Month: September 2014

ACWA Power promotes social development of Saudi Arabia

Posted on by Ashton Wenborn

For ACWA Power, it is not enough to provide clean water and electricity to people: the company is also concerned with the social and economic development of the communities in which it operates. Based in Saudi Arabia, it is an international developer, investor and operator of power and desalinated water plants, and a corporate social responsibility force in the region, ensuring that the needs of the population are being met.

It invests in a number of public and private partnerships with the Saudi government, aiming to empower communities by meeting all their growth demands when it comes to water and power. Paddy Padmanathan, President and CEO of ACWA Power, spoke to World Finance about sustainability, social economic development, and ACWA Power’s plans for the future.

What initially attracted the firm to projects such as the Higher Institute for Water Power and Technologies (HIWPT)?
The primary objective of the institute is to enable Saudi Arabia’s power generation and water desalination sector to be staffed by homegrown, first-rate operators and technicians. With this in mind, it is our intent to ensure that from the outset the institute becomes a thriving and self-sustaining place that inspires young Saudis to enter the power and water sector, allowing it to become the polytechnic of choice for trainees and employers, based on reputation and quality.

ACWA Power net income:

2011

SAR 280m

2012

SAR 331m

2013

SAR 459m

Clearly the institute will also therefore contribute to the creation of an employable pool of skilled resources, and given the shortage of these resources in this sector will directly impact on reducing the high unemployment problem in the kingdom.

As a business that is investing billions of dollars up front and collecting our investment back by selling electricity at a few cents per kWh and/or desalinated water at a few cents per litre over 20-25-year contracts, the sustainability of the markets we operate in and the social and economic development of the communities who ultimately consume what we supply is absolutely critical to ACWA Power. This is what will ensure continued affordability of and willingness to pay for the water and electricity we produce, which in turn will ensure we get the reasonable level of return we are seeking on the investment we make.

ACWA Power therefore ensures from the outset that in making our investment, in getting the electricity and desalinated water plants built and then subsequently over 20-25 years operating and maintaining them, we maximise the opportunity to retain as much value as possible in the local economy and generate the maximum possible true value by creating employment opportunities for the local people. In addition, ACWA Power sets aside a portion of its revenue to support community development activity, wherever our assets are located, all with the mindset of ensuring increasing the health, wealth and happiness levels of the communities within which our plants are located.

Quite apart from all this, given that we need to sustain our operations at the plant for 20-25 years, in the long-run we also need to focus on how best to ensure a reliable source of skilled professionals we require to operate and maintain our plants and quite clearly this means looking towards the citizens of the country rather than expatriate workers.

As we started to build our business in the Kingdom of Saudi Arabia (and now we are seeing something similar in other geographies that we are operating in) we saw a significant skills shortage, particularly at the technician level; the much-needed skillset to operate and maintain our power generation and desalinated water production plants.

We thus decided that we should help ourselves and fulfil our own objective of local employment creation and value retention in the local economy by establishing a training school focused on delivering what we need.

What influence do you believe it will have on the local population?
HIWPT is selectively recruiting promising school leavers to sponsor for training, thus empowering local communities. The sponsoring companies also offer all the trainees at the institute employment contracts with guaranteed jobs upon satisfactory completion of the 30-month programme. Thus, on graduation, they return to their communities and take up employment at the nearby power or desalination plant to start a meaningful and stable career.

Practical lessons at the Higher Institute for Water and Power Technologies in Rabigh, Saudi Arabia
Practical lessons at the Higher Institute for Water and Power Technologies in Rabigh, Saudi Arabia

Currently, the majority of teachers are English-speaking foreign nationals, as all training is delivered in English. In due course, the intention is also to encourage the development of a group of local trainers to consolidate the sustainability of the institute itself.

Are there any other organisations involved?
While ACWA Power originated the concept, established the need and funded the development of the institute from the business plan to curriculum structure, the value of partnership with a wider stakeholder community was recognised. Today, the initiative’s success is very much based on strategic partnerships spanning from government authorities involved in promoting and funding technician training, to water and power infrastructure sector participants, industry leaders and plant operators. The board of directors includes representatives from two governmental departments and four sector partners, with trainees coming from 14 different enterprises involved in the power, water and utility service provision sectors.

What is your relationship with the government on the project?
The initiative started by ACWA Power was ultimately translated into an agreement with the Saudi Arabian Technical and Vocational Training Corporation (TVTC) in 2008. The outcome was a strategic partnership programme between the private and public sectors to jointly establish HIWPT in Rabigh, and as such the institute is well positioned to meet the overall objectives of the government: to promote skills development and create local jobs.

How long will the institute last?
HIWPT is not an initiative with an expiry date. Indeed, it has been purposefully established as a non-profit, self-funding enterprise to ensure its sustainability as a valued sector and community resource. The initial focus has been on maturing the vocational training programme for school leavers starting on their apprenticeship career as technicians and operators.

Future plans aim to broaden the training programme to offer short technical and safety courses that will provide both entry level and more advanced training to the entire network of industries along the Red Sea coast. The success of this initiative has given sufficient confidence for HIWPT to expand its student intake numbers, and to facilitate this the TVTC has made a budgetary commitment of $70m to construct a 40,000sq m campus with trainee and teacher accommodation at Rabigh, with a target opening date of September 2017.

Was Rabigh chosen for a particular reason?
Recognising that electricity generation and desalinated water production plants are usually located at remote sites and operation and maintenance staff need to commit to being located at those sites for medium-to-long durations, a conscious decision was made at the outset to select trainees from remote locations, preferably from communities located in the vicinity of plant sites, and to locate the institute itself away from glamorous urban conurbation so as to minimise the risk of trainees being tempted to seek employment opportunities in the urban areas. The peri-urban area of Rabigh was also selected as it is conveniently located within reasonable distance of six of ACWA Power’s own desalinated water production and electricity generation facilities and the head offices both of our operations and those of our maintenance subsidiary company.

Do you have any plans for similar initiatives?
We have used the experience gained from HIWPT to guide our training and socio-economic plans in each country that we are expanding our portfolio of electricity generation and desalinated water production assets into. Thus, attached to our concentrated solar power plant project in Morocco, Noor 1; at the Bokpoort Concentrated Solar Power Project in South Africa; and the coal fired power plant being developed at Moatize in Mozambique, we are already considering the initiation of similar training facilities. In the interim at all these locations we have already embarked on local community development initiatives, many of them focused on construction skills development to enable the sites to benefit from the opportunities offered by these very large scale construction programmes.

Slimming down: Mexico’s telecoms master looks to offload assets

Posted on by Ashton Wenborn

It’s not every day that Carlos Slim, one of the world’s richest people, decides to throw in the proverbial towel. But then Slim, who has amassed much of his multi-billion-dollar fortune in the telecoms market of his native Mexico, is a pragmatist, and has always been quick to grasp the political realities of a worsening business climate. In short, he needs to offload some of his domestic assets before he’s forced to do so, with local politicians finally tightening the screws on him and others.

Telecoms and broadcasting reforms now being implemented in Mexico also mean the enforced pruning of Slim’s America Movil empire will have ramifications, not only for the domestic market but also further afield. According to his own bankers, Slim will look to deploy a war chest, once the assets are sold, that could amount to $20bn.

Even when the dust settles and the newly slimmed down America Movil emerges, it will remain a major beast in the Mexican jungle

Though Slim has yet to indicate the assets to be sold off, America Movil, Latin America’s biggest telecoms company, which includes (former state enterprise) Telmex and Telcel, its fixed line and mobile subsidiaries, will see its overall domestic market share trimmed to below 50 percent. Telmex and Telcel presently enjoy market shares of 80 percent and 70 percent respectively.

Overall, it has more than 270 million mobile and 70 million fixed-line, broadband and TV subscribers, which includes 73 million subscribers in the Mexican market alone.

The new rules, signed into law in July 2014 by President Enrique Peña Nieto, marked the culmination of a pledge made when taking office 21 months ago to boost competition in Latin America’s second-largest economy.

Slim pickings
Slim’s initiative – aimed at escaping the antitrust measures being applied to dominant players by new watchdog the Federal Telecommunications Institute (IFT) – will still mean America Movil having to present its plan to the regulator.

The IFT, which has been given powers to break up dominant players if necessary, will only free America Movil from tougher regulations once effective competition conditions exist.

Slim, who has already come under pressure to share his infrastructure with domestic competitors such as Spain’s Telefonica (which has a 20 percent market share), is willing to play ball and keep the regulator happy if it means he can enter lucrative markets he has previously been kept out of, such as pay TV.

If the beefing up of powers for the new regulator sends out a strong political message it also reflects years of weak regulators and inadequate laws that allowed major companies to stall regulatory decisions in court, often for years.

Yet even when the dust settles and the newly slimmed down America Movil emerges, it will remain a major beast in the Mexican jungle.

Evidence of the negative impact of Slim’s market dominance, at least when it comes to cost and quality, can be seen in the OECD’s 2013 report Mobile Handset Acquisition Models, OECD Digital Economy Papers, No. 224, which found Mexico to be the most expensive of 12 major markets for a basic talk, text and data mobile phone plan (see table opposite).

Another survey, from internet metrics provider Ookla, found Mexico to be the 41st most expensive (of 64 markets monitored) for monthly broadband costs per megabit (US dollar terms).

Though Slim remains non-committal about how his assets will be offloaded he has indicated any sale will be to an operator with the necessary scale and financial clout to compete effectively in the Mexican telecoms market. Slim has always maintained the relative weakness of his immediate competitors has been down to their lack of capital investment. This would seemingly preclude Mexican companies – the attention instead shifting to foreign telco giants such as AT&T, which may be looking to directly enter the market.

Source: OECD
Source: OECD

Finding a buyer
Meanwhile, there are currently no plans for America Movil to sell its cell phone towers – the company looking instead to opening them up to anyone interested in renting them.

In a July interview with Reuters, Slim said the company would continue to pursue expansion into central and eastern Europe through its investment in Telekom Austria and reiterated he would likely sell his Mexican assets to a single buyer.

AT&T, a long time investor in America Movil, may yet prove to be a long shot though, having recently confirmed it intends selling its eight percent stake as it looks to buy TV company, DirecTV.

Other potentially interested parties include China Mobile, Huwai Technologies and Deutsche Telecom – all of whom would be entering the Mexican market.

Slim and Telefonica meanwhile have been crossing swords not just in Mexico but also in Brazil where Telefonica is the leader in that country’s mobile market through its Vivo unit, and where Slim may be looking to grow his relatively small market share of 25 percent.

Telefonica already has a potential conflict of interest being not only the owner of Vivo, but also an indirect shareholder in number-two player Telecom Italia’s TIM – a point already noted by Brazil’s regulators who are looking for some form of consolidation. Resolution of this particular issue could present an opening for Slim to raise his market share.

As Slim has expanded his substantial non-telecom holdings, which include oil, mining, banking, construction and a 17 percent stake in New York Times Company, among others, he has simultaneously striven to reduce America Movil’s dependence on the Mexican telco market. Indeed, 65 percent of its sales now come from outside the country against just 30 percent a decade ago.

International expansion
While Slim intends to commit more money to energy and infrastructure investment in Latin America, telecommunications investment overseas remains an attractive proposition for him.

Most intriguing of all, is whether Slim will use some of the proceeds from his forced sales to increase his footprint in the US, where America Movil’s TracFone unit is the fifth-largest domestic mobile provider. That unit, which rents space on networks run by the likes of AT&T and Sprint, provides pre-paid mobile services through well-known US retailers and has largely grown through the buying up of a clutch of smaller pre-paid operators.

Yet part of the problem for TracFone, with its 25 million subscribers, is that it barely saw any growth in the second quarter of 2014. The question remains whether Slim will be content to tread water in terms of market share or look to expand via a major share stake or acquisition.

T-Mobile US, the fourth-largest operator was seen as a possible target – not least because its proposed merger with Sprint the third biggest provider, was likely to fall afoul of US regulators on competition grounds.

While America Movil’s management was quick to quell any idea of buying T-Mobile US outright, it was then suggested America Movil could be in for assets that would need to be divested should any T-Mobile/Sprint merger be signed.

Shoppers pass an AT&T phone store. The telco giant could be drawn to the Mexican market
Shoppers pass an AT&T phone store. The telco giant could be drawn to the Mexican market

That would appear to be a moot point now with Sprint having walked away from the ‘merger’ that valued T-Mobile at $32bn.

But perhaps not. With Deutsche Telekom – 67 percent stakeholder in T-Mobile US – long interested in offloading its unit – news of the failed merger with Sprint effectively brings T-Mobile US back into play. Though America Movil may not be interested in an outright purchase there is little stopping it building a sizeable stake along with others.

The demise of the Sprint/T-Mobile US merger clears the way for French telco Iliad to negotiate with T-Mobile US over a $15bn ($33 a share) offer for a 56.6 percent stake, which was already on the table. While T-Mobile US will likely reject the offer as too low, Iliad is looking to improve it by bringing in more investors and is reportedly in talks with US satellite and cable operators, Cox Communications, Charter Communications and Dish Networks to climb on board. Other potentially interested parties include the Ontario Teachers Pension Plan (OTPP) and various sovereign wealth funds, such as Singapore’s GIC.

The problem for Iliad, which has a 13 percent share of the French mobile market, is that it needs partners because it’s unable to raise more debt than the $13bn lenders such as BNP Paribas and HSBC.

Though America Movil has yet to be mentioned as a would-be partner in any proposed deal, the changing cast of characters ensures it at least has the opportunity to come to the party late should it wish to do so. However, given Slim’s growing European interests he may yet be content to ‘let sleeping dogs lie’ and pass on this occasion.

European ambitions
In Europe, America Movil presently holds stakes in Dutch operator Royal KPN NV and Telekom Austria AG. In May 2014 America Movil, which had a two percent direct stake in Telekom Austria and a 25 percent indirect stake through its Carso Telecom unit, submitted an offer, along with partner OIAG (the Austrian state holding company) to buy the public shares in Telekom Austria they didn’t already own.

Under the new arrangement, which had become mandatory, OIAG currently holds 28.42 percent with America Movil (direct and indirect) holding 50.8 percent. The deal is likely to have cost America Movil up to $2bn.

Slim’s European intentions were further bolstered by an announcement of the share offer of the proposed creation by America Movil and Telekom Austria of one of the world’s largest fibre networks.

The network, to be established between Vienna and Miami, would have a joint footprint with 200 points of presence stretching across 47 countries, via the interconnection of networks offering voice, roaming, data and mobile services. For its part Telekom Austria’s voice traffic would in future be processed through America Movil’s Latin American voice hub in Miami.

Despite a subsequent $545m write-down on its Bulgaria operations that will likely push Austria Telekom to a full-year loss, Slim clearly sees the long-term attraction of its Eastern European operations, even if many analysts still question the strategy, due to obvious shorter-term security considerations in the region and Austria Telekom’s still relatively low subscriber base – 20 million compared to America Movil’s 270 million.

If there is one thing that can be said about Carlos Slim, however, it is his inherent adaptability and the ability to sniff out an investment opportunity. Having said this, his investments don’t always work out – last year’s failed $9.6bn takeover of Dutch operator KPN left him nursing an estimated $1.2bn loss, according to one analyst, having earlier built up a sizeable stake. Slim also failed in a joint takeover bid (with AT&T) to buy Telecom Italia back in 2007.

Despite this, Slim has increasingly become a global player in recent years, having lessened his dependence on the Mexican market. And that is precisely why analysts, competitors and investors alike will continue to be kept guessing about what he’ll do next after raising additional cash from his Mexican asset sales. It could prove an interesting ride for investors.

How American Apparel is moving onwards and upwards after Charney

Posted on by Ashton Wenborn

“One of the best known and most relevant brands in the world,” according to American Apparel’s interim Chief Executive John Luttrell, is in free-fall. The sweatshop-free retailer has failed to turn a full-year profit since 2009, its controversial marketing practices have dealt it a reputational knock or two along the way, and its founder and CEO Dov Charney has been ousted by a board brought to the end of its tether.

“Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead,” wrote an optimistic Co-Chairman, Allan Mayer in a June announcement. “We take no joy in this, but the board felt it was the right thing to do.”

A brief history of Charney
Starting out with the ambition to spark an industrial revolution in the apparel industry, Charney’s focus on American-made garments earned him a respectable reputation in industry circles. In 2003, the Montreal-born entrepreneur was listed alongside Bill Murray, Jon Stewart and Johnny Depp in GQ’s Men of the Year, and a year later was named in Details’ 50 Most Powerful People, alongside Frank Gehry, Steven Spielberg and even Arnold Schwarzenegger. Renowned for his philosophy-first mentality and voracious appetite for expansion, Charney quickly came to be seen as a pioneering name in the retail space.

Although Charney has proven himself to be an incredibly capable entrepreneur, he has likewise shown himself to be an incapable CEO

In the immediate aftermath of the Dhaka factory collapse, Charney offered his condolences to those affected and reasserted the importance of a sweatshop-free future for retail. “It is critical for us to know the faces of our workers,” he wrote in a company blog post. “The apparel industry’s relentless and blind pursuit of the lowest possible wages cannot be sustained over time, ethically or fiscally.” In a time where many in his field saw little other option than to outsource manufacturing to developing countries, American Apparel’s LA factory stood as living proof that the garment industry need not necessarily look abroad.

However, despite Charney’s admirable philosophy and various industry accolades, he is perhaps better known for his various run-ins with trouble. Since he started the company at age 20, his career has been punctuated by controversy, not least when in 2009 a probe found that a third of the company’s workforce were ineligible to work in the US, and again in 2012 when a former employer alleged Charney had choked and derided him.

Perhaps most characteristic of the executive’s quarter century-long stint at the helm, however, is a string of sexual harassment lawsuits, which have collectively tarnished the retailer’s reputation and caused no small degree of discomfort for those at the top.

Addressing the losses
Charney’s dismissal, therefore, is unsurprising, given the damages, financial or otherwise, that his endeavours have inflicted on the retailer. “Your conduct has required the company to incur significant and unwarranted expenses, including expenses associated with litigation and defence costs, significant settlement payments, substantial severance packages that were granted to employees, and unwarranted business expenses that you incurred for personal reasons,” read Charney’s termination letter, which was leaked shortly after his dismissal and posted on Buzzfeed. “The resources American Apparel had to dedicate to defend the numerous lawsuits resulting from your conduct, and the loss of critical, qualified company employees as a result of your misconduct cannot be overlooked.”

The now-former CEO’s unflinching focus on sex and unconventional management style has split opinion among observers, employees and board members alike. Last year, when a company warehouse in La Mirada struggled to keep its doors open, Charney made the place his home for three months; when he regularly paraded his factory in only his underwear he quickly acquired the nickname ‘pants optional’; and when he was forced to lay off 30 workers without the paperwork to work in the US, he offered them each $30,000 in company stock as compensation. Whereas some say his methods are responsible for the company’s high profile and iconic status, others cite those same methods as reasoning for the retailer’s continued losses and managerial deficiencies.

Although Charney has proven himself to be an incredibly capable entrepreneur, he has likewise shown himself to be an incapable CEO. American Apparel’s stock peaked at an impressive $15 in 2007, only for the company’s overreliance on debt and penchant for micromanagement to land the retailer with a debt burden of over $200m, and for its share price to come in short of 50 cents.

After losing $270m in the space of only four years, it’s little wonder that the board’s patience with Charney has worn thin – although it insists the decision to oust him was not financial-related. What has come as a surprise to some, however, is that the hedge fund Standard General has stepped in so readily to revive the company’s fortunes.

Jumping to the rescue
The New York-based hedge fund and major shareholder agreed that it would grant the retailer a $25m loan on the condition that it reshuffled management and used the money to repay Lion Capital on a $9.9m defaulted loan – originally not due to be paid until 2018. The key points of the agreement included a reconstitution of the company’s board, in which five of the seven members would be replaced, a continuation of the investigation into Charney’s alleged misconduct, and a guarantee that prohibited Standard General from acquiring additional shares.

“This truly marks the beginning of an important new chapter in the American Apparel story,” said Mayer in a company statement. “With the support of Standard General, we are confident the company will finally be able to realise its true potential.”

To add another twist to the rescue effort, Standard General has also struck a deal with Charney to acquire shares on his behalf and then loan him the money – $20m with a 10 percent interest rate – to purchase the shares from them. The deal leaves Standard General with a 43 percent stake in the company and Charney still on American Apparel’s pay scale as a ‘strategic consultant’, pending the results of the investigation. Of the pre-dismissal seven-member board, only the Co-Chairmen Allan Mayer and David Danziger remain, representing something of an overhaul for American Apparel, though not without a lingering whiff of the old Charney-inspired mentality. On speaking to Bloomberg Businessweek in July, Mayer appeared to have quite the same philosophy as Charney on what makes American Apparel unique. “I think it’s the tension between the transgressive part of the brand and the idealistic part of the brand that gives it its special place in the culture,” said Mayer.

“If you took out the sex, it would be kind of boring. And if you took out the idealistic component – our commitment to the sweatshop-free, made-in-USA philosophy – it would just be sleazy. But you put them together, and you have something that’s interesting.”

Among the company’s new additions to the board is the former CEO of Fischer Communications, Colleen Brown, which in many ways represents a major leap forward for the company. Known primarily for her management and operations expertise, the managing director of Newport Board Group and longtime media executive also looks to add a much-needed measure of diversity to American Apparel’s board. All things considered, the deal marks the beginning of a period of relative stability for American Apparel, although it also raises the question of why an investor would go to such lengths in order to revitalise a – some-would-say – broken company.

The repair job
Irrespective of the company’s corporate governance standards and dire financial straits, its influence among young, hip and affluent consumers remains very much intact. Little other than the company’s sexually charged imagery and ‘Made in USA’ philosophy set the retailer apart from its competition, yet willing consumers have propped up the company’s bottom line for years. The fact that the retailer’s success is resting on factors aside from financial stability, however, poses a potential problem in that consumers could just as easily wake up to the company’s fragility and flee in much the same way investors have.

Granted, American Apparel’s managerial oversight and lacklustre financial performance leaves a lot to be desired, although the retailer’s clout among its target demographic remains an asset worthy of investment. Whether Charney keeps on at American Apparel or not, the fact that he was once ousted from the top spot means that there is a serious commitment from those on the board to instigate a turnaround and realise what potential there is.

Whether the company will rid of jobs, outlets or even its ‘Made in USA’ philosophy remains to be seen, but it’s almost certain that American Apparel without its figurehead will be an altogether different beast. If the retailer had a more conservative head on its shoulders, it could well be in a better financial shape than it is now; however, few can argue that without Charney the company would not be the world recognised and – some-would-say – iconic brand it is today.

Japan wage growth highest since 1997

Posted on by Ashton Wenborn

Japanese wages in July saw their strongest annual increase since 1997, with earnings up 2.6 percent on the year previous. The development was welcomed by consumers, whose wages have so far failed to keep pace with the rate of inflation and compensate for the April sales tax hike.

“Wage growth surged in July, but is set to slow in coming months as the summer bonus season ends,” said Marcel Thieliant, Japan Economist at Capital Economics. “The summer bonus season ends in August, and bonus payments are set to fall sharply. As a result, the growth rate of overall earnings will mostly be driven by changes in regular pay. With base pay expanding clearly less rapidly than bonuses, wage growth will likely slow again but it should stay in positive territory.”

The figures came in much higher than anticipated and represented a sharp uptick on the one percent rise posted in June

The figures came in much higher than anticipated and represented a sharp uptick on the one percent rise posted in June. However, pay, when adjusted for inflation, still shrank for a thirteenth consecutive month, at -1.4 percent, and continues to stifle consumers’ appetite for spending. “Real earnings growth will likely remain negative at least until April’s consumption tax hike falls out of the annual inflation comparison, but with the yen broadly stable over the past year, price pressure is set to decline,” said Thieliant. “This should provide some relief to households.”

Regular pay exhibited a 0.7 percent year-on-year rise – the biggest climb since 2008 and a sizeable increase on the 0.2 percent equivalent in June – but special earnings were up 7.1 percent and accounted for close to two thirds of overall wage growth. Analysts expect the upward trend to continue, although it will take a concerted effort from corporates before real wage growth matches the rate of inflation and boosts household spending.

Japan considers legalising gambling

Posted on by Ashton Wenborn

The 23rd chapter of Japan’s Penal Code prohibits any person from partaking in gambling activity, save for a few exceptions. Japanese high rollers are permitted to wager their wallets on horse, boat and motorcycle races, prefectures and large cities still hold small-scale lotteries, and pachinko parlours have found a way to skirt the country’s anti-gambling legislation and dole out cash prizes.

The circumstances here underline the absurdity of Japan’s antigambling laws which, according to critics, are starving the country’s economy of the stimulus it so desperately needs. True, the legislation is steeped in tradition and has stood now for over a century, though the vast majority of the country’s 127-million-strong population, not to mention its leader, are agreed that it’s now time to make way for a casino-led recovery. “Given the amount of pent-up demand in Japan, casino gambling could thrive,” said David Schwartz, Director of the Centre for Gaming Research at the University of Nevada, Las Vegas.

Learning by example
Now, after years of stop-start discussions and any number of administrative changes, the issue of introducing pro-casino legislation has finally made its way to the fore and onto the agenda of the Japanese Parliament, marking the last leg of what has been a marathon ordeal for the bill. The pathway to legalised gambling is a long and arduous one, though few today can ignore the economic advantages it could potentially bring. As was so nicely put in a recent CLSA report: “Hallelujah! Japan’s casino business will be drenched in cash.”

$187bn

Annual global Pachinko machine revenue, 2012

$38bn

Macau’s global gaming revenue, 2012

23.3bn

Passengers carried by rail in Japan annually

33

Japan’s global tourism rank, 2013

Asia’s foremost equity brokerage estimates that the introduction of a mere dozen or so casinos could contribute $40bn in revenue – not far off Macau’s $51bn equivalent and over six times more than what the Las Vegas Strip makes in a year. Add to that the prime minister’s ambition to make known Japan’s newfound business credentials for international firms, alongside efforts to bump up foreign tourist numbers before Tokyo 2020, and it looks as though the passage of a pro-casino law is looming large on the horizon.

The onset of globalisation, combined with increased average per-capita income and spending in South-East Asia, has seen the likes of Macau make a minnow of former gaming hubs such as Las Vegas. Buoyed by rock-solid economic fundamentals and an influx of wealthy tourists, the former Portuguese colony has come to rank as the world’s fourth-richest territory, and revenues for the region’s major casino players have risen hand over fist.

Proponents of the Japanese casino bill will want to replicate the success of Macau, although perhaps a more accurate comparison is Singapore, which cut the ribbon on two casino resorts in 2010 and a year later matched gaming revenues at the famous Las Vegas Strip. The scale and immediacy of success for casino gambling in Singapore has again reinforced the economic benefits Japan could stand to gain, and acted as motivation for the country to align its gambling offerings with those in neighbouring nations.

Source: CLSA, Japan National Tourism Organisation
Source: CLSA, Japan National Tourism Organisation

There is another major lesson to be learned from Singapore’s gambling endeavours, however: that being a refusal to continually expand upon casino numbers or slacken gambling regulations can slow momentum and cost dearly. After an explosive introduction to the casino business, a marked reluctance to up the ante and build on the industry’s success has turned investors off to the straight-laced Singapore market. As a consequence, gaming revenues have fallen short of Las Vegas’ for two straight years (see Fig 2).

A new era for Japan
For the time being, however, the focus lies not with regulatory technicalities but with pushing a bill through parliament and gaining the necessary support from the public. Japanese Prime Minister Shinzō Abe, for one, has been taking pains to lay the foundations for international business to flourish in Japan, not least casinos, and from what has been said so far, there can be no doubt that the legislation constitutes an important part of the prime minister’s so-called third arrow.

Crucially, no prime minister has supported the push to legalise casinos prior to Abe, and proponents of the move believe that parliament must act now if it is to capitalise on government support and the opportunities that have come by way of the Tokyo Olympics. Beginning with Shintaro Ishihara’s tenure as Governor of Tokyo in the late 1990s and spanning a 10-year-plus period of whirlwind discussion, the casino legislation is as much a part of the political landscape as the issue of unemployment or tax itself. Granted, the approval process is drawn out, the social implications potentially dangerous, and support anything but unanimous, though many are of the opinion that a failure to make good on the support now could cast a long shadow on the legalisation.

Crowds gather at the Sega and Sammy booth during the Tokyo Game Show in Makuhari, Chiba Prefecture, Japan
Crowds gather at the Sega and Sammy booth during the Tokyo Game Show in Makuhari, Chiba Prefecture, Japan

“The legalisation process in Japan is a two-step process,” said Jay Defibaugh, Senior Research Analyst at CLSA Japan. “The first-stage law, called the Integrated Resorts Promotion Law, should be passed in an extraordinary Diet session due to take place from late September or early October to early December. Within the Promotion Law is a commitment to pass an Execution or Implementation Law within 12 months. The second-stage law will include various key details including issues on taxation, floor space restrictions, and whether local Japanese will be required to pay entrance fees. We believe that the first-stage law is likely to be passed in the extraordinary session.”

Many, including Defibaugh, are in agreement that a positive verdict is likely to arrive in the autumn session. However, there are some who are less than optimistic about the passage of a casino law any time soon, and believe the obstacles to progress to be too great. “Given the political process and the very emotional issues surrounding casinos, I think the likelihood of casino legalisation in the next year is very small,” said Ellsworth. “If the Japanese Parliament did pass legislation approving casinos, it would require a two-year study to decide all the details and administrative structure of the industry. There is pressure to have casinos up and operating in time for the 2020 Summer Olympic Games, but I think the opposition is too great, and it will be difficult to put all the pieces in place by 2020.”

Source: CLSA, Japan National Tourism Organisation
Source: CLSA, Japan National Tourism Organisation

Although supporters of the bill have put forward a compelling economic case for casinos, whether it is in relation to tourism (see Fig 1), employment or tax revenues, negative perceptions are still widespread, and are shaped primarily by fear of crime. “The Japanese are determined to look closely at the potential downside of legalised casino gambling, including problem gambling, the involvement of antisocial forces, and potential negative effects on the family and children,” said Defibaugh.

However, studies undertaken by CLSA suggest that opinions on casino gambling are not necessarily deeply held, which again emphasises the importance of capitalising on recent media and political attention.

Pachinko to cash in or crash out
Irrespective of the uncertainty, a number of major industry names outside of Japan have made their support known, and many intend to fund the casino rush should the legislation come to pass. Both MGM Resorts International and Wynn Resorts have said that they’re looking to boost their profiles in the country, as part of a wider plan to up their share of the highly lucrative Asian gambling market.

MGM, the largest casino operator on the Vegas Strip, stated in February that it would be willing to inject between $5bn and $10bn into the Japanese market, whereas Las Vegas Sands, the largest gambling firm in terms of market value, is ready to invest $10bn or “whatever it takes” to win a share. The fight to gain a foothold in the market is understandable, given that the country looks set to become the world’s second-largest gambling market, should the bill pass and conservative estimates of $20bn to $40bn prove accurate.

However, interest from major industry names raises another important point, which, according to Ellsworth, is “whether the government should consider partnering with international casino properties to manage and run the operations, or attempt to run the operations with Japanese business operators.” The dilemma centres on the all-important issue of who will benefit from legalised casino gambling and, more broadly, what the country stands to gain by turning tail on the ban.

Source: CLSA, Japan National Tourism Organisation
Source: CLSA, Japan National Tourism Organisation

One of Japan’s home-grown sectors that could either cash in or crash out as a result of the bill is the pachinko industry, which, despite stringent anti-gambling laws, has managed to skirt the restrictions in quite spectacular fashion. Take a look on any one of the country’s bustling commercial districts and you’re likely to see the neon-lit exterior of a pachinko parlour; often-garish establishments that house row upon row of pinball-slot-machine hybrids called pachinko.

The activity has come to represent something of a modern Japanese tradition, in particular among elder generations. However, an ageing player base combined with a distinct lack of investment means that attendance has sunk near enough consistently since the mid-1990s, and the introduction of the casino business to Japanese shores could either kill or kick-start the industry.

Major pachinko industry names claim that the introduction of casino companies could well present the industry with a chance to return to former glories, although there are some that remain unconvinced by the effects of such an adjustment. “To the extent that casino gambling would be pulling would-be pachinko players, it may have an adverse effect on pachinko,” said Schwartz. “How large of an effect would depend on where casinos are sited, how accessible they are, and how many there are. There may be a market for both pachinko and casinos.”

The end of smaller gaming?
There are some, however, who believe the implications of the legislation will affect different parts of the industry in very different ways. “The bigger pachinko operators seem to favour casino legalisation, as they feel recognition of pachinko as a casino operation would follow,” according to Ellsworth. “Some form of taxation would be close behind, and the small ‘mom and pop’ operators could be in danger of going out of business. An estimated 15 to 20 percent of the population plays pachinko, and I don’t believe those players would travel a long distance to play in the integrated-resort-style casinos [see Fig 3]. This could change if they were to legalise local slot parlours, but the effect on the pachinko industry could either be devastating or a lifesaver – it will be interesting to see how this kabuki plays out.”

Source: CLSA, Japan National Tourism Organisation
Source: CLSA, Japan National Tourism Organisation

Other analysts, meanwhile, insist that the overlap between casino and pachinko players will be limited, and that the two customer segments actually share very little in common aside from their contribution to gaming revenues. “Based on the widely accepted view that the initial build-out of integrated resorts in Japan would be limited to about four sites, the direct competition with the more than 12,000 pachinko parlours found throughout Japan will be limited,” says Defibaugh. “Also, pachinko is nearly exclusive to Japanese players, whereas foreigners will be an important component of expected spending at integrated resorts. This speaks to the idea that customer overlap will be relatively limited.”

The fact remains, however, that pachinko operators are perhaps the most capable gambling entities in Japan, and, should legislators decide to sideline international firms in favour of local players, machine makers such as Sega Sammy could well emerge as the biggest beneficiaries of the bill. Once the restrictions on big pay-outs and cash prizes are lifted, pachinko operators need no longer find themselves confined to the smoke-laden, flea-ridden establishments they are forced to operate in today, but could instead be relocated to cavernous and cash-rich casino halls.

At the time of writing, the future for casino gambling in Japan is still very much up in the air. Not knowing whether legalising the industry could open the floodgates for problem gamblers or compromise what few traditions remain for a country in the midst of a major transformation, the casino gambling industry’s prospects are highly uncertain. However, with the correct measures in place and the right partnerships, both the tourism (see Fig 4) and gaming industries in Japan will be cashing in.

Canada set for unified securities regulatory systems

Posted on by Ashton Wenborn

It appears that Canada is tying the last loose ends before its dream of a unified national securities regulator becomes a reality. Saskatchewan and New Brunswick have become the latest additions to the roster of provinces that have signed up to the unified regulator, bringing the total to four. Though nine provinces are yet to fully commit (the new directive will only come into force in 2015), the four that have joined represent around three quarters of the total companies with market capitalisation in Canada.

The Cooperative Capital Markets Regulator (CCMR) has been in the works since 2008, as a response to the fragmented structure of the current system. Because Canadian provinces are fairly autonomous, securities have been regulated independently, without a unifying authority for the entire country. For a long time, there appeared to be little or no need for such an organisation as authorities from Ontario, British Columbia and Alberta handled the vast majority of securities, and cooperated with each other through the Canadian Securities Administrators.

But the fragmented structure of this arrangement meant the regulators had a tough time reacting in a timely manner to market events. This became a particular concern during the 2007 financial crisis, and led to the Canadian government appointing an expert panel to review the system and work alongside provincial authorities to devise a more inclusive and agile national system.

Voluntary but enforceable
So far the soon-to-be CCMR is a voluntary enterprise, but as Ontario and British Columbia have already signed up, there is little doubt the new agency will have considerable bite. Saskatchewan and New Brunswick are relatively small securities markets in Canada, but Ontario and British Columbia command large swathes of the national market.

There have also been concerns about the way in which the federal government has gone about creating the CCMR

However, even as more provinces – notably Nova Scotia – continue to consider the benefits of joining a national register, others, such as Quebec and Alberta, have been vocal with their concerns. Both these provinces have significant securities markets operating within them and have expressed a deep reluctance to relinquish control over their regulatory affairs to a national body.

There have also been concerns about the way in which the federal government has gone about creating the CCMR: in 2011, a judge ruled its first attempt to underpin the new regulator with federal legislation and make it mandatory for provinces to join up was unconstitutional. That’s why the new CCMR is a voluntary regulator.

So far, the four provinces that have signed up to the Cooperative Capital Markets Regulator account for 53 percent of the entire securities market in Canada. when asked how negotiations were proceeding with the remaining nine provinces, Canadian Finance Minister Joe Oliver told reporters: “I can’t comment on our discussions with individual provinces and territories except to say that a number of them are moving at a good pace.”

Teeth and backbone
Despite Ontario and Alberta’s reluctance to join the volunteer regulatory body, the move for a more unified system has been a hit among industry bodies. “This is a significant development and shows that the momentum towards the creation of a Cooperative Capital Markets Regulator is growing,” said Terry Campbell, President of the Canadian Bankers Association after the announcement that Saskatchewan and New Brunswick had signed up. “It is important in the continuing efforts to strengthen investor protection and the efficiency in Canadian capital markets. The federal government has shown a great deal of perseverance and leadership on this important economic issue as Canada’s current fragmented system puts us out of step with other countries around the world.”

While it is understandable that some provinces might be reluctant to relinquish control over their regulatory systems, it is hard to argue against the overall benefits of a coherent and unified system. Though there are restrictions on the type of legislation that will underpin the agency, there will be complementary federal legislation to ensure the regulator has teeth, and that rules are enforced across the country with the same vigour and to the same standards. After all, there is nothing wrong with cooperation when it comes to regulation.

Could UBI be the answer to filtering money into the economy?

Posted on by Ashton Wenborn

Unconditional basic income is a hot topic at the moment. The people of Switzerland, for example, are currently preparing for a national referendum on whether they should pay themselves a yearly income of CHF 30,000 (about £20,000), even if they don’t work. Other groups, such as Basic Income UK, have made similar proposals, though most have suggested a figure around £7,000 per year, which would be easier to fund than the deluxe Swiss version.

The idea of paying citizens an unconditional basic income has been around for some time, and has been tested on a small scale in a number of countries. To many people, it sounds like a utopian scheme. Indeed, Thomas More mentioned it in his 1516 book Utopia. It would mean that people wouldn’t have to work unless they truly wanted to. The government could also avoid micromanaging tax allowances, and different benefits for housing, food and so on. Although it is often presented as socialist, its appeal is broad-based.

Even Milton Friedman thought it was a good idea (though his version was called negative taxation), since he thought it would shrink the size of government and therefore pay for itself. The pros and cons of basic income have been debated in a series of World Finance articles and videos; but here I’m comparing the scheme with another method of handing out money – quantitative easing (QE).

Basic income vs quantitative easing
In some respects, basic income and QE are the opposite of each other. The term ‘quantitative easing’ makes no sense and seems like a deliberate attempt to obfuscate what is going on. Unconditional basic income, on the other hand, does exactly what it says on the tin. It hands out money, with no conditions.

QE attempts to stimulate the economy in a top-down fashion, by using newly created money to buy government bonds from private sector banks. The theory is that this should flood banks with money, which they will then lend out to companies, and this will boost the economy. However the banks might just hoard the money, or channel it into unproductive activities such as boosting house prices and paying themselves bonuses, which is why the jury is still out on the effectiveness of QE.

A basic income, in contrast, could boost risk-taking and entrepreneurship by giving people the time and space to experiment

The basic income on the other hand, just gives everyone money. It will have the largest impact on low-income people, who tend to spend their money rather than hoard it, so will boost economic activity directly. Of course, they might spend it on things such as drink, drugs or gambling. But a nice feature of basic income compared to QE, is that it is easier to test on a small scale, and the empirical evidence from a number of such studies shows the money is usually spent quite sensibly.

One thing the techniques have in common is they are both unconventional approaches that will have uncertain effects on things such as inflation. When QE was first proposed, it generated little controversy because no one could figure out what it was, but some people did worry that it equated to ‘printing money’ and so would boost inflation. Others argued the new money was just filling a void left by the implosion of credit instruments during the financial crisis, so inflationary effects would be muted. The latter appears to have been the case in the US and UK (so far), though asset prices certainly rose, which was part of the idea.

The inflationary impact of a basic income would also be mixed and uncertain. It won’t directly affect money supply since it does not involve creation of new money, though it may boost the rate at which it is spent. Inflation is affected also by economic behaviour, which will certainly change in ways that are hard to predict. For example, workers may demand higher salaries for undesirable jobs, but lower salaries for more rewarding jobs.

Easy money
The UK’s current benefits system tends to stigmatise the poor while incentivising them to not seek paid work, because if they get a job their benefits are cut. This makes it hard to wean them off state support, like certain banks. A basic income, in contrast, could boost risk-taking and entrepreneurship by giving people the time and space to experiment – and potential customers some money to spend. As record label owner Alan McGee has pointed out, the unemployment benefit system in the UK certainly helped to incubate the music industry until it was cut back – most musicians in the 80s and 90s seemed to have honed their skills while on the ‘dole’.

Perhaps the biggest impediment to a basic income is psychological. Our monetary and economic system is based on the concept of scarcity and competition. We have to fight for our lucre, and it seems morally wrong to get something for nothing. But much of the wealth in the economy is generated from public goods such as natural resources or land values, and what the father of social credit, the British engineer CH Douglas, called the “cultural inheritance of society”, which today would include inventions such as the internet or mobile communications. So it makes sense that some of these proceeds be considered a birth right rather than something that can be captured by a small group (for example shareholders in Facebook).

Also, some of our fears about giving money away have surely dissipated after the bailouts and QE. After all, many countries devoted a major fraction of GDP to rescuing banks. Why not rescue some single parents? Basic income is often discussed as something that is theoretically interesting but politically impossible. Which is strange when you think about it – shouldn’t money for nothing be an easy sell? Instead, it seems to be something that many people are uncomfortable with – even though QE was OK. But maybe it is time to relax those worries, and make way for a new kind of quantitative easing – one which makes life easier for a large quantity of people.

Scottish independence is merely about oil, whisky and finance

Posted on by Ashton Wenborn

Scotland finds itself at one of the most important junctures in the country’s long history. Since the Act of Unions was passed in 1707, England and Scotland have formed a heterogeneous and immensely successful nation. This 307-year-old union has allowed Scotland to import and export in other parts of the UK and across Europe without having to consider border controls, trade barriers, or use a different currency.

The country’s long-term future is balancing on a knife-edge. With a healthy list of stable exports, the country’s riches are based predominantly on sales abroad. Likewise, a number of intergovernmental trade agreements have aided Scotland’s ever maturing economy in its growth and development. As the country enters a new era, however, recent tremors on both macro and micro levels could see Scotland’s economy re-adjust to almost unrecognisable proportions.

Tackling exports
Exports like oil, gas and whisky could be worth up to £100bn, according to the Scottish Government. Official figures show that in 2012, Scotland’s international exports were worth £39.8bn and £58.3bn in the rest of the UK (see Fig. 1). But should the £100bn estimate – based on recent government stats – be taken with a pinch of salt? If correct, the data points to a prosperous independent state: a country that would rank among the top 25 biggest exporters in the world, ahead of Sweden and Indonesia. These figures pre-date the vote on independence and were based on projections about the amount of oil taxes Scotland would be able to recoup as an independent nation.

The rest of Britain has up to 80 percent of its oil and gas revenues tied up in Scotland, which shows the size of the industry the country holds. Wages in Edinburgh and the oil hub Aberdeen are growing faster than most regions of the UK, and there has long been evidence to suggest that Scotland’s economy would thrive as a solo nation.

$35bn

Annual value of Scotland’s oil and gas industry

$7bn

Scotland’s financial industry worth, per year

$4.3bn

Scotland’s annual whisky exports

These assertions are based on how much oil and gas is left in the North Sea. Since it peaked in 1999, production has slowly declined and the Office for Budget Responsibility estimates that production can continue for another 30-40 years before the reserves dry up.

But the prosperity of Scotland’s economy does not rest exclusively on energy reserves. Issues like debt burden, workforce productivity and demography are also important. The latter is a concern because the average Glaswegian man can expect to live an average of 72.6 years, the shortest life expectancy in the UK, according to data by the World Health Organisation. Scotland’s business must have a healthy workforce if it is to become the economic powerhouse Alex Salmond envisions. It will need to encourage and support the next generation of entrepreneurs and university graduates so they can develop bright ideas that can be grown into profitable enterprise. More importantly, Scotland must strengthen trade relationships with the international community, with foreign exports key to sustaining its industry if oil and gas reserves dry up by 2054.

It’s not all about oil and gas, however (see Fig. 2). After oil, single malt whisky is the country’s most lucrative export, worth £4.3bn annually. The Scottish Whisky Association (SWA), which represents the domestic and international interests of Scottish whisky, told World Finance in the run up to the independence vote that it harboured concerns over the ‘support’ of exports if Scotland left the UK. A spokesman declined to comment on the impact independence would have on whisky exports, stating only that there were ‘potential risks’.

Scotland’s financial industry contributes £7bn annually, employs over 200,000 people and is crucial to the economy. The Scottish Financial Enterprise (SFE) represents the financial sector, and in June published a briefing paper on some of the uncertainties Scottish business could face.

This report was controversial not least because SNP leader Alex Salmond personally tried to suppress its publication – it contradicted many of his claims on Scotland’s finances. ‘If there is a ‘Yes’ vote, many important questions instantly cease to be hypothetical and become both real and urgent… [Scottish businesses] will have to consider what, if anything, can be done to address the risks and uncertainties that arise,’ read the report.

Tourist tax
Scotland’s tourism industry is at a disadvantage because of air passenger duty (APD) tax. APD is paid on international flights into London and on flights between London and Scotland; tourists flying to Scotland usually go via London so APD tax is paid twice. This is hurting the tourism industry. If Scotland were to be independent, tourism – which accounts for three percent of economic income – could give the country a significant boost.

Currency conundrum
One much-talked about issue facing Scottish industry is what currency it would use. A poll by YouGov in February showed that more than half of Britons were opposed to a currency union with an independent Scotland. UK Chancellor George Osborne has since quashed hopes of Scotland using the pound, leaving three options: using it without Britain’s consent (sterlingisation) in the same way that Panama uses the American dollar; adopting the euro; or establishing an entirely new currency.

Forming an effective single market, maintaining international competitiveness and adapting to new financial regulation are other pressing uncertainties that businesses could face. Scotland is unlikely to suffer from a flight of foreign trade, though. Its biggest international market is the US, with an estimated £3.55bn in exports in 2012. China’s growing middle class could also give the sales of luxury items – like single malt whisky and salmon – a significant boost. Big importers like America and China will be crucial to strengthening the export sector if Scotland were not quickly accepted into the EU.

If this is the case, Scotland could join the Nordic Council, according to co-founder of Biggar Economics Graeme Blackett. He told World Finance that joining the Nordic Council would ensure Scotland maintained good trade relationships. “It would help in the global exportation of Scottish goods and to develop connections with countries involved in green growth,” he said.

He added that it’s imperative the financial industry retains close ties with London banks. Scotland exported £11.2bn in financial services in 2012, and the strength of the industry is linked to its close association with the city. “A single market that continues to benefit from relative proximity,” is key to the industry, said Blackett.

Fig-1-Scotland

Business perspectives
Most Scottish businesses remained impartial in the run up to the independence vote – but not all of them stayed on the sidelines. Bus tycoon Sir Brian Souter, owner of Stagecoach, donated £100,000 to the Yes Scotland campaign for independence, while distillery William Grant and Sons donated a six-figure sum to the Better Together team. The fact that both Yes and No campaigns received donations from Scottish businesses goes someway to illustrating how divided the business community has been on the issue. It was unable to equivocally agree on what outcome would be more beneficial for businesses.

Scotland needs a individual approach to economic policy. It needs to ensure growth and demonstrate that it is capable of making its own decisions. Edinburgh provides an interesting example of the need for economic reform. Scotland’s second-biggest city has had control over a range of policy areas for 42 years thanks to the Local Government Act, and has done surprisingly little with it. Among its powers includes the ability to vary income tax by up to three pence to the pound. Its leaders have not exercised this right in over 40 years, which is hardly indicative of a country desperate to make its own decisions. Independent or not, local Scottish governments need to be given more power, and to exercise it.

Glasgow is set to receive a £1.13bn grant to help pay for infrastructure projects and employment programmes in the city. The grant is part of the City Deal policy, an initiative set up by the coalition government to give cities control over decisions that affect them. The deal will see the “creation of 28,000 jobs, generate £1.75bn annually and unlock £3.3bn of private sector investment”, said a Glasgow City Council spokesman. Westminster and Holyrood will both invest £500m in the scheme with the remaining £130m coming from local authorities in the Clyde Valley region.

The huge infrastructure fund – one of the largest City Deals in the UK – will be used to support projects like the long-awaited city centre to airport rail link, new roads and an improved bus service. The policy is one of the few nationally approved plans from the coalition government, but it may be politically motivated. Glasgow will only receive the sum of £500m from the British government if it chose to remain part of the UK, which at the time of writing was as yet undecided. Asked if the deal was a parliamentary bribe disguised as a sweetened pill, the spokesman denied it was a “gift”. Blackett was equally coy on the political undertones that have dogged the Glasgow City Deal, but emphasised £1bn isn’t enough. “Scotland needs an infrastructure fund of at least £5bn to compete internationally. And any such infrastructure package needs to be funded by Scottish investment rather than deficit funding,” he said.

The cost of change
Professor Patrick Dunleavy of the London School of Economics believes that independence would cost the Scottish taxpayer between £600m and £1.4bn over the course of a decade. His figure includes the cost of forming government bodies, an army and intelligence service, and would be equivalent of up to 1.1 percent of Scotland’s GDP. It is a high price, but Scottish nationalists would gladly take it over another 307 years with Britain.

Fig-2-Scotland

If the people of Scotland choose to leave the UK on September 18, businesses will be faced with a number of risks and uncertainties. It is fair to question if exports will be worth £100bn, or if Scotland can become one of the world’s wealthiest nations, as Graeme Blackett hopes.

The headaches over oil and gas reserves, demography, productivity and international competitiveness are all ones that will need to be addressed. Regardless of whether Scotland is independent or not, the most important thing for its industry is that a dynamic economic policy is developed to nurture growth and support exports like oil and whisky.

Investors see the potential in Latin America’s corporate bonds

Posted on by Ashton Wenborn

Latin American corporates have become an attractive asset due to growth dynamics and shifts in the region’s economic structure, its valuation levels and diversification opportunities, as well as lower political and geographical risk in comparison to other emerging market (EM) regions.

It has the most to gain from a recovering US economy, and the recent tensions between Russia and the Ukraine – along with higher political risk in Turkey and scepticism over the Chinese economy – have all led many investors to increase their exposure to Latin American markets.

Emerging ahead of the pack
Deutsche Bank’s markets research goes on further to explain how this is exemplified by inflows into Latin American focused fixed income funds since the beginning of 2014, accelerating to 2.9 percent of total assets (see Fig. 1), which compares previously to outflows of 10.7 percent and 9.1 percent for Asia and Emerging Europe-focused funds, respectively. This trend has also been reflected in Latin American corporates that are strongly outperforming their peers from other EM regions since the beginning of 2014.

According to the widely followed JP Morgan CEMBI Broad Index, corporates in Latin America generated a total return of 6.03 percent year-to-date, facing 3.38 percent and -0.07 percent for the corresponding Asia and CEEMEA sub-indices. Volatile countries from Latin America – such as Argentina and Venezuela – have very little corporate bonds outstanding and are mostly viewed in isolation from rest of Latin America. But even a slight positive political change can lead to large upside potential on corporate credits from these countries.

Source: Deutsche Bank Market Research. Notes: 2014 figures are year-to-date
Source: Deutsche Bank Market Research. Notes: 2014 figures are year-to-date

Despite tapering the US Federal Reserve’s commitment to maintaining a low level of rate for a long time – and the ECB and Bank of Japan still being on the side of further unconventional stimulus – will keep the bid on higher yielding assets such as EM credits. As Latin American bonds overall have a higher duration than other EMs, they also benefit most from a contained yield level in the US treasury. Latin American credits have the highest amount of participation from US investors compared with other EM regions. For instance, JP Morgan data shows that 62 percent of the total new issuance volume from Latin American corporates in 2013 has been acquired by US Investors, compared to only 17 percent for new issues out of Asia and 30 percent out of emerging Europe and Africa.

Differentiating niche spreads
Spread levels of Latin American credits are much higher than US credits both in high yield and investment grade segments – providing further positive catalysts. According to Merrill Lynch, Latin American investment grade corporates on average provide a pick-up of around 125bps in spread compared to Northern American investment grade corporates from the US.

The spread difference increases further to around 250bps when looking at the higher yield segments. This is compared to a pick-up of around 60/300bps for Asia and 170/260bps for the Europe, Middle East and Africa region – the latter being reflective of the recent political tensions in Russia’s corporate space.

At the same time, Latin American corporate issuers offer robust credit and liquidity profiles. As of September last year, Merrill Lynch data has shown a comparable net leverage ratio of around 1.4 times for both Latin American and North American investment grade corporates from the US, while Latin American high yield issuers are showing significantly lower net leverages of around 2.9 times compared to four times for their US high yield counterparts.

Similarly, by looking at the respective liquidity ratios – as measured by cash relative to short-term debt – for both Latin American investment grade and high yield corporates (2.4 times and 1.6 times, respectively) relative to US corporates at 2.1 times and 1.5 times for the investment grade and high yield sub-segments. Taken together, this results in an attractive spread when adjusted by leverage of about 160bps for Latin America investment grade and 166bps for Latin America high yield issuers.

A great degree of diversity across issuer types is also of interest. According to further Merrill Lynch data, 30 percent of total new issuance volumes in 2013 can be attributed to the oil and gas sector; 17 percent to financials; 13 percent to the consumer space; and nine percent to telecommunication service providers, with the remainder being focused on the industrial and construction segments.

Latin America tends be a region with a low level of fiscal stimulus, leaving ample room for growth in the banking sector. Also, the financial sector tends to be a leading issuer in corporate bonds, and therefore the Latin American corporate bond markets a good place to be on the medium to long-term horizon.

Ahli Bank sees Islamic finance gain extraordinary momentum

Posted on by Ashton Wenborn

The mistrust borne from the financial crisis has completely transformed the culture of banking. Where once irresponsible risk-taking reigned supreme, sustainability and ethics today play a far more important role than they have ever done before.

As a result, alternatives such as Islamic finance have gathered extraordinary momentum, as customers seek instead to explore new opportunities outside of the traditional banking space.

Many believe that the Islamic finance industry could tip $2trn by the year’s end (see Fig. 1). However, the complications that come with being a relatively new sector remain an issue for many, especially those in emerging markets. We spoke to Lloyd Maddock, CEO at Oman’s Ahli Bank, about the sector’s unique opportunities, and the various challenges it faces on a national and global scale.

Islamic finance is a rapidly growing market worldwide. What are the main challenges institutions such as Ahli Bank face in developing the industry?Islamic finance is relatively new to the Sultanate, which of course means that knowledge about the Islamic finance sector is also relatively low. However, given the ability of the Islamic finance model to offer innovative financial solutions to an under-served market, it is seen as a community-banking niche with considerable growth potential.

In the Muslim world, and increasingly in the West, significant segments of the institutional and retail markets are actively considering this alternative for their financing and investment needs. However, the general availability of information remains limited for what is still a young and evolving industry. Although Islamic finance has generated substantial coverage in the media and academic journals, there has been little study as yet on how Islamic financial institutions differ in practice from conventional banks.

Many believe that the Islamic finance industry could tip $2trn by the
year’s end

How does Ahli Bank remain competitive?
We do not have any institutional limitations that will hamper our competitiveness or our ability to meet the expectations of the Omani financial market. Our Al-Hilal branch network is the largest in the country, spanning seven Islamic branches catering to all regions within the Sultanate.

We also exhibit a keen focus on our e-channels, and stand at the forefront of product development in the region. We remain competitive not only with other Islamic finance institutions, but also with the conventional finance institutions in the country, and on a consolidated basis we are the fastest growing bank in Oman.

Islamic financing by definition entails a direct link between financial flows and real flows in the economy. That is, funds will flow from Islamic banks only in direct support of real underlying economic activity. Therefore, investors will approach Islamic banks only when they have genuine needs, and in this sense, Islamic financial architecture could be seen as superior to the existing interest-based financing architecture.

How has Ahli Bank developed its e-channels? How have clients responded to this service?
At Ahli Bank, one of our brand promises is “convenient banking”. We are striving to provide a uniform and superior experience across all deployed channels, whether it be ATM, internet banking, mobile banking, SMS banking, or cash deposit machines. We firmly believe that empowering the customer to undertake transactions at a time and place convenient to them, and through a mode they find most suitable for the purpose, is the best way forward in our search for customer service excellence.

So far the response from customers has been encouraging, with a rapid take up in the use of online and e-channel platforms to perform day-to-day banking. As a result, we will shortly be expanding our e-services to include loan applications and new account openings.

What attracts clients to Islamic finance?
Though the concept of Islamic finance is hundreds of years old, the modern version of it has evolved recently to satisfy the needs of those looking to invest without being in contravention of their religious beliefs.

Besides the moral incentives, there are attractive investment opportunities unique to sharia-compliant investments. The sector has grown to $1.6trn in assets over the past three decades, according to the Global Islamic Financial Review, and is impossible to ignore – even for non-Muslims. From an investor’s perspective, Islamic investors cannot make money from money. There must be real assets involved that can be easily identified. But religion isn’t the only reason. A second source is people looking for diversification.

Muslim consumers are looking for financial products that are aligned with their value base, and non-Muslim consumers are also increasingly interested in the alternate funding channels and genuine returns that Islamic finance can provide. Islamic financial institutions become partners with clients within transactions rather than simply an intermediary.

It is noteworthy that many corporates, typically large ones, are regularly issuing sukuk to compliment more traditional ways of raising project finance or term debt (through bond issuance or syndicated loans). This reflects the large pool of liquidity within Islamic finance that sukuk issuers are able to tap, within appropriate financial structures.

What advantages does Islamic finance offer investors?
Islamic investments are distinguished by a ban on interest-based transactions, an emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit sharing, and the prohibition of speculation and uncertainty in business contracts.

Sharia-compliance in effect results in avoidance of transactions that are eschewed by Islam, including option trading or interest-based transactions, such as margin trading and short selling. Saving and investing in line with religious principles is important for many Muslims, and an increasing range of financial products are now available to meet sharia rules.

Source: World Islamic Banking Competitiveness Report
Source: World Islamic Banking Competitiveness Report

The rationale behind the prohibition of interest in Islam suggests an economic system where all forms of exploitation are eliminated. In particular, Islam rule aims to establish justice between the financier and the entrepreneur. The financier should not be assured of a positive return without doing any work or sharing in the risk, while the entrepreneur, in spite of their management and hard work, is not assured of a positive return.

Can non-Muslims be successful investing in Islamic finance?
Islamic finance is not restricted to any one person or followers of a single faith, and is open to everyone. Non-Muslims that choose to include sharia-compliant investments in their portfolio will notice it becoming enhanced by having a socially conscious, ethical aspect to their investments.

Additionally, what is noticeable when investing in Islamic finance is an emphasis on equitable contracts, the linking of finance to productivity, the desirability of profit sharing, and the prohibition of speculation and uncertainty in business contracts that will facilitate a greater transparency, reducing overall portfolio volatility.

What sort of products does Ahli Bank offer SMEs?
Ahli Bank understands that SMEs play an integral role in boosting economic growth and stability. Our research has shown that in most countries, SMEs generate a substantial share of the GDP and are key sources of employment creation, in addition to SME start-ups being incubators of entrepreneurship. We understand and believe SMEs are the lifeline of any economy, and in Oman, Ahli Bank plays an active role in the provision of both financial and non-financial inputs to the sector.

Our SME products are designed specifically to help our customers realise their ambitions, by providing them with products that accommodate their business needs, regardless of industry specific requirements. The product suite includes working capital finance, lease finance, diminution musharaka, and trade finance facilities.

Our goal is not just to be a financial institution that provides generic services to clients, but one that delivers bespoke solutions and propositions specific to the sector. Beyond simply lending money, we support SMEs to plan for their business expansion; informing and preparing to counter any obstacles that they may experience, and more broadly, to lend assistance in deepening the culture of leadership among our business pioneers.

What specific types of SMEs are typical Ahli Bank customers?
The SME proposition in Oman is built around three key needs: access to efficient banking services and channels; access to finance with a simple procedure and fast turnaround time; and access to advisory and training services.

There are two distinct business segments within our banking unit – the first being the leasing and commercial finance unit that caters to our customers’ borrowing needs with credit facilities up to $130k. We also cater to trading companies that have transaction banking needs and are generally non-borrowing. Non-SME clients are relationships managed by industry specific teams within our corporate banking department.

SSIAM opens up Vietnamese food products to international markets

Posted on by Ashton Wenborn

According to the UN, the world’s projected population will be 9.6 billion people in 2050, compared to 2.4 billion at the end of the Second World War and seven billion today. From a global perspective, demand for food is tremendous, while drought, storm, disease, and climate change threaten food security. Supply of food is constrained as population growth is projected to outpace arable land and available agriculture technologies.

From Vietnam’s perspective, the rise of middle-income class and health awareness created a shift in domestic consumption from quantity to quality food products. However the lacks of infrastructure, scalability, and know-how led to the constraint in providing quality food products.

An opportune fund
Vietnam has become a leading agricultural, rice and cashew exporter and coffee manufacturer (see Fig. 1). The country has strong competitive advantages in agricultural food production, yet its products have often been undervalued on the international markets with no brand recognition. For a long time, Vietnam focused on volume and total export value rather than on quality, added value or branding of its agricultural products. This lead the country to position itself in the global market as an exporter of raw materials and of lower quality and lower priced products.

Seeing a great opportunity to change the game, SSI Asset Management (SSIAM) is in the process of setting up a Vietnam food chain fund to help solve these issues and to improve food quality. While the fund’s objective is to achieve above market return on investment for the fund’s investors, it also aims at generating economic and social benefits for local communities, positively impacting their standard of living.

The fund takes a value chain integration approach when investing in food related sectors, selectively from upstream to downstream, creating value and unlocking growth potential through economy of scales. SSIAM sees huge market size and ample opportunities and believes value chain integration will help to improve sector’s cost efficiency and control input’s price as well as output’s quality.

SSIAM and its parent company, Saigon Securities Inc (SSI), the largest and leading securities firm by market capitalisation in Vietnam, has many years of experience of investing in the agriculture sector. It employs an active post-investment management strategy in investee companies where team members join the companies’ Board of Director and Supervisory Committee and work with key members of management to map out a three to five year business strategy, improve corporate governance, reduce operational costs, and connect with strategic investors. This strategy has broadened the investment team with extensive industry knowledge.

Source: (i) Ministry of Agriculture and Rural Development (ii) Vietnam Association of Seafood Exporters and Producers (iii) Business Monitor International, 2014 figures
Source: (i) Ministry of Agriculture and Rural Development (ii) Vietnam Association of Seafood Exporters and Producers (iii) Business Monitor International, 2014 figures

Creating firm roots
So far, two anchor investors have committed to invest 10 percent to the fund. The team is still trying to raise more capital from investors who share the same vision of creating a better world for future generations, where food security and food safety is secured. What differentiates SSIAM to other asset management firms from a fund raising perspective is that in the past, it has built a reputation as one of the most effective investment managers. Not only has it generated higher returns to investors, it has also helped enhance the values of investee companies.

It manages a concentrated portfolio and treats each investment as a partnership. A hands-on active investment strategy has helped the company surpass overall market performance.

Today the team are working on a merger deal between one of the firm’s investees in the agriculture sector and its main competitor. It will soon join hands to create a much larger player in the market and help realise the vision of making a difference for the future of Vietnam’s agriculture.

UAE’s status upgrade behind investment surge, says ENDB

Posted on by Ashton Wenborn

Official data shows that the United Arab Emirates’ economy has turned around after years of low growth, financing issues and restructuring post-2009. Now, the Emirates is seeing a strong rebound in profitability and growth as it continues to benefit from its perceived safe-haven status amid regional instability.

The economic recovery has been solid, supported by the tourism and hospitality sectors, and a rebounding real estate sector in particular. What’s more, infrastructure and growing wealth has fostered a growing financial industry in key hubs such as Dubai and Abu Dhabi. Public projects in Abu Dhabi and buoyant growth in Dubai’s service sectors have continued to underpin growth, which reached 5.2 percent in 2013. Now, the macroeconomic outlook from the IMF, expects a 4.8 percent growth in 2014 and approximately 4.5 percent in coming years, supported by a number of government-led mega projects and the successful bid for the World Expo 2020.

Crucially, the UAE growth is increasingly supported by non-oil activity, which remains a robust source of income as the local economies wait for oil production to stabilise. In particular, construction and retail trade will continue to drive economic activity, supported by high levels of public infrastructure spending and strong private sector credit. In addition, oil production is expected to rise owing to strengthening global demand, challenges in restoring oil production in non-UAE countries such as Libya, and a decline in global oil inventories. Recent analysis from the IMF also revealed projections for the production of 2.8 million barrels of oil per day in the UAE during 2014 (see Fig. 1). This positive outlook for the current economic state in the UAE has bolstered financial services in the region, which have picked up significantly following the drop in markets post-crisis and after the Arab Spring, which drove down bond prices.

100%

Growth in ENDB assets in the last two years

Now, major players such as Emirates NBD Asset Management (ENDB) are looking positively on the investment landscape in the region.

“We’ve seen a re-rating that’s attracted investors’ interest; a lot of international investors are now interested in the region. For me the game changer was of course the upgrade from Frontier to MSCI status of the UAE and Qatar this year. This really forced international investors from just being interested, to making significant allocations,” says David Marshall, Senior Executive Officer at ENDB.

“On the fixed income side, we’ve seen a real improvement in spreads. Borrowers were somewhat shut out of traditional lending sources – namely banks in the Middle East. So since then they’ve tapped the capital markets. We have seen really interesting issuers looking to raise money at attractive yields, and again there’s been a re-rating there. So we’ve seen, since the crisis, CDS levels coming from around the 940/950 levels down to 150 today.”

Financial services boost
The UAE officially transitioned from being considered a frontier market to emerging on a key MSCI market index in June 2014, which marked a new era of both greater opportunity and closer scrutiny for the financial markets. Since the announcement in 2013, stocks across the UAE have 89 percent over the last year as of June, while capital markets in Dubai are starting to draw more attention from foreign investors.

Being listed on the emerging markets index, UAE companies are joining firms from Brazil, China and more than 20 other markets across the globe. In particular, several Dubai-listed financial firms have benefited from this and seen their stocks soar as a result. In this respect, investments in financial services are a growing trend in the UAE as the economy continues to recover. Like most parts of the world, banks were under strain after 2008-2009 and balance sheets were largely impaired, with loan-to-deposit ratios in some cases of up to 130 percent and thereby inhibiting loan growth. When some of these loans defaulted, local firms endured provisioning and impairments, but having moved past this part of the economic cycles, players like ENBD are seeing very strong underlying profits and a renewed faith in the Arab region.

Foreign interests
“Geographically I think there are some interesting trends. Countries like Egypt, which obviously has been under political and social strain, now looks attractive from an economic point of view, with elections having just taken place. We think that’s going to put confidence back into the region, and we expect foreign direct investment to improve, which will spur capital expenditure and investment,” says Marshall.

“Last year, we started making investments there defensively: utilities, and telecom companies. Now we are moving to play the cyclical story, so construction, real estate, and more investment banking themes. The big game changer will be Saudi Arabia though. That’s the untapped market, the one that all investors want to get into. It’s still expensive; you can only do it through derivatives or indirect access. The recent announcement that the market will open up to foreigners will have a huge impact once this happens, with likely strong foreign investor participation and possible inclusion to various indices.” In this respect, the IMF projected that foreign direct investment will reach almost AED44bn (approximately $12bn) in 2014.

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

A key part of this growth will be driven by an expansion in non-oil sectors namely manufacturing, construction, tourism, trade, transport, and logistics. Conversely, the Middle East has traditionally been an exporter of capital of the world, however, now the financial industry is seeing a growing interest in MENA investments from international clients. This follows a period of bearish investments, after the market peaked three years ago along with the depression on regional stock prices. Since then, flows dropped as investors considered the risk. But now, 2014 has been a bullish MENA year.

“To be frank they weren’t ready; we were too early. I think there was too much investment risk for them, there was too much business risk and I think possibly at the individual level, too much personal risk. So they weren’t ready to allocate then, but I think they are very much ready to allocate now. We are also seeing sovereign wealth fund interest in coming to the region,” explains Marshall.

“I think on a macro-level there are also reasons why investors are interested in the region. If you look at recent trends, emerging markets have really been in the doldrums for the last couple of years, driven by currency weakness, weak fiscal and current accounts on the side of the governments, and really slow growth. We don’t have any of those problems in the Middle East. We have largely dollar-pegged assets. We have strong growth driven by a high oil price. And that is really going to make a nice diversification play for those emerging market managers.”

Islamic investments
Another key driver for ENBD’s marked growth, is the increasing popularity of sharia-compliant investing, which has become a prominent part of global portfolios. For ENBD, one of the UAE’s largest asset managers, Islamic banking has always been a major focus for the business, with about 30 percent of assets run on a sharia-compliant basis. This amounts to more than $700m of the firms total $2.6bn in assets, invested in Islamic products.

“We’re seeing people starting to tap into sharia-compliant investing. Even the UK government is looking into issuing a sukuk, in order to tap into that investor base. For me, it’s all about investor demand. We’re in the Middle East – if you want to attract assets from say Saudi, UAE, Oman – even further afield like Malaysia or Brunei – we have sharia-compliant products and services that are a key part of that. What we’re seeing is a lot of interest in sukuk – a very attractive asset class, which can sit on the balance sheets and clip out income, thus helping to optimise balance sheets. In addition there is strong demand for sharia-compliant real estate solutions as well as money market products,” says Marshall.

On that basis, ENBD has grown its assets by approximately 100 percent in the last two years. A key driver in this has been the diversification of its product range, which Marshall insists is a trend that will continue along with a reduction in the dependence on cyclical issues.

“I want to achieve a diversified product set, so we can offer products from real estate to fixed-income to liquid equities. Also, I want to broaden our investor base. The wholesale market is very strong and I see a lot of growth in institutional investors,” he explains.

Finally, the firm is working hard at gaining an international flavour, which can diversify its business portfolio even further. Having recently launched a platform in Luxembourg for its fund range, ENBD Asset Management is looking to expand aggressively and is betting on strong growth in Europe and Asia that can sustain further asset increases in the years to come.

People’s Bank leads Sri Lanka’s economic growth

Posted on by Ashton Wenborn

Sri Lanka’s recent economic performance has been better than expected. Its seven percent annual growth in recent years has boosted the economy out of the doldrums, prompted by a credit crisis, which followed the country’s civil war in the mid-2000s. Now the economy is booming, with one of the highest growth rates in Asia, despite headwinds from market turbulence in the emerging sector, as well as climatic shocks.

As such, Sri Lanka’s bank credit is estimated to grow 14 percent in 2014 and the outlook for the local banking sector is stable. This is due to strong fiscal policy and a recent surge in banks’ loan books and customer numbers. A particularly strong performer is People’s Bank, a state-owned commercial bank headquartered in Colombo, Sri Lanka’s capital.

Sri Lanka’s bank credit is estimated to grow 14 percent in 2014 and the outlook for the local banking sector is stable

With 738 branches and service centres located across the island and more than 10,000 employees, People’s Bank is one of the largest institutions in the country. With more than 13 million customers – the largest customer base of any commercial banking entity in Sri Lanka – it has grown exponentially. The bank has continued to enhance its banking activities and grow its business portfolio in response to the country’s economic growth.

A key part of this growth has been the bank’s focus on accommodating a broad base of the Sri Lankan public, which speaks several different languages and has varying levels of wealth. To this end, the firm has launched accounts that suit various needs, such as ‘Sisu Udana’ for students, ‘Yes’ for the youth, ‘Vanitha Wasana’ for ladies, ‘Parinatha’ for senior citizens, ‘Ethera Isura’ for foreign employees, ‘Aswenna’ for agri professionals and an investment savings account. Of particular note, People’s Bank has launched various loan schemes in addition to its advisory services that can help stimulate local wealth and the development of businesses.

Loan growth
This personalised service has been popular in recent years as the economy has improved and prompted ratings agencies to give a positive outlook for Sri Lankan loans. Moody’s looked at how creditworthiness will evolve over the next 12-18 months and said that it viewed the operating environment, asset quality, capital, funding, liquidity, profitability, efficiency and systemic support as stable.

Source: People's Bank
Source: People’s Bank

The rating is good news for Sri Lanka, which is recovering from a balance of payments crisis, which led to a sharp rise in interest rates, a depreciation of the exchange rate and energy price hikes.The impressive loan book growth during the year 2013 in People’s Bank was due to some very strategic initiatives employed during the year with absolute focus on sustainable development cascading to regions around the country. The North gained intensity with People’s Bank strengthening operations and driving business growth in Northern Peninsula. This saw a significant number of entrepreneurial ventures being initiated especially in agriculture, dairy and fisheries which are the staple industries in this part of the country. The Bank began rolling out regional development facilities at concessionary interest rates and relaxed security requirements to support entrepreneurs and industries in the region. Srikanth Vadlamani, Vice President and Senior Analyst at Moody’s said in a statement, adding that the ‘stable outlook for the Sri Lankan banking system is also consistent with our stable outlook on the Sri Lankan government’s B1 rating’.

Strengthening the economy

This comes down to the authorities investing in a pipeline of infrastructure projects, which are expected to boost economic growth, together with an accommodative monetary policy. Fitch ratings suggested that such an environment would prompt loan growth to rebound and asset quality to stabilise.

Essentially, this is why People’s Bank has seen a growing interest in loan products (see Fig. 1) and its scheme offerings for SMEs. This ties in perfectly with the firm’s overarching goal to be the bank “for the aspiring people in Sri Lanka, empowering people to become value creating, competitive and self-reliant”.

Having one of the largest ATM networks in Sri Lanka, along with offering mobile and e-banking, has helped grow People’s Bank’s customer base and seen it retain profit growth in a challenging economic environment. To this end, People’s Bank has contributed greatly to the country’s financial development, as it endeavours to continue in setting high socioeconomic goals that will make Sri Lanka a financial hub by 2016.

Japan’s growth slows down, falling short of July expectations

Posted on by Ashton Wenborn

Japan’s growth prospects suffered another knock in July, as its economy failed to make the predicted third quarter turnaround. Official figures show April’s sales tax hike is continuing to affect consumer behaviour, slowing growth seen in the first quarter.

“Today’s data on industrial production and retail sales show that the economy continued to stagnate at the start of the third quarter,” says Marcel Thieliant, Japan Economist for Capital Economics. “What’s more, inflation moderated in July and is set to decline further, which should increase the pressure on policymakers to do more.”

Without the third quarter turnaround that so many expected, confidence in Abenomics continues to fall

Decades of deflation have encouraged consumers to hoard savings in the hope prices will fall further. Shinzo Abe’s stimulus package marked a return to inflation, but consumers are still reluctant to increase spending. This is a predicament for an economy that relies in large part – 60 percent – on private consumption.

After a 6.8 percent annualised slump during April-June, caused by the sales tax hike, Abe’s government have failed to instruct a quick turnaround. “The recent sluggishness in spending is indeed largely a result of the consumption tax hike,” says Thieliant. “But business surveys suggest that the economy will recover in the second half of the year.”

Core inflation for July, at 1.3 percent, fell within the BoJ’s target of two percent, though without a rise in wages the rise counts for little. Retail sales, however, represented a small positive, after rising 0.5 percent on the year previous, following a 0.6 percent slump in June.

The prospect of a ‘virtuous cycle’ seems distant, with inflation failing to stimulate wage increases, despite government calls for companies to raise pay. Without the third quarter turnaround that so many expected, confidence in Abenomics continues to fall.

“More worrying is arguably that wages are not picking up despite the government’s exhortations. Japan’s trade unions simply lack the bargaining power to push through higher pay deals,” says Thieliant. “That said, price pressure should moderate in coming months as the impact of the weak yen is fading, which should provide some relief to households.”

Capital Bank Group: stability will ripen opportunities in Iraq

Posted on by Ashton Wenborn

During periods of conflict, crisis and upheaval, the investment environment is seemingly bleak. This is aggravated by the absence of security, an unstable macroeconomic environment, failure to comply with the rule of law, weak infrastructure and a dysfunctional labour market and educational system. By contrast, in post-conflict periods, investment activity picks up as an investment-enabling environment takes hold. Security is restored, the macro economy stabilises, the rule of law is upheld, and banks evolve, allocating capital to the economy and providing the private sector with much-needed access to credit.

Iraq is a country that holds much economic potential, underpinned by untapped oil resources and strong demand for infrastructure, goods and services, due to 30-plus years of underinvestment as a result of wars, sanctions and neglect. Since the downfall of the Baath regime in 2003, Iraq has tripled its oil production from approximately one million barrels per day to three million, making it one of the leading producers of oil in the world (see Fig. 1). In this time it has also posted strong GDP growth rates (see Fig. 2) and saw the market capitalisation of its stock market reach $10bn by the end of 2013, up from only $3bn in 2010. With oil production expected to triple yet again, reaching a reported nine million barrels per day by 2020, the scale of economic growth is expected to mirror the economic transformation of Saudi Arabia in the 1960s and 1970s and Russia in the 1990s. For investors, success in a country like Iraq could reap significant returns.

Iraq’s expected growth rate, 2014

5.9%

Making the transition
Yet, Iraq today has not completed its transition from a conflict economy to a post-conflict environment. In considering the country as an investment destination, recent political developments and instability are troubling. As a result, investors, especially foreign investors, are adopting a ‘wait and see’ approach, remaining on the sidelines due to what they perceive to be a country in conflict.

The Capital Bank Group, consisting of the Capital Bank of Jordan and its majority-owned subsidiary, the National Bank of Iraq (NBI), is no stranger to this environment. Only two years after the fall of the Baath regime in 2003, when Iraq was embroiled in widespread turmoil and sectarian strife, Capital Bank became one of the first foreign banks to enter the Iraqi market when it acquired a controlling stake in NBI. Since then, the group has gradually, but consistently, built momentum in the Iraqi market. Capital has increased from approximately $20m in 2004 to approximately $215m today, and successfully building a profitable business with NBI posting net income of $12.6m in 2013.

Overcoming conflict
With an approximate 10-year presence in Iraq, the Capital Bank Group has grown accustomed to operating in an environment that may not necessarily adhere to familiar norms. When foreign investors look at Iraq today, they see a conflict zone. However, as a bank operating in the country, we see a different picture. Despite recent developments, Baghdad today is a large business hub. The capital, which is Iraq’s largest city by population, has constantly seen new industries being developed and investors coming in. Business continues to thrive there, with a very robust trade finance activity.

Iraq’s northern Kurdistan region has long enjoyed political tranquillity, offering lucrative business opportunities. Southern Iraq, containing 65 percent of the country’s oil wealth, is also emerging as a relatively stable region insulated from the political and security challenges seen in the central and western regions.

Source: US Energy Information Administration. Notes: Q1 2014 figures
Source: US Energy Information Administration. Notes: Q1 2014 figures

Moreover, throughout the turmoil, the economy still boasts foreign reserves in excess of $80bn. Meanwhile, the Iraqi dinar has been relatively stable against the US dollar since 2009. In general, we have not seen a drop in commercial activity. The Iraqi economy is expected to post a 5.9 percent growth rate in 2014, according to the latest IMF projections. These indicators are very important for the banking and investment sectors providing them with a different perspective. The Capital Bank Group is committed to the Iraqi market and has expanded its range of services appropriate for the realities of the business environment in each region.

We remain active in the area of trade financing in all parts of Iraq, as this is a much-needed service for our clients with large trade volumes. On a monthly basis, the average volume of letters of credit and letters of guarantee issued by us has increased 47 percent and 28 percent respectively, from 2013 to 2014. Other services we provide include cross-border cash management and transfers. We are also extending credit facilities to our corporate clients, and car loans in the north. Through our investment banking subsidiary, Capital Investments, we are providing corporate finance services to investors in projects in the north and the south, arranging debt and equity financing and advising foreign investors seeking to gain exposure to lucrative investments.

Stability and success
Despite the recent developments, we see great potential for the future in Iraq. Therefore, we continue to focus on the market and on putting in place strategies and making investments that will position us for further success when the situation stabilises. We are currently present in all major cities in Iraq and are planning to double our branch network over the next two years. We are introducing ATMs in the fourth quarter of this year and offering credit cards to our clients in Iraq. We are also investing in our brokerage business, Wahat Al Nakhil, upgrading IT systems and applying for a custodian license to allow us to better service foreign investors seeking to invest in the Iraq Stock Exchange. What’s more, we are developing investment products for our existing and new clients who are seeking to capitalise on promising investment opportunities in Basra. At Capital Bank Group we are in the business of turning challenges into opportunities and we strive to better serve our clients and the entire region. Throughout the crisis, we are remaining closely engaged with our clients.

Source: International Monetary Fund. Notes: Post-2011 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2011 figures are IMF estimates

The Capital Bank Group is present in Iraq and Jordan. Given the geographic proximity between the two countries, close historic ties, and the fact that more than half a million Iraqis call Jordan their home, it is a natural hub for investing in and doing business with Iraq. The Capital Bank Group is in a unique position and we have a distinctive vantage point that allows us to effectively capitalise on opportunities that are present in each of the regions, and to assist our clients in accessing these opportunities.

Iraq today is a country in a process of state building and serious reconstruction, a process that is unfolding, with different dynamics, in various parts of the country. Over the course of the next three to five years, we believe the situation in Iraq will stabilise, an enabling environment for investment will develop, and immense potential will be unlocked. We see the development of a more positive future. The change will be gradual but consistent, and we believe investors who enter early will be rewarded.