Month: July 2014

The African Development Bank on collaborating with China

Posted on by Ashton Wenborn

Africa’s biggest trading partner is preparing to get further entrenched in the continent. The People’s Bank of China, the central bank of the Republic of China, has co-financed a $2bn fund with the African Development Bank. World Finance speaks to Angela Nalikka, Chief Investment Officer at the latter, to find out more.

World Finance: Angela, what do you say to China observers who believe it’s only investing this money to hit back at those critics, who argue it strikes one sided deals in resource extraction projects – what do you make of that argument?

Angela Nalikka: China is not unique among our partner countries that have come up with funds for the banks to manage. We have the Nigeria Trust Fund that the bank has been managing for the last 40 years; it invests alongside the bank.

The Arab World Fund that was set up the 1970s, it has recently closed. In addition, African Development Bank is not alone in benefiting from China’s funds. China set up a similar fund with the Inter-American Development Bank, as well as the International Finance Corporation.

The African Development Bank’s rich experience and competence makes it the most suitable partner for China’s engagement
in Africa

World Finance: But Angela don’t you every worry that getting involved with China, and establishing funds such as the one we are taking about now, in any way tacitly acknowledges the fact that China is indeed striking these deals?

Angela Nalikka: China has signalled a shift in its engagement in Africa; it favours the more lateral approach. The African Development Bank’s rich experience and competence makes it the most suitable partner for China’s engagement in Africa.

We are considered the honest brokers for the African countries, and the private sector. These new resources will enable the bank to do more in the infrastructure space – especially in the fragile states and the low-income countries.

World Finance: And do you think that these opportunities would not exist, if your bank weren’t overseeing this sort of fund development?

Angela Nalikka: For Africa to maintain the current growth rates, we would have to invest upwards of $60bn per annum. The limited budgets that the countries have are unable to meet a big portion of this amount. The Development Finance Institution by itself cannot meet this amount. So we have to look at the private sector, to help fill this gap.

World Finance: The fund is intended to support sovereign and non-sovereign guaranteed development projects. Can you give me examples of non-sovereign projects that are now taking off? Which countries are they coming from, which industries do they represent and what key demographic factors are leading to their success?

Angela Nalikka: The Africa Growing Together Fund is just starting off, and we expect it to do a lot of activity by the end of the year. We are looking at a number of regional transport, rail and port infrastructure projects, as well as renewable energy projects; mostly in the non-sovereign space.

World Finance: Now in that non-sovereign space, are the main actors who are taking advantage of the funds, Africans?

Angela Nalikka: The non-sovereign projects by their definition imply that they will not attract any government guarantee. Private sector could be African or non-African; the criteria is that it should be majority owned by the African country. And the project should be limited regarding cost, mostly project finance projects.

World Finance: Have you been happy or satisfied with the breadth of companies that are coming forward to take part?

Angela Nalikka: We would like to see more coming to Africa. We need to develop the inter-country links to the sea. We need to encourage regional trade among countries, in a number of sectors. We need to get our mining resources to the sea, and we need to help manage all these business linkages.

World Finance: In speaking about some of these local countries of course, we are looking at a vast disparity in terms of stability. Whose responsibility is it to make sure that these countries remain stable, and thus be able to promote economic development – does it lie with the bank or with the local governments?

Angela Nalikka: Primary responsibility is with the local government. The bank is a tool for all these countries. The bank is owned by the 54 African countries and the 25 non-African countries. We operate on international best practice norms. We do consider governance; it’s a lynchpin and one of the deciding points, when we do decide to engage in a country.

World Finance: The bank of course has been criticised for seeding much of its sovereignty to some of the external donor countries. Do you think this is the case with China’s involvement in the Together Fund?

Angela Nalikka: China has been Africa’s biggest trading partner over the last three years. In fact, China has had a relationship with the bank that dates back to 1985. The fund marks an important milestone in the African Development Bank and China’s relationship. It will help the bank do more in the private sector.

The fund will co-finance alongside the African Development Bank, it will be managed by the African Development Bank. It will benefit from the bank’s own policies and procedures, as well as integrated safeguards for the environment and social impacts.

Nigeria is and continues to be one of the most attractive investment destinations in the continent

World Finance: Your job Angela of course is to create economic development opportunities that sustain local development as well as bridge the disparity divide.

Now given this task, let’s look at Nigeria. Despite being an economic powerhouse of late, the country still faces widespread economic disparity. Do you ever worry that your work is thwarted by the mismanagement of foreign investment by the local governments, that your development work is expected to economically uplift?

Angela Nalikka: Nigeria is and continues to be one of the most attractive investment destinations in the continent, mostly because if its potential in all aspects of business. The recent unbundling and privatisation of the private sector demonstrated this.

The African Development Bank on its own part, approved about $400m to help Nigeria guarantee the off-tick for many of these companies. The infrastructure gap is huge, the opportunities for new businesses are huge, as well as the business linkage that emanate from the infrastructure space.

World Finance: In order to do your job, does there have to be a kind of turning a blind eye to what is happening locally?

Angela Nalikka: I work in the private sector. The private sector will not go to a place or a country where the business environment is not well defined, where there are no rules set up. They have to be sure that they will get their returns, and should they need to refer to the courts; the courts are competent enough to deal with that.

Most importantly the rules of the game will not change half way, the countries are away of this. They are also aware of the infrastructure gaps and the needs of the population.

World Finance: Now we have seen how destabilising militant activity by Boko Haram is for the country. Do you ever worry that China or any foreign investors are going to lose confidence in the country, and the continent over the long term?

Angela Nalikka: On the contrary. We are seeing a lot more activity on the Nigerian and Kenyan stock exchanges. We believe the opportunities that these countries in particular offer, far outweigh any risks any private sector company would want to think about, because of the rewards. In addition, with more infrastructure investment there will be more development, and probably less insecurity.

World Finance: Angela, is there going to be a day when you and I are not talking about some of the systemic infrastructure issues that are plaguing development, and Africa is going to no longer be seen as this place riddled by some of those problems?

Angela Nalikka: Africa is right on cue. On average the African countries are 50 years old. America is 200 years old; it did go through growing pains. Africa is going through growing pains. The most important thing is that there is communication. Africans know what they want; Africans are trying to get what they need.

World Finance: Angela, thank you so much for joining me today.

Angela Nalikka: Thank you for having me.

Argentina defaults on debt as final talks in New York fail

Posted on by Ashton Wenborn

Argentina defaulted on its sovereign debt after vulture fund investors demanded a full payout of bonds they’re owed.

A ministerial delegation from Argentina flew to New York to broker a deal and people took this as a positive sign that both parties were in dialogue. But Argentina told bondholders – led by NML Capital – that they could not afford to pay the $1.3bn sum and accused investors of exploiting their debt problems to make a profit.

Late last night the country’s Economy Minister Axel Kicillof said that bondholders had rejected a $539m interest payment tabled in an attempt to save Argentina from economic meltdown. Some investors had agreed to a restructuring which would involve a 70 percent haircut. NML Capital refused to accept the deal. They were holding out for the full $1.3bn but Axel Kicllof said it was “impossible to pay more.”

“We are not going to sign any agreement that compromises the future of the Argentine people,” he said at a press conference at Argentina’s consulate in New York.

Shortly after, Daniel Pollack, the court-appointed mediator in the case, said in a statement: “Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default.”

Economists have predicted inflation rates to rise and that the default will heap pressure on foreign reserves

The damage this will inflict on Argentina, which slipped into recession in June, remains unclear. Economists have predicted inflation rates to rise and that the default will heap pressure on foreign reserves. Capital Economics analyst David Rees told World Finance: “This is a headwind Argentina doesn’t need. They are already in recession and locked out of capital markets and this default could spur a flight of private investment.”

This is the second time Argentina has defaulted. It used to be the third biggest economy in Latin America, but has suffered a series of economic and political meltdowns dating back to the 1930s. These reoccurring crises are often attributed to mismanagement. Poor government policy and fluctuating commodity prices have, in the past, plunged millions of Argentines into poverty and depression.

This default leaves many wondering if this recession will be as bad as 2001. “The economy is in better shape than it was last time around and banking is in a good state too. We are forecasting that the economy will contract by at least two percent and GPD won’t grow either. But the recession won’t be as bad,” said David Rees.

It all seems like déjà vu for Argentina. They previously defaulted on $100bn worth of debt in 2001, which was the biggest failure to pay debtors in history. This meltdown 13 years ago is largely credited to one man: former Argentinian president Carlos Menem.

In the early 1990s Menem transformed Argentina from a struggling nation to the poster child of free market reforms. When he left office in 1999 corruption was rife and investors could not get out of Argentina fast enough. To curb inflation and interest rates the country used a currency peg but this became untenable and the government had to borrow money, rather than print it themselves, according to Business Insider.

By 2001, 20 percent of the population was unemployed and reports began to surface of widespread hunger and malnutrition. A country that had once been hailed as the ‘breadbasket’ of Latin America was impoverished. Riots and looting spread like wildfire and when it reached the capital of Buenos Aires, Menem’s successor, Fernando de la Rua, resigned in the wake of civilian deaths. In the next two weeks five presidents would come and go as the country was trapped in a downward spiral.

Before the crisis ended the economy had shrunk to a fifth of its former size. Its future workforce, young, educated Argentines, flocked back to the ancestral homes of their grandparents in Europe, who had migrated to South America in the 1930s and 1940s.

Since the country failed to pay back the debts it owed, Argentina has been ostracised from capital markets. Between 2000 and 2010 taxes have risen by 2.5 percent to accommodate increased spending on social welfare programs, according to a World Bank report. High spending on such programs, alongside a stagnant economy has caused one of the world’s highest inflation rates. In January, the peso was devalued by Argentina and the country is now regarded as bête noire by investors.

“It has been made very public that this is a legal issue, not a solvency issue,” said Hargreaves Lansdown senior analyst Laith Khalaf. “It remains to be seen whether international bond markets will retaliate by hiking borrowing costs for Argentinian companies. If that happens, those companies will find it more difficult to access capital.”

The vultures are circling over Argentina. Its political elite may have wilfully destroyed their economy in a bid to look tough on international investors, after previously stating a willingness to negotiate. The country is already in recession, battling high inflation rates and with an economy expected to contract annually, the future is bleak for Argentina.

Don’t cry for d(efault) Argentina

Posted on by Ashton Wenborn

D-Day arrived for Argentina: when the country either had to repay its debt, or default. Both options are not particularly savoury for the economically crippled country. World Finance speaks to Eric LeCompte, Executive Director of Jubilee USA, to talk about the greater ramifications of this situation.

World Finance: Well Eric, let’s start with the day: what’s so important about July 30th for Argentina?

Eric LeCompte: July 30th essentially was the day that the grace period expired for Argentina. They were supposed to make payments to all of their restructured bondholders on June 30th, and so they had a grace period through to July 30th. And that has now expired.

World Finance: Well economically speaking, what is the situation like on the ground now in Argentina?

Eric LeCompte: The country is in a much stronger, much more stable place, that it was when it defaulted back in 2001. As the country now goes into another default, it’s a very different situation. Although there certainly are economic consequences, this is much more of a technical default that Argentina is facing.

The country is in a much stronger, much more stable place, that it was when it defaulted back in 2001

World Finance: Well you hear the word default, and it does sound dramatic. So what sort of consequences will this bring?

Eric LeCompte: They will face difficulty in accessing certain credit markets. They’ve had that difficulty since their default in 2001. But they’ll continue to have that difficulty. And right now the government is very interested in accessing new lines of credit for development within the country.

We’ve seen Argentina reaching out to Russia as well as China in order to find ways to continue to receive credit. Although they may be shut out of some of the markets.

I think there are also some positives in terms of defaulting as well. It’s very possible that the government of Argentina made a decision that it was better to default than to comply with an order from New York ordering them to pay hedge funds in full. Because now that they’ve defaulted, they’ll have the opportunity to again restructure payments to bond holders that they’re seeking to pay.

World Finance: So what are the country’s options, moving forward?

Eric LeCompte: The country will very likely want to continue payments to the 92 percent of restructured bondholders.

So the way that they’re most likely going to do that is to restructure the bonds, either under Argentine law, or go through English law: recontracting either in London, Paris or Frankfurt, since all of those financial jurisdictions do not tolerate the predatory activity that the financial jurisdiction in New York does.

World Finance: Well vulture funds have dominated the news about Argentina’s debt; how prolific are these types of funds, and how do they work exactly?

Eric LeCompte: You know, these are hedge funds that originally got their start by buying up companies that were in distress. Breaking up those companies, selling off parts in order to make a profit, and then moving on.

These vulture funds – according to the World Bank there are less than 100 firms around the world – what they do is, when a country is in financial distress, or dealing with severe financial issues because of development. Because the country is so impoverished. These groups that are popularly known as vulture funds, come into a country and buy up their debt for pennies on the dollar.

There are other investors that may want to get out of the situation, or cannot wait long enough to recoup their investment of a particular country. And so vulture funds don’t invest in a country: they buy up the debt on the secondary market, and then generally vulture funds will make upwards of 1,400 percent in profits.

So right now, in the case of Argentina, we see two particular funds: NML Capital and Aurelius, that bought up debt after the 2001 default. And right now if they were to accept the deal that the other 92 percent of bond holders accepted. Aurelius and NML Capital would make a profit of about 157 times their investment. But they want a judgment to receive payment in full, which is actually more than 1,200 times what they paid for the debt.

Part of the concern with the activity is that it disrupts debt restructuring that the majority of legitimate bond holders want to participate in, and that they target moneys that are needed by a country when they’re in recovery, or in the poorest countries of the world, they actually target the monies that countries receive from debt relief efforts.

World Finance: Now Eric, they’re not actually doing anything illegal, so isn’t this just excellent business for them? And shouldn’t the blame perhaps be laid at the feet of Argentina’s economic policymakers?

Eric LeCompte: Although the behaviour is legal, it doesn’t make the behaviour any less disruptive for the international financial system.

I think this is one of those few moments when behaviour is so extreme, you see essentially most actors that are involved in the financial system around the world, lined up on the side of Argentina.

Not because they agree with Argentina’s politics, but because they know the precedent set by this case can disrupt how the international financial system operates.

And once they default, it won’t be easy

This behaviour can disrupt economies in wealthy countries, as well as poor countries. Because at the end of the day, Argentina still caucuses with the G20. It’s not a poor country. What global actors, what our organisation is most concerned with, is the precedent that this sets. Because this precedent can actually make it difficult for legitimate investors to be able to restructure bonds. It can make it difficult for the financial system to operate. It can make it difficult for any country to be able to receive credit, to be able to lend, and be part of lending and borrowing contracts in a proper and forceful manner.

And you know, one of the most extreme aspects is that this behaviour actually hurts the poorest people in the world. Since these people in the poorest countries of the world are beneficiaries of debt relief, it’s that money that by international law is supposed to build infrastructure, hospitals, and schools. And unfortunately that’s the very money that these extreme actors are collecting.

World Finance: And do you see foreign countries in the region also being affected?

Eric LeCompte: I don’t think we have to worry about contagion in the sense of hurting other economies globally. For the most part, Argentina’s neighbours and other powerful economies in South America, like Brazil, are not necessarily connected to Argentina, and do have rather strong economies.

So I guess it’s the billion dollar question of the day, but what in your mind is the solution to Argentina’s debt problem?

It seems clear that they’re not able to pay in full the hold-out investors and the vulture funds, because according to the UN Conference on Trade and Development, that would open up Argentina to another $135bn in claims. And right now they have less than $30bn in their reserve.

So I think the Argentine government has probably made an assessment that it’s better to default than to comply with Judge Griesa’s order. And once they default, it won’t be easy, but I think they are likely to go through a process of restructuring again all of the restructured bondholders: the 92 percent can continue to receive payments, either under Argentine law, or other friendly international law.

Once that happens with Argentina, you know, with the energy reserves they have, being a G20 country, they will see a way to get beyond this current moment, and ultimately a way to not pay the holdouts and the vulture funds.

World Finance: Eric, thank you.

Eric LeCompte: Thank you.

Analytica’s expertise helps clients exploit the riches of Ecuador

Posted on by Ashton Wenborn

Ecuador is full of surprises. Voters supposedly wholeheartedly support its self-styled revolutionary president, Rafael Correa, yet on February 23, they elected a slew of economically centrist and conservative mayors – so many that at the local level, most Ecuadorians are now governed by fiscal conservatives. Civil society, including the business sector, has shown democratic resilience. The electoral results indicate that the cycle of Ecuador’s trial-and-error populist experiments – which have economically left it several years behind its immediate neighbours – is perhaps reaching its end.

That’s not to say the South American country hasn’t had relevant developments in recent years, from resilience against the more radical policies in the likes of Venezuela to its wholehearted adoption of the US dollar, which lessens foreign investors’ currency risk. Prospects for an improved investment climate are now at their best in several years. The attractiveness of the hard left has clearly diminished among the electorate.

This means that the president should understand that a rollback of the more radical ideas would in fact increase his popularity among a significant percentage of voters. Aside from the dissatisfaction many voters have shown the government, Correa himself has given away some signs of understanding the need for greater economic orthodoxy. And the chances have increased for his administration to be replaced by a much more market-friendly government in 2017.

Finding a global financial market
Besides oil exports (see Fig. 1), Ecuador’s use of the dollar requires foreign cash inflows. China appears to have become more hesitant to fund Ecuador than it has been in the recent past, during which it has lent Ecuador $11bn for major infrastructure projects, mainly hydroelectric power plants. This has nudged the Correa government to mend ties with global financial markets and take steps towards fiscal responsibility by planning to reduce its wasteful gas and electricity subsidies.

Despite being a small country, Ecuador has shown global leadership in several agricultural and resource-based export industries

The government has passed legislation to tighten anti-laundering rules in line with global standards and restored ties with the World Bank, while remaining current with Latin American multilateral lenders. This will hopefully culminate in a successful return to the global bond market with a placement near $700m that would put Ecuador back on the radar of investors, particularly for emerging market funds.

For the local market, a bond placement would help set benchmarks and therefore reduce costs. Recent capital market reform has meanwhile removed much uncertainty for potential issuers and investors. This forms an added boom to companies who already benefitted from lower financing costs on the bond-heavy exchanges of Quito and Guayaquil than from bank loans and where Analytica has provided tailor-made, rather than generic, financial solutions for its issuing clients.

As a key incentive, the new capital markets law passed in the first quarter of 2014 exempts foreign investments in Ecuadorian bonds and stocks from a five percent currency export tax that previously led some investors to hesitate. Not to forget, despite being a small country, Ecuador has shown global leadership in several agricultural and resource-based export industries, including bananas, tuna, roses, and fine cacao.

Investors with a particular interest in Latin American business have therefore already made moves into Ecuador without being distracted by negative news headlines, just as major local companies, including the newspaper and media company El Comercio, the bank Banco Pichincha, and the brewer Cervecería Nacional, have all weathered the crises to continue going strong a century after being founded. The insurance sector has seen major deals, including Australian QBE’s purchase of Seguros Colonial, as well as ACE’s purchase of Río Guayas from Banco de Guayaquil and Liberty Mutual’s purchase of Panamericana.

Four out of the five biggest insurers in Ecuador are now owned by multinationals, reflecting growth and international interest. Premiums show that these deals did not go ahead at fire-sale prices; they are still somewhat lower than in neighbouring markets, positive for international insurers looking to enter Ecuador and/or to expand their presence in Latin America, where the new middle classes are driving insurance business growth. Prices are also going up while still relatively low.

Source: International Monetary Fund. Notes: Post-2013 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2013 figures are IMF estimates

Even the banking industry has seen foreign interest. Promérica, a leading Central American bank that already had a local presence, leapfrogged the competition by closing a deal in 2014 to buy 56 percent of Produbanco, the number three commercial bank in Ecuador, for $130m. Before the takeover, Produbanco had assets of $2.76bn and equity totalling $234m. While Promérica has a presence elsewhere in the region, including Ecuador since 2000 – the year the dollar was introduced – as well as Costa Rica, El Salvador, Honduras, Nicaragua, and Panama, the Produbanco takeover has been its biggest single takeover to date. Other deals reflect the growth of Ecuador’s consumer economy and construction, as well as infrastructure.

Cross-company expansion
In the food and beverages industry, where SABMiller set the stage for major foreign entries by buying Cervecería Nacional in 2005, takeover deals have included the $345m takeover of Coca-Cola bottler EBC by Mexican peer Arca in 2010. Since then, Arca has continued expanding in Ecuador, taking over dairy goods company Tonicorp, and snack company Inalecsa. The global paint industry leader Sherwin Williams bought Pinturas Cóndor – Ecuador’s number one paint manufacturer – and continued investing in a local production capacity, expanding its presence in the market. Other industrial foreign investment has included a participation of South Korean engineering firm Posco E&C in its local peer Santos CMI, and Australian engineering and construction firm Cardno who in 2012 bought Caminosca, which employs 450 staffers in the country.

In transportation, Colombian airline Avianca bought local airline Aerolíneas Galápagos. Private equity investments have included Darby Overseas’ purchase of participations in cargo facilities at the new Quito international airport, built by a US-Canadian-Brazilian consortium and opened in 2013, as well as investing in Cobiscorp, an Ecuadorian specialist provider and exporter of banking software. Other than the Promérica takeover of Produbanco, most of these takeovers have involved buyouts of 90 to 100 percent of the targets.

Analytica – one of Ecuador’s most prestigious investment banks – has helped make many of these deals a reality, including the sale of Panamericana, and assisting the entry of Grupo México, which holds the world’s second largest copper reserves. Ecuadorian companies meanwhile have also begun to expand across borders. With support from Analytica, the plumbing fixtures and sanitation company Edesa linked up with Fanaloza of Chile, Briggs in the US, and Cesa in Peru to acquire assets from Chilean company Cementos Bio Bio, achieving an international scope of economic success. Its work in divestitures has included government-held assets in TV Cable and Machala Power, tobacco giant Philip Morris, and also includes a series of international companies.

Aside from mergers and acquisitions, Analytica understands its clients’ needs thanks to its expertise in raising funding in the fixed and variable income markets, as well as in linking these financial requirements with guarantees of liquidity and convenience for investors given the particularities of risk aversion in Ecuador’s market.

By providing teams of highly qualified financial, risk, and legal experts to tailor issuance from large industrial and commercial to relatively small companies, Analytica buyers tend to be large institutional investors. Clients for structured fixed-income instruments include Edesa, distiller and beverages company Azende, chemists Fybeca, forestry company Forescan, and Novacredit, which specialises in buying and selling automotive credit portfolios. In the case of Edesa, it has managed securities issuance in 2011, 2013, and is preparing to do so again this year, as an example of the continuous, follow-up service in long-term relationships with its clients.

The company also leads the market in equities trading volumes. With continued leadership and an impeccable reputation, the team has decades of experience, previously helping to develop specialist micro-credit and commercial banks Unibanco, Banco Solidario, and Finca. It has also won a gold medal for research awarded by Latin Finance.

Analytica’s Ecuador Weekly Report, with more than 700 editions, features unparalleled depth in country-specific economic and business analysis. Analytica President Ramiro Crespo, meanwhile, is regularly quoted by local and international media, including The Financial Times.

With a wealth of natural resource possibilities and plenty of catching up with emerging market neighbours Colombia and Peru to plan, Analytica will be happy to advise institutional investors looking for the best value in the complexities of the Ecuadorian market.

Infrastructure investment essential to Ireland’s economic recovery

Posted on by Ashton Wenborn

‘Cautious’ is a word often used to describe investor behaviour in the years immediately following the 2008 global financial crisis, as uncertainty over proposed regulation, as well as high public sector debt, rippled through the financial markets – all while banks tried to repair their balance sheets. As the project finance world underwent a sea change in active players, the financial industry has adapted to new market conditions, and is now in good shape to help meet the purported ‘funding gap’ in the long-term infrastructure finance sector.

With institutional investors beginning to play a more significant role in the funding of projects, as they look for stable returns to match their long-term liabilities, the challenge now lies in marrying the capabilities of the banks, public sector and other investors – a task that many market players have taken on with vigour.

Meeting infrastructure needs
Infrastructure – a key catalyst for growth, triggering further investment and job creation – is a policy direction particularly suitable for those countries facing weak GDP prospects, low interest rates, and burgeoning infrastructure needs.

The OECD forecasts that development in transportation will grow twice as fast as global GDP between now and 2030, and the European Commission estimates that infrastructure requirements in Europe will reach €1.5trn over the next eight years. As such, it is encouraging to see the emergence of institutional investor interest.

The private sector – not long ago fragmented by the repercussions of the financial crisis – is now in rallying mode. Project finance banks are making a comeback with higher levels of activity. With their expertise in advisory, origination, structuring and servicing, they remain core to raising funding but increased collaboration with institutional investors can be now be seen.

The private sector – not long ago fragmented by the repercussions of the financial crisis – is now in rallying mode

Ireland – the poster-country for infrastructure
We can see this dynamic taking place in Ireland. Following severe setbacks to the country’s economy – including lowered sovereign credit ratings and a number of project cancellations – Ireland has received a significantly-improved outlook from leading ratings agency Moody’s. As well as being the first eurozone country to exit its bailout programme last December, the ‘Emerald Isle’ made a full return to the sovereign debt markets with a successful – and oversubscribed – issuance of government bonds in January.

Although economic indicators suggest that the country remains some way from pre-crisis levels of activity, the fiscal constraints from its bank bailout are now abating and the government has given infrastructure development renewed focus, with Public Private Partnerships (PPPs) being a key delivery tool.

Concrete government measures are encouraging investors. As part of a €2.25bn stimulus package announced in June 2012, the Irish government introduced a €1.4bn PPP programme, with the first phase supported by the European Investment Bank (EIB), the National Pensions Reserve Fund (NPRF) and local Irish banks.

Furthermore, the most recent project to reach financial close has seen the renewed presence of international banks in the Republic. This was the N17/N18 motorway project – a 57km standard dual-carriageway route between Gort and Tuam – under a PPP contract with the Irish National Roads Authority, won by the Direct Route consortium comprising Marguerite Fund, InfraRed, Strabag, Sisk, Lagan, and Roadbridge.

A combination of bank lenders provided the senior debt – including Natixis, Bank of Ireland, Société Générale and the EIB. Natixis was the largest international commercial lender on the deal, bringing a €118m contribution to the total €331m financing. This funding was underpinned by the infrastructure debt partnership between Natixis and Ageas, a Belgium insurer – an innovative collaboration that will provide for the deployment of some €2bn investment into the infrastructure debt space through Natixis’ banking platform.

The French banks also introduced other institutional investors to the deal, notably Aviva and ING Insurance. Indeed, the interest received from international investors marks a significant milestone demonstrating the viability of hybrid bank and institutional investor funding solutions. Attracting international financing support is all the more crucial given Ireland’s banking sector remains one of the most concentrated in the world.

Much of this institutional interest is motivated by the low interest rate environment, which is driving investors to take more risk in their portfolios. Peripheral eurozone countries such as Ireland now represent key investment opportunities, offering better yield prospects while the economic recovery reinforces investment grade ratings.

The successful closing of this deal should aid investor confidence in other projects currently in procurement. Ireland’s healthy pipeline currently includes the Grange Gorman campus development, Primary Care centres and Courts buildings, Schools Bundles 4 and 5, as well as the N25 and M11 roads. Further cementing the sector’s buoyancy are the anticipated projects due to form part of the stimulus package’s second phase, expected later this year.

Rapid progress
Although Ireland has struggled in the post-crisis environment – ratings agencies have said they will continue to monitor the country’s fiscal consolidation efforts related to its debt ratio, GDP growth and export levels – it has managed to meet each of its bailout conditions and been held up as a poster-country for recovery by institutions such as the European Union.

Moody’s restored Ireland to investment grade in January – a move that was well overdue, according to many investors – and in early May, Ireland’s long-term borrowing costs fell below the UK’s for the first time in six years. With such rapid progress – including Standard and Poor’s raising its sovereign credit rating for Ireland (from BBB+ to A-) in June – it makes sense that investors should be drawn to its infrastructure sector, especially while yields remain attractive, which is further encouraging international contractors and financial sponsors.

Argon Asset Management on the future of South Africa’s retirement industry

Posted on by Ashton Wenborn

A revitalised national security system is high priority for the South African government, but what opportunities and challenges will this pose in the retirement industry? World Finance speaks to Dr Manas Bapela and Mothobi Seseli from Argon Asset Management to find out what they may be.

World Finance: Well Manas, if I might start with you, how is the retirement industry in South Africa structured?

Dr Manas Bapela: The retirement industry has moved from having approximately 18,000 funds in the 1980s to just about 3,000 funds, those being largely industry funds, or multi-employer funds. The number of members accounted for in the system is currently sitting at about 15m. The value of the assets being managed as of the end of 2012 is sitting at 2.75trn R, with the split being about 40 percent the government employee pension fund, and the rest of the privately administered funds accounting for about 50 percent, and the rest being underwritten funds or those funds that follow it in the insurance space.

Asset management is quite critical a service in the retirement fund industry

World Finance: Well Mothobi, how is Argon Asset Management Company involved in this industry?

Mothobi Seseli: Asset management is quite critical a service in the retirement fund industry. The reason why retirement funds exist is so when people get to retirement there’s many for them to retire off. We play an important part there in that we try and grow wealth on behalf of pension fund members. We offer strategies across the asset class spectrum, so equities, fixed income, as well as multi-asset class strategies.

World Finance: Over the past months, the South African National Treasury has released a number of papers proposing changes to the retirement industry in South Africa. So what are the main proposals?

Mothobi Seseli: The proposals are numerous, but the key objectives are how do you increase coverage and participation in the system, number one. Number two, the issue of savings. Savings are very important in an economy, if you are going to grow an economy. So how do you increase the rate of savings out of that system? There are a number of things that you could do, so giving incentives from a tax point of view to get more contributions into the system. Giving more incentives for non-retirement savings, that’s very important. How to better income at retirement, that’s also very important. Those are some of the objectives, including of course the issue of preservation, how to get funds working a lot better from a governance point of view. We’re starting to move towards individual retirement accounts, as well as the issue of portability, which also becomes quite critical.

World Finance: Manas, what do you see as being impact of these changes?

Dr Manas Bapela: The impact will be quite broad. If you focus on the one hand on consolidation of funds, I mentioned earlier on that we have seen the number of funds changing from in the 1980s, where it was in the region of 18,000, to a point where it’s about 3,000, and we’ll continue to see this changing over time. I think one of the important benefits is that the economies of scale, the improved governance budget, you no longer have for instance the likes of small employer funds, where affordability of having to handle issues of governance is an issue. You’ve got the likes of umbrella funds where you have the economies of scale. Therefore, when dealing with issues of governance, where we are operating in an increasingly highly regulated environment, seeing those benefits coming through of economies of scale.

Savings are very important in an economy, if you are going to grow an economy

World Finance: And Mothobi,what will be the challenges they will pose?

Mothobi Seseli: There are a number of challenges. The low level of financial literacy in our society. Quite a big challenges. That’s one. Two, the one policy proposal for mandated preservation is potentially difficult in an environment where people don’t have income security. You need to be providing a broad social security net if you are going to mandate preservation, in effect they can’t touch that money, but it’s their money. To trust in the system is three. Quite critical, because of entrenched and vested interests, but largely the issue of attaining the country’s transformational objectives. How do you, alongside changing the system, also change or achieve the transformational objectives of the country, black economic empowerment.

World Finance: Manas, why is improving fund disclosure so important?

Dr Manas Bapela: We all know that globally there’s a move towards improving adherence to affect treatment of customers. At TCF, we know that in our country that something that has been making rounds are guidelines being distributed to trustees of funds that we manage. So it’s important. Now one of the key things to be disclosed is obviously our costs, we know that costs do play a big role in the value that we tried to build for the members, and hence it’s important for them to know what’s going on so that they can make informed decisions.

World Finance: Well finally, Mothobi, with these reforms will come opportunities. What do you see these to be and how are you set to capitalise on them?

Mothobi Seseli: I think the reforms are looking to protect the customer and get the system working better, but importantly there’s an opportunity to put the client at the centre again, so anybody that is will to play along that dimension, I think they’ll find the space open. Increasingly there’s harmonisation across geographies of regulation. Manas spoke about TCF, it’s a global guideline. So firms that are interested in playing, or firms that are capable of raising their level of service provision to talk to that global environment, firms that are able to raise the level of service to a global standard, I think are firms that will take advantage of those opportunities.

World Finance: Mothobi, Manas, thank you.

Both: Thank you.

The private equity market is Bangladesh’s ‘biggest opportunity’, says LR Global

Posted on by Ashton Wenborn

Bangladesh has seen an uptick in economic growth in the past few years, but have richer investment opportunities followed? World Finance interviews Reaz Islam, Managing Partner of LR Global Bangladesh Asset Management Company, to discuss the country’s economic growth and potential.

World Finance: Now a significant portion of Bangladesh’s economy is the export-oriented textile industry. Would you say that this strong growth is sustainable over the next five or 10 years?

Reaz Islam: The labour cost in Bangladesh is about one fifth of China, and about half of India. So that gives you a great idea in terms of the numbers.

The export – you know, I expect this to grow further. It’s about $22bn plus. So Bangladesh has reached a position in terms of value addition, and basically has become the priority, and the choice, for the importers to essentially have a manufacturing base in Bangladesh.

World Finance: What are the other industries that are likely to come to the fore in the near future?

[E]ssentially any kind of manufacturing sector will be very attractive

Reaz Islam: You have on one hand, a huge supply of labour. So essentially any kind of manufacturing sector will be very attractive, and we see has a high potential.

The second thing is the consumer base. So essentially when you have per capita income going from $700 to $1000, all fast-moving consumer products have huge potential, we believe.

The third one, which is somewhat related, is infrastructure. With this GDP growth there is a huge amount of infrastructure required in Bangladesh. Bangladesh has done fairly well in the power sector, covering that gap; but essentially airports, roads, highways, the ports and so on – we see anything related to that in terms of construction and material related companies have huge potential, we believe.

World Finance: How mature is the investment management sector in Bangladesh?

Reaz Islam: So the investment industry is actually very very small, relative to our peer countries. And there are various reasons for that.

If you look at the market cap of the mutual fund industry, which is approximately one percent of the market cap, and very very small for a country like Bangladesh, with a GDP approaching $130bn plus.

Given the size of the market, we see substantial growth potential. But Bangladesh is still a relatively new country, and the depth is less, but we expect this industry to grow significantly over the next few years.

World Finance: Now your client base includes local as well as offshore investors; can you tell me what type of investments are the latter group looking for?

Reaz Islam: Generally the offshore investors are I would say, in terms of priority, most interested in the stock market, because it’s liquid, and it’s more transparent companies.

Number two, the fixed income market. Bangladesh has recently been rated BB- Ba3 by S&P and Moody’s, and we understand Fitch is also looking at it.

Given the size of the market, we see substantial growth potential

And the spread that you get for taking that risk is substantial. The reason I say substantial is, in our view, adjusting for certain factors, Bangladesh probably deserves a BBB- rating, which is in line with India in terms of actual raw, fundamental numbers. Obviously rating agencies look at other things. But from a risk-adjusted basis, if you look at debt-to-GDP and other fundamentals. So we have seen substantial demand over the last six months to maybe a year, once this rating kicked in.

Where I think Bangladesh has the biggest opportunity, which is yet to be explored in a substantial way, is in the private equity market.

The reason is, the cost of funds is very high in Bangladesh, and most of the projects and other initiatives are funded by banks.

Recently we have seen a few private equity funds coming in, setting up their offices here, and there are one-off investments that are done in conjunction with the IFC. But the highest potential we think is there, and we think it’s on that trajectory in terms of opening up that space for foreign investors in the near future.

World Finance: How else can the Bangladeshi government work to create new international investment opportunities locally?

Reaz Islam: You’ll be surprised; if you look at the laws on the book about foreign investments, Bangladesh is probably one of the best. You can own 100 percent of a private company; the repatriation issues have been about 95 percent resolved, in terms of dividend payout and taking capital out.

Bangladesh has the biggest opportunity, which is yet to be explored in a substantial way, is in the private equity market

But the problem, or the challenge, in a country like Bangladesh, is coordination. So basically you have the Central Bank, which manages the capital account. And then you have the Board of Investment. And then you have the Ministry of Finance. And then you have the NBR, which is revenue collection.

I personally believe there must be more coordination among these regulatory entities. And me, as a foreign investor in Bangladesh, would like to see a one-stop shop so that these laws, or rules, which are actually quite attractive, are properly functioning.

So my suggestion to the government, officials, and leaders, would be: we’ve got great laws on the book, let’s mobilise this! There’s a great shortage of capital, and for Bangladesh to grow at 8-9 percent rate will require substantial foreign investments. And I think fixing some of these issues will definitely improve the plumbing to attract foreign investments.

World Finance: Reaz, thank you so much.

Reaz Islam: Thank you.

Illiquid assets are ‘the way to go’, says Futura Investment Management

Posted on by Ashton Wenborn

Adequate risk and return investments have proved illusive following the global financial crisis, where governments have implemented quantitative easing and, as a result, low interest rates to boost economic recovery. World Finance speaks to Alberto Matta from Futura Investment Management about which investment opportunities are the most buoyant.

World Finance: Now Alberto, Futura Investment Management focuses on niche markets, so why was the company set up and what’s your investment style?

Alberto Matta: If you look at banking and asset management, they both work as completely separate industries. In banking you have financial sophistication, you have flexibility, you have balance sheets, and you can provide investors with tailor-made solutions that work according to the specific needs they have.

Asset management works in exactly the opposite way. Asset management was very much a value creation, or there was a culture for value creation – from alignment of interests, which is very important in asset management. And also in a way, a transparency; but of course there, there was no flexibility.

Most asset managers were creating a product that investors either liked, or didn’t like. So what we try to do with Futura is really to try to merge the two cultures.

What we see right now is an undue reward for illiquidity

World Finance: Where are you concentrating funds currently and where are the best investment opportunities?

Alberto Matta: It is a difficult market environment at the moment. What we see right now is an undue reward for illiquidity. So if you look at the illiquidity premium, i.e. the excess return you get from illiquid assets, we think that this premium does not justify the real risk of illiquidity.

We are in an environment where interest rates are very low again, so it’s very difficult to make money for you as an asset manager. We try to focus on illiquid assets because we think that that’s where the value is. Coming from a risk return point of view, that is where most of the value is. And we have the type of investors that allow us to do that.

So if you look at, for example, investors that have long-term investment horizons like 15 years, if you look at a pension fund or an insurance company, they don’t need their liquidity. So it’s actually a sin for them to go after liquid assets, because they lose out on all the extra premium they could get, and they really don’t need it because they have long-term liabilities and should have long-term assets. So we try to focus on these type of investments, and this is why one of the main focuses for us is real estate, we also look at secondaries of private equities.

World Finance: What are the challenges of investing in these areas and how do manage risk?

Alberto Matta: You know how it is, investors sometimes change their minds or their objectives change, and all of a sudden it’s difficult for us to liquidate a portfolio, if an investor decides that they want to only invest in liquid assets. So we always have to keep a clear balance between our full investment portfolio, also allowing for that one or two investors that might change their strategies.

In terms of risk, the way we try to de-risk the portfolio is first of all with local presence and local expertise

In terms of risk, the way we try to de-risk the portfolio is first of all with local presence and local expertise, because at the end of the day, the more you know about what you are buying, the lower the risk you are going to take.

Secondly, we try to have a match between the liquidity of the assets that we own and what we say in the documentation. We don’t promise the possibility to instantly redeem the funds, so investors that are coming into the funds know that they are there for the long run, so that we can exploit the strategy.

World Finance: Well you are based in Malta, and the tax structure in Malta is significant for investors – what are the incentives?

Alberto Matta: That’s not the main reason why we are in Malta. I mean Malta is a hidden pearl in my point of view, because you have availability of skills, which is unprecedented. You have this real eagerness to succeed and to work.

The responsiveness you have from the MFSA, which are the regulators, is exceptional. So the reason that we are in Malta is really for that. We were trying to have an alternative market for Luxembourg, but we also have a Luxembourg platform.

Malta is, you know I always say, they have the mind of the English and the heart of the Italians, and luckily it’s not the other way round. It’s really a place where people, they want to do business and it’s something which is very much appreciated.

Unfortunately if you look at Luxembourg, which is a competing market, in fact it’s a leading market; I think they are being so successful that they are becoming a bit complacent. And I think the responsiveness you get from the regulators, from the lawyers, from the service providers there, reflects a lot of opportunities for them. So they’re not as responsive, whereas in Malta, everything works like a Swiss clock.

World Finance: You have a close partnership with Optimum, why is this beneficial for your clients?

Alberto Matta: Unfortunately the only, let’s say, black mark of Malta is perception. So a lot of institutional investors don’t like Malta, and they prefer Luxembourg for some reason; it is more due to past reasons, or perception.

Malta is a hidden pearl in my point of view

At the end of the day, Malta is a member of the European community, so there is no reason why there should be more recognition to Luxembourg than Malta. But that’s the way it is, and unfortunately we have to adjust to what the market wants.

So why Optimum; Optimum is our Luxembourg platform and a lot of the investors don’t want to invest in Malta, they want to invest in Luxembourg; so we need to provide the two alternatives, in order to attract investors and give them the choice.

World Finance: So finally, what plans do you have for future growth?

Alberto Matta: We will continue to be in illiquid assets, because we really believe that that’s the way to go, and that’s where the opportunities are. So right now we are in a number of markets, real estate markets, around the world.

We would like to launch a second US fund, we think the US market continues to offer great opportunities; it is probably one of the only economies that is growing significantly and consistently.

We would also like to go into emerging markets, so that is something that we might do in the next two to three years. But I would expect to launch a second US fund very soon.

World Finance: Alberto, thank you.

Alberto Matta: Thank you very much.

KAMCO on the MENA region’s ‘increasing opportunities’ for investors

Posted on by Ashton Wenborn

The asset management sector in the MENA region, though relatively unexplored, is growing from strength to strength, with a wealth of investment opportunities. One institution that has capitalised on the industry’s boom is KAMCO. World Finance speaks to its Chief Executive Officer Faisal Sarkhou to find out more.

World Finance: Well Faisal, potential growth in the MENA investment banking industry is seen to be promising, with deal activities gaining momentum. So where would you say are the investment opportunities, and what is the size of the market?

Faisal Sarkhou: Last year was truly a good year. The financial crisis had hit a lot of companies in the region and a lot of business activity slowed down on the investment banking side. We saw a turnaround that resulted in 2013 being the largest in terms of deal value in the past five years, at around $73bn.

This year started well in the first quarter but slowed down again in the second quarter. We are expecting the second half of the year to be strong as well. In 2013 we saw some of the highest performing markets in the world and the region, in particular in the gulf and the GCC countries, that has resulted in an increased flow of foreign direct investment from all over the world.

In 2013 we saw some of the highest performing markets in the world and the region

This has made it more attractive as well for local investors, and has regained their confidence back into the markets. So opportunities are increasing.

On the investment banking side, we haven’t seen too many IPOs in the past period. There is a lot of talk of new IPOs in the UAE, and Saudi Arabia, and there is some talk in Kuwait, but we expect that once that begins to flow, sentiment will also gather momentum.

World Finance: The MENA region has seen its fair share of turbulence – how safe of a place would you say it is to invest?

Faisal Sarkhou: The region has had its turbulence for many years so we are used to having some kind of turbulence in different pockets of the region. However, GCC in particular has been very stable politically, despite any issues that happen; the stability factor has been important there.

What is more important is the stability in the policies of governments as they evolve and develop the markets; introducing new regulations, pushing markets to move from frontier to emerging status. Stability of currency is very strong, GCC and the MENA region being closely pegged to the US dollar has helped with having stability in the market during turbulent times. We are optimistic that political turbulence will result in a better and more efficient government, as the government strives to develop the infrastructure and the human capital.

We believe that this, along with stability, will result in a better operating environment.

World Finance: And how do you manage risk?

Faisal Sarkhou: We at KAMCO have a sophisticated and well-developed risk framework that was built over the years, even before additional regulatory reform and policy that has come in the past four years. This has allowed us to remain operationally profitable during the entire financial crisis.

GCC in particular has been very stable politically

World Finance: What do you see as the major investment trend for 2014, and what do you foresee as being the major events that will affect the market?

Faisal Sarkhou: Always remember the context. The young population’s diversification journeys in the GCC for example, focus on the energy sector, aiming to diversify economies and generate more jobs for the populations that are coming into the workplace. It is that, alongside significant infrastructure spending.

The planned infrastructure spending in the GCC is at around $2.5trn. This is lead by Saudi and UAE markets, with all other GCC countries putting in significant amounts to develop infrastructure. That infrastructure development will help mostly on the defensive sectors of the markets.

It will have an impact on the health-care sector, the education sector, the housing sector and all of this will result in more jobs, more activity and better capital market movement in the future.

World Finance: Looking at your KAMCO research now; emerging markets have had a difficult year, why do you think this is and do you see them picking up?

Faisal Sarkhou: The start of this year they have had a bit of a better pick up as currency and debt issues are being resolved. However the MENA region in particular and the GCC have had one of their best years in 2013, with some of the markets performing in the top tier and 90 percent of them giving double-digit returns in growth and investor returns.

This is one of the key reasons that there is the stability of the exchange, the GDP growth that has happened, and the stability of the oil prices. So the MENA region in general has gone through a good year in 2013 and we expect it to continue this year, despite the political turbulence that is there.

We at KAMCO have a sophisticated and well-developed risk framework that was built over
the years

World Finance: Looking to the future now: what markets will you target for growth and investment?

Faisal Sarkhou: The strategy is focused on growing our activities in the MENA regions at this stage. We believe the prospects are positive and will remain positive.

If you look at all economic indicators you have got strong GDP expectations, the MENA block is expected to be in the top three in the world in terms of GDP growth. The impact of surpluses will be there; extensive government spending on infrastructure and human capital will also fuel this positive expectation. More political stability will also add to this.

We at KAMCO have established, and are establishing, a number of products that are spanning the MENA regions from our base in Kuwait, and we hope to grow those products as we truly believe these regions are here to grow and in a faster manner in the future.

World Finance: Faisal, thank you.

Faisal Sarkhou: Thank you Jenny.

Managerial roles diversify at investment firm MASIC

Posted on by Ashton Wenborn

Perhaps the most significant challenge faced by any family-run business is longevity. There is a strong body of evidence to suggest that the founding family should relinquish control of a company within three generations; a mere four percent of firms survive into the ownership of the fourth generation, according to several academic studies on the subject.

The transaction is the largest private equity deal in the MENA region so far this year

Long-term survival was certainly one of the factors that prompted Mohammed Alsubeaei & Sons Investments Company (MASIC) – one of Saudi Arabia’s most prominent firms – to change its managerial model. The Riyadh-based company manages assets including equities and private equity funds, and generates returns through direct investments in a range of sectors including real estate. “Three years ago we decided to institutionalise, and move towards a more professional management structure,” said Ihsan Abbas Bafakih, MASIC’s CEO.

“We started implementing the changes, putting in place new legal structures that separate family from day-to-day management. So there are family members on the board of directors and the executive committee, and they can continue to be a great inspiration and generate ideas that contribute to the overall success of the firm through a best-practice structure that carries on their legacy.

“The transition has been difficult at times but the positive aspects make it worthwhile. Other companies respect you more, banks look at us more favourably when considering lending to us, but I think for us the main incentive was longevity, ensuring our business is sustainable in the long term.”

Far-reaching deals
Impressive growth, domestically and internationally, suggest it was the right move for MASIC, as do the recent nominations for two World Finance awards, in the categories of Best Family Owned Investment Company and Best Private Equity House in the GCC. MASIC’s assets under management have doubled in the last three years, and its overseas investment portfolio has grown exponentially – with investments spread across the board in sectors such as financial services, real estate, agricultural (aquaculture), manufacturing, industrial and retail.

In recent years, the firm has been involved in some landmark deals, including the redevelopment of London’s iconic King’s Reach Tower (now known as the South Bank Tower) by providing £145m of funding through the largest sharia-compliant mezzanine facility of 2012. And just this month, MASIC’s Fajr Capital led a consortium that announced it is buying the Dubai-based oilfield services company National Petroleum Services. The transaction is the largest private equity deal in the MENA region so far this year.

Despite its ascent into the ranks as one of the kingdom’s most respected companies, MASIC refuses to lose touch with its family roots and the principals of its founder, Sheikh Mohammed bin Ibrahim Al Subeaei. An astute but modest businessman, Sheikh Mohammed instilled a strong sense of social responsibility in the company, and these ethics and values have been transferred to his sons, and instilled in the current members of the management.

Source: International Monetary Fund. Notes: Post-2013 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2013 figures are IMF estimates

The Mohammed & Abdullah Al Subeaei Charity Foundation epitomises this, which supports humanitarian, religious, cultural and social projects in the kingdom over the last 10 years since it inception. “Our founder was well known as a very ethical man,” said Bafakih. “He wanted his company to behave ethically and demonstrate a strong sense of social responsibility, and that governs how we do business today.” Other examples of corporate social responsibility include the MASIC Annual Forum – now in its sixth year – which helps attract investment to various projects that underpin the development of the country. Another important founding principal, and one that guides all MASIC’s investment decisions, is that of sharia-compliance.

“When companies come to talk to us, sometimes they have to go back and do something differently before we’ll invest, so that’s forcing what we see as positive change on certain other firms, and in the long term, throughout the business environment,” Bafakih explained. To this end, MASIC also sponsors Harvard University’s Islamic Finance Project, which conducts research into the theory and practice of sharia-compliant finance.

The Al Subeaei family business started life as a trading house founded in Mecca in 1933 by brothers Mohammed and Abdullah Ibrahim Al Subeaei. The family group of companies grew with the fortunes of Saudi Arabia following WWII, and the founding of The Al Subeaei Currency Exchange Company marked its formal entry into the financial services business.

MASIC is fiercely proud of its Saudi heritage and maintains a strong bias toward investing in domestic markets (see Fig. 1). Among MASIC’s key investment assets are Alargan Projects, Bank AlBilad and Jadwa Investment, the biggest independent CMA-licensed investment company, which has been able to gain market share from bank-backed investment firms established in the 1970s. “Our roots are in Saudi Arabia, so the family feel they have a duty to the local society,” said Bafakih.

Addressing local unemployment
Nurturing local talent among a young Saudi population is something the firm is actively involved with. MASIC has developed strong links with local universities and colleges, offering the sort of compensation packages likely to attract high-quality local graduates. The government has been addressing the kingdom’s well-documented skills shortage by investing heavily in education and vocational training.

Such reforms, aimed at bringing down high youth unemployment, have enjoyed a degree of success. The Labour Ministry recently reported that the number of Saudi citizens working for private companies has doubled in the last two and a half years. “We need to get more of our locals working for the private sector. Yes, there’s a need for people to receive the right kind of education, but there’s also a responsibility on companies to hire local talent. You find some companies want to hire less expensive, foreign labour, and that’s something that needs to change,” according to Bafakih.

“At MASIC we have a policy of working with educational institutes, aiming to network with universities and be in touch with talented locals. Companies must offer good benefits and professional development opportunities in order to compete with government jobs and attract young Saudi nationals.”

The company has every reason to be optimistic about the future. Its three-pronged approach to generating returns, through asset management – including equities, fixed income and private equity funds, direct investment and real estate – has proved highly successful. Bafakih said the company will continue to focus primarily on domestic markets while at the same time increasing its rapidly expanding foreign portfolio. “A lot of our growth is down to a strong Saudi market,” he said. “But the larger you grow, the more global you want to become, so we definitely want to increase the international portion of our assets.

“We’re not trying to double the money next year, we have a focus on generating income through things like real estate,” Bafakih explained. “We have a large amount of investment in office space, and we have companies that do residential leasing, for example. “Our recent expansion in the services sector catered to logistics. While Saudi Arabia is the most advanced in the industry regionally, it falls behind in logistics.

“Our recently launched initiative will cater to this gap in our local offering. “We have a long-term perspective. We’re not a hedge fund or a fly-by-night operation, we want to still be around in three or five hundred years Insha’Allah [God willing].”

With a new management structure in place, a growing portfolio of global and domestic assets, and a strong reputation for building successful long-term partnerships with stakeholders, Bafakih sees no reason his company won’t be a premier Saudi investment firm, deploying strong investment practices delivered by a team of professionals all sharing a common set of values.

“We feel we are in a very strong position indeed,” he said. “Although our heritage and the legacy of our founders is central to what we do, we are moving with the times, always adapting to a constantly evolving business landscape. I believe that’s what makes MASIC unique and gives us our competitive edge.”

KAMCO accelerates GCC region’s economic growth

Posted on by Ashton Wenborn

Last year was a positive year for Kuwait, which, along with most major equity markets in the region, managed to build on the previous year’s positive performance, coming off the back of a particularly tough 2011.

Investor confidence in capital markets has grown and this is reflected by increasing investor demand for a wider range of investment opportunities, services, and better returns in the low interest rate environment. This client-driven demand has created incentives for KAMCO and other major regional investment companies to further enhance existing platforms in order to deliver solutions and opportunities to help investors achieve their investment goals.

Despite ongoing political instability seen in some nearby countries, most regional equity markets have achieved double-digit returns. All of the GCC capital market participants are working to further build robust financial institutions with stronger and evolving regulation.

Despite the challenges, the region’s capital markets are expected to see growth in returns, as well as higher activity, investment flows and liquidity

With MSCI upgrading the UAE and Qatar to emerging market status, other countries are working to develop their markets to international standards. We at KAMCO expect that in the coming five years, more regions will be considered as emerging markets, thus adding more liquidity to the region, in line with strong private sector growth and development expectations led by strong oil prices, government infrastructure spending and human capital development.

Looking forward
So far, 2014 has been a good year for all MENA regional equity markets. Expectations for the rest of the year are positive. With recovery signs well in place, the MENA region is expected to see further growth as its economies prosper.

Even though the year is expected to see some volatility in regional capital markets, if the geopolitical scene continues to improve, the area is expected to perform well overall, with most markets set to achieve double-digit returns. This maintains our expectations, in line with most other analysts, that if there are no major shocks, growth is expected to continue, especially in a low interest rate and inflation environment. Certain sectors will benefit from the anticipated growth more than others, such as real estate, services, consumer and trade finance sectors. We at KAMCO are looking into launching products that meet growth prospects and investor needs, and have launched MENA-focused managed equities and real estate funds in the past 12 months, as well as a new MENA fixed income fund. We are also gearing ourselves up to play a leading role in managing new capital market issuances.

Despite the challenges, the region’s capital markets are expected to see growth in returns, as well as higher activity, investment flows and liquidity. With those anticipated capital inflows – combined with significant developments in regulatory frameworks, including enhanced corporate governance and transparency initiatives – we anticipate a transition to strong growth in terms of depth and breadth of markets, with blue chips and growing medium-sized enterprises benefiting the most in 2014. Since Qatar and the UAE were upgraded to emerging markets status by MSCI, Kuwait has been present on the MSCI Frontier Markets Index, which makes Kuwaiti corporates more visible, attracting interest from major international equity investors.

Along with the anticipated growth in capital markets, we expect to see more development in regulation, which will bring higher costs and compliance risks, especially in the short term. Furthermore, keep in mind that regulators and policymakers alike have become extremely cautious in overseeing and managing growth, having learned from previous bubble experiences.

Nonetheless, given the current strong liquidity available with regional banks, there will be stricter limits imposed on financial institutions in order to avoid overexposure to any particular sector. Banks will be encouraged to use a risk-adjusted capital management framework for lending, as well as dealing with the operating implications of Basel III and other international issues, such as FATCA.

This could present an opportunity for local investment houses like KAMCO and international players to play a major role in developing more sophisticated capital market solutions that meet growth needs.

The region’s capital markets are still in their infancy, with limited depth and breadth, but are quickly evolving as the private sector grows and markets develop, with more instruments being introduced along with new regulations and government policies focusing on developing markets.

Such developments are needed, especially in GCC countries like Kuwait, which are considered fiscally sound markets that offer ample opportunities to investors across various sectors, including real estate, infrastructure and consumer goods sectors.

Dealing with debt
The debt situation in Kuwait and the GCC remains dominated by bank financing, and markets remain thin and limited to traditional forms of debt financing and products. They do not yet have the structured and tailored financial products seen in more advanced markets.

One key reason for the slow growth in debt issuances in Kuwait and the GCC is that the region’s sovereign debt markets are relatively underdeveloped. Investors are also not well versed in investing in local or regional debt products, meaning the market lacks depth. Stable and high oil prices have led to strong fiscal surpluses, making government activity in developing the situation a lower priority. We believe that sovereign action is needed, and that sovereign issuances are central to developing the regional debt markets through the appropriate establishment of yield curves, which is an essential base for debt management.

Having said that, some GCC countries like Qatar, the UAE and more recently Saudi Arabia, are developing their debt markets by issuing conventional and Islamic debt, as well as forming policies to develop such instruments.

Source: International Monetary Fund. Notes: Post-2010 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2010 figures are IMF estimates

The interest rate environment in the GCC is low at present, making the debt market a viable financing option for businesses. However, the presence of challenges that limit the depth and breadth of solutions makes it costly and difficult to consider such solutions by businesses raising debt financing. Another important element is the increasing awareness and understanding of debt financing and its benefits with or over equity funding. Companies need a better understanding to strike the right balance between debt and equity so as to optimise the cost of their capital structures.

The impact of oil
The six nations of the GCC had a combined nominal GDP of $1.45trn in 2011, which accounted for two percent of global GDP. This figure is estimated to have reached $1.58trn in 2012, while the IMF 2013 estimate for 2013 is $1.60trn.

The GDP of the GCC region has almost quadrupled in nominal terms since 2001, growing at a compound annual growth rate (CAGR) of 14.5 percent. This has led to a near doubling in its percentage share of global GDP from 1.1 percent in 2001 to two percent in 2011 (estimated to be 2.2 percent for 2012).

The rise in the GCC’s weight in the global economy is a result of both high energy prices and rapid real economic growth supported by government spending on production and infrastructure projects. GCC real GDP grew at an average annual rate of 4.86 percent from 2007-11 compared with a world average growth rate of 3.4 percent, making it one of the fastest growing regions in the world. The IMF estimates that real GDP growth in the GCC reached five percent and 3.7 percent in 2012 and 2013, respectively, outperforming global GDP growth expectation of 3.2 percent and 2.9 percent.

The size of the GCC economy has been supported by the hydrocarbon sector, which has been the backbone for an economy driven by elevated oil prices. However, a global economic deceleration can severely impact oil prices, with weaker demand leading to weak economic growth; this despite the fact that many countries have the buffers to withstand short-run oil price volatility, yet a sustained drop in oil prices resulting from a further slowdown in global economic activity remains a key risk.

Kuwait is the second-wealthiest country in the GCC on account of its substantial oil resources, and the fourth-largest economy in the region with an estimated nominal GDP of $199.3bn in 2013, according to the IMF. The economy remains dominated by oil and gas production, which comprised an estimated 63 percent of nominal GDP in 2012, and contributed to around 94 percent of the government’s revenues.

Economic growth has been strong, with constant prices GDP growth of approximately 8.2 and 6.6 percent in 2011 and 2012, respectively, as the oil sector expanded due to capacity increases and the mandated production cuts by OPEC introduced in 2010. Going forward, the Kuwaiti economy is forecasted to continue posting healthy growth rates in the medium-to-long term (see Fig. 1).

Global review: a look at the WEF’s Enabling Trade Index 2014

Posted on by Ashton Wenborn

Rankings are based on the quality of institutions, services and policies that allow the trade of goods over international borders. The higher the ranking the better the trade.

Singapore (Rank 1)
Singapore’s government has been positioning the country as a global business hub for a number of years, welcoming global trade. It has topped the report for four consecutive years, reflecting the way in which it has opened its borders to international trade. It scored top marks on the four key sub-indexes of market access, border administration, transport and communications infrastructure, and business environment. Singapore is regarded as a highly developed trade zone that is the most open in the world, with very low tax rates that represent 14.2 percent of GDP. This year, the economy is expected to grow at 3.8 percent, with exports falling slightly.

Netherlands (Rank 3)
Widely seen as having the best port infrastructure in the world, the Netherlands is the highest-performing European country in the index. The country was also praised for its entire transport infrastructure network, as well as its advanced and extensive use of IT for its trading operations. Border administration is both transparent and efficient, although far more expensive than Singapore and Hong Kong. Despite its strong performance on infrastructure and transport, the Netherlands performed slightly worse in terms of market access, coming in at 75th. Improving this access for overseas businesses would help the country climb up the rankings.

Global-review-2

UK (Rank 6)
The UK is described as having a world-class border administration and infrastructure by the report, something that might come as a surprise to those that frequently use its airports. Trading in the UK has been made considerably easier in recent years, with a commitment to encourage cross-border business as a way of boosting the economy. Transport services enjoy positive logistical competence and tracking ability, as well as efficient delivery of goods. It also has an advanced IT infrastructure, coming second globally to connect businesses and consumers online. However, it was criticised for its market access and ‘high complexity’ of tariff structure.

Canada (Rank 14)
Canada’s relatively high performance is largely down to its attitude towards imports, with a reported 89.4 percent entering the country free of duty. It is described as ‘one of the most accessible among advanced economies’ in the world, although its performance in other areas hampered its score. The nation’s high tariffs mean that it scored poorly on the index for importing and exporting goods. It is the high tariffs and overly complicated import procedures that most companies feel are the main issues for importing goods into Canada. There were also concerns over restrictions on the amount of multilateral trade, as well as difficulties in the hiring of foreign labour.

Australia (Rank 23)
Australia was praised for its consistency, particularly in IT use and transport infrastructure. Despite this, the WEF says that the Australian government needs to improve both its port and railroad infrastructure if it is to continue to cater for its booming mining industry, as well as other trade, and avoid potential bottlenecks. Its border administration is efficient, even though the costs are relatively high. Australia employs high tariffs for exporters, meaning that foreign market access is especially difficult for traders. According to the report, a shipping container from Australia costs $300 more than from nearby New Zealand.

Taiwan (Rank 24)
Jumping five places up the index, Taiwan has undertaken a series of public sector initiatives designed to boost trade and improve economic efficiency. It was rated highly in the report for its efforts to simplify border administration, although saw a drop in terms of market access. The country did finish top for customs transparency and terrorism incidence, as well as fifth for trade finance. While the rise was a positive step for Taiwan, it performed poorly in terms of margin preference for destination markets, coming 134th out of 138, showing that the country is not integrating fast enough with its local neighbours, preventing domestic firms from expanding overseas.

Global-review-

Mexico (Rank 61)
Mexico’s performance has been mildly better than its Central American and Caribbean neighbours, with market access being cited as one of its competitive advantages. As much as 83.7 percent of imports enter into Mexico free of customs duty, meaning it is relatively welcoming of overseas trade. However, it is criticised for its lack of infrastructure, and its poor quality of transportation. A dramatic improvement of Mexico’s rail network would help to boost trade, as well as making the postal system more efficient. Marked down for his lack of accountability of public institutions, President Enrique Peña Nieto has however, been praised for being open to FDI.

Argentina (Rank 95)
Populist and anti-business measures by the government have meant companies are wary of doing business in Argentina. Border administration was criticised, with imports and exporters suffering from costly and prolonged procedures. The WEF say the government should look to speed things up by employing useful IT services to improve transparency and accountability. There are also concerns over the country’s business environment, and in particular the protection offered over property rights, FDI rules and access to finance. If Argentina is to improve the business environment for importers and exporters, it will need to relax its protectionist policies.

Banca CIS on San Marino’s economic potential

Posted on by Ashton Wenborn

The Republic of San Marino is a small state inside Italy, yet is renowned for its banking sector. One bank that has firmly built its routes there is Banca CIS. World Finance speaks to Professor Massimo Merlino and Daniele Guidi from the company to discuss San Marino’s economic potential, and the opportunities open to investors.

World Finance: Well Massimo, if I might start with you, San Marino – what’s its economic potential globally?

Massimo Merlino: San Marino is a sovereign state, having its own autonomy from three centuries after Christ’s death, so it’s an unbelievably long story of the republic. It’s very very integrated with the world, it has a lot of relationships with more than 100 countries around the world, so it’s commercially and financially also integrated we must say.

[A]ll the small states are leading globalisation

Of course, we can do more; the potential of small states in globalisation is very high, as you know. Because all the small states are leading globalisation and also San Marino can offer to the world a lot of its own competencies and a lot of its own experiences. Normally we are not so known like very old financial platforms, like in Asia or in Europe, but we can of course have a very similar role in the future.

World Finance: What can you tell me about the region’s financial system from an international perspective?

Massimo Merlino: All the micro-states in Europe are moving to more integrating agreements with Europe, with the US, with international markets. And San Marino has proven to do very accurately all these steps, of integration internationally and agreement to be signed with the US and with Europe, and so now it’s ready to be completely open to the world.

The recent fiscal agreement with Italy has at least finished a long discussion with the Italian government. San Marino is on the White List of all OECD organisation countries, but was not with Italy, so now everything has been solved and San Marino is ready to go on the world stage. Of course we have a lot of things to learn in techniques, in competencies, and a lot of new human resources to be educated to international financing.

World Finance: And how is Banca CIS positioned in the region?

Massimo Merlino: Now it is a bank of about 8,000 clients, about 90 employees in the banks and collecting total assets of €1bn. So it’s a medium bank, and of course very active in retail but also in private, because it’s the result of a fusion of previous institutes operating in San Marino.

In the private segment we have the longest periods, from one of these institutions which were connected all together in this Banca CIS. And our private experience is particularly strong because we have a financial company, which is called Scudo Investimenti.

This company is managing 15 funds of San Marinese law and this fund has a lot of advantage from a fiscal point of view, because of San Marino’s lower regulation. And we can also, through Scudo, engineer new products and new funds for other banks according to their specifications.

World Finance: Well Daniele, over to you now: how is the banking system in San Marino structured?

Daniele Guidi: In the past there were 12 banks and about €14bn managed by our whole financial system. But the crisis beginning in 2008 and also the fiscal amnesty in Italy have reduced the potentiality for about 50 percent of deposits. Now we are only seven banks after a process of consolidation and merger acquisition.

The system is in this moment stronger. Also the Central Bank of San Marino’s Annual Report has recently certified the potentiality of the system. And just to give you an idea, the supervisory regulation required for our bank is a minimal level of service duration of 11 percent, so all the system is more than 11 percent. To make a comparison with Europe, Europe is at six, seven or eight percent.

But there are a lot of opportunities: in the last two years our government has improved a lot of laws for residential and fiscal opportunities for foreign investors

World Finance: Well what opportunities do you see for foreign banks and firms in San Marino?

Daniele Guidi: We know very well that San Marino is not acknowledged in this moment as a financial opportunity for foreign investors. But there are a lot of opportunities: in the last two years our government has improved a lot of laws for residential and fiscal opportunities for foreign investors in San Marino.

Just to give you another idea, San Marino is involved as a smaller state – a European small state – in an agreement with the European Union for association, when enables exchange of capital and people inside Europe. So when this process has been handled, there should be the possibility to invest through our country directly in Europe and also using our double taxation agreement network to have fiscal advantages for investors in Europe.

World Finance: Well finally, what’s Banca CIS’ strategy for future growth?

Daniele Guidi: To offer for our local customers a number of products and services under our technology; mobile phone and mobile opportunity.

Secondly, there is an opportunity reserved with this agreement with the European Union. We would like to develop corporate finance, because corporate finance should be very interesting for this kind of investor.

Thirdly, our know-how is also important in private banking and wealth management, and as a family office. We are opening new branches outside Italy, outside Europe in this sector, so we would like to develop private banking and wealth management opportunities in Europe.

World Finance: Daniele, Massimo, thank you.

Daniele Guidi: Thank you.

Massimo Merlino: Thank you.

Pakistani anti-terrorism measures not good enough to attract FDI | Video

Posted on by World Finance

Pakistan continues to face a sluggish economy partly due to recent terrorist attacks in the nation’s financial capital, Karachi. These events, in addition to other local threats from militant groups, have resulted in a limited number of foreign direct investment opportunities. World Finance speaks to Michael Kugelman on how the government and the emerging middle class can improve the country’s economic prospects.

World Finance: Pakistan is currently engaged in its most ambitious attempt to control the Taliban and Islamist fighters in the mountains of Waziristan; what are the costs of losing this region?

Michael Kugelman: You hear very often the phrase that Pakistan is essentially the supermarket for global terrorism, just because there are militants of all walks of life. Some Pakistani, some from elsewhere around the world. Al-Qaeda has a large, or had a large presence, in this region. There are a lot of foreign fighters there. And of course Pakistan is a country with nuclear weapons, so that all adds to the picture, and makes it a really unpleasant stew of militancy.

So there’s really a lot at stake here.

World Finance: Now do you think the perception that Pakistan has been harbouring terrorists, the likes of Osama bin Laden, will be obscured by this current military campaign?

Michael Kugelman: Unfortunately no. I think that on the surface level, this military campaign in north Waziristan seems to be a good thing. Because for the very first time in recent memory, the Pakistani government has agreed to launch a military offensive in this locus of terrorist activity in north Waziristan.

The problem though is that the Pakistani military’s going to be very selective in who it goes after. It’s going to go after certain militants, like the Pakistani Taliban, that target the Pakistani state. But there are many militants in north Waziristan that target Afghanistan, that target international troops in Afghanistan, that target India; I’m talking about groups like the Afghan Taliban, the Haqqani network.

There are a lot of groups that are threats, and they really are not going to be dealt with. In fact many of them have actually just left north Waziristan and slipped into Afghanistan or other tribal areas.

World Finance: And all of this being considered, how is it going to affect investor confidence in the region?

Michael Kugelman: There really is not much interest at all in terms of foreign investment in Pakistan, and particularly since a terrorist attack on the Karachi airport not too long ago, which I think really hit home.

If the major airport in the financial capital of Pakistan is attacked… you know, it can’t really get much worse than that.

And it’s a shame! Because there is a lot of potential in Pakistan. A lot of growing industries. In my view there is the architecture for there to be significant foreign investment in Pakistan. But the security situation just does not allow for it.

World Finance: So what is this all going to do for the country’s international economic curb appeal?

Michael Kugelman: If the security situation calms down, then I think we could see it change. Unfortunately I tend to be a pessimist. I really fear that the security situation will get worse before it gets better. I fear that a lot of the militants that are being targeted by the military will essentially launch a new campaign of revenge attacks, which will make the security situation even more troubling. And that of course bodes very ill, bodes very poorly, for foreign investment.

World Finance: Now let’s consider the role of the military. The military complex of course is one of the strongest in the world in Pakistan; who really controls the country? Is it the government, or is it the military?

Michael Kugelman: The military has a say in everything, including the economy. Every year, despite promises to the contrary from the government, defence spending always constitutes a significant component of the national budget. And this hasn’t changed this most recent year. And so I think until the military is willing to relinquish its tight hold on the budget; until more money is made available to cover other key areas – from energy to education – there are going to be a lot of problems.

Others will argue however that the military, when it’s been in power, the military was actually very effective. It actually managed the economy very well. There wasn’t as much corruption and so forth.

But the key issue is that the military still hogs the national budget, and that’s not going to help the economy.

World Finance: But there have been some demographic changes, including the role of the middle class; can you tell me how important are they to the future of Pakistan?

Michael Kugelman: Pakistan is not the type of country that lends itself to large protests. It’s a very divided country, fractured along ethnic lines, provincial lines, sectarian lines. It’s hard to get these large movements, even within the middle class.

I’m glad you mentioned that, it’s a very significant component of the demographic; it’s relatively large and rising.

I just don’t see it as realistic. I don’t see there being these protests, trying to get the military to change the role it plays in the politics of the country.

World Finance: Now let’s look at the government’s overall game-plan. They’ve been involved in fiscal consolidation to deal with high deficits, but do you think that this is even the most effective economic strategy?

Michael Kugelman: No, unfortunately I think there’s much to be concerned about the Pakistan’s economic policy. I’ve said before, I’ve said many times that Pakistan does have the potential to get its house in order. But I just see repeatedly that despite what the government’s saying about belt-tightening moves and austerity measures, that it essentially is settling for hand-outs.

Not too long ago, the Saudi Arabian government, which is very close to the Pakistani government, provided a lot of money to Pakistan to try to deal with some of its economic problems. It’s a good short-term measure, but it certainly is not sustainable in the long-term.

Similarly Pakistan has tried to address its very large amount of debt in its energy sector. Not by creating more efficient industries, or dealing with pricing and subsidies, but simply printing more money to bring the debt down! That’s what it did a few months back. And of course, completely predictably, that debt has come right back.

So I see a lot of encouraging nice talk, and the right things are being said. But in terms of actual action on economic policy, I’m not seeing much to be encouraged about.

World Finance: Michael, how long is it going to take for us to see Pakistan really turn a corner?

Michael Kugelman: So I think it’s going to really take a paradigm shift in how the state and its practitioners, and the people in government, think about the country as a whole.

Maybe one could argue that we have to wait for a new generation of younger, more open-minded Pakistanis to bring about this change. But unfortunately, given what I’m seeing about demographics in young people in Pakistan, they tend to be much more conservative, in many cases much more hard-line, than their parents’ generation. More supportive on the military.

So I fear… it’s hard to put a date on when things could change. And I really worry that Pakistan could really… it…

Probably what will happen is that it will muddle along. It’s not going to collapse, it’s not going to fail – contrary to what a lot of people, including in Washington DC here, say. But I think it’s really going to plod along, muddle along, and it’ll reach a point where you have to wonder – how long can it continue to survive on that level? And I don’t know.

World Finance: Michael Kugelman, thank you so much for joining me.

Michael Kugelman: Thank you.