Anheuser-Busch InBev has announced that they are to buy back Oriental Brewery (OB) five years on from its original sale and six months earlier than the July date that was agreed upon by KKR and Affinity Equity Partners. The acquisition, which is valued at $5.8bn including debt, will see the world’s largest brewer regain a foothold in the Korean beer market, which is currently exhibiting twice the growth rate as the rest of the world.
The acquisition…will see the world’s largest brewer regain a foothold in the Korean beer market, which is currently exhibiting twice the growth rate as the rest of the world
“We are excited to invest in South Korea and to be working with the OB team again. OB will strengthen our position in the fast-growing Asia Pacific region and will become a significant contributor to our Asia Pacific Zone,” said AB InBev’s Chief Executive, Carlos Brito in a press statement. “We expect to be strong contributors to the Korean economy and community, fulfilling our global commitment to establish AB InBev as a leading corporate citizen in the markets in which we operate.”
Although AB InBev are paying over three times the original sale price, the Belgian brewer believes the opportunity in the region to be well worth the price tag. South Korea’s beer market is forecast by Plato Logic Limited to expand more than 13 percent through 2012 to 2022, and has grown at an annual rate of approximately two percent through 2009 to 2012, which represents a considerable opportunity for brewers such as AB InBev.
Over the course of the past five years, OB’s domestic market share has gone from 40 to 60 percent since KKR acquired the company for $1.8bn in mid-2009, at which time InBev was seeking to curtail its debts following a $52bn takeover of Anheuser-Busch.
“The success experienced since 2009 is a testament to all the employees of OB, and we are gratified to have invested in the company and supported the company’s growth as well as their environmental and citizenship initiatives,” said the Chairman and Managing Partner of Affinity, Kok Yew Tang in a statement.
Like politicians everywhere, Puerto Rico’s legislators never like to be reminded of failure – not least (in their case) the island’s dubious distinction of sliding into recession in 2006 when much of the West was still in the throes of an economic boom.
After eventually becoming a self-governing US territory (a new constitution was approved in 1952), which was a legacy of the US victory in the 1898 Spanish-American War, the island latterly entered an economic cycle punctuated by fiscal mismanagement that hit its nadir in 2006 when yet another budget crisis this time saw the government temporarily shut down, putting 100,000 people out of work.
Puerto Rico by numbers
3.66m
Population
13.2%
Unemployment rate (June 2013)
$1.38bn
Deficit hoped to be wiped by 2016
The closure came after the legislature and then Governor Anibal Acevedo Vila failed to seal a last-minute deal to address the government’s $740m budget shortfall. Debt meanwhile continued to mount.
While the leader of the Senate offered to implement a 5.9 percent sales tax to help pay off an emergency $532m line of credit the government needed in order to see it through the fiscal year, this was subsequently vetoed by the island’s House of Representatives, which would only go up to 5.5 percent.
Exemption to the rule
Vila, who was later to be charged by US authorities for campaign finance violations, said neither plan was sufficient and that a seven percent tax would be required to pay for an additional $640m loan. The straw that finally broke the camel’s back though was a decision by the US Congress removing an exemption, allowing US companies to avoid paying tax on profits generated by their Puerto Rican manufacturing operations; ostensibly because US legislators concluded their own taxpayers had been systematically bilked.
The island meanwhile found it increasingly difficult to finance – through the use of so-called ‘triple tax-free bonds’ – its accumulating debt, resulting from a decades old industrial policy that had seen heavy investment in education, infrastructure and high-tech manufacture. Hence, when Congress pulled the tax exemption rug from under the economy the fiscal landscape became even more hostile.
Superficially, Puerto Rico may have the appearance of a typical US state, including a governor and bicameral legislature; yet its extensive use of public corporations to deliver public services sets it apart from US states. Directly and indirectly the island manages more than 40 public benefit corporations, leading to charges that such a structure limits both transparency and fiscal accountability in its public sector.
Looming large over the economy is the Government Development Bank (GDB), which acts as the fiscal agent and primary lender to the island’s political subdivisions and public corporations. Hence, growth and financial stability in many respects are a function of a healthy GDB. Complicating the issue further, the island cannot legally file for bankruptcy – a legacy of becoming a US territory – given its constitution states debt payments must be made before anything else is paid for. Unsurprisingly, for decades the island was (and continues to be) sustained by federal subsidies from pensions to food stamps – a reflection of its people being poorer than the American average.
Debt spirals out of control
While debt has been issued to finance the annual budget deficit – now rolling over into its 13th straight year – the island has required market access to meet payroll and other obligations. Between 2001 and 2010, gross public debt soared from 25 percent to 90 percent of GDP. It eased back to 84 percent of GDP in 2012, according to data from Morgan Stanley, while unemployment had slowed to 13.2 percent as recently as June 2013, having peaked at 16.9 percent in May 2010.
A closer examination of the island’s $3trn plus municipal bond market though will readily show that successive government objectives of fixing the island’s finances have subsequently proven hollow – borrowings by the government (and its agencies) more than doubling over the 2004-13 period to $70bn – this at a time when the economy contracted 16 percent.
Indeed, despite unemployment having seemingly peaked, Puerto Rico’s problems are far from over. Against a backdrop of an ageing and shrinking population (of 3.66 million) the island has continued to run annual budget deficits of around 2.5 percent of GDP in recent years and sought to reduce them by levying yet more taxes, raising the retirement age for government employees, and increasing the share of their salaries they contribute to their pensions – the objective being to wipe out a $1.38bn deficit this year by 2016.
Described by some commentators as the ‘Greece of the Caribbean’, the similarities between Puerto Rico and Greece are striking in many ways. Greece was living beyond its means even before it joined the euro with public sector wages, for example, surging 50 percent between 1999 and 2007 – far faster than in most other eurozone countries.
Adding to the problem, public coffers were progressively drained as tax evasion – almost a national sport – lurched further out of control, leading to the budget deficit itself becoming uncontrollable without the implementation of drastic measures.
Not helping matters either was that much of the Greek government’s borrowings had been concealed as successive Greek governments sought to meet the 3 percent of GDP cap on borrowing required of euro members.
When the global financial downturn hit – and Greece’s hidden borrowings came to light – the country was ill prepared to cope. While Greece is now in its sixth year of recession, aggravated by swingeing public spending cuts linked to a €240bn ($320bn) bailout from the euro area and IMF. Puerto Rico’s Government Development Bank, tasked with handling the commonwealth’s capital market transactions, claimed in a recent statement that the island’s capacity to service its public debt was being unfairly compared to Greece. Yet neither economy, linked as they are to the euro and US dollar respectively, have any control over monetary policy – hence neither can devalue their currency to kick-start the economy.
Moreover, neither have a strong productive base, while both economies are economic mirages based on consumption that has been sustained by a monetary illusion. That is, by having access to a stronger currency than their fundamentals warrant, according to Sergio M Marxuach, Policy Director and General Counsel at the Puerto Rico think tank The Center for a New Economy (CNE).
Ineffectively treading water
Certainly the portents for Alejandro García Padilla weren’t looking good when he assumed office as Governor of Puerto Rico back in January 2013. Unemployment stood at 14.6 percent – more than any US state – and murders were at an all-time high as the drugs trade continued to plague the island.
In addition, the economy was being weighed down by debt of $70bn worth of bonds outstanding and a budget deficit of $2.2bn (later to be revised down), leading to rating agencies downgrading the island’s bonds to near-junk status. Total income tax collections meanwhile fell for a fifth straight year and were $4.4bn in fiscal 2013, (FY 2012: $4.54bn; FY 2011: $5.19bn).
Nearly all other categories of income taxes also declined, but for a $92m year-on-year rise in those collected from non-residents. Excise tax collections on cigarettes and motor vehicles also showed increases in the last fiscal year. The current fiscal 2014 budget covering the 12 months that began July 1 relies on a projected $1.38bn from tax increases.
However, the island’s Treasury Department said an initial fiscal 2013 general fund deficit projected at $965m by an earlier administration now looked to total $247m, suggesting that economic forecasting isn’t necessarily one of the government’s strengths. The island’s general fund covers education and other essential spending. Treasury Secretary Melba Acosta-Febo added in a statement that her department had just added 65 auditors to reduce tax evasion on the island.
The blame game is always subject to rigorous political debate, and if economic mismanagement is at the top of the list no such list would be complete without the inclusion of Wall Street. As it borrows frequently to fund operations, Puerto Rico must retain market access to avoid a bond default.
In October 2013 the nation suffered the ignominy of seeing 10 year debt yields climb to 7.94 percent (13 percent on a taxable basis) – exceeding that of an economically incompetent post-Chavez Venezuela, which was witnessing 12.6 percent on similar maturity US dollar debt.
If much of the froth in the Puerto Rican munibonds market was down to their attractiveness to US investors from a tax standpoint, events have subsequently shown how quickly fund managers can head for the exit. Interest on Puerto Rican bonds is exempt from state and local taxes in the US for most investors. Coupled with attractive yields, due to credit ratings just above ‘junk’ status, they’ve proven popular. So much so that 77 percent of US based muni-bond mutual funds reportedly hold Puerto Rican debt.
Reactionary-based business
Chasing yield can become self defeating after a while, especially when markets temporarily head south as they did last May when US Federal Reserve Chairman, Ben Bernanke spooked investors by flagging up the possibility of reducing monetary stimulus to the US economy.
Investors have reacted to selloffs in the interim by pulling tens of billions of dollars out of US muni-bond funds, forcing those funds loaded with Puerto Rican paper to offload some of those holdings. Prices fall, further investor redemptions ensue, more bonds are sold off and the vicious circle continues.
Puerto Rico’s current budget expects to raise more than $2.5bn in revenue though new taxes and other levies
Also in October ratings agency Moody’s downgraded $6.8bn of Puerto Rico sales tax revenue bonds to A2 from Aa3. While the bonds still maintain a high investment grade, it noted the island’s continued weak economy (a 5.4 percent contraction over the year to August 2013) and an even weaker underlying credit rating, given general obligation bonds are rated just one notch above junk.
The downgrade also reflected the agency’s view that the sales tax bonds are more tightly linked to the sovereign’s underlying credit rating than the previous six-notch gap had suggested. The agency affirmed Puerto Rico’s general obligation bonds at Baa3 and $9.2bn in subordinate sales tax bonds at A3.
The outlook for both ratings was revised to negative from stable, however, because of the negative outlook of the commonwealth’s general obligation bonds, trading at the time at some 70 cents on the dollar and yielding 8.8 percent.
Puerto Rico’s current budget expects to raise more than $2.5bn in revenue though new taxes and other levies. Or, to put it another way, an estimated 25 percent of the general fund budget. Yet, despite such optimism, which also includes a five-year economic plan designed to create 130,000 jobs by 2018, the markets are saying otherwise – the S&P Municipal Bond Puerto Rico index showing a 17.8 percent decline, year-on-year, as of early November.
US investment research group Morningstar estimated in September that Puerto Rico can only cover 11.2 percent of its public pension costs – even less than that of the notoriously underfunded Illinois retirement system. It added that Puerto Rico’s liability now equates to $8,900 per person, and this as three of the island’s public pension plans are projected to deplete their respective assets over the coming years.
The pensions time bomb, prompting an overhaul earlier this year to bring down the island’s $37.3bn of unfunded pension liabilities, in part explains why the economy has tipped back into recession.
Meanwhile, $35bn of pension debt is likely to remain on the books for years. Any further ratings downgrades will mean higher government borrowing costs. Then the big question is what can the government do once it runs out of funds to cover pensions, social welfare funds and debt servicing.
As a federal territory it remains unclear how Puerto Rico can be ‘restructured’ should the doomsday scenario of default come to pass, for example. As it is not a municipality it doesn’t have the option of reorganising its debt via a US style bankruptcy. While the US Congress would likely get involved, it remains open to question from a legal standpoint, as to how they would.
In the meantime, markets stand ready to further punish Puerto Rico if its economic situation fails to improve soon. That will only exacerbate the market-dependent island’s already serious economic problems. Time is running out.
The insurance market in Mauritius – as with the wider island economy – is small yet dynamic, and best characterised by emerging opportunities for growth. Although the market is naturally quite limited in scale, it is nonetheless occupied by as many as 14 insurance firms, the majority of which are struggling for survival in what is proving to be an increasingly challenging marketplace.
During the process of these firms setting up in Mauritius, many small companies have merged with others to allow them the best possible chance of competing with the stiff competition in the sector. However, one of the larger and more experienced firms in operation, the New India Assurance Company (New India), which has a history dating as far back as 1919 and a huge presence in India and Afro-Asia, is capitalising on its rich experience in the industry.
Historic local presence
Although the firm’s headquarters are in Mumbai, New India has maintained a presence in Mauritius for over 77 years and has, since its beginnings, endeavoured to become the most respected, trusted and preferred non-life insurer in the region. The company’s assets have increased for three years running in Mauritius, and have risen from $34.44m in 2011 to $39.76m in 2013 (see Fig. 1), which offers an indication of the pace at which New India is growing.
The company has a number of advantages over rival insurers in the region, too, in that it is wholly owned by the Indian government and backed by $8.4bn worth of global assets. These foundations have allowed New India to procure more business in new markets and leverage its business elsewhere, which has been crucial in the company posting consistent profits these past seven years.
The company’s mission is to develop general insurance business in the best interest of the community and to provide financial security to individuals, trade, commerce and all other segments of society by offering insurance products and services of a high quality and at an affordable rate.
This client-centric and forward-thinking ethos can best be seen in Mauritius, where New India has made it its highest priority to not only cater to customers’ needs, but to maintain high standards of public conduct and transparency in all it does.
Technology and transparency
One of the ways in which New India has differentiated its services from those of its competitors is by introducing new software called Web-Based Agent’s Modules, which is accessible to all of the company’s accredited agents and allows them to issue certificates and receipts from their offices. The system is the first of its kind in Mauritius and has not only streamlined New India’s services but instilled a greater measure of transparency to the Mauritian market.
At present, New India is operating through 27 accredited agents’ offices and has plans to introduce a further 10 in the coming year. Coverage of this scale is part and parcel of the company’s ability to astutely analyse and evaluate the marketplace, as well as adjust to any major changes with immediate effect.
Also in keeping with New India’s dedication to customers is the appointment of a complaints coordinator, who is charged with handling any grievances customers might have. Regardless of this position, New India last year received the least number of complaints in its history, due in large part to the company’s well-defined systems, faultless authority delegation, compliance with regulatory requirements, and the required technical expertise to negotiate a challenging Mauritian marketplace.
The island’s insurance industry is one rife with lucrative opportunities, which will no doubt be capitalised on provided that firms follow New India’s example and expand upon their existing products and services.
It’s highly unlikely that the average American consumer had heard of a company called Shuanghui International until the middle of this year – but they certainly will over the next few years. The Hong Kong-based but mainly China mainland-owned company is a producer of meat products that only got going 30 years ago. As for its Shuanghui brand (Shineway in English), it was launched barely 20 years ago.
But in September, Shuanghui pulled off the biggest-yet takeover of an American company by a Chinese one when US regulators approved its $4.72bn acquisition of Smithfield Foods, a global conglomerate. Shuanghui, led by Managing Director Zhijun Yang, who worked his way up from the shop floor, had to fight for the deal. The notably defensive committee on foreign investment (CFIUS) signed off on the takeover only after senior representatives of both parties in Congress took a long and hard look at it under what they described as a “thorough review” of the deal.
$221bn
Global M&A transactions, 1985
$2.3trn
Global M&A transactions, 2010
According to M&A lawyers, politicians would have got investigators to give the Chinese company a forensic examination, including finding out the location of Smithfield’s processing plants. If they are near military bases, for example, the takeover may have been pushed off the table. After all, the foreign investment committee has blocked at least three transactions since 2009 that would have had Chinese companies owning premises near sensitive locations.
But with the committee satisfied that Shuanghui is only concerned with selling Smithfield’s products around the world, and especially in China, rather than steal military secrets, the transaction is seen as a landmark in global M&A. As Forbes contributor Jack Perkowski pointed out, the deal can only be of benefit to America because it opens up the vast mainland Chinese market to US producers. “This is the beginning of an important new trend – look for more transactions [like it] in the future,” he commented.
The Shuanghui-Smithfield transaction is, however, only one example of something of a stampede by highly acquisitive Chinese companies to do M&A deals outside their own borders. Indeed, it is the most significant development of a more buoyant M&A sector in 2013 as global deals, whether by Chinese or other companies, finally began to approach the size they achieved before the financial crisis.
Even by halfway through the year, it was clear that a seismic shift was occurring in the global M&A market. By then Chinese companies had wrapped up no less than 98 cross-border transactions valued at $35.3bn, according to data from consultant Deloitte Touche Tohmatsu China. The two main target markets were Europe and the US, with mega-deals – anything above $1bn – accounting for well over a dozen transactions. And since then the deals have kept rolling in. With just one month remaining in 2013, Chinese companies had splashed nearly $61bn on foreign acquisitions, the highest on record.
According to the consultant’s local M&A expert, Stanley Lah, China’s increasingly bold move offshore (see area graph) is a reflection of growing confidence built on the back of more demanding and affluent consumers. Reflecting the nation’s thirst for premium European whiskies and spirits, they want higher-quality products made by prestige brands. “With US, European and Chinese economies having shown signs of growth, it should be no surprise that Chinese companies are becoming more optimistic,” Lah wrote in a report.
Big deals Stateside
Significant as they are, China-inspired deals do not top the charts for 2013. Indeed, they pale in size when compared with those taking place in the US. With interest rates at historically low levels because the US Federal Reserve has pumped so much money into the economy, acquisition-hungry American companies could not resist the temptation of low single-digit loans to fund raids on rivals or complementary businesses.
“The silver lining [in M&A by US companies] is that the Fed has made it clear they’re not going to pull back on easing near-term,” Paul Parker, Head of Global Corporate Finance and M&A at Barclays, told Reuters in September. “Therefore companies do have a window to take advantage of the rate environment, which is still historically low.”
The towering acquisition of the year of course was Verizon Communication’s $130bn purchase of the US wireless business of Vodafone (see bar chart). Launched in late August, it involved Verizon buying the UK telecommunications group’s 45 percent interest in Verizon Wireless. The price was irresistible – Vodafone will return £54bn to its shareholders, including £22bn in the UK. As Chief Executive Vittoria Colao said, echoing the basic rationale behind most M&A transactions: “We got an offer that was thought was in the interests of our shareholders to accept – at the end of the day it’s as simple as that.”
Until Verizon’s mammoth deal, it seemed that the top three would be the $28bn takeover of food group HJ Heinz by Warren Buffett’s Berkshire Hathaway and 3G Capital, followed by Michael Dell’s buy-back of his computer manufacturing company for $25bn and the $23.3bn acquisition of Virgin Media by Liberty Global.
But as people live longer around the globe, it was the rush for healthcare and life-science companies that dominated the top 10. In fourth place was Life Technologies after it was snapped up for $13.6bn by New York exchange-listed Thermo Fisher Scientific. Other top 10 healthcare deals in the sector include Onyx Pharmaceuticals (bought for $10.4bn by Angen), Bausch + Lomb ($8.7bn by Valiant Pharmaceuticals International), and Ireland’s biotech group Elan ($8.6bn by Perrigo).
The number of global deals may have fallen by around 10 percent to 25,374 compared with 2012, but nearly all of these are below the radar, well under the $100m mark by value. It is however the size of the transactions that is instilling a growing confidence in most markets as well as China.
“Overall deal activity is a good barometer of chief executive and board confidence,” explains Patrick Ramsey, joint head of Americas M&A at Bank of America Merrill Lynch. “But big-deal activity – $10bn and plus – is the best barometer of confidence. And we’ve seen more big-deal announcements this year-to-date than in any year since 2008.”
Rush to debt
Quite apart from the fact the M&A market is generally healthier, one of its most noteworthy aspects is how the big deals have been funded. For the first time in a long time, investors are rushing to back big-ticket debt splurges, as Verizon’s acquisition shows. After the transaction was approved, the US communications giant went to the market to raise the money. It offered $49bn in bonds to investors, a daring three and a half times the $14bn raised by Apple a few months earlier. At the outset it looked like the tactic could be a mistake – but Verizon took the plunge and got swamped. In a week-long debt-buying frenzy, Verizon’s brokers received about $100bn in bids.
For the first time in a long time, investors are rushing to back big-ticket debt splurges
According to underwriter Morgan Stanley’s Paul Spivack, Global Head of Investment Grade Syndication, the level of interest was a shock. “We had orders in this book that exceeded anything we’ve seen before”, he told the Wall Street Journal.
After years of investor nervousness about mega-transactions, the ease with which Verizon’s gargantuan acquisition was funded suggests the debt markets are regaining confidence and everybody is winning as a result. First, Verizon gets cheaper and more predictable debt than it otherwise would through loans organised by a syndicate of banks. Second, investors book a higher-yielding return from the corporate bonds than they would from, say, buying US Treasury bills.
And finally, the dealmakers – the Wall Street firms that oiled the acquisition – booked a total of $265m in fees. According to public filings, Barclays, Morgan Stanley, Morgan Chase and Bank of America took around $41m each for leading the debt sale.
More transactions, more regulation
Despite the bigger transactions, M&A consultants say the deal-making climate is changing. Just one fly in the ointment is the eagle-eyed attention of regulators. In Europe, Brussels’ bureaucrats usually involve themselves in sizeable transactions, while the US Justice Department has been particularly active. Its anti-trust lawyers only withdrew in November their objections to the merger of American Airlines with US Airways. And as the price of approving its $20.1bn acquisition of Mexico’s Modelo group, they forced brewer Anheuser Busch Inbev to sell off one of the company’s breweries, among other conditions.
“We’re seeing more activism out of the anti-trust regulators”, says Scott Barshay, Head of the Corporate Department at law firm Cravath, Swaine & Moore. “As a result, fewer deals are being pursued because of fears the regulators will just turn them down or demand too high a price.”
[T]he sun could be about to come out in Europe after five years of M&A gloom
In fact, some regulators are trampling all over transactions on the skimpiest of authority. The UK’s competition authorities are a case in point. When Netherlands-based specialty chemicals group Akzo Nobel tried to buy all of Metlac, an Italian competitor, in July, the Competition Commission jumped in boots and all. Even though both companies were based outside Britain, it blocked the merger on the grounds that the companies make sales in the UK. Of nine competition authorities that could have intervened, the UK regulator was the only one to take such a step.
As multinational law firm Norton Rose Fulbright points out, this was a landmark ruling. After all, Akzo Nobel did not ‘carry on business’ in the UK, which is the usual requirement for such intervention. The overriding lesson, warn consultants, is that firms should hire a lawyer well before launching a cross-border M&A – and incurring considerable costs. Regulators are adopting increasingly generous interpretations of commercial law to get involved in M&A deals.
As lawyer Vera Rechsteiner of Houston-based law firm Andrews Kurth explained in a November note to clients: “[In the US] A transaction may be [deemed] ‘cross-border’ for any number of reasons, including foreign deal participants, non-US assets or the application of non-US laws, to name a few.”
Raking the ashes
Without the jump in interest from Asia, particularly China, and the UK, deal making in mainland Europe would languish even further than it does. M&A activity collapsed by nearly a quarter during the year in Europe to a total of $383.3bn, despite Vodafone’s €7.7bn takeover of Kabel Deutschland, and – the big deal of the year – the $35bn merger of French advertising agency Publicis with America’s Omnicom.
And opportunist investors are raking over the ashes of the financial crisis. As the employees of Spain’s Panrico, one of the world’s biggest doughnut manufacturers, will vouch, a fast-emerging phenomenon in Europe is the distressed M&A. In the case of Panrico, which collapsed earlier this year, Los Angeles-based Oaktree Capital snapped up the debt and, with it, the assets. Immediately, the private-equity firm launched a painful restructuring that involved lower wages and redundancies, triggering protests by employees.
Howard Marks, Chairman of Oaktree Capital Management, which subsumed and then restructured Panrico Donuts
But this is a Europe-wide phenomenon, even in the EU’s economic powerhouse. “Distressed M&A transactions are currently en vogue – especially in Germany,” confirm researchers Juergen van Kann and Rouven Redeker of New York-based law firm Fried Frank Harris Shriver & Jacobsen. Right now, there are several high-profile examples – energy group Solarworld and DIY chain Praktiker, to name just two.
New insolvency laws in Germany have made it easier for opportunistic funds to jump into the fray and acquire assets on the cheap. Alarmed at the way some insolvency specialists were plundering assets through sky-high fees at the expense of creditors, Bonn passed a law in early 2012 that among other things gave creditors more say in post-collapse proceedings. Any important creditor can be elected to the creditors’ committee, including third parties such as vulture funds that are often highly adept at rescuing a company in trouble, albeit at a price.
However, the sun could be about to come out in Europe after five years of M&A gloom. “All things seem to point to a future increase of activity,” says Gilbert Pozzi, Goldman Sach’s Head of M&A for Europe, the Middle East and Africa. Indeed, in late November, Germany’s third-biggest cable company, Tele Columbus, made an offer for junior rival Primacom.
Some things don’t change though. As French-born Harvard Professor Marc Bertoneche pointed out recently in a review of mounting M&A fever, these deals often come unstuck. And he cites a range of causes, including overvaluations, clashes of culture, absence of a disciplined post-M&A strategy, and inability to resist pressure from banks and others with a vested interest in a deal.
“All the studies agree on the conclusion that 50-70 percent of M&A transactions do not create value, a statistic that is nearly as high as the rate of failure in the marriage and partnership of Hollywood stars,” he said. So, 30-50 percent of all that money will be wasted.
Not content with having recorded the highest profits of the entire Indian general insurance sector last year, the success of the New India Assurance Company (New India) is in large part indebted to a commitment to expand further afield and introduce excellent products and services to new markets. Throughout the firm’s 93-year history, New India has extended its reach to 22 countries and five continents while simultaneously maintaining its high standing in the industry.
New India is among India’s largest and most financially secure non-life insurance companies and has spearheaded a number of innovations in the industry, ranging from domestic airlines to satellite insurance. Moreover, the company has been awarded an ‘A’ rating by AM Best for each of the previous nine years, based on a healthy capital position, excellent liquidity, strong operating performance and a high insolvency margin. The company is also the first insurance provider in the region to have secured a ‘AAA’ status from the Credit Rating Information Services of India (CRISIL), which reflects the company’s financial capacity to meet policyholders’ obligations.
Success in Oman
One of the markets in which we’ve seen our business grow substantially is Oman, which has, since our establishment there in 1974, proven an extremely hospitable climate for the insurance sector. New India was the first Indian insurance provider to enter the sultanate and has since built and consolidated a strong insurance base, merited widespread customer praise and advocated transparency in the wider industry.
The ongoing industrialisation drive in Oman, along with continued growth in the oil sector, has given rise to new opportunities in general insurance – project insurance being the single biggest beneficiary. With the upward trend in infrastructure and commercial projects set to continue for the foreseeable future, New India’s high standing in the market ensures the firm is well positioned to capitalise on this growth in the years to come, which will no doubt prove mutually beneficial to both company and country.
New India sees Omanis and Indians working together at every juncture, with more than 60 percent of the company’s workforce made up of Omani nationals
Oman’s insurance market consists of 20 general insurance companies, 10 of which are national and the remaining 10 foreign. Among the 10 foreign general insurance companies in operation, New India is the leader by some margin, with 34 percent of the market share and a reputation that is unmatched by any other in the region. As an indication of New India’s market dominance, the firm boasted gross premiums of RO27.5m ($71.5m) last year alone.
Nurturing the industry
New India stands at the forefront of devising unique insurance products and services and offers a range of value added services in catering to its exhaustive range of clients. The personal accident insurance cover, devised for customers of money exchange transfer companies in Oman, is testament to this commitment, as well as to the company’s wider efforts to address insurance shortfalls in the surrounding region.
Aside from matters of business, New India also seeks to consider those in the communities in which it works by introducing Omani nationals to the staff and providing them with the appropriate training and experience to progress in the region’s budding insurance sector. New India sees Omanis and Indians working together at every juncture, with more than 60 percent of the company’s workforce made up of Omani nationals. Far from an unfamiliar resident to Omani shores, at New India well-trained Omani personnel play a crucial role in nurturing the nation’s thriving insurance sector.
Asset management is very different now from what it was five years ago. Since the crisis struck Europe, risk appetite has been subdued, which in turn has taken its toll on returns. However, as markets slowly return to form, asset managers are once again emerging as favourites with HNWIs and institutional clients.
Founded in Liechtenstein in 2001, Finanz Konzept quickly evolved into a successful asset management firm operating across Europe. Since 2004 it has been headquartered in Zurich, and its small but efficient team is committed to delivering a personalised service. Today it is an authorised asset manager in Switzerland regulated under the supervision of the authorities.
A stalwart of the firm’s products is the Triple Fixed Income Opportunity Fund, which benefitted from the slow market and offers phenomenal returns. The increased volatility afflicting the market since 2008 has not been kind to many asset managers playing in Europe, but the firm has persevered with its funds and remained profitable. And while others have struggled to maintain diversified portfolios, Finanz Konzept has strengthened its own funds, and continued to perform solidly. And now that risk appetite is returning to the market, the company is ideally positioned to provide diverse and solid investments for its clients.
It has not all been doom and gloom for fund managers. Low interest rates have meant that borrowing has been cheap, and the stock market has been consistently undervalued. Clever investors and managers have found cheap and efficient ways of keeping their returns up while the market has been down. At Finanz Konzept, managers have been busy investing in bonds and avoiding the liquidity trap that has flooded the market since Basel III was implemented.
For Finanz Konzept, each client’s individual needs are the highest currency, and each portfolio is tailored to measure. But it is the company’s dynamic investment model that attracts discerning clients. Over the years, the experts at Finanz Konzept have become adept at playing the weak European market to the advantage of their clients and have created a variety of asset management products and funds. Lars Oberle, Chairman of the Board of Directors, spoke to World Finance about the current investment landscape in Europe, how his company is taking advantage of the economic environment, and about its two successful funds.
How has Europe’s debt crisis affected the business of asset management?
The crisis deeply affected the business of asset management. The behaviour of investors and the pricing of assets are the main factors that affected the business. Investors are seeking returns comparable to those achieved in the last decade. Considering that central banks worldwide are flooding the markets with liquidity to stabilise the markets – which are already under threat of government debt crises in developed economies – it is very difficult to generate acceptable returns with the same or less risk exposure compared to the time before the crisis. So, many asset managers have increased risk taking to meet the needs of investors. Hence, the pricing of assets is skewed and not reflecting the real risk proportions. If another crisis were to occur in the near future, it would have an even bigger impact on the world economy, causing hyperinflation or an extensive economic recession.
How has Finanz Konzept adapted to negotiate these challenges?
Though from the beginning we have had a strategy that is set up under a long-term approach, some adjustments had to be made to manage these challenges. To avoid unjustifiable risks, the investment focus changed in a profound way. New criteria have been also implemented to our valuation process in order to identify the ‘new’ risks better, especially macroeconomic risks.
Do you foresee Europe’s financial climate improving at any time in the near future?
In order for Europe’s financial climate to improve, the real economy has to be improved. As long as there is no catalyst from the economy, an improvement of the financial climate cannot be expected in the near future. In the long run, however, there will be an improvement due to the nature of business cycles. But the potential is limited as the markets are saturated with liquidity from the central banks.
What is Finanz Konzept’s position in the market and how do your services differ to those of your competitors?
Our strategy is based on different approaches; a top-down as well as a bottom-up procedure is pursued. In addition, an investment decision is taken only if relevant factors meet our stringent criteria. Own methods identify undervalued bonds that contribute efficiently to the success of our portfolio. Undervalued bonds benefit from the recovery in the credit quality and thus provide a useful diversification to the traditional bond portfolio. Our clients benefit from independent high-class asset management with a remarkable risk-return profile, which we are continuously improving.
Which countries and asset classes are you invested in, and for what reasons?
The main investment focus is Europe (see Fig. 1). Within Europe, bonds from companies in countries with relatively low government debt are favoured at the moment (see Fig. 2). In general, it depends on different factors during the investment process so that we can’t say that we invest in a particular country. However, the debt of a country is an important factor as a decrease in economic output would affect the companies in these countries most. Due to the expansive monetary policy, the risk-return profiles aren’t generally attractive in comparison to other companies in countries with lower government debt.
Tell us about the investment objectives of the Triple Opportunity Fund
The Triple Opportunity Fixed Income Fund aims to achieve a maximum total return. Although there are no geographic restrictions, the fund invests mainly in European government, corporate and convertible bonds and short-term securities and debt derivatives. A leverage of up to 200 percent of the assets is possible; however, the current leverage depends on market conditions. In this way, the duration can be managed.
The fund is committed to investing in securities that are significantly undervalued, which are identified with our methods and models. The fund seeks a benchmark independently to a target return of between eight and 12 percent yearly on the euro. Therefore, the currency risk is hedged against the euro (see Fig. 3).
How has the fund performed over the past two years?
The Triple Opportunity Fixed Income Fund was issued on May 2011. In 2011, the performance was -3.61 percent, which jumped to 26.58 percent in 2012. Besides a general decrease in euro interest rates in the last year, some recoveries of undervalued bonds contributed to the performance significantly. The fund seeks a yearly volatility of no more than 10 percent. Current data shows that the volatility is within that limit.
Do you have plans to expand to new markets or launch any new products and services in the near future?
We always optimise the methods and models for our funds; innovation is also a main focus in our company. In the near future, we want to offer physical diamonds merged in appropriate portfolios to our clients in addition to the Physical Diamond Fund, which we also manage and optimise. Our clients profit from innovative, independent and professional wealth and asset management.
The Lebanese banking sector has always been the cornerstone of the country’s economy, remaining resilient throughout the various crises that have shaken the country, the region, and the world over the years, and constituting a solid foundation for an emerging market economy. More specifically, the Lebanese banking sector has been a major source of financing for the Lebanese government, retaining 50.5 percent of the country’s LBP-denominated debt. The contribution of the central bank to LBP-denominated debt, meanwhile, stands at 32 percent, as of the end of July 2013.
[T]he Lebanese banking sector has been a major source of financing for the Lebanese government, retaining 50.5 percent of the country’s LBP-denominated debt
In fact, the Lebanese banking sector continues to garner international attention and remains the subject of praise by renowned rating agencies for its outstanding performance even during rough periods of economic stalemate and instability. Banks operating in Lebanon remain characterised by high liquidity (primary liquidity in excess of 78 percent), strong solvency and solid capitalisation levels, which shield the sector from local or external shocks. In parallel, Lebanese banks are also acclaimed for their rigorous risk management and corporate governance practices, in addition to their impartial internal audit, which altogether play a pivotal role in protecting and shielding the sector’s strength and asset quality.
Lebanese banks are determined to preserve their pioneering role across the globe in terms of abidance by international norms and standards, especially the Basel I, II, and III requirements, enhancing the sector’s image and credibility in the eyes of the international community. During our last visit at the head of the Union of Arab Banks delegation to attend the World Bank Group IMF Annual Meetings in Washington DC, we met with several high-ranking officials from the Federal Reserve System and US Department of Treasury who announced they had witnessed an improvement in compliance functions in Arab banks in general, and expressed comfort towards the compliance of Lebanese banks with international rules and regulations, namely those of AML/CFT.
Lebanese banks are also governed by an extensive set of laws, regulations, and periodical circulars issued by Banque Du Liban (BDL), continuously hailed by international rating agencies for its prudent and scrupulous monetary policy. The central bank is also resolute in combating money laundering under the provisions of Law No. 318, with the SIC bearing the responsibility of investigating suspicious transactions and detaining the exclusive right to lift banking secrecy when deemed essential. The necessary actions and related sanctions are subsequently decided upon by the Higher Banking Commission and the relevant judicial authorities in Lebanon. Moreover, the central bank strives to confine banks’ allowable scope of investments away from exotic and toxic financial instruments. The fruit of that policy was tested during the global financial crisis of 2008, with the sector posting a healthy performance at a time when major international institutions and economies were crumbling. In this context, BDL works hand-in-hand with four committees and commissions, namely the Higher Banking Commission, the Banking Control Commission of Lebanon (BCCL), the Special Investigation Commission (SIC), and the Consultative Committee, to ensure a closer monitoring of Lebanese banks’ operations and the proper implementation of all laws and regulations.
Personnel and services
From a human resources angle, the Lebanese banking sector is renowned for employing the finest personnel, hiring highly qualified university graduates and adopting continuous learning programmes to further sharpen their skills and knowledge. This is mirrored through the ever-increasing efficiency, competitiveness, and quality of services across the sector. Lebanese banks have similarly been devoting great attention to technological advancement, constantly enhancing their IT infrastructure to support all business requirements, employing front-end technology solutions, and renewing their methods and techniques. In addition, Lebanese banks gain a competitive edge by continuously tailoring new products and services that respond to an educated customer base and the market’s ever-changing needs and unique preferences. In this context, it is worth noting that BDL and the Association of Banks in Lebanon (ABL) were behind the launching of several subsidised loan schemes with the objective of stimulating lending activity and spurring economic growth. Said schemes target various factions of society, including members of the Lebanese Army, internal security forces, judges, and small- and medium-sized enterprises (SMEs). Lebanese banks have also displayed throughout the years their eagerness to contribute to the welfare of civil society, offering numerous products that support the environment, education, anti-drug campaigns, cultural and heritage associations and events, among others.
Financial performance of Lebanese banks’ subsidiaries in Syria
Year end
310.1
Total assets
0.526*
Net profit
Sept 2013
462.4
Total assets
10.7
Net profit
% change
49.12
Total assets
1,933.1
Net profit
Source: Syrian Commission on Financial Markets and Securities, Credit Libanais Economic Research Unit
Notes: SYP figures in billions; *Figures as of September 2012
From a rating perspective, the Lebanese banking sector remains constrained by Lebanon’s sovereign rating. Moody’s Investors Service has assigned each of Bank Audi, BLOM Bank, Byblos Bank, and Bank of Beirut with a rating of ‘B1’ with a ‘negative’ outlook, while Fitch Ratings has assigned Bank Audi and Byblos Bank a rating of ‘B’ with a ‘stable’ outlook. Capital Intelligence has also assigned each of Bank Audi, BLOM Bank, Credit Libanais, Byblos Bank, BBAC, and Fransabank a rating of ‘B’ with a ‘stable’ outlook. Most rating agencies cited Lebanese banks’ strong domestic franchise, experienced management, relatively sound asset quality, and resilient profitability, in addition to hailing the central bank’s wise policies and decisions. Nevertheless, the rating agencies had warned that the sector’s significant exposure to Lebanese sovereign debt, in addition to the regional turmoil and governmental void, could constrain any future rating improvement.
From a financial performance perspective, and despite the prevailing local and regional instabilities, the consolidated balance sheet of commercial banks operating in Lebanon has grown by 7.83 percent year-on-year to around $158.56bn as at the end of August 2013 (see Fig. 1), with customer deposits increasing by 8.88 percent to $134.19bn and loans to the private sector expanding by 9.22 percent to $45.57bn. This robust performance can be attributed to depositors’ and investors’ confidence in the Lebanese banking sector, the sustainable flow of remittances from the Lebanese diaspora to its native country, and the continuous promulgation of new subsidies and financing schemes by Banque Du Liban to foster growth. It is worth noting that the Lebanese banking sector has earned a prominent position in the region, ranking third with respect to the number of banks appearing on the top 100 Arab banks list for the year 2012 (10 banks), and fourth in terms of total balance sheet size ($147.52bn).
Growth despite uncertainty
Similarly, Lebanese banks have managed to record a 5.5 percent annual growth in net consolidated profits to $845m in the first half of 2013. One cannot deny, though, that the profitability of Lebanese banks that have a foothold in turbulent markets like Egypt and Syria, for instance, has been hampered by the ramifications of the current uprisings.
Nevertheless, the contribution of the foreign operations of Lebanese banks represents a mere 15 percent of the sector’s consolidated profits, limiting any major repercussions on the sector as a whole. In parallel, Lebanese banks have adopted corrective measures, including full provisioning of doubtful and non-performing loans, the results of which have already been reflected.
More specifically, and notwithstanding the aggravated political uproar in Syria which exacerbated uncertainties and risks surrounding the country’s operating environment, the Syrian affiliates of Lebanese banks managed to reshape their financial standing in the first three quarters of 2013 (see above, right), recording an astounding 1,933.12 percent annual surge in net profits to SYP 10.7bn ($78.19m) as at the end of September 2013. This sizeable rebound in profits is explained by the unrealised gains on our foreign exchange position, which aggregated to SYP 28.26bn ($206.56m). The consolidated balance sheet of Lebanese banks’ subsidiaries in Syria was no exception, soaring by 49.12 percent during the first nine months of 2013 to SYP 462.41bn ($3.38bn).
On the foreign expansion front, Lebanese banks have been eagerly expanding their foothold around the globe over the last decade on the back of fierce competition and unstable political and economic environments. Banks succeeded in obtaining licenses across the Middle East, North Africa and Australia; from Algeria in the West to Iraq in the East. Lebanese banks’ current geographical foothold comprises more than 31 regional and international cities distributed over five continents, added to a wide correspondent banking network covering some 111 cities around the globe.
In this context, Credit Libanais’ corporate priority centres primarily on maintaining and improving its strong retail image in the market, spread over a domestic network of 66 branches, a branch in Limassol, Cyprus, two branches in Iraq (Baghdad and Erbil), a fully fledged bank in the Kingdom of Bahrain, a joint-venture bank in Dakar, Senegal, and a representative office in Montreal. Credit Libanais is also looking to tap new markets, with plans for additional expansions within the Middle East, West Africa, and Europe. Based on the panoply of factors mentioned above, the outlook surrounding the Lebanese banking sector’s future performance remains quite rosy.
Most economic experts are in agreement that Turkey has been playing an increasingly prominent role in the world economy, redefining itself as an attractive hub for foreign direct investment (FDI). The country is regularly talked about alongside the economically strong BRIC nations and has accentuated its appeal to foreign investors thanks to its resilience during the recent recession.
According to 2012 figures, global FDI inflows declined by 14 percent from 2011 to $1.4trn. High volatility in financial markets, macroeconomic uncertainties, the fiscal gap in the USA and euro crisis have all affected the slump in FDI. In 2012, the FDI projects volume in Europe shrank by 21 percent year-on-year as a result of the global slowdown. By contrast, Turkey expanded its market share and still ranked as one of the top 10 countries in Europe for FDI, with around $12.5bn in 2012 (see Fig.1).
Although project numbers for the world’s top five industries decreased in 2012, some promising industries – such as natural resources and renewable energy – increased in number. As far as Turkey is concerned, the construction industry is the most booming sector. It produced $1.3bn in 2012; four times as much as in 2011.
Global investors
In parallel with global indicators, Turkey’s FDI inflows have dropped by 23 percent to $12.4bn, a figure dominated by the finance and insurance area (41 percent). Apart from the service sector, manufacturing is the leading industry, accounting for 27 percent of all inflows. FDI real estate purchases, meanwhile, increased by 31 percent to $2.6bn. The UK is at the forefront of foreign investment in Turkey, with around $2bn. Following the UK are Austria, Luxembourg and the Netherlands, which have each contributed around $1.3bn to FDI in Turkey.
Sustainable growth, economic stability, and the improvement of laws and intellectual property rights have created an optimistic outlook for Turkey. The AT Kearney FDI Confidence Index moved Turkey up from 23rd place to 13th in 2012. Furthermore, the WEF Global Competitiveness Index ranked Turkey in 43rd position, whereas it stood at 59th in 2011.
As an emerging market, the Turkish economy is driven by developed countries’ economic conditions. Current financial uncertainties in the US economy resulted in a predicted decline in FDI from that country. In line with these circumstances, a 35 percent downfall in FDI was observed in Turkey in the first five months of 2013. It seems certain that the financial and political instability seen in recent months have been instrumental in retarding the country’s growth this year; however, some large volume transactions are expected to conclude (particularly on privatisations) in the last quarter.
Reasons for growth
In any country and in any economic system, political, legal and financial stability are indispensable in encouraging foreign investment. There are many factors at work behind the growth of FDI in Turkey, including the country’s geostrategic location and its young and dynamic population. However, these assets alone are not enough to attract foreign investors; you also need liberal legislation.
As far as Turkey is concerned, the construction industry is the most booming sector. It produced $1.3bn in 2012; four times as much as in 2011
Turkish financial reforms, which began in 2001, legal reforms made within the frame of EU candidature, and also new regulations in social security, have provided financial stability in Turkey. As a result of these reforms and bureaucracy minimisation efforts, a new FDI Code has been in force since 2003. This code provides a declaration-based system instead of a permission system. As a result, foreign investors do not have to obtain authorisation for the establishment of a company in Turkey. Moreover, the minimum foreign capital requirement of $50,000 has been abolished. Also, the new code does not require the establishment of limited liability or joint stock companies by foreign investors.
In addition to these legal developments, committees for improving the investment climate have been in action since 2001. These aim to bring international interest to the investment climate in Turkey by gathering opinions from other institutions’ representatives. Beyond these factors, bilateral agreements are also a reason for the growth of FDI in Turkey. Bilateral agreements facilitate foreign investments in agreement parties. According to the statistics, Turkey has been a party to 84 bilateral foreign investment agreements as of 2012.
Legal FDI framework
The advantages brought by macroeconomic and political stability are buttressed by the Turkish legal framework, which is designed to augment FDI (see Fig.2). The FDI Code provides several advantages to encourage FDI and protect the rights of foreign investors, all of whom are treated equally with domestic investors. Foreign investors are free to invest in any field of business without any restrictions. There has been increasing demand lately for foreign direct investors in the fields of energy, financial services, chemicals, environmental technologies, infrastructure, machinery and tourism. Foreign direct investments can be done by:
Establishing a new company/branch or liaison office of a foreign company. Foreign investors are able to establish new companies even with one shareholder as either joint stock companies or limited liability companies. There is no restriction regulated by law about the nationality of shareholders, so they can be either foreign or domestic.
Acquiring shares in a company established in Turkey (any percentage of shares acquired outside the stock exchange or 10 percent or more of the shares or voting power of a company acquired through the stock exchange).
Assets acquired from abroad by foreign investors are capital cash in the form of convertible currency bought and sold by the Central Bank of Turkey, stocks and bonds of foreign companies (excluding government bonds), machinery and equipment, industrial and intellectual property rights. Assets acquired from Turkey by foreign investors are reinvested earnings, revenues, financial claims or any other investment-related rights of financial value, commercial rights for the exploration and extraction of natural resources.
Foreign investors are able to transfer freely abroad: net profits, dividends, proceeds from sales or liquidation of all or any part of an investment, compensation payments, amounts arising from license, management and similar agreements, and reimbursements and interest payments arising from foreign loans through banks or special financial institutions.
With the FDI Code, corporate income tax was reduced from 33 percent to 20 percent and there are tax benefits/incentives in technology development zones, industrial zones and free zones which could include total or partial exemption from corporate income tax, a grant on employers’ social security share, as well as land allocation.
Future political prospects
The indispensable corollary of investment confidence is the political expectation that investment will take place. Markets value not only economic but also political stability. In that regard, 2014 might seem to be a particularly important year in terms of the political agenda in Turkey. Turkish voters will go to polls to decide on country’s new president and the local elections will decide who is going to rule the municipal governments in Turkish cities. This might seem to be another addition to already burdened Turkish politics after the incumbent government’s decision to suppress the Gezi protests which had started over a controversial decision to build a new shopping mall modelled as a replica of an Ottoman army barracks on the site of a public park in Taksim square. However, the latest polls covering the period between 10-19 August 2013 suggest, despite the widespread protests for Gezi, that Erdoĝan’s AKP party still commands slightly more than 50 percent of the overall votes, which is more than enough for the resumption of single party government.
What unites almost all of the political analysts from different political backgrounds, who rarely agree on anything, is that there is no serious and united opposition in Turkey that can challenge Erdoĝan’s rule. Even though the Kurdish issue is and has always been Turkey’s soft belly, expectations are running high that Erdoĝan might show resolve with regard to the peace process in exchange for the much needed support of the Kurdish opposition party BDP, to garner enough votes for the critical constitutional amendment that would transform the Turkish political system from a parliamentary to a presidential one. This would give Erdoĝan complete mastery of Turkish politics. Turkey will have local elections in 2014 and a general election in 2015, and is highly likely to witness the continuation of AKP rule, and the stable political situation that has lasted for more than a decade. And that is highly favourable for Turkish FDI.
Tax regulation has always been a contentious issue within the EU. Various tax regimes in different countries have forced companies to come up with creative tax plans which have left citizens vulnerable to excessive taxation. And as austerity measures endure across Europe, tax bills are on the up and viable alternatives for companies are scarce, making it difficult to operate in the region. There is a lot of national regulation to contend with, but the EU tax framework makes it a doubly complicated environment to navigate.
“Though no one will ever phrase it outright, the aim within the EU is to eliminate tax competition between member countries,” explains Thierry Afschrift, founding and Managing Partner at Afschrift Law Firm, a renowned Belgian firm with bases in Brussels, Antwerp, Madrid, Geneva, Luxembourg, Tel Aviv and Hong Kong. “So far, taxpayers, whether companies or individuals, have the freedom to establish themselves in a country of their choice – after taking into consideration its tax legislation. For instance, one may decide to work in Luxembourg because of bank secrecy or inventive regulations, or might choose to establish in Belgium because, for example, capital gains are not taxed under certain conditions. It is absolutely legal for taxpayers to make such choices, as long as their operations correspond to reality.
What is curious, is that while the EU works hard to protect competition, at the same time, when it comes to taxes, it maintains that competition is not a good thing
“What is curious, is that while the EU works hard to protect competition, at the same time, when it comes to taxes, it maintains that competition is not a good thing. This is not true: as in any field, healthy competition is always a good thing.”
Violations of privacy
Another issue that comes with eliminating tax competition between countries is that it often threatens the privacy of citizens. “Take bank secrecy, for example,” explains Afschrift, “it cannot be disputed that bank secrecy might be able to sometimes protect people who are carrying out illicit activities like fraud; the problem is that new regulation in Europe is too wide-ranging. A US private lawyer once wrote that when dealing with people’s private lives, one should use a scalpel. Nevertheless, this is not really an option chosen by our governments.”
So right now, an individual established in Belgium can be asked – under certain conditions too easy to fulfil – to provide the authorities with every document relating to their account, and if they do not do so, they can break the bank secrecy of your account. “That means that not only does the tax administration gain access to all your transaction history, they can also know how and where one spends his money in private – and that is a fundamental violation,” says Afschrift.
“This is not supposed to happen. And furthermore, once bank secrecy has been broken, and they see transactions between one company or person and another, then they can try to get access to other people’s accounts as well. It is a big problem for citizens because they cannot escape any more. From any point of view, it is evident that people’s rights are being eroded.
“The states’ policies all over Europe demand too much in taxes and social security charges from employers, making it too expensive to hire new employees. There are also charges to cover unemployment benefits, even if companies would rather have more employees. Before going any further, it is useful to be reminded that growth is close to zero, and that public finances are still managed improperly.”
Employer challenges
All over Europe governments are facing the same challenges. The financial crisis has left them struggling for cash, and taxes are a seemingly easy way to raise money. But, as with anything, there is a limit on how much citizens and companies are willing to put up with, as exemplified by the French tax exodus. This makes it hard to predict upcoming trends, but Afschrift is confident that not much will change in the next few months. “The main preoccupation in Europe right now is with information. From a political point of view it is difficult to keep demanding new taxes, so for the time being governments will likely pursue more subtle options,” he says.
The financial crisis has left them struggling for cash, and taxes are a seemingly easy way to raise money
“The idea is not to have new taxes but to broaden the tax base by trying to add concealed revenue. This way most measures taken will concern information, particularly data transmission between countries. We are now going further: at first it was just pertaining to revenues of savings, now we have included other financial products on the list. From 2015 – a bilateral agreement with Belgium will allow transmission of certain information from January 1, 2014 – Luxembourg will have to start transmitting data. Two or three years after that, they have already announced that information pertaining to accounts of residents living abroad will be divulged to the authorities concerned.”
In this context, those who are struggling to do business in today’s tough environment cannot afford to hire new employees, because that costs money… money they don’t have. Unemployed people still need a decent standard of living and are, thus, helped by the state, which also costs money. As a result, the state’s needs increase, yet at the same time the number of taxpayers able to contribute directly to the funding of the state decreases. Consequently, the existing taxpayers will pay more tax in order to compensate for the lack of new sources of income to the state. All these actions mean that most European jurisdictions are facing rising domestic tax bills; the austerity policy adds to the weight of the problem.
Incentivising growth
Speaking of his native country, Afschrift is scathing: “Belgium is a federal country, so there are federal tax rules, then there are regional rules, then provincial, communal… multiple taxations without end.
“This is a tough environment for tax lawyers who deal with businesses facing a number of issues. They increasingly have to get more and more creative in order to find legal solutions to people’s problems. But that creativity has limits. Furthermore, sometimes it is even difficult to foresee the problem that could affect the client. For example, the Belgian government has passed new ‘anti-abuse’ legislation. The new set of rules is so obscure that nobody is certain that authorities have a real sense of how it will be applied in practice. There is nothing worse than nonsense rules that cover every other rule in the tax code. The new anti-abuse rule ensures that while you abide by the strict legal boundaries of the law, if the tax administration feels that the way you conduct your affairs violates the spirit of the law – and here there is a distinction between the text and the spirit – then the operation may be disregarded by the tax administration, and taxed in accordance with the spirit of the law. The rule casts a shadow of doubt over every operation and suggests the tax code is no longer sufficient.”
What Afschrift is keen to emphasise is that there are ways to incentivise growth and boost the services industry without continuously raising taxes
Apparently, the real problem is that instead of trying to “create” new resources, the state’s policy is to draw more from existing ones. What Afschrift is keen to emphasise is that there are ways to incentivise growth and boost the services industry without continuously raising taxes. Asked about the new Fairness Tax on companies, Afschrift said: “This is an additional tax for companies of a certain size. It is true that this is not an additional withholding tax on dividends, but a tax on the benefit of the company: that means that there is actually an indirect effect on shareholders who will pay the same tax but on dividends calculated on a lower benefit.
Thus, additional expense will eventually prevent the company from hiring new people or making new investments. This is a structural problem of increasing taxation,” he explains. “I would prefer if the establishment of a new tax was inevitable, with the option of avoiding the tax if the company were to invest in development and/or employment. Those would be concrete measures, with durable effects. Of course, no authority can force anybody to invest or to hire new people, but they can say, ‘there is an additional tax to be paid, unless you spend an amount equivalent to the tax you should pay investing or creating new jobs’.”
French flight
The facts mentioned above undoubtedly create a challenging environment for companies and individuals operating in Belgium, especially given that the economic forecast for Belgium remains gloomy, with the growth forecast for 2013 remaining stubbornly stuck at zero percent. However, the Belgian tax regime is still appealing to certain companies, especially because of the interest that arises from the so-called ‘Belgian Holding’ regime.
Furthermore, Belgium’s tax regime is also appealing to wealthy foreigners, mainly from France, who flock to Belgium for several reasons. “The tax environment in France is as challenging as that in Belgium, the difference – for the time being – is that we don’t have a tax on wealth,” says Afschrift. “So, wealthy French individuals come here, also attracted to the fact that Belgium does not charge any tax on capital gains from shares.” The French ISF – which stands for Solidarity Tax on Wealth – will continue to drive wealthy French nationals to Belgium looking for fairer taxes. “The moment the French State decides to abolish the ISF, then this influx to Belgium might cease. Some French politicians have recently spoken of abolishing this tax, probably because wealthy people are leaving the country, but, for the moment, there is no official discussion on this subject”.
The ever-increasing range of tradable online financial product presents traders with a variety of choices. While choice and competition are obviously good for traders, it can lead to a somewhat daunting environment when trying to choose the best way to invest in the financial markets.
An increasingly popular form of trading is that of binary options, which are beginning to rival the forex markets. Made available to the market in 2008, binary options have grown to become a popular financial instrument for traders around the world.
Gathering a core understanding
According to data from Google, binary options took nearly half of the traffic from the traditional forex market in 2013. Although they are rising in popularity, understanding how they work is essential for all traders. With binary options, investors can profit from successful estimates of financial assets during a set period of time. With only two investment possibilities to choose from – up or down – a profitable trade only requires the minimal increment in price movement in the selected direction.
However, with so many companies starting to offer binary options, selecting one that is both trustworthy and experienced is vital. One company leading the field in breadth of product and quality of service is European-based HotForex, an award-winning foreign exchange and commodities broker. A team of industry leading experts caters to individual, corporate and institutional clients around the world, offering innovative and dynamic management of clients’ portfolio investments.
[W]ith so many companies starting to offer binary options, selecting one that is both trustworthy and experienced is vital
HotForex provides this new investment product packaged under the brand name OptionTrade, offering the same high standards of its current products. The internet, technology, mobile devices and advanced online trading platforms continue to be paramount to the widespread success of the online financial services offered at HotForex.
Binary options are a modification of a larger class of financial instruments known as options, classed below exotic options. In the financial markets, binaries are also known as digital options, all-or-nothing options, and are normally traded over the counter (OTC). As with traditional options, the outcome is determined by the price of the underlying asset at the expiry time. With digital options, the trader will never actually take ownership of the asset.
Straightforward trading
While exotic options are by definition known for their complexity, binary options are seen as a simplified version, particularly on the traders’ end in terms of functionality. The broker takes care of all the variables, and the investor is left with one primary question to answer: whether the underlying asset will rise or fall within a specific time frame. Only two outcomes are possible – making these exotic options binaries.
They are securities or types of investments with predetermined fixed returns and limited risk. An investor enters a position knowing exactly what the payoff will be if the trade is successful and the amount of loss incurred if the trade is unsuccessful. For this reason, binary options are also known as fixed return options (FROs). Essentially binary options are an alternative trading method that provide access to global markets with financial products such as currencies, commodities, stocks and indices, allowing for potentially high returns for correct market speculation.
They attract traders because of the way they allow them to make money in both a rising and falling market. Considered to be one of the simplest trading methods, the process of binary options is easy to grasp with high potential yields.
[Binary options] attract traders because of the way they allow them to make money in both a rising and falling market
The investor always knows the exact exposure and potential profit, removing any uncertainty at the time a trade is placed. The specific price movement of an asset is irrelevant for a successful outcome; only the direction is important – the volatile nature of binary options is what attracts many traders to them.
According to HotForex, traders wager on the direction of the market from the strike price by buying either a call or a put. At the time of expiry, the underlying asset will be either above or below the strike price. If a trader speculates the price will be above the strike price at the time of expiry, a call would be bought. However, if a trader speculates the price will be below the strike price at the time of expiry, a put would be bought. As long as the price of an asset is above the strike price, a call binary option is considered to be in the money; otherwise it is out of the money. The opposite is true for a put binary option.
Redefining binary options
While HotForex has been primarily focused on offering foreign exchange trades, it is enthusiastically integrating binary options into its portfolio of financial products. This is being done in line with its business strategy to continually deliver the latest financial products in the industry, as well as elevating the services through advancements in trading technology and innovation, with a strong focus on protecting client information, transactions, and funds.
Binary options at HotForex will be available to traders as a fully licensed and regulated options broker by the Cyprus Securities and Exchange Commission (CySEC), under the registered brand name OptionTrade. Some observers think that the extremely volatile nature of binary options poses too great a risk to investors. However, HotForex maintain that binary options are easily accessible to both novice and experienced traders alike, although they point out that traders should have both discipline and risk management strategies.
Concerns over binary options were addressed last year, when European regulator CySEC officially recognised them as financial instruments. Shortly after, OptionTrade became one of the first options brokers to acquire a cross-border license, ensuring a secure trading environment and the authorisation to provide this new and exciting investment service on a global scale.
Investors looking to diversify their investment portfolio with binary options will be able to trade online via a web-based platform, anywhere, anytime, without the need to download any software.
OptionTrade stands out from the crowd with numerous advantages including transactions, clients’ information and funds security, adherence to strict financial standards, cutting edge technology, dedicated client area for online account management, high liquidity, competitive risk management ratios, fast and secure payment methods and withdrawals at any time,without limits.
HotForex also provides a wide range of additional services to clients, including white label solutions and partnership programmes. The White Label solution is primarily focused for banks, financial institutions and consultancy firms tailored as per the needs of the clients.
They also offer their Introducing Brokers service, which is for both individuals and organisations that want to turn a profit from the forex market by introducing new business to HotForex.
Investors looking to diversify their investment portfolio with binary options will be able to trade online via a web-based platform, anywhere, anytime, without the need to download any software
Everything from trading platforms, transaction execution and settlement – as well as all the administration of the business – is dealt with at HotForex. Introducing Brokers benefits can earn as much as 60 percent of the net spreads based on the volume generated by the clients introduced. As an industry first, HotForex pays its IBs twice a month directly into their accounts.
A full ratio of services
The company is involved actively in a number of charitable initiatives with financial support to those in need. Born out of an intrinsic sense of responsibility, it directs its efforts through humanitarian organisations.
As of late its benefactors included the Rotary Club, the Red Cross and UNICEF who aid the less fortunate around the world. Anticipating the mobile-user of today, HotForex is one of very few online brokerage firms that optimised its trading services and products to the latest smartphones and tablet devices. A client can trade any financial product with one account and on eight different platforms. Utilising MetaTrader4 – the most popular trading platform in the industry – the firm enhanced the trading experience with interbank liquidity and fast trading execution ensuring the best trading conditions possible.
Known worldwide by traders from all walks of life with diverse investment needs and trading experience, the investment firm opens new accounts on a daily basis and is continually building stronger relationships with existing clients. At the heart of HotForex’s drive to offer the best possible trading environment is the steadfast support towards its clients and partners. Excellence in the offering of financial products is achieved through constant innovation, advanced technologies, and research and development.
The company believes this is essential to staying ahead of the curve and delivering products customised to today’s investors. It endeavours to develop ground breaking and exceptional products and services.
Binary options are merely one of the latest additions to the company’s product line-up and are certainly not the last. HotForex aims to design each product highly, with a strong dedication to satisfying the needs of its clients. By understanding the importance of investments, it will continue to aim higher when it comes to online trading, providing a state-of-the-art trading environment with the best trading conditions.
Despite the sophisticated legal framework currently in place, several Brazilian states and municipalities have been handling public private partnerships (PPPs) in a somewhat clumsy fashion. Addressing the matter of PPPs in Brazil with well thought out legal mechanisms to both securitise receivables and reduce tax impacts has become contentious, especially in the first phases of civil works in a PPP.
Lack of cohesive planning
Some recently released projects and those in the process of being approved by state and municipal governments within Brazil would have caused confusion among investors, and a resulting lack of interest from the private sector.
In that sense, one could argue that Brazil has a cultural issue rather than a structural or institutional one
Brazilian PPP laws – including some recent amendments dated from 2011 and 2012 – have useful, pragmatic and feasible legal mechanisms available to finance any long-term infrastructure concession. Government funds and budget limits have also been broadened. However, some investors still find this legal scenario incompatible with most on-going requests for proposals (RFP), as none utilise the most efficient statutory guarantee mechanisms for long-term debt finance.
In that sense, one could argue that Brazil has a cultural issue rather than a structural or institutional one. Perhaps the true difficulty lies with the Public Administration in accepting its share of risk regarding any project – avoiding due investment in market oriented policy for infrastructure industries.
One example of a legal mechanism that is ready and available to secure any PPP project and make it attractive to private capital is the advance payment of government considerations (as per section six, paragraph two of the Federal Law 11,079/2004, the Advance Payment Mechanism).
That is a kind of public funding associated with the deferral of income taxes throughout the concession term – where income taxes in connection with capital expenditure receivables are due along with equipment – property and plant depreciation and amortisation.
Another useful and safe mechanism is the possibility of state and municipalities to incorporate autonomous legal entities with the sole purpose of securing high liquidity assets as collateral for PPP projects (as per section eight, part V of Federal Law, 11,079/2004, Independent Guarantor Mechanism).
Well-constructed finance
If a project comprises of both mechanisms mentioned, all finance thereupon would, for instance, be easily structured, both from a Capital Expenditure (CAPEX) standpoint – which is the money spent on the improvement or purchase of fixed assets – and from an Operational Expenditure standpoint (OPEX), which is money a company spends on an ongoing, day-to-day basis, in order to run a business or system.
Therefore, if both CAPEX and OPEX are secured, interests would be lower, profits reasonable and public services would be available faster and more efficiently.
Considering that there is a direct correlation between OPEX and the value of the enterprise (when the OPEX decreases, while maintaining the same level of production and quality, the overall value of the enterprise increases) it’s questionable why Brazilian governments would even consider not applying such legal mechanisms which are so attractive to private capital – especially when the public sector greatly needs it.
We understand that the main reason for this apparent paradox is rather prosaic: public administration fears to take the risk. Governments prefer to use mechanisms that have no impact on their balance sheets, and let all finance risk with the private partner’s special purpose vehicle.
Governments prefer to use mechanisms that have no impact on their balance sheets, and let all finance risk with the private partner’s special purpose vehicle
For example, instead of incorporating an independent entity and capitalising it with high liquidity assets – the independent guarantor mechanism – most RFPs are limited to the receivables securitisation.
Usually these receivables are derived from the Federal Fund of Participation of States and Municipalities (FPE and FPM respectively), including monies that are not statutorily bound to any public service, as for example, import and export tax credits that are transferred from the federal government to state and municipal governments, as a compensation for tax exemptions.
By electing the FPE as the main source of security for PPP projects, governments seem to disregard the unconstitutionality and determination declared by the Brazilian Supreme Court (STF) to modify individual coefficients of each state receivable in the FPE.
If any or all projects used the advance payment mechanism or the independent guarantor mechanism, changes in the FPE coefficients would not threat the liquidity of securities provided thereupon – even if the resources anticipated or capitalised were to be paid in from the FPE.
Sharing the risk for greater gains
The concept is simple and old: project finance, either in PPPs or any other debt capital intensive project, depend on cash flow, hence fluctuations must be hedged. Both advance payment mechanism and the independent guarantor mechanism work this way – hedging the FPE securitisation.
Brazil has the legal tools necessary to attract private investment and deliver powerful infrastructure projects, and public administrators should make effective use of these existing mechanisms.
On the other hand, the private sector must take the lead and show the way, by helping and demonstrating why projects are more interesting and efficient when the public sector shares the risks with them.
Despite the hurdles associated with PPP projects, Brazil’s dynamism and forward-thinking characteristics have consistently provided investors with new opportunities to do business. That is also the case with respect to the recently enacted legislation regarding the pre-paid industry.Until the enactment of such new legislation, several electronic payment services, including pre-paid cards businesses, mobile payment solutions and digital currencies (or coins) were not subject to solid and specific laws or regulations in Brazil.
As from October 9, 2013, Federal Law 12.865/2013 put an end, to a certain extent, the legal controversy applicable to payment services in Brazil and formally recognised that all of those services and the legal entities responsible for their execution, including services rendered by the Brazilian payment card industry, are part of the Brazilian Payment System, as defined by the existing legislation.
As one may appreciate, Law 12.865/2013 established that the Central Bank of Brazil (BACEN) will have to shortly issue new rules to authorise, regulate and control the organisation and operation of payment businesses in Brazil based on the Brazilian Monetary Council (CMNs) principles and guidelines.
This is a unique opportunity to assist not only the private players within the pre-paid industry but also the regulators, and we trust that our company’s strong knowledge of the legal system applicable to the payment card industry, including its application regarding pre-paid cards, to be an asset and of utmost importance to help current players, as well as newcomers.
Running a company in Brazil is a challenge that comprises a wide range of different aspects, from cultural diversity to logistical trials, if we consider the country continental in extent. There are some other quite interesting challenges – among them its tax system. By considering it a federal republic, specific taxes are ruled by Federal Government, others are under the rules of the 27 states that form the country and then there are those related to the municipality.
With this structure, a particular aspect must be paid attention to: the tax burden is not equally charged all over the country, reporting important variations between states or cities. For those who are unfamiliar with the Brazilian tax system, it is worthwhile to take a look at the statistics below:
Main federal taxes
34%
Income tax + social contribution
VAT Federal (PIS+COFINS)
Main state tax
17-19%
VAT State – charged on goods and products sold (ICMS)
Main municipal tax
5%
VAT State – charged on goods and products sold (ICMS)
But avoid getting enthusiastic. The figures are just a broad-based summary of a complex system with many overcharges and with many distinguished rules. Various tax aspects that are repeated in most countries do not occur in Brazil. For example, consider federal and state VAT, which, with some exceptions, considers physical credit. In other words, the system allows the deduction of some materials physically added to the products or goods sold and some services consumed in the productive process. A long list of special situations is addressed separately and is under very careful analysis when admitting the purchase deductions.
In addition to this list we have the fact that VAT federal and VAT state taxes utilise a gross-up criteria where one is added to the basis adopted to calculate the other, as a kind of “tax cascade”. As an example, in São Paulo, the biggest state in Brazil’s economy, the VAT rate is 18 percent and this is added to the VAT federal basis rate, which is 9.25 percent. At first the result could be 27.25 percent, but according to the gross up criteria, it becomes 37.45 percent. Yet, if we take a look at the tax on services, a municipal duty, the rate is five percent, but with a cumulative peculiarity; adding taxes to each chain stage, and even worse, it becomes unrecoverable when the service is applied to any production process.
Easing complications
It is obvious that, regardless of what the Brazilian tax system comprises, it applies, with all its particularities, to all market competitors equally, in a way that it doesn’t give advantages to certain bodies, at least theoretically. This scenario could lead investors to think that the Brazilian tax system is not competitive because the conditions are equal to all competitors.
It is advisable to keep an eye out for the existence of two other taxation models: Lucro Presumido (assumed profit) and SIMPLES (national simplified tax system). Both of these systems charge taxes in a different way when compared to the mechanism described in the figures above and in certain market segments they do cause difficulties to competitors. They are optional taxation mechanisms, since the two can be used by companies reporting annual revenues of €26m and lower, for the first model and revenues of about €1.2m and lower in the second model.
Some other duties run in parallel: the great majority of the ancillary obligations that are linked to the taxes and the necessity the companies have in managing them raises the costs outrageously, mainly due to the head count required.
According to The World Bank’s Doing Business Group, those in other countries do not spend as much time dealing with tax bureaucracy as they do in Brazil. The average national business requires about 2,600 hours of form filling, registering entries in general ledgers, looking for consultancies, waiting in lines, and so on. For comparison purposes, in Switzerland the average time is 63 hours and in France 132. Because of this unaware investors believe that they need five times as many people to manage their taxes in Brazil as they do in Europe.
[I]t is important to remember that many non-tax aspects should get greater analysis, such as deciding between buying supplies in the local market or getting them abroad
And it is exactly this point that companies like Sevilha Contabilidade – Accounting and Consulting play a remarkable role, by offering efficient solutions and consulting to those investors wishing to get established in Brazil, but are not willing or can’t afford an oversized head count.
Clever economics
Last but not least, it is important to remember that many non-tax aspects should get greater analysis, such as deciding between buying supplies in the local market or getting them abroad: should we have the goods imported and distributed, or produced in Brazil? Or should we export services to Brazil or set a working team locally and have the services rendered there?
A misleading investor may perform an excellent analysis on a specific market, may develop excellent sales and distribution channels, and may have an excellent production cost, but without studying the tax implications of his decisions, there is a great possibility of jeopardising the investment feasibility.
For more than 25 years Sevilha Contabilidade has assisted many companies from many different countries in getting adjusted with the reality of doing business in Brazil, leading our clients to achieve better tax results, as well as to the whole accomplishment of the bureaucratic demands. The main objective is to provide opportunities to the investors, focusing their business needs and as a result, saving 2,600 hours or more unnecessary red tape.
China has entreated member nations of the IMF to give more power to emerging markets. The request was brought about after US lawmakers blocked the IMF’s move to reorganise power structures in favour of emerging markets. The change would give countries such as China, Brazil and India more weight in relation to the emergency lender’s operations.
Such restructuring has been in the pipeline for over three years and the US remains the only country not to have authorised the necessary changes. The Obama administration has continually pressured Congress to sign off on these changes, but Republicans have refused to cooperate.
Hong Lei, spokesman for the Chinese Foreign Ministry, indirectly criticised the US for its lawmakers’ inability to agree upon funding measures need to move forward. “Quota realignment is a significant decision made by the IMF,” said Hong in a press conference held on Wednesday. “Members of the relevant organization should step up efforts to implement the plan for quotas and governance reform and give greater representation and bigger say to emerging markets and developing countries in international financial institutions.”
In challenging the long-standing power structure of the US and Europe, China could be looking to create new alliances with developing markets
“I think the whole issue with the reform is political rather than economical,” said Managing Director at Global Intelligence Alliance UK, Aleksi Grym. When asked what the short term effects of such quota reforms would be, he replied, “none probably. It’s effect rather than cause. It’s really just a power play between the US and China.”
Developing nations have historically been suspicious of the IMF. In the early 1990s, the fund promoted privatizations that made the transition from communism more difficult and a few years later it cut budgets, worsening the debt crises in Latin America and Asia.
Such structural reforms are being discussed now that would position China as the third largest IMF member, while loosening the US’ tight hold on the fund’s voting shares. China’s championship of emerging markets might reach beyond an immediate increase in power for itself. “If you think about the IMF and its role, it’s all to do with crisis management. This is about how much influence China will have on emerging markets in terms of crisis, development and aid,” said Grym. Although the quota reforms have not yet been ratified, China has already begun exercising influence in future markets.
“China has offered selfless assistance to Africa mainly in the fields of economic and social development,” said Hong. “[China has] helped Africa earn development fund and promoted Africa’s ability of self-development and ability of bargaining in the international market.”
Greater say over the IMF’s quotas could have much larger implications in the future. Though China’s objectives seem clear, there could be another driving force. In challenging the long-standing power structure of the US and Europe, China could be looking to create new alliances with developing markets.
Just when this avowed socialist is belatedly taking steps to resurrect a moribund economy and save his presidency, he attracts the wrong kind of publicity by having a clandestine affair with an actress while living in the Elysee Palace, official home of the head of state, with his mistress.
Inevitably, the revelations of the dalliance with Julie Gayet – and the hospitalisation of the president’s shocked first lady Valerie Trierweiler – brought the spotlight back on to a largely ineffectual 18 months in office. London business newspaper City AM derided Hollande’s management of the world’s fifth-biggest country while citing “awful social problems” and “frighteningly high taxation”.
Je suis désolé? Francois Hollande looks sheepish yesterday at a press conference where he was quizzed about his alleged affair with French actress Julie Gayet. The allegations are likely to harm his already flagging popularity
And then after the French ambassador in London responded with an angry letter accusing the paper of “French bashing”, it brought down further opprobrium on the nation’s leader. The president “seems to manage his country’s finances as well as his personal affairs”, wrote Brooks Newmark, a Conservative MP and member of the parliamentary treasury committee.
Never a surplus Both of them have a point. The latest Global Competitiveness Report by the World Economic Forum ranks the home of “liberty, equality, fraternity” at a disastrous 130 out of 148 for its “regulatory burden”. As for the flexibility of its labour market, the country comes out at well over 100 on all counts.
Finally, on quality of government spending, it rates a poor 83rd. Since Hollande’s government spends 57 percent of GDP – over four percent more than the revenues it takes in, the implications are obvious, as they have been for years. In 60 years no French government has managed to achieve a surplus or seemed in the least interested in doing so.
As most other objective international organisations such as the OECD and IMF have long pointed out, France is a punitive tax-gatherer and a profligate spender. They have repeatedly warned Hollande to do something about it. And despite being known as the “president of high taxes” as well as the “imprudent president”, as L’Express magazine headlined after the latest bedroom revelations, he has against all predictions taken heed.
France is a punitive tax-gatherer and a profligate spender
Assault Although Hollande remains an unabashed fan of big government – “I am a socialist. I am not won over by liberalism, in fact quite the opposite because it’s the state that takes the initiative”, he said in January, he has listened to big business and quietly launched an assault on his country’s problems.
He’s taking the axe to crippling social contributions by business – this year they will pay €30bn less. And, incroyablement, he is committed to cutting public spending by €15bn in 2014 – and by a total €50bn between now and 2017, much to the fury of the more militant unions.
Simultaneously, an attack on red tape is supposedly under way. Hollande has promised to reduce the mountain of regulations under which French businesses labour. But, as Le Monde points out, he proposed something very similar – the still-awaited “shock of simplification” – back in 2012.
Also purportedly in the offing is a concerted attack on direct and indirect individual taxes, but nobody’s waiting up. Currently, France’s best and brightest spend more than half the year working for the government. Hence the stampede by wealthy French people to lower-taxed Switzerland.
Start-ups And yet France has the foundation for a recovery, if Hollande has the will. Despite the red tape, France attracted more foreign companies in 2012 than any other European nation. Indeed the US is one of its biggest investors. To boot, it’s a particularly favourite location for start-ups, in fact heading Germany.
Tourists don’t care about economics – France is the third-most attractive country for visitors after the US and Spain. And many shop at the five-star stores on the Champs-Elysees, showcase for a home-grown luxury sector that claims around a quarter of the industry’s annual global sales of €210bn.
Finally, far from spending half the day over cafes au lait while discussing football or cycling, French workers are, well, workers. They are officially the second-most productive in the world. Only Americans beat them, according to the OECD. Deeply family-minded, the French might have more days off but they more than catch up when they’re on the job.
Given that work ethic, the “imprudent president” may still have time to save the nation.
As tablet devices become more mainstream, the office printer sector is suffering. Eighteen months ago, OKI Group announced a three-year plan to refocus its print and imaging business, and double its sales. Takao Hiramoto and Terry Kawashima discuss the impact that mobile devices are having on the office printer industry, its strategy to explore niche markets such as graphic arts, and their plan to unify sales and marketing in Europe.
World Finance: Hiramoto-san, if we could start with you, and the big picture for OKI Data Corporation. You’re halfway through this three-year plan; what position was OKI in, 18 months ago?
Takao Hiramoto: For a long time, OKI’s business domain was office printers; you know, computer printers. But we are facing some technology changes, like smartphones and mobile devices. So because of that, we are going to shift from the office printer sector, to office solutions areas; and also the professional area, those vertical areas.
Just now we are facing the challenge that the number of computers is decreasing. So that’s why, according to the IDC Report, use of SFPs – single-function printers – is going down. But on the other hand, use of MFPs – multi-function printers – is still growing. And also the office solution areas, like copier manufacturers, those areas are very flat. So we are very interested to go into the growing areas, with our LED technology.
“We are facing some technology changes, so we are going to shift from the office printer sector to office solutions and the professional area”
World Finance: Terry, if I can turn to you, tell me more about the strategy. What’s OKI’s focus now?
Terry Kawashima: We have the strategy of a, increasing our penetration in our core office print market; b, strengthening our presence in the office solutions market; and c, we have a big opportunity in what we categorise as the professional printing market.
We work very very closely with channel partners and end customers, and we have very strong feedback from customers. So we have identified those opportunities through a few channel partners that, this is a niche market, but with your machine you could probably address it, if you fine-tune here and there.
And it’s not really that we have thought about application at R&D, it’s the customer who tells us what we can do. And that is our strength.
World Finance: You’ve spoken about the need to unify your sales and marketing; is this an important part of the three-year plan?
Terry Kawashima: I think so, I think Hiramoto-san would agree to that! When I was appointed the Managing Director of OKI Europe, one of the tasks that I was given by Hiramoto-san is really to drive the business through marketing. Hiramoto-san has a very strong philosophy that marketing should be the core of driving the business around the strategy that the company establishes.
We have very capable teams across Europe, very talented people, very loyal; and they have done a lot of work on their own market. But we have been a little bit too independent from each other. So one thing that I thought we should do is to really integrate activities between us all, and benefit from each other, rather than compete.
“We should integrate activities, by working very closely together and have one face across Europe through integrated marketing”
So we have formed a channel marketing team, basically consisting of only a few staff at headquarters, but involving key marketing people of all the operating companies across Europe. And I am expecting that six months, 12 months from now, we will start to see fruit of this working together.
This is not a cost-reduction exercise: obviously that could come as an additional benefit, but I’d rather ask Hiramoto-san to allow us to make additional investment using that saving, and bring more impact to the market by working very closely together and have one face across Europe through integrated marketing.
World Finance: Back to you then, Hiramoto-san. Is this sales-marketing unity key, and how big a role does Europe play in OKI’s global plan?
Takao Hiramoto: For OKI Data and OKI, the Europe market is very important, because 40 percent of OKI’s revenue comes from Europe. So Europe is a very important market to our business. So we are directed to invest more in European areas, and also as Terry said, we have a very strong sales organisation, and also we are going to add such a marketing force to combine not only individual countries, but also collaborate with each other. And this will eliminate indirect and extra costs, and will make a very effective operation in the future. So we are very expectant for the future.
