funds?
Hungary has a huge potential for renewables, especially solar
The country is developing a world-class green finance research centre in Leeds and London
64
An antidote to costly cross-border payments
TECHNOLOGY
ECONOMY
BUSINESS DOSSIER
38 IRAQI BANKS EMBRACING TECHNOLOGY
72
82
JAPAN'S ROBOTICS BOOM
GERMANY’S INDO-PACIFIC STRATEGY
Japan is using its robots to also fight Covid-19
Germany aims to strengthen its trade and investment linkages
4 | March 2021 | International Finance
62 THE VERSATILITY OF BANGKOK INSURANCE
80 THE PROFOUND WORK OF
QETAIFAN PROJECTS
www.internationalfinance.com
THOUGHT LEADERSHIP CALLUM RIMMER INNOVATION IN GLOBAL INSURANCE
30
Consumers are overwhelmingly dissatisfied with the level of service they are receiving
60
TONY CHEN WHAT IS NEXT FOR AFRICAN VCS?
The start of 2021 points to two important questions— What has gone well? What hasn't?
70
IGNACIO JAVIERRE CHARTING THE COURSE FOR EMBEDDED FINANCE
BaaS providers and other agile fintechs have built the foundation for the emerging embedded finance trend
78
JOHN MITCHELL REAL-TIME ANALYTICS: A TIPPING POINT
What organisations can do with the knowledge of the data provided matters
Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Pritam Bordoloi, Sangeetha Deepak Production Merlin Cruz Design & Layout Vikas Kapoor Web Developer Prashanth V Acharya Business Analysts Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Alex Carter, Janet George, Indra Kala, Chris Harris, Rohit Samuel, Priscilla Salt, Peter Berkman Business Development Manager Steve Martin Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436 Fax +44 (0) 208 181 6550
REGULAR EDITOR'S NOTE
03 06 08
Amid the pandemic...
TRENDING APac's first carbon-positive corporate service
NEWS Ghana first to import LNG in Sub-Saharan Africa
Email info@ifinancemag.com Press Contact editor@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144
International Finance | March 2021 | 5
# TRENDING ENERGY
$2409 Blockchain IoT market to be worth $2,409 mn by 2026
APac's first carbon-positive corporate service Singapore-based fintech startup Sleek has become the first company in Asia Pacific (APac) to provide carbon-neutral corporate service provider. Last year, the startup financed reforestation Indonesia to compensate for the carbon emissions associated with the company. These projects help absorb the company’s monthly carbon footprint. It will also absorb 400 tonnes of CO2 in the next 20 years. Co-founder and chief executive officer Julien Labruyere told the media, “By 2030, we foresee Sleek to be the first carbon-positive corporate service firm in Asia-Pacific and we hope to see more companies join this green revolution.”
The blockchain IoT market is expected to be worth $2409 million by 2026, according to research published by MarketsandMarkets. It is expected to grow at a compound annual growth rate (CAGR) of 45.1 percent. Last year, the blockchain IoT market was worth $258 million. The report further revealed that the US and Canada are expected to be major contributors to the Blockchain IoT markets growth.
At a Glance Growth forecast for Gulf nations in 2021 Saudi Arabia
2.6% Qatar
DITO launches in the Philippines
First economic contraction in 11 yrs
DITO Telecommunity has finally launched its services in the Philippines. It has become the third telco in the Philippines market, thus ending the long-standing duopoly maintained by Globe Telecom and PLDT. The telco was set to launch last year, however, the pandemic delayed the launch. At present, DITO’s services are available in 15 areas in the country. According to the telco, it is aiming to cover 37 percent of the country's population after its first year of operations.
South Africa’s gross domestic product (GDP) shrank 7 percent in 2020, as a result of the coronavirus pandemic, which also pushed the global economy into a recession. This was South Africa’s first economic contraction in 11 years. It is the economy’s first annual contraction since 2009 when GDP fell 1.5 percent. In 2019, South Africa’s economy grew by 0.2 percent. The lockdown measures introduced to curb the spread of the virus and restricted economic activity took a heavy toll on South Africa’s economy.
TELEC OM
2.5% Bahrain
2.3%
BAN K I N G
Oman
1.8% UAE
1.3% Source: International Monetary Fund
6 | March 2021 | International Finance
NEWS | INSIGHTS | UPDATES | DATA
Ones to Watch
OIL AND GAS
China buying 1 mn bpd of crude from Iran The fact that China is buying one million barrels of crude oil per day from Iran is disrupting the Organization of the Petroleum Exporting Countries (OPEC)’s effort to tighten supply in the global market. While many refiners often hesitate to buy crude from Iran due to the US sanctions, however, buyers in China have decided to overlook this factor. Even though Iran is a part of OPEC, it is exempted from the supply restrictions. And as a result of a growing appetite for cheap crude in China, it has lead to decreasing demand from OPEC members as well as other producers like Norway and Brazil. Yuntao Liu, an analyst with Londonbased Energy Aspects told the media, “With increased flows from places like Iran, and all the other grades’ arbitrage to China closed currently, the spot market is looking really weak. Between now and June to July, the teapots’ preferred grades
such as West African crudes, Norway’s Johan Sverdrup and Brazilian crudes will be quite hard to sell." Recently, OPEC+ and its allies which include Russia, decided to extend its output curbs till April. This resulted in crude oil prices surging to a fresh one-year high. The Kingdom of Saudi Arabia, which is the unofficial leader of the OPEC members, also voluntarily decided to additionally cut 1 million barrels per day through April.
By the Numbers
TEWOLDE GEBREMARIAM CEO AT ETHIOPIAN AIRLINES Tewolde Gebremariam has been serving as the CEO of Ethiopian Airlines since 2011. Under his guidance, the carrier managed to weather the Covid-19 storm without the need for a bailout package from the government.
ANNE BODEN CEO OF STARLING BANK Anne Boden founded Starling Bank in 2014. Under her leadership, the UK-based challenger bank has managed to acquire the status of a unicorn within a very short period of time.
Government health expenditure as % of GDP in 2020 US 17.06% UK 9.63% Germany 11.25% Spain 8.87% China 5.15% Source: Themoneyroller.com
BADER NASSER AL KHARAFI GROUP CEO AT ZAIN GROUP In 2018, Bader Nasser Al Kharafi was ranked number one in the 100 most influential Arabs list by Arabian Business. Zain has been at the forefront and leading the 5G revolution throughout the Middle Eastern region.
International Finance | March 2021 | 7
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
Almost 13 countries in sub-Saharan Africa burn gas for power generation. Ghana use a combination of imports and domestic production.
Five directors at Petrobras also stepped down following the departure of Robert Castello Branco
Ghana to import LNG With a motive to develop energy consumption by gas-fired power generation, Ghana is all set to become Sub-Saharan Africa’s first country to import liquefied natural gas (LNG). The Tema LNG terminal is ready to receive its first cargo by the end of this March. This development will eventually be adding to the country’s imports from Nigeria through the West African Gas Pipeline. There are numerous LNG export projects across North and West Africa yet Egypt, in the year 2015, was the first and so far the only African country to import LNG. Following this, Ghana sets the record for Sub-Saharan Africa. The Tema LNG terminal can import 1.7 mmt of LNG per year. The project is backed by Helios Investment Partners and Africa Infrastructure Investment Managers.
The Tema LNG terminal can import 1.7 mmt of LNG per year. 8 | March 2021 | International Finance
Under a long-term contract with Shell, LNG will be supplied. Last month, Shell said that it wanted to grow its LNG market footprint by creating new markets, including being the first supplier of LNG to Ghana. The maintenance of the terminal will be carried out by Reganosa, a transmission and regasification company. They will also be taking care of the 6 kilometre pipeline. A project spokesperson of S&P Global Platts said that the Terminal at Tema will be mechanically ready for full operation by the end of March. They further said that added, “We are waiting for Shell, the supplier and GNPC as the offtaker to decide and confirm the delivery date for their first cargo to arrive at the terminal.” For Ghana, this initiative of LNG imports is considered as a boost for developing its gas-fired power generation sector. Almost 13 countries in sub-Saharan Africa burn gas for power generation. Out of that, 10 countries, including Angola, Cameroon and Nigeria use their domestic gas production. Togo and Benin are reliant on imports and Ghana use a combination of imports and domestic production.
Brazil president fires Petrobras CEO Brazilian President Jair Bolsonaro replaced Robert Castello Branco, the chief executive officer of energy giant Petrobras with an army reserve officer. The government decided to replace the CEO with Joaquim Sila e Luna. A note from the Ministry of Mines and Energy published by Bolsonaro on his Facebook account stated that, “The government decided to appoint Joaquim Silva e Luna to full-fill a new mission crisis as… president of Petrobras, after closing the cycle, exceeding two years, of the current president Roberto Castello Branco.” Branco has been facing pressure to resign after Bolsonaro vowed to make ‘changes’ at the firm in which the government owns a controlling stake. Brazilian truck drivers went on a strike
The price hike have amounted to a 35%rise in less than two months
over the fourth diesel and gasoline hike of the year. The president accused the company of unreasonable hikes in fuel prices eventually piling pressure on Branco. To grant relief to the industry, the president said that he would slash fuel taxes for the next two months. He also told the journalists in Sertania in the northeast of the country that “I can announce that we will have changes, yes, inside Petrobras.” Brazil holds a history of rows over fuel prices that have forced changes in the firm’s management in the past. Pedro Parente, a former Petrobras’ chief executive, stepped down after the truckers’ strike in May 2018. Yet the courses inside Petroleo Brasileiro SA, as the firm is formally known, say Castello Branco has no plans to step down. Investors are apprehensive about the possible interference from the authorities in the future. The price of shares in the company, where the government holds a 30 percent stake, fell by 6 percent. The price hike is said to have amounted to a 35 percent rise in less than two months. Prices are now fixed by the company as per market variations.
International Finance | March 2021 | 9
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
Tesla will start accepting bitcoin for its products very soon
Deutsche bank plans to let go of around 20% of their workforce in a four-year restructuring announced in 2019
Tesla buys $1.5 bn bitcoin
Effective Pfizer vaccine
Tesla announced in a Securities and Exchange Commission (SEC) that it has bought $1.5 billion worth of bitcoin and plans to accept it as payment for the exchange of its products and services. Elon Musk, chief executive officer of Tesla has been credited for increasing the value and prices of cryptocurrencies through his recent tweets in support of the popular cryptocurrency. The company said the action was taken for ‘more flexibility to further diversify and maximise returns on our cash.’ The company, first ever automaker to do so, will start to accept bitcoin for its products ‘subject to applicable laws and initially on a limited basis.’
Pfizer’s Covid-19 vaccines seem to be effective against the strains in Brazil, UK and South Africa. It displayed a high ability to neutralise mutant coronavirus strains found in these particular countries. In a study conducted by scientists from Pfizer, BioNTech and the University of Texas Medical Branch it was found that this shot demonstrated ‘roughly equivalent’ levels of neutralising activity against the Brazil and UK strains compared with a version of the virus found early last year. Pfizer - BioNtech vaccine showed a ‘robust but lower’ activity against the South African variant where the strain has been tougher to target.
Oil production in Africa as of 2019, by country Nigeria
Algeria
Egypt
Angola
Libya
Congo
101.4 10 | March 2021 | International Finance
69.1 Source: www.statista.com
64.3 57.8
33.6 17.4
(in million metric tons)
Deutsche Bank targets 450 jobs
Cathay Pacific posts $2.79 bn loss
Deutsche Bank in its first round of branch closures targets 450 jobs. This reduction is a part of Deutsche Bank’s chief executive officer Christian Sewing’s plan to let go of about 20 percent of their workforce in a four-year restructuring announced in 2019. Sources said that the exact number of jobs that will be reduced has not been decided and the figure may still change as talks with work councils continue. The pace of the process at the retail unit has been slow partly because eliminating jobs is difficult and costly under Germany’s tough labour laws.
Hong Kong-based carrier Cathay Pacific Airlines recently announced losses of around $2.79 billion for 2020. According to the carrier, last year was the most challenging in its 70-year history. During the first six months of 2020, the carrier posted losses of around $1.3 billion. That was the period when almost all carriers across the globe halted their operations to curb the spread of the virus. In this regard, Cathay Pacific’s Chairman, Patrick Healy said that the travel restrictions and quarantine requirements in place around the world brought about an unprecedented disruption of the global air travel market, and the repercussions have been huge.
TOP 8 UK Startups 2020 Global Switch The Hut Group Deliveroo LendInvest
$6.3 bn IT $3.9 bn Commerce $1.5 bn F&B $1.3 bn Financial Services
Funding
Prodigy Finance OakNorth Oxford Nanapore Telegram Messenger
Industry
$1.3 bn Financial Services $1 bn Financial Services $855 mn Healthcare $850 mn IT International Finance | March 2021 | 11
INDUSTRY
ANALYSIS
HEALTHCARE GOVERNMENT HEALTHCARE INSTITUTIONS
Joining forces has helped the nation to achieve a milestone for carrying out the highest number of Covid-19 testing per capita in the world
Are private-public alliances the way forward? PRITAM BORDOLOI
A lot has changed in the UAE healthcare since the first positive case of the Covid-19 was detected in the country. The pandemic has led to significant changes in healthcare, not only in the UAE but around the world. Such significant changes are in their nascent stages and will The continually change in the government coming years. Even before outlays 70% the pandemic, the healthcare of total GCC sector in the UAE had healthcare undergone a considerable expenditure number of infrastructure and the UAE and procedural changes. This has helped the country governmentto position itself as a leading funded69 % healthcare provider and also of its total an important destination for healthcare medical tourism. expenditure of Even prior to the $16 billion. pandemic, the country was a major contributor to healthcare. According to KPMG, the UAE government contributed 66 percent of its total healthcare spending which stood at $15 billion in 2018. In the following year, the government outlays comprised approximately 70 percent of total GCC healthcare expenditure and the UAE government funded approximately 69 percent of its total healthcare expenditure of $16 billion. According to GCC growth forecasts, contributions from the private sector are expected
12 | March 2021 | International Finance
to grow at a compound annual growth rate (CAGR) of 7.4 percent compared to a CAGR of 4.9 percent for the government sector during the period between 2018 and 2022. With the pandemic, the dynamics within the sector are dramatically changing. There is a drive to promote private spending in the healthcare sector by encouraging the adoption of public-private partnership (PPP) models. Since the public-private collaboration has worked well for the UAE, it could further drive the growth of the healthcare sector and prove to be a model for other economies, not only in the Middle East but across the world.
Why private-public cooperation is key? To ensure that the healthcare sector was sustainable and ready to tackle the problem of Covid-19, an important decision that the administration took was to promote partnerships between private and government healthcare institutions. One of the biggest challenges that the healthcare providers in the UAE needed to address was to test, identify, isolate and treat Covid-19 patients according to their conditions. In the initial days of the pandemic, this required huge manpower, funding and resources. The government in the UAE was quick to recognise this. The UAE has anticipated the need for testing in gigantic numbers and quarantining facilities. This is where public-private cooperation has helped the UAE healthcare sustain itself. Many private
hospitals and healthcare firms in the UAE have stepped in. In May, the UAE achieved a milestone for carrying out the highest number of Covid-19 testing per capita in the world. Working in close collaboration with the government, the private healthcare sector has brought in its expertise and manpower to fight the virus. What resulted was that the public sector joined forces with the private sector, setting up field hospitals for thousands of Covid-19 patients across the UAE, while private organisations have helped in managing those by providing human resources. With the public-private cooperation in the healthcare sector helping the UAE to fight the future, there is anticipation that the collaboration will see new advancements in the region. Many experts predict that such collaboration holds the key to the development and growth of the overall healthcare sector in the UAE. Richard Stolz, Associate Director, Advisory, KPMG Lower Gulf told International Finance, that there is a drive to promote private spending in the sector by encouraging the adoption of publicprivate partnership (PPP) models. “One key driver for the promotion of private investments is the increased need to bring in niche healthcare sector skills, for example, cardiology, that are not yet widespread in the UAE,” he said. “From 2018 to 2022, private-sector healthcare spending is forecast to increase at a cumulative annual growth rate
How much does UAE spend on healthcare?
Expenditure 2018
Estimated 2023
2019
2028
$13.7 billion $14.4 billion
$18.3 billion $26 billion
(CAGR) of 9.5 percent, compared with the government contribution growth rate of 4.4 percent. “Growth is mainly supported by the rising emergence and support for PPP, as well as the increasing demand for treatment and hospital beds amongst an ageing population. Further, the privatisation of hospitals and mandatory medical insurance, especially in Dubai and Abu Dhabi, will
International Finance | March 2021 | 13
INDUSTRY
ANALYSIS
HEALTHCARE GOVERNMENT HEALTHCARE INSTITUTIONS
likely encourage spending and contribute to a more integrated health system." To curb the spread of the virus, lockdown measures were introduced in the UAE and had forced citizens to follow social protocols. On the bright side, there was a significant growth for digital health. Many healthtech companies rose during the period to fulfil the demand. For example, Meddy is a GCC-based healthcare firm that allows patients to find doctors, hospitals and book appointments with them through its web-based platform. In light of public-private cooperation in healthcare, Meddy’s Chief Executive Officer Haris Aghadi, told International Finance, that he firmly believes that publicprivate cooperation in healthcare holds the key for the sector’s development. “I believe that the pandemic put us in such a situation that we had to come together as a nation to combat it. The healthcare sector in the UAE has witnessed significant growth over the past few years and in order for it to grow more, the government’s association is key—whether it is in keeping regulations favourable for the private sector, aiding in the healthcare setup, or diminishing problems as we are currently doing in the case of Covid-19,” Aghadi said. Another important aspect of the healthcare sector in the UAE is that most of the population comprises expats. Around 82 percent of physicians and 96 percent of nurses in the UAE are expatriates. Also, citizens above the age demographic of 50 years merely
14 | March 2021 | International Finance
make up 5 percent of the population. This highlights the importance of grooming homegrown talents for the healthcare sector and it can be effectively achieved through publicprivate cooperation.
Tech innovation improves patient outcomes KPMG, in its ‘Who cares, wins, the first edition of our UAE healthcare perspectives report’ said that digital innovation is a growing priority. In the present day, a rising number of technologies are disrupting the healthcare information technology (HIT) space and at a very rapid pace. On a global level, administrations are understanding the important aspects of HIT. Additional funds in the form of administration and private investors are being poured
into developing technologies that deliver faster, cheaper and more accessible care—while keeping patients well informed. In the UAE, the government is leveraging healthtech and smart healthcare to promote an integrated experience and improve patient outcomes. In particular, the local government seeks to tackle lifestyle diseases putting the country’s healthcare system under pressure. According to KPMG, the UAE accounts for approximately 26 percent of the total healthcare spend in the GCC. It is ranked among the top 20 countries in the world in healthcare spending per capita, at $1,200. In short, the UAE’s health regulators are increasingly considering the adoption of new smart technologies. A study
“New models of care are likely to emerge, for example, greater digitalisation with a focus on remote monitoring and consultation. Telehealth, the use of communication technologies to access healthcare remotely, is likely to be integrated into PPP models and government healthcare systems. We will see increased spending on healthcare R&D and innovation” - Richard Stolz
published by PwC last year shows that 67 percent of consumers in the Middle East are willing to receive healthcare services through virtual means. Some of the UAE’s health regulators are increasingly considering the adoption of new, smart technologies to modernise the healthcare ecosystem. The country is predicted to add an additional $182 billion to its economy by 2035 on the back of accelerated artificial intelligent adoption, further contributing to its vision of becoming a leading, global technology hub for healthcare. Stolz said, “New models of care are likely to emerge, for example, greater digitalisation with a focus on remote monitoring and consultation. Telehealth, the use
of communication technologies to access healthcare remotely, is likely to be integrated into PPP models and government healthcare systems. We will see increased spending on healthcare R&D and innovation.” According to KPMG, the UAE government plans to prioritise fostering the development of future technologies. Regulatory authorities’ openness toward futuristic technologies and their application in the healthcare industry creates an agile environment.
Telehealth is a big game-changer Telehealth is a game changer and it is here to stay. Telehealth eliminates the need to physically visit a doctor’s clinic or the hospital and the pandemic has given this a
significant push. To curb the spread of the virus, social distancing measures were introduced by the government and this has resulted in telehealth becoming an important communication and treatment tool during the Covid-19 pandemic. Telehealth facilitates either a synchronous or asynchronous session between the patient and his doctor. Companies providing such services grew significantly in the last year globally. While many new startups providing telehealth services have sprouted since the beginning of last year, big players have also set up their own telehealth platforms to tap into the growing segment. Richard Stolz believes that digitalisation and telehealth have the potential to revolutionise the healthcare sector. Given the implementation of online collaboration tools and platforms driven by the outbreak of the Covid-19 pandemic, remote monitoring and consultation solutions will likely become predominant in the future healthcare landscape. Stolz said “The UAE has witnessed multiple private-sector hospital players embark on the telehealth journey throughout 2020 – within a short time of the outbreak of the pandemic, several had set up digital telehealth offerings that were quickly absorbed by the market.” “Patients can consult specialists from the comfort of their homes and offices, get e-prescriptions and sick leaves on their phones, and their medicines re-filled and delivered by the pharmacy to their doorstep,” Aghadi explained. “Telehealth has made treatment convenient for both the patient and the doctor, in terms of cost, effort and comfort.”
International Finance | March 2021 | 15
INDUSTRY
ANALYSIS
HEALTHCARE GOVERNMENT HEALTHCARE INSTITUTIONS
The UAE’s pronounced efforts in medical tourism KPMG estimates the global health tourism industry to have generated revenues of approximately $32.5 billion in 2019 at a CAGR rate of 17.9 percent for the period 2013 to 2019. According to the World Tourism Organization (UNWTO), the medical tourism industry is expected to become a $207.9 billion industry by 2027, expanding at a CAGR of 21.1 percent. The growth is attributed to the growing middleclass populations, especially in regions such as Southeast Asia. Their ability to board a flight seeking medical treatment is enhancing medical tourism. Inbound medical tourism in the UAE has grown steadily. Visitors often arrive in the UAE seeking treatments such as surgery, rehabilitation and cosmetic corrections. Dermatology, orthopedics and ophthalmology are in their prime at this point. According to the latest Medical Tourism Index Ranking, Dubai and Abu Dhabi ranked sixth and eighth for the best global destinations for medical tourism. What makes the region attractive for medical tourism is its wider tourism ecosystem. The UAE has a strong tourism sector supported by its tourism attractions, hospitality, entertainment and the provision of world-class aviation and transport logistics. These factors, along with low cost contribute to the UAE’s growing medical tourism industry. KPMG said in its report that the average cost of a hip replacement in developed countries such as the USA and Switzerland is $26,500 and $19,722 respectively; however,
16 | March 2021 | International Finance
when it comes to the UAE, the same procedure costs under $15,000. On the down-side, the UAE exhibits higher costs of medical treatments and services compared to countries such as India, Thailand and Singapore, which could push local patients to seek treatments abroad, KPMG said in its report. Aghadi explained that Dubai is the top Arab destination for medical tourism. It is slowly becoming the hub for offering world-famous treatments with its high-end facilities and medical staff. This in return is boosting the healthcare industry in the region more than ever. “Licenced healthcare professionals are becoming skilled; the entire experience is no less than a vacation with an added bonus for travelers as well. And it is important not to forget the economic boost, increase in local employment, and improved tourism activity, with the government’s focus on aiding and improving the healthcare sector in the country,”Aghadi added.
Work models likely to change for greater digitisation Certainly, healthcare in the UAE remains one of the fastest-growing sectors. This is attributed to the growing number of hospitals and clinics in the country. Aghadi said that in some ways, the pandemic has acted as a catalyst for the healthcare sector in the country. Stating Meddy’s example, he said that within a time frame of two weeks, their team created a HIPAA compliant, which is a telehealth platform that allows patients to access doctors on video calls from anywhere, at any time. “The entire
Public healthcare spending within 1-year period
2018
2019
66% 69% Medical Tourism Index Ranking
Dubai
6th position Abu Dhabi
8th position process of consulting the doctor from the payment to the followup was shifted online. Similarly, pharmaceutical companies have been in a rush to develop, clinically test, and supply vaccines,” Aghadi further explained. “However, alongside the quick innovation and collaborative problem solving, the virus has left the healthcare industry drained—overworked staff, lesser space, higher costs, and unemployment are just a few of the issues which have arisen during the outbreak. This pandemic has allowed the healthcare sector to always be ready for the future.” The level of merger and acquisition (M&A) activities not only in the UAE but across six countries of the GCC has increased
significantly since last year. Due to the pandemic, many smaller private healthcare providers were hard hit by the lockdown and many of them were mandated to allocate resources to fight against Covid-19. This has to some degrees impacted their liquidity significantly and some were even on the brink of closing their business. On the other hand, larger private healthcare groups acquiring smaller healthcare players seeking financing aid and support seemed to be a viable option to sustain themselves amid the pandemic. “Increased consolidation through merger and acquisition activity in the global and regional healthcare sectors, as smaller private healthcare groups increasingly face liquidity
difficulties caused by the Covid-19 pandemic,” Stolz said, additionally pointing out the phased return of elective surgeries were postponed during the pandemic. Teleradiology and online pharmacy retail are witnessing unprecedented demand. An increasing number of citizens in the UAE are adopting these kinds of new services which were still relatively new to the sector. The pandemic has also led to greater government focus on healthcare spending, in terms of laying emphasis on an efficient, robust and dependable healthcare sector for the welfare of its people. As a result, Stolz hopes that policies and decision-making will likely be conducted in a more efficient and coordinated manner. Additionally,
the pandemic is anticipated to drive global intergovernmental collaboration. For example, the World Healthcare Organisation and other international and national healthcare authorities will jointly monitor the potential emergence of viruses, Stolz added. “New models of care are likely to emerge, for example greater digitalisation with a focus on remote monitoring and consultation. Telehealth, the use of communication technologies to access healthcare remotely, is likely to be integrated into PPP models and government healthcare systems. We will see increased spending on healthcare R&D and innovation,” he added. editor@ifinancemag.com
International Finance | March 2021 | 17
18 | March 2021 | International Finance
COVER STORY QATAR'S VISION FOR GROWTH
Preparing for
success SANGEETHA DEEPAK
Power International Holding is expanding its work horizontally and vertically into diversified sectors in Qatar and regions of the world
Founded by Moutaz Al-Khayyat and Ramez Al-Khayyat, Power International Holding is a business conglomerate headquartered in Qatar. Overseeing the conglomerate’s portfolio which sits across six main sectors: general contracting, industries and services, agriculture and food industries, real estate, lifestyle and services, has given Moutaz Al-Khayyat and his younger brother Ramez Al-Khayyat a wide exposure to nearly all facets of Qatar’s rapidly growing economy. As part of a bigger vision, Power International Holding seeks to ensure sustainability and success for each of its business enterprises within those sectors—by providing them with necessary support functions, tools and resources. Interestingly, grouping of the sectors is carried out by leaders who proactively work together in multi-disciplinary groups. This in turn ensures that its business enterprises will continue to thrive and flourish in the coming years. Power International Holding has transformed itself How diverse is Power International as a second-generation business organisation expanding Holding's portfolio and what are its horizontally and vertically into diversified sectors and efforts in promoting sustainable growth regions of the world. By practice, the conglomerate for business enterprises? Power International Holding is a uses its vertically integrated business units to create Qatari conglomerate comprising six sophisticated products and services. In an interview main subsidiaries. We challenge all with International Finance, Chairman of Power these businesses to run a continued International Holding Moutaz Al-Khayyat, tells us about programme of becoming more what unites the group of companies and their collective efficient, responsive, and agile. We work in enhancing the nation's economic attractiveness believe that these principles will best in line with Qatar National Vision 2030. International Finance | March 2021 | 19
INDUSTRY
COVERSTORY QATAR'S VISION FOR GROWTH
POWER INTERNATIONAL HOLDING
serve the needs of our customers, whether they are prominent real estate developers or individuals consuming our cartons of milk. First: UCC Holding is one of the world’s top 250 contractors, according to Engineering News-Record. Focused on four main areas of activities, such as infrastructure and heavy construction; buildings; marine works; and oil and gas, UCC Holding is currently constructing what is essentially a new city in Al-Wakrah, with two vast residential projects, as well as mosques, public spaces and hypermarkets. Second: Elegancia Group is a conglomerate of excellence, comprising companies working in their individual industry of specialization. The group spans four major divisions in sectors such as services, industries, healthcare and contracting. A subsidiary of Elegancia Group, Elegancia Healthcare, has recently signed an agreement with Cedars-Sinai Los Angeles for The View Hospital. The 250bed facility is located in Al Qutaifiya, in the vicinity of Lusail, Katara and The Pearl, Qatar, and will open in August 2022. Third: Baladna QPSC is Qatar’s agrifood industries champion. Established three and a half years ago, Baladna spans 2.5 million square metres of land on which over 20,000 cows graze. Within a year of launch, Baladna had helped Qatar to achieve 100 percent milk self-sufficiency and since then it has diversified into fruit juices, UHT long-life milk, laban, and a vast range of other dairy products. The group was successfully listed on the Qatar Stock Exchange last year. Fourth: Assets Real Estate works in hospitality, commercial, residential and mixeduse developments across Qatar, Lebanon and Oman. This includes THE e18hteen tower in the Qatari coastal city of Lusail, a project that was recognised to be the nation’s best commercial high-rise development. The 23-storey residential Baywalk Tower on The
20 | March 2021 | International Finance
Demonstrating strength across PIH companies
Flagship projects
+250
Pearl is a luxurious artificial island off Doha that was completed this year. Fifth: AURA Group is Qatar’s leading lifestyle business, with particular strengths in food and beverage and entertainment. This includes Megapolis, an unrivalled entertainment centre that has top quality arcade games, escape rooms, bowling and karaoke. Despite the pandemic, AURA has secured international brands for the Mall of Qatar and The Pearl by early 2021, including a burger joint to the stars, Black Tap, and French restaurant Beefbar. Sixth: Power International Holding General Services include Joury Travel and Tours and Printshop. Established in 2012, Joury offers personalised travel tours, including inland expeditions and stays at some of the Middle East’s finest
COVERSTORY QATAR'S VISION FOR GROWTH
Workforce
Awards and recognition
+45,000 +200 hotels. Printshop uses advanced technologies that can fulfil our clients requirements, be it in UV printing, offset printing, 3D printing, solvent printing, sublimation, die cutting, laser cutting or engraving.
How are those business enterprises performing in their respective sectors amid the coronavirus pandemic? Baladna, for example, is used to thriving even in the case of crisis as it was born under the shadow of the diplomatic crisis that led to the blockade. The company continues to thrive, supplying more than eight out of every 10 glasses of milk consumed in Qatar. It has recently partnered with Veolia Water Technologies to upgrade the wastewater treatment facilities at its farm in Al Khor. The treated water will be
used for irrigation throughout the farm, and during hot summer months, it will be used to spray and cool the cows, saving thousands of gallons of water every month as part of the group's ongoing sustainability initiatives. However, construction business has obviously been difficult across the world, but we have only faced challenges in terms of slight slowing of projects. Safety and sustainability continue to be the core pillars of Power International Holding's growth story, with UCC recognised as the Country Winner – Qatar 2020 by the British Safety Council. UCC was felicitated based on the safety record of our workers and the Qatari government has signaled greenlight for a number of our projects. The FIFA World Cup is set to be hosted in Qatar in 2022 and the pandemic won’t stop the nation from preparing for the sporting jamboree. Our affiliated company Elegancia Facilities Management has assisted us in many ways. It has invested heavily since the beginning of
International Finance | March 2021 | 21
INDUSTRY
COVERSTORY QATAR'S VISION FOR GROWTH
POWER INTERNATIONAL HOLDING
the year and is furnished with state-of-theart disinfection vehicles and equipment.
What is the role played by Power International Holding in realising Qatar National Vision 2030? As you can see based on our range of sectors, from food self-sufficiency to laser cutting to building infrastructure to providing worldclass entertainment, Power International Holding embodies Qatar National Vision 2030. The ambition is to diversify the economy away from oil and gas and our subsidiaries are leading that charge.
UCC subsidiary has been awarded a contract for developing two residential projects worth over £1 billion in Al-Wakrah, a historic fishing village that lies on the shoreline of Qatar’s coast. How will the new development contribute to Qatar’s construction sector and cement UCC’s global reputation? UCC recently signed a deal to develop Qatar’s second biggest city, building two residential projects in Al-Wakrah. Once completed, the projects will house more than 60,000 people, along with new schools, leisure spaces, and green transport connections for visitors and residents. The city will be home to tens of thousands of people, transforming UCC from a national champion in the Middle East and North Africa (MENA) to the builder of the region’s most modern cities. The contract points to the fact that Qatar’s construction sector is thriving and will continue to be a prime focus for the economy in the future.
A report has taken into account Qatar’s work in following sustainability principles in the construction of various World Cup projects. What opportunities will they bring to build resilience in the construction sector and how will Power International Holding assist in building that resilience? All World Cup stadiums need to obtain the Gulf Organisation for Research and
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Global operations Qatar United Kingdom France Morocco Turkey Lebanon Oman Maldives
Development’s green building standard Global Sustainability Assessment System certification. The Global Sustainability Assessment System is designed specifically for the MENA region and drives sustainability endeavours and climate actions by addressing global challenges in a regional context. UCC Holding is an affiliate member of Gulf Organisation for Research and Development and is also a sponsor of Lean Construction Institute-Qatar. Despite the recent talk of change, there are many aspects that remain the same and will continue to offer us tremendous growth opportunities. People want a home they can be proud of and visit restaurants or entertainment venues with their families. For our colleagues, they should feel proud that they are part of
COVERSTORY QATAR'S VISION FOR GROWTH
delivering projects that not only seek to make the World Cup a success, but also for people to enjoy and value the moment for generations to come.
What is your outlook for the domestic real estate sector over the next two to five years considering that the nation has loosened restrictions on foreign property ownership? We believe that investments in tourism, infrastructure and real estate projects will increase after the pandemic. The Foreign Property Ownership Law, which was introduced in October this year, is particularly beneficial as it encourages competitiveness among non-domestic buyers and businesses. For example, this law increases the number of places where non-Qataris can buy properties outright and permanent
residents will be able to run commercial operations without a local partner.
How has Qatar’s status translated into economic gains after it won the 2022 bid to host the FIFA World Cup? Statistics show that there were a number of boom years as Qatar built the infrastructure needed to deliver a fantastic sporting spectacle. In 2013, the real estate price index soared 16.45 percent when adjusted for inflation, followed by 31.81 percent and 10.75 percent in the next two years. Moreover, this has helped Qatar
International Finance | March 2021 | 23
INDUSTRY
COVERSTORY QATAR'S VISION FOR GROWTH
POWER INTERNATIONAL HOLDING
to diversify the economy away from its previous reliance on oil and gas, especially with the construction sector adding value to hospitality, retail and leisure industries, through development of new restaurants, shopping malls and hotels. With all eyes on the 2022 FIFA World Cup, I look forward to highlighting the best of Qatar and hope to leave a legacy long after the iconic golden trophy is presented in Doha.
The conglomerate has profound knowledge and industry expertise through developing complex projects over time. How do you see its collective experience contributing to economic sectors in Qatar and regions of the world? The Al-Wakrah project is a significant part of our growth in Qatar. As a mature business, we can now build new modern ideas for the development of a smart city. Beyond Qatar, our companies are already exporting to and developing several MENA countries. Perhaps the most exciting work coming up for us is in Malaysia, where Baladna will support another nation in its drive to dairy self-reliance.
What will be the impact of the recent cooperation agreement with Dar Al Sharq on enhancing public relations in the Arab world? Dar Al Sharq is a leading institution in
24 | March 2021 | International Finance
providing distinguished services in the field of media, advertising, and public relations. We will work together to take public relations to new heights for employees in the Gulf and the Arab world. Supported by Power International Holding, Dar Al Sharq has started work on establishing the first Arab website that specialises in integrated services for public relations experts in the Gulf and neighbouring countries. This database will be a reference point for the public relations industry, modernising it throughout the region.
How does Power International Holding see Qatar’s strength in terms of its economic diversification away from oil and what sectors need to be in sharp focus to achieve that diversification? Construction and manufacturing are clearly the key beneficiaries of Qatar’s diversification away from oil and gas. We know that the economic multiplier of those sectors is significant, creating growth in other sectors. If you take the construction sector, it has flourished, backed by four years of budget surpluses to fund public spending. We have a fast-expanding airport, new metro lines and billions of dollars allocated for new highways. All of this points to better connectivity—and further diversification will seamlessly follow.
Will Qatar’s economic readjustments be on point, given that the value of its construction sector is estimated to reach £57.04 billion by 2025? We are confident that the economy will rally significantly, putting the Qatari construction sector back on track. The development of the nation’s transport infrastructure,
COVERSTORY QATAR'S VISION FOR GROWTH
creation of world-class sporting venues and building modern residential and hospitality projects are key drivers in catering to the growing population.
The pandemic is notoriously affecting businesses worldwide. How has it disrupted the work so far and how is the conglomerate coping with the crisis? Of course, there were disruptions, but we have kept our workforce safe and use the best disinfection equipment available. My absolute priority as the chairman has been to look after our people throughout the pandemic. By ensuring that we have the right measures and equipment in place, we have been able to keep people safe and minimise disruption, meaning that most of our projects have remained on track. I’m incredibly grateful and proud of my teams’ efforts, and I believe that we are well positioned for continued growth. We are ready to go when pent-up demand is unleashed as the economy recovers. What the pandemic has shown us is how important the digital world has become—and how technology builds resilience. For example, we created a comprehensive digital shopping experience for the Mall of Qatar. This includes a customer data platform that allows engagement with customers, a generous loyalty programme to encourage frequent visits and an innovative ecommerce platform to complement the experience. Another example is AURA Hospitality’s adoption of digital solutions. Scannable QR codes are used to replace physical menus. The group has also introduced Wajbati, the one-stop-shop for shoppers, combining food delivery, ingredient delivery and food subscription service—all in
one app. We are working with some of the top players in digital transformation, such as Google and SAP, to future proof our business frameworks and processes. Innovation and digitisation remain our priorities. We want Power International Holding to become agile, data-driven and flexible. While hard work and collaborative approach has earned the conglomerate years of success, we must always consider what comes next and be ambitious about our investments.
How is the pandemic influencing the key sectors of Power International Holding? Arguably, this year has shown us that the most effective business leaders must be ready to adapt now more than ever. The pandemic has obviously slowed down most of the economic sectors. Businesses have had to prove their resilience and Power International Holding’s model has demonstrated significant strength. We are looking forward to bounce back not only in Qatar, but also in the MENA region and the rest of the world. Having overcome short-term challenges, we certainly seem to have prepared Power International Holding for more years of impressive growth and achievements. editor@ifinancemag.com
International Finance | March 2021 | 25
INDUSTRY
IN CONVERSATION
ONYEKACHI IZUKANNE CO-FOUNDER AND CEO OF TRADEPORT
Intra-African trade has been around 15 percent over the past five years, necessitating an increased economic integration
The current state of trade value chain in Africa IF CORRESPONDENT
Africa has made tremendous economic progress in the last two decades, following the negative per capita growth. The reinstated fact is that African countries would hugely benefit from more intense trade and investment linkages. This even includes higher intraregional trade, according to a report published by the Organisation for Economic Cooperation and Development. Recent global crises like the coronavirus pandemic and climate change have magnified trade disputes among the world’s leading trading partners. In this context, it is important for East African governments and industries to make a rapid shift in focus from global value chains to regional ones. Besides the pandemic-related complexities encountered by African countries, there are other substantive reasons to introduce a new strategic approach for regional value chains. This is because some of the existing supply chains are quite complex, even resulting in carbon emissions. Also, the East African markets have resilience compared to their global counterparts due to geographical proximity, thus helping regional industries to sail through the pandemic. So having advanced approaches will help to enhance regional trade on various levels. On January 1, the African Union introduced the African Continental Free Trade Area, which explores two crucial elements: Tap into manufacturing to mitigate risks in global supply chains and leverage integral and global supply chains. Because the pandemic has stalled production and is reducing trade between several countries, local production capabilities have helped them to cope with the challenges. The report published by the World Economic Forum states that an increase in local production could help to strengthen supply chain resilience.
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SUPPLY CHAIN AFRICAN CONTINENTAL FREE TRADE AREA
Technology and connectivity are identified as key enablers for the continent’s growth and innovation on this front. Their impact was portrayed through the African Medical Supplies Platform which is a collaboration between the African Union, foundations, corporations and several international organisations. By the numbers, intra-African trade has been around 15 percent over the past five years, which necessitates an increased economic integration on the continent. In 2019, intra-African trade had reached $137.6 million, which was 4.6 percent less than in 2018. Of the recorded trade, only 16 percent of total African exports and 12 percent of African imports were transported to and from the continent during that year. In an effort to understand the trade value chain in Africa well, International Finance carried out an interview with TradePort. Onyekachi Izukanne, cofounder and CEO at TradePort discussed the trade value chain environment on the continent, identified problems and TradePort’s industry focus at large. Izukanne is a seasoned entrepreneur with 17 years of experience in technology and consultation. He co-founded C2G Consulting, a technology consulting
practice that he bootstrapped to become the leading SAP Partner in West Africa by 2013.
What is the current state of Africa’s trade value chain and what is your outlook for the industry in the next five years? Over the years, the trade value chain in Africa, similar to several other emerging economies, has been defined by a very high-level of fragmentation, a preponderance of informal players and multiple layers of middle-men, often resulting in an inefficient supply chain. To significantly improve this value chain, a lot of investment is needed in infrastructure, as well as in technology to digitise and organise the various operators and operations within the space. There has been a sizable increase in the level of investment in this regard on the continent in recent years, but nowhere near the levels required to drive extensive transformation across this sector. Over the next few years, most of the world will be recovering from a global pandemic and Africa will be no different. Technology will play a huge role in revitalising the African business landscape, as a whole, and we anticipate more capital flowing into
International Finance | March 2021 | 27
INDUSTRY
IN CONVERSATION
ONYEKACHI IZUKANNE CO-FOUNDER AND CEO OF TRADEPORT
Technology will play a huge role in revitalising the African business landscape, as a whole, and we anticipate more capital flowing into players offering digital solutions to make the market more fluid
players offering digital solutions to make the market more fluid and address these fundamental challenges.
What are the identified distribution problems on the African continent? At the core of the challenges, we face in the distribution in Africa is a lack of access to finance. While micro SMEs and other small businesses in the informal sector drive the bulk of distribution in Africa, these players are unable to obtain bank loans, have no access to affordable capital and very limited access to any capital at all, and have to rely on internal funds, or cash from friends and family, to launch and run their enterprises. The World Bank estimates an unmet financing need for micro-SMEs of $331 billion every year in sub-Saharan Africa alone. Coupled with poor infrastructure and significant fragmentation of the supply chain, this results in some of the highest distribution costs per dollar compared to other regions in the world. While the population is increasingly mobile-first, more needs to be done to leverage this access to digital platforms to provide data-driven financing solutions that unlock working capital to these millions of small and micro businesses in a bid to fill this funding gap.
In 2018, Partech announced the first Partech Africa fund investment in your company. How has the fund investment added value to your offerings today and are there any prospects in the near future? Partech led our series A round of fundraising which was pivotal in helping us find and prove our business model. On the back of this, we have built out a platform that facilitates distribution across the value chain, while enabling access to finance and new markets for retailers and distributors on our network. Building on this we have had additional high profile investors come on board to support our push to scale this across
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more markets in Africa while deepening our value proposition for our existing customer base. We are currently scaling at a very fast pace, and expect this hypergrowth to continue over the next several years.
Which African countries are evolving the most in the trade supply chain and why? Are those markets in TradeDepot’s focus? There are many similar retail markets across Africa, in terms of size, retailer profiles, manufacturers and consumers. For example, we see an opportunity to replicate what we are doing in Nigeria across some of the main cities in South Africa and Ghana, alongside other similar markets in East Africa and Frenchspeaking West Africa. Several of these countries benefit from favourable business environments and relatively stable economies, and we will continue to explore expansion on a city-by-city basis across these countries.
How is your company’s 360° solution well-integrating actors in the trade value chain, such as manufacturers, distributors and retailers? Our platform aggregates data from the different players in the value chain, providing us with key insights to facilitate and accelerate trade. One key area in which we currently leverage this data to totally transform the value chain is in the provision of inventory financing to retailers on behalf of manufacturers and distributors with our Embedded Finance offering. We leverage purchase performance histories for these retail store owners to determine creditworthiness and on the back of this extend working capital in the form of short term loans in partnership with commercial lenders and other aligned credit investors. These loans allow these retailers to order additional goods, repaying the loan once they’ve sold the stock, allowing them to sustain and scale their businesses. For the manufacturers, this availability of working capital to retailers makes it easier for them to get their products into the millions of small retail stores, allowing them to sell more at a lower cost-to-serve.
Why are retailers in some African countries subject to some of the highest product distribution costs globally? The factors behind high distribution costs vary
SUPPLY CHAIN AFRICAN CONTINENTAL FREE TRADE AREA
but some of the main issues include high costs of financing, inefficient supply chains, fluctuations in currency, infrastructure efficiencies and tariffs imposed by governments.
Last year, TradeDepot raised $10 million to expand its business in financial services and credit offerings for retailers. How have the proceeds from the investment contributed to developing supply chain services for its African SMB? Small retailers often need fast and flexible loans but the existing mix of microfinance banks and cooperative societies are complicated, fragmented and time consuming. It, therefore, made business sense to plug this credit gap in retail by offering solutions that enable the circular flow between manufacturers, retailers and consumers. Our ShopTopup embedded lending product enables retailers to buy larger quantities of stock when the need arises, which also benefits manufacturers and leads to a circular flow in the informal economy.
How has the pandemic impacted Africa’s trade and value chains and how are they picking up pace as we move into 2021? In some ways, the pandemic has sped up the digitisation of many of the processes in the retail supply chain. From a supply perspective, one of the biggest impacts we observed, at a high level, was the improved performance of fast moving consumer
goods. Consumer demand for food items significantly grew, as was the demand for home care items, electric appliances and home building supplies. Some restaurants that embraced home delivery also had a good year despite the pandemic. There’s nothing to suggest that 2021 will be remarkably different to 2020. We expect at least the first half of the year to be very similar in terms of pandemic behaviours, such as maintaining social distancing. Ecommerce is projected to see real growth and demand from small retailers for digital solutions in the supply chain should also be higher as the capacity to access wholesalers remains limited.
What is TradeDepot’s supply chain goal in the next five to 10 years and what are its planned efforts to become the supply partner for Africa’s retail stores? We will continue to invest in expanding our footprint across Sub Saharan Africa, first in the number of states we serve in Nigeria as well as other countries across Africa. We will also focus on expanding our Embedded Finance business which kicked off mid-2020. Ultimately we are building the future of distribution in Africa and by digitising these retail stores and providing them with access to financing we are able to execute our mission which is to create better everyday lives for retail store owners in emerging markets. editor@ifinancemag.com
International Finance | March 2021 | 29
INDUSTRY
THOUGHT LEADERSHIP
INSURANCE DIGITAL EXPERIENCES
The urgency to tail retail banking and offer customers a highly engaging digital experience could limit the industry’s own course
CALLUM RIMMER FOUNDER AND CEO OF BITS
Innovation in global insurance The pandemic has forced every industry to review its operating models and approaches to customer experience in light of rapidly changing customer needs and expectations and evolving cultural behaviours. This is particularly pertinent when it comes to motor insurance as global lockdowns, social distancing measures and sweeping changes to working habits have led to a huge reduction in car usage.
Ripe for change According to the J.D. Power 2020 Auto Claims Satisfaction study, there was a 22 percent decrease in car insurance claims since the pandemic in the US. In the UK, we have seen a few insurers like Admiral offer cash refunds to customers as a result of travelling reduced miles. While it is a nice gesture, it is not one reflective of the disparity of the situation—both historical and present. That is because the insurance industry has been ripe for change for years—long before Covid became part of the vernacular. Motor insurance, in particular its pricing models, are seen as opaque and unfair, and because it is mandatory if you own a car, motor insurance still feels like a tax rather than a purchase decision. According to this 2018 study (BritainThinks) by the Association of British Insurers, seven in ten (70 percent) insurance customers agree that, no matter
30 | March 2021 | International Finance
what they do, their insurance premiums seem to go up every year. There is no doubt consumers are overwhelmingly dissatisfied with the level of service they are receiving so the industry is at an inflection point. It’s a situation not dissimilar to that of the banking sector some years ago. Early reticence towards online channels was quickly squashed that means—over a decade on—the industry is a poster boy for delivering a seamless engaging digital experience in everything from account opening to payment methods.
Dynamic digital experiences are sought after Not least because customer expectations have increased markedly, people now rightly expect insurance products and services to measure up to the experiences they enjoy with their other consumer purchases. They expect to be able to review their usage data in real-time, like they do with their fitness apps, access financial statements like they do with their banks (Monzo) and communicate like they do through messaging apps. Today’s insurance customer wants a dynamic and engaging digital experience. Instead, what they are getting is cumbersome and one-dimensional products because the insurance industry has been slow to adapt to technology innovation. Efforts to
digitise and optimise customer experience have largely failed. Insurance has rested on its laurels for too long. Insurers should already be considering how to embrace consumer trends in their products for both the short and long term. In many cases, this means catchingup to what is current and urgently putting measures in place to scale and pivot their products and services to respond to ongoing changes in driving habits and digital consumption. Insurers simply won’t be able to survive if they continue to treat customers as they have done up until now - they can’t afford the shockingly low retention rates that they’ve got away with until now. This is because a holy trinity of mobility, customer expectations and democratised data are dictating innovation. New rating engines and new products are only part of the solution. How insurers interact, engage, communicate and manage data will also be critical. Customers will want to know how answering a set of questions can truly reflect their premium price fairly. The data that can be provided at the onset (and during the life of the project) from open banking integrations, activated vehicle safety features, use of assisted driving features and usage data are all elements that will contribute to future policies. Insurance companies urgently need to put the customer first or they risk losing market share and becoming irrelevant.
22 percent
decrease in car insurance claims since the pandemic in the US.
Not seeing the big picture? Traditional players and those insurers unwilling to meet the speed and scale of change are not going to retain the level of customers they have had before, which then by proxy means they will need to spend more money to go out and win customers back. The answer lies in evolving to offer a product that will retain customers and evolve the wider industry at the same time. As an example,
International Finance | March 2021 | 31
INDUSTRY
THOUGHT LEADERSHIP
INSURANCE DIGITAL EXPERIENCES
we have seen years of insurers concentrating heavily on achieving a high-ranking on price comparison sites, which has led to a situation where, largely, the industry has a commoditised product with little differentiation or USP. Yet, we are witnessing major macro changes to motor insurance in the form of partially assisted driving on the road and the rise of electric vehicles (EV). Anyone who has an EV is immediately penalised on price, in some cases quite heavily, even though EVs are safer on the road. This is essentially due to fear of change within the insurance industry and a misguided desire to keep the status quo. Because there currently is not enough volume for insurers to insure EV drivers by their normal statistical models, they have tried to ignore the situation, rather than develop the innovative solutions that are needed (and will undoubtedly happen anyway). Obsessed with price comparison sites and a race to the bottom on pricing, insurers have neglected to see the bigger picture. Many simply haven’t developed the right mindsets, cultures and approaches to respond to changes in consumer needs and to get on the front foot through innovation. They're putting themselves in a position that the only way that they can stay competitive is to lobby governments not to allow these types of technology on the road. And that’s why, rather than focusing on getting ahead of new (and some would say inevitable) technology innovation and collaborating on solutions to potential challenges, some insurers and legal firms appear to be focused on stifling and delaying progress. Insurers should also be taking an active role in encouraging policyholders to consider the micro (air pollutants) and macro (greenhouse gases) environmental impact their car usage has. It is estimated that 36,000 deaths every year are caused by air pollution in London. This has led to the introduction of the ultra-low emission zone, which will expand from 25th October 2021 to create a single larger zone up to the North Circular Road (A406) and South Circular Road (A205). Insurers have no reason not to be helping educate drivers about the pollution their cars emit and helping them to consider how and when they drive. They could be advising on the best times of day to use their car and the best routes to take to limit
32 | March 2021 | International Finance
We are witnessing major macro changes to motor insurance in the form of partially assisted driving on the road and the rise of electric vehicles (EV). Anyone who has an EV is immediately penalised on price, in some cases quite heavily, even though EVs are safer on the road. This is essentially due to fear of change within the insurance industry
environmental impact. Intervention, in support of governmental actions, can help to save lives. We are at a nexus point with car technology of changing user behavior, changing customer expectations and changing technology. And right now, progress is being held back because of the insurance industry. Businesses in the insurance industry need to make a choice and pick a side—they can either be an inhibitor or an innovator but, in the long-term there’s only going to be one winner. Callum Rimmer, a physics graduate from the University of Bath, co-founded By Bits and By Miles, a company that provides insurance tech to deliver their insurers compelling new propositions and supercharge their capabilities. editor@ifinancemag.com
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INDUSTRY
INSIGHT
ENERGY
Hungary has a large potential for solar power generation with average solar radiation of over 1300 KWH/m²
Why Hungary’s power market is a hotspot? IF CORRESPONDENT
The Hungarian government is on an interesting spree to increase the installed photovoltaic capacities by sixfold between 2020 and 2030. By this time, the country has faced enough pressure to develop a clear plan for its electricity generation mix over a fleet of ageing coal-fired power plants and a nuclear power plant. In 2018, the European Union’s skyrocketing prices in the emissions trading system forced the government to hold discussions with the country’s last big ignite power plant Mátra about phasing out coal and installing renewable energy. Mátra’s lignite accounted for 16 percent of the country’s carbon dioxide emissions in 2016 and half of the energy sector’s pollution. A big chunk of the country’s coal and ignite basins have been closed and the number of miners has significantly reduced from 125,000 in 1965. The increasing frequency of climate change impacts had urged the European Union to triple the cost of a pollution permit in a year. In the same year, it was reported that the carbon price around €18 a tonne gave gas plants a competitive advantage over coal plants. The prices were anticipated to continue rising over the next five years from then, forcing a strong transition away
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from coal. Hungary is not as highly reliant on coal as some of its central and European counterparts like Poland, the Czech Republic and Bulgaria which have the highest percentage of coal plants, but the country has shown resistance to measures that could drive out the wicked fossil fuels. The European Union carbon prices were anticipated to continue growing by an average of €35 to €40 per tonne over the period between 2019 and 2023. The country’s second national climate strategy that was approved by the parliament in October 2018 thoroughly supports three essential factors: reduce carbon emissions by replacing fossil fuels with clean energy; improve energy efficiency and develop a green economy through forestation. There was a common forecast around that time that coal-fired power plants in the country could sharply decline by 2025. The country’s efforts in investing in photovoltaics to meet the European climate targets is gradually getting off the ground and the market is a window of opportunity for foreign investors. It has been stipulated that the ratio of renewable energy resources must reach 30 percent by 2030 in accordance with the Paris Climate Agreement.
INSIGHT HUNGARY ENERGY
Growth of photovoltaics in Hungary 2017
300 MW 2018
640 MW 2019
1277 MW 2020
1920 MW
Hungary to ditch coal by 2030 Hungary, was one of the EU’s most coal-dependent member states, however, with the EU raising prices of lignite as a way of reducing greenhouse gases, Hungary is shifting its focus to renewables as its principle power source. The Hungarian government believes that a predicted price drop of up to 30 percent in photovoltaics gives the country the chance to meet the energy directives proposed by the EU, which states that all 28 members within the bloc must source 20 percent of their energy from renewable sources by 2020. President Janos Ader said on September 24 at the UN Climate Action Summit in New York that Hungary will increase its solar power capacity ten times by 2030. It will stop producing energy from coal while expanding the production of nuclear power plants. However, this has pushed the mining communities into a state of apprehension when it comes to their future. Many believe Hungary wants to emulate Spain in this regard. Spain also announced that it will aim to derive 100 percent of its energy needs from renewable energy sources by 2050. To achieve such a feat, the Spanish government has come up with a transition plan worth €250 million. As per the plan, the country
is planning for a transition of workers in the coal industry to clean energy jobs by providing them with the right kind of training and requisite skills. Currently, Hungary has 2000 MW of PVs installed in the country. However, it aims to increase this to 30,000 MW by 2022 in its renewable drive. This makes Hungary an attractive proposition for solar investors seeking to invest in the CEE region. With Hungary taking its commitments to renewable energy seriously, the pivot is set to be closely observed by investors.
Hungary’s energy mix Hungarian energy supply is dominated by imports from Russia. Hungary imports around 80 percent of its gas requirements from the Russian majority stateowned multinational energy corporation Gazprom. With both domestic gas and oil production has peaked, many believe that imports will only increase from here on. However, exploring the renewable energy potential could help counter that. Nuclear power accounted for 49 percent of domestic electricity generation in 2019 in Hungary. Meanwhile, gas contributed to 23 percent of the total electricity generation, coal 15 percent and
International Finance | March 2021 | 35
INDUSTRY
INSIGHT
ENERGY
Hungary energy mix Nuclear
49%
Renewable energy
12% Gas
23% Coal
16% renewables 12 percent. While nuclear is expected to continue to be the primary source of energy, renewable is expected to grow in Hungary in the coming years. According to Enerdata.net, half of the gas in Hungary is consumed by households and services. The share of industry in gas consumption has increased since 2000, from 18 percent to 22 percent in 2019 (including non-energy uses), a share higher than that of the power sector (19 percent). Hungary proposes a share of 20 percent energy from renewable sources in the gross final consumption of energy in 2030 and corresponding sectoral shares. In 2015, 10.5 percent of the gross Hungarian electricity production came from renewables, whereas around 52 percent of that amount was from biomass. Wind energy stood at 22 percent, 7 percent was from hydro-energy and solar contributed to only 3 percent of the total.
Hungary to reach 6 GW of solar capacity by 2030 Currently, Hungary has a solar power capacity of 2 GW, the government aims to achieve a three-fold increase by 2030. Due to its geographical position, Hungary has a large potential for solar power
36 | March 2021 | International Finance
generation. Compared to other parts of Europe, Hungary’s average solar radiation is over 1300 KWH/m². The good news for Hungary is only a very small part of this is being tapped into. It was reported that there is a tender for more than 2 GW of capacity. Looking at the current scenario and the government’s commitment towards renewables, we can expect much more growth especially in household and small size power generation. What Hungary wants to do is to increase the rate of carbon-free electricity production to almost 90 percent by 2030. This will be achieved by increasing activities in nuclear and solar power in the country. The minister further added that scaling up production capacity in the solar sector is also important from the aspect of industrial policy. According to him, the European countries could reach a level where they could compete with Asian countries that dominate this segment. However, to be competitive enough the European countries need new technological advancement, production of renewable energy equipment and also enough funding. Giving the example of the Ecosolifer plant, the minister said that similar projects could help Europe to reposition itself in the global market.
INSIGHT HUNGARY ENERGY
Share of renewable energies in gross final energy consumption in EU-28 countries in 2019 (in %) Sweden
56.4 %
Finland
Hungary
43.1%
Last year, media houses also reported the completion of a 20 MW photovoltaic power plant at the town of Felsozsolca in Northern Hungary. The newly installed plant now delivers clean energy to around 8000 homes. Similarly, Hungarian state-owned utility MVM is planning to expand its solar photovoltaic (PV) footprint in the country to about 1GW. Earlier in August, it's renewable subsidiary MVM Zold Generacio closed a tender for new solar PV units of 0.3 to 60MW each, with a combined capacity of 300MW. Under Hungary’s National Energy Strategy up until 2030, the country plans to ensure the long-term security of energy supplies and increasing the share of renewable sources such as solar in its energy mix. The strategy also points out the importance of fossil fuels for future generations. Besides boosting renewable energy capacity, the central European country also plans to boost its nuclear energy capabilities as well. The National Energy Strategy further notes that the construction of new power plants will be required to replace those that will become obsolete in the future.
Investors optimistic towards Hungary’s solar market In the Renewable Market Watch’s yearly updated
43.1%
‘Attractiveness index for solar photovoltaic (PV) energy investments in CEE and SEE countries in 2020, Hungary is ranked among the top 10 countries when it comes to attractiveness for solar photovoltaic (PV) energy investments. The very act that Hungary is focused to meet the growing need for power in the country through renewables and reduce its carbon footprints makes the country an investment hotspot. Notably, Hungary is also one of Europe's biggest coal consumers. Hungary plans to increase solar panels to 30,000 MW by 2022, making the country a magnet for solar investors. Another factor that makes Hungary a hotspot for renewable investment is the fact that the number of sunny hours in Hungary is between 1,950 and 2,150 per year. If the potential is tapped into, the country could generate a huge amount of energy which could equal several tens of thousands of MW. Investors across the globe understand Hungary’s potential and as authorities sanction projects in the future in this regard, we could see a rush from green investors to put their money in renewable projects in Hungary. editor@ifinancemag.com
International Finance | March 2021 | 37
IF Advertorial - International Development Bank
Iraq’s banking system branching deep into technology Advancing technology in digital banking to succour clients
T
he International Development Bank (IDB) was established in 2011 with an initial capital of 100 billion Iraqi Dinars and has now developed to be a paid-up capital of $210 million. IDB has established itself among the leading banks, both locally and regionally, offering commercial banking services to both corporate and retail customers. The Khalaf Abed Kareem family along with several other Iraqi investors were among the bank’s initial investors. While the Khalaf Abed Kareem family remains the biggest shareholder with 61 percent of total equity, the number of shareholders has grown to include more than 100 holders of common shares, which have been listed on the Iraq Stock Exchange since 2018. Ziad Khalaf Abed Kareem, Chairman of Board of Directors, IDB, institutionalised the firm's foundations and principles for operations. With his leadership, IDB was able to acquire a significant market share of the total corporate, small and medium enterprises (SME), trade finance, retail banking, electronic card issuing and overall local banking market. The bank has adopted International Financial Reporting Standards (IFRS) since 2017 and is abiding by the norms and regulations relating to Compliance and Anti-Money Laundering. The bank also works with Ernst & Young as external auditors to ensure both accuracy and transparency on all bank levels of operations. IDB was also rated as the Best Bank in Iraq as per the Central Bank of Iraq CAMEL rating for four consecutive years. It is also the first Iraqi Bank to engage and sign a memorandum of understanding
38 | March 2021 | International Finance
(MoU) with the IFC related to the investment side, empowering Iraq’s private sector whilst promoting economic growth. IDB has succeeded in establishing a wide network of correspondent banks in more than 10 countries around the world to support the bank’s trade finance and external transfers. Its continuous expansion strategy for its local branch network will see the bank expand new branches every year. On the other hand, IDB also expanded its operations internationally by becoming the first Iraqi Bank to establish an official presence in the UAE as well as Lebanon.
IDB playing a leading role in the reconstruction of Iraq
IDB has more than 40 percent market share of the retail banking business in Iraq, more specifically in the Central Bank of Iraq’s initiative, which is targeted at the public sector employees’ salary domiciliation where IDB has more than 250,000 domiciled accounts as of today. IDB also offers a wide range of products and services to satisfy its client’s financial needs such as different types of accounts, loans on housing, personal, travel, wedding, car, medical and education, consumer finance, cards like credit, debit, pre-paid, gift and internet, corporate payroll and cash management, billing and collection services and western union money transfers. Services for the corporate include trade, corporate and SME finance and payroll services. It is also the first Iraqi Bank to be granted Principal Membership with international companies’ Visa and
IDB will continue developing bundles of competitive products and services along with adequate e-channels to cater to the needs of its target segments and Iraqi untapped sectors MasterCard and issue all types of debit, credit and prepaid electronic cards. IDB holds the largest ATM network with over 300 ATMs and the largest point of sale network with more than 5,000 merchants. It positively contributed to the Iraqi reconstruction phase by facilitating adequate credit lines and financing needs for major multination’s working in Iraq within the construction, telecommunications and infrastructural sectors. Through IDB’s collaboration and engagement with IFC, it is expected to continue capitalising on its existing market share in the corporate and SME segment with Iraq. This will also help in IDB’s success and being the fastest growing in corporate banking.
Key financial highlights over the last two years
Consecutively for the second year, IDB has achieved the highest earnings amongst all Iraqi private banks. It was also recognised as the fastest growing corporate bank concerning its trade and finance volume in 2020 that helped Iraqi-based import businesses. IDB was rated BB- for Core Financial Strength and B- for Bank Standalone Rating (BSR) by Capital Intelligence. Additionally, it has contributed to the reconstruction of Iraq through financing mega projects across various sectors with a total lending sum exceeding $445 million. IDB actively participated in the SMEs Financing Initiatives stipulated by the Central Bank of Iraq through financing projects with a total sum exceeding $20 million throughout various provinces in Iraq. The bank has achieved double digits growth in the fiscal year
2020 with a total balance sheet reaching $1 billion. IDB is also one of the three privately owned banks to reach this threshold whilst capital adequacy has been maintained at 38.4 percent with solid liquidity ratios as LCR and NSFR were at 194 percent and 138 percent respectively as of December 2020.
IDB leads in product development and innovation
IDB was the first bank to introduce digital banking services like mobile banking, bill payments whereby clients can perform direct bill payments as well as peer-to-peer payments. It established a high-end and world-class IT infrastructure supporting its competitive advantages in e-services and digitisation. They have been constantly investing in the same which has been a key element to its success in its domination in the Iraqi retail banking sector. IDB will continue developing bundles of competitive products and services along with adequate e-channels to cater to the needs of its target segments and Iraqi untapped sectors to maintain and provide a wide range of corporate, SME and retail products and services on assets and liabilities based on advance segmentation approach. This proactive segmentation approach will be backboned by a high-end digital platform supporting IDB delivery channels and shortening the distances for its client base to ensure more convenience and access.
International Finance | March 2021 | 39
BANKING AND FINANCE
ANALYSIS
OFFSHORE FINANCE HEDGE FUND JURISDICTION
What makes Cayman Island so popular for hedge funds? The offshore jurisdiction is tax neutral and considerably friendly in terms of legal support
SANGEETHA DEEPAK The Caribbean tax haven—Cayman Islands is a pre-eminent offshore jurisdiction for hedge funds. In 2017, it was reported that around 85 percent of the world’s hedge funds were domiciled in the Cayman Islands, driving the jurisdiction to outperform its offshore peers as the top destination. In the same year, another report pointed out that close to 11,000 funds were registered with the local regulator. This Despite the constituted more than 60 support, are percent of global hedge funds European in terms of numbers and net countries assets. It appears that nearly willing to 70 percent of those funds involve the were managed by the US Chinese managers and about a third corporations were administered by the US in their administration. pandemic Carlyon Knight-Evans, story? who is an Assurance Asset Management Partner at PwC
40 | March 2021 | International Finance
told International Finance, “You could look at it from a statistical perspective. I mean it is one of the leading offshore jurisdictions purely by numbers. There are more than ten thousand hedge funds registered in the Cayman Islands. If we go beyond that, why have so many hedge funds used Cayman? There is the logic that success breeds success. It is a jurisdiction which is offshore and tax neutral. But it is also a jurisdiction which is very friendly in terms of legal support. You will find that Cayman law firms have established themselves with a presence in North America, Europe and Asia. They have travelled to be in the markets where people are running funds. If you look at the core concentration of hedge funds in Asia, they are in Hong Kong and Singapore; For Europe, it is London; and North America, it is in the east coast and west coast; and New York is probably the biggest centre.”
A tax haven has unexpected costs Following the work of the EU Code of Conduct
Group on Business Taxation, the council adopted the EU list of non-cooperative jurisdictions for tax purposes. This was set out in an Annex that not only comprised blacklist jurisdictions but also a grey list in line with the EU Code of Conduct Group. The Cayman Islands in response to the situation had closely engaged with the EU and adopted a host of legislative measures. An example of that is the Cayman International Tax Co-operation, also known as the Economic Substance Law in 2018. Nevertheless, the Cayman Islands was added to the EU’s list of non-cooperative jurisdictions for tax purposes on February 18, 2020, because it “does not have appropriate measures in place relating to economic substance in the area of collective investment vehicles,” the Annex states. Over the years, the efforts of Cayman Islands in becoming a successful hedge fund jurisdiction has been quite remarkable. The EU removed Cayman Islands from its blacklist of non-cooperative jurisdictions last October. In truth, “It was not
the Cayman Islands alone that was looked at, but British Virgin Islands (BVIs), Bermuda and others. They also looked at Hong Kong, Singapore and other jurisdictions. They look at a regime to see whether it is in compliance with the EU standard. If that is not the case, then they issue a warning,” Florence Yip, who is PwC’s Asia Pacific Asset and Wealth Management Tax Leader and China Private Equity Tax Leader, told International Finance. “And if you do not make changes before the warning expires, they would put you on the blacklist. The problem of when a jurisdiction appears on the blacklist is it would affect lots of investors and also managers.” In the investment world, many investors have their own bylaws. Some of them such as pension funds would prohibit them from investing in a jurisdiction which is listed in the EU blacklist. So this is quite problematic if a jurisdiction is on the blacklist. “Cayman Islands actually was on the blacklist because it missed a certain deadline by a couple of days, so it is quite unfortunate,” Yip explained. “But on the other hand, it also shows that
International Finance | March 2021 | 41
BANKING AND FINANCE
ANALYSIS
OFFSHORE FINANCE HEDGE FUND JURISDICTION
the EU can be very stern by imposing penalties and placing jurisdictions in the blacklist.”
The common practice for Cayman funds As outlined above, having legal capabilities on the ground in North America, Europe and Asia has meant that the Cayman Islands has been able to readily promote itself as an attractive jurisdiction for hedge funds. It is a common law jurisdiction that people are familiar with. By practice, hedge funds established in the Cayman Islands will take the form of a company, a limited partnership, or a unit trust, and they can be managed by a management entity operating from anywhere in the world. It is reported that the fund managers for a majority of Cayman funds do not have a presence in the Cayman Islands because there is no requirement per se for them to be domiciled there. “Simply what it means is that if a company or a legal entity is set up in the Cayman Islands, proclaiming to carry out certain activities is important. For example, fund managers would need to have a commercial substance to support the claim that they are carrying out fund management business activities in the Cayman Islands,” Yip said. “To support the claim, you need to have people, an office, the right infrastructure and platform to carry out the business. Now, we all do know that in the Cayman Islands they do have their own residents, but very few fund managers operate from there. Of course there are a few, but many international fund
42 | March 2021 | International Finance
Why is Caymans Islands a leading hub for investment funds? Attracts new offshore fund formations
80%
World’s offshore hedge funds
Industry’s asset under management
75% $1.1
managers actually work and live in cities of their choice, like New York, London, Hong Kong or Singapore.” Yip further explained that there was a significant trend among fund managers, particularly those from Asia, in setting up a Cayman fund manager entity and entering into a fund management agreement with a Cayman fund. Then the Cayman fund manager entity would sub contract some or all of its services to a local investment advisor, for example, in Hong Kong. The Cayman fund would pay two percent management fee to the Cayman fund manager, which in turn would pay a portion to the local investment advisor. In turn, that allows the Cayman fund manager to keep a good profit margin, while in the past such profit margins kept in the Cayman Islands were not commonly subject to tax anywhere in the world. “So this is something that the EU had to combat and wanted to stop. In January 2019, many of the tax havens such as the Cayman Islands, BVIs and Isle of Man have implemented their own versions of Economic Substance Law to tell the world that they are operating up to the EU standard, and are not collaborating with tax evasion
trillion
and tax avoidance activities,” Yip said. Now, all the explanations are leading up to the fact that before 2019, there were many Cayman fund management companies. Because of this change, many of the Cayman fund managers have either been closed or downgraded from being a manager to an advisor— while some of them have changed their roles to holding companies.
Cayman government enacts bills for hedge fund regulation Last February, the government enacted two bills aimed at regulating private funds and subsequently enhancing the regulation of hedge funds in the Cayman Islands. The Private Funds Bill 2020 and the Mutual Funds Law (Revised) of the Cayman Islands will bring private and hedge funds with less than 15 investors under the regulatory oversight of the Cayman Islands Monetary Authority. With that, all Cayman investment funds will be fully regulated by the Cayman Islands Monetary Authority, except select investment vehicles that will be regulated under the Mutual Funds Law. By definition, the Private Funds Bill applies to any close-ended fund
that is established in the Cayman Islands. The bill also exempts nonfund arrangements which include securitisation of special purpose vehicles, joint ventures, proprietary vehicles, holding vehicles and preferred equity financing vehicles among others. That said, the amendment of the Mutual Fund bill will affect open-ended funds that were previously exempt from Cayman Islands Monetary Authority regulations. “With the new enactments, the fund managers are very alert to the potential future amendments to the Cayman law, including the economic substance law that could be changed due to the EU requirements,” Yip explained. “For now, all the investment funds in the Cayman Islands are exempt from the Economic Substance Law. So hedge funds are performing alright. However, one would need to wait
and see, because in the Cayman Islands or other tax havens, usually most directors of GP of such fund vehicles are not residents in Cayman or BVI.” “The European Parliament adopted a resolution on 21st January 2021 setting out certain proposed changes to the criteria used to draw up the EU blacklist. An example of such proposed changes is for the European Council to include the automatic listing of non-EU jurisdictions with a zero percent corporate tax rate or with no taxes on companies’ profits as a stand alone criterion. So one needs to be careful to monitor the development of the Cayman Economic Substance Law and the EU’s rules. Of course, from the operator point of view, the players would hope that it would be a stable regime because they would like to minimise the cost
of compliance and risk of noncompliance,” she added.
A highly conducive offshore financial centre for investors Although the Cayman Islands is not the only offshore financial centre with tax exemptions, it has become vital to the US hedge fund industry, mainly attributable to its geographical advantages that have enabled it to provide services to the US market. It has a pronounced legal and judicial system that is based on English common law, and more importantly, its public and private sectors have closely engaged with each other since the 1990s to build a constructive regulatory regime for hedge funds. “There is a very clear tax exemption treatment for its funds regime,” Yip said. “People do not need to worry about taxation in the Cayman Islands. Of course,
International Finance | March 2021 | 43
BANKING AND FINANCE
ANALYSIS
OFFSHORE FINANCE HEDGE FUND JURISDICTION
separately we have to think about taxation elsewhere. But as far as the Cayman Islands is considered, the fund vehicle itself will definitely be tax exempt. That is very important. The other thing is, because the Cayman fund vehicles have been in existence for many years, it is run well with very good and experienced service providers and quite familiar with international investors and regulators.” This makes the Cayman Islands quite suitable for many investors and fund managers, in addition to becoming a cost efficient destination to set up and run a company. “However, I want to point out that the Cayman Islands has no avoidance of double taxation treaty with any country or any jurisdiction in the world. So people who use Cayman vehicles are not really looking for tax treaty protection; however, they are looking for efficiency, streamline and simplicity of the Cayman fund regime,” Yip said.
A regulated approach for unregulated funds But there were a few issues from a regulatory standpoint. “One of those was around which funds were captured by the regulations and what were not. Historically, hedge funds were captured and so they needed to be regulated, and there was an exemption for funds with a small number of investors (15 or less). But the bigger concern was what was not captured, which was all the private equity and real estate funds that were used in the Cayman Islands. Those have now needed to be registered,” Carlyon explained. For that reason, more than
44 | March 2021 | International Finance
Funds registered with CIMA in 2017 Overall funds
Global hedge funds
11,000 60% 10,000 private equity and real estate funds were registered in 2020 which were previously not subject to any regulatory oversight—a situation that had shaped up to be one of the EU’s key concerns. Although the legal framework is robust, in Carlyon’s view, “It is a common law legal system with good strong cause and lots of precedents that help protect investors and other stakeholders, it was those funds that were not previously captured by the regulatory regime that had become the rising concern with Cayman Islands funds.” For the unregulated funds, the number has now dropped dramatically with the new reforms, which Carlyon reasons out with an example. The private equity and real estate funds are close-ended and now captured under the private funds law in the Cayman Islands. So they have had to register with the Cayman Island Monetary Authority. “While there are some exceptions, these generally relate to where there is a single investor and the need for investor protection is very different or more to do with factors such as special purpose vehicles that are designed for a singular purpose.” In this context, what is essentially done is that “the previously unregulated funds have been swept
Managed by US managers
70%
in and captured in the net—that is now the Cayman regulated fund framework,” he said. The second aspect around this is that it could lead to increasing cost. Being regulated funds, they naturally will incur additional costs, not only in terms of registration in the Cayman Islands, but also in compliance and dealing with audit and other tax related matters. Another interesting fact that Carlyon states is that the new reforms have brought those funds into a safe non-blacklisted environment. “They are now considered regulated funds rather than unregulated. The cost of doing business in the Cayman Islands has increased, but it does not mean that investors might start looking at other jurisdictions. At this phase, the Cayman Islands is the dominant jurisdiction [for hedge funds] and I don’t expect that to change anytime soon.” However, “the new audit requirement of private equity funds and other closed end funds registered with the Cayman Island Monetary Authority might also cast some operating or practical issues because of the additional time and cost associated with audit work to be done in the Cayman,” Yip said.
editor@ifinancemag.com
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BANKING AND FINANCE
FEATURE RENEWABLE ENERGY
BANKERS FOR NET ZERO UK CENTRE FOR GREENING FINANCE AND INVESTMENT
Britain is on a mission to build back greener 46 | March 2021 | International Finance
FEATURE BANKERS FOR NET ZERO
The country is developing a world-class green finance research centre in Leeds and London
SANGEETHA DEEPAK
B
efore the reset, Britain’s largest lenders HSBC, Barclays, Lloyds and NatWest received a lot of criticism from activists for their slow response to climate change—despite issuing ambitious statements about their commitment to lower carbon emissions. New data suggest that leading British banks had invested around £150 billion in fossil fuels since the Paris climate accord in 2016, according to NGO BankTrack. A European ethical bank Triodos, founded
in 1980 in the Netherlands, estimates that around £16 billion of daily savings through British stocks and shares ISAs could be financing fossil fuels. Last year, Triodos launched a campaign ‘Don’t be a fossil fool’ to raise awareness among citizens and to ‘democratise’ the banking industry. Nigel Green, CEO of DeVere, the world's largest independent financial consultancy, told International Finance, “Action by British banks has fallen short on climate change over the last decade and a half for several reasons. However, I think the main issue is the 2007-2008 global financial crisis. Banks were, in most cases, spectacularly caught off guard by the crash. In the fallout, they were understandably busy dealing with the new regulatory landscape that prevailed in the aftermath, evolving client expectations and, for some, the massive financial penalties that were imposed on them. As a result, corporate social responsibility obligations were way down their to-do list. They were too focused on regrouping. They were in survival mode. However, simultaneously, the rest of the world was waking up to the very real issue of climate change.” And, as the beginning of this year has demonstrated, a lot is going to change for British banks and the economy at large. Of late, Britain has been witnessing a growing appetite for financial support in sustainable projects, as clients expect banks to be able to show environmental credentials. “This is why challenger, paperless banks with stronger green credentials, such as Vault, are filling the void left by traditional banks, especially in terms of what clients expect firms to be doing today and in the future when it comes to the environment,” Green
International Finance | March 2021 | 47
BANKING AND FINANCE
FEATURE RENEWABLE ENERGY
said. “They are also, of course, getting serious because green investments are outperforming the market and are, therefore, good for their clients and profitable for them.
British banks know the path forward The global talk about the Paris Agreement on climate change and what it can do to the economy has put a lot of pressure on British banks. “Despite allegations that some banks are simply ‘greenwashing,’ I have not seen much evidence of this. I think that most are finally getting serious about this subject,” Green said. For example, NatWest and Lloyds of London have pledged to reduce their emissions linked to the loan book by half. However, the levels of their emissions are yet to be worked out. In another example, Barclays has already announced a host of green finance products to help clients finance sustainable developments in the country and globally. These green finance products are mainly designed to channel investments into environmentfriendly activities and green initiatives leading to a successful low-carbon economic transition. NatWest has made its action on climate change an integral part of its rebrand under the leadership of new chief executive Alison Rose. Last November, it launched the first green mortgage, which allows borrowers to enjoy lower-interest rates while purchasing an energyefficient home. The green mortgage for new customers might be a relatively small move, but this year is anticipated to see NatWest’s efforts on a large scale as it aims to target an expansive customer base. Lloyds, on its part, has become increasingly active in financing clean energy projects. Because it is one of the
48 | March 2021 | International Finance
BANKERS FOR NET ZERO UK CENTRE FOR GREENING FINANCE AND INVESTMENT
country’s biggest providers of car finance, it has strategic plans to expand lending for electric vehicles. Again, British banks are likely to come under the scanner with the country preparing to host the UN COP26 climate summit in Glasgow in 2021-end. “This should provide positive impetus for the industry,” Green said. Barclays has worked with Sustainalytics, a leading independent global provider of environmental, social and corporate governance research and ratings to investors, to develop a Green Product Framework, which will be used to identify sustainable projects that will have a beneficial impact on the environment and demonstrate full support of green financing activity. Although Barclays has refused to halt fossil fuel lending, it is optimistic that setting a carbon limit on its activities will lower emissions. The work of British banks “will sharpen the industry’s focus on the issue of climate change for sure. It is a significant step to ensure that banks are playing their part,” Green explained. British banks remain quite bullish about their progress in fulfilling climate goals over a series of announcements and product launches that are slated for this year. “I think that they will be compelled to make real advancements, not only by regulators but by pressure and expectations from their clients,” Green said. “Those banks that are slow to respond will face not only increased regulatory and public scrutiny but also limited growth. In 2021, and moving forward, banks can no longer afford to ignore climate change.” Another fact that points to the real efforts by British Banks is the recently licenced Oxbury Bank’s world’s firstever carbon-offset savings account, known as Oxbury Forrest Saver, which provides a huge opportunity for British
The initiative is to explore two crucial aspects of the climate change action: How can British banks support key sectors in the net zero transition? What is required in terms of policy and regulation to finance a rapid transition?
savers to help in the transition to a lowcarbon future. The money that would be earned in interest from the Oxbury Forrest Saver accounts will be used to finance tree-planting projects. This is especially important for savers because a new survey commissioned by Triodos shows that 65 percent of the respondents are clueless about their savings— whether they are supporting fossil fuel developments in some form. An even higher percentage of respondents expect banks and savings providers to be transparent about their investment. In this movement, the government seeks to enforce disclosure mandatory by 2025. Obviously, this still requires the government to take the initiative. And, as known, Bankers for Net Zero initiative backed by an influential group of MPs, is assembling banks, regulators and businesses to enable banks to fully support their clients, speed up the net-zero transition and deliver on the government’s climate change vision. According to its official website, the
FEATURE BANKERS FOR NET ZERO
Doing so will support industries and businesses to develop clean green innovations, creating thousands of jobs across the country—ensuring we build back greener,” as reported.
Back to sustainability bonds and carbon taxes
initiative is to explore two crucial aspects of the climate change action: How can British banks support key sectors in the net zero transition? What is required in terms of policy and regulation to finance a rapid transition?
World-class green finance research hubs Interestingly, the government will be investing £10 million for world-class green finance research hubs that will be based in Leeds and London. The two cities will house hubs designed for driving green finance and investment globally. These hubs are slated to open in the coming months in collaboration with a set of British institutions such as University of Oxford, University of Leeds and Imperial College London. Their potential ability to provide world-class data and analytics to financial institutions around the world will help banks, lenders, investors and insurers to make wise investment decisions by taking into account the environmental and climate change impact.
This advancement is essentially what the country needs to step up its game on a global level. It could even create new opportunities in the form of positioning Leeds and London as global centres for green finance—a promising logic that could take it to the next level of promoting green finance and protecting the global economy from climate risks. According to the Energy and Clean Growth Minister Anne-Marie Trevelyan, “Climate change is the biggest issue that we need to tackle to protect our planet for our children and grandchildren. While the government has invested billions of pounds so we can end the UK’s contribution to climate change, we will not reach our net zero target without mobilising private capital and unleashing the power of the free market. The UK Centre for Greening Finance and Investment in London and Leeds will encourage financial services to turn the tide of their investments and focus on sectors and companies that have a smaller environmental footprint.
In 2019, the London Stock Exchange already expanded its green bond segment into a comprehensive Sustainable Bond Market that will incorporate sustainable, social and issuer-level segments. Essentially, these segments offer a host of opportunities for investors transparency and sustainability-related debt instruments. By the numbers, 155 green bonds, nine social bonds, seven sustainability bonds and 77 green issuers from 23 countries and regions are listed on the Sustainable Bond Market, raising £51 billion so far. With that, its strongrecord is likely to continue. This, now seems clear, is the year for Britain to get to the bottom of green finance. British Finance Minister Rishi Sunak plans to launch the country’s first green government bonds. These bonds will be created to finance environment-friendly investments and even encourage the Bank of England to focus deeper on climate change action. It is reported that the finance minister is also urged to reduce the 20 percent value added tax on energy efficient projects. In the case of carbon taxes, any progress that was vouched for by the International Monetary Fund in October might be slow. This is because the budget deficit of £400 billion is still worked on, marking the largest since the second world war. However, it does seem like the country has taken a slow approach to environmental taxes. editor@ifinancemag.com
International Finance | March 2021 | 49
Why China is winning the FDI race IF CORRESPONDENT
C
hina attracted the biggest share of FDI in 2020, despite the coronavirus pandemic. The mainland has been second to the US for a long time, but last year was a turning point when it overtook the US to take the top spot in FDIs. The United Nations Conference on Trade and Development (UNCTAD) said that China saw direct investments by foreign companies rise by four percent during the period. China was also the only major economy to avoid an economic contraction last year. It posted a gross domestic product growth of 2.3 percent in 2020. It is noteworthy that in 2020, East Asia alone accounted for one-third of the global FDIs. However,
50 | March 2021 | International Finance
the ten-member ASEAN regional bloc saw FDI decline by 31 percent during the period. Similar to China, India too registered record highs last year when it comes to FDI. According to India’s Ministry of Commerce and Industry, during the second and third quarter of 2020, FDI inflows increased by $58.4 billion despite India recording the highest number of Covid-19 cases during the period. In contrast, FDI in Latin America dropped by 37 percent during the same period. The European Union also suffered a 71 percent drop to an estimated $110 billion from $373 billion in 2019. Among the EU members, 17 of them registered a drop in FDI during the period. In the US, FDI inflows dropped 49 percent from
BANKING AND FINANCE
FEATURE FDI INFLOWS
CHINA FDI STOCK INVESTMENT
Data compiled by OECD shows that the total stock of foreign investment remains much larger in the US compared to the mainland
China beats US over FDI in 2020
China
$163 billion US
$134 billion over $250 billion in 2019 to $134 billion in 2020. According to UNCTAD, global FDI fell from $1.5 trillion in 2019 to just under $860 billion last year, which is a 40 percent decline. When it comes to Southeast Asia, the region registered a 31 percent contraction led by a 68 percent contraction in Malaysia, 50 percent in Thailand, 37 percent in Singapore, 24 percent in Indonesia, and ten percent in Vietnam. UNCTAD said in its report, “FDI inflows to developed countries fell drastically by 69 percent to values last seen almost 25 years ago. Of the global decline of $630 billion, almost 80 percent was accounted for by developed economies. At an estimated $229 billion, inflows in developed economies were only one third of the low point after the global financial crisis of 2009. Multinational enterprises (MNEs) significantly reduced new equity investments. In combination with lower M&A activity this resulted in a market decline in the equity component of FDI to near zero. Intra-company loans turned negative (-$134 billion) as parent firms withdrew or were paid back loans from their affiliates, strengthening their balance at home. Contrary to earlier expectations and despite significantly lower profit
levels, reinvested earnings in foreign affiliates remained relatively stable, declining by only 6 percent.”
China becomes the biggest recipient of FDI in 2020 Last year, China was the largest recipient of foreign direct investment in 2020 despite the coronavirus pandemic, which originated in the Chinese city of Wuhan in 2019. China attracted foreign direct investments worth $163 billion in 2020. The US, on the other hand, attracted FDI inflows of $134 billion only. In the previous year, the US registered $251 billion in inflows, while the mainland had received $140 billion. However, in 2020 China dethroned the US to take the top spot. According to data compiled by the Organisation for Economic Cooperation and Development, the total stock of foreign investment remains much larger in the US when compared to China. It also must be noted that China recorded a decline in FDI inflows in the first quarter of 2020, however, growth soon picked up during the remaining three quarters of the year. According to data released by China’s Commerce Ministry, FDI inflows contracted by 11 percent in the first quarter, but it grew
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FEATURE FDI INFLOWS
by 8.4 percent and 20 percent in the second and third quarter respectively. When FDI in the US peaked in 2016 at $472 billion, China registered FDI inflows of $134 billion. Since then, investment in China has continued to rise. In contrast, investment in the US has fallen each year since then. Even more noteworthy, FDI flows into China’s IT services leaped by over 28 percent in 2020. The service sector in China registered the largest share of FDI in the same year. China’s cross-border merger & acquisition activity jumped by 54 percent during the period, mostly in China’s IT and pharma sectors. Foreign investment in China’s high-tech industries was also up by more than ten percent last year. The Netherlands and Britain increased their investment in China by 48 percent and 31 percent respectively during the period. Nigel Green, the chief executive of deVere Group said, “China’s benchmark index the CSI 300, which tracks shares on the Shanghai and Shenzhen stock exchanges, jumped nearly two percent as investors around the world rush for exposure to the People’s Republic’s economic recovery from the Covid pandemic. These fresh impressive gains for Chinese equities come after an incredible year in 2020 in which the index added more than 27 percent. “This trend of piling into Chinese stocks can be expected to continue throughout 2021 as investors seek growth. China’s rebound is quite remarkable, compared to other major economies, many of which are once again rolling out stricter restrictions to stop the spread of Covid amid a tsunami of new cases. The country has just reported increased industrial output and retail sales towards the end of 2020, bolstering expectations of further
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CHINA FDI STOCK INVESTMENT
China, but also Asia in general, has massive potential and will likely outperform the rest of the world in 2021. However, investors must not get giddy and forget about the importance of diversification – the investor’s best tool to capitalise on opportunities and mitigate risks.” Global FDI drops with one-year period
2019
$1.5 trillion 2020
$860 billion robust growth in 2021, adding fuel to the nation’s stock markets and currency as well as those economies that get a boost from domestic spending within China. Of course, all of this will not go unnoticed by investors looking for yield. “But as 2020 showed us with perhaps too much clarity, things can change quickly and so-called ‘certainties’ can shift overnight. Therefore, as ever, it is essential that investors have a truly diversified portfolio. This includes across geographical regions, assets classes, sectors and currencies. A good fund manager that can secure
global exposure and actively seek out opportunities in Asia, especially in China, will best position investors to reap rewards in 2021. China, but also Asia in general, has massive potential and will likely outperform the rest of the world in 2021. However, investors must not get giddy and forget about the importance of diversification – the investor’s best tool to capitalise on opportunities and mitigate risks.” Building on an impressive performance in 2020, FDI into China continued to increase in January 2021. According to the Chinese Commerce
FEATURE FDI INFLOWS
Ministry, FDIs in January increased by 4.6 percent year-on-year to reach $14.2 billion. Data released by the ministry further revealed that foreign investment in the services industry amounted to ¥68.46 billion in January, which is an increase of around 11 percent year-on-year. The sector alone accounted for 74.7 percent of the country's total FDI in January. Other sectors that also did well are wholesale and retail trade. These sectors saw FDI climb 27.2 percent year-on-year during the period. Also, the accommodation and catering industries witnessed a 71.5 percent increase in foreign investment.
According to the Ministry of Commerce, the services sector in China registered a 11 percent rise in FDI amounting to $10.1 billion. Similar to January 2021, the services sector also attracted the largest share of FDI in 2020 as well. Last year, FDI in China’s service sector rose by 13.9 percent yearly to $120 billion and accounted for a record portion of overall FDI.
Global FDI is moving into Asia Despite the pandemic and economic uncertainties, Asia has attracted the highest number of FDI last year,
helped by China’s strong performance. Along with China, India too has posted positive FDI inflow growth. In India, the growth was driven by its fast growing service sector which has attracted a large list of foreign investors. Surging levels of FDI were also reported in the financial and science-based services and IT sectors. This is a result of large US multinationals entering the Indian sub-continent to tap into the potential of India’s vast domestic market as well as counter China in this aspect. Asia is currently leading the global economy with FDI inflows either picking up or at least showing signs of a potential rise from last year’s negative growth patterns. In contrast, the European Union suffered a 71 percent drop in FDI last year. The UK and Italy, which have been hit hard by the pandemic and have recorded high mortality rates, attracted no new investments. Germany, which is the largest economy in Europe, saw a 61 percent drop in FDI inflows as well in 2020. Similarly, FDI inflows in Latin America also declined by 37 percent during the same period. When it comes to the Association of Southeast Asian Nations (ASEAN) countries, their FDI inflows were largely negative last year, however, several of its member nations are getting back on track in attracting growing levels of FDI. This is attributed to the recently-agreed regional trade agreements. Leaders from ten Southeast Asian countries, as well as South Korea, China, Japan, Australia and New Zealand have signed a mammoth trade agreement that will define trade and commerce in the Asia Pacific (Apac) region for decades. Called the Regional Comprehensive Economic Partnership (RCEP), it’s a trade agreement signed by Australia, Brunei, Cambodia, China, Indonesia,
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FEATURE FDI INFLOWS
CHINA FDI STOCK INVESTMENT
Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam. It is noteworthy, that even though India was part of the initial negotiations, they decided to back out after growing pressure from the opposition and other stakeholders back home.
ASEAN’s FDI inflows slowdown While China’s FDI inflow climbed four percent last year, the ten-member ASEAN regional bloc saw FDI declined by 31 percent, which amounts to $107 billion for 2020. According to UNCTAD’s Investment Trends Monitor, ASEAN saw growth of around $70 billion in greenfield investments last year. Interestingly, in 2019, ASEAN registered a decline of 14 percent when it came to greenfield investments. The levels of FDI inflows do vary from country to country. Some countries did register a far greater drop in FDI inflow last year when compared to other ASEAN members. Vietnam too registered an FDI inflows drop of around ten percent in 2020 to around $20 billion for the year, when compared to its FDI inflows in 2019. According to UNCTAD, Singapore’s FDI inflows plunged by 37 percent last year amounting to $58 billion. Despite a plunge, which is similar to levels during the financial crisis of 2009, Singapore still held pole position as ASEAN’s largest recipient of foreign investment in 2020. Indonesia also registered a drop in FDI inflows by 24 percent in 2020, according to Indonesia’s Investment Coordinating Board. FDI inflow in Indonesia last year amounted to $18 billion. This is mainly because of the widespread lockdown measures introduced to curb the spread of the
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virus during the first half of last year. FDI inflows in Indonesia have picked up since then, rising by a yearly 1.1 percent during the third quarter of 2020. FDI inflows registered strong growth in the fourth quarter as well, rising by nearly 5.5 percent. A major chunk of the funds came from investors in China and Singapore. The sectors that attracted these FDI were telecoms, transportation, warehousing and utilities. The UNCTAD report further revealed that Thailand and Malaysia were especially negatively impacted when it came to FDI. However, Malaysia’s Department of Statistics argues that by taking account of an alternative measure, in the form of ‘gross FDI inflows’, then for the first nine months of 2020, investments into Malaysia were up by 5.8 percent on the previous year, amounting to $26.8 billion in that period. Malaysia’s FDI inflow did register growth in the fourth quarter reaching $1.5 billion as a result of the lifting of its restrictions
and lockdown measures previously introduced. This proves that Malaysia continues to be a major investment destination and attract global investors. Most of the foreign investments came into the country from its neighbouring countries such as Thailand, Singapore and Japan. A major chunk of the investments went to the manufacturing, finance and retail trading sectors. One country that did well compared to the other ASEAN members, is the Philippines. The country registered an increase in inward direct investment of 29 percent to $6.4 billion during the period. The Philippines’ impressive performance was the result of surging net equity capital investments which rose by 48.6 percent during the first 11 months of 2020. Sectors such as manufacturing, banking and insurance, and property attracted the major portions of the funds, which came from investors in countries such as Japan, Singapore, the Netherlands, and the US.
FEATURE FDI INFLOWS
India to emerge as China’s potential challenger Similar to China, India also registered high FDI records in 2020. According to India’s Ministry of Commerce and Industry, during the second and third quarter of 2020, FDI inflows increased by $58.4 billion despite India recording the highest number of Covid-19 cases during that period. This is a 22 percent increase in FDI inflow when compared to the same period in 2019. It is the highest ever recorded during the first eight months of a financial year. The ministry further revealed that around $43.8 billion were invested as equity capital alone. India and China were the only two countries that registered FDI growth last year. During the month of November, India recorded a growth of 81 percent yearon-year, which stood at $10.2 billion. Around $7.6 billion went to sectors such as banking, finance, insurance, R&D, testing and analysis and outsourcing, while around $7.4 billion went towards
computer hardware and software. Other sectors that also benefited from strong FDI include retail and wholesale trade, telecoms, tourism and automobile production. According to the UNCTAD report, India is attracting record numbers of deals in IT consulting and digital sectors, including e-commerce platforms, data processing services and digital payments. A major portion of FDI inflows in India came from Singapore. It contributed around $8.3 billion to India’s FDI inflow in 2020. Singapore was followed by the US in second, which overtook Mauritius, investments totaling $7.12 billion. US technology giants buying up Indian tech ventures helped the US topple Mauritius and take the second spot. The US was also helped by former US President Donald Trump’s relationship with Indian Prime Minister Narendra Modi. Other countries that also made significant contributions include the UK with $1.35 billion FDI and France
with $1.13 billion. Also, holding company jurisdictions, notably the Cayman Islands and the Netherlands, contributed $2.1 billion and $1.5 billion in FDI inflow respectively. India was helped by FDI policy reforms made by the government to boost FDI amid a global recession. Other factors that also helped India include investment facilitation and ease of doing business. Like China, India also has a big service sector that attracts foreign investors at a very large scale. This could possibly mean that India could be China’s worthy competitor when it comes to competing for FDI, and not the US. The very fact that the US’s FDI inflows dropped by 49 percent in 2020 and has been declining in the last couple of years, whereas India’s FDI inflows grew 22 percent year-on-year during the first eight months of the financial year proves it.
editor@ifinancemag.com
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BANKING AND FINANCE
IN CONVERSATION
GILES COGHLAN CHIEF CURRENCY ANALYST AT HYCM
Tokyo’s Nikki reached record highs in February than at any time in the past decade, while the greenback plunged to lowest levels since April 1998
How should we interpret record performance on global stocks? SANGEETHA DEEPAK
Understanding the stock market is a complicated feat. There are expectations combined with plausible outcomes. So we carried out an interview with Giles Coghlan, Chief Currency Analyst at HYCM, to discuss the best performing stocks and how investors should plan their portfolios. This year, stock markets around the world have cooled after the contagion effects of the coronavirus pandemic. On January 1, investor sentiment was riding high on the optimism of vaccine rollouts, which caused global stock markets to hit record highs, a big opening for 2021. The Chinese yuan had risen 1 percent against the dollar, while the greenback plunged to its lowest levels against a basket of peer currencies. The greenback’s plunge to those low levels was recorded for the first time since April 2018. It is observed that even European stocks opened higher for 2021. In Asia, the stock markets recorded gains too. However, the 0.4 percent drop in Japan's Nikkei 225 index can be treated as an isolated incident following Prime Minister Yoshihide Suga’s confirmation of the government considering to issue an emergency for Tokyo and three close by districts to contain the infection spread. On the bright side, the Tokyo stock exchange reached record highs in February, for the first time since August 1990. This proves that investor sentiment has drastically improved against the global situation over the last few months. In the first fifteen minutes of trading, the stock average on the Nikkei index rose 339.93 points and stood at 29,119.12.. That said, the Tokyo Stock Price Index 22.96 points on the same day, leading up to 1,913.91. Although trying to predict the future performance of stocks in the
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FOREX HYCM FORECAST
context of the pandemic seems challenging, one plausible scenario is that inflation could rise modestly over the next 12 to 18 months to below 2 percent in the United States and nearly 1 percent in Europe. This implies that ‘policy rates will remain anchored’ and investors should be more cautious about holding excess cash. Another factor that could play a significant role in the stock market performance is the US-China trade war that is here to stay. Despite the new Biden administration, it is reported that the trade relations between the two superpowers are not likely to experience much improvement following the tit-for-tat tariff hikes. For emerging markets, policy revolution might remain in place despite the possibility of inflation rise. Morgan Stanley expressed that globally there are many ‘buying opportunities in banks as they benefit immensely from reopenings as vaccines are distributed through 2021’. HYCM is a leading multi-regulated broker of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognised financial regulator FCA. HYCM is backed by the Henyep
Capital Markets Group which is a leading global corporation established in 1977 with investments in property, financial services, charity and education. The group through its relevant subsidiaries have representations in Hong Kong, the United Kingdom, Dubai and Cyprus.
IF: Are the rapid gains in global stock markets based on optimism that vaccines will help the world return to normal? Giles Coghlan: This is definitely part of the reason why we are seeing the major markets make positive gains in the opening stages of the year. Alongside the vaccination programme the main reasons for stock market gains are low interest rates from central banks, large levels of government support via fiscal stimulus and anticipation of a swift economic recovery across major countries. 2020 was a volatile year and this had to do with the general uncertainty that investors faced. Not only was there Covid-19; there was also a US presidential election and the UK’s scheduled departure from the EU. These are significant events by themselves, and with both of them now resolved for the most part, investors now have a better handle on what the coming months could bring.
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BANKING AND FINANCE
IN CONVERSATION
GILES COGHLAN CHIEF CURRENCY ANALYST AT HYCM
Some of the best performing Chinese stocks were a mixture of energy and technology stocks. The ‘stay at home’ nature of 2020, induced by Covid-19 lockdowns, naturally helped demand for tech stocks.
If the vaccine rollout successfully continues, I’d like to think that the optimism currently on display will only grow as lockdown restrictions are slowly lifted. But we need to be realistic about this – I imagine we will not be in a position to confidently declare that the pandemic is on the verge of coming to an end until the latter stages of this year. So, the risk is that a vaccine resistant variant sends stocks lower again. It is a key theme I will be keeping our clients aware of.
It is reported that strategists say the market valuations are distorted and that we are likely to see a pullback in 2021. How did the global stock market perform in 2020 and can we expect a record-fast recovery of the stock market in 2021? It is indeed an interesting point. All assets and markets are in a strong position at the moment, be it the Dow Jones, Nasdaq, or the Dax. We are even seeing rapidly rising interest in cryptocurrencies like Bitcoin. Naturally, there are concerns this cannot last and that we could even be in a bubble that is being enlarged by overvaluations and volatile market movements. We all know that growth in the financial markets is by no means linear, but rather a series of peaks and troughs. On that basis, we could see a sudden retraction in prices as the market adjusts to new conditions. We also need to remember that there are big questions about public debt in the UK and the US, and how both countries will be now tasked with overcoming the economic disruption caused by Covid-19. While I do think the stock market will be in a stronger position come the end of the year, the reality is that the economic recovery from Covid-19 may take time. While there is good reason for investors and traders to be optimistic, they should also be cautious and realistic and expect pullbacks. From my standpoint the first test will come when the Federal Reserve considers raising interest rates. This
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will likely result in a re-pricing of stocks as the easier monetary conditions begin to fade.
Which of the Southeast Asian stock markets rallied in the fourth quarter of 2020 to crack into the bull market territory and what were the contributing factors to their stock surge? Emerging markets have been rallying strongly on the so-called reflation trade, and this is part of a coordinated global recovery. On this basis, the Southeast Asian stock markets have been rallying. What’s more, the MSCI Asia Pacific Index surged last year to outperform the US. A strong economic rebound in China and Asia’s low valuations relative to the US and Europe are key positives that will likely support the ongoing surge in activities across the Asia Pacific.
Were Chinese financial stocks some of the best performers in Hong Kong and Shanghai in the midst of the peak pandemic? If so, why? Some of the best performing Chinese stocks were a mixture of energy and technology stocks. The ‘stay at home’ nature of 2020, induced by Covid-19 lockdowns, naturally helped demand for tech stocks. Future FinTech Group Inc grew by 317.18 percent and Renesola, a solar energy company, brought in a massive 704.30 percent return. As well as these outstanding returns, well-known consumer companies like JD.com and Alibaba also made excellent gains. Alibaba has made a 21.46 percent change and JD.com has seen a stunning 134.66 percent change.
What is the current state of stock market activity in the UAE and how is the foreign and local investor sentiment in the market? Like other major indices the Dubai Financial Markets index has seen a recovery from April 2020 lows. However, the market closed -9.87 percent on the year in 2020. This year looks more promising as the UAE is showing excellent speed in vaccinating its population with one of the world’s fastest programs. It has been a very good start to the year for the DFM index and the price currently sits at 2594, which is a 3.04 percent rise for the year. The Abu Dhabi Securities Exchange has shown a very similar pattern to Dubai Financial Markets. On top of this, vaccine
FOREX HYCM FORECAST
optimism and rising oil prices are contributing to the rise of positive investor sentiment.
Which of the GCC stock markets are expected to perform well in 2021? Why? In 2020 Saudi Arabia and Qatar were the best performing regional markets. Qatar for instance has been able to establish a buffer of around 165 percent of its GDP, pointing to $320 billion, so it was able to attract defensive inflows. However, in terms of 2021 the UAE markets are well poised for recovery with Dubai’s economy being driven by tourism, hospitality and trade. The UAE were hit hard by the pandemic, but I believe it should do very well as vaccinations continue and people are able to start travelling again. It is certainly one market to watch. Furthermore, with many expats leaving property in Dubai, we could see a large influx of people returning once the pandemic is brought under greater control.
Is the global stock market due for a correction and how should investors plan their portfolios? At the moment, it is difficult to tell. Markets can trade ‘overvalued’ for months and even years. I anticipate
that the pace of growth will presumably slow down in the coming months. There is plenty of speculation at the moment, which is why it is important for investors to do their research when it comes to planning future portfolio movements. Investors are also still taking a cautious approach, reducing their risk exposure to assets that are subject to sudden price corrections. Recent research commissioned by HYCM revealed that cash savings remains the most popular asset class among UK investors at the beginning of 2021. What this demonstrates is that while fiscal and monetary stimulus have been positively received by the market, investors are still treading carefully. Cash remains king, and this is despite interest rates in the UK hovering just about zero percent. The big question now is what kind of assurances investors will need to look beyond cash savings. Should the vaccine rollout and current lockdown successfully curb Covid-19 cases, I’d expect more investors to start moving some of their cash into other assets.
editor@ifinancemag.com
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BANKING AND FINANCE
THOUGHT LEADERSHIP
EARLY-STAGE VENTURES SILICON VALLEY VC MODEL
The start of 2021 points to two important questions—What has gone well?—What drives outcomes in early-stage ventures?
TONY CHEN CO-FOUNDER OF KINYUNGU VENTURES
What is next for African VCs? We are now at the 20-year mark into the first chapter of venture capital in Africa. The start of 2021 is a better time than any to take a moment to reflect. What has gone well? What hasn't? What drives outcomes in earlystage ventures? To answer that question, over the last year, we interviewed 100+ investors, entrepreneurs, and LPs across 15 African nations. We found that the Silicon Valley VC model is largely a mismatch for African realities and is blindly applied too widely. But we also found that startups and funds have been thoughtfully innovating and adapting around those mismatches.
Evolving ecosystem leads to success and exit And as the ecosystem continues to evolve, there will be big successes. Exits are beginning to happen. Two Nigerian bloggers put it this way in The Chicken or the Exit: The continent only just had its first unicorn. China had its first unicorn in 2010, and it took five years for it to get to five unicorns; the year after that, it had twenty. Ecosystems develop very slowly, and then all at once. "All at once" could arrive in leading African markets by 2030, but there is work to be done to get there at all. As the saying goes, “follow the money.” It all starts with the Limited Partners (LPs) who invest significant resources into venture capital
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funds. LPs can keep investing courageously into the ecosystem. However, LPs can stop expecting risk-adjusted market-rate returns on short time horizons. Thinking beyond the traditional metrics, such as financial return over a fixed 10-year term, will enable more aligned capital to reach the best companies. LPs can start dedicating a small percentage of their assets under management to exploring new structures and models, such as revenue-based instruments, permanent capital vehicles, different carry structures, and closed funds with optionality to convert to longer-term structures. General Partners (GPs) are often stuck in the middle. They must attract LPs to invest in their funds, and thus are constrained by LP global expectations. However, as they work to invest in entrepreneurs, the “on the ground” realities are often more challenging than expected. GPs can keep being creative about making first funds work by generating revenues from grants, concessionary capital, and building other revenue lines. GPs need to stop relying on others to lead rounds and build the internal capability to lead or co-lead. GPs — especially well-established ones with track record— are best positioned to start new funds with innovative structures using new models.
For entrepreneurs and incubators Entrepreneurs can keep grinding, learning,
pivoting, and adapting. However, they can stop taking money with unacceptable strings attached. It is a tough decision, but sometimes no money is better than misaligned money. Also, stop measuring success by funds raised. Start investing one hour a week to learn more about investing “hot spots”: stronger governance, the fundraising process, fundraising options, and investment due diligence. Incubators can keep up-skilling great talent in cohorts. However, incubators can stop thinking about training as knowledge transfer. The transformative part is unlearning mindsets. Also, incubators can start on-boarding more mentors with entrepreneurial experience. Angel networks are an important part of the ecosystem—keep investing in groups and learning from one another. There are more and more groups popping up all across Africa. Angel groups do need to respect the time and to stop saying "no" to entrepreneurs by not saying anything. Start working on ways to de-risk early projects and to encourage investment by considering co-investment funds or first-loss vehicles. Governments can keep adopting new regulations that facilitate entrepreneurship, lower the risk of capital, and stablise the business environment. Too often, governments need to stop thinking about
innovation as a defensive zero-sum game to be taxed. Start thinking more bottom-up, not top-down. Tunisia’s start-up act is a good baseline. Big corporates also have a role to keep building out their corporate venture arms and investing in deals. However, corporates need to stop trying to use their venture arms to steal ideas, intelligence, or tech. Also, too many big corps get complacent and just think about turf protection. Start thinking about innovation as a core strategy for survival, not as a nice-to-have side programme. All of us can keep being clear about what we are doing and what we are not. Also, as an ecosystem at large, we need to stop paying too much attention to the hype, click-bait and superficial stories. Let us get to the real, more layered narratives. We can start being more open about mistakes and pivots. We are all learning, and in the end, a rising tide will lift all boats. Tony Chen is co-founder of Kinyungu Ventures and has a portfolio of 15 Kenyan companies. Tony has enjoyed 20+ years creating new businesses: 10 years as a corporate intrapreneur building new business lines and another 10 years in launching new companies. He co-founded Redica Systems (formerly Govzilla), a SaaS business he led as CEO for 8 years until 2017. editor@ifinancemag.com
International Finance | March 2021 | 61
IF Advertorial - Bangkok Insurance
The versatility of Bangkok Insurance With 74 years of industry presence,
Bangkok Insurance Public Company Limited (BKI) is recognised as Thailand’s leading non-life insurer with 2020’s direct written premium of up to $708.3 million. Among companies with the premium balance of over $300 million, BKI achieved the highest premium growth rate at 20 percent in 2019. Moreover, BKI gained an impressive growth rate of 5.6 percent in 2020, which is about twice higher than that of the market despite the adverse impact of Covid-19, with the solid financial position backed by the ratings of A- (Strong) by Standard & Poor’s (S&P) and A(Excellent) by A.M. Best Company. BKI’s achievements in the premium growth rates and satisfactory performances were owing to its strategy to further expand the retail customer base. Under the strategy, a focus was placed on the development of a very user-friendly digital platform that is easily accessible to retail customers for their insurance purchase decisions. The platform allows customers to get immediate coverage, pay premiums efficiently and enjoy a secure international standard system.
Products designed to cover seasonal health issues
At present, due to consumers’ growing concern over health risks from changing environments and disease outbreaks as well as higher costs of medical expenses, BKI has issued insurance products to cover seasonal diseases that are frequently found in Thailand—such as influenza, dengue fever, or other mosquito-borne diseases. Insurance coverage options have been designed 62 | March 2021 | International Finance
The platform allows customers to get immediate coverage, pay premiums efficiently and enjoy a secure international standard system to ensure appropriate compensation limits and affordable insurance premium rates for low-income earners who may find general health insurance options unaffordable. BKI is the first insurer in Thailand to offer this type of insurance. With the outbreak of Covid-19 globally, consumers still express concerns over possible losses of income caused by the infection with lengthy quarantine and treatment processes, despite the government’s efforts to offer subsidies on medical expenses. In this context, BKI has issued Covid-19 insurance policies with a lump-sum payout—a first of its kind in Thailand—aimed at maximising benefits and relieving consumer concerns, despite the losses. The premium rates for such policies start at only $3, to ensure access for medium-income and low-income earners, who will be financially impacted if infected. Customers can conveniently make insurance purchases through various online channels, easily pay premiums through a 2C2P system under security international standards and immediately receive coverage confirmations. Also, BKI can make claim payments quickly within three days. Such policies have received a warm welcome from customers with 600,000 policies bought within two months. The insurer has diversified relevant
hydrant system can adequately and appropriately prevent any fire incident. In another example, Risk Survey by Drone Service is the type of service that has a bird's eye view of the insured property, including areas with blind spots or hard access. Also, the technology can store details of the layout of the survey areas from high perspectives in cases of new sites or areas with newly completed construction. Risk survey officers of BKI must receive drone controlling licences from the Civil Aviation Authority of Thailand (CAAT). Thermoscan Service is a type of risk survey using thermoscan technology to examine electrical devices such as power transformers, power control panels, electrical motors, electrical wires and connections to see if those electrical devices are still in valid condition, ready to use and no weakness points. This service is regularly conducted at least once annually. It organised the Loss Prevention Training programme to ensure risk improvement and smooth business operations. Last year, risk recommendation reports were issued to more than 1,000 corporate customers on the company's expenses.
risks through reinsurance arrangements. Under the ‘new normal’ lifestyle, consumers are avoiding outdoor activities and show significant concerns over hospital visits. To address those concerns and ease the situation, BKI is offering telemedicine services through a specific application to customers who take health insurance with the insurer. This in turn will enable them to consult doctors and receive prescribed medicines at home.
New-age surveys for better insights
For commercial customers, BKI has continuously positioned itself as a business partner rather than an insurer by providing advice and assistance to customers in terms of risk management. BKI has conducted risk surveys using modern technologies such as fire simulation through the Pyrosim Program. This technology simulates a fire incident at an insured property so that BKI can see a simulation of fire behaviours and responses generated by fire preventive systems installed at the insured property and also helps to clearly identify risk levels that the insured property is exposed to. For example, Fire Hydrant Flow Test is used to identify a level of pressure and a rate of fire hydrant flow in the event of fire to see if the available fire
RPA for task reduction and swift process
BKI has paid attention to not only developing products and services to meet its customers' needs, but also to improve productivity and reduce expenses of long-term operations. It has used Robotic Process Automation (RPA) in various operations including insurance applications, claim payments, and accounting and finance. RPA leads to a reduction in times of processing routine tasks that need no human decision making. It helps to reduce human errors and has enhanced BKI’s ability to quickly respond to customers’ needs. For example, BKI was able to issue more than 70,000 individual personal accident policies for corporate customers within 10 minutes. BKI strives to be a data-driven organisation by improving its enterprise data warehouse system to support data analysis in insurance applications, risk surveys, claim payments, and product developments. These operations reflect its strong commitment to constantly improve efficiency—and to eventually attain the highest satisfaction. Encouraging members of society to have insurance for their well-being is a cornerstone of BKI’s business—which is also the hallmark of its philosophy: ‘Your Caring Partner’— and to always be the customer’s first choice.
International Finance | March 2021 | 63
TECHNOLOGY
ANALYSIS
CRYPTOCURRENCY BITCOIN VERSUS GOLD
The idea of bitcoin becoming the world’s reserve currency is stoked by its recent runup values. Can it bring economic order?
An antidote to costly cross-border payments SANGEETHA DEEPAK Bitcoin eagerly competes with other cryptocurrencies as the coin of the digital realm—but can we say that it is the future of conventional currency? “Bitcoin may be the most popular cryptocurrency, but it is by no means the only one,” says Marius Reitz, It is very likely General Manager for Africa that bitcoin at Luno, a cryptocurrency will continue platform that allows people to be the most to buy, sell, store and trade dominant for a various kinds, in an interview while, mainly with International Finance. because of its Well, there are already more properties as a than 5,000 cryptocurrencies store of value causing competition. “Many of them are offering unique characteristics that appeal to various needs,” Reitz says. “It is very likely that bitcoin will continue to be the most dominant for a while, mainly because of its properties as a store of value, its 12-year track record and the network effects it has shown.”
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In 2009, bitcoin appeared on the scene, as the first type of cryptocurrency, enjoying an addedadvantage of high media attention and investor trust. It has built a relatively larger ecosystem because of its wide acceptance among merchants and its convenience in use. Although some of the new altcoins are developed by virtue of introducing new ideas they are yet to flourish to a point of surpassing bitcoin by its value or adoption rate.
In vogue for all traders By design, the bitcoin protocol fully relies on a resilient, peer-to-peer network referred to as nodes. One of the most vital responsibilities of a node is to verify a new transaction, validating it against a series of criteria. It is worth noting that even if one criterion is not fulfilled, the transaction will be rejected. Although resilient, the underlying software that holds bitcoin is an open-source, which makes it possible to clone and create a new digital currency version of it. With advancing the
evolution of cryptocurrencies ”there is certainly room for many of the existing and some new ones to play pivotal roles in the growth of the crypto industry,” Reitz explains. “As the market matures and viable use cases emerge, we envisage that more cryptocurrencies will become more prominent and individuals will be able to make informed decisions on which ones to explore and invest in.” For now, bitcoin is still in the lead. Its market capitalisation hit $1 trillion as it climbed yet another record high in February, making a contrast statement to analysts' warnings that it is an ‘economic side show’. “The last 12 months have been great,” Reitz says. Last December, it climbed to above $28,000 over a weekend, leading to promising talks about the exciting future of cryptocurrency. On top of that, Reitz makes a comparison in the surge of bitcoin that “this time last year, the price of bitcoin was under $9,000, but the economic uncertainty that has come with the pandemic has encouraged a wider group of people to explore cryptocurrencies, driving the price
to over $40,000 in January 2021.” The surge in crypto values is not only seen in the case of bitcoin. “Even ethereum has performed well and the price broke the $1,500 barrier for the first time recently, but bitcoin is still the biggest crypto asset by market capitalisation,” Reitz added. Another interesting fact about bitcoin’s run-up value is that even after a recent 15 percent drop, it still accounts for about 68 percent of the cryptocurrency market, which makes its market capitalisation greater than all other altcoins put together. In this way, it will continue to be in vogue for all traders. Bitcoin’s continuous rally might stoke one’s mind on whether its value trend has always been the case. In truth, bitcoin built back its reputational value when it captured the majority of the market within a year following its 32.8 percent market share in January 2018.
Bitcoin’s growing reputation as an asset class The fintech community still questions the two forms of money: cryptocurrency and traditional bank
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TECHNOLOGY
ANALYSIS
CRYPTOCURRENCY BITCOIN VERSUS GOLD
deposit. Traditional finance officers consider the surge in bitcoin value as part of a larger speculative bubble, as reported. Some believe that the dramatic rise in its values is largely driven by retail investors. In January, the UK watchdog warned that investors ‘could lose all their money’ as the volatile price of bitcoin dropped from its all-time high record. Its starling 300 percent increase over the past year has received a lot of attention from market participants, but the 15 percent drop has forced them to revisit their investment decisions. The main worry is that amateur investors could be easily drawn toward bitcoin mania, without realising its potential to collapse in value, as it did in 2018. The Financial Conduct Authority has emphasised that cryptocurrencies like bitcoin are largely unregulated, and investors would only have a slim chance to request compensation or raise complaints in the event of a mishap. “Our advice to anyone interested in cryptocurrencies is to avoid jumping on bandwagons without taking their time to investigate the assets they would like to invest in and getting advice from reliable sources. Also, don’t place all your money in a single investment and don't invest more than you can afford to lose,” Reitz says. “There are many cryptocurrencies with many different appeals. As a result, there is no one way of measuring what ‘best performing’ actually means. Bitcoin may be the most valuable crypto asset at the moment but there are other assets that have grown in popularity for a variety of reasons.” He states an example of Dogecoin’ price that
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Run-up value captures crypto market majority Price drop
15% Market share
68%
went up by over 800 percent in January 2021, as a result of attention from Reddit users, particularly encouraged by the actions of Elon Musk. “Globally, 2020 was a record year for institutional investment in cryptocurrencies, with MicroStrategy, Mode, Square and others moving huge percentages of their cash reserves into bitcoin in a bid to hedge their investments,” Reitz says. According to Musk, bitcoin is ‘on the verge’ of being more commonly accepted among investors. Certainly,
that's one way to look at this. If cryptocurrency is being treated like gold and accounts for half of a percent of many balance sheets, it would still point to the high price for all major cryptocurrency assets. Tesla has bought $1.5 billion worth of bitcoin. In a filing, the company said that the reason for buying bitcoin was for “more flexibility to further diversify and maximise returns on our cash.” Tesla has also said that it will start accepting bitcoin as payments in exchange for products, initially on a limited basis and subject to applicable laws. With that, the company could become the first major automaker to take such a big step, and the $1.5 billion worth of purchased bitcoin will give the company liquidity in bitcoin once its new payment option becomes available. Even PayPal has opened doors to bitcoin by allowing its 346 million users to buy and spend various types of cryptocurrencies. The company wrote on its website “We announced that PayPal users in the US can buy, sell and hold select cryptocurrencies directly through PayPal using their Cash or Cash Plus account. Users will be able to learn about crypto, track crypto prices, all without leaving the PayPal app. We plan to introduce this service to Venmo in 2021. PayPal also announced that it will enable cryptocurrency as a funding source for purchases in 2021, allowing users to use their cryptocurrency holdings to make purchases at its network of more than 26 million merchants. Once launched in 2021, when a consumer selects cryptocurrency as the
Marius Reitz, General Manager for Africa at Luno
funding source, the cryptocurrency will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency.” The world’s largest asset manager BlackRock has also started exploring the bitcoin side of things. Rick Rider, who is BlackRock’s chief investment officer of fixed income, told the media that ‘people are looking for storehouses of value’, despite bitcoin’s volatility being extraordinary. In fact, in January, the asset manager had added bitcoin futures as an investment for two of its funds, the BlackRock Strategic Income Opportunities and the BlackRock Global Allocation Fund. Other financial institutions such as BNY Mellon, which is New York’s oldest bank, and Mastercard are preparing to test the waters. It is reported that BNY Mellon is planning to launch a digital assets unit later this year, while Mastercard aims to support
certain cryptocurrencies on its formal network. “We are holding a lot more cash than we’ve held historically,” Rider told the media. “It is because duration doesn’t work, interest rates don’t work as a hedge and so diversifying into other assets makes some sense. Holding some portion of what you hold in cash in things like crypto seems to make some sense to me, but I wouldn’t espouse a certain allocation or target holding.”
Vying with gold In some capacity, bitcoin is already competing with gold, which is accepted as a safe haven on a global scale. Reider believes that bitcoin could take the place of gold ‘to a large extent’ and cryptocurrency is here to stay. There is a lot of receptivity between millennials and technology, especially if it is new and exciting. For years investors
have been turning to gold, especially during times of stifling financial or market conditions. Bitcoin is slowly building on the same reputation as a ‘form of digital gold’, according to a global market strategist at JP Morgan. However, bitcoin still has a long way to go because the value of gold in the private sector is around $2.7 trillion, and it would take an inexplicable amount of time for bitcoin’s market capitalisation to reach that level, with a price of around $146,000. In January, the gold prices fell 3 percent, while bitcoin rallied. The price of gold rose from $1,100 to $1,900 during the period between 2019 and 2020. Gold’s market capitalisation stands anywhere between $9 trillion and $10 trillion. Even if bitcoin captures half of gold’s market capitalisation there will be a growth of four times or $200,000. Still, the biggest caveat is the volatility around bitcoin’s price. It is observed that its price volatility is five times higher than gold. “Cryptocurrencies are still relatively new, so there will always be a higher level of volatility compared with other more established asset classes. We must remember that as the benefits become more evident, more people will hold these cryptocurrencies for their utility and this will make the market less volatile,” Reitz says.
New global reserve currency of the future? The new celebration around bitcoin is gaining momentum. There is enough anticipation that bitcoin could climb to $1 million in five years to become a global reserve currency for two reasons. First:
International Finance | March 2021 | 67
CRYPTOCURRENCY BITCOIN VERSUS GOLD
ANALYSIS
TECHNOLOGY
Which is a better investment? Asset performance from a $1 investment on 6 Oct 2009 when bitcoin first appeared on the scene Period
BTC price
Gold price
2020 value from $1 investment
1 year ago
$9635
$1604
2 years ago
$3946
$1334
Bitcoin: $14.13 | Gold: $1.34
3 years ago
$11230
$1347
$1057
$1242
Bitcoin: $52.76 | Gold: $1.44
4 years ago
Bitcoin: $5.79 | Gold: $1.11 Bitcoin: $4.97 | Gold: $1.33
5 years ago
$420.4
$1231
Bitcoin: $132.66 | Gold: $1.45
6 years ago
$241.5
$1210
Bitcoin: $231.00 | Gold: $1.48
7 years ago
$624.8
$1321
Bitcoin: $89.27 | Gold: $1.35
8 years ago
$29.39
$1608
9 years ago
$4.378
$1723
Bitcoin: $12,738.94 | Gold: $1.04
$0.9490
$1384
Bitcoin: $58,774.88 | Gold: $1.29
$0.008088
$1113
Bitcoin: $6,896,157.25 | Gold: $1.61
10 years ago
11 years ago
Bitcoin: $1,897.79 | Gold: $1.11
Source: Woobull charts
Scarcity of cryptocurrency with a market capitalisation of 2.1 million coins. Second: The decentralised nature of the technology. Currently, the bitcoin network is made up of miners who are responsible for processing transactions and operate specialised computers that use powerful machines. There can be no single entity to control the network because there are so many miners who are solving the puzzle independently, at the same time. Bitcoin proponents claim that the network is one of the strongest computer networks globally, making a statement that it is so much more resilient. The blockchain serves as a ledger in the bitcoin protocol, with a record of every transaction ever made. The intriguing thought behind its potential to become a reserve currency of the world is that with
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an increasing number of people coming into the market, there is more liquidity, meaning that there is more utility and as a result, more stability in price, thus creating an evolution. That said, another important requirement of a reserve currency is that it must function as a store of value. In the case of bitcoin, it would need to hold a value over the long-term, and although market observers believe that it is possible, the vote is not unanimous. It seems that bitcoin has the potential to capture interest around the world— and in truth it does. It can be a great store of value in those countries that suffer from geopolitical turmoil, as they can witness their national currencies go through substantive changes in value quickly, The internet economy is a vast space with no native currency. So it certainly creates
a huge opportunity for bitcoin to transform itself as the ‘global reserve currency of the internet generation’. However, there is one aspect that is highly debatable. For bitcoin to become a global reserve currency it will have to replace the US dollar by functioning as a unit of account—and the extent to which it can serve this purpose is open to discussion. Today, most central banks are conducting research into digital currencies to create their own. According to the Bank of International Settlements, Sweden’s imminent work in becoming a cashless economy is moving in the direction of developing central bank digital currencies, which surpasses its aim to change the international monetary system. However, many economists believe that the fixed supply of bitcoin would not be an impractical attempt at making it a
global reserve currency, as demand would outstrip the supply, resulting in a permanent deflation if adopted. “With the uncertainty caused by the pandemic, an entirely new audience is looking at cryptocurrency, as a whole, for the first time. They are beginning to think beyond the tried and tested way of managing money, and exploring new ways to get the most out of their money,” Reitz says. “If the last few months have taught us anything, it should be that the future can be difficult to predict. However, we envisage now that people are beginning to see the untapped potential of cryptocurrency and more use cases are beginning to emerge, we will see a continuation of the ongoing trend of increased interest in cryptocurrencies.”
Digital currency adoption among regions Asia
41% Europe
35%
Notable crypto revolution in Africa Africa is experiencing a quiet cryptocurrency revolution as the continent continues to embrace mobile money, for its tech-savvy population. The cryptocurrency transactions on a monthly basis to and from Africa which was below $10,000 has increased by 55 percent over the past year, according to data from US Blockchain research firm Chainalysis. A fascinating thing about Africa’s exposure to cryptocurrency is that it is mainly used for commerce, unlike the rest of the world. Small businesses in Nigeria, Kenya and South Africa are mostly following this trend. According to the latest Google Trends data, Ghana, Nigeria and South Africa rank in the top 10 countries for the highest Google
search of the word bitcoin. Reitz points out that, a recent survey from Luno, which featured 15,000 participants from France, Italy, the UK, Nigeria, South Africa, Indonesia and Malaysia found that 54 percent of Africans are ready to adopt a global digital currency. These figures show that Africa has the largest appetite for digital currency adoption with Asia at 41 percent and Europe at 35 percent ranking second and third respectively. “In Nigeria, we grew by more than 2 million users in 2020 alone and our transaction volume more
than doubled during this period. We also had thousands of new users from South Africa, Zambia and Uganda, resulting in a 100 percent increase in trading volumes during this time. Globally, we now have more than 6 million users and more than 75 percent of those are based in Africa,” he said. In many African countries, where money is often more than just a ‘nice to have’ and is vital for securing what you want from life, people spend more time understanding it, managing it, preserving it and being creative with how you maximise the use of it. For many Africans, if cryptocurrencies can provide a secure, legal and cheaper means of exchanging value than the existing system, it will be used; or at least explored. “Cryptocurrencies also offer an ideal antidote to costly cross-border payments which are necessary for facilitating intra-continental trade. Stablecoins like USDC for example, which we recently launched on our platform, can mitigate the impact of currency volatility, and deliver a greater level of stability for individuals and businesses than local currencies,” Reitz says. “However, the numbers in Africa are still small. The presence of institutional investors in Africa’s cryptocurrency market will help the industry to mature and become more efficient, and we envisage more institutional investment in Africa over the next five years. However, there needs to be a better understanding of crypto’s use cases and regulation to attract this level of investors,” Reitz added. editor@ifinancemag.com
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TECHNOLOGY
THOUGHT LEADERSHIP
EMBEDDED FINANCE BAAS PLATFORM
IGNACIO JAVIERRE CO-CEO AND CO-FOUNDER, HUBUC
BaaS providers and other agile fintechs have built the foundation for the emerging embedded finance trend that will take off this year
Charting the course for embedded finance In the pre-Covid pandemic period, the way that people bank was changing. Bank branches have been closing as people move away from in-person banking towards online and mobile, forcing banks and businesses to adapt. The pandemic accelerated this shift even faster in 2020 pushing everyone online and spurring unprecedented demand for online services. The legacy financial services infrastructure that supports the world’s banks simply can’t keep pace with this new level of digital demand. Amidst these challenging conditions for the industry, Banking-as-a-Service (BaaS) providers and other agile fintechs have built the foundations for the emerging embedded finance trend that will take off this year, allowing businesses with and outside the financial sector to compete with the banks. Embedded finance is all about abstracting banking functionality into technology, and enabling any brand or merchant to integrate financial services into their suite of products and services via APIs provided by the BaaS platform. Ambitious brands including startups, social media platforms, and supermarkets can now do this rapidly and at low cost. According to industry research, embedded finance will be worth $3.6 trillion by 2030, but with a wider addressable market of $7 trillion. What does this mean for individuals? Well, it is enabling their favourite non-financial service
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brands to provide financial services on their terms, any time of any day. It’s a game changer.
A boost in use cases While embedded finance is not new, it began largely to help existing financial services providers offer new products. Now a glut of the world’s leading brands outside of financial services are adopting embedded finance, with pioneers like Apple launching Apple Card and Apple Pay, and Grab launching a buy-nowpay-later option. Many others are following suit. One well known example is paying for an Uber ride. Customers don’t need to get out a credit or debit card at the end of a journey, because Uber product designers, working with a BaaS platform, have enabled payments to be embedded into the experience. This benefits both customers and the company’s drivers, who get paid the right amount at the right time. Another trend we’re seeing is social media platforms embracing embedded finance— think about Instagram’s Checkout feature in the US where people can buy goods directly through a businesses’ Instagram account. The concept of these ‘social payments’ has been brought sharply into the spotlight by Covid-19, with a global study by Kantar reporting social media engagement has increased by 61 percent and 58 percent of consumers in the age demographic between 13 to 37 years are
interested in purchasing items directly from their feeds. And FIS’ 2020 Power your Payments report, which surveyed 33,000 people across 12 countries, found that over half, or equivalent to 53 percent, had paid through a social media site. This makes a lot of sense.
What’s next on the horizon? Embedded finance has huge and far-reaching potential for all parties. For individuals, it will transform the way they access services that would traditionally only be available through a bank—resulting in better solutions for them from businesses who want to compete to offer the best customer service. For the businesses that do adapt it can improve customer engagement and loyalty, and also offer them better insight into their client base. And for financial services providers, the opportunity lies in partnering with BaaS providers to reach even more customers through a third party agreement. At HUBUC, we are trying to take the embedded finance revolution one step further. We are working with our clients on a range of different use cases, for example corporate cards for on-demand delivery for riders and drivers that only approve transactions at set merchants, through to allowing businesses to integrate banking transactions within their
bookkeeping process for accounting and employee expense purposes. But unlike other embedded financial services providers, we offer clients access to an extensive network of banking and fintech providers including Currency Cloud, Mastercard and IDEMIA which can be adapted to suit their needs— whether they want to receive money, hold money and make payments, or issue cards. We also handle all compliance on behalf of clients—making it even easier for smaller businesses to access and democratising the ability to access BaaS. Embedded finance is here to stay, a fact illustrated by the recent explosion of VC interest in the burgeoning sector. We expect 2021 to be a pivotal year as it moves out of financial services into even more markets, allowing bold businesses the opportunity to get involved with a previously closed world and become a one-stop shop for their customers and users. Ignacio is the co-founder of HUBUC and was formerly the co-founder of PIGARI HQ, a manufacturer of corporate debit cards for businesses and freelancers intended to automate expense management and eliminate paper expense receipts. Before that he was the associate, deal and growth strategist at KPMG. editor@ifinancemag.com
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TECHNOLOGY
FEATURE ROBOTICS
JAPAN ROBOTICS ROBOTICS MARKET
Japan is also using its robots to fight the Covid-19 virus
Japan's robots are conquering the world IF CORRESPONDENT
J
apan has been at the forefront of robotics technology and has amazed the world with its robotics innovation for many years. Seven out of the 10 world’s leading industrial robotics companies are housed in Japan. Furthermore, it has the highest density of robot workers in the world. The market for service robotics is thriving, including the field of senior care. The country is the powerhouse of technologies such as machine vision, machine learning and artificial intelligence. These technologies are vital for the development of effective robotic hardware. The country’s industrial robot makers have produced more than 50 percent of robots supplied in 2017, which is 39 percent more than the year earlier. There is no doubt that Japan is the sphere head in the field of industrial robotics as it is the number one exporter for robots in terms of shipments and number of operating units. The country also remains the testing ground for new applications of robotics. Companies such as Kawasaki, FANUC, OTC Daihen, Epson, Denso, and Mitsubishi are driving the
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FEATURE JAPAN ROBOTICS
Japan surpasses the US on robot sales
Japan
38,600 units
US
31,400 units
South Korea beats Japan with highest density of robot workers
South Korea
855
Japan
364
Installed industrial robots per 10,000 workers
development of industrial robotics in the country. Furthermore, Japan is one of the world’s leading hub for startups and the tech ecosystem. Thus investments have been flowing into the country seamlessly. While looking at the statistics, Japan has been ahead of other economies in robot shipments. The country has shipped robots worth ¥3.4 billion in 2012, covering 50 percent of the global market share. Furthermore, about 300,000 robots were operating in the country, covering 23 percent of the global market share. Today, Japan is successful in the robotics segment because of its highly competitive research, development and applied technologies. Robotics development has the potential to transform the global landscape.
Japan is buoyant in Robotics Japan
has
focused
on
the
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TECHNOLOGY
FEATURE ROBOTICS
JAPAN ROBOTICS ROBOTICS MARKET
development of robotics since the 1970s. Earlier, industrial robotics were used across segments such as electronics and automobile. However, the usage of industrial robotics became pivotal in other industries to reduce the physical burden of human beings. While speaking to International Finance, Ken Matsui, chief executive officer at Mira Robotics said, “Japan has established world-class manufacturing technologies in home appliances, automobiles, and semiconductors, and specialised production machines like machine tools that has been computerised into industrial robots. Industrial robots have become widespread and have contributed greatly to alleviating the labour shortage and improving the efficiency of production in Japan’s rapidly growing economy since the 1980s.”
The scenario outside Japan and various robotics investments The demand for robotics in places such as China, the USA and Europe has been thriving because of the establishment of public and private sector robotics projects. While the Internet of Things (IoT) has played a major role in shaping up the robotics’ base in Europe and the USA. The global demand for robotics surged over the years and is still robust. The installed robotics units are projected to grow annually by over 15 percent between 2018 and 2020. The data are produced by the International Federation of Robotics (IFR) in its report known as World Robotics 2017. China is betting on industrial robotics to boost quality and productivity because of high labour cost and intense global competition. The country has become the top nation globally to acquire industrial robots. After Japan, South Korea is the next robotics hotbed since it had the
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world's highest robot density since 2010. The country’s density is greater than the global average with 631 robots per 10,000 human workers. The country will be filled with over eight million people aged above 65 years. Therefore, robots are viewed as a catalyst to assist elders. The concept has received a positive response from the government including funding from companies such as Hyundai Heavy Industries, SK Telecom, and RoboStar. Mr. Ken Matsui said, “Japan is entering a new phase in its super-aging demographic structure, ahead of the rest of the world, where the total population is decreasing, the number of elderly people is increasing, and the number of workers is decreasing. The world population is increasing, but as medical care develops and living standards rise, sooner or later all countries will eventually have a population structure similar to that of Japan. At that time, I believe the need for automation, efficiency, remoteness, and digitalisation of city infrastructure
services will become even stronger. I believe that service robots, which were born out of social issues in Japan, can contribute as exemplary solutions to similar issues that are expected to arise in countries around the world.” Japan’s tech companies, research institutions and other entity partners work together to deploy the country’s cutting-edge robotics in a wide range of sectors. The county’s robots also have the capability to be used in space exploration. The Japanese government spurred the development and application of disasterresponse robots after the earthquake and tsunami in 2011. The department of precision engineering at the University of Tokyo School of Engineering are working on robots that can be operated in inclement weather and extreme environments. The sole purpose of the development is to train the robots to go into adverse environments which are difficult for humans to enter, capture images and collect information.
FEATURE JAPAN ROBOTICS
Robots are specifically designed to stimulate patients suffering from ailments such as dementia, Alzheimer's, and other cognitive disorders. The robot responds to the owner’s voice and interactions. Data has revealed that this type of robots are effective towards loneliness and dementia therapy.
Medical robotics is another vital segment. The Japanese government is betting on the development and dissemination of medical equipment that utilises robotics technology. The robots will cut the burden of both medical professionals and patients alike, for example, surgery assistant robots. While, the department of mechanical engineering at the Tokyo school of engineering is testing robots for medicine and industrial processing. The team is currently conducting research and development on robot-assisted surgery.
Japanese companies are leading from the frontline with innovations A Tokyo-based firm called Connected Robotics has developed automated food robots. The first robot OctoChef makes a famous Japanese cuisine known as tokoyaki, while the second robot Reita serves ice-cream. The firm has secured a $7.8 million Series A funding in 2019. It is expected to fulfil the firm’s ambitions
towards the launch of products such as an automated dishwasher robot and an automated breakfast-cooking robot. The world’s first robot capable of tidying up a room was launched by Preferred Networks. The startup is valued at $2 billion and is also the highest valued startup in Japan. The firm’s newer robotic endeavours are powered by ML and AI. The house cleaning robot has the capability to clean rooms with commands and instructions and can recognise 300 household items through machine vision. The robot intelligently selects and put away belongings. SoftBank’s subsidiary SoftBank Robotics operates an independent startup that is famous for creating an emotionreading robot, Pepper. The company has partnered with HSBC to rollout service robots for the bank’s branches across the US. There is another firm known as Ascent Robotics, which specialises in AI -based software for robotics and self-driving vehicles. The firm’s research
unit has developed ML algorithms and advanced neural models to equip intelligent vehicles. Furthermore, the firm has raised funds worth $16 million in 2018. It has also partnered with companies in the automotive segment to develop the technology. PARO Therapeutic is a firm that has launched a medical robot which is specifically designed to stimulate patients suffering from ailments such as dementia, Alzheimer's, and other cognitive disorders. The robot responds to the owner’s voice and interactions. Data has revealed that this type of robots are effective towards both loneliness and dementia therapy. According to Citi, Japan’s Fanuc and Europe’s ABB control nearly three-quarters of China’s industrial-robot market. Mira Robotics is also considered one of the best robot makers in Japan. The company’s Ugo robot is a top-notch product. Ugo, which is developed to cater to the country’s
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TECHNOLOGY
FEATURE ROBOTICS
JAPAN ROBOTICS ROBOTICS MARKET
shrinking workforce, is equipped with a pair of height-adjustable industrial arms mounted on wheels. The $1,000 robot can be used to safeguard office buildings, carry out inspections and clean toilets and other areas inside an office. Ugo is capable of eliminating viruses on elevator buttons and door handles through ultraviolet light. Apart from that, it can record the temperature of the premises. It will be interesting to see how the robot is effectively utilised. Mr Ken Matsui said, “The robot we are developing Ugo is not an industrial robot that works in a factory, but a service robot that works in a familiar living environment. Japan is said to be the first country in the world to face a super-aging society, and it is estimated that the working population in Japan will decrease by more than 14 million in the next 20 years. The city’s living infrastructure services include facilities, transportation period, communication, logistics, retail, medical care, security, cleaning, inspection, guidance, education, etc. There is a serious shortage of essential workers who support these services. Ugo is currently being developed as a building maintenance service robot, and is working to transform service tasks such as security, cleaning, and inspection into sustainable living infrastructures that can be shared between people and robots.”
How Japan weathered Covid-19 pandemic with robots? Japan has deployed sterilising robots for disinfecting airplanes and hospitals, while delivery robots have carried out contactless deliveries seamlessly and avatar robots are standing in for university students at graduation. The sterilising robots use ultraviolet light. Ory Laboratories, a Tokyo-based
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robotics has launched a desktop communications robot called OriHime Biz. The robot is used by children with physical impairments to virtually attend classes. Furthermore, a teacher suffering from amyotrophic lateral sclerosis (ALS) have used the robot to attend his student’s graduation ceremony. The company has also developed avatar robots for people working from home during the pandemic. However, the robots can also be utilised by people suffering from chronic health conditions.
Government investments for robotics development The Chinese government invested $577 million for manufacturing intelligent robots in 2019. According to IFR Data, in 2018, the robotic density in China’s manufacturing segment recorded 140 units per 10,000 workers. In 2020, the government floated new developments for the robotics segment. The government unveiled plans to establish a handful of global robot manufacturers, followed by the establishment of new industrial clusters, boost China’s robot density and secure 45 percent of the domestic market share for the country’s high-end robots. The Japanese government has ramped up its robot-related budget for 2019 to $351 million, with a mission to make the country the number one robotic innovation hub. The county delivered 52 percent of the global robot supply in 2018 and is the world´s number one industrial robot maker. The reports are produced by IFR. In South Korea, the government is seeking to enhance the robotic segment through the Intelligent Robot Development and Supply Promotion Act of Korea. Furthermore, the government invested funds worth ₩$126 million in 2020 for
robotics development. The government’s 2019 basic plan for intelligent robotics encourages systematic selection and concentration of promising public and private sectors. The focus area includes key robot software, manufacturing businesses, next-gen key components and segments such as logistics and healthcare where robotics are vital for operations. According to IFR, South Korea has doubled its number of industrial robots in operation and has ranked third behind Joan and China in 2018. Europe’s largest-ever funding programme for research and innovation Horizon 2020 has funded robotics projects. Horizon 2020 covers various segments ranging from agrifood, manufacturing, commercial, transportation and healthcare use
FEATURE JAPAN ROBOTICS
to consumer robotics. The European Commission provides a fund worth $780 million through the programme for robotics research and innovation for a period of seven years. The work programme 2018-2020 covers topics such as industry digitalisation through robotics, robotics applications in key areas, including artificial intelligence and cognition and many others with a budget of $173 million. Germany is backing the usage of new cutting-edge technologies within administration and industry as part of its high-tech plan. The country is the fifth largest robot market in the world and number one in Europe is looking to boost robotics development through the PAiCE programme with a funding budget of $55 million. The robotics-oriented projects
are seeking to develop platforms for service robotics solutions across relevant application segments including the manufacturing field, logistics and service. Germany sold almost 27,000 units of robots in 2018, creating a new record. The US government floated the National Robotics Initiative (NRI) for fundamental robotics research and development. The budget for NRI in 2019 was $35 million. The department of defence and the Mars exploration programme provides funding for additional robotics application in the field of defence and space. The county ranks third in terms of robotics installation annually.
businesses are betting on automation to assist the economy, contribution to a national enthusiasm for robots. Furthermore, Japan is a great example to many economies in terms of successful implementation of technology. The Japanese robotic segment is poised to remain the best in the world in terms of innovation and sustainability. Majority of the Japanese population have ample knowledge about robotics and therefore there should not be a problem for the future generation to adapt to robotic environment. Japan’s aging population is a major concern for the government. More than a quarter of the population are 65 years or older, and the number is expected to surge by 40 percent in 2050. Therefore, robots are expected to play a pivotal role in assisting the workforce. The government is experimenting with robots in the elder care segment for both patients and workers. The robotic can be found in the country like hotels and cafes; which is an inspiration to the rest of the world. Global economies, other than Japan must embrace robotics. However, it depends upon the approach of individual nations towards robotics. Effective deployment of robots will assist human beings and make life easier. Mr Ken Matsui said that “With Covid-19, the introduction of robots in Japan has become even more aggressive, and I feel that we are several years ahead of schedule. I believe that in the next three years, various service robots will spread throughout the city, and in five years, they will become the core technology that will make smart cities a reality in cities all over Japan.”
What does the future hold? Japan’s robotics segment has a bright future as the Japanese government and
editor@ifinancemag.com
International Finance | March 2021 | 77
TECHNOLOGY
THOUGHT LEADERSHIP
DATA ANALYTICS DERIVING INSIGHTS
JOHN MITCHELL CEO, EPISODE SIX
It is what organisations can do with the knowledge and insight the data provides that makes a difference
Real-time analytics: A tipping point Real-time analytics is at a tipping point within the financial services industry with its full potential likely to be fully realised by banks within the next few years. Data in and of itself is not necessarily the king. Rather, it is what organisations can do with the knowledge and insight the data provides that makes it key. By leveraging real-time analytics, banks are better equipped to create an enhanced customer experience, overcome constraints of legacy technology, drive greater value from customers and combat fraud. At the same time, greater adoption of real-time analytics, and eventually artificial intelligence, will continue to help banks evolve and manage the multitude of challenges they face today, including determining the appropriate next step on their digital transformation journeys as we look towards the new normal.
Understanding customers to deliver a better experience Real-time analytics provides accurate of-themoment insight into customer behaviours, preferences and financial history. Banks are fast recognising that this 360-degree-view offers a deeper knowledge of customers at the point of transaction, ultimately enabling great customer service and cross-selling opportunities. The opportunity to build stronger client relationships cannot be ignored, especially
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when banks are under pressure from a range of competitors from neobanks to apps that enable consumers to make active financial decisions. Before diving in, however, it is important to understand that implementing real-time analytics takes time, effort and patience. It also requires strong consideration of how to embed the insights derived across the organisation.
Supporting the journey from legacy tech Many financial services companies’ systems and processes were originally developed decades ago, which can complicate the introduction of new technology. But the good news is, there are options available to banks to help ensure they can fully harness the power of real-time analytics. Accessing data across multiple platforms built across multiple decades is a challenge. Getting a handle on the data your institution already has and realising the impact of combining different data sets will help to drive even better outputs and learnings within the institution. In some cases, this has slowed—and even complicated—the process of establishing realtime analytics programmes. As such, some organisations have embarked on projects to ‘rewire’ their systems to allow for the integration of new technology. Others have seen a better path in looking to third parties, such as smaller, more nimble fintechs, to
provide the technology and analytics with their institution needs. It is then a matter of integrating fintech into the existing system, an operation that has been made much smoother by the ability to utilise open banking. Such partnerships are contributing to the growing trend of banks leveraging the abilities of other businesses to maintain their competitive edge.
Overcoming fraud The estimated cost of fraud is $32 billion in 2022. And as fraudsters continue to deploy new techniques, especially amid the remote environment presented as a result of the global pandemic, the challenge of tackling the problem grows increasingly important. Real-time analytics has the potential to provide great value and direct savings to banks through the reduction of fraud loss and the early detection of fraudulent transactions. Banks and financial services providers are already applying real-time analytics to identify, flag and pause suspect transactions. The efficiencies this provides the industry amount to savings of hundreds of millions per year. More importantly, there is potential for applications of real-time analytics to be more widely applied, thus reducing fraud losses even further. It is crucial for the industry to move towards the widespread implementation of technology, like real-time analytics to eradicate current challenges while simultaneously learning to prevent new fraud techniques.
the business banking world, where its application is still relatively untapped. This opportunity will be even greater when Artificial Intelligence is fully harnessed by the industry. Artificial intelligence will allow for intuitive, real-time analysis during transactions and enable insights to recommend new, different or better products and services dependent on the needs of the customer. These abilities could help to support many SMEs as they reassess their finances following the impact of Covid-19 and as government support packages come to an end. With real-time analytics, its potential has yet to be fully realised across the industry. But now is the time for banks to consider taking the next step in incorporating actionable insights into their decisionmaking processes to advance on their competition while meeting their customers where they are. And while any technology enhancement within a financial institution can seem daunting, especially when legacy systems are involved, there is value in exploring symbiotic partnerships with nimble fintechs to bring the latest innovations like real-time analytics well within reach.
John Mitchell, an alumni of the University of Texas at Austin, is the CEO and co-founder of Episode Six which develops software for financial services, ecommerce and other firms that issue payment products.
The growing opportunity Real-time analytics also have the opportunity to impact
editor@ifinancemag.com
International Finance | March 2021 | 79
Business Dossier - Qetaifan Projects
The profound work of Qetaifan Projects in Qatar
Q
etaifan Projects Company, a subsidiary of Katara Hospitality, was established to develop and manage Qetaifan Island North. The company is fully owned by Katara Hospitality—a leading global hotel owner, developer, and operator based in Qatar. The foremost objective of Qetaifan Projects is to build cities of sustainable and intelligent infrastructure to support Qatar’s long-term economic vision. The first main development of Qetaifan Projects is Qetaifan Island North, which is a distinct island featuring world-class facilities that make it a modern, globally competitive community with unique designs. This thriving waterfront hub represents a thrilling new way of life and aspires to transform itself into an internationally recognised landmark location.
Qatar’s future iconic destination
Qetaifan Island North features all elements to attract a warm and welcoming community that is seeking a vibrant lifestyle. Located off Lusail city, Qetaifan Island North spans approximately 1.3 million square metres, and the project area on the island extends 80 | March 2021 | International Finance
Qetaifan Island North is characterised by world-class facilities and state-of-the-art designs—making it a globally competitive community
to approximately 830 thousand square metres. Inspired by the rich culture and nature of the region, the island is uniquely designed with state-of-the-art features that include exciting entertainment attractions, waterpark, diversified waterfronts, distinct neighborhoods, private beaches, luxurious hotels, pedestrian-friendly streets, living gardens, saltwater canal with F&B and retail outlets on both sides, world-class accommodation, retail and festival plazas, school, and medical centre. Along with adrenaline-fueled water activities, visitors will also be able to enjoy fishing, boating and a whole range of other activities. Qetaifan Island North’s main attraction is the state-of-the-art waterpark. Spanning over an area of approximately 160,000 square metres of the island, the waterpark features more than 10 attractions. Each attraction comprises two to three rides including an edutainment ride which has a unique design, inspired by the Qatari culture—complementing the oil and gas industry’s theme. That said, the Icon Tower which is
a distinct zone in the waterpark is the world’s highest tower of its kind. It is 80 metres high and located on a small island Opposite to Qetaifan Island North and also linked to a causeway. The journey to the Icon Tower is by a specially designed train that passes through the causeway. The premier ride includes a 26-metre-tall rotating water slide, which is the first of its kind in the region. An elevator is also available for all floors within the tower. Qetaifan Island North also features a Beach Club, that will be operated by Rixos International Hotels. The Beach Club comprises all the facilities of a 5-star hotel, with a gross floor area spread across 4,300 metres and the beach approximately 12,000 metres. The club
is recognised as the waterfront attraction of the island, featuring a white sand beach, infinity pool, restaurant, cabanas, spa, gym and kids area. That said, the Linear Park forms a link between all zones on the island. An artificial Salt Canal stretching 1.2 kms is linked to the sea for visitors to enjoy fishing, boating and similar activities. Community facilities such as retail, F&B, sports and entertainment outlets are spread by the canal side.
For the residential community and FIFA fans
The island also caters to the residential community with first-class beach villas characterised by spectacular waterfront views, in addition to residential apartments and penthouses. Phase 1 and 2 of residential villa plots were sold out in 2020. They included waterfront villa plots, beach access villa plots and garden villa plots. The beach villa plots were launched in phase 2, marking the first in the Middle East, with access to an exclusive five-star operated beach. Qetaifan Projects will also be launching a new real estate development in early 2021 within the South Mid-rise buildings on the marina. It is worth noting that some of the most exquisite suites for stay are in Qatar. Discover some of the most elegant hotel rooms in
Qatar on Qetaifan Island North, 350 keys designed to offer guests absolute comfort and supreme luxury. Qetaifan Island North features a 5 star luxury resort to offer comfort to all visitors and tourists, in addition to the distinctive sea view and private beaches, chalets, rooms design. The Hotels will surround the Waterpark to ensure a unique experience for hotel guests. Guests will also have access to the retail plaza for a unique shopping experience during their stay. The gross floor area of the retail plaza is 8,000 meters and it will be operated by Rixos. Moreover, the hotel will also host
160,000 12,000 Square metres of the island
Metres of beach approximately
events, leisure activities, services and facilities that will attract tourists More importantly, Qetaifan Island North will be an attractive destination for all during the Fifa World Cup 2022. It is close to Lusail city where the Lusail International Stadium is located for hosting the premier sporting event. The stadium will host the final game of the tournament on December 18th, 2022, which marks the National Day of the State of Qatar. Qetaifan Island North will also feature a temporary accommodation for the FIFA World Cup fans.
International Finance | March 2021 | 81
ECONOMY
FEATURE TRADING
GERMANY INDO-PACIFIC STRATEGY GERMANY CHINA TRADE
Germany aims to strengthen its trade and investment linkages with Australia, New Zealand, India, ASEAN, Japan, and South Korea
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FEATURE GERMANY INDO-PACIFIC STRATEGY
Germany’s Indo-Pacific strategy PRITAM BORDOLOI
I
n the last two decades, China has developed into a trade giant, with cheap Chinese products dominating almost every market in the world. Last year, while discussing Europe’s trade negotiations with China, German Chancellor Angela Merkel said, “In the last 15 years, China has become much stronger economically and this means that the demand for reciprocity – for a level playing field – is of course very justified today.” In September 2020, the German government released a document entitled ‘Policy guidelines for the Indo-Pacific region. Germany—Europe—Asia: shaping the 21st century together’. While endorsing the concept of Indo-Pacific for the first time ever, the document highlights Germany’s approach in dealing with China’s growing influence in the region as well as global trade. The approach is assertive and the document, which is 70 pages long, is a set of guidelines for multiple ministries across seven priority areas. Through the document, Germany has stressed the importance of multilateralism and urged The North Atlantic Treaty Organization (NATO), an intergovernmental military
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ECONOMY
FEATURE TRADING
GERMANY INDO-PACIFIC STRATEGY GERMANY CHINA TRADE
alliance between 30 European and North American countries, to expand ties with Southeast Asian countries such as Japan and South Korea. Germany also called for the speedy conclusion of free trade agreements with countries like Australia and Indonesia and pledges to expand regional sustainable infrastructure initiatives.
Why Germany needs an Indo-Pacific strategy? More than 50 percent of the world’s population resides in the IndoPacific region. In the last two decades, economies such as China, India, Vietnam and Japan have seen rapid economic growth. Some of the world’s topmost emerging markets are found in this region. It also accounts for nearly 40 percent of global GDP, according to reports. During the same period, countries such as China and India have emerged as global superpowers with huge nuclear capabilities. This has led to the region gaining economic as well as political importance from the west and the rest of the world. The shifting geopolitical power structures in the Indo-Pacific region impacts not only Germany, but the whole European region as the whole region is interconnected through global supply chains. Some of the major international trading routes pass through the Indian Ocean, the South China Sea, and the Pacific. Hence tensions in these regions impact Germany too. Through its new strategy, Germany wants to work more intensively with the countries of the region with regards to climate change, human rights or to enhance cultural, educational and scientific exchanges. Another important reason is the expansion of economic relations with the region. Germany understands
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Germany’s exports to China in 2019 Automobile
$27.09bn Machinery
$22.78 bn Electronic equipment
$17.36 bn Pharmaceuticals
$4.06 bn
the importance of the region. What Germany wants to do is eliminate unilateral dependencies, which can be achieved by diversifying partnerships. The Indo-Pacific strategy serves this very purpose. Some of the other aspects include digital transformation, connectivity, free access to information and protection against misinformation.
Indo-Pacific strategy to add value to the German economy The Indo-Pacific region is of central importance to not only Germany but also Europe. Not only the region is leading global growth, but it is also leading in innovations when compared to the rest of the world. Germany, being an export-oriented economy did need
to develop their own strategy when it comes to the Indo-Pacific region. While taking to International Finance in this regard, Rituparna Majumder, Industry Principal, Frost & Sullivan said, “Germany’s digital transformation journey has over the last few years remained lackluster as evidenced by the slow speed of the Internet and the low digital adoption rate by the local firms. The Indo-Pacific strategy with its commitment to deepen the German alliance with the ASEAN markets, in addition to Japan, Australia, and South Korea stands to boost Germany’s Industry 4.0 agenda while garnering bigger investment opportunities in digital infrastructure. "The Indo-Pacific strategy is also perfectly in sync with Germany‘s Digital Strategy 2025 programme as the former aims for closer cooperation with IndoPacific countries in the field of research and development to make Germany a leader in artificial intelligence. In light of the Sino-US trade tensions and the US sanctions against Huawei Technologies, Germany is keen on safeguarding the economic interests of the country. “To expedite 5G deployment in Germany and to develop a multivendor alternative to Huawei, the IndoPacific strategy will help Germany to strengthen its relations with leading Asian equipment providers such as NEC Corporation of Japan and The Samsung Group of South Korea,” Rituparna added. Similarly, Rashmi Banga, Senior Economic Affairs Officer, Unit of Economic Cooperation and Integration among Developing Countries, Division on Globalisation and Development Strategies, UNCTAD told International Finance, “Within the European IndoPacific strategy, Germany has also decided to support the expansion of Europe’s
FEATURE GERMANY INDO-PACIFIC STRATEGY
Germany’s top trading partner in 2019 engagement with the Indo Pacific region and accordingly in September 2020 Germany released policy guidelines for the Indo-Pacific region in the form of Germany-Europe-Asia for shaping the 21st century together. Indo pacific region is emerging as an important trade partner for Germany. In recent years, Germany’s exports have grown by an average of around three percent globally, but exports to the Indo-Pacific region have increased by approx. seven percent annually. “Around 15 percent of Germany’s global exports are directed to the countries in the Indo Pacific region, of which about half of the total exports are directed to China. On the imports side, Indo Pacific region contributes around 19 percent of the global imports of Germany, of which around 52 percent are from China. China is, therefore, a major trading partner to Germany in the Indo-Pacific region.” With this strategy, Germany aims to strengthen its trade and investment linkages with all countries in South Asia, Southeast Asia, East Asia as well as Australia and New Zealand, with a particular focus on India, ASEAN, Japan and South Korea. One of the areas where Germany is hoping to gain traction in the region is in digital infrastructure. Indo-Pacific region can prove to be a steadily growing market for Germany’s digital goods and services along with a sizeable destination for its investments. The region is in the process of digital transformation and Germany is a leading provider of digital technology. Digital connectedness in the digital age will become more important than physical connectedness as more and more machines get connected in an intelligent way connecting markets, producers, and consumers.
Imports
China
€110.05 bn Netherlands
€97.82 bn US
€97.82 bn Exports
US
€118.68 bn France
€106.56 bn China
€95.98 bn
“Germany, therefore, sees a huge potential for exporting its digital goods, services, and technology to the region in the coming years. This will also help in diversifying tradeable products and markets for Germany in the region. Japan and South Korea are also engaged in
digital dialogue with Germany in terms of collaborations of digital technologies like 5G, Cloud applications and artificial intelligence,” Rashmi added.
Germany’s economic conditions amid the protracted pandemic The Covid-19 has battered economies across the globe. In Germany, the pandemic led to a historic decline in economic output. However, due to the monetary and fiscal policy measures introduced by the government, the economy started to recover. Policies such as the economic stimulus package adopted by the German federal government of €130 billion, played a crucial role. Guntram Wolff, Director of Bruegel told International Finance that, Germany has handled the pandemic relatively well. He said, “In the first phase but more recently numbers have been quite high as Germany has not escaped the second wave. Thanks to strong government support, however, the economic decline has been kept in check." According to Rashmi, Covid-19 is not just a health crisis but has also unfolded into an economic crisis that has slowed down the global economy, creating widespread unemployment and poverty. While the South has been hit economically harder and will take more time to recover, even developed countries like Germany have felt its impact. The Federal Office of Statistics in Germany said that the country has experienced a significant slowdown during the pandemic. While growth has revived in the third quarter of 2020 as compared to the first and second quarters, GDP in the third quarter of 2020 remains around 4 percent lower when compared to the third quarter of 2019. Rashmi said, “Production in terms of gross value-added has declined
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ECONOMY
FEATURE TRADING
GERMANY INDO-PACIFIC STRATEGY GERMANY CHINA TRADE
in manufacturing by 10.8 percent in the third quarter of 2020 than a year earlier; while this decline has been of around 8 percent in business service; 3 percent in the areas of trade, transport, hospitality and 3 percent, in the construction industry. Pandemic has also adversely impacted Germany’s exports of goods and services which were 9 percent lower in the third quarter of 2020 as compared to the third quarter of the previous year. With a slowdown in almost all sectors of the economy, employment also declined by 1.5 percent which translates into 688,000 people. Germany is therefore facing an economic slowdown with adverse impacts on its growth of trade and industry with associated employment losses.” Germany emerged from the Covid-19-induced recession during the third quarter of 2020. During the period, Germany recorded 8.5 percent GDP growth as compared to the previous quarter, driven by strong gains in domestic demand and rapid recovery in industrial production. In this regard, Rituparna said, “As the economic conditions under this recession are closely tied to the pandemic’s trajectory, the reimposition of restrictive measures in November to curb the second wave of the spread of the virus risks creating a double-dip recession in Q4 and early Q1 2021. “In 2021, the economy is projected to grow by 4.3 percent, supported by improved domestic and external demand and continued fiscal support by the government. The expectation about the availability of the vaccine by Q1 2021 is also likely to restore consumer sentiment.”
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The Indo-Pacific strategy might enhance free trade The Indo-Pacific strategy will potentially work toward strengthening the multilateral trade system supported by a well-diversified supply chain in the post-Covid era, by eliminating tariff and non-tariff trade barriers. According to Rashmi, this should also pave the way for a fruitful EU-ASEAN free trade agreement and agreements with other countries in the region. The strategy also emphasises the Asia-Pacific Conference of German Business and the German Chambers of Commerce Abroad to actively promote Germany as a strategic business location and to further generate employment opportunities. She said, “In light of an aging German society and the shortage of skilled workers in the country, the Indo-Pacific strategy is also looking to strengthen the new Skilled Immigration Act that came into effect in March 2020 by easing the visa processing services to facilitate students and skilled workers to come to Germany or to relocate outside of the country for training or employment purposes.” Rituparn added, “Indo-Pacific strategy of Germany can open new avenues for trade and investments especially with respect to Industry 4.0. This has the potential of creating new sources of demand for the goods, services and investments in Germany creating job opportunities for millions of people. However, in many new age FTAs there is a growing concern about data flows, data security and digital technology transfers. This is leading to a rising mistrust in developing countries with respect to trade and investment agreements with the developed countries. For example, the e-commerce chapter in RCEP is not enforceable. In my opinion, it is important for a country like Germany to be more
open to the needs of the developing countries and not enforce rules which may restrict their policy space. “Any firm commitments on digital technology transfers to partner countries can build mutual trust and the possibility of effective trade and investment agreements. Investments in data centers and digital infrastructure in the IndoPacific region can be a win-win situation. However, insisting on rules like free flow of data, no data localisation laws and no source-code sharing, etc. can slow down the negotiations and conclusions of trade and investment agreements. “For Germany and for the EU it is important to understand that developing countries, especially in the Indo-Pacific region, are in the process of designing their policies for digital transformation and need the policy space which these countries had when they were building their digital infrastructure. Trade and investment agreements, therefore, need to provide sufficient flexibilities to developing countries and also fulfil their
FEATURE GERMANY INDO-PACIFIC STRATEGY
Will Germany’s Indo-Pacific strategy impact trade with the EU?
need for digital technology transfers. This can increase the possibilities of inter-regional FTAs between EU and the Indo-Pacific.” Guntram Wolff said, “A strategy is not a concrete agreement but a directional impetus. The key to success will be to develop a proper EU strategy and then agree on free trade deals and connectivity deals with the region. In particular, ASEAN is a region that the EU needs to focus on as well as relations with India.”
How will the strategy impact Germany’s relations with China? China alone accounts for almost 10 percent of total German imports and is a major market for Germany, particularly evidenced by the fact that almost 30 percent of the vehicles of the largest German automakers are sold to China. Guntram Wolff added, “China is and will remain of fundamental importance to Germany. But it is true that many in Germany have grown more worried about the political orientation that
China has taken in the last years. The new strategy paper represents a small shift of direction.” However, on the back of the USChina trade war and the Covid-19 pandemic disruptions, Germany seeks to diversify its foreign trade policy beyond China and aims to pursue deeper economic relations with the Indo-Pacific region. Notably, the IndoPacific region is an important global consumer market accounting for almost 40 percent of the world GDP. The region’s youth population share (ages 20-39 years) is also much higher than the global average with the region being home to more than 50 percent of all global megacities. Rashmi said, “It appears that Germany wants to continue trading with China and the Indo-Pacific strategy is more of an addition to rather than a substitution in the German economic policy. Hence, the strategy is not supposed to have any significant disruption to the Sino-German relations.”
Some of Germany’s biggest trading partners include many European nations, most notably France and the Netherlands. When it comes to the Pacific, only China features among the other countries in the nations in Germany’s top trading partner list. So, will an Indo-Pacific strategy impact Germany’s position in the EU and also trade in the region? In this regard, Rashmi said, “With France initiating the idea of an integrated Indo-Pacific strategy in 2018, and with Germany and the Netherlands initiating the same in September and October 2020 respectively, a coherent Indo-Pacific vision is plausible for the entire EU region. In addition, the United Kingdom which proposed an alliance of 10 democracies including India, South Korea, and Japan to create an alternative 5G source of supply is also expected to soon launch its own Indo-Pacific vision. “Hence, the German move with its Indo-Pacific strategy does not pose any potential complication for Germany as well as the EU economy. That said, an EU-wide Indo-Pacific strategy is going to be a function of the success rate of the German economic diversification with regards to the market access to the ASEAN, supply chain strengthening, and tariff reductions.” Also, the EU is already pursuing bilateral trade and investment treaties with countries in the region. So far, the EU has or is negotiating bilateral agreements with many countries in the region including Singapore, Vietnam, Indonesia, Thailand, Malaysia, the Philippines, Japan, Australia, New Zealand and India. editor@ifinancemag.com
International Finance | March 2021 | 87
ECONOMY
FEATURE DIVERSIFICATION
ECONOMIC DIVERSIFICATION THE GULF COOPERATION COUNCIL
Oil and gas production continues to represent over 40 percent of GDP in most of the economies
GCC establish economic diversification amid Covid-19 IF CORRESPONDENT
T
he Gulf Cooperation Council (GCC) economies have been burgeoning over the last few years through various policies focused on economic diversification. However, further diversification is pivotal for a robust future. Over the years, the governments in the Arab countries are working to reduce their economy’s dependence on oil. For many years, oil has been the major source of income for many Arab economies. This longstanding problem is linked to the nonrenewable nature of oil resources. The volatility of oil revenues combined with strong demographic growth has brought the issue back into the headlines. Moreover, since hydrocarbon is the major source of revenue for these countries, tax revenues only comprise a small percentage of the total government income. Corporate and household tax rates in these economies
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are also on the lower side since hydrocarbon revenues are the preferred source of budget revenue. In recent years, these economies have made significant investments in sectors such as fintech, tourism, hospitality, technology and real estate. However, the outbreak of the Covid-19 pandemic has mired the diversification ambitions of the GCC economies, which comprises the Kingdom of Saudi Arabia, the Sultanate of Oman, Kuwait, Bahrain,
FEATURE THE GULF COOPERATION COUNCIL
the UAE and Qatar. These governments need to boost investments in industries such as healthcare, technology and telecommunications to fulfil their diversification goals as current efforts are not up to the mark. Export diversification has been limited amid a steady surge in the share of non-hydrocarbon output towards GDP. Further diversification will make these economies less reliant on hydrocarbon output.
Middle East oil exports
The Covid-19 effect has changed the landscape
2017
The Covid-19 pandemic has walloped the oil segment as Brent crude prices slumped to $23 in April 2020, from $64 per barrel at the beginning of 2020. The oil prices are poised to remain below $50 per barrel throughout this year. Therefore, it will affect the GCC nations’ fiscal position, which is expected to run last year deficit budget averaging 9.2
16255 bpd 2018
16098 bpd 2019
15010 bpd
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ECONOMY
FEATURE DIVERSIFICATION
ECONOMIC DIVERSIFICATION THE GULF COOPERATION COUNCIL
percent and this year’s 5.7 percent. The sustainability of hydrocarbon revenues has always been a concern for the GCC economies for many years. The oil and gas reserves are expected to be exhausted in the long run. Economies such as Oman are at a very critical stage as reserves are expected to become less within the next 25 years. Oil revenues are expected to slump due to the possible downturn in the global demand starting around 2040. This will spur clean energy demand and implementation while enhancing storage and efficiency. The GCC nations have already invested in financial assets worth $2 trillion and have also injected capital into their respective sovereign wealth funds for a robust future. While speaking to International Finance, Martin Hvidt, Associate Professor, University of Southern Denmark said, “The effects of Covid can be two-fold. Firstly, it can delay any current attempts at diversification, simply because the economies lack money or secondly the Covid, exactly because the economies are stressed (the 2014 oil price collapse + the Covid effects), opens up for hard policy choices. In other words, it is likely that both the decision makers and the populations see themselves in a new situation, where the need to reform the economies through drastic measures become evident for all. So, the situation can be used as a stepping stone for more fundamental reforms, eg. in the labour market.” According to IMF estimates, before the pandemic, GCC economies will deplete their conserved wealth by 2034, unless they deploy stringent and substantial fiscal and economic reforms. IMF said that international oil companies and producing states have come to recognise that alternative energy
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sources, alongside greater efficiency, are already eroding demand. In a report, it said, “While Gulf producers like Saudi Arabia and the UAE are developing new industries in preparation for a post-oil era, they’re not moving quickly enough to avoid running out of cash. Regional governments will likely need to cut spending further, save more and introduce broad-based taxation to make ends meet. A further decline in oil prices this year, in the face of geopolitical tensions and threats the coronavirus poses to growth, is making that task even harder. Should global oil demand trend downward before those plans take root, the countries would have to cope with their longer-term economic problems even sooner. The world’s demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades.”
Diversification ambitions must become real The diversification ambitions of the GCC economies have been driven by a slump in hydrocarbon reserves and revenues while motivating the economies to develop products outside the oil and gas segment. The private segment activity in the economies still depends on government-backed projects and consumption that are backed by the revenues generated from the oil and gas sector. The policymakers must float alternate ideas without depending on the oil and gas segment and also overcome the flaws of the previous diversification plans. The GCC economies must avoid projects that require support from the government or subsidies, and are expected to diversify their revenue streams through sovereign wealth funds. Economies should encourage their
Diversification can only be achieved if the private sector comes to play a much more prominent role in the economic landscape of the Gulf countries.
citizens to get involved in wealth and economic diversification efforts, which also include savings and investments. Martin Hvidt said that diversification is a process, that inevitably demands significant changes in society. Diversification can only be achieved if the private sector comes to play a much more prominent role in the economic landscape of the Gulf countries. As such diversification implies that the stateled approach, where very large parts of the economy are tied to public sector spending must imply changes. This might be uncomfortable for the current rulers in that the changes in the social contract (could imply less support for the rulers) and also for the private sector which is used to a different mode of operation. One major change will be to provide incentives for the nationals, that are the citizens of the Gulf countries, to seek jobs in the private sector. He said, “So far public sector jobs are preferred, due to better pay,
FEATURE THE GULF COOPERATION COUNCIL
shorter working hours etc. As such, for diversification to work, incentives must be changed, so private sector employment is a real alternative to the national population. Other challenges include the size of the economies and the size of the markets, the low technological level among the national population as a consequence of former rentier policies etc. Saudi has a good potential to build a domestic sector, that can be provided with domestic products (market of 30 million inhabitants), while Qatar, Bahrain etc. are small indeed.”
Biggest oil producers in the Mideast by rank Saudi Arabia
First UAE
Third Kuwait
Fifth
How can GCC economies succeed? Firstly, the economies will have to eliminate or cut the structural barriers towards innovation, enhance local capabilities and inject capital in R&D. The economies must establish top-notch infrastructure that fosters technology and innovation at the same time, particularly in areas such
as digital infrastructure and clean energy. There should be competition in the delivery of services to consumers and businesses. The economies must cut regulatory barriers towards the implementation of cutting-edge technologies such as advanced analytics, drones and AI. For
example, implementing robust data protection regulations to maintain a stable base line, while encouraging consumers to safeguard their data and use new technologies. The government should enhance the quality of local education by focusing on topics such as technology, maths, science including soft skills such as problem solving, creativity and many more. Martin Hvidt, said “Market size is an important factor. Thus UAE (10 million) and KSA (30 million) are best positioned to build a diversified economy, that initially aims to supply the local market. Furthermore, quite a bit diversification has already taken place in these countries in sectors such a building material, food supply, tourism and within or related to the oil and gas sector, for eg. aluminum smelting, petrochemicals etc.”
Goods and services play a major role in economic diversification Middle Eastern economies largely produce goods and services, mainly for domestic consumption. The goods and services include business services, manufactured goods, agricultural products, etc. However, the majority of the citizens and ex-pats living in the Middle East are driven by the vast quantities of imported goods and services. Therefore, domestic goods and services will not replace the exported ones soon. To achieve economic diversification, new goods and service should be produced other than hydrocarbons and their derivatives, that can be imported outside the GCC. In this context, the Middle Eastern economies have to buckle up their seats to achieve what they want. In 2018, 90 percent of total exports in Kuwait and Qatar comprised
International Finance | March 2021 | 91
ECONOMY
FEATURE DIVERSIFICATION
ECONOMIC DIVERSIFICATION THE GULF COOPERATION COUNCIL
hydrocarbons and related products. While more than 80 percent of total exports happened in the Kingdom and the Sultanate. Furthermore, 50 percent of the total exports were carried out in the Emirates and Bahrain.
FDI is vital too FDI is a powerful tool in measuring a nation’s potential competitiveness, which reflects the ambitions of foreign companies to invest in an economy or not. FDI is lagging among the GCC nations. Only these two economies’ FDI inflows (as a share of GDP) that were higher than the world average of 2.5 percent between 2015 and 2019: the Emirates and the Sultanate. The GCC nations’ FDI net inflow were only 1.1. percent of GDP, which is less than the half of global average. The weak inflow so FDI is due to a volatile business environment in most of the GCC nations. Therefore, firms which don’t have great insiders may find it difficult to enter the market. Moreover, frequent policy change also affects the whole scenario which may bring limitations on work permits from specific economies, limitations of abroad fund transfer and cutting of economic ties with neighboring economies. This kind of policies often possess a threat international, and even local, businesses in terms of policy uncertainty. GCC nations had the had the luxury of making arbitrary policy decisions and even costly policy mistakes when revenue from oil and gas were flourishing. However, the scenario has changed and has compelled the economies to be more responsive to the needs and concerns of investors.
The road ahead for the GCC? Martin Hvidt said, “Fundamentally it
92 | March 2021 | International Finance
IMF economic forecast for the Gulf Country
2020
(Contraction)
2021 (Growth)
Saudi Arabia
3.9% 2.6%
UAE Bahrain
6.6% 1.3% 4.9% 2.3%
Qatar
4.5% 2.5%
is all a matter of implementing policies while they still have income from oil and gas which can finance such policies and thus can ease the transformation from non-diversified economies to diversified ones that build on the normal way economies without abundant natural reserves operate under, that is where the educational level, skills, and hard work of the population are the main drivers behind the wealth of the countries. So, the overall blueprint – at least in our neoliberal era – to implement structures in the economy that facilitates incentives to produce. As a part of the diversification strategy, several countries aim to become knowledge-based economies. Qatar, UAE and KSA are moving forward in this direction. Most visibly UAE has created the Mars mission (they have placed a spacecraft in orbit around Mars just this week) to inspire their young generations to pursue studies within STEM sciences. And so, does KSA. At the heart, the futuristic city NEOM under construction is an attempt to make a huge laboratory that can train the youth in the knowledge base or what
is now called Fourth Industrialisation Revolution technologies.” The GCC governments have a great chance to bolster their diversification ambitions as they have learnt a strict lesson from the pandemic which hampered the global oil industry. Therefore, the governments can plan and take stringent measures that are buoyant, diversified and based on innovation and research. With the current global scenario, the GCC economies are expected to ramp up their economic diversification efforts. Policymakers must think out of the box to do something new and innovative to generate quick results. They can cut down on budgets and instead prioritise the development of vital elements needed to build a robust and effective post-hydrocarbon economy. GCC nations have to further cut down public services, benefits and limit employment opportunities for rent-seeking in the private segment; to establish a resilient post-oil future. The GCC governments should ramp up their efforts to integrate both women and youth into the labour market and float new incentives to push nationals to work for the private sector. Most importantly, the governments should invest in reskilling and retaining their workforce. It will be interesting to watch on how GCC economies respond towards economic diversification in the coming years. If the GCC economies are successful establishing non-oil economic diversification then the rest of the world is expected to see a brand-new Middle East.
editor@ifinancemag.com
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