Geoffrey Okamoto, First Deputy Managing Director of the IMF: Knightmare Uncertainty

[caption id="attachment_18355" align="alignright" width="300"] Author: Geoffrey Okamoto, First Deputy Managing Director of the IMF[/caption]

The American economist Frank Knight theorised about the difference between risk and uncertainty in his classic book Risk, Uncertainty and Profit. Risk is “a quantity susceptible of measurement.” A precise outcome may not be known, but the probability of a few that are most likely can be calculated. Uncertainty means there is not enough information to even narrow down the possibilities. When a situation is “not susceptible to measurement” economists call it Knightian uncertainty.

If this sounds familiar, it is because we are living in the most unmeasurable of times. All aspects of life have been disrupted by the simple fact that it is harder to quantify the risk of going to work, shopping for groceries, or having a wedding. Despite necessary optimism, there is great uncertainty about treatments for COVID-19 and a vaccine: when they may be available, how effective they will be, how willing people will be to take them. While it will take years to rebuild the economic devastation and restore jobs and growth, the pandemic will have a lasting impact on how we choose to live our lives. The 1920s economic chaos left many Germans traumatised about inflation to this day; Americans who experienced the Great Depression remained frugal throughout their lives. This pandemic could fundamentally change how we view and manage risk and uncertainty, with lasting consequences on investment decisions, business strategies, government policies, and overall economic productivity.

"High uncertainty makes it harder still to predict the net impact of so many behaviour changes."

Individuals may change their risk perceptions permanently after a sharp and sudden loss of income, leading to higher precautionary saving. In the short term, this may mean less debt, but in the long term it could lead to deeper structural changes, such as less willingness to take on a 30-year mortgage. In many countries, home ownership is low because long-term debt is seen more as a risk than an opportunity. Consumption patterns may change if people whose health is at high risk avoid certain activities. Consumers may decide to hold more essential goods in fear of new lockdowns—good news for toilet paper manufacturers, at least! But what about a young woman who has mulled over a transformational business idea night after night at her kitchen table, but whose now-heightened aversion to risk means a business is never started, employees are never hired, and products are never launched? High uncertainty makes it harder still to predict the net impact of so many behaviour changes.

Companies also face a new set of uncertainties. US carmakers have experienced parts shortages because the Mexican state of Chihuahua, where many suppliers are based, has limited factory attendance to 50 percent of employees. Such disruptions may lead manufacturers to diversify their supply chains or keep more inventory on hand. Employee health is another new operational risk. Will companies decide to rely more on automation as a result?

Changing suppliers, keeping more inventory, and needing to invest in more advanced machinery all bear costs for manufacturers often operating on thin profit margins. But raising prices in a recession is also difficult. For goods deemed “essential,” like medical supplies, countries may change regulations or subsidise domestic production, altering the competitive landscape. Similar to households, companies hit by a sharp drop in revenue may keep higher liquidity buffers. Some changes may be quantifiable once shifts in production stabilise and the impact on earnings becomes clearer, but uncertainty will remain for a long time for many companies.

Market volatility, defaults, and evolving regulation will change the landscape for the financial sector. The extreme swings in market conditions and asset prices seen early in the outbreak will change risk management models, with impacts on liquidity and capital buffers held to manage such risks. Regulations may also change, as policymakers seek to prevent a recurrence of the volatility and reduce the need for central bank interventions to preserve market functioning. Moreover, the recession will increase losses.

Economic policymakers are confronted with an intricate new puzzle: how to finance higher spending demands amid falling revenue and ballooning debt. Without a solution to the health crisis, governments will be dealing with unmeasurable variables in trying to plan the future. Private sector interventions through guarantees or direct ownership may have lasting and hard-to-quantify implications for competition and private risk-taking, beyond the immediate impact on public sector balance sheets

What does all this mean for the IMF? We have been called to action like never before, providing emergency support to a record number of countries within a short time frame. We have introduced new support facilities and expanded the borrowing limits on existing ones.

The IMF faces new operational challenges. Many countries have requested financial assistance to weather this storm. Some have challenging debt loads, where sustainability is hard to measure amid elevated uncertainties about growth and trade prospects. And if some countries do need to renegotiate their debts in a post-COVID world, the private sector will have to play a larger role in providing financing assurances to reduce uncertainty, given its increased importance as a creditor. Our members are also asking for policy advice and for help developing the capacity to cope with this severe shock. We must respond while still largely working remotely and unable to travel. Similar operational restrictions have challenged production of one of our key raw materials: timely and accurate country statistics.

In fact, one of our core functions, economic surveillance, has had to reinvent itself. Going back to Knight’s concepts, much of our work focuses on measuring and addressing quantifiable risks. We use macroeconomic data to create baseline scenarios and estimate their likelihood. Following the global financial crisis, the approach had already been broadened by developing various scenarios and analysing their probability so as to better understand the risks around numeric forecasts.
The size and simultaneity of the pandemic shock make for extreme Knightian uncertainty and ever-changing landscapes. We have had to become more agile in that regard. When the infection was still a suspicious pneumonia outbreak in China, we reached out to epidemiologists to learn how to combine their forecasting models with ours. New sources of big data were incorporated to understand consumer behavior changes where traditional statistics fell short. Even before the pandemic, we had started using military-style simulations to study escalating trade tensions. The approach has proved helpful as we attempt to quantify new risk.

Some time ago, I came across an article about how a US epidemiologist teamed up with a German reinsurance company to develop pandemic insurance product. They designed health models and early warning systems, estimated the economic impact for vulnerable industries, and determined how to distribute the risk. The policy became available in late 2018, but potential clients found it too expensive for such an unlikely event. When the catastrophe materialised in early 2020, it was too late to buy insurance.
This cautionary tale shows how much we need to improve risk assessment and management. Manufacturers, for example, must strike a balance in their supply chains between just-in-time (cheaper but inflexible) and just-in-case (more resilient but costlier) methods while factoring in trade, logistics, and sanitary conditions. Going back to the old ways seems reckless; erring too much on the resilience side might decrease the productivity of the economic engines.

Finding this new equilibrium between risk and resilience when there is so much uncertainty is a challenge we will face far into the future. It will require effort, patience, and innovative thinking. Fundamentally we will need more global cooperation. Everyone will be safe only when each one is safe. Only by working together will we overcome the massive uncertainty and the economic turmoil caused by this mighty microscopic scourge.

Opinions expressed here are those of the authors they do not necessarily reflect IMF policy.


The Sustainability Accounting Standards Board: Financial Impacts of Sustainability - Connecting Businesses and Investors

Sustainability issues are global business issues. For example, data security—a social issue—is important to companies in the software industry. Water management—an environmental issue—is essential to a beverage producer. Managing conflicts of interest—a governance issue—is critical for an investment bank. Effectively managing these issues over the long-term is likely to improve companies' financial performance. Because of this, investors want comparable data on how companies are managing business-critical sustainability issues. Just as financial accounting standards provide a common language for companies and investors to talk about financial performance, the markets need a common language for companies and investors to talk about sustainability performance.

[caption id="attachment_18382" align="aligncenter" width="900"] Jeff Hales: SASB Standards Board Chair. Photo: Reese Nanavati[/caption]

The Sustainability Accounting Standards Board (SASB) fills this need by connecting businesses and investors on the financial impacts of sustainability. SASB Standards—which are available for 77 industries—identify the subset of environmental, social, and governance issues most relevant to financial performance in each industry. Companies around the world use SASB Standards to identify, manage, and communicate financially material sustainability information to investors. SASB Standards are designed to be cost-effective for companies—on average, each standard has six disclosure topics and 13 accounting metrics. The Standards help investors access sustainability data that is comparable, consistent, and reliable. SASB’s rigorous and transparent standard-setting process includes evidence-based research, broad and balanced participation from companies, investors, and subject matter experts, and oversight and approval from an independent Standards Board.

Standards are an important tool because improved transparency leads to improved performance. When companies use SASB Standards to disclose comparable sustainability data, investors can clearly compare companies on their sustainability performance and can allocate capital to the best performers. Companies can benchmark their performance against peers and work to improve their sustainability performance to increase shareholder value. This creates a “race to the top” on improved environmental and social outcomes, ultimately making the capital markets a powerful lever of change for a more sustainable and just world.

The Sustainability Accounting Standards Board, led by CEO Janine Guillot, is a nonprofit organisation. The SASB Foundation Board of Directors oversees the strategy, finances, and operations of the entire organisation, and appoints the members of the SASB Standards Board. The SASB Standards Board is an independent board that is accountable for the due process, outcomes, and ratification of the SASB Standards. The SASB Foundation’s funding model includes three pillars of support: earned income, contributions from market participants, and philanthropy.

To download any of the 77 industry-specific standards, or learn more about SASB, please visit SASB.org.


The Two Sides of Capital Flows into Brazil

There was a significant inflow of funds in Brazil's external financial account in October and November for investments in both stocks and fixed income instruments.

The bulk of the recent inflow has come in a passive way, and it did not include much volume on the side of active investors. For the wave to unfold in the availability of external resources to finance investments in the country, progress and confidence in the domestic fiscal and regulatory agenda will be relevant.

FDI in Brazil this year remains weak (Chart 1) but there was a significant inflow of funds in the external financial account in October and November for investments in stocks and fixed income instruments.

[caption id="attachment_18390" align="aligncenter" width="592"] Chart 1: FDI monthly flows 2020 (USD $ billion). Source: Central Bank of Brazil[/caption]

The portfolio investment account for the year remains in the red (Chart 2). The substantial departure in March and April, reflecting the tremendous shock that Covid-19 brought to the global financial markets, has not yet been fully offset by inflows since June. But for some, the recent figures gave rise to a feeling that the improvement in international financial conditions was sufficient to guarantee tranquility on the external front.

[caption id="attachment_18391" align="aligncenter" width="586"] Chart 2: Portfolio investment - net flows 2020 (USD $ billion). Source: Central Bank of Brazil[/caption]

The external inflow was an important factor for Brazil’s equity index (Ibovespa) to register an increase of 17.73 percent in November, which reduced the fall in 2020 to 4.35 percent. In dollars, due to the appreciation of the real in the month, the appreciation was almost 25 percent, placing the Brazilian stock exchange as the best performing of emerging economies and the three largest Wall Street indices (S&P 500, Nasdaq and Dow Jones). It is also worth noting that the share of foreign investors holding domestic public debt securities rose from 9.44 percent to 9.79 percent in October.

What now? Could those who drew so much attention to the need for advances on the domestic policy side be exaggerating? Wouldn’t the approval of reforms to facilitate compliance with the public spending ceiling be a precondition for relying on foreign financial resources in the recovery of Brazilian economic growth?

The truth is that capital flows to emerging economies respond to external, more general, and domestic, country-specific factors and impulses. They are always the combined result of both, which implies recognising that, at the limit, domestic factors make each country unique. In the current Brazilian scenario, it is not possible to fully rely on the evolution of international financial conditions.

Let's look outside. News of effective vaccines with lower logistical requirements has fuelled optimism about the future of the global economy. The appetite for taking risks has increased, particularly given the prospect of prolonged low rates of return in low-risk applications. The US election outcome also contributed to this.

Then, in November, there was a rush towards assets in emerging economies, accompanied by another for stocks and debt securities in the US. In the case of emerging markets, there is a clear return to the situation prior to the Covid-19 financial shock and the capital flight in March.

Emerging stock funds attracted nearly $14bn in the second and third weeks of November, while $22bn moved to buy stocks of those countries in the same month. Debt securities from those countries were also acquired with intensity (Chart 3).

[caption id="attachment_18392" align="aligncenter" width="596"] Chart 3: Cross-border flows have surged in two of the past three weeks.
Weekly foreign investor flows to local emerging markets (USD $ billion). Source: Institute of International Finance. © FT[/caption]

The appetite for risk and the prospect of improvement in the global economy were manifested in a portfolio rotation, with a stronger demand for energy and financial services in relation to assets already valued in Wall Street. The Brazilian stock exchange as a destination benefited from the fact that it has banks, Vale and Petrobrás as main stocks.

There is also a forecast that the dollar will gradually devalue against other currencies. This tends to raise dividends and interest earned in local currencies with emerging assets in dollars, and facilitates the payment of debt commitments abroad by governments and companies in these countries. Just remember the hardships of some — like Argentina and Turkey in 2018 — in times of dollar appreciation.

The possibility that, at some point, the Federal Reserve will be urged to raise interest rates and/or undo its quantitative easing (QE) remains. The simple conjecture could generate a new “taper tantrum” like that of 2013, when the mere announcement by the Fed that it was planning to exit QE caused a huge outflow of capital from emerging countries with current account deficits, including Brazil at the time. In any case, this is not likely any time soon.

How about the country-specific side in the Brazilian case? First of all, it should be noted that the bulk of the recent inflow has come in a passive way, that is, as a component of funds that seek exposure to emerging assets in general. In this a group, Brazil occupies a significant position despite recent changes recent in indices. As an increasing volume of resources in the global financial markets has been driven by exchange traded funds (ETFs), in relative terms, lower quality assets (lower-rated sovereign bonds, less liquid stock markets) undergo more positive and negative impacts than the others in situations of increase or decrease in the size of ETFs.

The recent inflow of capital in Brazil did not include considerable volume on the side of active investors, those who look directly at specific assets. For these, country-specific domestic determinants weigh more. For the ongoing positive wave to unfold in the availability of external resources to finance investments in the country, progress and confidence in the domestic fiscal and regulatory agenda will be relevant.

Public-private partnerships, as fiscal space for public investments, will continue to be tight in the coming years. As the inflow of funds is no longer obtained by offering high interest premiums on the public debt, its full return will have to occur for exposure to assets of another nature. Many think that the Brazilian economy is at a crossroad, with possible positive or negative trajectories in the interaction between risk premiums, interest, public debt and GDP. Capital inflows or outflows will respectively reinforce positive and negative trajectories. And the homework will make a difference.


UNCDF: Women as Builders of Inclusive Digital Economies

[caption id="attachment_18401" align="alignright" width="300"] Author: Nandini Harihareswara[/caption]

The dramatic toll of the COVID-19 pandemic, at times, seemingly defies belief. Yet, every time there is an analysis of the pandemic’s damage — human, societal, economic — a recurring narrative emerges, one that is quite believable. That COVID-19 has wielded particular damage against upon those constituencies traditionally underserved by their communities, country and the global financial ecosystem. The particular impact COVID-19 has unleashed on women, specifically given their precarious place in practically all local and national economies, is a dramatic example.

Data from the powerful report published by UN Women, “From Insights to Action: Gender Equality in the Wake of COVID-19,” proves the point. Regarding the 740 million women in the world working in informal economic sectors, they saw their income fell by an astounding 60%. As for women in formal employment, women in Asia and the Pacific were far more likely than men to report drops in employment working time, 50% to 35% respectively, while a quarter of self-employed women in Europe and Central Asia reported job losses. With women representing the vast majority of the world’s domestic workers (80% according to the report), nearly three-fourths of those domestic workers have lost their jobs as a result of COVID-19, while women working in “feminised sectors” were nearly 20% more likely to lose their job compared to their male counterparts.

At its worst, the pandemic would exacerbate the challenge of global female poverty, with the UN Women report projecting that nearly 250 million women aged 15 will be driven to poverty due to COVID-19, with nearly half of these women living in sub-Saharan Africa alone. For women aged 25 to 34, the global poverty rate will tilt towards women disproportionately over men, with 121 women experiencing poverty for every 100 men. These impacts will almost surely create a multiplier effect relating to the challenges women are more likely to experience, including gender-based violence.

"Inclusive digital economy is an economy that connects individuals, households, and small businesses with financial eco-systems that catalyse participation in the local economy and provide tools to climb out of poverty and manage financial lives."

Of course, the economic damage will be the most ferocious in the world’s 47 least developed countries (LDCs)—the countries of primary focus for the United Nations Capital Development Fund (UNCDF). As we have observed over the past year, COVID-19 threatens to dramatically exacerbate the structural challenges that prevent women from achieving financial agency and autonomy: from being more likely to be excluded from economic resources to lack of training driving women to work in the informal sector; from inadequate support and financing for women-led and gender friendly SMEs to the absence of infrastructure and related services that would strengthen women’s economic opportunities; from the digital and energy divide in the LDCs more likely impacting women and girls to local policies, laws and social norms that are discriminatory against women while reflecting a profound lack of women’s leadership in decision-making.

UNCDF has actively worked to deploy gender-aware responses to the pandemic: prioritising local support mechanisms to protect women-owned enterprises and female entrepreneurs, including direct financing, technical support and credit guarantees; digital finance solutions tailored to women, such as connecting women entrepreneurs and workers through e-commerce, data collection and agriculture chain digitisation; and collaborating with UNDP on a bottom-up gender-responsive strategy and action action for COVID-19 recovery. But the reality is that we cannot choose between deploying both a gender aware response to combat the pandemic on the ground or addressing the structural challenges that pre-dated COVID-19 in impeding women’s economic empowerment. We have to confront both at the same time, in particular because they are inextricably intertwined with each other. And a critical driver of UNCDF’s approach to addressing and reforming these structural challenges involves supporting inclusive digital economies.

Empowerment Through Inclusive Digital Economies

What are the characteristics of an inclusive digital economy? It is an economy that connects individuals, households, and small businesses with financial eco-systems that catalyse participation in the local economy and provide tools to climb out of poverty and manage financial lives. When it comes to women’s economic empowerment, an inclusive digital economy reduces poverty, increases resilience, and improves economic opportunities for women and girls. UNCDF envisions women as agents of change who can be builders of the digital economy, and who will partner with women and the public and private sectors, leveraging technology and innovation, to help increase women and girl’s digital and financial autonomy.

With 20 years of experiencing advancing financial inclusion in the world’s toughest markets, we are implementing a market system development approach to decrease the digital divide for women and girls, use technology to improve women’s economic opportunity, to help to transform women into builders of emerging digital economies.

"We will leverage technology to increase access to finance for women-owned or managed small to medium enterprises using innovative forms of funding."

This approach is designed to serve the distinct needs of women and girls throughout their lifecycles: from the educational needs of young, adolescent women, to the household challenges of adolescent girls and adult women, to the realities tied to caring for the infirm, dying of spouses and elder age for older women. The approach is framed around five key goals, realising those goals will change the reality of women’s participation in growing digital economies, foster the wellbeing of their households, and in turn contribute to the inclusive economic development of their countries.

First, we aim to decrease the digital divide by increasing the number of women and girls that own a phone, can access to the internet, and have access to energy sources to power digital services. For access to be meaningful women and girls need the capability and autonomy to use it to empower their lives. Second, we are going to work with the private and public sector to increase the number of affordable digital and financial products that address the needs of diverse segments of women. For instance, rent-to-own smartphone payment plans, goal-based savings products, digital credit, and biometric bank access points.

Third, we will leverage technology to increase access to finance for women-owned or managed small to medium enterprises using innovative forms of funding. Women-owned businesses are often part of the ‘informal economy’, this has made it hard for them to receive support during the COVID-19 pandemic. Our work will, therefore, also focus on helping to formalise women-owned businesses. We will also support the public sector to collect and use sex disaggregated data to inform policy decisions increasing women’s digital or financial inclusion; work with public and private sector on the barriers to collecting and using sex disaggregated data for increasing product usage by women; and share learning on policy gender bias and ways in which to address that bias.

Finally, we are going to create natural “coalitions of the willing” between public and private sector actors to increase the number of women in the workforce and leadership positions within Digital Economy Ecosystems.

Into the Future

2020 marked the 25th anniversary year of the Beijing Declaration and Platform for Action — the UN-led agenda for women’s empowerment that UN Women described as the “most visionary agenda for the empowerment of women and girls, everywhere.” While the onset of COVID took some focus away from this important anniversary, this did not stop UN Women from launching its Generation Equality campaign, a multi-generational campaign to realise women’s rights for an equal future.

UNCDF was privileged to be chosen as co-leader of the Economic Justice and Rights Coalition. We will work with fellow coalition members and other partners to contribute to reducing economic inequality between men and women. We bring to the coalition our experience in promoting equitable economic development through “last mile” financing, our considerable reach developed through an on-the-ground presence in 28 developing economies, and our market development approach.

It is a sad coincidence that the pandemic coincided with the 25th anniversary year of the Beijing Declaration and the Generation Equality movement. But it can also serve as a powerful reminder. A reminder that the pervasive and systemic challenges women face cannot be separated from the harms they are experiencing due to the pandemic. This reality defines our approach of supporting inclusive digital economies to advance women’s economic empowerment, as well as embracing the challenge of making this empowerment a universal reality in the years to come.

About the Author

Nandini Harihareswara is a Senior Advisor and Lead Focal Point on Gender Equality for the UN Capital Development Fund’s Inclusive Digital Economies division. She formerly worked as the UNCDF Digital Finance Regional Technical Specialist in Zambia and Malawi. She was a founding member of the USAID Digital Development Division in 2011 and served as the Strategy & Operations Chief and Senior Digital Finance Advisor. She began at USAID working as an Investment Officer for the Development Credit Authority Office. She began her career as a Presidential Management Fellow at the US Department of Transportation & the World Bank.

She was the architect of the UNCDF Zambia Sprint4Women DFS design competition, and the author of numerous publications focused on finance, technology and international development, most recently a co-author of the recent G20 paper on Advancing Women’s Digital Financial Inclusion.

Nandini has an MBA and a Masters in International Trade and Investment Policy from the George Washington University. She also holds a BS in Psychology and a BA in Political Science from the University of California at San Diego.

About UNCDF

UNCDF offers “last mile” finance models that unlock public and private resources, especially at the domestic level, to reduce poverty and support local economic development. UNCDF pursues innovative financing solutions through: (1) financial inclusion, which expands the opportunities for individuals, households, and small and medium-sized enterprises to participate in the local economy, while also providing differentiated products for women and men so they can climb out of poverty and manage their financial lives; (2) local development finance, which shows how fiscal decentralisation, innovative municipal finance, and structured project finance can drive public and private funding that underpins local economic expansion, women’s economic empowerment, climate adaptation, and sustainable development; and (3) a least developed countries investment platform that deploys a tailored set of financial instruments to a growing pipeline of impactful projects in the “missing middle.’’


PwC: South Africa Has an Unprecedented Opportunity to Capitalise on the Rapidly Developing Global Hydrogen Economy

Hydrogen can be a game changer for the South African economy. Opportunities exist for South Africa to partake in the global hydrogen economy but will depend largely on investments in renewable energy generation, as well as the development of a clear hydrogen strategy.

All over the world, interest in hydrogen as a vector for clean energy is growing, as industries and governments investigate and implement national decarbonisation strategies. With the rapid growth in renewable electricity and falling costs of wind and solar power, the opportunity to produce zero carbon hydrogen has caught the attention of global energy players. With the world increasingly turning towards countries that have optimal renewable energy resources to provide the clean energy of the future, South Africa is in an extraordinary position to revolutionise its own economy and supply green hydrogen to the world.

[caption id="attachment_20910" align="aligncenter" width="900"] Key takeaways: Unlocking South Africa’s Hydrogen Potential.[/caption]

PwC South Africa recently issued its inaugural ‘Unlocking South Africa’s hydrogen potential’ report released today.

Hydrogen Is Critical to Achieving Global Decarbonisation

As the world becomes more reliant on renewables as its primary source of energy, hydrogen offers an unparalleled solution for the transport, storage and efficient utilisation of clean energy.

In the past few decades, the world has already seen the massive growth in both renewable energy technology and implementation. As the pace on innovation has accelerated and the benefits from economies of scale were realised, the landed cost of renewable energy has tumbled. In many cases, renewables are on par or cheaper as compared to their carbon intensive counterparts.

"The outlook for the global energy sector will see wind, solar and hydro accounting for an ever-increasing proportion of our energy needs."

The outlook for the global energy sector will see wind, solar and hydro accounting for an ever-increasing proportion of our energy needs. It is estimated that by 2050, 85% of global electricity production will be sourced from renewables.

As the world moves towards renewables as its primary energy source, production will become increasingly geographically constrained, necessitating increased cross-border transportation and storage of green energy. With the impracticality of long-distance electricity transmission and the prohibitive cost of large scale battery storage, it just so happens that the best option for the transport, storage and efficient utilisation of clean energy lies with the same element that makes up 75% of the mass of the universe; hydrogen.

Hydrogen is exceptionally energy dense per unit of weight and is no more difficult to store and transport than liquified natural gas (LNG). Through its direct combustion, its use in fuel-cells and its use as an industrial feedstock, it can decarbonise a greater range of sectors than renewable electrical energy alone. Hydrogen can be produced in collaboration with renewable energy almost anywhere in the world. Importantly, in the context of global climate change, the use of hydrogen that is produced from renewable energy produces no carbon emissions.

The Time Is Now

Hydrogen is receiving an unprecedented level of international traction as the cost of renewables decline and carbon emissions are increasingly penalised.

[caption id="attachment_20911" align="aligncenter" width="900"] The Global Energy Transition: Hydrogen is critical to achieving global decarbonisation.[/caption]

Global momentum is growing across the hydrogen industry, with few sectors likely to remain untouched by this upcoming energy revolution. At the beginning of 2020, the global hydrogen project pipeline, across grey, blue and green projects stood at $95 billion. The carbon abatement of the blue and green hydrogen projects in this pipeline will be large enough to offset the annual carbon emissions of Nigeria.

Progress has been seen with the launching of national policies and government funding initiatives, including national hydrogen roadmaps, building upon the momentum of existing pilot programmes. Strategic memorandums of understanding (MoUs) between hydrogen countries that are ideally suited to the production of hydrogen and countries who have aggressive decarbonisation targets and want to use hydrogen are clear signs of the traction in the market.

South Africa Has the Competitive Advantage to Produce and Export Green Energy

Hydrogen is categorised into three broad types; grey, blue and green. Classified as such based on the quantity of carbon that is emitted in their production and the production process itself. Grey hydrogen is produced from natural gas (through steam methane-reforming) or from the gasification of Coal. Although grey hydrogen still accounts for most of the global hydrogen supply, its relative high carbon intensity has seen a decline of its popularity.

Blue hydrogen is produced from the same carbon intensive feedstocks as with grey but is twinned with some type of carbon capture technology, thus vastly increasing the green credentials of the final hydrogen gas. Blue hydrogen allows companies or countries who have previously invested into grey hydrogen production to elongate the lifespan of their assets and allow for the continued utilisation of already identified fossil fuel resources.

Where most investor attention is being focused is on green hydrogen. This production method utilises electricity generated through renewable energy (wind, solar or hydro) and splits pure water through an electrolysis process into hydrogen and oxygen molecules. As the cost of renewable energy and electrolysis technology has plummeted in recent years, green hydrogen is ever increasingly reaching parity with its more carbon intensive counterparts. In countries with high renewable energy potential such as Saudi Arabia, Australia and Chile, green hydrogen has already become the preferred investment choice.

As South Africa has world leading solar and wind resources, these early mover green hydrogen producing countries have important implications for the future of the South African economy. If the South African can properly leverage these resources and combine it with a fertile investor and regulatory environment, South Africa could transition to an exporter of green energy to the world alongside decarbonising large sectors of its own economy.

Hydrogen Means More Than Just Fuel Cells

For the past decade or so, hydrogen development in South Africa has been largely driven through the initiatives of the mining sector. There have been projects from some of the country’s largest PGM miners such as Anglo American Platinum’s fuel cell electric vehicle (FCEV) mining truck at Mogalakwena mine or Impala Platinum’s FCEV forklift fleet at the Springs refinery. These pilot schemes have been heavily focused on the use of PGMs in the catalyst plates of fuel cells. Although these projects are a good start to bring hydrogen technology into the transportation space, the focus of their application is quite narrow. There exists a far larger opportunity to leverage the unique properties of hydrogen to revolutionise how we think about energy.

When looking at what hydrogen can do, it is easiest to break it down into the four pillars of the hydrogen economy:

Transportation - Across both the road and rail sectors, fuel cell technology can provide unparalleled performance for vehicles. These FCEVs can outperform their fossil fuels and battery counterparts through better power to weight efficiencies, faster refuelling times and significantly longer ranges. Across the aviation and shipping industries, hydrogens ability to produce carbon neutral fuels that can run through existing traditionally carbon intensive technologies such as diesel engine and jet turbines, makes it unmatched in its ability to decarbonise the transport sectors.

Building heat and power - In countries that have existing natural gas networks, hydrogen offers a simple decarbonisation alternative. If green or blue hydrogen is blended into these gas grids, then the largest carbon emission in the household (heating and power) can be entirely offset. Pilot schemes that aim to transition existing natural gas grids over to running on 100% hydrogen are already underway in Northern Europe. In areas where access to power or reliability of power are problematic, Hydrogen solutions are already being used to provide an alternative to carbon intensive diesel generators. Fuel cells are already widely used in the Southern Africa telecommunication infrastructure for off-grid power.

Industrial heat and feedstock - Perhaps the most compelling future area for hydrogen is in its use for both industrial heat and in chemical feedstocks. Either combusted on its own, or in combination with oxygen, hydrogen can produce extremely high temperatures. If green hydrogen is utilised for this purpose, then offers perhaps the only plausible decarbonisation alternative for large scale industrial heat users. Hydrogen is already widely used at the feedstock for the production of fertiliser (ammonia) and in the production of liquid fuels. Currently the vast majority of the hydrogen used in these processes is sourced from natural gas or coal. If the hydrogen needed for these processes were to be sourced from renewable energy, via electrolysis, this would fully green these fuels and feedstocks. As it currently stands green hydrogen is the only plausible option to decarbonise industrial feedstock.

Energy sector - One of the key issues facing the renewable energy sector is how best to efficiently store the energy created in order to achieve smooth supply and maximise asset utilisation. Currently, there is limited capacity to hold energy within grid systems and the massive cost involved with battery storage at scale makes it a poor option. Hydrogen can help solve the intermittent supply issues associated with renewable energy by utilising electrolysis to convert excess electricity into hydrogen during times of oversupply. This hydrogen can then be utilised to generate power through either fuel-cell or direct combustion in gas turbines when it is needed.

Investing in Hydrogen is Necessary to Diversify the South African Economy

Traditionally, South Africa has been a net importer of energy, especially in the liquid fuels and gaseous sector - development of the hydrogen production sector will be pivotal in cementing South Africa’s position as a net exporter of clean energy and major earner of foreign currency to our economy, but also to secure clean domestic energy supply that is de-risked from supply chain disruptions and currency devaluation.

One of the key issues for South Africa’s energy sector is that as a country we are reliant on energy imports, specifically in the liquid fuels and gaseous space. Development of the South African industrial economy has been hamstrung by the slow development of much needed infrastructure development such as the delay on LNG import terminals and required supporting infrastructure to enable industrial development. Naturally, this is an extremely volatile situation as the economy and households are subject to any supply chain disruptions, market changes, and the impact of currency devaluation.

World energy production is becoming increasingly geographically constrained, necessitating the need for cross-border transportation of storage of energy. Being able to leverage our world-leading renewable power potential, South Africa will be well positioned to secure its own domestic supply of energy that will anchor economic growth, but more importantly become a net exporter of energy in the form Hydrogen enabled chemicals, fuels and products to high demand markets in Europe and Asia. The large renewables investment needed to generate sufficient quantities of Hydrogen for export will bring South Africa’s landed cost of energy down and a portion of this capacity can be used to support our domestic grid, relieving the load on state utility, potentially at a lower cost to consumers. Furthermore, development of a new hydrogen export industry will create numerous jobs along the value chain and enhance the specialised skills pool in the country.

Regulation is Key for South Africa to Successfully Capitalise

Progress is being made in the South African hydrogen space, with the first government led hydrogen roadmap under development and the Green Hydrogen Atlas-Africa initiative highlighting South Africa’s potential to the global community.

However, in order to fully realise the benefits of the hydrogen economy the following steps need to be taken:

Finalise the South Africa Hydrogen strategy and roadmap – where to play, how to start, how we support and incentivise (Currently under development)

Clear Ministerial direction around which government department will champion hydrogen (e.g. Energy or Trade and Industry)

Assesses the need for regulation in enabling a competitive market (regulatory hurdles need to minimised and processes streamlined)

Incentivise early investment and just transition from red, to blue, to green Hydrogen (e.g. sector specific Special Economic Zones, tax credits, policy certainty)

Fast tracking of renewable energy licensing used for hydrogen production

Review and strategy for local content and local skills development

Signing of collaboration agreements between hydrogen producers, off takers and technology players (similar to the Japan-Australia and Germany-Morocco MoUs signed in recent years)

If South Africa commits to a certain, transparent, stable and accountable policy environment for hydrogen, the country can reap the significant rewards on offer. The country stands in an unprecedented position to benefit from the global energy transition and transform itself in one of the green energy majors of the world.

About the Author

[caption id="attachment_20913" align="aligncenter" width="800"] Author: Jonathan Metcalfe[/caption]

Jonathan Metcalfe is South Market Lead for hydrogen and an economist in PwC’s Strategy& division.

Jonathan’s has a core focus on the development of South Africa’s hydrogen economy. Jonathan has extensive experience in mining and resources, particularly in cost optimisation, market entry strategy and infrastructure development. Jonathan is an economist by training and has considerable knowledge in financial and risk modelling.


Sparkling Dubai: Tourism and Business Hub — and the  Perfect Events Venue

[caption id="attachment_20088" align="alignright" width="300"] AIM organiser and CEO of Strategic: Dawood Al Shezawi[/caption]

CFI.co puts questions to Dawood Al Shezawi, AIM organiser and CEO of Strategic, one of the world’s leading exhibition, conference and event organisers.

The Strategic group operates across sectors to facilitate a healthy ecosystem for investment promotion, start-ups, real estate, wood and woodworking equipment, and environment tech.

Since its establishment in 2000, the company has operated to international standards, underpinned by strong, clear business principles and ethical values.

More than 25 million visitors are expected at its crowning event, AIM (Annual Investment Meeting) Expo 2021-2022, to be held in Dubai in March. It’s seen as one of the most important business events on the global calendar.

What are your expectations for Expo 2021-2022?

It will be the greatest show in Dubai and in the UAE, a showcase of innovation, a celebration of human brilliance, bringing together the highest talents from over 190 countries.

More than 25 million visitors are expected, 70 percent of them from overseas. It is the world's largest meeting place, with pavilions dedicated to countries offering opportunities for investment, networking, creating partnerships and meaningful relationships. It’s become an amazing way to enrich one’s cultural experiences and gain a wealth of knowledge.

The Expo will create job opportunities in sectors such as tourism, construction, ICT, marketing and logistics. It will generate opportunities, and highlight UAE as a preferred investment destination. It also contributes to the country’s economic, cultural, and social initiatives.

How has the pandemic influenced Dubai?

The pandemic has been an enormous challenge, not just for Dubai but for every city and country. But on the other hand, it has also become a great opportunity for Dubai to prove its resilience and its generosity.

It has made strides to improve the lives of its people and support them during the trying times by implementing beneficial initiatives for individuals, families and businesses. It has launched several measures to address the challenges and adapt to the demands of the pandemic.

We have also seen the utilisation of innovative technologies and AI in the healthcare, finance and real estate sectors, for faster and easier transactions and for improving the business environment. The pandemic has given the city the time to explore, understand, and work quickly to ensure a strong post-COVID recovery.

The challenges ahead remain vast, but these will continue to catalyse the Dubai government and business leaders to work together to leverage new technologies and opportunities to build a more sustainable and diverse economy.

What sets Dubai apart from other venues?

Dubai is one of the most influential cities and is a world-class tourist destination. It’s home to landmarks such as the Burj Khalifa. It also has the Dubai Mall — the world’s biggest — and many other attractions. It’s multicultural and diverse, has a large expat community, and welcomes millions of tourists each year; 16 million in 2019. Even during the pandemic, Dubai saw 417,000 visitors July-September 2020. The city is a leading financial hub, also for infrastructure, healthcare, AI, fintech and many other sectors. Dubai sets itself apart with constant growth; it’s the perfect venue.

What live events or conferences do you have coming up?

We hold the International Property Show (IPS) physically, from March 23-25 at the Dubai World Trade Centre. IPS attracts thousands of visitors across the globe every year and the numbers are expected to grow for this 17th edition. We’re excited and keen to offer a world-class event for the global real estate community.

We’ll use the powerful combination of live and the virtual environments to offer a more dynamic platform for the global audience. The Annual Investment Meeting will hold its Hybrid Edition on the same dates. We will offer both physical and virtual activities.

WoodShow Global will also have a series of Hybrid Editions this year; we have Cairo WoodShow from February 18 to 21, Dubai WoodShow from March 9 to 11 and Gabon WoodShow from June 10 to 12.

Any virtual events or conferences in the pipeline?

The Annual Investment Meeting will be having its series of digital regional focus editions to generate opportunities in specific regions of the world and highlight their economic potential. The first edition is the AIM EURASIA 2021 which will be held in February 9-10. AIM Africa will be held in June, AIM Latin America in September and AIM Investment Network in October.

What are the advantages and disadvantages of virtual conferences?

During these times they have helped to realise the full potential and flexibility of the event industry. Holding virtual conferences is an excellent option to connect and continue business transactions, despite the limitations caused by the health crisis. Another huge benefit is that virtual events have no geographical limitations, eliminating travel costs for participants. The number of attendees and the opportunity for more exposure grow exponentially.

Virtual events also maximise opportunities for networking, building solid partnerships and collaborations among governments, among businesses and organisations.

The format provides a wide range of metrics that will help organisers plan for future events, such as the engagement rate of activities, live polling response rates, deals closed, attendee satisfaction and retention, website visits, generated revenues. These KPIs are a lot easier to track when your event is online.

On the other hand, going virtual can be challenging for those who do not have access to fast internet. For those who prefer interpersonal connections for high-stake meetings, joining a virtual conference could be seen as a setback.

What business and leadership lessons have you learned over your career?

One of the most important things is that successful long-term business relationships stem from integrity. Professionalism, honesty and practising the right business etiquette — all the time — are crucial to trust and reputation in the industry.

Commitment and passion will also go a long way. No matter what hindrances you encounter, if you stay committed and if you’re passionate about what you do, nothing can stop you. And as a leader, your passion inculcates new energy in your team, which serves as their motivation to work harder and perform better.

As an entrepreneur, it’s important to embrace change as part of the growth process. Especially during these times where technological advancements are crucial for survival. You need to be open-minded and be willing to keep learning and cultivating your knowledge to stay abreast of the latest trends and innovations. It is not a skill you can learn in a day but we learn through our challenges.

What are your expectations and hopes for 2021?

The pandemic has changed lives around the world, how we work and live. For sure, the use of innovative technologies will continue to rise and expand. I expect 2021 to be a much better year where businesses find more innovative, sustainable and flexible ways to an economic recovery.

We have proven our resilience; we’ve found new ways to do business through smarter solutions. As the global situation improves, I am optimistic that we will be able to hold physical exhibitions and conferences as well as hybrid editions. We’ll bring excitement to our audiences through our state-of-the-art activities, and continue to explore possibilities. We stay true to our commitment to deliver world-class events and create rewarding opportunities for everyone. No matter what it takes.


Dissident’s Daughter, Crusader for Health and Women’s Rights: Sheikha Moza bint Nasser al-Missned

[caption id="attachment_18414" align="alignright" width="300"] Sheikha Moza bint Nasser al-Missned[/caption]

When Sheikha Moza Bint Nasser, mother of current Emir of Qatar, inaugurated WISH 2020 (World Summit For Health) in Doha in November, she did so in her official capacity as president of the Qatar Foundation.

Her unofficial role was once described as “the enlightened face of a profoundly conservative regime”. She is the daughter of a prominent Qatari dissident, Nasser bin Abdullah Al-Misned, who — once released from prison — led his extended family into exile in Kuwait.

Bint Nasser, born in 1959, lived there from age five to 18. Her family returned to Qatar for her marriage to Sheikh Hamad bin Khalifa Al Thani, who had just been appointed Crown Prince of the Emirate. The couple had five sons and two daughters, and their second son is the current Emir of Qatar.

In 1995, Bint Nasser and her husband founded the Qatar Foundation for Education, Science and Community Development (QF) with the aim of supporting Qatar “on its journey from a carbon economy to a knowledge economy, by unlocking human potential”.

After seizing power in a bloodless coup in 1995, Sheikh Hamad oversaw an increase in natural gas production — to 77 million tonnes — making it the world’s richest country per-capita, with an average income in excess of $85,000. He realised that the country needed to diversify its economy and invest wisely. Moza Bint Nasser was the perfect figurehead for the foundation, a non-profit comprising 50 entities. It has partnerships with leading international institutions, and Bint Nasser has proved adept at spearheading national and international development projects.

Domestically, Sheikha Moza Bint Nasser serves as chairperson of the QF and courts leading global educational institutions to set up campuses in the emirates Education City. Eight universities — six American, one British and one French — have branch campuses at Education City, including University College London, HEC Paris, and Georgetown.

As vice-chair of the Supreme Council of Health from 2009-2014, Sheikha Moza Bint Nasser was responsible for major healthcare reforms. Since 2016, she has been president of Sidra Medicine, a training and research hospital that is a leading institution caring for women and children.

Internationally, she founded Education Above All (EEA). Its goal is “to contribute to human, social and economic development through the provision of quality education, with a particular focus on those affected by poverty, conflict, and disaster”. The organisation has committed to enrolling 10.4 million schoolchildren worldwide, and has Graça Machel — former first lady of Mozambique and widow of Nelson Mandela — on its Board of Trustees. Also on the board is Koichiro Matsuura, former director-general of UNESCO. As a Special Envoy, Moza Bint Nasser has promoted higher education in Iraq, and is active in addressing youth unemployment in the MENA region.

Living in a part of the world where women have been historically and culturally regarded as subservient, she is an active campaigner against domestic violence. Always impeccably turned-out in a style which embraces Middle Eastern and Western fashion, Sheikha Moza Bint Nasser has proven the perfect ambassador for her country as it seeks to raise its global profile.


The Sudden Fall and Coming Resuscitation of Reaganomics

Trickle-down economics was counted amongst the first fatalities of the corona pandemic. The belief that government interference with the functioning of the free market is evil by design hastily gave way in early March as the ‘Wuhan virus’ revealed its terrifying scope and doomsday-like impact on businesses and households alike.

Making a landfall in Austria and Italy, but quickly engulfing all of Europe before bursting stateside, the novel coronavirus almost immediately prompted loud calls for decisive government action to shield society from the devastation. Suddenly, nearly all were clamouring for the agencies of state to come a-knocking with offerings of help.

Central banks were the first to act. The European Central Bank (ECB) expanded both the size and duration of its emergency purchase programme, in place since 2014, to €1,850 billion. However, ECB President Christine Lagarde also warned that monetary policy alone could not prevent an economic meltdown and appealed for fiscal stimulus on a scale not usually seen outside wartime.

In the US, the Federal Reserve stepped in – and up – with $2.3 trillion in new lending facilities. The bank also slashed its federal funds rate by 1.5 percentage points to a historic low of 0.25%. Since March, the Fed has been buying government-backed debt to the tune of $120bn per month. Fed President Jerome Powell staged an abrupt and surprising about turn by taking the system of US central banks back to its original mandate, declaring that henceforward monetary policy levers would be worked to prioritise full employment instead of price stability.

Powell enjoyed his own ‘whatever-it-takes moment’ when he stated that the Fed would deliver ‘powerful support to the economy until the recovery is complete’. The bluntness of the message buoyed equity markets even as pink slips poured down by the tens of millions in a tickertape parade of despair and misery.

Fiscal Largesse

Soon after, the US government followed the example set in Europe and began pumping vast volumes of ready cash into the economy. Though widely criticised for its initial reluctance to act, the Trump Administration – prodded by Congress – released a fiscal impulse equal to about 14% of GDP (2019) according to data compiled by the Bruegel Institute, a Brussels-based economic thinktank. This number is roughly at par with the fiscal measures taken by most EU member states with the sole exception of Italy where the government committed almost half of the country’s GDP to supporting the sagging economy.

The template of the 2008 financial crisis proved quite useful even as fiscal and monetary policymakers quickly realised that their response had to be scaled up by an order of magnitude. In its ‘The $10 Trillion Rescue’ study, global management consultant McKinsey showed that most major economies amplified their fiscal response to the pandemic by a factor of ten compared to the previous crisis.

Early on, Germany suspended its (in)famous ‘Schwarze Null’ policy – a source of pride to a frugal nation – for the duration to once again allow deficit spending. The government of Chancellor Angela Merkel acted swiftly to protect German industry and shield households from the pandemic’s fallout. It provided relief in excess of 33% of the country’s GDP. Japan (21.0%), France (14.6%), and the United Kingdom (14.5%) soon followed suit, driving pre-existing deficits into the fiscal stratosphere. Others on a less sturdy financial footing at the pandemic’s onset, tried to keep up as best they could with India committing 10% of GDP to emergency stimulus measures, South Africa 8.6%, and Brazil 5.5%.

In the US, the swansong of a few supply-side economics (aka voodoo economics) diehards was drowned out by an almost unison choir of new converts to economic heterodoxy. A stimulus package unprecedented in size and scope was duly approved by both houses of Congress. Thus, Americans received their first sampling of the welfare state. The government, so it seemed, was able to help without also terrifying its beneficiaries, as President Ronald Reagan had memorably quipped in 1986.

A last-ditch attempt by Mr Trump to forego the aid package and fight the pandemic with additional tax cuts instead went nowhere and the president signed the CARES Act into law on March 27. The act instantly freed up $560bn for increased unemployment benefits and a one-off $1,200 cash payment to individual Americans. Additionally, the Paycheck Protection Program provided $350bn to small businesses struggling to meet their payroll. This fund was later expanded to $669bn.

Trickle-down Economics

Despite the loss of 22 million jobs, an estimated 18 million Americans emerged from poverty in April as stimulus cheques were cashed and the $600 unemployment supplement kicked in. However, after the weekly bonus expired on July 31, some 14 million people dipped back under the poverty line over the following two months.

Remarkably, even a few former fans of trickle-down economics bravely agreed that the vast layouts of government cash would not noticeably distort the national accounts. Interest rates stayed low, and moved lower still, and corporate America was not squeezed out of the credit market by a voracious state, as the voodoo economics script predicted.

The new consensus holds that the national debt and fiscal deficits, whilst ballooning, will evaporate soon after growth’s return – and/or become more manageable through inflation (the latter bit is only whispered, never said out loud).

Also, direct generous payments failed to keep the unemployed on Benefits Street glued to Netflix. Almost ten million Americans rushed back to work as soon as job opportunities arose – putting paid to the notion espoused by most conservative economists that social benefits sap the vitality of the workforce.

Survival of the Herd

The Year of the Pandemic showed, if anything, that even in the land of the free, government remains the lender of last resort, stepping in to save the market from its own logic by providing essential support when no sensible financier would. However, this is not populism at play or, perish the thought, social democracy. The events of 2020 have been inspired by a herd survival instinct sparked by an elusive and novel foe.

In Europe, by contrast, the fiscal largesse produced by the pandemic scarcely merited a raised eyebrow, except – of course – when the European Union got involved and the frugal north felt it was asked to rescue the frivolous south. It is, however, too soon to tell if Americans like the welfare state experiment forced upon them by unfortunate circumstance. A tradition of rugged individualism and a collective distaste of government paternalism seem to advocate against the institutionalisation of state-sponsored social care.

The upheaval caused by the Corona Pandemic is profound and may take years to overcome. It is, however, probably not a calamity that provokes a paradigm shift in attitudes to life and pursuit of happiness anywhere. Once mass vaccination has taken hold and banned the novel virus to the fringe, business as usual will likely return as people everywhere – including entrepreneurs and corporate executives –will wish to reclaim their former lives and, perhaps, make up for lost time.


Q&A with Ovais Shabab, Head of Financial Services at KPMG: Investing in People, Creating Jobs, Inventing Strategies — it’s a World of Possibilities for KPMG Network

[caption id="attachment_18430" align="alignright" width="300"] Head of Financial Services: Ovais Shabab[/caption]

KPMG is a global network of independent member firms offering audit, tax and advisory services, operating in 147 countries. Here, the firm’s head of financial services, Ovais Shabab, fields questions from CFI.co

What sets KPMG's professional services apart in KSA?

KPMG in Saudi Arabia has a unique value proposition in its tailored offerings that leverage local experience and expertise and its global network.

KPMG is the lead auditor for nine of 11 Tadawul-listed banks, and has deep knowledge of the Kingdom’s financial sector. We also have strong relations with the regulators and the of support finance companies, asset-management firms, fintechs, and the insurance industry. With our solution-based approach, our advisory services are well-received by our stakeholders and clients.

What is your track record of Saudization? Saudization is a policy implemented by KSA’s Ministry of Labour and Social Development requiring Saudi companies and enterprises to fill their workforces, to a certain level, with Saudi nationals.

"The lending space in the Saudi banking sector has seen continued growth in mortgage financing throughout the pandemic."

KPMG plans to create more than 700 jobs over the next five years for Saudi nationals, in-line with the Kingdom's policy. Currently, our localisation rate stands at 42 percent and is rapidly moving towards our 60 percent target. At KPMG, our capital is human capital — and that’s why we continue to invest in our people. Ultimately, they will make the difference when we address the challenges of our clients as a firm. Our learning and development efforts range from LEAP, the leadership programme for young talent across all functions, the SOCPA programme for our audit team, and the TAX Academy. We have a dedicated team to provide our people with relevant upskilling programmes to stay ahead of the curve — all strong efforts to support Saudization.

What is your outlook on the Saudi banking sector's performance in Q4 2020?

We foresee that Q4 of 2020 is likely to be a nexus of several divergent themes, given the macro-economic developments that have taken place this year. In the grand scheme of things, the closure would depend on the continued tenacity and resilience of the sector founded on measures taken by the Saudi Central Bank and individual banks. We have observed multiple efforts towards customers’ endurance at the back of a strong capital base and funding structure of the industry. As such, we do not foresee a different proposition for the rest of the year.

Will the new five percent real estate transaction tax help to drive growth in the bank's mortgage business in coming quarters?

The lending space in the Saudi banking sector has seen continued growth in mortgage financing throughout the pandemic. It’s a reflection of the housing demand in the Kingdom, and testament to government support measures. The implementation of real estate transaction tax (RETT) have essentially been welcomed by retail property buyers as a step-down of the tax rate from 15 percent back to five, being a non-claimable component of the purchase cost in general. If these past trends are representative for the last quarter, then, coupled with the introduction of RETT and the sale drives witnessed each year-end, it is quite likely that the overall banking sector will end FY 2020 without major impact on profitability.

KPMG's Q3 2020 Banking Pulse report states that the process of loss quantification continues to be a challenge for banks. How can they overcome it?

The overall net profitability of Saudi banks declined six percent for the year-to-date period from FY 2019 due to higher expected credit losses of SAR12bn — a period-on-period increase of 41 percent. At present, the process of loss quantification continues to be a challenge for banks in the absence of "days past due (dpd) backstops" for facilities subject to payment holiday and useful qualitative information of borrowers in general. This translates into a continued need for judgmental overlays to cater for data gaps and therefore, the overall expected credit loss governance process is ever more important.

Do you foresee more potential banking mergers in Saudi Arabia? If so, why?

The M&A space in the banking sector is moving towards the creation of the largest lender in Saudi Arabia, with a formal agreement between National Commercial Bank and Samba Financial Group (SAMBA). This bodes well for the merging entities and the sector in general. The entities can leverage on the experience of Saudi British Bank and Alawwal Bank and focus on cost and revenue synergies. With significant investments in technology and people already made by Saudi banks in recent past, cultural and infrastructural integration will be a priority. Timely and effective stakeholder engagement, as well as pre-merger planning, remain the key for reaping all anticipated post-merger synergies.

Are Saudi banks ready to embed ESG into their business strategies? What are the possible benefits of such a move?

A key element gathering swift momentum in the banking sector is ESG: three central factors in measuring the sustainability and societal impact of a business. The immediate health and economic crises pushed the sustainability agenda to the back-burner. However, KPMG's view suggests that ESG will increasingly become central to the economic equation globally, and Saudi Arabia will be no exception in the post-COVID world. While the pandemic may have slowed progress, banks across the globe continue to embrace the ESG agenda. New products and models are constantly developed, tested and commercialised. Retail banks are creating unique, sustainable banking and investing products and services. The bottom line is that banks can no longer afford to overlook ESG, and must embrace it to avoid constrained growth and increased regulatory and public scrutiny.

How does the VAT increase to 15 percent impact banks?

The recent increase in the value-added tax (VAT) rate from five to 15 percent has introduced some complexities to the tax considerations of the banking sector. Given the mixture of taxable and exempt supplies that banks provide, the increased VAT rate will lead to deductibility challenges on operational and capital expenditure relating to exempt supplies. In addition to managing the impact of VAT on fee-based services, banks face the challenge of managing a 10 percent increase in VAT incurred on their purchases. Tax technology solutions will be needed more than ever before to minimise risk while taking into account competitiveness, profitability, and cashflows.

How do you rate Saudi banks in terms of deploying tax technology solutions post-VAT increase?

Unless it is a foreign bank with a fair degree of non-zakat obligations (zakat obliges individuals to donate a certain proportion of wealth each year to charitable causes), we haven’t seen a lot of tax-specific technologies in the banking environment — as compared with the more widely implemented product and accounting technologies such as product management and analysis tools. If the bank has corporate income tax obligations, we have seen some use of consolidation type accounting tools.

On the indirect tax side, we know that some banks have bought indirect tax solutions. This appears to be inconsistent in terms of effectiveness — managing VAT can result in complex calculations. On top of that, there are challenges with the completeness and accuracy data that many businesses face. To improve in this space, we anticipate that banks will continue to employ senior tax professionals to manage the entire tax environment.

Acquiring the necessary skills and experience remains a challenge, because as a professional environment tax is relatively new (but developing) in Saudi Arabia. But it is evolving rapidly and presents a major challenge in terms of keeping up-to-date. Technology can definitely play a role, but it also depends on the banks’ capacity to use and manage technologies well, from people and operating model perspectives.

Banks require a target operating model for tax — an end-to-end model to run taxes before technology is introduced. From a governance perspective, it is wise to have a voice at board-level to ensure the needs of the tax team are not ignored. Even if there are robust accounting systems in place, taxation brings a different dynamic. It is not technology first, but rather the other way around; first your operating model, then your people, then the compatible technology.
Currently, for banks in Saudi Arabia, tax target operating models are at early stages of development. With more changes to the tax environment, including the prospect of e-invoicing, the need for a strong tax operating model to support the management of tax risk is becoming ever more urgent.

About Ovais Shabab

Over 22 years working in KPMG offices in Kingdom of Saudi Arabia, UAE and Pakistan, Ovais has gained significant experience of multi-locations and multi-cultural environments. He is currently managing a portfolio of clients involved in various sectors and having distinguished complexities. During his association with KPMG he has worked on various audit and advisory engagements such as due diligence, business restructuring, compliance & internal controls reviews and accounting advisory projects.

Professional and Industry Experience

Ovais epitomizes a wealth of assurance and advisory experience in the financial services sector, amassed over 20 years of his association with various KPMG offices. During his 15+ years with the Saudi practice, he has led successful engagement delivery to some of our flagship Audit clients. His sound credentials have enabled him to advise and successfully collaborate with prominent regulatory bodies in KSA, including SAMA, SOCPA, and CMA.

For all engagements, Ovais remains responsible for Presentation to the BODs, Audit Committees and Senior Level Executives for communicating the Audit Plan and Results of our audit; and liaison with the Senior Management throughout the year to understand key developments and issues; suggesting solutions and improvements in the business processes.


Bitcoin: A Fatal Lapse of Memory

Stephan Thomas is a rich man. Recently, the value of his assets ballooned to a staggering $260 million. There is, however, a hitch: Thomas owns 7,002 bitcoins but cannot access his digital wallet. He lost the password and after eight failed attempts has only two tries left before the digital vault holding his treasure – and his private keys – gets encrypted, destroying its contents forever.

The plight of Thomas, a German-born computer programmer, has sparked a gold rush of sorts amongst security experts who claim they can recover the lost passwords by finding a side-channel. This requires the deployment of raw computing power over a period of six to eight months and may cost the hapless German up to 10% of his bitcoin stash.

Thomas is not the only cashless bitcoin millionaire. According to Chainalysis, a company providing blockchain analytical services, a fifth of the approximately 18.5 million bitcoins mined so far have been lost with most of the missing bits stranded in locked wallets. In 2013, an unfortunate Welsh IT technician binned a hard drive containing the keys to 7.500 bitcoins now valued at well over $280 million. The total value of lost or inaccessible bitcoins amounts to almost $140 billion.

In the early days of cryptocurrency, about a decade ago, bitcoins were traded for as little as two dollars. Use of the novelty currency was mostly limited to techies and digital anarchists. Suffering wild swings in value as bitcoin trading platforms and exchanges boomed and bust, the virtual currency steadily settled at a rate of $5,000 early last year before breaching the $40,000 mark in early January. It has since dropped 17% for no apparent reason. The dynamics of bitcoin and other cryptocurrencies, regulated only by their built-in algorithm, are impervious to established market triggers and are largely determined by deals taking place outside the public realm.

The recent boom in prices is feeding the concerns of regulators in the US, UK, and Europe. President Christine Lagarde of the European Central Bank (ECB) called for stronger oversight and scrutiny of cryptocurrencies considering their extreme volatility. Lagarde is also worried about the criminal activity associated with crypto assets such as money laundering and the trade in illicit goods and services. Lagarde called bitcoin a ‘highly speculative asset’ which has conducted some ‘funny business’.

The UK’s Financial Conduct Authority (FCA) earlier this week expressed concerns over unauthorised investment schemes and warned consumers that they have no recourse to regulators should their bets fail to pay off. The FCA is particularly worried about possibly false advertising claims being made and the increased interest of investors seeking to diversify their holdings by moving into the cryptocurrency space.

Lagarde is more concerned about criminal activity and pointed to a number of ongoing police investigations, including one uncovering the online trading platform DarkMarket used by about 2,400 vendors to sell illegal drugs. Europol arrested a 34-year-old Australian allegedly in charge of the dismantled marketplace and seized twenty servers in Moldova and Ukraine. A preliminary scan of these computers has revealed trades worth in excess of €140 million.

Bitcoin’s trajectory is not that distinct from that of the wider equity market which barrels ahead notwithstanding the near-global economic malaise brought on by the Corona Pandemic. The disconnect between events ‘on the ground’ and the buoyancy of bitcoin and more traditional asset classes may have different reasons, but the outcome is similar. However, as an asset, bitcoin has one defining characteristic that sets it apart from all other assets: It is a virtual asset or, if you will, a figment of our collective imagination – one, moreover, running rather wild. It, essentially, does not exist other than as a long series of digits, the blockchain, confined to a hard drive. As Thomas found out to his possibly everlasting detriment, bitcoins may be locked away at any time by something as mundane as a lapse of memory. No other investment class is so fickle.


Europe Drifts Away as its US Bogeyman Prepares to Leave

[caption id="attachment_15363" align="alignright" width="300"] European Commission[/caption]

Tired of dancing to an American tune, the European Commission is ready to challenge the global supremacy of the US dollar. Next week, the commission will likely adopt a policy paper aiming to strengthen the euro by lessening the continent’s dependence on dollar-denominated trade and finance.

The bloc’s executive arm proposes a review of financial benchmark regulation to encourage the use of its own currency. The commission also wants to promote the use of euros in commodity trading, specifically on the natural gas and hydrogen exchanges emerging in Amsterdam where most contracts are already being denominated in euros.

The policy paper under discussion recommends reducing the union’s dependence on non-EU investment banks which – it notes – in times of financial crisis may prefer to focus on their domestic markets. Following this logic, the paper emphasises the need to replicate parts of the UK’s financial market infrastructure in to lessen the EU’s dependence on London clearinghouses and strengthen the euro.

Whilst the goals set out by the commission are imminently reasonable, and even sensible, the policy paper on the global role of the euro ignores one of the root causes of the dollar’s continued supremacy: the outsized current account deficit sustained by the US. The world is happy to accumulate dollars, freshly minted to cover the almost ever-widening payments deficit. This creates a vast pool of liquid assets that are used for trade and investments worldwide. Conversely, the European Union consistently runs a sizeable current account surplus, essentially accumulating dollars, limiting the volume of euro assets held outside the EU, and precluding the euro’s use as a global reserve currency.

However, it was the extraterritorial application of US law and policy under the Trump Administration that caused considerable irritation in European capitals. President Trump’s snap decision, in May 2018, to rescind the Iran nuclear deal and reimpose sanctions, was seen as a direct challenge to the EU which reacted with a dismay that quickly turned to anger. That same month, in open rebellion against US hegemony, the European Commission instructed the European Investment Bank (EIB) to facilitate investments in Iran. The commission also declared the US sanctions ‘illegal’ and forbade companies and private citizens from complying with them. A special purpose vehicle was duly set up to finance trade with Iran after the US managed to exclude the country from the Swift payment messaging network and the Euroclear and Clearstream securities depositories.

The euro policy paper specifically seeks to develop a regulatory framework that shields EU-based economic actors from interference by third countries. Speaking to the Financial Times, a Brussels official indicated that the initiative is meant to redefine the EU’s ‘place in the world’ by giving it the means to become a financial and economic power commensurate with the ‘bloc’s heft’.

Coming on the eve of Mr Biden’s inauguration, the policy paper represents clear proof of the lasting damage wrought by the Trump Administration. Its unilateral actions, and blunt wielding of US power, have highlighted the need to boost the strategic autonomy of the EU to replace the entente that has provided the basis of transatlantic cooperation for well over fifty years.

Though the EU is willing, and even eager, to rebuild the bridges burnt by the Trump Administration, the commission also seems determined to steer a course independent of Washington. The recently signed China-EU investment deal is an example of that, as is the commission’s refusal to stop its backing of Germany in its dispute with the US over Nord Stream 2, the undersea pipeline that links Vyborg in Russian Karelia with Lubmin in Germany from where the natural gas it transports is injected into the European distribution network. The US fears that the second pipeline crossing the Baltic Sea may yet give a strategic edge to an ‘expansionist’ Russia which not only gains a money spinner but a stranglehold over Europe’s energy supply as well. Germany counters that mutual interests cancel this threat and that the US merely tries to carve out a lucrative market for its own natural gas.

The message Brussels sends Mr Biden as he prepares to move into the White House is a rather simple one: the EU welcomes the new administration but has since moved on and is not prepared to fully trust the US to show consideration and engagement any time soon.


Double Dip Recession in the Making, UK Expected to Emerge First

The Deutsche Bundesbank expects a double dip recession. Analysing non-traditional indicators such as Google Map traffic data and air and water pollution, the German central bank detected a significant retreat of last week’s economic activity index. Consumer confidence is also waning with a 20% of respondents admitting to a hesitancy to go ahead with major purchases, up four percentage points since December. Manufacturing output provided a thin silver lining to an otherwise depression picture. In line with the other major eurozone economies, German industrial production showed a surprising resilience, largely supported by strong exports.

Though the final numbers for the fourth quarter of 2020 are not in yet, most economists predict a contraction of around 2% across the eurozone. The Bundesbank now fears that the first quarter of 2021 may produce another dip for two consecutive quarters of negative growth – and a second, double dip, recession in a year. The recent tightening of lockdown measures, and the slow pace of the vaccination drive, do not bode particularly well for the current year.

Next Thursday the European Central Bank (ECB) holds its first rate-setting meeting of 2021, with analysts expecting no major changes. However, ECB-President Christine Lagarde indicated before the weekend that the bank is not about to tighten monetary policy: “That would be very unwarranted at the moment.” Lagarde indicated that the ECB may yet again expand its bond-buying programme which currently stands at €1.85 trillion and runs through March 2022. Last week, both Germany and The Netherlands extended their lockdowns.

Chancellor Angela Merkel said that the restrictions will likely last another eight to ten weeks before any thought may be given to their relaxation. In The Netherlands, where the government of Prime Minister Mark Rutte resigned over a report detailing the social damage wrought by the strict policies pursued by the country’s revenue service, the lockdown was extended by three weeks. Rutte, now heading a caretaker government, remains in charge but is prevented by political precedence to undertake major policy initiatives. The country goes to the polls on 17 March and Rutte’s liberal VVD is expected to gain additional seats in parliament and remain the country’s largest political party.

Meanwhile, the ECB has signalled its growing concern over the gathering strength of the euro against the US dollar which puts an added downward pressure on inflation. Ms Lagarde said that the bank is closely following the exchange rate impact on consumer prices. In the UK, the Bank of England (BoE) continues to resist cuts that would move the benchmark interest rate into negative territory. Investors do not expect the BoE to yield even though inflation shows no signs of revival. However, a growing number of analysts is willing to bet against Threadneedle Street in light of the disappointing numbers published Friday by the Office of National Statistics that showed a GDP contraction in November – the first in six months. Next Wednesday, inflation numbers are released which may trigger a response from the BoE when its monetary policy committee meets next month. An external member of the committee called the option of negative rates an ‘important tool’.

UK Foreign Secretary Dominic Raab warned over the weekend that the lockdown restrictions are not likely to be relaxed before March and then only if the vaccination programme stays on track. Markets are anticipating the UK to be the first of the major economies to emerge from the Corona Pandemic. The country’s immunisation campaign is significantly further ahead than those on the continent with Sir Simon Stevens, head of the National Health Service (NHS) in England, announcing that each minute 140 jabs are being delivered – a rate four times faster than the number of new covid-19 cases detected. Stevens also said that the English NHS was on track to deliver 1.5 million doses this week.


EY Argentina: Argentina Amends Promotional Tax System for Knowledge-Based Firms

With technology disrupting business models in various sectors of the global economy, Argentina has finally introduced tax incentives for knowledge-based industries.

Law number 27,506 was first published in the Official Bulletin on June 10, 2019, and established the promotional regime for the knowledge-based economy.

But the regime was suspended by the government this January, with the intention of introducing amendments. In February, a bill to do that was submitted to the Chamber of Deputies.

According to the submission letter, the main goal was to divide benefits according to the size of each local company and the level of maturity of each production sector, while continuing to promote and accompany the development of large companies for the good of the country.

On October 26, Congress enacted Law No. 27,570, which imposed new qualification requirements and modified certain benefits. The regime will be in force until December 31, 2029.

Government representatives said the amendments were aimed at building a new and progressive tax system that promotes quality employment, technological development and export of added value. In this sense, the changes seem to strengthen opportunities for entrepreneurs, support the export development of small knowledge-related services companies and contribute to territorial and gender equality.

While the new law finally provides a legal framework that removes uncertainty for these industries, it is not certain that it was worth the wait. Have the reforms really improved the capacity of the knowledge-based industries to generate employment, federal economic development and foreign exchange reserves?

The new law does not modify the activities that were originally subject to promotion. Those are: (i) software and IT and digital services; (ii) audiovisual production and post-production, including digital formats; (iii) biotechnology, bioeconomy, biology, biochemistry, microbiology, bioinformatics, molecular biology, neurotechnology and genetic engineering, geoengineering, and their trials and analyses; (iv) geological and prospective studies, and services related to electronics and communications; (v) professional services, insofar as they constitute export services; (vi) nanotechnology and nanoscience; (vii) aerospace and satellite industry, space technologies; (viii) engineering for the nuclear industry; (ix) manufacturing, fine-tuning, maintenance and introduction of goods and services aimed at production automation solutions, including feedback cycles from physical to digital processes and vice-versa, characterised at all times by the use of industry 4.0 technologies such as AI, robotics and industrial internet, Internet of Things, sensors, additive manufacturing, and augmented and virtual reality.

It also comprises engineering, exact and natural sciences, agricultural sciences and medical science activities related to research and experimental development tasks.

Under the amended regime, professional services qualifying as exports include legal, accounting, management, public relations, audit, tax and legal advisory, translation and interpretation services, human resources, advertising, design, engineering and architectural services.

Registration Requirements

Companies intending to enjoy the tax benefits shall be required to prove that:

70 percent of their total billing in the past year arises from promoted activities. The professional services must meet this requirement to the extent of their export

the promoted activities are performed intensively to incorporate the knowledge arising from scientific and technological progress made in their products, services or production processes, so as to add value and innovation, under the terms and the scope set by regulations and along with the documentation or requirements for this purpose.

This last item in particular seems to refer to the technological processes or activities promoted within a company that are incorporated to final products or services, but do not generate any revenue in themselves. It is clear that the administrative order will have to determine how to articulate the benefits in these cases, as many domestic companies could incorporate part of their activities into this system.

The law also sets forth that those interested in applying for the promotion shall meet two of three requirements in relation to the promoted activity: (i) provide evidence of continued improvements in the quality of their services, products or processes, or through a well-known quality standard; or (ii) prove the disbursements made in (a) training a percentage of their payroll employees, or (b) research and development as a percentage of total billing; or (iii) prove the export of goods or services arising from promoted activities or their development and intensive application as a percentage of total billing.

These requirements were included in the first version of the law. The new bill breaks down the percentages to be applied based on the definition of micro-, small- and medium-sized or large enterprises.

As to the training ratio applicable to employees assigned to promoted tasks, microenterprises must disburse at least three percent of total salaries, SMEs at least five percent, and large enterprises, eight.

As to the research and development ratio, microenterprises shall prove disbursements for at least one percent of total billing and SMEs two percent, while three percent was set for large enterprises.

The requirement related to the exports of goods and services breaks down the percentages as follows: four percent in the case of micro enterprises, 10 percent for SMEsm or 13 percent for big enterprises

Self-Development

The new law excludes the self-development activity from the promotion system, which cannot be calculated as part of the billing percentage required to have a promoted activity.

The law defines self-development as that carried out by an artificial person for its own benefit or for companies that are related from the corporate and/or economic perspective, in all cases in the capacity of final user.

This is not irrelevant. It could be interpreted that, if the service beneficiary were not the “final user” of the process or product outsourced by the local company, the activity would not qualify as self-development and could be computed within the billing percentage required, as the product or service would be marketed in turn by the foreign company to its customers or final users.

Benefit Stability

According to the original law, beneficiaries enjoyed tax stability in relation to the promoted activities and during its effective term. Tax stability implies that the total domestic tax burden of beneficiaries will not be increased upon their request to join the system. The text amended indicates now that “[…] The parties subject to the system […] shall receive stable benefits in relation to their promoted activity or activities as from the date of registration with the registry […] during its effective term […].”

The difference is that, based on the new text, taxes could be levied on a specific industry or activity, and tax stability would not be affected to the extent that the benefits originally granted are not amended.

This will generate uncertainty when defining the direct investment, as the business models that will be built will eventually reflect an increase in the expected profitability of the model itself because of such uncertainty.

The tax credit certificate granted by the system for 70 percent of employer contributions will be subject to a tax quota to be determined by the enforcement authority. How the tax stability benefit is granted to beneficiaries and the tax quota to be defined by the enforcement authority at its own discretion should be clarified.

Tax Benefits

Besides the stability for the taxpayers, companies within the knowledge-based regime will receive the following benefits:

A 60 percent reduction in the income tax rate for micro and small enterprises, a 40 percent reduction for medium-sized enterprises and a 20 percent reduction for big enterprises, applicable on the income originated in the promoted activities (which, considering the current general rate

of 30 percent, would result in effective income tax rates of 12 percent, 18 percent and 24 percent, respectively)

A tax credit bond that equals 70 percent of the amount payable as Social Security contributions on employees working in the promoted activities (80 percent if those employees are female employees, professionals graduated in engineering and/or exact or natural sciences, people with disabilities and other specific groups) and applies to up to 3,745 employees (and to new hires for promoted activities that increase the total headcount).

The tax credit bond may be used to offset federal taxes, except income tax (only exporters of services or goods originated in the promoted activities will be allowed to offset income tax) and is not transferable.

System beneficiaries performing exports in relation to promoted activities will not be subject to VAT withholdings or additional withholdings. Nor shall the additional withholdings made abroad be computed towards income tax, and those charges may only be deducted if the resulting income is the consideration for the promoted activities and is classified as Argentine-source income.

Finally, the law sets forth the creation of the Trust Fund for the Promotion of Knowledge-Based Economy (FONPEC, in Spanish). The resources of that fund will arise, among other sources, from the contribution of system beneficiaries of up to four percent of the total amount of benefits received.

Under this new scenario, and while Covid-19 is still impacting the world, companies doing business in Argentina have a new tool to develop a growing strategy — if knowledge and technology are key drivers of their business models.

About the Authors

[caption id="attachment_15880" align="aligncenter" width="216"] Author: Sergio Caveggia[/caption]

Sergio Caveggia is a tax partner currently in charge of Transaction Tax area in Argentina. He joined EY Argentina in 1994 and has developed expertise over 24 years in international taxation and merger and acquisition matters. Sergio is also focus on servicing clients in the Private Client Services (PCS) area. He is highly experienced in inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax area.

Sergio has served in a variety of industries and has also been involved in many due diligence procedures performed in the past 20 years. He has given lectures in national universities and is a frequent speaker in tax seminars. He has also written several articles dealing with Argentina tax issues.

He is a Certified Public Accountant who graduated from University of Belgrano in Argentina. He obtained his Tax Specialist’s Degree at the University of Belgrano and has a postgraduate certificate in Business and Management from Universidad Catolica Argentina (UCA). He is also member of the Professional Council of Economic Sciences of Buenos Aires and the Argentina Fiscal Association.

[caption id="attachment_15881" align="aligncenter" width="227"] Author: Jimena Rocío García[/caption]

Jimena Garcia is a Manager currently working in the International Tax and Transaction Services (ITTS) and Private Client Services (PCS) areas in Argentina. She joined the firm in 2014.

She has extensive experience in social security & labor law buy-side and sell-side due diligence services in numerous companies in different industries. She also participated in the coordination of many cross-border engagements, dealing with foreign labor and social security legislation matters on each transaction. Jimena participates in numerous seminars related to payroll taxes and labor law matters.

Jimena is a Lawyer graduated in 2010 from UNLAM (Universidad de La Matanza). She is enrolled in the Bar Association of the City of Buenos Aires.