Author: World Finance

Iraq contracts 0.5 percent under pressure from ISIS | Video

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The Islamic State of Iraq and the Levant, the jihadist group know as ISIL or the IS, will lead Iraq’s oil dependent economy to contract by 0.5 percent this year, according to IMF predictions. World Finance speaks to Baroness Nicholson about the country’s prospects after “40 years or more of massive horror”.

World Finance: Baroness Nicholson, 0.5 percent doesn’t actually sound that bad, and it’s not as high as initially predicted. So why have predictions changed?

Baroness Nicholson: Predictions have really changed because of the fall in the oil prices globally, and naturally Iraq as one of the key oil producers internationally is automatically affected. The massive invasion of what I would prefer to call the Daesh, the Arab term for ISIL, meaning the so-called Islamic State, has naturally had a great impact on the whole region.

The Daesh invasion has had a terrific impact on the poor city of Mosul and its inhabitants. Recall that Mosul was once, pre-Saddam really, the most booming city in the whole of Iraq, bar Basra, for trade and industry because of its unequalled access to the northern region, to Turkey, and of course in that sense to Iran when Iran is open for business again, and right up further with the Caspian Sea. So the loss of Mosul is drastic.

World Finance: What’s the economic situation on the ground today in Iraq in terms of figures?

Baroness Nicholson: Iraq as a whole has a very large income indeed, but the ministries are not yet able to offer the public services to the level of competence that the population has a right to deserve, so this is quite a gap in time and in actuality between the enormity of the funding pouring into the coffers of the federal government and its capacity to actually use it constructively.

If you think that Iraq has more or less been at war for 30 years, that is not surprising. So it’s taking Iraq time to get back on her feet in terms of services for her people. So I suggest that the enormity of the income, Iraq is the second biggest per capita, theoretically, income in the globe, and the government’s own capacity through the ministries to be able to deliver the services that money should allow them to deliver them to the same standard as other countries with developed economies, that is still lacking. That is the same throughout all 18 governorates.

World Finance: Well Al Jazeera reported that Iraq’s financial sector is facing recession. Did it ever actually recover from the US invasion?

Baroness Nicholson: Iraq has been at war for at least 30 years. Before that, the destruction of the head of government, the royal family, and the destruction of the whole system, which Saddam himself engineered, Iraq has been drastically unstable since then, ruled by terror and ruled by dictatorship. You look at the impact that the Daesh ISIL have had, their dictatorship, Saddam wasn’t very far off that in his last decade at least.

If you just look at health, Iraq had a really good health system, which it took off the British National Health Service system, and then that of course collapsed completely with the amount of war, civil war, invasions. No health system could have survived, and it hasn’t.
That’s why it’s very very difficult to pinpoint one single thing. It isn’t a single thing, it’s 40 years or more of massive horror, which has got worse and worse at particular moments.

World Finance: Well let’s look at oil production now. This is of course at the heart of Iraq’s economy, but OPEC has said that it’s not going to limit production, which means the oil prices are falling through the floor. So what sort of impact will this have on Iraq’s economy?

Baroness Nicholson: 80 percent of Iraq’s oil is produced by I think Shell and BP. But you see the enormity of the income that Iraq has already got, and will still be pouring in, and the federal government’s relative inadequacy in terms of expenditure systems, frankly if they earn a small proportion of that, the country would be much better off in terms of service provision and the population would have all the electricity they needed, and so on.

World Finance: And how are other industries faring?

Baroness Nicholson: Very open for bids and contracts is construction and infrastructure. After this four decades of destruction, my goodness, building is needed. This problem with the jihadists is not going to go away tomorrow. This is going to take quite a long time. So housing is needed. Schools are needed. Many of this deserted population is living in schools, and many buildings are needed as fast as possible, but they must be well done.

World Finance: What can be done to attract private investment, and do the rewards actually outweigh the risks?

Baroness Nicholson: The trade industry, professional services are sorely needed, and it is essential to get in there and do it. It makes business sense, it makes commercial sense, and it makes huge sense for the population of Iraq and thus for the shareholders of the companies in question.

World Finance: How does it make business sense?

Baroness Nicholson: Because Iraq has such a huge possibility of business, and industry. Probably one of the biggest unexplored major energy countries of the globe. Risk is a part of life, risk is with us always everywhere. In that sense, I’m sorry to say that most energy countries do now offer quite a significant degree of risk. Perhaps they always did but we just didn’t notice it so clearly. Libya, Nigeria, and so on, sadly there is risk everywhere.

World Finance: Well the World Bank ranks Iraq 156th out of 189 countries in its ease of doing business report. So what can be done to make it better on this scale?

Baroness Nicholson: It is never easy to do business in a country that has come out of dictatorship. Because dictatorship stops people not just taking risks, but actually making decisions. So people are scared stiff to make decisions in a post-dictatorship country.

World Finance: So how do you see Iraq developing in the future?

Baroness Nicholson: Iraq will undoubtedly develop, and I believe that business and industry, particularly form the West, with the standards that we have adopted in the West with the anti-briberies act here and in the USA, with the World Bank standards, I believe we can transform Iraq for both her people and her businesses and her industries.

All the ethics that come in with a good business, those are the things that can ground a population and can assist a government in starting to recognise what it should do, and how it can do those things. So business and industry and professional services are the key to success.

The highs and lows of Randall Kroszner’s life at the Fed | Video

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Hard to believe that it was just a few years ago that the US faced economic meltdown. One of thek key decision makers at the time was Randall Kroszner; he speaks to World Finance about the decisions they made, the loss of Lehman Brothers, and the one thing nobody saw coming.

Hard to believe that we were, just a few years ago, facing an economic meltdown in the United States. Now one of the people at the helm, making the big decisions, joins me now – ex-Governor of the Federal Reserve, Randall Kroszner.

Word Finance: Do you think that all of the right decisions were made by Bernanke at the time?

Randall Kroszner: Well, I was one of the fellow Governors, along with the Chairman, making these decisions – so you’re not going to get an unbiased view from me. So we obviously tried to do our best in very difficult circumstances. I think the emergency liquidity policies that we undertook, the various lending programmes, the international swap agreements that helped to prevent meltdown in other countries around the world, that had very strong demand for dollars but didn’t have them – I think those are very helpful in one, fighting off deflation which is something that central banks can do if they’re active about it, but sometimes they’re not as focused on it. And two – avoiding more broadly a kind of repeat of the great depression. The unemployment rate in the US went up by 10 percent during this crisis – during the 1930s it was over 20 percent. So I think we did a lot of things that helped to prevent the crisis from being nearly as bad as it was back in the 1930s.

Word Finance: Now, if you could go back – what would you change?

Randall Kroszner: So one of the things that we didn’t have enough insight into were some of the interconnections in the economy. And so we were focused on regulating banks and focused on banking institutions. Other regulators were focused on other types of institutions. And there wasn’t enough information exchanged between them to see the interconnections, to see those vulnerabilities, those fault lines and weaknesses.
I wish we could have had more foresight to say, well rather than us just look at our institutions and you just look at your institutions, let’s look at the interconnections and relationships between them – and that’s really where the weaknesses were. 

Word Finance: Do you think that there was a bit of naivety in terms of impact the housing crisis played towards the toppling effect of the US system?

Randall Kroszner: So one of the things we were doing was international comparisons, to see how the US housing market was doing relative to other countries. Because obviously housing prices were moving up reasonably rapidly. But we, as well as the IMF, did some of these comparisons and the US I think was even in the top five of the countries seeing housing price increases.
That gave us a false sense of confidence that the US was not an outlier. The challenge was that there was a risk factor in housing around the world and it wasn’t just us in the US, but people in Spain, people in many other countries didn’t see that there were these challenges there also.

Word Finance: Should we be mourning the loss of the Lehman brothers or is the US really better off without it?

Randall Kroszner: Well certainly the Federation, as well as other regulators and supervisors, were trying to find a merger partner for Lehman Brothers – and that didn’t work. There were some challenges with the UK Government and being able to implement a takeover by Barclays, and so we were left that weekend dealing with Morgan Stanley, Goldman Sachs, Merrill Lynch and then there was no merger partner for Lehman Brothers.

The key challenge was what would be the consequences for the markets more broadly? And this goes back to the other answer that I gave you – the consequence was in the money market funds, which we didn’t see because we didn’t regulate those funds. People weren’t looking to see if there was a concentration of Lehman Brothers debt obligations in one particular money market fund, that fund got into trouble and then that triggered trouble throughout that industry. And so if we had been able to see those interconnections more clearly earlier, we might have been able to prevent Lehman Brothers demise from causing such problems throughout the system.

Although I think Lehman Brothers was really much more of a symptom rather than a cause. I mean even if something could have been done to put a band-aid on Lehman Brothers – the vulnerabilities were there in the system. They needed to be addressed much more fundamentally and something like the Troubled Asset Repurchase Programme, the TARP Program, which injected capital into the financial system, was crucial – and without that it would have been very difficult to stabilise the system. We might have seen another institution, perhaps a larger institution, get into trouble.

Word Finance: Do you think the right banks were bailed out?

Randall Kroszner: So we were dealing with the challenges as they were coming, and certainly they were coming quite rapidly, and thinking from a system point of view what would be the best to stabilise the system. Because by doing that we could prevent a meltdown, a repeat of the great depression that would have led to a 20 percent unemployment rate, housing prices falling by 60 or 70 percent rather than only 20 or 30 percent. So we were trying our best trying to try and deal with the challenges as they came along.

Word Finance: We’re now a few years out since this crisis happened. Did you ever expect the US economy to be where it is today?

Randall Kroszner: When I left the Federation in early 2009 I don’t think anyone sitting around the Federal Open Market Committee table, making decisions about interest rates, would have thought that in 2014 the debate was – well when in 2015 would interest rates rise – that they would be so long in coming up. We brought rates down to roughly zero at the end of 2008, and that six or seven years later interest rates would still be at zero – I don’t think anyone really foresaw that.

World Finance: So how are you feeling in terms of progress – where do you think the US stands to go a year from now?

Randall Kroszner: So I think it was very important that the Federation did what it did to prevent a repeat of the great depression. But central banks can do the necessary job to prevent the deflation, or in other periods to prevent high inflation – but they aren’t sufficient for getting the economy going.

Fiscal uncertainly is something that weighs heavily on businesses uncertain of what their taxes are going to look like over time, uncertainly on regulation – a lot of uncertainties surrounding the President’s business healthcare program. And so I think that’s been slowing us down. If we can deal with some of these issues, I think that will help to put us on a more solid foundation.

I wish I could say everything’s solved now – but it’s a little bit too early to tell whether the elections are going to solve problems. But we do seem to be making progress in the labour market – we do seem to be making progress more generally with production. But we need to restore confidence in investment to get productivity to grow, to get wages to grow and really come back more strongly.

“Without financial inclusion, you can’t create a middle class” – David Schwartz at Felaban 2014 | Video

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The power-players have gathered for yet another year at Felaban. With nearly 2,000 representatives from financial institutions from markets around the world present, what are the key themes being explored by developed and developing nations? David Schwartz, CEO of FELABAN’s key partner, the Florida International Banker’s Association, tells all.

The power players have gathered for yet another year at Feleban. Here to tell us about some of the highs and lows of the event – David Schwartz.

World Finance: David, I know thousands of people who are attending this year – bankers from all over the world. Tell me, what were some of the big takeaways for you?

David Schwartz: Well you’re right – what we’ve estimated so far is about 1800 participants from 50 countries around the world. So as you can see this is a central meeting point for bankers from around the globe, to do business in Latin America and I think that’s what underlines the importance of this event.

World Finance: Tell me – how central of a role does this particular event have for the banking sector in Latin America?

David Schwartz: Well for Latin America it’s of the up most importance because what your looking at are banks coming from around the world – Europe, Asia, the US – seeking to advance lines of credit and offer financing here for everything from trade finance to infrastructure projects. And this is what helps boost the economies in these countries, which have been struggling of late.

World Finance: So do you think there was any really big takeaway in terms of what significant steps need to be put in place? For instance from The Finance Minister of Columbia, who was speaking earlier.

David Schwartz: Well I think we heard two common themes. One was of course financial inclusion, which is very important in some of the poorer countries in Latin America, and without that you don’t create a middle-class. I think that was a very important note from the speech of the Minister.

The second was technology, because technology and those advancements will really help bring those people into the financial services industry. Not only to help them bank but also to help them create their own businesses – many of these people have ideas and they want to create them, but they don’t have the means to do it. And this will help them.

World Finance: Next year – Miami. What can we expect?

David Schwartz: Well next year we will be celebrating 50 years of Feleban, so I’m not going to release any secrets or unveil any secrets – but will prepare something very special to celebrate the 50th anniversary.

World Finance: Now reflecting on the Americas in general – as much as emerging markets need some of the developed economies, the developed economies need the emerging markets. Is that going to be a theme that runs through next years conference?

David Schwartz: That will always be a theme in every conference because while we talk about the developed nations, really today it’s only the US and maybe the UK, that have come out of the crisis with any type of future hope, in that the economies will remain stable. We see that Europe is struggling still. Japan today officially announced that they have entered into a recession. So we need trading partners, and Latin America has always been the top-trading partner for the US.

World Finance: Why do you keep going back to Miami – what is it about that community that really reflects the ambitions of the banking sector?

David Schwartz: Well we like to say that Miami is the gateway to Latin America, and in some peoples minds Miami is the capital of Latin America. Don’t say that to the Latin American’s because it could be offensive, but culturally and geographically we are the meeting point.

We are able to have events like Feleban in Miami, speak to them in their own language – people of their own culture are organising these events. In Miami of course it’s sunny all year round – we have the ocean. And most importantly for a lot of them, we have shopping.

World Finance: Ok now one last point – I know FIBA organises quite a few events around the banking sector, the anti-money laundering conference that’s going to be held is personally a lot of interest for me. Can you tell me, what can we expect from it?

David Schwartz: Well this has been a challenging year for the banks when it comes to regulation and compliance. We will be holding the 15th annual anti-money laundering conference on March 5th and 6th.

We have a lot of regulators that have reached out to us, and policy makers, they want to come and discuss the issues at the conference. And that’s always been the most important aspect of it. We have an open, free flowing dialogue between the industry, policy makers and regulators.

And given the current challenges, I think you’ve seen a lot of the rather substantial fines that have been handed out to banks for failures with their money laundering programmes – this is going to be a very important event, a very key event this year. Because we have regulators and policy makers issuing guidance saying banks really need to work better – and you have the banks and the industry of course saying we’re over regulated.

So we’re going to have a very interesting and perhaps controversial discussion on some of the main issues.

World Finance: David Schwartz, thank you so much for joining me today.

David Schwartz: And thank you.

Recession hits Japan; Latin America reacts | Felaban 2014 | Video

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The surprising fall into a recession – that’s how Japan’s current economic situation is being described by market watchers. BTGPactual’s Mauricio Gutierrez discusses Japan’s presence in Latin America’s vital infrastructure sector, and the possibilities that may lay in store as banks react to its new economic reality.

The surprising fall into a recession – that is how Japan’s current economic situation is being described by industry watchers. Here to shed light on what that means for foreign lending, Mauricio Gutierrez.

World Finance: The news has just hit, what do you make of it?

Mauricio Gutierrez: Well I think the financial situation in Japan has impressed us for quite some time. In Latin American markets where the Japanese banks compete, we have seen them to act very aggressively, to have cost of funds that are below zero sometimes, so that allows them to lend money to projects still at home, and I imagine other countries as well.

Very aggressively, we have seen them compete with us in our projects, in infrastructure projects, and we’re very impressed. I don’t think this news that we’ve just had of them going into a recession will change that, because if anything we will still see low interest rates in Japan, and very low cost of funds. So if there’s less activity in Japan, the likely scenario is that this aggressiveness outside of Japan will continue. 

World Finance: Do you see more opportunities coming out of Japan in light of the current destabilising economic situation that’s happening?

Mauricio Gutierrez: I see them very present in the Latin American markets, very aggressive. I don’t see that aiming down, the opposite. A week ago I just saw a very aggressive proposal from a Japanese bank to a project that we’re also approaching. So I think that will continue.

Maybe I’m being optimistic, maybe some of these banks will have problems at home that will affect their appetite overseas, but I think LatAm is a natural market for them to grow, they’re present in the main market. I think they will continue taking advantage of the growth that is coming out of this region. 

World Finance: It sounds like optimism abounds from your perspective. Mauricio Gutierrez, thank you so much for joining me today.

Mauricio Gutierrez: You’re so welcome. Thank you.

Is the US economy ready to end QE? | Felaban 2014 | Video

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As the US prepares to end its monetary easing programme, what potential financial stresses should the federal government keep an eye on? Former Fed governor Randal Kroszner talks unemployment, manufacturing and the tricky question of whether the US people have confidence to invest again.

As the US prepares to end its quantitative easing program, many question what is going to happen to the economy in the days, months, years to come. Former governor of the fed reserve Randall Kroszner joins me now. Thank you so much for joining me today.

World Finance: So as I said, what is going to happen, do you think the US is really ready to end this program?

Randall Kroszner: Well I think the fed felt that there had been enough progress in the labour market. The US economy was sturdy enough to stop the additional asset purchases. We have to remember that the fed’s balance sheet is now $4.5tn. It had been $800bn, so it’s dramatically larger. Even though they’re not purchasing more asset, they’re still providing a lot of support for the economy. 

World Finance: Absolutely. Now you were in charge when the 2008 financial crisis hit. Bernanke, many say, was quick to respond. Do you think that he put in the measures that needed to be taken at that time?

Randall Kroszner: We tried to act very quickly. One of the things that really haunted us was what happened in the 1930s when the shocks came and the fed did nothing. Milton Friedman, one of the great University of Chicago economists, had said that the depression became the Great Depression because the fed didn’t act, and so we were certainly not going to make that mistake. We undertook a lot of programs to avoid a deflation, avoid a repeat of the Great Depression. Was everything perfect? Certainly not. But did we avoid the worst outcomes? I think we did a reasonably good job.

World Finance: Do you think the labour market was hit too hard by the measures that were put in place?

Randall Kroszner: We were trying to provide support for the economy and for the labour markets. The shocks hit very hard across large and small financial institutions, people who owned homes, and in the US the main savings vehicle for people are their homes and they fell dramatically in value, so consumption was down, and it was a challenge overall. So we’ve had a slow recovery, but we’ve had a steady one. It hasn’t been as robust as we would like, but fortunately it’s been a bit stronger than many other major countries around the world. 

World Finance: So do you think that the US labour market is now poised to continue the slow but steady growth that we have been seeing?

Randall Kroszner: So I think that’s likely. There could be so many shocks that come in, there are so many geo-political uncertainties, whether it’s the Middle East or the Ukraine. We see what happened Vladimir Putin storming out of the G20. That doesn’t suggest that everyone’s working perfectly together. So there are lot of risks out there, but if there’s no major shock that comes in, it’s likely that the labour market will continue to recover, but we’ve still got a long way to go. There are a lot of people who are not in the labour force who would like a job, there are a lot of people working part time that would prefer to be full time.

World Finance: The precarious balance that we face right now, a lot of focus has been on what is it going to do to the wider economy? But as you and I know, a lot of American money that comes in is fuelled by a stable currency, but the currency rising, what is that going to do to manufacturers who rely very heavily on exports?

Randall Kroszner: We’ve had a lot of productivity growth in manufacturing in the US over time, and I think the manufacturing sector in the US will be reasonably robust to these changes in the exchange rate. The main challenge is going to be weak demand in much of the rest of the world.

World Finance: How do you think the US can stave off the impact of that in addition to the end of the monetary stimulus programs?

Randall Kroszner: So it’s challenging times, and as I mentioned, there could be a lot of geo-political shocks that come in. But it seems that there’s a gradual restoration of confidence, a gradual willingness to hire and hire full-time rather than part-time, although we still haven’t made as much progress there as we would like, and as those trends continue we should be on a reasonable path, not an incredibly robust path. The US is much less of a manufacturing economy than it once was, so we’re not as dependent upon manufacturing in our core growth, but it’s still an important contributor.

World Finance: Do you think we’re looking at a different USA, different qualitatively in terms of the mood, the willingness, risk projections. Do you think that people are really ready to take that next step to invest, to buy homes, that sort of thing?

Randall Kroszner: I think that’s a very important point, because there’s a lot of uncertainty, particularly on the fiscal side. People are not quite sure what taxes are going to look like, they’re not quite sure what the level of government expenditures are going to be, and we haven’t really lifted that cloud of fiscal uncertainty either in the short run or the long run, and that’s something that’s really been holding back investment, particularly by firms. 

If firms aren’t investing, they’re not going to be hiring as much, and if they’re not hiring as much and they’re not giving the capital goods for the workers to work with, we’re not going to see wage growth to be that strong, so I think that’s the major gap in US policy right now, is that fiscal uncertainty both in the short and long run. 

World Finance: And what impact is political divisions going to play in the future of the US economic system?

Randall Kroszner: If we’re optimists, we could say well this is what happens in the last few years of the Clinton administration, a Democratic president, Republican congress, and they actually got a lot of things done.
 
I’m not as optimistic now to be able to restore that kind of working together relationship, but I think both the Republicans as well as President Obama want to get some things done, and I think we’ll be able to make at least some progress on some small things. I don’t think the big issues related to fiscal uncertainty, the long term unsustainability of our spending trajectory, that’s not going to be resolved before the next presidential election, but I’m hopeful that we can make some contributions. We’ll see. 

Basically, if we can get a few small things done that will be a good sign, but if by the end of the year we can’t get anything done, then unfortunately it’s going to be business as usual.

How ready is Latin America for Basel III? | Felaban 2014 | Video

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Banking regulation is tightening worldwide, and Basel III is at the head of these changes. Ricardo Anhesini, Head of Financial Services for Latin America at KPMG, discusses the outlook for Brazil, Argentina, and the region as a whole in light of the tougher demands.

Banking regulation is tightening worldwide and Basel III is at the helm of those changes. Here to tell us whether Latin America is ready for the wave of change that’s upon it is Ricardo Anhesini of KPMG.

World Finance: Ricardo we know that Brazil of course was able to benefit from the commodities boom a few years ago. Now the economy has slowed down, the banking sector is going to play a key role is shoring up any sort of economic development. Do you think that the country is going to be able to build on the capital shortfall that has existed in the past and be able to draw investors in the future?

Ricardo Anhesini: Yes Kumutha, absolutely. Listen, the situation in Brazil is complex. I think Brazil has under delivered over the last couple of years, with respect to a measure of momentum, which was the general election. So we now have a new government, which happens to be the former government re-elected. But in general what we see is that the new government will look at what is necessary for the economy to catch up. The banking community will play a very important role in this catch up.

We have several things that need to be addressed. We need to look at infrastructure finance. We need to look at credit for consumption, especially because credit for consumption was pretty much the basis for keeping momentum in previous years in Brazil. And we also have to look at the global regulation, and the implications of global regulations in Brazil – as Brazil is normally following BIS guidance on that particular set of rules.

World Finance: So do you think Brazil is ready for these changes, as you discussed some of them that need to be made?

Ricardo Anhesini: I don’t think Brazil is ready – I think Brazil will be ready. You know, there’s a lot of expectation that came out from what happened in the election. But from what I heard this morning for example when we debated here at Felaban, the Brazil economy perspective from 2015 – 2020, it was quite encouraging. We heard from the economists a number of positive things about the current structure of the Brazilian banking system and how that can play a role in the future.

Over the last, lets say five to six years, the central bank was quite keen in being present, dictating and adapting the Brazilian rules to the global regulations. And that created some sort of protection to the Brazilian system and the Brazilian banks, and we had quite a consistent level of capital, getting ready to comply with Basel III. We have credit at a level that has grown a lot, as I said, but it’s still below average of the developed world.

World Finance: Is it the right type of capital to move the country forward?

Ricardo Anhesini: Absolutely. Brazil needs to get more investment, a higher level of investment either by local savings or getting investment from abroad. It’s absolutely imperative that Brazil, we meet leverage and delivery expectations, finance infrastructure, and be able to move from where we currently are manufacturing to a higher level, if we get higher levels of investments.

So you’re absolutely right, we need to get more capital and better capital. Now as far as it relates to capital movement in the financial institutions, in the financial system – this seems to be quite right. Our tier one level in Brazil remains high. From a Basel III point of view Brazil is one of the most prepared countries in the region. So we have to deal with other issues coming from different regulations. But on capital I think either on financial institutions, financial systems in general, I think we’re quite right.

World Finance: Let’s go from specific to general. Latin America as you said – robust economies, still there are some issues that riddle these economies. Anti-money laundering, anti-fraud – these are regulations that any country that wants to move forward, is going to have to make sure it is very responsive to the changes that Basel calls for, as well as the other regulatory partners. Are they ready?

Ricardo Anhesini: When you talk about anti-money laundering, when you talk about anti-corruption, owing that to the conduct codes and fair lending – all those strengths are already present in Latin America. Either because the national banks that play an important role in the region, or because the local central banks from Brazil, Mexico, Argentina, are looking at those regulations in a very relevant way, and putting them quite high at the top of their agendas for the banks to deal with.

If we talk about the humour of the banks and the regulations – we are ready now. What it takes to get there, what it takes to implement in terms of technology, in terms of restructuring the governance of the financial institutions that is still to come. And an important piece on that is also about what we just said, about the appeal to make further investments in building the infrastructure of those financial institutions, to get it delivered.

World Finance: Now let’s look at another significant economy – Argentina. We know Argentina is still grappling with some significant issues, trying to control inflation, reduce the exchange rate. How likely is it in the next few years, to be able to be responsive enough to the changes that are required at the Basel level, international regulation?

Ricardo Anhesini: Argentina has of course gone through its issues and problems, but it cannot be ignored. When we look multiple years ahead, Argentina needs to find a way to solve its internal problems, its political issues, its inflation issues and be prepared to absorb and realise the potential the country has. And financial institutions and financial institutions are looking at Argentina with the expectation that those issues will be solved, and Argentina will deliver on those expectations. Now the big question is, how long is it going to take? And I have no answer to that.

World Finance: I wish we all had that crystal ball, but in trying to prove the virility of any banking sector and the potential for future mergers and acquisitions – how much of a role is Basel III playing in those conversations? 

Ricardo Anhesini: The two discussions are quite connected – Basel III implementation and the consolidation of the market in the region. M&A in the region is going to be big in upcoming years. There is no way that the change on the business models, how the banks are operating – they need to control costs, they need to leverage capital to make sure that we get the proper levels under the required regulations.

So I see, without question, that under the financial service M&A is going to be big. Now, to finish on Basel III and how that’s connected. I think that, you know, it’s absolutely necessary that you employ your capital in the best way possible to comply with the regulations. It is a lot more effective if you can combine capital, manage liquidity levels and manage regulatory capital levels, when you are bigger and focused on the larger slice of the region where you operate. I think those two things will really connect as we move forward.

World Finance: Do you think that we are going to see a new flourishing of banking products that are more in line with what Basel III and the international standards are calling for?

Ricardo Anhesini: In general banks the response is yes. I think we will see a lot of innovation in banking products. We need to deploy capital properly and we need to control costs. My response to that is yes. Now I don’t have the crystal ball here either, to tell you what those products are going to be – but a lot of innovation is coming into this industry in the coming years. 

Islamic State “is a completely different model of terrorist financing” | Video

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What makes a terrorist organisation successful? Extreme views? The ability to recruit high numbers of dedicated and malleable followers?

These might be contributing factors, but what it really boils down to is money. Loretta Napoleoni, one of the leading experts on terrorist financing, and financial barrister William Willson, discuss the ways terrorists raise the billions of dollars needed to wage war against the state, and how this can actually have a positive impact on nations’ economies.

World Finance: Well Loretta if I might start with you. Terrorism: could it be described as a business?

Loretta Napoleoni: Oh absolutely! It is a very, very expensive business; and it’s also a business which is very hard to keep rolling, because most of the activities that terrorist organisations carry on in order to fund themselves are illegal or criminal activities.

“Before 9/11, about one third of the money that terrorist organisations generated came from legitimate businesses”

World Finance: What sort of figures are we looking at? How much does it cost to finance a terrorist organisation?

Well terrorist organisations are very expensive. It is in reality an organisation that is waging war against the state.

It’s very difficult to give a figure to the amount of money. Some terrorist organisations can generate vast amounts of money. In the case of PLO in the 1990s, according to the CIA, the turnover of this organisation ranged $8bn-$12bn. So we’re talking about more money than was the GDP of countries like Jordan, for example.

World Finance: What’s the most significant source of terrorist financing?

Loretta Napoleoni: Well in the past, the smuggling of drugs and people was the number one revenue for terrorist organisations. Things have changed since the rise to power of the Islamic State. It’s a completely different model of terrorist financing.

Before 9/11, about one third of the money that terrorist organisations generated came from legitimate businesses. PLO actually controlled the production of textiles from the occupied territories in Palestine, and used those revenues to fund its terrorist organisation.

So, one third is roughly what it was before 9/11. But today, in the case of the Islamic State, the so-called legitimate business is actually much more than one third. Some of the aid near the borders in Turkey, in Iraq, and in Kurdistan – part of that aid is taxed by the Islamic State, which controls those borders.

We can say the same about the oil fields. The Islamic State is in business with the local tribes in Syria, in order to sell the oil to the Damascan government.

“There are suddenly new sources of cash, and that’s a very terrifying prospect, and a very difficult thing to counter”

World Finance: William, do you have anything to add?

William Willson: In terms of the rising star of international terrorism, the Islamic State, we’ve got a completely new situation here. We have a terrorist organisation that’s basically taken over the second largest city in Iraq. Reports say that their raid on the large bank in Mosul pocketed them $430m. Well that’s quite a lot of money to hold in cash. It’s not something we’ve ever really seen in international terrorism before: the ready access to that amount of cash.

When you couple that again with them holding 35 percent of territory, they’ve now got all of the oil fields in the north of Syria. There are lorries full of oil going into Turkey. There are all of the antiquities that were held in the Middle East: there seems to have been quite a large outflow of them, again raising tens of millions of dollars.

There are suddenly new sources of cash, and that’s a very terrifying prospect, and a very difficult thing to counter.

World Finance: Well Loretta, do you think economies could perhaps indirectly benefit from terrorism? Especially considering the new calculations on GDP which will include arms sales, drugs, and prostitution?

Loretta Napoleoni: Oh, absolutely. The best example is Italy: Italy is part of the PIGS, which you know are in serious economic trouble because of the crisis of 2010.

And among these countries, Italy is the one that has done the best because a large part – maybe even 40 percent – of the GDP of Italy is produced by the black market! And the black market is controlled by organised crime, so, we have a criminal economy which has sustained strongly the legitimate economy.

“For some people what they would call terrorism is for other people what they’d just call politics”

World Finance: Well William, what are the penalties for financing or investing in terrorist organisations, or those affiliated with terrorism?

William Willson: In this country it’s obviously regarded as a criminal activity. So the terrorist legislation here says that if you either have knowledge or a reasonable suspicion that a particular batch of money is being used for the purposes of raising terrorism, that creates a criminal offence.

The state has search and seizure powers, so it can stop actual flows of money as they are flowing out to fund terrorist activities.

Part of the problem that we face in trying to clamp down on these organisations is that they’re treated differently in different places. Part of the reason for that is that different people define terrorism differently: for some people what they would call terrorism is for other people what they’d just call politics, or involvement in foreign politics in other arenas.

World Finance: Well William, a comment piece in the FT said that financial secrecy supports networks that fuel terrorism, criminality, and tax evasion. If companies were forced to be more transparent, what would be the impact on terrorism? 

William Willson: We traditionally associate the funding of terrorism coming from shady places, often offshore jurisdictions, which have very light-touch regulation. Where banking secrecy law is very prominent, and therefore the ultimate depositor or customer, their identity is ultimately masked.

But at the same time it’s true to say that that situation has changed quite a lot in the last decade.

A lot of the jurisdictions that I work in – the Cayman Islands, Dubai, the British Virgin Islands, Gibraltar – have all enacted tough legislation, and their regulators are now taking this sort of thing a lot more seriously.

You’re not seeing so much money in the terrorist economy coming from sources like that. The terrorists all seem to be one step ahead of the game. And they’re now resorting to different tactics and different places.

I think we’re going to be seeing the geography of that shift away to other places. I think Central Asia is the next big one, and also certain states in Africa.

World Finance: William, Loretta, thank you.

William Willson: Thanks a lot.

Pakistani anti-terrorism measures not good enough to attract FDI | Video

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Pakistan continues to face a sluggish economy partly due to recent terrorist attacks in the nation’s financial capital, Karachi. These events, in addition to other local threats from militant groups, have resulted in a limited number of foreign direct investment opportunities. World Finance speaks to Michael Kugelman on how the government and the emerging middle class can improve the country’s economic prospects.

World Finance: Pakistan is currently engaged in its most ambitious attempt to control the Taliban and Islamist fighters in the mountains of Waziristan; what are the costs of losing this region?

Michael Kugelman: You hear very often the phrase that Pakistan is essentially the supermarket for global terrorism, just because there are militants of all walks of life. Some Pakistani, some from elsewhere around the world. Al-Qaeda has a large, or had a large presence, in this region. There are a lot of foreign fighters there. And of course Pakistan is a country with nuclear weapons, so that all adds to the picture, and makes it a really unpleasant stew of militancy.

So there’s really a lot at stake here.

World Finance: Now do you think the perception that Pakistan has been harbouring terrorists, the likes of Osama bin Laden, will be obscured by this current military campaign?

Michael Kugelman: Unfortunately no. I think that on the surface level, this military campaign in north Waziristan seems to be a good thing. Because for the very first time in recent memory, the Pakistani government has agreed to launch a military offensive in this locus of terrorist activity in north Waziristan.

The problem though is that the Pakistani military’s going to be very selective in who it goes after. It’s going to go after certain militants, like the Pakistani Taliban, that target the Pakistani state. But there are many militants in north Waziristan that target Afghanistan, that target international troops in Afghanistan, that target India; I’m talking about groups like the Afghan Taliban, the Haqqani network.

There are a lot of groups that are threats, and they really are not going to be dealt with. In fact many of them have actually just left north Waziristan and slipped into Afghanistan or other tribal areas.

World Finance: And all of this being considered, how is it going to affect investor confidence in the region?

Michael Kugelman: There really is not much interest at all in terms of foreign investment in Pakistan, and particularly since a terrorist attack on the Karachi airport not too long ago, which I think really hit home.

If the major airport in the financial capital of Pakistan is attacked… you know, it can’t really get much worse than that.

And it’s a shame! Because there is a lot of potential in Pakistan. A lot of growing industries. In my view there is the architecture for there to be significant foreign investment in Pakistan. But the security situation just does not allow for it.

World Finance: So what is this all going to do for the country’s international economic curb appeal?

Michael Kugelman: If the security situation calms down, then I think we could see it change. Unfortunately I tend to be a pessimist. I really fear that the security situation will get worse before it gets better. I fear that a lot of the militants that are being targeted by the military will essentially launch a new campaign of revenge attacks, which will make the security situation even more troubling. And that of course bodes very ill, bodes very poorly, for foreign investment.

World Finance: Now let’s consider the role of the military. The military complex of course is one of the strongest in the world in Pakistan; who really controls the country? Is it the government, or is it the military?

Michael Kugelman: The military has a say in everything, including the economy. Every year, despite promises to the contrary from the government, defence spending always constitutes a significant component of the national budget. And this hasn’t changed this most recent year. And so I think until the military is willing to relinquish its tight hold on the budget; until more money is made available to cover other key areas – from energy to education – there are going to be a lot of problems.

Others will argue however that the military, when it’s been in power, the military was actually very effective. It actually managed the economy very well. There wasn’t as much corruption and so forth.

But the key issue is that the military still hogs the national budget, and that’s not going to help the economy.

World Finance: But there have been some demographic changes, including the role of the middle class; can you tell me how important are they to the future of Pakistan?

Michael Kugelman: Pakistan is not the type of country that lends itself to large protests. It’s a very divided country, fractured along ethnic lines, provincial lines, sectarian lines. It’s hard to get these large movements, even within the middle class.

I’m glad you mentioned that, it’s a very significant component of the demographic; it’s relatively large and rising.

I just don’t see it as realistic. I don’t see there being these protests, trying to get the military to change the role it plays in the politics of the country.

World Finance: Now let’s look at the government’s overall game-plan. They’ve been involved in fiscal consolidation to deal with high deficits, but do you think that this is even the most effective economic strategy?

Michael Kugelman: No, unfortunately I think there’s much to be concerned about the Pakistan’s economic policy. I’ve said before, I’ve said many times that Pakistan does have the potential to get its house in order. But I just see repeatedly that despite what the government’s saying about belt-tightening moves and austerity measures, that it essentially is settling for hand-outs.

Not too long ago, the Saudi Arabian government, which is very close to the Pakistani government, provided a lot of money to Pakistan to try to deal with some of its economic problems. It’s a good short-term measure, but it certainly is not sustainable in the long-term.

Similarly Pakistan has tried to address its very large amount of debt in its energy sector. Not by creating more efficient industries, or dealing with pricing and subsidies, but simply printing more money to bring the debt down! That’s what it did a few months back. And of course, completely predictably, that debt has come right back.

So I see a lot of encouraging nice talk, and the right things are being said. But in terms of actual action on economic policy, I’m not seeing much to be encouraged about.

World Finance: Michael, how long is it going to take for us to see Pakistan really turn a corner?

Michael Kugelman: So I think it’s going to really take a paradigm shift in how the state and its practitioners, and the people in government, think about the country as a whole.

Maybe one could argue that we have to wait for a new generation of younger, more open-minded Pakistanis to bring about this change. But unfortunately, given what I’m seeing about demographics in young people in Pakistan, they tend to be much more conservative, in many cases much more hard-line, than their parents’ generation. More supportive on the military.

So I fear… it’s hard to put a date on when things could change. And I really worry that Pakistan could really… it…

Probably what will happen is that it will muddle along. It’s not going to collapse, it’s not going to fail – contrary to what a lot of people, including in Washington DC here, say. But I think it’s really going to plod along, muddle along, and it’ll reach a point where you have to wonder – how long can it continue to survive on that level? And I don’t know.

World Finance: Michael Kugelman, thank you so much for joining me.

Michael Kugelman: Thank you.

Joseph Pearlman on the outcomes of Davos | Video

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The 2014 World Economic Forum has now come to a close, and it was the first Davos in five years where the financial crisis hasn’t been at the forefront. Joseph Pearlman, economist at City University London, discusses Davos’ theme of inequality, the irony of low representation of women, and the ongoing problem of youth unemployment.

World Finance: So Joseph, let’s start with the purpose of the event. Would you say it was a January jolly, or as the founder maybe intended, a platform for collaborative thinking and searching for solutions?

Joseph Pearlman: It is more like a January jolly; however, one does see that there are lots of important business leaders who are meeting up with the top world economists, and that is likely to lead to, probably, better thinking about the role of business in the future, and the direction that the economy is going to take.

World Finance: So would you say there was anything that came out of this year’s Davos that would impact lives or economies?

Joseph Pearlman: The only thing it might influence is the concern that economists and have the concern that politicians of both left and right are beginning to have, and certain other business leaders as well: that the world, and particularly the developed world, is becoming more unequal.

World Finance: Well let’s talk more about that, as inequality was one of the key themes of Davos. Oxfam came out with startling statistics: 85 people hold half of the world’s wealth. Now, this is a really strong statistic, is it as bad as it sounds?

The greater our income disparities, the more likely that one is going to see increased political unrest within countries

Joseph Pearlman: What one would hope for the world is social cohesion, and the greater our income disparities, the more likely that one is going to see increased political unrest within countries. Occupy Wall Street is the kind of thing which potentially could increase as people become more and more dissatisfied, and in certain countries such as Greece, one is seeing violence in the streets, and maybe that could extend to other southern European countries.

Also from an economic perspective, if you think about ever pound that is earned, the poor will by and large consume virtually everything out of that one pound, whereas for every one pound that the rich earn, they’ll probably only spend 60p or 70p of it. And in order to help the economy to grow, one wants to see increased demand.

World Finance: One thing that does strike me about the inequality debate is that maybe it should focus more on how people make their money, because if they do it in a competitive way, it can really benefit economies. So maybe the debate should be more about people who gain wealth through corruption, this kind of thing. Surely there is always going to be inequality?

Joseph Pearlman: Oh yes, and I think corruption is probably less of a problem in the developed world. One has always seen it as more of a problem in the developing world, notably in African economies. But on the other hand, the irony is that in the economies where there is greater corruption, one is seeing less inequality. There’s a tendency towards economies and countries becoming less unequal. Whereas if you examine what’s happening in the developed economies, where there’s less inequality, over the past 30 years one has seen increased inequality, where there’s a level of inequality that hasn’t been seen since about 100 years ago.

World Finance: Moving on now to another big talking point of Davos, and that was the female delegates who attended the event. This year that was only 15 percent, which is down from last year – 17 percent. So, do you think this is a reflection of the world of business?

Joseph Pearlman: I don’t understand why the proportion of women at Davos is actually down, given that one is seeing a greater proportion of world leaders – prime ministers, presidents, being women. So I’m quite puzzled by that.

World Finance: What else came out of Davos then? I know there was a lot of talk about challenges facing Europe, especially with youth unemployment. How do you think this can be resolved by businesses getting involved? Is there anything that they can do?

Joseph Pearlman: Governments’ fiscal policies have got to come in. There seems to be a general view among the top economists who attended Davos that governments have been rather reluctant to engage in government investment.

World Finance: British Prime Minister David Cameron suggested at Davos that the UK should take back factory jobs from Asia to boost western economies. Do you think this could be a solution? And is it realistic?

I think firms will go to where costs are cheapest

Joseph Pearlman: I don’t think it’s terribly realistic, I think firms will go to where costs are cheapest. And who can blame them for that? Trade is a cyclical process that eventually, as people in developed countries become more skilled, and costs of employment for unskilled jobs start to rise, and eventually unskilled jobs will have to move elsewhere.

One can see that with the experience particularly of Hong Kong and South Korea. Hong Kong, 50 years ago, was producing all the rubbishy plastic goods. Then subsequently South Korea did. Look at South Korea now: it’s the second most important shipbuilder in the world, in Samsung it’s got probably the most important electronics company in the world, and they’re not producing the rubbishy plastic items that they used to produce.

That’s now going to be produced among the lesser southeast Asian economies. And eventually that’s going to move towards African countries which are in their own right starting to grow. Eventually, when all of those countries achieve a decent skills level, then we’re going to see more and more manufacturing start to return to the countries where the firms that are responsible for these manufactured goods are based.

World Finance: I think what was interesting was the Google chairman Eric Schmidt said that new technologies could take over some jobs of people. So there’s a race between computers and people: what’s your take on this?

Joseph Pearlman: It strikes me that one will as a result see an increase in service industries. You know, leisure industries. There’s always going to be a desire for more goods, and it’s not as though there’s a set number of jobs in the country. The moment the demand for jobs in one industry disappears, there’s likely to be a demand for jobs in other industries. And if people are losing their jobs in skilled industries, then there’s likely to be a decline in wages, which will make the demand for jobs in other industries start to increase.

World Finance: Joseph, thank you.

Joseph Pearlman: Thank you.

Chocolate Bonds: the sweetest way to attract investors | Hotel Chocolat | Video

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Chocolate is most people’s guilty pleasure; but when it comes to business, the industry is more guilt-free. Entrepreneur Peter Harris shows us around Hotel Chocolat, which has taken a slice of the global $100bn chocolate market and transformed it into one of Britain’s most advocated brands. And Laurent Pipitone from the International Cocoa Organisation explains the global outlook for cocoa, and what’s causing the supply deficit pushing prices up.

Peter Harris: Chocolate is an amazing thing. I mean, how people actually worked out that you would take this cocoa pod, take the beans out of it, and through a number of processes make it into this unusual but beautiful substance is absolutely remarkable.

World Finance: Chocolate. It’s most people’s guilty pleasure; but when it comes to business, the industry is more guilt-free.

Laurent Pipitone: Global sales of chocolate represent around $100bn. Then the cocoa market, which is the main ingredient for chocolate, represents around $10bn, which is the value of the cocoa produce around the world.

World Finance: Entrepreneur Peter Harris has taken advantage of this billion dollar industry, and turned his passion for chocolate into a flourishing business, having founded one of the leading boutique chocolatiers, Hotel Chocolat. But what does it take to succeed in the world of confectionary?

Peter Harris: People often say ‘that was a fantastic idea, how did you come up with it?’ But I actually think there are thousands of good ideas, and the most important thing is how you apply those ideas. And you’ve got to have an almost evangelical passion for your idea, or your business, to make it successful.

Global sales of chocolate represent around $100bn

In the very beginning, Angus [Thirlwell] and I lent money to the business, and the bank matched that with overdraft. That gave us the ability to develop the business to an early stage. But the biggest thing is to actually sell your product successfully. We did that, so we were able to then invest the profits of the business, back into the business, to then develop those ideas.

World Finance: So it really has grown organically, you could say?

Peter Harris: Absolutely, absolutely. You know, we’re one of the rare businesses that’s grown to the size we are now – we employ a thousand people, we’ve got 70 shops in the UK, we have our own factory, our own cocoa plantation – so all these are things that we’ve been able to develop in our business, and afford if you like, by reinvesting those profits.

World Finance: According to a Bain & Co survey, Hotel Chocolat was placed fourth in the top ten most advocated brands. It was also the only British name to make the list.

The company has a loyal customer base, and has found original ways to capitalise on this. The chocolate tasting club offers members a different selection box each month, and encourages their feedback, making the experience interactive. And in effect, a free and self-funded way to do market research.

Peter Harris: Innovation in itself is really important, and through the life of Hotel Chocolat, we’ve actually incubated many of our own businesses. So these are ideas that we’ve come up with, normally because of prompting from our customers, listening to our customers. And by then giving them a little bit of space within our business – in other words, a little bit of resource – we can then allow those to develop without the sort of spotlight of having to make profits in the early days.

World Finance: Innovation has played a large role in Hotel Chocolat’s success, even down to funding its expansion. In 2010 they launched Chocolate Bonds, where loyal customers could invest in the company’s future, and take their monthly yield in – you guessed it – chocolate, raising an impressive £4m.

We won’t pay you any money or interest, but we will pay you a return in chocolate

Peter Harris: We just thought it would be really nice if we could involve our customers in what we’re doing, so we said to them, would you be interested in lending us £2,000 or £4,000, and in return we won’t pay you any money or interest, but we will pay you a return in chocolate. And so you’d get six boxes for a £2,000 bond, and 13 boxes for a £4,000 bond. And this was something that people were a little bit cynical about initially, but we were very successful. And this is really about the relationship we have with our customers.

World Finance: But now the chocolate industry might be headed for darker days, with global chocolate supplies headed for the longest production shortfall in more than five decades.

Laurent Pipitone: Well, the money’s increasing. The long-term average is about three percent per year. On the other side, supply’s not following. One of the reason is that farmers are turning to other crops, which they feel are more profitable for them. Many cocoa farmers are still in poverty, so this is the main reason why cocoa producers are not choosing cocoa as a new investment.

Farmers are hedging, plantations are also hedging. Many cocoa plantations were planted 20, 30 years ago, so their yields are declining over time. So there has not been enough new investment in recent years to supplement what is existing.

World Finance: According to a Bloomberg news survey, cocoa prices may rally 15 percent to $3,200 a tonne by the end of 2014. Which raises the question: should investors be indulging their sweet teeth, and backing cocoa?

Laurent Pipitone: Cocoa prices are expected to continue to rise over the coming few years, due to the supply deficit that the cocoa market is experiencing. So, we’ve seen the supply deficit over the past few years, we’ve seen price increases over the past few years, and we expect this to continue.

Then this will also have an impact on the chocolate price. Cocoa is the main raw material for chocolate, and the price of cocoa in chocolate products represents about 10 percent. So this will impact on chocolate prices to some extent as well in the coming few years.

Many cocoa farmers are still in poverty. Farmers are turning to other crops which they feel are more profitable for them

World Finance: While cocoa prices are forecast to rise, sales in China more than doubled in the past decade, outpacing gains in western Europe – the biggest consumer. And tighter supplies will translate into higher costs for food makers.

But Hotel Chocolat’s Peter Harris is not concerned.

Peter Harris: It’s important actually to put price rises of commodities into perspective. Invariably price rises are reported, but price falls aren’t. And if you actually look at cocoa, yes it is rising a little bit at the moment, but it actually went through a period of it going down quite a lot – but this was never reported.

So the answer is, obviously we manage that. We buy forward cocoa so that we know how much we’re having to pay, so we can obviously guarantee the prices to our customers. But I believe there’s a lot of speculation goes on in the cocoa market – as in other markets – which actually is designed to try to destabilise the pricing so that people can make money. But it’s not really relevant to the source of the product and the availability of it, because that’s very good.

World Finance: So with new restaurants in the pipeline, their turnover at an all time high, and customer satisfaction their driving force, the British start-up looks like it has found the lasting recipe for success.

Arthur Lang on Asia’s real estate market | CapitaLand | Video

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CapitaLand has grown to become one of Asia’s largest developers. Arthur Lang, CapitiLand Group CFO, talks about CapitaLand’s focus on China and Singapore: China’s five ‘city-clusters’ that are driving the real estate market, and how Singapore’s low interest rates are affecting property investments.

World Finance: Mr. Lang, which countries are you targeting for growth and why?

Arthur Lang: CapitaLand today is in almost 20 countries all over the world, even in Europe and in the UK, where our serviced apartments are, but really the focus is very much on Singapore and China. I think for Singapore and China alone today, it’s about 75-80 percent of total assets for the group. If you look at all the projects and activities we’re involved in in these two countries, I think in the next five years I wouldn’t be surprised if it’s about 85 percent of our total assets and total business. Specifically if you look at China, it’s perhaps the best place to do business in Asia, with 1.3-1.4bn people; it’s a huge market. I think more importantly as well, urbanisation rates in China are still relatively low compared to the developed world, it’s still in the 50 percent area, the developed countries are in the 80s or even in the 90s, in terms of the population that’s urbanised.

World Finance: Well staying on the subject of China, and we obviously hear an awful lot about the potential in the country, but there is a lot of talk about a possible housing bubble. How much of a problem do you see this being?

The urbanisation rate for China is still relatively low compared to other large countries, so there is still a lot of room for growth

Arthur Lang: With the new government I think we are still fundamentally confident with the residential sector, the property market in China, for the reason I mentioned earlier; the urbanisation rate for China is still relatively low compared to other large countries, so there is still a lot of room for growth. I think we are also very encouraged by the recent measures from the Chinese government to cool the residential sector down, and not create bubbles. Because I think for real estate companies, what we really like is sustainable growth, where we can make proper investments, we can make judgments in terms of which cities to invest in. If there are a lot of bubbles I think things get a bit too volatile, and it’s quite disruptive to business, because real estate is a very long-term business, and actually we wanted to grow sustainably.

World Finance: Would you say the housing bubble is perhaps less of a concern in places like China because there’s so much demand for housing there?

Arthur Lang: It really depends on which city you are looking at. China has something like more than 600 cities with populations of at least a million, so we can’t be in every city, and I think that each city has its own dynamic, has its own regulatory requirements, has its own market demand dynamics. So we need to look at each city. China as a whole, we are very bullish on its overall economic performance over the next 10-20 years, but I think also at the city level we have to look at and see where we want to place our bets.

World Finance: So moving on to Singapore now, where CapitaLand is based, the property market there has been flourishing due to low interest rates, so how do you see the new total debt servicing ratio impacting the market?

Arthur Lang: There have been a series of property cooling measures instituted by the government for the last three years, the last one being the total debt service ratio, TDSR. Cumulatively, that has actually moderated the residential market in Singapore. Now in terms of what we think of the prospects, the fundamentals are still there for Singapore. Population growth is still increasing, and I think the government is still wanting to make sure Singapore is a great place to live as well as a place to do business.

World Finance: CapitaLand has achieved great success over the past few years, in part because you haven’t relied on one source of funding. So why do you think it’s important to diversify sources of capital?

I think the government is still wanting to make sure Singapore is a great place to live as well as a place to do business

Arthur Lang: The realistic developments are a very long gestation period, meaning that at the point of buying the land and when you actually spend capital, in putting capital to buy the land and to build, you don’t see that capital coming back to you until a few years later. In certain very large projects it could take seven to eight years before you actually see the capital return.

Two, I think real estate fundamentally or inherently is a very cyclical business. There are peaks, there are troughs, we talked about bubbles earlier. So I think one needs to understand the cyclicality of the industry.

Three, I would say that right now, especially in Asia, where we are focused on our cities in Asia, the ticket size of real estate has become a very intensive business. For example, in Singapore I always tell my colleagues that any building and any office building in the CBD in Singapore costs you at least a billion dollars. So large amounts of capital are actually needed to make sizeable investments in Asia.

World Finance: Well finally, I think the question most people want answering is, where’s the next big thing, where will you next be targeting for investment?

Arthur Lang: I think we’ve got our hands full in Singapore and China. It’s definitely these two countries, as I mentioned earlier, we’re fundamentally very confident about our prospects in these two countries, and we still want to continue to grow there.

World Finance: Will you maybe be going to more third tier, even fourth tier cities, rather than just the major cities like Shanghai, Chongqing?

Arthur Lang: I think at this point if you look at, probably about 90 percent of our China business is concentrated in about 10-11 cities in China. I think that what we want is to really go deep, deepen our presence in these cities. So what we have done is, we’ve actually created five city-clusters at CapitaLand within China for China business. And each city-cluster is anchored by one of the major cities. So in the northern part of China, we’re Beijing, in the eastern part we’re Shanghai, in the southern we’re Guangzhou, Central we’re Wuhan, and then in the southwestern with Chongzhou, Chongqing. So I would say at this point we’re still very much focused on these five city-clusters, but always keep your options open, so maybe next year there might be a sixth city cluster, but at this point it’s five.

World Finance: Mr. Lang, thank you.

Arthur Lang: Thank you Jenny, thank you very much.

Dr Hazim El-Naser, Thomas Langford, Anne De Pazzis on the As-Samra Wastewater Plant | SPC Samra | Video

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As-Samra Waste Water treatment plant is the largest of its kind in Jordan. It’s also the first project in the country to be built under a build, operate and transfer model. Dr Hazim El-Nasser from Jordan’s Ministry of Water and Irrigation joins Thomas Langford from CCC and Anne De Pazzis from Degremont, the sponsors responsible for the BOT model, discuss the advantages the project will have for the people of Jordan, and the way the country has benefited from commissioning the project as a public-private partnership.

World Finance: Your Excellency, the first phase of the project addressed, among other things, the problem of a severe water shortage in Jordan. How bad was this, and did As-Samra address this?

Dr. Hazim El-Nasser: Jordan is one of the most scarce-water countries worldwide, classified by international indices as number 3. By constructing this treatment plant, Jordan was able to reallocate more freshwater from irrigated agriculture towards the most urgent needs of the domestic water sector, and by releasing more freshwater.

“As-Samra Waste Water Treatment Plant was the first build-operate-transfer PPP in Jordan”

World Finance: How has the construction of the original plant helped to address environmental and health concerns in Jordan?

Dr. Hazim El-Nasser: By the completion of this treatment plant, we were able to connect more households to the public sewage networks and thereby enhancing environmental and health standards. Most important is the protection of our precious underground water resources from pollution through septic tanks.

World Finance: Why was the plant expanded at this time?

Dr. Hazim El-Nasser: As you might know, Jordan is in the troubled Middle East, and a lot of people influx to Jordan as a result of regional conflict. On top of that, Jordan is witnessing economic development and a high population growth rate, which makes the need for additional freshwater services for households.

World Finance: How has Jordan benefited from commissioning the project from a public private partnership?

Dr. Hazim El-Nasser: As-Samra Waste Water Treatment Plant was the first BOT in Jordan, and the first in the region, and by doing this BOT, we were able to attract more private sector participation into water and infrastructure projects, and other sectors, energy infrastructure and so on. This was very important, especially in countries going under structural and physical reforms; they need such a financing so they will have less borrowing, especially if they have limitations on their borrowing capacity.

“The timing of the financing was difficult: the markets in Europe, plus the situation in Jordan where the deficit was increasing”

World Finance: Well Thomas, over to you now, and as a sponsor what are the main financing and structuring issues for this project?

Thomas Langford: Well, this expansion was built on the existing plant. BOTs and PPPs are very difficult concepts to implement. In this particular case, we had to complement the inclusion of MCC and their requirements in the project. Secondly, the timing of the financing was difficult. The markets in Europe, because of the financial crisis, plus the situation in Jordan where the deficit was increasing, the country was suffering because of the reduction of the gas supplies from Egypt, made it somewhat difficult, and we had an overall constraint on affordability.

World Finance: Well what financing mechanisms did you use to deal with these issues?

Thomas Langford: We decided to approach it as a brownfield project and combine the existing plant together with the expansion. This allowed us to use the continuing operations of the plant, help in the securitisation of some of the payments that the sponsors were making. It allowed us to leverage the existing plant, which reduced the equity requirements for the new plant.

World Finance: Anne, this is the first BOT project for MCC, so what challenges did you face in its implementation?

Anne De Pazzis: Challenges arose in the course of the discussions. The first reason is that MCC was undertaking its first BOT co-financing with the private sector in this project, and they were involved in all aspects of the negotiation of all documents. Secondly, the expansion was a negotiated project because the original agreement provided for direct negotiation between MWI and the project company as an anticipation for a needed expansion of the treatment plant. Therefore, MCC had to develop thorough cost analysis methodology to assess our proposal and ensure that the price is reasonable. Finally, MCC requires strict adherence to its conditions and requirements, as well as to international standards. In that respect, MCC imposed very strict conditions on the EPC contractor, such as trafficking persons, and on the operator as well when it comes to sludge management.

“If affordability is a must for such long term contracts, acceptability is also something of importance”

World Finance: Well can the As-Samra model act as a template for future developments?

Anne De Pazzis: It is a reference, from an environmental standpoint, renewable energy is produced from biogas capture and hydraulic energy. It is self sufficient at roughly 95 percent, and as part of the expansion agreement the parties have also agreed to improve sludge management practices and pursue viable reuse options for sludge. Secondly, the viability gap funding approach, through the contribution of MCC, was absolutely critical to the development and the expansion. Through this contribution the project is much more affordable for the government of Jordan and financially attractive to the banks and the sponsors.

And lastly, if affordability is a must for such long term contracts, acceptability is also something of importance. In the case of As-Samra, effective stakeholder engagement has occurred from the early stages of the project. Since its origin, throughout the current operation of the existing plant, as well as during the development of the expansion. And I strongly believe that this inclusive approach has benefited the project and all parties in the end.

World Finance: Your Excellency, Ann, Thomas, thank you.

Dr Hazim El-Naser, Thomas Langford, Anne De Pazzis: Thank you.

Takao Hiramoto and Terry Kawashima unite sales with marketing | OKI | Video

Posted on by World Finance

As tablet devices become more mainstream, the office printer sector is suffering. Eighteen months ago, OKI Group announced a three-year plan to refocus its print and imaging business, and double its sales. Takao Hiramoto and Terry Kawashima discuss the impact that mobile devices are having on the office printer industry, its strategy to explore niche markets such as graphic arts, and their plan to unify sales and marketing in Europe.

World Finance: Hiramoto-san, if we could start with you, and the big picture for OKI Data Corporation. You’re halfway through this three-year plan; what position was OKI in, 18 months ago?

Takao Hiramoto: For a long time, OKI’s business domain was office printers; you know, computer printers. But we are facing some technology changes, like smartphones and mobile devices. So because of that, we are going to shift from the office printer sector, to office solutions areas; and also the professional area, those vertical areas.

Just now we are facing the challenge that the number of computers is decreasing. So that’s why, according to the IDC Report, use of SFPs – single-function printers – is going down. But on the other hand, use of MFPs – multi-function printers – is still growing. And also the office solution areas, like copier manufacturers, those areas are very flat. So we are very interested to go into the growing areas, with our LED technology.

“We are facing some technology changes, so we are going to shift from the office printer sector to office solutions and the professional area”

World Finance: Terry, if I can turn to you, tell me more about the strategy. What’s OKI’s focus now?

Terry Kawashima: We have the strategy of a, increasing our penetration in our core office print market; b, strengthening our presence in the office solutions market; and c, we have a big opportunity in what we categorise as the professional printing market.

We work very very closely with channel partners and end customers, and we have very strong feedback from customers. So we have identified those opportunities through a few channel partners that, this is a niche market, but with your machine you could probably address it, if you fine-tune here and there.

And it’s not really that we have thought about application at R&D, it’s the customer who tells us what we can do. And that is our strength.

World Finance: You’ve spoken about the need to unify your sales and marketing; is this an important part of the three-year plan?

Terry Kawashima: I think so, I think Hiramoto-san would agree to that! When I was appointed the Managing Director of OKI Europe, one of the tasks that I was given by Hiramoto-san is really to drive the business through marketing. Hiramoto-san has a very strong philosophy that marketing should be the core of driving the business around the strategy that the company establishes.

We have very capable teams across Europe, very talented people, very loyal; and they have done a lot of work on their own market. But we have been a little bit too independent from each other. So one thing that I thought we should do is to really integrate activities between us all, and benefit from each other, rather than compete.

“We should integrate activities, by working very closely together and have one face across Europe through integrated marketing”

So we have formed a channel marketing team, basically consisting of only a few staff at headquarters, but involving key marketing people of all the operating companies across Europe. And I am expecting that six months, 12 months from now, we will start to see fruit of this working together.

This is not a cost-reduction exercise: obviously that could come as an additional benefit, but I’d rather ask Hiramoto-san to allow us to make additional investment using that saving, and bring more impact to the market by working very closely together and have one face across Europe through integrated marketing.

World Finance: Back to you then, Hiramoto-san. Is this sales-marketing unity key, and how big a role does Europe play in OKI’s global plan?

Takao Hiramoto: For OKI Data and OKI, the Europe market is very important, because 40 percent of OKI’s revenue comes from Europe. So Europe is a very important market to our business. So we are directed to invest more in European areas, and also as Terry said, we have a very strong sales organisation, and also we are going to add such a marketing force to combine not only individual countries, but also collaborate with each other. And this will eliminate indirect and extra costs, and will make a very effective operation in the future. So we are very expectant for the future.

Nyo Myint on Myanmar’s potential | KBZ Group | Video

Posted on by World Finance

50 years back and Myanmar was the Pearl of Asia – one of the region’s leading economies. While most of its neighbours have seen their economies skyrocket, Myanmar languished, and now has Southeast Asia’s lowest per capita GDP. But times are changing. Nyo Myint, Senior Managing Director from KBZ Group discusses the challenges Myanmar faces today, and how KBZ Group’s CSR activities are contributing to the country’s success.

World Finance: Nyo; tell us, what are the challenges that Myanmar faces today?

Nyo Myint: Myanmar faces major challenges in political, economic, and also social arenas.

In the political arena, we have transitioned from a military government to a democratic government very recently. Therefore we have many political challenges, but we believe we are now on the right track. Political prisoners have been released, and our government has re-engaged with international communities. Now we are in the process of developing a people-centric government to move the nation forward.

For the economic arena, the major challenge is to create a fully developed financial sector. Now the Central Bank of Myanmar has recently been granted full autonomy, after the separation from the Ministry of Finance. I believe a strong financial sector will create a vibrant economy for the country.

For the social sector, we have to focus on solving the ethnic conflicts in Myanmar. We have many minorities with diverse religious beliefs and cultural differences; it is very important to create a more harmonious society in order for the country to grow.

World Finance: And tell me more about the economic arena; what potential is there for growth, and what role are businesses going to play in that?

Nyo Myint: Myanmar is the largest country in continental Southeast Asia, which has an abundance of natural resources, and has a population of almost 70 million people. Myanmar has been closed to international businesses for 50 years, so the potential for growth is huge. I believe the sectors that will have first rate development and most potential are oil and gas, electric power generation, agriculture, and telecommunications.

Political prisoners have been released, and the Myanmar government has re-engaged with international communities

World Finance: What catalysts are needed then to unlock Myanmar’s potential?

Nyo Myint: One of the major catalysts is that more multinational companies need to enter and operate in Myanmar. So it will bring many positive knock-on effects on the whole business world and the economy of Myanmar.

Another catalyst is that more Myanmar-born ex-patriates return to the motherland with skills and technical expertise learned abroad, and contribute to the growth of the country.

World Finance: Let’s take KBZ Group as a case study. You’re one of the most successful businesses in Myanmar; what is your business philosophy?

Nyo Myint: Although we have grown in size, we are always focusing very much on giving back to the communities we work in. We believe doing the best for the people is a good business philosophy.

Our KBZ Group is well known for our best CSR initiatives in the country, and due to our latest contribution for various projects in health, education, religion, social, and disaster relief, we have been recognised as a most charitable company in the country.

Moreover, we are very much proud and feel honoured for being the highest tax payer in Myanmar for several years now.

World Finance: KBZ Group is also a heavily diversified conglomerate; what’s the key to your success?

Nyo Myint: In our KBZ Group we also want to serve the interests of our stakeholders, including our customers, our suppliers, and our employees.

We consider every one of our employees to be a part of our extended family

We believe that doing good for the people is a good business practice, and will pay dividends in the long run. In order to do that, we want to create the best corporate culture, based on merits, accountability, and transparency.

We consider every one of our employees to be a part of our extended family. We provide most comprehensive compensation package programmes, which include daily transportation, education assistance, generous pension and healthcare plan, a lucrative annual bonus, and so on.

World Finance: And how do you position the group in the transitional period that Myanmar’s going through?

Nyo Myint: KBZ Group is the industrial in banking, aviation, and issuance. Our entities are regarded among the people as being the best in Myanmar. Our strong ties with our people, and our domestic reputation, will continue to keep us in a strong position during this transitional period.

We are also exploring various ways to collaborate with reputable international companies through possible strategic alliances or joint ventures, in order to keep our company competitive internationally.

Our aim is to continue as a major player within Myanmar, but also to expand our presence throughout the region.

World Finance: Nyo Myint, thank you very much.

Nyo Myint: Also thank you very much.

Ben Lucas on Europe’s AIFMD | EY | Video

Posted on by World Finance

Speculation about the Alternative Investment Fund Managers Directive (AIFMD) has dominated the European funds industry over the past couple of years, but the deadline for EU and EEA Member States to transpose its provisions into national law was not until July 2013. Ben Lucas, Asset Management Director at EY, discusses the challenges that asset management firms are facing, and the best practices that have emerged from the directive.

World Finance: Ben, overall how would you say companies are handling the changes resulting from the directive?

Ben Lucas: Overall it’s a fairly mixed reaction, so there’s a pretty clear split between the larger players who are very used to dealing with regulatory change – be it MIFID or UCITS or whatever else it is that they’ve dealt with before – versus the alternative asset classes, who are pure-play. So a private equity house, or a hedge fund, or a real estate fund, for which it’s much more of a fundamental cultural shift, for them. So, they’re coming from, effectively, either a very low level of regulation, or no regulation at all, to actually an incredibly high level of regulation. So for them it’s a real step-change in mentality and cultural shift.

“If you’re a small start-up shop, you’re going to need quite a lot of external advice”

World Finance: And who would you say will benefit most from this directive?

Ben Lucas: In the short term, I think there’s going to be a fairly significant cost impact. So if you look at the firms, no one will benefit directly from it in the short term. But the funds that will handle it best will be the larger firms. So obviously the marginal cost, if you’re already dealing with a significant amount of regulation and regulatory change, you’ve already got the budget set aside for that. And you’ve got the change departments and compliance departments set up ready for that.

The larger firms will handle that slightly better. The other firms that will benefit immediately will be the service providers, because if you’re a small start-up shop, you’re going to need quite a lot of external advice. You’re going to need services such as depository, which are mandated by the directive. And then if you look to things like the reporting requirements of the directive, then, again you can see that there’s a lot of crossover with other regulations, and firms that are already providing services in the reporting space will very easily be able to provide reporting for AIFMD. So you’d expect that the service providers will do very well out of it.

In terms of the benefits to the managers themselves, and then ultimately the investors, they will – if they materialise – will be somewhat further down the line.

World Finance: What are the biggest challenges facing firms at the moment?

Ben Lucas: A lot of firms took advice very early on, when the directive was in its early stages. And I think the result of that is, to minimise cost, they took advice, went away, and started working on whatever that advice had been. And there’s been quite a lot of change since then, numerous iterations, lots of consultation papers, further guidance; and I think some firms have checked back in and taken further advice, had a bit of a health-check around that. Others haven’t, and are now struggling to deal with what is actually quite a changed environment from where they were when they were initially looking at this, perhaps 18 months ago, or something like that. That’s certainly one of the challenges.

The other fundamental one, as the deadline approaches, is around operational readiness. So again, a lot of the advice and a lot of the guidance that firms have had, has been theoretical. And what that means in terms of actually managing your back office or selecting your depository, and working with an outsource provider for the first time, perhaps, is very very different on the shop floor, effectively.

“Things will have settled down beyond 2018: the framework should be starting to bed into place”

World Finance: And what are some of the best practices you’ve seen develop as a result of the directive?

Ben Lucas: So in terms of actual response best practice, there is I think, very little, because it’s so varied in terms of how the market’s responding. I think there are guiding principles around how you react to the directive which are best practice.

So for example, proactivity. Don’t bury your head in the sand. If you think something is potentially – for example, your method for calculating derivative gross commitment or whatever that might be – if you think it\s potentially throwing out massive numbers? Engage, and check. So you can check with your peer group, you can check with the industry bodies at AMA, IMA, you can check with the actual regulator themselves. That early engagement, I think, is taken very well from the regulator.

World Finance: Finally, what do you expect the long-term impacts of the directive to be?

Ben Lucas: Short-term being now, medium-term being perhaps up until 2018, and then 2018 and onwards? If we look at it in terms of those three timeframes, short-term now, I think it’s very difficult for anyone to say anything other than just increased operational cost. So, I think that will hit the managers and eventually hit the investors. So I think that’s pretty widely taken in the market.

Medium-term, I think there is a real question around… it’s very clear that there is a cost, but the main problem in the medium-term is that there’s also uncertainty. So people aren’t just worried about, okay, if we want to do business in Europe there is a regulatory cost associated with that. There’s also a future uncertainty about what that might mean. Will the thresholds come down? Will the valuation methodology change? All of those questions mean that people, by choosing to do business, will then be engaging in a level of uncertainty they might not be happy with.

In the longer term, regardless of whether the net effect is positive or negative, it should at least be clearer. So you will have a framework that… the tools will be there to enable you to make your cost-benefit analysis about whether those euros are worth investment, whether it is worth doing business in Europe. Because hopefully things will have settled down beyond 2018. The framework should be starting to bed into place. And the result of that is you should be able to make a much more informed decision.

World Finance: Ben, thank you.

Ben Lucas: Thank you.