Climate change is an issue that is rightly on everyone’s lips. We need to transform our economies and societies swiftly – only then can climate change be combatted and the Paris Agreement become a reality. In order to achieve this, an investment of around €180bn ($201bn) is needed in the EU alone, a substantial chunk of which should come from the private sector.
But sustainability is more than just climate protection. The UN recognised this by adopting 17 Sustainable Development Goals (SDGs) in 2015. These provide a shared blueprint for nations to work in tandem to achieve a more sustainable future for all. They also recognise that ending poverty must go hand-in-hand with strategies that improve health and education, reduce inequality and spur economic growth. Hence, the goals attempt to address the societal challenges we face globally and to leave no one behind.
The Liechtenstein Government published its first interim report on the implementation of the SDGs in July, highlighting how sustainable development has been a key priority for some time. For instance, by promoting solar energy since 2015, Liechtenstein has become a global leader in the energy source. Liechtenstein has also launched pioneering public-private partnerships for environmental causes.
Liechtenstein’s financial community and regulatory authorities have considerable expertise in combatting illicit financial flows
To mark World Water Day in March 2017, Waterfootprint Liechtenstein was launched. The principle behind the project is simple: ‘Drink tap water. Donate drinking water.’ With this campaign, Liechtenstein is aiming to become the first country to provide access to clean drinking water to every resident, improving the living conditions of around 37,500 people in the process.
Waterfootprint Liechtenstein is well on the way to achieving its target: to date, more than 22,000 ‘waterfootprints’ have been activated. The government, schools and numerous organisations, including the Liechtenstein Bankers Association, support the initiative and practise the drink and donate mantra.
Collaboration and cooperation
Another of the country’s progressive projects is the Liechtenstein Initiative for a Financial Sector Commission on Modern Slavery and Human Trafficking, which aims to end human trafficking and modern slavery for good. The project is a partnership between the governments of Liechtenstein, Australia and the Netherlands, along with the United Nations University Centre for Policy Research and a consortium of banks and philanthropic foundations. The Liechtenstein Bankers Association and its members are part of these supporting organisations – for good reason.
According to the UN, more than 40 million people globally live in captivity, are exploited by forced labour or suffer another form of injustice. Some 25 million people are forced into labour, 16 million of whom are in the private sector. Although 58 percent of slavery cases take place in India, China, Pakistan, Bangladesh and Uzbekistan, around one million people in Europe also live in similar conditions.
The International Labour Organisation estimates that around $150bn is traded annually worldwide through slave labour and human trafficking. This is where the financial sector comes in: it can be implicated in various ways, such as by handling money generated from such practices, or by financing goods and services whose supply chains include modern slavery or human trafficking. In fact, modern slavery and human trafficking are the largest contributors to money laundering and terrorist financing in the world today.
In light of the global nature of this crime and the need to access financial data in order to identify abuse, the involvement of the financial sector is essential. Liechtenstein’s financial community and regulatory authorities have considerable expertise in combatting illicit financial flows, and can play a pioneering role in tackling these crimes. This can be through the promotion of high due diligence standards, the development of responsible investments or the promotion of inclusive financial technologies. For this reason, Liechtenstein banks and the Liechtenstein Bankers Association actively support the Liechtenstein Initiative.
The Financial Sector Commission on Modern Slavery and Human Trafficking has been holding global consultations since September 2018 to discuss how the sector’s approach can be reformed to facilitate responsible lending and investment through industry-wide innovation. Based on these consultations, a catalogue of measures that places the global financial sector at the centre of worldwide efforts is now being devised. This catalogue will not only help to bring those who exploit others to justice, but it will also advise financial institutions on how to protect themselves against these investments and transactions.
It is time to ban unworthy working conditions and forced labour. A ban would also contribute to more climate protection, as legitimate jobs can be regulated to ensure less environmental pollution is caused and taxes are paid. The Paris Agreement can therefore be adhered to, and the holistic approach of Liechtenstein can be used to best implement the much needed-working and climate reforms.
Imagine clean tap water running just once a week, or half the population struggling to rustle up a single meal every day. This, according to Eddie Cross, an MP for Bulawayo South and founding member of the opposition Movement for Democratic Change (MDC) party, is the reality of a “period of harsh austerity” in Zimbabwe that “has [drastically] reduced living standards”.
These tough conditions show little sign of letting up, with the country sinking deeper into an economic crisis that has drawn comparisons to 2008, when GDP growth in Zimbabwe fell to -17.7 percent (see Fig 1) and the currency was devalued to such an extent that a wheelbarrow full of notes wouldn’t even buy a loaf of bread.
In the aftermath of the 2008 hyperinflationary crisis, the country’s leaders were able to agree on a power-sharing arrangement that allowed Zimbabwe to emerge with some semblance of hope. This time round, with the nation’s ruling party refusing to relinquish control or acknowledge the depths of the crisis, no solutions – international or domestic – are forthcoming. Rather, the country seems doomed to sink deeper into a financial depression that will have devastating consequences for its citizens and could take decades to recover from.
In its short history as a unified country, Zimbabwe has seen its fair share of economic hardship. The area of land that makes up modern-day Zimbabwe had been home to various tribal communities for centuries before it was demarcated in its current form in the 1890s by imperialist Cecil Rhodes and the British South Africa Company. The new state, which was named Southern Rhodesia in honour of its coloniser, remained under the control of the UK until 1965, when it declared itself independent. The following 15 years would be defined by a brutal civil war, which pitted the white colonialist minority government against black guerrilla forces led by, among others, future Zimbabwean Prime Minister Robert Mugabe.
Zimbabwe seems doomed to sink deeper into a financial depression that will have devastating consequences for its citizens
Peace was achieved in the early 1980s, facilitating Zimbabwe’s emergence as an economic star. The country’s GDP grew by an average 5.2 percent during that decade, thanks to an extensive programme of public spending – notably on education and healthcare facilities. In 1992, a study by the World Bank found that more than 500 health centres had been built across the country in the preceding 12 years, while enrolment in secondary schools had increased by 902 percent between 1980 and 1990. For all intents and purposes, the country was well on its way to becoming mythologised as a great African success story.
Mugabe’s administration, however, made a series of poor decisions that impeded the country’s economic ascendance. The first was the manner in which the early 1980s investment drive was carried out. As a fledgling independent nation, Zimbabwe did not have the necessary productivity to support such high spending, so while the new societal infrastructure improved the quality of life for Zimbabwe’s citizens, it also meant the country racked up a significant budget deficit, leaving it extremely short on emergency funds.
The government’s second misstep came in 1998, when it chose to weigh in on the conflict in the neighbouring Democratic Republic of the Congo (DRC). Not only did the cost of this intervention drain what little remained of Zimbabwe’s bank reserves, it also alienated the country from the international community – in 1999, both the World Bank and the IMF suspended their aid provision due to an unwillingness to fund Zimbabwe’s military spending in the DRC. Three years later, the country was suspended from the Commonwealth and subjected to sanctions by both the US and EU amid allegations of political corruption. This isolation decimated Zimbabwe’s agricultural sector, which accounted for around 12.6 percent of GDP at the time.
“Zimbabwe was an agrarian industrial country, with emphasis on the word ‘industrial’,” Stephen Chan, a professor of international relations at SOAS University of London, told World Finance. “It was regarded as extremely hi-tech, growing food for modern international markets.” The application of sanctions, however, severely dampened exports. The industry was further crippled by a drought in 2003, which destroyed the meagre subsistence agriculture that remained and left 70 percent of Zimbabwe’s citizens living below the bread line.
Over the following five years, the country descended deeper into economic crisis. Inflation reached 1,000 percent in 2006 – leading the World Bank to declare Zimbabwe the fastest-shrinking economy outside of a war zone – and the government’s attempts to stop prices from skyrocketing were ineffectual, to say the least. While Gideon Gono, the former governor of the Reserve Bank of Zimbabwe, claimed hyperinflation peaked at 2.2 million percent in July 2008, Bloomberg estimates it was closer to 500 billion percent – a figure that Chan described as “metaphysical”. He added: “You couldn’t offer beggars anything in the street, because they’d just throw it away. It was meaningless. You’d have entire alleyways just full of worthless notes.”
Chan’s vivid image symbolises a wider truth: currency has always been at the heart of Zimbabwe’s economic troubles. In the 1980s and 1990s, as the country remained in relative infancy, one of the most vital tasks for Mugabe’s administration was to ensure the Zimbabwean dollar retained its value in order to support macroeconomic stability. It failed dismally for two reasons: first, it showed an inability to create and maintain national industries that would offer underlying productive value, and second, it proved itself too willing to devalue the currency, which, in turn, caused a greater international PR problem.
The destructive impact of the government’s failure was borne out most clearly in the hyperinflation crisis, but the repercussions continue to this day. In 2009, then finance minister Tendai Biti, who was part of an emergency government of national unity, implemented a recovery plan centred on the adoption of the US dollar as legal tender. While this succeeded in curbing hyperinflation at the time, it has subsequently caused significant issues when it comes to obtaining foreign currency – particularly given the rest of the world’s reluctance to lend to Zimbabwe, which stems from the country’s failure to prove that it has learned its fiscal lesson. “What has come home to roost very recently is that [Zimbabwe] really has no way of sourcing any more dollars,” Chan told World Finance. “No one will lend to [it] anymore, because there never really was a viable repayment plan.”
The government has not been entirely oblivious to these shortages and has, over the past few years, attempted to introduce various currency policies, each with little success. In 2016, bond notes and coins that would purportedly mirror the value of the US dollar were introduced, but they rapidly lost value when citizens realised they had no inherent worth and were not widely accepted as payment. In June 2019, the government – now led by President Emmerson Mnangagwa following the ousting of Mugabe in a military coup in 2017 – went a step further and attempted to introduce an entirely new currency. The RTGS dollar – the first iteration of Zimbabwe’s sovereign currency since 2008 – prevents citizens from using foreign currencies such as the US dollar and pound sterling as legal tender.
In August 2019, Zimbabwean Foreign Minister Sibusiso Moyo claimed that introducing the new currency had stabilised the economy, but with the government refusing to publish inflation data until February 2020, it’s difficult to know whether there’s much truth in his statement. Chan is unconvinced: “There was no real choice because of the lack of US dollars, but there’s no productive value [in the new currency] to pay for imports, so wholesalers are just going to charge more and more money for things.” In other words, the government’s reluctance to reveal inflation information smacks of a cover-up – it does not want to reveal to the world exactly how much of a failure its initiative was with regards to curbing inflation.
Anecdotal evidence emerging from Zimbabwe does little to suggest the government has averted an economic crisis. As of June, fuel prices had been hiked to such an extent that the average daily commute costs as much as $20, while 18-hour blackouts have become commonplace in Zimbabwe’s capital, Harare. According to the World Food Programme, an estimated two million people are facing drought-induced starvation, while the same number have no access to clean water.
The current scarcities pose an immediate threat to life for some of Zimbabwe’s citizens, but there are also deeper and more wide-reaching disasters on the horizon, particularly with regards to shortages in HIV and AIDS medication. According to the UN, the country has one of the highest prevalences of HIV in sub-Saharan Africa, with an estimated 12.7 percent of the population living with the disease in 2018. This figure has fallen dramatically from its peak in the early 2000s – thanks, in part, to increased awareness of transition methods and behavioural changes such as the use of condoms. Access to antiretroviral treatment (ART) has also improved as a result of a government programme that started to be rolled out in 2003.
According to the UN, 84 percent of those living with HIV in Zimbabwe were able to access ART in 2018. Within this group, 70 percent were provided with medication by the Global Fund to Fight AIDS, Tuberculosis and Malaria, a multinational organisation that provides grants to nations where HIV is prevalent. In order to unlock these grants, however, governments must contribute a certain percentage of the cost; in Zimbabwe’s case, its leaders must pay $24.2m between 2018 and 2021 to gain access to the full $483m grant.
As a result of the financial troubles currently afflicting the country, the Zimbabwean Government was unable to contribute the $6m sum required in July to unlock the Global Fund’s latest instalment. Consequently, access to ART for HIV patients has been severely restricted, with some being issued a two weeks’ supply at a time rather than the requisite three months, and others being given expired drugs.
“You’ve got the makings of a second stage of the pandemic [of the 1980s],” Chan said. If HIV sufferers cannot gain access to the life-saving medication needed to control their symptoms, cases of AIDS are likely to surge. Infection rates may also rise, as sufferers will not be visiting clinics to collect medication and, as a result, will not be offered condoms at the same time.
Mine for the taking
Of course, not all of Zimbabwe’s citizens are suffering. “There’s an oligarchic class made up of elite governmental and military figures – or those related to such people – who have insulated themselves by some recourse to corrupt means,” Chan explained. Members of this class, which established itself during Mugabe’s reign and has gone unchallenged by Mnangagwa, reportedly enriched themselves through a combination of bribery, overvalued government contracts and the illegal seizure and sale of illegitimate property.
“Transparency International estimates that $100bn has disappeared from the Zimbabwean economy [as a result of corruption],” Cross told World Finance. “The military has been a major beneficiary and has fought to protect its privileged position [under Mnangagwa].” What’s more, this corruption is not the sort that offers a silver lining in the form of job creation or productive value. “Corrupt monies circulated within can be beneficial, even if not always traceable,” Chan said. “But when it’s taken out of the system – or spent on non-productive luxuries, as is largely the case in Zimbabwe – no good is done.”
The diamond market has proven a particularly popular breeding ground for corruption, with a 2008 cable (leaked in 2010) from the US Embassy in Zimbabwe calling the sector “one of the dirtiest” in a “country filled with corrupt schemes”. In 2006, Zimbabwe became a diamond hotbed overnight following the excavation of the Marange diamond fields, which were regarded at the time as the richest natural source of the gems to be discovered for more than a century.
It was hoped initially that the government would utilise the funds derived from mining to reduce the country’s budget deficit; in practice, though, profits have been concentrated in the hands of a select few political and military officials. According to the 2008 cable, these include Gono and former vice president Joice Mujuru, both of whom were accused of skimming hundreds of thousands of dollars a month in illegitimate profits from gem sales. Both Gono and Mujuru denied these allegations.
The Marange diamond fields were also reported to be the site of a torture camp run by the Zimbabwe National Army, the existence of which was revealed in 2011 by the BBC’s Panorama series. Victims told the broadcaster they had been subjected to beatings, sexual assault and dog maulings at the hands of the soldiers there, none of whom are known to have faced repercussions for their actions.
With the government paralysed by a crisis of its own creation, Zimbabwe’s citizens have been left to weather the storm alone
Military impunity remains a significant issue in Zimbabwe today. Not only does this reinforce the existence of corruption, it also creates a culture of fear and violence, robbing citizens of their right to peaceful protest. In January 2019, when trade unions led a work stoppage following a 150 percent hike in fuel prices, security forces shot dead 17 people and raped at least 17 women, according to Human Rights Watch.
No way out
Given the endemic nature of corruption, the dire economic situation and looming public health crisis, the outlook for Zimbabwe is bleak. The most pressing challenge remains the restoration of some kind of economic stability, but with other countries unwilling to offer budgetary support loans and national industry at a standstill, the government will be hard-pressed to drum up any sort of funding soon. Even if it did stumble upon some miraculous money tree, the notes growing on its branches would either be entirely worthless or not accepted as legal tender in accordance with current monetary policy. What’s more, given the level of corruption at the uppermost levels of government, it’s highly unlikely that any new funds would be directed to the sectors suffering critical shortages. Instead, they would find themselves lining the pockets of the well connected.
With the government paralysed by a crisis of its own creation, Zimbabwe’s citizens have been left to weather the storm alone – a nigh impossible task given the absolute lack of basic societal infrastructure. Even the informal economy, which has historically proven extremely resilient in Zimbabwe, is floundering. Last year, in a bid to maintain some sort of viable currency regime, a number of small operators began establishing a grassroots virtual economy, using mobile cash to pay for goods and services. However, this was quickly quashed by the country’s conservative-leaning finance minister, Mthuli Ncube, who introduced a two percent tax on transactions that priced out low-earning citizens.
In a functioning democratic society, the clear response to such an abject failure in economic policy would be to vote out the politicians responsible. In Zimbabwe, though, this is not an option given the monopoly held by Mnangagwa’s party, the Zimbabwe African National Union Patriotic Front (ZANU-PF). Even if there were to be an election, the likelihood of the results being manipulated is extremely high. What’s more, ZANU-PF’s main opposition, the MDC, is by no means squeaky clean, having experienced its own corruption scandals in recent years. “If you’re looking at democratic solutions for the future, then Zimbabwe is currently between a rock and a hard place,” Chan told World Finance.
The one glimmer of light at the end of the tunnel is Zimbabwe’s negotiations with the IMF regarding a bailout programme, which remain at an early stage. However, the IMF is highly unlikely to green-light any loans until Zimbabwe pays off its debts to other lenders, such as the World Bank. Even if loan agreements can be reached, the country will pay a high price for financial assistance. “Terrible austerities have to come and the poorest people will be hit the hardest,” Chan said. This would likely lead to further civil unrest, again culminating in military violence.
As it currently stands, Zimbabwe is a ticking time bomb. With domestic options exhausted, international intervention is crucial to supporting and sustaining the lives of its citizens. If the country is allowed to collapse entirely, the implications will stretch well beyond Zimbabwean borders, leaving the rest of the world to pick up the humanitarian and economic pieces for decades to come.
Every day, Shenzhen, a rapidly growing city in Southern China, produces around 15,000 tonnes of waste. As a whole, China generates around 300 million tonnes of rubbish each year, according to the World Energy Council’s (WEC) World Energy Resources 2016 report. Due to swift population growth and urbanisation, this is expected to reach half a billion tonnes a year by 2025.
To answer Shenzhen’s growing waste management challenges, China is building the world’s largest waste-to-energy (WtE) plant on the outskirts of the city. WtE plants are able to generate electricity by burning waste – a particularly useful process for non-recyclables. Once operational in 2020, the Shenzhen East WtE plant will incinerate about 5,000 tonnes of waste each day, producing 550 million kWh a year, according to the project’s architects, Schmidt Hammer Lassen.
With China being one of the world’s largest energy consumers, WtE is viewed as a solution to both the country’s waste issues and its carbon emissions – but public concerns over negative health and environmental impacts threaten to hold the industry back.
Trash to treasure
Poor management of municipal solid waste (MSW) – the waste taken from residential, industrial and commercial sources – can contribute to increased air pollution, surface-water contamination, the spread of disease and increased methane production, all of which can cause numerous environmental and health problems. Following an analysis of Asia’s WtE industry, the International Energy Agency (IEA) wrote: “For these reasons, the impetus for cities to provide effective waste management is strong.”
Waste-to-energy provides a solution to the global waste crisis by converting surplus waste into a source of low-carbon energy
The WtE market makes up a small but growing proportion of the world’s waste management industry. According to the WEC, in 2015, the market was valued at around $25bn, with an average growth rate of 7.5 percent per year. This is expected to reach $36bn by 2020 – a projected increase of 44 percent in just five years.
According to Mark Sommerfeld, policy manager for the UK’s Renewable Energy Association, WtE is towards the bottom of the waste management hierarchy, suggesting authorities should first seek to prevent, reuse and recycle waste. Once these options are exhausted, WtE can be used to dispose of non-recyclables. “[WtE] provides a necessary solution for dealing with the section of waste that cannot be economically recycled, utilising it as a valuable energy resource, rather than seeing it sent to landfill,” Sommerfeld told World Finance.
WtE can produce energy in several different ways, Sommerfeld explained: “Most commonly, it is used in electricity generation, providing dispatchable low-carbon power and displacing fossil fuel use… Additionally, the heat from this process can also be captured and used within heat networks, which is now common across Europe, such as in Germany, Sweden and the Netherlands.”
Anaerobic digestion, meanwhile, is a form of WtE that uses organic waste from food or purpose-grown crops to produce biomethane to generate electricity, which can be used for the gas grid or transportation sector. Additionally, advanced conversion technologies (ACT) such as gasification and pyrolysis can produce green chemicals and renewable transport fuels. “In this way, ACT could help decarbonise difficult-to-treat sectors like aviation and shipping,” Sommerfeld said.
WtE essentially provides a solution to the global waste crisis by converting surplus waste into a source of low-carbon energy – a win-win result. However, there are concerns that when energy plants do not meet environmental regulations, they could end up damaging the surrounding ecosystem and harming public health.
Not in my backyard
China is emerging as the swiftest adopter of the technology; from 2011 to 2015, the country more than doubled its WtE capacity. The process was introduced in China in the 1980s, with the first modern plant built in Shenzhen in 1988. Since then, incineration plants quickly became an established means of waste management. China is the country with the largest installed WtE capacity in the world, with 7.3GW generated by its 339 plants in 2017, according to the IEA’s analysis. While the IEA expects the industry to continue growing – projected to reach 13GW by 2023 – the organisation warned that realising this growth would require responding to concerns raised by the public over air quality and health implications.
In Waste-to-Energy in China: Key Challenges and Opportunities, a 2015 report from the journal Energies, the research found public opposition was the industry’s biggest challenge to overcome. “With growing awareness of the need for environmental protection, public opposition has become the main obstacle to China’s WtE incineration [programme],” the report’s authors wrote.
The three main reasons cited were: opposition to the proximity of sites to residential areas, schools, lakes and rivers that provide drinking water; a lack of accountability; and a lack of public participation in decision-making.
“Due to the negative publicity of mainstream media and other factors, public opposition to the construction of MSW incineration plants has occurred in cities including Guangdong, Zhejiang and Shandong,” the report said. “Village demonstrations, student strikes and other protests affect social stability. These disturbances cause panic among members of the public.” In Shenzhen, for example, residents have been involved in a legal battle to halt the Shenzhen East project over fears pollutants will enter the air and nearby reservoir of drinking water, according to Yale Environment 360.
China’s WtE plants take in a lower quality of waste due to the country’s lack of recycling programmes, meaning the waste has a higher organic composition and moisture content. This results in lower energy efficiencies and higher rates of pollutants. Where waste in Europe has an average net calorific value of eight to 11MJ/kg, China’s sits at around three to five MJ/kg. “[Improving] the quality of the waste that is fed into furnaces is crucial to achieving safe incineration”, the Energies report said.
Sommerfeld told World Finance it is important for WtE plants to have a good understanding of the nature of waste going into the site. “As such, the industry is supportive of policies that see different waste streams separated,” he said. “This also helps improve recycling rates. Avoiding contamination of waste streams as part of a modern waste management scheme is good for the whole waste industry.”
Along with promoting recycling, researchers in China have looked for ways to address this issue, including creating a new style of incineration plant that can extract more energy from waste with a high moisture content. This method also lowers dioxin levels to below EU limits. At the time of the WEC’s report in 2016, China had 28 WtE plants with this capability.
But even with these solutions, China still faces the challenge of high costs in the WtE industry. The WEC called high technology costs “one of the biggest barriers to market development”. These high costs often cause Chinese WtE plants to take the form of public-private partnerships, the Energies report found, which creates another problem for companies and results in an increased risk for fraudulent conduct. It also enables plants to avoid national emission standards or disclosing environmental monitoring information.
Even though many Chinese WtE operators claim to use advanced technologies in their environmental reports, there is little proof to back them up. In China, 16 percent of WtE incineration plants did not meet national standards in 2015, while more than three quarters did not meet EU standards. “Substandard incineration facilities and ﬂue gas puriﬁcation systems trigger a series of environmental pollution problems, and pollutants are generated in the process of incineration; in particular, emitted dioxins cause serious air pollution,” the Energies report said.
The prevalence of dioxins is one of the main reasons for public opposition to WtE, so firms must improve their standards to ensure they are not endangering public health.
Although China’s WtE industry faces controversy and challenges, the industry is a crucial part of the country’s response to its growing waste problem, especially as the region’s landfill are set to hit capacity in the next few years.
When built with state-of-the-art technology, WtE can deliver improved environmental and sanitary benefits when compared with landfill. For example, a WtE plant built to best-practice standards can reduce carbon emissions by up to 350kg of carbon dioxide equivalent to each tonne of waste processed.
According to Sommerfeld, WtE sites in the UK are subject to tight environmental legislation. He said: “Public Health England looked at WtE plants in 2013, with several studies also monitoring impacts since. They have concluded modern, well-managed WtE sites make only a ‘small contribution’ to local air pollution, and any health impacts, ‘if they exist, are likely to be very small and not detectable’.”
By continuing to research and develop new WtE technologies, pursue aggressive recycling programmes, create specialised regulatory agencies and guarantee public participation, China could enable its WtE plants to be safe for the environment and the surrounding population, while providing clear benefits in waste management energy generation.
As the global waste problem continues to pile up, WtE has a vital role to play. However, public health and environmental guarantees are needed to ensure incinerators aren’t doing more harm than good.
Saudi Arabia finds itself at a significant economic crossroads. Home to the second-largest oil reserves in the world, the kingdom’s economy has been largely defined by the crude industry since drillers first struck oil in Dammam in March 1938. The discovery marked a watershed moment in the nation’s history, sparking an economic boom and propelling Saudi Arabia towards becoming one of the world’s wealthiest countries. Today, the nation is recognised as a global economic powerhouse, sitting among the G20 countries and boasting one of the highest GDPs in the Middle East.
While oil has brought Saudi Arabia great wealth and prosperity, we know one thing for certain – it won’t last forever. Crude is a finite resource and, although there is much debate surrounding the extent of the nation’s vast oil reserves, some estimates predict that supplies will last just 70 more years. This looming time limit – coupled with a global push to create a greener future – has seen Saudi Arabia begin to craft its vision for a post-oil era.
In 2016, Prince Mohammed bin Salman launched the ambitious Vision 2030, a far-reaching reform plan that aims to diversify the economy away from oil, bolstering the private sector and improving employment opportunities for young people. The plan seeks to create a thriving economy where non-oil sectors such as tourism, manufacturing and renewable energy can drive growth, and entrepreneurial activities are encouraged. Small and medium-sized enterprises (SMEs) are a main focus for Vision 2030, with the project seeking to increase the contribution of SMEs to the Saudi Arabian GDP from 20 to 35 percent over the next decade. As the government forges ahead with its diversification drive, Saudi businesses must develop in line with these exciting transformations. A new economic ecosystem is emerging in Saudi Arabia and opportunities are plentiful for those businesses that contribute to its creation.
With Saudi Arabia ramping up its economic transformation plan, the nation’s private sector is truly coming into its own, and non-oil industries are beginning to drive growth. One such industry is the Saudi insurance market, which has shown great promise in recent years, emerging as one of the largest insurance sectors in the Gulf Cooperation Council (GCC) region. Since first opening its doors to customers in 1986, the Company for Cooperative Insurance (Tawuniya) has grown into one of the nation’s foremost insurance providers, offering more than 60 insurance products – including medical, motor, fire, property, engineering, casualty, marine, energy and aviation insurance – in order to protect Saudi citizens from all manner of risk.
A new economic ecosystem is emerging in Saudi Arabia, and opportunities are plentiful for those businesses that contribute to its creation
Throughout its long history in Saudi Arabia, Tawuniya has continuously adapted its offerings to meet both evolving customer demands and the country’s changing economic landscape, providing products that are practical and relevant for customers at every stage of their lives. This remains true today as Tawuniya continues to develop its business in accordance with the social and economic changes occurring in present-day Saudi Arabia, particularly focusing on the developments laid out in the wide-reaching Vision 2030 project. Given the integral role that SMEs are set to play in the Saudi economy of the future, Tawuniya hopes to assist burgeoning businesses by offering a range of practical insurance solutions.
It is with the nation’s nascent SMEs in mind that Tawuniya created its 360 Degree Integrated Insurance Programme. At Tawuniya, we understand that establishing and managing various insurance policies can be both arduous and confusing, taking up time and expertise that could be better used elsewhere. The 360 Degree Integrated Insurance Programme simplifies things for SME owners, allowing them to have all their insurance needs – including medical, motor and property policies – in one convenient place. This not only makes it much easier for SME owners and entrepreneurs to manage their policies, but it also reduces administration costs. By making life simpler for the country’s small-business owners, Tawuniya hopes that it will have a positive impact on Saudi Arabia’s emerging SMEs.
As the country continues on its path towards a brighter, more innovative future, it is clear that technological advances will play a key role in creating this new and improved Saudi Arabia. The nation is already in the midst of a technological transformation, with new technologies such as high-speed internet and contactless payments radically altering the daily lives of Saudi citizens. In the years to come, technology will also revolutionise the way we do business in Saudi Arabia, with cutting-edge developments such as artificial intelligence (AI), robotics and biometric identification all changing the world of business as we know it.
As Saudi Arabia embraces the digital era, businesses simply cannot afford to fall behind the curve. Future success is already largely dependent on the early adoption of new technologies, and companies of all sizes must put digital innovation at the very heart of their operations if they wish to stay relevant going forward. At Tawuniya, we recognise the importance of a strong digital strategy, and we fully embrace new technologies in everything we do.
As part of our digital drive, we have created a pioneering e-store, where customers can conveniently manage all their insurance needs. Available in both Arabic and English, the e-store is the first of its kind in Saudi Arabia and gives customers reliable remote access to their insurance accounts. At the click of a button, online users can quickly and efficiently update their insurance policies, manage their accounts, update their data, track their claims and find their closest sales office. The e-store also allows customers to compare various insurance products before purchasing a policy, helping them to find the package that is best suited to them and their needs.
Alongside this advanced e-store, Tawuniya is also introducing a range of cyber risk insurance products, specifically designed for clients who might be at a greater risk of cyberattack. Tawuniya understands just how valuable its customers’ digital data can be, and hopes to protect clients from every eventuality. The cyber risk insurance policy offers compensation for blackmail relating to cybercrime and makes provisions for reward payments for information leading to the arrest of anyone associated with a cybersecurity breach. The policy also provides compensation for losses related to illegal electronic publication, along with protection against losses to a company’s income that might be incurred during service restoration following a cyberattack. As technology continues to reshape our lives – both professional and personal – such protections are fast becoming indispensable.
Keeping it personal
While new technologies will prove critical to the future success of all businesses, large or small, we must not forget the importance of cultivating human relationships with our customers. It goes without saying that online solutions are practical, time-saving and convenient, but there are times when you might require an in-depth, face-to-face discussion with a trusted advisor.
Tawuniya has the largest network of sales offices of any Saudi insurance provider, with more than 115 branches open to customers. At any of these sales offices, customers can sit down with a knowledgeable advisor and discuss the various insurance options available to them, resolving any queries they might have and learning more about the policies that will best suit their needs. Tawuniya also makes sure to invest in human capital, ensuring it attracts and retains the very best industry talent and helps its workforce to grow.
In addition to offering a range of innovative insurance products – including cyber risk insurance, for example – Tawuniya also offers a range of traditional policies, such as health and travel insurance. Of course, even these more traditional offerings must change with the times and with evolving customer demands, so Tawuniya is continually reassessing its policies to ensure they are relevant and useful for modern Saudi citizens.
Travel insurance is one such area that has been updated to reflect modern trends. Tawuniya is set to introduce a new, low-cost insurance programme for those who frequently travel throughout the GCC region. The programme is primarily aimed at businesspeople and their families, and offers a 50 percent discount on coverage for children between the ages of two and 15, and free coverage for children under two years old.
The company is also looking to update its traditional health insurance offerings and recently signed a landmark agreement with Vitality, a global leader in integrating wellness benefits with insurance products. The agreement, which is the first shared-value insurance product created in the Middle East and North Africa region, will see Vitality’s health and wellness programme effectively developed and promoted across Saudi Arabia. The pioneering partnership aims to improve the health of customers and reduce the number of medical insurance claims.
From original insurance products to new digital solutions, Tawuniya is creating an exciting future for the Saudi insurance industry – one that’s very much in keeping with the nation’s Vision 2030 project. With innovation, entrepreneurship and ambition at the core of this long-term vision, Saudi Arabia is well on its way to crafting a dynamic new chapter in its history.
The Middle East and North Africa (MENA) region is home to around 381 million people, comprising six percent of the total global population. It also functions as a yardstick for the world economy due to its vast reserves of oil and natural gas, both of which underpin the global energy industry and therefore, by extension, the global business community.
Oil in particular is highly susceptible to price shocks, either as a result of oversupply or trade tensions, both of which have afflicted the global economy in recent years. The 2015-16 oil glut, caused by the US and Canada’s decision to ramp up production, saw the value of Brent crude tumble to below $30 a barrel in January 2016, severely dampening the economic fortunes of oil-producing nations in the MENA region.
In 2017, several of these nations, which form part of the Organisation of the Petroleum Exporting Countries (OPEC), elected to implement supply cuts in a bid to prevent a further slide in oil prices. While these succeeded in driving prices back up, the oil sector remains volatile, as it has faced additional headwinds over the past 12 months in the form of the global economic slowdown, the US-China trade war and the application of sanctions to Iran.
Iran’s oil exports plummeted to just 300,000 barrels per day in June 2019, from a high of 2.5 million barrels in April 2018. While this has driven up oil prices due to a supply shortage, it has also posed challenges for oil-importing countries that trade heavily with the US. The sanctions mandate that these nations can no longer purchase oil from Iran, forcing them to find alternative – and often more expensive – suppliers.
These various factors have weakened the MENA region overall, with oil-exporting nations hit hardest; their growth is expected to dip to just 0.4 percent in 2019, according to the IMF’s Regional Economic Outlook. Oil-importing nations will fare better, posting collective GDP growth of 3.6 percent, although this is still a decline from last year’s rate of 4.2 percent.
Breaking down barriers
Among the world’s oil-exporting nations, the countries that are faring best are those that are diversifying their economies by investing in non-oil initiatives. The UAE is one such example: it has accelerated work on the Etihad Rail network, a 1,200km railway construction scheme that will link all major ports in the country and encourage freight transportation of goods. It has also implemented reforms to its business environment, such as improving online registration for new companies and strengthening access to credit, according to the World Bank’s Doing Business 2019 report.
For a number of nations in the MENA region, ongoing violence, political conflicts and corruption are inhibiting meaningful investment and development
These actions have served to encourage foreign investment in the UAE’s start-up sector: according to a report by MENA start-ups directory MAGNiTT, the country captured 26 percent of all deals and 66 percent of all funding in the region in the first half of 2019. In particular, the $3.1bn acquisition of ride-sharing app Careem by its US rival Uber has served as testament to the calibre of firms being incubated there, thereby boosting investor confidence.
Oman has also taken steps to create a more robust regulatory environment and attract foreign business, notably through the introduction of the new Foreign Capital Investment Law. This legislation, which comes into force in 2020, aims to attract international investment by offering incentives and expanding sectors to external investors.
These two nations, however, are largely the exception to the rule with regards to regulatory reform. Regional integration across the MENA region overall is extremely poor, meaning countries are not able to take advantage of some of the business opportunities on their doorsteps. Tariffs remain high, while bureaucratic barriers impede the flow of both goods and services across borders.
In oil-importing countries, meanwhile, large public debt burdens are limiting their capacity to invest in infrastructure and tackle social issues. Jordan is one such example: in 2018, its fiscal deficit stood at 3.3 percent of GDP – 1.4 percent higher than the budget target – due to limited tax revenue growth. As a result, it has been forced to slash public spending, notably on food subsidies, which has led to civil unrest.
Morocco is also grappling with an elevated budget deficit of 3.7 percent of GDP, compounded by its decision to increase public spending in the education and healthcare sectors. The country is the largest energy importer in North Africa, meaning its national finances have been hit by the rise in oil prices since their 2016 lows. In a bid to balance the books, the government announced in October 2018 that it would look to generate MAD 8bn ($827.43m) by privatising a number of state-owned firms.
The one exception to this trend is Djibouti, a rising star of the region, where the economy has been expanding rapidly. GDP growth is expected to reach seven percent by the end of 2019, thanks to the development of new infrastructure such as the Djibouti International Free Trade Zone, an initiative that has helped to establish the country as a key trade and logistics hub. Concerns have been raised, however, about the loans from China that underpin the project.
Grinding to a halt
For a number of nations in the region, ongoing violence, political conflicts and corruption are inhibiting any sort of meaningful investment and development. This is particularly evident in Yemen, where a brutal civil war has been raging since 2015. The country’s economy is estimated to have contracted by 39 percent since the end of 2014, as the violence has disrupted all business activity and hindered any sort of foreign investment. Even if the conflict were to end tomorrow, a significant degree of foreign aid would be needed to solve the humanitarian crisis and restore basic services such as healthcare and education before business could resume.
In Libya, a conflict that began in April between the UN-recognised Government of National Accord and forces loyal to the Libyan National Army has left more than 1,000 people dead and thousands more injured. Production of oil – the lifeblood of the Libyan economy – has dropped following a number of forced closures at the country’s largest oil field, which are believed to be politically motivated attacks. “The associated lack of security and reforms hinders investment and development of the private sector,” noted the World Bank in its economic update for Libya in April.
As a result of this violence, the overarching security situation in the region has worsened, which has brought foreign investment to a standstill. Moreover, May’s attacks on vessels in the Strait of Hormuz by the Iranian Revolutionary Guard Corps indicate a deterioration in US-Iran relations, which will further inhibit development in the region as a whole. Finding a solution to this conflict and achieving peace across MENA is therefore essential in securing long-lasting and equitable growth. In the World Finance MENA Investment and Development Awards, we recognise the firms that continued to invest in the region in order to drive vital growth over the course of 2019.
World Finance MENA Investment and Development Awards 2019
Best Islamic Bank Kuwait International Bank
Best Retail Bank Arab National Bank
Best Commercial Bank
Most Socially Responsible Bank
Best Bank for Trade Finance
Ahli United Bank
Most Innovative Insurance Product
Best Asset Management Company
Best Fund Management Company
Qatar Investment Authority
Best Investment Banking Company
KAMCO Investment Company
Best Islamic Investment Company
A’ayan Leasing and Investment
Best Telecommunications Company
Best Logistics and Transportation Company
DHL Express MENA
Best Islamic Private Wealth Management Company
Most Sustainable Energy Company
Best Customer Experience
Majid Al-Futaim Group
Most Customer-Focused Brokerage House
Best Organisation for Female Empowerment
Al-Tijari – Commercial Bank of Kuwait
Best Full-Service Law Firm
Al-Twaijri and Partners Law Firm
Best SME Finance and Support Programme
Commercial Bank Of Qatar
Best E-Services Trade Facilitator
Best Pharmaceutical Company
Teva Pharmaceutical Industries
Best Investment Destination
Invest in Israel – Israel
Best Tourism Destination
SMIT – Morocco
Business Leadership and Dedication to Community
Sheikh Mohammed Al-Sabah, Chairman of Kuwait International Bank
Banker of the Year
Raed Jawad Bukhamseen, Kuwait International Bank
Fintech CEO of the Year
Wael Malkawi, ICS Financial Systems
Pharmaceutical CEO of the Year
Kåre Schultz, Teva Pharmaceutical Industries
Telecommunications CEO of the Year
Sheikh Saud bin Nasser Al Thani, Ooredoo
Investment CEO of the Year
Mansour Hamad Al-Mubarak, A’ayan Leasing and Investment
Energy CEO of the Year
Paddy Padmanathan, ACWA Power
Logistics and Transportation CEO of the Year
Nour Suliman, DHL Express MENA
Retail CEO of the Year
Alain Bejjani, Majid Al Futtaim Group
Jewellery Designer of the Year
Fatima bint Ali Al Dhaheri, Founder of Ruwaya Jewellery
Just when it seems as if the trading relationship between the US and China is normalising, it breaks down all over again. In August, the US Treasury officially declared China a currency manipulator. Then, just a few weeks later, President Donald Trump claimed to have had a number of “very, very good” phone calls with top officials from Beijing keen to secure a trade deal. China claims no such talks took place; speculation has grown that Trump simply made them up.
So far, the US-China trade war has impacted as many as 1.9 million Chinese jobs and cost the US economy $7.8bn in 2018 alone, according to a paper published by a team of US economists. The lack of certainty surrounding future trading conditions continues to cause chaos for several industries in both countries. In the US, one industry in particular is in danger of missing a huge opportunity for growth.
In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances
China’s pork market, by far the world’s biggest, is in trouble: since August 2018, African swine fever (ASF) has devastated domestic supply. This will inevitably lead to price rises and necessitate the procurement of new suppliers. In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances.
The first outbreak of the ASF virus is believed to have occurred in Kenya during the first decade of the 20th century. It has remained endemic to Africa ever since, greatly hindering the development of the continent’s pig-farming industry. The virus, which is highly contagious, results in blotchy patches on the skin of the animal, diarrhoea and respiratory difficulties. Death usually occurs after a period of seven to 10 days.
Although contained to Africa for many years, the virus has subsequently proven itself to be a keen traveller, after a case of ASF was reported in Lisbon, Portugal, in 1957. Since then, instances of the virus have been found in France, Belgium, Eastern Europe, the Caribbean and now Asia. The current crisis is believed to have started in Georgia in 2007, before migrating to Russia and then China – probably as a result of pig farmers feeding contaminated food scraps to their animals. The impact in China has been staggering.
“There is little doubt that China will face a pork shortage; the more difficult question is when it will materialise,” Joe Schuele, Vice President of Communications at the US Meat Export Federation, explained to World Finance. “Hog liquidation put large volumes of pork into cold storage in late 2018 and early 2019, and China now appears to be working through those inventories.”
According to Rabobank estimates, China’s pig population could fall by a third in 2019 as a result of ASF, with approximately 130 million swine set to die either as a direct result of ASF or due to culling. Consequently, the price of pork in the country has climbed significantly – a year-on-year rise of 20 percent was recorded in April 2019 – with further increases expected.
Went to market
China is the world’s largest producer and consumer of pork. According to the OECD, Chinese households purchase 55 million tonnes of the meat every year, fuelled by a domestic swine population in excess of 430 million. This market has always held huge potential for US farmers, but given the challenges presented by ASF, it is beginning to look like a once-in-a-generation opportunity.
But said opportunity is fast going to waste as trade tensions between the US and China rumble on. Tariffs on US pork products have risen substantially this year, limiting the competitiveness of American farms even at a time when Chinese consumers are getting used to paying more for their meat. If these barriers were not in place, it’s likely that US farms would have already ramped up their exports considerably.
“It’s actually very hard to say what ‘normal’ trading circumstances would look like for the Chinese market, because China’s pork imports fluctuate based on its domestic production,” Schuele said. “China’s pork industry is so massive that even a relatively small decline in production can create significant opportunities for pork-exporting countries. It is difficult to project how much pork the US would have exported to China in 2018 had retaliatory duties not been imposed, but in 2017 (prior to the tariff hikes), US exports to China exceeded 300,000 tonnes, valued at $663m. In 2018, volume declined to 220,000 tonnes, valued at $571m.”
How the market reacts to the ASF outbreak will, in part, determine what happens next. For example, China’s carnivores could switch to other varieties of meat such as chicken or beef, but these too are likely to witness some form of price increase in response to the value of pork going up. Alternatively, they could decide that the increased price of pork is worth paying. In that instance, China would need to maintain a constant supply from international sources to make up for domestic shortfalls.
“Were it not for China’s trade retaliation, US pork producers would be in a strong position to capitalise on an unprecedented sales opportunity in China, where domestic production is down significantly as ASF has ravaged the country’s swine herd,” Rachel Gantz, Communications Director at the National Pork Producers Council, told World Finance. “US pork producers face retaliatory tariffs of 60 percent on exports to China, in addition to the existing 12 percent duties on US pork, for a total annualised rate of 72 percent. According to Iowa State University economist Dermot Hayes, US pork producers have lost $8 per hog, or $1bn industry-wide on an annualised basis, because of China’s punitive tariffs.”
Tariffs represent a reasonable way of protecting vulnerable industries from outside competition, particularly when faced with rival businesses that can offer much cheaper products and services. The drawback, of course, is that retaliatory tariffs are often subsequently imposed. US pig farmers know this better than most: in addition to the trade barriers imposed by China, the American pork industry has faced tariffs from Mexico. A relatively competitive product that would normally help reduce the US’ trade deficit is therefore being prevented from doing so.
Chop and change
The lifting of trade barriers would certainly help US farmers, but it would not necessarily open up the Chinese market completely. Many US farms give their pigs ractopamine, a feed additive that promotes the growth of lean meat. Despite its presence in American pork, ractopamine is currently banned in 160 countries, including China. If US producers wanted to target Chinese consumers, they would have to either raise pigs without using ractopamine or hope that China relaxes its regulations. The latter seems unlikely: earlier this year, Beijing banned three Canadian exporters from selling to China after ractopamine was found in a pork shipment.
“Ractopamine has been determined to be safe by the US Food and Drug Administration, the UN’s Food and Agriculture Organisation and the World Health Organisation,” Gantz said. “It is approved for use in pork production in 26 countries, with 75 additional countries allowing the import of pork from ractopamine-fed hogs, even though it is not fed [to] their domestic herds. Pork producers have a right to choose how to raise their animals and ractopamine is a scientifically proven safe product.”
Despite being approved for use in the US since 1999, some farmers, at least, are reconsidering their use of the drug. Ultimately, though, each farmer will have to weigh up the costs and economic drawbacks of removing ractopamine from their own herds. Currently, around 60 to 80 percent of all US pigs are fed the drug, and some of the country’s top export markets, including Japan and South Korea, do not ban its use.
Any interest that currently exists in expanding ractopamine-free production would likely be much stronger if US pork had more consistent and reliable access to China, and was on a level playing field in terms of tariff rates. If the US remains priced out of the Chinese market, then pork producers elsewhere stand to profit. According to Chinese customs data, the EU already supplies approximately two thirds of the country’s pork imports, and will no doubt look to increase this figure in the future. However, cases of ASF have recently been found on pig farms in Romania, Poland and Bulgaria. The disease has even been recorded in wild boar as far west as Belgium.
“Thanks to vigilant oversight by the US Department of Agriculture and… US [Customs and Border Protection (CBP)], there have been no reported cases of ASF in the US,” Gantz said. “The agencies and our industry continue to remain on guard, and we have asked the CBP to add 600 agricultural inspectors at our borders and ports to ensure ASF or any other foreign animal disease does not enter our country.”
If ASF continues to prove difficult to purge, then markets where pork is popular will undoubtedly come knocking at the US’ door looking for uncontaminated produce. For now, though, it is unlikely to be Chinese consumers. With the trade dispute between President Trump and China continuing, it is US farmers who are missing out on an opportunity that may not present itself again for a very long time.
Across the globe, growth remains somewhat sluggish. After two years of relatively robust expansion, the global economic upswing has now slowed to a more subdued level, knocked back by financial market volatility and widespread political uncertainty. Trade and technology tensions between the US and China have seen tit-for-tat tariff increases on the nations’ respective imports, escalating an ongoing dispute between the world’s two largest economies. Over in Europe, meanwhile, prolonged Brexit-related uncertainty continues to weigh heavily on the eurozone’s economy. The pound hit a two-year low in July, and the UK economy has contracted for the first time since 2012 as the possibility of a no-deal Brexit looms large ahead of the planned October 31 exit date.
Elsewhere, growth in emerging markets and developing economies has also disappointed, with weaker-than-expected results across Asia and Latin America. While global growth is projected to pick up once again in 2020, this is decidedly precarious, hinging on favourable geopolitical outcomes and the successful resolution of current trade disputes.
Against this unpredictable economic backdrop, the investment management industry faces myriad challenges. In order to remain prosperous and ensure profitability for their clients, investment managers must successfully navigate this ongoing economic uncertainty, using their extensive knowledge and expertise to overcome ever-changing market conditions and capitalise on emerging opportunities. The winners of this year’s World Finance Investment Management Awards have shown themselves to be resilient, adaptable and innovative in such challenging conditions, establishing themselves as industry leaders that can be counted on to provide stability and security when it is needed most.
Playing by the rules
Last year, the investment management industry was largely concerned with exhaustive changes to establish regulatory frameworks. This year, the issue remains just as pertinent, as increased regulatory scrutiny continues to carve out a new landscape for the sector. From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business, and to effectively and expeditiously apply any required regulatory changes to their operations. Time is certainly of the essence, and those who fail to make the necessary changes can expect significant damage to both their wallets and their reputations.
The fine for failing to comply with the EU’s sweeping General Data Protection Regulation (GDPR), for example, is four percent of the previous year’s annual global turnover, or €20m ($22.1m) – whichever is higher. Investment managers must also take care to comply with the EU’s MiFID II legislation, which, when introduced in early 2018, was hailed as a key milestone in creating the new, more transparent financial landscape that legislators have been promising since the global financial crisis a decade ago.
From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business
The introduction of these frameworks last year reflects an ongoing trend within the financial sector towards greater regulatory oversight. According to a PwC report entitled Asset Management 2020 – A Brave New World, this flurry of regulatory activity is only set to increase over the upcoming months. As soon as 2020, PwC predicts “full transparency over investment activity in products will exist at all levels; there will be nowhere for non-compliant managers to hide as regulatory, tax and other information’s reciprocal rights will extend across the globe”.
However, just as regulatory compliance moves up the global financial agenda, meeting these requirements is also becoming increasingly complex as the investment industry digitalises. With data analysis set to play an indispensable role in the future of investment analysis, companies must stay conscious of both privacy laws and cybersecurity as they further digitalise their operations.
A new dawn
Even as the changing regulatory climate creates new costs for investment managers around the world, technological advances are helping to cut expenses quite dramatically. Traditionally, investment management has been a low-tech industry, but the sector is now in the midst of a comprehensive technological transformation. Robotic process automation has begun to redefine daily operations at investment management companies, taking over repetitive routine tasks such as data transcription – jobs that would otherwise take up a significant portion of an employee’s working day. This not only frees up workers to dedicate their time to more valuable tasks, but also allows companies to create a reliable, 24/7 workforce that can carry out essential data-driven tasks at any time of the day or night.
Machine learning and artificial intelligence (AI) are also set to transform the investment management industry, giving managers access to an extraordinary range of practical data, which will help them to better understand both their existing customers and potential clients. AI advisors and social media chatbots are particular areas of interest, as these can provide managers with a wealth of data on what customers are repeatedly searching for, allowing them to respond with suitable products and services. At the same time, customers themselves have grown to expect a streamlined digital experience when it comes to keeping track of their investments.
In order to meet this demand, investment managers must provide a range of innovative digital solutions that suitably satisfy their customers’ evolving needs – whether that be through round-the-clock personalised financial advice delivered by state-of-the-art chatbots or remote, on-demand access to their investment portfolios. As the financial services sector becomes increasingly digitalised, investment management firms cannot afford to fall behind the curve. If they wish to stay profitable and relevant in the years to come, now is the time to place technological innovation and investment at the very core of their businesses.
Appetite for change
Each year brings with it new opportunities and areas of interest, and 2019 could well be the year that environmental, social and governance (ESG) investments hit the mainstream. As climate change and environmental concerns continue to rise up the international sociopolitical agenda, investment managers would do well to consider their clients’ ESG preferences when moving forward. There is certainly a growing appetite for sustainable investments, with Moody’s predicting that green bond issuances will break $200bn in 2019 alone. This trend shows no signs of slowing down in 2020 and beyond, as the public consciousness shifts towards creating a greener, more sustainable future.
As we look to the months and years ahead, we can expect to see investment managers around the globe working to fully integrate ESG factors into their operations, using pertinent data analysis to assist clients in creating investment portfolios that truly reflect their own personal values. What’s more, as the ESG sector continues to grow, sustainable investments are set to create some substantial returns, making them increasingly attractive from both a financial and ethical standpoint.
In the rapidly evolving industry of investment management, only the most adaptable and forward-thinking firms can expect to enjoy continued success. The winners of this year’s World Finance Investment Management Awards have proved themselves in the most testing and turbulent times, finding opportunity where others have found adversity, and overcoming complex industry hurdles with ease. For an insight into the very brightest names in the world of investment management, take a look at our winners for 2019.
World Finance Investment Management Awards 2019
Antigua and Barbuda Global Bank of Commerce
Austria Erste Group
Chile – Equities and Fixed Income
BCI Asset Management
SURA Investment Management
Stefnir Asset Management
Setanta Asset Management
Mexico – Fixed Income
SURA Asset Management
APG Asset Management
AXA Investment Management
UOB Asset Management
Ak Asset Management
Vietnam MB Securities
Wealth Management & Corporate Finance
Best Multi-Client Family Office, Liechtenstein
International financial centres like The Bahamas play an increasingly important role in the global economy. The country is tax-neutral, which means it can avoid the distortions and the corresponding losses that occur when price changes cause fluctuations in supply and demand.
Tax neutrality can also ensure that the tax system can raise revenue and minimise the consequences of economic choices. This aids the notion that the same principles of taxation should apply to all forms of business, which further reduces the likelihood of biases influencing economic decisions.
Wealth management accounts for a large part of the country’s financial sector. For many high-net-worth individuals, banking and wealth management outside one’s home country simply makes good business sense and represents a wise avenue for investment. There are several reasons for this.
The Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to develop the industry
For example, multinational and multigenerational families can preserve their wealth for the long term and transfer it to younger generations with relative ease when they place assets in a territory with trust laws. Their home country might be subject to civil unrest, or a history of political and financial instability. It is therefore prudent for high-net-worth individuals to offset these risks by protecting some of their assets. They can do this by keeping them in a jurisdiction that does not suffer from these problems. Furthermore, international banking and wealth management centres offer financial products that are usually more rewarding and secure than those found in their home countries.
The Bahamas also requires businesses and other entities to disclose information to the government about the ways in which they generate their income and the amount of tax they pay. This can be argued to be transparent taxation, as The Bahamas adheres to the doctrine that nations ought to exchange information with one another about the tax affairs of individuals and other entities.
After tourism, financial services is the most important industry in The Bahamas. Governments have repeatedly recognised the importance of the industry to the country’s continual economic and social development. The financial sector’s viability for success is therefore a priority for both the public and private sectors.
This level of importance is indicated by the responsiveness of the legislature and regulators to the needs and demands of the market, as well as the swiftness with which these processes can take place. It is also demonstrated by the balance that regulators strike between ensuring the financial services industry keeps its integrity while still encouraging lively competition. What’s more, The Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to help promote and develop the industry.
In order to highlight The Bahamas’ strengths as an international financial centre, The Bahamas Financial Services Board was established in April 1998. It is funded both by private enterprise and the government, and continues to promote greater awareness across the globe.
Fiscal and economic stability
Representatives of the IMF visited The Bahamas at the end of last year, with a report from the organisation’s visit noting: “The Bahamian economy continues to recover, with real GDP growth projected to reach 2.3 percent in 2018 and 2.1 percent in 2019… The Fiscal Responsibility Bill will support the government’s efforts to secure fiscal sustainability and put debt on a downward path.” With The Bahamas’ GDP already having risen by more than $4bn between 2000 and 2017, this projection seems highly plausible.
Indeed, the legal system in The Bahamas has been very successful in helping the country respond effectively to the changing needs and demands of the market. It is based on English common law, which is (by and large) clear and simple for its citizens to understand. As an independent nation with a financial services industry bolstered by a strong public-private sector partnership, The Bahamas responds to shifts in the market swiftly and efficiently.
Less than a decade ago, Kuwait’s banking sector was stagnant, hindered by a slew of changing governments and crippled by political instability. Between 2011 and 2014, infrastructure projects were few and far between, public spending was at a low point and banks were suffering on the back of it. In 2015, the government announced its first budget deficit for more than a decade.
Over the past few years, though, that has all changed, with the government making efforts to diversify the economy through a series of measures – from allowing 100 percent foreign ownership in certain sectors to providing tax breaks to investors and relaxing the regulatory environment. The latter has been particularly beneficial to the financial industry, which is now one of the country’s biggest sectors and is propping up the economy at a time when volatile oil prices (see Fig 1) and OPEC production cuts continue to have a significant impact on the Gulf Cooperation Council (GCC) region.
According to the IMF’s 2019 Kuwait: Financial System Stability Assessment report, financial system assets represented 252 percent of the country’s GDP at the end of 2017, with the majority being held within the banking sector. KPMG’s 2019 GCC Listed Banks’ Results: Embracing Digital report, meanwhile, concluded that the nation’s banks had “witnessed one of the best years in the recent past”, with overall net profits in the segment rising 19.3 percent year on year and total banking assets in the country growing by five percent.
In the coming years, a raft of mega-scale infrastructure projects – including the construction of new cities, bridges and highways under the ambitious Kuwait Vision 2035 development plan – is set to bolster the sector even further. As a result, Kuwait is now a finance leader in the GCC – a fact that is reflected in its continued position as one of the wealthiest nations in the world per capita (see Fig 2) – and it doesn’t look set to slow down any time soon.
Leading the market
While conventional banks are playing their part in propping up Kuwait’s financial industry, it’s the Islamic finance sector that’s witnessing the strongest growth: according to the Central Bank of Kuwait (CBK), Islamic banking groups recorded a 22.5 percent growth in their net income in 2018, compared with 15.9 percent among conventional institutions. Sharia-compliant assets now account for 40 percent of the country’s banking sector, according to the IMF.
Such progress has been facilitated by various developments, not least the government’s decision to start issuing Sharia-compliant instruments in 2016, which gave Islamic institutions easier access to high-quality liquid assets. Various digital innovations in the sector have helped spur growth further, with the likes of electronic payment systems, teller machines and biometric security all being utilised, and partnerships with fintech firms gradually being established.
A successful business isn’t simply defined by the actions it takes to improve its profit
Together, these changes are putting Kuwait on the map at a time when the Islamic finance industry is growing as a whole – according to Thomson Reuters’ Islamic Finance Development Report 2018, global Sharia-compliant assets were worth $2.4trn in 2017 (up 11 percent from the previous year) and are expected to reach $3.8trn by 2023.
Among those benefitting the most from this growth is Kuwait International Bank (KIB). The Sharia-compliant lender stepped into the limelight recently when it was listed on Boursa Kuwait’s Premier Market – one of three new divisions introduced by the stock exchange in 2018 for companies excelling in terms of financial performance, share liquidity, corporate governance and other policies. It marks a new era for the former real estate specialist that became a fully fledged, full-service Islamic bank in 2007, boosting its investor profile within the region and beyond.
“KIB’s listing on the Premier Market reflects improvements in the bank’s operations and financial performance as part of its new strategic direction,” the bank’s CEO, Raed Jawad Bukhamseen, told World Finance. The new strategy involves a series of forward-thinking, client-centric digital innovations, an ambitious expansion plan and a focus on corporate social responsibility that puts company culture, the local community and the development of Kuwait’s wider economy at its heart.
At the core of the global Islamic banking sector is the sukuk. Equivalent to a bond, a sukuk is compliant with Sharia law and gives the holder a portion of the earnings generated by the asset without the need to pay interest. “Sukuk are important financial instruments for the Islamic banking sector – not only in Kuwait, but all over the world,” Bukhamseen said. “These specialised financial instruments can boost the funding and capital position of financial institutions.”
Banks are catching on to this fact: according to the IMF, global sukuk issuances multiplied 20-fold between 2003 and 2013 to reach $120bn, as institutions recognised the importance of diversifying their funding. One such institution was KIB, which struck gold earlier this year when it successfully priced a $300m AT1 perpetual sukuk at an annual profit rate of 5.625 percent. Listed on Euronext Dublin, it was the first AT1 sukuk to have been issued in Kuwait since 2017 and became the best performer in the secondary market this year. A weeklong road show helped the bank generate interest from investors across 26 countries, with the order book reaching a peak of $4.6bn – a more than 15-fold oversubscription. Further, 51 percent of the final distribution went to international investors.
Bukhamseen believes the successful issuance represents another turning point for the bank: “With this important financing instrument, KIB will be able to carry out its local expansion strategy, build its capital base as per Basel III guidelines and add a new source of capital. It also enhances the bank’s capital adequacy ratios and diversifies its funding sources.” KIB’s expansion plan includes opening several new retail branches in the country over the coming years, with the bank considering the strongest growth opportunities to be present in the market where it already boasts a substantial customer base. “Every organisation seeks growth and expansion as a long-term goal, as this allows you to gain an advantage in a relentlessly competitive environment,” Bukhamseen added. “As well as presenting new opportunities for everyone in the bank and enhancing profitability, expansion is a crucial strategy for survival.”
According to Bukhamseen, it’s not just the bank that will feel the benefits, as sukuk like this are essential to the development of the wider economy: “In addition to supporting the bank’s accelerated growth plans, the sukuk is a strong testament to the region’s capabilities in driving greater economic development by enabling the exchange of expertise and pro-active collaboration. A more diversified, efficient and stable financial system is necessary for the development of the banking sector. The financial system’s ability to allocate resources effectively and efficiently is crucial to supporting Kuwait’s transformation into a high value-added, high-income economy.”
Banking on digitalisation
But the health of the financial system (and, indeed, Kuwait’s wider economy) does not just rest on the development of sukuk: it also depends on how such financial instruments are presented to the public. This is where technology – and the sector’s uptake of it – comes into play. “Now, clients across every industry want to be constantly connected in all aspects of their lives,” Bukhamseen told World Finance. “The banking industry must meet these demands by offering new services that deliver an enhanced client banking experience – one that is armed with innovative technology. Today, the banking world is being disrupted by new technology and digitally sophisticated clients, driving banks to innovate in order to maintain customer loyalty. By embracing technology, banks can continue to stay relevant and set themselves apart in an increasingly digital world.”
Put simply, technology is essential in a market dominated by young, digitally savvy consumers – according to the UN, over 70 percent of Kuwait’s population is under the age of 35. Technology is also a way of reaching the underserved, with access to payments, transfers and other transactions made easier through the introduction of digital systems. Such transactions tend to involve lower costs for both the provider and the customer.
With the help of the CBK, which introduced new regulations to promote innovation in electric payment operations last year, Kuwait’s financial industry has already taken several steps to implement digital solutions. Further, according to KPMG’s GCC Listed Banks’ Results: Embracing Digital report, this trend is set to continue in the near future: “The digital agenda for banks in Kuwait is expected to increase as Kuwaiti banks continue to invest in digital banking channels, infrastructure and solutions. This will involve investments in new-age technologies, such as intelligent automation, blockchain and artificial intelligence. It is anticipated that Kuwaiti banks will see an increased acquisition of customers through digital channels across most product offerings.”
But, as Bukhamseen told World Finance, banks can’t do it alone: “KIB believes that collaboration between fintech firms and banks is essential in order to advance processes and banking offerings. These collaborations have already paved the way for improved service and technological innovations.”
A client-centric strategy
In order to keep up with this changing landscape, KIB has made significant changes to the way it utilises technology: at the beginning of 2018, the bank implemented a new, client-focused digital strategy, introducing several new services to its online and mobile banking platforms. Among the most significant updates was KIB’s new multichannel contact centre – the first of its kind in Kuwait. The centre provides a centralised system for monitoring, queuing, routing and reporting transactions, improving services and revolutionising the customer experience.
KIB’s youth empowerment project encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs
The bank has also introduced a new ‘cardless’ ATM withdrawal system that enables users (including non-customers) to withdraw cash using their mobile phone number or civil ID. Other developments include an interactive voice response system and a live chat service, which provide clients with access to most of KIB’s services via a visual interface rather than just a voice-activated, self-service one. More recently, the bank launched a video call tool, enabling clients to complete a number of transactions face to face with a service representative, without having to go into a branch.
Of course, it’s how these services are accessed that is of the essence. With the aim of making its interface more convenient and user-friendly, KIB undertook an ambitious overhaul of its website. The new design features various advanced aspects to increase accessibility and meet the banking needs of all of its customers. For example, a special text-to-speech function has been introduced for those with reading difficulties.
Mobile compatibility is also an important consideration for any company making the move into the digital sphere. As such, KIB has used Unstructured Supplementary Service Data to ensure all of its clients can access the website, regardless of how new or old their phone is. The updated mobile website allows for all of the essential banking functions to be carried out on even the most basic of devices, from viewing account balances to paying credit facilities and transferring money between accounts.
“By incorporating more digital solutions, we want to deploy services across all channels and become a necessary extension to clients’ everyday lives,” Bukhamseen said. “We are putting the customer at the heart of everything we do, as clients continue to seek exceptional, personalised experiences.”
Digitalisation also comes with challenges, though – not least concerns around cybersecurity. Fortunately, the Kuwaiti banking sector is working hard to minimise risk, and KIB is no exception, having made data protection its priority through a series of new measures. This includes the introduction of a 3D secure authentication service, which is designed to offer an additional layer of protection against fraud during payments, and other software elements to pre-emptively combat and deter potential threats.
The bank has also established a dedicated information security steering committee – chaired by the CEO – to constantly monitor information security across the company and keep an eye on any security breaches in the wider industry to help protect KIB from similar threats. Further, the bank has implemented the internationally recognised ISO 27001 standard to ensure it is up to date with best practices. KIB has received several accolades in recognition of these security measures, including Cybersecurity Professional of the Year, Middle East, and Cybersecurity Team of the Year, Middle East, at the Cybersecurity Excellence Awards 2018, reaffirming the company’s commitment to its customers and their privacy.
The whole works
A successful business isn’t simply defined by the actions it takes to improve its profit margin. Central to any good business is a commitment to the employees within it – something that KIB has fully embraced. “For continued success in any industry, organisations must invest in their people,” Bukhamseen said. “Investing in the long-term development of human capital helps maintain a competitive edge both locally and regionally, and fosters a strong reputation for the industry as a whole. As one of the most valuable components of any organisation, investment in human capital is a necessary step in ensuring competitiveness in a changing market environment.”
KIB has introduced several policies to support its employees and the wider local workforce, nurturing and developing talent in the banking sector through various training programmes and workshops. These range from leadership skills sessions to classes focusing on specific roles and functions, with the ultimate aim being to develop its employees’ future career prospects. In 2018, more than 700 employees took part in these training programmes; as of September this year, nearly 600 – covering all divisions and levels within the company – have already participated.
“Human capital continues to play an increasingly critical role in the implementation of a bank’s future strategy, and KIB’s human resources department works hand in hand with the bank’s overall objectives to achieve a common goal, anticipating business needs and overall business direction,” Bukhamseen explained to World Finance. “The future will belong to those who pay attention to effective human capital management as an essential criterion for growth.”
It’s not only a case of training existing talent, though: recognising and recruiting the right individuals is just as important to any business wanting to boost its bottom line, create an efficient, cohesive company culture, engage and motivate staff, and provide the highest levels of customer service. “When employees are motivated and engaged, absenteeism and employee turnover are reduced, increasing productivity and efficiency, and improving overall results,” Bukhamseen said. “KIB has set forth clear, all-encompassing strategies with the goal of attracting qualified, talented individuals and matching them with career opportunities that fit with their professional aspirations. This ultimately allows them to grow and develop.”
A pillar of society
In recent years, financial institutions across the globe have been establishing and enhancing their corporate social responsibility programmes to the benefit of the wider community. Bukhamseen believes such an approach is essential to any organisation hoping for long-term success.
“In addition to providing a number of financial services, banks play a key role in community development by empowering youth, spreading fundamental financial and banking knowledge, and serving as a long-term partner in their everyday lives,” he said. “Today’s interconnected world has highlighted the influential role that financial institutions play in their local communities. As a corporate citizen, KIB focuses on addressing a diverse range of social issues, underscoring its integral role as a national financial institution.”
With the aim of supporting and bettering the Kuwaiti community, the bank has implemented a social responsibility programme based on four key pillars: financial literacy, youth empowerment, positive social impact and community development. KIB’s flagship financial literacy programme aims to promote financial and economic education through school visits and other means. By introducing students to the basic principles of saving, spending and money management, the project is designed to ensure younger generations grow up with a heightened awareness of financial products and the banking industry. This empowers pupils to propel the economy forward while improving financial inclusion and banking penetration.
The bank’s youth empowerment project, meanwhile, encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs. Beyond that, projects span fields as diverse as arts and culture, health, sports and the environment, with the overarching goal of having a positive social impact and developing communities throughout Kuwait. All of KIB’s projects tie in with the bank’s underlying aim of putting the customer first – of recognising them as an integral part of the business and reaching out to them in innovative ways that set an example for others in the sector.
“We believe this commitment brings benefits to both the organisation and the community,” Bukhamseen said. “Those benefits are manifold – it’s about uniting everyone while reinforcing the bank’s reputation and establishing it as a true partner for its clients. Time and time again, KIB has proven its dedication to meeting both the growing needs of its customers and the social needs of the community in the hope of accelerating Kuwait’s development across all areas.”
KIB’s ultimate goal is to develop Kuwait as a whole, and Bukhamseen believes banks can work together to achieve this aim: “The banking sector has always been the backbone of economic development in any country, providing financing to both the private and public sectors. Acting as intermediaries, banks channel funds from savers to investors in an efficient manner, enabling a more productive allocation of capital and higher income growth.
“Countries with a stable financial industry are generally met with faster, more sustainable economic growth than those in a more precarious position. A thriving banking sector also means a greater availability of capital for investment, presenting the opportunity for organisations to direct resources in a way that stimulates economic growth. Additionally, banks provide specialised financial services, reducing the cost of obtaining investment information, boosting the efficiency of the overall economy and driving GDP-per-capita growth.”
The Kuwaiti Government is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects
Among the sectors that hold the most potential for both private and public investment is, of course, real estate. As a former specialist in the field, KIB continues to focus a large portion of its efforts in this area. “Kuwait’s real estate market has witnessed outstanding performance in 2019,” Bukhamseen said. “In the absence of other investment opportunities, real estate continues to provide significant profitability and reel in investors. Over the years, the market has found itself in a position of importance with regards to economic change, and has played a pivotal role in transforming the built environment. With megaprojects and new cities at its core, the real estate market will have a profound impact on the national economy moving forward, as many sectors and industries will depend on it.”
The sector isn’t without its challenges: for instance, it still struggles with significant information gaps and insufficient data, which affects the investment decisions of individuals who want to buy real estate. Accessible, timely and accurate reports from independent bodies are also lacking, presenting hurdles to market regulation and slowing the sale and purchase of properties.
To help combat these issues, KIB has a dedicated real estate appraisal division (READ) that brings together a team of qualified specialists to offer a variety of services, including property management, economic feasibility studies, cost estimation and real estate appraisal. Drawing on the bank’s long-standing expertise, READ uses a combination of approaches to determine the real value of a property. It has served as a key source of information for a number of government entities, banking institutions and real estate firms, providing in-depth reports on the local market and offering insight into current trends to help customers make the right property decisions.
A site more
According to Bukhamseen, there are further challenges to potential homeowners, real estate developers and investors in Kuwait – not least a shortage of land. “A lot of land is either unsuitable for construction or in areas that do not appeal to buyers,” he told World Finance. “This means prime spots are sold at a premium.”
Fortunately, the country is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects that come under the far-reaching Kuwait Vision 2035 development plan. Announced by the government in January 2017, the plan was drawn up with the aim of further diversifying the economy and reducing its dependence on oil production at a time of volatility and instability. Its goal is to transform the country into a leading financial, commercial and cultural hub over the coming years, scaling back public investment and increasing the private sector’s influence.
The Kuwait Vision 2035 plan focuses on the development of seven key pillars: public administration, economy, infrastructure, living environment, healthcare, human capital and global position. Ultimately, though, it aims to create a favourable business climate and prepare the younger generation for more private sector involvement in the future. Currently, its most crucial elements concern infrastructure – notably, the construction of bridges, roads and government buildings, as well as larger-scale projects such as new cities. The latter, in particular, will bring huge opportunities for private investment.
Projects already under construction include: a new rail network; a metro system; a regional highway; a university campus; Kuwait’s largest housing project to date; the biggest hospital in the Middle East; and an extension to Kuwait International Airport. The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is also scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City. A whopping $100bn has been put aside by the government to support these projects in the next few years, with the aim of quadrupling the government’s total revenues by 2035.
“The real estate market is pivotal to the Kuwait Vision 2035 development plan, offering ample opportunities for private sector participation and providing a boost to related industries,” Bukhamseen said. “Currently, the Kuwaiti Government is focusing on encouraging more private investment in the real estate market, which has started to yield positive changes. In addition to reforming laws, the sheer number of major infrastructure projects currently underway is contributing to market momentum.”
Bukhamseen believes the country’s high per-capita income (see Fig 3) is also supporting this growth, with individual investors flocking towards the real estate market for investment opportunities – particularly the residential sector, where sales are valuable and frequent. With greater investment comes increased profits for the likes of KIB, which, in turn, helps such institutions achieve their individual goals and support Kuwait’s wider economy.
While there are still significant challenges to overcome, these ambitious moves signify a sea change for Kuwait and its private institutions. Combined with an advancing march towards the digital world, they represent a turning point in the history of a country that has depended almost solely on its oil exports for decades.
For banks willing to adapt to such a change, it’s an incredibly exciting time – there are more opportunities in the sector now than ever before. Financial institutions have the power to shape the future of the country by educating members of the younger generation and empowering them to successfully lead Kuwait’s changing economy. How they go about doing so remains to be seen, but KIB is one bank that has fully embraced the new opportunities, leading Kuwait’s financial sector into the future with confident strides.
Global merger and acquisition (M&A) volume stood at $842bn in Q2 2019, representing a 13 percent drop from the previous quarter. According to preliminary data from Refinitiv, this figure would have been significantly lower were it not for a flurry of US mega deals.
Around the world, M&A activity has suffered as a result of escalating geopolitical tensions. Dealmaking in Europe totalled $152bn – down 54 percent from a year ago – while Asia saw M&As decline by 49 percent to $132bn. By comparison, US dealmaking witnessed only a three percent drop, falling to $466bn.
Cross-border M&As have slowed as a result of global trade tensions, with buyers preferring to seek acquisitions in their domestic markets
The US’ relatively strong M&A performance can be attributed to a number of mega deals that took place in the past three months. These included the $121bn merger between United Technologies and the US defence contractor Raytheon, and US drugmaker AbbVie’s agreement to acquire Allergan for $63bn.
However, these mega deals, and the level of sector consolidation they represent, have raised some concerns. The United Technologies-Raytheon merger, for example, would be the biggest in US defence sector history, but President Donald Trump has warned that the deal could ultimately harm competition.
Notably, cross-border M&As have slowed as a result of global trade tensions, with buyers preferring to seek acquisitions in their domestic markets instead. Reuters reported that it has been more than 400 days since a cross-border deal worth over $20bn was announced.
The slowdown in global M&A activity is predominantly a reflection of sinking confidence due to geopolitical risks. It’s possible, though, that US dealmakers have experienced a comparative confidence boost as a result of growing cash reserves and a more relaxed regulatory environment. However, regulators in the US should be careful to ensure that this trend of consolidation does not stifle competition at home.
On June 25, the MSCI announced it would upgrade Kuwait to its main emerging markets index in 2020. The MSCI, the world’s largest index provider, previously classified Kuwait as a frontier market. Its decision to alter the country’s status could attract billions of dollars of investment from passive funds.
The new classification comes after enhancements were made to Kuwait’s equity market, making it more accessible to international institutional investors. In 2017, for instance, Kuwait began its Market Development Project. Since then, it has removed foreign ownership restrictions on listed banks and simplified investor registration requirements. The country also plans to introduce omnibus accounts by November 2019, allowing foreign investors to trade while remaining anonymous. This would grant international investors the same privileges that local Kuwaiti investors have today.
The MSCI’s decision to alter Kuwait’s status could attract billions of dollars of investment from passive funds
Mohammad Al-Osaimi, the acting CEO of Boursa Kuwait, the country’s national stock market, welcomed the MSCI’s decision: “[The] MSCI’s reclassification of Kuwait to emerging markets [status] represents a recognition of the instrumental role Boursa Kuwait played in improving market access and efficiency… and strengthening investor confidence over the last two years.”
The inclusion of the MSCI Kuwait Index will involve nine stocks being added into the MSCI Emerging Markets Index, putting the country’s weight at about 0.5 percent of the index. Kuwait is the only country expected to see an upgrade of this kind and is just the fourth Middle Eastern country to obtain the classification, after the UAE, Qatar and Saudi Arabia.
The MSCI also announced that it would start a consultation on reclassifying the MSCI Iceland Index to frontier market status. Although a subset of emerging markets, frontier markets are considered to be riskier and less liquid. The MSCI has warned that the same consultation could be launched for the MSCI Peru Index, which is also at risk of losing its emerging market status.
On the weekend of June 8-9, finance leaders from around the world gathered for the G20 Finance Ministers and Central Bank Governors Meeting in Fukuoka, Japan. In its final communique, the group stated that trade and geopolitical tensions had “intensified”, but remained noticeably muted on the US-China trade conflict.
“Global growth appears to be stabilising and is generally projected to pick up moderately later this year and into 2020,” the announcement read. “However, growth remains low and risks remain tilted to the downside. Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks and stand ready to take further action.”
The G20’s suggestion that growth is stabilising comes in spite of the IMF warning that the trade deadlock between China and the US could cut global output by 0.5 percent
The group’s suggestion that growth is stabilising comes in spite of the IMF warning that the deadlock between China and the US could cut global output by 0.5 percent in 2020. In fact, the collective’s response to the superpowers’ trade dispute was conspicuous by its absence, with the group reportedly removing a clause included in an earlier draft of the communique addressing the “pressing need to resolve trade tensions”. Further, there was no direct admission in the final announcement that the US-China trade conflict was hurting global growth. According to G20 sources quoted by Reuters, this came at the insistence of the US.
Another key takeaway from the summit was the promise to crack down on tax loopholes. The leaders present at the summit agreed to compile common rules that would close loopholes that allow global technology firms like Facebook and Google to reduce their corporate tax payments. Such companies provide services across international borders and can therefore book profits in low-tax countries. While the proposal would increase the tax bills of large multinational firms, it could also make it harder for countries like Ireland to attract foreign investment.
Regarding a potential end to the US-China stalemate, the summit in Fukuoka left many questions unanswered. According to US Secretary of the Treasury Steven Mnuchin, the “main progress” is likely to be made when presidents Donald Trump and Xi Jinping meet at the Osaka G20 summit later in June.
More than 200 of the world’s largest companies expect that climate change will cost them a combined total of $1trn, according to a new report by the CDP. The research, which was published on June 4 and analysed data from major corporations, including Apple, Unilever and JPMorgan Chase, revealed that much of this outlay is expected to come in the next five years.
The firms surveyed attributed the cost to extreme weather conditions, the pricing of greenhouse gas emissions and the need to update company infrastructure. For example, Google’s parent company, Alphabet, expects rising temperatures to increase the cost of cooling data centres, while Banco Santander Brasil anticipates that severe droughts could prevent borrowers from repaying their loans.
The CDP has warned that the $1trn cost disclosed in the report may only be the tip of the iceberg
The agency behind the report, the CDP (previously the Carbon Disclosure Project), represents pressure groups, fund managers, central bankers and politicians who believe climate change poses a significant threat to the financial system. In the report, the CDP noted that companies still have a long way to go in terms of evaluating climate risks. The $1trn cost disclosed, it warned, may only be the tip of the iceberg.
Many companies also predict that climate change will present significant opportunities. Across the 215 companies surveyed, an estimated $2.1trn worth of possible opportunities were identified, mainly as a result of increased demand for electric vehicles and investment in renewables.
That said, the CDP warned that some companies could be overstating the potential benefits and underestimating the risks. For example, fossil fuel companies predicted opportunities in the low-carbon economy to be worth $140bn – more than five times the $25bn value of the risks they identified. The CDP advised investors to be wary of such overconfidence, especially considering the fact renewables pose a significant threat to fossil fuel companies’ current business models.
Firms are under more pressure than ever to disclose the cost that climate change could have on their businesses. In October 2018, the Network for Greening the Financial System called on the financial sector to improve its transparency around climate risks. Interestingly, the CDP noted that financial services companies tended to be more forthcoming about the impact of climate change than other industries. Certain sectors, it would seem, are beginning to acknowledge that failure to disclose climate risks to shareholders and regulators could prove even more costly in the long term.
The US has announced the sale of 34 ScanEagle drones to its allies in the South China Sea, in a move that could increase its intelligence gathering capabilities amid growing tensions with China. The drones are unarmed, but are best known for their surveillance capabilities, which will enable US allies to better monitor – and potentially curb – China’s influence in the region. The Pentagon confirmed the drones were sold to Malaysia, Indonesia, the Philippines and Vietnam for a total of $47m on May 31.
At the Shangri-La Dialogue, a regional defence summit in Singapore, acting US Defence Secretary Patrick Shanahan said that Washington would not “tiptoe” around China’s behaviour in Asia. The South China Sea is a region of great strategic and economic importance, with $3trn worth of trade passing through its waters in 2016 alone. China lays claim to almost the entire region, and has built and armed artificial islands in order to reinforce this claim. The US, however, is committed to enforcing a free and open Indo-Pacific.
Under the Trump administration, the US has grown its naval presence in the South China Sea by conducting an increasing number of freedom of navigation exercises
On June 2, China’s Defence Minister, Wei Fenghe, delivered a strong rebuke of the US. Speaking of both the ongoing trade war between the countries and of US interference in the South China Sea, he said that the Chinese Government “would not let others prey on or divide us”.
Under the Trump administration, the US has grown its naval presence in the region by conducting an increasing number of freedom of navigation exercises. One such exercise occurred last month, when two US Navy warships sailed near islands claimed by China in the South China Sea. This particular exercise came at a sensitive time for US-China relations, as the US had just retracted China’s invite to a major US-hosted naval drill. China has since condemned the operation.
The recent drone deal is likely to escalate tensions between the two superpowers. China will almost certainly perceive any reconnaissance missions conducted by ScanEagle drones as a hostile action against its territory and could retaliate in turn. As the number of provocative vessels in the South China Sea increases, so too does the threat to peace in the region. With more opposing aircraft and warships coming into close contact, there is a heightened risk that one day a misunderstanding could develop, igniting a more serious conflict.
Almost 20 years ago, George A Akerlof, winner of the 2001 Nobel Memorial Prize in Economic Sciences, and Rachel E Kranton, Professor of Economics at Duke University, published a paper in the Quarterly Journal of Economics titled ‘Economics and Identity’. The paper outlined an exciting new concept for economic analysis. The theory – one that had too long been missing from the field – explains that people make economic choices based not just on financial incentives, but also on their identity. In doing so, they avoid actions that would conflict with their own concept of self.
People make economic choices based not just on financial incentives, but also on their identity
Identity economics put forward a school of thought wildly different to what was believed at the time. Kranton told World Finance that she believes her academic background in Middle Eastern studies and her husband’s work on political identity in Egypt were significant influences. She noticed a marked difference between how her husband’s field and her own dealt with identity: “The way we define who we are, the way we define who others are, the way that impacts how we make decisions, was not present [in economics].”
This absence resurfaced when Kranton’s former PhD advisor, Akerlof, published a paper that attempted to deal with the issues arising when people from different social groups interact. “He didn’t have this as a central notion of identity,” Kranton told World Finance. “So I then wrote to him and said, ‘Well I really think this is what is needed in such a study’, and that’s how the collaboration started.”
Kranton described what followed as a “very long and torturous process”, due to the complexity of studying identity across so many fields – from history and anthropology to philosophy and the social sciences. “The big difficulty was how to translate this very, very rich intellectual tradition in so many places into something that would work in an economics context and economics model.”
Explaining this complex notion in a simple – but not simplistic – way was a vital part of applying it to economic analysis. “A historian would say we’re too simplistic, for example, but [it needed to be] sufficiently rich so that we did not throw away the richness of the concept, but it was sufficiently tractable so that economists may be able to work with it and understand it,” said Kranton.
To apply the theory to economics, the pair had to create a new utility function – a central concept in economics that measures an individual’s preferences over goods and services. “That’s the workhorse of economics and so we thought we would use that and modify it or add ingredients, and explain these ingredients in a sufficiently precise way so that it could be operationalised,” Kranton explained.
Often in economics, the example of apples and oranges is used to explain utility function. In other words, one’s preference of apples over oranges will be considered, along with price, when making a purchase. For identity economics, the example of meat and vegetables is of greater use, because this choice may not necessarily be confined to one of taste. One’s identity also plays an important role. Namely, if someone is vegetarian, or has an ethnic or religious background associated with vegetarianism, this choice is linked to who they are and how they understand their place in the world.
“You’re moving from preferences, which is ‘I like this’ versus ‘I like that’… to actions that have a social and cultural meaning to them,” Kranton told World Finance. This model works with all kinds of choices we make. In a division of labour context, for example, it’s ‘I wanted to stay home and look after my children’ versus ‘I want to rejoin the workforce after maternity leave’. Essentially, how someone is raised influences what they believe is appropriate or inappropriate. “If I’ve grown up in a particular context then I will think it’s more or less appropriate for a woman to be taking on a leadership role in an organisation,” said Kranton.
This move from preference to what one should do or how they should act is a key tenet of identity economics. “That’s the big leap – your preferences become socially driven,” said Kranton. “So we have arguments over whether it’s appropriate for women to do X, Y and Z. We argue whether it’s appropriate to raise animals for food, and not just on economics grounds, on other grounds – religious grounds, ethical grounds [and] so forth.” As these preferences are socially driven, they can change over time – another departure from the classic utility function in economics.
Gender politics is a great example of the theory in action, particularly regarding how norms have changed over the years. What’s appropriate for a woman today, for example, is very different from what was appropriate just two generations ago. “It’s not that the brains and the bodies of women have changed,” said Kranton. “It’s how we understand gender [that has changed].”
According to the theory, deciding to work hard in school or picking a profession isn’t just about personal taste. Such decisions are invariably linked to how one sees oneself. Kranton told World Finance: “To say ‘how does identity affect decision-making?’, it’s just an ingredient that more or less consciously people have in their minds when they decide whether to buy a product, to pursue a career or to start a family.”
Kranton provides the example of men who work as nurses. Despite requiring stereotypically masculine traits such as physical strength, nursing is broadly viewed as a feminine profession entailing so-called feminine traits, such as being caring and nurturing. Though the demand for skilled jobs in the US persists, the nursing profession remains understaffed due to a common unwillingness of men to enter the field. “Sometimes it’s not necessarily conscious and reasoned in that sense, but there are a lot of men who would feel that [being a nurse] is not something [they] would do.” The problem is, of course, related to how society views masculinity. But, as identity economics teaches us, concepts of masculinity change over time, making it likely that more men will be drawn to the field in the future.
Micro and macro applications
Understanding identity economics can be tremendously beneficial on the micro and macroeconomic level. For instance, assessing how employees identify themselves within a company and how strong corporate culture is can make a marked difference in terms of performance and loyalty. “You want somebody to feel invested in their company, you want people to feel part of it, you want them to see their success as the company’s success,” Kranton explained. The aim, therefore, is to ensure people feel like they play an important role in an organisation, that it is a place they feel proud to work at, and that objectives align throughout. This, again, is a notable difference from traditional economics, in which work incentives fail to acknowledge the vital role that company culture plays. Kranton said: “A lot of management folks will know this and, in fact, we read a lot of management literature, but the economic modelling just didn’t have this as an important variable.”
Akerlof and Kranton use the military to explain how motivational a strong sense of identity can be, even with the flat wage structure and relatively low pay of army roles. The extraordinarily strong sense of identity, work ethic and loyalty found throughout the armed forces cannot be explained by standard economic analysis. The military, as such, provides a number of important lessons. Kranton added: “In the military, you want people to have a very intense loyalty to your squadron, but this fighting unit also has to work in the service of the larger objective.”
This strong intra-unit culture can also lead to problems. For example, mistakes may not be reported to senior officers. “There’s these trade-offs that need to be managed in a particularly skilful way,” said Kranton. “But if you didn’t know that identity is a part of people’s work incentives, then you wouldn’t be aware that there are these trade-offs [that need] to be managed.”
The theory also applies to education. When students strongly identify with their school, they are more likely to work hard and continue their education at that institution. Teachers too are more inclined to help their students reach their full potential if they feel an alignment with their school. Education policy should, therefore, help schools establish an identity, a strategy that will see teachers and students working towards a common purpose, and will ultimately produce better results. On a bigger scale, Kranton noted: “[The] economy is going to be better off because then you’re going to be taking advantage of your human capital.”
Sense of self
According to the theory, our choice of identity may well be the biggest influence on the economic decisions we make. “Everything follows from it,” Kranton explained, referring to her career as an example. “I conceive of myself as an economist. A lot of my life choices follow from that. I could have conceived of myself as a different type of economist. I could have worked in a bank or on Wall Street, but I was more of a publicly minded person. That choice of who I am shapes the rest of my decisions.”
For most people, sadly, boundaries related to their identity impact their economic wellbeing. Kranton explained that all people exist within a social structure; childhood, ethnicity, race and class all feed into this construct. “You grow up in a place with a particular set of parents, a particular set of neighbours, a particular religious environment and socioeconomic strata, and in some sense that is very determinant, not of the opportunities you have, but how you think of yourself.” The social hurdles we encounter throughout life also shape how we think of ourselves and, as a result, the decisions we make.
How someone conceives of themself impacts how they perform at school, the career they pursue, where they live and what they buy. It all starts with identity. Knowing this can bring a greater understanding of what can be done to make improvements to a company, school and even the wider economy. Identity economics doesn’t just help us better comprehend our own economic decisions – it provides a foundation from which we can make the world a better place for one and for all.