Author: Ashton Wenborn

HSBC on tackling Brazil’s retirement plan deficit

Posted on by Ashton Wenborn

Since 2005, HSBC has been looking in-depth at retirement, and how pre-retirees are able to save in today’s market. The bank’s research is based on a nationally representative survey of 1,001 people into understanding and supporting all retirement plans – including working age people (see Fig. 1), along with pre and current retirees. The independent research study is a driver for HSBC Fundo de Pensão in achieving its desired standard of living in retirement. Conducted in August and September last year, the study is the 10th in the series, revealing many findings that confirm some of the actions that have been taken by HSBC Fundo de Pensão to improve members’ wellbeing.

Retirement concerns
Many retirees feel that they have an annual household income well below what they deem necessary for a comfortable retirement. The outlook for the next generation is even less optimistic: 10 percent of working age people believe they will never be able to fully retire and more than 43 percent believe that they will not be able to maintain a comfortable lifestyle if they retire. A total of 29 percent say they will not be able to afford to do the things they want later in life.

Brazil’s age structure:

Median age:

29.9 years

Male

31.5 years

Female

Life expectancy at birth:

73.8 years

Population average

69 years

Male

77 years

Female

Source: Index Mundi
Notes: 2014 figures

Maintaining a comfortable standard of living during retirement is a real concern for many. Almost 32 percent of pre-retirees are not confident in their ability to maintain a good living standard once they have stopped working. For those aged 45 and over this figure rises to 40 percent compared with over 26 percent of 25 to 44 year olds. These retirement lifestyle concerns are an issue across all income levels – even among pre-retirees with a household monthly income of more than $4,890 a month, as over 28 percent are not confident that they will be able to maintain a comfortable standard of living through their retirement years.

What’s more, the majority of those of working age have more fundamental concerns about funding their retirement. The majority at 83 percent worry about having enough money to live comfortably, and 81 percent are concerned about having enough money to live day-to-day. Running out of money is a concern for 80 percent of those at working age people. All of this suggests that pre-retirees fear that life after work may be less comfortable than they might have hoped. Almost 49 percent of working age people say they fear financial hardship in retirement. A similar proportion at 46 percent expect that when they retire, they will have to cut down on everyday spending, and 28 percent believe that they will not be able to eat out as much.

Working age people are worried about their financial preparations for retirement. More than 41 percent think their preparations are inadequate for a comfortable retirement. There is concern from retirees too, with 43 percent saying their preparations were insufficient.

Some of the main reasons why people are not preparing adequately to maintain a comfortable standard of living in retirement are because they:

  • Cannot afford it: more than 29 percent of pre-retirees say they cannot afford to prepare adequately for their retirement years.
  • Have more immediate financial commitments: more than 34 percent of pre-retirees say they are paying off other non-mortgage debts and almost 23 percent say they had an unexpected expense.
  • Did not start saving early enough: around 54 percent of pre-retirees and 42 percent admit they did not start saving early enough.
  • Were not aware of how much to save: over 22 percent of retirees say they did not realise how much they needed to save.
  • For 87 percent of working age people, saving for retirement is not their main priority. Other priorities include paying off debts at 18 percent, saving for holidays at nine percent, saving for a rainy day also at nine percent, and carrying out home improvements at eight percent.
  • Even with the best intentions, major life events have affected 81 percent of pre-retirees’ retirement saving. While some of these events can be planned for, such as buying a home or paying a mortgage (28 percent), starting a family (18 percent) or paying for children’s education (21 percent), unexpected events can also have a significant impact. Almost 17 percent of working age people faced an unexpected illness that stopped them or their spouse from working, with a knock-on effect on their retirement saving.

Factoring in external conditions
The global economic downturn has also had a far-reaching impact. More than 27 percent of pre-retirees say it had a direct and significant impact on their ability to save for retirement. It is also likely to have had an indirect effect on pre-retirees’ economic wellbeing, with 35 percent saying that losing their job, getting into debt or having severe financial difficulty would greatly affect their ability to save for retirement.

With the benefit of hindsight, many retirees would have done things differently before they retired, to improve their standard of living in retirement. For example, over 36 percent of retirees know better than pre-retirees that you need to start planning for retirement early – 38 percent of retirees say they would have saved more, and 35 percent would have developed a financial plan for the future. A total of 33 percent would have saved a small amount regularly and 31 percent would have started saving earlier.

While almost 29 percent of pre-retirees say you can start planning for retirement in your 40s and still maintain a similar standard of living after retirement, significantly less of those retired at 22 percent think you can start at this age. Moreover, more than half at 53 percent of pre-retirees are either not currently saving for their retirement or do not intend to start. Even among pre-retirees nearer to retirement – those aged 45 and over at more than 42 percent are not saving or do not intend to start saving specifically for retirement. There is a noticeable gap between pre-retirees’ intentions towards saving for their retirement, and the reality as experienced by current retirees. Over their working life, pre-retirees on average plan to save 19 percent of their income towards retirement savings and investments, excluding pensions. In reality however, today’s retirees actually saved only 15 percent of their income over the course of their working lives.

Brazil's population breakdown

Working age people plan to save a constant 20-23 percent of their income towards their retirement savings and investments – excluding pensions – throughout most of their working life. Again, the current reality is different. Retirees saved a considerably lower share of their income – eight to 14 percent – when they were younger (between the age 18 and 44), and only later in life, at age 45-59, they increase the share of their income closer to their intended level, missing out on the full benefits of compound growth.

Working age people do not have enough savings and investments to last them through their retirement. On average, pre-retirees expect that their retirement savings and investments that exclude pensions will run out 11 years into their retirement. With retirees on average fully retiring at age 55 and a typical life expectancy in Brazil of 74 years, pre-retirees face an eight-year gap when they will be solely reliant on any state, employer or personal pension provisions they may have.

Among pre-retirees, women in particular do not have enough savings and investments to last them through their retirement. Women expect their retirement savings and investments will last just 10 years, but with an average retirement period of 22 years, this leaves 12 years when women will be reliant solely any pension provision they may have. The situation is better for men as their savings and investments should last them for 13 years of an average 15-year retirement. However, if men retire before the age of 55 then their retirement funding gap will widen further.

The recognition by retirees that a different path in working age savings would have driven to a more comfortable retirement only reinforces the understanding of HSBC Fundo de Pensão that there is a need to educate members to start early and save for retirement, as well as spend an adequate amount to retirement savings. With life expectancy getting longer, it becomes even more important to adequately save for retirement. The first step to be taken is to create awareness and HSBC Fundo de Pensão is constantly making efforts to make it happen. It also insists on placing specialised consultancy services to guide customers in their choice of the most appropriate products for their company and its employees.

HSBC is a member of the Associação Brasileira das Entidades Fechadas de Previdência Complementar, and has been selected by Associação Nacional dos Contabilistas das Entidades de Previdência as the best multi-sponsored pension fund in Brazil. Its administrative services are provided by HSBC Administração de Serviços para Fundos de Pensão (Brasil), while assets are managed by HSBC Global Asset Management, one of the largest managers of third-party assets in Brazil.

Germany’s first Islamic bank opens for business

Posted on by Ashton Wenborn

Europe’s first fully-functional Islamic bank will soon open its doors in Frankfurt, offering German’s Muslim population the opportunity to use a bank that complies with sharia law for the first time.

The branch, which will operate under the name KT Bank, can only be backed by tangible assets and shall refrain from speculative investments, in accordance with Islamic banking rules. Charging interest on loans is also not permitted, although the bank is allowed to purchase and sell assets for a profit.

[S]ervices will also be available for non-Muslims, including retail and wholesale customers

Additionally, activities that are considered un-Islamic, such as participation in forbidden goods, services and projects, including businesses within the gambling and alcohol industries, are strictly prohibited.

Kuveyt Turk Bank currently has another branch in Mannheim, although it is not fully functional under sharia law.

As well as the four million Muslims living in Germany that form the targeted customer base for the bank, services will also be available for non-Muslims, including retail and wholesale customers.

Islamic bonds, known as sukuk, have become increasingly attractive for both Muslims and non-Muslims in recent years, given their fast rate of growth. According to Gulf News Banking, the global sukuk market has doubled in the last three years – with no signs of slowing down at this point.

Kuwait Finance House, which owns a majority stake in Kuveyt Bank, has remarked on this latest move as confirming its leading position in Islamic banking. “This new achievement shall open vast scopes of business and investment in Europe’s largest economies, thus indicating that the bank is the first bank that obtains a full function license to practice deposits and credit finance facilities in Germany as per Islamic rules and regulations,” read a company press release.

Kuveyt Turk Bank plans to make multiple investments in the coming years in order to expand its portfolio of financial products, as permitted by sharia-banking regulations, as well as to grow its global reach. If the Frankfurt model proves successful, the bank hopes to open more fully functional Islamic branches within Germany, and elsewhere in Europe also.

NCB adapts to Jamaica’s reformed pensions sector

Posted on by Ashton Wenborn

A sharpened focus on Jamaica’s pensions sector has brought with it a wave of improvements, as the government has taken major strides towards implementing a regulatory framework for private pension plans. Beginning with the passage of the Pensions Act, this changed marketplace has created a host of new challenges and opportunities for providers, whose job is poles apart from that of only a few short years ago. World Finance spoke to Vernon James, Managing Director and CEO of NCB Insurance Company, about the pensions landscape and what steps have been taken so far.

The reform of the private pensions sector is in two phases, with the first – pertaining to the passage of the Pensions Act and any related operational, registration, licensing and governance issues – completed, and the second, termed the ‘adequacy stage’ still to address portability and vesting concerns. “Prior to the passage of the Pensions Act”, says James, “the local tax authority, Tax Administration Jamaica, had the sole task of monitoring, regulating and approving pension plans under the Income Tax Act. The Income Tax Act, however, is inadequate when it comes to handling basic issues specific to private pensions, such as management of trustees, benefit payments, complaints, solvency and funding requirements and compliance.” It is in this department, therefore, that the ruling administration will be aiming to rectify some of the underlying issues, and a quick look at the progress made thus far shows that the situation is improving.

9%

Of the employed labour force in Jamaica are covered under a pension plan

“The Pensions Act signalled a sea of changes to the operation of private pension plans in Jamaica. It designated the Financial Services Commission (FSC) as the regulatory body charged with regulatory and supervisory powers”, says James. The Pensions Act also codified many of the common law fiduciary duties owed by trustees and regulated the governance of pension plans, including the requirement that the composition of all boards of trustees include those nominated by the members of the plan and, in certain prescribed circumstances, a trustee nominated by the pensioners. Add to that prescribed prudential and quantitative limits for different classes of investments and the imposition of significant filing requirements, and the changes made so far are clearly worth a look.

Pension potential
Although the reforms have been bold and the scale of ambition admirable, the government has been slow to enact what many call necessary changes to Jamaica’s pension sector. “There have been a number of setbacks in getting phase II legislation before parliament”, says James. Both the FSC and Ministry of Finance and Public Service are working towards bringing a draft bill before parliament in the not-too-distant-future, which is at least a step in the right direction. The FSC has also prepared its recommendations and is currently soliciting feedback from stakeholders in the industry, including the Pension Fund Association of Jamaica, the Caribbean Actuarial Association and the Insurance Association of Jamaica. And while the reforms have faced criticism, namely with respect to the pace at which they’ve been brought forward, there is a tangible sense today that the sector is beginning to change.

“The Pensions Act and Regulations (to cover phase I) were passed only after significant and substantive dialogue and feedback from interest groups in the pension industry, and although all stakeholders did not see eye-to-eye on all issues, the act and regulations that are presently in force represent a solid legislative platform for us to continue to build on”, says James.

According to one report published in 2009 by the OECD and cited by James, entitled Core Principles of Occupational Pension Regulation, the organisation encourages both members and non-members alike to establish, amend or review their pension regulations according to the principles laid out in the paper. Included in the so-called core principles were: conditions for effective regulation and supervision; establishment of pension plans and pension fund managing companies; plan liabilities, funding rules, winding up, and insurance; asset management; rights of members and beneficiaries and adequacy of benefits; governance; and supervision. “To one degree or another, the core principles, are reflected and incorporated in our Pensions Act”, says James.

Room for improvement
“There are, however, a few key areas in which the legal and regulatory landscape for private pension plans can be improved; particularly in the area of reform of the prudential and quantitative limits for investment of plan assets. The manner in which pension assets are invested and the regulation of those investments bear a direct relationship to the success of private pension plans”, says James. “While the current landscape of restrictive investment regulations has as its primary focus the safeguarding of assets of private pension plans it simultaneously fails to create an environment in which those assets can be managed in order to obtain the best returns at an acceptable level of risk. Movement away from regulation based on quantitative criteria to a prudential or prudent person approach will allow pension plans greater flexibility in the investment management process and a better opportunity to leverage higher returns on investments of plan assets.”

In Jamaica, the reform of the private sector remains very much a continuous process, and a failure to do so could affect the adequacy of pension coverage, the adequacy of retirement benefits and the financial sustainability and affordability of pension arrangements on sponsors of private pension plans. Still, there is a sizeable opportunity for pension providers in Jamaica to grow their pension portfolio, given that only nine percent of the employed labour force is covered under a pension plan, says James. The challenge in the main, therefore, is to educate the remaining 91 percent on the importance and relevance of securing their pension benefits, which, if done successfully, could bring a wealth of opportunities their way.

Catering to the community
With the government focused on reforming the sector and providers looking to make good on the country’s untapped potential, focusing first on the financial and social wellness of Jamaicans is paramount. “NCB Insurance Limited (NCBIC) is cognizant of the ways in which our products and programmes cater to the welfare of the communities we serve”, says James.

“This year we launched our ‘I benefitted’ campaign, which showcased some of our customers who, despite tough economic times, made the sacrifice to put aside monies to support the tertiary education needs of their children. These parents shared how Omni Educator, through our special 20 percent grant, assisted in making it possible for their children to successfully complete college and elevate themselves up the social and economic ladder.” This focus on education can be seen on display again in various other company-led initiatives, not least NCBIC’s ProCare and grant giving programmes, as well as their sponsorship of the Junior School Challenge Quiz.

Apart from education, NCBIC has and will continue to engage with a range of corporate social responsibility programmes, which have each highlighted just how far the firm is willing to go to extend its benefits to the wider community. “Additionally as a wider social responsibility mandate, the parent company National Commercial Bank Jamaica Limited (NCB) through its strategic philanthropic arm – NCB Foundation demonstrates its social responsibility embraced by the businesses within the NCB group of companies to build the communities in which it serves”, says James. “Since its formalisation in 2003, NCB Foundation has donated in excess of JMD 1bn ($8.67m) towards several activities and is actively involved in the socio-economic development of the Jamaican society and providing an avenue through which our over 2,700 employees can give back.”

Testament to the group’s success is that this responsible culture coexists with financial solidity and a willingness to bring innovative advances to the Jamaican pension sector. The company’s segregated pension fund management style is perhaps the clearest indication that NCBIC sits at the cutting edge of Jamaica’s pension sector.

“NCBIC currently manages pension funds on a segregated (as opposed to pooled) basis, with investment portfolios being customised to reflect the liability profile of the respective pension funds”, says James.

“This pension investment management methodology offers trustees the flexibility to rebalance the pension asset portfolio and to take full advantage of changing market conditions on a timely basis. Trustees may extend partial or full discretion to NCBIC in this regard. In the segregated pension fund management model, the assets of funds are not co-mingled (with those of any other fund or with the proprietary funds of NCBIC). This allows trustees, guided by relevant regulations, to align the composition of the pension portfolios under their purview to their particular risk appetite.”

In continuing to abide by a series of innovative pension fund management styles and techniques, the company will stay on this same path, which benefits all of its clients. “Three years ago we embarked on new strategic imperatives designed to grow our penetration in the customer base of the NCB Group through product innovation, sales productivity improvement and maximising the use of technology as an enabling force”, says James.

“Through this process we expect to improve our value proposition to our customers and increase the channels of our service delivery. We have already launched one new product and are proud of our progress so far. Over the next year we expect to launch more products and make significant progress in the pursuit of our goals.”

‘I welcome their hatred’, says expelled Varoufakis

Posted on by Ashton Wenborn

After months of negotiations with international creditors, Greek Prime Minister Alexi Tsipras has overhauled his negotiating team. The reshuffle has meant that Greece’s finance minister Yanis Varoufakis – known to be outspoken and described as a maverick – has been sidelined. The move comes as Greece failed to meet its own self-imposed deadline of April 24, as many predicted, with the country quickly running out of funds.

“They are unanimous in their hate for me; and I welcome their hatred”

Nikos Theocarakis, the handpicked representative of Varoufakis has been replaced by George Chouliarakis who is seen as a close ally to Tsipras. The new negotiating team will be led by deputy foreign minister Euclid Tsakalotos, an economist who, according to Reuters, is well liked by officials of creditor nations.

Varoufakis is said to have fallen foul of his counterparts due to his uncompromising negotiating style. CityAM reports that Spain’s finance chief Luis de Guindos said that all ministers involved in the negotiations told Varoufakis that “this can’t go on.” After negotiations, the finance minister tweeted on April 24:

According to Mujtaba Rahman, Head of European Analysis at the Eurasia Group risk consultancy, reports the Financial Times, “Varoufakis has become the single biggest impediment to a Greek deal,” and that his “relationship with Tsipras and Tsipras’s willingness to cut him loose has been the central question investors have been focused on.”

Markets reacted well to the sidelining of Varoufakis. The Athens stock market saw a 4.4 percent bump, while the German Dax rose nearly two percent. Greek 10 year bond yields also fell by a percent and borrowing costs on Greece’s July 2017 bonds were down by almost four percent.

A promising year for pension funds

Posted on by Ashton Wenborn

If 2014 was a big year for pension funds, 2015 looks set to be even bigger. As countries across the globe continue to recover from the financial crisis, funds across nations at all stages of development are capitalising on new opportunities and increased coverage. Emerging economies are improving their pension systems with wide-reaching reforms and game-changing liberalisation, while new regulations across a number of countries in the EU are helping pension fund managers to optimise and stabilise their long-term returns.

Pension funds remain the biggest institutional investors in a number of countries across the world, and that looks set to continue as their capital is boosted yet further through various key factors. Last year the UK experienced its biggest annual fall in unemployment in more than 40 years, according to data by the ONS, while the US saw its highest level of job creation since 1999 – meaning both could see record levels of employees contributing to pension schemes in 2015 and beyond.

The favourable prospects are also evident on a wider scale; according to the Mercer Global Pension Index 2014, schemes have improved globally, and Professor Deborah Ralston, Executive Director of the ACFS, is confident this is a sign of things to come. “It’s pleasing to note average scores are increasing over time, suggesting pension reform around the world is having a positive effect”, she said in a statement.

According to the report, the number of people between the ages of 55 and 64 still in employment has risen across the majority of countries surveyed, indicating another promising development for pension funds. And they’re likely to be further bolstered when the pension age rises over the coming years – a trend set to take off across a number of key markets in the near future.

Brimming with opportunity
The situation is particularly exciting in emerging economies, where GDP growth is set to hit 4.8 percent this year (up from 4.4 percent in 2014), and 5.4 percent by 2017, according to the World Bank. India, China and other oil-importing countries are expected to receive a boost from lower oil prices, and pension funds in the region will likely reap the benefits.

In wider Asia, pension systems have been going from strength to strength; Singapore ranked in the top 10 of the Pensions Index for the first time ever in 2013, benefiting from relatively high levels of coverage, and it has maintained its place in the top 10. “Pension systems in many Asian countries are in an embryonic phase and we expect them to gradually strengthen in coming years”, said David Knox, Senior Partner at global consulting firm Mercer.

Pension funds are also growing rapidly across a number of African nations. Increased stability in the political sphere and rapid economic growth are leading to a rising number of partnerships with Western pension funds, and there’s enormous scope for further growth in the region; while 80 percent of the population in North Africa already come under a compulsory pension scheme, only 10 percent in sub-Saharan Africa are covered.

“Within three, four years you’ll see a transformative industry”, Hubert Danso, CEO of African Investor Group, told Institutional Investor. Growth in the near future is set to be especially strong in Nigeria, where the pensions industry is now almost three times the size it was in 2009, as a result of pension systems being liberalised and opened up to competition. South Africa continues to account for the largest pensions sector on the continent, with an estimated $252bn in assets.

There the state recently proposed a government-sponsored pension fund that would make contributions obligatory – a move other developing countries have also started looking towards as a means of increasing coverage and further boosting funds.

Among those is Peru, where some are pushing for regulation that would make contributions for everyone under the age of 40 compulsory – a ruling appealed in September. There remains huge potential for more coverage in the country, and that’s likely to be gradually tapped into as the focus moves towards educating people about the importance of pension saving. Elsewhere in South America, countries are seeing strong pension prospects, headed up by Chile and Brazil, which both scored well in the Mercer Pensions index.

Reform and diversification
It’s not just in emerging economies that pension reforms are starting to take effect; a new system in the UK comes into force in April 2015, offering pension savers greater freedoms – which could prove an incentive for more people to opt into schemes. Last May, Finland launched an alternative investment fund managers (AIFM) directive, encouraging the diversification of asset portfolios – something Sweden is also focusing on. The latter implemented new regulations last July, detailing standard debt investments versus alternatives, and widening out the definition of the latter.

Moving towards alternative investments and diversification is a trend being seen throughout the wider investment field across much of the globe, as fund managers adapt to changing market conditions and seek out the wisest possible investments; according to the Financial Times’ MandateWire, alternatives are attracting more attention than other major asset classes. A report by consultancy Mercer showed a similar trend, stating that investors were trying out “less familiar” investments for long-term payoffs.

A number of pension funds are capitalising on the potential benefits of those alternatives – including strong yields and less volatility – in order to optimise funds and achieve greater flexibility. Private equity is becoming an increasingly popular choice – as evidenced in Japan, where the Government Pension Investment Fund recently sold JPY 6.67trn ($55.4bn) in domestic bonds, shifting its focus onto equities to boost long-term returns. African pension funds are likewise strengthening their focus in this area.

Infrastructure too is predicted to attract greater interest from pension funds in the coming years, with other countries projected to follow in the footsteps of the UK’s Pensions Infrastructure Platform (PIP). Set up in 2012, the PIP sees pension funds pooling their funds together to approach challenges in a constructive, inventive way so as to secure larger, long-term investments with lower fees. “The basic philosophy of the PIP is infrastructure assets as a match for long-term inflation-linked cashflows”, said its CEO Mike Weston, who was appointed in September. “You are trying to match a long-term liability stream, so you want long-term predictability”, he added.

 

Pension Fund Awards 2015

Posted on by Ashton Wenborn

Austria
Victoria Volksbanken Pension

Best Pension Fund, Belgium
Amonis OFP

Brazil
HSBC Fundo de Pensão

Canada
Ontario Teachers Pension Plan

Caribbean
NCB Insurance Company

Colombia
Colfondos

Croatia
PBZ Croatia Osiguranje

Chile
AFP Capital

Czech Republic
Ceske Sporitelny

Denmark
Industriens Pension Fund

Finland
ELO

France
EADS

Germany
Allianz

Iceland
Almenni

India
Tata AIG Nirvana

Ireland
Allianz

Italy
Fonchim

Mexico
Profuturo

Netherlands
Pensioenfonds Horeca en Catering

Norway
Nordea Norge Pensjonskasse

Peru
Prima AFP

Poland
ING

Portugal
CGD Pensoes

Serbia
Dunav

South Africa
Sentinel Retirement Fund

Spain
Ibercaja

Sweden
Kapan Pensioner

Turkey
Groupama Sigorta

UK
Pension Protection Fund

US
Arkansas Teachers Retirement System

Deutsche Bank slashes $3.8bn in refocus

Posted on by Ashton Wenborn

One of the world’s leading financial institutions has announced as significant change in strategy as a result of tougher new rules on leverage. Germany’s largest bank, Deutsche Bank, has today unveiled $3.8bn worth of cuts to its operations that will see it retreat from some of its investment banking assets and reduce its stake in consumer-focused Postbank.

Incoming regulatory changes are causing many of the world’s largest financial institutions to reassess their strategies. The most stringent new rules includes the leverage ratio, which requires banks to maintain a more reasonable balance between their assets and how much it borrows.

Deutsche is still expected to grow in other areas over the coming years

Deutsche Bank say they will reduce leverage at its investment banking division by €150bn in the next three years. At the same time, the bank will reduce its holding in retail-focused Postbank by floating it next year. This is likely to result in a slashing of up to 200 branches, as well as job cuts of 3,000. The investment banking division is also likely to see job losses.

Despite posting better-than-expected quarterly results yesterday, Deutsche still saw a 50 percent drop in its earnings for the first three months of the year. Last week, Deutsche Bank was fined €2.5bn for rigging interest-rate benchmarks by US and UK regulators, while its stock performance has been well below that of its global rivals over the last year.

Announcing the new strategy, Deutsche’s joint CEO’s, Juergen Fitschen and Anshu Jain, said that the firm would stop trying to spread itself too thinly across many different areas. “We must remain client-centric, but focus more sharply on mutually attractive client relationships; remain global, but become more geographically focused; and remain universal, but avoid trying to be all things to all people.”

While this shrinking of the business is significant, Deutsche is still expected to grow in other areas over the coming years. It is set expand its asset and wealth management divisions by ten percent each year until 2020, while it is likely to also focus on growing in key emerging markets like India and China.

Infonavit on reshaping Mexico’s mortgage market

Posted on by Ashton Wenborn

Mexico represents a landmark example of how emerging nations can quickly upend their standing on the world stage and, with the right reforms in place, emerge as something truly impressive. In Mexico, urbanisation has taken hold more rapidly than almost any other OECD country, and by the year 2010 almost 78 percent of the population would go by the tag ‘city dweller’ (see Fig. 1). Owing to a half-century-long drive to fulfil the country’s formal housing needs, an unrelenting focus on social housing has brought with it a host of challenges, and Mexico must now adapt to a more sustainable model or risk facing struggles further along the line.

Under the leadership of its CEO, Alejandro Murat Hinojosa, Infonavit has transformed Mexico’s housing market and set the population on a pathway to sustainable prosperity. World Finance spoke to Murat Hinojosa about the many ways in which the housing landscape has changed, and how it is that his and Infonavit’s contributions have created a host of new and exciting opportunities. “Infonavit is changing the course of housing history in Mexico through financial innovation”, says Murat Hinojosa. “We transitioned from a quantity-oriented, numbers-based mortgage model to one focused on improving the quality of life of the workers and their families, not only providing mortgage loans, but also protecting and ensuring efficient returns to their savings.”

Providers of mortgage loans in Mexico, 2014

389,600

Infonavit

63,100

Fovissste

94,900

Banks

26,100

Co-financing

Source: Infonavit, Fovisste, ABM

Some decades ago, large swathes of the population couldn’t afford a house, and the prospect of a home away from hardship convinced millions of city residents to pack their bags and head to the outskirts where the costs were less. With housing agencies like Infonavit doling out subsidised mortgages and healthy relocation packages, the focus on social housing construction enabled the country to make a much-needed transition. “This rapid expansion of housing finance [see Fig. 2], led mainly by Infonavit and facilitated by public policies aiming to expand access to formal housing, enabled the country’s transition from informal to formal housing on a grand scale”, says Murat Hinojosa.

“Although great progress towards diminishing the housing deficit was achieved, the model became unsustainable.” In choosing to focus on social housing outside of the city centre, the population has moved away from the pick of the jobs and services, which has raised congestion, dampened productivity and brought an all-round lesser quality of living. The country’s urban population rivals many even in developed nations, yet the key difference is that largely low-rise single-family homes rather than high-rise buildings dominate the landscape. Irrespective of the efforts made to address the housing deficit, the market of today still bears the scars of abandoned properties and social segregation, according to a recent OECD report prompted by Infonavit, and the sector has failed to provide the basic benefits of agglomeration: lower transportation costs, security, better schools, lower carbon emissions, innovation clusters and proper public services.

Mexico's urban population

Changing face
The appointment of President Enrique Peña Nieto in 2012 hammered the final nail in the coffin of Mexico’s long running social housing model. This has shifted the government’s focus to centre less on single family housing and more on ‘verticality’. Since his appointment, the president has partnered with congress to approve no less than 11 key structural reforms, each aimed at boosting productivity, expanding citizen rights and, crucially, consolidating a more efficient democracy. “The federal government has shown a strong commitment with this sector and as such, at the beginning of 2015, President Enrique Peña Nieto has announced fiscal and financial measures supporting housing financing and development with aims to build 500,000 new homes with an expected investment of over $23bn”, says Murat Hinojosa.

True, the issues plaguing the housing market are not easily fixed, though the ruling administration’s well-intended structural reforms should boost both the country’s productivity and competitiveness, and should generate sustainable economic growth in the region of five percent and upwards by 2018.

As was the case for so many developing nations of its ilk, Mexico was in no way isolated from the financial crisis, and the circumstances inflicted pains on the economy and on employment (see Fig. 3). “The effects of United States’ housing crisis took some time to appear in Mexico but they were significantly less. One main difference is that in Mexico there was no price bubble. As a matter of fact, the impact on housing prices was limited”, says Murat Hinojosa.

“Another important difference was the contagion between different sectors. Whereas in the US the crisis began in the real estate market and spread through the financial sectors, in Mexico the opposite effect occurred. Moreover, in Mexico the contraction of housing sales, while important, had differences between regions and segments.” In this important period, Infonavit fought hard to keep pace with lending, to mitigate the decline in housing supply and to secure its affiliates’ access to housing.

Fast-forward to the present and the market is much changed from the crisis-stricken climate of yesteryear. Underpinned by its fair share of macroeconomic stability, Mexico has solid economic fundamentals that should allow the country to cope with any adverse international winds. The federal government has also demonstrated sound financial responsibility in the face of crisis and managed to adjust public expenditures accordingly in an enduring low oil price environment.

Housing finance in Mexico

According to forecasts carried out by Mexico’s central bank, the national economy is on course to expand somewhere in the region of 2.5 to 3.5 percent in 2015 and 2.9 and 3.9 percent in 2016; far greater than the estimates for 2014, which fell in the region of two to 2.5 percent. In a bid to break down the estimate into the sum of its parts, the central bank said that the growth would be driven by a gathering US recovery, a stronger domestic market with improved consumer confidence and labour statistics, and a thriving construction, automotive, aeronautics, services and electronics sectors. However, no other factor will play a greater part than structural reform in the energy, telecom and finance markets, which should shepherd the economy on to greater heights.

In February 2013, Peña Nieto announced a national housing policy and signalled the country’s departure from the social housing model of old, setting out a new course to provide suitable and satisfactory housing in a more sustainable manner. As a fundamental part of the urban development puzzle, the ambition is not only to offer more sustainable housing opportunities, but an all round better quality of life.

Broken down into its simplest parts, the four main points set out in the national housing policy are to enhance coordination of urban planning and housing institutions, move towards a sound and sustainable urban development model, reduce the housing deficit in a responsible manner and procure more appropriate and decorous housing solutions. However, public housing agencies still have a major part to play in the process, not least Infonavit, whose influence in the housing sector means that it will remain a relevant and highly influential party throughout the plan’s implementation. In close coordination with both the Ministry of Finance and Public Credit, and the Ministry of Agrarian, Territorial and Urban Development, Infonavit will continue to work under a sound institutional framework and work closely alongside other national housing agencies in seeing this vision through to fruition.

A reinvigorated market
“Looking at the housing situation in Mexico at the moment, there are a number of points worth touching on”, says Murat Hinojosa. “Due to Mexico’s macroeconomic stability, both commercial banks and governmental institutions are increasing credit lending for the housing sector. On the one hand, commercial banks are lending more money for the high-end market. On the other, governmental institutions are fostering credit for developers and both subsidies and more credit for low-income households.”

The government is also expanding its solutions to build better and more sustainable housing closer to city centres, where jobs are more readily available and transportation costs lower. Its leadership is promoting better coordination from all the relevant stakeholders, which will ultimately bring people to consider formal jobs, improve the sector’s productivity and overall quality of life for the average citizen.

Meanwhile, the vertical housing segment has been gathering momentum in recent years, and in only the past five years its share in the Unique Register of Housing has increased from eight percent to 27 percent. Infonavit’s efforts have also brought positive results in terms of reducing urban sprawl, and between December 2012 and December 2014, the number of housing developments located within the recently defined urban contention perimeters increased from 35 percent to 67 percent.

Unemployment in Mexico

According to data published in 2015 by the National Institute of Statistics and Geography (INEGI), the housing sector contributed 5.9 percent to GDP and three million jobs (7.3 percent of the total) to Mexico in 2012. Additionally, it added more value to the GDP than either agriculture (3.3 percent) or education (4.1 percent) and can be likened more so to transport, shipping and storage (6.3 percent).

Infonavit’s transformation
Otherwise known as the Institute of the National Housing Fund for Workers, Infonavit was originally founded in 1972 as an autonomous organisation, and its institutional governance consists of the equal representation of workers, employers and government. The institute’s dual mandate is to ensure access to decent and decorous housing for Mexican workers and also to provide the secure and responsible management of the National Housing Fund for Workers.

As part of the first mandate, Infonavit managed to generate over three quarters of all mortgages in 2014 (see Fig. 4) and has facilitated more than eight million loans since its foundation. On this same point, the organisation has approximately 4.4 million outstanding loans, and more than 1.2 million mortgages and home improvement credits were granted in the period spanning January 2013 and December 2014. On Infonavit’s second mandate, the housing resources registered by the Retirement Fund Administrators (AFORES) and managed by the institute; represent 21 percent of the total resources.

Foreign property investment: what does it mean for economies?

Posted on by Ashton Wenborn

The number of overseas property investors in cities such as New York (see side bar), London and Sydney has skyrocketed over recent years, as buyers from the likes of Russia, the Middle East and China flock to Western economies to capitalise on political security and stable growth.

Global foreign property investment from China alone has hiked a staggering $14.4bn in the space of five years (from just $600m in 2009), rising 60 percent in 2014, according to real estate consultancy Knight Frank. In London, 69 percent of investors purchasing prime location new-builds were from overseas in the two years to June 2013, with nearly half living abroad.

Percentage of New York City residences owned by shell companies in 2015

57%

Bloomberg Tower

69%

The Plaza

77%

One57

64%

Time Warner Center

57%

Trump International

58%

15 Central Park West

Source: The New York Times

Misguided backlash
These figures, compounded with the ongoing headache of soaring house prices (see Fig. 1), are leading a number of industry insiders to conclude that foreign investors are out-pricing locals. Michael Sacks, Director at UK-based Sequre Property Investment, for example, claims that cash-heavy overseas investors are “corrupting the [UK] market” by purchasing real estate to sell at higher prices, leaving wannabe first-time homeowners out in the rain.

The backlash isn’t unique to Britain. In Australia, “there are perceptions in the community that young [people] are being priced out of the market by speculative investors from offshore”, according to Tim Harcourt, Fellow of Economics at UNSW Australia Business School, while Singapore and Hong Kong have both introduced taxes for foreign property investors on the back of similar concerns.

Others argue overseas investors that are not living in the designated properties aren’t contributing to local economies; an anxiety especially prevalent in New York, where non-primary residences now account for a reported 89,000 co-ops and condos.

But all of these arguments ignore the flipside; that overseas real estate investors are an essential driving force for new-builds and wider economies. The misguided backlash hasn’t been helped by a recent report by The New York Times, which revealed that almost 50 percent of the highest-price American residential real estate was bought through shell companies – limited liability corporations through which foreign investors didn’t have to reveal their identities.

Among the list was an unfortunate string of corrupt individuals. Russian oligarch Vitaly Malkin, who’d been embroiled in a number of shady dealings before purchasing an apartment at the centre for over $15m in 2010, and Greek official Dimitrios Contominas, who recently sold his condo for over $21m – after being arrested for illegal company fund use in 2014. The issue has led the Fiscal Policy Institute (FPI) to suggest a graduated four percent tax on high-end property investments on the apparent grounds that “these owners bid up the price of NYC residential real estate, and since they don’t spend much time in these units, contribute little to the local economy”.

In Australia, the government has already proposed application fees for foreign investors, as part of a crackdown on the back of similar concerns around Melbourne and Sydney. The proposals would see AUD 1m purchases incurring fees of AUD 5,000, rising to AUD 10,000 for every extra AUD 1m and AUD 100,000 for anything over AUD 1bn.

Apples to oranges
But those arguing that foreign property investors are out-pricing local buyers seem to be overlooking the reality that the majority of foreign investors purchase properties in a completely different market to those of most ordinary buyers – namely ultra-high-end new-builds.

Amanda Lynch, CEO of the Real Estate Institute of Australia, agrees: “Foreign investors and first home buyers purchase vastly different properties, with the latter group entering the market at the lower price range, while foreign investors generally purchase properties valued at over $1m”, she says.

A report by think tank Civitas found the situation to be similar in the UK, while Knight Frank data showed that domestic residents still accounted for 79 percent of new home purchases across London – rising to over 93 percent in outer London. That implies once again that foreign investors are mainly limited to the most expensive, largely non-domestic properties – meaning their impact on the wider real estate market in cities across the world is limited.

“The ability of foreign investors to influence the market, at least in an Australia wide context, is negligible”, says Lynch. Introducing taxes, or cracking down on transparency as the US is predicted to do following the shell company revelations, appears to evade the real issues.

If the Australian Government wants to tackle extortionate property prices, it should look at other factors rather than solely focusing on foreigners. Among those is capital gains tax exemption on principal homes, and negative gearing – whereby investors get tax deductions if there’s negative cash flow on their properties – which Prime Minister Tony Abbott tactfully declined to review.

Harcourt agrees that a wider approach needs to be taken if the housing issue is to be somehow overcome: “Most young home buyers are being outbid not by foreigners but by baby boomers living off the benefits of negative gearing and superannuation tax concessions”, he says. “If anyone won Willy Wonka’s golden ticket off the Australian budget, it is Australia’s baby boomer generation.”

Harcourt adds that many of those out-bidding others for properties are actually domestic, rather than foreign, investors. “Anecdotes abound of Chinese bidders but many are Australians of Chinese origin”, he says, implying that the perceptions of out-pricing by overseas investors are based on hearsay and conjecture rather than solid fact.

An essential stimulus
If the Australian tax, or the one proposed by the FPI, have any effect at all, then it’s likely to be negative. That’s something Andrew Taylor, Co-Chief Executive Officer of Juwai.com, recognises: “We do believe that imposing unwise fines on overseas buyers will reduce foreign investment – investment which is demonstrably good for Australia.”

Overseas investment in key cities across the globe remains an essential stimulus for new-builds, propping up a real estate market that suffered several blows over the past decade under the financial crisis. The REIA agrees: “Without it, many building projects would simply not be viable”, says Lynch.

That’s certainly true in London; The Shard, brought to fruition thanks to backing from Qatar, has become an icon that’s brought with it global publicity, development in the surrounding region and extensive business and finance opportunities. It’s quite clear that such investments – “an exclamation mark that London and Britain are open for business”, in Boris Johnson’s words – are vital for the country’s economy.

The same is true of the US and the investors supporting the likes of the Time Warner condos; they’re propelling the economy by pumping in much-needed investment. Those economic benefits can clearly go a significant way in compensating for the lack of tax contributions that non-primary proprietors, as the FPI argues, aren’t subject to if living overseas.

And where foreign investors do venture into the more affordable property market, it can further bolster economies and their citizens. “It adds to the supply of housing and increases the supply of rental properties”, says Lynch. “Without this investment, Australia could potentially see higher average rents.” Once again, any attempts at deterring overseas investment are likely to do more harm than good – as the Property Council of Australia, a body for real estate investors and developers, argues: “The proposed new fees are excessive and will act as a deterrent to foreign investment”, it said in a statement. “This in turn will jeopardise housing supply, thereby exacerbating existing housing shortages”, pushing the prices up even further.

One-track focus
But some continue to argue that even though the majority of foreign investments are properties in a distinctively different price range to those of ordinary buyers, effects can trickle out to the wider economy. In the Civitas report, David G Green and Daniel Bentley state that “foreign buyers are chiefly interested in costly central London properties, on which they spend billions of pounds a year, but the impact ripples out to the suburb and beyond”.

That draws attention to the real issue; expensive new-builds with high-end investors in mind are being almost exclusively focused on, with ordinary, reasonably priced real estate severely neglected. It’s that predominantly external focus that’s provoking controversy. That was seen in London in January, when UK development company Berkeley Group faced aggressive opposition for its video promoting a new block of London apartments – in which the cheapest flats will cost £1.1m ($1.61m) – targeted at foreign investors, according to The Guardian.

But the problem is less down to the investors themselves than it is the developers; in London, just 18-20,000 new houses are being built despite an annual population growth of around 100,000, according to Professor Tony Travers, local government expert at the London School of Economics, in a BBC report. A new development at Battersea Power station serves as a suitable emblem for the wider city, with affordable homes accounting for just 15 percent of its total.

It’s a similar lack of housing supply in Sydney and Melbourne that’s driving the soaring prices in Australia, according to the REIA. That’s resulting from limited available land in urban areas, red tape and lengthy, expensive planning processes – rather than foreign buyers.

In any case, according to Don Peebles, Chairman and CEO of real estate investment firm Peebles Corporation, it’s only a matter of time before the ultra-high-end property surge – at least in New York – crashes. That means developers might soon be forced to shift more of their attention to lower-end housing. “In the last year to 18 months we’ve seen six years of real estate appreciation all at once, because the market plummeted in 2008 and didn’t really get into a recovery until 2013”, he said in an interview with Bloomberg.

“This is not sustainable and there is not a very broad universe of people buying $100m.” Peebles says to account for that change, a sensible focus for developers would be on “workforce and luxury housing”, including rental space, for domestic, local buyers.

While some would argue that would be a good thing, a total shift would likely have far-reaching negative implications. Foreign property investment within both high and lower-end spheres is vital for real estate markets and wider economies, and while it shouldn’t detract from the development of ordinary, affordable homes, it’s an essential stimulus for the very cities witnessing the backlash.

By laying the onus on overseas buyers, the Australian Government and those attacking the US shell company saga risk detracting from more relevant causes for rising house prices, while simultaneously discouraging the very individuals helping to limit that rise. A wider vision is needed if governments are to tackle the pressing crises rupturing Western property markets in a sensible, realistic way that benefits everyone.

HSBC considers moving HQ from UK

Posted on by Ashton Wenborn

One of the UK’s leading banks has announced it is reviewing whether it should move its headquarters out of the country after investors raised concerns over the cost of doing business. HSBC is thought to be considering a move to Hong Kong; after many of its Asia-based investors said that the prospect of higher taxes and further regulations would harm its profitability.

Any departure from the UK would be a blow to the country’s financial services sector in London

Announcing the move, HSBC Chairman Douglas Flint said that the bank would undertake a “strategic review” of its operations, which may result in a move away from the UK. “As I said at our informal meeting in Hong Kong on Monday, we are beginning to see the final shape of regulation and of structural reform, including the requirement to ring fence in the UK. As part of the broader strategic review taking place, the Board has therefore now asked management to commence work to look at where the best place is for HSBC to be headquartered in this new environment.”

Any departure from the UK would be a blow to the country’s financial services sector in London, which has traditionally acted as the most desirable location for many of the world’s leading institutions. HSBC moved its headquarters to the UK in 1992 after acquiring the Midland bank, and has taken prime position in London’s Canary Wharf financial hub ever since. It currently employs more than 47,000 people in the UK.

The news comes during a bitterly contested general election in the UK where politicians argue over how to regulate and tax major financial institutions. With little chance of their being a strong government after May 7th’s election, the uncertainty over policy is giving major businesses pause for thought over their long-term operations. HSBC is also thought to be concerned about any departure of the UK from the EU, with a referendum over membership likely to take place within the next two years.

Incoming regulations are already having an effect on banks like HSBC. By 2019, banks like HSBC and Barclays will have to insulate high-street operations away from riskier investment banking services in an effort to avoid the sort of crisis that happened in 2009.

The only way is up for oil prices, says Hayward

Posted on by Ashton Wenborn

Former chief executive of BP, Tony Hayward, has claimed that oil prices are set to soar after their recent steep decline in prices, according to the Financial Times. The prediction was made by Hayward – who presided over BP during the 2010 Deepwater Horizon oil spill and now runs the Iraq oil focused company Genel Energy – at a Financial Times summit in Switzerland on April 23.

Hayward is not alone in his optimism for oil prices

Hayward is not alone in his optimism for oil prices. Ian Taylor, chief of the Dutch energy commodity trading company Vitol also claims that the price of oil has bottomed. Likewise, the CEO of the liquid gas exporter Cheniere Energy Charif Souki shares the same sentiment. In an interview with CNBC he claimed: “It may take another few months, but I think the worse is now behind us and the correction mechanism has started.”

The recent boom in shale initially led to a fall in oil prices in 2014, from over $100 a barrel in June 2014 to less than $50 in January 2015. In what seemed like a counterintuitive move, in November 2014 rather than cut production in order to hold up prices, OPEC held production rates steady, further depressing the price of oil.

According to Hayward this was to stop the shale boom “in its tracks”, the FT reports. “The supply base is shrinking,” said Hayward, “[t]hey [OPEC] are maintaining their market share. It seems like it’s been a big success.” Speculating that the price of oil would return to $80, Hayward called OPEC “the most successful cartel in history.”

The impact of migration on sender countries

Posted on by Ashton Wenborn

Now is an age of globalisation. The parochialism of the nation-state is giving way to the global village. At the same time, never before have borders been so heavily policed; walls keeping prospective citizens out so high; camps for detaining the transient so large. Yet for all these barriers to entry and hazards to navigate, the number of migrants, globally, continues to grow. In 2013 247 million people, according to the World Bank, were global migrants, while 2015 is estimated to see this number rise to 250 million.

From the borderlands of the American South West, to nearly every nation in Europe, and down to the South African cities of Durban and Johannesburg, anti-immigration sentiment is on the rise; the economic benefits of migration in migrant-destination countries hotly debated. While the impact in destination countries in areas such as North America and Western Europe is a constantly recurring debate, the economic impact – be it positive or negative – also weighs heavily upon sender nations.

Sending money south
For sender countries, one of the chief benefits of global migration is remittance payments from the departed. Migrants that have secured a job abroad often send parts of their wages to their families still residing in their home country. While the growth of remittance payments has slowed in 2015, their total global value still stands at $440bn. Further, remittance payments, due to positive predictions for the global economy, are set to pick up growth rates in 2016 and reach the value of $479bn by 2017.

One of the primary economic drawbacks of migration for sender countries is the experience of a brain drain

These large transfers of money, from the more prosperous developed world to the poorer developing, are often seen as key to the latter’s economic development. As Professor Andrew Geddes, an expert in international migration at the University of Sheffield notes, remittance payments “are a private flow that is far more significant in size, scale and impact than state to state development aid. They are private flows that put decisions to consume, invest etc in the hands of migrants and their families.” As the Philippines-based newspaper the Inquirer reported in 2013, remittance payments “sent home by overseas Filipinos now reach about $2bn per month, oiling the country’s robust consumer spending.” In Nigeria, remittance payments are said to contribute up to five percent of GDP.

Likewise, remittance payments can also be used as collateral for migrants to purchase houses in the sender country. As one report by Migration Policy notes, “The idea is to develop legal and financial procedures that permit migrants to purchase a house for themselves or their families without having to return to their country of origin. The remittances are used to pay off the loan, while the house serves as loan collateral.”

Others are less optimistic about the benefits of remittance payments. In the 19th century, the ability of impoverished populations to migrate was also viewed as an “escape valve” that dissipated social discontent. The contemporary sociologist Werner Sombart observed that the migration opportunities offered by the American West prevented social conflict in the US. At the turn of the twentieth century the German state and many newly independent Balkan states also saw immigration as providing a safety valve for relieving social discontent within their own countries.

According to Raúl Delgado Wise and Humberto Márquez Covarrubias, both of the Autonomous University of Zacatecas, Mexico, remittance payments are providing a similar function. Remittance is being relied upon by governments, in absence of meaningful economic development, as “a support for social stability.” In relation to sender countries such as Mexico, El Salvador, Philippines, and Morocco, Wise and Covarrubias write that “the chief benefit of remittance payments are used by states as, in that they mitigate poverty and marginalisation while offering an escape valve from the constraints of local, regional, and national labour markets.”

The problem with such reliance upon remittance, say Wise and Covarrubias, is that it is “in reality a perversion of the idea of development that offers no prospects for the future.” Poverty is merely being relieved through remittances, with the support of governments and international agencies, rather than fundamentally addressing poverty through economic development policies.

Unlocking funds
Beyond cash transfers for consumer spending – as economically stimulating as they may or may not be – remittance payments also have the potential to unlock much-needed funds for developing countries. These funds could be used to promote more comprehensive development initiatives. The use of remittance payments has been used in some countries as collateral for international borrowing. As the World Bank notes, the “use of future remittances as collateral – future-flow securitisation of remittances – can lower borrowing costs and lengthen debt maturity. An important element of a future-flow securitisation structure is the creation of a special purpose vehicle offshore to issue the bond and shield it from sovereign interference.” Although up to date figures are not available, in 2008 an additional $20bn had been raised by developing countries using this method.

Global migration from the developing to the developed world also opens up other potential tools for economic development. Migrants in destination countries saving their money are likely to use a deposit account, accruing little interest. This presents a financial opportunity for sender countries, through offering bonds to diaspora populations to raise funds for development.

Typically a migrant saving in a destination country will be earning little to no interest on their savings. Sender countries could offer their countrymen (and women) working abroad the possibility of purchasing a bond “with a face value of $1,000, say, carrying a three to four percent interest rate and five year maturity,” the World Bank suggests. Interest rates paid to those holding bonds would be lower than that of sovereign bonds issues, as the interest benchmark rate, determined by that of a deposit account, would be lower than the LIBOR benchmark rate.

Some countries have had success with diaspora bonds, such as India and Israel, with the former using it to support balance of payments and the latter to fund education and infrastructure projects. Migration offers the opportunity for developing countries to carry this out. For example, Bangladesh has around $9.5bn in diaspora savings, while Haitian and Afghani diaspora populations both own around $4.5bn in savings. The finance accrued from a diaspora bond could help finance much needed infrastructure projects in these countries. As the World Bank reports, globally diaspora bonds “could be used to mobilise a fraction – say, one-tenth – of the annual diaspora saving, that is, over $50bn, for financing development projects.” Nigeria, with its estimated 17.5 million migrants abroad, is presently in the process of readying diaspora bonds.

The American Uncle
In 19th century Germany there was the cultural – and actual individual for some – figure of the American Uncle. Following the 1848 revolutions, many Germans headed across the Atlantic, and made their fortunes in the US. Now as before, some migrants are able to take advantage of the opportunities offered in destination countries and make it rich. Many such migrants often engage in philanthropy, sending money back to their home countries or towns in the hopes of alleviating poverty for the less fortunate.

According to the World Bank there are “[t]wo relatively organised forms of diaspora philanthropic engagement is through Home Town Associations (HTAs) and diaspora foundations,” as well as the use of private channels. “Some governments,” the World Bank continues, “have attempted to channel collective remittances through HTAs by offering matching funds. Among the best-known matching fund schemes is Mexico’s 3-for-1 program, under which the local, state, and federal governments all contribute $1 each for every $1 of remittances received through a HTA overseas.”

These philanthropic endeavours are mostly used in rural areas to provide vital services such as healthcare, electricity or education. However, the private nature of philanthropy often means that it “is difficult to assess whether these investments—and the matching grants—have gone to the highest-priority projects or have been diverted from other regions with a great need of assistance from fiscally constrained governments,” says the World Bank. Such philanthropy may provide small, often localised poverty relief and even some economic development. However, the criticism of Wise and Covarrubias of remittance payments also applies here; it is a temporary relief measure in absence of economic development. No economy ever transitioned from third to first world through the patronage of wealthy donors.

Brain drain to Europe
One of the primary economic drawbacks of migration for sender countries is the experience of a brain drain. In the past, migration was primarily the pursuit of the rural poor, dislocated from their traditional economies by modernity, left without many prospect in their home country. However, the developing world is becoming increasingly educated. The result for sender countries of the developing world is the loss of the most educated (often so at the expense of the state) to other countries, leaving the sender country without vital human capital.

“Potentially, there is a loss known as brain drain if countries invest in skills and training (eg of medical professionals) only for these people to then leave and work in another country,” Professor Geddes says, “although there will be flows back, such as remittances and there may be the eventual return of migrants to their homes possessing more skills and experience.”Others are not optimistic. Professor Leila Simona Talani in her book The Arab Spring in the Global Political Economy, argues countries such as Tunisia and Egypt are trapped in a vicious cycle of a brain drain and marginalisation in the global economy; both continually reinforcing each other.

According to Talani, “Tunisia is lagging progressively more and more behind in terms of the technological skills necessary to enter new global productive chains. This dramatically reduces the possibility for highly-skilled personnel to find appropriate jobs in the country.” The option taken by these highly-skilled workers is often to realise the potentials of their university education in France, Germany or Italy, reinforcing Tunisia’s lag and marginalisation.

The same phenomena exists in Egypt says Talani, writing in her book that “the marginalisation of Egypt and of the MENA region from the global political economy reduces the possibilities of employing highly skilled personnel in the country, thus further adding to its marginalisation. The country seems to have entered a vicious circle which is becoming more and more difficult to break.”

Whether or not migration brings a net economic benefit to the sender countries is hard to determine. Migration offers many benefits to sender countries through the transfer of funds from those abroad through remittance, however the danger is that this becomes a substitute for economic development; with the sender countries reliant upon cash transfers but without any real economic foundation to build upon. Ideas such as diaspora bonds or using the future-flow of remittance payments to secure debt may help cash strapped sending countries with much needed funds – which if used correctly, such as to build infrastructure – could stimulate economic development.

Venezuela secures $5bn loan from China

Posted on by Ashton Wenborn

Venezuela has secured a loan from the Chinese government of $5bn. Venezuelan President Nicolas Maduro stated only that it would be used to “finance development,” without giving any specific details. The loan will, according to Venezuela Analysis, be repaid using oil exports to China. Venezuela currently sells 640,000 barrels of oil to China daily, with this expected to rise to one million.

China is now Venezuela’s primary financial backer

The loan comes at an important time for Venezuela. The steep decline in world oil prices has hit the country particularly hard, as oil accounts for 95 percent of Venezuela’s exports. The country is also in the midst of a recession and reeling from high inflation, resulting from a mixture of economic mismanagement and sanctions imposed by the United States.

China is now Venezuela’s primary financial backer. Since 2007 the Latin American nation has received over $50bn in loans, reported the LA Times earlier this year. In January of 2015, after a trip to China, President Maduro secured $20bn from China to fund infrastructure development.

According to The Diplomat, the loan from China stems from a wish to “avert a major crisis in a country that has given it a geopolitical foothold in Latin America for decades.” The loans are perhaps less about development than attempting to put Venezuela’s ailing economy on life support.

China has had close relations,based on ideological affinity, with Cuba since Maduro’s predecessor, the late Hugo Chavez, was elected to office. As Venezuela moves closer to China, Cuba has warmed relations with its traditional adversary, the United States, as economic sanctions and travel restrictions have eased.

Cuba and US become stronger neighbours

Posted on by Ashton Wenborn

For more than half a century, relations between Cuba and its superpower neighbour have been frosty. Beginning with an embargo imposed on Cuba by the US, the two countries have spent the past 53 years distrusting and refusing to do business with one another. Undoubtedly, the worse off of the two has been communist-run Cuba, which has been unable to sell its exports to its nearest and largest neighbour as a result of the embargo (see Figs 1 and 2).

However, just before the end of last year, US President Barack Obama delivered a speech that was the most conciliatory stance shown by an American leader since the dispute began. If the speech turns into more than just rhetoric and brings an end to an economic ban that has lasted more than half a century, then the potential for prosperity for Cuba’s downtrodden citizens is vast.

US President Barack Obama delivered a speech that was the most conciliatory stance shown by an American leader since the embargo began

Cuba effectively became an enemy of the US when Fidel Castro led a revolution against US ally Fulgencio Batista at the end of the 1950s. It subsequently embraced the communist ideology espoused by the Soviet Union.

Before the revolution, the US and Cuba had been strong trading partners. Cuba was seen as an exotic location to which the rich and glamorous of American society holidayed, while acting as a strategic link to the rest of Latin America. General Batista was a staunch ally of the US for many years, but his regime was widely condemned for causing mass corruption throughout the country.

Troubled past
Batista’s regime led to more than two decades of close cooperation between the US and Cuba, so much so that the US effectively propped up his government with military and economic aid. US companies flocked to the island during his reign, and there was widespread corruption throughout the country as a result. This ultimately fuelled a huge amount of resentment among the Cuban people, with a rebel group led by Fidel Castro rising up during the 1950s.

The US Government’s part in the conflict and propping up of Batista meant that many Cubans saw their larger neighbour’s interests being pursued at their expense. Eventually, the US ceased supply to Batista’s regime, leading to disgruntled US State Department Advisor William Wieland famously stating: “I know Batista is considered by many as a son of a bitch… but American interests come first… At least he was our son of a bitch.”

Ever since the Cuban Revolution deposed General Batista at the start of 1959, the two countries have had practically no relations whatsoever. John F Kennedy’s government initiated an embargo on all trade from Cuba a year later when the new regime, led by new President Fidel Castro, nationalised a number of US-owned oil refineries without paying a single dollar in compensation. All this changed at the end of last year, however, when Obama announced plans to normalise relations between the US and Cuba, open an embassy in Havana and negotiate the end of the embargo.

Fig 1

Ending the embargo
Announcing the dramatic shift in policy towards Cuba, President Obama said: “In the most significant changes in our policy in more than 50 years, we will end an outdated approach that, for decades, has failed to advance our interests, and instead we will begin to normalise relations between our two countries. Through these changes, we intend to create more opportunities for the American and Cuban people, and begin a new chapter among the nations of the Americas.”

He added that the embargo had become especially outdated in light of improved relations between the US and other communist-run countries. “Neither the American, nor Cuban people are well served by a rigid policy that is rooted in events that took place before most of us were born. Consider that for more than 35 years, we’ve had relations with China – a far larger country also governed by a communist party. Nearly two decades ago, we re-established relations with Vietnam, where we fought a war that claimed more Americans than any Cold War confrontation.”

It’s important to note that the embargo on trade with Cuba is yet to be lifted, and any such move would have to pass through a potentially hostile Republican-led Congress. Nevertheless, the softening of relations between the two countries is a historic moment that came as a surprise to many.

Raul Castro, the current president of Cuba and younger brother of Fidel Castro, was quick to acknowledge the steps taken by Obama. He hailed the news as a huge opportunity for Cuba, and said Obama’s decision “deserves the respect and acknowledgement of our people”. However, Raul Castro also called for the US to go further and end the embargo. “We have agreed to re-establish diplomatic relations, but this does not mean the principal issue has been resolved: the blockade which causes much human and economic damage to our country should end.”

Boosting trade
A key part of the deal between Cuba and the US will be trade, according to Obama – in particular, giving the Cuban people more money through remittances and boosting the country’s nascent private sector. “I also believe that more resources should be able to reach the Cuban people,” he said. “So we’re significantly increasing the amount of money that can be sent to Cuba, and removing limits on remittances that support humanitarian projects, the Cuban people and the emerging Cuban private sector.”

With so many Cubans fleeing the country for the US over the past 50 years, there has been a substantial amount of money sent back to the country to family members. It is thought that every year around $2bn is sent to Cuba, but the US has restricted the amount that individuals can send to $500. With the reforms, Cuban Americans are likely to be allowed to send back as much as $2,000, which would prove a huge boost to Cuba’s economy. Private citizens will suddenly have a lot more cash to spend, while the wider economy will benefit from more money being available.

Obama has been keen to stress the importance of opening up Cuba to US firms, with the benefits to the Cuban population being a key offshoot of increased trade. “I believe that American businesses should not be put at a disadvantage, and that increased commerce is good for Americans and for Cubans. So we will facilitate authorised transactions between the US and Cuba. US financial institutions will be allowed to open accounts at Cuban financial institutions. And it will be easier for US exporters to sell goods in Cuba.”

Increased trade will ultimately improve the fortunes of a number of industries, both in the US and Cuba. While opportunities for US firms looking to expand into a potentially lucrative new market will exist, it is Cuban industry that should see the biggest financial shot in the arm from the relaxing of relations between the two countries.

Tourism surge
One of the industries most likely to be transformed by the new relationship is tourism. Although a popular destination for many global travellers (see Fig 3), Cuba has been cut off from direct access to the US for decades. Currently, the island sees three million visitors each year, but just 90,000 of those come from the US – instead, Americans that have wanted to travel to Cuba have had to do so via airports in nearby Mexico or other Caribbean islands. The costly flights have deterred many travellers, as has the general assumption that Americans aren’t welcome in Cuba. However, according to the IMF, Cuba could see around 180,000 US citizens travel to the country once the restrictions are lifted.

Fig 2

The attractions on offer in Cuba are vast, with stunning (if poorly maintained) early-20th-century architecture throughout the country. An influx of American tourists could also see Cuba’s many tropical beach resorts transformed into thriving destinations. Beach locations like Varadero already have high-end hotel facilities, but US hotel groups will likely swarm these tropical destinations once they are able to. US groups looking for a prestigious home in the country’s capital could also target other historic hotels, like Havana’s Hotel Nacional de Cuba.

It is thought that the tourism industry could treble in size as a result of the new rules between the two countries. And yet, whether the country is ready for such a massive influx of tourists remains to be seen. Its tourism infrastructure is largely state-run, with costs kept down and little investment made in higher-end services that many US tourists might expect. The wider infrastructure of the country could also do with substantial improvements.

Infrastructure investment
Cuba’s creaking infrastructure has seen minimal investment over the last few decades, with little in the way of a modern transport network and its crumbling housing rarely invested in. There will certainly need to be more hotels built, and there are signs that this has already begun, with reports of Swiss luxury hotel chain Kempinski looking to build a 200-room resort. There is even a $350m luxury golf course being built by UK firm Esencia close to the Varadero resort, five decades after Fidel Castro ordered all golf courses to be closed for being “elitist”.

Aside from tourism infrastructure, the country is in dire need of a digital revolution. Its internet penetration is one of the worst in the world, currently standing at just five percent. Obama is hoping the reforms will see US telecoms giants enter the market and drastically improve the Cuban population’s access to the internet and other modern technologies.

There have even been other tentative steps from US firms moving into the Cuban market. Online video streaming service Netflix has recently started offering its product in Cuba, although a lack of high-speed internet in the country could hinder its chance for wider expansion. However, it is a symbolic step towards the country opening itself up to US firms, not least ones that will widen the population’s perception of America.

Another industry likely to enjoy a rapid increase in business is Cuba’s aviation sector; domestic airlines like Cubana, the country’s largest, could expand their services to the US. With a lifting of the embargo, many US airlines will also look to offer services from across the country to Havana. United Airlines has already said it plans to start offering flights to Havana from its hubs at Newark and Houston, while American Airlines, Southwest, Spirit and JetBlue are also said to be enthusiastic about serving the country in the future.

Lighting up
Cuba’s most famous export is undoubtedly tobacco. Cuban cigars are widely regarded as being the best in the world, but getting them into the US has been particularly hard. With a new market being opened up to Cuban tobacco farmers, huge amounts of cash could be brought into the country. The US is already the world’s largest market for premium cigars, but because of the embargo and the country’s refusal to recognise well-known Cuban trademarks, rival firms have been selling cigars under Cuban brand names for years. This may result in a series of trademark disputes over world-renowned brands like Cohiba, Partagas and Romeo y Julieta – for instance, there has been a dispute between the General Cigar Company and Cuba over ownership of the Cohiba brand since 1997.

Aside from tobacco, Cuba’s agricultural sector is dominated by sugar. It has huge potential, and could see a big boost from having the US market opened to it. However, Cuba imports a lot of its food from abroad – as much as 65 percent, according to some reports – and so outside investment could help it harness its own industry potential. For US agricultural firms, there will be significant gains to be made from having Cuba open for business.

Alvaro Vargas Llosa, a senior fellow at the liberal US think tank the Independent Institute, wrote in The Globe and Mail newspaper in January that, despite the tough talk of proponents of the embargo for many decades, the reality has seen many businesses trade with Cuba regardless of the restrictions. He explained: “Given the somewhat flexible conditions of the embargo, the US is already Cuba’s fifth-biggest trading partner and its largest supplier of food and agricultural products. This limited economic exchange will not vary much and the tiny amount of private enterprise allowed in Cuba will continue to see some 300,000 very small businesses go about their daily routine.”

Wider impact
The impact of this normalisation of relations could be felt far and wide. Cuba has relied upon the assistance of countries like Venezuela, Russia and China in the past, but its existing trade partners are beginning to become less reliable. Venezuela’s economy is in turmoil thanks in large part to the collapse in the price of oil and recent political upheaval. Russia has its own troubles to be dealing with, not least as a result of the western-imposed sanctions over the Ukraine crisis, and China is beginning to be more selective with where it invests its money overseas. If the US is to offer Cuba an alternative source of investment, it will prove a timely boost to the struggling Castro regime.

Fig 3 Tourist arrivals in Cuba

This thawing of relations between Cuba and the US could even see the country rejoin the IMF. Though Cuba was one of the original 40 founding members in 1945, Fidel Castro renounced the country’s membership in 1964 after a series of delays in paying back loans to the organisation. However, having relied heavily upon financial assistance from the Soviet Union until its fall in 1991, Cuba has reportedly been trying to rejoin the IMF ever since. Were the country to gain access in the future, it would no longer be reliant on getting financial assistance from countries like Venezuela, which is itself in economic turmoil.

However, some observers feel that the deal to normalise relations between the US and Cuba will likely benefit the Castro regime, rather than ordinary Cubans. Vargas Llosa believes that the deal will give the Castro brothers both political and financial benefits, but will “have only tiny economic impact on the people”.

He added: “The substance of the new agreement is that the Cuban hierarchy is now recognised as part of the civilised community of states and will be granted access to foreign exchange at a time when the Venezuelan subsidy is in grave peril due to that country’s economic collapse. No political change is even insinuated in the accords; the Cuban people will at best pick up a few economic crumbs spilled on the floor by their masters. The only way the Cuban people could truly benefit from an agreement would be if the island was inundated with US investment and trade, none of which will happen because the federal embargo prohibits this. Only the US Congress could lift it.”

The Castro regime, however, has control over Cuba’s currency, the Cuban peso, and so any US dollars that come into the country as a result of trade will go to the regime, rather than into the wider economy, according to Vargas Llosa. “The new measures entail a small increase of US dollars that flow to Cuba by way of travel and remittances. But because the Castro regime has complete control of Cuba’s currency, the foreign exchange will go directly into its pockets. Under the prevailing system, the ordinary people will obtain only Cuban pesos [which are] worth very little.”

A hugely divisive and passionate issue among Cuban nationals and the Cuban-Americans who fled Castro’s regime over 50 years ago, the embargo has proven a popular piece of policy for many US politicians. Getting it lifted will prove especially difficult with a Congress and Senate dominated by Republicans ideologically opposed to recognising Cuba’s communist leadership. Nonetheless, Obama’s intent and changing the relationship between the US and Cuba, and offering an olive branch to the country, should be welcomed as the first serious attempt in a generation to bring back such a historically important neighbour into the international fold.

Hong Kong buys $5.85bn to maintain currency peg

Posted on by Ashton Wenborn

On April 20, the Hong Kong Monetary Authority bought $1.2bn for HK$7.75 a dollar in its latest round of purchases this month that bring the total to $5.82bn.

Since Chinese authorities have made it easier for mainland firms to make purchases on the city’s stock exchange, demand for the Hong Kong dollar has been rapidly rising. As such, Chinese magnates are beginning to shift their investments from overseas into Hong Kong.

Chinese magnates are beginning to shift their investments from overseas into Hong Kong

According to Bloomberg, Hong Kong shares listed on the Hang Seng China Enterprise Index have risen by 16 percent in April, exhibiting the most growth among equity benchmarks, bar Dubai.

Experts believe that the influx of wealth into the city could cause further tension given Hong Kong’s infamous level of economic inequality, which contributed to the widespread protests that took place last year. Property prices and living costs can be expected to experience an additional hike as a result of this new trend, thereby raising the possibility of another outbreak in social unrest.

Since 1983, Hong Kong’s local currency has been pegged to the US dollar as a means of providing economic stability and international credibility. Doing so has worked for decades, but given recent moves made by Chinese premier Li Keqiang to open up the Hong Kong Stock Exchange to the rest of China, the opposite could now be in effect.

Hong Kong’s devaluing currency is also contributing to its rising inflation rate, which grew to 4.6 percent in February, a sizeable difference in comparison with Mainland China’s 1.4 percent. It would seem that maintaining the dollar peg is no longer required, while removing it in favour of the yuan could make China’s currency more accessible and transparent on the international market, therefore aiding its objective to internationalise the yuan.