May 2020
Issue 16 Volume 12
UK £4 Europe ¤5.35
www.internationalfinance.com
US $6
Inside
Russia’s stablecoin initiative
BRICS and EAEU show full support in the project
MatchMove to foray into neobanking
The UAE's logistics transformation
Pandemic is hitting Brexit plan hard
International Finance | May 2020 | 1
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MAY 2020 VOLUME 12 ISSUE 16
EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE
As the pandemic continues...
A
gainst all odds, Russia is working on an interesting development in cryptocurrency—a multinational stablecoin initiative with EAEU and BRICS in an attempt to limit the US dollar influence and strengthen trade in the coming years. The country is testing an oil-backed stablecoin to understand its potential uses. In fact, experts believe that an oil-backed stablecoin could be an opening for cryptotraders to start participating in oil trading markets— and revive crypto economics in Russia and the rest of the world. Today, the world is mired in a state of shock because of the protracted Covid-19 pandemic which is having a huge impact on international affairs, economic sectors and people's lives. Case in point, the world has slipped into recession pointing to another great recession, perhaps? Or the delay in Brexit which is causing more agony to the UK on top of the pandemic’s distress. The UK is investing efforts to ensure British banks become more responsible in line with the Paris agreement. Ian Bradbury, CTO for financial services at Fujitsu UK, explains the matter in an interview with International Finance. In fact, an observable trend in renewable energy is noticed in Latam and Thailand showing that they are progressing in the right direction with the help of green bonds and robust frameworks. The banking industry has become fast-evolving with the rise of neobanks which in turn has forced traditional banks to seek digital adoption. Singapore’s MatchMove in an interview spells out how it already functions like a neobank and has stepped up efforts by applying for a licence in the city-state. Even the Middle East remains in good shape on the wealth management front, especially with major companies having established their operations across the region. The UAE, in particular, has transformed itself from a logistics hub to supply chain nerve centre attracting investments and new developments in recent times.
sabraham@ifinancemag.com www.internationalfinance.com
International Finance | May 2020 | 3
INSIDE
IF MAY 2020
IN CONVERSATION v
UK PROMOTES 22 THE GREEN FINANCE
British banks seek to stop fossil fuel financing in the next few years
36 RUSSIA'S MULTINATIONAL STABLECOIN The proposed multinational stablecoin initiative backed by commodities seeks to strengthen trade WEALTH MANAGEMENT
TECHNOLOGY
ANALYSIS
16 Latam is prime for trillion
dollar green bond market
50 Egypt is accelerating
digitisation in healthcare
60
What Thailand’s green energy transition looks like
12
44
THE RISE OF WEALTH IN THE MIDDLE EAST
THE UAE'S NOVEL KYC BLOCKCHAIN
Foreign wealth managers show deep interest in the region's fortunes
The platform will enhance ease of doing business in the region
The global economy is facing the gravest threat in two decades
LOGISTICS
TELECOM
INSIGHT
74
28 Why is Africa of such
54
68
THE UAE—A SUPPLY CHAIN NERVE CENTRE
5G IS A LOGICAL SOLUTION TO THE PHILIPPINES
Its strategic location in the east-west trade route is a key contributor
The country's average internet speed is lower than the global average
4 | May 2020 | International Finance
importance to Japan?
www.internationalfinance.com
THOUGHT LEADERSHIP OLEG PATSIANSKY NEOBANKING IN SOUTHEAST ASIA
26
Neobanks offer unique digital propositions built on a sea of customer data
47
STEFANO BENSI COBOTICS: THE WAY TO AUTOMATION
Organisations need assurance that robots and AI can enhance work
66
NIGEL GREEN IMPACT OF WEAK OIL PRICES
Investors and oil firms will be affected if oil output increases
78
RUTH WANDHÖFER BREXIT UNDER STRAIN
The pandemic is bringing Brexit negotiations to a standstill
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, Maria Mamtha, Henry James, Indra Kala, Mohammed Alam, 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
REGULAR EDITOR'S NOTE
03 08 06
As the pandemic continues
NEWS Nasdaq to tighten rules for Chinese IPOs
TRENDING Air travel won't normalise until 2023
Fax +44 (0) 208 181 6550 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 | May 2020 | 5
# TRENDING ECONOMY
Al Dhafra Solar Project
Photo by By Todd Church
The Al Dhafra Solar Project has recorded the world’s lowest tariffs of $0.0135/ kWh. The project is expected to be double in size of the estimated 1.2 GW Noor Abu Dhabi solar project—recognised to become the largest solar PV project in the world. The tariffs are reportedly 44 percent lower than the ones set for the Noor Abu Dhabi solar project.
The UK's post-Brexit global tariffs
The UK government has outlined a new set of global tariffs for the post-Brexit world which could potentially lower the prices of thousands of commodities. The Department for International Trade said the new regime will see tariffs eliminated on $76 billion of imports. The tariffs, termed as the UK Global Tariff, will be applicable to countries that the UK does not have a trade agreement with. The new tariffs will be applicable from January 1, 2021, when the UK officially leaves the EU. To read more on how the pandemic is upsetting Brexit plans, turn to page 78
At a Glance Pandemic hits Kenya's jobs and real estate
52.9%
reduced incomes and earnings
Exxon to lose $70 bn in revenue in 2020
Singapore Airlines' historic loss in 48 years
Exxon Mobil, one of the largest integrated oil and gas companies in the world, is expected to lose around $70 billion in revenue this year due to lower production and weak commodity prices. Despite the oil industry's distress, fuelled by depleting oil prices and price war, the oil giant announced a dividend of $0.87 per share for the second quarter. Exxon reported a 12 percent drop in revenue in its first quarterly report of 2020 because of declining oil demand. In 2019, the company generated around $265 billion in total revenues for the full year.
Singapore Airlines has reported a net loss of around S$212 million for the 12 months ending March 31. This marks its first biggest loss in 48 years. The loss is attributed to the negative effects of the pandemic which has forced global aviation to cancel operations and ground their fleet to help curb the spread of the disease. The carrier made a profit of around S$683 million in its previous year. It first announced the cancellation of its flights due to the pandemic in early March and raised S$19 billion in funding to cope with the crisis.
OIL AND GAS
6 | May 2020 | International Finance
AV I AT I O N
43.2%
active labour force not contributing to economic activities
30.5%
households unable to pay rent
8.7%
tenants receive rent waiver or relief
NEWS | INSIGHTS | UPDATES | DATA
Ones to Watch
AVIATION
Air travel won't normalise until 2023
IATA predicts passenger traffic won’t rebound to pre-crisis levels until 2023. Since the start of the pandemic, air travel has dropped significantly by more than 90 percent, notably in regions such as Europe and the US. The association also forecasts that revenue passengerkilometres would decline to under 4 billion in 2020 from around 8 billion in the pre-pandemic period. Since March, carriers globally have cancelled operations and grounded their fleet. Against this background, the global aviation industry could lose $314 billion in revenue this year, observed IATA. In April, a new analysis by IATA revealed that around 25 million jobs are at risk, which further pushed the global economy into a recession. Around 65.5 million people are employed in the global aviation industry, including sectors such as travel and tourism. The analysis pointed out that around
11.2 million aviation jobs will be lost in Southeast Asia, 5.6 million in Europe, 2.9 in Latin America, 2 million each in North America and Africa and around 0.9 million in the Middle East. The association stresses that airlines in various regions will need the support of their respective governments to bounce back in a post-pandemic world. IATA in a report published in March said airlines globally will need a $250 billion bailout package to survive the ongoing pandemic.
By the Numbers
SHINZO ABE PRIME MINISTER OF JAPAN Japan's Prime Minister Shinzo Abe recently announced a $1.3 trillion package to back financing of Japanese firms adversely affected by the protracted coronavirus pandemic.
ANTHONY TAN CEO OF GRAB Under Anthony Tan's leadership, ride hailing startup Grab has diversified into food delivery, insurance and epayment services— and has now stepped into wealth management with Bento acquisition.
Prime spots for current and future clean energy investments Middle East 26% 11%
The UK 18% 13%
Southeast Asia 18% 17%
SubSaharan Africa 16% 11%
North Africa 18% 17%
Current investments Prospect investments Source: Ashurst
ELON MUSK CHIEF EXECUTIVE AT TESLA INC While the US is heavily reliant on Russia for space rides, Elon Musk's SpaceX could be providing NASA with space rides in the coming years.
International Finance | May 2020 | 7
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
Nasdaq to tighten its IPO rules to restrict smaller Chinese companies from listing on the stock exchange
The Eurozone economy contracted by 3.8 percent in the first quarter of the year due to the pandemic
Nasdaq to restrict Chinese IPOs Nasdaq is set to tighten rules in initial public offerings which in turn might make it difficult for some Chinese companies to list on the stock exchange. Although Nasdaq will not directly point to Chinese companies, the changes in rules are expected to be made based on lack of transparency. The new rules will require companies from select countries, including China, to raise $25 million in their IPOs or at least a quarter of their post-listing market capitalisation. This move is anticipated to stop many Chinese companies from going public on Nasdaq. This is the first time ever Nasdaq is putting a cap on the minimum value of its IPOs. According to Refinitiv, around 155 Chinese companies have listed their shares on Nasdaq since 2000. If the minimum value cap was introduced earlier it would have stopped around 40 of them from selling shares on the stock exchange. Last year, Nasdaq made specific changes to its rules and regulations to stop smaller Chinese companies from listing on its stock exchange.
8 | May 2020 | International Finance
The shares of such companies that remain with few insiders often don't attract the attention of large institutional investors. The new rules will only intensify the sour relationship between China and the US in terms of trade, technology and finance. Last year marked an important year for both superpowers as President Trump waged a trade war against China. Both the US and China have locked horns over the years as the former accuses Huawei of espionage. Seeing Nasdaq’s new rules as an opportunity, China has eased restrictions on listing in its home market to encourage Chinese companies. It is reported that after Nasdaq’s recent announcement, many Chinese companies have started rethinking their fundraising strategies. Once the new rules are introduced, auditing firms will have to ensure that their international franchises comply with global standards. Nasdaq, for instance, will also inspect the small US firms’ auditing of accounts for Chinese companies that are registering to sell their shares on Nasdaq.
Eurozone GDP contracts by 3.8% in Q1 2020 The Eurozone economy witnessed sharp contraction in the first quarter of the year due to the pandemic. The Eurozone’s GDP contracted by 3.8 percent during the first quarter of 2020, compared to the previous quarter. According to Eurostat, this was the sharpest quarterly decline since the time series started in 1995. The fall is observed to be the sharpest year-on-year since the third quarter of 2009 when eurozone output contracted 4.5 percent. France has recorded the deepest quarterly contraction of 5.8 percent, followed by Slovakia with 5.4 percent and Spain with 5.2 percent. Germany, which is the biggest economy in the Eurozone, also recorded a GDP contraction of 2.2 percent during the same period. Interestingly, Finland alone recorded a GDP growth of around 0.1 percent. According to Eurostat, the region’s exports have dropped by 6.2 percent in affecting sectors such as aviation, logistics and supply chain, hospitality and tourism. Imports were also down
by 10.1 percent during the period. Eurzone has recorded a 0.2 percent drop in employment since Eurostat started the series in the second quarter of 2013, bringing the year-on-year employment growth rate sharply down to 0.3 percent from 1.1 percent in the previous three months. Many economists and experts believe the economy will contract even further in the second quarter of this year as global lockdown continues. The inflation rate in March dropped to 0.7 percent from 1.2 percent in the previous month. Year-on-year GDP fell 3.3 percent in the eurozone and 2.7 percent in the European Union comprising 27 nations. This year, the pandemic has hit countries such as Italy, Spain, the UK and France hard. The lockdown measures introduced to curb the spread of coronavirus has severely impacted the economy.
International Finance | May 2020 | 9
IN THE NEWS
FINANCE
BANKING
INDUSTRY
TECHNOLOGY
Fintech startups in the UK have lost around $1.7 billion in investments so far due to the pandemic
Gabon commits to the development of natural gas; statistics say the country has gas resources close to 28.3 billion cubic meters
Photo credit: sia.nikkei.com/
UK fintechs lose $1.7 bn
RAKBank expands remittance routes
A joint study carried out by blockchain firm Qadre and techUK revealed that fintech startups in the UK have lost around $1.7 billion in investments as the pandemic continues. Around 68 percent of respondents surveyed by Qadre said they lost up to $600,000 in funding. Overall, the study revealed that the fintech sector in the UK recorded a significant drop in investments in the first quarter of 2020. Around 61 percent of founders who responded to Qadre’s survey believe that time spent on equity management has impaired their ability to deliver a product or scale their business. Currently, there are around 1600 fintech startups operating in the UK.
UAE-based RAKBank is expanding remittance payment services to Bangladesh by leveraging Ripple’s blockchain network. According to the bank, it has entered into a partnership with Bangladesh’s Bank Asia to facilitate cross-border payments between the two nations. The partnership would see customers of both banks get their transactions approved within 24 hours. The service will be free until June 30. With that, Bangladeshi expats will be able to send money home within a few hours. Over 200 banks across the globe use RippleNet to facilitate cross-border payments, in particular remittance payments.
Closing price of Brent crude in 2020 February
$55.66 10 | May 2020 | International Finance
March
$32.01
April
$18.38
May
$29.38 Source: Countryeconomy.com
Gabon develops natural gas
Traditional funding in UK blockchain
The development of natural gas has been a major source of discussion for several African nations and energy demand is increasing among emerging African markets. Gabon is the latest African country to commit to the development of natural gas. Statistics published by the International Energy Agency show that Gabon has gas resources close to 28.3 billion cubic meters. This could help establish Gabon as an important player in the liquefied natural gas exports market over the years. Gabon has identified the importance of natural gas and the development process has already begun. Last July, Perenco Oil & Gas Gabon purchased an operating licence at the Olowi field from Canadian Natural Resources.
A recent study conducted by MMC Ventures observed that UK-based blockchain firms are turning to traditional capital raising strategies. This highlights that the Initial Coin Offering, or ICO model is becoming increasingly difficult to utilise. The study also revealed that ICOs represent a valuable funding source for open-source projects. Interestingly, another study by Cointelegraph in 2017 found that nearly 80 percent of ICOs conducted in the same year were identified as scams. Factors such as lack of regulation, technology hype and increasing prices of cryptocurrencies have helped to boost ICOs as a funding method between 2017 and early 2018. However, by the end of 2018, it was observed that the ICO funding had decelerated.
Pandemic forces US startups to shut down despite funding
Brandless
Starsky Robotics
$292 million
$20 million
Hipmunk
Service
$55 million
$5.1 million
Vreasy
$5.1 million International Finance | May 2020 | 11
BANKING AND FINANCE
FEATURE WEALTH MANAGEMENT
MIDDLE EAST
Why the Middle East is incredible for wealth management PRITAM BORDOLOI
The region presents sizeable opportunities for asset and wealth managers with its fortunes growing faster than the rest of the world
12 | May 2020 | International Finance
T
he Middle East has established itself as a financial hub creating a link between emerging markets in the east and the west. It is worth noting that the region's dominating oil market has led to the rise of high net worth individuals and families there. Over the years, an increase in creation of wealth has been seen in the Middle East—leading to a profound growth in its wealth management industry. According to a new study published by Oliver Wyman and Deutsche Bank titled Out of the pit stop— into the fast lane, growth of high net worth
FEATURE WEALTH CREATION IN MIDDLE EAST
individuals in emerging markets will exceed the growth in developed markets until 2023. The study showed that Asia-Pacific, Latin America, the Middle East and Africa (MEA) and Eastern Europe will account for over half of global wealth growth over the next five years. In 2018, global high net worth wealth grew to $70 trillion at a rate of 4 percent. The study observed that private high net worth wealth in the MEA region is expected to grow by 6 percent annually until 2023. Only private high net worth in AsiaPacific is expected to grow at a higher rate of 9 percent. This highlights that the industry in the Middle East will provide significant wealth for wealth managers in the years to come. Also, experts predict that digitalisation will
revamp the industry in the next decade or so.
Stock market access to foreign investors will increase wealth In the Middle East, most assets remain in the hands of very few ultra high net worth individuals. The rise of wealth management in the MENA region is caused by better than average returns on oil investments. The substantial growth in wealth in the Middle East in the last two decades has caught the attention of foreign or western wealth managers. Ali Janoudi, Head of Wealth Management Middle East & Africa and Member of GWM
International Finance | May 2020 | 13
BANKING AND FINANCE
FEATURE WEALTH MANAGEMENT
Executive Committee at UBS, a Swiss multinational investment bank and financial services company and the largest Swiss banking institution in the world, in an interview told International Finance, ”We are in agreement that the Middle East presents a sizeable opportunity for both asset and wealth managers in general. Today, residents of the region still represent fortunes that are growing faster than in any other part of the world. Again, in the current environment we should approach such statistics with caution as the most recent events like the drop in oil prices have not yet been factored in, but a significant part of the world's wealth is concentrated in regions across the MEA, which is why at UBS we consider them strategic markets.” In present day, the world’s top wealth managers have their offices setup in the region. The oil and gas financial boom has created several sovereign wealth funds and a vast amount of wealth for individuals and families. Boston Consulting Group, for instance, predicted that private wealth for both locals and expatriates in the MEA region is expected to grow at an average rate of 8 percent annually and reach $12 trillion by 2021. However, the landscape has started to change in the last couple of years. “If we are looking for major contributors, then obviously private wealth growth and the development of wealth and asset management industry go hand in hand with the economic development overall. The local and national governments of the GCC nations in particular have continued to align regulation and transparency with international standards, which includes giving access to their stock markets to foreign investors,” Ali Janoudi further
14 | May 2020 | International Finance
MIDDLE EAST
Global high net worth wealth grew to
$70 trillion in 2018
Private high net worth wealth in MEA to grow
6 Percent by 2023
Private wealth for both locals and expatriates in MEA to reach
$12 trillion by 2021
explained. “That is an important driver of local wealth and an important accelerator for the financial sector. In addition, the Middle East is home to some of the largest sovereign wealth funds which are important clients of the leading investment banks.”
Covid-19 and depleting oil prices to impact wealth creation From an economic point of view, both the pandemic and the depleting oil prices are considered as an opportunity for governments in the Middle East to continue their diversification away from oil, as well as finding other revenue opportunities to invest in local and social infrastructures. Many countries in the Middle East such as the UAE, Oman and the Kingdom of Saudi Arabia have taken significant steps to reduce their economy’s dependence on oil. Huge investments have already been
made in the energy sector, especially in solar energy, even before the pandemic and the oil prices began crashing to its lowest value in the last two decades. How are these factors anticipated to affect the Middle East wealth management industry? In this context, Ali Janoudi said “The pandemic has caused governments to implement social distancing measures that affected the economies in the region through their impact on global growth, domestic consumption and investment— and a nearly unprecedented energy demand shock. These factors will likely weigh on the wealth creation in coming quarters, adversely affecting the wealth management industry. However, we expect containment measures to be gradually lifted in the coming months and to end in the second half of the year. If this happens, demand for energy should increase, as mobility restrictions
FEATURE WEALTH CREATION IN MIDDLE EAST
In present day, the world’s top wealth managers have their offices setup in the Middle East—and the oil and gas financial boom has created a vast amount of wealth are lifted and more workers will use cars instead of public transportation for their commutes. Overall, headwinds might slowly shift into tailwinds, although it will likely take years to fully recover the wealth loss.” The sudden suspension of global activities has forced governments, companies and private individuals to tap into savings and liquidity buffers to bridge the gap in income. It was not unusual that private and corporate clients had to liquidate assets to remain current with their ongoing obligations. “Luckily, foreign bond investors willingly remain to invest in the region. Although we mainly saw the higher rated issuers tapping international capital markets, most bonds were many times oversubscribed. Hence, there was reduced need for governments to rely on local savings,” Ali Janoudi added.
Technological change is likely to remain disruptive The challenges associated with Covid-19 are unprecedented. It is observed that oil prices are at their lowest in a decade forcing major restructuring and sometimes even driving people out of business. Tourism and real estate which are undoubtedly important for business hubs such as Dubai are currently dealing with challenges. These reasons combined create a difficult economic environment which in turn could have repercussions for the wealth
management sector. “Macroeconomic instability may also trigger events that will force wealth managers to look at their business models and forecasts, as well as the way we do business. Take technology for example. Technological change is likely to remain a disruptive yet positive force over the coming years. Many innovations are being driven from within the Middle East itself,” Ali Janoudi said. “Digitalisation will dominate the decade ahead in wealth management, and is crucial in serving clients and advisors as we seek to achieve greater personalisation and a more tailored experience based on each client's feedback. We have seen for example more than 3,000 people from the Middle East attend our webinars in the last few weeks presenting the latest market outlook.” However, this does not mean wealthtech can replace advisors. Human touch in wealth management will remain intact because managers discuss very personal topics like succession planning and values driving their clients’ choices. That said, investment in wealthtech paves a way for client advisors to deepen the relationships they have with their clients and that in turn might increasingly become a differentiating element for the wealth management industry in the Middle East and the rest of the world. All of this will depend on when the
pandemic ends. “As wealth managers, clients have never needed us more than they do now and we are in a position to help them navigate uncertain times and maintain their confidence in their investment portfolios. Interest in wealth planning and succession, along with the possibility that social distancing becomes a long-term way of life means that those wealth managers who can truly offer a full range of services through sophisticated digital platforms are the ones that will stand stronger and grow,” Ali Janoudi explained.
What does this mean for wealth management in the Middle East The wealth management industry in the Middle East presents a positive outlook. Economic diversification in the region and a new fast-paced shift in technology will create massive opportunities for wealth managers. Also, it will simultaneously create an environment to work with more certainty and ease. “Where there is wealth creation and growth, it is natural that the wealth management industry will follow suit and thrive. We see the younger, affluent generation emerging who are both techsavvy and keen to invest sustainably," Ali Janoudi said.
editor@ifinancemag.com
International Finance | May 2020 | 15
BANKING AND FINANCE
ANALYSIS
FINANCE LATIN AMERICA GREEN BONDS
The region's green bond market offers a massive pipeline for investments in a potential trillion dollar infrastructure
Latam's green bond market is flourishing PRITAM BORDOLOI
Latin America’s first green bond was issued in late 2014—and since then 11 countries have issued those bonds with Brazil. It is observed that Brazil is currently leading the market with the highest number of issuances. In terms of volume, Chile is on the top of Latin America’s green bond market. Brazil ranked According to a report among the top published by Climate 10 emerging Bonds Initiative, issuers markets in in the region contributed 2 percent of global green bond green bond issuance volume last July. issuance for The report found that Brazil a cumulative accounts for 48 percent of period between total Latin American green 2012 and bond issuers, with Chile and 2018 Mexico at 16 percent and 13 percent respectively. Even though other economies such as Europe dominate the green bond market, Latin America is relatively new with massive potential for growth. The year 2017 proved to be remarkable for the region's market with issuance of around $4 billion. However, the market slumped significantly in 2018, contrary to the global market record. It is noteworthy that despite sluggish growth in 2018, Brazil ranked among the top 10 emerging markets in green bond issuance for a cumulative period between 2012 and 2018.
16 | May 2020 | International Finance
Sovereigns expected to see massive growth The green bond market in Latin America is largely dominated by corporate issuance. The number of government-issued bonds or sovereigns has been relatively low in comparison to bonds issued by non-financial corporates. The corporates have been quite strong in the region but they vary in degrees between different countries. In Brazil, for example, most of the markets are dominated by non-financial corporates. That said, Argentina is dominated by local governments while Costa Rica is by government-backed entities. So there are big differences with public-sector domination seen in some countries. Thatyanne Gasparotto, analyst at Climate Bonds Initiative, told International Finance, “We have been anticipating the arrival of sovereign issuance in the region. And when Chile came out, it sent a signal to a lot of other countries and they began exploring the possibility of issuing sovereigns. We have seen some countries already expressing it publicly, like Mexico showcasing its STG framework, just a couple of months ago. Also, Columbia is looking to do the same.” Another analyst believes sovereigns will grow in Latin America as governments try to build green infrastructure and align with the climate goals. Miguel Almeida, analyst at Climate Bonds Initiative, told International Finance, “Other
ANALYSIS SOVEREIGN ISSUANCE
00 7,0
Number of deals and issuers in Latam
5
63 5,9
countries have already signaled potential sovereign green bonds such as Mexico, Peru and Columbia. So we are not just expecting sovereigns to grow, but also depending on the country, some local governments and developed banks issuing more." Bruno Bastit, analytical director at S&P Global, in an interview with International Finance, was asked about sovereigns growth prospect in the region in the coming years. His immediate response to it was “Yes we do.” Bastit said “Chile has been leading the way so far, issuing the first euro-denominated sovereign green bond in the region, and we expect other countries to follow suit. Indeed, we’ve seen some positive developments coming from the governments of Colombia, Costa Rica or Mexico. Several Latin American countries, including Chile have announced their intention to achieve net-zero emissions by 2050 and green bonds would play a crucial role in achieving this objective.”
Energy, transport and land use space vital to issue green bonds
19
Amount issued ($ m) Number of deals Number of issuers *CABEI and CAF
6
32 1,9
5
2 6 74 2 5 1 1 8 1 1 81 8 63 04 00 1 5 5 36 50 7 .5 5 1 2 1
11
26
9
5
5
2
6
2
1
1
1
5
ile razil xico eru tina ica bia uay dor ama dos nal* h C B e P en ta R lom rug cua an rba tio M g Ar Cos Co U E P Ba rana p Su It is important to note that green bond issuance in Latin America is highly concentrated in terms of countries, issuers and sectors. A majority of the issuances have been directed toward finance projects in energy and transport sectors. Almeida said the energy sector really dominates in Latin America. “This is because if you include Chile’s
International Finance | May 2020 | 17
BANKING AND FINANCE
ANALYSIS
FINANCE LATIN AMERICA GREEN BONDS
green sovereigns, they have mostly financed clean transports. Most of the funds were for Santiago’s metro infrastructure, so they are related to transport. However, if we remove the sovereign from the equation, energy really dominates," he explained. “Also, we have quite a big deficit for building projects, when compared to the global market, in addition to waste and water infrastructure. Looking forward, there is a really big need to finance low carbon infrastructure in the region and that will involve more projects related to transport in other countries apart from Chile. And even then waste management and water infrastructure management has to be greener.” Another powerful sector in the region is land use and is mostly related to forestry and paper. In fact, Brazil has a huge agricultural production. Gasporotto explained that the big distinction between Latin America and the rest of the world when it comes to green finance is the land use space. She said “I would say that is the big difference when compared to Europe, say for example, which has a very large low carbon building stock. However, this doesn’t mean Latin America won’t get there. It’s just how the economies are structured and where the low hanging fruit is. I wouldn’t say it is on the low carbon building side at the moment, but rather in the land use space. We began to see that with the forestry issuances and now we are moving into bio-energy which has picked up pace.”
Effects of Covid-19 on green 18 | May 2020 | International Finance
issuance in Latin America An unprecedented event like the Covid-19 pandemic has pushed the global economy into recession. The International Monetary Fund (IMF) claims that the impact of Covid-19 will be more severe than the 2008 financial crisis. In this context, Almeida spoke from a data perspective on how the pandemic will affect the green bond market. “The level of issuances has decreased a lot since early March. What is happening is on the flip side other labels are increasing in usage, especially social bonds to finance projects related to healthcare. We don’t really expect it to be a substitution between the two, it is more about issuing bonds that can cover social-environmental aspects. Especially when it comes from the public sector where they
might have very different types of projects they can’t finance, issuing a sustainability or STG bonds, that pace is really what is going to pick up in the medium term.” Thatyanne too agrees with Almeida. “I think we had a decrease in issuances overall, and this is not in particular to green. And what’s interesting to see is that the investor’s appetite has not gone away, the limited green issuances that have come out when we look at the global market has really been successful in light of the lack of products in the market and investors continue to signal that they do want to see green labelled bonds with transparency and clear use of proceeds,” she said. From Thatyanne’s standpoint, there are other challenges such as domestic complexities in countries
ANALYSIS SOVEREIGN ISSUANCE
Total number of Latam's green bond issuances
6,241.9 13
3,682.0 10 2,448.7 3
1,618.5 5
1,190.0 5
359.0 3
16 20
17 20
Proceeds US$ mil
18 20
19 20
19 20
20 20
No. of Issues
like Brazil which have very specific regulations in issuing sovereigns.— and the capitalisation of plans will be complicated with the pandemic.
“Let’s just say that Chile issuance was a benchmark and since then a lot of countries have started looking at it.” The biggest complexity for Latin
America has been around currency depreciation during the crisis. In many countries there was already a downward trend before the pandemic occurred and the situation has now worsened. The region mainly takes debt in US dollars with Brazil being an exception. Currency depreciation has, in some ways, complicated the economy to continue accessing international capital markets more frequently. “I would say it’s a constraint on the capital market side effects on Latin America more than other regions in the world and obviously green goes with that,” Thatyanne said. “But the silver lining is that investors really want green so what we are working here in the region is to promote green stimulus packages which could be an alternate source of financing for these economies in the near future in light of the crisis.” Bastit, on the other hand, explained that the Covid-19 crisis has led to a slowdown in emissions. It appears that there have already been some notable issues in the first quarter of the year from corporates in Brazil and Uruguay in the pulp and paper and energy sectors. Besides corporates, possible sovereign issuances throughout the region may actively help to support that growth.
Trillion dollar infrastructure in the coming decade It is a known fact that green bonds in Latin America is a new market. In the region, Mexico and Brazil were the sole markets initially, but in the last year and a half other countries such as Columbia, Chile and Costa
International Finance | May 2020 | 19
BANKING AND FINANCE
ANALYSIS
FINANCE LATIN AMERICA GREEN BONDS
Most of the infrastructure stocks in Latin America are yet to be built— creating an opportunity to derisk from a project finance standpoint
Rica, for example, have decided to test the market and are anticipated to see major issuances in the coming years. “In Latin America, however, most of the infrastructure stocks are yet to be built. So there is an opportunity to actually derisk from a project finance standpoint. In that regard, we have just a massive pipeline of investments in the trillions of dollars of infrastructure that needs to be built in Latin America over the next decade,” Thatyanne said. “So I would say that especially in the green finance space, investors are looking at that type of assets and in Latin America we have an endless pipeline to offer. Now in terms of financial profile, the risk will be the same.” In addition, Bastit said “One trend we have seen with green bonds investors is a higher level of scrutiny of issuers’ corporate practices to ensure some coherence between green bonds and the environmental profile of that entity.”
More countries to foray into green bonds The current crisis is creating a lot of uncertainty which might impact the green bond market and the situation is being closely monitored. Nevertheless, the region’s outlook remains positive “as we see a growing interest from both investors and issuers, sovereign and corporate alike in green and sustainable debt instruments,” Bastit explained.
20 | May 2020 | International Finance
“I think there is a lot of room to grow for Latin America. I would probably say all the main countries in the region have either issued or developed initiatives around sustainable finance and with even a highlight for Central America and the Caribbean, with smaller countries, which could be a challenge to access international capital markets,” Thatyanne said. “Also, so much has been done with the regulation and stock exchange level with Panama, Costa Rica, for example. We think it’s all very new and the region is just starting to tap the potential. I think more countries are coming into the fold. So far, 11 countries have entered the market and a good two odd countries are yet to enter. “Looking forward, I would say diversification of both issuers and asset categories is important. There is a lot of potential in the land use space as well. Renewable energy is very big in the region and it will continue to grow. I also think the market is highly concentrated in Latin America. In Brazil, we have a lot of non-financial corporates, financial corporates in Columbia and sovereigns in Chile. I think that concentration would begin to dissolve over the next few years as the market reaches out to other types of players.” Miguel expects more Latin American countries to be added to the mix in the coming years. When it comes to the development of green
finance, the same trends apply but to different degrees. It often happens that when one country starts doing things differently the trend is followed by the rest creating competitive pressures which together in the specific region will allow the market to develop in many ways. “We have seen many countries issuing green bond guidelines and wider sustainability bond guidelines to develop the market in their respective countries. So the ecosystem infrastructure for more issuers to come in is also important. There are some organisations which are working like stock exchanges, for example, CFE in Mexico or green finance council in Brazil allow more issuers to come into the market where there is more information available and support as green bond issuance has different requirements,” Miguel explained. “We expect to see infrastructure growth when it comes to transport and agriculture. There is also a potential for blue economy projects. These are related to the sustainable use of ocean resources such as fishing, marine renewable energy like offshore wind and tidal wave energy. And also in Latin America, there are a lot of oil-producing countries and many countries have very big coastlines.”
editor@ifinancemag.com
IN CONVERSATION
BANKING AND FINANCE
IAN BRADBURY CTO FOR FINANCIAL SERVICES, FUJITSU UK
Climate activist groups are forcing British banks and financial services companies to become more responsible in their financing acts
The UK’s efforts to promote green finance begins SANGEETHA DEEPAK
A rising number of British banks understand that climate change is serious and it could pose a financial risk to them and their country at large—if necessary actions are not taken to end fossil fuel finance. But at the same time, not all banks have actively fought climate change— and not until recently, when climate activists, green groups and the Investor Forum escalated the matter by revolting against Barclays for financing fossil fuel companies. In recent months, Barclays and HSBC have been accused of fossil fuel financing worth a combined £158 billion since the signing of the Paris Agreement five years ago. A recent report published by 350.org has recognised the two organisations as the top fossil fuel financiers in Europe. The report points out that Barclays had injected £91 billion between 2015 and 2019 into fossil fuel companies while HSBC had financed £67 billion in the same period. It is true that both organisations have demonstrated sustainability commitment over the last few years. However, their financing roles in fossil fuel companies have been quite prominent. In light of the current circumstances, Barclays has pledged net-zero climate policy by 2050 including operations and investments and HSBC is committed to provide $100 billion in sustainable financing by 2025. In fact, the Bank of England thinks climate change is a liability to the UK economy because it could hinder progress in so many ways. However, developing strategic responses to the anticipated financial risks that stem from climate change can help British banks and financial services organisations to maintain monetary and financial stability in the coming years. Last year it was reported that the Bank of England might force British
22 | May 2020 | International Finance
FINANCE UK GREEN FINANCE
banks and insurers to discuss how vulnerable they are to the climate change crisis and how they might respond to the effects of rise in temperature up to 4 degree celsius under its first climate stress test. British banks including HSBC, Barclays, Standard Chartered, Royal Bank of Scotland, Santander UK, Lloyds and Nationwide will be subject to the test which is expected to be released in 2021. In theory, the test will take into account three possible scenarios: early policy action, late policy action and failed attempts to address climate emergency which might further lead to temperature rise. The first scenario is focused on transitioning to a carbon-neutral economy while the second scenario is where the country might achieve global climate targets but the transition will be delayed by 10 years. The final scenario will arise when stakeholders do not demonstrate responsible behaviours and government policies fail to address climate change issues. The risk of climate change is already affecting financial companies in the country. It appears that British banks are extremely vulnerable on the back of having established their presence in certain regions like Southeast Asia which is highly exposed to climate
change. According to a joint study published by University of California, Berkeley and Stanford University, unmitigated global warming could result in a loss of 23 percent in per capita earning globally by the end of the century. If there is a bright side to all of this, it is that the fossil fuel industry is slowly deteriorating. This is not only because of the recent revolts against fossil fuel financiers which is now more pronounced than ever, but fossil fuel companies are realising that investors want to put their money into renewables. The situation looks much the same around the world. So it is not too late to start asking what the UK financial industry can do to fight against climate change. And one answer states the obvious that all industry stakeholders should become more responsible in their acts. It turns out that the UK is increasing efforts to cement its position as a global climate leader. Last year, the UK government announced the Green Finance Strategy—a landmark move aimed to increase investments in sustainable projects and infrastructure. That said, the UK is the first country in the G7 to pass net zero emissions law last year. Against this background, Ian Bradbury, CTO for
International Finance | May 2020 | 23
BANKING AND FINANCE
IN CONVERSATION
IAN BRADBURY CTO FOR FINANCIAL SERVICES, FUJITSU UK
The organisations that will thrive in this new environment are those that recognise what is important and valuable to their collective customers and society as a whole
financial services at Fujitsu UK, in a exclusive interview with International Finance, further explains how the UK is beginning to promote a culture of green finance—in addition to the short and long-term implications of climate change for banks and financial services organisations in the country.
IF: How are British banks and financial services responding to purpose-led financing in the country? Ian Bradbury: There is a growing shift across the financial services industry toward purpose-led business. Financial services organisations need to build a brand that goes beyond simply providing and protecting assets. This is especially important in a digital world where there is more choice, greater competition and less customer lock-in. The organisations that will thrive in this new environment are those that recognise what is important and valuable to their collective customers and society as a whole; perhaps even strengthening those opinions over time through clear statements and ‘doing the right thing’. Right now, climate change is a high priority for many customers, with its visible impacts now occurring and deniability becoming less plausible.
The unprecedented rise in fear about climate change is slowly bringing a shift in financing. What is the approach taken by the UK financial industry to wrestle this issue? As financial services businesses begin to move toward being more purpose-led, helping to combat climate change is becoming a major opportunity to improve brand value and generate customer loyalty. Sustainable and ethical investment funds have been around
24 | May 2020 | International Finance
for many years as niche portfolio holdings but they are now seen as mainstream funds, generating high returns and good investor interest. The way that businesses operate is also under more scrutiny than ever, with sustainability metrics beginning to be viewed as a critical measure of business performance and future success for all stakeholders.
What is the role played by climate activist groups in promoting a culture of financing in renewable portfolios? Climate activist groups are no longer seen as ‘fringe’— they increasingly represent mainstream public opinion, with more visibility of the potential impact of climate change and, subsequently, a better idea about the need for change in society. These groups are also benefiting from new technologies that allow them to quickly develop ideas, grow in size and take visible action, which is having a far greater impact on societal views than ever before. ‘Naming and shaming’ about poor attitudes to climate change is just part of this—in the digital age financial services organisations should be more aware of how their businesses can be impacted by changing public perceptions.
British banks like RBS are imposing restrictions in line with climate action policies. How should the UK government and financial regulators step up actions to further support banks’ efforts? Many national governments are also setting an agenda that is driving business change. For example, the UK government recently published its ambitions for Decarbonising Transport: Setting the Challenge. In the opening, the following intent is outlined: ‘public transport and active travel will be the natural first choice for
FINANCE UK GREEN FINANCE
our daily activities. We will use our cars less and be able to rely on a convenient, cost-effective and coherent public transport network.’ This scheme provides a huge opportunity for financial services organisations to invest, partner, visibly champion and support the government in its fight against climate change.
represent. For these reasons it is appropriate for both central banks and regulators to be seen to be encouraging this change.
Should British banks treat risks rising from climate change as a financial risk, and not just a reputational risk? Why?
The way banks approach climate change over the coming months and years may be influenced by the short and long term uncertainties around Covid-19. From a positive perspective we can already see that we can be more ambitious with our drive to reduce climate change. Home working for many has proved to work better than expected, and we have moved quickly to enable it; in turn, it has significantly removed the need for much of our hydrocarbon driven transport. In the long-term the outlook is more challenging. Experts are predicting a recession in
Climate change poses a significant financial risk to both the short and long term success of financial services businesses. This is already being felt by the insurance industry, as the impact of flooding and extreme weather events drive up the cost of claims. The long-term underlying financial stability of economies is also already recognised as a major future risk. Climate change potentially affects population migration,
How do you foresee British banks and financial regulators actively driving sustainability banking over the next five years?
The way banks approach climate change over the coming months and years may be influenced by the short and long term uncertainties around Covid-19
security of water and food and the geographical location of valuable assets (as we move away from a hydrocarbon driven economy). All of these challenges have led to economic instability in the past and in some cases major wars. Climate change must not be underestimated as a major global economic risk and the financial services industry needs to plan for it.
many economies, with the loss of many traditional businesses and jobs. With the right leadership, the damage could be mitigated and they could see an opportunity to reshape the economy much faster to be zero carbon. But the climate change imperative could be overtaken by the quick-fix stimulation to the economy that hydrocarbons have been able to generate in the past.
Why is adoption of the Task Force on Climate-related Financial Disclosures initiative important for banks globally? With all of the reasons above there is perhaps enough stimulus for financial services businesses to act on both the challenge and the opportunity of climate change without the need for the involvement of central banks and regulators. Having said that, central banks and regulators do need to act on major policies and direction set by the government, and in the interests of the populations which they support and
editor@ifinancemag.com
International Finance | May 2020 | 25
BANKING AND FINANCE
THOUGHT LEADERSHIP
BANKING SOUTHEAST ASIA NEOBANKS
OLEG PATSIANSKY HEAD OF DIGITAL BANKING, BPC
Neobanks in Southeast Asia rival traditional banks with unique digital propositions built on vast amounts of customer data
Neobank diary: data is everything Micro, small and medium sized businesses are the backbone of many Southeast Asian economies. In particular, Indonesia and the Philippines have more small businesses than most of their regional counterparts—and yet only 40 percent can access formal financial credit. Traditional banks have failed to close the SMB funding gap, leaving this segment majorly underserved. The risk of SMBs falling outside of the digital banking system could worsen with the current climate of the Covid-19 pandemic. Businesses are facing challenges in solving liquidity problems for an unknown period, while banks will be limiting their risk appetite—and the outcome could be millions of SMBs coming out of the crisis unbanked. However, a wave of new fintechs, neobanks and even telecom operators are creating their own digital lending systems to better serve SMBs. But how can they ensure to overcome the existing challenges? And with so many players contending for banking licences, who will win the race to support SMB lending?
Data is key to build trust Small businesses in Southeast Asia face the same struggle when accessing credit: it is crucial for them to have a credit history to prove their creditworthiness. It is a vicious cycle. Financial institutions are cautious and
26 | May 2020 | International Finance
have strict risk policies which do not match the reality and needs of this vibrant but potentially underserved sector. In essence, data is the missing link. Traditionally, SMBs would need to provide a multitude of data for the bank to score their creditworthiness and underwrite a loan—but this is often not available in the same way as it is for larger businesses. Recognising this challenge, new entrants into the market have experimented with alternative ways of scoring businesses using different types of data. In Southeast Asia, Mobile Network Operators (MNOs) have access to vast amounts of data on customers compared to banks. Alternative data such as phone airtime consumption, bill payments and other customer behaviours are being used where traditional credit scoring data points are not available. Other players are similarly shifting toward community or behaviour-based data to assess businesses using the data that is available. Advancements in data science and machine learning are giving new players a predictive power to assess the ability to repay a loan.
Neobanks reinvent SMB lending Typically birthed out of the idea of challenging the current processes of incumbents, neobanks are not bounded by legacy systems,
or burdened by branch networks. New neobanks like TONIK in the Philippines boast lower operating costs than the incumbents, meaning they can generally offer lower rates on business loans. Business owners are open to a purely digital proposition. However, it is simply not enough to provide digital channels to access financial services. Similarly, neobanks will need to find creative ways to assess businesses looking for a loan. In addition to neobanks entering the Asian market, there are several non-banks looking to reinvent themselves in this sector. Many are seeking to acquire a digital banking licence including Grab in Singapore and Gojek in Indonesia, thus increasing competitiveness; both companies have started out as ride-hailing service providers in their respective markets. With that, both of them have recognised the opportunity and are now repositioning themselves as neobanks to start provisioning loans to underserved businesses. Once again, the common factor here is data. Grab and Gojek already have large volumes of data on their customers and are using that knowledge to effectively boost lending to small businesses.
essential if neobanks and other new players are to get SMB lending right. They need to look at what factors make most sense when underwriting a small business loan. They need to sync with what data is available and the likelihood of repayments based on the local circumstances. Where traditional banks have gone wrong is mandating small businesses to comply with preexisting policies and rigid systems. New players must understand the challenge first and then build a solution. They must consider many alternative models and data sources, if they hope to meet the needs of small businesses across Southeast Asia. After all, neobanks have made a great start, but the race is far from over—and it requires them to build from a true understanding of the local market. Oleg Patsiansky is the head of digital banking at BPC and has been with the firm for more than 20 years. He carries profound experience in the payments industry and is responsible for reimagining the payments systems for digital banks.
Local market offers meaningful insights Understanding the intricacies of the local market is
editor@ifinancemag.com
International Finance | May 2020 | 27
BANKING AND FINANCE
INSIGHT
JAPAN IN AFRICA
Japanese banks are establishing strategic presence on the continent to scale up corporate sector and reinforce long-time trade relations
Why is Africa of such importance to Japan IF CORRESPONDENT
Africa is already transforming, thanks to big investments fiercely led by Japanese banks to venture into the continental market—much like what China is doing. Why is Africa of such importance to Japan and in what aspect? Interestingly, the Japanese are not new to the African market but have demonstrated deep interest in recent years. Already there are over 700 Japanese companies operating on the continent and it was only a question of time before they became more proactive.
Africa’s banking industry has a ‘refreshing contrast’ In 2018, a report published by McKinsey titled Roaring to life: Growth and innovation in African retail banking observed that the African banking industry provides a ‘refreshing contrast’, pointing to the fact that its markets are fast developing, yet there is great potential for future growth. One reason for that is because the African population is relatively young compared to developed economies with a large percentage of unbanked. The continent
28 | May 2020 | International Finance
is still pushing poverty out in an effort to build financial inclusion—and in turn has created huge opportunities for foreign and domestic banks to work together on disruptive strategies. The report highlighted that 300 million Africans were banked in 2017 and the numbers could significantly rise to 450 million in 5 years since then. “This makes it attractive in terms of building a young, upcoming customer base which is keen to embrace technology,” PwC Partner Francois Prinsloo told International Finance. “Some of the South African banks have been leading the technology journey in terms of customer experience and innovation and have received international awards on that front. For this reason and others, foreign capital issuances from the major South African banks have generally been oversubscribed, reflecting international investor confidence in South African banks and the South African banking system.” Prinsloo makes a strong case that large South African banks have been well-regarded internationally on many fronts, including trusted
INSIGHT JAPANESE INVESTMENTS
Africa banking revenue pools to grow 8.5% YOY until 2022 11% p.a
51 20 (39%) Retail banking Wholesale banking Source: McKinsey
brands and diversified franchises, returns on equity levels higher than their G-SIB counterparts, prudent approach to capital and liquidity management and experienced stable management teams who have embraced technological change for some time now. And this is another good reason for Japanese banks to seek collaboration with them for developmental initiatives. South Africa, Nigeria and Kenya are recognised as mature markets with higher branch penetration. In fact, these competitive retail banking markets with high levels of mobile banking and long-time trade connections could be motivational factors for Japan to grow its stake in Africa.
JBIC supports trade between Africa and Japan Last May, the Japan Bank for International Cooperation (JBIC) and a group of private financial institutions extended a $350 million export credit line with a tenor of up to 20 years to the Trade and Development Bank (TDB) operating in eastern and southern Africa. The proceeds from the credit
31 (61%) 2012
8.5% p.a
86
129
53 (41%)
35 (41%) 76 (59%) 51 (59%)
2017
2022
will be used by Trade and Development Bank to financially help customers in Sub-Saharan Africa to import machineries and equipments from Japanese companies and their overseas affiliates. One important aspect of this move is that it will financially support Africa-bound exports from Japanese companies and build new opportunities for banks and trade companies. Previously, JBIC had extended a $12.5 million three-year export credit line in 2007 followed by a $80 million sevenyear credit line in 2016.
Japanese banks become a prominent player Japanese banks have become a prominent player on the continent trying new ways of doing business, making investments, getting work done—which in part is seen positively for the continent “as the interest in Africa grows, many investors consider the African continent to be a potential investment destination,� Prinsloo made a point. The year 2016 was promising for Africa because it saw three largest Japanese banks seek business expansion into the continent. But the
International Finance | May 2020 | 29
BANKING AND FINANCE
INSIGHT
JAPAN IN AFRICA
JBIC, other lenders extend export credit line to TDB
$80 mn
$12.5 mn 2007
3 years
7 years
2016
$350 mn 20 years tenor
2019
idea behind the expansion for Sumitomo Mitsui, Mizuho Bank and Mitsubishi UFJ was to help Japanese companies operating in Africa to tap the continental market and further develop the corporate sector. First, Sumitomo Mitsui had established an agreement with Trade and Development Bank to offer loans up to $80 million to the African bank, along with JBIC’s credit line extension. Sumitomo Mitsui had also signed an agreement with the African Development Bank and Banco de Desenvolvimento de Angola for future developments. Meanwhile, Mizuho Bank had agreed to form a business collaboration with Africa’s six financial institutions including the Zambia Development Agency and the Development Bank of Southern Africa to provide in-depth knowledge and enhance the banking sector on a large scale. Around the same time, Mitsubishi UFJ and the Kenya Investment Authority had collaborated under the terms that the bank would receive insights regarding new investment projects in Kenya which will be shared with Japanese companies operating in the country.
30 | May 2020 | International Finance
Last March, Japanese banks extended
$15.5 billion
in credit to African countries, twice the amount from a decade ago African banks become a beneficiary of such developments As Africa becomes one of the prime investment destinations of the world, it not only lures Japanese companies for resources but also its fast-developing consumer markets. African banks have also become a beneficiary of such developments as it throws a positive light on their global reputation and potential in the
INSIGHT JAPANESE INVESTMENTS
Estimated increase in African banked population
450 mn 300 mn
2017
banking industry. In short, the transactions seek to promote trade and investments in Africa. The seventh Tokyo International Conference on African Development which was held last year led to the possibility of Sumitomo Mitsui signing five Memorandums of Understanding with African banks. It is reported that one of its partners will include Kenya Commercial Bank. The Tokyo International Conference on African Development is quite beneficial to both Africa and Japan as it allows both of them to foster business collaborations on many levels. Last year it was reported that Sumitomo Mitsui offered financial services in 42 African countries and the number is expected to reach to 48 countries, or possibly even the whole continent on the back of these agreements. According to the Bank of Japan, the data showed that Japanese banks had extended $15.5 billion in credit to African countries last March, twice the amount from a decade ago. Even Mitsubishi UFJ has played an important role as the sole arranger, bookrunner and facility agent on $280 million and JPY 2.5 billion Samurai Loan for Afreximbank.
2022
This in fact marks the largest commitment from a Japanese bank for an African issuer—and is considered ‘historic’. During the period between 2005 and 2014, Japan had announced $3 billion for the bank to support co-financing of projects in agriculture, water, health and infrastructure. Some of those examples include the Bujagali hydropower plant in Uganda, the Sahanivotry hydropower plant in Madagascar, the Lekki toll road in Nigeria and the Takoradi II gas-fired plant in Ghana. The relationship between Japan and Africa is longstanding with Mitsubishi UFJ’s involvement on the continent dating back to 1926. And that’s not all. Even Japan and African Development Bank are known for their profound relationship over the years.
Source: McKinsey editor@ifinancemag.com
International Finance | May 2020 | 31
IN CONVERSATION
BANKING AND FINANCE
SHAILESH NAIK FOUNDER AND CEO, MATCHMOVE
MatchMove has evolved to become one of the highly disruptive fintechs in the city-state and is now stepping up efforts in neobanking
Democratising Singapore’s financial services IF CORRESPONDENT
The government of Singapore and regulators are actively involved in building a community of fintechs and neobanks in recent years. In line with that, a Visa Consumer Payment Attitudes Study shows that nearly 65 percent of Singapore residents would consider working with a neobank. The study also highlights that 84 percent of respondents are willing to adopt neobanking services offered by existing financial institutions. This points to the fact that neobanking in Singapore is set for unprecedented growth, especially with a notable trend observed in the digital-led demographic. In essence, Singapore’s business environment is conducive for companies seeking market expansion. MatchMove’s readiness and openness to capitalise on this opportunity has encouraged it to step up efforts in joining the city-state’s neobanking race. In fact, the company has already submitted an application for a digital full bank licence to the Monetary Authority of Singapore. In many ways, it already functions like a digital bank. Its Wallet-as-a-Service platform and the full Spend.Send. Lend™ suite enables the company to operate like a neobank managing end to end processes for millions of customer transactions. In an exclusive interview with International Finance, the founder and CEO of MatchMove Shailesh Naik speaks about the company’s growth trajectory and its capabilities to establish itself as a neobank in Singapore. Shailesh has a successful track record in high-tech and new media sectors across China, India, Korea and Southeast Asia—and has made several successful investments in both online entertainment and ecommerce companies in Asia and the US. He has served as part of the iN2015 committees to develop Singapore’s new national IT master plan
32 | May 2020 | International Finance
FINTECH SINGAPORE DIGITAL PAYMENTS
and is also a founding investor in Singapore-based social venture fund Aavishkaar.
IF: MatchMove has emerged from an entertainment business to a sophisticated payment platform. What was the driving force behind this transition? Shailesh Naik: During our entertainment and games days, we encountered a fundamental pain point when making in-app/ in-game purchases, which caused user friction and users discontinued. This pain point transcended across industries. We realised that consumers across Asia were unable to make payments digitally. We saw this as a fundamental gap in the market and the opportunity for us to improve the quality of people's digital lives by providing them with access to essential banking services. Hence, we pivoted into payments and developed a B2B ‘Bankingas-a-Service’ platform to enable essential banking services Spend.Send.Lend™ for any business that is looking to digitise.
MatchMove is the latest fintech company to apply for a digital banking licence with the Monetary Authority
of Singapore. How does it plan to serve underbanked segments like SMEs and gig economy workers? At its core, MatchMove aims to improve the quality of peoples’ digital lives by extending essential and safe banking services to them anytime, anywhere. Our proposed digital Banking-as-a-Service will accelerate this objective by leveraging our existing and already available capabilities to address current pent up demand and reach digitally underserved segments like SMEs and gig workers among others, through platforms that they trust and are familiar with. As a pure-play fintech, we believe we are well positioned to become the digital bank of choice for enterprises, employees and consumers of the future in Singapore and in the region. We are already acting a lot like a bank
The company has formed a consortium with Singapura Finance, Lightnet and OpenPayd for a digital banking licence. What is the consortium’s value proposition that distinguishes it from majors like Sea? Our carefully curated consortium brings together world class financial institutions, each regulated in their respective jurisdictions with deep capabilities
International Finance | May 2020 | 33
BANKING AND FINANCE
IN CONVERSATION
SHAILESH NAIK FOUNDER AND CEO, MATCHMOVE
Our platform drives financial inclusion by giving the digitally unbanked or underserved their first user account to store money digitally as well as an open loop prepaid card to pay for goods and services
enabling seamless payment services for Singapore’s shipping company Marine Innovation?
and experiences across the spectrum of digital financial services. These partners bring along regional and global connectivity as well as experiences across the spectrum of digital financial services to enhance our proposed digital bank’s value proposition.
Mature industries today are still reliant on traditional and cash payment methods. In shipping, for example we discovered that a large proportion of sailors still get paid in cash. One of our clients, Singapore-based Marine Innovation is using MatchMove's platform to digitise payroll and provide essential banking services to those sailors. Upon receiving their payroll digitally through the Marine Innovation branded ewallet, they can make purchases online and offline using a prepaid card as well as remit money to their family directly from the app. For Marine Innovation, this solution reduces costs of transactions as well inefficiencies from the manual process.
What will be the role played by consortium partners Lightnet and OpenPay in building MatchMove’s digital banking capabilities?
It is reported that MatchMove seeks to raise $150 million for new market expansion. What are the key markets the company is targeting and why?
Our banking aspirations are aligned and there are many synergies with both organisations that we can explore. The proposed digital bank can leverage Lightnet’s blockchain-based clearing and settlement network in the region, while OpenPayd brings proven capabilities and best practices that we can leverage on.
We are looking to raise $150 million in the ongoing series C funding round by October 2020. The proceeds from the funding will be directed toward new market expansion, platform and product development as well as procuring relevant licences to support business growth. Aside from strengthening our presence across Asia, other key markets we are targeting include Latin America, North Africa and the Middle East. These markets have a similar market profile to Asia with a large unbanked population, high mobile phone penetration and ecommerce adoption. We are also planning to enter the European market as there is demand from businesses looking to digitise and build their own payment ecosystems.
How is MatchMove democratising financial services using advanced cloud and mobile technologies? Give an example. Leveraging cloud and mobile technology, MatchMove is enabling anyone to Spend.Send.Lend™ anytime, anywhere. Our platform drives financial inclusion by giving the digitally unbanked or underserved their first user account to store money digitally as well as an open loop prepaid card to pay for goods and services. In addition, we are solving pain points for underserved SMEs by extending essential banking services to them and providing access to financing. For example, our recent collaboration with Shopmatic will provide aspiring ecommerce entrepreneurs with integrated payment and financial solutions. It will also enable users across Asia transact digitally to buy goods and services.
The company has already built bank-like capabilities for various industries including shipping. How is it 34 | May 2020 | International Finance
editor@ifinancemag.com
COVER STORY CRYPTOCURRENCY
Inside Russia's stablecoin initiative The project raises legitimate questions on whether a multinational stablecoin can strengthen trade and reduce US dollar dominance SANGEETHA DEEPAK Russian President Vladimir Putin is all for cryptocurrency— the pivotal factor accelerating the country’s interest in building a digital economy. Two years ago, something stood out of the ordinary in his address to the Federal Assembly, when he emphasised, “Build your own digital platforms.” It pointed to Russia’s financial literacy strategy and even the possibility of introducing a national cryptocurrency to evade western economic sanctions. 36 | May 2020 | International Finance
International Finance | May 2020 | 37
TECHNOLOGY
COVERSTORY CRYPTOCURRENCY
RUSSIA STABLECOIN
It was in the same year that Putin held a discussion with ethereum co-founder Vitalik Buterin and miners from fifteen countries, including the US, India, Israel, Armenia and Turkey to seek recommendations and understand their approaches to mining regulations. It was, perhaps, his idea to launch a multinational stablecoin initiative which would typically involve digital currencies backed by commodities. Russia’s proposed multinational stablecoin initiative has received full support from the BRICS and EAEU member states. The expectation is that a commodity-backed stablecoin will reduce corruption, facilitate trade and strengthen the economies of those countries involved in the initiative.
BRICS' experiment in multinational stablecoin initiative BRICS, which is a group of five emerging economies— Brazil, Russia, India, China and South Africa are working together to create a single payment system and make settlements in a single cryptocurrency. Last year, they announced the development of BRICS Pay, a cloud platform designed to link the national payment systems of those countries to create a digital wallet. The proposed digital wallet once launched will make it possible for buyers to purchase goods and services in any of those countries irrespective of the currencies held in their accounts. The initiative is important to Russia and other member states because it could help them to achieve mass adoption of cryptocurrencies and peer-to-peer transfers eliminating middlemen and challenges in fighting against money laundering, observed the Financial Action Task Force. Dmitriy Sheludko, member of the commission for blockchain technologies and cryptoeconomics Investment Russia, expert in cryptocurrency trading and CEO of CoinBene, told International Finance, “Cryptocurrency stablecoins have established themselves as a universal and fast means of pay-ments around the world. This has made central banks change their processes and keep up with the times.”
A bold attempt at dedollarisation The stablecoin development is a major step
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BRICS member states are collectively working to create a single payment system for settlements
US dollar share in foreign trade reduced in last 5 years
toward something significant—it will result in the integration of BRICS member states as they seek dedollarisation and disassociation from the USdominated banking system worldwide. That in turn could pave a pathway for them to reduce the share of settlements in US dollars. The share of the US dollar in foreign trade settlements has already reduced from 92 percent to 50 percent in the last five years. It appears that the use of cryptocurrency in settlements can be especially convenient for supranational organisations such as BRICS. Their progress—though notable—is still in the early stage. Experts believe the main reason for stablecoin development is to reduce dependence on transnational payments amid rising geopolitical tensions. Dmitry Labokho, who is actively working with China for Russian companies in the field of cryptocurrency, in an interview with International Finance, said, “The point of creating a stablecoin is to get away from the diktat of the dollar and get some kind of instrument of netting without complicated external control and to provide through the resources that are stored in the depths that countries have.” Russia, China and India are already exploring an alternative to the US dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment mechanism. For that reason, Russia’s financial messaging
COVERSTORY BRICS AND EAEU
From
92% 50% to
The Central Bank of Russian Federation is testing an oil-backed stablecoin in a regulatory sandbox
system SPFS will reportedly be linked with China’s Cross-Border Interbank Payment System and India plans to link the Central Bank of Russian Federation’s platform with a service that is underway. In practice, this new system will act as a ‘gateway’ while transcoding payments messages in line with a particular financial system.
Russian companies seek an alternative to US dollar Building an alternative to the US dollar is perceived to be an integral part of building commoditypegged stablecoins. Interestingly, “Russian commodity companies want to use stablecoins instead of the dollar in mutual settlements. In addition, this would help the country to get away from sanctions,” Denis Chernookiy, assistant director of Integration Advisory Group in KPMG Russia, told International Finance in an email interview. Last year, a prominent mining company Nornickel which is owned by Russian entrepreneur Vladimir Potanin announced the development of its own stablecoin tied to the company’s metals. “It was slated for 2019, but has been postponed due to the current position of the state. The oligarchs are unlikely to become a locomotive for the development of stablecoins in Russia, since their fate depends too much on the central government," Chernookiy said.
Russia’s efforts in developing an oilbacked stablecoin The Central Bank of Russian Federation is testing an oil-backed stablecoin in a regulatory sandbox. Having an oil-backed stablecoin is a logical solution to the Russian economy on the back of the current state of the oil market and surging dollar value. Sheludko sees positive signs for Russia in this context, as he points out, “When a stablecoin is created at a national level, trade relations across the country will go to a whole new level in terms of speed and convenience of mutual settlement processes.” Arguably, it could even limit the US influence on the Russian economy—and more importantly, help the country to circumvent sanctions and trade restrictions imposed by the Trump administration. This particular attempt requires dedication and movement in the right direction to optimise the cryptocurrency industry. “For the development of cryptocurrency, it is necessary to build the right bridges between organic, direct investment and the industry. At the same time, the flexibility of attracting resources should be combined with a responsible approach to investment,” Chernookiy said. “An approach in which investments are perceived as a tool and not just funds received from the investor is required. The stablecoins for the development of which big businesses advocate it could help this.”
Real intent behind testing an oil-backed stablecoin The push for stablecoin development remains debatable in Russia. Despite mixed views, the central bank testing an oil-backed stablecoin does not imply it will function as a means of payment or become a surrogate for money. For now, the idea is to simply understand its potential uses by pegging to another commodity. “I don't believe in an early launch of stablecoin as there seemed to be too much controversy even during the discussion phase. If the stablecoin works, it will allow the member countries to work more freely together, without involving the FRS or the Central Bank of Europe,” Labokho said.
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TECHNOLOGY
COVERSTORY CRYPTOCURRENCY
RUSSIA CRYPTOCURRENCY
Is it a far fetched idea? Indeed, stablecoin talk has received a lot of attention and criticism at the same time. “This initiative does not go beyond the talk, especially if you are talking about the deep involvement of all potentially interested countries,” Labokho explained. Some experts argue that it is not possible for the proposed stablecoin to become an alternative to the US dollar—or at least it is a far fetched idea. In fact, Pavel Grachev, co-founder of Cyberian Mine GmbH seconds that thought in an email interview with International Finance that “It could turn out to be an alternative for some national states pushed by Russia into the EAEU to adopt eRouble. But even that is an enormous task. As far as international trade is concerned, there is no alternative to the US dollar and it is unlikely that any (stable) coin would have a chance of replacing it in the foreseeable future.”
Positives for Russia’s business, trade and crypto industry But when—and if Russia launches an oil-backed stablecoin the implications for businesses and the cryptocurrency industry might be huge. For businesses, it might even lead to the “possibility of achieving a larger investment during an IPO and making it easier to hedge investment risks,” Chernookiy said. In the midst of all this, an oil-backed stablecoin could even be an opening for cryptotraders to start participating in oil trading markets. Another interesting fact is that the proposed stablecoin could result in a “great revival and development of cryptoeconomics in Russia and the world,” Sheludko said. In addition, he adds that without this transformation, there is a good chance that “We will live for more than a decade in the current economic situation and all the old problems that have risen already.” In short, developing a stablecoin is a boost to the Russian cryptocurrency industry
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because “there will be a varying number of innovative projects in the pipeline waiting to offer services and products related to the national stablecoin and other crypto assets," Sheludko pointed out. The outcome could have a profound effect on trade and corporate relations between the public and the private sectors in Russia. Overlooked is the fact a commodity-backed stablecoin could positively support economies against global crisis. For example, the current pandemic has forced China to freeze its production and the rest of the world is facing the wrath of the situation. In theory, “by making commodity-money settlements faster and more convenient will reduce the effect of such crises as goods will be produced and delivered on time,” Sheludko explained. Again, if Russia strengthens efforts in stablecoin development it will provide “unlimited opportunities for free and transparent trade relations within the state and in the global world,” Sheludko emphasised, further stating that “the simplicity, speed and transparency of operations to trade with anyone in relation to any product or service” will make the country more sophisticated on that front, thus “removing various barriers of existing commodity-money relations.”
Stablecoin can remove hydrocarbon dependence Digitisation is imperative to Russia’s energy sector because it already ranks fourth in the world for primary electricity production, energy
COVERSTORY BRICS AND EAEU
80%
of Russia is dependent on exporting oil, natural gas, timber and metals
consumption and carbon emissions—and the Russian Natural Resources and Environment Ministry has further acknowledged that the country is heating faster than the rest of the world. Now numbers show that 80 percent of Russia is dependent on exporting oil, natural gas, timber and metals. “The strength of Russia’s dependence on hydrocarbons lies in the streamlined process of trade in raw materials and a large lobby to support these processes,” Sheludko said. In 2018, Putin signed a decree establishing a Digital Economy state programme to diversify Russia’s hydrocarbon-intensive economy—and digital energy infrastructure is seen as a key component of the programme. Stablecoin can contribute to Putin’s ambition in its own way. “When states seriously engage in the establishment of other areas of the economy and the introduction of innovations, including the creation of stable national currencies, this deviation will lead to a change in the structure of state revenue generation and hydrocarbon dependence will be removed,” Sheludko explained. Against this background, the Ministry of Digital Development, Communications and Mass Media of the Russian Federation has developed projects focused on digitalisation, regulation and coordination of Russia’s energy sector. For example, Russia’s national energy grid operator Rosetti in collaboration with technology startup Waves is testing a blockchain solution for payments in the retail electricity sector in Kaliningrad and
Sverdlovsk regions. “The stablecoin could make it so much easier for companies to raise funds on the basis of the ICO for such projects than to receive state funding,” as Chernookiy sees this as “the only lever of change so far.”
Solarisation of stablecoin is as important as the stablecoin itself Ever since the talk of building a stablecoin started there has been speculation on whether it will help Russia and other countries involved to diversify away from their hydrocarbon energy intensive and dependent economies. The solution to this problem is solarisation of stablecoin. But for Russia, utilisation of solar energy only stands at 0.03 percent. Solarisation is highly crucial because it is estimated that more than 41 percent of the world will be using electric energy-intensive blockchain and smart contracts. Last year, the UN published the Emissions Gap Report 2019 which found that temperatures are
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TECHNOLOGY
COVERSTORY CRYPTOCURRENCY
RUSSIA CRYPTOCURRENCY
$551 billion
Russia ranks third in subsidies for hydrocarbon industry valued at $551 billion
expected to rise 3.2 degrees celsius above pre-industrial levels by the end of the century if this technology is fuelled by hydrocarbons highly subsidised by member states. To make matters worse, the BRICS member states are not on track to prevent 1.5 degree global warming. A report published by the International Monetary Fund ranks Russia third in subsidies for the hydrocarbon industry valued at $551 billion and it houses the world’s largest gas reserves, equivalent to 27 percent of the total. It is worth noting that the country’s tax policy is majorly hindering solarisation as it imposes 13% tax on carbon emissions from its energy use. The problem is “the tax will push mass investors away from stablecoin and the mass boom will not happen,” Chernookiy explained.
Taxation is hindering solarisation The path to taxation taken by the Russian government is partially slowing down the country’s cryptoeconomics. According to Sheludko, “It is understandable that both stablecoin and cryptocurrencies will be subject to taxation, but the country needs to be aware that making the process complicated will not make crypto economics more effective than previous monetary relations. Thus, a more simple and flexible approach is needed for such innovations.” Currently, Sheludko as part of Investment Russia is working on a cooperation to develop flexible taxation of cryptocurrencies and national stablecoin. In this context, Chernookiy speaks from an objective standpoint that “For a preferential tax regime to appear, the state must learn to use the benefits of stablecoin for its own purposes. This experience will not come in one or two years and during this period the development will not be very rapid.”
Fraility of Russia’s approach need to be addressed But even if Russia makes progress, there are fears associated with the possibility of launching a stablecoin in the country which further pronounces “head of central bank Elvira Nabiullina repeatedly stating that the financial regulator will not allow cryptocurrency circulation in Russia,” Chernookiy
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explained. “Imagine, if a ruble stablecoin is issued in Russia, the private companies will have an opportunity to organise the circulation of an analogue of the national currency in private blockchains out of the control of the central bank. With that, stablecoins can be exchanged for both rubles and cryptocurrencies. According to Nabiullina, ‘if, for instance, individuals are allowed to keep money in accounts with the central bank, it could significantly change the passive base of commercial banks. During uncalm times, the flight of deposits and overflow of funds may begin. This could eventually lead to the collapse of the banking system’”—a true nightmare to the Russian economy. These fears will only make the situation bleak and there is no sense to use a new tool if it does not bring obvious advantages. “State policies together with the lack of drivers of growth in interest in cryptocurrency may reduce its investment attractiveness,” Chernookiy added. On the downside, it can even cause an “outflow of capital from cryptocurrencies and provoke the beginning of a phase of long-term decline in the value of digital assets, which will only increase as the stablecoins rise in price relative to fiat currencies.” Although many have cast doubts on Russia’s stablecoin development, Labokho said the country has not yet made up its mind about how to treat cryptocurrencies. “Once again, what is planned to be created has nothing to do with the current cryptocurrencies. But its release will really push the government toward stricter regulation of this sphere." Put into perspective, Russia might see a fresh round of development if it revises its approach to stablecoin in the future. editor@ifinancemag.com
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TECHNOLOGY
FEATURE BLOCKCHAIN
KYC BLOCKCHAIN
Blockchain is disruptive Experts predict fintech volume in Mexico to SANGEETHA DEEPAK reach $68 billion by 2022
T
he power of blockchain technology is so deep that it can simplify complex tasks and enhance transparency to solve many of the problems that have beset economic systems. The UAE has better understood the technology’s profound implications for public data repository and digital security of national documents. In January, the Fourth Industrial Revolution UAE, Dubai Future Foundation and the World Economic Forum released a joint report titled Inclusive Deployment of Blockchain: Case Studies and Learning from the United Arab Emirates to explore the potential impact of using blockchain. The report conducted a study on more than 100 stakeholders from over 60 governmental and non-governmental entities that are already using the technology in some form. The findings showed that 80 percent of public sector entities firmly believe in implementing an applicable blockchain solution during their early phase.
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At the peak of blockchain’s popularity, the UAE government launched the Emirates Blockchain Strategy 2021 to digitise 50 percent of government transactions and facilitate the documentation process at the time and place of convenience for customers. Arif Amiri, CEO of DIFC Authority, told International Finance, “The UAE’s Blockchain Strategy 2021 relates to getting government transactions on blockchain platforms.” The strategy is intended to change the way data is collected, stored and accessed— eventually reducing operational costs and time consumption. In short, the UAE government expects to save Dh11 billion in frequent transactions and documents processes, in addition to 398 million
FEATURE BLOCKCHAIN STRATEGY
The UAE's KYC blockchain platform simplifies data verification process for businesses and minimises regulatory oversights of banks
printed documents and 77 million work hours annually. This points to the next advancement which was the establishment of a KYC blockchain platform to fasten documentation processes and share verified data about customers.
KYC blockchain is a boost to public and private sectors DIFC formed an alliance under a tripartite agreement with Mashreq Bank and Norbloc to develop the region’s first blockchain KYC data sharing platform for businesses and corporations in Dubai. It is the backbone of the project having a “vision to drive the future of finance.” Norbloc is an enterprise-grade blockchain-driven ecosystem and one of the participants in DIFC Fintech Hive’s inaugural 2018 programme, while Mashreq Bank is a long-term partner for Fintech Hive. “Although it was the first solution of its kind in the UAE, we had been
looking at it for some time with our partners,” Amiri said. According to Amiri, the consortium agreement governs KYC efforts between banks, government bodies, financial institutions and other licencing authorities that subscribe to the platform. In fact, the consortium provides a business framework that supports the requirements of registered companies,
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TECHNOLOGY
FEATURE BLOCKCHAIN
KYC BLOCKCHAIN
financial institutions and regulators, enabling secure, trusted and customercontrolled KYC data sharing—in line with the UAE Blockchain Strategy. Already 80 percent of public and private sector entities in the country are using blockchain. In fact, “the consortium’s efforts go beyond government entities and help private companies accelerate their adoption of blockchain,” he added.
Enhances ease of doing business and FDI In fact, the creation of KYC blockchain has the potential to support companies and banks organise their operational structures. If companies start using the blockchain platform it will enable them to digitally build a single KYC record authenticated with electronic ID for simultaneously sharing it with other financial institutions. Amiri said that the platform will be “making it faster and more efficient for them to get up and running. Sharing data through blockchain will enhance the quality and integrity of corporate KYC information, reduce the cost of data verification and simplify the customer experience.” In practice, the blockchain platform will speed up the process time in acquiring a bank account number for newly registered companies and lower the cost of managing KYC data for registered companies. When companies consider opening in new locations, complexity of setting up procedures, including opening a corporate bank account is a major consideration. The shared KYC platform is the solution to speeding up the process of opening a bank account and reducing the cost of KYC— and even provides great advantages for organisations, particularly regarding redundancy, security and compliance.
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If companies start using the blockchain platform it will enable them to digitally build a single KYC record authenticated with electronic ID for simultaneously sharing it with other financial institutions Amiri made an interesting point that “companies that embrace the KYC platform contribute to market stability by preventing cyber-attacks and money laundering.” Moreover, the initiative provides financial institutions and businesses with a platform to undertake seamless operations, essential in attracting global and regional investor interest. KYC blockchain, theoretically, ensures “financial information remains transparent and secures the investororganisation relationship which can give institutions and businesses better peace of mind,” he said.
It is credit positive for lenders KYC blockchain is also credit positive for lenders in the UAE, observed Moody’s. The platform will ensure robust compliance and have legal implications if lenders do not comply with KYC regulations. On the bright side, it will help them to minimise regulatory oversights of banks in collection and management of KYC data and further provide enhanced data in credit risk management for client underwriting and debt collection. In Amiri’s view, it made perfect sense to launch the first-to-market blockchain solution in the country as “the UAE, Dubai and DIFC are always looking for ways to make it easier for people to do business here.”
DIFC pushes blockchain innovation to the forefront “DIFC is prioritising the use of technology and innovation, including blockchain, across everything we do with clients,” Amiri said, further explaining that “we also provide a leading legal and regulatory framework that encourages companies to innovate, test and use blockchain technologies.” Also, cooperation between Smart Dubai and the DIFC Courts have led to the world’s first ‘Court of the Blockchain’, he said. It uses blockchain to verify court judgments in jurisdictions beyond DIFC Courts. “DIFC bodies also have memorandum of understanding in place reinforcing our dedication to embracing this key technology. This includes Tribe Accelerator, the first Singapore government supported blockchain accelerator. Blockchain technology will evolve over the next five to ten years. Our approach to it will also continue to evolve as part of our commitment to drive the future of finance,” Amiri concluded.
editor@ifinancemag.com
TECHNOLOGY
THOUGHT LEADERSHIP
AUTOMATION COBOTICS WORKFORCE
STEFANO BENSI GENERAL MANAGER, SOFTBANK ROBOTICS EMEA
Cobotics is making seamless collaboration between humans and robots possible for organisations
Cobotics: The way to automation As we enter this new decade, business leaders across all sectors continue to prioritise digital transformation as a way to create efficiencies, improve customer service, ensure regulatory compliance and drive innovation. Organisations recognise that to stay competitive in an increasingly turbulent global economy, they need to embrace new technologies and operational models to meet the challenges of the future economy. The narrative around widescale adoption of automation and AI technologies has largely been one of fear and uncertainty to date, with reports of mass job displacement on the horizon. The widely held view, too often perpetuated by mainstream media, has been that the robots are coming to take our jobs in a strange and often bleak future world. In my opinion, this is why many digital transformation programmes have yet to deliver on their promises, held back by a lack of understanding and buy-in among people at the coalface, resistant to change and reluctant to interact with new technologies, Without doubt, of far greater significance is the impact that automation will bring to the types of work people carry out on a daily basis. McKinsey predicts that while less than 5 percent of all occupations can be automated entirely using current technologies, about 60 percent of all occupations have at least 30 percent of constituent activities that could be
automated today. So rather than replacing people, automation and robots will in fact work alongside people within a hybrid workforce model, where operations and tasks are resourced according to the relative strengths of both people and technology. Over the next decade we will see much closer collaboration between humans and machines within the workplace, with robots and automation increasingly assisting with the repetitive and time-consuming tasks which are such a drain on productivity and staff engagement, and workers being freed up to focus on higher value and more fulfilling activities. The benefits are easy to understand—greater efficiencies, higher employee engagement and improved levels of performance and servicing.
Cobotics has a big role to play in automation To accelerate this shift to a hybrid workforce model, we need to re-frame the introduction of automation, so that it becomes less of a threat to the existing workforce and is instead embraced as a route to interesting and varied work and developing new skills. Across all sectors we need to reassure vast sections of the workforce that robots and AI can enhance their working lives, rather than hindering them. This is where the concept of cobotics has a big role to play.
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TECHNOLOGY
THOUGHT LEADERSHIP
AUTOMATION COBOTICS WORKFORCE
Cobotics is the collaboration between workers and machines or robots. Cobots are collaborative robots which carry out repetitive or strenuous tasks which would otherwise be performed by a person, but they work alongside that individual or team, not in their place. Cobots are instructed, controlled and managed by workers on the ground and are there to support workers. Across a whole range of sectors, the introduction of cobots can (and will) dramatically alter the working lives of people in a wide variety of job roles. Whether it is retail, healthcare, hospitality or cleaning, cobots can take away the most laborious and least pleasurable tasks from human workers and enable them to focus their efforts elsewhere, on more rewarding and valuable work. We are already seeing this happening in a number of sectors where forward-thinking organisations are introducing cobots into their operational models. Within such a human-cobot workforce, businesses reap the benefits of both machines (in terms of efficiency, consistency and performance in carrying out repetitive tasks), and of human workers, with their capacity for objective thought, creativity and problem solving. And in an ever more challenging labour market, where high quality talent is in such demand in so many industries, it makes sense to have your best
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(and expensive) people focused on activities which make a real impact. In the age of Cobotics, machines assist with the grunt work and people are freed up to make a genuine difference and pursue more fulfilling working lives.
Innovation beyond technology Too often businesses approach innovation from solely a technological perspective; but equally as important is a willingness to embrace new ideas and adopt new business models. Organisations today need to embed agility and scalability into all areas of their operations, ensuring they have the flexibility to adapt to market dynamics, exploiting new opportunities and reacting swiftly to new threats. As organisations introduce cobotics into their operations, they will also seek out more innovative and flexible leasing models, rather than traditional procurement methods, with large capital expenditures and little certainty around long-term life-span and value. With cobotics, we will see innovative business models allowing organisations to access the very latest technologies without major upfront investment; and all servicing and product upgrades included, taking away the hassle and cost of ongoing maintenance. In addition, cobots can collect valuable data that
THOUGHT LEADERSHIP COBOTICS WORKFORCE
can be translated into meaningful insight to ensure operations are continually optimised and to make faster, smarter decisions. Indeed, cobotics is as much about a commitment to innovation, smart working and efficient operations, as it is about automation and robots. It requires a major shift in thinking, among both business leaders and the workers who are engaging with cobots in the workplace. This cultural change is important and businesses need to ensure they have the right strategies in place to influence behaviours and mindsets across the organisation to ensure that cobotics is harnessed in a smooth and seamless way. Technology providers have a role to play here, helping business leaders to manage change, and to reassure, educate and upskill people to work effectively and harmoniously alongside cobots.
The cobotic difference Rather than bringing in automation by stealth, in the age of cobotics we are seeing organisations making a virtue of their adoption of cobots and the shift towards a hybrid human-cobot workforce model, to attract new talent, particularly amongst younger generations of workers. The message is that these organisations can offer people more interesting and fulfilling work, with less time spent on mundane and repetitive tasks. Cobotics demonstrates a commitment to employee wellbeing at a time when mental and physical health in the workplace is becoming an ever-more pressing concern for businesses and public health authorities. The World Health Organisation estimates that the global economic impact of depression and anxiety is US$1 trillion every year and organisations across all sectors are struggling to address and promote health and wellbeing at work and beyond. Cobotics removes the strain and stress of certain manual tasks, while putting people in the driving seat, making decisions and managing technology, rather than the other way around. It also gives relatively inexperienced or lowskilled people the opportunity to work alongside cutting-edge technology and to develop specialist skills and knowledge. However, it isn’t just prospective workers that will be drawn to organisations that are embracing
Cobotics removes the strain and stress of certain manual tasks, while allowing people to drive the engine with decision-making and technology management
cobotics. Such a commitment to innovation and new ways of working is also hugely appealing to prospective customers, whether they be consumers or individuals. Those businesses that are first to integrate cobotics within their operations over the next few years will create genuine differentiation in the market and attract forward-thinking organisations that are looking to align themselves with future ways of working. Stefano Bensi, General Manager of SoftBank Robotics EMEA, is responsible for building and launching innovative robotic solutions across a range of industries. Stefano has extensive experience in leading international teams in sales, marketing, product management and operations. He also has expertise across a wide range of technologies, including Internet of Things, cloud computing and robotics.
editor@ifinancemag.com
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INDUSTRY
ANALYSIS
HEALTHCARE AI IN HEALTHCARE
Healthcare startups in Egypt are helping the government to curb the spread through integrated healthtech services for non-Covid-19 patients
Egypt is accelerating digitisation in healthcare PRITAM BORDOLOI
Global healthtech sector has boomed in the last decade, especially in markets such as the US, the Middle East and Southeast Asia. Now an interesting observation is that Egypt is following suit amid the protracted pandemic and is evolving its healthcare system. According to Deloitte, The rapid increase in healthtech pandemic has investments and innovators encouraged leveraging artificial intellimore startups gence, machine learning to offer remote and the Internet of Things monitoring to enable products and solutions was evident in the and telehealth last two years. While the platforms country has been embracing digital change in healthcare, the Covid-19 pandemic is expected to give the industry a timely boost. The pandemic has accelerated digital transformation as startups offering remote monitoring and telehealth platforms are seeing substantial increase in businesses. Also, a notable trend is observed in the use of AI-enabled assessment apps and devices. Egypt-based startups Chefaa, Vezeeta and D-Kimia are among the leading healthtech startups revolutionising the industry on various levels. It is clear that rapid advancements in digitisation are changing every aspect of our lives, with technology
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innovations such as blockchain, Internet of things and artificial intelligence being applied in almost all sectors to improve efficiency—and healthcare is no exception. The global digital healthcare market was valued at around $147 billion in 2019. A Global Digital Health Outlook 2020 report published by Frost & Sullivan noted that the sector will be valued at around $234.5 billion in 2023.
Healthtech startups wrestle Covid-19 spread The healthcare sector started leveraging digitisation at the beginning of the decade. After a number of US-based startups raised funding, the trend was soon followed by other emerging markets across the globe. The fact that digital disruption was first seen in other sectors such as finance, logistics and education has helped the industry to leverage technology easily. Over the years, we have also seen numerous digital innovations which have helped save lives or make life easier for millions affected by at least one medical condition globally. Healthtech is playing a prominent role in fighting against the disease and curbing its spread globally. It is reported that the pandemic has posed to become one of the greatest healthcare challenges in the world. Established in 2017, Chefaa, an Egypt-based healthtech startup manages chronic patient’s
monthly prescriptions and all pharmacy needs with the use of AI and GPS technology. Its cutting-edge technologies are handled by a domain expert team. “We have witnessed an increase by 300 percent, driven by chronic patients needing to secure their monthly prescriptions amid the lockdown especially that chronic patients are among the risk groups for Covid-19. Since chronic patients are among the risk groups, it was very important to help them secure their prescriptions regularly and sustainably and avoid unnecessary exposure; pharmacies are excluded from lockdown,” Dr. Rasha Rady, cofounder and chief operating officer at Chefaa, told International Finance. “Our 24/7 chat support is managed by licenced pharmacists who help assure and serve patients, answering their questions in light of the published instructions by the Egyptian Ministry of Health (MOH). Also, they would answer patients' questions and give relevant pharmaceutical consultations. Our Arabic speaking pharmaceutical blog educates the public about sound protective measures as well as sound use of medicine.” Vezeeta, another leading healthtech company
operating in Egypt as well as the Middle East has launched a free medical consultation service for anyone experiencing flu-like symptoms. Such services are being offered by the startup without any charges.
Driving force behind Egypt’s healthcare digitisation The Egyptian government is pushing for universal healthcare and cross-industry partnerships. With that, digitised hospitals are emphasising on connectivity and hardware and software developments related to big data, machine learning, artificial intelligence and the Internet of Things—a pathway for innovators in healthcare worldwide. In comparison, Egypt’s approach to healthcare is quite similar to other African countries.. For example, in Africa, different startups are using artificial intelligence to diagnose diseases, provide treatment recommendations and data management solutions to its users. Likewise, advancements in heathtech in Egypt are driven by artificial intelligence. An article published in the MIT Technology Review pointed out that artificial intelligence has the potential to save cost by taking over
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INDUSTRY
ANALYSIS
HEALTHCARE AI IN HEALTHCARE
diagnostics procedures previously carried out by health workers. However, with the integration of artificial intelligence hospitals will be able to better utilise the resources. According to a PwC report titled The Potential Impact of AI in the Middle East, Egypt is aiming to have 7.7 percent of its GDP derived through artificial intelligence by 2030. The Egyptian government is driving digitisation in the country across sectors. More recently, it developed a national AI strategy to integrate artificial intelligence in different sectors such as healthcare, education, smart cities, infrastructure and transport among others.
Telehealth is fostering healthcare in rural Egypt Especially during uncertain times like now social distancing has become pivotal in the fight against Covid-19. Against this background, telehealth is proving to be a useful tool to ensure healthcare is provided to all Egyptians. It has the potential to reach those who are deprived from proper healthcare in rural Egypt—meaning that it can establish convenience and allow healthcare workers to have a wider reach to a greater population compared to conventional methods. In short, telehealth and telemedicine have seen a substantial rise in Egypt since the country entered into a state of lockdown to curb the spread of the disease. In a country as vast as Egypt, huge amounts of medical data are being generated every day in hospitals, healthcare units, pharmacies and labs, in addition to
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some data generated by healthcare consumers. But the common problem lies in making sufficient use of the data available. Every time a patient seeks services from a healthcare worker, new data is created. For that reason, integrating cloud-based data systems, data such as medical history, diagnoses, treatments and past appointments could be stored digitally and made available when patients or doctors require it in realtime. The main purpose of these innovators are to lower costs and improve access to healthcare. Egypt records a population of nearly 98 million people. Investments are being made in healthtech over the years to reduce the cost curve and bring the Egyptian population under the healthcare umbrella.
Outlook for Egyptian healthcare system The outlook for the Egyptian healthcare and healthtech sector is quite positive. The pandemic is only expected to increase investments into the sector but drive innovations. While most of the funding is seen from foreign investors, the pandemic is expected to catch the attention of local investors.
Experts believe that the healthcare sector will go through a major disruption in the next two decades. Dr. Rady explained that “The healthtech sector in Egypt is expected to grow significantly. Covid-19 crisis may have driven the change toward a new normal, but all healthcare stakeholders will seek more online presence like reaching out to patients through technology, while patients on the other hand are learning to deal with the ‘new normal’ by trying out different services which makes healthcare quality management, patient safety and cost-effectiveness the key differentiating criterion.” In her view, “Moving toward the digital transformation era of healthcare in Egypt is inevitable as Covid-19 has made it quite clear. The pandemic has driven people who previously never thought of online being safe or even a reliable tool to offer services in the healthcare sector, to start exploring it, discussing the pros and cons and perhaps even trying it. I expect significant growth in the sector with the key differentiating criterion.”
editor@ifinancemag.com
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INDUSTRY
FEATURE LOGISTICS
UAE SUPPLY CHAIN
54 | May 2020 | International Finance
FEATURE UAE LOGISTICS
How the UAE became a supply chain nerve centre SANGEETHA DEEPAK
Integrated free zones, fast customs clearance and strategic location in the east-west trade route have all contributed to the transformation
T
he UAE has impressively transformed itself from a logistics hub into a supply chain nerve centre in recent years. Certainly, there are multiplying reasons driving the transformation and many ways in which it is acting as a redistribution gateway for multinational corporations. So what are the reasons contributing to its transformation? What are the profound implications for the economy? Success of economic diversification efforts compounded with effective implementation of national logistics plans and digital transformation initiatives
undertaken by public and private sectors are recognised to be some of the chief contributing factors. But that’s not all. The country’s trade facilitation reforms, fast customs clearance and strategic location in the east-west trade route, in theory, which are all important to the industry’s growth have encouraged the UAE to emerge as a logistics hub and a gateway for Asia, Europe and the MEA region. A noteworthy fact is that its “geographical location and infrastructure has always positioned it as an ideal supply and
International Finance | May 2020 | 55
INDUSTRY
FEATURE LOGISTICS
UAE SUPPLY CHAIN
redistribution gateway and offers huge growth potential for businesses,” Moustafa Elbanhawi, CEO of DHL Global Forwarding, Arab Cluster and head of industry projects and business development in Middle East and Africa, told International Finance. The UAE’s developmental efforts in the logistics industry is reflected with the release of a new report titled Agility Emerging Market Logistics Index 2020 which observed that the country’s score has improved in all the three sub-indices—domestic opportunities, international opportunities and business fundamentals. The UAE has been featured for the first time in the top 10 list of all three sub-indices. In particular, it saw significant improvement in business fundamentals and has moved up two places to ninth rank in international logistics opportunities. Realising the country’s progress in logistics, Agility has attributed its credit for improvement to the ecommerce market which is predicted to expand at a CAGR of 19.1 percent by 2023. Studies carried out by the Ministry of Economy shows that ecommerce is one of the propellers pushing the country to the forefront of logistics. This is in line with Gopal R, Global Vice President for Transportation and Logistics Practice at Frost & Sullivan, who said that with rapid expansion in regional ecommerce growth, high priority is being given by the government to support development of ecommerce hubs around key sea and air ports. “Combined transport is gaining prominence due to increasing demand for sea-air combination for freight movement, logistics and trade facilitation ease, coupled with established logistics infrastructure, technology adoption and
56 | May 2020 | International Finance
Forecast for the UAE logistics industry Logistics market to grow
5.7%
between 2015-2020 Ecommerce to expand at CAGR of
19.1% by 2023
availability of qualified resources are the key reasons the UAE continues to be a popular regional supply chain and distribution gateway in the region,” Gopal R told International Finance.
Free zones and infrastructure investments strengthen logistics The logistics industry in the UAE is upbeat. “Its logistics ecosystem is strengthened by increased investment in the development of logistics infrastructure with a focus on improving global connectivity with multi modal logistics facilities, logistics process digitalisation, warehouse automation, reforms targeted to improve business environment and trade facilitation measures,” Gopal R said. “In addition, as a result of opening up of free zones around ports and airports the contribution of non-oil exports expanded increasing contribution from free zones.”
Integrated free zones and huge infrastructure investments play a significant part in its logistics transformation. This points to the fact that Dubai International Airport is currently the world’s sixth busiest in terms of cargo traffic and Jebel Ali port is the ninth biggest container port undergoing further expansion to meet the surge in upcoming traffic. The obvious positive outcome from free zones is that they “provide a conducive tax free environment for trading between regions. All these support continuous improvement to keep the UAE as a preferred regional supply chain and distribution gateway,” Gopal R said.
Growth prospect for the UAE logistics A report published by Frost & Sullivan said the UAE’s logistics market is expected
FEATURE UAE LOGISTICS
to grow by 5.7 percent between 2015 and 2020 on the back of national logistics development plans, Expo 2020 and trade with Asia and Sub-Saharan Africa. “Despite a general slowdown in global growth coupled with some short term market shocks, we still expect positive growth in the UAE due to a strong fiscal stimulus, Expo 2020-related infrastructure push, investment reforms and businessfriendly laws,” Elbanhawi said. “Expo 2020 is expected to drive the logistics and supply chain segment even further and cement the UAE’s position as a global leader in logistics.”
Logistics industry contributes to real GDP With the country scaling up the logistics industry, positive changes are to be seen for the economy at large in the coming
years. The Dubai Chamber of Commerce and Industry noted that real GDP of the UAE’s non-oil sector is projected to grow at an average rate of 4.1 percent between 2019 and 2023 compared to 2.8 percent growth seen between 2014 and 2018. Elbanhawi said that the momentum behind the UAE’s GDP growth over the next 5 years will likely be led by the country’s transport and logistics industry which is set to record growth of 7.9 percent. Even Gopal R highlighted the fact that expansion in trade has increased the share of non-oil GDP, strengthened the manufacturing base and reduced the dependence on oil revenue—further opening up opportunities in freight transportation, warehousing and freight forwarding segments. “Due to the presence of global logistics companies in the UAE, competition has increased among
service providers; regional expertise has become a key factor for companies that opted for logistics outsourcing,” Gopal R said. “All these support the transformation as a supply chain nerve centre, providing opportunities for logistics companies to play a regional role by using the UAE as a base.” Last year, the logistics industry's gross output reached Dh219 billion based on the data released by the Federal Competitiveness and Statistics Authority. Already it ranks first in the Gulf region and third globally after China and India.
UAE government’s push to sustain as a supply chain nerve centre In this context, the Dubai Silk Road strategy is brought into sharp focus with initiatives pointing toward infrastructure, logistics and
International Finance | May 2020 | 57
INDUSTRY
FEATURE LOGISTICS
UAE SUPPLY CHAIN
connectivity. Supported by DP World and Dubai Chamber of Commerce, China is one of the biggest trade partners for the UAE. “The UAE-China bilateral trade is expected to cross more than $70 billion by 2020,” Gopal R said. “Port Infrastructure development projects in the country’s Khalifa Port and Jebel Ali Port are expected to improve connectivity with BRI infrastructure in Central Asia, Eastern Europe, South Asia and China. This in turn will result in increased flow of exports and imports through the UAE Ports.” According to Elbanhawi, the strategy is set to uplift Dubai’s position as a global economic and business hub “enabled by its exceptional connectivity and logistics services,” Elbanhawi explained. That in turn might introduce rejuvenated efforts to “enhance infrastructure such as improvements to Dubai’s ports, airports and free zones—building a stronger ecosystem for thriving trade.” The UAE government is also developing a rail network to connect seaports, distribution centres, major transportation hubs, freezone areas and freight terminals. In fact, the rail development is expected to speed up the growth of the country’s logistics industry.
Dubai is prime to become one of the world’s top logistics centres Dubai plans to become one of the top five logistics centres in the world as part of the Dubai 2021 plan. Supported by a robust legal framework, Elbanhawi is positive that the city’s pool of expertise spans the logistics business community, regulators and other government entities—in turn creating a unique offering which “makes it unlikely for any other potential logistics centre to match up to in the foreseeable future,” Elbanhawi reinstated, with the fact that
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the city’s strategic location between the east and the west makes it an ideal hub for transshipment routes and enhances ease of doing business in terms of customs and regulations. “We are certain that Dubai will continue to be an important hub and we continue to keep a lookout for opportunities to ensure we help our customers tap new prospects,” he said.
DHL is important to intraregional trade Intra-regional trade offers an opportunity for the region to boost economic growth and job creation through lower non-tariff barriers and reduced trade costs. It is against this backdrop that DHL has strengthened
its expertise and offerings in this part of the world to meet customer needs in the international market. “We are committed to grow intra-region trade and bolster volumes in all trade lanes as the region as a whole continues to hold strong economic prospects,” Elbanhawi pointed out. “We are also looking to provide customised and tailored solutions to meet the needs of our customers.” Last February, DHL launched its Global Humanitarian Logistics Competence Centre in Dubai to provide forwarding and logistics services to the humanitarian and public health sectors to support emergency disaster response and ongoing development programmes. Following that the company even
FEATURE UAE LOGISTICS
technology and humanitarian logistics to name a few.” More specifically, DHL Industrial Projects which addresses the needs of large-scale industrial and infrastructural developments will seek to further strengthen its position as the preferred supplier and forwarder for key international oil and gas, engineering, procurement and construction companies.
Technology is at play for the future of free zone trade
established the Centre of Excellence for DHL Industrial Projects in the city supported by competency centres in Egypt, Ethiopia, Kenya and Turkey to jointly coordinate complex logistics projects across the region.
DHL seeks to become supplier and forwarder for key sectors The company is focused on driving organic growth by investing in present and future markets in the region. This will include harnessing opportunities to tap cross-border trade and ecommerce, Elbanhawi explained. “We will continue to tap deeper into our expertise in various sectors to support our customers. These sectors include perishables, life sciences,
Furthermore, the Dubai 10x initiative supervised by the Dubai Future Foundation is aimed at enabling Dubai government entities to anticipate global changes in all sectors and transform Dubai into a city of the future. “This initiative comprises nearly 23 key projects with focus on infrastructure, smart governance, trade facilitation and infrastructure development,” Gopal R said. “Free Zone Exchange and Dubai Airport Freezone has announced the development of Dubai Blink, the world's first B2B smart commerce platform”— using artificial intelligence for the future of free zone trade. Digitalisation is being adopted by stakeholders in the UAE’s logistics infrastructure. An example of that is a digital 3PL company FreightOn looking to digitalise the logistics industry. Research shows that 95 percent of businesses prefer to work on a single platform to improve their shipment time and minimise time spent on the next shipment. In another example, DHL has introduced Saladoo which is a fully integrated digital freight platform that enables shippers and transport providers to make fast and reliable road freight connections within the UAE. In practice, the platform simplifies
road freight processes by matching shippers to transport providers, introduces transparency with tracking and enhances efficiency by optimising routes, cargo and time. It was a natural choice for DHL to launch Saladoo in the UAE because of its untapped opportunities comprising a fragmented road freight market that lacks transparency and trust across many players involved. Using the platform, carriers can maximise their truck load for greater efficiency and look to reduce their carbon footprint—which is in line with DHL’s efforts to reduce all logisticsrelated carbon emissions to zero by 2050. “All contractual relationships will be organised through the existing local DHL entity thereby providing trust and peace of mind to carriers and shippers alike,” Elbanhawi said. “We believe that it will plug the digital gap in logistics technology to accurately match shippers’ needs and transport providers’ offerings in the Middle East and Africa as well.” “Some of the initiatives include adoption of electronic systems to streamline exports and imports process, development of integrated transport infrastructure and improvement and liberalisation of logistics and special economic zones.,” Gopal R explained. Overall, the number of policies and initiatives with a deep focus to improve global connectivity using multi-modal logistics is what has transformed the UAE into a supply chain nerve centre.
editor@ifinancemag.com
International Finance | May 2020 | 59
INDUSTRY
ANALYSIS
RENEWABLE ENERGY THAILAND ENERGY 4.0
Energy 4.0 model, active green bond market and Asian Development Bank’s investments are uplifting the country’s efforts in many ways
What Thailand’s clean energy transition looks like SANGEETHA DEEPAK
Pushing against the receding fossil fuel consumption, Thailand’s transition to renewable energy is supported by a myriad of plans, technology developments and investments that could lead to breakthrough projects in the sector. The country’s Alternative Energy Development Plan Energy 2015-2036 includes a target demand in to achieve 30 percent of total Thailand is consumption from renewable expected to energy by 2036. This plan increase by is anticipated to have major 78% by 2036 effects on the country’s renewable energy transition. and GDP by A report published by 126% the International Renewable Energy Agency (IRENA) projected Thailand's potential to increase the share of renewable energy from its original target of 30 percent to 37 percent by the end of 2036. However, the country will need to vastly explore and discover new ways to build a sustainable clean energy system. In fact, the report estimated that the energy demand in Thailand is expected to increase by 78 percent by 2036 and GDP by 126 percent. In a close sync with the report’s view, the ASEAN Centre for Energy, an intergovernmental organisation representing ASEAN 10 member states, forecasted the country’s energy demand to increase by nearly
60 | May 2020 | International Finance
80 percent over the next two decades. Renewable energy is anticipated to meet Thailand’s rising demand in the coming years. Daine Loh, an analyst for power & renewables at Fitch Solutions, explained that Thailand’s Power Development Plan (PDP) 2018-2037 seeks to source 35 percent of the energy-mix from renewable energy by 2037. “The country’s non-hydropower renewable energy has grown rapidly over the last five years, driven by the government's implementation of a supportive regulatory environment which includes attractive FiTs, bidding programmes for renewables capacity and tax incentives,” he told International Finance. Approved by the National Energy Policy Council, the PDP said the power production capacity will rise 67 percent from 46,090MW in 2017 to 77,211MW in 2037—a year which will see 53 percent of energy consumption from natural gas, 35 percent from renewable energy and 12 percent from coal. The IRENA report is convinced that developing a portfolio with a variety of renewable energy sources can help to achieve a higher capacity. “As of 2019, we estimated Thailand to have approximately 8.3GW of non-hydro renewables capacity which generated about 12.5 percent of total power mix,” Loh said. The numbers show that Thailand is on the right track to realise its renewable energy ambitions. But what is more interesting is the fact that it has developed a dynamic model—Energy 4.0—which
is pivotal “to support the country’s growth toward a low carbon economy using technology and innovation,” Loh defined.
Thailand’s defined renewable energy targets by 2036
Transformative potential of Energy 4.0 The Ministry of Energy developed Energy 4.0 to enhance energy supply, grid resilience and subsequently reduce carbon emissions. “Broadly, it will encompass the use of more renewable energy and boost energy efficiency through smart energy management, decentralisation and energy storage capabilities,” Loh added. In theory, “the model has the ability to iron out short-term output fluctuations and allow additional wind and solar capacity jeopardising grid stability on a grid level. That said, it will also enable households and businesses to optimise their grid feed-in by extension of balancing power supply or demand dynamics at a distributional level.” Energy 4.0 comprises three specific sector policies such as Electricity 4.0, Fuel for Transportation 4.0 and Heat 4.0—with each specific sector policy aimed to “help Thailand to
Solar power total capacity
Total renewable energy consumption
Increase in renewable energy demand
17GW 30% 78% transition to a more sustainable, low-cost renewable energy for the future,” Pasamon Pechrasuwan, a senior consultant for Industrial, Asia Pacific at Frost & Sullivan, told International Finance. Pechrasuwan comprehensively explained the targets of the three policies set to be achieved by
International Finance | May 2020 | 61
INDUSTRY
ANALYSIS
RENEWABLE ENERGY THAILAND ENERGY 4.0
2036. The first policy Energy 4.0 is focused on energy efficiency in power generation to reduce construction of 10 new power plans, reduce natural gas dependency in electricity generation to below 50 percent and double the use of renewable energy. The second policy Fuel for Transportation 4.0 is formulated to achieve lower energy consumption in the transportation sector for 45 percent from Business as Usual, increase the use of public transportation and have 1.2 million electric vehicles. “We believe that electric vehicles and vehicle-togrid technologies will play an increasingly important role in power supply management, as it represents the largest addition of electricity storage capacity in a large number of countries over the coming decade,” Loh added. “It could be used as a demand response resource as EV owners charge during low electricity prices and feed some of this power back to the grid during peak demand.” The third policy Heat 4.0 is directly related to increase in energy efficiency during heat generation, lower energy consumption in the industrial sector by 22 percent and overall boost heat production in renewables by 37 percent. Again, Loh delved into the model’s core stating that it can support the “integration of intermittent wind and solar generation and adoption of distributed energy solutions due to better power demand or supply management.” That explains the transformative potential of Energy 4.0 which is imperative to Thailand’s efforts in becoming a low
62 | May 2020 | International Finance
carbon economy and ensuring high yields from renewable energy as an alternative to fossil fuels.
Thailand’s active green bond market Indeed, Thailand is setting an example for the rest of Southeast Asia with its powerful strategies that may well prove to be a driving force in its renewable energy transition. The strength of its green bond market is pronounced with the
issuance of certified climate bonds designed to finance and refinance green projects. An example of that is the country’s leading private power producer B.Grimm Power’s landmark issuance which seeks to increase the share of renewable energy generation in the company’s overall portfolio from 10 percent to 30 percent by 2021. The real promise of B.Grimm Power’s green bond is to help Thailand reduce carbon emissions by 20 percent by 2030.
ANALYSIS THAILAND 4.0
Role played by ADB in green bond issuance So to further support the issuance, Asian Development Bank has invested 5 billion baht in the company’s green bonds and the funds are designated for nine operating solar power plants with a capacity of 67.7MW, in addition to seven developing solar power plants. “We have seen Asian Development Bank invest 5 billion baht in B.Grimm Power’s green bonds on top of a 235 million baht loan agreement earlier
B.Grimm Power green bond promises to help Thailand reduce carbon emissions by 20 percent by 2030 in 2018. Furthermore, the bank has invested 3 million baht in the maiden green bond issuance from Energy Absolute PCL last October which will support the company's 260MW Hanuman wind project,” Loh said. B.Grimm Power’s bonds comply with the International Capital Markets Association’s Green Bond Principles
and Climate Bond Initiative standards. These bonds are issued in tranches with 5 year and 7 year tenors as part of the overall corporate bond issuance worth 15 billion baht. Loh pointed out that the bank has invested more than $2 billion over the past decade to encourage innovations in the power sector,
International Finance | May 2020 | 63
INDUSTRY
ANALYSIS
RENEWABLE ENERGY THAILAND ENERGY 4.0
including the first few renewable plants and climate bonds. Asian Development Bank’s investments are in line with its new strategy 2030 which mandates at least 75 percent of its committed operations to support renewable energy projects. Further analysing Thailand’s efforts in renewable energy transition, Pechrasuwan is positive that the country is even harnessing blockchain technology in numerous ways although it is “too early to assess the blockchain potential of the whole country.”
Blockchain is well suited for use in renewable energy Blockchain is backing the country’s progress in renewable energy as it “supports peer-to-peer electricity
64 | May 2020 | International Finance
trading using distributed renewable sources such as rooftop solar and aggregates power demand or supply in the mini grid system,” Loh emphasised, pointing to its “ability to better manage these decentralised sources of power that will facilitate greater deployment and in turn encourage more renewable consumption typically used in DES which will boost the overall share of renewables generation.” For example, Thailand’s multinational energy conglomerate PPT and Energy Web Foundation, a global non-profit organisation focused on accelerating blockchain in the energy sector, announced the development of a new renewable energy trading platform last September. The platform based
on blockchain distributed ledger technology will simplify the purchasing process in the energy sector between buyers and sellers. In light of Thailand’s rising energy demand, the platform will match demand with supply, generate revenue for operational renewable energy assets and promote new sector investments. In another example, a joint development by Sansiri and BCPG two years ago saw the world’s largest real-time blockchain-based peer-to-peer electricity trading pilot project implemented on T77. The essence of this platform is its ability to establish a cross-industry collaboration on a deep level between the country’s real estate and renewable energy sectors.
ANALYSIS THAILAND 4.0
Also, BCPG is working on another blockchain-powered renewable energy trading platform at Chiangmai University which will be much larger with 12MW electricity generation capacity from rooftop solar PV. The project is slated for completion this year and will demonstrate scalability of blockchain-powered renewable energy trading platforms to facilitate energy trading for larger systems. It is worth noting that Power Ledger, the digital energy partner of BCPG, implemented both projects with its own developed blockchain of POWR tokens and Sparkz tokens. “As Power Ledger is using dual-token economics where POWR tokens are limited, publicly tradable, and required to access and use Power Ledger’s platform, Sparkz tokens are unlimited, pegged to local fiat currency and only used within Power Ledger’s platform as tokens for energy trading,” Pechrasuwan explained. “It is very interesting to see whether this approach could further enable renewable energy trading not just within projects of single market operators but also between projects of different market operators in the future.”
Thai government steps up efforts for smooth transition In the big picture, the Thai government has established supportive regulatory frameworks for distributed renewables generation and has launched various initiatives to encourage its uptake. Pechrasuwan cited an example of how the rooftop solar PV industry is currently being driven using the private Power Purchase Agreement (PPA) scheme. Thailand has progressed much in terms of its renewable energy
Thailand’s multinational energy conglomerate PPT and Energy Web Foundation, a global nonprofit organisation focused on accelerating blockchain in the energy sector, announced the development of a new renewable energy trading platform last September generation capacity through PPA programmes and private sector participation. These programmes were “incentivised by projects using per-kWh subsidies for electricity generated by renewable energy to be sold to the national grid under Enhanced Single Buyer framework,” Pechrasuwan said. The smart grid master plan which was reaffirmed in the PDP 2018-2037 had set out a list of research studies and strategies that will operate along three core pillars: power load response and management, electricity forecasting and microgrid systems and energy storage systems. Interestingly, the government is driving renewable energy developments, especially in biowaste under Energy for All policy. The Community Power Plants for Local Economy programme is the main focus to stimulate the local economy using distributed renewable energy generation, mainly from agricultural wastes. Last year, the Energy Regulatory Commission launched the ERC
sandbox programme to “support research development activities of energy innovation,” Pechrasuwan said, analysing the five projects under this programme, which are "new electricity market structure (peer-to-peer energy trading), new electricity tariff structure (netmetering and net billing), new technology (EV and energy storage), new electricity management and operation (microgrid) and new energy business (supply and load aggregator).” It appears that the first phase of the programme approved 34 projects of the 138 projects and many of those approved projects are using renewables. These developments are certainly appealing. And it is safe to say that the country's progress in renewable energy, in part, will help to realise Thailand 4.0, a sophisticated model to “transform the economy into a valuebased economy,” Pechrasuwan concluded.
editor@ifinancemag.com
International Finance | May 2020 | 65
INDUSTRY
THOUGHT LEADERSHIP
OIL AND GAS INVESTOR SENTIMENT
NIGEL GREEN CEO and founder, deVere Group
Investors and oil companies are on the receiving end of Saudi and Russia's decision to boost output at this time
Weak oil prices dull stock market outlook The Kingdom of Saudi Arabia and Russia’s decision to increase their oil output at a time of weakening global energy demand due to Covid-19 has contributed to steep fall in oil prices. In fact, excess stocks due to fall in demand have resulted in shortage of storage space. But the impact of weak oil prices goes well beyond the energy markets as the plummeting share prices of major oil companies weigh down global stock market indices and rattle credit and emerging markets’ bonds.
Oil companies stagger to maintain high dividends Quoted oil companies have seen their share prices plummet, as drop in prices reduce the value of oil they have underground, in production and in supply pipelines. One of the attractions of the energy sector for investors has been the relatively high dividend yield and share buyback schemes. While some companies were borrowing to afford these, a few had strong dividend cover. In addition, research and development expenditure will be pared down and this will impact a plethora of smaller energy sector service companies. Many income funds have traditionally looked to the sector to deliver the yield that their investors require. Active income funds that do not have to follow the stock market index may outperform
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passive income funds as the sector sees both an underperformance of share prices and potentially severe cuts to dividends. In a normal world, energy intensive sectors, notably transport and power utilities should benefit from reduced input costs and this would act as a supply-side boost to the global economy. But the pandemic is likely to ravage demand for all but essential fuel consumption over the coming months. Set against the evaporation in demand for air travel, it is difficult to see, for instance, airlines benefitting much from cheaper kerosene. Truth be told, if we come out of the pandemic only to find the Kingdom and Russia continuing to pump out excess production in an effort to win market share—oil consuming sectors may rally sharply—resulting in a combination of pent-up demand and low energy prices. Of the major stock market indices, the FTSE 100 has the highest energy weighing of 12.6 percent as at the end of February. The S&P500’s energy weighting stood at 5.6 percent and 5.4 percent for the euro zonefocused Euro Stoxx 50 index. Of the major developed economies, Japan stands out as having no hydrocarbon energy reserves—and it makes up 0.3 percentage points of the Nikkei 225 index. This makes Japan and its stock market, perhaps, the main beneficiary of low energy prices for when global demand
returns to normal—and if Russia and the Kingdom are still engaged in a price war against each other.
Covid-19 worsens the scenario Some countries despite being dominated by the energy sector can ride out prolonged periods of weak prices. Norway has its $1.1 trillion sovereign wealth fund shared by just 5.3 million people and the Kingdom has approximately $500 billion in foreign reserves. Borrowing costs may increase for these governments but their sovereign debt will remain quality investment grade. For those countries, the pandemic is yet another reminder of the need to accelerate economic diversification. Some of the other Gulf states do not have large foreign currency reserves—and might have to cut back on public spending and raise taxes. Or they will have to borrow more at higher yields. Many also have plans for economic diversification, but lack the reserves needed to implement them. That said, countries like Nigeria, Iraq, Venezuela and Angola have entered this crisis with weak state budgets and now look even less able to finance dayto-day spending. This group of sovereign borrowers will be of interest to distressed bond investors who are potentially willing to sit through years of litigation— should defaults take place.
What are Russia and Saudi doing? Russia is aggrieved that the benefits of its 2016 agreement with the Kingdom and OPEC to limit output and support the oil price have in part gone to the US shale oil sector. It wanted to end the production agreement with the Kingdom in order to put pressure on the US shale industry, which it accuses of stealing market share. If Russia wanted to attack the sector, now is an opportune moment given the high level of borrowing of the sector at a time when the market is risk averse. The Kingdom’s response points to a promise to increase production by a quarter and to put pressure on Russia to back down. Russia has limited capacity for a prolonged low oil price and Kremlin has admitted that the low oil price will force it to run a budget deficit this year. President Trump has greeted the low oil price as being ‘good for the American motorist’, but Republican senators especially from big oil producing states such as Texas and North Dakota have urged the Kingdom to review its policy of brinkmanship with Russia.
Nigel Green is the founder and CEO of deVere Group. editor@ifinancemag.com
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INDUSTRY
FEATURE TELECOM
THE PHILIPPINES 5G
5G is a logical solution to the Philippines Experts predict fintech volume in Mexico to PRITAM BORDOLOI reach $68 billion by 2022 Globe Telecom became the first telco to rollout 5G in the Philippines—marking a turning point for the country to strengthen its internet capabilities
A
study commissioned by Cisco observed that telecom operators in the Philippines could expect their revenues to increase by nearly $650 million by 2025 due to the nationwide rollout of the 5G technology. The study carried out by American global management consulting firm Kearney showed that the introduction of 5G will result in 50 times higher internet speed in the Philippines. To that end, it requires the combination of three distinctive features—high throughput, ultra-low latency and low power connectivity. In the last decade, the country’s users have often raised concerns about slow and disruptive internet connections.
68 | May 2020 | International Finance
The Philippines has the highest social media users in the world; however, it ranks 107 in terms of mobile internet speed of around 15 Mbps, which is significantly slower compared to global average. Last year, Globe Telecom, the country's largest mobile network operator and one of the largest fixed-line and broadband networks launched 5G technology in the Philippines. The telco aims to offer high-speed internet to tens of thousands of Filipinos in key urban areas in the country.
FEATURE PHILIPPINES DIGITAL BANKING
International Finance | May 2020 | 69
INDUSTRY
FEATURE TELECOM
THE PHILIPPINES 5G
First to the 5G race Globe Telecom’s efforts to introduce 5G technology has pushed the Philippines to the forefront making it the first country in Southeast Asia to implement the rollout—thus leading the 5G race in the region. In fact, the move seems logical because of the country’s urgent need of an overhaul to make advancements on this front. Ernest Cu, executive director, president and CEO of Globe Telecom, in an interview told International Finance, “It has been less than 4 years since the average internet speed in the Philippines improved from just 7.91Mbps in 2016 to 23.8Mbps in 2020 for fixed internet, and 7.44Mbps to 14.24Mbps for mobile. 5G can help increase the average speed, to some extent. Mobile speeds in the Philippines is actually quite adequate, but the speeds of at-home connection are dragging the average down. There is still a bit of legacy copper infrastructure in the country and over 1.49 million homes are riding on our 4G LTE infrastructure which has a maximum speed of only 10Mbps.” Even though Globe Telecom was able to launch 5G technology in the Philippines, a full-fledged deployment will take time. It took Globe Telecom around three to four years to rollout 4G—and 5G might take about the same, if not longer, since the latter runs at a higher frequency. Ernest Cu is positive that with the current technology they will be able to use the same spectrum as 4G—and in turn that should speed up the rollout. In his view, “We will also have to see the tradeoffs between having 5G-ready sites versus the number of sites needed to give a good 5G experience. There are too many variables right now, and this new set of conditions with
70 | May 2020 | International Finance
The Philippines average internet speed Fixed internet 2016
10
20
Fixed internet 2020
30
10 50
5
75
1 0
100
7.91Mbps
20
30 50
5
75
1 0
100
23.8 Mbps
Even though 5G speed is expected to be super fast, equivalent to downloading a movie within seconds, much of it will depend on external factors such as location and network traffic
Covid-19 will bring about a new normal to the whole country.”
5G’s potential to address internet issues Certainly, 5G is recognised as the technology of the future. While the hype around 5G mainly points to improved internet speed, the technology’s greater
bandwidth will allow a large number of devices to be connected to the network compared to previous scenarios. The fastest 5G networks are expected to be at least 10 times faster than 4G LTE, according to wireless industry trade group GSMA. Even though 5G speed is expected to be super fast, equivalent to downloading a movie within seconds,
FEATURE INTERNET CAPABILITIES
nutshell, 5G has the potential to change the internet and connectivity landscape in the Philippine she added.
Mobile internet 2016
10
20
30
10 50
5
75
1 0
Impact of duopoly on 5G
Mobile internet 2020
100
7.44 Mbps
much of it will depend on external factors such as location and network traffic. Although it is quite evident that 5G has the potential to solve the problem of internet speed in the Philippines, its high functionality will depend on scalability. Ernest Cu said “Offering 5G to the home will greatly help in raising the averages, but it will only happen if 5G becomes ubiquitous and once the price of 5G modems comes down to a reasonable level.” It is imperative that telcos in the Philippines make the 5G network available to a major section of the society for it to become a successful project. As of May 2019, 4G was available to 72 percent of residents in the country. But the benefit of 5G is not limited to just internet speed, he explained.
20
30 50
5
75
1 0
100
14.24 Mbps
“In this age, improved connectivity is critical to economic development. It has been proven that when people are interconnected and can transact through the web, significant growth in GDP can be seen. As we rollout 5G, more people will enjoy higher speeds on mobile devices and in their homes. An increase in speeds will also allow for more use cases that will empower people and increase productivity, thereby boosting the Philippine economy.” To second that view, Mei Lee Quah, who is the associate director of Telecoms and Payments Strategy for ICT, APAC at Frost & Sullivan told International Finance in an interview, “Yes, 5G can improve on internet speeds in the Philippines, but because the rollout is limited the impact will likewise be limited as well.” In a
The telecom sector in the Philippines is heavily dominated by Globe Telecom and Philippine Long Distance Telephone, which has led to a duopoly market. But the duopoly is on the verge of shattering because of Dito Telecommunity, a consortium of Davao businessman Dennis Uy's Udenna Corporation, its subsidiary Chelsea Logistics Corporation and Chinese state-owned China Telecommunications Corporation Last year, President Rodrigo Duterte challenged the consortium to become the third major telecommunications player in the Philippines—and to break the duopoly of Philippine Long Distance Telephone and Globe Telecom. Earlier known as Misatel, the company rebranded to Dito after being granted a licence to operate in the Philippines. Experts believe the third telco in the Philippines will play a key role in improving the poor internet connectivity in the country. If Dito Telecommunity proves to be a reliable internet service provider, then it can emerge as a challenger in a market dominated by Globe Telecom and Philippine Long Distance Telephone. Dito Telecommunity could also take advantage of the recently launched National ICT Ecosystem Framework (NICTEF) which outlines the country’s ICT agenda in the next five years. In essence, NICTEF replaces the Philippine Digital Strategy Initiative 2011-2016, identifies trends in the ICT industry, strategic thrusts and indicators that the government will be looking out for. In the absence of Dito Telecommunity, there will not be significant
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INDUSTRY
FEATURE TELECOM
THE PHILIPPINES 5G
competition in the Philippines’ telecom market. While competition brings out the best among industry players, Globe Telecom and Philippine Long Distance Telephone might become unresponsive to the country’s need for improved internet service. Even if both the telecom giants seek to launch 5G— technology, scalability and timeframe of the launch might take longer than expected. With that, it has become clear that Dito Telecommunity plays an important role in the Philippines' telecom sector, 5G deployment and improved internet service.
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Reasons why the Philippines shows slow progress Social media platforms such as Facebook and Instagram find the highest number of users in Asian countries. When it comes to social media, the Philippines holds the highest record for the number of social media users in a country. However, its social media experience is often plagued by slow connectivity. Why is the Philippines lagging behind in this aspect? A major factor for low internet penetration in the Philippines is the high price of FTTH and limited reach in many remote locations. It is important to take into consideration that the Philippines
is one of the world's largest archipelago nations with about 7,641 islands that are broadly categorised under three main geographical divisions from north to south—Luzon, Visayas and Mindanao. Mei Lee Quah said 5G technology will also face similar problems when it comes to full deployment. Globe Telecom chose 5G because of local geographical limitations and the need to bring higher speeds to the masses. The company cited that 5G’s massive MIMO capabilities has allowed for an easier transition. Mei Lee Quah further explained that “The Philippines telecommunication
FEATURE INTERNET CAPABILITIES
infrastructure with 16,300 sites in 2017 lags behind some of its neighbouring countries such as Malaysia with 22,682 sites, Thailand with 52,483 sites and Indonesia with 93,549 sites. The reason behind this lag in telecommunication infrastructure is due to mobile operators being constrained by the difficulties of adding new base-stations due to the difficult permitting process. Long approval timelines for construction that can take between 8 and 12 months are commonplace. To build a tower at a new site in the Philippines, it requires 26 permits, which typically would take a year to obtain.” Ernest Cu said “Availability and coverage are quite good for both telco companies in the country, but we have very low site density. We lack cell sites. It is difficult to build cell sites in the Philippines due to a number of reasons. First, the country is made up of thousands of islands and the topography is extremely varied, making it already challenging from a geographical standpoint compounded with the Covid-19 situation. Second, it takes an average of 26 permits to build one cell site which can sometimes take years to complete. Excessive bureaucracy is one of the things that is really preventing us from building in large numbers. Although the national government has promised to help the industry in this regard, it still needs to translate into action on the ground. We have earmarked a lot of CAPEX in order to catch up to the capacity that is required, but building has been very difficult, and now with the Covid-19 situation, rollouts have been delayed.”
Positive industry outlook despite global disruptions The outlook for the telecom sector in the Philippines is quite positive
A major factor for low internet penetration in the Philippines is the high price of FTTH and limited reach in many remote locations despite the global disruption caused by factors such as the ongoing pandemic, depleting oil prices and economic recession. In this context, Ernest Cu shares similar views with most analysts and consultants who consider the telecom sector to be in good shape. “Globe Telecom, in particular, will surely come out of this in a very strong manner with continued demand. The crisis heightened the need for digitisation, automation and a cloudfirst type of IT infrastructure for businesses, all of which are services that telcos are providing,” he commented. “If you think about the homes today, people are entertaining themselves with streaming services which I see will continue to grow, in addition to social media and new applications such as TikTok and House Party. Zoom and other video conferencing apps are new use cases that were not around in a big way prior to Covid-19, but now they are.
The work-from-home arrangement moved a lot of potential for telcos. I think telcos across the world are going to fare very well as long as they have the balance sheet strength, which Globe Telecom has, to be able to rollout the services for consumers.” In addition, Ernest Cu said that the plan to expand the 5G services remains unchanged, but its pace will be affected in light of the current circumstances. Globe Telecom has already lost a month and a half to the pandemic—and it will take time to ramp up capacity as the 5G build continues.
editor@ifinancemag.com
International Finance | May 2020 | 73
ECONOMY
ANALYSIS
RECESSION 2020 COVID-19 PANDEMIC
The global economy is facing the gravest threat seen in the last two centuries because of the protracted pandemic
Is recession 2020 pointing to another Great Depression? PRITAM BORDOLOI
It was in the month of November last year that China recorded its first positive case of Covid-19 in the city of Wuhan. Since then, the novel disease has spread to nearly 180 countries, forcing the world to enforce lockdown. In March, Managing director at International With supply Monetary Fund (IMF) chains Kristalina Georgieva annodisrupted, the unced that the fund has pandemic is reassessed the growth forcing prospects for 2020 and economists to 2021 only to find out that reexamine the the global economy has vulnerability entered into a recession. The of the recession can be attributed to interconnected measures taken by countries global to curb the spread, which economy includes having sealed borders, cancelled air travel, grounded flight and imposed lockdowns on citizens. The last time a global recession took place in 2008, it was caused by high default rates in the US’ subprime home mortgage sector. This time around it is the service sector which has played its hand in leading to another global recession.
Protracted pandemic could change globalisation The pandemic has proved to be a major stress test
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for globalisation. With supply chains disrupted among economic sectors, the pandemic is forcing economists to reexamine the vulnerability of the interconnected global economy. Also, it will have ramifications for trade relations and globalisation in the long term. Moody’s expects supply chains in some sectors to be reorganised. Such efforts are already underway and the pandemic’s shock has accelerated the trend. In essence, it could fundamentally change consumption patterns with the potential for a large-scale reorganisation of economic structures over time. Analysts say sectors such as leisure, hospitality, travel and retail will likely experience irreversible structural changes. As individuals and businesses adapt to social distancing, the nature of work and delivery of services could permanently change in certain sectors. For example, disruption will likely occur in the oil and gas sector as a result of changes in travel and work life. Digitisation will increase in the process. And this shock could also lead to profound geopolitical consequences. Against this background, a KPMG spokesperson told International Finance, “We are likely to see both businesses and households becoming more risk-averse and focusing on repairing their balance sheets in the medium term. There will be more remote working, on-line commerce and business
ANALYSIS RECESSION 2020
and a greater emphasis on mitigating potential future risks.�
In depth analysis of recession 2020 It seems impossible to accurately predict the precise damage caused by the pandemic on global economy mostly due to our inability to predict effectiveness of countermeasures, containment efforts and time frame required for the development of a vaccine. However, a thorough study of the markets and the GDP forecast of Covid-19 impacted countries show signs of a global recession. In April, IMF Chief Economist Gita Gopinath said that the global economy will experience its worst recession since the Great Depression, surpassing the damage caused by the 2008 financial crisis. IMF in its website said that if we assume the pandemic and required containment peaks in the second quarter for most countries in the world, and recedes in the second half of this year, it projects global growth in 2020 to fall to -3 percent, which is a significant downgrade of 6.3 percentage points from January 2020 forecasts. Madhavi Bokil, Vice President and Senior Analyst in the Macro Research Team of the Credit Strategy and Standards Group and a member of Moody's Macroeconomic Board told International Finance, “We expect that G20 economies as a group will shrink 4 percent in 2020. These forecasts incorporate a severe contraction in
We expect that G20 economies as a group will shrink 4% in 2020. These forecasts incorporate a severe contraction in economic activity in the first half of 2020
economic activity in the first half of 2020 (especially in the second quarter in most major economies, except China), followed by a gradual resumption of activity in the second half of the year. In most major advanced economies and many major emerging market countries, the contraction will be severe enough to result in negative growth for the whole year. We expect that global economic activity will remain below the pre-coronavirus level through 2020 and much of 2021. In addition, much of the lost output, income, and revenues over this period are unlikely to be recovered.� The IMF further said that growth in advanced economies is projected at -6.1 percent. Emerging markets and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020. However, the forecasts are likely to change and the damage could be deepening as it depends on the trajectory of the pandemic. Eurostat revealed that the Eurozone GDP fell 3.8
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ECONOMY
ANALYSIS
RECESSION 2020 COVID-19 PANDEMIC
percent in the first quarter of 2020. This is the most significant decline ever in this series since it was recorded. Even more negative than the peak of the Global Financial Crisis which observed -3.2 percent in the first quarter of 2009. “But how deep and long the downturn will be depends on the success of measures taken to prevent the spread of COVID-19, the effects of government policies to alleviate liquidity problems in SMEs and to support families under financial distress. It also depends upon how companies react and prepare for the restart of economic activities. And, above all, it depends on how long the current lockdowns will last," Nuno Fernandes, who is a professor at the IESE Business School, Chairman at the Board of Auditors at Banco de Portugal and member of the Audit Committee, European Investment Bank told International Finance. “Despite many government measures to ease confinement restrictions, the service sector will remain in a deep hole and tourism will plummet this summer. And countries with heavy reliance on service and tourismrelated jobs will continue to suffer for longer. I think we will only see significant signs of an employment rebound in the fourth quarter.”
Can a Covid-19 vaccine save the global economy? Even though a vaccination for Covid-19 is still months away, it is imperative that global economies work together and bring out a vaccine to counter the virus. It is, in fact, the only way to be able to understand the actual trajectory
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of the damage caused by the novel disease—and then predict where our economy is heading. While a vaccine may not be a tool to uplift the economy from recession, the development of a vaccine is vital. A spokesperson from KPMG said, “The duration of the recession will depend to a great degree on the timing of a vaccine becoming widely available. The economy is unlikely to recover significantly until that happens, as we will likely have on-going social distancing measures in place and high levels of uncertainty among businesses and households.” Fernandes observed that the economic costs of a recession are unequally distributed. “We already know many of the most affected sectors. Also, based on prior crises, it seems that younger and less educated workers will, unfortunately, be more likely to
lose their jobs. Also, it is next to impossible to correctly predict the final financial damage caused by the pandemic. This obviously depends on timing, the severity of the pandemic into future weeks or months and countries' policy responses. Also, hopes of a coronavirus vaccine mount which would be welcome news. However, it is clear that if the ongoing crisis lasts until the end of the summer, the global economy faces the gravest threat seen in the last two centuries.” he said.
Current lockdown versus financial crisis 2008 According to Bokil, this recession is different from the 2008 global financial crisis in two fundamental ways. First, this shock has its roots outside the economy. Social distancing measures and other restrictions designed to reduce the
ANALYSIS ECONOMIC FORECAST
IMF’s global economic forecast for 2020 Advanced economies projected growth
-6.1%
EMs and developing countries projected growth
-1.0%
scale of human suffering and curb the spread of the virus are pointing to tremendous economic costs in terms of loss of income, business earnings and jobs across major economies. The 2008 recession on the other hand resulted from a collapse of a US housing market bubble that quickly escalated into a financial crisis. Secondly, the economic costs in terms of job losses and loss of economic activity in the current crisis is upfront. It appears that economic activity has collapsed sharply and very rapidly. In the last recession, in comparison, the economic costs such as job losses accumulated over several quarters. On the bright side, policy makers have benefited from the experiences of the last recession. In fact, Fernandes explained that “Public policymakers are now realising the massive economic consequences of
the lockdown. Most importantly, the sooner we, as well as policymakers, understand and acknowledge this is not ‘another economic crisis’, the easier it is to deal with the future, focused, determined, and strong. The results suggest that on average, each additional month of crisis costs 2.5 percent to 3 percent of global GDP.” Many of the tools used in the last crisis were deployed quickly and effectively to prevent disorderly developments in financial markets. On the other hand, fiscal space for a number of policy makers is more constrained this time. And interest rates are already quite close to the effective lower bound.
Economic activities to resume in H2 2020 Many experts and economists across the globe share similar views that the recession could last longer than earlier predicted. There are certain indications that can be taken into account even though it is very difficult for economists to predict how long the recession will last without knowing when the pandemic will end. And based on these indications, economists and experts arrive at their conclusions. For example, Madhavi Bokil said, “We expect that economic activity will partially resume in the second half of this year. On a sequential basis we expect positive growth in 2020 H2, provided that the stay-athome restrictions will be relaxed by the end of the second quarter.” Bokil added that there are significant downside risks to the forecasts in the event that the pandemic is not contained and
lockdowns have to be reinstated. A longer lockdown period would result in large-scale destruction of businesses and entire sectors as well as structurally high unemployment rates, a permanent loss of human capital and persistent malaise in consumption and investment. These scenarios would lead to a deeper recession or weaker recovery than what the IMF or Moody’s are currently projecting. China has demonstrated significant efforts in tackling the virus and curbing its further spread. Within months, it has not only regained control over the situation but its economic activities are back on track. Factory activities have also resumed in China, however, full resumption of activity, especially spending on discretionary services is likely to take time. Given that China got back on its feet within months of the pandemic, the big question is—can countries bounce back too? Interestingly, Bokil positively said ”In other countries, we expect recovery to be uneven across sectors as the fear of contagion will likely alter consumer behavior even after restrictions on business activity and mobility are lifted. Similar to China, the services sector will take longer to recover. In particular, activities that require a high degree of human contact, such as traveling, dining out, going to movie theaters, flying, and using mass transit, is unlikely to fully normalise until the disease is eradicated, or a vaccine or an effective treatment is available.”
editor@ifinancemag.com
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ECONOMY
THOUGHT LEADERSHIP
UK ECONOMY BREXIT
DR. RUTH WANDHÖFER PARTNER, GAUSS VC
The ongoing pandemic is especially challenging for the UK on the back of rising Brexit agonies
The pandemic is hitting Brexit plan hard Despite contradicting comments, the UK is still expected to leave the EU on the 31st December 2020. The biggest political change in Europe has been delayed multiple times due to breakdowns in negotiations and domestic government changes in the UK. Already meetings between the 100 person-heavy negotiating parties have been delayed due to ‘public health concerns’. Like many of us around the world, negotiations will have to be managed via video conference. How can anyone possibly know when the next face-to-face negotiation will be able to even take place? As things stand, if the 31st of December 2020 arrives and no mutually beneficial arrangement is reached then there will be no agreement on anything of strategic importance. This could further cripple the UK on top of the pandemic’s impact. For instance, applying a no-deal scenario in today’s context is a concern for many on how dangerous life outside of the EU might be should there be another major outbreak. Many are asking what kind of terms of access to future vaccines the UK will have. According to some experts, capacity to produce vaccines may not be sufficient and reliance on other countries may therefore result in a longer wait. On the back of the pandemic, the overwhelming concern for the UK is what
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will happen to Brexit in case of further delay? What will this mean for its economy at large?
Rising uncertainty during transition These extraordinary circumstances imply that following the current Brexit timetable is futile—and now the UK is in the transition period. The deadline can be extended but it must be agreed on by July 1. Under the terms of the UK law, an extension is impossible and perceived as undesirable. Currently, the UK government is resisting and neither side is able to have face-to-face interactions to agree on what will happen next. For 2020, the UK is a paid-up EU member and yet it has no say in matters related to the organisation. The current situation is frustrating not just for the UK, but for the conservative party who were overwhelmingly voted in on their promise of getting ‘Brexit done’. Opposition leadership candidate Lisa Nandy believes moving on with Brexit under the current timetable would be dangerous, stating that “British companies who trade with the EU do not know what terms they’ll be trading on in 10 months’ time. Add to this the falling demand and disruption created by coronavirus and it is reasonable to expect many businesses will not survive.”
What Nandy points out is exactly the issue that businesses will face if Brexit is delayed again. Currently there is uncertainty because the terms of the deal are yet to be decided, on top of the crisis led by the ongoing pandemic. Even prior to the outbreak a number of businesses were unable to commit to investment, employment and expansion decisions. And the current situation exacerbates this.
But what is becoming more clear is that digital business models and services are beginning to form the backbone of the global economy as the physical realm is challenged. Furthermore, digital solutions to automate and increase efficiencies will become a necessity for many institutions to manage their costs from the fallout of the pandemic. Digital globalisation, if anything, will accelerate.
Uncertainty points to Brexit or full global collapse?
The mismatch of EU members
For many, the pandemic is signalling the end of globalisation. As many communities turn inward, as individual homes shut their doors and as businesses figure out how to pivot to meet local demands—some may conclude that the world will become smaller as a result of this global virus. Prior to the pandemic, many UK businesses were wondering how the transition process would affect them in terms of finances and workers. They panicked about what it would mean for trade barriers, access to staff and transaction costs. And now the complications have become obvious. Many of the issues Leave Voters feared would happen with an EU divorce will be highlighted during this time of crisis.
Currently, members of the EU must be aligned in terms of their monetary policies. However, if one country makes a fiscal decision that is seen as non-competitive then it can be heavily fined. A case in point is the recent ruling by the EU that Italy must be fined â‚Ź7.5 million after failing to recoup subsidies previously given to the failing Sicilian tourist sector. Given the number of fiscal stimulus packages that are now being delivered across the bloc, despite the EU itself failing to offer one, in response to the outbreak, it will be interesting to see how closely the EU leaders in Brussels will be able to keep on top of the delicate financial balance that is required to manage such a union. Should they deem anything against the strict economic agenda, then there will be serious consequences.
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ECONOMY
THOUGHT LEADERSHIP
UK ECONOMY BREXIT
This will seem harsh given the EU has failed to offer a swift and comprehensive action plan when it comes to fighting the pandemic both financially and socially. The EU leaders have debated issuing Eurobonds. However, this brings its own issues by lumping individual countries’ debt such as Italy with Germany into one bond. An unpopular decision. Yet many analysts and leaders believe a lack of coordinated action will lead to a major economic downturn in the trading-bloc. Whatever is decided, it will certainly give antiEU campaigners some strong rhetoric in the coming months and years and cause UK voters to push harder for Brexit, regardless of whether it reaches a no-deal.
Brexit is an irrevocable complication For now, there are two major sticking points in the ongoing negotiations: fisheries policy and the Level Playing Field. The Common Fisheries Policy is a funny one to be causing so much upset. Economically it represents a very small sector, yet both the UK and the EU have put a disproportionate amount of political peacocking behind it. This makes it all the more difficult to resolve. However, the UK is seeking a much looser arrangement. Should there be a delay, then the uncertainties for both the UK and the French fishing boats will continue. So, in the coming December 31 will either see the UK achieve a zero-tariff outcome with the EU, rather unrealistic in my view, versus applying the WTO rules—the default position in the absence of any specific trade agreement with the EU. This is something the UK fishermen are desperate to avoid and will cause some major disruption. The Level Playing Field issue is in regard to the access of the UK goods and services to the EU. Both sides loosely agree that there should be a free trade agreement in place. But the detailing and commitment toward this view is what is causing problems. Bureaucracy-loving EU officials would like the UK to sign an agreement "underpinned by robust commitments to ensure a level playing field for open and fair competition, given the EU and the UK's geographic proximity and economic independence.” This is so that no British business can be more competitive than its EU counterparts.
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Arguably, signing up to the EU’s demands would defeat the point of Brexit—and if Brexit is further delayed then it is worth adding financial crisis to the existing issues
Arguably, signing up to the EU’s demands would defeat the point of Brexit—and if Brexit is further delayed then it is worth adding financial crisis to the existing issues. Editor’s note: New developments in relation to Brexit may have taken place since the time of writing this article
Dr. Ruth Wandhöfer is an expert in the field of banking. After a distinguished career of over a decade with Citi, Ruth is now an independent non-executive director on the board of Permanent TSB and partner at Gauss Ventures. Until recently, she served as an independent non-executive director on the board of the London Stock Exchange and Pendo Systems.
editor@ifinancemag.com
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