ISSUE 19 | JULY-AUG 2013
BUSINESS INTELLIGENCE FOR INTERNATIONAL TRADE
THE CHANGING LANDSCAPE OF TRADE WE TAKE A LOOK AT THE DEVELOPMENTS IN TRADE FINANCE, CURRENCIES, FREE ZONES AND MORE REGIONALLY AND GLOBALLY.
PUBLICATION LICENSED BY IMPZ
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EDITOR’S LETTER
Publisher Dominic De Sousa Chief Operating Officer Nadeem Hood
A time for reflection… We are in the holy month of Ramadan and I always feel that the pace of life slows down during this month and gives us time to reflect on the small pleasure of life and to appreciate people who matter to us. Don’t you think so? Even the city – Dubai, it seems takes a break from the mad rush and relaxes.
Managing Director Richard Judd richard.judd@cpimediagroup.com +971 4 440 9126 EDITORIAL Senior Editor Aparna Shivpuri Arya aparna.arya@cpimediagroup.com +971 4 440 9133
However, the one thing that doesn’t slow down is our rush to meet the monthly deadline for our magazine. And keeping up to the tradition, we have some very interesting features lined up and to de-mystify Islamic finance.
Business Assistant Adelle Louise Geronimo adelle.geronimo@cpimediagroup.com +971 4 440 9160 ADVERTISING Media Sales Executive Ibrahim Parwaz ibrahim.parwaz@cpimediagroup.com +971 4 440 9135
First, we have a series of features lined up on Islamic finance. Islamic finance has been gaining a strong foothold not only in the region but also globally, however not many people understand the origin or the basic principles. So, this is our humble attempt to get experts to talk about it.
PRODUCTION AND DESIGN Production Manager James P Tharian james.tharian@cpimediagroup.com +971 4 440 9146
Moving on, if you are into trading of perishable goods, then don’t miss out our article on how to handle the logistics for such goods. Also, we bring to you a feature on flydubai and their take on cargo and trade.
Database and Circulation Manager Rajeesh M rajeesh.nair@cpimediagroup.com +971 4 440 9147
As always, we have the movement of currencies provided by Western Union Business Solutions to help you trade in a cost-effective way.
Head of Design Fahed Sabbagh fahed.sabbagh@cpimediagroup.com +971 4 440 9107 Designer Froilan A. Cosgafa IV froilan.cosgafa@cpimediagroup.com +971 4 440 9107 Photographer Jay Colina Abdul Kader Pattambi DIGITAL SERVICES www.tradeandexportme.com
We have also been working hard on organising our event on Ecuador on the 29th of September. So, please watch this space for more details and updates. And if you would like to attend the event and know about trade, tourism and investment opportunities in Ecuador then visit our website to register or drop me a line. By the time this issue reaches you it will be Eid. So let me take this opportunity to wish you Eid Mubarak and have a blessed year ahead! Until next time…
Digital Services Manager Tristan Troy Maagma Web Developer Abey Mascreen online@cpimediagroup.com +971 4 440 9100 Published by
Aparna Shivpuri Arya, Senior Editor, Trade and Export Middle East Registered at IMPZ PO Box 13700, Dubai, UAE Tel: +971 4 440 9100 Fax: +971 4 447 2409 Printed by Printwell Printing Press © Copyright 2013 CPI All rights reserved While the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.
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JULY - aug 2013
updates
ISSUE 19
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News: International and regional news which can impact your trade.
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EVENTS CALENDAR: A snapshot of exhibitions and conferences around the region, which can help you spend less time planning and more time attending.
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ABOUT TOWN: We bring you coverage from the events we attended.
LOGISTICS: Perishable goods: Muhamad Ali Shah, Supply Chain Manager, Global Shipping and Logistics, gives his opinion on the logistics of perishable goods.
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Cargo: Cargo is an important component of any airline – and flydubai is no different. Mohamad Hassan, Head of Cargo Division at flydubai talks about the cargo milestones that the airline has achieved.
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FREE ZONE: With more businesses opening in the UAE, new blood is being pumped into the country’s economy making it more robust. Peter J. Fort, CEO of Ras al Khaimah (RAK) Free Trade Zone (FTZ) gives us enough reasons to set shop in this free zone.
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HOW TO: Dr Ashraf Mahate, Head, Market Intelligence, DED, tells us what to do if your export strategy fails and to not concede defeat so easily.
trade talk
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INDUSTRY WATCH: Aparna Shivpuri Arya caught up with Leanne Piggott, Director of the Business Programmes Unit at The University of Sydney Business School and Dean of the Faculty of Engineering and Information Technologies, Professor Archie Johnston to know more about the collaboration between Australia and the UAE, in the field of energy. FINANCE Origin of Islamic finance: In the first of a multiseries, Ehsaan Uddin Ahmed, Head of Global Transaction Services and SME, Noor Islamic Bank, endeavours to explain what is Islamic finance, it’s basic principles and relevance. GCC countries and Islamic finance: Continuing with our discussions on Islamic finance we bring you a feature from Frost & Sullivan, which talks about the status of Islamic finance in the GCC countries.
INTERNATIONAL TRADE ISSUES Trade routes: In its report on global trade routes, Trade Routes: What has changed, what will change?, Euler Hermes, provides a holistic view of global trade scenario. We bring you some snippets of the report.
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Bilateral trade: The Gulf Petrochemicals and Chemicals Association (GPCA) talks about bilateral trade relations in the chemical industry.
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African economies: Media Eghbal, Country Insights Managing Editor, Euromonitor highlights investment opportunities in emerging African economies in this report.
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Currencies: Western Union Business Solution Team gives us the update about how the major currencies have been performing, to help us trade better.
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Sector watch: We got talking to Aamir Mehdi, Operations Director, Fonterra Middle East and Africa, to know more about the company and his take on the food sector.
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Updates REGIONAL TALK
DMCA signs MoU with Maritime and Port Authority of Singapore
Dubai Maritime City Authority (DMCA) recently signed a Memorandum of Understanding (MoU) on maritime cooperation with the Maritime and Port Authority of Singapore (MPA), the government authority behind Singapore’s port and maritime development. Under the MoU, DMCA and MPA will explore possible areas of collaboration in planning and regulation of marinas and waterways, promoting maritime environment protection in line with international standards, conducting maritime training and research, and exploring other mutual maritime areas of interest.
USD 1 billion value of KSA’s oil exports to Brazil (Jan - April 2013)
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UAE and Kazakhstan explore bilateral trade relations The UAE and Uzbekistan are increasing cooperation as the CIS country seeks foreign direct investment, while UAE re-exports are growing, a study recently commissioned by Dubai Chamber of Commerce and Industry shows. According to the study, despite a difficult environment for investors, FDI continues to rise, led by the energy sector. The government has an ambitious USD 47 billion infrastructure development programme for 2011-2015, which it plans to finance through loans and also through FDI sources. The government is actively seeking investment in energy, metallurgy, agriculture, light industry, electro-technical and pharmaceuticals to support privatisation efforts. Meanwhile, according to the report, FDI is also sought in sectors including real estate, logistics and tourism, which contains untapped potential in attracting visitors from Islamic countries to visit holy shrines. UAE companies already present in Uzbekistan include Masdar, the International Petroleum Investment Company, Emaar Industries and Investments and Mubadala.
Qatar Rail awards QAR 30 billion ‘Design & Build’ contracts for Phase 1 of the Doha Metro Qatar Railways (Qatar Rail), the company overseeing the construction of the much-anticipated integrated railway network, is awarded four ‘Design & Build’ Contracts for Phase 1 of the Doha Metro Project for a total of approximately QAR 30 billion. The awarding of these contracts for Phase 1 of the Doha Metro marks a key milestone in the development of Qatar Rail Development Programme, with the construction of Phase 1 scheduled to begin later this year, and expected to be completed by 2019. The contracts relate to Phase 1, and comprise the following underground sections: • Red Line North (RLN) • Red Line South (RLS) • Green Line (GRN) • Major Stations (MS)
Updates REGIONAL TALK
Bahrain to host the GCC- Asian Trade and Investment conference The Bahrain Chamber of Commerce and Industry (BCCI) has welcomed the kingdom’s hosting of the GCC-Asian Trade and Investment Conference and its accompanying exhibition in October, 2013. In this regard, BCCI Chairman Dr. Issam Abdulla Fakhro said that the event
reflected the kingdom’s success in hosting and organising mega international functions, and its leading role in enhancing GCC-Asian cooperation in all fields, especially the economic and trade ones, calling for the need to take advantage of such events to boost and consolidate economic collaboration and
facilitate trade exchange between the two sides, particularly in the investment and economic fields. Dr. Fakhro said that organising the conference and exhibition in Bahrain will play a key role in consolidating Bahrain’s relations with Asian
countries, its economic partners, opening up new horizons for the Bahraini private sector to gain access to Asian markets. It will also push forward the efforts made by GCC and Asian countries towards free trade exchange between them, facilitate bilateral trade, exchange information and data, develop a mechanism to settle trade disputes and exchange views vis-à-vis economic activities.
Emirates SkyCargo to increase cargo capacity to the Philippines Emirates SkyCargo, the freight division of Emirates, is set to increase its cargo capacity to the Philippines, when the airline begins daily non-stop flights to Clark International Airport on October 1st 2013. With the new daily flight to Clark International, Emirates SkyCargo will be able to provide more than 160 tonnes of
additional cargo hold capacity each way per week, further supporting Philippine exports of perishables, such as dairy products, fruit and vegetables, meat, seafood and electrical and electronic equipment, and it’s imports of textiles, apparel, plants, flowers and chemical products.
GCC-China's rising trade value The “GCC-China trade was at USD 92.5 billion in 2010 and has reached USD 155 billion in 2012. Exports from GCC to China in 2012 were USD 101 billion and imports by GCC from China in 2012 were USD 54 billion. Saudi Arabia was the major contributor in GCC trade followed up by UAE and Oman,” said Dr. R Seetharaman, Group CEO, Doha Bank, speaking at a knowledge
sharing seminar organised by Doha Bank on “Opportunities in Qatar and the GCC” held in Qatar recently. He said the trade between China and Saudi Arabia reached the highest level of USD 73.4 billion in 2012. The UAE is China’s largest export market in the Gulf – the bilateral trade between the two countries has reached more than USD 40 billion in 2012.
He further forecasted that GCC projects worth more than USD 350 billion are expected to be launched in 2013. Moreover, Chinese can further invest in UAE infrastructure construction projects of transportation, telecommunication and electricity. Kuwait Investment Authority (KIA) and Qatar holding are qualified foreign institutional investors (QFII) in China.
Palestine Business Council established The Dubai Chamber of Commerce and Industry has recently launched the Palestine Business Council for Dubai and Northern Emirates which is in line with the long felt need for boosting economic cooperation and enhancement of trade and commerce between the business communities of Dubai and Palestine. JULY-aug 2013
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Updates Global Watch
New South Wales – UAE build stronger ties
The Honourable Andrew Stoner MP (Deputy Premier, Minister for Trade and Investment, Regional Infrastructure and Services - New South Wales Government) recently visited the UAE to explore opportunities for further collaboration.
“I was delighted to visit the United Arab Emirates recently and meet government and business leaders and discuss how we can strengthen the relationship between the UAE and New South Wales (NSW),” H.E said. The UAE is Australia’s largest market in the Gulf, with excellent growth prospects. In 2011-12, total bilateral trade between NSW and the UAE was valued at AUD 687 million. This was an increase of 36 % on the previous year. Trade is growing and there are more opportunities. The NSW Government wants to build the bilateral relationship. This is being facilitated by Mr Moin Anwar, NSW Trade and Investment Commissioner to the Middle East, based in Abu Dhabi. There are a range of investment opportunities in New South Wales, in
AUD 687 million value of trade between NSW and the UAE in 2011-2012 ICC Open Market Index 2013 highlights protectionist tendencies Despite recurring pledges to roll back protectionist measures, the G8 and its larger sibling the G20 are failing to demonstrate global leadership on trade openness, according to the ICC Open Markets Index 2013. The biennial report, commissioned by the International Chamber of Commerce (ICC), indicates that only one G20 nation ranks among the world’s top 20 open trade markets. The 2013 index found
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that the average score across the 75 countries was 3.6, a slight improvement on 2011’s average score of 3.5. The two highest performing economies, and the only two ranked as excellent in terms of overall openness (scoring above 5.0), were Hong Kong and Singapore. Meanwhile the worst-performing economies (scoring below 2.0), were Uganda, Bangladesh, Sudan and Ethiopia.
particular, opportunities in infrastructure as the state embarks on a massive infrastructure renewal programme. Thus, the current investment in infrastructure in the Gulf Co-operation Council region – in rail, ports, airports and highways – has potential synergies with the requirements in NSW for infrastructure. H.E also pointed out that NSW can be a secure and reliable partner and supplier to the UAE in other sectors including financial services and food products. Doha Bank late last year opened a representative office in Sydney. It is the first GCC bank to establish a presence in Sydney. In his speech he highlighted that there are also investment opportunities in agribusiness, minerals and energy, tourism, hospitality and aviation. “We also welcome Emirati students to NSW and Australia. This will promote stronger research and development capabilities. Numbers are modest at the moment, but growing,” he concluded.
Eurozone posts trade EU- US discuss free surplusagreement despite export drop trade The Eurozone sharply increased its trade surplus in May, despite uncertainty hanging over the world economy, European Union data showed.The Eurozone posted a surplus of EUR 15.2 billion, despite a drop in exports on monthly and annual bases, the EU said. The Eurozone trade surplus, largely driven by Germany’s export performance, is one of the strong points as the zone struggles to emerge from its debt crisis, and it has underpinned the value of the Euro.
Updates Global Watch
EU files case against China at the WTO The European Union plans to lodge a complaint with the World Trade Organisation against Chinese duties on steel tubes used in power plants, according to EU sources, opening another front in a rapidly escalating trade conflict with Beijing. The move will allow the EU to join a related complaint filed by Japan against Chinese duties in December. The EU complaint would seek to overturn duties on exports to China of seamless stainless steel tubes made by firms such as Spain’s Tubacex S.A (TUBA.MC) and Germany’s Salzgitter A.G (SZGG.DE), the sources said.
Key logistics trends in life sciences sector Direct distribution to end consumers is among the key logistics implications and action needs in the life sciences sector for 2020 and beyond, according to a white paper compiled by global logistics provider DHL. One of the five key action opportunities for manufacturers is to build up their
Chinese RMB gives fight to the USD Chinese currency Renminbi or RMB is set to emerge as the anchoring currency of global economy in longer-term. As the world economy continue to change, the role of the USD will diminish and the RMB will improve, Simon Williams, Chief Economist for HSBC in Mena said. “Of course, the USD is still the most liquid currency. But this is a cliff phase for the Dollar and the Renminbi will be the anchoring currency of global economy,” Simon said. Customers in Qatar, as well as in the UAE, Bahrain, Kuwait and Lebanon are able to conduct RMB crossborder payments for settlement of trade transactions, and to place remunerative Term Deposits in RMB. Globally, the use of RMB has been increasing since 2009, when China launched a pilot programme to internationalise its currency by allowing the RMB to be used to settle crossborder trade. Since then, China’s trading partners have increasingly been able to use the RMB when paying for imports or receiving payments for exports.
own e-commerce operation, either by developing their own fulfillment capabilities or by distributing their products via a thirdparty platform. The study also points to an increase in the differentiation of supply chains. Mode of transportation, warehousing consolidation and
depth of distribution will need to be tailored in each country to the Life Sciences product category, differentiating high-value/specialty drugs and implants, innovative standard drugs and devices, generic drugs and frugal/low-tech devices OTCs, nutraceuticals and consumer medical devices.
US disputes Indian trade practices
A group of major American business organisations and advocacy groups launched a new alliance against what they allege as India’s “discriminatory” economic policies, including intellectual property issues, which they claim hurt US jobs and economy. The alliance alleged that over the last year, India has systematically discriminated against a wide range of innovative US products and exports in order to benefit India’s business and industrial
community at the expense of American jobs. These actions constitute a disturbing trend that puts at risk a growing bilateral trade relationship worth over USD 60 billion in 2012 alone, it said. In a cross-sector report comparing IP systems across the globe, ‘Measuring Momentum’, the GIPC found that India consistently ranked last, behind Brazil, China and Russia in promotion and enforcement of patents, copyrights, and trademarks.
JULY-aug 2013
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Community events calendar
Save the date!
We know that you are a busy trader with a demanding events diary. Therefore, we are providing you with a snapshot of exhibitions and conferences in the region and around the world, so you spend less time planning and more time attending.
Date
Event
Location
1-7
Ramadan and Eid Exhibition
Kuwait International Fairs Ground
19 - 22
FABEX Saudi Arabia
Riyadh International Exhibition Centre
Date
Event
Location
September
28 - 30
Green Middle East
Expo Centre Sharjah
29 - 31
NAJAH Education Exhibition - Abu Dhabi
Abu-Dhabi National Exhibition Center
Middle East Big Data Summit
Radisson Blue Hotel Kuwait
2-4
Food and Hotel Oman
Oman International Exhibition Centre
30 - 31
4
PCI Abu Dhabi
Beach Rotana Hotel
November
3-5
Gulf Glass
Dubai World Trade Centre
2-4
Food and Hotel Oman
Oman International Exhibition Centre
3-5
GulfSol
Dubai World Trade Centre
3-5
Inventions and Nanotech MiddleEast
Qatar National Convention Centre
10 - 12
Materials Handling and Logistics
Dubai International Exhibition Centre
2-3
Mubadarat Forum
Jeddah Centre For Forums and Events
16 - 18
The Big 5 Kuwait
Kuwait
4-7
Saudi Build
Riyadh International Exhibition Centre
Riyadh International Exhibition Centre
9 - 13
Irf World Meeting & Exhibition
Riyadh Intercontinental Hotel
Middle East International Motor Show
Dubai World Trade Centre
16 - 19
Saudi Agro-Food Industries
19 - 22
INFDEX
Doha Exhibition Centre
9 - 13
22 - 25
EPICT
Dammam- Dhahran International Exhibition
10 - 13
Abu Dhabi International Petroleum Exhibition and Conference
Abu Dhabi National Convention Centre
23 - 25
Power + Water Middle East
Abu Dhabi National Exhibition Centre
10 - 21
Real Estate Cruise
Kuwait City (TBA)
23 - 25
MedHealth and Wellness
Oman International Exhibition Centre
11 - 13
Airport Exchange
Qatar National Convention Centre
24 - 26
Paper Arabia
Dubai International Exhibition Centre
12 - 14
Real Estate Fair Qatar
Doha (TBA)
25 - 26
3rd Annual Iraq Airport, Aviation & Logistics Show
Baghdad International Airport
14 - 15
Jumeirah Beach Hotel
27 - 29
World Luxury Expo Abu Dhabu
Emirates Palace
Mena Forex Show, Managed Funds & Investment Opportunities
29 - 01/10
The Hotel Show
Dubai World Trade Centre
16 - 17
Real Estate Bahrain
Manama
30 - 02/10
Telecoms World Middle East
Jumeirah Beach Hotel
16 - 19
GITEX Saudi Arabia
Riyadh International Exhibition Centre
30 - 02/10
Iraq Mega Projects
Madinat Arena
16 - 19
Saudi Communications
Riyadh International Exhibition Centre
18 - 19
Real Estate Fair Saudi Arabia
Dammam
October 1-3
Private Label Middle East
Dubai World Trade Centre
17 - 21
DubaiAirshow
Dubai World Trade Centre
1-5
Middle East Watch & jewellery Show
Expo Centre Sharjah
17 - 19
The Speciality Food Festival
Dubai World Trade Centre
1 - 10
Gulf expo-Qatar
Gulf expo-Qatar
17 - 19
Seafex
Dubai World Trade Centre
1-4
Electrolight Qatar
Doha International Exhibition Centre
17 - 19
World Luxury Expo Doha
St. Regis Hotel Doha
7-9
Arabiashop
Dubai World Trade Centre
18 - 19
Gulf Aviation Training Event
Dubai World Trade Centre
7-9
Light Middle East
Dubai International Exhibition Centre
18 - 23
Kuwait Internationa Property Show
Kuwait International Fair Ground
7 - 10
Doha International Oil and Gas Exhibition
Doha Exhibition Centre
19 - 23
Jewellery Arabia
Bahrain International Exhibition & Convention Centre
8 - 10
Kuwait Oil and Gas Show
Kuwait International Fair Ground
20 - 21
Kuwait Drill Tech Conference and Exhibition
Hilton Kuwait Resort
8 - 10
Cityscape Global
Dubai International Exhibition Centre
23 - 25
Medhealth and Wellness
Oman International Exhibition Centre
8 - 10
Future Build
Dubai International Exhibition Centre
24 - 26
Itca Abu Dhabi
Abu Dhabi National Convention Centre
8 - 10
Future Cities
Dubai International Exhibition Centre
24 - 26
SIAL Middle East
Abu Dhabi National Convention Centre
8 - 10
Future Retail
Dubai International Exhibition Centre
25 - 28
CCFS- Chinese Commodities Fair Sharjah
Expo Centre Sharjah
20 - 24
GITEX technology Week
Dubai International Exhibition Centre
25 - 28
Gulf Maritime 2013
Expo Centre Sharjah
20 - 24
Infocomm MENA 2013
Dubai World Trade Centre
25 - 27
Saudi Arabia International Oil and Gas Exhibition
Dhahran International Exhibition Centre
27 - 29
Abu Dhabi Medical Congress & Expo.
Abu-Dhabi National Exhibition Center
25 - 28
Big 5 - Big 5 PMV - Middle East Concrete - FM
Dubai International Convention & Exhibition Centre
28 - 29
MENA Mining Congress
Dubai World Trade Centre
25 - 28
Facilities Management Expo
Dubai World Trade Centre
28 - 30
SPE Intelligent Energy
Dubai International Exhibition Centre
27 - 30
Riyadh Motor Show
Riyadh International Exhibition Centre
10
JULY-aug 2013
Get in touch! Would you like to list your event here? Or better still, list your detailed event profile? If yes, then please contact: aparna.arya@cpimediagroup.com
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Updates ABOUT TOWN
Look towards the future! “The future is not what it used to be”, was the opening statement given by H.E Faizer Mustapha, President’s Counsel, Deputy Minister, Investment Promotions Sri Lanka during his welcome address at the Invest Sri Lanka Investor Forum. We were there and bring to you some interesting highlights.
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he forum was organised by the Colombo Stock Exchange (CSE) in association with Bloomberg Data Services at the Ritz Carlton Hotel, Dubai International Financial Centre. The primary objective of the forum was to strengthen the commercial and investment relations between the United Arab Emirates and Sri Lanka by attracting high net worth investors, top business corporates and fund managers into Sri Lanka’s capital market. According to H.E Mustapha the future is very different from the past in Sri Lanka. The country is currently on a fast-track development when it comes to investment opportunities. He also expressed that though the incoming domestic investments in the country are doing good, it would still be better if they could gather more foreign investments as well. Dr. Sarath Amunugama, Senior Minister for International Monetary Corporation and Deputy Minister, Finance and Planning of Sri 12
JULY-aug 2013
Lanka also delivered his keynote address. He stated that this is the time for Asia and as a fast growing emerging economy Sri Lanka will play a key role in this evolution. Recovering from a 25-year old civil war, Sri Lanka’s capital market industry has witnessed a remarkable growth in just a short span. Dr. Amunugama stated that they have been recognised as a breakout nation with a tremendous potential for more growth considering their GDP. Over the last 12 months Sri Lanka’s market has grown by 36.49% and they have plans to increase it by three folds for the next 3-4 years. With the target GDP of USD 100 billion they expect an increase of 50% in capital market contribution. Sri Lanka is now known as one of the safest countries in Asia, not just in the physical sense but also financially. With its political stability, unique geographical location and investor friendly policies it is deemed as an
attractive and ideal investment location for various industries. Dr. Amunugama’s speech was followed by presentations by Dr. Nalaka Godahewa, Chairman, Securities and Exchange Commission Sri Lanka (SEC), Mr. Krishan Balendra, Chairman, Colombo Stock Exchange, Mr. Priyantha Fernando, Commission Member, SEC and Dr. Lakshman Jayaweera, Chairman, Board of Investments Sri Lanka. Their presentations covered details about Sri Lanka’s noteworthy economic growth and stability and different investment opportunities available in the country. The presentation highlighted data that proved how much Sri Lanka has improved over the previous years and how the CSE and SEC work hand in hand to facilitate FDI to the country. The investor forum, Invest Sri Lanka attracted over a hundred high net worth investors including representatives from CES, SEC, various financial institutions and stockbroker firms. Companies such as John Keells Holdings PLC, Commercial Bank of Ceylon PLC, Carson Cumberbatch PLC, Sampath Bank PLC, National Development Bank PLC, Hayleys PLC, Access Engineering PLC and People’s Leasing and Finance PLC were among the participants. At present, remittances from Sri Lankans working overseas contribute 30% to the county’s GDP and plays a big role in its economy. Tourism, infrastructure development, financial services, agribusiness and manufacturing were among the sectors that they wish to promote and develop. Overall, the goal of the forum was to generate more opportunities for investments in Sri Lanka. Attendees were encouraged to be a part of Sri Lanka’s emerging market.
TRADE TALK Logistics
Make it to the end! Perishable products are items that tend to lose life and quality much faster if required conditions are not maintained properly. Muhamad Ali Shah, Supply Chain Manager, Global Shipping and Logistics, gives his opinion on the logistics of perishable goods.
P
erishable items include, but are not limited to, fresh meat, sea food, fruits, confectionaries, medical supplies and so forth. However, non-perishable items are not time and temperature sensitive. The perishable goods logistics dates back to late 1700 when the British fishermen used ice to keep stock fresh while at sea. It was further realised strongly when France started importing frozen meat at mass scale from South America and Great Britain imported beef from Australia. Over the past 50 years logistical third party companies began emerging and instituting the modern methods for moving the commodities globally. Before that the cold chain was managed itself by the manufacturer. The value of cold chain in preserving the freshness of food started to 14
JUly-aug 2013
get recognised as more logistical companies started to appear. In today’s fast market, reliance on the cold chain has gained importance within the food industry. Movement of raw and final products relies heavily on controlled and unaccompanied transfer of shipments. With perishable supply chain growing ever more geographically diverse, the task of maintaining quality, security, freshness and economy has never been more difficult As more and more exports are happening around the globe, the freshness of food relies on the expertise of the logistics provider. The cold chain serves the function of keeping food fresh for extended periods and eliminating any doubts in the consumer’s mind over the quality of food product.
Customers have always been very sensitive to the supply of food products therefore there has always been a complex interconnected relationships between the food industry and logistics providers. Along with the freshness of perishable items, safety of food is also considered to be one of the prime compliances. It is considered to be the right time to invest an extra mile in improving the logistics of perishable items as the demand is increasing with growing population. The commitment of keeping a satisfied consumer requires delivery at an appropriate shelf life and with the proper routing through the chain. These are crucial factors for executing and maintaining competitive advantage. A highly organised and professional supply chain network is the most important factor in
transporting the perishable items especially food worldwide. The logistics of perishable items requires professional staff, dedicated team and equipment as well as deep knowledge of regulations in different countries. Poor handling and longer lead times result in damaging the perishable goods. The confidence of being able to ensure that shipment will remain within the required temperature limit, for extended period of time depends onto the type of container used and the refrigeration method. Keeping the transit time in mind, size of the shipment, the varying regional temperature play an important role in the selection of packaging required. It may range from small insulated boxes, dry ice, gel packs as well as containers up to 53 foot reefers with its own generators. It is hard to conclude that distance, logistics lead time is not the only challenge as other factors like weather conditions, political barriers, regulations and so forth also contribute to shortening the life of the product. Weather conditions are one of the major concerns when it comes to perishable logistics. Change in temperature is considered a great disadvantage when loading or offloading into different modes of transportations. Company’s operations use strategic techniques such as loading and offloading during different times in a day to protect especially from heat. Political uneasiness between two countries contributes towards impacting the logistics of perishable items. Unlike dry goods, time sensitive products cannot be left for a long time. It is highly advisable to optimise and select the routes to avoid any politically conflicted regions. Furthermore, local and regional regulations, such as bans on storing cargo with dry ice in small closed areas, or special provisions for transport of medical equipment and supplies, should be carefully followed by all cold chain participants and contributors. Health and safety in cold chain is an unavoidable area. This responsibility does not merely starts within the warehouse but from the start of the processing and movement of the food with in the chain. It is the legal and ethical responsibility of an individual or organisation to deliver healthy food to the consumers.
ABOUT Muhammed Ali Shah an Industrial Engineer holds Dual Master’s Degree in Lean Operations (Manufacturing / Supply Chain Management) and MBA in International Trade & Supply Chain Management from USA Muhammed specialises in today’s growing need of “Lean Technology” in improving processes and eliminating the non-value added from the system. With more than 10 years of strong manufacturing and supply chain experience, he has a proven track of translating ideas into action and leading cross functional teams. He is a certified Six Sigma specialist and an International Trade Professional CITP
Food travelling across the globe, experiences temperature and climatic variations. Improper packaging, handling and failure to maintain the standards can prove to be fatal sometimes. A slight negligence in health and safety can cause legal interferences and closures to the companies. It can only be achieved by proper auditing each and every supplier/vendor along adherence with the set standards. Food export through UAE ports is increasing for all GCC countries whether it is by road, sea or air. However there are still challenges in transporting the perishable items to the destination. The variation in temperature during the transit is the biggest challenge especially considering the road model. Mechanical breakdowns are very common where as immediate savior backups are unavailable. The increase in waiting time due to longer customs and inspection delays account for huge product damages. Though GCC and other Middle Eastern countries have trade treaties but some where there are challenges and resistance to the policies. The duty issues, documentation time as well as longer delays at the border are not very encouraging to the movement of perishable items. It is not to be forgotten that freshness is the most important factor when it comes to food. What is required is a strong governmental flexible systems to smoothen the flow of the products through regions and help increase the export. Consumption level of perishable foods in the world increases each year. The industry is demand-driven and, therefore, increases the
necessity for even more efficient cold chains in terms of reducing the time-to-market. It requires high problem-solving skills supported by technological means. If logistics providers want to stay on top of the cold chain game, they must continuously search for new technologies that will advance their operations and competitiveness. Besides the governments and authorities playing their roles, the logistics companies should adopt an approach to managing their supply chains by • Creating closer ties and communication with end to end partners in the chain • Taking benefits of well rooted , specialised third party transportation and logistics provider • Investing more on leading technologies increasing the traceability and visibility of the products • Continuously improving the process in reducing the lead times contributing towards the freshness of the perishable items.
Companies using more technical and adaptable approach are gaining benefits, ensuring the supply chain of the time sensitive products. The efficiency and reliability of temperature controlled logistics has reached a point which enables the food industry to take advantage of global seasonable variations, which means that during the cold season the southern hemisphere can easily export to the northern hemisphere while an opposite trade, generally of smaller scale, takes place during the summer. JULY-aug 2013
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TRADE TALK Logistics
E H T E TAK F F O D LOA
mponent of o c t n a t r o p . Cargo is an im no different is i a b u d y l f d an ivision at D o g r a any airline – C f o ssan, Head o milestones g r Mohamad Ha a c e h t t u s abo flydubai talk achieved. as the airline h
B
y establishing itself as a logistics hub for the Middle East region, Dubai has further increased its appeal for foreign investment. Companies working in the logistics field are drawn to the Emirate, thereby strengthening its position as a leading entity in the industry. Dubai has been a midway point for trade and travel between the East and West for centuries, with a vibrant merchant culture having developed into the burgeoning city we know today. The natural progression of society drove the necessity for developments in the transport industry, and modern equivalents of ancient trading routes – with cargo now taking to the air, as well as by sea – have turned the metropolis into a top choice logistics hub. It makes perfect sense, given the ideal location of the Emirate, which is enhanced by the accessibility of its infrastructure and processes, set up specifically to create a no fuss logistics zone. The natural evolution of Dubai’s status as a hub for cargo shipped both by sea and air. Given the well-established procedures already in place and Dubai International Airport’s considerable cargo handling 16
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experience, transporting cargo in and out of the city has become a matter of mere hours, as opposed to days. This, of course, is significant for traders dealing in timesensitive goods such as perishable items; faster transport between destinations opens up the potential for wider-spread markets and therefore further profitability. Growth is expected to occur in logistics on a regional level, but Dubai, in particular, stands out as a leader in the Middle East and North Africa. It is currently one of the largest re-export hubs in the world, handling approximately 70% of the Middle East’s air cargo traffic, according to Boeing, World Air Cargo Forecast 2010-2011. Shipments from Africa to Asia, as well as from Europe to Asia pass primarily through Dubai, making it the hub of choice for many international operators. Accompanying this growth is an increased level of expertise available on the ground, which is pivotal in attracting more cargo to be processed through Dubai’s logistics centres. This, in turn, is essential to driving growth in not only the industry, but in the emirate’s economy. The Dubai Strategic Plan (20072015) has a specific focus on transportation
and storage – and therefore on logistics – which have collectively been identified as a solid platform upon which to build future growth. According to the Ministry of Economy, last year Dubai’s economy grew by about 4% and this trend is set to continue in 2013. The contribution of the aviation sector to Dubai’s GDP is expected to increase from the current USD 22 billion to USD 45.4 billion in 2020. With almost a year of operating under its belt, the level of success we at flydubai Cargo have achieved as a relative newcomer is testament to the regional demand for simple, affordable and accessible transportation. Our global freight network quickly and conveniently covers points around the world. Despite only starting operations in January 2012, flydubai Cargo already boasts
an impressive list of destinations, allowing goods to be transported across the GCC, Middle East, Southeast Europe, Russia and Ukraine, Central Asia, North and East Africa. Interline agreements further strengthen our capabilities by allowing us to expand beyond the reach of flydubai’s passenger network. This has extended export potential for many previously underserved countries, underpinning Dubai’s position as a logistics hub. For example, since the launch of our global network, manufacturers in Serbia are now exporting specialist sporting goods and spare parts to Australia, through Dubai. In addition to providing direct routes for previously underserved countries, our ontime record and rapid transfer times has opened up greater potential to transport perishable goods. Exporters from the Indian Subcontinent and Commonwealth of Independent States (CIS) now frequently send goods such as pharmaceuticals, fruits, vegetables and flowers through Dubai with
ABOUT Mohamed Hassan is Head of flydubai Cargo. He joined the airline in July 2010 to set up the department ahead of its launch in January last year. A UAE National, Mohamed gained extensive air cargo experience, with Emirates SkyCargo prior to joining flydubai. During this time he was presented with the award for Best UAE National Trainee of the Diploma Graduates’ Programme in 2007 by His Highness Sheikh Ahmed bin Saeed Al Maktoum. Mohamed is a graduate of the Higher Colleges of Technology in the UAE.
Even the eight-hour window for shipments moving between interline partners shows a competitive advantage. In opening up further trading avenues by providing exporters with rapid and reliable links between countries, we are supporting Dubai’s position as both a business and logistics hub. This also extends to the destinations we serve and it has been shown in the growth of overall traffic that
Growth is expected to occur in logistics on a regional level, but Dubai, in particular, stands out as a leader in the Middle East and North Africa. It is currently one of the largest re-export hubs in the world, handling approximately 70% of the Middle East’s air cargo traffic, according to Boeing, World Air Cargo Forecast 2010-2011. flydubai Cargo, while demand from Europe sees live tropical fish transported from Port Sudan. With many international and local companies based next door to Terminal 2 in the Dubai Airport Freezone, it is even more convenient for our customers to deliver their goods or re-export them without delay. The infrastructure at Dubai International Airport is also advantageous as it allows goods to be rapidly transferred between flights, allowing them to reach their destination in the shortest time. Shipments can be transferred from one flydubai flight to another in as little as an hour from arrival time in Dubai.
flydubai has had a positive impact in many of its markets. With several flights a day to many destinations including Doha and Kuwait, our customers have the ability to choose from a number of convenient flight options, thereby delivering the optimum in flexibility to meet the needs of their trade partners. Ever improving upon our existing scope, flydubai Cargo is expanding in order to bring our service to a broader section of the trading community. In November 2012, for example, we started cargo operations out of Kuwait, where demand had long been held to transport personal effects to the
Subcontinent plus courier items to the UAE. Following the example set by the airline’s commercial passenger operation, which was launched in June 2009 and has grown rapidly to cover more than 50 destinations and 28 aircraft, we are now working to develop services to meet the growing demand for goods transportation. Since the start of our operations to Belgrade, we have seen the volume of cargo carried increase by 30% in just two months. Sports equipment and spare parts are among the most frequently carried items. We expect to see this figure increase further in the coming months as more food products are converted to air transport offering consumers a greater variety of food items with a longer shelf life. Furthermore, we have invested in a number of electronic Cargo systems which enables all our customers to have free access to realtime online shipping and tracking of their consignments. Also, we only use electronic air waybills and Dubai have a fully automated warehouse storage facility and retrieval system with real time information to further enhance our operation and transit times. That we have been capable of achieving so much in such a short time is testament to both the environment in which we operate plus the dedication of the team. There is no doubt that Dubai is achieving its aim of being a world logistics hub. We will always support this goal through expanding our services of providing accessible and most of all, affordable, ways to transport goods across the region and beyond. JULY-aug 2013
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TRADE TALK Free zones
The fast-track free zone
Businesses are thriving in the UAE as international companies recognise that the country is an ideal gateway from which to access the rapidly developing emerging markets of Middle East and Africa. Peter J. Fort, CEO of Ras al Khaimah Free Trade Zone (RAK FTZ) explains the rationale for starting a business in the country’s fastest growing free zone.
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ith a 13-year pedigree as the ‘home of business’ in the United Arab Emirates, and with 7,000 registered companies representing 106 countries spread across our four business parks, RAK FTZ’s track record speaks for itself as does our growing roster of accolades and awards. We understand that setting up a business, especially in a foreign country, can be both intimidating and, often, time consuming. And this is where RAK FTZ does things differently. We believe that by going the extra mile to fast track the bureaucratic process, we help 18
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eliminate unnecessary red tape, allowing you to get up and running – with minimal delay or loss of earnings, within as little as one week depending on the type of business you are setting up. While RAK FTZ offers the same operational advantages as other UAE based free zones, our competitively priced services for all types of business combined with strategically advantageous location and reputation as an accessible and dynamic commercial gateway to the emerging markets of Africa, the Middle East and the booming Asian economies, are a key draw for new partners.
The Emirate also has a well-planned and advanced infrastructure in place, which is being augmented by long term government investment, with additional road, rail, sea and air connectivity well past the blueprint stage. This will undoubtedly add further value to what is clearly an ultra-convenient location for business, with easy and quick access to the UAE’s current major logistical centres in Dubai, including less than one hour away from Dubai airport. Once you’ve made a decision to join our growing family of businesses, we guarantee a seamless experience. Our philosophy is
that access to information and two-way communication is the easiest way to make things happen, so our procedures are initiated with minimal red tape and administration requirements. We aim to be the preferred business partner for all of our clients. As a one-stop-shop for our clients, we offer assistance all the way from initial registration and the visa process to office set-up, human resources support, finance, and marketing services. Our global community of investors, each of whom has their own unique requirements, enjoys this attention to detail and personalised service. In 2012, investors from India topped the list of new registrations, followed by UK, Pakistan, Jordan, US, Turkey, Egypt, Germany, Canada and France. To support our international client base, we also have international liaison offices located in India, Germany, Turkey and the USA. These offices act as an extension of the RAK FTZ service and can also help potential clients to start the registration process, without having to leave their home country. Additional support is provided by satellite office in Abu Dhabi and Dubai, and multilingual client service representatives who speak Arabic, English, German, Hindi, Korean and Russian, among other languages. We are also regular exhibitors at important conference and trade exhibition events. Our continued success can be attributed, in part, to our ongoing commitment to reach out to existing and potential clients at every opportunity, wherever they may be resident. Also In addition, we participate in high profile UAE Ministry of Foreign Trade-organised visits, attend international events, and run an annual calendar road show series, which takes the RAK FTZ message to other countries. The benefits of setting up in Ras Al Khaimah are numerous, and RAK FTZ registered companies enjoy a number of advantages, with 100% ownership and 100% tax free status topping the list. These benefits apply to all types of business from SMEs to large corporate clients. New business start-ups and SMEs can opt for our affordable Flexi Facilities package with access to shared networked stations and offices supported by the latest IT and
ABOUT Peter J. Fort is Chief Executive Officer of the Ras Al Khaimah Free Trade Zone Authority (RAK FTZ) and the Senior Economic Advisor to the Government of the Emirate of Ras Al Khaimah (RAK) in the United Arab Emirates (UAE). In his dual role, Mr. Fort is responsible for the ongoing growth of the free zone and the channeling of investments into the emirate, reinforcing RAK’s reputation on the regional business and investment landscape.
administration services, including dedicated phone numbers, private email addresses and a postal address. This popular option is an extremely costeffective business solution, and is ideal for professionals who are looking to test the market before committing more resources, and investment, with a package upgrade to Executive Office level, or a tailor-made solution, the next step. For medium-sized companies, the Executive Office packages include UAE residence visas, competitively priced office space for lease, and an advanced IT infrastructure, as well as all other admin support services. Clients also have access to RAK FTZ business centre support and a 24/7 messaging service. Popular with commercial operations, consultancies and general trading entities, which form 80% of our client base. In 2012, 63% of our new registrations were commercial and 27% were consulting, 9% were general trading and 1% was industrial. Within our four business parks, we also have areas set aside exclusively for warehousing and offering land for lease at the Industrial and Technology Parks. These are made available for the storage, light manufacturing and assembly of goods on a year-round basis, and include round the clock security and staff accommodation options. Varying tracts of land designated for industrial, logistics and service industry purposes are available for long and shortterm lease, with the same fast track set-up process applied. Accessibility is also key to the success of these two business parks, with both sites located close to the Emirate’s airport and seaports, customs department and government administration offices.
This year, we are very optimistic in achieving more growth in both our new registration and renewal statistics, and in turn, helping grow Ras Al Khaimah’s GDP. We are very fortunate to be operating under the leadership of Sheikh Ahmad Saqer Mohamed Al Qasemi, RAK FTZ Chairman, who is spearheading the upward trajectory and long term growth goals of the free zone Our future growth is also contingent upon our commitment to ensuring that we continue to deliver on our planned series of strategic initiatives, whether it is developing new customised and competitive packages or adding even more value by enhancing our menu of support services. This is enhanced by in-depth analysis of the regional and global trends impacting our area of business, and the economic health of the UAE. Population growth and increased investor confidence is having a positive impact on the retail and bustling tourism sectors with new hotels opening in the Emirate like Waldorf Astoria and Rixos hotels. As a result, we expect food and high-end products to increase this year too, which will potentially translate into demand for more commercial and trade licences. We also see more housing developments on the radar such as the Minal Al Arab and the Marjan Island development. And this is reflected in our growth figures, which have risen incrementally over the last 13 years. In 2012, we had 2,297 new company registrations, an increase of almost 13% against 2011 figures. In the first five months of 2013 alone, we have recorded 1,008 new company registrations, up by almost 71% on the same period last year and are looking ahead to an equally positive second half of the year. JULY-aug 2013
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TRADE TALK How to
Never give up
Experience shows that even the most well prepared export plans can fail in assisting a company to enter and become successful in global markets. The question that arises from this is what should the next step be for a company. Dr Ashraf Mahate, Head, Market Intelligence, DED, tells us what to do if your export strategy fails.
in the future to know what can work. It is important to realise that few people have this information which would not have been obtained had the entrepreneur not tried to establish a presence in an overseas market and should be a source of confidence to start again in the same or possibly a new market. In fact, some of the most famous business leaders in history failed on numerous occasions before becoming successful global businesses. Would we have had Microsoft if Bill Gates had given up after his first business Traf-O-Data failed or Ford cars if Henry Ford did not set up his fifth business after the first four failed.
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he most common response for firms and especially SMEs is to avoid the global markets altogether and concentrate only on their domestic client base. Such a defeatist approach is not sustainable in the longer term because even though a firm may not venture overseas there is no reason why foreign firms cannot enter the domestic market. Also, what the last few years have shown is that companies need to diversify their customer base so that any weakness in one country does 20
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not significant impact their business. However, failure need not be a failure and can actually be a step towards success. Despite the dark and miserable realities of failure it should not be a hindrance to re-starting and using this experience productively as a learning exercise. A failed export attempt actually gives the entrepreneur real life experience and knowledge of what does not work in a foreign country so that they are in a better position
How to deal with failure? The manner in which a failure is dealt with depends on how an entrepreneur wishes to perceive it. The entrepreneur can decide that that is the end and totally give up exporting altogether. Alternatively, the entrepreneur can choose to perceive the experience of failure into a powerful tool that allows them to identify new opportunities and possibilities. To many this may seem odd as we are conditioned by our society and cultural prejudices to perceive business failure as a negative experience that has no merit or value. The reality of the situation is that it is a personal choice as to how the entrepreneur reacts to failure. So how can an entrepreneur “fail –up�, which means learn from the experience of an exporting failure and start the next attempt that may become successful. First, the entrepreneur needs to detach himself from the failure while
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TRADE TALK How to
taking responsibility for his actions. There is little point in feeling sorry for oneself or believing that failure took place due some bad luck. Instead the entrepreneur should feel proud because they were part of a very small minority of the population that was brave enough to take the risk to establish a foreign presence. Estimates show that of the half a million or so registered business in the United Arab Emirates less than 1% carry out any form of exporting. Actual exporting is a pro-active approach that differs from selling to foreigners once they are in the UAE. At the same time it’s important not to blame anyone and to realise that failure came about as a result of certain decisions which were incorrect at the time. What is more important is for the entrepreneur to study the reasons for the failure. For instance, Henry Ford found that his first company the Detroit Automobile Company sold cars that were of a poor quality and were hugely overpriced. As a result of which four attempts later he developed a car that was affordable and very well built and continues to be a global firm to this day. This knowledge would not have come about unless Henry Ford went back to his customers, dealers, and so on to ask them what was wrong with his cars and why they were not as successful as the competitors. Just as one needs to get back onto a bicycle after falling off the same is true with exporting after a failure. However, on the next attempt the business should be a lot more knowledgeable and skilled compared to the previous attempt. Despite the high prevalence of exporting failure there are essentially only a handful of reasons that can explain the causes. Therefore, the entrepreneur should use his experience and knowledge of failure to better tackle them in the next venture. The most common reason for business failure is an inadequate level of planning. Export success is not only about hard work but knowing where to go and how to do things? Therefore, an export plan needs to be realistic and based on accurate, current information with reasonable projections for the future. In this regard trade promotion agencies such as Dubai Exports can play a vital role as they have access to data sources as well as sector reports. 22
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ABOUT Dr. Mahate received his doctorate from Cass City University Business School in London (UK). He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institute of Education (University of London). He is a member of the Chartered Institute of Managers (UK) and a Member of the Institute of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS). He can be reached at ashraf.mahate@dedc.gov.ae.
The second reason for export failure is poor the exporter to concentrate on his core activity. management and leadership. A successful Another reason for lack of capital is that the exporter needs to understand that he cannot entrepreneur over-expands the business do everything by himself and will need to hire more quickly than is prudent. In the modern staff and even enter into partnerships. Internet age a website is the minimum online presence that a company needs to be able to do SMEs by their very nature are resource business. If a company does not have a website restrained and this is more so the case when it comes to capital. Therefore, it’s no surprise then it is losing out on potential business that that one of the most common reasons for it can carry out. Ideally, the website needs to be produced professionally containing up to date export failure is lack of sufficient working information that is easy to navigate – a website capital. More often than not entrepreneurs underestimate their requirements for capital should be truthful but make the company look largely in the belief that they will be paid good. In time the company can expand the on time allowing them to in turn pay their website so that it can actually be an additional own suppliers. However, in reality accounts distribution channel and source of income. A receivable is a problem especially in foreign company now needs to have a social media presence strategy that includes how it will markets where cultural and even banking factors may prolong payment. Exporters have market itself to potential customers as well two solutions first, an entrepreneur can refuse as connect with them on a regular manner. If to give credit but then this excludes a large social media is used effectively it can be a great marketing tool as well as feedback mechanism proportion of the customer base. on how well the company is doing and where Second, the entrepreneur can plan improvements can be made. ahead so that realistic assumptions can be The final and perhaps the most important made regarding accounts receivable. More ingredient to export success is the importantly, through adequate planning the entrepreneur can take risk mitigating action, entrepreneur him or herself who learns from failure and uses it as a step towards climbing such as requiring the customer to open a to success and not as an excuse to hide letter of credit, factoring which allows him to receive payment from a third party. If away and give up any hope of exporting. An factoring without recourse is obtained then academic research has shown that successful the entrepreneur is also protected against entrepreneurs tend to be of average ability any bad debts as well as the need to collect and intelligence. The differentiating factor between successful and non-successful from customers. Then there is export credit insurance which is readily available which entrepreneurs is that the former are open to reimburses the exporter in the event that the new ideas and are willing to learn whatever it customer does not pay. takes to succeed. As Donald Trump once said, “sheer persistence is the difference between Customer non/late payment risks can be transferred to a third party company allowing success and failure.”
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TRADE TALK Industry watch
Securing your future! There is no denying that energy and food security are two important priorities for the UAE. To know more about how the UAE has been working with other countries, Aparna Shivpuri Arya caught up with Dr. Leanne Piggott, Director of the Business Programmes Unit at The University of Sydney Business School and Dean of the Faculty of Engineering and Information Technologies, Professor Archie Johnston. 24
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ABOUT Dr Leanne Piggott is a graduate of the University of Oxford and the University of Sydney. She is the Director of the Business Programs Unit at The University of Sydney Business School where she teaches political risk management and related topics on the global business environment. Leanne’s research interests focus on Middle East security, specifically on the energy-food-water nexus.
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started my discussion with Dr. Leanne Piggott by asking her how the security of global energy markets has been impacted by the Arab Spring and this led to some interesting reflections. According to Dr. Leanne, when countries talk about energy security, they’re really talking about oil supply security. “The main source of energy used in the global economy today is fossil fuels — coal, gas, and oil. As for coal, many countries have their own domestic supply, and if they don’t, it’s readily available on the global market. Australia, for example, is a major energy exporter, providing enormous quantities of coal to
the developing economies in the Asia Pacific region including China and India.” As for gas markets, Dr. Leanne continued, there’s an important revolution underway that’s really changing the fundamentals of supply and demand. The United States is at the centre of this seismic shift. Less than a decade ago, the United States was on the verge of becoming a net importer of gas. However, with the development of hydraulic fracturing technology (the fracturing of shale rock by a pressurised liquid), large reserves of shale gas that were previously uneconomical to access have now come on to the US domestic market, so much so that the US is now set to become a major gas net exporter. Fracking, as the technology is commonly known, has enabled other countries also to access previously untapped shale gas within their own borders with the cumulative effect that there is increasingly a security of gas supplies on the global market. “Oil is a different story,” explained Leanne. Whilst there is plenty of oil to be pumped and sold on the global market, a number of the major oil producers are located in parts of the world that are susceptible to political instability, which include, importantly, the Middle East. Conflict in the region has on occasion led to supply constraints that have caused price spikes. And when there have been oil price spikes, recessions have followed. This is because of the important role that oil plays in the economy, in particular, the fuel that keeps our transportation on the roads and in the
air. When the price of transportation fuel goes up, the whole economy suffers. This is why America has had such a key interest and at times military presence in the Middle East. As the Gulf region is the largest supplier of oil to the global market, stability in this part of the world is critical to the global oil price. Leanne pointed out that it’s important to remember that the oil price is set by the global market, not by individual suppliers. So it does not matter if the US has more or less of its own oil, the price paid for it is determined globally. The factors that impact the global price are therefore of great importance to any country that relies on importing oil to meet its consumption needs. Whilst the US remains the largest oil consumer, China recently surpassed the US as the number one importer of oil. “That is why events in the Middle East, including the Arab Spring, are of great interest to the developed and developing world alike. And this is set to remain for as long as transportation remains dependent on oil as its source of fuel,” Leanne observed. Moving on to what countries can do to secure their energy, or oil security, Dr. Leanne said, “The only way that that’s going to happen is through diversifying and eventually changing the fuel used in the transport sector. This might include gas, electricity, or bio-fuels. But it is most important that bio-fuels are not made from crops that are also used for food.” This latter point shifted our conversation to another important topic – food security, a JULY-aug 2013
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TRADE TALK Industry watch
very important issue for the GCC countries, Dr. Leanne noted. This is because of the ABOUT lack of sufficient water supply, the most As well as being Dean of the Faculty of Engineering and IT at the University of Sydney, Professor Archie Johnston is important component for growing food. a Fellow of Australian Academy of Technological Sciences “As a result, the GCC countries are highly and Engineering and Chair of its Education Forum. He dependent on food imports (approximately is a Fellow of Engineers Australia, the Institution of Civil 60%). When you’re dependent on imports Engineers (London) and the Australian Institute of Company Directors. He is an Advisor to the Reliance Group of India, you are vulnerable to systemic risks in the Advisory Professor to Shanghai Jiao Tong University and global market. Global food markets are Advisor to the Associated Chambers of Commerce and susceptible to disruptions, such as dramatic Industry of India. He has consistently been cited as one of changes in the weather including drought one of Australia’s 100 most influential engineers. or floods. One bad flood can dramatically impact on a country’s food production. So, too, can a drought, which might result in a food security, renewable energy, Islamic food exporting country placing restrictions finance, robotics, and, women in leadership on exports, which in turn impacts on other prompted a follow up visit to the UAE by a countries along the supply chain.” University of Sydney delegation. Prof. Johnston, further added, “The forum Dr. Leanne spoke about the work being was a timely opportunity to showcase the done by her university. “We are looking renewable energy and robotics research at how the University of Sydney might being done at the University of Sydney that is collaborate with universities and research of relevance to the UAE strategic directions institutes in the UAE and other Gulf states for renewable energy.” to address these issues. One example is to develop mechanisms for effective global risk Research collaborations between the analysis of food markets through analysing University of Sydney and the Masdar the entire system that affects a particular Institute of Science and Technology have commenced. “A chemical engineering project domestic market. lead by the University’s Dr Ali Abbas has “We are also looking at what might be started and this project is expected to done in the UAE to increase the yield of existing agriculture, but in a manner that appears to be considerable opportunity for expand into the areas of clean energy, smart the UAE industry to engage with Australian (electrical power) grids, cyber security does not increase but in fact decreases the use of water. One mechanism to do this, tertiary institutions in a number of key associated with infrastructure, as well as areas such as, renewable and clean energy desalination plant related research,” stated that has had excellent results elsewhere, is through a closed agriculture systems using as well as robotics. Of particular value Prof. Johnston. hydroponics,” remarked Dr. Leanne. Prof. Johnston highlighted that there and interest are industry partners with “A related area of our research is experience or interests in energy storage are opportunities to collaborate with aquaponics, which combines fish breeding using flow batteries and supercapacitors, not only local UAE universities but also and plant growing within the same system, energy systems analysis and management, the universities of Saudi Arabia, such as where the only water that leaves the distributed renewable energy systems, University of Science and Technology hothouse is that in the plants or the fish “waste-to-energy” and “waste-to-product” (KAUST) as well as with Saudi industry. that are produced and sold,” explained As the UAE moves forward to realise the technologies.” Dr. Leanne. She noted that there are UAE Vision 2021, Abu Dhabi Economic Australia has commenced collaborative companies in the Gulf region that are research in the field of renewable energy Vision 2030 and most importantly the already using some of these technologies. with researchers throughout the Middle UAE Expo bid 2020, (in particular, the The University of Sydney would like to work East. A successful forum held last year, the 2020 Expo theme of ‘Connecting minds, with them to see how each might mutually “Australia-Gulf engagement: Future directions, Creating the future’), there is significant opportunities and challenges” forum was benefit from each other’s work. value in collaborative research associated We came to the end of our talk at this point attended by as many as one hundred and with food, energy, and water security to and then I had the opportunity to catch up seventy delegates. promote best practice in food production with Professor Archie Johnston who echoed through efficient water (including recycled) These successful discussions which also Dr. Leanne’s sentiment and stated, “There and energy (including renewable) use. touched on the areas of health, water and 26
JULY-aug 2013
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TRADE TALK Finance
Understanding Islamic finance Islamic finance has been gaining prominence in this region and globally in the last few years. In the first of a multiseries, Ehsaan Uddin Ahmed, Head of Global Transaction Services and SME, Noor Islamic Bank, endeavours to explain what is Islamic finance, how does it work and its impact on the trading community.
I
n my business interaction with several people, I find that the prohibition of interest is the most visible characteristic of Islamic finance that most recognise. Even then, there are more questions in their minds than answers, such as: How does Islamic finance work and how is it different from the conventional stream of finance? What are the current and future trends in Islamic finance? And, most importantly, why do we need to give it another look? To answer these questions, we will take a brief look at the origins of Islamic finance, the main principles it rests on, and the factors for its growing relevance in the wider financial scheme of things. It will set the context for succeeding instalments of the series, which will take a deeper look into aspects such as the benefits of Islamic finance, including takaful, for the region’s export-import trading community. The principles of Islamic finance The mosaic of principles that forms the framework of Islamic finance originates with the Prophet Mohammed (Peace Be Upon Him) and his inspired teachings over 14 centuries ago. Incidentally, the Prophet 28
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(Peace Be Upon Him) was a businessman himself, serving as a trader for Khadija (May Allah be pleased with her) who later became his wife. The Shari’a acknowledges both the value of industriousness and the power of a progressive economy towards fulfilling the valid aspirations of the society. Thus, contrary to certain misconceptions, the Shari’a grants ample latitude to conduct business and trade. Yet, it reminds us of our paramount obligation to God and fellowmen, by remaining true to all that is halal – as embodied in the principles of righteousness, justice and fairness. Let us now have a quick look at these principles. For Muslims, the prohibition of interest – riba – is an implicit command that embraces several moral obligations, such as avoidance of greed and exploitation and the protection of the needy. This would help in the more equitable distribution of wealth among the community. Violating the principle of riba is considered a gross violation of the faith.
However, the spirit of the ‘middle path’ infuses riba with practical balance that serves to protect as well as deliver profit. Thus, if I borrowed money from my friend, I would be obligated to pay back nothing more than the principal. If, however, I invested in his business enterprise, then I would be entitled to a profit for the risk I took of sharing any resulting losses. The principle of riba is connected to another fundamental premise that requires money to be treated as a medium of exchange, and not as a commodity in itself that can be traded for profit. On the other hand, the Shari’a deems as valid only such financial transactions that are backed by tangible, physical assets. Money by itself is never treated as a tradable commodity in Shari’a compliant finance. Another associated principle is that of gharar or relative freedom from uncertainty. The principle prohibits any business enterprise or transaction that is fraught with excessive
risk and speculation. The rationale extends to any business situation where the total risk involved far outweighs the sum benefit. To clarify, the Shari’a does not disallow every business that carries a risk quotient – indeed, risk bearing and sharing are an inherent part of doing business, and the Shari’a model, in fact, prescribes that profits should be measured in direct proportion to an undertaking’s risk burden. Gharar thus concerns itself with excluding such business scenarios where the outcome rests in the realm of unreasonable uncertainty. This could be attributed to wilful deceit by a party to the transaction, or to the heavy unpredictability surrounding a venture – qualifying it as a gamble – or maysir. Gharar, therefore, encourages fairness and transparency in business, while avoiding the pitfalls of excessive risk. The growing relevance of Islamic finance According to some estimates, the global banking industry was worth USD 94.4 trillion in 2009. Of this, the share of Islamic banks was a little above 1%. This is not surprising, as the Islamic finance industry germinated only in the 1960s. Since then, and to its credit, the Islamic banking system has grown worldwide, with assets to the tune of USD1.3 trillion in 2011. The sector is also poised for growth to USD 2 trillion by 2014, as per a report by Ernst & Young. Takaful contributed just 0.21% to the global insurance premium, which was worth USD 4.3 trillion in 2009. Islamic sukuk made up 0.12% of the USD 82.2 trillion global bond market.
ABOUT Ehsaan Uddin Ahmed is Global Transaction Services and SME Head at Noor Islamic Bank PJSC, based in Dubai, UAE. He has 21 years of diverse professional experience at country and regional levels with various organisations. He has a MBA in Finance from Imperial College London where he was a Britannia Scholar. He was also awarded the gold medal for top position in BSc (Hons) Mechanical Engineering from University of Engineering and Technology Lahore, Pakistan.
perspective, Islamic finance lends itself readily to over 49 of the world’s economies that are predominantly Muslim. Giving us a glimpse of the vast potential, the combined GDP of core Islamic finance markets such as Saudi Arabia, Malaysia, Qatar, Turkey and Indonesia touched USD 5 trillion in 2011, as per the Ernst & Young report. The march of Islamic finance even among Muslim-dominated countries is not even. On the surface, this could be seen as a drawback, but in fact represents an unexplored opportunity. For example, even while the Middle East and North Africa (MENA) is home to just 20% of the world’s Muslim population, it made up 81.2% of Islamic finance assets globally in 2009 valued at USD 416 billion. Within the MENA region, Islamic finance penetration in MENA leans heavily towards the GCC (which contributed 42.9% to the global Islamic finance industry), while markets such as Algeria, Libya, Morocco and Tunisia – countries whose political landscapes have been favourably altered by the Arab Spring from the industry’s
The principle of riba is connected to another fundamental premise that requires money to be treated as a medium of exchange, and not as a commodity in itself that can be traded for profit. The power of demographics, coupled with factors such as strong liquidity and regulatory frameworks – is key to the industry’s growth prospects. Shari’a compliant finance appeals to the collective conscience of 1.6 billion Muslims worldwide – or about 23.4% of the world population. Seen from another
perspective – are poised for growth. Ernst & Young forecasts that as new geographies open up, the MENA region could more than double to reach USD 990 billion by 2015. Today many financial institutions, even in the Western world, offer financial services and products in accordance with Islamic
finance. The testimony to the universal power of ethics-based banking, and interestingly representative of a huge customer-base, lies in the fact that a significant part of its clients are non-Muslims. Many people scarred by the effects of the global financial crisis are looking for an alternative financial system that they can trust. It hardly surprises that a majority are finding that the Shari’a model presents them with a wide and growing array of solutions. The inherent protective strength of the Shari’a based finance system, even though it is nascent and evolving, helped it weather the global financial crisis. While most Islamic economic institutions were impacted, they were insulated in greater measure, and thus were in a position to bounce back into profitability sooner. For example, Shari’a based banks are barred from resorting to practices such as excessive speculation and the unsustainable leveraging of assets. The Islamic financial model also looks askance upon measures undertaken by certain economies to print and circulate trillions of Dollars’ worth of paper money as part of a ‘remedy’ to prop up sagging economies, when underlying assets to support such a printing spree simply are not there. The Shari’a way ensures that any economic progress is backed by corresponding value that is created. In the final tally, the Islamic model does not seek to replace the conventional financial one. The former primarily seeks to satisfy the faith-based financial needs of almost a quarter of the world’s population. While doing so, Islamic finance continues to work with its conventional peers, acting as a bridge that can mobilise the resources of nations, thereby contributing towards the creation of a more efficient world economy. JULY-aug 2013
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TRADE TALK Finance
Taking the next step – Islamic Finance Continuing with our discussions on Islamic finance, we bring you a feature from Frost & Sullivan, which talks about the status of Islamic finance in the GCC countries.
for Islamic Sukuks are estimated to touch USD 950 billion by 2017. According to Islamic Wealth Management Report, the Islamic funds’ assets also grew to USD 40.9 billion in 2011, recording a 7.4% growth during the period. Also, the number of funds grew to 715, an increase of 3.9% from the 688 funds in 2010. Advantages of Islamic Finance Islamic finance incorporates strict risk management practices and ensures controlled or minimal risk exposure for the Islamic finance institutions. This is because Shariah laws prohibit speculation and excessive trading. It also ensures reasonable pricing and equal bargaining power for all parties involved.
What issues to be aware of while dealing with Islamic Finance?
THE BEGINNING The origin of Islamic finance can be traced back to the Ottoman Empire in the Middle Ages but it was not until the 1960s and 1970s that a unique system based on Islamic principles was developed to address modern economic and financial market issues. The first designated Shariah- compliant mutual fund, the Al Ahli International Trade Fund, was launched by the National Commercial Bank in 1987. The first Islamic bank was established in Egypt in 1964; however, the first bank that was explicitly based on Sharia principles was created by the Organisation of Islamic countries (OIC) in 1974. Thus, Islamic finance continued to spread throughout the 1980s and 90s and is one of the fastest growing sections in the financial services industry currently. According to Islamic Wealth Management Report, the Gulf Cooperative Council (GCC) accounts for around 80% of global Islamic assets 30
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which was estimated at USD 1.14 trillion by the end of 2011. Although this is a milestone in the Islamic finance industry, Islamic assets contribute just about 1% to the total world financial assets. Islamic finance industry has grown at a Compound Annual Growth Rate (CAGR) of 15-20% since 2000. The industry has its presence in over 75 countries and is expected to cater to a Muslim population of 2.5 billion across the world by 2020. The potential market size of Islamic assets is estimated at USD 1.8 trillion by end of 2013 and USD 4 trillion by 2020. The sukuk market was recorded at USD 178.2 billion and accounts for 14.3% of the total global Islamic finance assets in 2011. Primary market issuances recorded a year-on-year growth of 88.4% and reached USD 85.1 billion in the same year. South-East Asia accounted for 76.9% and the GCC accounted for 22.1% of sukuk issuance in 2011. Demand
• Shariah interpretations can vary in different countries and it is extremely important for any individual to properly understand the prevalent Shariah laws before investing in Islamic institutions • As Islamic finance’s legal and regulatory reforms are at an evolving stage in many countries, individuals must be prudent to understand the risk and return characteristics while investing in any innovative or new Islamic products. • Transaction costs involved during investments in Islamic assets are higher as there is no standard Shariah model that is followed across all countries or even institutions
How are the GCC countries doing?
Islamic finance is prevalent in all the GCC countries. However, it should be noted that Islamic finance has been implemented in both Muslim and non-Muslim nations at various levels. The implementation status in a few countries is as follows.
TRADE TALK Finance • Oman Oman did not give any Islamic Banking Licences due to political reasons until 2011. Oman reversed its stance on Islamic finance after witnessing a steady investment outflow to other GCC countries with well-established Islamic banking sectors. The decision was also taken partly to appease the 3 million Muslim population that had caused internal political upheaval against corruption in the country. Bank Nizwa was the first Islamic lender in Oman to be listed on Oman stock exchange in June 2012. Islamic finance Industry in Oman is estimated to have 8% -10% market share and touch USD 6 billion by 2015. • Kuwait Kuwait passed legislation on Islamic finance in 1976 with Kuwait Finance House as the only Islamic institution for 25 years. However, legislation was superseded by an amendment made to Central Bank law that allows Islamic finance institutions to operate alongside conventional banks with no special privileges. The law provides a framework for Islamic financial governance, especially articles 86, 87, 93 and 96, making it compulsory for every Islamic institution to have a Shariah board with a minimum of three members.
• Bahrain Islamic finance in Bahrain falls under the strictest regulations in comparison to any other GCC country. The country has national Shariah board with the central bank installing a detailed reporting framework which is customised to the concept of Islamic finance. The framework covers in detail about licencing requirements, capital adequacy, risk management, business conduct, and financial crime and disclosure requirements for both banking and insurance firms. • United Arab Emirates Neither the Dubai Financial services authority nor the Central Bank has Shariah compliant boards to govern Islamic finance institutions. However, the latest initiative by the government to set up a comprehensive platform of Islamic economy products and services is expected to strengthen the Islamic finance services in the region. 32
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ABOUT Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that addresses the global challenges and related growth opportunities that will make or break today’s market participants. For more than 50 years, they have been developing growth strategies for the global 1000, emerging businesses, the public sector and the investment community. For feedback/enquiries contact: deepshrii@frost.com/tanuc@frost.com
• Qatar Qatar also has written regulations on Islamic finance services. Qatar had implemented new regulations in August 2011 that prohibit conventional banks from allocating more than 10% of issued capital to Islamic banking operations. It also prohibits conventional banks from opening additional branches for Islamic banking. There is also a limit on mudaraba (profit-sharing) and musharaka (joint ventures) to 5% of a bank’s total Islamic operations. The regulations imply that banks may have to choose between Islamic banking and conventional banking and cannot operate in both windows. • Saudi Arabia Saudi Arabia also has two main regulatory bodies that supervise and manage the activities of the financial services sector – Saudi Arabian Monetary Agency (SAMA) and Capital Market Authority (CMA). Both the regulatory bodies do not have Shariah supervisory responsibilities. However, they have the authority to impose Islamic Finance standards introduced by international standard-setting organisations, such as the Islamic Financial Services Board. Saudi Arabia does not have specific rules tailored to Islamic financial services, like countries such as Bahrain or Malaysia.
What are the different tools in Islamic Finance?
• Musharaka – It is a joint venture in which profits are shared by the parties according to the original agreement whereas losses are shared according to the original investment. The arrangement is structured in a way that the lender receives his initial investment plus a return that is based on some benchmark and also a small margin. The customer manages the mushakara funds and may charge a nominal fee for providing his services.
• Mudaraba – This is similar to musharaka but is suited for private equity investments in which one party provides funds while the other provides expertise. Like mushuraka, profits are shared based on the original contract. However, losses are borne completely by the investor and the fund manager does not receive any compensation for his services. • Murabaha – This tool is used to provide trade finance or fund acquisition transactions. Murabaha transaction also involves installment or credit sale that is used for purchase of goods. The seller would disclose the actual costs and the profits he seeks can be demanded as a lump sum amount or as a percentage of costs. The profit is defined based on an interest rate index such as London Interbank Offered Rate (LIBOR). • Ijara – Ijara transaction operates like a conventional lease agreement in which the leasor (provider of funds) allows the leasee (debtor) to use his assets at a rental fee. Hence the leasor buys the asset from the seller and rents it to the customer. The customer makes regular rent payments which represent an agreed profit which is calculated based on LIBOR plus margins. • Salam – Salam is a contract in which payment is made in advance for future delivery of an asset. Salam is used to fund working capital requirements. It is most suited to finance agricultural, small construction or manufacturing projects. • Istisna – This is like a salam contract where the financier funds the manufacturer instead of buying the asset and then acquires the asset on completion. The financier then either sells the asset to the customer or leases it to another party. • Sukuk – Sukuk is essentially a bond contract where the ownership of the underlying asset is transferred to the sukuk holder together with all risk and returns relating to the asset. Hence, the sukuk holder is entitled to proportionate returns generated by the asset.
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TRADE TALK International trade
Is there a new route? Between 2000 and 2012 average growth in global trade outpaced that in GDP by 3 percentage points. In its report on global trade routes, Trade Routes: What has changed, what will change? Euler Hermes, provides a holistic view of global trade scenario. We bring you some snippets of the report.
O
ver the course of the past decade, the increase in exports benefited economic growth and companies’ turnover. Foreign trade is expected to continue to increase at a faster rate than growth, which is forecast to recover
gradually (+7% in 2013 then+11% in 2014 for trade in value terms, compared with +5% in 2013 followed by +8% in 2014 for nominal GDP). This will be something of a godsend for those countries that have run out of steam, particularly in Europe (where economies have been dragged down by a domestic demand shock). In real terms, global trade will increase by +4.1% in 2013 (compared with GDP growth of +2.5%), followed by +5.9% in 2014 (+3.2% for GDP).
GCC, Mercosur). This opening has resulted in an acceleration in growth of close to 0.2 percentage points on average. The more open the economies, the stronger the economic growth has been. With a degree of openness of close to 71% on average over the decade, ACFTA (ASEAN-China Free Trade agreement) has been the best-performing region (+17% on average). By contrast, NAFTA, with a degree of openness of 30%, has registered the weakest performance.
All regions in the world have benefited from the opening up of their economy, whether they are considered in economic terms (developed vs. emerging), geographical terms (America, Europe, Asia, Africa) or as the fruit of trade agreements (European Union,
At the least, trade agreements have allowed countries to maximise the impact of trade liberalisation at the regional level. Also, “trade� regions have outperformed their respective regions. The most significant performance has been from the ACFTA, achieving 7 percentage points more growth than the Asia-Pacific region as a whole. The weakest performances were
The opening up of international trade has favoured growth particularly in emerging countries and free-trade zones.
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Trade zones have globally outperformed their respective regions
ABOUT Massimo Falcioni is the Chief Executive Officer of Euler Hermes in GCC, responsible for all six GCC Countries (UAE, Saudi Arabia, Qatar, Kuwait, Oman, Bahrain) in addition to Egypt. Falcioni joined the Allianz Group in 2008, and was also Managing Director of Euler Hermes SIAC and member of the Board of Euler Hermes SIAC Services. Massimo has received two prestigious awards in the Q1 2013m from Trade & Export Middle East and Finance & Banking Review, for the best performance and management of the company’s credit insurance in the UAE. Euler Hermes is the worldwide leader in credit insurance and one of the leaders in the areas of bonding, guarantees and collections. To download the full report, please visit http://www.eulerhermes.com/mediacenter/ Lists/mediacenter-documents/Special-report-trade-routes-1192_E_extract.pdf
less open to global trade have managed to maintain substantial grown rates in 2012 (Indonesia, for example), proving that while interdependence is a precondition to structural growth, it can also be unsettling economically.
The international development of the pharmaceuticals sector has benefited emerging regions in value added terms
recorded by North America and the European Union, where trade zones almost matched up with geographical regions.
Beware however of the risks of contagion
However, in the aftermath of the 2008-2009 recession, the risks tied to too much or too rapid liberalisation became clear. In terms of growth, note that some countries particularly open to international trade were that much more vulnerable in 2012 to the loss of vigour in neighbouring regional blocks. For example, emerging economies that had developed close ties with the Eurozone have been hit by a substantial slowdown in growth, “imported” by demand shocks in the countries that receive their exports. Turkey, on the footsteps of Europe, and also smaller open economies in Asia have seen their GDP growth rates slump, directly in line with the slowdowns observed in Europe. On the other hand, certain economies
At the global level, 14% growth in pharmaceuticals trade corresponds to a
little less than 8% growth in its value added. But two blocks stand out: on the one hand, Eastern Europe, Asia and Middle East, which are growing rapidly; on the other, developed countries, Africa and Latin America. The pharmaceuticals industry has long been the reserve of developed countries that have concentrated both medication sales and R&D. Large Western pharmaceutical companies have taken advantage of emerged countries’ freshly solvent demand for pharmaceuticals
Import growth forecast 2012-2015 China
Vietnam
8.8%
Indonesia India Angola Nigeria
6.6% 6.1%
Turkey
Russian Federation Argentina Colombia Singapore
5.5%
5.2% 5.1%
Kuwait
Slovak Republic Ecuador
8.6%
5.8% 5.8% 5.7% 5.6%
Peru United Arab Emirates Oman Ghana
7.3%
8.6%
10.5%
3.0%
5.1% 5.0% 5.0%
Sources: World Bank, IMF, IHS Global Insight, Euler Hermes forecasts
JULY-aug 2013
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TRADE TALK International trade
In the long term, in terms of growth: (1) trade between developed countries is expected to weaken, (2) trade between developed and emerging countries should intensify, (3) trade between emerging zones should experience strong growth. products. On the other hand, these companies have suffered from the lower productivity of their R&D and from the competing supply of generic drugs with much less value added than their patented medications. Regions are increasingly connected, driven by increasingly regionalised trade flows. Interregional trade ties have increased, but the logic of dependence has gradually changed, giving way to greater autonomy on the part of emerging economies. In addition to expanding inter-regional trade, intra-regional trade has also gathered pace. Trade agreements between emerging and developed economies increased over the past decade, but the pace slowed at the end of the periods (+2 points between 2001 and 2007, +1 point since 2007). Nevertheless, emerging economies remain very dependent on developed economies, with volumes between the two representing over 50% of the former’s total trade. However, this degree of dependence is decreasing rapidly (-12 points between 2001 and 2011). This follows in particular the emergence of industry giants among these regions, especially in Asia (China, Thailand), but also in Eastern Europe (Russia, Czech Republic), that are slowly overturning production patterns. The dependence of developed regions on trade with emerging countries remains slight (one third of trade on average between 2001 and 2011), a situation due in large part to the substantial amount of intra-Eurozone trade. The proximity of a trade partner is a determining factor in international trade. This gravity effect goes back to the fact that the closer the economies are from one another, the more likely they will trade among themselves. This concept, which does not exclude geographical, cultural or linguistic 36
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proximity, remains the predominant variable. The last decade provides a good illustration, with strong growth in intra-geographicalregion trade. The best performances were found in emerging economies, which saw growth in intra-regional trade of 19% compared with 7% for developed counties. ASEAN-China, Africa and Eastern Europe saw their trade volumes more than quadruple in the last decade. The expansion of regional markets has allowed better performances over larger areas thanks to spill-over effects: for example, Asia-Pacific has become the best performing large region. Among globalised sectors, this regionalisation of trade can be observed, but factors specific to each sector should also be noted. Sectors can be broken down into two groups according
to various factors- positioning within the production chain, industry strategies, location of demand, years of openness to trade: sectors that are highly globalised on the one hand, and sectors in which the regional dimension predominates on the other.
The future actors in global trade: Between potential growth and the role of infrastructure
In the long term, in terms of growth: (1) trade between developed countries is expected to weaken, (2) trade between developed and emerging countries should intensify, (3) trade between emerging zones should experience strong growth. The (new) emerging economies will be the cornerstone of future trade growth. Without a change in paradigm (change in structural policy in developed countries in particular), past trends will persist. Following the collapse in demand in 2009, the speed of recovery in international trade for emerging countries (+25%per year) was 7 percentage points greater in value terms than that of developed countries. The progress in Asia has been confirmed, with an increase of+26% per year, led by China-ASEAN with an increase of+27%.
The wells of demand In order to determine the potential for demand, we focus on the main global import countries and incorporate the major economies from regions without a significant presence on the global market. Certain countries susceptible to extreme risks that may severely hinder the economic engine have been removed from the sample (Syria, for example).
An analysis of additional imports expected for 2015 versus 2012 highlights the regions and the sectors that are likely to receive additional demand
Together, three regions account for close to 85% of additional imports forecasted. Asia is the most sought-after geographical zone, with 45% of such expected imports. In terms of sectors, imports are also concentrated in a few sectors: the chemicals, automotive and agrifood industries together account for over 80% of forecasted new imports. In addition to the large shares forecasted for chemicals and for Asia, sectoral growth is also expected for Latin America, Eastern Europe and Africa. The total amount of additional imports forecasted for 2015 versus 2012 amounts to USD 845 billion, across the sectors included in this study alone.
What sectoral routes are taking shape?
Three very distinct groups of sectors can be defined based on their outlook and potential. First, the ‘high potential’ sectors such as plastics and fertilisers, both subsectors of the chemical industry, and the automotive industry (both components and manufacturers) which have bright futures ahead for demand being on a structural upward trend. Second, there is an ‘intermediate potential’ cluster which encompasses the agriculture and pharmaceuticals industries. They both have a slightly less positive outlook than the high potential cluster but appear as super resilient since they both cater to the end consumers – households. Last, the ‘low potential’ group including the electronic components and IT
29%
Construction
29%
IT Commodity General Trading
3% 18%
Petrochem
21%
equipment industries gathers sectors which are less intensive in value added because of the already established Asian supply chains, and important pressures on prices and margins. Adding to these findings, Massimo Falcioni, CEO-GCC, Euler Hermes said, “Globalisation designed new routes of trade worldwide. The traditional trade flow between emerging countries rich of raw materials and developed economies, which used to transform such materials into finished goods to then re-export them, has shifted to new routes the emerging countries, where labor, energy costs and taxation are very competitive and are exporting such intermediate goods due to the de-localisation of manufacturing processes.” Regional unrest on one side, the recession in the Eurozone and weakened economic climate in China on the other side, have impacted the trade dynamics. The GCC countries were the first beneficiary of such events, capturing most of the trade activities thanks to their political stability and openness to trade and export. In addition, other major drivers fuel such robust growing trend for trade credit insurance in MENA due to – increased sensitiveness by CFOs regarding trade credit risk; sustained economy diversification from non-oil towards trade export in the six GCC countries; implementation of the new Basel III requirements which impacts bank’s operations in financing receivables, cost effective services offered from credit
insurance industry, and increased customer care activities put in place by insurer to ease the understanding of policy management and understanding”, said Massimo Falcioni. Furthermore, Massimo explained, “Credit Insurance supports the sostainable growth by helping companies make informed decisions about the level of credit they should offer their customers, identifying those businesses at risk and enabling them to manage their credit risk exposure accordingly, avoiding the negative impact of unexpected bad debts or the need to make a claim. This ensures that companies are offering competitive credit to the right customers, converting opportunities into sales and profits.” “Euler Hermes has seen an average claims increase in the GCC by 35% Y-o-Y from 2009-2012 with the highest spike in 2010 and have paid out more than 70% of the declared claims in the GCC region. With most claims deriving from the IT industry followed by the construction sector, petrochemicals and general trading, claims are being paid due to various contractual factors. What cannot be ignored is the fact that claims paid are rising steadily even from the so called ‘recession proof ‘and thought as safe sector such as commodity and petrochemicals. Euler Hermes has identified more than 600 claims of our customers of non payment during 2010 and 2012 and has managed payment delays and overdues for over 2500 cases”, said Massimo. JULY-aug 2013
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TRADE TALK International trade
Passing the litmus test It was in 1988, that the GCC and the EU signed an agreement to create a free trade agreement (FTA). While that didn’t happen, the relations between the two have been going from strength to strength. In this article, the Gulf Petrochemicals and Chemicals Association (GPCA) talks about the bilateral trade relations in the chemical industry. Overview of EU-GCC chemicals trade in 2012 In 1988, the Gulf Cooperation Council (GCC) and the European Union (EU) and GCC reaffirmed their commitment to deepen relations by signing the EU-GCC Cooperation Agreement in 1988 which sought to create an FTA between both regions. Since then, all efforts to sign an FTA agreement have been thwarted. Nevertheless, investment relations continue to flourish – GCC is among EU’s top import markets with estimated 30% of GCC investments being made in the EU countries. Since 2008, EU imports from the GCC countries have grown at CAGR of 12.9%. In 2012 alone value of total imports from GCC to EU has increased by 6.3% to EUR 61 billion.
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Patterns of EU imports from the GCC revolve around hydrocarbons (oil & gas) and chemicals which represented 79.8% and 8.5% of 2012 import value respectively. During 2012, GCC producers have exported EUR 5.2 billion worth of chemicals to the EU region which is 3.2% of the total import of chemicals. Over the past years, value of EU imports of chemicals products from GCC grew at CAGR (2008-2012) of 10.3%, higher than an average annual growth of EU chemicals imports from the world during the same period which reached 6.8%. The non-oil imports from the GCC to EU equated to EUR 12.3 billion in 2012. Chemicals represented the largest share of 42% followed by manufactured goods accounting for 31%. EU-GCC chemicals trade
Figure 1: Evolution of EU imports from the GCC 2008-2012, Euro Billion
ABOUT The Gulf Petrochemicals and Chemicals Association (GPCA) is a dedicated and nonprofit making association serving all its mem¬bers with a variety of data, technical assistance and resources required by the petrochemicals and chemicals industry. GPCA’s mission is singular and specific in that it intends to support the growth and sustainable development of the petrochemical and chemical industries in the Gulf in partnership with its members and stakeholders and be both a sounding board and a meeting point for debate and discussion. It is the first such association n to represent the interests of the industry in the Middle East. Additional information is available at www.gpca.org.ae
Figure 3: Composition of EU imports from the GCC in 2012
Figure 4: Composition of EU non-oil imports from the GCC in 2012
Figure 2: Evolution of EU exports to the GCC 2008-2012, Euro Billion
Source: Eurostat, Year 2012 Source: Eurostat 2013
is characterised by significant exports from EU to GCC as well. In 2012, EU has exported EUR 9.9 billion worth of chemicals products to GCC countries. The majority of EU chemicals exports to the GCC are comprised of chemicals (SITC divisions 51, 52, 53, 55, 56, 59) and pharmaceuticals (SITC division 54) representing 52% and 35% respectively. In 2012, EU states have exported EUR 6.4 billion worth of products to the GCC, which is still higher than GCC exports to EU. EU saw a positive trade balance in the trade of chemicals (SITC divisions 51, 52, 53, 55, 56, 59) with the GCC: in 2012 it reached EUR 2.8 billion. During the past years, negotiations of the EU-GCC, Free Trade Agreement (FTA) have been stalled regardless of the commitments from both parties to further strengthen EU-GCC links. During 21 st Ministerial meeting in 2011 in Abu Dhabi, both parties “reiterated their intention to continue their consultations to conclude an FTA as soon as possible”. According to 2010-2013 EU-GCC
joint action programme for implementation of the cooperation agreement, EU-GCC trade cooperation consisted of mainly “soft measures”: trade fairs, exchange of business delegations, workshops and
Source: Eurostat 2013
exchange of views. However such soft measures may not be sufficient in EU-GCC partnership, particularly in a view of the growing importance of EU-GCC trade and investments.
Figure 5: Composition of EU-GCC chemicals trade in 2012, EURO billion
Source: Eurostat, Year 2013
JULY-aug 2013
39
TRADE TALK International trade
Go Africa!
Media Eghbal, Country Insights Managing Editor, Euromonitor highlights investment opportunities in emerging African economies in this report.
S
trong economic growth, young population, a swelling middle class and untapped consumer spending potential are making Sub-Saharan Africa a key investment opportunity. Euromonitor has identified five African frontier economies, outside of the larger and relatively well known markets of South Africa and Nigeria. Kenya, Ethiopia, Ghana, Tanzania and Cameroon stand out for their population size, relative maturity of their economies and economic growth prospects although challenges remain across Africa such as skills and infrastructure deficits and the development of labour-intensive sectors to sufficiently Total GDP, Population and Real GDP Growth in Selected African Economies: 2012-2017
Kenya
41,052
43,054
6.2
Ethiopia
41,008
86,579
6.5
Ghana
39,204
25,557
6.4
Tanzania
27,943
47,705
7.0
Cameroon
26,229
20,469
5.6
Source: Euromonitor International from national statistics/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)
40
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absorb the number of new entrants to labour markets. Despite risks, these frontier markets will offer attractive long-term investment potential as their economies develop from a low base, outperforming many stagnant, crisis-hit advanced economies.
1. Kenya: Government aims for middleincome status After a relatively volatile election in 2013, the prospects for the Kenyan economy are increasingly positive, which should attract investor confidence and Foreign Direct Investment (FDI). Agriculture, hunting, forestry and fishing retains its importance (28% of GVA in 2012) but the government intends to support private sector growth by improving the legislative framework, an important step in a country whose ranking in the World Bank’s Ease of Doing Business Index has declined. Risks of inflation remain amid strong domestic demand while high unemployment (38% of the economically active population in 2012), investment in infrastructure and reoccurring drought are challenges. The government aims to become a middle-income newly industrialised country by 2030 as part of its Vision 2030 plan while the discovery of oil could prompt national oil production.
TRADE TALK International trade
2. Ethiopia: Targeting accession to World Trade Organisation Ethiopia has experienced Sub-Saharan Africa’s fastest average annual real GDP growth over 2007-2012 (8.7%) while it has the second largest population in the region (behind Nigeria) at 86.6 million in 2012 providing major consumer market opportunities. Progress in privatisation of land ownership and higher private sector involvement will promote growth in the medium term but this is underdeveloped as public investment in infrastructure remains a fundamental driver of economic growth. Risks include high inflation (22.8% in 2012) and global food price shocks. Ethiopia has benefitted from notable poverty reduction and made strides towards meeting
ABOUT Euromonitor International has established a strong presence in the Middle East over the past 5 years. Our robust research methodology, supported by 800 researchers and in-country analysts across 80 countries has distinguished us as the world leader in strategy research for consumer markets. For more information, please contact kim.perks@euromonitor.com
should lift economic growth in the medium term. As a result, Ghana has attracted strong capital inflows especially to the oil industry. Development of labour-intensive sectors is a challenge while a lack of adequate water
Real GDP growth has been driven by exports and the communications sector and Euromonitor expects robust average annual real GDP growth of 7.0% in 2012-2017 in Tanzania.
the Millennium Development Goals (although per capita incomes remain low). The country has strong potential for hydro and wind power and the government is targeting accession to the World Trade Organisation.
3. Ghana: Stable growth to continue in the medium term Ghana’s economy has enjoyed robust growth thanks to sound governance and an abundance of commodity resources including gold, cocoa and now oil. The country has recently become an oil producer which
Media Eghbal, Country Insights Managing Editor, Euromonitor
42
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supply threatens sustainable economic growth and consumer health. Ghana holds close trade ties with Europe, with 57.4% of exports going to the region in 2012. This poses a danger to the external sector as Europe continues to struggle to grow. In 2013, the country ranked 64th out of 185 in the World Bank’s Ease of Doing Business Index, making it the fifth easiest country to do business in across Sub-Saharan Africa, promoting opportunities for FDI in the private sector.
4. Tanzania: Set to become a major natural gas producer Real GDP growth has been driven by exports and the communications sector and Euromonitor expects robust average annual real GDP growth of 7.0% in 2012-2017. Tanzania is gaining advantage from regional growth but electricity shortages are a major hindrance for businesses and consumers. The agricultural-based economy is performing below potential. The quality of education is
weak and the government faces the challenge of fostering labour-intensive economic activity. Poverty has declined but GDP per capita growth has been growing slowly with GDP per capita of just USD 586 in 2012 compared to USD 409 in 2007. Tourism holds significant potential while privatisation is also underway. The country’s natural resources are attracting investment in the mining sector. Tanzania could become a natural gas producer by 2020 amid recent offshore natural gas discoveries.
5. Cameroon: Relative economic diversification boosts growth prospects Agriculture, construction and services are driving Cameroon’s economy while mineral mining and a pool of natural resources will boost growth in the medium term, with production of diamonds and bauxite alongside an expected rise in oil production. Services accounted for 46.8% of GDP in 2012. The greatest obstacles to sustained economic growth are the incidence of poverty and income inequality, the sizeable informal sector (estimated to employ around 90% of workers) and underemployment. Export market diversification is also needed as 46.0% of exports went to Europe in 2012. Yet, Cameroon benefits from stable politics, a young and growing population which could inject opportunities into labour and consumer market development. Infrastructure and electricity deficits restrain the business environment but major infrastructure projects are underway. Cameroon has an ambitious target to become an upper middle-income country by 2035.
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TRADE TALK Currencies
Money talks – III This month the team at Western Union Business Solutions (WUBS) brings you the movement in four currencies – the USD, the EUR, the BZR and the GBP to help you trade better in August. USD: United States Federal Reserve Chairman Ben Bernanke’s testimonies to the US House of Representatives and the Senate set off a maelstrom of speculation in the financial sphere last month. The crux of the matter lies in which meeting the Fed may choose to taper its third quantitative easing programme. In the midst of the Global Financial Crisis, America’s central bank found itself between a rock and a hard place. The nominal target Federal Funds Rate was approaching the zero-bound but the aggregate economy continued to spiral out of control. To ameliorate the growing credit strains amongst the nation’s banks, the Fed engaged in massive bond buying sprees to backstop the drop in liquidity. Even after the inferno from the crisis calmed down, the Fed deemed that the tenuous nature of the US economy warranted alternative measures of monetary stimulus. The process featured numerous quantitative easing programmes, and led to the 44
JULY-aug 2013
expansion of the Fed’s balance sheet from about USD 870 billion in 2007 to nearly USD 3.6 trillion currently. The most recent stimulus programme was dubbed “QE3” (the third quantitative easing programmeme), and consisted of USD 85 billion in monthly purchases of various fixed income assets. Throughout their various stimulus programmes, the American Central Bank tied the necessity of their bond purchases to the weakness in labour markets. The tide, however, appears to be changing. The steady drop in the unemployment rate this year along with pleasing recoveries in housing/growth led Mr. Bernanke to estimate an end to QE3 in 2014, and a taper of the programme to begin late this year. When and how the Fed chooses to ease off the quantitative easing pedal is of utmost interest to nearly every branch of the world’s largest economy. In his testimonies to the Legislative Branch, Mr. Bernanke deflected specifics and instead related
the timing of the tapering process to broader economic developments in the nation. Not surprisingly, currency market participants have resorted to using every byte of new data as a prism into the potential direction the Fed may take. Some data is more important than other though, and markets’ over exuberance with simpler survey-based statistics towards the end of July likely indicated the potential volatility that could be generated by harder hitting reports. Chief among the most pernicious news releases for the greenback this month will be the July employment and Q2 growth reports. Signs of waning economic progress will invariable chisel away the buck’s strength, and vice-versa. With only three monetary policy meetings left this year, the reports this month will play pivotal roles in establishing which month the Federal Reserve picks to reduce their large balance sheet. Critical Data August 2: June Personal Spending August 2: July Employment Report August 5: July ISM Non-Manufacturing PMI August 15: July CPI August 29: Q2 Preliminary GDP Estimates Economic Indicators Three-month Deposit Rate: 0.02% Gross Domestic Product: 1.8% Q1 (y/y) Inflation: 0.5% June (m/m) Unemployment: 7.6% (June) Trade Balance: - USD 45 billion (May)
GBP The Federal Reserve dominated the global monetary policy debate last month but August is expected to bring the Bank of England to the table, with new governor Mark Carney all set to finally outline his stimulus plan. Despite aggressive fluctuations in the British pound’s value already this year, sterling could face another stinging reaction in currency markets following this month’s key announcements. US Dollar bulls dominated much of early July, pinning hopes on a September Fed stimulus taper which sent Cable crashing to three-year lows. In contrast, Carney’s surprise statement following last month’s
BoE policy decision fanned fears of more monetary activism in the UK, keeping sterling tagged with “sell” recommendations. Poor UK manufacturing data in July, emphasizing the case for additional monetary stimulus, widened the cracks further and sent the pound to four-month lows against the euro. Sterling has recovered to some degree coming into August after the Fed sought to flatten speculation about its quantitative easing programme, which weakened the US Dollar. Furthermore, Britain’s latest GDP data showed economic growth in the UK doubled over the second quarter, increasing optimism about a sustained recovery. But the GDP figures did little to inspire a sterling rally amid fears the BoE will respond to concerns that risks in the Eurozone could still damage business morale in Britain. The pound currently remains trapped within familiar ranges, and Mark Carney’s response to Britain’s economic challenges may hold the key to sterling’s outlook for the second half of 2013. Carney may uncover a different and somewhat alien BoE policy framework, such as tying long-term interest rates to economic thresholds, similar to what the Fed does. It could take investors months to adjust to such a change which could prove detrimental for the British currency. Having said that, Carney and the Monetary Policy Committee may judge that with signs of an economic recovery in Britain overlapping early signs of a revival in Europe, the BoE must continue providing a stable monetary policy environment. Accompanied by strong UK economic data through August, such an outcome could suddenly encourage investors to tag sterling with “buy” recommendations. Markets expect no change following the BoE’s monetary policy announcement on August 1st, but are anticipated very clear communication about future policy drivers in the bank’s Quarterly Inflation Report on August 7th. Key Events Aug 01: Bank of England Monetary Policy Announcement Aug 05: GB Jul Services PMI Survey Aug 06: GB Jun Manufacturing Output Aug 07: Bank of England Quarterly Inflation Report
Aug 13: GB Jul Consumer Price Inflation Aug 14: Bank of England Aug 01 Meeting Minutes Aug 15: GB Jul Retail Sales Economic Indicators 3-month Deposit Rate: 0.52% GDP: 0.6% Q2 (q/q) Inflation: 2.9% Jun Unemployment: 7.8% May Trade Balance: GBP-8.5 billion May
EURO Tiffany Burk, Senior European Market Analyst, Zurich What the Eurozone has vs. what it needs The good news is that economists and politicians have come to a relative understanding on what the Euro zone needs to thrive/survive. There are four pieces to this puzzle that are typically headlined. First, there needs to be structural reforms in some countries, particularly for labour markets and pension systems. Second, small-to-medium sized enterprises (SMEs) need funding, which is currently unequal and fractured throughout the area. Third, many European banks need recapitalisation and lastly a banking union needs to be created. The EU is expected to break the negative feedback loop between bad banks and fiscally weak governments, but it will need one, to include a mutual fund that can be used to wind down bad banks and two, guarantees for depositors. Just to highlight the urgency of the problem, the percentage of bad loans sitting on banks’ balance sheets in Spain rose to 11.2% in May from 10.9% in the previous month. The bad news is that Europe might not have what it needs to attain these goals. Several countries (even core economies) across Europe have experienced various degrees of political turmoil, which threatens the very leadership required to put through structural reforms. Portugal’s government nearly fell apart last month. Calls are increasing for Prime Minister Rajoy to resign in Spain, while Luxembourg’s Prime Minister stepped down in a spying scandal. Greece continues to be bombarded by growing anti-government protests, while France and Italy faced credit rating downgrades last month. A court ruling at the end of July JULY-aug 2013
45
TRADE TALK Currencies
may have ended Berlusconi’s political career, threatening the government’s ability to hold itself together, while the government in France still faces record lows in opinion polls. The European Central Bank (ECB) appears to still be arguing over whether it is in the bank’s mandate to intervene in the securities market in order to support SME lending, while European banks still seem to be in denial on recapitalisation needs. Germany at the moment does not seem to be ready to commit to a full banking union (at least not before the German elections in the Autumn), which means the ties between weak banks and weak governments has yet to be completely broken. There is also one thing that the Eurozone has right now that it does not need and that is a weakening engine. The economic data seen recently out of Germany caused an investor sentiment survey to swing south in an indication that the country’s growth outlook may be weakening. In addition to this, the latest trade figures from Germany showed exports falling 2.4%. The purchasing managers’ index (PMI) manufacturing survey for Germany has also been in contraction territory for the last four months and industrial output dropped by more than double expectations last month, while industrial orders, a leading indicator for output, fell 1.3%. Financial markets hope that after the German elections in September, the Chancellor
KEY events August 01: July manufacturing PMI August 01: ECB Monetary Policy Committee meeting August 02: June Producers rice index August 03: July services PMI August 05: June retail trade August 13: June industrial production August 14: Q2 gross domestic product 1st estimate August 16: July final Harmonised Index of Consumer Prices August 16: June trade balance August 30: August Business Climate Index
Economic Indicators Three-Month Deposit Rate: 0.22% Gross Domestic Product (annualised): -1.1% Inflation (annualised): 1.6% Unemployment: 12.2% Trade Balance: EUR +15.2 billion BRL Joe Manimbo, Senior Market Analyst, Washington, DC
August could usher in another month of weakness for the Brazilian Real, which last month plummeted to its lowest in more than four years against the greenback. Socking the real around have been developments at home in Latin America’s
The European Central Bank (ECB) appears to still be arguing over whether it is in the bank’s mandate to intervene in the securities market in order to support SME lending, while European banks still seem to be in denial on recapitalisation needs. will come out with a stronger mandate to lead the Eurozone forward, but weakened economic conditions at home are not likely to help her position. Until then, however, it is possible that the Euro will drift aimlessly higher, until complete and utter disgust forces markets once again to the brink of collapse before politicians wake up and implement the incremental changes required to thrive. 46
JULY-aug 2013
biggest economy, as well as those abroad in places like the US and China, the world’s two largest economies. Expectations of less easy US monetary policy and mounting signs of weakness in China, a big buyer of Brazilian exports, have taken a heavy toll on the real. Since the spring, Brazil’s currency has shed approximately 13% in value against the greenback. And the weaker real
has compounded Brazil’s inflation problem, which at 6.70% in the 12 months to June was the highest in nearly two years. To help strangle inflation, the country’s central bank has had to do a dramatic U-turn on policy and switch from an interest-ratecutting cycle to an interest-rate-hiking campaign. As recently as nine months ago, Brazil’s key base rate had hit a historic low of 7.25%. Now, following a series of rate increases this year, the key Selic rate stands at 8.50%—a 15-month high. The severity of Brazil’s inflation problem, which is running far above policymakers’ comfort zone around 4.50%, suggests that more rate hikes could be right around the corner. During less volatile times, Brazil’s alluring 8.50% base rate, the highest in more than a year, would tend to attract investors and be a source of support. However, the currency’s yield magnetism for now has been overshadowed by expectations for Fed policy and growth in China. The real would be exposed to further downside risk if US economic data were to remain on an improving path, allowing the Fed to cut back on an extraordinary stimulus programme that helped fuel rallies for riskier, higher-yielding assets such as Brazil’s currency. China, meanwhile, should remain a wildcard for the real. Any sign that China’s economy might be headed higher after a multi-quarter slowdown would bode constructively for the real, since the Asian giant is a leading buyer of Brazilian commodities. Though should China’s economy continue to cool, brace for more “real” volatility. KEY EVENTS August 1: June industrial output August 1: July trade balance August 5: July HSBC services purchasing managers’ index August 7: June factory utilisation August 7: Inflation Economic Indicators 3-month deposit rate: 8.47% Gross domestic product: 2.5% Inflation: 6.70% (June) Unemployment: 5.8% (May) Trade balance: +9.3 (June)
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TRADE TALK Sector Watch
Milking an opportunity Fonterra is a global, co-operatively-owned company with its roots firmly planted in New Zealand’s rich land. We got talking to Aamir Mehdi, Operations Director, Fonterra Middle East and Africa to know more about the company and his take on the food sector. Please give us a brief background about Fonterra.
Fonterra is a global, co-operatively-owned company with its roots firmly planted in New Zealand. It collects 22 billion litres of milk each year. Our business is based on sourcing secure, high quality milk and unlocking its natural goodness in ways that add real value to our customers and consumers around the world. From our humble beginnings nearly two centuries ago, we’ve become the world’s largest dairy exporter, wholly owned by the ten thousand farmers who supply us. The company came into being in its current form in 2001 and today represents 95% of all New Zealand dairy exporting to more than 100 countries. Our integrated operations stretch from fresh milk production to highest quality ingredients supply and some of the most loved brands on shelves like Anchor, Mainland, Anlene, Chesdale, Anmum, Kapity and others. We stand for providing dairy nutrition to everyone, everywhere, everyday.
What is your opinion about trade and the food sector in the UAE?
UAE has had the history of being a change agent and leader in most trends for the Middle East. Trade and food sector are no different. With its position as a major trading hub for the wider region, UAE has developed some of the best standards and processes to enable both efficiency and quality. Retail in the country is very developed and having a highly diverse populace the variety in the sector stands out. 48
JULY-aug 2013
It also positions itself as a culinary capital of the region with a mix of traditional and international fine dining. All these elements create an interdependency of UAE’s image with the requirements of the trade and food of sector and therefore we see continued focus on its development.
How important are food imports to the UAE and the GCC?
Just by virtue of the tough natural terrain that the Arabian Peninsula has, local food availability is a challenge. The weather and water scarcity severely limit both quality and varieties of food that can be produced indigenously. This inevitably makes the GCC region dependent on imports and high population growth rates coupled with booming economies, this put further pressure on the demand-supply equation. While government sector has worked to increase local production and processing, the deficit is high as virtually everything from fresh vegetables to dairy has to be imported. That trend is probably here to stay for some time to come.
Are there any special considerations for trade in food products, such as dairy? Food is liable to pretty much all variables of trading like commodity pricing, availability, global consumption trends, production forecasts and investor interest but what puts an additional twist is the sensitivity to shelf life. With consumption usually at mass scale
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(and direct to mouth) the aspects of quality and safety are paramount. You want the product to arrive as fresh as possible with maximum shelf life made available to the end consumer. While trading in the food sector you have to be mindful of the suppliers you are dealing with and their credibility but also the distance the product has to travel. New Zealand for example is a far way away from most points on the globe and this is why Fonterra has developed processing technologies that help maximise the freshness of our dairy over long distances and over long periods.
What are the biggest markets supplying to the UAE?
In the dairy sector all the big players are trading with UAE. Distance also makes a difference and Europe being closer, compared to the other major producers, its share is on the higher side. Germany, Denmark, France and Netherlands are the major exporters but supplies from ANZ region are not far in terms of percentage. Here again the advantage of being a big trading hub benefits UAE because you can find no shortage of food supplies from US, South America and Far East, specially in the meat and fresh vegetable categories.
How important do you think logistics is to the food sector?
Speed- to- market is perhaps one of the key drivers in food along with quality and cost. And if you think about it this speed has an indirect impact on quality and cost as well. Freshness is at the cornerstone of most food marketers today and whether the sourcing is local or global, the lever to achieve this freshness is logistics. In the Middle East specially, cold chain management is critical because weather is the biggest challenge. Expertise in logistics from infrastructure, processes, systems and flexibility points of view are critical and these need to be complemented with the highest standards on regulations and safety.
What are the relevant issues related to food logistics? We can probably bullet point them as elaboration can be compiled into volumes! 50
JULY-aug 2013
ABOUT Aamir is the Operations Director at Fonterra Brands Middle East and Africa. Prior to joining Fonterra he worked with Proctor & Gamble. He has more than a decade of experience in supply chain and logistics.
• Integrity of cold chain from supplier to shelf • Availability of reliable shipping line options across many trade lanes • Clarity on regulations and quality requirements • Compliance of logistics service providers with international standards • Creation of capacity that outpaces demand growth
For a company interested in importing to the UAE, what would be your advice?
First and foremost establish a good liaison with the regulatory bodies like Dubai Municipality, Customs, Ministry of Health and Agriculture etc. Extending this to GCC ombudsmen like SASO or SFDA can be even more beneficial. Knowing regulatory requirements of the categories you want to play in is crucial to a good startup. Second useful step would be to network with other players in industry; both service providers and businesses. Depending on the nature of goods, success has a lot to do with partnering with right people in retail, processors, 3PLs, agents and more. Forums like this one give an excellent opportunity to build these networks. The assumption that enough market intelligence is available to you before importing/marketing is at the base of all this. UAE is a very competitive market and almost all big players are part of the landscape.
Are there any new developments in the food logistics industry? What challenges do you face as a company when it comes to logistics?
Our biggest challenges lie in clarity of regulations and availability of reliable service providers. As a Kiwi company we have to deal
with the reality of being a long distance away from our milk base and the shipping industry has had a lot of issues in the recent past in terms of reliability. Impact of this gets aggravated when importing countries in the region have constrained port capacities and ever changing regulations. This hampers speed to market and in most cases increases cost to serve. On the flip side a lot of work is going on in the technology arena. Business intelligence tools that can provide real time information on location of product and other metrics are enabling effective and quick decision making. RFID and other gadgets are improving security and tracking of product. Instruments to map the cold chain integrity during transportation are helping identify weak points in the design. Keeping abreast of these developments through such forums and other networks is always helpful.
What is your strategy for expansion and growth in this industry?
We work for the Brands arm of Fonterra and therefore compete with some of the biggest multi-national names in the dairy food industry. Being on the shelf at the right time, at the right cost and with the best quality is key to our growth. As our marketing campaigns are developed to introduce new products and build nutrition platforms, we add value through product innovation, speed-to-market and sustaining quality. Standing for the best quality dairy products across all markets is at the heart of our strategy. Expanding both our portfolio as well as the geographical reach in the wider Middle East – Africa patch will enable our growth objectives while staying true to the vision that Fonterra has.
One complete package to expand your business.
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