Month: August 2014

A life for a gun: can Cameron and Obama’s engagement in the global arms trade ever be justified?

Posted on by Ashton Wenborn

Conflict in Israel and recent high school shootings across America have led many to condemn the global arms trade, and governments for facilitating it. While trade in arms is a multi-billion dollar industry, many argue that the deaths caused by armed violence can never justify its existence. Is governments’ engagement in the global arms trade ethical? World Finance speaks to Andrew Feinstein, author of The Shadow World: Inside the Global Arms Trade, to hear his views.

World Finance: Andrew, let’s start with the scale of the global arms trade; what numbers are we looking at?

Andrew Feinstein: Well looking back to 2013, about $1.75trn was spent on national defence, national security, what’s sometimes called homeland security. So, business that the arms companies could get into.

That’s about $250 for every person on the planet.

The trade in what we know as conventional weapons is usually somewhere between $70bn and $120bn a year.

World Finance: And is it structured like other industries?

Andrew Feinstein: The trade is really dominated by the big players: the Lockheed Martins, the Northrop Grumanns, the BAE Systems.

I think what makes this a unique industry is that its relations with government are incredibly close

But I think what makes this a unique industry is that its relations with government are incredibly close. And there is what we call a revolving door, a movement of people, between the industry, the military, and the government.

So that creates quite a unique structure, and quite unique arrangements.

World Finance: Well to coin a phrase from Star Trek, the Ferengi said “War is good for business, and peace is good for business.” Would you say this sums up the global arms trade? And in economic slump times, how is the industry affected?

Andrew Feinstein: In times of greater peace, there does tend to be less spending on conventional weapons.

And there certainly have been accusations that the trade in some ways is involved in attempting to ensure that the world doesn’t have periods of long peace or stability, because it is bad for their business model.

World Finance: Well how political is it when a country chooses where to buy from? Or even where to sell from? Or is it always best price?

Andrew Feinstein: No, it’s not always best price. There are a number of dimensions.

One is definitely political: they tend to purchase to cement political and military alliances. Saudi Arabia, for instance, purchases an extreme amount of military equipment – far more than it has the personnel or expertise to ever use! – in order to cement political alliances.

Unfortunately, what is crucial to decisions about what is bought, and where it is bought from, is corruption.

The trade in weapons is widely regarded as the most corrupt of all trades in the world. So one estimate by a researcher at Transparency International a few years ago, puts the figure at 40 percent of all corruption in all world trade.

[T]he company that pays the biggest bribe, to the most key decision makers, is the company that often gets the business

And unfortunately, from my own experience in South Africa, the company that pays the biggest bribe, to the most key decision makers, is the company that often gets the business.

World Finance: How significant is the black market in creating inconsistencies?

Andrew Feinstein: The distinction between a legal arms and an illegal, or black market, arms trade, is extremely fuzzy.

So you would find some of the biggest defence manufacturers would also use key dealers that operate in the black market – or what’s often called the grey market, where there are aspects of legality and illegality – in transactions.

And this creates huge additional costs on purchase price, because often the costs of corruption, of what are known as ‘economic offsets’ or ‘economic incentives’, are built into the purchase price.

World Finance: So how much does business come before humanitarian principles in this industry? Because obviously we’ve seen in the UK they’ve been criticised for selling arms to Israel, despite their condemnation of what’s happening in Palestine.

Andrew Feinstein: There is often the claim that the trade intensifies and extends the life of conflicts.

This isn’t to say that the trade in arms causes those conflicts; but that once those conflicts are underway, the easy availability of weapons to all players in those conflicts is something that keeps them going for far longer than they would ordinarily do.

So I think that there is some validity to the argument that this is business ahead of concerns for peace, ahead of human safety and security.

World Finance: We often hear phrases such as ‘arms control by embarrassment’, where it takes a humanitarian catastrophe such as Palestine to stop the selling of arms to a particular country. But at the end of the day – sorry to be blunt, but – the arms are designed to kill people. So wherever they’re sold, there’ll be the same result. So surely the problem is the trade itself, not where they’re sold to?

Andrew Feinstein: There are elements of what these companies produce that can be used legitimately for self-defence, for homeland security.

However, the vast majority of what they produce is used for what is called ‘offensive warfare’.

You refer to the situation in Palestine; we have the ironic reality that someone like President Barack Obama or Prime Minister David Cameron are calling for a ceasefire in Gaza, but are still supplying Israel with enormous quantities of the weaponry that they’re using in Gaza.

[W]e have the ironic reality that someone like President Barack Obama or Prime Minister David Cameron are calling for a ceasefire in Gaza, but are still supplying Israel

And we even had a situation where during one of the ceasefires, Israel was able to replenish its weaponry from its US sources during the ceasefire.

Now clearly that is not going to lead to any sort of lasting peace in that situation. So yes, there is absolutely no doubt that a part of this warfare, and these conflicts, are being driven by the industry.

They also, crucially, influence government policy. So that we have a situation in the US today where the default position is warfare to resolve differences. And that’s reflected best by the reality that it takes more people to staff and maintain one aircraft carrier than the US has diplomats throughout the world.

And today the US has 10 aircraft carriers.

World Finance: Well institutions such as the NRA believe that gun ownership is a necessity, and if the trade is supporting economies, surely there’s an argument for it?

Andrew Feinstein: One could argue that the trade in hard drugs aids the economy. There are probably in the US hundreds and thousands, if not more, people who actually earn a living out of the trade in hard drugs.

That doesn’t mean we should regard that trade as a trade we want to encourage.

Similarly, the trade in weapons is not a trade that we should be encouraging, because it facilitates and intensifies conflict.

Where it needs to exist – and unfortunately in the world that we live in, it’s probably not the most practical solution to say that the manufacture of armaments should be brought to an end. But I think what we can say, given that we regulate the trade in alcohol, the trade in pharmaceuticals, and various other trades that have an impact on our lives; surely the most highly regulated trade on the planet should be the trade whose products result in death.

World Finance: Well finally, purely economically speaking now: such is the scale of the arms trade, would you suggest wars are beneficial for economies?

Andrew Feinstein: I think as an economic industry its importance is overstated.
I think as a job creator, it’s an incredibly bad industry.

As a generator of new technology, there could be more productive technologies generated with the R&D expense that is incurred – usually by the state.

And I do believe that the industry undermines governance by the extent of corruption in the industry. It undermines the rule of law in both buying and selling countries. And it does contribute to greater warfare and conflict than would otherwise be the case in the world we live in.

World Finance: Andrew, thank you.

Andrew Feinstein: Thank you very much.

Twin listing Seplat could seriously boost Nigeria’s energy industry

Posted on by Ashton Wenborn

Nigerian oil and gas company Seplat has set records and may seriously boost Nigeria’s energy industry after being listed in London and Lagos, in an attempt to raise much-needed capital. The move proved extremely lucrative for the firm, which is hard-pressed to buy up oil fields in the Niger Delta as international firms flee the sabotage-prone area. For Seplat, the IPO brought in more than $500m, valuing the group at $1.9bn. It was the largest IPO in London in years, and its success suggests that African firms looking for capital should venture outside of the continent’s stock exchanges, which still lack significant liquidity. In this respect, Seplat’s young story could be one of great fortune.

Founded in 2009 by two Nigerian businessmen – ABC Orjiako and Austin Avuru – the company conducts independent oil and gas exploration and production in Nigeria, having acquired a 45 percent participating interest in three on-shore producing oil and gas leases, located in the western Niger Delta basin of Edo and the Delta states, which include the Oben, Ovhor, Sapele, Okporhuru and Amukpe fields.

The area is particularly lucrative for firms to gain access to, as some two million barrels of oil a day are extracted in the Niger Delta, with an estimated 35 billion barrels of crude still residing under the delta. It is this area that has helped make Nigeria the biggest producer of petroleum in West Africa (see Fig. 1). With Seplat becoming the first indigenous oil company to acquire such assets and be awarded operatorship of the fields, the company has increased oil and gas production year-on-year and revenues and net profit continue to grow as a result.

Seplat’s young story could be one of great fortune

Boosting capital
In order to build on this, Seplat was looking to raise $500m by selling new shares, giving it a market capitalisation of more than $2bn, which it would use to further expand in the delta and pay down its million-dollar net debt. Upon listing, the IPO ranked as the largest for a sub-Saharan company since Kenya-based telecom group Safaricom’s in 2008, and the flotation is also the second largest for a Nigerian company, after the $550m of Starcomms six years ago.

“Despite a challenging market for oil and gas stocks, the response has been excellent and demonstrates strong demand in both London and at home for leading Nigerian indigenous E&P players,” said Seplat’s Chairman ABC Orjiako, in a statement at the time. The move to list on both the Lagos and London stock exchanges is not a surprising one, an analyst in the Nigerian oil industry told World Finance. IPOs on the NSE have been few and slow, with the primary market section experiencing the strongest initial public offering activity between 2006 and 2008.

“Since the financial crisis, listing activity on the Nigerian Stock Exchange has dropped dramatically, and aside from Seplat, the exchange has only seen one other listing so far this year. The NSE doesn’t offer the same potential for capitalisation as established exchanges”, the analyst said. “Seplat is still a relatively new firm and they started out with limited capital and have had to refinance since. They obviously needed to increase their capital in order to buy more oil fields and develop their current ones, and decided that an IPO would be the best way to go. When it comes to IPOs, there is no place like London and it has opened the firm up to a lot more investors and money than would have been the case had they only listed in Lagos,” the analyst, who prefers to remain anonymous, said.

Seplat pumps about 60,000 barrels a day from its three crucial fields in the Niger Delta, which it bought from a Royal Dutch Shell-led consortium in July 2010. Eager to please its major shareholders Maurel et Prom – the French oil group, and Mercuria, the Swiss-based commodities trading house – Seplat has been working hard to develop its current oil fields and acquire some of the other lucrative areas within the delta. Recently, Nigerian authorities have improved the company’s chances of dominating the local oil sector, as new laws have made it considerably harder for foreign firms to gain access to Nigerian resources.

Nigeria is the world’s 12th-largest oil producer, but major energy firms such as Shell, Total and Eni are retreating from the region by selling their Niger Delta oil fields. Despite oil in Nigeria being of a high quality and relatively easy to drill, widespread sabotage and oil theft, as well as a government drive to increase local ownership, has hampered the profitability of business for international players. Earlier this year, Shell said that it had lost around $1bn because of theft and other disruption to its Nigerian operations last year. Now Shell is actively looking for buyers to take over its oil fields.

Source: US Energy Information. Notes: 2013 figures
Source: US Energy Information. Notes: 2013 figures

The cash Seplat has raised in the IPO will put it in a stronger position to compete for the oil giants’ disposals because foreign companies must partner with Nigerian businesses to bid. The company is therefore considered one of the lead bidders for Shell’s Nigerian oilfields worth an estimated $2bn to $3bn, according to several media reports, and more fields could be available soon as other firms are leaving to concentrate on less problematic offshore operations.

Local oil boom
Seplat is not the only Nigerian firm to realise the potential for growth that lies in major corporations leaving the Niger Delta. Other local oil companies such as Oando and Shoreline Natural Resources have bought fields from the likes of Shell, ConocoPhilips and Chevron. The home- grown Nigerian oil industry has experienced dramatic growth over the past five years, buying assets worth $5bn. This has prompted industry analysts to suggest that other local Nigerian oil and gas companies are likely to seek a listing in established stock exchanges such as London and Johannesburg in the next year or two.

Despite this, Seplat’s founders are not positive that everyone will benefit from the Nigerian oil boom. There’s a reason why multinationals have dominated the local industry said Avuru at Ernst & Young’s World Entrepreneur of the year 2014 awards in Monte Carlo. “For 50 years the oil and gas industry in Nigeria was dominated by oil and gas multinationals. If it were that easy, it wouldn’t have been a 50-year dominance.

“In the past 20 years there have been several regulatory attempts to introduce indigenous participation. It didn’t work. It looks easy because we walked in, did a landmark transaction, led the way and raised half a billion dollars. It looks easy because we did it right. One of the most difficult industries to operate in is the oil and gas industry. Oil is an international commodity and you have no control over the price and you have to build a business that will survive in good times and in bad times,” the chief executive explained.

Nevertheless, Seplat’s successful listing is an indication that Nigeria’s policy of indigenisation of the oil sector might be working. The company, which is the first pure upstream player in the Nigerian Stock Exchange, sold its shares to over 300 institutional investors with Nigerian shareholders consisting of over 48 percent, and will have a combined free float of over 42 percent of its shares on the NSE and LSE. With the country’s first dual listing receiving such unprecedented interest from investors, analysts suggest that the Nigerian oil boom may only just be starting and as such, more local oil and gas companies are expected to list on the NSE.

“The Exchange made a commitment to facilitate durable wealth creation by listing and nurturing the next group of African champions. That is, companies with over $1bn in market capitalisation with operations across the continent,” said Oscar Onyema, CEO of the NSE, when speaking to the press during the Nigerian listing of Seplat. “We applaud the board and management of Seplat for their determination to be identified as a Nigerian success story. The listing of Seplat now creates a benchmark for others,” he said. It will be interesting to see whether other local resource firms will be able to follow Seplat’s strong capitalisation and enter the bidding war for key oil fields. At the moment, US oil giant Chevron is keen to divest assets in the Niger Delta, and Seplat is again considered a prime contender for what could be one of the most lucrative oil deals this year.

Ocean Bank goes from strength to strength in the retail banking sector

Posted on by Ashton Wenborn

According to the economists currently evaluating the potential of retail banks in Vietnam, this developing economy is undoubtedly attractive and prosperous, drawing the attention of a wide array of established banking institutions. To this end, the retail banking sector in Vietnam has witnessed fierce competition among commercial banks seeking to acquire greater customer numbers and an increased share of the market.

Because of today’s volatile climate, it is evident that banks are attempting to remodel themselves by improving and broadening their product-category, as well as diversifying their distribution channels in order to reinforce the change from traditional banking service provider to innovative, modern and friendly banking institution. Ocean Bank is typical in that it is rapidly adjusting its business practices to suit this aim, successfully adopting the international ‘4Ps model’: Product (outstanding products), Place (nationwide and efficient distribution channels); Process (simple processes) and People (professional, friendly, and dedicated human resources).

Ocean Bank believes that the best retail services and products are the simple ones – those which allow our customers to easily use them at low cost and with high efficiency. We hope that Ocean Bank is widely known as a simple bank that goes beyond the expectations of its customers, which is reflected in the 4Ps adjustment process.

Ocean Bank believes that the best retail services and products are the simple ones

Customers as the focus
In just a short amount of time, Ocean Bank has launched a series of rejuvenated retail products and services based on the real demands of our customers. There are now more than 10 products in the accumulative saving category, among which ‘Accumulated savings – Living in peace acceleration’, ‘Amortized Saving – Love for Children’, and ‘Flexible withdrawal of principal savings’ are considered the highlights; yet currently these options only account for 10 percent of the saving policies across the system.

The majority of our customers currently use the ‘Lộc Phát Tài’, and ‘Tỷ phú’ ATM cards, which allow customers to withdraw up to VND 1bn within the first 10 years, at no service charge from Ocean Bank, regardless of whether the customer is using an Ocean Bank ATM or a competitor’s.

The highlights among our credit card products are the ‘Credit Card VISA Food Lovers’, a product specifically targeted at food lovers, and the ‘Credit Card VISA Professors’, a specialised option for professors who have a master degree qualification or above.

Around the clock banking
Furthermore, Ocean Bank offers a wide range of personal loan products and services which are highly customised to meet the specific demands of our customer groups. Unsecured loan products that are exclusively designed for government officials and people in the military have been one of our leading lines so far, thanks to super-fast loan processing times and online tracking tools.

For a secured portfolio, our car, home improvement and mortgage loan products cover flexible borrowing options that not only allow our customers to get the right deal, but also help Ocean Bank become more and more competitive in the market. To this end, our internet banking system has also been developed using a high-technology platform, supporting our customers to make easy transactions. Our ‘Easy SMS Banking’ and ‘Easy Mobile Banking’ smartphone apps allow customers to manage their accounts twenty-four-seven.

Being the first Vietnamese bank to respond to new banking trends and the unpredictable fluctuations of the economic market, Ocean Bank has gradually strengthened its position in the retail banking sector. The long-term objective of the bank is to bring “better, easier and cheaper” experience to its customers, and is one we are pursuing with fervour.

Banca CIS on San Marino’s flourishing banking sector

Posted on by Ashton Wenborn

Bordered on all sides by Italy and dating its origins back to the 4thcentury AD, the parliamentary Republic of San Marino, with the help of some of the country’s leading names, is making waves in the international banking scene and bringing its unique brand of banking to all corners of the globe. Spearheaded by the country’s leading lenders, San Marino’s banking industry should be seen as equal to those in far larger and more developed countries in Europe and beyond.

Originally founded in 1980, Banca CIS – Credito Industriale Sammarinese (former CIS) is just one of the nation’s banks that has played an integral part in boosting the country’s international credentials and the wider restructuring process of San Marino’s financial services. Today, Banca CIS stands at the forefront of savings and investment landscape in San Marino.

The bank’s supervisory authority is the Central Bank of the Republic of San Marino (CBSM) and its anti money-laundering and terrorist financing body is the Financial Intelligence Agency (FIU). Both bodies ensure the bank’s practices are carried out in alignment with the most comprehensive international standards of compliance and transparency; the process, once completed, looks to align the country’s financial services industry with those in the principal international financial districts. With only seven banks in the country – down from 12 in 2007 – Banca CIS is the result of the merging and acquisition by a private bank, Banca Partner, of Credito Industriale Sammarinese in 2012 and the acquisition Euro Commercial Bank’s total assets in September 2013.

San Marino’s banking industry should be seen as equal to those in far larger and more developed countries in Europe and beyond

After the consolidation process was completed, Banca CIS’s total assets came to approximately €1bn and its reinforced organisational structure signalled the start of a new international development cycle in the bank’s life. On a much larger scale, however, consolidation among some of the country’s key firms has seen San Marino secure a place on the global banking stage and spread its influence beyond its borders. The recent enactment of the Foreign Account Tax Compliance Act (FATCA), the involvement of our Republic in negotiating and signing intergovernmental agreements, the opening of negotiations with the EU on the savings taxation directive, and the discussion of a possible association agreement are all good evidence of an international economic integration process.

Small state adopts globalisation
International integration has emerged as one of the single most defining characteristics of business in the 21st century, and San Marino, as has been the case with so many smaller nations, has set about following suit, focusing first on its financial services industry. In the last few years it has gained a greater degree of visibility by enforcing and being compliant with governance and regulatory international policies in accordance with the helpful suggestions given by international agencies, organisations or committees such as the IMF, OECD and MONEYVAL. By maintaining successful relationships with more than 100 countries, as well as an important network of double taxation agreements, Banca CIS is representative of the steps that have been taken to accommodate changes in today’s banking environment.

Considering the country’s size and relatively simplistic economic make up, globalisation has long seemed a distant concept for its inhabitants to grasp. And where once the global economy looked to San Marino for tourism and very little else, increasingly, businesses are passing through San Marino and beginning to grow curious of the small state’s economic and financial potential, in particular as a possible way to enter other European countries.

With a client base of 8,000 in a state of 32,000 inhabitants, Banca CIS’s retail department exercises a sizeable degree of influence in banking matters across San Marino and offers specialised services that are suitable even for those in emerging European, Asian and the Middle Eastern markets. San Marino’s trademark attention to hospitality has been translated into highly personalised asset management services, highly capable management, and fully-integrated consulting and family office services to match.

Banca CIS’s range of private banking products and services underscores the extent by which San Marino’s banking sector has developed as a whole. The country does not shy away from the world’s most complex challenges, and, as a result, wealthy clients looking for superior services are finding themselves attracted to San Marino’s culture of client dedication and responsibility.

Funding the future
San Marino’s banking climate boasts a number of distinct advantages over much of mainland Europe, namely a lower percentage rate of taxation on capital gains, as well as interests and financial instruments for both non-EU residents and local companies, meaning that margins are not squeezed to quite the same extent they otherwise would be.

Among the bank’s impressive achievements so far is that Banca CIS was the first company in the Republic to own an asset management company, Scudo Investimenti SG, which specialises in engineering and managing funds under Sammarinese Law. Scudo Inv. SG does not only produce standard funds, composed of shares and bonds, but combines a mix of instruments to meet the specific needs of any one single client or institution. These funds are subject to governance rules similar to those applied in most famous financial platforms; despite this their competitiveness in management costs is particularly high. The company also engineers private label funds for other asset managers and financial institutions.

Banca CIS’s innovative fund strategy also plays a decisive role in the development of new products, which has been instrumental in the bank’s rise to the top of San Marino’s financial services industry. Some years ago, Scudo Investimenti SG created the Scudo Arte Fund, a fund which invests in modern and contemporary art, in particular in Italian painters through 1900-1990, representing a period of modern art that is appreciated internationally and one that has performed particularly well in global markets.

In order to meet its ambitious objectives, Banca CIS is establishing partnerships with firms in other small states in Europe and entering into strategic alliances with other business operators or financial advisors located in the new emerging countries. The bank has begun considering the  strengths and weaknesses of other consolidated financial industries all over the world and is developing a recruitment process aimed at finding international professionals. In line this new international approach, Banca CIS has recently started up a new asset management company in Monte Carlo, EFG & Partners Eurofinancière d’investissements, in a joint venture with EFG Bank (Monaco) to better develop asset and wealth management activities for top international clients.

So as to better understand these countries, and decipher the various ways in which there might be a cultural clash of sorts, Banca CIS has taken pains to interpret the market and the ways in which it might be able – or unable – to adapt in a new competitive context and for international customer needs. All things considered, Banca CIS’s speed and flexibility in adapting to perpetual market changes is unmatched, especially when considering it only has a staff of 90.

Technically and geographically gifted
Aside from the steps taken by Banca CIS to better financial services in San Marino, the country’s business landscape as a whole has gravitated towards highly personalised services, with the government having recently introduced new fiscal policies to incentivise new firms and investors looking to bring operations to the territory. What’s more, the development of the university and technology park looks capable of accommodating for a more challenging social and cultural environment, particularly for young and technologically savvy workers.

The changing complexion of San Marino’s banking system is underpinned, as with many other industries, by technology. The introduction of new high-tech enterprises to the country has brought with it a distinctly international perspective, and should aid in better integrating the small but smart society in the ever-evolving global economy.

Another facet that serves to favour San Marino is the country’s geographical positioning and opportunities outside of banking. Located only 20km from the international airport in Rimini and 100km from Bologna, with a high-speed railway network capable of reaching Milan and Rome within approximately two hours, the country boasts impressive transport links to key European cities. What’s more, the easy availability of residential and industrial buildings throughout San Marino, combined with the high standard of education and hospitality, makes the country an ideal destination for many reasons.

With globalisation in full swing, a number of smaller – though no less dynamic – countries are now beginning to discover what benefits they can offer to their far larger counterparts. Increasingly, developed and developing markets alike are looking to the Republic of San Marino to explore what economic and social opportunities are emerging there.

Puente’s expertise helps investors navigate Argentina

Posted on by Ashton Wenborn

In the last few years, Argentina’s headlines have been split between short-term challenges and medium-term opportunities. The short-term challenges have been dominated by macroeconomic imbalances and legal challenges from holdouts following 2001’s default. But despite those challenges, worldwide investors are looking for an entry point to capture medium-term opportunities. Puente has prepared itself for that point, enlarging and strengthening a structure that has the capacity and expertise to support and accompany investors’ demands.

Puente has been a pioneer in the intermediation of financial opportunities for both the public and the private sector

Argentina’s opportunities arise from the existence of high shale resources, a low level of public debt, and an unleveraged private sector in a country where investment as a share of aggregate demand has lagged in the last decade. As the leading regional investment bank, Puente has been a pioneer in the intermediation of financial opportunities for both the public and the private sector, with the most important corporations and sub-government entities in the country entrusting our business.

Puente’s expertise has let clients exploit these medium-term investment opportunities through a combination of well-designed strategies and best-in-class professionals who are trained to exceed expectations. Amid a challenging and volatile environment, Puente has made solid investment recommendations on fixed-income, equity, and exotic derivatives – such as GDP-Warrants – and has been one step ahead of its competitors in the region when providing advice. With more than $1.4bn in AUM and an annual trading volume of $10bn, the company has leveraged on local expertise and high technical skills to provide clients with strategies which allow them to profit by optimising their use of time and mitigating risk.

Vaca Muerta: a game changer
The game changer for Argentina’s medium-term prospects is Vaca Muerta, an oil and gas reservoir with the second-most extensive shale gas resources and the fourth-largest shale oil resources in the world, putting the country at the higher end of the league table for recoverable resources (see Fig. 1 and 2).

Since 2008, Argentina’s energy trade balance has turned negative, becoming a burden to external accounts. Vaca Muerta has the potential to turn the balance upside down by making the country a net exporter of both natural gas and oil in the next decade, reducing balance of payments risks. Along the way, Vaca Muerta’s potential could attract an average $25bn per year of inflows, boosting growth and domestic demand.

The investment required to fully exploit the energy potential is bound to spill over to other sectors, such as steel and transportation, creating opportunities for an array of companies. These opportunities will be particularly permeable in a low-leverage environment, for both the private and the public sector, which should naturally be accompanied by an increase in financial services and capital markets’ demand from these entities. Puente is ready to step in wherever it can create value, and has gained itself a solid reputation in the business for understanding where the demand is, making Argentina’s upside a one of a kind growth opportunity for Puente as well.

A burgeoning private sector
The government has followed markedly expansive fiscal and monetary policies in the last decade, mostly oriented towards boosting consumption and reducing income inequality. However, these policies have dramatically reduced investment rates, which have remained around 15 percent in the last decade. Domestic savings have been below international averages, and foreign inflows have been scarce, dragged by macroeconomic imbalances and legal risks around Argentina’s debt litigation case.

Argentina’s corporate sector has experienced a steady decline in leverage along higher corporate profits despite high costs of borrowing abroad, in a context of high sovereign yields. The ratio of corporate debt as a fraction of GDP has gone from 45 percent in 2003 to 24.4 perecent by 2013, half the average of Latam peers. The reduction in leverage has left the corporate sector in a favourable position to exploit an eventual reduction in sovereign yields, raising expectations for the near future of this sector’s demand for financial intermediation services. The ability to provide strategic advice, make markets, and guarantee liquidity provision and safety custody will be the determinants to fulfill the required role of financial services provider.

In the public sector, the restructuring of debt following the 2001 default drastically reduced the debt burden. After a high-growth period, the economy ended 2013 with a public debt ratio of around 45 percent, with less than a third of it owed to the private sector. In a country with infrastructure bottlenecks and growing development, the range of opportunities to boost productivity and growth will go from the construction of highways to energy projects. In this context, financial intermediation is bound to have a fundamental role by channeling both external and domestic savings into productive investment projects.

Source: EIA
Source: EIA

At Puente, we understand that the public sector requires a perfect blend of trustworthiness, efficiency, and expertise, which, having developed ourselves a reputation for serving accordingly, places us in a key role.

A sub-sovereign bookrunner
Argentine provinces have been issuing debt in the last few years to finance infrastructure projects, and Puente has collaborated with them to this aim. Puente has been the main placer of sub-sovereign debt in the domestic markets, accounting for 75 percent of the market share ($1854m) in the period 2012-13.

Puente has participated in issuances of the City of Buenos Aires, the Province of Buenos Aires, Cordoba, Chubut, Entre Ríos, Mendoza, Chaco and Neuquen, among others. Funds were used for large-scale projects that have markedly changed the economic potential of the regions, such as the Metrobus in the City of Buenos Aires, an alternative public transport solution to urban traffic, a plant for treating urban solid waste in the City, and investments to increase the transmission and distribution of electricity in Chaco.

Puente has also participated in the issuance of corporate debt, which has allowed for revenue smoothing and the financing of productive projects, some of them related to the energy sector. Some of the biggest companies in the country have trusted Puente for their debt issuances, such as YPF, Petrolera Pampa, IRSA, TGLT, Grupo Roggio, and Cresud, among others.

Staying one step ahead
Argentina’s medium-term potential will require financial intermediation to be fruitful, and that is where Puente’s expertise and its value-adding business model steps in. Puente has accompanied clients on plain-vanilla public and corporate issuances, public-private partnerships (PPP), and solid investment strategies, delivering tailormade financial solutions. The company has also launched an infrastructure division to accompany cities and states in developing infrastructure projects, making evident our contribution to economic development in the region.

In the last few months, the country has gone through a challenging macroeconomic and legal transition. On the macroeconomic side, the expansive policies of the last few years have led to imbalances that triggered exchange rate devaluation and an interest rate hike in early-2014. On the legal side, the country lost its long-standing battle with holdout creditors from the 2001 debt exchange, introducing uncertainty among investors. Those risks have increased yields and volatility, but have also left some low-hanging fruit for well-informed investment strategies. Our strategy and sales teams work daily to detect those opportunities.

Source: EIA
Source: EIA

Along the bumpy road of short-term risks, Puente has developed strategies that have beaten emerging market returns, enhanced by accurate market timing and a precise evaluation of risks. Puente’s strategies have been grounded on solid economic analysis, looking at both short-term volatility and medium-term opportunities, and its enrooted understanding of the markets of the region. Its strategy team has covered a comprehensive array of asset allocations, with a main focus on sovereign and provincial debt issuances, both domestic and external, but has also analysed corporate credits, equity, and exotic derivatives, such as GDP-Warrants. Our recommendations have stood ahead of our competitors, providing our clients a one-of-a-kind quality service.

A partner for life
With plenty of investment opportunities on the horizon, Puente is now extending its activities toward public-private partnership (PPP) projects and infrastructure. With our interest in creating value and contributing to economic development, a new infrastructure division has been created to assist cities and states in developing projects from scratch, with the company already becoming actively involved in assisting clients in PPP projects in both Argentina and Uruguay.

Puente’s value resides in its unique ability to understand the idiosyncrasies of local Latin American markets, providing sound investment strategies and exploiting opportunities in a challenging environment. It is also steadily committed to putting its clients’ interests first, creating solid relationships that are long lasting.

As Argentina’s medium-term potential expands, Puente’s horizons in the region follow suit, making its reputation for top tier service provision and professional quality its most valuable asset.

Pacific Alliance offers rich investment opportunities, says Scotiabank

Posted on by Ashton Wenborn

Business leaders may be excused if they failed to ‘go global’ in recent years, or they appeared hesitant to increase their cross-border trade push. As economic optimism goes back and forth between developed and developing markets – including recently dampened enthusiasm for BRIC nations – it’s little wonder that some companies are less confident about international trade potential, particularly with emerging markets. With such uncertainty, it might be tempting to sequester your business within safe and familiar home markets.

While I understand business reticence about wading into new overseas risk, our experience as a Canadian-based international bank demonstrates that considerable success can be attained on the international stage. However, it takes a disciplined and very focused approach to chart the right cross-border course.

During a keynote address at Toronto’s National Club, Brian Porter, Scotiabank’s President and CEO, noted that, “Continued international growth is an important part of our strategy. In fact, many people don’t realise that, although we are a Canadian-headquartered bank, we have almost twice as many branches outside Canada as within, 50,000 of our 83,000 employees are located outside Canada, and about half of our earnings are generated internationally.”

While we see attractive growth opportunities across the bank, many of them relate to the Pacific Alliance, since we recognise that not all emerging markets are equal. With this mindset, we are focused on deploying our shareholder capital accordingly.

Success from precise focus
Our rationale for concentrating more of our international business within Latin America – specifically among the Pacific Alliance countries of Peru, Colombia, Mexico and Chile – is based on a careful, strategic review of the region. We encourage our own clients to perform this same kind of critical assessment of international markets in preparation for their own overseas ventures.

Taken together, the Pacific Alliance bloc forms the world’s sixth largest economy – when measured by purchasing power parity – and is the seventh largest exporter

Individually each of the Pacific Alliance countries has attractive economic fundamentals and growth prospects (see Fig. 1). Mexico has size, with a GDP of $1.2trn, exports of $371bn and a population of 112 million. Peru has a strong fiscal position. Its sovereign debt to GDP ratio is 16 percent, and its foreign exchange reserves have grown to $66bn. Peru and Colombia are also sizable markets with GDP of more than $200bn and $360bn respectively. Finally, Chile has a proven track record of economic growth and a $270bn dollar economy.

Taken together, the Pacific Alliance bloc forms the world’s sixth largest economy – when measured by purchasing power parity – and is the seventh largest exporter. Within Latin America, the Alliance has 208m people, and accounts for almost 40 per cent of GDP of the region, and 50 per cent of trade. Historically, some trade blocs and alliances in Latin America have taken a defensive and protectionist stance. By contrast, the strategic purpose of the Pacific Alliance is to fully leverage opportunities for increased global trade. Members of the Pacific Alliance are committed to high levels of trade liberalisation. They already have bilateral agreements with one another and they each have trade agreements with major partners such as the US, the EU, Canada and a number of Asian countries.

Many positive steps have reinforced the strength of this four-country alliance. The integration of their stock exchanges and the development of deeper capital markets and stronger central banks have resulted in a more efficient and effective economic system, which is translating into greater investor confidence. The members of the Pacific Alliance have also undergone important structural and legal reforms, which represent the general shift to a more open, free-market approach. These changes have transformed the Pacific Alliance into a very attractive place to do business.

In light of these factors, Scotiabank’s customers have an increasing commercial interest in the region, with many companies already active there, or contemplating how they can grow their business within the Pacific Alliance bloc. As a customer-centric organisation, we respond to the needs of our customers by building our network, expertise and capabilities within this high-potential market.

Focus on LatAm leaders
We have looked beyond broad investor enthusiasm for Latin America and are focusing our own strategy within those specific Pacific Alliance nations that stand above the crowd. For example, Alliance members have average GDP growth forecasts of 3.8 percent in 2014 and roughly the same in 2015. By contrast, GDP growth in Argentina, Brazil, Paraguay, Uruguay and Venezuela is expected to average just 1.5 percent this year and next.

To put a sharper point on this difference, Pacific Alliance countries are growing twice as fast as their neighbours. Even the Brazilian economy is forecasted to grow relatively modestly this year and next. As further evidence of this stability, Peru, Colombia, Mexico and Chile all have investment grade sovereign debt ratings. Brazil is the only other Latin American country with such a rating.

Source: International Monetary Fund. Notes: Figures post-2013 are IMF estimates
Source: International Monetary Fund. Notes: Figures post-2013 are IMF estimates

So our underlying message could be, ‘dig deep before you dive in,’ since not all markets are created equal, nor are all countries within a single region cut from the same cloth. While investor sentiment can shift quickly – sometimes causing them to treat emerging markets as a single asset class – it is important not to paint all countries with the same brush, whether the tone be bullish or bearish.

For Scotiabank, the economic, social, demographic and political facts have illuminated our path towards the Pacific Alliance nations. They may hold promise for other sectors too, since the factors that attract international banks like Scotiabank also create access to credit and other financial services that form the lifeblood of business and trade.

This snapshot of Scotiabank’s own international market strategy offers some useful insights for any organisation considering overseas expansion. First, regardless of solid, high promise numbers resonating from any market, it is critical to understand that investing in emerging markets is not without its risks. As a bank that has been immersed in overseas trade since 1832, we have learned that lesson first hand. We can say with certainty that any company doing business in an emerging economy should have a sound and comprehensive strategy for managing risk.

Upon review of Scotiabank’s own international playbook, there are a number of recommendations that are relevant to any company pondering a greater cross-border presence. They are:

  • Develop a deep understanding of – and respect for – cultural and historical nuances in each country;
  • Seek out trusted partners with local expertise and engage with the full range of stakeholders;
  • Put in place a strong risk management framework and develop an understanding of the local judicial system;
  • Ensure strong leadership by putting your best talent in place;
  • Enforce the highest standards of business ethics and conduct;
  • Make sure your control functions are effectively governed by mirroring corporate standards and regulatory requirements that are local and those that span across regions;
  • Finally, don’t invest everything in one country – diversify your exposure.

Managing risk
The bottom line is that companies must ensure they are being adequately compensated for the incremental risk that comes with emerging markets exposure. At Scotiabank, our long history of operating internationally, together with our disciplined approach to risk management, has provided us with the confidence to continue investing beyond our home borders. 

Speaking for our clients, including those who depend on the cross-border services of our Global Transaction Banking group, they would certainly emphasise the importance of seeking trusted partners with local expertise. That is how we deliver value to our customers, whether they are transacting within the Americas, Europe, Central or Southeast Asia.

Without a doubt, there is vast divergence in the economic prospects, monetary and fiscal policy, and social issues among the emerging markets. Each country is at a unique point in its economic development, political evolution and regulatory maturity. In light of this reality, success depends on realising that not all markets are equal, and it takes a critical eye, a carefully crafted strategy, and dedicated partners to reap the rewards of going global in uncertain times.

Sharjah is striking a chord with investors, says Shurooq

Posted on by Ashton Wenborn

The third-largest of the seven emirates that comprise the UAE, Sharjah has been pulling out all the stops to transform itself into a world-class investment hub, and its efforts have not gone unnoticed. In January of this year, Standard & Poor’s rated its long- and short-term foreign and local currency sovereign credit services A/A-1, with a stable outlook, and in the same month Moody’s assigned a first-time local and foreign-currency rating of A3 to the Government of Sharjah, also with a stable outlook. In statements released in support of their ratings decisions, both S&P and Moody’s pointed to the robust state of the government’s finances, with limited fiscal risks and low government debt, a comparatively wealthy and diverse economy, and the likelihood of support from the UAE should the need arise.

So what is it about Sharjah that is making international investors sit up and take notice? First of all the emirate has some very attractive fundamentals in place. There are no taxes, 100 percent repatriation of profits, a stable economy, and excellent infrastructure.

Sharjah’s economy is also well diversified, being the only one in the Middle East region with no single sector contributing more than 20 percent of GDP (see Fig. 1). It has the third-fastest-growing economy in the UAE, and has already attracted almost a quarter of the country’s business establishments. Sharjah is also the third-largest emirate by contribution to the UAE’s GDP and the third largest in size and population. When you add to this the relatively low cost of doing business in Sharjah – thanks to lower living costs and a well-stocked human resources pool – it becomes clear that Sharjah offers a stable investment environment that helps investors compete at a global level (see Fig. 2).

Source: Shurooq
Source: Shurooq

Attracting investment
What makes Sharjah truly noteworthy, however, is what the emirate is doing to leverage these fundamentals to attract foreign direct investment (FDI). With an eye on maximising FDI, Sharjah has identified four key growth sectors – travel and leisure, transport and logistics, health, and environmental services – and is aggressively working to attract investment in each.

Why are these specific sectors so important? When considering Sharjah’s travel and leisure sector, the first factor that must be mentioned is that it is, as always, all about location, location, location. The UAE’s geographical location makes it easily accessible to numerous markets, both from the East and West, and Sharjah is strategically placed right at the UAE’s heart. Sharjah’s major tourism areas are under 20 minutes’ travel from either Sharjah International Airport or Dubai International Airport. Sharjah is also the only GCC hub with direct access to both the Arabian Gulf and Indian Ocean. This means that thanks to its excellent air connectivity, along with Port Khalid on the Gulf and Port Khorfakkan on the Indian Ocean, Sharjah offers a gateway to 160 countries.

Last year, Sharjah welcomed more than 1.9 million tourists, a number which is expected to grow significantly this year in light of the large scale celebrations – which include over a thousand international cultural, tourism, and entertainment events – planned to mark Sharjah’s year as Islamic Culture Capital for 2014. The continuing demand for different experiences, the growing expatriate population, government investment and rising disposable income in Sharjah is also creating new opportunities in the travel and leisure sector, with market potential expected to reach AED 1.49bn by 2016.

Capitalising on this growth, the Government of Sharjah is proactively working to initiate tourism and leisure projects and to open pathways to attract foreign investors. It is a drive that is being spearheaded by the Sharjah Investment and Development Authority (Shurooq). According to HE Marwan bin Jassim Al Sarkal, CEO of Shurooq, which was established in 2009 to encourage investment in Sharjah by providing facilities and incentives to help overcome obstacles facing investment activities in the emirate, this targeted approach is at the core of the upsurge in foreign investment that Sharjah has seen recently. “We understood from the get-go that if we wished to succeed and truly develop Sharjah to its full potential, we needed a clear and systematic approach,” he said. “Which is why one of the first things we did as an entity was to engage in an in-depth study of where Sharjah’s strengths lie. We then used the findings of that study, which clearly identified the four key sectors, to plan and develop a number of projects that would accelerate each sector’s growth further.”

The heart of Sharjah
Among the projects currently under development by Shurooq is the Heart of Sharjah, a five phase, 15-year historical restoration project that aims to restore and revamp the traditional heritage areas of Sharjah to create a tourist and trade destination with contemporary artistic touches that retains the feel of 1950s Sharjah. The Heart of Sharjah will also include the AED 100m Al Bait Hotel, the region’s first-ever traditional Emirati hotel, which is set for completion next year. These projects are in addition to the three leisure projects in the city of Sharjah that are already in play: Al Qasba, the Al Majaz Waterfront, and the recently opened and redeveloped Al Montazah Amusement and Water Park.

Shurooq has also taken care to ensure that its projects revitalise more than just the emirate’s urban areas. On Sharjah’s east coast, work is well underway on Al Jabal Resort, The Chedi Khorfakkan, which has been inspired by the region’s traditional architecture and way of life, and which promises to become the ultimate luxury destination in the Emirates. The emirate’s central region hasn’t been overlooked either. The development of Al Hisn Island in Dibba Al Hisn is now in the planning, design and layout phase and will, when completed, offer a large water canal, restaurants, cafes and cinemas with stunning views of the canal, as well as parks, children’s play areas and various other amenities.

Ecotourism plays a significant role. Kalba Ecotourism – the largest project of its kind in the UAE – is in its first phase. In this phase, the focus is on the redevelopment of the natural reserves at Kalba and the restoration of important archaeological sites. In its second phase, the project will develop Kalba Lake, and the final phase will see the construction of a number of new hotels and chalets, including a luxury five-star resort overlooking the Gulf of Oman, as well as a state-of-the-art activities centre – all of which will be built to eco-friendly standards.

Source: Shurooq. Notes: 2014 figure is a projection
Source: Shurooq. Notes: 2014 figure is a projection

As ambitious as that project might sound, it is soon to be overshadowed by the development of Sir Bu Nuair Island. At a cost of half a billion Emirati dirhams and set to be completed in 2017, the island will host a luxury five-star hotel and resort, hotel apartments and villas, a camping village, an amphitheatre, a museum, a mosque, an education centre, a harbour, an airport, and a number of other retail and leisure offerings. The island is of special ecological importance as it supports a high biodiversity of rare species and plants, resulting in it being registered on the list of Wetlands of International Importance under the Ramsar Convention in December of last year – one of five sites in the UAE on the list.

Access to growth
Sharjah’s transport and logistics sector is another where the UAE’s location, coupled with its excellent infrastructure and well-priced labour, makes for highly profitable investment opportunities. In the case of Sharjah specifically, its access to ports in both the Gulf and the Indian ocean, its highly successful and efficient free zones, namely the Hamriyah Free Zone and the Sharjah Airport International Free Zone, as well as its central location within the UAE – it is the only emirate to share borders with all six of the other emirates – have resulted in a fast-growing sector with a market potential expected to reach AED 6.24bn by 2016.

The UAE has also been making a name for itself as a healthcare hub in the region. Sharjah’s healthcare sector is expected to grow significantly in coming years, powered by the increased demand for specialised services that has prompted the creation of several state-of-the art medical facilities, most notably Sharjah Healthcare City. The industry is expected to grow by 9.3 percent, from AED 4.59bn this year to AED 6.55bn in 2016, which will provide numerous openings for foreign investors to enter this burgeoning market and invest in solid projects that offer excellent exit possibilities.

The ‘Green Emirate’
The UAE enjoys sunny weather all year long, making it an ideal platform for sustainable and renewable energy enterprises. Sharjah is already home to the largest waste management and treatment company in the region, Bee’ah, which is well on the way to reaching its target of a zero waste-to-landfill ratio by 2015.

This makes Sharjah an ideal market for environmental technology and equipment, in addition to innovation in green technology. Through continued collaborations with all concerned sectors, Sharjah is working to attract and establish sustainable projects that do not cause harm to the environment and ultimately establish Sharjah as the ‘Green Emirate’.

With these types of initiatives, projects, and organisations in place, it’s easy to see why Sharjah is seen as a highly tempting investment destination. Not only is there a great deal for prospective investors to choose from, but there is also ample support from the Government of Sharjah and other entities to facilitate investment.

Bank of Korea cuts interest rate as part of its measures to boost GDP

Posted on by Ashton Wenborn

In keeping with what many analysts predicted, the Bank of Korea (BoK) has cut its key lending rate in a bid to revive domestic growth and better consumer sentiment. The decision, which marks the first cut in 15 months, will see the rate reduced to 2.25 from 2.5 percent, and follows a string of measures designed to lift the country’s GDP.

“In the domestic financial markets, after having risen substantially owing chiefly to the government’s announcement of economic policies, stock prices have fallen back somewhat due for example to geopolitical risks. The Korean won has depreciated under the influence of the US dollar’s strength globally, and long-term market interest rates have fallen,” wrote the BoK in a statement.

Some argue…that the bank’s rate cut has come too soon after the government’s stimulus package

The cut is the largest of its kind since November 2010 and comes less than a month after the government unveiled a $40bn stimulus package to aid SMEs and offset rising unemployment. After quarterly GDP growth slowed to 3.6 percent in the second quarter after 3.9 percent in the first, and the annual growth forecast was revised from four to 3.8 percent by the BoK, the country’s policymakers are hoping the measures add a much needed dose of momentum in the second half of the year.

“In Korea, exports have maintained their buoyancy but the Committee judges that improvements in domestic demand, which had contracted due mainly to the impacts of the Sewol ferry accident, have been insufficient, and that the consumption and investment sentiments of economic agents also continue to show sluggishness,” according to the BoK.

Domestic demand has been sluggish since the Sewol ferry tragedy in April, which cost 304 lives, and policymakers have since rallied to boost consumer sentiment and, therefore, spending. Some argue, however, that the bank’s rate cut has come too soon after the government’s stimulus package, and that not enough time has been given before the central bank has proceeded to pile on additional measures.

Europe’s recovery on hold as conflict ensues

Posted on by Ashton Wenborn

The euro area recovery has stalled after its three biggest economies saw reported low or no growth in the second quarter, as investors continue to pull out of Europe and the deepening crisis in Ukraine casts a shadow on the region’s markets.

In a surprising report from the German statistics agency, Destatis, GDP shrank 0.2 percent, more than economists forecast, after a negative balance of imports and exports, and a significant drop in construction sent growth reeling. Adding to this, foreign trade and investment was also weak.

The slowdown in Europe’s growth engine follows a strong first quarter where a mild winter had pushed production back to earlier in the year and caused the economy to grow 0.7 percent. Similarly, data from the French national statistics bureau Insee showed that the country’s economy stagnated during the second quarter of this year after stalling in the first.

30 percent of global investors said that the 12-month profit outlook is worse in Europe than in any other region

Consequently, French Finance Minister Michel Sapin said he now expects full-year growth of 0.5 percent instead of the one percent announced previously and that the government would have to scrap this year’s deficit target of four percent of economic output agreed with the European Commission. Combined with Italy’s unexpected slide into recession, pressure is mounting on the European Central Bank to expand stimulus and combat Europe’s crippling inflation, which has reached the lowest point since 2009, at 0.4 percent.

With the Crimean-crisis clouding outlook for the coming months, Europe’s status as the world’s market darling for much of 2014 largely evaporated, with more investors currently underweight European equities as sentiment on the region continues to drop, according to the BofA Merrill Lynch Fund Manager Survey.

30 percent of global investors said that the 12-month profit outlook is worse in Europe than in any other region, with sentiment falling a staggering 24 percent since July.

“We see further de-risking to come in Europe. Negativity in this month’s survey towards Europe reflects growing softness in economic data from both the core and periphery of the region,” said Manish Kabra, European equity and quantitative strategist.

The poor economic data is an indication that Europe’s economy is still very sensitive to current political unrest and that the recovery seen earlier this year has been more fragile than expected. ECB President Mario Draghi has called for countries to implement structural reforms, arguing that nations that have done so are recovering faster. Notably, Spain’s economy expanded last quarter by 0.6 percent, resulting in the highest growth since 2007 and Greece’s economy contracted at its slowest pace in almost six years.

To this end, the ECB announced an unprecedented package of stimulus measures in June, including a negative deposit rate and targeted loans for banks, but it remains to be seen whether this will be too little too late to boost the weak European economy.

Parpública on the importance of privatisation for Portugal’s economy

Posted on by Ashton Wenborn

The economic forecast for Portugal has taken a turn since becoming a eurozone bailout recipient. Part of the progress can be attributed to the country’s privatisation programmes. World Finance speaks to three representatives from Parpública – Isabel Castelo Branco (Secretary of State for Treasury), Sergio Monteiro (Secretary of State for Infrastructures Transport and Communications) and Manuel Rodrigues (Secretary of State for Finance) – to find out more.

World Finance: Sergio, state entity Parpública has been commandeering the process of privatising various airports, including Aeroportos de Portugal. Before the agreement was made, a new economic regulatory process was created. Tell me about it.

Sergio Monteiro: We started the privatisation process by changing the regulation, because the previous regulation was meant to develop a new airport. It was meant to be a green-field project, instead of the approach we took, which was to make better use of existing infrastructure.

We started a public consultation, in which we heard all stakeholders involved in the airport business directly and indirectly. And based on that information, we have decided to go closer to a model of dual-tail, instead of a pure single-tail. But taking into consideration all feedback received from airlines.

So we believe that we have a regulation in which the interests of the airport owner, the airlines, and the Portuguese economy, were taken into consideration

So we believe that we have a regulation in which the interests of the airport owner, the airlines, and the Portuguese economy, were taken into consideration.

World Finance: Now, are there any transportation initiatives you plan on pursuing now that the European Central Bank and IMF will no longer be reviewing the Portuguese economy?

Sergio Monteiro: We continue to have TAP’s privatisation on the forefront of our agenda. We are constantly reviewing competition conditions in order to see if there is sufficient competitive tension in the environment, in order to relaunch the privatisation process.

Then in another area, which is the ports: we have an ambitious agenda to multiply by three our port container movement capacity in the Portuguese ports. And also concessions for the rendering of public service in urban areas: both in Lisbon and in the Oporto region.

So there are a lot of initiatives that we are taking towards the openness of the economy, and the reduction of subsidies granted by the state.

World Finance: Manuel, Portugal committed to a wide-ranging privatisation programme back in 2011 – what else is being sold off?

Manuel Rodrigues: Well, let me just review the privatisations which we have just concluded after the successful privatisation of ANA airport.

After the last 12 months, we have concluded the first IPO in the previous five years of the mail operator CTT, which was a very relevant operator transaction. And today CTT has already joined the Portuguese stock exchange index, and has a market capitalisation of more than €1bn.

Then we have also privatised CGD Insurance, which is the state-owned bank insurance arm, which accounts for more than 30 percent of the insurance market share in Portugal. This was the largest M&A deal in the insurance sector in Europe in the last three years.

Now we are going ahead with the privatisation of EGF, the waste management company, which accounts for more than 65 percent of the waste management treatment in terms of volume, and covers more than 50 percent of the territory. It is the national market leader, and it is also a very relevant player in Europe.

This process has been very attractive in terms of the number of non-binding offers that were received. We received seven non-binding offers from different geographies, and we are now going into the phase of binding offers.

Finally, we are going ahead with other processes, such as the privatisation of the remaining stakes in REN, and several other concessions that are going to be launched under due term. Which includes among others, an online gambling network concession that is being prepared.

All these processes are critical to the recovery of the Portuguese economy, inducing more confidence, and helping to further progress the growth, which is starting this year with 1.2 percent yearly growth.

World Finance: So how does the public stand to gain from all of these privatisation deals?

All these processes are critical to the recovery of the Portuguese economy

Manuel Rodrigues: The privatisation programme is one of the cornerstones of our adjustment of the Portuguese economy. Our privatisations have been able to attract long-term investors from a diversified set of geographies, and those investors are helping to boost growth and increase efficiency, and the competitive position of the country.

The introduction of new shareholders in these Portuguese companies are enabling these companies to finance themselves for longer maturities, at a lower cost, in higher volumes. Which is also critical.

On the top of that, the Portuguese government has been undergoing a substantial regulatory revision of some sectors, that also ensures that these companies are committed to achieve public service codes.

Also very relevant: all these privatisations have been enabling revenues that exceed five percent of GDP, and this five percent of GDP in revenues are being used to reduce the public level of indebtedness.

The privatisation agenda is also critical in the sense that those investors are raising joint ventures for Portuguese corporates to be able to internationalise themselves, and to reinforce exports to other markets. Which also give a strong contribution to Portuguese growth.

World Finance: Isabel: a fear that has been raised by economic forecasters is that the government’s efforts to attract foreign investment involves cutting labour costs, and making it easier to hire and fire workers. What do you make of this criticism?

Isabel Castelo Branco: The labour reform was one among many that this government has implemented. Other reforms have to do with, for instance, the restructuring and achieving operational balance of the SOE sector, and also the privatisations.

We privatised several companies that were fully state-owned, or partially state-owned. And we achieved over €8bn of revenues in the process. So what we are aiming for with these reforms is essentially to make the economy more flexible, and we are already seeing the results of that.

[W]e have seen already our efforts paying back

Essentially it’s becoming more flexible, that you will achieve the improvement in unemployment and labour conditions.

World Finance: How do you plan on instilling confidence in your foreign investors given that you were just taken off the eurozone bailout recipient list?

Isabel Castelo Branco: Since the very beginning of the programme, we have been working very hard, in order to rebuild the confidence of investors. And we have been doing this in two ways.

One way, we kept in very close contact with investors, by informing them, and being present, either through the debt management office or through the government.

On the other hand, by accomplishing the targets that we were asked for in terms of the memorandum of understanding that we signed with the troika. So we have seen already our efforts paying back, and that’s very visible in the adjustment that we have seen in the public debt interest rates, and the spreads toward Germany.

World Finance: Sergio, does the government’s long-term economic recovery plan involve relying less on foreign investment and improved labour conditions?

Sergio Monteiro: I would say it’s the other way around. Throughout the privatisation process we have shown that the bidder that has from a financial, economic, development and strategic standpoint, the best proposal wins.

We have had investment from China, from the Middle East, from Europe, and the Americas. And we continue to believe that foreign investment, together with the internal part of the consumption and investment, is the best way to bolster and foster the Portuguese economy.

Banco de Costa Rica’s thirst for innovation makes it a trailblazer

Posted on by Ashton Wenborn

Despite being a leader in the Costa Rican financial sector, Banco de Costa Rica (BCR) has never been one to rest on its laurels, always developing new and opportune products and services. It’s this forward-thinking attitude that has resulted in the bank being named the Best Banking Group in Costa Rica for the second year in a row by World Finance due to its ‘outstanding financial performance, excellent customer service and its careful risk administration in different business areas’.

It’s this sharp focus on integrity and its status as a trailblazer in the Costa Rican market that makes the bank a reliable partner for investors; BCR’s international risk ratings are similar to those of the Costa Rican government, with ratings of baa3 from Moody’s and BB+ from Fitch Ratings, both with a stable outlook. This has allowed BCR to successfully place $500m of bonds in the international market in 2013, a first for a Costa Rican state bank.

Our current business model has permitted us to obtain excellent financial results, with net profits of greater than $53m in 2013 – the second highest in the Costa Rican financial system – along with solid growth of 12 percent in assets and 10 percent in equity, and a credit portfolio with a closing 2013 delinquency rate of around two percent, one of the best in the financial system.

Evolving practices
Our drive to improve has led us towards a business model that incorporates the best international practices, with a view to increasing innovation, efficiency and productivity, in line with the high level of service expected by our clients. With this in mind, as of Q2 2013, we have begun a transformational process with the objective of updating our business model to continue meeting the challenges of the changing and competitive national and international financial market.

It’s this sharp focus on integrity and its status as a trailblazer in the Costa Rican market that makes the bank a reliable partner for investors

This initiative, which we have named ‘Evolucionemos’ (Spanish for ‘we evolve’), seeks to transform the relationship the bank has with its clients, stimulating customer loyalty, increasing the quantity and quality of the products and services used by our clients across the whole of the financial conglomerate, and establishing an operational model which permits the achievement of greater levels of efficiency and productivity, thereby increasing our competitiveness.

It is an ambitious project but a necessary one so that we can strengthen our competitive capacity to face future challenges in a fast-changing industry, while also meeting the demands and needs of our clients.

Cornering the market
Looking towards the future with optimism, BCR continues to consolidate its leadership: we are the second-largest bank in the country and the sixth-largest in Central America; our investment fund society is number one in the industry; our brokerage house is first in profitability and third in market volume in the Costa Rican stock market; our pensions operations service is third in the market; and our insurance brokerage division is a leader in policy placement in the Costa Rican insurance market.

Additionally, we are the majority shareholders for the Banco Internacional de Costa Rica – International Bank of Costa Rica (BICSA) – a financial entity based in the Republic of Panama with branches in Miami, US and offices in all Central American countries. This has permitted us to maintain a market share of greater than 20 percent, with continual growth over the last five years.

BCR has demonstrated over its 137 year trajectory its ability to adapt to the changes demanded by the times, always upholding excellent services through its many decades of serving its clients.

Bitcoin: reality or illusion?

Posted on by Ashton Wenborn

Is Bitcoin real money? Not according to Alan Greenspan, who recently described the entire phenomenon as a ‘bubble’. The People’s Bank of China concurred that it isn’t a currency with ‘real meaning’ and backed that up by banning financial companies from making Bitcoin transactions.

Of course, this raises a number of questions, such as what is the meaning of ‘real meaning’? Why is Bitcoin a bubble, but not the housing market in 2006? And what exactly is a Bitcoin anyway? The main feature of Bitcoin, which distinguishes it from conventional currencies such as the yuan or the dollar, is that it is produced and maintained by a network of computers, rather than by a central bank. The other main difference is that you can’t use it to buy much, and you certainly can’t pay your taxes with it.

In other respects, though, Bitcoin is not so different from conventional currencies. Bitcoin is a ‘virtual’ currency, in the sense that it only exists as a string of digital information that you can download to a ‘digital wallet’. But the British pound or US dollar are also best described as virtual currencies. As outlined in a recent paper from the Bank of England, the vast majority of money is created by private banks, and ushered into existence by pressing a button on a keyboard. The central bank plays a relatively small role in the money supply process, primarily by setting its own interest rates.

The difference between Bitcoins and state-backed currencies is therefore smaller than appearances suggest

The difference between Bitcoins and state-backed currencies is therefore smaller than appearances suggest. Both are virtual currencies that run on computer networks. Mobile phones, for example, are increasingly used as a kind of electronic wallet. The primary advantage of Bitcoin, though, is that it was designed from the outset to work this way.

Block chain
For example, while we are all used to making purchases over the internet, the process is clunky and involves a number of middlemen, such as credit card companies, who charge transaction fees. These middlemen are necessary in order to make sure that the money has left your account and is deposited in the store’s account. Unfortunately the process is not completely secure, which is why most credit card fees go to paying for fraud.

A main challenge of digital transactions is how to avoid things like double spending. One reason the music industry is in so much trouble, for example, is that it is possible to send a digital copy of a song to somebody else, while keeping your own copy. If this were to happen with money, it would be great for a while, but would soon lead to chaos, since you could spend your paycheck as many times as you wanted (I have tried this and it doesn’t work).

The main innovation of Bitcoin is that transactions are recorded on a secure, anonymous, public ledger, known as a block chain, which is maintained by a network of computers that make such shenanigans impossible. Unlike digital music, you can’t share your Bitcoins with a friend, or eat out on them multiple times. And without middlemen, transactions are faster, cheaper, and more secure.

Maintaining the block chain requires a lot of number crunching. The task is carried out by a network of computers that communicate through a shared protocol, and is currently rewarded by the granting of Bitcoins. Just as traditional currencies used to rely for their backing on supplies of gold, today people ‘mine’ for digital gold. According to some estimates, the electricity used to mine Bitcoins would power some three million homes.

The issuing of new coins will end when the total number reaches 21 million, which should happen some time around 2140. After that, mining will only be rewarded by a regular transaction fee. One of the attractions of Bitcoin for many people is that its value can’t be inflated away by turning on the digital printing press, as governments are wont to do.

Real meaning
So why would Bitcoin not have ‘real meaning’? According to Greenspan, the main problem seems to be that it is not produced in the normal way through a central authority. “I do not understand where the backing of Bitcoin is coming from,” he has said. “There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual.”

But why should only a government or monarch be able to back a currency? Bitcoin is backed by something equally significant, if more distributed and amorphous: its network of users. The only thing that makes the US dollar ‘real’ is that it is accepted by the government as an official means of payment. The main thing that has dissuaded potential Bitcoin users is the currency’s volatility, and its connection with anonymous transactions. But volatility may come down as the user pool grows larger and more diverse, and as new tools for insurance and currency hedging become available. And associations with things like crime or drug running never put people off the hundred-dollar bill.

In any case, the most disruptive feature of Bitcoin is not its status as a potential rival for mainstream currencies, but the technical innovation of the block chain, which allows for anonymous and secure transactions over the internet. The potential for such a system was foreseen by Milton Friedman, who said in 1999: “I think that the internet is going to be one of the major forces for reducing the role of government.

“And the one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the internet you can transfer funds from A to B, without A knowing B or B knowing A, the way in which I can take a 20 dollar bill and hand it over to you and there’s no record of where it came from.” No wonder central banks don’t think the Bitcoin is real.

ICBC’s economic housing projects see many get on Macau’s property ladder

Posted on by Ashton Wenborn

Macau is listed as one of UNESCO’s World Heritage Sites, is known as the ‘Orient Las Vegas’, and has achieved amazing developments over the past few years. The IMF estimates that its per capita GDP in 2013 could have been as high as fourth globally.

At the same time, local people are benefitting from the historically low unemployment rate. But like all booming economic entities, Macau has had to deal with soaring real estate prices. The contradiction between real estate prices and average individual income exists in lots of developing cities, but is more prominent in Macau because it is only a tiny island. The Macau Government began to realise how the problem hindered the improvement of local people’s livelihoods and began to make efforts to solve the problem.

Driven by its booming tourism industry, service exports and domestic demand, Macau has grown substantially over the past few years. Its GDP in 2013 was almost double that in 2010, while its per capita GDP ranked the first in Asia. Meanwhile, its foreign exchange reserves and fiscal reserves have been increasing since 2010, and Macau has already become one of the richest cities in the world.

A climate of growth
Founded in July 2009, ICBC Macau has also developed a lot in the past few years thanks to the prosperous economy in Macau and the internationalisation of the renminbi. ICBC’s compound average growth rate of profit after tax from 2009 to 2013 is 31 percent, and its assets in 2013 are 2.7 times what they were in 2009. Today, ICBC Macau is the second-largest bank and the largest locally registered bank in Macau.

ICBC Macau…paid much attention to economical housing projects, and grasped the chance to serve those low-income people from the outset

According to recent statistics, the real median incomes of locally employed residents stood at MOP 15,000 in 2013, while the average property price per square metre was MOP 81,111 (see Fig. 1). Indeed, Macau real estate prices reached a historical high in 2013. There is no doubt that more and more low-income residents can hardly afford to buy a house; most of them can’t even meet the conditions for private mortgage loans.

In order to ease these people’s stress in the housing market, the MSAR (Macau Special Administrative Region) Government announced a restart to the Economical Housing Plan in 2011, followed by an amendment to the Economical Housing Law, which aimed to assist local residents who were at a specific income level and financial situation in solving their housing difficulties, and to promote the increase of local housing supply and improve the residents’ social welfare.

According to the law, the income of qualified applicants should be somewhere between MOP 7,820 and MOP 22,240 per month, and personally held net assets should be no more than MOP 672,168. The average property price per square metre of the ‘economical’ house is nearly one-fifth that of ‘normal’ houses.

Those people who have succeeded in applying for economical houses were generally those on low-incomes and in vulnerable sections of society. Some of them even have difficulties decorating new houses. Compared with the application procedure for ordinary mortgage loans, the application for an economical house mortgage is similar, but deals in smaller amounts. Because this could result in a difficult workload and comparatively low returns, other banks in Macau paid less attention to providing mortgage loans to low-income residents.

Economical housing projects
ICBC Macau, however, paid much attention to economical housing projects, and grasped the chance to serve those low-income people from the outset. The Economic Housing Programme has several projects located in different parts of Macau, and during its involvements in these projects, ICBC Macau has found that the major challenge was how to supply timely information, together with a complete and convenient service to the customers, while approving the mortgage loans as much as possible in accordance with local regulation from the AMCM (Monetary Authority of Macau).

Based on research of the local market situation, together with related laws and regulations, ICBC launched a series of loan privileges for citizens who planned to buy the economical houses. Most of the measures were carried out in order to offer high-quality mortgage loans to local residents and help those low- and middle-income people overcome their funding issues. At the time when the first economical house was on sale, applicants could get useful information without delay.

Source: ICBC Macau
Source: ICBC Macau

ICBC Macau also provided a lot of preferential terms to benefit applicants. To smooth along applications, the bank sent its own staff to sales offices and show flats for economical housing properties. With face-to-face service, the problems and applications of prospective owners could be solved in time.

When it came to the products and the pricing aspects, the bank offered flexible services to convince more customers to use the system, instead of the traditional strategy of low interest rates, for example, taking the household appliance coupon and the supermarket coupon as an additional premium. Compared with other banks in the country, ICBC Macau offered a package of benefits for a larger group of local residents.

Additionally, learning about the decoration difficulties that some applicants were having, ICBC Macau offered various ways to help them out of this situation. Besides the free household appliance coupons, the bank also promised to provide decoration loans in order to lower the worries of applicants.

ICBC Macau issued specially designed mortgage loan strategies to low-income residents and reduced credit risk by separating the censoring and approving procedures, aiming to improve the success rate of the mortgage loan and to maximise customer satisfaction.

Fast and efficient
Based on the high concentration of the economical housing projects, the loan origination work has to be finished in a relatively short period of time. To ensure the applicants aren’t made to wait, the bank works hard to concentrate its human resources together with technology and facility support to prolong business hours consistently. With the active engagement of the relevant departments, on one occasion more than 1,000 mortgage loans had been set up in less than 10 days, and the whole loan origination stage in each project had been finished in a rapid and effective way.

In spite of the low return of economical housing mortgage loans, ICBC Macau still sticks to providing excellent service to every single customer. By the end of 2013, five Economical Housing Projects had been finished, and 8,060 units could be occupied. According to official statistics, 6,004 units have been sold. ICBC Macau has dealt with 4,554 of the mortgage loans offered to these successful applicants, representing a market share of 75.85 percent.

Having worked hard in the sector, ICBC Macau has established its brand image in economical housing mortgages and won the respect and appreciation of the low-income segment of society. Going forward, with the objective of ‘taking from society, giving back to society, serving society’, ICBC Macau will continue to support the MSAR Government’s policies and fulfil its social responsibility, devoting itself to social welfare.

Bank Leumi: technology is key to Israel’s long-term economic growth

Posted on by Ashton Wenborn

The population of Israel is about 8.2 million people, which is similar to that of Austria or Hong-Kong, and its geographic size is small – slightly larger than the state of New Jersey. Nonetheless, despite its small size, Israel has a strong economy, with a GDP of about $292bn in 2013 – similar to that of Finland or Singapore. GDP per capita in Israel is about $37,000 per year, which is relatively high and only slightly lower than that of the UK. Israel’s rate of inflation is low, currently at about one percent per year, and the government’s debt as a percentage of GDP is well under 70 percent.

Israel has a technologically advanced market economy; indeed, its achievements in technology have made it a giant in this sector worldwide. About 25 percent of Israel’s business activities are in hi-tech, and the country enjoys massive foreign investments in the sector. About half of Israel’s exports of goods are of hi-tech nature, and it also has substantial exports of hi-tech services, such as software, cyber-security, research and development and others.

Aside from hi-tech, Israel exports large quantities of cut diamonds, pharmaceuticals and chemicals. Its major imports include crude oil, grains, and raw materials. It also exports services, both in the area of hi-tech, such as research and development services, software services, and also tourism.

The global financial crisis of 2008-09 brought about a very brief recession in Israel, but the country entered the crisis with solid fundamentals following years of prudent fiscal policy and a resilient banking sector. The economy has recovered much better than most advanced, comparably sized economies.

In 2010, Israel was formally accepted as an OECD member. Following the ongoing improvement in the state of the Israeli economy in previous years, the country’s credit rating was increased by the various credit rating agencies in late 2007 and in early 2008. In September 2011, Israel’s credit rating was further increased to A+ by Standard and Poor’s.

Israel has a technologically advanced market economy; indeed, its achievements in technology have made it a giant in this sector worldwide

Offshore natural gas
Natural gas fields discovered off Israel’s coast during the past few years have brightened its energy security outlook. The ‘Leviathan’ field was one of the world’s largest offshore natural gas finds in the past decade, and production from the field is likely to start by 2020. Production from the ‘Tamar’ field, which started in early 2013, is expected to meet all of Israel’s natural gas demand for the next two to three decades.

Natural gas is expected to play a significant role in Israel’s future energy mix. In addition to ongoing growth in electricity consumption, natural gas demand will be boosted by a preference for natural gas-fuelled power stations, as well as increased industrial usage and possible applications as a transportation fuel.

Israel’s natural gas discoveries have paved the way for the energy independence, as well as significant cost cutting and productivity gains. Aside from the impact on economic activity and the country’s level of competiveness, the revenues that the state of Israel will receive from natural gas taxation and royalties are expected to be significant. Whereas royalties and corporate taxes are incorporated into the government budget, the taxes on surplus profits will be directed to a sovereign wealth fund.

Most upstream investments will not have a significant net effect on domestic GDP because they require few inputs from domestic companies, since major infrastructure projects are contracted to global service providers. However, investments related to the use of natural gas are expected to result in an increase of gross real fixed asset investments. There will be substantial activity related to the installation and maintenance of the systems. In addition, growth is likely to be boosted by various spillover developments such as demand for financial services required as part of the investment process, demand for planning and infrastructure services and also for materials to be used in the process.

The transition to natural gas is expected to result in increased energy efficiency and a reduction in Israel’s energy costs in the long term. This is likely to contribute to the country’s global competiveness and will be particularly important for medium- and low-tech industries that have significant energy needs. Examples of these industries include chemicals, food, rubber and plastics, textiles and paper. Other parts of the economy that are likely to benefit from the accessibility of natural gas include hotels and agriculture. The use of natural gas will help Israeli exporters to increase their global market share and will help manufacturers that are focused on the domestic market to better compete against imports.

Consistent growth
Israel’s real GDP grew by 3.3 percent in 2013 compared to 3.4 percent in 2012 and 4.6 percent in 2011. The slowdown of economic expansion in this period was evident in substantially slower export growth and a major slowdown of investments in non-residential capital, such as machinery and equipment. But despite the slowdown, Israel, an OECD member, has continued to maintain a growth level well above the OECD average (see Fig. 1). The outpacing of Israel’s growth rates compared to those of OECD members has been evident since 2004.

GDP growth in 2014 is not expected to be led by private consumption expansion, which is showing some signs of strain following several years of direct and indirect tax rate increases and also higher housing prices. Higher tax rates have affected the rate of growth of disposable income for many households. Parallel to this, higher rent payments or mortgage payments on newer and more expensive housing has required many households to allocate a larger share of their disposable income to housing services. This has left fewer resources for other types of private consumption. Private consumption is expected to rise by 2.3 percent in 2014, compared to 3.2 percent in 2012 and 3.7 percent in 2013. This rate of increase is only slightly higher than annual population growth of 1.8 percent.

Source: Bank Leumi. Notes: Post-2013 figures are Bank Leumi estimates
Source: Bank Leumi. Notes: Post-2013 figures are Bank Leumi estimates

Export growth is expected to start to recover moderately in 2014 following a gradual recovery of developed market global demand. Exports of goods and services are expected to rise by 3.7 percent in 2014 compared to growth of less than one percent per year in 2012-13. Investments in fixed assets are expected to rise by 1.8 percent in 2014, similar to rate of 1.4 percent in 2013. Investment growth is expected to be concentrated in machinery and equipment, in part for the utilisation of natural gas.

Fiscal policy
The government’s deficit in 2013 was 3.1 percent of GDP, compared to its target of 4.3 percent. The lower than expected deficit was attributed to higher tax rates and also a series of one-off events that contributed to state tax revenues. In addition, government spending in 2013 was safely within the budget framework limits.

Israel’s fiscal path is subject to an explicit feedback rule with a government debt-to-GDP target ratio of 50 percent of GDP. The 2013 year-end debt ratio stood at about 66 percent of GDP. Israel’s fiscal deficit in 2014 is expected to be 2.3-2.7 percent of GDP and the year-end debt ratio is expected to remain at about 66 percent of GDP (see Fig. 2).

The better-than-planned outcome of the 2014 fiscal deficit figure, compared to the official target of 2.7 percent of GDP, is likely to reflect an increase in government revenues that stems from a hike in corporate tax rates, a tightening of tax collection and strengthened enforcement, and also several one-time factors.

Our forecast for the rate of GDP growth in 2015 is four percent. The main factors that are expected to contribute to this growth include: investment in machinery and equipment that make use of natural gas; an acceleration of the housing market and investment in construction; and the ongoing recovery of demand from developed economies.

Long-term economic growth is projected to average a respectable four percent a year, and will be supported by Israel’s high level of technological innovation and its investment in research and development, on which it spends a larger proportion of GDP than any other developed country in the world. Natural gas extraction and its usage will boost the economy over time.

Credicorp on the global importance of the MILA region

Posted on by Ashton Wenborn

Governments in the Mercado Integrado Latinoamericano (MILA) region have provided a unique and welcoming regulatory framework for investment. Coupled with the increasing opportunities and steady growth channels across the region, investors seem to be heading there in droves. World Finance spoke with Alejandro Perez-Reyes Zarak, Head of Asset Management at Credicorp Capital, about what makes the region so unique.

Why do you think the MILA region presents good opportunities compared with other emerging markets?
The region benefits from macroeconomic stability, which has resulted in a succession of credit rating upgrades over the last decade. Colombia, Chile and Peru enjoy high levels of international reserves as a percentage of their GDPs (their average level in 2013 was 19.3 percent), which are sufficient to cover their current account deficits and smooth imbalances, aided by flexible exchange rate regimes.

Moreover, decreasing levels of net government debt provide the MILA countries with additional flexibility to utilise fiscal and monetary policies. MILA’s public debt in 2013 was 21.3 percent of its GDP, below the emerging market average of 44.8 percent. In terms of inflation, in 2013 the three MILA countries displayed some of the lowest levels of inflation seen in Latin America, with an annual inflation rate of 2.6 percent on average (Latin American GDP weighted at an average of 8.6 percent).

Despite these fundamental strengths, last year the MILA region was hit harder than emerging markets as a whole in both the equity and fixed income markets. This situation has provided a great investment opportunity, as investors can now buy assets with great fundamentals at a discounted price. MILA corporates offer better yields than US high yield corporates (with a spread of 23 basic points), despite having a better rating – the average rating of the three countries is A-. MILA yields are even higher than the ones offered four years ago, when the average rating was split BBB/BBB+.

In equities, price-to-earnings ratios in MILA are below its historic average, suggesting it is still discounted despite its positive year-to-date return. As a consequence of discounted valuations and the decline of bad news in emerging economies, investor sentiment shifted, turning positive in March and luring inflows into equity and fixed income mutual funds in emerging markets. In the equity market space, most inflows were directed to Latin American equity funds, while in the fixed income space inflows were seen only in Latin American bond funds.

Source: United Nations
Source: United Nations

Do you believe that regional regulations are supporting economic growth?
We believe the regulation in the region offers a better investment environment, which supports economic growth, although there is still room to improve. To further boost its competitive edge, the region must close its infrastructure gap, crucial for creating a business and investor-friendly environment. Free trade agreements and regional integration, such as the Pacific Alliance, help to attract the required investment.

Moreover, changes in regulations, tax systems, intellectual property and labour laws will encourage risk-taking, attracting talent from all over the world. The region is already moving, with Colombia encouraging utility companies to share their fibre optic cable networks and funding the development of supply chain applications that force smaller companies to adopt more innovative business models.

In addition to this, the Chilean government’s start-up programme is attracting entrepreneurs from all over the world to build a culture of risk-taking and innovation, creating a Latin American entrepreneurship hub. Although there is still much work to do to improve productivity, the region has achieved considerable progress in strengthening its institutions. For instance, MILA stands out among emerging markets in ease of doing business and world governance indexes.

What do you think the future is for emerging markets in general?
Emerging markets’ share of world GDP in PPP is around 57 percent. Despite this, their share of equity and fixed income global markets remains below 14 percent. Developed countries debt represents 88 percent of total world debt and in many cases a larger percentage of the countries’ GDP, creating a drag for future growth. In the following years, we expect emerging economies to gradually increase their importance in the equity and bond markets.

From a growth perspective, emerging economies may still benefit from a demographic momentum, while developed ones are dealing with the ageing of their populations (see Fig. 1). This dynamic will continue in the following years, and will lead their dependency ratio to increase to 0.71 in 2050, whereas in emerging countries it should remain close to present levels (0.23 in 2050), according to the UN.

The higher proportion of a working-age population, combined with higher investment as a percentage of GDP (the average for BRICS, MILA and Mexico is 27.6 percent in 2019 according to the IMF, compared to an average of 22.4 percent for the US, Euro area and Japan), will allow them to keep growing at a faster rate than the developed economies, providing interesting investment opportunities.

While emerging markets are not impervious to global shocks, they have carried out reforms that provide more insulation from external stress than in previous decades.

The key to achieving sustainable growth will be to develop additional productivity reforms which invest in human-capital-improving education systems. Although we are positive about the future of emerging markets, it is important to keep in mind that this term engulfs a lot of different countries, and it is important to differentiate between those taking the steps to maintain their growth rates and those that are not.

What products does Credicorp Capital offer to gain entry to these markets?
Credicorp Capital has a wide product offering which satisfies most investor needs. This summer we will be launching Cayman and Luxembourg domiciled funds in the equity and debt markets. The Condor Equity Fund will invest exclusively in MILA, while the Latin American Corporate Debt Fund seeks to invest 40 to 60 percent in MILA and the remainder in Mexico and Brazil primarily.

These funds will follow the same investment processes and benefit from our regional expertise, which have made us leaders in our local markets. For instance, in Peru we lead the mutual fund market with a 40 percent market share and manage 16 mutual funds, covering fixed income, balanced and equity funds granting exposure to Peruvian and Latin American markets.

In the alternative markets sectors, we are in the fundraising period for our Peru Real Estate Fund and our Colombian Real Estate Construction Fund, which offer investors access to MILA’s developing real estate sector and experienced investment team, which currently manages a $250m real estate income Colombian fund, which has consistently delivered double-digit returns. Likewise, in Chile we have structured several club deals, granting investors access to the hydroelectric, dairy and real estate sectors.

In the past few years we have also entered the asset backed security market. In Peru we developed an operating lease programme, which has issued over 10 notes granting investors access to cash flows from Peru’s blue chip companies who serve as lessees. In Colombia we have a fund through which we finance auto purchases for taxi drivers. We also see great potential in the infrastructure sector, which we hope to enter in the short- to medium-term.

We provide technical advisory services to Atlantic Security Bank (ASB), Credicorp’s offshore bank that serves the group’s private bank and family office. Our strategy team – widely respected in the region and specialised by asset class – is an invaluable part of our advisory services, recommending global, local and mixed portfolio allocations. In addition to serving as investment managers for ABS’ funds, we analyse mutual, hedge and private equity funds that invest outside of MILA, to complement our clients’ global portfolio with the best investment vehicles available. Likewise, we structure capital- and semi capital-protected notes granting our clients exposure to risky markets while protecting their capital.

How do you believe Credicorp Capital stands out from the competition?
The company is unique in that it is MILA’s first investment bank, born of out the merger of three leading financial service providers – BCP Capital (Peru), Correval (Colombia) and IM Trust (Chile). It is a truly regional bank with local expertise in each country in which it operates. Our focus in Latin America – and MILA in particular – has led us to distinguish ourselves as the partner of choice for investors in the region. We manage assets totalling $7bn in the region, and advise on an additional $5bn. Just like our parent company, Credicorp Ltd – Peru’s largest financial holding (NYSE: BAP, market cap: $11bn) – Credicorp Capital holds a focus on its clients at the core of its DNA.

We have assembled the most experienced investment team possible. Our strategy, investment management, investment products, and alternative investment teams are regional in nature, with a presence in every operational country. Our head equity and fixed income portfolio managers have over 30 years of combined experience investing in MILA. Our buy-side research team, composed of 14 people – including four CFA charter holders, specialised by industry – regularly meets with top management at target companies, as well as with their clients and suppliers, incorporating this information into proprietary models. By the end of 2014, we expect to cover 100 percent of the MILA 40 index, 80 percent of the MILA index (140 companies total in Peru, Chile and Colombia) as well as 50 percent of CEMBI Latin America, with an emphasis on Mexico and Brazil.