The case for increasing Peru’s private pension system investment limit

Since its creation in 1993, the Peruvian private pension system (PPS) has gained importance at a national level. In 2017, all the investment companies within the PPS, which are otherwise known as Administradoras de Fondo de Pensiones (AFP), managed a total of approximately PEN 140bn ($43bn) in assets. This figure represents 20 percent of Peru’s GDP and 40 percent of savings in the financial sector. It’s a substantial increase from recent times; in 2000, for example, the PPS managed around PEN 40bn ($12bn), or five percent of GDP.

The elevation of the limit to foreign investments has not only diversified risk, but has also allowed the PPS to attain higher returns

Given its importance, the PPS is subject to strict regulations and limits, which are aimed at mitigating agency problems and controlling risk, both at the systemic (macroeconomic) and idiosyncratic (microeconomic) levels. Specifically, the regulation imposes limits based on asset class, economic sector, group or entity, and by issuance, among other variables. In addition, foreign investments by the PPS are constrained by the ‘operative’ limit fixed by the Central Reserve Bank of Peru, with a maximum given by the ‘legal limit’ established by Congress. Nowadays, the operative limit is 48 percent, while the legal limit is 50 percent. This situation implies that the central bank has a narrow margin before the operative limit hits its legal maximum.

At Prima AFP, we believe that increasing the legal limit for foreign investments will improve both the degree of diversification and the long-term returns of the PPS. At the same time, such reform will give more degrees of freedom to the central bank, thereby enabling it to adjust Peru’s international investment position, which in turn will enhance its financial stability. Finally, it is worthwhile to mention that the elevation of the legal limit does not jeopardise the supply of local funding, or the development of capital
markets in Peru.

Diversifying risk
One of the main benefits of increasing the limit to foreign investments is the gains that can be achieved from the diversification of risk. Almost 20 years ago, the PPS’ limit to foreign investments was around 10 percent, and so it mainly held local assets. In such a situation, the diversification of risk was accomplished by a set of limits (otherwise known as ‘ceilings’) on asset classes, economic sectors and individual entities.

As those limits were reached, the PPS portfolio approached the composition of the market portfolio. Under these circumstances, if the economic situation in Peru had deteriorated, then the PPS’ returns would have deteriorated as well. Therefore, the only way to diversify that risk was through the elevation of the limit to foreign investments. In other words, thanks to the increase of the limit, the PPS’ portfolio acquired exposure to factors that differ from those affecting the Peruvian economy.

Nonetheless, given the size of the Peruvian economy at the global level, a 50 percent limit still exposes the PPS to significant risk. This means that the potential gains from diversification, although lower than in the past, are still substantial. Three types of risks are diversifiable: first, risks related to fluctuations in the international prices of minerals (Peru’s main export); second, risks caused by domestic economic and political conditions, which includes issues such as corruption and political instability; and third, risks caused by natural phenomena, such as the El Niño-Southern Oscillation and earthquakes. Peru’s geographic location exposes the country to significant disaster risks, which can have severe and persistent economic and social effects.

Raising the bar
In the past, the elevation of the limit to foreign investments has not only diversified risk, but has also allowed the PPS to attain higher returns. Given its increasing size (as explained by a relatively young population and a growing economy), the demand for financial assets by the PPS has outpaced the local supply.

This situation, combined with the aforementioned regulatory limits and relatively illiquid local capital markets, can deteriorate the long-term returns of the PPS. For instance, in 2000, when the operative limit was only 7.5 percent, the percentage of PPS funds invested in local liquid and safe assets (such as deposits and central bank certificates) was around 25 percent. A similar situation occurred in 2013, when those assets represented around 10 percent of the PPS’ funds and the operative limit was 34 percent. If the limit to foreign investments were not elevated, a substantial share of the PPS’ funds would have been trapped in assets with low long-term returns. Unfortunately, even at the current limit of 50 percent, it is not possible to rule out such an outcome in the future.

Increasing the legal limit provides additional tools to mitigate monetary and financial instability. Given the limited depth of Peruvian capital markets, foreign capital flows can exacerbate the fluctuations both of Peru’s foreign exchange rate and of other financial assets. In response, the central bank has tended to elevate its operative limit in moments of abundant foreign capital inflows.

As such, the central bank has eased the extreme volatility of demand for local securities and, hence, it has avoided their overvaluation. Therefore, the elevation of the legal limit to foreign investment gives the central bank the option to lean against the wind of capital inflows, without using its international reserves. If the legal limit is not increased, the international reserves management of the central bank will bear the burden of foreign capital inflows, which in turn could increase the fiscal cost associated with their sterilisation.

Outweighing the risks
The elevation of the limit to foreign investment will neither limit the local supply of funding nor endanger the development of Peruvian capital markets. First, given its financial integration into the rest of the world, the Peruvian economy has access to foreign financing sources that can substitute local ones.

Second, the external limit is a ceiling, not a floor, to foreign investments, and thus does not restrict the repatriation of funds by the AFPs. In fact, in periods of financial turmoil, during which non-residents suddenly and unexpectedly withdrew their funds from local markets, PPS managers (together with other institutional investors) increased their appetite for local securities. For example, as a result of the volatility in international bond markets in 2013, the participation of non-residents in the holdings of Peruvian government bonds went from 70 percent to 57 percent in just one year.

Third, for reasons already explained, the previous increments of the operative limit have not threatened the capacity of the PPS to invest locally. This includes investments into projects that are a priority for Peru’s ongoing economic development, such as transportation infrastructure. Finally, international evidence indicates that the policies aimed at developing a deep and efficient capital market have nothing to do with keeping institutional investors captive locally.

The operational limit to foreign investment by the PPS has now come close to its legal maximum. This means that the investment opportunities for the Peruvian PPS will soon be constrained. As a consequence, the risk-adjusted returns of the PPS will be impaired. Moreover, the central bank will lose an additional tool with which it can lean against foreign capital inflows. Given these factors, it is therefore advisable to increase the legal limit. It is worth noting that doing so will not jeopardise either the local supply of funding or the development of capital markers, as long as the central bank progressively adapts its operative limit to the new legal maximum. Politically, it is clear that the key player in this important reform is the 130-member Congress of the Republic of Peru. With its support, the PPS can keep developing – to the benefit of Peru’s growing economy, as well as its investors, both near and far.

Embracing the march of digitalisation in Turkey’s burgeoning banking sector

Last year was a period of recovery in global macroeconomic indicators. Positive trends in the world’s growth and inflation outlook supported sentiment towards emerging market economies – indeed, funds flowing into emerging countries exceeded $200bn. Turkey stood out among these economies, particularly given its strong GDP growth, which saw it attract a considerable volume of foreign fund flows.

Customers’ needs and expectations are continuously evolving and reshaping in harmony with technological advancements

Turkey’s GDP growth reached 7.4 percent at year-end 2017, compared with 3.2 percent in 2016. However, this robust domestic demand repressed inflation. Together with the currency depreciation, headline inflation rose to 11.9 percent in the same year. As a response to inflationary pressure and volatility in the Turkish lira (TRY), the Central Bank of the Republic of Turkey (CBRT) maintained its tight stance, with average funding costs increasing by around 450bps in 2017. Despite the rise in interest rates, revitalisation in economic activity and active balance sheet management supported the banking fundamentals, with the sector delivering better results than expected.

Despite the outstanding performance of 2017, Turkish banks still have significant room for growth. Although penetration rates for banking products have increased significantly since 2002, they are still low compared with figures in the eurozone. More importantly, the unbanked population is quite high in Turkey; more than 40 percent of the adult population do not have an account with a financial institution.

Strategic priorities
In line with the aims of Banco Bilbao Vizcaya Argentaria (BBVA), Garanti’s majority shareholder, the bank will continue to focus on customer satisfaction. Garanti will bring a new age of opportunities to its customers by offering them the best banking solutions.


Turkey’s GDP growth at the end of 2017


Turkey’s GDP growth at the end of 2016

Customer experience is a priority for Garanti. This is even more important in today’s ever-changing environment, which is accelerated by technology. Boundaries between industries have already blurred, and digital business models create the new norms for all business areas. Solutions that delight customers easily become the standard not for a specific category, but for all. At Garanti, therefore, we see the customer experience as the most important element for strengthening our competitiveness and differentiating us in our industry, as well as from other markets.

On that note, digitalisation is one of the global trends that deeply influences every part of life. Digital transformation is driven by developments in many different areas, from the Internet of Things and cloud technology to big data and artificial intelligence. As internet access and smartphone usage become far more widespread, customers are turning away from traditional methods and changing their preferences in favour of more simple, useful and timesaving channels that they can access anywhere. Therefore, it is now more important than ever to deliver a customer experience where customised solutions are offered and, indeed, go a few steps beyond simply meeting customer expectations.

Our new branch service model, which has been recently launched, represents a new era in the Turkish banking sector and reflects digitalisation in its branches. With the aim of creating a seamless, omni channel experience to ensuring similar customer experience across all channels, Garanti started to approve its products and services digitally in branch processes. With a universal banker that provides both cash transactions as well as advice from a single point of contact in the lobby, accompanied by digital screens for customer use, Garanti enables the best service and customer experience.

A leading position
In 2017, Garanti welcomed 73 million customers in its 948 branches, which are spread throughout Turkey, offering them a wide range of products and services to meet their financial needs. There is nothing coincidental about the fact that we have ranked number one in the net promoter score among peers for two consecutive years.

We continue to maintain our leading position among private banks in consumer lending. With its effective delivery channels and successful relationship banking, Garanti’s market share in retail lending among private banks increased further in 2017.

While supporting its customers in a growing economy with a young population, Garanti secured a 19 percent annual growth rate in consumer General Purpose Loans (GPLs). Noteworthy was the significant increase in digital sales within total GPL sales: at the end of the year, the ratio climbed to 78 percent. Mortgage Expert Garanti, meanwhile, sustained its leadership in mortgages among private banks with an annual growth of 10 percent.

As a pioneer in digital transformation for more than 20 years, we have now reached a point where we can bring banking services to our customers – wherever they are located – and serve Turkey’s largest digital customer base with close to six million active customers.

In our actions, we are guided by the principles of trust, integrity, accountability and transparency towards all of our stakeholders. Furthermore, our efforts in supporting financial literacy, health and inclusion have touched the lives of the almost 810,000 customers who have started using our savings products.

We have a solid and long-term strategy built on a combination of technology and human factors, which are the key determinants of our age. We execute our customer experience strategy with the aim of making our customers’ lives easier, looking after their financial wellbeing, assisting them in making conscious financial decisions, helping them to grow their business in a sustainable manner, and providing access to financial services for everyone.

Garanti certainly finds itself in a commanding position, a position it continues to strengthen, which in turn benefits its customers, both big and small.

Chinese investment in Pakistan’s infrastructure drives real estate growth

The Pakistani property market has experienced growing interest in recent years, largely due to close international ties between China and Pakistan. In 2013, Chinese President Xi Jinping announced the China-Pakistan Economic Corridor (CPEC), a $62bn project to develop Pakistani infrastructure and energy. With better access to cities across Pakistan, investors are seeing more opportunities to build on the land near these new developments. CPEC projects include the $2.8bn Peshawar-Karachi Motorway, set to open in August 2019, and the East Bay Expressway in Gwadar Port in the south, which is due to be completed later this year. Both will dramatically help to facilitate real estate developments on previously barren land.

Real estate has become an attractive option for investors: numerous housing schemes are launched with the promise of 10 to 40 percent returns

Rather than building in megacities like Karachi, investors are taking their money to more peripheral locations in order to create urban clusters on formerly agricultural ground, a move that is known as ‘peri-urbanisation’. “The landscape has visibly changed with the proliferation of housing societies and gated housing enclaves moving along highways towards secondary cities,” according to Anjum Altaf of the Lahore University of Management Sciences. As a consequence, investment in residential property increased from five to seven percent between 2015 and 2016.

Luxury appetites
Pakistan’s growing middle class is a major driving force in the rising popularity of these gated housing communities. Luxury development projects, carried out by companies like Bahria Town, DHA City and the Fazaia Housing Scheme, for instance, are some of the most sought after – by those who can afford them.

The rising number of luxury developments, however, is not solving the housing gap currently bedevilling Pakistan. With a population of almost 200 million people, Pakistan is suffering a shortage of 12 million houses. Karachi, with its behemothian population of 16.6 million, has an annual shortage of 300,000 houses. “It’s not about the catering to actual demand or housing shortages. It’s much more about the tastes of richer Pakistanis,” Aisha Ahmad, a research student from the University of Oxford, told World Finance.

Lucrative real estate
Real estate has become an attractive option for investors: numerous housing schemes are launched with the promise of 10 to 40 percent returns. Meanwhile, FDI has also been made easier as a result of measures introduced by the government in 2013. These include a new open entry system, which waivers pre-screening and government permission for investment into real estate. Furthermore, investors are no longer limited on the transfer of ownership or entitlement to lease land unless they breach federal or
provincial regulations.

These measures have encouraged foreign investors, and Pakistani expats in particular, to pour money into the housing sector. At present, much of this FDI comes from Egypt. Serving as an example of this is a new $2bn real estate development just outside Islamabad – the first of its kind from Egyptian billionaire Naguib Sawiris. Once finished, the complex will cater to every need of its occupants, providing everything from luxury housing units and schools to hospitals. “That’s what every Pakistani housing scheme coming from FDI looks like. They all tout the same thing: the American dream for Pakistani citizens,” Ahmad explained.

Rocketing prices
In the past six years, average house prices in Pakistan have more than doubled. This exponential rise can be linked to file trading – the documentation of unplotted barren land that does not give ownership rights. According to Ahmad: “Most real estate agents and property dealers are not selling people homes – they deal with each other. They sell each other files, and they’ll buy up an entire block in a housing scheme that’s yet to be announced or even developed on. So when investors come in, prices are already pretty high.”

Consequently, foreign investors remain keen on Pakistan’s real estate sector. According to data from Business Recorder, FDI in Pakistan increased by 132 percent to $340.8m in February, compared with $146.7m 12 months prior. The largest segment of FDI – $86m, to be exact – was pumped into the construction sector, which is hardly surprising given the attractive returns on investment.

Thanks to Chinese funding in roads and motorways, investors now have access to untapped plots of land upon which residential property can be built. This trend seems set to continue in the near future, thereby facilitating the continued growth of Pakistan’s burgeoning real estate sector.

Immedis: Payroll software in the cloud; payroll experts on the ground

In the first half of our interview with Immedis, directors Patricia Khalifa and Barry Flanagan explained the complexities that global payroll departments face, and how the iConnect dashboard can help. Now they dive deeper into how: by leveraging robotic process automation they can reduce the amount of manual collection, inputting, checking and verification of payroll data every month, and give departments two days of time back every payroll cycle.

Patricia Khalifa: Immedis is the fastest-growing global payroll technology company in the world. We provide multinational organisations with a secure, cloud-based payroll management platform called iConnect: providing a single global oversight of what’s happening on a payroll basis around the world, giving CFOs real-time information on what’s happening with gross-to-nets, and also with employer costs, pensions and healthcare contributions in each country.

World Finance: And you’re also bringing automation into this process.

Patricia Khalifa: Yes – in payroll there’s a lot of tasks that are quite repetitive. Data is collected, it’s input, it’s checked and qualified and verified in the system. And this can be quite manual, and it is a repetitive process each payroll cycle.

What we have done is introduce robotic process automation into the software, so that these checks and validations of data happen instantly once a client sends through their data to Immedis.

This speeds up the overall payroll cycle, and allows the payroll team more time to actually verify and check their information every month, so that the payroll cycle improves in accuracy and the overall speed is improved also.

World Finance: So what effects does that have on the payroll cycle?

Barry Flanagan: Effectively what it allows us to do is to elongate the time for the collation of data. So we’re getting a higher quality, later data feed in from our clients. Then we are compressing the payroll processing time, which then allows for our clients greater time for checks. So we’re getting better quality information up front, and we’re allowing a lot longer period of time for them to validate the results that we send them out, pick up on any errors, and therefore you’re getting a better quality output – which of course reduces the amount of time you need to spend next month on fixing the previous month.

They’re then able to spend it on a value-add activity. So instead of spending time reviewing, they can actually spend their time much more on data analytics and reporting. So effectively we’re equipping the payroll specialists in our client companies with the ability to produce bespoke, well-designed digestible board-of-director level reports. So we’re moving them away from retrospective reporting, and into much more progressive and prescriptive analytics.

World Finance: While you can achieve all of this through software, it’s important that it’s backed up by international, expert understanding of employment taxation and regulation.

Barry Flanagan: Yes; while we’re extremely proud of our tech, we’re not a tech company. We are a service company that has the best technology. So this tech has enabled our teams, rather than replaced them.

I think that most people who work in global payroll will know that you’re never going to replace the skill and expertise that a global payroll experienced professional will bring. So while we have our software in the cloud, we have made sure that we retain our experts on the ground.

In every jurisdiction that we operate in, we have local, qualified experts who are performing qualitative reviews on all outputs, to ensure compliance.

Skilled, qualified experts are at the heart of everything that we do.

World Finance: So what does the future of a global payroll operation look like?

Barry Flanagan: The future is in effect already here; a best-practice global payroll function is a service-led function, enabled by technology. It has multi-jurisdictional reporting capabilities, and it has to be instantly and efficiently scalable. So if they are the elements that you’re looking for, you’ll find them with Immedis.

World Finance: Barry, Patricia; thank you very much.

Patricia Khalifa, Barry Flanagan: Thank you.

How to unify global payroll reporting in a single secure dashboard

As companies expand overseas, it’s not uncommon for local payroll departments to be working to completely different reporting and compliance standards, using widely divergent systems and processes. Immedis helps businesses get a global understanding of their payroll and employment tax obligations with its cloud-based payroll management software iConnect; directors Barry Flanagan and Patricia Khalifa discuss the complexity that businesses face, and how iConnect can help. Watch the second half of this interview to find out how Immedis can give payroll departments two days back every payroll cycle.

World Finance: Barry, just how much can payroll requirements vary from country to country?

Barry Flanagan: Well the basics remain fundamentally the same; you usually have a gross pay, deductions, and then net pay. However once you get into the detail, there is just a huge variety.

So you go from regimes which actually don’t deduct tax at all like Saudi Arabia, to regimes that have a flat tax like Bulgaria. In Belgium for example, accountancy firms won’t actually process a payroll because it is so complex: there are such a huge amount of social insurance deductions there you have to go to a very specialised firm.

France is just about to bring in a system whereby they actually withhold at source. Previously it was quarterly withholding in arrears, and Singapore would have also had arrears – but it’s the following year that you pay your tax.

So while broadly they all follow the same pattern, the variance between jurisdictions is enormous.

World Finance: And with all these varying reporting and compliance standards, there’s no easy way for companies to get a global understanding of their payroll.

Patricia Khalifa: Exactly. I mean, typically what we see is that organisations deal with multiple vendors or suppliers in each different country that they operate in. And what that brings is a lot of complexity. Each different country and each vendor that they work with will have different reporting formats, different standards of how they supply information.

While that may be okay on a local level, for regional or global level directors it’s a real headache to make any sense of that information. And what happens is, the payroll team then has to spend huge amounts of time unpicking that information to make sense of what’s actually happening at a company level.

This is a big issue because the payroll team has a finite amount of time to play with. The payroll calendar can’t change – information has to be supplied at a certain time, it has to processed and reviewed and checked, and payments need to be made to people’s bank accounts at the same time every month because they’ve got their bills to pay.

So a lot of time being spent trying to make sense of information from lots of different countries is just time that payroll teams don’t have.

World Finance: So how does Immedis unify all of this data and give companies a centralised, global understanding of their payroll?

Patricia Khalifa: Our global payroll platform iConnect is a cloud-based platform, and it integrates with organisations’ HR and finance systems so that data flows securely into our software to manage the payroll.

The platform is a payroll-management software tool, but it’s also a business intelligence platform. And what it does is, it consolidates global payrolls across the world into one single view, giving single oversight into what’s happening in any country around the world.

What that means then for a CFO is that on a single dashboard they can see the overall company’s gross to net pay, they can see employer contributions, pensions, and healthcare at a global level. And what that really allows you to do – because it’s standardised on a single company currency – a CFO can actually see in real time what’s happening in the business from an employee and payroll perspective.

Saint Kitts and Nevis continues to prove an alluring choice for second citizenship

What options are available to those people limited by the nation in which they were born? They may seek to relocate through their career or, in some cases, attempt to trace their family tree and obtain rights to an alternative citizenship. For those unable to follow these more traditional paths, however, citizenship by investment delivers a ready-made solution.

While gaining citizenship to Saint Kitts and Nevis is certainly contingent on an investment, it is, above all, conditional on the applicant’s good character

Citizenship by investment is the process of obtaining citizenship by making a significant contribution to a nation’s economy. The process is forward-looking, with applicants contributing to the future prosperity of a country, rather than demonstrating a historic link to its people or institutions. One nation in particular can be credited with the conceptualisation, development and extension of citizenship by investment: the Federation of Saint Kitts and Nevis.

A twin-island nation located in the Caribbean Sea, Saint Kitts and Nevis launched its citizenship by investment programme in 1984 – one year after obtaining full independence from the UK. Since then, it has refined its offering, providing a second citizenship that is widely recognised as the platinum standard by investors around the world.

Consistent evolution
Saint Kitts and Nevis has been leading the economic citizenship segment for more than 30 years, yet at no time has its citizenship process been more appealing than it is today. Previously, aspiring Kittitians and Nevisians could donate to the Sugar Industry Diversification Foundation – with donations starting at $250,000 for a single applicant – or invest $400,000 in pre-approved real estate to be held for a minimum of five years.

As of March 29, however, these programme staples have been surpassed in popularity by two new options: a $150,000 contribution to the recently established Sustainable Growth Fund (SGF) or a $200,000 joint investment in pre-approved real estate valued at $400,000 or more.

The SGF option is particularly noteworthy, as it aligns Saint Kitts and Nevis with the UN’s Sustainable Development Goals and seeks to redirect funds to projects fostering climate resilience, education and medical advancement, among others. It also caters to large families, with each family member requiring a $10,000 contribution. The sole exception to this rule is the investment required from the spouse of the main applicant, who must contribute $25,000.

Checks and balances
While gaining citizenship to Saint Kitts and Nevis is certainly contingent on an investment, it is, above all, conditional on the applicant’s good character. Saint Kitts and Nevis is famed for its extensive security and vetting procedures, with due diligence performed by both the government and independent specialist risk analysis firms at every stage of the multi-tiered process.

Files are also reviewed by international law enforcement agencies and checked against a number of sanction lists. Further, there is room for economic citizens to have their citizenship revoked if they are later found guilty of providing misleading information or committing crimes at odds with the government’s rule of law.

By these methods, Saint Kitts and Nevis has safeguarded the reputation of its programme, its people and its future citizens. The security and subsequent strength of the citizenship by investment programme is also apparent in the diplomatic relationships that are continually being forged by the Federation to ensure its people have the greatest possible mobility.

True citizens
In addition to strict due diligence and safety guarantees, Saint Kitts and Nevis promises applicants a straightforward – yet sophisticated – application process with prompt turnarounds. Applications typically take around three months to be actioned, but a commitment to meeting the market’s requirements can expedite the process.

Unlike any other jurisdiction, Saint Kitts and Nevis also offers the Accelerated Application Process (AAP), which ensures all steps for the acquisition of citizenship – including the issuance of a passport – are completed in 60 days or under. Furthermore, there is no need for investors to reside in the Federation or speak English, and applicants are not required to be familiar with the local history, traditions or customs.

Saint Kitts and Nevis regards foreign investors as essential cogs in the engine of its development and, as such, puts economic citizens on par with those who obtain citizenship by birth, marriage or lengthy residence. Economic citizens who choose Saint Kitts and Nevis, therefore, are choosing a strong government with an equally robust legal system, sound investment opportunities in a thriving economy, and a peaceful home in paradise.

Kamakura Corporation champions a holistic approach to credit risk modelling

To measure and manage your risk, you need to do three things well: define and quantify a company’s financial distress; understand the time horizon of the risks you’re taking; and understand the drivers of potential default. At Kamakura Corporation, we are strong advocates of using quantitative tools to answer these questions. Specifically, we use reduced form models, which provide easy visualisation of everything you need to know.

Kamakura’s Risk Information Services monitor a global index that contains over 38,000 businesses spread across 62 countries to analyse default probability reports and other financial predictions

Financial distress is defined as the elevated probability that a firm will fail to meet its financial obligations, but elevated probability isn’t a very helpful measure when you’re assuming some of the risk. To quantify the distress level, you can use a variety of tools, including fundamental research, credit scores and reduced form models.

Many of these tools have their limitations. Credit scores have an ambiguous time frame and do not answer the question of what is driving the default risk. Forecasting introduces biases. Financial information, while useful, is backwards-looking.

Looking forwards
When you’re driving, you use your rear-view mirror frequently, but you spend most of your time looking through the windshield. Identifying and quantifying financial distress should be a similar process. That means you need a tool that can incorporate history, while also focusing on forward-looking factors. Reduced form models, like Kamakura’s Risk Information Services (KRIS), allow you to do this. KRIS can be used to monitor a global index that contains in excess of 39,000 businesses spread across 68 countries. With such a wealth of data to draw from, it is easy to analyse default probability reports and other financial predictions.

Risk managers, investors and financial experts can then examine this sophisticated analysis as a key part of their decision-making process. It is, therefore, an essential tool in understanding which businesses to support and which ones are too risky to back. Crucially, a reduced form model like KRIS is sophisticated enough to incorporate a complete set of inputs and can provide a probability of default that corresponds to specific time frames.

Logistic regression models allow the user to calculate the most accurate predictions of default probabilities for a given set of inputs. The Kamakura models use company-specific information as well as macro variables (company accounting and market-based variables, along with interest rates and indicators of macroeconomic conditions) to deliver a default probability that can be used to directly assess a company’s risk. Further, a nested family of logistic regressions produces a highly accurate term structure of default.

Our current version of KRIS is version 6.0. This version benefits from the addition of nearly 500,000 observations compared with the previous database. The addition of more than five years worth of incremental data in the aftermath of the credit crisis has dramatically enhanced the insights that our models bring to users. Observed company failures, for instance, are 31 percent higher than with our previous model.

The credit crisis that occurred between 2006 and 2010 was the most severe crash to occur during the span of the Kamakura modelling database; the data shows that financial institutions and other highly leveraged firms were the most vulnerable in a crisis. Moreover, the search for yield over the past years has led many investors to high-yield investments and longer durations, which necessitate improved risk management practices by portfolio managers. We encourage our clients to utilise KRIS as much as possible so they can understand how reduced form model tools can help them to evaluate historical inputs and forward-looking inputs, and their various correlations to default risk. You can also analyse all these variables within a specific time horizon.

Finding fault
Before you perform any in-depth analysis, it is helpful to know which firms have already been identified as having an elevated probability of failing to meet their financial obligations. At Kamakura, we use a ‘troubled company index’, which shows the percentage of 39,000 public firms with a default probability of more than one percent. An increase in the index reflects declining credit quality, while a decrease reflects improving credit quality.

Of the firms in our coverage universe, 10.63 percent had a one-month default probability of more than one percent as of April 3, 2018. As credit managers, we want to be forward-looking. We use analytics to create an expected cumulative default rate, and we have further refined the list to focus on the rated companies in our coverage universe. Interestingly, our analysis shows that while the risk of financial distress in the short term has been low and stable, the default risk in the five-to-seven-year period has been growing.

Defaults can occur for any number of reasons and certainly aren’t limited to young, inexperienced firms. Aggressive expansion leading to financial instability is a common cause, as is relying on revenue streams from volatile, rapidly changing industries. Poor management at boardroom level can also be a factor, while macroeconomics issues beyond a company’s control can push organisations towards the edge. Although the reasons behind a default may be varied and difficult to pin down, data analysis will usually reveal some telltale signs.

Using Kamakura’s default probability solution, investors and creditors can assess a variety of different factors to achieve a predictive power that is unmatched anywhere else in the market. Transparency, of course, is paramount, so we ensure that nothing is withheld from our clients. This allows our service to be as comprehensive as possible, while still complying with all the credit modelling requirements stipulated under the Basel II provisions of the New Basel Capital Accord.

Company-specific risk
Corporate credit managers and traders may focus on shorter-term risks, while lenders and investors are more concerned with the longer-term risks of a counter-party. The time horizon that is most relevant will vary with every business and every lending or investing situation. Therefore, not only do you need to define the most relevant time horizon, you need the ability to measure the risk and the drivers of the risk over that period.

We will use the Noble Group as an example (see Fig 1). Noble is a commodities trader and was once one of the largest in Asia, but the firm defaulted on its obligations in March. The graph makes it clear that this should not have been a surprise: notice how the quantitative default probabilities show an increasing risk of default for the company in both the one-month and the one-year categories. You can see that in May 2017, both default probabilities jump up, and the expectation of default within the year begins to be significantly higher than the probability of default within one month. Given the announcement by the firm last month, this analysis proved to be very accurate.

The second thing to know when dealing with distressed firms is what is driving the default probabilities. KRIS reveals the drivers of default. In our Noble Group example, net income, oil prices, market volatility and the company’s stock volatility combined to drive the increased risk. KRIS combines both forward and backwards-looking factors, allowing us to quickly understand what needs to be monitored, including the absolute and relative levels of default probability.

You need this information to make an informed decision about a distressed company. It helps you determine whether to take the risk of extending credit or to pursue a range of alternative options, such as avoiding the risk, shorting the risk or hedging the risk. As Professors Robert Jarrow and Arkadev Chatterjea wrote in their book An Introduction to Derivative Securities, Financial Markets and Risk Management: “We live in an imperfect world, in which it is hard to find perfect hedges.”

One of the goals of a risk management system is to answer the question: “What is the hedge?” If there were a single source of risk and a single measurement to quantify it, the answer would be easy, but of course, that’s never the case. The strength of the Kamakura approach is that we offer an integrated measure of all the risks and their sources, with a definitive time horizon for each. Finally, you cannot consider the time horizon without addressing the debate regarding ‘point-in-time’ and ‘through-the-cycle’ credit indicators.

The reason for the debate is the vagueness of the maturity and default probabilities for a specific company at that point in time. When you use a quantitative default probability, the debate becomes meaningless as the default probability has an explicit maturity with a defined meaning. All default probabilities that exist today at all maturities are point-in-time default probabilities, while the longest maturity default probability for a given firm is the through-the-cycle default probability. When you’re dealing with a distressed company, you can’t afford to leave any stone unturned.

Banco Mercantil Santa Cruz succeeds by putting its customers first

While Bolivia’s economy expanded at a remarkable rate over the past year, the pace of growth in the financial system was slower than in prior years. Despite this, Banco Mercantil Santa Cruz (BMSC) reached a milestone of over $5bn in assets and led the local banking industry in both net income and asset growth, once again proving its leadership in the sector. These results reflect BMSC’s ability to create value even in a year that was full of new challenges, demonstrating that the consistency of our strategy delivers results in different environments, even with continuous change.

BMSC performed well over the last few decades by combining its risk-centred culture with an aggressive appetite for growth in the country

Throughout its history, BMSC has provided quality financial services. It performed well over the last few decades by combining its risk-centred culture with an aggressive appetite for growth in the country. In 2017, the bank completed the acquisition of Banco PyME Los Andes Procredit to continue diversifying its risk portfolio and better serve the SME sector. Today, BMSC is the largest bank in the country, and enjoys a successful history of satisfied customers.

Prioritising the customer
BMSC has put significant resources towards improving customers’ experiences of its products and services, in addition to creating a tailor-made solution for customers. The star product, Super Makro Account, has performed outstandingly in the market, even prompting competitors to replicate it. In addition to traditional features, the product offers a competitive interest rate and the benefit of weekly cash prize draws.
Furthermore, we have developed a new brand aimed at younger generations, called Banx. After two years, Banx is very active in high schools and universities as a result of promotions and campaigns, but most of the business is done with clients in our targeted age range of between 26 and 35.

BMSC is committed to the people of Bolivia, and to this end it has promoted growth in social housing loans and productive sector loans. These loans allow families to achieve the dream of home ownership and contribute to the growth of their businesses.

The bank also supports efforts to develop a more inclusive financial system that provides greater access to financial products, services and capital for low-income communities and individuals. In line with this commitment, we were the first bank to grant loans with 100 percent financing for social housing, a product that enabled a large portion of the Bolivian population to access their first home.

To reinforce the country’s small producers, which in many cases do not have the opportunity to access traditional financing, BMSC has created a unit to look specifically at structured loans. This product allows the small producer – with help from a large company – to access loans that were previously unthinkable.

Refining a digital strategy
Internet banking was formally introduced to our corporate customers to improve customer experience. This new channel was redesigned under a modern technology platform to be friendlier and safer, with the aim of improving functionality to allow transactions 24 hours a day, 365 days a year.

The BMSC mobile banking app allows our customers to make enquiries and financial transactions from their mobile phones. Our app has become more popular in the past year as more operational improvements have been released, such as facial and fingerprint recognition. Both our internet and mobile channels are continually improving to make customer transactions and questions easy to resolve.

The bank is also working to update its core banking system, a project that began in 2015. The project, which represents a massive investment of time and money for any bank in the financial system, will give BMSC a world-class core system and allow it to be more competitive in the market.

Nevertheless, the most important achievement in 2017 was the acquisition of Banco PyMe Los Andes Procredit. This was the most significant deal to have taken place in the country in the past 10 years. In December 2016, BMSC acquired 100 percent of the company’s shares, and the integration was completed by August 2017. After this transaction, BMSC consolidated its position in the market as the largest bank in the country, not only growing in traditional products, such as housing loans, but also improving its position in the SME sector.

As a result of continuous efforts of the main directive and all employees of the bank, total assets reached $5bn this year, growing by $925m since 2016. Furthermore, the bank maintains important funding in public deposits, reaching 91.59 percent of the total liabilities as of December 31, 2017.

Throughout the years, BMSC has demonstrated a commitment to its customers by constantly investing in technology and innovation and providing an excellent service designed to meet the needs of its customers.

China demonstrates grand trade ambitions through New Silk Road

Between the second century BC and the end of the 14th century AD, the Silk Road enriched the many empires and dynasties it travelled through. As a direct result of trade, people gained access to goods, ideas and technologies that had been developed thousands of miles away. It represented an early form of globalisation, long before the term had been invented.

Although the route facilitated economic and cultural exchanges between many countries in the East and the West, modern depictions of the route predominantly focus on the transportation of Chinese goods such as gunpowder, porcelain and, of course, silk. Today, the government in Beijing has plans to recreate this corridor of influence. Once
complete, the network will cover 60 percent of the world’s population, 30 percent of global GDP and cost more than $1trn.

The New Silk Road will not be built upon the mettle of intrepid merchants, but through huge infrastructural projects and closer economic integration

Unlike the original, however, the New Silk Road will not be built upon the mettle of intrepid merchants, but through huge infrastructural projects and closer economic integration. Along the way, key transit hubs will play a vital role in managing the flow of goods – that is, if they are up to the job.

Concerns are beginning to grow that some of the most critical sections of the New Silk Road are not developed enough to cope with the increased demands that will surely be placed upon them. One such area that is coming under close scrutiny is the Brest-Małaszewicze crossing on the Belarus-Poland border. It is a feature of almost all rail routes linking China and Europe, and yet it also provides the biggest potential stumbling block to the continued expansion of this vital trading network. Along the New Silk Road, a bottleneck is starting to emerge.

Bumps in the road
Just as the original Silk Road was not a single route but a network of trading paths stretching through Eurasia, so too is its modern iteration. Today’s version has been formally dubbed the Belt and Road Initiative and encompasses the Silk Road Economic Belt, its overland component, and the 21st-century Maritime Silk Road.


The proportion of the world’s population the New Silk Road will cover


The proportion of the world’s GDP the New Silk Road will cover


The projected final construction cost of the New Silk Road

The project was officially unveiled by President Xi Jinping in late 2013 and has so far augmented Eurasia’s pre-existing infrastructure with numerous investments. Nevertheless, China is not always the main funder, and it is far from the only beneficiary. Completed projects such as the Kouvola-Xi’an rail link and the China-Kyrgyzstan-Uzbekistan railway have significantly reduced transit times for people and goods, and promise to boost economic growth.

For the New Silk Road to achieve its full potential, however, it will need to do more than simply connect previously disconnected places. The Eurasian landmass is already crisscrossed with thousands of miles of roads and railways, and updating the many transport links that exist in a state of decline should be a priority. A good place to start would be the Poland-Belarus border.

Up until now, the rapid growth of railway container traffic between China and the European Union has been managed fairly effectively. Between 2011 and 2017, traffic grew from 7,000 forty-foot equivalent units (FEU) – a conventional measure of cargo capacity – to 131,000 FEU. But with expansion predicted to continue, inferior capacity at crossing points along the EU’s external border could cause significant issues in the future.

In particular, the crossing point between Brest in Belarus and Małaszewicze in Poland is set to become extremely problematic. Today, the Polish side processes between nine and 10 trains a day, already below the negotiated figure of 14. Evgeny Vinokurov, Director of the Centre for Integration Studies at the Eurasian Development Bank, believes delays occurring here greatly impair the competitiveness of the route.

“Infrastructure bottlenecks in Poland have resulted in up to 3,500 cars having been detained at the Brest-Małaszewicze crossing point,” Vinokurov said. “Several major consignors, including Hewlett-Packard [HP], have expressed grave concerns about that crossing point. According to HP representatives, the company’s trains running from Chongqing [in China] to Duisburg [in Germany] may have to wait for the crossing for two to three days, while trains running from other Chinese cities may be delayed by five to six days.”

Infrastructural problems are partly to blame for the bottlenecks and further investment is certainly needed, both in Poland and Belarus, to modernise this section of the New Silk Road. Better management of current traffic levels would also help alleviate some of the strain. Despite the fact that there are four terminals at Małaszewicze, each capable of handling 10 trains daily, they are often underutilised. Some of them only process one or two trains a day and some do not accept traffic from Asia at all. Before more money is thrown at the infrastructure at the Poland-Belarus border, inefficiencies must be dealt with.

Finding order in chaos
Given that the New Silk Road traverses numerous countries, each with its own established way of doing things, it is no surprise that the route lacks cohesion in places. Language barriers and administrative discrepancies can make the transport of goods across borders far from simple.

Digital solutions should be pursued to simplify the customs procedure, helping to facilitate more consistent documentation between countries

Where Poland meets Belarus at the EU’s eastern border, these problems are perhaps at their most pronounced. Differences in track gauges used by EU nations (1,435mm) and Russia, Belarus and Kazakhstan (1,520mm) mean unconventional approaches, including the use of automated gauge conversion technology, may need to be employed. EU speed limits, which are much lower than those of Eurasian Economic Union states, are another factor that adds to the complexity.

Regulatory divergence provides yet another headache. In Poland, technical regulations stipulate train lengths cannot exceed 600m. In Belarus, this limit is 910m, while in Russia it is higher still. This means if a 65-car cargo train arrives at Brest, it will need to be split in two before it enters Poland, with a 45-car train allowed to cross the border while the remaining 20 cars are left until they can join a later train.

Thomas Kowitzki, Head of China Rail and Multimodal Europe at DHL Global Forwarding, told World Finance that this lack of synchronisation is also found in terms of end-to-end train configuration. “Take, for example, a Chinese province announcing a new direct rail connection from Shenzhen to Hamburg. Instead of one direct train, this rail connection is likely to consist of three separately operated trains with multiple rail wagon sets [that] use multiple locomotives from various rail operators.”

Every time there is a change of train operator or regulatory standards, the potential for delay increases. And delays can have financial ramifications. “If a container train suffers an excessive delay when crossing the border,” Vinokurov explained, “the operator may indemnify the consignor at the expense of the railway company that caused the delay.” Although some delays are unavoidable, when they occur over a sustained period they can cause the profitability of foreign trade to plummet to unsustainable levels.

But just a few hundred miles from the Brest-Małaszewicze crossing, a new development is underway that could help alleviate some of the logistical challenges. With the slogan ‘time is money, efficiency is life’ appropriately hanging outside its entrance, the China-Belarus industrial park is beginning to take shape on the outskirts of Minsk. Initial proposals for the park focused on turning it into a free customs zone, but in 2017 the emphasis moved towards large-scale logistics for Chinese cargo.

Three 17,000sq m warehouses and a 22,000sq m open container terminal have already been completed, with much of the funding being supplied by China Merchants Group. As a focal point for export-orientated production, the park will mean some goods produced by Chinese businesses and destined for the European market will no longer have to travel distances that are quite so vast. It should also improve the efficiency of cargo processing along the route, reducing the pressure for urgent infrastructural development.

Coming together
Given the number of issues that need to be resolved before container traffic can reach the desired levels, it might be tempting for businesses to find alternative ways of getting their products to EU customers. However, while 90 percent of the world’s traded goods travel by sea, it is not ideal for all types of cargo or for all destinations. As Kowitzki noted, rail transport along the New Silk Road “fills a gap between sea and air freight. It is cheaper than transportation by air and faster than sea transportation”.

Encouraging funding from Chinese businesses into Silk Road projects is one way of plugging the investment gap; greater international coordination of investment policies is another

If rail remains the most viable option for some Chinese producers, perhaps an alternative route could deliver a more efficient passage to the EU. Again, this is unlikely to be the case. The only other prospective route would go via Ukraine, but the unstable political situation in the country is pushing Chinese investment towards its neighbour to the north. The Brest-Małaszewicze crossing is also strategically located along the E20 rail line – the key eastern entrance into the European market.

What’s more, plans are already underway to address some of the major challenges at the Poland-Belarus border. Investments totalling $2.5bn were made between 2011 and 2017 to improve capacity across Belarusian rail lines, and proposals are afoot to modernise signalling and communication devices before 2020 ahead of launching a high-speed service. While this will improve transit conditions along a small section of the New Silk Road route, further enhancements will be needed.

For a start, the Polish Government could attempt to match the investment being made on the Belarusian side of the border. Currently, most of Warsaw’s resources are being directed at railway routes connecting Baltic ports in the north to countries in Southern Europe. Encouraging funding from Chinese businesses into Silk Road projects is one way of plugging the investment gap; greater international coordination of investment policies is another.

If funds are increased, they must be used in a targeted manner. Digital solutions should be pursued to simplify the customs procedure, helping to facilitate more consistent documentation between countries with different administrative methods. Money should also be concentrated on the most severe bottlenecks first, starting with the Brest-Małaszewicze crossing before plans for new routes begin.

Just like its ancient forebear, the New Silk Road promises to usher in an age of closer cooperation between countries separated by huge distances. In order for it to be successful, unified standards will need to be employed across the route, particularly with regard to legal and administrative issues. It does not really matter whether countries choose the Convention Concerning International Carriage by Rail, favoured by EU states, or the Agreement on International Goods Transport by Rail, preferred by China and a number of other nations east of Poland – what’s important is finding a consensus for the entirety of the route.

Reducing bottlenecks along the New Silk Road will not only benefit Chinese companies or, indeed, local businesses found in proximity to the route. By encouraging investment in infrastructure that has long been neglected, it will drive economic growth in Poland, Belarus and many of the other 50-plus countries it passes through.

FXTM continues to thrive in the unpredictable world of forex trading

Financial market observers hardly need to be told that recent years have been among the most volatile in memory. With ongoing political tensions in the Middle East, post-Brexit uncertainty in Europe and the US president discussing foreign policy and sparring with political peers on social media, currencies and commodities have been on a non-stop roller coaster since 2016. Prices have been determined by single tweets, and each week has brought new and unexpected events.

FXTM’s vision is based on three pillars: superior trading conditions, advanced education and state-of-the-art trading tools

At the same time, the foreign exchange market is undergoing its own seismic change, most recently with the introduction of the MiFID II framework in January 2018. MiFID II aims to ensure the best, most transparent conditions for the industry and its traders. With technological advancements changing the way traders and the wider industry interact with the forex market on a daily basis, it’s more important than ever that the regulatory framework evolves in tandem.

Above and beyond
In the ever-changing regulatory environment, certain brokers stand out from the crowd. These institutions are recognised for the solid roots they have put down, as well as their consistent dedication to their clients and to improving services. As the proud recipient of the 2018 World Finance Award for Best Trading Conditions, FXTM is one of them. The company has received awards across multiple categories for four consecutive years, having also won World Finance awards for Best FX Broker in Asia and Best Customer Service in 2017.

This recognition is the culmination of years of hard work from a dedicated and talented group of people who put their customers at the heart of everything they do. As a young and flexible company, FXTM is able to quickly identify what its clients need and provide them with the service and safeguards they desire. FXTM has achieved great things in the seven years since the company was founded: since 2011, it has established an online presence in 135 countries across the world. Many traders have benefitted from FXTM’s global presence, as products have been localised to the conditions of their markets.

FXTM’s vision is based on three pillars: superior trading conditions, advanced education and state-of-the-art trading tools. Each pillar informs the way the company operates. Its slogan, ‘Time is money. Invest it wisely’, underpins its business philosophy and is recognition of the fact that, in the fast-paced industry in which FXTM operates, time often determines the success of trading decisions.

Setting the standard
MiFID II was brought into play at the start of the year to provide traders with better, fairer and more transparent conditions. When first introduced more than 10 years ago, MiFID focused only on equity markets, but the European Union’s ambitious update expanded the rules to all asset classes, including foreign exchange. Since MiFID II was enforced on January 3, forex companies have been held to a significantly higher standard by European regulators. FXTM is proud to have implemented many of the client-protecting policies required by MiFID II before they were mandated. The company continues to maintain full compliance with regulatory updates, ensuring clients are protected to the fullest extent.

For FXTM, 2018 marks another memorable year, as the Financial Conduct Authority (FCA) in the UK issued the company with an important operating licence. Discussing this achievement, Martin Couper, one of FXTM UK’s directors, told World Finance: “In a relatively short period of time, FXTM has managed to establish itself as an authority in the industry, and I look forward to seeing our brand enjoy further success as we continue our expansion. As a company, FXTM has developed a reputation of trust, transparency and exceptional service.”

Global Head of Currency Strategy and Market Research at FXTM, Jameel Ahmad, added: “It is a very proud moment in the history of FXTM to receive our FCA licence. FXTM has delivered sound and stable growth since our company was founded; our commitment to developing long-term relationships with clients has contributed significantly to our overall success. FXTM is known for its superior trading conditions and localised product offerings, and we can’t wait to enhance this reputation as we continue our global expansion following receipt of the FCA licence.”

The FXTM brand is authorised and recognised by a number of financial regulators, including the Cyprus Securities and Exchange Commission in the EU and the Financial Services Board in South Africa. The new licence allows FXTM to service a broader market, as well as honour its commitment to being fully localised in key financial regions.

Empowering traders
With world-renowned trading expert Andreas Thalassinos at the helm of FXTM’s educational offering, the company constantly seeks to empower traders through knowledge. It ensures traders are not only well informed about the risks of trading, but are also poised to reap the benefits. Speaking about FXTM’s dedication to educating its clients, Thalassinos said: “Giving clients the foundations they need to enter the financial markets with as much knowledge as possible has always been one of FXTM’s core values. As a company, we are always on the lookout for more ways to educate our traders and investors in order to match their learning styles, needs and knowledge levels.”

Such efforts do not stop there. In addition to providing traders with the tools they need to understand a complex financial world, FXTM also provides breaking news and analyses on the latest market trends and insights. Led by Ahmad, the market analysis team comprises leading financial experts positioned in key locations across the world. The team is dedicated to the timely dissemination of market news and insights, all of which serve to equip traders with the information they need to make informed trading decisions.

In 2018 alone, FXTM held 100 client educational events across 10 countries, attracting more than 2,000 attendees. This included a hugely popular Global Financial Market Outlook 2018 seminar led by Hussein Sayed, Chief Market Strategist at FXTM. The market analysis team also produces a hugely popular webinar series hosted by London-based research analyst Lukman Otunuga.

As an innovative and ever-evolving broker, FXTM prides itself on offering trading accounts that suit the needs of any investor, from novices to experienced traders. This includes two types of accounts: standard and electronic communication network (ECN). Standard accounts allow traders to trade in ‘standard’ currency lots, or amounts, while ECN accounts allow FXTM clients to receive liquidity from the biggest market participants.

Traders are able to make deals on MetaTrader 4, an industry-leading forex trading platform that can be downloaded onto desktops, laptops or smartphones to enable trading at any time and from any location. Traders can deal in more than 50 pairs of foreign currency contracts for difference (CFDs) as well as CFDs on spot metals, shares, commodities futures and indices.

Customer-first approach
A dedication to the customer sits at the heart of FXTM’s values. There is a high level of risk involved with trading leveraged products such as forex and CFDs. As such, the company strives to demonstrate commitment, appreciation, respect and responsibility in everything it does – something reflected in its outstanding customer service team. FXTM offers multilingual customer support through fully trained customer service representatives and personal account managers. FXTM works to ensure friendly, transparent and expert help is always at hand.

Transactions are executed immediately at FXTM, and the company endeavours to provide customers with swift access to funds, with more than 84 percent of funds processed within five minutes. The firm pays close attention to its clients’ personal preferences, and knows each client feels comfortable depositing and withdrawing money with their preferred method. This means it continues to work on developing as many deposit and withdrawal methods as possible, to satisfy each customer’s needs.

Tight spreads are another key prerequisite when choosing a forex broker. The fact that FXTM offers these to all clients – as well as even spreads starting from 0.1 percent pips, depending on the account type and market conditions – gives each trader a distinct advantage from their very first executions.

No dealing desk (NDD) technology allows FXTM’s clients to execute trades without human interaction. All orders are matched automatically without human intervention. NDD allows the broker’s clients to execute their order without dealer oversight, as orders are executed directly with ECN. Through this technology, FXTM offers deep interbank liquidity, giving direct access to rates that can be instantly executed.

FXTM is built around its traders. A recent customer satisfaction survey indicated that an overwhelming 90 percent of participants were happy with the company’s services – an achievement that FXTM is proud to include alongside its 2018 World Finance Forex Award for Best Trading Conditions.

To learn more about FXTM, visit their website

Unifin’s strong corporate governance ensures its sustainability, says CFO

Operating leasing firm Unifin went public in 2015, with a highly successful IPO on the Mexican Bolsa. But in preparation for this, the company radically enhanced its board, and made sure to adopt best corporate governance practices. CFO Sergio Camacho discusses this process, as well as how Unifin ensures good transparency with its shareholders, and its outlook for the years ahead. Watch the first half of this interview, where Sergio discusses Unifin’s success supporting Mexico’s SMEs.

Sergio Camacho: Unifin is the leading independent leasing company in Latin America. We are a public company; we made our IPO in 2015. And since then the company has shown tremendous growth.

World Finance: And why has corporate governance become so important to Unifin?

Sergio Camacho: We need to analyse corporate governance prior to doing the IPO, and after doing the IPO. When Rodrigo Lebois decided to go and make Unifin public, he started to enhance its board. He asked very well respected entrepreneurs in the country to join the board. And now we have 50 percent of that board to be independent.

When we did the IPO, that was one of the key questions that we received from investors. How’s your corporate governance? Who is on your board? Because being a new company into the market, for a leasing business, posted a real challenge to have a very successful IPO – which, by the way, it was. And corporate governance played a very very strong point for getting the trust of investors.

World Finance: How has your corporate governance changed over recent years, and do you have further improvements planned?

Sergio Camacho: Whatever is released as best corporate governance practice, we for sure are going to be implementing that.

Particularly when you hear many many things on Latin America, and some often think Mexico needs to comply even further – that will be the US, in this matter.

In Mexico, the business council release their best corporate governance practices, and we comply 100 percent with those.

We are subject of course to the banking commission supervision, and we’re a very transparent company. We have put a lot of effort in enhancing corporate governance, because of this.

So whatever is released, or suggested to be a best corporate governance practice in the future – for sure we’re going to implement in the company.

World Finance: How do you make sure that you are as transparent as possible with your shareholders?

Sergio Camacho: Well we have on a quarterly basis our press release and our conference calls. We attend, perhaps twice a quarter, different conferences or do these non-deal roadshows. And that’s a way that we communicate to our shareholders and to our bondholders. Because one of the most important ways that the company has financed itself over the last years has been issuing in the public markets.

So Unifin is in the spotlight in that regard – we have accessed over the last 24 months more than $1.2bn in the international markets. So the trust is there – we need to fulfil that trust now, so we need to continue, keep working. Because these are things that matter, and matter a lot to our, either shareholders or bondholders.

World Finance: And what would you say is the investor outlook for Unifin?

Sergio Camacho: I would say it’s very strong, very positive. If we analysed the numbers of Unifin over the last three years, we have had compounded annual growth rate of 50 percent, at revenues and profits. Since the IPO the stock has more than doubled its value.

So the outlook for the company looks promising. Of course it’s going to be driven by the political views and the economic policies to be implemented in the coming years. We have the threat of Nafta – there is a lot of uncertainty right now, what is going to be Nafta.

But no matter what the outcome of those two major events are, Unifin is very strong. Unifin has been in the market through difficult times, and has been successful going through. So we’re confident that we’re going to be capable of addressing good results, good numbers, in the upcoming years.

World Finance: Sergio, thank you very much.

Sergio Camacho: Thank you.

Unifin CFO: Mexico’s thriving SME sector will continue to drive our growth

Unifin is a leading financial services company in Mexico, offering leasing, factoring, and automobile credit services. Its CFO Sergio Camacho explains the key trends that have been affecting the business, how it has empowered its regional offices to capitalise on Mexico’s strong macro-economic growth – and what the next five years are likely to hold as Mexico prepares for its new president. Watch the second half of this interview, where Sergio discusses Unifin’s best corporate governance practices.

World Finance: Unifin is a leading financial services company in Mexico, offering leasing, factoring, and automobile credit services. Sergio Camacho is its CFO; he joins me to discuss the trends in the industry, and the company’s award-winning corporate governance.

But first Sergio, talk me through your business lines and how the company is structured.

Sergio Camacho: We have three business lines: operating leasing, factoring, and auto-loans.

Our main business is by far operating leases, in which we finance whatever asset an SME may need, providing full visibility on how much they need to pay on their initial down-payment, their monthly rent, and their residual value. So that is a very, very good financing alternative for the SME sector.

World Finance: What are the key trends that have been affecting your business?

Sergio Camacho: Well the key trends have been the growth, on a macro perspective. Mexico – even though it has not shown tremendous growth, like whatever you can see in other emerging markets – but it has shown steady growth. And the growth has been driven by investments, mainly by the SME sector. Which is a sector that we focus on. And that investment needs to be addressed by buying machinery or getting whatever you need to do on a production line.

The operating leases precisely solve that issue. Because we can lease whatever product – from an aeroplane, to a printer, or a camera like the studio we are in – and provide with the lease to the SME sector. And that’s a way that we are supporting the growth in the country.

World Finance: And how have you been capitalising on that growth?

Sergio Camacho: Well we have 13 regional offices. We do a lot of market research on what are the trends, on GDP per region, within Mexico. And based on that information, we put the regional office there, to be very close to our customers.

We hire local people, so these local people know the families, or know the founders, know the entrepreneurs that are within that city or within that region. And that posts a very good competitive advantage towards how to approach these people.

World Finance: Now, what impact is Mexico’s forthcoming new presidency likely to have on your business?

Sergio Camacho: Well, since we are focused on the SME sector – and it’s a very resilient sector within the Mexican economy – we do not expect any significant change in the trend.

However, whatever the public policies that this new president may impose to the country: that will have an impact on the macro growth, and of course that will have an impact on our clients and our customers, on their decision-making process for investments, for acquiring new machinery, or acquiring a new product or business line in their respective corporations.

So it will have an impact, but it will depend on how he’s going to be towards the public, fiscal, and monetary policies.

World Finance: So what would you say is your growth trajectory for the next five years?

Sergio Camacho: We will continue growing. This company was founded in 1993 – months before the Tequila Crisis. So within the company we have management that has been through the Tequila Crisis, through the Dot Com Crisis, through the Lehman Brothers Crisis. And Unifin continues to grow. So depending on how the macro is – thinking about a crisis, or whatever – we can capture that opportunity for growth. Because the traditional banks, whatever they do, they just reject and pull out from the country. Ninety percent of the traditional banks in Mexico are foreign-owned.

So we’re there. We’re very close to our clients. And that of course puts us in a very, very good position towards the potential growth of the company.

How Inversiones Security is fostering transparency in Chile’s banking sector

Chile is ranked as a high-income economy by the World Bank and is considered to be South America’s most stable and prosperous nation. It leads Latin American nations in competitiveness, income per capita, economic freedom and low levels of perceived corruption. Although Chile has high economic inequality as measured by the Gini index, it is close to the regional mean.

Chile has a market-oriented economy and a reputation for strong financial institutions. Its sound economic policy has given it the strongest sovereign bond rating in South America

Chile has a market-oriented economy characterised by a high level of foreign trade and a reputation for strong financial institutions. It also enjoys a sound economic policy, which has given it the strongest sovereign bond rating in South America. Exports of goods and services account for approximately one third of GDP, with commodities making up some 60 percent of total exports. Copper is Chile’s top export and provides 20 percent of government revenue.

Attractive markets
Chile deepened its long-standing commitment to trade liberalisation when it signed a free trade agreement with the US, which came into force on January 1, 2004. Chile now has 22 trade agreements covering 60 countries, including agreements with the EU, Mercosur, China, India, South Korea and Mexico. In May 2010, Chile became the first South American country to join the Organisation for Economic Cooperation and Development (OECD).

According to the OECD, economic inequality in Chile is a major problem. The country’s Gini coefficient value stands at a record 0.5, one of the highest in the world. In 2014, former president Michelle Bachelet introduced a profound tax reform aimed at fighting inequality and providing improved access to education and healthcare. The reforms are expected to generate additional tax revenues equal to three percent of Chile’s GDP.

Chile’s capital markets are well developed and open to foreign portfolio investors. Capital markets are structured into three major sectors, with each regulated by a different oversight agency. Pension fund management companies receive the money of workers (or affiliates) and offer these resources to the market, mainly through the purchase of bonds, other debt instruments, equities or alternative instruments. The Superintendency of Pension Funds is the regulatory body that oversees these companies.

Banks receive money from depositors, provide the market with capital – mainly through credit or loans – and are regulated by the Superintendency of Banks and Financial Institutions. The securities and insurance market, meanwhile, includes all the institutions that trade public securities. The Financial Market Commission regulates this.

In 2010, the Chilean Government enacted Law 20448, also known as MKIII, which introduced several changes to Chilean capital markets. This legal amendment was aimed at encouraging liquidity, financial innovation and integration with international markets, and was part of the continuous modernisation process of the Chilean capital market, which began with MK in 1994.

In a recent analysis of 20 emerging markets, Chile was found to have the highest quality rule of law, very low corruption and a superior quality of regulation. Still, it ranked less favourably in terms of shareholder protection, corporate governance and transparency. However, the public’s perception of the strength of shareholder protection is below the OECD average and the country has the most opaque corporate sector of all emerging markets. Although the discrepancy between the general quality of Chile’s institutions and its disappointing levels of corporate governance and transparency certainly stems from more than one cause, the prevalence of conglomerates and highly concentrated ownership levels are possible contributing factors.

An enticing destination
The Chilean Stock Exchange is the third-largest exchange in Latin America and, as of March 2018, its market capitalisation stands at $217.85bn. The market-capitalisation-to-GDP ratio, which when compared with the historic ratio indicates whether a market is over-or undervalued, stands at 80 percent.

In terms of the fixed income market, Chile stands out as the second-largest in Latin America, with a total traded value of $745bn for the year ending December 2017. The financial services industry accounts for five percent of the country’s GDP and is made up of more than 200 local institutional investors, banks, insurance companies, asset managers and pension funds, in addition to 25 brokerage houses. By the end of last year, the local industry of mutual and investment funds reached $78bn in assets under management, accounting for 36 percent of Chilean GDP.

Chile is an attractive destination in Latin America for investors who value its open market economy, the richness of its natural resources, its well-developed institutions, its juridical security, its low levels of risk, the high quality of its infrastructure, and its strong rule of law. The government’s positive attitude towards foreign direct investment (FDI) is another advantage, as is the fact that Chile’s legal framework for attracting and protecting FDI is solid.

The Foreign Investment Promotion Agency, created in 2015, provides services for FDI in four categories: attraction, pre-investment, landing and aftercare. Very few restrictions exist around FDI. Chile’s conversion and transfer policies are similar to those found in highly developed countries, such as the US: Chile has 41 bilateral investment agreements in force, in addition to 24 other investment agreements, including the investment chapter of its free trade agreement with the US. A US Chile bilateral treaty to avoid double taxation was ratified by Chile and is currently awaiting ratification in the US Senate.

The flows of FDI in Chile, which peaked in 2012 at $27bn, have now returned to pre-2012 levels. In 2016, FDI flows reached $11.3bn. According to the United Nations Conference on Trade and Development’s World Investment Report 2017, Chile is the third most attractive country in South America in terms of FDI, after Brazil and Colombia. The country ranks 55th out of 190 countries in the Doing Business 2018 report, issued by the World Bank. Chile’s new president, Sebastian Piñera, has announced his desire to attract financial support, particularly with regard to the mining industry, and to streamline the country’s investment process.

The tech effect
Following the presidential election of December 2017, in which Piñera was elected, various sectors have been exhibiting encouraging signs. This should foster more foreign and local investment, which will lead the economy to a rate of growth not seen in recent times. However, it is undeniable that the Chilean economy is embedded within the global context, hence the direction of world growth also impacts the local economy. It is for this reason that the market and its authorities are monitoring commercial tensions between the US, China and Europe very closely.

As countries mature, the factors that boost growth in the early stages start to lose their potency, fuelling the search for new sources of productivity and growth. Here, financial markets play a key role in paving the way to becoming a developed country. Inversiones Security is a leading player in wealth management, brokerage and asset management, and is intent on playing a key role in Chile’s financial development. As the sixth-largest brokerage company and the fifth-largest asset management company in the local market, we’ve set ourselves the goal of improving the finance industry’s entire value chain from start to finish.

Given the highly personalised service we offer to our private banking clients, we have chosen to focus on a number of key strategic areas within the value chain. Customer service and business intelligence are both essential. Our customer service and quality assurance group works in close coordination with our business intelligence group to ensure our clients are fully satisfied and that feedback is collected so performance can be reviewed. By taking operations, IT and compliance into consideration, we also ensure that new software, systems and workflows are implemented in an appropriate manner.

Our three investment factories (mutual and investment funds, international asset classes and local direct asset classes) help us to produce suitable products for our clients. Our department of research, meanwhile, provides us with the macroeconomic guidelines that enable us to build a solid and well-diversified asset allocation for both our clients and the rest of the market. In terms of digital transformation, we have worked with innovative local players, while maintaining a global perspective.

With our comprehensive understanding of the global and local technological landscape, alongside our emphasis on customer experience, we have initiated a transformation roadmap that allows us to incorporate new technologies in phases. This ensures that our different client segments have access to the digital solutions that are right for them.
Regarding wealth management, the decision has been made to incorporate the new functionalities that clients are demanding in the digital age, such as increased transparency, accessibility, mobility and information. At the same time, we aim to enhance the personal relationships and advice that our dedicated bankers can provide.

The first stage of this transformation was launched in February with a new, fully responsive website, which has been developed in accordance with the needs of our clients, strict local and global benchmarking, and which provides us with a platform capable of incorporating new technological improvements periodically over time. For 2018, we have a demanding and exciting project portfolio, with an open mind for new incoming developments and client needs.

China assumes the mantle of green energy leadership

The Chinese economy has long been dominated by heavy industry, the export of manufactured goods and the development of infrastructure, all of which have significantly contributed to the country’s greenhouse gas emissions. In fact, China is the world’s largest producer of greenhouse gases. It is therefore surprising that China is also the global leader in renewable energy development.

China is in the process of a transformative re-orientation of its economy, with its focus shifting increasingly towards technology and a service-based economic model. Despite coal making up the largest part of China’s power consumption, the government has very consciously been shifting away from it, shuttering mines and cutting around 1.3 million jobs in the sector in the past few years. One of the primary motivations behind China’s push for renewable power has been the country’s toxic level of air pollution. As recently as 2016, the World Health Organisation estimated that more than one million people a year – or just over 2,800 people a day – die in China as a result of overexposure to polluted air.

“Domestically, China is battling for better air quality. Cleaning its energy mix is a key solution which will bring co-benefits for air quality and climate change,” Min Yuan, Energy Research Analyst at the World Resources Institute, told World Finance.

Taking the helm
The geographical balance of renewable investment has shifted. The bulk used to belong to developed nations; Europe in particular. Now the ground has been ceded to developing nations, with China at the helm. In 2017, China invested $132.6bn into renewable energy, accounting for almost 40 percent of the total global clean energy investment, as well as 46 percent of the world’s new installed capacity.

When President Donald Trump pulled out of the Paris climate accord, there were fears that countries that looked to the US for leadership would take a more lax approach to the agreement. The opposite, however, was true: many countries have doubled down on their commitments, with China rushing to cement its position as the global leader in green energy.

“With the US recently becoming more economically insular and withdrawing from the Paris Agreement, China clearly sees an opportunity to dominate in clean energy markets around the world,” Simon Nicholas, Research Analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), told World Finance.

Stellar growth
According to data from the International Renewable Energy Agency, China’s total renewable capacity has been growing at an average rate of just over 15 percent annually for the past decade – almost twice as fast as the global average. Furthermore, China’s growth rates for hydroelectric, solar and wind power have all been between two and three times that of the global average over that same time period.

In total, Chinese renewable capacity has seen a 255 percent increase in the past 10 years. By comparison, the EU and the US have only seen a 105 percent and 97 percent increase respectively. Since 2008, China’s capacity in terms of hydroelectric power has increased by over 97 percent, while wind capacity has grown almost twentyfold.

The most remarkable growth, however, has been in solar capacity. Just 10 years ago, China accounted for less than one percent of the world’s solar capacity. By the end of 2017, it accounted for one third. The growth of China’s solar capacity has been exponential; on average, it has more than doubled every year since 2008. The average yearly solar growth in the US and EU in the same period has been 44.6 percent and 32.6 percent respectively.

In 2008, China’s solar installations produced just 113MW of energy, whereas at the end of 2017 they produced 130.6GW – 1,156 times as much. According to a report by the IEEFA, China now also produces 60 percent of the world’s solar cells.

“Solar power’s rapidly declining cost has driven growth in solar installations worldwide. This can be attributed [in large part] to the big Chinese solar module manufacturers that have ramped up their production capacity,” said Nicholas.

Forecasts suggest that China will take the lion’s share of renewable power capacity growth by 2022. The country will be responsible for 58 percent of global growth in solar capacity, as well as 60 percent of wind growth and 65 percent of hydroelectric.

More than generation
China’s efforts in clean power extend beyond how it is generated, also affecting how it is stored, transferred and used. The country used to lose more than eight percent of its wind and solar power as it was transferred back from energy farms to population centres, but has since taken steps to curtail that loss. These steps include the expansion of transmission networks and the prioritisation of clean energy transfer over conventional power. Between January and October of last year, the loss rate was cut to 5.6 percent.

Energy storage is another area in which China is leading. By 2020, China is projected to have four of the six largest battery factories in the world. The fastest-growing battery factory in the world, Contemporary Amperex Technology, is set to overtake Tesla’s Gigafactory in terms of battery production, despite the latter’s monopoly of media attention.

Japan and South Korea have historically led the battery manufacturing industry, but Chinese companies are being propelled by heavy subsidies and restrictions on foreign competition. Additionally, there have been reports of Korean battery companies being on alert for Chinese firms using high salaries and compensation to poach engineering talent.

China is also home to the world’s largest electric vehicle (EV) market. In 2017, the country produced more EVs than the rest of the world combined. Domestically, Chinese EV firms face little foreign competition as steep tariffs make imports too expensive for a mass market. China is also consolidating control over the supply of raw materials, such as nickel, lithium and cobalt, which are used for the development of batteries and other related technology.

The push for EVs has come about mainly because cars are one of the largest sources of pollution in the country. Allowing Chinese car companies to scale up in an environment unencumbered by foreign competitors will allow them to become strong exporters in the future.

“Going forward, even if your EV isn’t Chinese, its batteries very likely will be, as will the solar panels on your roof that charge it. China is moving into position to dominate clean energy markets worldwide,” said Nicholas.

In December, China launched the world’s largest cap-and-trade system, in which companies will have to pay for the right to release greenhouse gases. Under a cap-and-trade system, companies will have a cap on emissions, and can sell their unused capacity to other companies that need to exceed their cap. This system provides not just a regulatory penalty to exceeding the limit, but a positive financial incentive to minimise emissions.

In the past, renewable energy targets were typically only related to power generation, but China is now in the process of establishing quotas for green energy consumption as well. This is aimed at solving the problem of curtailment. Provincial power grids will be required to consume a minimum level of renewable energy or be penalised. This is likely to encourage grid networks and provincial governments to take steps to make energy transfer more efficient and reduce curtailment.

Green finance
In theory, there is a significant amount of capital floating around China that can be drawn for renewable projects. The big four commercial banks – the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China – are among the largest commercial banks in the world.

“The country is also home to very large funds that are increasingly seeking infrastructure investments, including China Investment Corporation (China’s sovereign wealth fund), the National Social Security Fund (China’s national pension fund) and China Life Insurance Group,” said Nicholas.

Some speed bumps remain, however, that may impede the speed of China’s continuing renewable growth. The cost of obtaining capital for renewable projects remains higher than traditional energy projects by about 20 to 30 percent.

Private companies are especially disadvantaged, as state-owned companies are regarded as being more trustworthy by banks, and are therefore given unsecured loans. Private companies, on the other hand, typically have to put up factories or other real estate as collateral. Risk and reward calculations are also more difficult for banks to make, as renewables are a relatively new asset class. Financing for projects in Northern and Western China can also be tricky, as inefficient energy transfer infrastructure leads to the curtailment of energy by the time it reaches the power grids in other parts of the country.

Restructure and expansion
Last year, the Chinese Government began restructuring many state-owned power companies. This was done in order to create companies with more diversified asset bases that could move them away from coal. For example, the China Energy Investment Corporation (CEIC) was created when Shenhua Group – China’s largest coal mining company – was merged with China Guodian, one of the country’s five largest utility companies. With an installed capacity of 225GW, CEIC is now the world’s largest power company.

The merger means that Shenhua’s resources can increasingly be redirected towards renewable technology. This is possible because having Guodian’s renewable assets at its disposal means it would no longer be entirely reliant on coal. Up to 90 percent of Shenhua’s generation capacity came from coal, whereas CEIC will generate close to a quarter of its power from renewables.

In addition to being aggressive in its domestic clean power growth, China is also a major patron of overseas renewable projects. According to the IEEFA, Chinese investment into large clean energy projects abroad (defined as exceeding $1bn), amounted to $44bn in 2017. This represents a 37 percent increase from 2016, which was also a record year. Projects abroad receive substantial support from multiple institutions, including the Export-Import Bank of China and the Asian Infrastructure Investment Bank, in which China has tremendous influence and will subsequently aid China’s Belt and Road Initiative.

“Some companies, such as hydropower manufacturers, have seen domestic opportunities dry up and are looking overseas for projects. Chinese solar module and wind turbine manufacturers naturally see opportunity overseas as the declining cost of the technology drives renewable installation globally,” said Nicholas. He added that support from the Chinese Government means companies can focus on gaining a share of foreign markets without profit being an immediate concern – a luxury that international competitors do not generally have.

Nicholas added: “Chinese renewables companies are also very active across Latin America, including just over the border from the US in Mexico. Chinese power transmission companies, led by State Grid Corporation, now dominate Brazilian power networks, putting them in an influential position when planning future capacity installations.”

China’s drive towards renewable energy is not simply an effort to combat climate change or to reduce pollution. There are strong geopolitical advantages to leading in this field, just as the history of oil and other hydrocarbons has consistently had a strong correlation with regional power dynamics. The strongest players in energy markets have always had outsized economic and political influence. The continuing fall in the price of solar power, which is set to decrease by a further 60 percent over the coming decade, will
only extend China’s lead.

The planet’s power supply has long been dominated by fossil fuels. It seems inevitable, however, that eventually the majority – and then all – of the world’s power will come from renewable sources. When that time comes, the economies that lead new energy markets will be in a position of power. China’s titanic effort to develop renewable energy is therefore an investment not just in public health or symbolic environmental leadership, but also in its future geopolitical and economic prominence.