IMF approves $498m disbursement to Ecuador

On December 19, the board of the International Monetary Fund (IMF) confirmed it had completed its second and third reviews of Ecuador’s performance under its 2019 economic programme. The completion of these reviews has allowed the Ecuadorian authorities to draw the equivalent of SDR 361.3m ($498m) from the IMF. However, there are expectations for what the money can and should be be used for.

In exchange for financial assistance, the IMF has stipulated that new economic reforms in Ecuador will be focused on reducing the current fiscal deficit, and for enacting changes in labour legislation to encourage increased productivity and competitiveness. The IMF additionally wants to be certain that any policies implemented will aim to make Ecuador self-sustainable in the future, and enable the country to function without additional international intervention.

In exchange for financial assistance, the IMF has stipulated that new economic reforms in Ecuador will be focused on reducing the current fiscal deficit

The Ecuadorian authorities have previously adhered to similar demands by showing their commitment to fiscal prudence, which is seen as the key to economic sustainability. However, protecting the poor and improving the social safety net both remain central priorities in Ecuador’s government-led programme. There remain long-standing concerns that austerity policies imposed by the IMF have caused additional economic hardship.

In 2015, Ecuador’s economy fell into a recession that persisted throughout 2016. To make matters worse, 2016 also saw a catastrophic earthquake in the country, leading to further financial difficulty.

In 2017, Lenín Moreno was elected the country’s president. His first challenge was to reignite the private sector to improve the country’s cash flow. This initially worked; Ecuador’s economy returned to positive (albeit slow) growth. In 2018, however, Ecuador’s GDP growth declined again, dashing any hopes of a quick recovery.

The weak economic growth of the past few years is partly to blame for why Ecuador has accumulated such a considerable amount of debt. Ecuadorian authorities will no doubt be hoping that the IMF’s financial aid will bolster the Central American country’s floundering economy.

Economic growth in Rwanda has arguably come at the cost of democratic freedom

A quarter of a century after the Tutsi genocide, Rwanda’s economy appears to be thriving, with annual GDP growth averaging 7.76 percent between 2000 and 2019, and growth expected to continue at a similar pace over the next few years. In light of the country’s chilling history, it is a curious state of affairs that Rwanda, a country once defined by death and conflict, has developed its economy to such an extent that it now aims to be an upper-middle-income country by 2035, and a high-income one by 2050.

Marie E Berry, Assistant Professor and Director at the University of Denver’s Josef Korbel School of International Studies, provided a possible explanation for these rapid developments: “In Rwanda, economic growth has been made possible by the strength of the state and the ruling party’s grip on power.”

Indeed, the business climate in Rwanda has continued to improve under the ruling Rwandan Patriotic Front. In 2009, the country ranked 143rd in the World Bank’s Doing Business report; by 2019, Rwanda sat 29th on the list, ahead of Spain, Russia and France.

However, Linda Calabrese, a research fellow at the Overseas Development Institute, told World Finance: “[Despite] Rwanda [being] one of the fastest-growing economies in Africa and the world – with low inflation – it has experienced limited economic transformation, with growth reliant on a small base.” In order to sustain economic growth, therefore, it is important for Rwanda to further diversify its economy.

Rwanda’s economy has benefitted from an increase in gender equality – a fact that is seen most prominently in its parliament, where 61 percent of members are women

Outside help
Since the end of the genocide, Rwanda has received extensive foreign aid, with nearly 50 percent of its 2019/20 budget coming from domestic and foreign borrowing. The country’s reliance on foreign aid has made the economy unstable: in 2012, for example, aid was withdrawn after the Rwandan Government was accused of sending troops to help rebel forces fight in the Democratic Republic of the Congo (DRC).

The US has continually aided Rwanda financially since 1964 – support the Rwandan Government received on the condition that it cracked down on corruption within the country. Rwanda has also developed regional trade links with the countries it shares borders with, which is especially important due to it being a landlocked country.

To improve its ability to trade effectively, Rwanda is currently reinforcing its relations with the DRC, as affirmed by academic Jonathan Beloff, who told World Finance that “political and security relations between the two nations have improved by leaps and bounds, with an eye towards economic integration”. Another strong financial supporter of Rwanda has been the World Bank, which has committed over $4bn to the country since the genocide ended.

A change in the weather
Despite the continual growth of the country’s economy in recent years, Rwanda’s reliance on its agricultural industry makes it difficult for the country to formulate an accurate figure for GDP growth each year, as unexpected droughts can undermine economic forecasts.

Similarly, climate change makes the weather much harder to predict, with low levels of water particularly difficult to cope with. Rwanda’s terrain also poses problems due to 90 percent of its domestic cropland being situated on slopes ranging from five to 55 percent in altitude. It is estimated that around 1.4 million tonnes of soil are lost per year as a result of erosion, a cause of great concern given that 80 percent of Rwandans depend on agriculture for their livelihood.

In a bid to become more sustainable and reduce the effects of climate change, the Rwandan Government has made an effort to decarbonise the energy sector. While more than 50 percent of Rwanda’s population is now able to access electricity in their home – compared to just 10 percent in 2009 – the cost of electricity remains high. The government will need to provide incentives, such as tax breaks, to convince the population and energy industry to switch to renewable sources, which can help decarbonise the country and produce cheaper electricity.

In good health
Rwanda’s economy has benefitted from an increase in gender equality, too – a fact that is seen most prominently in its parliament, where 61 percent of members are women. This is a significantly higher ratio than found in many western democracies: in the US, for example, women make up just 23.6 percent of members of Congress. As a result, laws have been passed that have directly benefitted women in Rwanda, such as compulsory paid maternity leave and the granting of women the right to own and inherit land.

The government also recognises the importance of education to ensure the economy continues to prosper. Stefan Trines, Research Editor at World Education News and Reviews, told World Finance that although Rwanda “has one of the highest primary enrolment ratios in sub-Saharan Africa, only four percent of Rwandans above the age of 25 have had any type of higher education”. To tackle this, the government is currently planning to expand access to basic education to 12 years, while also increasing equitable access to affordable higher education.

Despite economic developments and impressive advances in education, there is widespread concern that such improvements have allowed the authoritarian regime to consolidate its power

Further, Rwanda is adopting new technology, recently introducing drones that can deliver blood across the country. These drones are able to supply blood to 21 remotely located transfusion clinics in Rwanda, dropping off blood in minutes after a text or WhatsApp message is received from those in need. Rwanda’s health sector is showcasing plenty of improvement, recently launching a cervical cancer screening and vaccination campaign that aims to protect young girls and women.

A democratic deficit
Despite economic developments and impressive advances in education and technology, there is widespread concern that such improvements have allowed the current authoritarian regime to consolidate its power. Consequently, this has allowed the use of violence to continue against its citizens.

It is clear that Rwanda’s economy has significantly developed over the past 25 years, but the Rwandan model for economic development could not be easily used elsewhere, as it has arguably required political dominance and centralised control to achieve its success.

Academic Filip Reyntjens told World Finance that “Rwanda’s technocratic governance is better than in most of Africa, but its political governance is dangerously flawed”. This leads to democracy being compromised for the sake of development, something that could lead to future issues. Reyntjens added: “Authoritarian rule and the frustrations that go with it risk destroying the socioeconomic gains achieved after the 1994 genocide.”

The Review of African Political Economy’s Leo Zeilig has echoed these concerns, telling World Finance: “The Rwandan Government has used its record on poverty reduction and economic growth to legitimise its authoritarian rule.”

Although reducing poverty is incredibly important, to ignore democracy completely is likely unsustainable. If opposition parties grow in strength or the people of Rwanda rebel against the constraints on their democratic rights, then the Rwandan Government’s current regime may come crumbling down.

Saudi Aramco surges past valuation target in second day of trading

The oil giant Saudi Aramco, officially known as the Saudi Arabian Oil Company, has surpassed its valuation target of $2trn, as a result of its share price rising to SAR 38.15 ($10.30) on the morning of December 12 on the domestic Tadawul stock exchange.

The surge in valuation comes after a concerted effort by the kingdom to ensure trading got off to a successful start. It is hoped that funds raised by the initial public offering (IPO) can be used to diversify the country’s economy and further develop sectors outside of the oil and gas industry. The valuation also means Aramco has now overtaken Microsoft and Apple to become the most valuable listed company in the world.

The valuation means Aramco has now overtaken Microsoft and Apple to become the most valuable listed company in the world

Based on revenue, Saudi Aramco is one of the largest oil companies globally, and likely its most profitable too. Aramco is based in Dhahran in Saudi Arabia, and was founded in 1933, although the company’s name has since changed.

On November 3, Aramco first announced its plans to make between one to two precent of its market value available as an IPO on the Tadawul stock exchange on December 11. The IPO is synonymous with Saudi Arabia’s Crown Prince Mohammed bin Salem, who initially insisted on the company being valued at $2trn, despite a previous valuation last month only reaching $1.7trn.

Aramco’s 1.5 percent free float means that the shares owned by the public are worth $30bn, with Saudi Arabia encouraging local individuals to hold stock through cheap loans and a bonus share plan. Some international investors, however, have been deterred, declaring the stock to be too expensive given the governance and geopolitical concerns in Saudi Arabia.

Europe takes a “risk-based” approach to 5G restrictions following US lobbying against Huawei

Following last week’s NATO summit, the US believes it has successfully lobbied against Huawei, with the EU declaring that it will now take a “comprehensive and risk-based” approach to 5G networks. However, EU officials have stated that their decision was made purely in the region’s own interests and not to appease outside powers.

Europe has recently found itself caught between China and the US regarding Huawei’s 5G services. The US has been pressuring Europe to step away from doing business with Huawei, which, despite being privately owned, has benefitted from strong state support.

China has very different attitudes towards data privacy than those in the West

The dispute has proven difficult for European leaders, many of whom will want to maintain good relations with China due to its importance as a trading partner. At the same time, the US has long been considered the continent’s most important security ally, leaving no easy answers for EU officials.

The Huawei 5G disagreement has been complicated further by the US-China trade war, with another round of US tariffs on Chinese goods due to arrive on December 15. The trade war, which some have argued is increasing the risk of a global recession, has now been going on for 20 months.

As well as facing allegations of instigating cyberattacks, China has very different attitudes towards data privacy than those in the West. This raises concerns that Huawei could be used by Chinese state security services to access data held by international businesses, especially if the company’s 5G technology was adopted outside the country.

Finland’s Nokia and Sweden’s Ericsson are the next two biggest 5G companies after Huawei. Funding the growth of these two firms could be one way for the US to encourage Europe to abandon using Huawei 5G, further ensure the security of international business data and thwart Chinese efforts to infiltrate Europe’s sizeable chunk of the world’s telecoms market.

Spreading the word about responsible investing

As Liechtenstein’s first institution to sign the UN Principles for Responsible Investing (PRI), at Kaiser Partner Privatbank we realise we have an important role to play in defining and promoting responsible investment. Responsible investment encourages active involvement from investors in shaping company culture by placing emphasis on environmental, social and governance (ESG) factors, taking into account the long-term stability of the market.

Investment of this kind recognises that the creation of long-term sustainable returns is dependent on stable, well-governed environmental and economic systems. It entails the incorporation of ESG issues, active ownership (in terms of engagement), commitment to transparency and constructive engagement with public policy. At Kaiser Partner Privatbank, we believe we are not only responsible for our own clients and financial practices; we have a duty to espouse the importance of responsible investment to the wider market as well.

Growing in popularity
Responsible investing is the next step in the evolution of traditional finance, as it focuses primarily on delivering competitive financial returns by mitigating the risks associated with ESG factors in order to protect value in the long-term. We see a few drivers have been accelerating this process; both public awareness and political pressure around the issue have significantly increased in recent times. Furthermore, recent research findings, as well as lessons from institutional investors already practising responsible investing, show this approach can be incorporated without overly limiting an individual’s investment options or how these options perform.

Responsible investment encourages active involvement from investors in shaping company culture by placing emphasis on environmental, social and governance factors

A new, more youthful demographic has also brought change. In terms of age, responsible investing is definitely favoured among the younger generations of our clients. We see most demand coming from Western Europe – but it is interesting to see how clients from emerging markets are increasingly interested in this approach. Regardless of demographics, the preference can also be seen as an evolution started by institutional investors and now shifting more and more towards private individuals.

The 2016 Global Sustainable Investment Review found approximately $23trn (out of a global total of $85trn) is being managed through investment strategies that incorporate environmental, social and governance considerations, an increase of 25 percent since 2014. This trend is ongoing and has major implications for any investors in capital and investment markets. In the years to come, responsible investment will represent a core aspect of any financial portfolio.

A sustainable future
Since signing the UN PRI more than 10 years ago, we have continued to incorporate ESG issues throughout our investment process. Today, we offer a holistic approach for sustainable investment solutions that involves enhancing client profiles by taking into account any sustainability preferences, and offering tailor-made solutions that are based on individual values. In this way, responsible investing needn’t be limiting at all; it can be surprisingly flexible and customised for each individual. We also carefully monitor our ESG practices with regards to controversies, impact measurement and business involvement to ensure we meet our high standards at all times.

While there is now a significant awareness about responsible investment on a broad basis, implementation still lacks depth. In our view, the translation from awareness to the incorporation of ESG within all aspects of client portfolios will intensify in the future.

We think the major shift will be less about the investment landscape itself and more about a holistic approach – something we are delivering for our clients already. It will not be enough to simply have a responsible investment offering. Increasingly, wealth management companies will start working with every client by adopting a value-based onboarding process to further raise awareness around sustainable investing and to learn the preferences of each client.

Additionally, reporting will be a key requirement as clients want (and need) to know if some portfolio holdings are involved in any controversies, what the carbon footprint of the portfolio is, and to what degree the portfolio contributes to achieving sustainable development goals. Although these approaches have been deployed at Kaiser Partner Privatbank for over a decade, there is still more we can do – beginning with ensuring the wider financial services industry is aware of the many benefits of responsible investment.

Banks must prepare to serve the growing number of billionaires in Africa

Africa is made up of 1.3 billion people. Boasting ample natural resources, the continent has provided extraordinary wealth for a handful of individuals. Today, the region is reputed to be one of the fastest-growing in the world, with an annual GDP growth rate of approximately 3.5 percent.

Backed by resource-rich economies, Africa is also home to some of the richest people in the world, and the number is growing: an estimated 19,000 Africans became USD millionaires over the past decade. According to The AfrAsia Bank Africa Wealth Report 2018, there are now 148,000 high-net-worth individuals (HNWIs) living in Africa with net assets of $1m or more. The report also states that $920bn of the continent’s $2.3trn wealth – or 40 percent – is held by HNWIs, providing some indication of the concentration of wealth in the hands of a few. What’s more, there are currently 24 USD billionaires living in Africa, each with net assets of $1bn or more.

The growth of wealth in Africa and the rising number of USD millionaires will shape the type of wealth management solutions that are demanded by high-net-worth clients

The rich list
In December 2018, Forbes published a list of 23 African USD billionaires. In this report, Nigerian business magnate Aliko Dangote was singled out as the richest black person in the world, with a net worth of approximately $10.3bn (see Fig 1).

A further review of the top 10 billionaires on the Forbes list reveals real diversity in terms of the age, nationality and source of wealth of these individuals. Nicky Oppenheimer, for example, is a South African billionaire and philanthropist who has gained immense wealth mining diamonds. Naguib Sawiris is an Egyptian businessman who has made a great fortune in the telecommunications industry, in particular through the sale of Orascom to Russian firm VimpelCom (now Veon) in 2011.

Most of the top 10 billionaires listed are over the age of 60, with an average age of 65.2 years. Aged 44, Tanzanian Mohammed Dewji is Africa’s youngest USD billionaire and is ranked in 14th position. Women, meanwhile, are underrepresented on the list: Angolan Isabel dos Santos is the only woman featured among the top 10 USD billionaires.

Pleasing old and new
It is no longer news that Africa has produced a great number of individuals who have built successful business empires in what many would describe as a uniquely challenging business environment. It is important that private banks and wealth managers in Africa recognise the significance of this demographic shift. With rapid changes in client preferences, communications, technology, products and delivery channels, driving a successful and sustainable private banking or wealth business requires great skill. These businesses must be able to adapt to uncontrollable environmental changes and have well-managed responses. They must also have a thorough and in-depth understanding of the evolution of the private banking client through the years.

Further, wealth managers must adopt different models for profiling and managing ‘old-money’ and ‘new-money’ clients, and should devise effective acquisition strategies to close what I call the ‘20-year billionaire wealth gap in Africa’. This may involve challenging some common and strongly held beliefs about clients. For example, the belief that all Millennials are tech savvy and that investing heavily in technology will attract this cohort may be misleading. A few companies have learned that the hard way, pouring money into untested artificial intelligence (AI) systems or tools and only realising after repeated failed attempts at implementation that such tools were worthless.

The growth of wealth in Africa and the rising number of USD millionaires will shape the type of wealth management solutions that are demanded by customers. As such, wealth managers continue to face pressure to be more innovative and to align the needs of their clients in the new wealth class with the solutions they provide. Family offices in Africa, for example, are becoming more relevant to the continent’s growing HNWI population.

A new reality
The increase in wealthy Africans holding second citizenships means wealth managers must ensure such clients are protected at all times. It is important to understand that most developed markets place a tax on income an individual makes anywhere in the world. Regulatory requirements mandated by the Common Reporting Standard, which covers the automatic exchange of information on bank accounts between tax authorities in different jurisdictions, aim to reduce tax evasion through the cooperation of respective tax authorities. In the US, the Foreign Account Tax Compliance Act is targeted at US citizens either living in the US or abroad, and seeks to tie all offshore earnings back to their profiles in the US in a bid to reduce tax evasion.

With proper tax planning, private clients can reduce their tax burdens and improve tax efficiencies on their wealth. Wealthy Africans and, in particular, HNWIs holding US citizenship must have a clear line of sight on this. A good number of HNWIs rely on their wealth managers to make the appropriate introductions to competent tax advisory firms. For example, in October 2018, Nigerian President Muhammadu Buhari signed a presidential executive order introducing the Voluntary Offshore Asset Regularisation Scheme. The scheme allowed taxpayers who defaulted on the payment of taxes on their offshore assets in the last 30 years to pay a one-time levy of 35 percent within a period of one year, starting in October 2018. This enabled them to have immunity from prosecution.

It’s also important to take generational and succession planning into consideration. Planning for Generation X or Millennial successors or heirs to wealth introduces its own set of complexities. Children of HNWIs often end up living in countries other than that of their parents’ birth. Assumptions about them taking over their families’ businesses in Africa can therefore be misplaced, and understandably so. In Africa it is very common for high-net-worth families to send their children to study in schools in Europe and the US. Living abroad sometimes weakens the emotional and cultural ties that these children hold with their home countries, with some eventually choosing careers or vocations totally unrelated to their core family businesses. In this case, it is the wealth manager’s responsibility to put together succession planning structures that ensure the continuity of their clients’ businesses.

The growth in Africa’s HNWI population means wealth managers need to review their capability frameworks with the understanding that gaining private clients is becoming a lot more competitive. Portfolio performance alone can no longer suffice as a tool for retention, but must be supported by deeply personalised relationship strategies that are in sync with the client’s needs and preferences. There must be significant value added outside of the stellar performance of the client’s portfolio. The adoption of AI and algorithm scripts, even with the next generation, can never be a substitute for a real, personable client interface that is sensitive to the client’s individual needs. Managing their personal wealth should therefore always be a combination of sound technical skills and a strong emotional or even cultural connection.

Looking to the future, the source of wealth for private clients is set to change as the next generation enters the labour market. While the bulk of Africa’s billionaires have wealth embedded in industrial activities, resources and real estate, the next generation may have made their wealth in technology start-ups and other 21st-century sources. Wealth managers have to live up to these realities and brace themselves to cater to the needs of a generation that has vastly different values and expectations to its predecessors, but still seeks sound results.

Mexico an attractive investment option, despite wider economic turbulence

Mexico’s new administration promised to transform the country for the better. Since Andrés Manuel López Obrador (AMLO) took office in December 2018, though, he has made several decisions that have caused turbulence within the economy.

While AMLO ensured Mexico was the first country to sign the United States-Mexico-Canada Agreement, he also abruptly cancelled the construction of a new airport in Mexico City. Moreover, the unpredictability of his policies has seen credit rating agencies issue warnings to the country – under AMLO’s presidency, both sovereign bonds and the debt held by state-owned oil and electric companies have experienced downgrades. The finance minister’s sudden resignation in July also pointed towards internal disagreements within the government and sent the Mexican peso tumbling.

Clearly, if any investor had foreseen these events at the beginning of 2019, they would have immediately sold their Mexican assets in anticipation of continued uncertainty in the country’s macroeconomic environment. However, this has not transpired. In fact, almost all major financial assets in Mexico have generated competitive returns when compared with other emerging markets. At SURA Investment Management, we think we can explain this oddity.

Almost all major financial assets in Mexico have generated competitive returns when compared with other emerging markets

Bucking the trend
SURA is dedicated to the administration of assets and investments for global institutional customers. Our knowledge and extended presence in six Latin American countries makes us an optimal investment vehicle, connecting the region with global markets. Overall, we manage more than 400 portfolios invested across fixed-income, equity, multi-asset and alternative assets. Among our most relevant products are mutual funds, pension funds and corporate mandates. What’s more, our parent firm, SURA Asset Management, is the region’s number one pension provider in terms of assets under management.

We believe the answer to Mexico’s high returns lies in global growth and the monetary policies of the world’s central banks. There is currently a relative attractiveness to the Mexican market, with investors starting to anticipate that a period of positive economic growth in developed markets may be coming to an end. Central banks around the world have raised concerns about low economic growth and have changed their monetary policy stance accordingly by slashing interest rates. This trend has boosted liquidity and triggered a search for yields around financial markets, with investors turning to countries that boast stable macroeconomic conditions and allocating assets to those with positive real rates and undervalued equity markets.

One such market is Mexico, which offers potentially high returns in its local fixed-income and equity markets. According to SURA data, the country ranks among the top five emerging markets when it comes to risk-adjusted real interest rates, so it is unsurprising that the Mexican stock market appears more attractive to investors in real terms than other major equity markets.

Remain vigilant
At SURA, we expect the Mexican economy to continue along a moderate growth path, but this is by no means guaranteed. A global economic slowdown, combined with unwise political decisions, could hinder the deployment of much-needed economic resources, negatively affecting consumer demand and jeopardising investor confidence.

Although there is yet to be any clear evidence to suggest that the current macroeconomic environment is unfavourable, Mexico must be careful to keep the economy stable and its conditions attractive to foreign investors. In order to do this, financial discipline is of paramount importance. The government must strive to achieve a primary surplus and keep debt under control. It must also try to stabilise the financial situation of Pemex, the nation’s heavily indebted oil company.

If the Mexican Government is able to maintain macroeconomic stability (even when pursuing unorthodox policies) then Mexico’s financial assets should continue to outperform those of its peers, particularly as some fundamental risks are still present within the Mexican fixed-income and equity markets. Assuming this is the case, the potential yield compression in local-currency Mexican bonds will remain attractive, while returns in the equity market should improve.

Finally, due to a combination of global liquidity (a result of dovish central banks) and the relative attractiveness of the Mexican market, positive trade is likely to continue until there is strong evidence to suggest the macroeconomic environment is deteriorating. The lack of any fundamental threat will boost Mexican financial assets, normalising the extra risk premium that prevails in several financial instruments. This should enable the country to rapidly catch up with the strong performance of its fellow emerging markets.

No sure thing: insurance companies face new challenges in a changing world

In 2013, entrepreneur Freddy Macnamara needed to lend his car out for a few hours but realised it would be impossible. UK law requires vehicles driven on public roads to be covered by insurance, which, at the time, was not available for short-term periods. The thought irked him so much that he decided to launch a company offering hourly insurance. “I soon realised that insurance was completely broken and full of outdated processes, so I set out to create flexible insurance on mobile,” Macnamara said.

In 2014, he founded Cuvva, a company that connects customers directly with insurers to offer short-term solutions – including personal car, learner driver and van insurance – via an app. The company, the first in the UK to provide hourly car insurance, has so far sold more than one million policies. This August, it ventured into a new field, offering single-trip travel insurance.

Macnamara is scathing about the future of the industry. He told World Finance: “Insurance incumbents are no longer serving customers… as well as they could if they evolved and utilised technology to their advantage.”

Such harsh criticism is often dismissed by incumbent companies as marketing buzz generated by start-ups that promise disruption without understanding the fundamentals. However, many insurance veterans echo Macnamara’s views, admitting that tough challenges lie ahead for the sector. Mike McGavick, former CEO of XL Group and special advisor to AXA Group CEO Thomas Buberl, has urged the industry to embrace innovation before it is too late. “Products are becoming shop-worn and less relevant to the actual use of the clients,” McGavick said at a conference in Monte Carlo in 2016. “Unless they are reinvented, clients will continue to find them not terribly useful.” An EY study found that insurance is one of the world’s least-trusted industries, with more than half of responding consumers complaining about its lack of transparency and open communication.

For the time being, insurance powerhouses can rest on their laurels, as autonomous vehicles and other AI developments are still in the testing stages

Beware black swans
One problem insurers face is the emergence of unpredictable and extremely costly natural disasters linked to climate change. Losses associated with ‘black swan’ catastrophes – events that are extremely rare, damaging and difficult to predict, such as tsunamis, hurricanes and wildfires – have increased more than six times since the 1980s. The International Association of Insurance Supervisors estimates that in 2017, they caused damages worth around $340bn globally, more than a third of which was covered by insurance companies. Professor Joan Schmit, department chair for risk and insurance at the Wisconsin School of Business, told World Finance: “Climate change is a threat in that loss estimation is more difficult due to the combination of greater levels of volatility and environmental changes that make historical data less useful. Where before a potential loss might have been incredibly remote, today that potential may be meaningful.” A case in point is the 2018 wildfires in California – the most destructive natural disaster in the state since the San Francisco earthquake in 1906 – which will cost insurers an estimated $11.4bn.

The economic climate over the past decade has also hurt the industry. The 2008 recession led some insurance companies, such as AIG, to accept onerous bailouts. It was followed by a period of low interest rates on both sides of the Atlantic that reduced profitability. For an industry that places long-term bets by collecting insurance premiums and investing them to cover future claims, lower and more volatile returns can be a nightmare. “Actual returns may well be lower than had been anticipated when prices were set decades ago. Life insurers especially have struggled with this issue for the past decade,” Schmit said.

Another source of problems is demographic changes and generational shifts. In the developed world, an ageing population means more insurance payouts for the increasing number of retiring baby boomers. A study by LIMRA, an association of life insurance and financial services companies, found that fewer than a fifth of US Millennials are likely to buy life insurance; nearly nine out of 10 prefer usage-based insurance, according to a different study by insurance broker Willis Towers Watson. But there is a silver lining, Schmit said: “As people live longer, costs of life insurance and health insurance may be delayed, allowing insurers to earn higher returns than original prices. Longer lives also create a demand for long-term care insurance.”

Many insurers see a new frontier in the developing world. The Asian market is particularly promising due to the small number of people currently covered and booming economies that create demand for insurance. In China, the insurance penetration rate stood at 4.22 percent in 2018, below the global average of 6.09 percent (see Fig 1). Some also see a ray of hope in the rise of reinsurers: companies that insure the insurers. This has been the highest-performing segment of the industry over the past few years, according to McKinsey & Company, while many reinsurance companies are also making inroads into primary insurance. But even they might face problems, Schmit said: “They are in a highly volatile industry: risk-return. In the US, we went for an entire decade without a major hurricane loss. The industry made quite a bit of money. When loss hits, however, it tends to be enormous.”

Big tech muscles in
The other disruptive force is technology. Cyber-attacks are becoming a major threat, with malware and viruses, such as NotPetya and WannaCry in 2017, costing millions. A global ransomware attack could cost $193bn and affect more than 600,000 businesses, according to a 2019 report from the Cyber Risk Management Project. The industry itself can be a victim of attacks due to its storage of commercially sensitive data. In 2017, the servers of the US insurer Equifax were breached, costing the company up to $700m.

Big technology companies are also eyeing expansion in the sector: a survey by Capgemini found that nearly one out of three consumers would buy insurance from a large tech company. Last year, Amazon showed interest in launching a UK insurance comparison website, while Google invested in Applied Systems, an insurance software company. Google entered the market in 2015 with Google Compare, a service selling auto insurance, but discontinued it a year later. “The industry is incredibly highly regulated, which may act as a barrier to entry for an organisation such as Google,” Schmit said.

Many accuse incumbent insurance companies of being complacent; currently, no insurance company is included in the list of the world’s top 1,000 public companies in terms of research and development investment. ‘Insurtech’ start-ups are beginning to use this sluggishness to their advantage: more than $8.5bn was raised by insurtech start-ups between 2014 and 2018 in areas as diverse as healthcare and car insurance. Macnamara said: “Opportunities in the insurance sector are in abundance, as a result of the slower uptake of technology and digitalisation. It was only a matter of time before the insurance industry as we know it was challenged by technology-focused start-ups”.

Insurance on the go
One innovation that promises to upend current business models is the advent of big data, used to assess risks and optimise claims handling. Some even go as far as forecasting that big data and AI could render insurance obsolete. “The threat applies to incumbents who are slow to adopt a data-driven mindset and build the capabilities that will allow them to effectively leverage telematics or any new data source to inform business decisions,” Kirstin Marr, President of Valen Analytics, an insurance intelligence provider, told World Finance.

In the area of auto insurance, a host of start-ups have invested in telematics technology – software or devices, often attached to vehicles, that collect and transmit data in real time. Matt Fiorentino, Director of Marketing at telematics company TrueMotion, which has partnered with top US insurers, said: “Driving data flips the insurance industry on its head. Before, insurers would interact with their customers once a year. Customers would only think about their insurer nine minutes per year. But now, driving data allows insurers to create personalised, real-time experiences for their customers.”

Last year, the Floow, a UK-based software company, launched a service that turns anonymised mass data from vehicles and mobile sensors into detailed pictures of transport patterns. “Insurtech companies such as the Floow can bring capabilities that the insurer does not already have,” Andy Goldby, Chief Actuary at the Floow, told World Finance, citing as examples telematics scores that predict risk and claims based on a client’s profile.

Telematics also gives automakers access to driving data. Some, including Toyota and Tesla, offer insurance services directly to customers. In September, the Financial Times reported that Tesla was taking steps to underwrite its own policies, a move that could see intermediaries become redundant if it’s replicated by other car manufacturers. The advent of autonomous vehicles may also change how insurance is sold. “As vehicles become more autonomous, it is likely that insurance will evolve from cover for the individual to product liability for the vehicle,” Goldby said. For the time being, insurance powerhouses can rest on their laurels, as autonomous vehicles and other AI developments are still in the testing stages. But payout day might be due, Macnamara said: “Incumbents are being challenged to evolve and improve their product offerings if they want to stay relevant and fit for the 21st century.”

Turkish banks are pushing economic reform through digitalisation

Until recently, Turkey’s $849.5bn economy – the 17th-largest in the world by nominal GDP and the largest in the Middle East – was a favourite among emerging-market investors. Thanks to its advantageous geographical position, Turkey serves as a bridge between Asia and Europe. However, this also leaves Turkey’s economy vulnerable to external risks. It experienced a volatile year in 2018, as it was rocked by events such as the US-China trade war, the implementation of US tariffs on Turkish steel and aluminium, and the currency crisis, which wiped out the lira’s value against the dollar.

Yet, despite the crisis unfolding in the wider economy, the country’s banking sector is going strong. Although Turkey’s banks are struggling with weakening asset quality and currency fluctuations, they are showing a resilience that is enabling them to weather the storm. That said, maintaining this resilience depends entirely on a bank’s ability to stay focused on its long-term strategies for growth and value creation. To unlock the opportunities of the banking sector, Garanti BBVA works constantly to streamline its processes, manage risk and ensure high levels of governance – all with the intention of creating value for its customers. In this way, Garanti BBVA has been able to unlock sustainable growth in the country for decades.

To unlock the opportunities of the banking sector, Garanti BBVA works constantly to streamline its processes, manage risk and ensure high levels of governance

The pursuit of growth
In recent years, Turkey’s banking sector has experienced tremendous growth. In fact, the industry registered more than 10 percent growth in 2018. This is partly thanks to the country’s favourable demographics: home to nearly 80 million people, Turkey has one of the largest populations in Europe, the Middle East and Africa. What’s more, this population is young and fast-growing – only six percent of the population is over 64 years old.

However, Turkey’s banking penetration levels are still relatively low, with 31 percent of the country’s over 15-year-olds remaining unbanked. As a result, Garanti BBVA estimates sustainable credit growth to stand at about 15 percent despite the banking sector’s outstanding performance. Furthermore, the volatility of exchange rates from the second half of 2018 onwards led to high inflation and increased interest rates in Turkey. These have caused a slowdown in economic growth and placed pressure on the banking sector’s asset quality.

There are still positive indicators for growth in the sector, though. Household debt in the country is reasonably low at just 14.8 percent (see Fig 1), which puts the banking sector in a good position to manage risk in the retail segment.

Another driver for growth within the Turkish banking sector is the high liquidity and solid capital structure of the banks. Customer deposits constitute half of the total assets and serve as the main source of funding for the Turkish banking sector. The high liquidity within Turkey’s banking industry gives it more resilience in the face of unexpected macroeconomic developments. Its hardiness has also been bolstered by recent initiatives aimed at increasing household savings in the medium term, increasing the depth of capital markets in Turkey, extending the maturity of funding resources and, finally, stabilising the shift to foreign currency.

Creating value
Established in 1946, Garanti BBVA is Turkey’s second-largest private bank, with consolidated assets of approximately TRY 400bn ($70.42bn) as of December 31, 2018. The bank has more than 18,000 employees and an extensive distribution network comprising 926 domestic branches, seven branches in Cyprus, one in Malta and two international offices in Düsseldorf and Shanghai.

We provide a wide range of financial services to more than 16 million customers, operating in every segment of the banking sector, including corporate, commercial, SME, payment systems, retail, private and investment banking. We also have subsidiaries in pension and life insurance, leasing, factoring, brokerage and asset management, with international subsidiaries in the Netherlands and Romania. This wide range of services has played a key role in helping the bank reach TRY 311.2bn ($54.79bn) in loans and non-cash loans.

Creating value for all our stakeholders is a core part of our long-term growth strategy – we strive to continually improve the customer experience by offering new products and services that are tailored to their needs. To this end, we have 5,258 ATMs and an award-winning call centre, as well as digital banking platforms built with cutting-edge technology. Through our dynamic teams, consistent investments in technology, and innovative products and services – all developed with a strict adherence to quality and customer satisfaction – Garanti BBVA is able to maintain a leading position in the Turkish banking sector.

In everything we do, we ensure that we engage with our customers in a transparent and responsible manner. Strong corporate governance forms the foundation of our success. Garanti BBVA’s majority shareholder, Banco Bilbao Vizcaya Argentaria, owns 49.85 percent of the company’s shares and plays a key role in establishing responsible governance and promoting the bank’s core values.

Another way Garanti BBVA creates value for all its stakeholders is through its world-class risk management. Garanti BBVA not only effectively manages financial risks, but also fosters high levels of organisational agility, allowing it to take advantage of new opportunities. Further, we drive positive change through impact investments, strategic partnerships and community programmes focused on tackling real issues for Garanti BBVA and its stakeholders.

A transformative process
Among Turkey’s young, digitally savvy population, there is a high demand for digitalisation from banks. The banking sector has embraced this demand and now offers more efficient and productive services through online platforms. Today, 65 percent of the banked population uses mobile banking. For the past 20 years, Garanti BBVA has been at the forefront of this digital transformation in the Turkish banking sector. Because of our consistent investment in digitalisation, 67 percent of our active customers now use mobile banking.

In the digital age, maximising convenience for the customer is a number one priority for banks. The fundamental purpose of digitalisation is to make it easier for the bank to listen to customers’ needs and address them as quickly and effectively as possible. With this in mind, Garanti BBVA provides an omnichannel banking experience. This enables our customers to carry out transactions online and makes our services more accessible and easier to use.

In 2018, as part of our digitalisation efforts, we reassessed our bank’s deposit management system while retaining our existing customers. As a result, we made significant operational improvements. By offering clear and easily accessible new solutions to our customers through our branches and digital channels, we were able to strengthen the loyalty of our existing customer base and increase the number of new customers who wanted to work with us. These operational improvements ultimately helped us increase our number of deposits.

As well as innovating our deposit management system, we recently designed an innovative new service model that enables us to provide one-stop delivery of all services to our customers. In 2018, we rolled out the new service model across our entire branch network. It has since had a wide-reaching impact on our operations. Thanks to the new model, we have increased the efficiency of our sales force, decreased waiting times in branches and improved our customer experience. Since it was built, 95 percent of the branch network has transitioned to the new structure.

The new service model ensures that customers can access our services from anywhere in the world. Moreover, as all business processes and operations have been digitalised and streamlined, the quality and speed of our services have increased. The figures speak for themselves: waiting times have been reduced by 20 percent; 85 percent of loans are now approved in a paperless manner, without the need for signatures; and the in-branch customer onboarding process is down from 25 minutes to just eight.

Looking to the future, Garanti BBVA will continue to drive innovation and put the customer at the heart of everything it does. With this in mind, we are currently exploring ways to unlock the opportunities of big data, artificial intelligence and Internet of Things technology in order to deliver solutions that are precisely tailored to our customers’ needs.

Garanti BBVA owes its leading position in Turkey’s banking sector to its long-term thinking and planning. Our main purpose is to provide a convenient service to our customers, bringing them the best banking solutions and helping them to make financial decisions that will suit their personal goals. Our strategy is not focused simply on short-term targets: it is formulated around investment plans that stretch far into the future. Regardless of macroeconomic developments, we will continue to drive transformation in our sector. It’s by constantly streamlining and enhancing our operations that we create real value for our customers.

The first African Investment Forum secures billion-dollar investments for the continent

When I set out my vision to tilt the flow of capital towards Africa’s critical sectors through the Africa Investment Forum, the notion of convening a purely transaction-based forum was more an aspiration than a reality. One year down the road and the verdict is undisputed: Africa’s investment opportunities are proving seriously attractive.

The inaugural Africa Investment Forum secured record levels of investment interest in just under 72 hours, generating deals worth billions of dollars. In total, 63 projects valued at $46.9bn from 24 countries and across seven sectors were discussed during closed boardroom sessions involving investors, project sponsors and government representatives. Investment interest was secured for 49 projects, worth a collective $38.7bn. A further $51.2bn worth of deals were featured in the Africa Investment Forum gallery – a showcase of key projects that were not discussed during boardroom sessions.

The inaugural Africa Investment Forum secured record levels of investment interest in just under 72 hours, generating deals worth billions of dollars

Winning partnerships
Africa’s economic transformation is also being achieved through collaborative leadership and strategic partnerships. Beyond the African Development Bank, the Africa Investment Forum’s founding partners include Africa50, the Africa Finance Corporation, the African Export-Import Bank, the Development Bank of Southern Africa, the European Investment Bank, the Islamic Development Bank, and the Trade and Development Bank.

Development finance institutions, multilaterals and global investors are keen to work together in ways never done before. This was demonstrated by the $800m agreement signed between Africa50, the African Development Bank and the governments of the Democratic Republic of the Congo and the Republic of the Congo. The project, which seeks to develop and finance the first road-rail bridge linking the countries’ respective capital cities – Kinshasa and Brazzaville – was chaired in the boardroom by Africa50.

Already, the Africa Investment Forum has helped facilitate several deals that will benefit the continent’s critical industries, including a $10.9bn petrochemical deal in Egypt. A $2.6bn memorandum of understanding between consortiums from Ghana and South Africa – signed in the presence of Ghanaian President Nana Akufo-Addo – to develop and finance the Accra Ai SkyTrain project will also deliver significant benefits. This deal is unique in that the Ghanaian sovereign wealth fund, in its role as an anchor equity investor, crowded in other commercial and concessional investors.

In addition, a $400m cooperation agreement between Africa50 and the Rwandan Government to develop and finance the Kigali Innovation City project has been approved. This will help boost the innovation ecosystem in one of Africa’s emerging knowledge cities. Other notable deals that secured investor interest include a $3.7bn railway project in South Africa, a $3.2bn fertilisers and petrochemicals project in Nigeria and a $300m hydropower project in Gabon.

The Africa Investment Forum has positioned itself as an honest broker between governments and private sector stakeholders, including project sponsors, investors and transaction facilitators. A heralded feature of the inaugural Africa Investment Forum was the presence of seven African heads of state, who reiterated their commitment to providing an enabling environment for investors, with some of them also participating in the boardroom sessions of their respective countries.

The Lusophone Compact – signed by the African Development Bank, the Government of Portugal and six Portuguese-speaking countries – is another strong demonstration of the forum’s convening power. A pipeline of private sector and private-public partnership projects worth in excess of $5bn has already been identified in these countries.

Round two
Following the 2018 edition, the Africa Investment Forum has launched a new digital platform to connect investors with investment opportunities in Africa and vastly improve the quality of project information and documentation. The Platform, as it is known, provides a live database of private and private-public partnership projects, as well as a repository of information on investors and technical assistance providers on the continent. The Platform currently hosts more than 500 users and 110 companies, with over 30 percent based outside Africa. It is hoped that this community will continue to grow in the years to come.

The Africa Investment Forum is dedicated to advancing projects throughout the continent to bankable stages, raising capital and accelerating the financial closure of deals to provide opportunities for accelerated economic transformation on the continent. In the coming years, the forum promises to bring big things to the African continent.

The EU and Mercosur continue to negotiate cross-Atlantic trade deal

G20 summits rarely produce breakthroughs in world affairs, but the latest one, held in Osaka in June, was an exception: the four founding members of Mercosur, a South American trading bloc, and the EU announced that they have reached a provisional deal that could exponentially increase trade across the Atlantic.

Mercosur comprises Argentina, Brazil, Paraguay and Uruguay. The scale of the proposed deal with the EU will create a transatlantic market of nearly 800 million consumers, accounting for nearly a quarter of the world’s GDP.

It’s a deal
The agreement is a meeting of minds between two giants of global trade. Together, the two trade blocs account for a little less than 20 percent of the world’s trade.

In an era of rising populism, centrist leaders see trade liberalisation as a great opportunity for Europe’s trade prospects

Experts have dubbed the agreement a typical ‘food-for-cars’ deal. While European manufacturers are keen to tap into Latin American markets, Mercosur boasts a robust agricultural sector with limited access to European markets due to tariffs on products such as pork, sugar, ethanol and beef. The two blocs will lift or reduce tariffs on a wide range of goods, although services will be largely excluded. Tariffs on EU products exported to Mercosur are expected to decrease by over €4bn ($4.42bn).

Better late than never
But if the deal is mutually beneficial, why did it take two decades for it to be agreed upon (albeit provisionally)? The answer lies in domestic politics on both sides of the Atlantic. Governed by socialist governments at the beginning of the 21st century, Argentina and Brazil followed inward-looking economic policies, shunning trade liberalisation. Venezuela joined the group as a full member in 2012, only to be ousted four years later.

The political climate changed around the same time, when new governments elected in Mercosur countries were more willing to reform existing trade restrictions.

For its part, the EU demanded concessions in non-agricultural markets and services that the South American bloc was not willing to offer. Powerful interest groups representing the European farming industry blocked any progress through fierce lobbying, claimed Julio Nogues, an economist who previously served as Argentina’s trade representative to the US. Pressure from South American manufacturers was even fiercer, according to Nogues: “For these groups, there has never been an interest in signing trade agreements and particularly with highly advanced, industrial and competitive countries like the EU ones.”

The EU’s negotiating approach was heavily influenced by the concurrent negotiations between the US and the South American bloc, according to Dr Felicitas Nowak-Lehmann, a trade expert at the Ibero-America Institute for Economic Research, University of Göttingen: “When the US lost interest in the Free Trade Area of the Americas in 2003-04, the EU lost interest in negotiating with the Mercosur as well.”

This changed after 2016, when the US shifted to a protectionist stance following the election of President Trump, opening the way for the EU to adopt a different approach, said Dr Claudia Schmucker, a trade expert at the German Council on Foreign Relations: “The external factor of Donald Trump was decisive in finalising the agreement. The EU and the Mercosur countries realised that they had much to lose due to the current US trade policy.”

In an era of rising populism, centrist leaders see trade liberalisation as a great opportunity for Europe’s economy. The EU will also be keen to avoid a debacle like the protracted Transatlantic Trade and Investment Partnership (TTIP), a US-EU trade agreement that has been effectively shelved due to public discontent in Europe, and President Trump’s reforms to US trade policy. The prospect of a similar backlash to TTIP accelerated the signing of the agreement with Mercosur, Nogues told World Finance: “In the EU, fears of leaders over a growing nationalist sentiment in Europe must have been a factor in endorsing this draft [of the agreement].”

What’s the beef?
Although formal negotiations between the two blocs concluded in June, the process of implementing the agreement is far from over. Ratification, by national parliaments on both sides of the Atlantic and the European Parliament, is far from certain. The announcement of the deal has raised concerns in countries with strong agricultural sectors, such as France and Ireland, which fear competition from Mercosur producers.

Copa-Cogeca, a lobby group representing European farmers, sent an open letter to the European Commission warning against double standards on food safety that may create unfair competition for European producers.

Approval by EU member states should not be taken for granted, Schmucker said: “The real challenge will be the national parliaments. It will take years to ratify – if ever.” Schmucker pointed to the Canada-EU trade agreement as an example of a long ratification process that encountered several obstacles, including a last-minute rejection by Wallonia’s parliament. This could be repeated, Schmucker told World Finance, with strong opposition coming from agricultural and environmental groups across Europe. Ratification may also be hindered by the French political calendar, with President Emmanuel Macron potentially being pressured by powerful lobbies as the presidential election approaches in 2022, said Gaspard Estrada, Executive Director of the Political Observatory of Latin America and the Caribbean at Sciences Po University.

In South America, Alberto Fernández, an ally of the former president Cristina Fernández de Kirchner, is the favourite to defeat the current pro-business president, Mauricio Macri, and win the second round of the general election at the end of October. A Fernández government would be bad news for the deal, said Nogues: “Based on the recent experience of the Kirchner government, there is little doubt that Argentina will opt out from the agreement.” However, if rejected by one or more Mercosur country, Nogues noted, the agreement is likely to enter into force bilaterally.

To sweeten the pill of trade liberalisation for threatened sectors, negotiators incorporated into the deal provisions for the gradual lifting of barriers, such as phase-in periods and quotas. Brazil, one of the largest beef producers in the world, will benefit from an export quota of 99,000 tonnes of beef at a 7.5 percent tariff, but this will be phased in over five years. The EU has also pushed for high food safety standards, which most Mercosur countries will find difficult to meet. “There is more than enough time for protected industries in Mercosur to adjust and for governments to remove unnecessary regulations that make this part of the world quite inefficient,” Nogues said. “While [these] remain… industrialists will keep rejecting the agreement, and in Argentina, the next government is likely to listen to them.”

Stoking the fire
One of the most contentious issues around the deal is its impact on the environment – a topic that is expected to feature higher on the agenda of trade negotiators in the future. Brazil’s President Jair Bolsonaro is one of the world’s most prominent climate change sceptics; his government has often been accused of abetting illegal logging, burning and land invasion. Critics also point to human rights abuses against the country’s indigenous tribes.

Deforestation in the Amazon, a region known as ‘the lungs of the world’, hit a new record this summer with an area the size of three football fields being lost every minute, according to the DETER-B satellite monitoring system. Critics of the Bolsonaro government have publicly threatened to block the deal in the European Parliament. In March, a cross-party group of MEPs signed a letter to the EU trade commissioner, warning that they would not vote for the agreement unless there are guarantees that Brazil meets its commitments under the Paris climate agreement, and safeguards the rights of indigenous tribes.

Dr Molly Scott Cato, an environmental economist and MEP for the UK Green Party, told World Finance: “The shocking increase in destruction of the Amazon rainforest under Bolsonaro’s watch is now indisputable. The EU must put its rhetoric into action and make climate action and human rights a precondition to signing off the Mercosur trade agreement.” Protecting European farmers from unfair competition is also important, Cato added: “The EU must not accept lower environmental, pesticide, traceability and animal welfare standards, as these will threaten to undermine European farmers.”

Brazil’s lukewarm reaction to unprecedented wildfires in the Amazon region this summer has also stoked the flames of discontent against the Bolsonaro regime. France and Ireland have threatened to block the deal unless the Brazilian Government does more to guarantee the protection of the rainforest, with the French president directly accusing Bolsonaro of lying about the country’s climate commitments in Osaka. Environmental concerns are warranted, Schmucker said, but ditching the deal might backfire: “The question is whether the EU has more leverage with a trade agreement or without. The Brazilian president… promised at least to stick to the Paris climate agreement. And the EU has at least some kind of influence through this agreement, whereas other countries such as China have fewer qualms about importing ore, meat and soybeans produced through questionable [standards of] production or exploitation.”

The fight for free trade
For the outgoing Juncker Commission, the agreement may be the crowning achievement of an aggressively pursued trade agenda over the past five years. Spearheaded by the energetic trade commissioner Cecilia Malmström, the commission led the negotiations that produced deals with some of Europe’s most important trading partners, such as Canada and Japan.

If ratified, the deal will cement the EU’s role as a bulwark against US protectionism. The timing of the announcement couldn’t be more fitting, as the repercussions of the US’ unilateral approach to trade become clearer and clouds gather over the world economy. Under Donald Trump’s leadership, the US has repeatedly threatened the EU with tariffs on products such as cars and cheese, accusing Germany of currency manipulation. Trade experts believe the Mercosur deal could allow the EU to replace some of the ethanol, beef and cereal it imports from the US, while its own car industry would tap into South American markets as a response to potential US tariffs. Diversification is also a goal for Mercosur countries, Estrada said, given Brazil and Argentina’s increasing reliance on trade with China.

The message to the US is clear, said Dr Stephen Woolcock, head of the LSE’s International Trade Policy Unit and former consultant to the European Parliament and the European Commission: “Free trade agreements are important as a second-best option at a time when the US is eroding the existing system and China [is] not helping develop it. The signal is that the EU is still negotiating and concluding important trade agreements.” Through these deals, the EU – often accused of being protectionist – is projecting its image as a champion of free trade, added Woolcock: “These are second-best to a multilateral order, but they are at least supportive of a progressively open rules-based system in which parties cooperate and reach an agreed position. This contrasts with the US’ power-based approach to trade, which is to threaten the closure of existing market access unless trading partners make concessions.”

By supporting the establishment of global supply chains, trade agreements such as these can help the EU win the competition against the US and China to set trade and industry standards. The EU is keen to sustain the so-called ‘Brussels effect’ – an informal regulatory process through which the bloc can effectively impose its own rules on industries, such as chemicals and agriculture, due to the sheer size of its market. The deal with Mercosur may boost the EU’s role in setting trade standards, Schmucker said: “The EU sends a signal that – despite all the internal problems – it is still a global player in trade. While the US focuses on ‘America first’ and increasing trade protectionism, the EU is able to open markets and to develop modern trade standards and norms worldwide.”

The UK will lose the benefits of the Brussels effect if it leaves the EU with a no-deal Brexit in October, as the country will not be able to reap the benefits of agreements that the EU has signed with trade powerhouses such as Mercosur, Canada and Japan. The EU-Mercosur deal serves as a stark reminder of Brexit’s detrimental effect on the UK’s leverage in global trade, Schmucker said: “The UK will have major problems after leaving the EU as it will lose the appeal of the common European market with about [450] million consumers. In a world where market power dominates trade negotiations, the UK as a single country will have a hard time negotiating trade agreements without making major concessions.”

Financial inclusion will help all citizens reap the rewards of Philippine growth

The Philippine economy is currently experiencing sustainable, non-inflationary growth. Despite a slight setback in Q1 2019 – due, in large, to political hurdles delaying passage of the national budget – there is still an optimistic growth outlook for the year, with GDP expected to expand by 6.1 percent in real terms.

Due to lower energy and food prices, as well as favourable foreign exchange rates, inflation has been decelerating fast from its 2018 high of 6.7 percent, registering a low of 2.4 percent in July 2019 (see Fig 1). This has resulted in a recovery of household disposable incomes and, in turn, consumer spending – the largest component of Philippine economic activity. This also explains the robustness of the country’s retail sector and the recovery of its property market following the temporary inflation scare of 2018.

The Philippine peso has been remarkably strong in relation to other major currencies too, due not only to expectations of US Federal Reserve rate cuts, but also to heavy portfolio inflows from overseas investors who are finding the country’s macroeconomic story to be particularly compelling. It may be noted that, notwithstanding an increased fiscal load (the deficit is expected to remain at around 3.2 percent of GDP until 2022), the country still managed to earn a credit rating upgrade from Standard & Poor’s, reaching a historic high of BBB+. This is indicative of the positive outlook both investors and creditors have for the Philippines.

BDO Trust’s strategic plan is to continue to invest heavily in technology, enhancing digital facilities and making investments more inclusive

Changing channels
At BDO Trust, we are well aware that now is a great time to invest in the Philippines, but we also understand that risks remain present in all markets. With expertise in managing investment funds, BDO can provide the advice individuals and corporations need to ensure they build a portfolio that caters to their particular interests and matches their appetite for risk.

With the 2019 budget now signed and the current administration gaining a sweeping political victory in the mid-term elections, there are unlikely to be any more delays to its implementation. The government has already resumed its huge infrastructure programme, while public sector spending is poised to accelerate once again in the second half of the year. In addition, the Philippines has returned to an environment of declining interest rates after its central bank, the Bangko Sentral ng Pilipinas (BSP), moved to cut policy rates in response to decelerating inflation. This will encourage additional borrowing from both households and corporations, and consequently lead to stronger private spending and investments.

As our customers start to feel the effects of this economic growth, we are confident that BDO will prosper alongside them. We listen to their needs, goals, aspirations and concerns – it may sound cliché, but at BDO, we are very aware that we only exist because of our customers. As such, BDO continues to deliver greater value to clients through innovation and differentiated services. Part of our business strategy is to use new technology to increase our organisational efficiency. In fact, we are currently in the process of upgrading our legacy systems and, in doing so, reviewing and re-engineering our processes to provide greater scalability and increase our capacity to serve customers.

According to social media management platform Hootsuite, Filipinos spend more time online than any other nation, so we must ensure BDO can reach customers via the appropriate channels. As such, we are currently in the middle of enhancing our online and mobile platforms to greatly improve the customer experience. What’s more, BDO looks forward to delivering additional online products and services that are currently only accessible through traditional advisory channels. This will complement our branch distribution network, which is already known to be among the strongest in the country.

We also want to be regarded as one of the most dynamic trust entities in the Philippines. With this in mind, BDO’s growing suite of products and services takes both changing regulatory environments and clients’ growing sophistication into account. We have also revamped the way we communicate market developments and investment strategies to our customers, delivering economic briefings and investment forums in their primary language wherever possible. As we make an array of fund products available to clients to help diversify their risk and improve their investment returns, we have intensified and enriched our product training, better equipping branch personnel to advise on appropriate investment products that meet clients’ specific financial goals.

Finally, BDO’s Invest in the World event, which brings together leading managers, market analysts and product specialists, has made gleaning insights from asset management experts easier than ever. This annual gathering is held in cities where the majority of our investors are concentrated, presenting them with a wealth of international opportunities that are available through BDO’s managed funds.

Everyone on board
The improvement of financial inclusion in the country can mostly be attributed to the work of the BSP. The Philippines’ central bank has been advocating financial inclusion in recent years, encouraging banks and other financial entities to educate Filipinos throughout the country. BDO has been supportive of this drive, conducting financial inclusion and educational activities to the benefit of BDO and non-BDO clients alike.

Increasing smartphone and internet access has also helped Filipinos become more informed regarding financial products and services. Budgeting apps, financial planning tools, and tips and guides on how to improve individual finances are now readily available to download or stream. As a result, information is easily accessible at any time – something that could not be said a few years ago.

Greater financial inclusion allows underbanked or unbanked Filipinos to gain access to the country’s banking system, potentially improving their lives and eventually making them more productive citizens. What’s more, it helps Filipinos understand that there are different financial products and services available to them. With greater financial inclusion, Filipinos from a range of backgrounds can access the investment products that were previously reserved for the affluent, giving more people the opportunity to generate wealth. Consequently, the financial potential of citizens who are either used to keeping their money at home or in simple deposit accounts is unlocked. By improving the general financial wellbeing of Filipinos, we can reduce society’s reliance on social benefits and improve long-term fiscal sustainability.

To bridge the gap between knowledge and application, BDO has launched several initiatives in this area over the past few years. For example, we developed the BDO Easy Investment Plan to allow individuals to invest in different BDO Unit Investment Trust Funds for as little as PHP 1,000 ($19.12) per month or PHP 500 ($9.56) per payday. This has made investing affordable for our clients, who can access the services in branches nationwide or via the BDO Invest Online platform.

We also provide investment education online. Our website receives enquiries from local and overseas clients – as well as prospective customers – each month, and these are individually answered by our product training officers. Articles and tips on investing are published on the website to show the virtues of investing early, dollar-cost averaging and taking appropriate risks to obtain higher yields. Our strategic plan is to continue to invest heavily in technology, enhancing our digital facilities and making investments more inclusive by providing online services and mobile functionalities to all Filipinos.

Acting like a start-up
BDO currently has the widest and most robust multi-channel distribution network in the Philippines, incorporating both digital platforms and traditional channels. More than 1,100 physical branches – in addition to the BDO Invest Online and BDO Mobile Banking platforms – provide easy access to our trust and investment products. We take particular pride in the BDO Invest Online service, which features best-in-class functionalities, including a straightforward account-opening process and a Personal Equity and
Retirement Account application option.

Our strategy looks at the wider competitive environment and views technological adaptation as being crucial to leading the market. As such, BDO has embarked on a comprehensive system enhancement to prepare us to scale the business further and change the way we interact with clients. BDO’s aim is to continuously improve its digital assets, staying relevant to the needs of customers, who are becoming more technologically savvy and demanding.

Global financial institutions are now employing big data and artificial intelligence to improve operational efficiency and productivity. Given the fast pace of growth in the industry – and the amount of data available – we strive to adapt to these developments in order to maintain our momentum. Big data allows us to make decisions based on relevant information and verifiable data instead of basing them on instinct, personal experience and gut feelings. Similarly, artificial intelligence will allow us to make use of big data in a more efficient and scalable manner. Developments in these two technological frontiers will help us adapt to future industry changes.

In terms of market structure, there are currently around 30 traditional players in the domestic trust industry, with the top three banks accounting for two thirds of the market. Over the past five years, though, technologically inclined start-ups and fintech firms have started offering financial products and services – these organisations can easily encroach on our customer base, so we must consider them just as much our competitors as traditional banks.

Instead of dismissing these new players, we respect and recognise their capabilities. We try to learn from them, especially in harnessing the untapped power of technology and marketing to the younger generations, who largely prefer to conduct their financial activities using their smartphones. With this in mind, BDO must learn to think and act like a start-up; should we fail to evolve for this next generation of clients, we may find ourselves on the endangered species list.

Thailand is becoming an attractive investment option as Chinese production falters

By the end of 2019, growth in the Thai economy is forecast to reach 3.8 percent, down from the 4.2 percent recorded in 2018 (see Fig 1). Fortunately, this looks more like a blip than a long-term downward trend. Ironically, the very trade tensions that have contributed to the global economic slowdown that is harming Thailand’s economy could result in an upturn in 2020.

US tariffs, for example, have seen South-East Asian countries looking to lure investment away from China. According to the Office of the National Economic and Social Development Council, as many as 10 firms are already looking to relocate production from China to Thailand. This, alongside an influx of foreign direct investment, could see Thailand return to higher levels of growth next year. For investors looking to contribute to this growth, UOB Asset Management (Thailand) (UOBAM (Thailand)) can provide the expertise and knowledge needed to ensure positive returns. World Finance spoke with Vana Bulbon, the firm’s CEO, about Thailand’s investment climate and how it has developed over the past few years.

By treating sustainability as a critical factor, UOBAM (Thailand) places investments in a position to generate strong returns

What is the investment landscape currently like in Thailand?
Fixed income products are more common for investors in Thailand than they are in other countries. Because of sustained low interest rates, money market funds have become a favoured substitute for traditional savings accounts. In recent years, as Thai investors have become more knowledgeable, they have begun utilising multi-asset income and equity mutual funds as well as private funds as investment vehicles. Asset allocation and regular savings plans have become accepted as the general path towards building wealth and, for many, a way of planning for their retirement.

The Stock Exchange of Thailand and the asset management industry have also been active in educating the public on the merits of financial planning through regular events. At the same time, the Bank of Thailand has continued to relax regulations, allowing asset managers to market foreign investment funds to retail investors. Additionally, high-net-worth individuals are able to directly invest in foreign assets more conveniently.

Aside from private funds, what investment platforms does UOBAM (Thailand) offer?
As well as private funds and segregated mandates, UOBAM (Thailand) offers mutual funds and provident funds (defined contribution plans). Our services cover a spectrum of asset classes, including fixed income, multi-asset, equity and alternatives, such as real assets and private equity strategies. Through these platforms, UOBAM (Thailand) is able to serve individuals and juristic entities, including intermediaries and government agencies.

Private funds or segregated accounts offer unparalleled flexibility in comparison with mutual funds. Investors are able to mandate specific asset classes, the proportion of each asset class, and qualitative measures such as credit ratings and corporate governance ratings. Additionally, investors may change their mandate as market sentiments shift and benefit from being able to dynamically position their portfolio in a fluid environment.

Why should clients choose UOBAM (Thailand) over other private investment management services?
UOBAM (Thailand) believes the market to be inefficient, meaning there is alpha to be earned through active investment strategies. We are able to provide such strategies for our investors through our people and processes. Our people are experienced investment professionals who have been through multiple economic cycles, not just uptrends and downtrends, conducting their work through a process that is focused on maximising returns within the accepted risk tolerance of the investors.

As a subsidiary of UOBAM (Singapore), we are able to draw on our parent company’s regional strength, a benefit that directly contributes to the performance of our foreign
investment funds.

What types of assets are invested via the UOBAM private fund and what are their advantages?
Currently, our private funds cover a wide range of asset classes, each with its own characteristics. Starting from the lower end of the risk spectrum, fixed income instruments have the potential to generate income, mitigate downside risk and diversify a portfolio. They are favoured by investors prioritising capital preservation.

For multi-asset funds, we offer a broad range of investment options including absolute return, income and life cycle. For longer-term horizons, equity options that offer high levels of expected returns are available for those able to tolerate the possibility of capital loss.

Finally, investors can opt for funds that provide exposure to both alternative and inflation-sensitive assets and private investments in late-stage growth companies. This array of choices and capabilities allows us to meet the varied needs of our clients. On the whole, it is important to understand the characteristics and correlation of returns for each asset class in order to formulate a portfolio that is suitable to the investor’s risk tolerance. Furthermore, through active management of the portfolio, our fund managers can exploit the advantages of each asset class to generate returns regardless of market conditions.

What sort of clients do you serve generally?
UOBAM (Thailand) serves both institutional and individual investors. Within the institutional segment, our clients include private and public companies across a range of industries, endowments, foundations and insurers, as well as family offices. Within the individual segment, we serve retail investors and, through our private wealth department, high-net-worth investors are specifically catered for.

With our customer-centric approach, it is easy for a prospective client to learn about our services and open an account with us. Through our dedicated call centre, interested parties can contact our wealth service team and direct their enquiries to one of our highly trained advisors. Prospective clients interested in private funds will be directed to our private wealth department. Our relationship managers are able to meet with prospective clients to discuss their specific needs and assist them with account opening. Going forward, we aim to allow potential clients to complete the entire process electronically. In our view, that is the direction the account-opening process is travelling in with regard to the industry as a whole.

To what extent have digital technologies changed the private investment landscape in Thailand in recent years?
UOBAM (Thailand) recognises that the financial industry has been disrupted and, more importantly, will continue to be disrupted by technological changes. As such, we have developed an award-winning wealth management platform known as UOBAM Invest, which allows investors to monitor and manage their portfolios. The programme earned the title of Best Wealth Management Platform at Asia Asset Management’s 2019 Best of the Best Awards. UOBAM Invest is continually being monitored and improved to ensure it helps investors achieve their investment goals in a user-friendly manner.

With our customer-centric approach, it is easy for a prospective client to learn about our services and open an account with us

From a fund management perspective, we will continue to enhance our investment tools, using big data to evaluate stock prices, earnings and analyst recommendations in order to assess material shifts in the market. Again, the ultimate objective is to allow our fund managers to optimise their time and performance.

We are also keeping a close eye on the industry-changing implications of the growing fintech sector. Newly introduced or updated applications will ensure that investors have the best tools at their disposal. All asset management companies, including UOBAM (Thailand), continually optimise their platforms to achieve greater investor satisfaction.

How important is sustainability for UOBAM (Thailand) when managing investments?
Sustainability is a critical factor for us in managing investments. On June 14, 2017, UOBAM (Thailand) formally adopted the Investment Governance Code for Institutional Investors. In line with this code, our investment decisions will continue to be guided by professionals acting with the utmost integrity, free from insider information and corruption. This safeguards the company and the wider industry from involvement in the money-laundering process.

Also of significance is the inclusion of an environmental, social and governance framework in security selections. Each factor of this framework is given a value and each security is scored accordingly: negative, neutral or positive. By treating sustainability as a critical factor, UOBAM (Thailand) places investments in a position to generate strong returns.

What does the future of investing in Thailand look like and what role will UOBAM (Thailand) play within that?
Similar to other industries, the future of investing in Thailand will be defined by an increasingly sophisticated investor audience and a backdrop of technological innovation and disruption.
To prepare for the next generation of investors, UOBAM (Thailand) intends to enhance its existing products, platforms and services to stay ahead of the curve. Every decision the business makes will work towards bringing our customers the most seamless service and the best returns on investment.

Oil and gas companies must find new ways to attract investment as the energy sector evolves

The oil and gas industry is undergoing a transformation as it grapples with attracting new investors, a lack of pipeline infrastructure, competition from other energy sources, political pressure, relatively low commodity prices and investor demands for reduced carbon emissions.

As political pressure and concerns over climate change gain pace, further institutional funding cuts and share divestment from fossil fuel projects is expected. On September 23, around 130 international banks at the UN Climate Action Summit in New York committed to decreasing their support and investments in the oil and gas sector in the coming years, promoting renewables instead.

The oil and gas industry is undergoing a transformation as it grapples with attracting new investors

Despite these pressures, demand for oil and gas remains high. While some companies, including Shell, BP, Total and Equinor, have increased their spending on renewable energy and introduced carbon reduction targets. The sector must continue investing in new projects to meet future demand for oil and gas as economies in Asia grow.

Funding sources
While there is not a reduced appetite for investment in oil and gas, investors want to see attractive returns. This means exploration and production companies must maintain tight budgets and focus on efficiency. Continued innovation and new ways of working will be needed to ensure investors are paid the returns they expect.

Small and medium-sized producers, which are more exposed to debt markets and reduced financing, can struggle to get new projects off the ground. As a result, oil and gas companies must design more flexible and innovative financing packages, seek new sources of capital for their worldwide operations and communicate a compelling business plan if they are to maintain a healthy cash flow for returns on investment.

One of the most significant changes in the finance cycle is the dramatic reduction in lending from banks. While this doesn’t impact bigger players, which have a high credit rating and strong balance sheet, new and small players have it tougher as they will struggle to borrow capital for large infrastructure projects.

Hydrocarbon exploration – the process of digging deep into the Earth to find deposits of oil and gas – has traditionally been too risky for banks to finance, meaning companies have used alternative sources of finance, such as government funding, the bond market, project partners, private equity and export credit agencies. Private equity-backed companies and independent oil companies, such as Aker BP, are funding themselves by trading shares on the offshore stock exchange.

For midstream assets, the industry has seen a surge in investment from private equity firms and infrastructure funds focused on the upside potential of such assets. According to private capital tracker Preqin, oil and gas investments accounted for almost the entirety of activity in 2018, which saw 77 funds raise $89bn.

In the case of Africa, where GPB Global Resources operates, recent growth in the continent’s economies has boosted investor interest in African projects, with a wide range of financial incentives and structures being employed. International oil and gas companies are currently financing projects across Africa and allowing investments to carry, with loans repaid using cash flow from the project. If there is insufficient cash flow the repayment interest and the principal loan is prioritised.

Another popular method of financing is through corporate loans and bonds. Large, credit-worthy oil and gas companies can borrow money using their corporate balance sheet, allowing for relatively cheap loans. Consequently, the joint operating agreement structure often involves a large oil company financing its share of exploration and production costs by issuing corporate bonds or directing cash flow from more profitable projects.

The most common means of financing projects in Africa is through joint ventures with large international oil companies. Joint ventures tend to be formed between smaller exploration or production companies and large international oil companies.

Governmental support
Across all segments of the industry, there are opportunities to attract investment, reduce costs and mitigate risks. There is considerable scope for governments and international bodies to support innovation in these areas.

The oil and gas sector is a key source of economic growth for nations and the backbone of the energy sector, with their products underpinning modern society

For oil and gas companies in developing countries, perceptions of commercial and political risk play a significant part in investment decisions, especially if the country’s financial systems aren’t well developed or are characterised by weaker institutions. Good government leadership is therefore critical to reducing risks and allaying fears for private investors and state-owned enterprises.

Given the cyclical character of the oil and gas market and the long-term nature of investments, governments can facilitate investment by establishing clear regulatory and fiscal policies. In some cases, governments looking to stimulate investment may offer incentives to reduce the risks of exploration.

This can be done in the form of licensing exploration blocks onshore and offshore, agreeing favourable development rights with tax incentives and offering public-private partnerships. For example, in an attempt to incentivise and facilitate investment by oil and gas companies, the Bahrain Government has announced that it will allow foreign companies to own 100 percent of oil and gas drilling activities in the country.

Future success
The oil and gas sector is a key source of economic growth for nations and the backbone of the energy sector, with its products underpinning modern society. Though renewable and sustainable energy initiatives are gaining traction, they are still evolving and cannot produce energy at the volume or level of reliability required to satisfy demand.

The outlook for the sector is broadly positive, partly because many oil and gas companies are becoming leaner and more competitive. As the energy sector develops, so will the finance sources available.

To continue to attract investors and capital, the oil and gas industry must develop a value proposition that is consistent and favourable – one that combines cost reductions and margin increases. If it is to continue meeting investors’ expectations, the industry must prove that it can provide high returns on investment.

Competitive market conditions spark innovation in Russian banking sector

Russia is one of the most advanced markets in the world when it comes to banking technology, being home to a number of powerful actors that have set the pace for digitalisation. Organisations such as Sberbank and Tinkoff Bank have invested time and money to support their digital transformation efforts, forcing other players to respond and adapt in real time.

One institution that is following in the footsteps of these industry pioneers is Sovcombank. Having grown rapidly since its formation in 1990, the bank now has a presence in 1,027 towns across Russia and serves 5.4 million retail clients. What’s more, competition within the industry has helped the bank improve its services and become more efficient: for instance, robots now handle between 30 and 50 percent of all interactions with Sovcombank customers. Similarly, the bank’s collection business uses automation to handle over 50 percent of customer conversations and contacts. Clearly, digitalisation is moving rapidly in Russia, and is already having a positive effect on banks’ reliability, finances and customer retention.

With advances in robotics, people will increasingly lack personal communication – this is where Sovcombank’s branch network will make it more competitive

This helping hand is proving particularly useful at a time when the Central Bank of the Russian Federation (CBR) is looking to cut interest rates amid inflationary concerns and the spectre of slowing growth. With this uncertainty undermining the financial market, World Finance spoke to Dmitry Gusev, CEO and co-owner of Sovcombank, to learn how the organisation is embracing digital transformation while meeting shifting customer demands and protecting investor profits.

The CBR has been on a quest to rid the system of undercapitalised banks. How has this changed the banking landscape?
Due to the gradual withdrawal of private banks with negative capital from the market, the share of state-owned banks in terms of total capital and assets within the banking system has inevitably increased. As a result, the role of state-owned banks is much greater now than it was five years ago. This may not be ideal, but it won’t have much of an adverse effect on the system either. Obviously, the regulator did not want to increase the share of state-owned banks, but it had no choice given how many banks had negative equity and hidden problems. It was simply the lesser of two evils.

The entire process has increased customer confidence in privately owned banks simply because many of the peers that had insufficient or negative capital have disappeared from the market. In other words, this heightened confidence renders these developments beneficial to both the private sector and the industry at large.

What’s really important, though, is that the CBR has helped eliminate unfair competition. From the very start, banks with insufficient capital didn’t care about turning a profit. As a result, instead of developing an efficient and transparent business, their dubious practices stemmed from the fact that they were either actively inflating the cost of their liabilities or committing their assets on unfavourable terms, which created problems and skewed the competition. This is no longer the case, which is good news for the whole market.

What effect will the CBR’s campaign to reduce the key rate have on Russian banks and the industry overall?
Thanks to Russia’s comparatively high interest rate, which is much higher than its rate of inflation (see Fig 1), banks still have vast opportunities to make a profit and achieve a strong return on equity (ROE). At Sovcombank, we rely on a number of key solutions to protect our ROE amid the current market trend for lower interest rates. Our operations are broadly diversified, with each segment having almost the same share as any other. Further, a very significant part of our income comes from fees and commissions, which are not – or, at least, not always – affected by interest rates.

Our retail business also represents a sizeable share of our portfolio and is less vulnerable to interest rate changes. For example, our flagship retail product, Halva, is an instalment card that allows us to charge retailers for purchases made by our customers. Since it’s the merchant who pays the commission and not the cardholder, any fall in the interest rate actually results in increased profits thanks to a lower cost of liabilities against the same income. Put simply, we earn as much as before while paying less interest on our liabilities.

Do you think the regulator will continue to pursue lower interest rates in the foreseeable future?
Generally, the market has been expecting further gradual cuts in the medium term. At Sovcombank, we are basically in agreement with this suggestion, but a reversal is inevitable – the interest rate will start to move upwards at some point. The principal question is when.

For now, everyone is planning for a downward mid-term trend. As I said previously, the opportunities to make a profit remain strong, as the rate has been following and staying above inflation.

How are you adapting to the changing landscape and assuring shareholders that they will have a stable income?
First of all, we’ve disrupted the Russian market with Halva, a product that has given us an enormous competitive advantage. The result is that we now have more than 160,000 stores participating in the programme – this means that every fifth store in Russia pays us commission on every purchase made by Halva cardholders. This competitive advantage is impossible or very difficult to replicate.

Further, Halva is a great instrument for developing our entire retail portfolio – over the past two years, it has attracted several million customers. Although it’s not the most profitable consumer finance product on the market, Halva is a magnet for customers. By linking them with our bank, it allows us to offer a broader range of products.

As we’ve seen lately, people are tired of conventional credit cards; they simply don’t want to pay any interest whatsoever. Our idea is that while an instalment card is a niche product, accounting for somewhat less than one percent of the banking market, we expect this share to grow exponentially. As the biggest player in this segment, our goal is to continue leading the market amid skyrocketing growth.

What’s the reasoning behind your decision to go digital while maintaining a broad network of offices?
As we continue to emphasise, we are trendsetters when it comes to closing brick-and-mortar offices, helping to bring an end to the traditional full-scale branch model. At the same time, we have retained our offices, but these are lean and mean.

So long as people (our customers in particular) continue to go out for a walk, do some shopping or have a meal, we need to be around. Although a growing number of customers carry out their banking through apps, they occasionally need advice from our experts. Our staff members help educate and train customers on specific products and their advantages.

Additionally, while some customers do not visit our offices regularly, they need to know that they can do so should a problem arise. Having this option is important to them, and we expect this tendency to persist moving forward. With advances in robotics and wireless communications, people will increasingly lack personal communication – this is where our branch network will make us more competitive. On top of that, our offices ensure the continuous nationwide promotion of our brand.

How does Sovcombank plan to compete with banks that have an entirely digital service model?
We do not think banks that claim to be fully digital have any kind of advantage over us. Despite their digital-only model, they are still forced, like us, to employ a certain number of people, even if they are external agents. If we compare these and traditional retail banks in terms of the number of people or agents in relation to the corresponding assets, we don’t see any difference. Being digital doesn’t mean a bank like Tinkoff has no staff or doesn’t employ the same number of people to support its sales and collection network. In this respect, they are pretty much in the same position as the traditional players.

What’s more, digital-only banks tend to spend a lot more money on advertising. Unlike a branchless bank, we are well positioned to leverage our efficient branch network to promote our brand. In terms of profitability, we have had a similar ROE to Tinkoff in the past few years, so we don’t expect digital business models to be more profitable moving forward. We shifted most of our operations to less risky segments, such as secured retail lending and corporate banking. In this context, if we compare our risk-return ratio with digital-only banks, we can say that our shareholders have much more to gain.