Author: itsupport

Integrating new technology to remain competitive

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Innovative fintechs and challenger banks have proven to both customers and industry experts that putting digitalisation at the forefront of their business model comes with fruitful benefits. This technological takeover pressures traditional banks to rethink their strategy and choose between investing in technology partnerships or ignoring the digital wave and falling behind.

Payments represent a key revenue stream for any bank, and a core part of their business strategy. While banks used to have full control over payment systems, this supremacy is now under threat as new innovative players enter the market. Fintechs offer technology-driven and customer-focused payment services with speed, convenience and cost-effectiveness at their core, using technologies that traditional banks can’t easily deploy. This causes them to be completely disintermediated from their customers. Their struggle comes down to a legacy IT system that is highly inflexible and leaves no space for manoeuvring.

Firstly, traditional IT systems cost millions every year for maintenance alone. This is a large sum of money that could be redirected to improving other business areas. Secondly, these systems can’t be updated because they run on old technologies and processes that are incompatible with newer technologies. Thus, there seems to be no real benefit in holding onto a system that, in this day and age, is only causing complications.

It is understandable, however, that there is some reticence in changing a system that processes an estimated £2trn every day. Until recently, there hasn’t been a burning need for such changes. Any slight change made to a legacy system that holds so much power is of high risk, a risk that many thought wasn’t worth taking. But as consumer demand has shifted to favour speed, efficiency and convenience, it became evident that banks need a modern payment system to keep up with their customers’ expectations and optimise their reconciliation services.

 

Pushing things forward
However, urgent challenges require urgent solutions. Even if banks are committed to the deployment of new technology, these integrations inevitably take too much time, money and resources. This simply isn’t enough to keep up with an incredibly fast-paced industry that is constantly moving forward. As relying on their current systems isn’t in any way beneficial, there seems to be only one way for banks to modernise their payments system and offer a unique, value-added proposition to customers: partnering with the right payments solution.

The figures speak for themselves: according to a recent CGI report, 90 percent of customers prefer online banking services and 57 percent of customers would use PayPal to secure their payments. There isn’t any doubt that open banking is the future. Technology partnerships can give banks the competitive advantage that they are currently lacking, by allowing them to offer unique payment solutions tailored to their customers’ needs, whether that be real-time payment experiences, lower payment fees or the ability to easily make cross-border transfers.

Consider a service that allows your bank to free up precious resources that could be better allocated to other parts of the business, save money, expand your services to any part of the world, reach different customer bases and improve your customer loyalty. Those are some of the general benefits that a third-party cloud-based system can bring to the table.

Short-term, a cloud-based multi-payments ecosystem allows banks to process real-time payments and more easily manage higher volumes of transactions while saving time and resources. Then there is security: an area that has become high-priority for all financial institutions, where advanced technology is required to meet regulatory changes. A cloud-based system helps banks to adapt to these changes, comply with current regulations such as PSD2 and ISO20022 and be better prepared for the ones to come.

Outsourcing your payments system to a third-party company like Imburse effectively eliminates the biggest obstacles that banks are facing now: the inability to keep up with the market; the lack of resources to invest on the payment side; an old IT system that simply can’t be modernised and the inflexibility to fulfil consumer demands.

But perhaps the greatest benefit will be more noticeable a few years down the line: the capacity to easily, quickly and cheaply adapt to changing customers’ needs and new technologies.

Speed has never been so critical. The digital disruption is forcing traditional banks to face their weaknesses, make impactful decisions and transform their overall payments strategy, ideally as soon as possible. Solutions like Imburse are making it easier for them: we do the behind-the-scenes work, so banks don’t have to.

We offer integration-free connectivity to all payment providers and technologies, so banks don’t have to do single integrations that eat up far too much time and resources. Incorporating new technologies into payment systems is unquestionably a vital mission and partnering with the right third-party company is the best way to achieve it.

The benefits, pitfalls and importance of ESG

Posted on by itsupport

Seaspiracy, the hard-hitting fishing industry documentary, was top of the Netflix most watched list recently. It received huge amounts of attention, incredible reviews across the world, and sparked many interesting conversations. Why? It shone an important spotlight on sustainable fishing practices, which many were not aware of. It is another example, in a long line of documentaries and media exposés, which focuses on environmental, social and governance (ESG) concerns.

The consumer appetite to be more sustainable and ethical in how they live, shop and do business is growing. In fact, a 2020 global survey by Accenture found 60 percent of consumers have reportedly been making more environmentally friendly, sustainable, or ethical purchases since the start of the pandemic, with nine out of 10 saying they were likely to continue doing so. With this consumer appetite comes pressure for businesses to prove they take commitments to sustainability seriously. So much so, that ESG has become a boardroom topic, with many realising that if they don’t ‘prove it’ when it comes to ESG policies, it could seriously impact profits and investor relations.

However, a recent study by NAVEX Global revealed that while 82 percent of companies have ESG goals, less than half are performing well against individual ESG metrics. More needs to be done if businesses want to keep pace with the demand for ESG. With a multitude of frameworks available, varying guidelines, and uncertainty on how the E, the S and the G come together, it can seem like a daunting task to get right. But, understanding what each of these means is an essential starting point. The ESG acronym refers to a trio of business measures, typically used by environmentally and socially conscious investors, to identify and vet investments. Each measure adds its own value.

Environmental; benchmarks and addresses the way an organisation responds to environmental issues, such as climate change and greenhouse gas (GHG) emissions, energy efficiency, renewable energy, green products and infrastructure, carbon footprint, and water use.

Social; outlines how companies should respond to complex and evolving issues like data privacy, pay equity, health and safety, diversity and inclusion, social justice positions and employee treatment.

Governance; deals with issues such as executive compensation, diversity and independence of the board of directors and management team, proxy access, whether the chairman and CEO roles are separate and transparency in communication with shareholders.

 

Bringing the policy elements together
With an understanding of each element making up an ESG policy, success comes with the identification of relevant regulations for your business and implementing frameworks that can help you achieve compliance against them. To report ESG risks accurately, organisations need a framework or set of standards to assess the business operations against.

There are several popular ESG frameworks that companies can use to do this, but as there will be several different regulations relevant to your business, it’s important to find a framework that fits.

Key standards like the sustainability accounting standards board (SASB), global reporting initiative (GRI), carbon disclosure project (CDP) and taskforce on climate-related financial disclosure (TCFD) are recommended to help launch ESG reporting activities. These standard bodies have years of experience collaborating with industry working groups to develop increasingly important metrics. This is crucial for investors and other stakeholders to use, in order to understand how a business is performing. Leadership teams must build ESG programmes, create awareness with an ESG rating, and hit and report on metrics that matter to these forward-thinking investors if they wish to prosper.

 

The perks and pitfalls of ESG policies
The issue is that each of these ESG frameworks has different areas of focus. This can make it quite complicated when measuring against them, to find one that aligns well with your business goals. But, this is exactly where ESG software can help. Implementing ESG software like NAVEX ESG helps to manage internal ESG initiatives, as well as external activities and reporting.

Whether your goal is values-based business development or just making the world a better place, ESG software can ensure companies aggregate investor-ready data, help you build a best-practice programme, and address metrics that decision-makers, consumers and your employees care about, putting you on a path for sustainable future growth. Those who align ESG goals with wider business goals will have more long-term success as the appropriate professionals collect better information. ESG metrics are only going to increase in importance.

The fallout of the Seaspiracy documentary has seen online discussions calling for the banning of industrial fishing practices and viewers pledging never to eat fish again. While this particular topic may not directly affect your business, ESG policies and the increasing importance they play, most certainly will.

From a regulatory perspective alone, responding to current state and global regulations – as well as anticipated regulations – requires extensive data collection, a deep understanding of the reporting and frameworks and perhaps most essentially, keeping ESG issues at the top of business agendas. It is important businesses put ESG policies into practice now, in order to safeguard themselves in the future.

Why Switzerland’s private banks are here to stay

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Banking is as much of a Swiss cliché as watches, chocolate, and skiing. A tradition of client confidentiality and a commitment to quality service that goes back to the 18th century has helped the financial sector grow to 10 percent of the Swiss economy today. The Swiss National Bank estimates that securities of foreign private customers number CHF513bn (£403bn), with cross-border assets estimated by Boston Consulting Group to be CHF2.3trn (£1.8trn).

This success does not simply fall from the sky like snow in Zermatt. For Switzerland’s private banking sector to remain competitive in the future, its accomplishments must be safeguarded, and its innovations nurtured.

 

Strength in stability
Those who deal with the needs of high net-worth individuals (HNWIs) all know it: political instability is back. The certainty of the 1990s and 2000s has given way to tumult at the global level with the rise of populism, nationalism, and religious extremism. Question marks loom over newer centres such as Hong Kong and the UAE, and even established ones such as London.

Switzerland is not completely immune from this tumult. Still, the country’s political stability recently scored 95 percent in World Bank governance data. Switzerland also possesses a reliable national currency, with the Swiss franc’s sanctuary status further entrenched since the 2008 global financial crisis.

COVID-19 has affirmed the attractiveness of Switzerland. Many HNWIs favour its ‘middle way’ approach, offering a more liberal governance approach than places such as Singapore, but with a more reliable healthcare offer than Cyprus or Turks & Caicos. All of this serves to benefit the Swiss wealth management sector too.

 

Excellence and innovation
Sadly, the alpine state faces pressure to cede its promise of client confidentiality in the purported name of tax transparency and information sharing, most notably from the US government. The sad reality is that this never goes both ways. Take the OECD’s 2020 Peer Review Report, which makes 161 references to Switzerland, while the US – itself a major financial centre and not without its own internal troubles over secrecy, evasion and money-laundering – is mentioned only once. In a world of superpowers, it sometimes seems that only small countries can be sinners.

The Swiss federal government has recently passed a series of acts impacting trustees and external asset managers, meaning new licensing and demands for reporting and disclosure, some of which attempt to mirror the demands of the MiFID II system of the European Union. It’s still early days, and regulation will only take full effect by the end of 2022, but this will certainly mean a loss of some of Switzerland’s competitive advantage and no doubt lead to further domestic sector consolidation.

In other words, Switzerland cannot afford to rest on its laurels. Fortunately, there is little sign of that happening. In February, Geneva-based Bordier & Cie, founded in 1844, started offering cryptocurrency services as clients seek to diversify into alternative asset classes. The private bank itself relied on the B2B services of Sygnum, another Swiss firm that is part of the country’s burgeoning cryptocurrency sector. Zurich-based UBS, the largest private bank in the world, is also exploring this asset class.

Swiss technology excels, which is especially important as HNWIs become reliant on digital experiences. Etops, for example, specialises in aggregating clients’ financial data in the most seamless way possible. Altoo offers an intuitive and visually compelling platform for people to interact with their wealth. DAPM in Geneva can break down granular intra-day data about client investments across multiple accounts.

Swiss fintech spurs banking competition, with smarter players accepting this and working to impress savvy customers. Though the client is the ultimate winner, the country’s trusts and family offices also have much to gain here. These nimbler Swiss firms have a distinct advantage in being embedded in this software ecosystem, drawing on a strong domestic graduate pool.

It is not just Swiss people who make Switzerland, however. Despite its image as a quiet, settled country, Switzerland is one of the most cosmopolitan places in the world, a magnet for people across the globe to live and work. Over a quarter of its population are foreign residents, with even greater proportions of foreign workers in the cities of Geneva, Zurich and Basel.

Many of these residents serve the needs of private banking clients, either directly or in adjacent financial services. In Geneva, it is easy to find specialists in anything from Brazilian equities to 20th-century artworks. This internationalism is an undoubted strength, and is sure to persist, given Switzerland’s time-honoured position as a multilingual state in the heart of Europe.

Being the incumbent is great – though the risk of getting too comfortable and self-assured is always there. Thankfully, Switzerland’s unique blend of stability and innovation should be enough to ensure its private banking sector remains competitive in the years to come.

Giving the banks a run for their money

Posted on by itsupport

Will the banks be able to keep up in this rapidly changing landscape? The exploding popularity of fintech applications continues to transform the finance industry, a sector of the economy previously dominated by traditional-minded institutions. One notable development in the increasingly widespread use of fintech apps is the merging of banking and fintech that we are beginning to see. Fintech companies are rushing to apply for banking licences, and quite a few have already been approved. The first to lead this trend was fintech giant Square, which was able to obtain approval to create an industrial bank from the Federal Deposit Insurance Corporation (FDIC).

Since then, other fintech companies such as Varo Money, LendingClub, SoFi, Figure and Oportun either have been approved to create their own banks or have applications pending. These developments are important because it will create competition for existing banks and also affect the partnerships between the two entities in the future.

Certainly it is alarming for banks to realise that their current partner may soon become a competitor, armed with the benefit of a deep understanding of their operations borne from their work together. However, this change in status will also subjugate fintech companies with an increased amount of regulation and oversight. As fintech continues to create easy, convenient, quick and low-cost methods of serving the financial needs of individuals as businesses, banks must move to develop their own mobile banking technology to stay competitive.

 

Changing fintech landscape
In a select few US states, industrial banking charters are offered to companies who want to offer banking services and loans to small businesses without the burden of oversight by the Federal Reserve. Industrial banking charters are controversial, with many raising issues with a licence that allows non-financial companies to offer banking services. Because of this, an industrial banking charter has not been approved in 10 years – at least not until Square had theirs approved in March of 2020.

Certainly, this is an interesting development for the financial services sector. It could be a very positive change for small businesses, who may find that they have more options in terms of obtaining loans.

Servicing the small business market brings ample opportunities for fintech, as this historically has been ignored by traditional financial institutions

Square’s focus has always been on helping small businesses, which has never been more important, since the coronavirus pandemic has hurt profits for so many of them. In fact, one other interesting trend that has been seen among fintechs in the midst of the pandemic is the opportunity presented to them to serve small businesses under the Paycheck Protection Programme (PPP).

Fears that fintech will completely supplant the existing financial services sectors have been reignited. The birth of fintech originally scared banks for this same reason, and most of the traditional financial institutions reacted by agreeing to partnerships with fintech companies in the hope of riding their wave of success. The ability of fintech companies to offer new solutions, face challenges and adapt to a rapidly changing tech landscape has forced banks to reform their technology and adapt to better suit customers’ needs.

In fact, servicing the small business market brings ample opportunities for fintech, as this historically has been ignored by traditional financial institutions. This is a problem, with only 27.5 percent of small businesses, on average, being approved for business loans by banks. The pandemic has devastated small businesses, yet all signs point to the beginning of a recovery for the economy as a whole. It could be the perfect time for fintech applications to start offering banking services to help revive small businesses around the world.

 

Bypassing barriers
However, the process of applying for a banking charter can be lengthy. For example, it took Varo Money three years to be approved for theirs. Some fintech companies have found clever ways to bypass this governmental barrier, however, by acquiring digital banks in their portfolio. LendingClub was able to acquire Radius Bank in February, which may have saved them the steep fees involved in a banking charter application.

Both Radius Bank, LendingClub and Varo Money have focused more on individual consumers rather than small businesses, although this could change. The democratisation of stock reading, cryptocurrency investing and online banking has broadened access to financial services typically reserved for the middle or upper classes.

The financial services market has become so rife for innovation, and so potentially lucrative, that many industries are trying to get a piece of the pie. There has been a new term coined for technology companies who have recently begun offering financial services: techfin. However, traditional financial services point out that without the necessary knowledge, the ease with which everyday people can invest money via fintech apps can become dangerous. With fintech apps moving into the banking sector as well, there is a concern that these companies will encourage their users to invest their money rather than keep them in savings accounts.

 

Banking with fintech apps
So, what is behind this trend of fintech companies moving to get involved in the banking sector, rather than sticking with their partnerships with well-established financial institutions? By expanding their services to include those most commonly found in the banking sector, fintech apps can expand their clientele and gain access to a larger market. The profit is undoubtedly larger, as fintech companies can then cut out the middleman and deal directly with their customers, building relationships in the process.

 

Will we see more fintechs in banking?
There is a lot for fintechs to gain by applying for a banking charter. However, as we mentioned previously, the application process can be lengthy and expensive. There are also a lot of government regulations and obstacles that need to be overcome before an application is approved. Robinhood learned this lesson when they pulled their national banking charter application.

Previously, there was discussion from the Office of the Comptroller of Currency (OCC) of a special banking charter for fintech companies that would fast track the application. However, this was shut down in October 2019 after a New York federal judge ruled that the OCC, the regulator issuing the charters, did not have the authority to create this special type of charter. However, it is a significant development to have seen three fintech companies get approved with their banking charters (Square, Grasshopper and LendingClub). There have only been nine banking charters granted nationwide since 2008, and none at all in the past 10 years.

 

The benefits of a banking charter
It’s a fact that the traditional financing institutions have underserved small businesses, especially minority-owned small businesses. It’s also true that many of these same small businesses were hit hard by the pandemic and forced to close their doors because of lack of funding.

There is a huge need for financial services for small and mid-sized businesses as well as individuals who are just getting their financial lives started. There are undoubtedly hurdles to obtaining a national banking charter, but the rewards are astronomical. Fintech businesses with banking charters can work with Automated Clearing House (ACH), a standard payment rail. They can operate in any state in the US without having to deal with different state laws and jurisdictions and offer their customers FDIC insurance.

Fintech companies may be shaking up the financial sector, but that might be a good thing. Despite negative PR about the risks involved with new fintech investing apps and the value of cryptocurrency, clearly these companies are leaning towards accepting more federal regulations in return for access to broader market segments. The approval of so many fintech applications for national banking charters will serve to further legitimise many of these new fintech apps, and possibly become stiff competition for their former banking partners in the process.

The challenges facing the office property market

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The coronavirus pandemic has had implications for practically every aspect of our lives. Its impact on the world of work has been particularly acute, with the equivalent of 255 million full-time jobs lost in 2020 due to COVID-19, according to the UN’s labour body. This is four times the toll exacted by the 2008 global financial crisis. Those of us fortunate enough to keep our jobs had to deal with an almost overnight shift in the way we work. In June 2020 a survey of 12,000 professionals in the US, Germany and India by the Boston Consulting Group (BCG) found that around 40 percent of respondents had started working remotely since the start of the pandemic.

As vaccine rollouts progress across the globe, bringing the pandemic under control (albeit at dramatically different rates from nation to nation and region to region), offices are tentatively reopening. The proportion of employees returning to the office once it is safe to do so, however, is still very much up for debate.

 

Not going back
According to Anna Osipycheva, Head of Commercial Real Estate at VTB Capital, the working from home trend is here to stay. “The real life situation of lockdown helped business to experience, assess and make conclusions about the pros and cons of a remote work environment,” she says.

This is backed up by data from multiple reliable surveys that suggest that a significant proportion of employees (from 20 to 70 percent depending on sector, region and scale of firm) would like to continue working outside the office at least one day a week after the pandemic. Even more telling is that employers surveyed by BCG expect around 40 percent of their employees to work remotely in the future.

Not everyone is convinced. Nick Riesel, MD of UK-based commercial property agency FreeOfficeFinder, has his doubts about the longevity of the working from home and hybrid working models.

“Everybody believes it is here to stay,” he says. “When companies are reminded of how much easier it is to manage, train, brainstorm with employees inside an office, we will see working from home fall away and things will start to return to normal.” He gives these models 12 to 24 months before they “fizzle out.” Even taking the data from those surveys – all conducted in the midst of the pandemic – with a pinch of salt, however, it seems reasonable to predict that this 18-month global experiment in remote working will have some sort of long-term impact.

Malcolm Frodsham, director of consulting firm Real Estate Strategies, identifies remote and flexible working as a long-term trend that’s been turbo-charged by the pandemic.

“It needed a shake-up because, yes, it’s been a long-run trend but it’s been a bit slow and I think everyone would benefit from more flexibility,” he says. Flexible working was established in the UK before the pandemic, with 22 percent of employees occasionally working from home. The European average is half that, however, according to data from Eurostat. In Latin America, pre-pandemic rates varied hugely, from 45 percent of employees polled in Colombia to 21 percent in Peru.
So while the push towards remote and flexible working will have an impact on rents, the fact that this has been the direction of travel for a number of years mitigates that impact. Another offsetting factor is that the trend towards higher density of occupation in office will now go into reverse.

“It’s likely now that the density of occupation is going to go down because of the way people are changing how they’re working and also because there’s likely to be a sort of residual fear of packing too many people into an office,” says Frodsham.

 

The serviced office boom
The increase in remote and flexible working has further implications for the office property market, accelerating the trend towards serviced offices, says Osipycheva.

“The need for large, dense, centralised offices is dramatically decreasing as more people are working from home or at decentralised co-working offices. This means that serviced offices providers will prevail long-term, as those spaces offer flexible leases and allow users to take full advantage of the hybrid work model.”

Though more expensive than more traditional leasing arrangements over the long term, serviced offices offer greater flexibility, as tenants are able to scale up and down to fit their requirements without worrying about aspects such as furniture storage and third-party utilities, explains Riesel. FreeOfficeFinder has seen a year-on-year increase of 8.5 percent in requests for serviced offices, as of March 2021.

Investors have been taking notice of this trend, says Osipycheva, citing an increasing interest in co-working companies like WeWork and ImpactHub among large real estate-focused asset managers such as Brookfield, Prologis, Boston Properties, Gecina SA, L E Lundbergforetagen AB and Capital One. “Whoever is able to capitalise on the post-pandemic co-working boom will end up ahead in the long term,” she says.

Whoever is able to capitalise on the post-pandemic co-working boom will end up ahead in the long term

This sector may be exciting investors but there are downsides to the model, warns Frodsham, who is currently researching the investment implications of a rise in the flexible service market for the Investment Property Forum. This market is vulnerable in the event of an economic downswing. WeWork, which takes leases on buildings to run as co-working spaces, operating in 118 cities worldwide, lost $3.2bn last year when the pandemic forced much of its portfolio to close. Occupancy rates at WeWork’s co-working spaces were at 71 percent before the pandemic hit; by the end of 2020 they had fallen to 47 percent.

For Frodsham, the success of WeWork (notwithstanding the embarrassment of having to delay its IPO back in 2017 owing to a lack of investor confidence), is proof that the “demand is there” for serviced offices globally. Investors hoping to take advantage of this highly profitable business model – serviced offices generate nearly double the revenue of an equivalent traditional office lease – can protect themselves, Frodsham suggests, by looking to those companies running a hybrid model: operating serviced offices in buildings they own. “Doing it yourself is probably going to emerge as the dominant force,” he says.

 

 

Are central locations now redundant?
Smaller serviced offices and co-working spaces that open up in advanced economies as the threat of COVID-19 recedes will increasingly be found in smaller towns and cities. Frodsham believes the pandemic could prompt the office property market to swing back towards decentralisation as part of what he calls a “classic centralisation-decentralisation cycle.”

“We’ll go into a period of time where there will actually be more hub offices opened up, fewer companies moving to places like Central London,” he says. Other major cities that might suffer from such a move include Dublin and Amsterdam, though the analyst isn’t concerned about a big impact on rents as supply will be able to adjust. None of this is to say, however, that we’ll be seeing the end of traditional leased offices in large urban centres any time soon. “There will always be larger corporations with headquarter buildings but these will need to accommodate for the working from home sentiment,” says Dicky Lewis, a director at White Red Architects, a global practice based in Mumbai and London working in the commercial and office sector.

A central location is always going to make sense, both financially and logistically, for some firms, including state-owned enterprises. It’s just that, in order to support employees who wish to work remotely, at least some of the time, satellite offices will become part of the mix. The office property market is actually well prepared to adapt to any longer-term impacts ushered in by the pandemic because it’s a sector that has to embrace change by its very nature. Technological innovations from air conditioning to networked computers, design trends and demographic change all contribute to the process of obsolescence of office buildings.

“Offices have always changed. What we’ve gone through with a pandemic is lots and lots of different trends being accelerated,” says Frodsham. That’s why the sector should be able to bounce back with relatively little drama – existing office buildings that suddenly feel unfit for purpose would have become obsolete in a few years anyway. A new generation of buildings to replace them is already being planned and built.

 

A cyclical nature
The biggest threat to the office property market associated with the pandemic therefore is not the rise of remote working, the shift to satellite offices or a boom in serviced offices. It’s the possibility of recession kick starting a demand shock that knocks up to 50 percent off rents in the largest and fastest-growing centres.

“If it happens, it will be a shock, but it will be what everybody is trying to avoid,” believes Frodsham. “That’s obviously what all the central banks around the world are trying to stop.”

Even were this to occur, however, because of the cyclical nature of the sector, “you get a couple of bad years and then things slowly recover and in four or five years’ time everything’s up and running again,” he says.

As with everything COVID-19 related you would need a crystal ball to be able to predict how the office property market will respond to such an unprecedented set of circumstances. Ultimately, only time will tell.

Sustainable financing may be the transition Turkey needs

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Could the adoption of sustainable finance could mark a turning point for the country’s fragile banking sector? It has not been a season of stability for Turkey’s economy. Since 2016 when the country experienced a failed coup d’état, unending crises have made Turkey’s economy one of the most vulnerable in emerging markets. This, according to Dominik Rusinko, an Economist at KBC Group, is a result of “misguided, or outright wrong economic policies.”

Turkey’s apex bank has not been spared. In a span of two years, President Recep Tayyip Erdoğan has dismissed three governors. The changes have rattled financial markets with foreign investors increasingly becoming jittery at a time when Turkey is in desperate need for inflows. “The future path of the Turkish economy remains uncertain and bumpy particularly in the absence of a more orthodox economic policy,” observes Rusinko.

In recent years, Turkey has become a darling for investors due to a conscious drive towards sustainable development. As one of the countries most affected by climate change, desertification and natural disasters such as droughts, floods and landslides, the country has made a shift towards sustainability. In fact, despite being on the fringes of the European Union, Turkey has embraced the push for net-zero greenhouse gas emissions by 2050.

“Measures to incentivise a green recovery, and begin a green transformation, can keep Turkey at a competitive advantage as global markets decarbonise,” said Auguste Kouame, Turkey World Bank Country Director in April. He added that a more diversified and greener financial system would support a resilient, sustained recovery.

This is a challenge that Turkey’s banks are embracing wholeheartedly. It emanates from the understanding that banks have the potential to facilitate a green transition by mobilising capital for sustainable, green-led growth. For the industry, climate change and environmental issues have become an important source of risk and opportunity. “If you don’t take care of the environment, the environment will take care of itself,” said Ahmet Can Yakar, ICBC Turkey managing director, project finance department, during a sustainable finance webinar in April. In effect, sustainable finance is fast taking root in Turkey, a country that is attracting interest from ESG-focused domestic and international investors and issuers.

In fact, Turkey is determined to tap the $100trn global bond market after the government formed a bonds guarantee fund to encourage companies to issue bonds at lower costs. In Turkey, the total bond market is estimated at $3.1bn with green bonds accounting for only $836m.

 

Sustainable starting point
Taking a cue from the government and investors, commercial banks are acknowledging that sustainable finance will be the anchor for future growth. In effect many are abandoning financing of environment polluters like fossil fuels, mining and sections of manufacturing, for green projects in renewable energy, housing, water and sanitation, education, health, urban transport and mobility, street lighting, agriculture and consumer goods among others.

The transition is conspicuous. Over the past two years a number of banks have signed the UN’s responsible banking principles to implement sustainability. Additionally, several financial and non-financial companies have committed to issuing sustainability reports to raise investor awareness. Garanti BBVA, Turkey’s fifth largest bank, is among lenders on the forefront of sustainable financing.

The bank has vowed to stop financing ‘dirty’ projects like coal and mines. Over the next two decades, the bank that issued a $50m green bond in 2019 intends to cleanse its loan portfolio from these projects leading to zero exposure by 2040. This comes after the bank announced in February that it had reached $60.3bn in sustainable financing by the end of last year, ultimately achieving half of its objectives a year ahead of schedule. The bank has a target of $120.2bn of sustainable financing by 2025.

Another lender, the European Bank for Reconstruction and Development (EBRD), has put green investments in Turkey top of its priorities. Since 2015 when it launched its green economy transition strategy, EBRD intends to increase investments in green projects to 40 percent by the end of next year, up from 30 percent in 2015, with annual commitments of $4.8bn.

Ultimately, the target is for 60 percent of the lender’s financing going towards green investments. “Projects that we finance must have measurable climate mitigation mechanisms,” said Idil Gürsel, EBRD Associate Director, municipal and environmental infrastructure. She added that projects must reduce greenhouse gas emissions by at least 20 percent or improve energy efficiency by at least 20 percent. In this light it seems that Turkey has unequivocally demonstrated that it is committed to sustainable development.

However, recent economic and financial woes continue to cast a dark cloud. With President Erdoğan’s unorthodox economic policies fuelling the uncertainties, banks and investors remain cagey.

Is the gig economy headed towards a day of reckoning?

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When the UK-based food delivery platform Deliveroo announced its intention to float on the London Stock Exchange in March this year, it did so in anticipation of raising £8.8bn. Just days later the company lowered the price range of its IPO from £3.90–£4.60 to £3.90–£4.10, giving a new expected market value of £7.59bn. When trading began, however, Deliveroo’s situation went from bad to worse: its share price dropped as low as £2.73, cutting the value of the company to around £5.6bn.

How did it all go so wrong, and what does this disappointing start mean for other tech companies working in the food delivery space? Central is the fact that some of Britain’s biggest institutional investors declined to participate in the offering.

Legal & General Investment Management expressed concerns over unequal voting rights: Deliveroo has issued preference shares to its founder and chief executive, Will Shu, that give him over a 50 percent say. Fund managers at Aberdeen Standard Investments, Aviva Investors and M&G, meanwhile, all flagged issues around Deliveroo’s employment practices, citing a recent UK Supreme Court decision that went against ride sharing app Uber.

Deliveroo, like many gig economy firms operating in the UK, classes its drivers as self-employed, meaning that the firm is not required to provide employment rights such as minimum wage, sick pay and holiday pay. That was the situation with Uber too, until February, when the Supreme Court ruled that Uber drivers are workers, and therefore entitled to employment rights, regardless of their contracts. “The Uber case says that you don’t look at the contract, you look at the reality, and you ignore any contractual provision that has been put there specifically to get around employment status,” says employment lawyer Darren Newman.

The ruling has implications for other gig economy employers, whose profit margins would be threatened if they were required to class their drivers as workers and therefore be liable for higher rates of pay. Deliveroo is safe for the moment because of a clause in its contracts that allows drivers to subcontract their work, but Newman believes the company may encounter legal challenges down the road.

“There’s a place that the case law seems to be going, which is extending employment rights. Is it really sustainable to build your entire model on the assumption that these people don’t get the minimum wage? After Uber, that looks like a more dodgy proposition,” he explains. The Uber case only has implications for companies operating in the UK, of course, but there are similar regulatory conversations going on in other jurisdictions too. In the Netherlands, the Amsterdam Court of Appeal recently ruled that Deliveroo riders are employees, rather than self-employed.

In Spain, the Supreme Court ruled in 2020 that the Spanish delivery app Glovo should treat its riders as employees too, following on from a similar ruling against Deliveroo in 2018. Glovo’s co-founder Sacha Michaud commented at the time that the ruling would probably mean having to scale back on the company’s plans to roll out in 400 smaller Spanish towns and cities. All that said, the company appears to be doing fine – it has just raised €450m in Spain’s largest ever startup funding round.

Some gig economy firms have opted to get ahead of the situation. Just Eat Takeaway.com, an Amsterdam-based company formed from the merger of UK meal delivery app Just Eat and Dutch rival Takeaway.com last year, announced that it would be switching to an employee-based model. The firm’s chief executive, Jitse Groen, pledged earlier this year to “go all out” against rival Deliveroo in London, Europe’s largest market for ecommerce services.

Jason Chen is co-founder and CEO of Taiwan-based food startup JustKitchen, which floated on the Toronto Stock Exchange earlier this year and hopes to expand into Hong Kong, Singapore, the Philippines and the US. Chen, whose business works with third-party firms to deliver food to customers from its ‘ghost kitchens,’ is positive about how tighter regulation – in developed nations at least – appears to be moving towards better rights for workers.

“As a ghost kitchen operator, we want a healthy delivery ecosystem. This means having a well-established labour force, an abundance of drivers/riders, and that they are taken care of to want to stay within this ecosystem,” he says.

Food for thought
Sarah Simon, investment analyst at Berenberg, is not worried about Deliveroo’s disappointing IPO. “I don’t think this reflects wider concerns. There were some well-publicised issues that some traditional UK investors had. And the broader market has been somewhat choppy. Food delivery names (except Deliveroo) have actually been quite strong since the IPO,” she says. In a note to clients issued in April, Simon called Deliveroo “a great service, with good structural growth,” initiating coverage with a Hold rating and a price target of £3.10.

Clearly, there are question marks over how regulation will impact the big players in this market. This uncertainty notwithstanding, Deliveroo’s IPO was one of the largest LSE debuts in recent years and Britain’s largest-ever tech listing by value. The global online food delivery market is expected to grow 11.5 percent to reach $154.34bn by 2023, according to market data provider Statista.

Not all investors are hungry for the sort of risk inherent in these food delivery platforms but those that are – and have the patience to wait for these firms to turn a profit in a competitive marketplace – could well find themselves with an investment that bears delicious fruit.

Placing a priority on workplace satisfaction

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In the UK alone there are 1,343 established Fintechs, which is crowded for any type of industry. As a result, it can be easy for leaders to be distracted, focusing on product development or investor funding. Establishing a culture or building a stronger culture often becomes ‘something we can always do later.’ You know it’s important, but you’ll tackle it when you have a few hours to spare. At a time when you have customers to satisfy and investors or shareholders to keep happy, the idea of creating a common way of thinking and behaving in your business seems like a luxury you can’t afford.

And then this happens. As you grow, whether you are an established organisation or a start-up, the people you hired initially start to leave and you find it hard to attract replacements quickly enough. This leads to a compromise on quality. You try to expand into a new country, but the thought of getting people from different backgrounds to work together makes you break into a cold sweat. And then, at your next funding round or shareholder meeting, questions will be asked about culture and they will be unimpressed with a vague answer that ‘we all pull together and everyone loves working here.’

Or, you hit a plateau with your sales; your initial customers move away, saying you’re not the business you were when you first started, and new ones seem unsure if you’re the kind of outfit they want to buy from. Finally, you walk into the office one day and have the awful realisation that everyone’s the same. How are you going to create the most innovative products in the universe when your employees represent five percent of the population?

A great culture is what stops this happening. It isn’t something you can put off until a later date – to sometime in the mythical future when you have the head space or volume of people to warrant it. Because cultures, like weeds, have a habit of growing whether you plant them or not.

 

Attracting and retaining talent
However, preventing problems is only the starting point when it comes to what you gain from having a strong culture. Its main benefits lie in how it helps you to attract and retain talent, foster happiness and satisfaction in the workplace, increase your people’s engagement with their work, drive high performance, and attract investors.

If you go down this route you’ll discover the unassailable competitive advantage you have when your people are aligned with what you want to achieve and how you want to achieve it, which in turn gives you the best possible chance of leading a successful and sustainable business.

Having a clear and compelling brand relies on you having defined your company’s purpose

You’ll also find that your employees are willing to move heaven and earth to help you because they believe in your vision and share your dreams – to make the impossible possible. This is where your employer brand comes in, because it does the work of filtering out the inappropriate candidates before they even contact you. Having a clear and compelling brand relies on you having defined your company’s purpose, mission statement, and behaviours, so potential employees know what to expect from working with you. It also goes further than that: you need to articulate your employee value proposition.

This is the aspect of working for you that makes you different from other businesses – the special something that draws the right person in and sends the wrong person off to another organisation. At Grab Financial Group we were devoted to building and maintaining our employer brand, involving showcasing what the company had done, what it wanted to do, and the success it had achieved.

We produced lots of content and videos that gave potential candidates an insight into our culture, and were proud of the investment we made in this area because it paid dividends in the long run. Grab has now become one of the most dominant super apps in Asia, offering rides, food delivery and now, financial services.

At global fintech Paysend, our culture is the number one priority, alongside product and technology innovation, growth and even funding, because without the right talent there is no sustainable business growth. When a company has a strong focus on culture, it gives it a competitive advantage.

Universities will struggle in the post-pandemic fallout

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From Zoom seminars to locked-down halls, the pandemic has had an enormous effect on everyday life in universities across the globe. But COVID-19 will also have a serious impact on the finances of the higher education system, including both short-term lockdown-related costs and financial losses on long-term investment.

Last year, a fall in international enrolment was thought to be the biggest threat to university finances. Take the UK, for example, where the total income of the universities sector is around £40bn a year, half of which comes from tuition fees; overseas students account for around £7bn of this tuition fee income. In July 2020, the Institute for Fiscal Studies predicted that a decrease in overseas students because of COVID-19 could be responsible for a loss of up to £4bn.

The situation is exacerbated by Brexit, which will lose UK universities £62.5m per year in tuition fees, according to a February 2021 report by the Department for Education. While China is the largest single source of overseas students in the UK, the EU accounts for almost one in three of the UK’s international students, a figure expected to be halved by Brexit, though losses will be partly offset by an increase in fees.

International enrolment for the 2020–21 academic year in fact fell by 25 percent, a smaller downturn than initially expected. “Universities got very lucky in the summer as the second wave did not properly get going until students had essentially made their decisions where to study,” Elaine Drayton, a research economist at the IFS, told World Finance. Long-term losses from a decrease in international enrolment look likely to be less than £1bn.

“Now, with some of the uncertainties around student recruitment resolved, medium-term pension obligations look like the main risk to university finances,” Drayton says. The IFS predicts long-term losses in this area to exceed £5bn. A recent financial health check of the University Superannuation Scheme (USS), the UK’s largest pension fund, estimated that the funding shortfall has risen from £3.6bn to £18bn in just two years, sparking talk of benefit cuts, the latest development in a years-long clash over pensions in the sector. Enduring low interest rates were driving up deficits before the pandemic.

High-ranking institutions are more likely to have large numbers of international students and substantial pension obligations. London School of Economics – which the Times Higher Education (THE) ranks as one of the 30 best universities in the world – has the highest percentage of international students of any British university, at 68 percent pre-pandemic. LSE was anticipating acute financial problems from the 2021–22 academic year, leading its director and other management to take significant pay cuts in April 2020.

 

The covid conundrum
However, the pandemic will ultimately have a greater financial impact on smaller, newer and lower-ranking institutions, as high-ranking universities fill newly empty places with home students. According to the IFS, a university’s profitability before the crisis is a better indicator of risk of insolvency because of COVID-19 than the size of their pandemic-related losses.

The outlook is similar in the US, where wealthy private universities, such as Baltimore’s Johns Hopkins (ranked 12th in the world by the THE), are expected to lose hundreds of millions of dollars. But institutions with small endowments are more at risk, such as the 400-student Pine Manor College in Massachusetts, which, with just a $9.6m endowment, was taken over by Boston College in May 2020 after long-term financial instability was intensified by the pandemic.

Joe Biden’s $1.9tn American Rescue Plan has pledged $40bn to help support US higher education institutions through COVID-19, with a specific emphasis on those with an endowment under $1m. For context, the US’s richest institution, Harvard University, has a $40bn endowment, and the UK equivalent, the University of Cambridge, has an estimated £7bn endowment.

Last summer, the UK government announced a plan to support UK universities through the financial strain of the pandemic, including a £2.6bn advance in tuition fee payments and £100m of research funding. The IFS estimates that higher numbers of home students and diminished employment prospects could see the government’s long-term contribution to higher education increase by around £1.6bn for 2020’s cohort of students alone. The Institute for Fiscal Studies predicts that, without sufficient government support, around a dozen universities could emerge from the pandemic with negative reserves.

Insolvency could lead to debt restructuring, takeovers and mergers, or closure, though there is currently no precedent for the liquidation of a publicly funded university. Most of the UK’s universities will survive the pandemic, but, with predicted long-term losses of around £10bn, they will be in a precarious position to cope with future shocks.

Solving the global housing crisis

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It was revealed, in a survey carried out by the Lincoln Institute of Land Policy (LILP) in 2019, that 90 percent of the 200 cities around the globe that were polled were considered to be unaffordable to live in, based on average house price in relation to median income. The impact of COVID-19 has only worsened the housing crisis, and government stimulus packages designed to fend off economic disaster are unsustainable in the long term. The data from the LILP shows that although household debt might boost economic growth and employment in the short term, households are eventually forced to rein in spending to repay these loans.

This then results in debt damaging the economy in the long run, and therefore, affordable housing is ultimately beneficial for both homeowners and the economy.

The last half of 2020, and the first half of 2021, have both seen housing prices across the world dramatically increase; in America, prices rose by 11 percent during the period, the fastest pace in 15 years, while in New Zealand, house prices were up by 22 percent. As a result, many countries, including Italy and the US, implemented measures to protect mortgage holders against the risk of losing their homes. The reasoning behind this was because mortgages can go lower while wages are not rising, and many are becoming unemployed due to the pandemic.

The rise in house prices also coincides with the increased demand for more housing, as a result of a growing population and a shift in demographics. This demand for housing has been particularly present within city centres, where there are good transport links, and a surplus of public services.

Richard Florida, founder of the Creative Class Group, told World Finance that part of the reason for the housing crisis is because “housing has been financialised and turned into an investment vehicle, which has caused an oversupply of luxury housing and a lack of affordable housing.” Florida added to this that “home ownership has created challenges for our cities by restricting the supply of housing and creating a system that incentivises those that make an investment.”

The decline in home ownership as a result of unaffordable housing has led to the economic benefits of home ownership being questioned even further. In rich countries in particular, home ownership has previously been glorified as the ultimate goal. However, it now seems that it is a dysfunctional concept at times, and has led to gaping inequalities, as Florida talks about, as well as inflaming generational and geographical divides.

 

The foundation of the problem
Prior to the pandemic, lack of affordable housing was already a major issue. A growth in luxury tower blocks in cities across the world contributed to this, with this increase being partially aimed at the rise of foreign investors. This consequently contributed to a shortage in housing for the low and middle-income people in these cities. Vancouver has been viewed in recent decades as a place abroad for the wealthy Chinese to keep their assets. This has led to an increase in how upmarket certain areas of the city are, which has subsequently decreased how affordable the city is to locals.

Hong Kong is another unaffordable city, having retained the title as having the world’s least affordable housing market for an 11th consecutive year in 2020, with the average price for a home a staggering 20.8 times the annual household income (see Fig 1). Although there is a public housing scheme to try and combat this issue, it unfortunately offers little compensation to tackle this sizeable disparity, with a current waiting time of five and a half years.

Hong Kong’s home ownership scheme (HOS) does not improve on this, as the chance of being successful with this government initiative is only 1.63 percent. Tokyo is one of the few cities to have kept up with the increasing housing demand for all classes, but this can largely be explained by its deregulated housing policies, which mean that in this city there are no rent controls, and fewer restrictions on height and density. Japan has consistently been building nearly one million new homes and apartments each year for the last decade.

 

 

Shortage of houses
In the US, house prices have increased by nearly 40 percent since 2000, making the median home in 200 US cities $1m. Home ownership has become unattainable for the vast majority of the population. This difficulty is also highlighted through the National Low Income Housing coalition, who found that a renter working 40 hours a week and earning minimum wage cannot afford a two-bedroom apartment in the US. One of the reasons for the shortage of new houses is due to the exclusionary zoning laws, with some areas of the US having neighbourhood bans on new developments. There are also rules to establish minimum lot sizes, or requirements to include a certain number of parking spots per development.

Most recently, corporate relocations during the pandemic have contributed to dramatic surges in a demand for housing for particular reasons. At the end of 2020, Elon Musk announced that Tesla was moving to Texas, which consequently led to a boom in the Texas housing market. The rise in the cost of construction materials has also contributed to a shortage of new houses globally. The cost of home building materials has increased as a result of higher tariffs emerging from the ongoing trade war, with increased tariffs being placed on imported steel, aluminium and other building materials.

According to the Bureau of Labour, the cost of raw materials in the US has risen as high as 20.2 percent since the financial crisis. The lack of construction occurring during the pandemic has also contributed to this pre-existing issue, with output falling in April 2020 by 40 percent in the UK, and by 30 percent in the US. It will continue to take time before global residential construction reaches pre-COVID-19 volumes.

 

Tackling the housing crisis after COVID
Post-COVID, there is the hope that globally we can move forward on the critical housing targets of the UN’s Sustainable Development Goals (SDG). Goal 11 is to ‘make cities and human settlements inclusive, safe, resilient and sustainable,’ and new housing projects should bear this in mind when starting new construction projects, particularly in cities. In addition, more consideration for the wellbeing of citizens must be given over the desire to make a hefty profit.

More consideration for the wellbeing of citizens must be given over the desire to make a hefty profit

Some cities across the world have been working on affordable housing plans for the last couple of years to combat the housing crisis, and hopefully these new ways of solving the housing crisis can be learnt from, and put into effect on a global scale. In Australia, the state government of Sydney launched a partnership with the private sector and community housing groups in 2018 to develop and renovate 23,000 social housing units in different neighbourhoods.

In addition, Melbourne founded the Melbourne apartment project in 2018 to encourage home ownership, with 34 apartments built via this scheme. Six were sold at the market rate, which then enabled the other 28 to be subsidised through a deferred second mortgage model, in order to reduce the necessary deposit and repayments.

In India, they have found a cheaper construction material; glass fibre reinforced gypsum (GFRG) panels, which use a minimal amount of concrete and steel, and therefore the cost of the material is greatly reduced. This means that the houses made from this material in the future will be more affordable. In Austin, Texas, the company ICON has gone one step further to find more efficient and less costly ways to build houses, through developing 3D printing robotics that are capable of printing 2,000 square foot houses.

The global housing crisis is much bigger than just housing, due to the enduring issues of availability of transport and the nearby location of public services. The shortage of land must also be solved, due to limited land supply increasing demand and therefore also price. While it is important for a solution to be found to fix the current disparity between house prices and wages, it is also important to consider other solutions to unaffordable housing in cities. This includes repurposing vacant properties, and improving transport links to increase the amount of land around a city that people are happy to live in.

Amsterdam’s rise as Europe’s next financial centre

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When Brexit came one step closer to becoming a reality in 2018, Tradeweb was left with few options other than expanding its European presence beyond London. The US company, which runs platforms for fixed income, derivatives and ETF trading, was on the lookout for a European hub that would offer a business environment similar to that of London. The Dutch capital was an obvious choice, says Enrico Bruni, Tradeweb’s head of Europe and Asia business: “Amsterdam is home to many financial firms, so it was a natural fit for us.”

In January 2019, Tradeweb became the first foreign platform to get approval from the Dutch regulator to operate trading facilities from Amsterdam, replicating its UK regulatory status. Currently, the company’s Amsterdam office serves the liquidity needs of its EU clients.

 

Fintech boom
Tradeweb is not alone in its post-Brexit trajectory. Following the Brexit referendum, many fintech companies, including MarketAxess, Klana, Azimo and CurrencyCloud, have increased their presence in the Dutch capital, either by expanding their offices or moving their European headquarters there. Many cite the friendly regulatory environment for fintech companies, still seen as pesky disruptors by incumbents in other jurisdictions, as a reason for their choice.

Amsterdam’s talent pool and reputation as a tech hub, with home-grown success stories such as payment service Adyen, help too. “Most people in the Netherlands are fluent in English, while the talent pool is remarkable with lots of technological expertise,” Bruni says. In 2020, the Netherlands topped the EF English Proficiency Index, a survey measuring English fluency globally. Around a tenth of the 200,000 people employed in the Dutch financial sector work for a fintech company, primarily in Amsterdam. “It’s only in the last five years that fintech has been growing in Amsterdam.

Before that, most fintech companies were focused on London as Europe’s fintech hub. But now there is less talent there, and following Brexit there is also a need for many companies to move somewhere else, ”says Suzanne Cox, Head of Foreign Investments at Amsterdam In Business, the foreign investment agency of the Amsterdam metropolitan area.

Many hope that Amsterdam will regain some of its 17th-century glory, when it was the world’s leading financial hub

For most firms moving from London, relocating is all about minimising damage rather than gaining an advantage; moving to a city where the infrastructure is already there is a no-brainer. “Amsterdam already had a very good financial ecosystem, so we didn’t need to build anything from scratch,” says Michiel Bakhuizen, a spokesperson for Netherlands Foreign Investment Agency, an organisation responsible for attracting foreign businesses to the country.

The city is conveniently located close to other European financial hubs and frequent flights are available from Schiphol Airport to all places that matter in European tech and finance. Amsterdam is also home to Amsterdam Internet Exchange, one of the world’s largest networks of digital traffic, while the Netherlands boasts Europe’s fastest average internet connection according to Opensignal, a mobile analytics company.

 

Gaining momentum
The Dutch capital is also making strides in other areas. This January, Amsterdam Euronext overtook London as Europe’s top share trading venue. Although temporary and largely symbolic, given London’s dominance of other markets, the shift has been hailed as “irreversible” by Stephane Boujnah, Euronext CEO, in an interview to AFP.

Amsterdam is also gaining ground in euro-denominated interest-rate swaps, a $135trn market, and in the first half of the year was trailing London as Europe’s top corporate listing venue, with the €3.2bn IPO of Polish parcel-locker firm InPost as the jewel in its crown. Many see the canal city as an emerging hub in niche but up-and-coming markets. In another blow to the City’s mojo, US-owned Intercontinental Exchange announced last February that it will move EU carbon trading from London to its Amsterdam-based ICE Index, the world’s biggest carbon trading exchange, due to the EU’s refusal to grant regulatory ‘equivalence’ to the UK’s financial rules.

Chicago-based Cboe Global Markets, one of the biggest exchange operators globally, will launch its equity derivatives trading hub in Amsterdam this September, while CME Group, a US-owned derivative exchange, has already shifted euro-denominated trading and clearing from London to Amsterdam.

Many banks are also increasing their foothold in the ‘Venice of the North.’ Natwest and RBS have moved some UK operations to Amsterdam, while non-European banks such as Australia’s CBA, US investment bank BlackRock and Japan’s Norinchukin and MUFG have picked Amsterdam as their EU base.

Despite these early successes, the Dutch are careful to shy away from triumphalism. “When we made an analysis from a company’s point of view back in 2016, we saw that Amsterdam was attractive for various financial services firms, but not all of them,” says Bakhuizen. With a cluster of trading platforms and payment companies already in the city, it was easy to attract more of the same. Beating other European financial hubs in some markets has proved more challenging. “We knew that Amsterdam wouldn’t be the place to be for investment banks, because the Netherlands has a banking bonus cap,” Bakhuizen explains, referring to a law capping bonuses to a maximum of 20 percent of salary.

A survey by the think tank New Financial found that of the 440 financial services firms that have moved jobs out of London, one out of three picked Dublin as their primary destination; Amsterdam attracted a tenth, although it’s catching up, while most investment banks opted for Frankfurt and Paris.

 

Smooth regulator
One advantage that makes Amsterdam stand out from its EU rivals is regulation. The dispute between the EU and the UK over equivalence has left many financial services firms in limbo. “The Dutch regulator, the Authority for the Financial Markets (AFM), has substantial experience in financial services and understands our space very well,” Tradeweb’s Bruni says. The AFM allows proprietary trading firms to trade directly with institutional investors without treating them as clients, a rare feature among EU regulators that cuts down red tape. “The Dutch regulator is strict, but also open-minded and much respected in Europe. So it’s not necessarily easier to get regulatory approval here, but if you do, you know that you will be taken seriously in Europe,” Cox from Amsterdam in Business says. Many fear that regulatory divergence between the EU and the UK will lead to fragmentation in European financial markets, with US and Asian markets picking up the spoils.

For Tradeweb, lack of equivalence means that EU-based banks cannot transact with their clients on its UK platforms, due to EU regulation. As a result, the company has seen trading activity shift to US venues, most markedly in euro swaps. “We believe that even though equivalence would simplify things and reduce fragmentation in the market, it is probably not as much of a priority as it once was. Instead, we could see fractious trading become more prevalent in the future,” Bruni says.

 

SPACs, the new battlefield
The Dutch capital is gaining momentum in an up-and-coming niche market: special purpose acquisition companies (SPACs), which use money raised from investors to acquire promising start-ups and help them go public. Although the market has slowed down after an unprecedented boom in the US in 2020 and early 2021, it is gathering pace in Europe. In the first half of the year, Amsterdam’s Euronext exchange was the leading European venue for SPAC listings.

It is already the go-to listing platform for European SPACs supported by famous sponsors, a crucial element for SPACs relying on the reputation of their backers to attract investor interest. Big shot sponsors like Bernard Arnault, CEO of the world’s biggest luxury group, and Ian Osborne, a prominent tech investor, have chosen Euronext to list their SPACs.

Many European countries are considering regulatory reforms to attract SPACs. The UK Financial Conduct Authority may loosen current regulatory restrictions, such as the suspension of share trading once a proposed acquisition has been announced. However, the Dutch regulatory framework is perceived as being closer to the US one, with hardly any SPAC-specific restrictions in place. “They are competitive from a regulatory point of view. It’s fast, easy and flexible to list there. Plus, Euronext is an integrated market – it’s part of the EU’s Capital Markets Union with connections to other European markets, which is not the case with London,” says Daniele D’Alvia, CEO of SPACs Consultancy, a London-based consulting firm, and author of a forthcoming book on SPACs.

With finance entering a new era due to the rise of disrupting technologies such as the blockchain and AI, many hope that Amsterdam will regain some of its 17th-century glory, when it was the world’s leading financial hub, before a series of economic crises and wars allowed London to gain the upper hand; the Dutch capital is home to the world’s first official stock exchange, as well as the first public listed company (the Dutch East India Company).

However, the Dutch don’t rush to celebrate, nor do they overestimate the benefits of Brexit. “For us, it’s a pity that Brexit is happening. We have never been in favour of it. We think we can be stronger working with the UK, rather than competing with them,” Cox says. “A lot of companies move operations to Amsterdam, Frankfurt or Dublin, but never leave London completely,” Bakhuizen says. “They diversify their strategy to be close to the markets where they operate. It’s a global game now.”

NFTs: A new market for digital brushstrokes

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In the art world, rarity confers value. There is, and can only ever be, one Mona Lisa. This maxim is even more important to a replicable form such as photography, where a single set of negatives could produce a countless number of prints – the fewer authorised prints produced, the more each print is worth. It is an archetypal example of scarcity value.

But ubiquity also bestows its own form of value, and nowhere is this more evident than on the internet. Views are a commodity that can be bought and sold. Sharing is paramount.

More people with a meme saved on their phone gives it more cultural – and, now, financial – power (see Fig 1). At the heart of this commodification is the latest craze in cryptocurrency: the NFT. NFT stands for non-fungible token, meaning each unit is not interchangeable. While cryptocurrencies such as Bitcoin function through every token being completely interchangeable, NFTs are specifically unique. If you swap a five-pound note for another, your asset remains unchanged. If the Louvre swaps the Mona Lisa for another painting of equal value, their asset will be entirely different. This is why NFTs are innovating markets that require items to be unique and authentic, such as collectibles and art.

NFTs convert assets into tokens stored on a cryptocurrency blockchain that prove the authenticity of that digital item. A blockchain – a database of linked records, or blocks, which grows with new data – depends on cryptography, the technique used to protect the privacy of a message by encoding it into a form that is only understood by the intended recipient using public and private keys. The private key of the recipient acts like a digital signature. For NFTs, the creator’s public crypto key acts as a certificate of authenticity, and the buyer’s private crypto key as proof of ownership.

Any digital artwork that is sold as an NFT remains copyable. The difference in value is accounted for in terms of authenticity. Compare a poster of the Mona Lisa to Da Vinci’s painting: the former can be purchased for pennies while the latter is worth around $1bn, despite bearing an identical image. While, on the internet, anything and everything is in abundance, NFTs create scarcity.

 

A brief history
The term NFT can be traced back to Bitcoin: a peer-to-peer electronic cash system, the whitepaper on blockchain and distributed ledgers published in 2008 under the name Satoshi Nakamoto.

It is widely argued that the first NFTs were ‘coloured coins,’ tokens made of small denominations of Bitcoin that were used in the early 2010s to represent assets such as company shares, property, and, in some cases, digital collectibles. However, they required all participants to agree on their worth.

In 2014, decentralised exchanges that allowed asset creation were built on top of the Bitcoin blockchain and network. Counterparty was the dominant platform in this area until 2017, when it was superseded by Ethereum, now the most actively used blockchain, whose cryptocurrency, Ether (ETH), is second only to Bitcoin. Ethereum developed an interface that tracks ownership and movement of individual tokens on the blockchain, a key innovation in the formation of a functioning NFT market.

One of the earliest markets that utilised the blockchain was trading card games, followed by other quirky NFT exchanges, including meme marketplaces and 2017’s Cryptokitties, a still thriving virtual game where cartoon cats are adopted, bred and traded, based on the premise of value in rarity. 2017 also saw the birth of Cryptopunks, 10,000 unique algorithm-generated cartoon characters that were given away on the Ethereum blockchain. The name is a reference to Cypherpunks, who experimented with precursors to Bitcoin in the 1990s – as the name suggests, the simple visuals reference the early days of the internet. Cryptopunks are still being traded today, and NFT antiques have also enjoyed an increase in value, with some being sold for over $1m in this year’s NFT boom. But it is the digital art market that has driven the phenomenal rise in NFTs’ value.

 

A breakthrough year
The first quarter of 2021 has been the NFT gold rush. The average sale price of an NFT in January 2020 was $30; in a year, that figure skyrocketed, to $195 in January 2021. By the middle of February, the average NFT cost $4,000. NFT history was made in March, when Everydays became the first purely digital work of art to be sold by a major auction house. The piece, by digital artist Beeple, AKA Mike Winkelmann, is a collage of works he created for a project in which he posted a new digital artwork every day. It sold as an NFT for $69m. As of April, there was a 60–70 percent drop in average price since February, from $4,000-plus to around $1,500. However, stability of prices is a good sign for longevity, as it suggests that the NFT market is far from a bubble about to burst.

The decrease could be attributed to fewer outlying sales, such as Beeple’s Everydays, which drive up the overall average. Trading volumes have continued to rise: in one week in February, the volume of NFT trades doubled, from 20,000 a week to 40,000 a week, and, according to data platform NonFungible.com, there were as many as 80,000 weekly NFT transactions in March. While speculators use the ‘hype cycle’ to predict the future value of the NFT market – which, at the end of Q1, was worth around $250m – its popularity is driving NFT art and alternative applications of cryptocurrency technology towards the mainstream.

 

The NFT footprint
Financially, NFTs are a step towards a decentralised economy, as they work through peer-to-peer transactions. ‘Smart contracts’ written into NFT code mean that the terms of the agreement between the buyer and seller are self-executing, eliminating the need for a third party. The structure of the blockchain makes transactions irreversible. Smart contracts have been innovative regarding artist fees in NFT art spaces, automating an artist commission every time the piece is sold. Experiments with smart contracts are revolutionising ideas of ownership: a project called Terra0 made a forest in Germany an autonomous economic unit, unmanaged by human beings.

This is a bold ecological statement, considering the damaging environmental impact of the blockchain. ‘Mining’ – auditing of the blockchain carried out by highly sophisticated computers through solving complex maths puzzles – requires an abundance of electricity. In fact, each NFT transaction on Ethereum consumes the equivalent daily energy used by two US households.

Developers are working towards building a less computationally intensive design. Some, such as Ethereum co-founder Charles Hoskinson’s platform Cardano, use a ‘proof of stake’ mechanism as a more energy-efficient alternative to the ‘proof of work’ system currently used by most major blockchains to validate transactions and mine new tokens. While Ethereum is currently transitioning from proof of work to a proof of stake mechanism, a first in the cryptocurrency sector, a similar move is currently untenable for Bitcoin.

Until Ethereum’s migration is successful, the most sustainable option for proof of work blockchains is to fuel their computers using renewable energy. The use of sidechains – a separate but attached addition to a parent blockchain – is also a less energy-intensive development.

 

The future of art
Where NFT art is concerned, investors and collectors will follow digital artists to platforms where they decide to sell – and many artists are opting for ‘green’ NFTs, using platforms such as Hic et Nunc, an infrastructure built on the proof of stake Tezos blockchain. Peer-to-peer platforms make it easier for artists to be in contact with collectors, but that comes with its own challenges. While the NFT is largely a financial innovation, it is now a combination of speculators, investors and collectors who are buying NFT art and other collectibles. “At first, the cryptocurrency hoarders were trying to diversify their portfolios, and most of them didn’t collect art,” Fanny Lakoubay, a crypto-art advisor and collector, told World Finance.

Now, though headlines focus on memes and astronomically high outlying sales, a serious digital fine art market is developing.

While, financially, the blockchain drives towards decentralisation, it remains to be seen whether this model works for the fine art industry, where third parties such as galleries and auction houses play an important role in curation, sales, and maintaining the fine line between an artist’s accessibility and exclusivity.

Though headlines focus on memes and astronomically high outlying sales, a serious digital fine art market is developing

Sales platforms for NFT art remain tech-dominated, though online galleries such as the Digital Art Museum and the Museum of Contemporary Digital Art are chronicling digital fine art as a cultural, not just financial, asset. In fact, artists are using NFT art itself to explain and explore blockchain technology, such as Primavera De Filippi’s sculpture Plantoid, a series of plant-like metal sculptures that each have an attached cryptocurrency wallet.

Viewers are invited to send cryptocurrency to the wallet of any sculpture they like; when a certain amount is reached, software automatically commissions another artist to create a new sculpture with its own digital wallet, and so on. De Filippi, who researches the legal implications of smart contracts at Harvard University, has not only integrated cryptocurrency into her piece, but used it to demonstrate how blockchains work. “It’s pushing the boundaries of what digital art can be,” Lakoubay says. “Not just a JPEG attached to a certificate of authenticity on the blockchain.”

Artificially intelligent

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In their current form, it seems that machine learning algorithms excel at certain kinds of problems, but do less well at others. It is one thing to comb through countless strategies to produce a winning move in chess or Go; another, it seems, to nail the perfect movie recommendation (an early adopter of machine learning of course being Netflix).

In finance, machine learning has been used since the late 1980s by hedge funds. One popular machine learning approach is to look at investor sentiment, as measured by things like hashtags on Twitter. The limitations of such approaches are shown by the fact that the Eurekahedge AI Hedge Fund Index, which tracks the returns of 13 hedge funds using machine learning, has had an average annual return for the past five years of 5.5 percent, as compared to 12.5 percent for the S&P 500.

In healthcare, where data analytics is playing an increasingly important role, machine learning algorithms also tend to be frustrated by the noisy nature of the data, to the point where there are few rigorous studies that can prove superiority over expert-based methods.

The problem of bias in other areas such as recruitment is well documented. Amazon had to terminate one program because it consistently recommended hiring males, presumably because the other people to have been hired were also mostly male.

Superintelligence
In general, it seems that computers are highly efficient at finding patterns in anything from CVs to hospital visiting time data, but are less good at assessing whether they are relevant or meaningful. Machine learning algorithms therefore do well at analysing closed games with well-defined rules, such as chess, but must be used with care when it comes to complex

real-world problems. On the other hand, humans aren’t perfect either – so perhaps the solution is to combine the two.
According to the philosopher Nick Bostrom, who is head of Oxford’s Future of Humanity Institute, such a merger of human and machine can lead to what he calls a ‘superintelligence’ that can outperform either humans or machines acting alone. The problem is how to correctly integrate humans and machines to work together in synergy.

A merger of human and machine can lead to a ‘superintelligence’ that can outperform either humans or machines acting alone

One example of such a project is the MSI Brain system of Mitsui Sumitomo Insurance, which their CEO, Shinichiro Funabiki, described for World Finance as “a fusion of human and artificial intelligence, combining customer relationship management with sales force automation. The agent is able to uncover the customer’s potential needs through analysis of massive amounts of data, with MSI Brain then suggesting what insurance products to propose and in what way.” The aim is to “create a sustainable system in which AI and people grow together.”

Such hybrid systems may even play a role in geopolitics. As former NORAD chief Terrance O’Shaughnessy wrote of the artificial intelligence program known as Strategic Homeland Integrated Ecosystem for Layered Defense (SHIELD), it “pools this data and fuses it into a common operational picture. Then, using the latest advances in machine learning and data analysis, it scans the data for patterns that are not visible to human eyes, helping decision-makers understand adversary potential courses of action before they are executed.” One question of course is how computers themselves will evolve, particularly if and when quantum computers see widespread application. Many of the companies that currently lead in big data, such as Google and Amazon, along with governments and state-led consortia, are investing billions in the development of such computers.

Quantum chimera
As political scientists James Der Derian and Alexander Wendt note, there is “a growing recognition – in some quarters an apprehension – as quantum artificial intelligence labs are set up by tech giants as well as by aspiring and existing superpowers that quantum consciousness will soon cease to be a merely human question. When consciousness becomes a chimera of the human and the artificial, not only new scientific but new philosophical and spiritual cosmologies of a quantum bent might well be needed if we are to be ‘at home in the universe’.” A trope often explored in sci-fi movies, such as The Terminator when Cyberdyne Systems created Skynet, may not now seem so far-fetched – computers may really start to think for themselves.

Or even host life. Bostrom is perhaps best-known for his simulation hypothesis, which states that since computers in the future could one day produce consciousness, “we would be rational to think that we are likely among the simulated minds rather than among the original biological ones.” The hypothesis is taken seriously by people including Elon Musk, who probably uses it to justify the Tesla share price. Personally, I hold out hope that we are not just apps on some future teenager’s phone. However, it seems likely that the boundary between humans and machines will continue to evolve in fascinating ways.

Big Oil faces big transition

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In a period that has seen record lows and highs for gas, negative oil prices, more wells being abandoned than ever before, and drilling programmes slashed, the general consensus is that Big Oil is in trouble. Also, the industry faces pressure on all sides as the momentum turns against fossil fuels because of the looming threat of global warming. “If the world acts decisively, the scale of change will revolutionise the energy industry,” predicts international consultancy Wood Mackenzie in a landmark study released in April 2021 that foresees an “upending of oil and gas markets” as demand for oil shrinks and prices progressively collapse. As fossil fuels lose dominance in the energy mix, the oil giants are expected to lose their long-held power. “The steep fall in demand will prevent these key oil producers from managing the market and supporting prices in the way they do today,” Wood Mackenzie forecasts. “Only the lowest-cost producers such as the Middle East members of OPEC will remain core providers of oil.”

 

Preparing for a revolution
In this scenario Big Oil has 30 years – at the most – to prepare for this new era. That is the broad consensus of the latest reports into an industry that has kept the lights on for the best part of a century and powered nearly all of the world’s transportation. Demand for oil is expected to begin a long decline as soon as 2023, according to some forecasts. By 2030, the price per barrel could fall from today’s $60–70 on the Brent index to an average of $40 by 2030 and as low as $10 by 2050.

The vast refining industry is certain to suffer. “The scenario is grim for the downstream sector,” predicts Wood Mackenzie’s vice-president of refining and chemicals, Alan Gelder, who expects that all but the most efficient refineries will be shuttered. “The refining sector will have withered to a third of its current capacity,” he says. The challenge is how to slash fossil fuel-triggered emissions without running out of energy before renewables can take up the slack.

According to the Environmental Protection Agency in the US, the level of greenhouse gas emissions (GHG) in America, one of the world’s biggest users of energy per capita, fell by 1.7 percent between 2018 and 2019. And since 2005 they have plummeted by nearly 11.6 percent, largely because of increased use of ‘greener’ natural gas. “This is noteworthy progress and supports the larger point that natural gas is critically important in addressing the risks of climate change,” approved the EPA in early 2021.

 

Turning a blind eye
But is Big Oil ready for the revolution? Not according to Wood Mackenzie, which says “no oil company is prepared for the scale of change envisioned.” In the consultant’s scenario, “all companies face a decline with asset impairments and bankruptcy or restructuring on a scale far greater than that of 2020.”

Also, many countries have their heads in the sand, especially in Latin America, Africa, the Middle East and Asia, where entire nations rely on revenues from fossil fuels. According to a joint analysis by the OECD and International Energy Agency (IEA), in 2019 governments pumped over half a trillion dollars into subsidising the fossil-fuel industry. “The data show a 38 percent rise in direct and indirect support for the production of fossil fuels across 44 advanced and emerging economies,” the study noted. The findings provoked a scolding from OECD secretary-general Ángel Gurría, who criticised “an inefficient use of public money that serves to worsen greenhouse emissions and air pollution.”

However, some oil giants have seen the light. “After 112 years, we are pivoting from being an international oil company to an integrated energy company,” explained BP chief executive Bernard Looney in April. “We plan to be very different by 2030, reducing our oil and gas production by 40 percent and raising our low carbon investment 10-fold.”

Demand for oil is expected to begin a long decline as soon as 2023, according to some forecasts

Royal Dutch Shell has also recognised the dangers. In mid-April, chief executive Ben van Beurden took the unprecedented step of asking shareholders to approve a strategy that has set a target of net-zero emissions by 2050, in line with the Paris Accord. “We are asking our shareholders to vote for an energy transition strategy that is designed to bring our energy products, our services, and our investments in line with the goals of the Paris Agreement and the global drive to combat climate change.”

In concrete terms, Shell will embrace biofuels, electric charging stations, hydrogen and other renewable forms of power as well as the coming technology of carbon capture and storage (CCS). In the interim period though, Shell has no intention of axing its vast oil and gas operations which are fundamental to the current energy mix. “Ending our activities in oil and gas too early when they are vital to meeting today’s energy demands would not help our customers or our shareholders,” the chief executive warned in a 32-page explanation of the energy transition.

 

The switch to green
During the transition period to a mainly renewably powered future, low cost ‘green’ gas will become king as it steadily replaces coal and oil. According to the IEA, liquefied natural gas (LNG) will play an essential role in lowering global CO2 emissions. “In the generation of electricity, gas emits 50 percent less CO2 than coal,” points out US source RealClear Energy.

Meanwhile, the Biden administration has set America on an unstoppable course of clean energy, completely reversing the previous president’s policy of supporting Big Oil. Until Democrats took control of the White House, the trade body, American Petroleum Institute (API), was an unabashed supporter of Trump and fossil fuels in general, to the point of deriding renewables. The French giant Total, which has also set itself on a renewables course, resigned in disgust from the institute in January, while BP and Shell among others say the only reason they haven’t quit is because they believe they can reform it from within.

Lately though, the API may be acquiring religion. In March 2021, the institute issued a blueprint for the future that cited the importance of “tackling the climate challenge.” And president Mike Sommers, who spent much of 2020 praising president Trump’s anti-renewables policy, now sees Big Oil taking a lead in developing the technology necessary to achieve the great transition. “There’s nobody better equipped to drive further progress than the people who solve some of the world’s toughest energy problems every day,” he said.

 

Part of the solution
The API’s new tune could be put down to mounting evidence of climate change in the US. According to the US Drought Monitor, cited by Energy Bulletin, 2020 was the worst year for droughts in more than 20 years, with vast areas seeing little or no rain.

Big Oil could also play an important role in the transition. Blessed with much deeper pockets than most of the renewables companies, the industry has the financial firepower to change direction. Some of the oil giants are already leaders in the important but extremely costly technology of carbon capture that essentially traps the carbon dioxide that is produced by burning fossil fuels and isolates it from the atmosphere before, in some instances, reusing it. The US alone boasts 12 commercial-scale facilities that collectively handle about 25 million metric tonnes of CO2 a year.

In a highly volatile industry where abrupt fluctuations in fortunes mask long-term trends (see Fig 1), the tea leaves can be hard to read. In early April for instance, the price of a barrel of oil hit $66.09, up a promising 30 percent since the start of 2021. Yet most experts predict a steady retreat over the long-term. And herein lies an opportunity, according to the IEA’s executive director Dr. Fatih Birol. “Today’s low fossil fuel prices offer countries a golden opportunity to phase out consumption subsidies,” he said.

But will they take the opportunity? In its latest meeting, energy cartel OPEC shocked markets by tightening the taps to keep oil scarce and push up prices. As a result, in what may be one of the last flurries for oil, the Brent price approached $70 and some analysts forecast it could hit $100 or higher in 2022.

On one issue though, nobody is divided. Namely, demand for oil and especially gas will increase for a few years yet. “Fossil fuels are still seen as growing at least through the 2030s, even as renewables usage rises in popularity and affordability,” predicts Energy Bulletin published by America’s Post-Carbon Institute.

But the next 10–30 years will see the end of Big Oil as we know it, according to most forecasters. Citing an unlimited supply of sun, wind and water, they say that over the long term renewable energy will usher in an era of cheap electricity with the use of infinite and low-cost resources.

Backing up that claim, numerous research institutions such as America’s National Renewable Energy Laboratory, Bloomberg New Energy Finance and International Energy Agency are in no doubt that the capital costs of solar and wind will continue to decline well into the future. The writing really is on the wall.

Lira depreciation leaves Turkish banks vulnerable

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When Naci Ağbal, head of the Turkish central bank, hiked interest rates on March 18, markets responded with kindness. The value of the Turkish lira shot up by four percent. Within just four months in office, Ağbal managed to put out the fires surrounding the fragile Turkish economy. During his tenure, the lira rallied 24 percent from its lowest point this year. It was an unexpected triumph, but it did little to satisfy his boss, the President of Turkey, Recep Tayyip Erdoğan.

True to form, Erdoğan dismissed Ağbal with a terse announcement on the evening of March 19. According to the Turkish press, the decision found Ağbal working late in his office on a Friday evening that would be his last at the helm of the bank.

 

Another one bites the dust
For those closely following Turkish affairs, the decision was anything but surprising. “After the appointment of Ağbal as central bank governor, we put out a comment that even though he had a sterling reputation, one shouldn’t get overoptimistic about what could occur under him because, at the end of the day, his supervisor remained President Erdoğan,” says Dennis Shen, an analyst at Scope Ratings, a credit rating agency. Erdoğan’s preference for low interest rates has befuddled economists in and out of Turkey, and Ağbal’s decision to increase the rate allegedly played a role in his premature departure. However, the Turkish President’s motives, Shen says, are more political rather than economic in nature: “In his view, low interest rates support economic growth, and he’s down in the polls, so he’s liable to lose the election in 2023 or before. He feels that he needs higher growth through low rates to improve his likelihood of staying in power.”

Ağbal’s successor, Şahap Kavcıoğlu, is a former lawmaker for the ruling AKP party. Although he has pledged to keep monetary policy tight, he has previously embraced the unorthodox view of President Erdoğan that high interest rates cause inflation. But his economic beliefs do not matter as much as his willingness to go along with his boss, says Shen: “If he does not cut interest rates at the rate the president wants, he’s liable to be dismissed. Erdoğan appears to be getting impatient with his central bank governors faster these days.” The result, according to Ibrahim Turhan, former chairman of Istanbul Stock Exchange (currently part of Borsa Istanbul, the country’s main exchange), is that global markets are losing patience with Turkey’s institutions. “Central Bank independence is a very valuable political asset, which diminishes the cost of monetary policy. The groundless obsession of the government with the central bank and interest rates has had a high cost to the Turkish economy.”

 

 

Let the debt pile on
At first glance, Turkey’s fundamentals look bright. The country’s public debt stood close to 40 percent in 2020 (see Fig 1), a relatively low rate among G20 economies that allowed debt to grow precipitously during the pandemic, while growth hit 1.8 percent, a rare success story among OECD countries. Exports have also rebounded in 2021, despite disrupted global supply chains and paused tourism.

However, the vultures flying over the Turkish economy set their sights on a very different target: the country’s fragile banking sector. Although Turkish banks are well capitalised, they rely on short-term loans from the global syndicated loan market to stay afloat. So far, they have been able to kick the can down the road due to an idiosyncrasy of the Turkish financial system: unusually high dollar deposits, held by corporations and ordinary citizens who convert their savings into dollars to hedge against lira volatility. Turkey’s diaspora in Europe also chips in, lured by high interest rates. Whenever interest rates go up, as in Ağbal’s parting – and fateful – shot, the system gains time, says Edward Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments. More capital comes from overseas, reducing domestic credit growth and operating as a stabilising force that helps the lira stay strong.

However, government intervention may have broken this idiosyncratic but well-functioning system. Complying with Erdoğan’s desire to keep interest rates low, the central bank has dipped into the dollar reserves of commercial banks through forced ‘swap’ loans to support the lira. Between local elections held in 2019 and late 2020, the central bank and state-run banks are estimated to have spent reserves of around $128bn to prop up the currency. The controversial measure has caused a political earthquake, with the opposition turning the number into a symbol of the government’s financial mismanagement.

The policy has yet to bear fruit, with the lira edging towards a year low against the dollar in May. High inflation causes a vicious circle of growing demand for foreign currency that makes ‘de-dollarisation’ difficult without higher interest rates, according to Enver Erkan, Chief Economist at Tera Investment, an Istanbul-based private investment company. Inflation surpassed the 17 percent threshold in April, with a long-term target set at five percent by the central bank. Although Turkish banks do not face a liquidity crisis for the time being, Erkan says, an increase in Turkey’s credit default swap (CDS), which measures the level of sovereign default risk, may worsen their borrowing costs in the syndicate market. Lira depreciation is also making Turkish banks more vulnerable to the whims of the global markets, as their external debt liabilities up to mid-2022 are estimated at a staggering $89bn.

Some worry that trouble is just around the corner. “It’s a very fragile setup. At some point, someone will call the bluff and say the central bank is bankrupt and that the dollar deposits in the commercial banking system have been lent out and only exist on paper,” says Al-Hussainy. The end result, according to Al-Hussainy, will either be a bank run when local depositors find out that their dollars have been lent to the central bank, or an attack against the lira in the global markets that will lead to a currency crisis and possibly capital controls. “Both of those outcomes are pretty bad. It’s a system holding together, but only with duct tape and promises.”

For some analysts, capital controls are already there. “When foreign institutions are selling the lira, regulations are put into place to try to slow the selling down. That’s a form of capital controls,” says Shen. But many worry that the Turkish central bank is running out of options. “The central bank has borrowed more than the deposit base in the banking system. So functionally, the central bank of Turkey is bankrupt. The net asset position is negative in dollars,” says Al-Hussainy, adding: “You can print Turkish lira, but you cannot print dollars to solve that problem. The only way to solve that problem is by reducing the current account deficit. And the way you do that is by raising interest rates.”

 

Halkbank in the middle of the storm
Ironically, Turkey’s economic future may be decided on the other side of the Atlantic. The country’s relationship with the US has been strained recently over a series of issues, from Turkey’s military involvement in Syria and Libya to its purchase of Russian S-400 missiles – an anathema to its NATO allies – and the recognition of the Armenian genocide by President Biden last April.

Just as worrying is the forthcoming trial of Halkbank, a state-run Turkish bank currently investigated in the US over breaching sanctions against Iran. Although the bank has denied any wrongdoing, the trial, expected to begin later this year, casts a big shadow over the country’s fragile financial sector. Some think that a heavy penalty on the bank may be the final nail in the coffin of the Turkish economy, particularly if the government is forced to bail it out. However, the US authorities may be careful to avoid a crisis that may get out of control, says Al-Hussainy: “The US Treasury will be aware of the risk. The intent is not to isolate Halkbank from the rest of the global financial system and cause systemic financial crisis in Turkey.”

 

Crypto no more
As in other countries facing a combination of spiralling inflation, currency depreciation and capital controls, many Turks are turning to digital currencies. Last year, Turkey was the leading Middle Eastern market in terms of transaction volume in cryptocurrencies, according to a report by Chainalysis, a blockchain analysis company. Two of the country’s largest cryptocurrency exchanges collapsed this spring, leaving investors in limbo. The trend has worried the country’s regulators, who banned the use of cryptocurrencies as a means of payment last April, citing concerns over volatility and fraud. Although the share of deposits converted to digital currencies remains small, many believe that the real reason for the crackdown is that Bitcoin and other cryptocurrencies, despite their own volatility, are used as a hedge against lira depreciation and rising inflation.

Two of the country’s largest cryptocurrency exchanges collapsed this spring, leaving investors in limbo

The government hopes that a bumper tourist season, rising exports and the rebound of the global economy will help Turkey weather the storm through a stronger lira. But for sceptics, such hopes may be at odds with reality. “Locals lose confidence in a currency, either because of the expectation that a currency will depreciate or because they think that the official value of the currency is artificial,” says Shen, adding: “In Turkey, we are not completely at that stage yet, because Erdoğan’s own reforms post-2003 included championing a flexible exchange rate.

But the lira is becoming less flexible, and the locals are beginning to lose confidence in the value of the currency because of government interference.” Some think that the roots of Turkey’s economic woes may lie in politics, rather than economics. “Compared to peer countries and given the country’s track record, Turkish assets are extremely undervalued and underweighted in investor portfolios. The main problem of the Turkish economy is governance,” says Turhan. “Should Turkey fix this problem, economic challenges could be easily settled.”