Otaviano Canuto, World Bank: Global Imbalances on the Rise

[caption id="attachment_10794" align="alignright" width="251"] Author: Otaviano Canuto. (Photo: Silvia Costanti/Valor/Folhapress)[/caption]

Discussions around large current account imbalances among systemically relevant economies as a direct threat to the stability of the global economy vanished in the aftermath of the global financial crisis. As the crisis originated in the US financial system – followed by a second dip in the Eurozone – and global imbalances diminished in following years, the issue has faded into the background.

More recently, some signs of a possible resurgence of rising imbalances have returned attention to the issue. We argue here that, while not a threat to global financial stability, the resurgence of these imbalances reveals a sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential. In addition, we approach how the re-orientation of the US economic policy already announced by president-elect Trump suggests risks of new bouts of tension around global current account imbalances.

For five years now, the International Monetary Fund (IMF) has produced an annual report on the evolution of global external imbalances – current account surpluses and deficits – and the external positions – stocks of foreign assets minus liabilities – of 29 systemically significant economies. Results for 2015 have pointed out a moderate increase of global imbalances, after they had narrowed in the aftermath of the global financial crisis (GFC) and stabilised later (see chart 1).

“Asset bubbles in the US to a large extent were blown by European banks through their balance sheets, by channelling US money market funds into toxic assets.”

The evolution of imbalances in 2015 depicted in chart 1 as explained by the IMF is reflective of three major drivers:

First, the recovery among advanced economies proceeded in an asymmetric fashion. Stronger recoveries in the US and the UK relative to the euro area and Japan led to divergence in expected paths for monetary policies and appreciation of the dollar and sterling (pre-Brexit). The deficits of the US and UK widened, together with increased surpluses in Japan and both debtor and creditor countries of the euro area (see chart 2).

Second, the fall of commodity prices – especially oil – transferred income from commodity exporters to importers. Overall however, it made only a moderate contribution to the narrowing of imbalances.

Third, prospects of monetary policy normalisation in the US, as well as bouts of fears about the softness of China’s rebalancing, contributed to a slowdown of capital inflows and depreciation pressures in emerging markets.

All in all, larger US deficits and augmented surpluses in Japan, the Euro area, and China more than compensated for smaller surpluses in oil exporters and smaller deficits in deficit emerging markets and Euro area debtor countries. Hence, global current account imbalances widened last year, even if only moderately.

[caption id="attachment_11519" align="aligncenter" width="700"] Chart 1: Current Account Imbalances, 2001-15 (% of world GDP). Source: IMF, 2016 External Sector Report, July 2016.
Note: Surplus AEs: Korea, Hong Kong SAR, Singapore, Sweden, Switzerland, Taiwan POC; AE Commodity Exporters: Australia, Canada, New Zealand; Deficit EMs: Brazil, India, Indonesia, Mexico, South Africa, Turkey; Oil exporters: WEO definition plus Norway.[/caption]

However, a picture of higher global imbalances emerges if one focuses on the rising surpluses of two systemically relevant groups of economies. Chart 2 exhibits how in the euro area deficits in debtor countries have shrunk in tandem with the maintenance of surpluses in creditor countries (slightly increasing in the case of Germany). While the net foreign asset position (liabilities) of debtors has not diminished as much, their current account adjustment has added to the soaring surpluses the euro area as a whole runs with the rest of the world. Setser (2016) in turn has called attention to how the six major East Asian surplus economies – China, Japan, South Korea, Taiwan (China), Hong Kong (China), and Singapore – have reverted their post-GFC decline of surpluses and are currently topping even the euro area (see chart 3).

Such double trajectory of rising surpluses gives credence to those who have expressed concerns about a revival of rising current account imbalances as a source of risks to the global economy. While Eichengreen (2014) had declared “the era of global imbalances” to be over, more recently others believe they are back and claim that “rising global imbalances should be ringing alarm bells” (HSBC, according to Verma and Kawa (2016). To address this issue, however, it is worth first reviewing how the profile of current imbalances differs from the one prior to the GFC.

Global Imbalances Have Evolved

The “era of global imbalances” up to the GFC (chart 1) had two distinctive-yet-combined processes at its core:

On the one hand, credit-driven, asset bubble-led growth in the US, along with wealth effects, intensified the existing trend of domestic absorption (particularly consumption) growing faster than GDP. This resulted in falling personal saving rates and increasing current account deficits (see chart 4).

[caption id="attachment_11520" align="aligncenter" width="700"] Chart 2: Systemic Euro Area, Evolution of External Position, 2001-15 (% of Euro Area GDP). Source: IMF, 2016 External Sector Report, July 2016. Note: Current Account and REER (left). Net Foreign Asset Position 2 (right).[/caption]

On the other hand, the accelerated structural transformation and rapid growth in China, led to high and rising savings and investments and producing ever larger current account surpluses (see chart 5).

Two caveats about these distinctive-yet-combined processes are needed. First, the bilateral US deficit with China in the period decreases by a third when measured in terms of value added, as China became a “hub or a stroke” of value chains with intermediate stages supplied from abroad. The US-China bilateral imbalance therefore constituted outlets for production beyond China.

Second, while often linked as mirror images of each other – as in the hypothesis of an Asian savings glut causing low interest rates and asset price hikes in the US (Bernanke, 2005) – the US asset bubbles were more strongly associated to the “excess elasticity of the international monetary and financial system”, rather than to Asian current account surpluses. Global current account imbalances cannot be blamed for the US-originated GFC. As stressed by Eichengreen (2014):

“…the flows that mattered were not the net flows of capital from the rest of the world that financed America’s current-account deficit. Rather, they were the gross flows of finance from the US to Europe that allowed European banks to leverage their balance sheets, and the large, matching flows of money from European banks into toxic US subprime-linked securities.”

Asset bubbles in the US to a large extent were blown by European banks through their balance sheets, by channelling US money market funds into toxic assets. From the US-Europe balance of payments standpoint, short-term outflows from the latter to the former were netted out by simultaneous long-term flows in the opposite direction. Close-to-zero net capital flows hid a lot of financial intermediation and asset-bubble blowing via banks’ balance sheets.

A parallel to that China-US relationship can be traced within the euro area, including its later experience with a second dip of the GFC. The entry of the euro as a common currency was followed by a risk premium convergence toward German levels and to cross-border banking flows at extremely easy conditions. Consequent asset bubbles originated wealth effects and excess domestic absorption – besides inflated financial intermediation – in southern Europe and Ireland, leading to the subsequent debt crisis. The pattern of intra-euro area current account imbalances exhibited in chart 2 was primarily a consequence of the euphoria taking place under conditions of “excess elasticity” of the euro area’s financial system.

[caption id="attachment_11521" align="aligncenter" width="700"] Chart 3: Current account surplus in East Asia surplus economies versus European surplus economies (US$ billions).
Source: The Return of the East Asian Savings Glut, CFR discussion paper, October 2016.[/caption]

The commodity super-cycle also helped shape global imbalances in this period seen in chart 1. However, it was to a large extent a consequence of extraordinary global growth prior to the crisis, one in which commodity-intensive emerging market economies maintained growth trends above those of advanced economies.

While such a pattern of global imbalances was unfolding prior to the GFC, much discussion took place about its potential to spark a crisis on its own when faced with a sudden stop. China’s current account surpluses were boosted by depreciated levels of the exchange rate sustained mainly by a piling up of foreign reserves. The same evolution was interpreted by some as an expression of a savings glut unmatched by enough domestic availability of safe-and-liquid assets like US Treasuries.

Regardless of the emphasis of causality one might establish between export-led strategies and saving - glut - cum - safe - asset - scarcity, analysts were split into two camps, as described by Eichengreen (2014). Some analysts feared a possible crisis of confidence in the dollar bringing capital flows to a sudden halt, while others saw imbalances as an exchange of cheap Asian goods for safe and liquid US assets. In the latter case, imbalances might gradually unwind as export-led strategies reached exhaustion and/or the desire for asset accumulation approached satiation.

In any case, the GFC happened before that dispute was settled and global imbalances started to unwind in its aftermath. US personal saving rates began to climb, borrowers reduced leverage, the dollar devalued and the US current account deficit shrank from almost 6% of GDP in 2006 to much lower levels from 2009 onwards. At the same time, as shown in chart 5, China initiated its rebalancing from an exports and investment-led growth model towards higher domestic consumption and services, including an appreciation of the RMB and lower growth rate targets. This has not meant a straightforward change of trajectory, as caution against a post-GFC hard landing favoured continued high investment in domestic housing and infrastructure as a component of the transition.

As we have already seen, deficits also diminished in the euro area in the aftermath of its debt crisis. The decline in commodity prices also helped global imbalances to shrink.

[caption id="attachment_11522" align="aligncenter" width="700"] Chart 4: U.S. Personal Saving Rates and Current Account Balances (% of GDP) – 1960-2009.
Source: Canuto, O. – “Toward a switchover of locomotives in the global economy”, Economic Premise 33, World Bank, 2010.[/caption]

So, global imbalances did not spark a crisis and have returned in different configuration. Since current account balances are neither expected nor desired to be zero, how to make an assessment of whether the recent “moderate” uptick detected by the IMF might be a bad omen? Do those who have voiced concern over rising surpluses in East Asia and the euro area have a point? To answer these questions, it will be useful to look at the IMF exercise of judgement on whether global imbalances have been “in excess”, i.e. inconsistent with “fundamentals and desirable policies”.

How misaligned with fundamentals have current account imbalances been?

National economies are not expected to exhibit zero current-account balances and stocks of net foreign assets. At any period of time, domestic absorption – consumption and investment – can be larger or smaller than the local GDP, triggering inflows or outflows of capital, due to “fundamental” factors:

Differences in intertemporal preferences and age structures of their populations mean different ratios of domestic consumption to GDP;

Differences in opportunities for investment also tend to lead to capital flows;

Differences in institutional development levels, reserve currency statuses and other idiosyncratic features also generate capital flows and imbalances;

Cyclical factors – including fluctuations in commodity prices – may also cause transitory increases and declines in balances; and Countries’ outstanding stocks of net foreign assets also have a counterpart in terms of service payments in their current accounts.

When global imbalances – and corresponding real effective exchange rates (REERs) – reflect such fundamentals, economies are in a better place than they would be in autarky (isolated with zero balances). There are situations, however, in which such imbalances may be gauged as in excess and countries should reduce them.

There is the straightforward case of imbalances being magnified by domestic distortions, the removal of which would directly benefit the economy. For instance, this is the case when deficits are higher because of lax financial regulation fuelling unsustainable credit booms or excessively loose fiscal policies. It is also the case of surpluses that reflect extremely high private savings due to lack of social insurance or investments being curbed because of a lack of efficient financial intermediation. It is worth noticing that, while excessive deficits eventually face a shortage of external finance, surpluses suffer less automatic pressures to dissipate and can therefore persist for longer.

Furthermore, as pointed out by Blanchard and Milesi-Ferretti, there are also situations in which the multilateral interdependence of economies calls for restricting current-account deficits or surpluses. Unsustainable deficits of large, financially integrated economies are such a case, as a crisis associated to them may trigger cross-border effects.
Blanchard and Milesi-Ferretti additionally point out two conceivable situations in which surpluses can be deemed as in excess:

When current-account surpluses are the result of deliberate strategies of curbing domestic demand and deliberate exchange rate undervaluation, crowding out foreign competitors. On the other hand, given the simultaneous determination of savings and current account balances, it is always hard to disentangle such a strategy from other determinants of the current-account balance.

When an increase of one economy’s surplus takes place while others face difficulties to absorb it without suffering adverse, durable effects on their demand and output. This is the case when part of the world is caught in a “liquidity trap”, unable to resort to lowering domestic interest rates as an adjustment policy, or face obstacles to use countervailing fiscal policies.

The IMF “External Sector Report” aims to gauge to what extent current account balances and corresponding REERs are out of line with “fundamentals and desirable policies”, as well as whether stocks of net foreign assets are evolving within sustainable boundaries. What did the latest issue show?

Chart 6 displays its assessment of how intensively individual economies have exhibited current accounts – and REERs – that are out of line with their “fundamentals”, i.e. those features that would normally lead them to feature current account imbalances within certain estimated country-specific ranges. Stronger (weaker) corresponds to REER “undervaluation” (“overvaluation”). Stronger (weaker) also means that a current account balance is actually larger (smaller) than that “consistent with fundamentals and desirable policies”.
The report notices that the evolution toward less excess imbalances after the GFC has stopped and recent movements have given cause for concern:

First, those economies with external positions considered “substantially stronger” (Germany, South Korea, Singapore) or “stronger” (Malaysia, Netherlands) have remained as such for the last four years. Also noticeable has been the shift toward stronger positions in the cases of Thailand and Japan.

Second, at the bottom of the distribution, while some countries reduced – or suppressed – degrees of “weakness” (Russia, Brazil, Indonesia, South Africa, and France), others remained (Spain, Turkey, United Kingdom) – with the addition of Saudi Arabia to this group after the oil price decline.

Third, on-going trends of current account imbalances are bound to lead to a further widening of some external stock imbalances accumulated since the GFC. While China’s external stock position is expected to stabilise, other large economies are projected to exacerbate their debtor (US, UK) and creditor (Japan, Germany, Netherlands) positions. Furthermore, the net foreign asset position of some euro-crisis countries remain highly negative despite years of flow adjustment with high unemployment and low growth.

In our view, although not giving ground to fears of a collapse in major financial flows, global imbalances have not gone away as an issue, as they reveal that the global economic recovery may have been sub-par because of asymmetric excess surpluses in some countries and output below potential in many others. The end of the “era of global imbalances” may have been called too early. Lord Keynes’ argument about the asymmetry of adjustments between deficit and surplus economies remains stronger than ever.

The IMF report has a point in calling for a “recalibration” of macroeconomic policies from demand-diverting to demand-supportive measures. This would be particularly the case for countries – or the Eurozone as a whole – currently able to resort to expansionary fiscal policies that have instead relied mainly on unconventional monetary policy – which has become increasingly ineffective at the margin. On the other hand, one must acknowledge that there are limits to which national fiscal policies can deliver cross-border demand-pull effects. Huge savings flows – like German or US corporate profits – may also not be easy to redeploy.

Hence specific priority should be given to country-specific structural reforms addressing obstacles to growth and rebalancing. Which could be aided by cross-border dislocation of pools of savings currently parked in low-return assets. Paradoxically, global imbalances demand more globalization in a moment when the latter faces hurdles.

Implications of US Future Trade and Macroeconomic Policies for Global Imbalances

Given the weight of the US economy, global imbalances may undergo new shocks in the coming years as a result of the policy reorientation already announced by president-elect Donald Trump. Although at a preliminary stage, it is possible to devise two possible scenarios, the choice of which will depend on the options assumed by trade policies accompanying the macroeconomic reorientation.

President-elect Trump and his team have announced a macroeconomic platform with a likely strong potential impact: a major fiscal boost via infrastructure spending, corporate tax cuts, and a (financial and environmental) deregulation agenda. Such platform underlies the announced goal of raising the US economic growth to 4% a year, well above the potential 2% estimated by the IMF.

Important details are yet to be filled out. For example, how much of the $ 1 trillion of infrastructure investment pledged will be borne by the public sector or by public-private partnerships, and therefore how much of it will contribute to public sector deficits and debt. As suggested by different experiences around the world, including the United States, sudden increases in public investment are not easily implemented. The increase in investments in infrastructure will take some time to implement and there will be a lag in their effects, on both the demand and supply side.

[caption id="attachment_11523" align="aligncenter" width="700"] Chart 5: China’s Domestic Rebalancing and External Imbalances. Source: IMF, 2016 External Sector Report, July 2016.
Note: Balance of Payments and REER, 2002-15 (percenet of GDP) - left. Saving and Investment, 2002-15 (percenet of GDP) - right.[/caption]

Similarly, given that US corporations currently display already high liquidity reserve buffers and low levels of acquisition of new fixed assets, the results of corporate tax reduction on their expenditures will depend significantly on the terms of conditions of local investment that may be attached. Such type of conditionality has already been alluded to in the case of profit repatriation.

There are also doubts as to the extent of the impacts of deregulation. In the case of finance, given the favourable climate in Congress and beyond to reforming the Dodd-Frank regulation, one can expect a relief from the regulatory burden that has been inhibiting bank credit in recent years. Environmental deregulation may also facilitate investment in the energy sector, particularly on shale oil and gas.

Assuming that, in fact, aggregate demand is stimulated, there remain doubts as to the current capacity of the response of domestic supply. After all, low rates of involuntary unemployment and upbeat levels of economic activity at the end of the Obama administration will be part of the latter’s legacy. In the event of binding supply limits, the macroeconomic effect will be largely directed to higher inflation and import growth. The frenetic appreciation of the dollar in the weeks following the initial announcements of Mr Trump’s programme reinforces the possibility of greater demand leaks via foreign purchases of goods and services.

In any case, a drastic change in the current regime of fiscal and monetary policies is likely to occur. The normalisation of monetary policy by the Federal Reserve toward higher interest rates and smaller balance sheets tends to accelerate, while fiscal policy will definitely leave the consolidation path forced by Congress to the Obama administration in recent years. In effect, the US is one of those cases in which the IMF – and others – have long advised a shift from monetary easing to expansionary fiscal policies. The appetite in the markets for Treasury bonds has been far from satiated and larger public deficits would be easily absorbed, for which it would suffice to issue signs of future reforms toward some smoothing of the public debt path.

[caption id="attachment_11524" align="aligncenter" width="700"] Chart 6: Evolution of IMF External Assessments for Large Economies. Source: IMF, 2016 External Sector Report, July 2016.[/caption]

It is in trade policy and in dealing with current account imbalances that two scenarios emerge: a soft scenario is the one in which the Trump government limits its campaign promises to occasional arm twists with corporations, like moral suasion and tax concessions in exchange for local investments or import substitution within value chains. The hard scenario would be to establish extraordinary tariffs and other restrictions on imports – China and Mexico were frequent targets of such threats during the election campaign.

In the soft scenario, there will be a demand stimulus for the rest of the world, albeit at the cost of greater current US imbalances which would not likely face financing difficulties. The hard scenario, in turn, contains high risks of substantial price increases in the domestic basket of goods and services, as well as of having a negative impact on the profitability of US corporations. In addition, if followed by trade wars with countries directly affected, a lose-lose result in the global economy – as in the 1930s – could materialise. After all, the US economy nowadays has levels of trade and financial integration with the rest of the world sufficient to generate significant feedback loops.

Bottom Line

Current account imbalances in the global economy have returned to the spotlight, albeit with a different configuration from the one that marked the trajectory prior to the global financial crisis. Not as a particular threat to global financial stability, but mainly because they reveal asymmetries in adjustment and post-crisis recovery between surplus and deficit economies and, in the coming years, for the risk of sparking waves of trade protectionism.

About the Author

Otaviano Canuto is an executive director at the World Bank. All opinions expressed here are his own and do not represent those of the institution or of those governments he represents at the World Bank board.

The views expressed here are his own and do not necessarily reflect those of his employer or any of the governments he represents.


Leyla Aliyev, Heydar Aliyev Foundation: Azerbaijan’s Can-Do First Daughter

[caption id="attachment_11548" align="alignright" width="300"] Heydar Aliyev Foundation: Leyla Aliyev[/caption]

As Donald Trump moved into the White House, reluctantly swapping his gold-clad luxury pad in New York for the relatively austere dwelling on Pennsylvania Avenue, half a world away a government is celebrating the arrival of its moment: Azerbaijan is set to become a key US ally in Middle Eastern affairs with Baku – a city of glamour and plenty newfound wealth, and as such instantly appealing to the tycoon-turned-president – gaining its long-sought status of regional powerbroker.

In the Muslim world, Azerbaijan – sandwiched between Russia and Iran, two increasingly assertive powers – enjoys a unique position and one that merits recognition. While he rules a Shi’ite nation, President Ilham Aliyev (56) points out that his country boasts one of the oldest Jewish communities in the world. In fact, Azerbaijan is one of only a select few countries where Christians, Jews, Baha’is, and Shi’ite and Sunni Muslims coexist in peace and harmony – a feat of immense importance as the incoming Trump Administration inherits a deconstructed policy for the restless region.

Azerbaijan is not just a haven of religious tolerance; the country of eight million also assumes an outsized role as a dependable provider of energy to both North America and Europe. Azerbaijani exports of oil and natural gas – boosted by the completion of a 1,768 kilometre-long pipeline linking the country’s Caspian Sea oilfields with Ceyhan, a seaport on Turkey’s south-eastern shore – will already this year allow Europe to diversify its energy procurement and lessen the continent’s dependency on Russian supplies which, in the recent past, have been used as a political weapon by the Kremlin.

“Mixing entrepreneurial savvy with a taste for fine art, Ms Aliyev brought in glossy publisher Condé Nast International to help her launch Baku Magazine – Art, Culture, Wild – to showcase the country’s vibrant art scene.”

It is widely expected that President Aliyev will be amongst the first foreign heads of state to be invited to the Trump White House in recognition of his country’s pivotal role in the region. Additionally, the White House has cast an eye on Azerbaijan’s State Oil Fund (SOFAZ), the country’s $35bn sovereign wealth fund as it considers public private partnership for the long overdue upgrading of the United States’ infrastructure. Though SOFAZ reserves have been leveraged to compensate for low oil prices and underwrite social programmes deemed essential, Azerbaijan is considered a premier partner as the US tries to regain the initiative in the Middle East via active engagement with dependable partners.

Well on its way to implementing a sustainable development model that aims to ensure the country’s long-term prosperity, Azerbaijan moved to place ESG (environment, social, and governance) values centre stage as it seeks to diversify its economy. Leyla Aliyev, the president’s first daughter, has taken the lead with the founding of the International Dialogue for Environmental Action (IDEA) which seeks to offer young people a global platform for sustainability. The idea was inspired by the toxic legacy left after the Soviet Union fell apart in the late 1980s. Whilst exceptionally rich in natural resources – and beauty – Azerbaijan suffered severe environmental degradation as a result of Soviet extractive policies which seldom took environmental concerns into account.

Ms Aliyev has been a driving force behind a large scale initiative to save the black-tailed gazelle – a species officially classified as vulnerable – from extinction. Celebrated for its grace and beauty, the Azerbaijani gazelle once roamed the plains from Jeyranchol on the border with Georgia in the west to the Caspian Sea further to the east in their thousands. In the late 1800s, travel writers reported observing grazing herds as far as the eye could see, yet by the early 1960s a census found only 171 animals. Established in 2003, the 54,000-hectare Shirvan National Park now counts more than 6,000 gazelles – the largest population of the species anywhere in Europe.

According to Ms Aliyev, the bounce back of the Azerbaijan gazelle shows what may be accomplished once an executive decision is taken. The first daughter has launched new initiatives to rescue both the endangered Caucasian leopard and the Caspian sturgeon (beluga), listed as critically endangered, which has a lifespan of up to 120 years and grows to a length of five metres or more.

The first results of the conservation programme are promising with increased sightings of the Azerbaijan leopard in the Zangezur National park where females displaying territorial behaviour repeatedly set off camera traps. The country’s Ministry of Ecology and Natural Resources has recently strengthened legal provisions to protect the big cat. A Leopard Record Monitoring Network has been set up with neighbouring countries to track the leopard’s range and facilitate the exchange of data.

“Though only 32, Leyla Aliyev is a force of note – and a remarkable presence – in Azerbaijan and beyond. At times, it seems that Ms Aliyev is determined to personally ensure that Baku – once a dusty boomtown where fortunes were made, and lost, in weeks if not days – becomes the Dubai of the Silk Road.”

As a goodwill ambassador for the Food and Agriculture Organisation of the United Nations, Ms Aliyev has also helped to cement Azerbaijan’s position as a food-secured country. She has been instrumental in the shaping of the FAO’s Country Programming Framework which helps Azerbaijan expand its competitive edge in agriculture by promoting livestock health, plant protection, skills development, and resource management amongst others. FAO Assistant-Director Vladimir Rakhmanin recently praised Azerbaijan’s efforts to reduce food waste with innovative measures that offer blueprints for others to follow.

Though only 32, Leyla Aliyev is a force of note – and a remarkable presence – in Azerbaijan and beyond. At times, it seems that Ms Aliyev is determined to personally ensure that Baku – once a dusty boomtown where fortunes were made, and lost, in weeks if not days – becomes the Dubai of the Silk Road. The city is not far off from attaining its goals. Ms Aliyev is a tireless promoter of the Khazar Islands project – a universe of some 41 artificial islands in the Caspian Sea, linked by 150 bridges and able to withstand a magnitude 9.0 earthquake, that is to house around a million inhabitants by 2030. At its centre, the new $100bn city is to feature the Azerbaijan Tower rising a full kilometre skywards and slated to displace the Burj Khalifa as the tallest building in the world.

Mixing entrepreneurial savvy with a taste for fine art, Ms Aliyev brought in glossy publisher Condé Nast International to help her launch Baku Magazine – Art, Culture, Wild – to showcase the country’s vibrant art scene. The magazine quickly gained a dedicated international readership with newsstand sales in 22 countries for its avant-garde coverage of cultural trends and events.

In between, Ms Aliyev also helps run the Heydar Aliyev Foundation as its vice-president. The foundation is the driving force behind a growing number of social-impact initiatives and projects in both Azerbaijan and abroad.


Evan Harvey, Nasdaq: A Short-Term Look at Long-Term Growth - The Expert Outlook on 2017

Given the rapidly changing state of our global economic and political picture, it can be daunting to integrate sustainability strategies into business practices. This has ever been the case, but perhaps the tension between short-term deliverables and longer-term principles is perilously high. I put this theory to the test by asking a few colleagues to peer into the future with me, hoping to find a common vision for companies, investors, and analysts.

I wanted to know, first and foremost, if companies, investors, and other stakeholders are even measuring the right things. So I asked my expert panel about the current state of sustainability reporting and if they expected anything different in 2017. Dr Anthony Miller, economic affairs officer at the UN Conference on Trade and Development – and one of the architects of the Sustainable Stock Exchanges Initiative – was the first to respond.

“When I’m asked questions about sustainability,” Dr Miller said, “I try to think of the parallel question for traditional financial issues. Despite a 100-year debate in the accounting and finance community about good performance indicators, every unforeseen major market correction creates controversy about some metric that might have foreshadowed financial troubles, if only we’d paid closer attention. We have to expect the same kind of continuous learning and evolution with sustainability. What we measure now may be rudimentary, but it’s certainly better than what we had twenty years ago. So, we are moving in the right direction and 2017 will bring more focus on material disclosures, especially related to issues of climate change.”

“Companies are still at different levels when it comes to addressing sustainability. The laggards are stuck at limiting their efforts to compliance, and the more advanced think of it as protecting the company’s reputation and then as risk mitigation.”

Dr Todd Cort is a lecturer in Sustainability at the Yale School of Management and author of numerous papers on sustainability metrics and business impact. He turned my question on its head.

“The key to this question is the audience,” Dr Cort said. “I think companies are the closest followed by investors. We are all honing in on the most material indicators for companies and investors as evidenced by the fairly conclusive correlations between sustainability indicators and financial performance. However, we have a ways to go to get to the metrics level (i.e. we know that indicators such as ‘water use’ are material, but have less idea what metrics should be used to measure water use). However, I think we are a ways off on the other stakeholder indicators. Here I will point to the intersection of politics and sustainability and note that people are dissatisfied. Companies are still seen as corrupt, evil, etc. Investors are ‘the swamp’. Government is not trusted. Clearly, there is a gap between the indicators that society holds valuable and those measured by companies and investors.”

“For the environment, and the measurement of indicators against planetary boundaries and other scientific thresholds, I think we have made little headway, but will point to efforts to integrate natural and social capital as a good sign. For 2017, I see some very sweeping changes afoot which will challenge our preconceptions of sustainability and what matters to society. But at a more practical level, I think 2017 will see substantial changes in our understanding of some key sustainability metrics. Specifically, I think we will move toward a better understanding of social and natural capital, we will improve accounting controls on some sustainability data sets that will allow a move toward integrated reporting, and we will see a movement toward data as a public good which will allow greater access and mobility of ‘responsible’ investments.”
Robert Dornau, senior manager of Sustainability Services for RobecoSAM, also focused on the audience. “The big topic from an asset manager perspective is impact,” Mr Dornau told me. “Companies are still at different levels when it comes to addressing sustainability. The laggards are stuck at limiting their efforts to compliance, and the more advanced think of it as protecting the company’s reputation and then as risk mitigation. The last big wave was about integration of sustainability issues into the business case. In order to measure sustainability performance, RobecoSAM wants to see that companies link material issues to their business case, publicly report on KPIs and targets, and measure and report their performance against those targets.”

Mr Dornau believes that company KPIs (key performance indicators) should be directly linked to executive compensation: targets for pollution, energy use, green product innovation, accident rates, and so on. “Leading companies move beyond their own business and have concrete programmes to address environmental or societal needs,” he said.

RobecoSAM now asks about impact measurement and valuation in about one-third of its industry-specific questionnaires and will broaden that approach to more industries in 2017. Impact valuation in particular – identifying and valuing the externalities of company actions – is only done by about 20% of global companies, according to Mr Dornau, but another 8% are working on credible programmes for the future.

Will sustainability metrics mature into fully actionable financial disclosures in 2017?

Anthony Miller: “Depending on the metric and the industry, I think sustainability information is already an actionable financial disclosure today. Indeed, it has been for a few years now. Different companies and industries may have very different sustainability footprints, but investors are focused on climate risk. For example, understanding how a company can disconnect earnings growth from emissions growth is a vital, forward-looking metric that many investors want. We can also unpack the term ‘sustainability metrics’ to include not just information produced by a company, but information produced by other sources that affects a company or industry. For example, if you are an investor in a company that produces road salt for municipal customers to de-ice roads, then warmer winters with fewer days of snow cover are today having a material impact on revenues.”

Todd Cort: “I think the answer to this question is dependent on the investor. Some investors might argue that they have fully actionable metrics already. More mainstream investors and hedge fund managers may be the last holdouts, but even there we will see a handful of sustainability metrics integrated into a buy/sell dashboard. Greenhouse gas emissions, for example, may impact correlation coefficients, beta, risk adjusted cash flow, and so on. I think many of the large asset managers are already testing some of these metrics.”

Robert Dornau: “Some parameters – GHG data, male/female remuneration, CEO-to median-compensation – have already become mandatory disclosure items in certain jurisdictions. However, the standardisation of broader metrics into financial disclosures is not to be expected in the short term. RobecoSAM has twenty years of experience in translating intangible sustainability data into a comparable score, allowing us to evaluate the investment universe and rank companies, but not everyone can do so effectively.”

In terms of turning sustainability performance and measurement into financial instrumentation, where are the innovations likely to be in 2017?

Anthony Miller: “The exponential growth of green bonds seems set to continue for the next few years. Though slightly less prominent, equity indices and products based on them will remain the most popular sustainability financial instrument. We should expect integration of ESG strategies to deepen into other financial products both on and off the publicly traded markets. Yield-cos and REITs, while not explicit sustainability instruments, have certainly been growing in popularity as well.”

Todd Cort: “We’re at an interesting decision point on green bonds. The movement towards standards is good, but I also think there will be more publicly available data and proxy data to bring the cost of labelling down. So the green bond market may rise yet again, but at a more moderate pace than many of our original expectations. Green Banks offer an interesting new financial model for green (and soon social) investments. I would also look at the micro-generation of renewables (solar and renewable thermal technologies) since the infrastructure for sales and delivery is already developed.”

Robert Dornau: “There is clearly a trend away from active into passive investment. We see growing interest in the combination of Quant and ESG analysis. More investors are focused on long-term company growth. A longer-term focus looks at KPIs like variable compensation – and not just at the top, but also below senior management level. S&P Dow Jones Indices uses our economic score in combination with a financial quality score to select companies for its Long-term Value Creation Index, which has attracted a lot of capital from pension funds and interest from other investors, too.”

As we move into 2017, do you think most companies doing sustainability work are motivated by risk mitigation or revenue potential? Is one approach any more “authentic” than the other?

Anthony Miller: “Risk mitigation and revenue potential are, to some extent, two sides of the same coin. Many start-ups and young companies are innovating sustainability solutions, so we might be tempted to say they focus on revenue while larger, more mature firms focus on risk. But many large firms now have one or more divisions that look very much like sustainability start-ups. They are driving revenue by solving 21st century sustainability challenges. Whether one approach is more ‘authentic’ than the other is an interesting question. The key issue is how committed and financially invested the firm is in the particular sustainability work they do. If it’s seen as a necessary evil, then it will always be at risk. If it’s seen as core business, then it will go from strength to strength.”

Todd Cort: “I have no scientific evidence to back this up, but my strong sense is that risk management predominates sustainability metrics. One look at GRI, or SASB, or any other similar enterprise shows that impacts and risk mitigation are the predominant metrics – with opportunity a distant second. But I would also argue that more corporate activity focused on doing good sits just below the radar. Some companies (Tesla, Natura) can generate a lot of attention, but the bulk of the activity is in the long tail of distribution. Smaller companies tend to have a very small influence on politics, so we may continue to see an uneven playing field: More sustainable companies will have to fight both the market and the regulatory environment for their share.”

Which sustainability metric is the best driver of change right now?

Anthony Miller: While some sustainability metrics are material for everyone, the key drivers of change are often industry-specific. Particulate emissions for diesel was a break-out sustainability metric following the emissions testing scandals in recent years. This is something that many in the automotive industry will be keeping a keen eye on as more data comes in on the negative health impacts of localised urban pollution. We should expect similar metrics to emerge in other industries that face acute sustainability challenges. Beyond risk mitigation metrics, when we think of companies that are producing solutions to sustainability challenges, then the key sustainability metric is really a financial metric, i.e. how fast these companies are able to grow revenues, expand margins, bring down costs. When we look at a clean energy company or an electric car company, we’re not asking what their emissions are, but what their financial growth is.”

Todd Cort: “It’s difficult to say, but I think a robust and simple dollar figure on natural capital could be a wake-up call for states and nations on the rate of their capital depletion and the limitation on growth. My second vote would be a threshold metric on income inequality or the GINI coefficient. We have been pushing companies to measure environmental impacts against planetary boundaries, and I think there will be enormous pressure on companies to start thinking about their impact against global social boundaries. Income inequality seems globally relevant to me right now and something we might ask companies to start measuring and addressing.”

Robert Dornau: “While we would like to see companies ready themselves to evaluate real impact, it is still too early to say. As the numbers show, only about a quarter of the companies have some idea on how to do this in terms of qualitative or quantitative valuation. But clearly this is emerging and will be separating the leaders from the followers in the years to come.”

About the Author

Evan Harvey is the Director of Corporate Responsibility for Nasdaq. He also serves on the Board of Directors for the UNGC US Network and chairs the Sustainability Working Group at the World Federation of Exchanges.


DeVere Group: Decisive Move Into Private and Investment Banking

[caption id="attachment_11558" align="alignright" width="321"] Nigel Green[/caption]

One of the world’s largest financial consultancy services providers has moved into banking. Late last year, deVere Group acquired the St Lucia branch of Arton Bank in order to gain a foothold in private banking, and earlier this month the company announced it received an investment bank licence in Mauritius.

According to deVere Group CEO Nigel Green the development is a “critical next step” in the organisation’s evolution: “It will allow us to significantly further expand our offering to clients. It also enables us to create financial products that are specifically designed to meet the requirements of expatriates and international investors who have been our main market in the advisory sector for almost a decade and a half.”

The group expects its to launch its Mauritius investment bank in a matter of weeks. Mr Green said that Mauritius had been at the top of his list as a platform for banking operations: “Mauritius has a robust international reputation which is based on good governance, pro-business policies, legal expertise, and an educated English and French-speaking population.”

"The launch of our private bank is triggered by a growing demand from clients who are increasingly seeking asset and capital protection, as well as growth, together with financial privacy."

- Nigel Green

The twin developments in St Lucia and Mauritius add a number of dimensions to deVere group’s already comprehensive set of services: “The launch of our private bank is triggered by a growing demand from clients who are increasingly seeking asset and capital protection, as well as growth, together with financial privacy. This, combined with our investment bank licence, and of course our well-established global advisory business, means that deVere Group is truly able to meet the ever-evolving demands of our clients at every stage of their lives.”

Set up in 2002, deVere Group is focussed on providing premier financial consultancy services to expat professionals and global investors. The company now boasts over 80,000 clients in more than one hundred countries with in excess of $10bn under advisement. Focused on building, maintaining, and expanding long-term relationships with its clients, deVere Group has established a solid reputation for offering dependable advice within a bespoke strategic framework that is attuned to individual clients’ profiles.

“We were not satisfied with being just a world-class international advisory organisation and constantly seek to develop and grow our business in line with client demand. The launch of our private bank in January further demonstrates deVere Group’s status as a leader in the global financial community. The investment banking licence, I believe, cements it.”

Mr Green has taken the lead in the ongoing fight against the FATCA (Foreign Account Tax Compliance Act of 2010) legislation in the US which has wreaked havoc on the global financial system with its highly ineffective, burdensome, and onerous obligations. The campaign to repeal FACTA has gone into overdrive since the new administration took charge in Washington, earlier this year. DeVere Group is confident that it can help convince President Trump to scrap the entire act – or, at least, its most offending paragraphs.

“I am extremely pleased with the amount of high level and high profile support for the campaign to repeal FATCA. A delegation of our Washington DC-based campaign spent last week in the US capital garnering support. They took part in presentations on FATCA to two influential assemblies of tax activist groups that are helping to shape the tax package that will be passed by the US Congress this year,” said Mr Green.


Article 50 Invoked: For All the Wrong Reasons

[caption id="attachment_11572" align="alignright" width="300"] Theresa May. Carl Cour/Getty[/caption]

Driving a wedge right down the middle of British society and shattering a disconcerting number of endearing stereotypes, Brexit has now been served – fully nine months after a slim majority of voters expressed a wish to leave the European Union. The nation that kept calm and carried on bravely – and victoriously – in the face of overwhelming odds, suddenly seems to have succumbed to angst, nostalgia, mass delusion, and fits of ill-guided resolve to find problems for the solutions proposed.

Whilst there are plenty of good reasons to question the course and wisdom of the European project, the Brexit push uses none of them. Instead, Brexiteers resort to manipulations, machinations, outright lies, false promises, and delusionary vistas of sunny uplands to conduct a wild goose chase: there is no plan or grand strategy – the script is being written as the play is being staged.

Far from calm and carrying on, Brexit Britain prepares for a leap in the dark as bewildered continentals look on and wonder what happened to the nation that made stoicism into an art form – and a guiding principle of its politics and diplomacy, and a model for less enlightened others to aspire to. The British, usually unperturbed by whatever fad obsesses the continent – romanticism, communism, fascism – have now lost their collective cool. Those watching from across the English Channel – or La Manche if the observer happens to be French – wonder where pragmatism and reason have gone as their predictable and appreciated partner embarks on a quest perhaps best described as quixotic.

"Seldom, if ever, was such a crucially important topic – one that would determine the country’s fate for generations to come – presented to voters in such an irresponsible manner."

The Brexit referendum of June 23, 2016, constituted little more a cunning plan devised by then-Prime Minister David Cameron – the Baldrick of this improbable tale – to kill two birds with a single stone: keep the UK Independence Party in check and extract concessions from his Liberal Democrat coalition partner – the original plot had Mr Cameron withdraw his referendum promise post-election in return for the Lib Dems agreeing to the full Tory agenda. However, the May 7, 2015, general election saw the Conservatives gain an absolute majority in the House of Commons, crushed the Lib Dems, and returned only a single UKIP member of parliament – since deserted. With no need for a coalition partner to strong-arm, Mr Cameron was unable to ditch his referendum promise – the vote had to take place.

Thus, a scenario arose for which nobody in government had prepared. Worse, whilst Prime Minister Cameron reluctantly took the lead of an ill-prepared and disjointed campaign that lacked both a direction and a message, his own Conservative Party suffered a split between leavers and remainers with its hapless leader unable to maintain any semblance of discipline. Meanwhile, Labour – still suffering the aftershocks of its 2015 defeat at the polls and now led by an easily distracted and rather otherworldly ideologue – remained largely absent, leaving the field wide open to assorted crackpots, ego trippers, and opportunists. Seldom, if ever, was such a crucially important topic – one that would determine the country’s fate for generations to come – presented to voters in such an irresponsible manner.

During the lead up to the vote, the Leave Campaign’s wholesale use of fake news, alternative truths, and blatant lies went mostly uncontested. Flyers distributed in the millions spooked voters with warnings that Turkey, Albania, Macedonia, Montenegro, and Serbia were “on the verge” of gaining admission to the European Union resulting in yet more pressure on the underfunded healthcare services. UKIP frontman Nigel Farage found a new nadir publishing his now famous Breaking Point poster depicting hordes of refugees ready to engulf his green and pleasant land.

Leave campaigners assuaged fear by offering assurances that Great Britain would “take back control” whilst keeping full and unfettered access to the cherished single market. Voters happily took the bait: the now infamous £350m per week savings windfall Brexit was supposed to bring. The impressive number, entirely fictitious and the outcome of a likewise impressive exercise in creative bookkeeping, soon gained a life of its own – being spent many times over on the NHS, care for the elderly, infrastructure, defence, and a great many other worthwhile national pursuits.

Within a day after emerging victorious from the vote, prominent leavers such as Nigel Farage dropped the £350m promise: it now appeared to have only been an aspirational savings. Mr Farage et al also had no clue about what was to come next – no master plan, no strategy, no ideas, nothing. It was up to the government, he said, to obey the will of the people and fill in the details.

In the weeks and months following the referendum, most promises and assurances made by the Leave Campaign fell by the wayside: membership of the single market was no longer deemed essential, a hard border around Northern Ireland became a distinct possibility, and the envisioned drop in immigrant numbers suddenly proved a distant and – admittedly – unlikely goal.

In the chaotic aftermath of the vote, Prime Minister David Cameron stepped down and Home Secretary Theresa May, who presided over the largest recorded increase in immigrant numbers ever, floated to the top – by default since her contenders for Number 10 belonged to the looney fringe: spinster-supreme Andrea Leadsom whose love of contorted facts was not limited to her grotesquely inflated CV, and former Mayor of London Boris Johnson, professional EU-basher and originator of countless debunked euro myths, a Churchill wannabe, and the closest thing Great Britain produced to a shock-jock – a man who entertains interlocutors with buffoonery disguised as joviality.

Seizing the moment, Mrs May executed the greatest spin of all, becoming a Brexit convert overnight. Trading her principles for power, Mrs May – a former remainer – allowed her government to be hijacked by the clueless; instead of leading her cabinet and the nation, she was led by those screaming loudest, pulling the entire ensemble towards a hard Brexit – not an option ever presented to the voting public and, in fact, one emphatically rejected by the Leave Campaign. As often happens to converts, Mrs May swiftly radicalised if only to allay lingering suspicions that her heart was not really in Brexit.

The process culminated in Lancaster House where she delivered a blustering Brexit speech on January 17, preposterously warning the European Union of the “calamitous self-harm” it would suffer should Great Britain be denied its every wish and threatening to walk out in case the negotiations failed to deliver a deal considered advantageous. “No deal is better than a bad deal for Britain,” Mrs May fulminated.

As the government plotted an impossible course to allow the country to have and eat its cake, the contradictions mounted. Side-tracked to the Foreign Office, his consolation prize, Boris Johnson promptly departed for Turkey where he lavished praise on locally manufactured washing machines (“I own one!”) before assuring President Erdogan that Great Britain would help his country gain accession to the European Union. Mr Johnson’s greatest accomplishment: keeping a straight face while pledging his country’s support for Turkish EU membership.

As the union creaked at its seams with Scotland rebellious, Northern Ireland fearing troubles, and even placid Wales increasingly concerned, Mr Johnson promised the resurrection of the empire with former dominions and possessions reportedly clamouring to trade with the mother country. Australia indeed proved eager to put British farmers out of business, as did New Zealand. However, India did not quite aspire to become the jewel in Mrs May’s crown. Prime Minister Narendra Modi pointedly reminded Mrs May on her visit to the country that it had been the UK which had blocked a free trade deal with the European Union with its refusal to liberalise the visa regime for Indian visitors to the union.

Meanwhile back home, the government fought tooth and nail – all the way to the Supreme Court – to deny Parliament a say in the Brexit proceedings which, just a few weeks earlier, had been promoted as a way to return power from unaccountable Brussels bureaucrats to the elected representatives of the people. The rabidly anti-EU tabloids suffered a collective fit when the Supreme Court was asked for a ruling with The Sun reminding its readers that one of the judges was “openly gay”, The Daily Mail calling the court an Enemy of the People on its front page, and Nigel Farage – pint in hand – threatening revolution. Public discourse had now reached a new low with dissenters being branded defeatists and traitors, and anyone questioning the wisdom of Brexit summarily dismissed as a fifth-columnist for Brussels or a remoaner.

High on rhetoric and low on plans, Mrs May and her increasingly un-merry band of ministers plod on, making it up as they go along. Asked if he had a plan for the no-deal-scenario as suggested by the prime minister, Brexit Secretary David Davis simple answered: “No”.

Fourteen years ago, the British people were duped – with lies, misinformation, and fake news – into supporting the US-led invasion of Iraq and the toppling of Saddam Hussein. Those few who dared oppose the mission were dismissed as traitors and defeatists. Just as there were no weapons of mass destruction then; there are no sunny uplands now.

Brexit is the product of falsehoods and fabrications. The European Union may be far from perfect – it never pretended otherwise – and offer plenty room for improvement. However, the EU also has many accomplishments to its name apart from delivering “peace in our time”: bringing prosperity (also to the formerly sick man of Europe), maintaining the rule of law, imposing good governance, ensuring a comprehensive set of individual freedoms and protections, and creating the world’s largest market for businesses to prosper in.

Any one of its 28 sovereign member states is free to leave at any time and to remain a good friend and partner to those left behind. However, a friend is not a member of the family and cannot reasonably expect to be treated as one. Herein lies the conundrum facing Mrs May: how to turn one’s back on Europe without being expelled from the family. “We miss you already,” said European Union President Donald Tusk when he received the official notification letter signalling the UK’s intention to exit the EU on March 29. What Europe misses most, however, is the oasis of calm that used to exist in the uplands beyond the White Cliffs of Dover – that most admirable of nations where liberal democracy saw its first light and passion never prevailed over common sense. Those were the days.


Jury for AIM 2017 IPA Awards Receives Recognition

The six esteemed jury members for the AIM 2017’s Investment Promotion Agency (IPA) awards receives recognition for their kind support when the final winners results are presented at the gala ceremony at the Armani hotel at the The Burj Khalifa (in Dubai on April 2nd, 2017).

Mr. Ismail Ersahin, Deputy CEO from WAIPA

Mr. Emmanuel Noutary, General Delegate from Anima Investment Network

Mr. Andreas Dressler, executive from FDI Advisory

Mr. Kai Hammerich, former WAIPA president; now president of KA Foreign Investment Co.

Dr. Douglas van den Berghe, CEO of Investment Consulting Associates (ICA)


Ernst & Young: Argentina - New Government Measures to Improve and Strengthen Employment

[caption id="attachment_11592" align="alignright" width="300"] Argentina: Buenos Aires[/caption]

Argentine payroll costs are the highest in Latin America, standing at a maximum of 40%. Social security and health care employer contributions amount to 23% or 27%, based on each employer, whereas contributions withheld from employees stand at 17%.  In addition, the cost of work-related accident insurance coverage and mandatory life insurance must be added and amount to an additional average of 4%.

Moreover, Argentine Employment Contract Law and collective bargaining agreements also establish other type of costs that employers must bear, such as 13th payment, paid holidays, non-wage payments, uniforms, food, medical controls, and dining facilities, amongst others.

This situation, jointly with the high inflation that Argentina has suffered in the last few years, make companies’ labour and payroll taxes a significant component of their cost structure.

In order to boost the labour market and improve the country’s infrastructure, thus facilitating the production of goods and services, during its 14 months in office the new government made decisions and implemented policies in several areas, such as finance, employment, and taxes.

“Compensation applicable to a worker for disability will be improved since the basic gross salary will be adjusted monthly.”

Below are the most significant social security and labour measures being drafted, analysed and negotiated by the Argentine government with the different social actors, or that have already been approved by congress. The main objectives pursued by the current administration are:

reducing the labour cost borne by employers;

introducing young people into the labour market;

lessening the tax burden of workers;

strengthening employment in the private sector;

creating new registered work positions;

stimulating formal employment – at present, informal employment amounts to about 35%, representing four million workers.

Income tax payable by salary earners – On December 27, 2016, the amendments made to Income Tax Law, which governs payroll employees, became effective.

Income tax has significantly affected the workers’ purchasing power over the last few years since the previous administration did not adjust for inflation the scales for calculating income tax withholdings, which were the same from 2000 through to December 2016. The high inflation rates suffered in Argentina during these years caused the workers’ salaries to become increasingly unsteady, even if collective bargaining negotiations granted the agreed-upon increases, and/or if employers provided employees not covered by collective bargaining agreements with salary increases equal to or higher than the inflation rate. In many cases, despite salary increases, workers, due to the regressive nature of income tax over the last few years, earned a net salary which was lower than that collected before the raise.

Pursuant to income tax law amendments, updated personal deduction amounts became effective as of January 1, 2017, accounting for a 23% increase as compared to 2016 and which will be adjusted annually as from 2018. The amendment also sets forth the extension of the bracket scales for assessing income tax.

Workers Compensation Insurance Law – On January 23, 2017, a Presidential Necessity and Urgency Decree was published, whereby the president introduced major amendments to the workers compensation insurance system aimed at reducing the high rate of lawsuits for occupational accidents suffered by insurance companies mainly since from 2012, compromising their solvency, as well as the stability of the system.

The main amendment to the system is that if an employee wants to file an occupational accident/disease lawsuit, he/she is required to undergo a single administrative instance excluding any other intervention so that he/she may request, with legal counsel support, the assessment of the occupational nature of his/her disease or contingency, the assessment of his/her disability and the related monetary compensation set forth in Workers Compensation Insurance Law.

This instance comprises the involvement of a jurisdictional medical commissions before the employee appears in court. These medical commissions should issue an opinion no later than 60 administrative business days, a term which may be extended for ‘matters of fact related to the confirmation of the occupational accident or disease, duly grounded’. Should the worker disagree with the ruling, once the administrative instance is exhausted, he/she may resort to court proceedings. This amendment is expected to be regulated before February 28, 2017, so that it becomes effective no later than March 1, 2017.

[caption id="attachment_11591" align="aligncenter" width="580"] Work-related risks’ insurance: evolution of lawsuits[/caption]

In addition, the compensation applicable to a worker for disability will be improved since the basic gross salary will be adjusted monthly.

Based on official statistics, there are 340,000 pending trials at present which account for liabilities worth $4.5 billion. A total of 127,503 new trials were initiated in 2016. As a result of this high number of lawsuits, insurance companies have been forced to increase the monthly premium charged to employers to face these lawsuits, thus driving up labour costs.

First Job Promotion System and Employment Formalization Bill – This bill has been pending approval by congress since April 2016. It consists of two systems:

First Job System: It comprises exemptions for employer contributions (23%/27%), which may reach 100%, and additional economic incentives granted to employers for hiring first-job employees or employees who have worked less than 36 months as registered employees. This system comprises people aged between 18 and 24.

Special system for redressing unreported employment (regarding the age of the employee): In the case of payables from failing to pay over social security taxes, the employer is benefitted with the remission of such payable and the discharge of interest, fines and penalties.

Its main objective is to foster the creation of new registered work positions as a policy of national public interest and to boost economic and social development in Argentina.

Labour disclosure – This initiative is being drafted by the Argentine Ministry of Labour, Employment, and Social Security. It is aimed at (a) boosting the creation of employment by subsidising only employee social security contributions (14%); (b) amending collective bargaining agreements, and (c) reaching an agreement at collective bargaining negotiations considering future inflation, rather than past inflation as it has been done over the past twelve years in Argentina.

One of the key points of labour disclosure consists in subsidizing employer social security contributions. The Argentine government will bear the contributions of every new employee joining the labour market over the next three years.

Therefore, the executive branch seeks to register about 300,000 workers per year, reaching 900,000 employees in three years and thus avoiding a strong imbalance in the Argentine social security system.

This disclosure will aim at SMEs and informal workers with gross salaries of up to ARS 12,000. The Argentine government also seeks to reduce informality in some key sectors of the economy where unreported labour is high, such as construction, the rural activity and the textile industry.

Moreover, this initiative would set forth that the beneficiaries of social plans also make contributions to the social security system.

Besides, the disclosure would also toughen penalties for employers failing to register its employees in due time and manner. In February, the Argentine government will summon business persons and the main union leaders to bring forward the proposal and reach general consensus.

Vaca Muerta Agreement

Vaca Muerta is the second largest shale gas reserve worldwide and the fourth largest reserve of shale oil in the world. It is located in the Province of Neuquén and has a surface of 30,000 km2.

Last January the provincial government and oil unions and companies reached an understanding to relaunch investments to exploit the shale gas and shale oil fields in Vaca Muerta. The purpose of this agreement is to improve the profitability of the projects by adopting such measures to cut labour costs, invest in infrastructure, encourage exports and drop the price of energy, amongst others.

This ‘treaty to improve productivity’, as defined by the government, intends to lower business costs by removing certain economic items granted to employees so far. Although this removal slashes worker salaries by a third, and thus labour costs, the oil union upholds that, despite such salary decrease, work is humanised and the quality of life is improved.

Companies will invest $5 billion in 2017, whereas investment will increase to $15 billion per year as from 2018, which, based on government forecasts, will multiply the workforce in the oil and gas field and related activities by a factor of ten.

In addition, through this arrangement with the oil union, the government aims at setting precedent and replicating the model in other collective bargaining agreements to make them more ‘flexible’ and productivity-oriented, and hence promote investments in other sectors.

About the Authors

[caption id="attachment_11589" align="alignleft" width="172"] Sergio Caveggia[/caption]

Sergio Caveggia is a tax partner currently in charge of the Transaction Tax Area in Argentina. He joined EY Argentina in 1994 and has developed strong expertise over 21 years in international taxation and mergers and acquisition matters. He is highly experienced in acquisition structures for inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax Area.

Mr Caveggia has served numerous clients in a variety of industries and has also been involved in practically all buy-side and sell-side due diligence procedures performed by the firm over the last decade. He has given lectures in national universities and is a frequent speaker in tax seminars and has also written several articles dealing with Argentine tax issues

Mr Caveggia is a certified public accountant, graduated from University of Belgrano in Argentina. He also obtained his tax specialist’s degree at the University of Belgrano and has a postgraduate certificate in Business and Management from Universidad Católica Argentina (UCA). He is also a member of the Professional Council of Economic Sciences of Buenos Aires and the Argentine Fiscal Association.

[caption id="attachment_11590" align="alignleft" width="172"] Vanina Manteiga[/caption]

Vanina Manteiga is a manager within the Transaction Tax practice of EY Argentina. She joined EY in 2010. Mrs Manteiga has ten years of experience in labour, human resources, and social security issues (corporate advisory and payroll processing services provided to several companies). As social security manager, she has performed several due diligence processes in connection with numerous business transactions. She actively participates in social security audits for large number of companies in several industries.

She graduated in Human Resources, from the Universidad Argentina de la Empresa (2004). She is currently taking a Master’s Degree in Human Resources Management at the University of Buenos Aires.


France: Touch and Go

[caption id="attachment_11596" align="alignright" width="266"] French President-Elect Emmanuel Macron[/caption]

So far this year, Europe’s centre ground has held firm - sort of. After Dutch populist Geert Wilders in March failed to significantly expand his following, French voters on Sunday rejected Marine Le Pen in the decisive round of the presidential elections, sending instead former investment banker Emmanuel Macron to the Élysée Palace with 65.8% of the votes.

Though soundly defeated, for now, Marine Le Pen of the Front National is far from beaten. Her share of the vote in the first round of the polls went from 17.9% in 2012 to 21.3% this year. Mrs Le Pen on Sunday scored 34.2% - the highest-ever share obtained by a candidate from the far-right in France - virtually assuring a come-back in 2022. Marine Le Pen received almost double the votes her father did in the 2002 run-off against Jacques Chirac.

The danger is clear though, perhaps, not yet present: Emmanuel Macron, never before elected to public office, now has five years to address the many and varied concerns of French voters. Next Sunday, Mr Macron takes over from the deeply unpopular François Hollande whose passive and reactive approach to governing, and all-round failure to inspire, have left France if not unhinged, then at least confused and insecure.

Congratulating his former economy minister with the win, President Hollande interpreted the election as a vote of confidence in the values of Fifth Republic and proof that the nation remains united in its attachment to the European Union. In fact, French voters seem to have wholeheartedly endorsed the European project, causing an audible sigh of relief in Brussels. In recent times, no other politician has managed to win so decisively on a pro-EU platform.

"Though the government’s finances are far from balanced, the French economy is performing rather well."

EU leaders were uncharacteristically quick to heap praise on Mr Macron and the French voters. EU President Donald Tusk congratulated the French for rejecting “fake news” whilst the much-maligned commission president Jean-Claude Juncker welcomed the arrival of an ally and kindred spirit on the scene.

Mr Macron won with an apparently contradictory agenda: he proposes pro-business reforms while vowing to safeguard France’s welfare state. Even so, Mr Macron wants to slash government expenditure by €60 billion, dismiss up to 120,000 civil servants, and reform the country’s notoriously rigid labour market.

Though the government’s finances are far from balanced, the French economy is performing rather well. Over the past fifty years, labour productivity has remained at par with Germany. Since the introduction of the euro in 2002, France and Germany have also experienced similar growth levels.

However, French state finances are nowhere near as well balanced as those in Germany. The country has been in near-constant breech of EU fiscal rules since the beginning of the millennium with debts bordering 100% of GDP and a budget deficit only recently reduced to a more manageable -3.1%. Conversely, France’s current account has been dipping into - and out of - the red causing but little concern. Growth remains lacklustre but is expected to pick up next year, although Mr Macron’s moderately aggressive expenditure cuts may yet postpone a robust economic revival.

Whilst German Chancellor Angela Merkel welcomed Mr Macron’s win, she may find his plans for the EU slightly less palatable. The incoming French president has big plans for the post-Brexit EU, such as a common Eurozone fiscal policy and budget overseen by an all-powerful EU finance minister - all changes that have been ruled out by the German political establishment.

Squarely in favour of a multispeed Europe, Mr Macron wants to revive the EU by, amongst others, cementing a European defence union around the Paris-Berlin axis and building a strengthened Eurozone - a union-within-the-union complete with its own parliament, budget, and executive. Mr Macron’s reform proposals represent a bold dash forwards to be undertaken upon the United Kingdom’s exit.

“Macron’s EU plans are ambitious indeed,” says Michiel Luiding of the Clingendael Institute, a Dutch foreign policy think tank: “This is not something that particularly excites The Netherlands or Germany. It smacks of the transfer union idea which, of course, is quite popular in southern member states, but not so much elsewhere.”

However, Mr Macron may find that Germany is at least willing to listen and meet him somewhere halfway. Berlin needs strong French leadership. President Hollande, unloved at home and at loss in the EU, was largely absent from European affairs, leaving Germany to lead the union on its own - a source of great discomfort to Berlin. Mr Macron has promised to kick-start the Franco-German engine at the heart of the union and reposition his country as the main driver of the EU agenda.

However, of late, French presidents have displayed a bluster not matched by their actions. Both Nicolas Sarkozy and François Hollande proposed ambitious projects - to make France Great Again - that foundered almost as soon as they were unveiled. In order for Berlin to pay attention, and take him seriously, Mr Macron needs to deliver a few early policy victories. This would set the tone of his administration and provide the inertia needed for the implementation of his reform agenda. Striding onto the stage to the thunderous sound of Ode to Joy - the final movement of Beethoven’s 9th Symphony adopted as the official anthem of the union - provides only a momentary fuzzy feeling. The next day, reality is bound to set in.

Mr Macron’s first order of business is to gain a solid foothold in the National Assembly. Running as an independent candidate, the incoming president, for the moment, enjoys no official backing in France’s parliament. Though he is expected to gain a fair degree of support by appointing political heavyweights to key positions in government, Mr Macron’s En Marche! movement - founded to propel him into the Élysée - currently struggles to find enough reputable candidates to contest next month’s legislative elections in each of the country’s 577 constituencies. Candidates must be declared by May 18. The two voting rounds on June 11 and 18 are to provide the Macron Administration with a working majority - or coalition - for the next five years.

Though the script is simple enough, realities are markedly less so. Fully one third of the electorate was willing to throw its lot in with Marine Le Pen. Moreover, a quarter of the voters simply stayed home - the highest abstention rate since 1969. Add to that the around four million people who cast blank or spoiled votes - almost literally torn between cholera and the plague (the French take on the devil and the blue sea) - and Mr Macron’s triumph loses some of its initial lustre. A few pundits already brand the incoming French president “Renzi 2.0” in a non-complimentary nod to the former Italian prime minister whose reform-minded administration started with a hopeful bang only to get bogged down in parliament and ejected from power after voters overwhelmingly denied him the constitutional changes necessary to modernise and streamline the bloated state apparatus.

In France, the obstacles to change are no less formidable. Combative unions, restless farmers, and a strike-prone public sector conspire against Mr Macron’s reforms. A cliché it may be, but Emmanuel Macron faces an uphill battle. If he fails to push through the reforms needed for France to catch up with the times, Marine Le Pen will be found waiting in the wings, ready to apply her potion in 2022.


Paul Krugman: The Last of the Keynesians

 He doesn’t hold out high hopes for the Trump presidency: in fact, calamity is on the horizon. Barely a month into the Trump Administration, economics professor and New York Times columnist Paul Krugman concluded that the high and exalted office has failed to rub off on, or ennoble, the real estate tycoon: “Every day brings further evidence that this is a man who completely conflates the national interest with his personal self-interest and who has surrounded himself with people who see it the same way. Each day also brings further evidence of his lack of respect for democratic values.”

Mr Krugman (64) writes and speaks with considerable authority. In 2008, he was awarded the Nobel Memorial prize in Economic Sciences for his research on trade flows and economies of scale. A prolific as well as opinionated writer, Mr Krugman authored over twenty books and many hundreds of columns and essays. A self-styled modern-liberal, the New Yorker played a minor role in the formulation of 198s Reaganomics – an episode he remembers as both thrilling and disillusioning: “Already then, I was quite convinced – as I am today – that the welfare state represents the most decent economic arrangement yet devised.”

That opinion makes Mr Krugman an instant outsider in a world obsessed with – though not addicted to – fiscal probity. Mr Krugman is an unabashed social democrat – and as such, an oddity in the United States – who incessantly argues that capitalism needs to be saved from itself to the benefit of all people – as opposed to the oligarchic few.

“Considering President Trump’s proposals for the US economy as “Reaganomics on steroids”, Mr Krugman fears that the white working (or salaried) class that propelled him to the White House is in for a rude awakening: “They are about to be betrayed and won’t be happy for long.”

Considering President Trump’s proposals for the US economy as “Reaganomics on steroids”, Mr Krugman fears that the white working (or salaried) class that propelled him to the White House is in for a rude awakening: “They are about to be betrayed and won’t be happy for long. The numbers tell an interesting story. Thanks to Obamacare, the number of uninsured Americans fell by thirteen million. Whites without a college degree, who voted for Trump by a two-to-one margin, account for almost two-thirds of that decline. That means around five million Trump supporters just voted to makes their lives nastier, more brutish, and shorter.”

Most may not have fully understood what was at stake, or believed Mr Trump’s repeated assurances that he would replace Obamacare with something “great”. It never fails to amaze Mr Krugman how many voters insist on self-harm. The gullibility with which simplistic solutions to complex issues are accepted as the ultimate truth, lays bare an inconvenient truth in politics: demagoguery wins. It just happens that Donald Trump, for all his shortcomings, is a marketing genius.

Of late, Mr Krugman has attracted significant flack when debunking fallacies in economic thinking. The myth of trickle-down economics is one of his favourites bugbears as is the more recent window dressing by the Trump Administration: border taxes and strong arming corporations to stay at home are to Mr Krugman a sure-fire way to undermine US productivity – and by extension prosperity – levels. Contrary to popular perception, Mr Krugman was no fan of President Obama and his economic take. He thought the stimulus plan that followed the 2008 financial crash too small in relation to the size of the US economy and too tilted to providing relief to the financial sector.

Though he advocates free trade, Mr Krugman did suggest subjecting imports from China to a surcharge in order to compensate for the country’s insistence on keeping the exchange rate artificially high, thereby indirectly subsidising Chinese exporters. A Keynesian through and through, Mr Krugman never tires in criticising governments that in times of crisis chose fiscal austerity over full employment: “lives are blighted by the absence of jobs as recessions turn into depressions. When caught in a downwards spiral, the only feasible solution is to provide stimulus via increased expenditure. Not doing so, affects the social fabric of society and causes damage that, of not irreparable, always proves very expensive to repair.”


CFI.co Meets the CEO of ARC Ltd: Dolika Banda

[caption id="attachment_11603" align="alignright" width="282"] CEO: Dolika Banda[/caption]

African Risk Capacity Insurance Company Limited appointed a new chief executive officer in September 2016 to lead the insurance mutual in its next phase of growth across Africa.

“I am both honoured and proud to steer alongside Ngozi Okonjo-Iweala and Lars Thunell, the co-chairs of ARC and known game-changers in the drive for a better Africa for all,” says Dolika Banda of the opportunity to lead ARC.

Ms Banda, a well-known Zambian in the world of development and finance, was chosen for the role due to her 25 years of international banking and financial management experience and her extensive work on economic development in Sub-Saharan Africa, for which Ms. Banda has a strong passion.

She began her career in the Zambian banking sector, holding senior positions at Barclays and Citibank. She then relocated to Washington DC to take up a position with the World Bank Group’s International Finance Corporation (IFC) where she would continue working for more than sixteen years within the financial markets, credit, accounting, and treasury departments. Quickly climbing the ranks within the institution, Ms Banda become regional director of Financial Markets, managing activities across Sub-Saharan Africa as well as Latin America and the Caribbean.

“But after many years working across the globe, Africa was beckoning and I decided to return. If you are not part of the solution, you are part of the problem. Every time I was on African soil, I yearned to be part of the solution. There is so much to do for so many on this continent and yet such few capable hands with which to get the job done.”

In 2013, Ms Banda moved back to Zambia to begin a new chapter of her life, speaking out on financial inclusion, broad-based mentoring, and the need for public and private sector leadership that embraces vision, strategy, preservation, and integrity at the national level. In addition to a short contract as regional director for Africa at the UK’s Commonwealth Development Corporation (CDC), she joined the boards of several African and development-focused companies such as Ecobank Transnational Incorporated, Harith General Partners, and the UK DFID’s Financial Sector Deepening Africa and Zambia.

It was in 2016 that Ms Banda was head-hunted to lead ARC, an insurance mutual which provides parametric disaster insurance to African governments in coordination with ARC Agency, a specialised agency of the African Union.
Since joining ARC, Ms Banda has been driving its transition from start-up to fully-fledged institution, collaborating with ARC Agency to establish the group’s next growth phase. Her first months at ARC have been challenging, requiring high level marketing of the organisation and a whirlwind tour of its member states as well as long-term strategizing on optimising the company’s impact on the continent.

“I want to acknowledge my colleagues, Mohamed Beavogui and Simon Young who have been critical to driving ARC, and to thank BMZ through KfW, UK’s DFID, and the African member states for taking up the mantle to support.”

“I am confident that together we will achieve our goal of expanding ARC across the continent, with the aim of efficiently managing $2bn in climate risk by 2020 and protecting more than 150 million vulnerable people.”
Ms Banda has risen to this challenge and is already making in-roads to cement ARC as a critical tool in Africa’s management of disaster risk. Her natural leadership skills, deep understanding of the continent and passion for its development have made her a vital asset to ARC and the realisation of its goal of growing its membership to cover as many countries as possible with disaster risk thus helping vulnerable Africans to quickly rebound after disaster has struck.

Asked to share her vision, Ms Banda does not hesitate to respond: “I do not have the luxury of choice. ARC embodies all that I have been speaking out on regarding the continent’s growth and long-term survival: a public-private partnership focused on vision, strategy, and integrity aimed at facilitating economic development in Africa and empowering African governments to proactively protect our population and our natural beauty. In the words of Keats, the poetry of earth is never dead.”


African Risk Capacity (ARC): Towards Resilience - Africa Takes Disaster Management Into Its Own Hands

African Risk Capacity (ARC) has been named by CFI.co, for the second year running, as the most innovative environmental, social, and governance risk protection provider in Africa, in recognition of its dedication to technological and financial innovation, and its contribution to capacity building on the continent.

ARC provides a platform for African governments to proactively contain the impact of natural disasters by prioritising the resilience of households.

Set up in 2012, ARC is a public-private partnership that comprises an international organisation (ARC Agency – a specialised agency of the African Union); and its financial affiliate the African Risk Capacity Insurance Company Limited (ARC Ltd) – an insurance mutual. Any African government can join ARC by paying an annual premium to insure a portion of its disaster risk and linking this to a predefined contingency plan.

“One dollar spent on early intervention through ARC saves four and a half dollars spent after a crisis is allowed to evolve.”

Entering its fourth year, ARC has increased its total insurance pay-outs to countries impacted by disaster to $34.4m. The company paid out $8.1m to the Malawian government after the country was struck by drought last year, having previously paid $26.3m to Senegal, Mauritania, and Niger in early 2015 after drought impacted parts of the Sahel. These pay-outs have helped support more than two million people through food distribution and cash transfers as well as 900,000 livestock, thus boosting households’ resilience.

In addition to drought insurance, ARC has also expanded its offerings to provide cyclone insurance.

However, the impact of disasters is not proportionate in developed and developing countries partly because in many of the poorest parts of the world, extreme weather poses a greater threat to both the lives and the economic and environmental foundations of entire communities.

Disasters in low-income countries can undermine overall economic growth and development and hit the agriculture sector particularly hard. With over half of its labour force involved in agriculture, Africa has especially suffered from the impact of droughts, floods, and cyclones.

Director of Development Planning for The Gambia Alagie Fadera notes that most Gambians are involved in agriculture and therefore subject to the vagaries of weather and climate: “The Gambia’s rainfall pattern has been very erratic. That feeds into our GDP growth. Heavy rains causes GDP to contract which sends people into poverty.”

In the wake of a big natural catastrophe, families can resort to cutting nutritional intake, pulling their children out of school, and selling off key assets such as livestock. In dire cases, affected communities can be forced to migrate.

At a national level, governments are forced to reallocate scarce budgetary resources away from critical infrastructure and social investments to support the affected populations or wait on humanitarian aid which typically takes months to flow to the affected communities and can be uncertain in quantity.

Discussing Senegal’s drought in 2011 before it joined ARC, Mamadou Moustapha Ba, director of Economy and Financial Development Cooperation, notes that an almost 40% percent fall in crop production had badly impacted economic growth. While the government had managed to raise $70m, it was not without some major challenges: “Firstly, the money came too late. Secondly, it was only [raised] through budget reallocation which in the middle of the financial year is very difficult. We had to make cuts to health and education,” Mr Ba explained.

[caption id="attachment_11608" align="aligncenter" width="892"] ARC’s drought model in Africa RiskView converts rainfall data into drought information which is used to produce an estimated number of people affected by a drought and from that estimates the cost of responding to a drought based on the model.[/caption]

In light of climate change and competing demands on humanitarian aid, a growing number of governments are making financial resilience and ex-ante planning a priority. Governments are aiming to secure access to rapid financing to address emergency response which helps smooth the budget volatility associated with post-disaster expenditures.

ARC was created with just such an aim and countries which have joined the risk pool are calling on others across Africa to participate. “There have really been a lot of benefits for us since Senegal signed up and we believe it is an opportunity for all African countries to sign up for an insurance policy,” says Mr Ba.

Mauritania’s Minister Delegate to the Minister of Economy and Finance for the Budget Mohamed Ould Kembe reiterated his call: “The tactical solution to the problem of natural disasters is actually insurance. You need to join ARC. You have to have faith in this tool which is incredibly important.”

The insurance provided by ARC is parametric which means it is based on a risk model’s estimate of losses rather than actual losses which allows the pay-out to be triggered rapidly after a disaster hits. The speed of the pay-out and the certainty of financial liquidity have efficiency benefits as vulnerable populations do not have to resort to negative coping skills. An independent study showed that one dollar spent on early intervention through ARC saves four and a half dollars spent after a crisis is allowed to evolve.

[caption id="attachment_11609" align="aligncenter" width="897"] Tropical Cyclone Enawo hit Madagascar in March 2017. ARC’s cyclone model produced a wind speed footprint of the storm (right).[/caption]

ARC’s state-of-the-art modelling platform, Africa RiskView, uses satellite data to model a country’s drought and cyclone risk and will soon have a river flood risk component added. Governments work with ARC to customise the model to best represent their country’s unique risk profile. This customisation process allows a country to quantify its exposure to disaster risk – a critical first step in disaster management. Secondly, the model has an early warning system so governments can track a disaster in real-time as it occurs and start planning early.

Countries joining ARC become effective owners of the company and drive high level strategic decisions. They also benefit from lower insurance prices as more countries with diverse risk profiles join the risk pool and can access private insurance and capital markets at competitive terms given that ARC transfers a portion of its risk to the reinsurance market.

However, insurance is just one of the tools available for managing climate and weather risk and the concept still has a way to go. The so-called protection gap, the proportion of economic losses from natural disasters that is insured, was just 30% last year with insurance penetration at a much lower level in Africa.

Dolika Banda, a renowned Zambian, appointed to the helm of ARC’s insurance company arm in September 2016, says: “ARC is a first step towards narrowing this gap in Africa, allowing African governments to proactively take disaster risk management into their own hands and to build the continent’s resilience.”