Middle East - Business Trumps Politics

Joint business ventures, and the pragmatism required for success, laid the groundwork for the normalisation of relations between Israel and the United Arab Emirates (UAE) which was marked by the touchdown of the first official El Al flight at Abu Dhabi International Airport on August 13. On board, US and Israeli diplomats and officials celebrated the historic moment whilst Israeli journalists, swiftly dispatched by their editors, surprised morning audiences with an ebullient ‘Good Morning from Dubai’ and panoramic shots of the Burj Khalifa, the world’s tallest building poking 830 meters into the sky.

In an almost-replay of President Richard Nixon’s 1972 surprise visit to the People’s Republic of China, which stunned Americans and opened the host nation to the wider world it had shunned, the announcement of a ‘normalisation pact’ that formalises the links between Israel and the UAE upsets the regional power balance and signals the beginning of a major geopolitical shift that may see more countries recognise Israel and establish diplomatic relations with Tel Aviv.

Iran is, of course, quite unhappy and repeatedly denounced the UAE’s long-expected move as a ‘betrayal’ of the Palestinian Cause, conveniently forgetting to mention that 70+ years of disengagement has delivered few tangible results for the long-suffering people. Whilst in Tehran Supreme Leader Ayatollah Khamenei went on a verbal rampage, the Emirati government emphasised that its ‘bold but necessary’ step helps ease the polarisation in the region.

However, it was business that drew the two countries closer. According to data from the Tony Blair Institute for Middle East Change, trade between Israel and the Emirates last year amounted to a modest $1 billion or so. This number does not include the business conducted by Israeli surveillance firms in Saudi Arabia, Bahrain, and the UAE – the three countries that adhere to the philosophy that their enemy’s enemy is probably a potential friend. The common denominator being, of course, Iran.

In business terms, the UAE is most interested in gaining access to desert agriculture technology, a field in which Israel leads the world, and biomedical research. Almost immediately after the rapprochement was made public, companies from both countries announced a joint push for the development of a covid-19 vaccine. National Investment, the Emirati company charged with funding public sector initiatives and projects, on August 15 signed a ‘strategic commercial agreement’ with Israel’s TeraGroup to research the novel corona virus and develop new testing devices and methods.

TeraGroup has made significant progress in the design and manufacture of a breathalyser that offers a fast, cheap, and non-invasive way to detect infections. The company’s BioSafety device has already been deployed by the Emirates Field Hospital in Abu Dhabi which now plans to take its testing regime and kit national.

Early July, some six weeks before the entente was formalised, the official Emirates News Agency announced that Abu Dhabi-based high-tech pioneer Group 42 had inked a deal with two Israeli defence contractors – Israel Aerospace Industries and Rafael Advanced Defense Systems – to conduct research related to covid-19.

The UAE has long been quietly tolerant of its small Jewish community. Numbering, perhaps, a few thousand, Jews in the Emirates have received covert government backing and are allowed to discretely maintain two pseudo-secret places of worship. Now, the Emirates are preparing to receive an influx of tens of thousands of Israeli tourists and businesspeople. Tour operators are scrambling to cobble together travel deals and expect that, once the pandemic has abated, as many as 300,000 Israelis may come to visit the UAE annually.

Abu Dhabi hotel managers have received instructions to ready their restaurant kitchens for kosher certification by the country’s only rabbi, Levi Duchman. The 27-year-old is excited that the doors have, at long last, opened for business, leisure, and rites.

The UAE has largely ignored the barrage of criticism hurled at the country from Iran, Turkey, and the Palestinian Territories. Local support for the deal is strong, especially amongst young people who long to break with the olden ways and are tired of the rhetoric and animosity.

After the Kingdom of Bahrain joined the détente, most critics threw conceded defeat in the face of a diplomatic fait accompli. The country’s move, though not necessarily a complete surprise, may convince other moderates such as Oman, Morocco, and Sudan to offer formal recognition to the State of Israel as well. Further afield, Indonesia and Malaysia are also expected to follow the UAE’s lead before long.

The top prize, as grand as it is elusive, remains regional superpower Saudi Arabia which has been courted extensively by Jared Kushner, President Donald Trump’s son-in-law. Mr Kushner is said to have discussed the normalisation of Saudi Israeli relations with King Salman and Crown Prince Mohammed bin Salman.

Though the king reportedly wishes to remain loyal to the Palestinian Cause, the crown prince seems more pragmatic and appreciates Mr Kushner own loyalty: The senior adviser to the US president and his point man for the Middle East was one of only a handful of foreign emissaries and officials who sustained a friendly dialogue with Crown Prince Mohammed in the wake of the scandal that followed the 2018 death of the Saudi journalist Jamal Khashoggi.

Both men have since cemented a close relationship, although a tentative attempt by the crown prince to coax the Palestinians into acceptance of the Mr Kushner’s peace plan was blocked by the king. Though Saudi Arabia may not yet be willing to take a giant diplomatic leap, the kingdom’s Foreign Affairs minister, Prince Faisal bin Farhan, concluded that the agreement between the UAE and Israel ‘could be viewed as positive’, signalling a telling refusal to stop others from beating a diplomatic path that the kingdom may tread at some point in the future.

For the Israelis, the price of breaking their regional isolation is a freeze, possibly indefinite, on any and all annexation plans. It is an exceptional deal: The mere threat of annexation has given Prime Minister Benjamin Netanyahu the change he needed to help seal a landmark deal long in the making but executed with lightning speed. The conundrum otherwise known as the Middle East has just become a little less intractable. Trade and business may yet bring the peace that politics could not deliver.


The Twilight Zone of Fiscal Stimulus

Now in its second iteration, the corona pandemic no longer inspires the blind fear it did just six months ago. Governments are taking stock of the damage wrought and have begun exploring ways to repair economies derailed by lockdowns, social bubbles, travel restrictions and other emergency measures.

A consensus is building around the rather novel idea that this recession must be addressed by a strong and sustained fiscal stimulus. Austerity has become a dirty word and is only mentioned, if at all, as a distant mirage – a sort of utopian vision of a future reckoning when the budget hawks may be uncapped to hunt down big spenders.

Whilst funds are being sourced and plans hatched, policymakers wrestle with the political dimension, and framing, of the coming spending spree. This week, or more precisely on Sunday, September 13, a few people remembered to either celebrate or lament the fiftieth anniversary of the publication, in The New York Times, of an essay that changed the world.

In The Social Responsibility of Business Is to Increase Its Profits, Professor Milton Friedman (1912-2006) of the University of Chicago unleashed the economic doctrine that would form the bedrock of the neoliberalism that was to come, embodied by Ronald Reagan in the US and Margaret Thatcher in the UK, alongside countless minor players who eagerly jumped on the bandwagon.

Just a single year after Woodstock, and whilst Karl Marx was being dusted off and put on a pedestal and anti-war protesters were rocking the world, Friedman sparked a true revolution. His words, thoughts, and advice transformed the make-love-not-war hippy generation into a pack of rapacious wolves that plundered capitalism by ripping up the fabric of societies and raiding corporate icons.

The rejection of any and all social values in business would ultimately give rise to the ‘Greed Is Good’ generation of the 1990s and beyond. Wolves of Wall Street, such as market manipulator par excellence Ivan Boesky and junk bond king Michael Milken, were not merely crooked but possessed a philosophical excuse for their misbehaviour – one kindly handed to them by Friedman: the pursuit of profit trumps any other consideration.

The Professor’s Discrete Debt

Echoes of Friedman’s lectures resonate in renewed calls to stop the march of zombie companies – a term that has been broadened significantly to include almost any business in a legacy sector that has dipped too deep in debt. In June, The Financial Times warned policymakers against funding a ‘corporate twilight zone’. Simultaneously, the venerable newspaper appeared to suggest a reappraisal of ‘creative destruction’ as eloquently proposed by US-Austrian political economist Joseph Schumpeter (1883-1950) – to whom Friedman owes a debt of discrete gratitude.

The question before policymakers is actually not complex, though its answer may have far-reaching consequences: use the present crisis, and the fiscal stimulus already decided upon, as an opportunity to disrupt, innovate, and creatively destroy, or make a safe bet by helping quasi-zombies survive and revive.

Though the classification lacks a clear and uniform definition, zombies may include up to 16 percent of all companies in Germany – some 550,000 ‘living dead’. The number was produced by risk management agency Creditreform. According to research conducted by Bank of America in July, the UK presently accounts for fully one-third of all zombie companies in Europe. Since March, when the viral outbreak gathered speed, the country’s tally of ‘living dead’ businesses has increased by 26 percent as the hospitality, food, recreation, arts, and entertainment sectors took severe hits.

In the US, an estimated 15 percent of the companies included in the Leuthold 3000 Universe subsist in the twilight zone – up almost 3 percentage points over last year. Corporations of nearly all sizes and ratings have inundated the bond market to raise a total of $1,919 trillion so far this year, sailing at speed past the 2017 record of $1.916 trillion (for the entire year). The binge trickled down into junk bond territory and was fuelled by opportunistic issuers eager to secure long-term (non-emergency) funding at rock-bottom rates. In June, yields on investment-grade US corporate bonds dipped below the 2-percent mark for the first time in living memory.

The Basel-based Bank for International Settlements (BIS) found that during the first eight months of this year, non-investment grade corporations issued a whopping $322 billion in fresh debt – a volume equal to the whole of 2019. BIS data suggests that a fair number of older zombies received – paradoxically – a new lease on life for which they may thank the novel virus. The BIS based its finding on the most accepted definition of a zombie: a business that is consistently unable to cover its debt servicing costs with its EBIT (earnings before interest and taxes).

Swap for Growth

As governments in Europe prepare to wind down support schemes and mechanisms, grandees from the world of high finance are pushing debt-for-equity swaps. Baron Leigh of Hurley in the Royal County of Berkshire, a life peer of the British House of Lords who entered this world 61 years ago as Howard Darryl Leigh, has been particularly active in advocating for such swaps which, he says, provide a win-win: businesses benefit from interest-free liquidity whilst banks may recoup a larger part of their credit portfolio. Former Chancellor of the Exchequer George Osborne even suggested wiping the slate clean for small- and medium-sized businesses that took on corona debt.

However, the plans presented by Leigh and Osborne do not solve the plight of the zombie behemoths whose final passing could spell trouble to undercapitalised banks. The trouble with a proliferation of zombies is that their mere existence discourages innovation and the exploration of novel paths to sustainable growth. Allowing these failing companies to deal with reality, and founder sooner rather than later, would entail a (probably far from creative) destruction of equity which, as an event, will send shockwaves through the financial world – and possibly bring the carefully constructed house of cards down.

Yet, the flipside of this argument offers little to no solace either. It would imply a post-pandemic normal that is neither new nor sustainable. When faced with such conundrums, policymakers have a at their disposal an unusually effective instrument: a can that can be kicked down the road. Thus, the consensus emerging from the pandemic does not so much involve a nascent agreement on the preferred economic model but is limited to the volume of fiscal stimulus to be supplied: a lot.

Which sectors are to benefit remains, at least for the moment, a canned question. However, fiscal support usually comes with a few political strings attached: the late professor’s dictamen that business is only about profits has been relegated to the dustbin, fifty years after it was formulated.

Zombies such as legacy airlines and steel mills may be kept alive on the taxpayers’ dime, but must adapt their operations to the new normal – one that has not been brought about by a viral disease but by the now almost universally recognised need to observe the boundaries imposed by a planet of finite resources. After the pandemic has petered out – as it must eventually – it is time to restore nature’s health as well and undo the damage caused by Friedman’s, in hindsight, rather unidimensional and simplistic philosophy regarding the role and place of business in society.


Q&A with IBM's Bashar Kilani: Need for New Skills Emerging as We Re-Imagine and Transition to the New Normal

[caption id="attachment_16996" align="alignright" width="300"] Bashar Kilani[/caption]

Bashar Kilani oversees IBM business in the Gulf countries and the Levant, working with clients and partners across industries. In this Q and A, CFI.co asks Kilani about the effects of coronavirus on business in the region, and more.

Tell us a bit about the “new normal” for businesses in the Gulf and the Levant. How do regional differences manifest themselves as compared with other parts of the world — by industry sector, for example?

Bashar Kilani: In just the last six to seven months, the pandemic has altered nearly every aspect of our personal and professional lives. Seemingly overnight, almost every organisation around the world has been forced to shift to a near entirely remote workforce, and they need to keep their operations running smoothly. Governments and businesses were facing unprecedented challenges to manage their business continuity in light of the burdens this placed on capacity, productivity and security issues. Today, the combined health and economic impact of the pandemic is creating a “new normal” that is bound to transform the region, and the world.

In the region, we are constantly seeing bold and innovative measures as well as data-driven decisions that are not only helping contain the spread of the pandemic but reduce the economic impact. We are also seeing retailers shifting to eCommerce and numerous forms of digital engagements in education, healthcare, banking and many more sectors.

As we transition to the new normal, most economic sectors will contract in the short term, and a new phase of experimentation will emerge where organisations re-imagine their revenue streams in terms of products and services and rebuild their supply chains. This requires agility and leadership to explore new worlds and quickly adjust and react as new realities emerge. The transformation will accelerate digital adoption and establish new economic foundations.

Recently, the IBM Institute for Business Value (IBV) published a paper titled Beyond the Great Lockdown: Emerging Stronger to a Different Normal, describing the key trends that will shape the post-lockdown era from protection against cybercrime to operational risk and efficiency and focusing on the workforce of the future.

That new normal will introduce new operational models in the travel, retail, logistics and hospitality industries which are major contributors to the economy, in addition to oil & gas, which have seen major challenges during lockdown restrictions. As the region gets back to business, retailers are seeing volumes back to almost 50 percent of pre-lockdown, airlines are starting to connect the main global destinations and activities are slowly picking up across industries.

However, the focus now is mainly on capturing and processing data that will help create new digital engagements and improved customer experiences while conforming with today’s safety regulations such as social distancing and contactless transactions.

I had the pleasure of joining the The Dubai Future Council for Health and Wellbeing — one of the 13 Dubai Future Councils that focus on keeping pace with the latest developments and advances in health sector and employing the best technologies including AI to enhance health and wellbeing in Dubai. The council aims to enhance Dubai’s healthcare sector and create an innovative modern healthcare model that meets the needs of Dubai’s residents, finds solutions to future challenges and adopts the latest international smart applications and technologies to provide residents with quality services that will ultimately improve their quality of life.

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What are some of the challenges of having such a young regional population? What are some of the new skillsets required for the workforce? What kind of demand does that create for change in the educational system?

BK: Preparing and empowering young talent and professionals with the necessary digital skills are key to making them relevant in the workforce. With 70 percent of the region’s population less than 30 years of age, and as we navigate these uncertain times, we are more than ever seeing the importance of emerging technologies and digital skills to support and enhance the economy.

According to an IBM Institute for Business Value (IBV) study, as many as 120m workers in the world’s 12 largest economies may need to be retrained or re-skilled as a result of AI and intelligent automation in the next three years. The study also shows that the time it takes to close a skills gap through training has increased by more than 10 times in just four years, and that new skills requirements are rapidly emerging as other skills are becoming obsolete.

Organisations need to change the culture, processes, systems and applications, design different business models, re-skill the workforce to align with the trends and stay in the game. And it is our responsibility to prepare students and workers for the way those technologies will shape jobs and the nature of work. Today, “new collar” roles are about skills, not degrees or having a traditional background in technology.

At IBM, we are helping re-skill existing workforce in order to align with current trends and remain relevant. In fact, we have recently collaborated with the Ministry of Education in the UAE and Abu Dhabi School of Government as well as other leading government and private entities and educational institutions across the region to offer IBM’s Digital Nation Platform to their ecosystems. IBM Digital — Nation Platform is part of IBM’s global push to close the digital skills gap and empower youth with the most in-demand skills in data science, analytics, programming, cloud and AI, helping them become digital-ready.

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IBM has also been working closely with Area2071 and the Dubai Future Foundation to extend access to the cloud-based learning platform to entrepreneurs and startups in addition to several other entities in Dubai. Area 2071 brings together many different types of individuals and organisations to form a collaborative creative community focused on solving important human challenges, at scale. The IBM Garage, where a lot of creative engagements on digital transformation in the region take place is located in Area2071 and IBM regularly participates in transformative initiatives like the RegLab, which is a revolutionary approach on behalf of the UAE in the legislation and application of technologies in the real world faster.

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What are the critical success factors for digital transformation? What is the role of AI, and how can data best be used?

BK: The pandemic will definitely accelerate digital engagement and within a few years people will find themselves in a transformed world. We will see an acceleration in the move towards automation, the move towards cloud to make applications and data more accessible, supply chains will emerge with intelligence and flexibility, and in new ways of doing work and engaging people.

Today, most enterprises are only 20 percent of the way into their cloud journeys, but the remaining 80 percent of workloads are still on-premises. The move to hybrid-cloud architecture where data can flow between different cloud platforms in integrated workflows will enable organisations to embrace the challenges of the digital world.

The successful digital transformation draws upon three components: an appropriate technology platform, the corporate culture to deviate from traditional forms of service and corporate ownership, and deep and meaningful customer engagement (internal or external).

Customer-facing workflows must be humanised and automated, end-to-end. This is where the focus on data becomes so critical for personalisation and efficiency to deliver a unique experience and enable the use of AI to automate interactions and improve accuracy of predictions.

On the heels of digital trends that are starting to mature, the next wave of normal has begun. The rise of new technologies — AI, blockchain, the Internet of Things, robotic process automation, virtual and augmented intelligence, 3D printing and others — is teeing-up an era of change in business architecture. IBM defines the result of such revolutionary change as "The Cognitive Enterprise".

AI-adoption is expected to continue growing rapidly. In fact, average spending on AI will probably more than double in the next three years and with heightened AI use will come heightened risk, in areas ranging from data responsibility to inclusion and algorithmic accountability. The level of cognitive understanding between humans and machines is inherently lower than it is between humans and other humans, yet the latter arena has been structured for centuries around ethics. Since AI relies on huge computing power, it can derive insight from massive amounts of data that would challenge human cognition. Relying only on traditional ethical approaches to decision making may be insufficient in addressing AI-powered decisions.

The topic of AI Ethics has been a focus in the region and I had a pleasure joining the AI Ethics Board of Smart Dubai comprising representatives of leading government departments and private sector entities, the board has been formed to shape the development and deployment of human-centered ethical AI to encourage fairness, transparency and accountability in AI systems in Dubai.

The advisory board has been designed to create a multi-stakeholder collaborative platform and an ongoing dialogue, enabling board members to share knowledge and expertise around human-centered AI and to explore viable policy instruments that can more readily adapt to evolving AI technologies. The board’s remit covers the exploration of practical application and considerations of AI ethics in Dubai and the offering of strategic advice on the development path from soft regulation to responsible and trustworthy innovation in AI field.

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Prior to his appointment, Bashar Kilani was the Business Unit executive for IBM software business in MENA. He began his career with IBM in the UK and held several managerial and executive positions in software development, services, sales and marketing. His international career has taken him to assignments in the US, Europe and the Middle East.


Between a Rock and a Hard Place: UK Discovers the Hard Limits of Its ‘Newfound’ Sovereignty

It is not a good time to be a supporter of Brexit. If spin were a tradeable commodity, all would be exceptionally well in the realm. Alas, it is not. The attempt by Prime Minister Boris Johnson to supplant essential elements of the Withdrawal Agreement, signed with the European Union on January 24, with domestic law has backfired badly.

The surprise move has left the UK up the proverbial creek with few, if any, paddles or friends and drawing strong condemnation from both sides of the Atlantic in a crossfire of diplomatic rage. A hastily-organised damage-control mission by Foreign Secretary Dominic Raab, an accident-prone politician famous for his gaffes, accomplished the near-impossible: Whilst in Washington, Mr Raab singlehandedly succeeded in uniting Republicans and Democrats who in chorus denounced the UK Internal Market Bill tabled by the Johnson cabinet as a breach of international treaty obligations and warned the prime minister that no free trade deal would be contemplated, much less forthcoming, should he insist to ‘throw Ireland under the bus’.

The episode brutally showed the shock-and-awe level of soft power wielded by Dublin. The Irish not only enjoy the full backing of their 26 fellow EU member states but also that of the United States which has long cherished a soft spot for the emerald isle – a sentiment that cuts across the aisle and even seems to mellow President Donald Trump. The proud sovereignty that the UK hoped to regain with its departure from the EU suddenly looks very fragile and limited.

Conundrum

The ‘Irish Question’ – more of a conundrum – centres on the Good Friday Agreement (GFA) of 1998 that clarified and redefined the standing of Northern Ireland within the UK. The US-brokered peace deal put a stop to The Troubles, the three decades of ethno-nationalist violence between British unionists and Irish nationalists. The peace accord eliminated the border between the Republic of Ireland and the six counties of UK-administered Northern Ireland, cementing a union in all but name.

At the time, both Ireland and the UK were members of the EU which facilitated the removal of the physical border. However, the UK’s intention of leaving the union – which it formally did on January 31, 2020 – necessitated a rethink of the Irish border, now to become an external border of the EU after the 11-month transition period ends on December 31.

Both the EU and the UK recognised the sanctity of the GFA and, hence, the need to limit the Irish border to a line on the map as opposed to an actual barrier cutting the landscape – and communities. Years of painful, complex, and often maddingly frustrating negotiations ensued until the British government broke its promise to Northern Irelands unionists and agreed to leave the six counties in the customs union and erect a border in the Irish Sea. Although Parliament balked at this apparent weakening of the UK’s sovereignty, Prime Minister Johnson, fresh in office, ruthlessly rammed the Withdrawal Agreement through the House of Commons – almost literally by hook and crook – in order to remove the last impediment to the UK’s exit from the EU.

That very same prime minister, who illegally prorogued Parliament in order to get his way, is now having second thoughts and has indicated the need to unilaterally tinker with the signed and ratified WA since it is found to infringe on UK sovereignty. The UK Internal Market Bill is designed to address that and, essentially, gives UK ministers the power to ‘disapply’ the WA rules relating to the movement of goods between Great Britain and Northern Ireland. Thus, the UK government may at any time of its choosing lift the agreed-upon sea border.

Distraction

Predictably, the EU is not impressed. At first, EU Commission Vice-President Maros Šefčovič shot from the hip and gave the UK government a two-week ultimatum to withdraw the bill and prove its bona fides – or else. A few days later, Commission President Ursula von der Leyen took a more pragmatic approach and appealed to the UK to restore trust, calling Prime Minister Johnson’s backtracking on the WA a ‘distraction’.

Mrs Von der Leyen also expressed her ‘conviction’ that an EU-UK trade deal was still within reach, even tough Brussels insiders report that the negotiations are ‘getting messier’. A free trade deal, even one limited in scope, would instantly resolve the Irish border issue. Commission President Von der Leyen assured that the EU would not walk away from the negotiations. Her vice-president meanwhile offered Prime Minister Johnson a ladder to climb down from his now untenable position by stating that the bill would violate the WA ‘if adopted as proposed’.

However, the punchline was delivered by the European Parliament which stated unequivocally that any change to the Withdrawal Agreement, however subtle, would result in the summary rejection of an EU-UK free trade deal.

Whilst annoyed with the never-ending antics of Prime Minister Johnson, the powers that be in Brussels seem determined to call his bluff in the knowledge that the Irish hold all the cards: Dublin is not just backed to the hilt by the EU and the US, it also can easily and credibly blame London for any breach of the GFA if and when an actual border is instituted on the island. For a border there must be – somewhere.

Complaints

Whilst the rules of the World Trade Organisation (WTO) do not mandate a border, they do require checks to protect the integrity of internal markets. Absent a border, trade can flow – or seep – unimpeded and unchecked between the EU and the UK via Ireland. Under such a scenario the WTO would likely be inundated with complaints from member states that feel disadvantaged. Should UK exports enter the EU single market freely through the Irish border gap, exporters from other countries could well lodge complaints. Even though the Geneva-based WTO has no enforcement powers, its rules clearly state that, absent a free trade agreement, all trading partners are to be treated equal. The EU is not likely to risk being subjected to lengthy legal procedures and retaliatory tariffs authorised by the WTO.

By opening a can of worms that had been carefully and hermitically sealed, Prime Minister Johnson has played to his domestic audience of increasingly jingoistic Brexiters who loudly demand ‘respect’ for the country’s newfound ‘sovereignty’. However, the current predicament of the rather blustering British prime minister shows that, contrary to what gullible voters had been promised, UK sovereignty – within or without the EU – is not at all absolute: It ends where the neighbour’s sovereignty begins.

In fact, the entire exercise to extract the UK from the European Union has been fraught with mistaken assumptions, outright lies, and promises impossible to keep – from Global Britain striking trade deals galore to a £350 million weekly windfall for the exchequer.

Brexit was never going to end well and has now reduced the UK from a widely respected and admired rule maker to a possible rule breaker in the space of a few months. There is, of course, some poetic justice in plucky little Ireland kicking its former overlord around at will. Whilst that may touch the heartstrings of more than a few Americans, it is not what Dublin or, indeed, Brussels desires. The only thing the EU longs for, after dealing with an unreasonably recalcitrant neighbour and member for years, if not decades, on end, is a relationship devoid of tiresome British exceptionalism – one that mirrors the balance of power and is grounded in realism rather than flights of post-imperial fancy. That, however, is too much to ask – until reality bites.


Otaviano Canuto: Dependency and Disconnect of U.S. Financial Markets

U.S. stock and corporate bond markets performed extraordinarily well from the March financial shock caused by covid-19 to the end of last month. Then, three consecutive weeks of decline in the three major stock market indexes have been followed this week by a global slump attributed to fears of new lockdowns. A period of disconnect of financial markets with the underlying real economy has culminated in a revelation of the former’s high dependency to Federal Reserve policies.

Disconnect…

From the response by the Federal Reserve (Fed) to the March shock – interest rate reduction and creation/expansion of several lines of acquisition of private assets and credit provision – the rise in stock price indices in the U.S. markets led them in August to levels higher than pre-pandemic, in turn already considered high. Meanwhile, the economic recovery, even after hitting rock bottom in the second quarter, remained partial and uncertain, with a prevailing perception that a return to the pre-crisis growth trend would not be likely. Stock prices seemed disconnected from the real economy (Figure 1, left-hand panel).

The averages reflected in stock indexes went up with a sectoral differentiation that reflected the asymmetry of the impacts of the crisis of covid-19: technology and health booming, not being so much the case with energy, finance and the branches of services directly impacted by the pandemic (Figure 1, right-hand panel). Still, the whole set exhibited a revaluation performance far beyond what would be expected by looking at the real economy.

[caption id="attachment_17036" align="aligncenter" width="710"]<img class="wp-image-17036 size-full" src="https://cfi.co/wp-content/uploads/2020/09/Figure1.png" alt="Figure 1: The vertical line in the left-hand panel indicates 19 February 2020 (S&amp;P 500 pre-crisis peak). 1 Shanghai composite equity index. 2 Cumulative average growth rates of earnings per share (EPS), calculated between realized end-2019 and estimated end-2023. 3 S&amp;P 500 constituents as of 18 August 2020, simple averages. 4 Amazon, Apple, Facebook, Google, Microsoft, and Netflix. Source: BIS Quarterly Review, September 2020." width="710" height="471" /> Figure 1: The vertical line in the left-hand panel indicates 19 February 2020 (S&P 500 pre-crisis peak). 1 Shanghai composite equity index. 2 Cumulative average growth rates of earnings per share (EPS), calculated between realized end-2019 and estimated end-2023. 3 S&P 500 constituents as of 18 August 2020, simple averages. 4 Amazon, Apple, Facebook, Google, Microsoft, and Netflix. Source: BIS Quarterly Review, September 2020.[/caption]

A detachment from reality also seemed to be in full swing on the corporate credit side. Despite pre-pandemic fears that several companies had reached excessive levels of indebtedness in recent years, in addition to facing a drop in revenues during the crisis, credit spreads tightened (Figure 2, left-hand panel).

According to the Bank for International Settlements (BIS) quarterly report released last week, such long-term credit margins have fallen to historically low levels, despite evidence of a deterioration in credit quality (Figure 2, right-hand panel). The issuance of new debt across the spectrum of corporations – all ratings, but especially from companies with "investment grade" – was massive, even if partially for precautionary reasons, thereby increasing the degree of indebtedness in the capital structures of many companies.

The major responsible for such disconnection was, of course, Fed policy. Lower interest rates and asset price volatility have boosted investments in risky assets. In the case of technology companies, enthusiasm fed itself: dealers buying stocks in advance, in the expectation that prices would continue to rise, eventually reinforcing and corroborating their rise. In any case, as the BIS report points out, the appreciation in most sectors has led to ratios between stock prices and their yields to levels close to the historic top (Figure 1, middle-hand panel). The opportunities opened by financial conditions even more favorable than before the crisis outweighed its effect on business activity in the real economy.

[caption id="attachment_17037" align="aligncenter" width="800"] Figure 2: The vertical lines indicate 19 February 2020 (S&P 500 pre-crisis peak) and 12 May 2020 (Fed starts purchasing corporate ETFs). The dashed lines indicate 2005–current medians.
1 Option-adjusted spreads.
Source: BIS Quarterly Review, September 2020[/caption]

… and dependency to the Fed

Any remarkable event since late August? There was a (virtual) meeting of central bankers in Jackson Hole when Fed Chairman Jerome Powell announced a change in the monetary policy framework, something reinforced at the Fed's own meeting last week. Instead of projecting inflation to a certain time horizon, matching it with a 2% annual rate, and making interest rate policy decisions from that, as in the previous regime, the target would now be "flexible", aimed at an average, which would open up the possibility of waiting for some time with inflation above (below) before tightening (loosening). One may say that it is like looking at effective inflation (ex post), instead of being guided by expectation (ex ante).

Something equivalent to this would also happen regarding the consideration of unemployment rates in decision-making. A kind of confession of the failure to rely on projections of the "Philips curve" – the relationship between unemployment levels and inflation – in recent years.

In last week's meeting the Fed announced a push to the bottom on the low interest rate pedal, intending to keep it there until 2023. The median inflation (core CPE) projections by committee members pointed to levels below 2% by then (Figure 3). On the other hand, there was no anticipation of specific policies regarding the purchase of assets in the "quantitative easing" (QE), which generated multiple complaints...

Anyone doing minimal research on what analysts are saying about September and the immediate future will find an above-normal polarization between "bullish" and "bearish”. Bullish highlight the near-zero interest signal until at least 2023 and the mass issuance of Initial Public Offerings of shares last week to argue that "the easy money will keep fueling the market’s fever," particularly in the case of technology companies. The past few weeks would be nothing more than a corrective pause, compounded by the Fed's lack of commitment to continue buying long U.S. Treasury papers or other QE measures.

Bearish, in turn, highlight the proliferation of "zombie" companies that survive via debt and will have to face the lasting changes associated with the covid-19 crisis, as well as other aspects of the disconnect between asset prices and the underlying real economy.  The BIS report drew attention to the pressures suffered by banks considered vulnerable. This week began with fears about new lockdowns due to new covid-19 outbreaks, impacting financial markets and the global economic recovery.

The fact is that the disconnect and abrupt fluctuations in U.S. financial markets are manifesting a pronounced dependence – addiction – in relation to precise and detailed signals issued by the Fed. For its part, the Fed, by adopting a “flexible” inflation targeting regime and an announcement of low interest rates for long, signaled its recognition that it will not be able to provide financial markets with such guidance.

The role of superhero hitherto fulfilled by the Fed's monetary policy seems to have driven it to exhaustion. Fiscal policy needs to come to its rescue.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, a visiting public policy fellow at ILAS-Columbia, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

First appeared at Policy Center for the New South

U.S. stock and corporate bond markets performed extraordinarily well from the March financial shock caused by covid-19 to the end of last month. Then, three consecutive weeks of decline in the three major stock market indexes have been followed this week by a global slump attributed to fears of new lockdowns. A period of disconnect of financial markets with the underlying real economy has culminated in a revelation of the former’s high dependency to Federal Reserve policies.

Disconnect…

From the response by the Federal Reserve (Fed) to the March shock – interest rate reduction and creation/expansion of several lines of acquisition of private assets and credit provision – the rise in stock price indices in the U.S. markets led them in August to levels higher than pre-pandemic, in turn already considered high. Meanwhile, the economic recovery, even after hitting rock bottom in the second quarter, remained partial and uncertain, with a prevailing perception that a return to the pre-crisis growth trend would not be likely. Stock prices seemed disconnected from the real economy (Figure 1, left-hand panel).

The averages reflected in stock indexes went up with a sectoral differentiation that reflected the asymmetry of the impacts of the crisis of covid-19: technology and health booming, not being so much the case with energy, finance and the branches of services directly impacted by the pandemic (Figure 1, right-hand panel). Still, the whole set exhibited a revaluation performance far beyond what would be expected by looking at the real economy.

[caption id="attachment_17036" align="aligncenter" width="710"] Figure 1: The vertical line in the left-hand panel indicates 19 February 2020 (S&P 500 pre-crisis peak). 1 Shanghai composite equity index. 2 Cumulative average growth rates of earnings per share (EPS), calculated between realized end-2019 and estimated end-2023. 3 S&P 500 constituents as of 18 August 2020, simple averages. 4 Amazon, Apple, Facebook, Google, Microsoft, and Netflix. Source: BIS Quarterly Review, September 2020.[/caption]
A detachment from reality also seemed to be in full swing on the corporate credit side. Despite pre-pandemic fears that several companies had reached excessive levels of indebtedness in recent years, in addition to facing a drop in revenues during the crisis, credit spreads tightened (Figure 2, left-hand panel).

According to the Bank for International Settlements (BIS) quarterly report released last week, such long-term credit margins have fallen to historically low levels, despite evidence of a deterioration in credit quality (Figure 2, right-hand panel). The issuance of new debt across the spectrum of corporations – all ratings, but especially from companies with "investment grade" – was massive, even if partially for precautionary reasons, thereby increasing the degree of indebtedness in the capital structures of many companies.

The major responsible for such disconnection was, of course, Fed policy. Lower interest rates and asset price volatility have boosted investments in risky assets. In the case of technology companies, enthusiasm fed itself: dealers buying stocks in advance, in the expectation that prices would continue to rise, eventually reinforcing and corroborating their rise. In any case, as the BIS report points out, the appreciation in most sectors has led to ratios between stock prices and their yields to levels close to the historic top (Figure 1, middle-hand panel). The opportunities opened by financial conditions even more favorable than before the crisis outweighed its effect on business activity in the real economy.

[caption id="attachment_17037" align="aligncenter" width="800"] Figure 2: The vertical lines indicate 19 February 2020 (S&P 500 pre-crisis peak) and 12 May 2020 (Fed starts purchasing corporate ETFs). The dashed lines indicate 2005–current medians.
1 Option-adjusted spreads.
Source: BIS Quarterly Review, September 2020[/caption]
… and dependency to the Fed

Any remarkable event since late August? There was a (virtual) meeting of central bankers in Jackson Hole when Fed Chairman Jerome Powell announced a change in the monetary policy framework, something reinforced at the Fed's own meeting last week. Instead of projecting inflation to a certain time horizon, matching it with a 2% annual rate, and making interest rate policy decisions from that, as in the previous regime, the target would now be "flexible", aimed at an average, which would open up the possibility of waiting for some time with inflation above (below) before tightening (loosening). One may say that it is like looking at effective inflation (ex post), instead of being guided by expectation (ex ante).

Something equivalent to this would also happen regarding the consideration of unemployment rates in decision-making. A kind of confession of the failure to rely on projections of the "Philips curve" – the relationship between unemployment levels and inflation – in recent years.

In last week's meeting the Fed announced a push to the bottom on the low interest rate pedal, intending to keep it there until 2023. The median inflation (core CPE) projections by committee members pointed to levels below 2% by then (Figure 3). On the other hand, there was no anticipation of specific policies regarding the purchase of assets in the "quantitative easing" (QE), which generated multiple complaints...

Anyone doing minimal research on what analysts are saying about September and the immediate future will find an above-normal polarization between "bullish" and "bearish”. Bullish highlight the near-zero interest signal until at least 2023 and the mass issuance of Initial Public Offerings of shares last week to argue that "the easy money will keep fueling the market’s fever," particularly in the case of technology companies. The past few weeks would be nothing more than a corrective pause, compounded by the Fed's lack of commitment to continue buying long U.S. Treasury papers or other QE measures.

Bearish, in turn, highlight the proliferation of "zombie" companies that survive via debt and will have to face the lasting changes associated with the covid-19 crisis, as well as other aspects of the disconnect between asset prices and the underlying real economy. The BIS report drew attention to the pressures suffered by banks considered vulnerable. This week began with fears about new lockdowns due to new covid-19 outbreaks, impacting financial markets and the global economic recovery.

The fact is that the disconnect and abrupt fluctuations in U.S. financial markets are manifesting a pronounced dependence – addiction – in relation to precise and detailed signals issued by the Fed. For its part, the Fed, by adopting a “flexible” inflation targeting regime and an announcement of low interest rates for long, signaled its recognition that it will not be able to provide financial markets with such guidance.

The role of superhero hitherto fulfilled by the Fed's monetary policy seems to have driven it to exhaustion. Fiscal policy needs to come to its rescue.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, a visiting public policy fellow at ILAS-Columbia, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

First appeared at Policy Center for the New South


Perfect Storm Brewing: The Winter of Our Discontent

[caption id="attachment_17048" align="alignright" width="300"] Political Science Professor Charli Carpenter[/caption]

Winter is coming. Instead of setting the stage for another spell-binding episode of an epic television drama, the ominous phrase presages a time of struggle and discontent.

Commenting on the present moment in Foreign Affairs, Political Science Professor Charli Carpenter of the University of Massachusetts recently lamented the ‘jockeying for power by self-interested actors’ in pursuit short-term objectives, and ‘sub-optimal chaos’, whilst disregarding ethical norms, the needs of common people, and those of the natural world. “Gamesmanship,” Prof Carpenter writes, “distracts players from the truly pressing issues of human survival and stability.”

Vast amounts of spin and evermore outrageous conspiracy theories regarding deep states, swamps, and other figments of the popular imagination almost monopolise public opinion. Easily verifiable facts are demoted to ‘just another opinion’ and alt-truths carry the day in the echo chambers of the internet that pose as social media. Qanon is on the march – apparently capturing the imagination of millions. Informed debate has largely given way to a culture of entitlement in which each crackpot loudly demands ‘respect’ and all opinions – no matter how outlandish, ridiculous, or misinformed – must be awarded equal time, consideration, and weight.

In under a year, the world has turned into an even scarier place with at least four of its major powers turning rouge or getting perilously close to doing so. The China of President Xi Jinping is exploring its Maoist roots; the United States of President Donald Trump is fuelling extremism on all sides; the Russia of President Vladimir Putin is stalking its borderlands; and, perhaps most depressing of all, the United Kingdom of Prime Minister Boris Johnson seems intent on abandoning its formerly exemplary dedication to the rule of law.

Whilst these, and a motley crew of similarly bombastic leaders of lesser relevance, upset delicate balances of power as they ply their brinkmanship, the world battles a particularly pernicious virus that has thus far cost almost a million human lives and is on track to shear up to $8.8 trillion off the global economy according to the latest estimates drawn up by the Asian Development Bank. The International Labour Organisation (ILO) expects the pandemic to wipe out up to 24.7 million jobs, pushing global unemployment to 213 million by the end of the year.

Recovery hopes and outlooks crisscrossed the alphabet moving from V to U via L, before settling on an optimistic W – indicating periodic slumps and rebounds moving in tandem with the viral transmission ratio in a disharmonic replay of the danse macabre.

Whilst Rome burns to a crisp, alongside his ‘oven ready’ EU trade deal, UK Prime Minister Johnson, who fancies himself a classicist, fiddles merrily away, protecting British fish from dastardly continental would-be poachers, hiring advisers who boast in public that a lie is merely another man’s truth, and tabling frivolous legislation in Parliament to impress the home front and show Johnny Foreigner that Britannia – indomitable, indefatigable, implacable, and of course impregnable – still (or again) waives the rules.

Busy fighting the many demons he awakened or failed to slay, Prime Minister Johnson did not seem to have any tether left as he was verbally humiliated and fileted during Prime Minister’s Questions by stand-in Labour leader Ed Miliband last week. The prime minister, slumped rather hapless on the bench and with an almost zombie-like expression on his face, lacked the puff to grasp the despatch box and meet Mr Miliband’s challenge with some venom of his own. The poor man, a shadow of his ebullient former self, could not even mount the credible, let alone vigorous, defence the Labour leader’s unscripted assault called for. Instead, Mr Johnson stared at his phone, refusing to look up and hurrying away as soon as protocol allowed.

The prime minister’s performance, or lack thereof, in the grand theatre of PMQs is a far cry from the ‘Dazzling Boris Johnson’ whom the Daily Telegraph predicted in May would ‘beat’ any Labour leader anytime – particularly the ‘dull’ Keith Starmer who was unable to attend the unusually acerbic yet highly entertaining weekly parliamentary ritual due to a covid-19 case in his family. Mr Johnson momentarily forgot that PMQs is all about the joust.

As winter approaches, a perfect storm is gathering with the corona pandemic getting its second wind and a dysfunctional body politic unlikely to steer polarised societies towards a safe harbour. Whatever President Donald Trump or Prime Minister Boris Johnson say, exactly half of society will meet with cheer and the other half with jeer. And never the twain shall meet for common ground – the sensible centre – has ceased to exist.

To use an analogy from municipal politics: There is no ideological approach to collecting the trash. In the same vein, battling a public health hazard is not the job of politicians, but of experts and scientists who may be empowered by national leaders – but cannot be replaced by them.

Dr Anthony Fauci simply knows more about immunology than President Trump and his entire administration put together. Yet, the commander-in-chief still seems to think that his suggestions for self-medication, gleaned from YouTube snake oil peddlers, are worth taking into consideration. What do the experts know, after all?

It is the disdain for the experts, and the drowning out of their voices amidst the cacophony of uninformed opinion, that will ultimately inflict most harm. That Messrs Jinping and Putin are stone and tone deaf should, of course, surprise nobody. Their authoritarian and manipulative ways allow these leaders to get away with murder – often literally. However, Messrs Trump and Johnson should know better than to polarise their societies, play to latent nationalism, flirt with populism, and skirt the boundaries of legality.

Over the years, much has been made of Europe’s dangerous tendency to veer to the right, stoke the dying embers of nationalism, and tolerate the presence of lingering ghosts from its dark past. Each member state of the union – from Finland and Sweden to Greece and Spain plus all in between – has its own homegrown firebrands whipping up xenophobic forces, catering to chauvinism, and furthering the ironclad philosophy of ‘my country, right or wrong’. Yet, whilst these forces are indeed present within the EU, they have thus far only gained any real traction in the halls of power in Washington and London where most all pretence has now been dropped, liberalism abandoned, and tradition shoved aside – all, supposedly, in the name of serving the demos. Follow the money – the shorts placed, the funds shifted – and get a warm coat for this is likely to become the winter of our discontent.


Africa - Unity Key to Remarkable Success in Fighting Covid-19

The corona scare has passed, and most countries of Africa are reopening their borders and businesses. Infection rates never reached the apocalyptic highs that had been predicted. With around 17 percent of the world population, the continent tabulated just under 33,500 deaths from covid-19, or about 3.5 percent of the global total. According to Dr John Nkengasong, the Cameroon virologist who heads the Africa Centres for Disease Control and Prevention since its foundation in 2016, the curve is slowly bending downwards, and fatalities have now dipped to fewer than one hundred a day.

Nkengasong was instrumental in bringing Africa’s 54 countries together in a quickly assembled ad hoc alliance to fight the pandemic and formulate a joint response which has been more effective in containing the viral outbreak and spread than those of others, such as the United States.

Haunted by the memory of the estimated twelve million Africans dying before cheap antiretroviral drugs became available for the treatment of HIV, Nkengasong mobilised public health officials and pressed political leaders to put their differences aside. He appealed to them to act promptly, jointly, and decisively to halt the pandemic by leveraging the continent’s few advantages such as a relatively young and healthy population.

Rudely shoved aside when other countries deployed their financial firepower in the unseemly global battle to secure test kits, ventilators, and personal protection equipment, the African Union and the Africa CDC joined forces with public and private entities to establish a robust online purchasing platform and strongarm the continent back into the global market. The initiative has been so successful that a number of Caribbean countries have signed up and now source their medical supplies via the new facility.

President Nana Akufo-Addo of Ghana remembers that at the very beginning of the Corona pandemic, only days after the first case of covid-19 was reported on February 14, he and other leaders agreed that the only viable option was to cooperate closely: “We just had to depend on each other as it soon became clear that little outside help would be forthcoming.”

Begging Bowl Ditched

Nkengasong didn’t want to wait for help either: “We reject the image of Africa holding a begging bowl. In fact, I realised that the financial resources were there and just needed tapping into. Former USAID Administrator Gayle Smith has no doubt: “Africa is a great story that needs telling. The continent is getting a lot of things right where others either dither or simply fail. In fact, Africa is the only part of the world I’m aware of that actually built a PPE supply chain from scratch.”

Smith is not the only one singing Africa’s praises. Director Sema Sgaier of the Surgo Foundation that produced a covid-19 vulnerability index for the continent says she’s optimistic: “The countries of Africa have shown real leadership and succeeded in rallying their scarce resources effectively and impressively.”

The next battle against the disease concerns access to any future vaccine. Nkengasong explains that the first step has already been taken in June by securing a number of late-stage clinical trials. The first one got underway in South Africa which by the last week of June had nearly one-third of all Africa’s confirmed cases. Due to limited local testing capacity, clinical trials of new medication usually take place outside the continent. However, the Africa CDC and the World Health Organisation (WHO) have managed to vastly increase lab capacity for covid-19 in a matter of just months. At the start of the pandemic, only two African countries were equipped to test for the coronavirus whilst now all 54 have that capacity.

The WHO estimates that Africa can initially access up to 220 million doses of any future vaccine through its COVAX (Covid-19 Vaccines Global Access Facility) programme – a favourite target of the US Administration which declined to join. However, Nkengasong says that Africa needs at least 1.5 billion vaccine doses in order to approach herd immunity by immunising 60 percent of the population. The campaign is expected to cost upwards of $10 billion.

South Africa Hurt Badly

Though Africa managed to contain the spread and infection rate of the coronavirus, the economic effects of the pandemic could yet make for a pyrrhic victory. As South Africa reopened its borders on October 1, visitors encountered a heavily damaged country with a jobless rate steadily climbing to breach the 50 percent mark. During Q2 2020, at the height of one of the world’s strictest lockdowns, GDP shrank 16 percent on a quarter-to-quarter basis in real terms and a whopping 51 percent on a seasonally adjusted annualised rate. Over the entire year, South Africa’s GDP is expected to decline by 8 percent or more.

So far, the government and its social partners have been unable to come up with a recovery plan, although President Cyril Ramaphosa did reveal that one had been ‘agreed upon’ without offering any further details. Meanwhile, the government told the National Treasury to look behind the proverbial couch to find a chunk of change for the rescue of troubled flag carrier South African Airways which last turned a profit over a decade ago and has languished in administration since last December.

In an ominous sign that has investors worried, Finance Minister Tito Mboweni seems to have lost his feud with Public Enterprises Minister Pravin Gordhan who insists that the airline must be kept solvent and aloft. Gordhan enjoys the full backing of the ruling African National Congress (ANC) which has long misused SAA as a deluxe storage facility for its extended family and its friends – and friends of its friends. An initial 10 billion rand (approx. $590 million) has apparently been committed by the cabinet to underwrite the first stage of the airline’s reorganisation and restructuring.

Another urgent matter on Ramaphosa’s plate concerns state-owned power company Eskom which generates more losses than it does electrical power. The company’s singularly poor performance has long checked economic growth and will undermine any recovery plan. Eskom’s losses stem, in part, from bills left unpaid by local, provincial, and national state entities.

Nigeria Reeling

Africa’s largest economy is reeling as well with GDP forecast to contract by 6.1% over 2020. Although the country’s relatively short lockdown was gradually eased from early May, the slump in oil prices – which tumbled from a January high of almost $70 per barrel to an April low of barely $15 – has deprived the federal government of 75% of its oil revenue. According to the Nigerian National Petroleum Corporation, the government’s share of oil export sales in July amounted to just $55.3 million. Although oil prices have recovered some ground since, the loss of income has now fully derailed the Economic Recovery and Growth Plan introduced in the wake of the crippling 2016 recession.

Analysts fear the country may not recover any time soon. During a recent webinar organised by Nairametrics, a Lagos-based financial resources provider, Rolake Akinkugbe-Filani of real estate investor and developer Mixta Africa noted that the economic fundamentals of the country have still not changed and Nigeria continues to live above its ‘pay grade’ looking to finance its deficit addiction by borrowing: “That is just not sustainable.”

Meanwhile, Zambia became Africa’s first covid-related debt defaulter when President Edgar Lungu announced that his country was negotiating a six-month suspension of repayments, beginning October, with the holders of bond tranches worth $3 billion. Zambia’s total foreign debt amounts to $11 billion, a significant part of which is owed to China.

However, Beijing has indicated its willingness to display ‘flexibility’ in renegotiating the terms of outstanding loans but may ask for a quid pro quo in the form of a commitment by the International Monetary Fund (IMF) to support low-income countries. Zambia and others facing a cash crunch remain, however, reluctant to ask for IMF support. Lungu faces an election next year and has so far refused, albeit politely, to enact the reforms the fund has suggested.

Under its own power, and largely without outside help, Africa has succeeded, beyond all expectations, in keeping the coronavirus in check and avoiding a cataclysmic public health emergency. Almost as importantly, African nations showed that they can effectively coordinate policies by working together to defeat a common foe. This is where the key to the continent’s future lies: expand that newfound unity to markets and a winner emerges.


China on the Way Back to Rebalancing

[caption id="attachment_17071" align="alignright" width="300"] Shanghai by Stefan Fussan[/caption]

China’s economy keeps recovering from the coronavirus pandemic-led crisis through the third quarter of 2020, as revealed by the numbers of August activity. Its GDP grew by 3.2% in the second quarter, after falling by 6.8% in the first quarter, in both cases as compared from a year before. It is now the only major economy expected to exhibit growth this year. Successful containment of the pandemics has allowed it to be first-in-first-out relative to others.

One feature in common with other countries, however, has been the unbalanced shape of the economic recovery. The supply side has run ahead of the demand side. Re-opening factories starting in February made possible a steady return of industrial output, which grew 5.6% on an annual basis in August, while overall domestic consumption lagged during the first half of 2020.

Fixed investment has picked up and, on the external side, the gradual lift of global trade activity is helping exports. The uptick in retail sales in August, rising faster than industrial production, suggests a broadening of domestic consumption and a catch up with production. Except for services that require physical proximity of people, which still face both supply restrictions and a demand slowdown despite the virus containment.

As China’s economy marches toward normalization, one may wonder whether it might move from its previous trajectory, particularly as the post-crisis global economy is expected to be at a "new normal". To what extent pressures toward a “relative de-globalization” might bring a need for China to review its development path? If anything, we believe the post-COVID global economy will reinforce China’s need to speed up its rebalancing.

China’s growth trajectory in the second decade of the century has been one of a rebalancing toward a new growth pattern, one in which domestic consumption is to rise relative to investments and exports, while a drive toward consolidating local insertion up the ladder of value added in global value chains also takes place. Services should also rise relative to manufacturing.

Waves of credit-driven over-investments in infrastructure and housing, after the global financial crisis, helped sustain growth but there has been a clear perception of a temporary exhaustion for such a lever. Declining GDP growth rates from two digits in previous decades to 6% last year - and likely 4% ahead – would be the counterpart to rising wages and domestic mass-consumption, and to the transition toward higher weights of services and high tech.

Two were – and remain – major challenges. On the one hand, the transition toward a less investment- and export-dependent growth model has been taking place from a starting point of exceptionally low consumption-to-GDP ratios. Besides high profit-to-wages ratios, low levels of public social spending lead to high household savings. In 2017, private consumption and investment were, respectively, 39% and 44% of GDP, whereas 60% was the average consumption-to-GDP ratio in the rest of the world.

The “new normal” of the global economy tends to exhibit an environment even less trade-friendly than in recent years. The pay-off from shifting from a reliance on export growth to domestic consumption will be higher. Over the past two years, with the US-initiated trade war, investors from Japan and the US already accelerated the transfer of assembly lines and supply contracts in their ITC value chains from China to Vietnam, Thailand, Indonesia and, to a lesser extent, Mexico. This may be taken as a signing point, regardless of whether trade tensions subside or return at full length.

The second challenge is, of course, on the technology and value-added climbing fronts. China has done its homework in terms of investments in education, infrastructure, etc. to creatively absorb technology. It has now reached the top of the ladder, where a tacit and idiosyncratic technology content must be locally developed, as it is not available simply by using or adapting existing technologies. If anything, regardless of the US election results, the premium for China to speed up such process will rise in the “new normal” of the global economy.

China’s bounce back from the deep COVID dive is at full. Focus will increasingly turn back to its economic rebalancing previously on the way.

By Otaviano Canuto

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, a visiting public policy fellow at ILAS-Columbia, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

First appeared at CGTN, 25 September 2020


Hadiyah Mujhid,  CEO and founder of HBCU.vc: George Floyd’s Death Brought in Flood of VC Offers for Black Founders in US

[caption id="attachment_17102" align="alignright" width="300"] CEO and founder of HBCU.vc: Hadiyah Mujhid[/caption]

Hadiyah Mujhid is CEO and founder of HBCU.vc, a not-for-profit organisation that helps African American and Hispanic students become technology entrepreneurs and access venture capital.

The acronym — Historically Black Colleges and Universities — nails literal and figurative colours to the mast. HBCU.vc came to life because Mujhid had recognised a lack of opportunities for black entrepreneurs seeking venture capital funding.

The year 2019 was a big one for HBCU.vc, and its budget increased from $200,000 to $500,000. The team doubled to six full-timers and three part-timers, but things started to fall apart as the world went into lockdown. Mujhid even met with her colleagues to forewarn them of a probable shutdown because of a lack of funds.

George Floyd’s death changed all that.

Since his murder there has been a sudden rush of VCs eager to invest in black founders. Mujhid asks, “Why did it take this tragedy to bring them in?” The short-term future of HBCU.vc is now assured and there is a growing group of donors. The hope is that the trend will endure, and the support turn out to be meaningful and substantial.

Mujhid’s passion is to create economic opportunities for her community, and she is driven by natural curiosity and a love of problem-solving. Her motto is “stay curious and keep learning, whatever your age and situation”. She has spoken at conferences and has been featured in Black Enterprise, Crunchbase and Entrepreneur Magazine.

The problem facing black entrepreneurs in the US is that investors place funds in their own networks and recipients do the same. They are predominately white, and this can result in people of colour being locked-out. Not much more than one percent of VC-backed companies have black founders. Blacks are generally poorly represented, even in “go-ahead” companies such as Google, Facebook, and Twitter. Mujhid points out: “So many organisations cite diversity as a core value but fail to understand that the composition of their decision room works against this.”

HBCU.vc students can be paired with a VC mentor, internships are possible, and they can act as investors in their own college communities. A one-year HBCU.vc programme helps them to identify investment opportunities, conduct research, and make real funding decisions. Mujhid does not expect applicants to have any experience in VC or start-ups, but rather a natural curiosity and passion to learn about the tech industry. In 2019, HBCU.vc launched a partnership with TechStars to offer start-up weekends for HBCUs.

Mujhid earned her first degree (in computer sciences) from the University of Maryland East Shore, which historically is a place of learning for black students. She went on to study for her MBA at Drexel.

Lockheed Marten offered her a job as a software engineer upon graduation, and she spent 10 years working on aerospace projects. Although coming from a low-income family, she often describes herself as privileged — essentially for being able to follow her interests. Lockheed was not a purpose-driven career choice — that would come later — but she got her start after an interview with a fellow African American, which was a rather unusual situation for both parties.

After a few pay cheques and the accumulated savings of a frugal lifestyle, Mujhid was able to finance the purchase of a home and over the years ended up with a further three rental properties. After Lockheed she cashed out and moved to the West Coast — and the rest is history, or at least her story.

Many white VCs pay lip service to the needs of future black entrepreneurs. Hadiyah Mujhid and HBCU.vc are expecting much more.


US Election - Trump and Biden Crush Policy Ideas and Initiatives in Televised Clash

In the US, the number of covid-19 deaths has rushed past 200,000 whilst worldwide more than one million people succumbed to the disease. As the second wave of the Corona Pandemic gathers pace, it remains eerily quiet on the vaccine front. However, warnings abound that the virus may roam freely for another six to twelve months. It could mutate whilst doing the rounds, and become less deadly in the process, but that – for now – seems an idle hope.

In Europe and elsewhere, people are showing signs of corona-fatigue. Though the recalcitrant fringe of deniers has failed to attract many converts, ‘normal people’ are becoming weary of the restrictions, retightened in the face of the increased infection rate, creeping up after a mid-summer lull.

Though a pandemic is raging, the ‘leader of the free world’ has taken a leave of absence. Judging by the cheap theatrics featured in yesterday’s televised clash of the two US presidential hopefuls, that leader is not returning any time soon and may, in fact, have abdicated altogether. The powers that be in Beijing and Moscow can easily be imagined wringing their hands over the demise, or moral collapse, of their rival.

Throwing caution to the wind, President Donald Trump chose to verbally assault and overpower his opponent with an impressive display of tone deafness and a near-complete disregard for the rules of engagement and common courtesy. Sounding more like a bullying streetfighter than a holder of high office, Trump refused to entertain any notion of failure, repeatedly touting his superior administrative competence and infallibility.

Democratic frontrunner Joe Biden had a few moments and at times looked vaguely presidential but was unable to pin Trump down and allowed himself to be dominated and pre-empted during the ninety-minute brawl. Though most pundits agree that Trump never landed a knockout punch, his transparent strategy of vigorously spouting half-truths and naked lies to overwhelm and cow his opponent into submission worked well and managed to paint a picture of ‘Sleepy Joe’ for all to see.

Machiavellian

Contemporary US politics is no longer about issues, ideas, or policies; it is the image that counts – and the perception. Many Americans want a raging bull as their leader, not a nuanced, cautious, and considerate politician who talks rather than dictates, and suggests rather than commands: A strong man willing to lay down the law and obliterate anything or anybody standing in America’s path to greatness. Biden’s strategists have still not grasped that their adversary is in it to win it – at whatever cost and by whatever means. Trump may not be Machiavellian in his rather unidimensional political deviousness, he unwittingly honours the Italian master strategist by adhering to the maxim he purportedly coined in the 15th century – the ends justify the means.

What Joe Biden and his team lack is a thorough study of the ‘princes mirrors’ (specula principum) that were mandatory reading for prospective rulers in the High and Late Middle Ages. These texts are usually full of noble ideals – good for public discourse and sustaining conversations at the dinner table – but leave no doubt that opponents and possible rivals need to be ruthlessly cast aside before and after securing power. Statesmanship, Machiavelli concludes, must be held completely independent of morality.

Trump has an innate understanding of this truth. Biden does not and that may cost him the election. During yesterday’s debate, and at different occasions prior to that clash, Trump made it very clear that on November 3, US voters face two choices – and Biden is not one of them. He either wins the election outright or delegitimises the vote by claiming fraud – and possibly mobilising the Proud Boys and other white supremacist groups he asked to ‘stand back and stand by’ to safe the nation from assorted ‘leftists’.

At no time before in its history has the United States faced such a direct threat to its prized, and in many ways exemplary, democracy. The script has been written, unveiled, and set in motion, yet the Biden team is looking for a high road that no longer exists. Instead of hammering on a few key points – Trump’s risible income tax payments, his support of right-wing fanatics, his denial of scientific fact, or even his $70K haircut – Biden’s strategists homoeopathically dilute their message to the vanishing point. It is not as if President Trump’s convoluted half-truths are particularly hard to expose.

Whilst President Trump shoved the responsibility for the fires devastating California onto environmentalists and local authorities for failing to properly manage their forests, Biden remained mute. He could have shut his blustering opponent down by simply pointing out that two of every three acres charred by the fires in California, Oregon, and Washington are owned by the federal government and managed by the US Department of Agriculture.

Biden may, of course, still win the race for the White House and return the United States from the brink. That will, however, require a supreme effort to overcome the sharp division within society. Confined to their respective social media echo chambers, right and left have stopped talking and abandoned the political centre. According to some estimates, floating voters, those that have not yet made up their mind and may be swayed either way, represent just five to seven percent of the US electorate. The extreme polarisation of the political landscape is, perhaps, not uniquely American. It has been replicated, to an unsettling degree, in the United Kingdom although along different lines.

The challenge is how to govern split societies which only find common ground in the fears stoked by a pandemic that will likely persist well into 2021 but cannot agree on a course of action. After yesterday’s ‘debate’ had concluded, Biden’s running mate Kamala Harris echoed the questions of many on both sides of the divide when she wondered out loud how her country is going to tackle the three crises it now faces: The Corona Pandemic, the economy, and climate change. The answer to that is a blank stare. The best that America can hope for over the coming months is to preserve its democracy intact. That already appears to be a tall order.


Uruguay: A Near-Perfect Country to Live, Work, and Play Post-Covid-19

[caption id="attachment_17132" align="alignright" width="300"] Capital of Uruguay: Montevideo[/caption]

The best countries to build a prosperous post-corona life include obvious choices such as Australia (#1), New Zealand (#3), and The Netherlands (#8), but also a few surprising ones: Mauritius claimed a top spot (#6) as did, remarkably, Spain (#5), and Tunisia (#4). However, according to Business Insider, the second-best place to settle once the virus has been defeated is Uruguay – a discrete destination for a select league of in-the-know jetsetters, but otherwise lodged in the shadows of its much larger, and more boisterous, neighbours Brazil and Argentina.

To compile its list, Business Insider only looked at democratic countries and then considered a number of criteria such as economic performance and resilience, climate, cost of living, and attitude towards immigrants. Uruguay pulled in top scores on all metrics, narrowly missing out to Australia, but still light years ahead of any other country in Latin America. Only landlocked Paraguay made the list at #13 for its near-perfect climate, welcoming society, and its enviable cost-of-living – almost 60 percent lower than that of the US.

Both Uruguay and Paraguay have managed to contain the corona outbreak better than others in South America. Paraguay sealed its borders at the first signs of trouble, instituted a curfew, and gave its medical community a free rein to set policy. “The country took drastic, almost draconian, measures early on. At the time, there were only two confirmed covid-19 cases in Paraguay but that was enough to spark a national emergency,” says Dr Luis Roberto Escoto, the local representative of the Pan-American Health Organisation (PAHO).

According to a study by the Inter-American Development Bank (IADB), the relative success of Paraguay and Uruguay in containing the spread of the virus is owed to their governments’ quick and decisive response. Both countries not only shut their borders, but also restricted large gatherings, and quarantined travellers. The researchers also found that both countries’ low population density helped slow the rate of infection and facilitated contact tracing.

Universal Healthcare

Moreover, Uruguay benefitted from a universal healthcare system that was properly funded and possessed the means and expertise to respond to a large-scale viral outbreak. It also helped that the vast majority of Uruguayans trust their government with just 24 percent of people queried in a 2017 IADB poll stating that they do not expect their rulers to do right by them. In next-door Brazil, fully two-thirds of respondents expressed a distrust of their government.

Though Uruguay did not impose a formal national lockdown, some 90 percent of people chose to stay indoors after medical authorities explained in great detail how the virus spreads and appealed to common sense and individual responsibility. Absent extreme poverty and an informal economy, most Uruguayans were able to stay at home without the risk of immediately becoming destitute.

PAHO Assistant-Director Jarbas Barbosa emphasised that strict lockdowns and adherence to social distancing rules are almost impossible to maintain in poor countries where people live in slums and subsist hand-to-mouth.

Once known as the ‘Switzerland of South America’, Uruguay stands out in the region for its egalitarian society. Almost 70 percent of the country’s population belongs to the middle class and, as such, has a vested interest in moderate politics and good governance. Uruguay is also the highest-ranked Latin American country on Transparency International’s Corruption Perceptions Index, scoring 71 out of a 100 and claiming the 21st spot amongst 198 countries investigated and tabulated.

Progress Lost

IADB President Luis Alberto Moreno noted that whilst governments throughout Latin America are slowly managing to flatten the pandemic’s curve, their debt curve is shooting skywards. The World Bank is worried as well and fears twenty years’ worth of progress in poverty reduction may be lost to the novel virus.

The bank’s regional vice-president, Carlos Felipe Jaramillio, sounded the alarm and said that Latin America was facing its "worst crisis since record-keeping began, at least 120 years ago". The World Bank forecasts that some 53 million people on the continent may be pushed below the regional poverty line of $5.50 per day: “Under a downside scenario, it could actually be worse still,” warned Jaramillio.

Even before the pandemic struck, most South American economies were struggling with anaemic growth, averaging out at just 0.5 percent annually over the last ten years. The International Monetary Fund (IMF) now predicts a sharp 9.4 percent decline in average GDP for 2020, followed by a timid recovery in the years that follow. According to the IMF, Latin America and the Caribbean is the region hardest hit by the pandemic. The fund noted that the economies of Sub-Saharan Africa are expected to shrink by 3.7 this year before roaring back in 2021.

Jaramillo manages a $32 billion World Bank projects and grants regional portfolio and hopes that he can help Latin American governments structure a much more dynamic and resilient post-pandemic economy. He has urges his partners to take a cue from Asia and Africa in particular, and points to Kenya’s revolutionary M-Pesa mobile money transfer system as an example of the innovative thinking and approach that should have been adopted in Latin America a ‘long time ago’: “The continent needs to get serious about fostering innovation, entrepreneurship, and competition to address [its] low productivity”.

The World Bank has suggested three priorities that may direct the continent to an accelerated yet sustainable growth trajectory: (1) improved access to digital broadband services, (2) investing in public health and education leveraging the internet, and (3) developing a more dynamic business environment.

Plus ça Change…

However, the political moment in most Latin American countries is not really opportune for large-scale transformation. When disgruntled people take to the street even in Chile – arguably one of the best-governed, least corrupt, and most prosperous countries in the region – something is seriously amiss.

The capacity of most states in Latin America to impose pragmatic policies and deliver effective solutions has been undermined by years, if not decades, of neglect of the public sector. That, in turn, has eroded confidence in politics and opened fissures in the fabric of society, amplified and exploited by populists such as Nicolás Maduro in Venezuela, Jair Bolsonaro in Brazil, and Christina de Kirchner and her presidential puppet Albert Ángel Fernández in Argentina. These and other regional leaders eschew administrative and economic innovation and keep harking back to policies that have failed before – and will keep doing so.

A few brave and wildly optimistic pundits have suggested that, perhaps, an economic crisis of the magnitude predicted by the IMF and others may spark a genuine movement for change. Though hope springs eternal, Latin American voters have run the political gamut from near-fascist to near-communist – and quite literally everything in between – without finding a lasting solution to their plight. The faces and public discourses may change from red to blue and black, but the underlying corporativism and the associated clientelism are carefully kept in place by nearly all actors. Don’t expect the Corona pandemic to change any of that. Uruguay is much the exception and thus a lone beacon of hope.


Reshma Sohoni: An Identity and an Ambition Forged Through a Lifetime of Migration — and Adaptation

[caption id="attachment_17152" align="alignright" width="300"] Co-founder and managing partner of VC firm Seedcamp: Reshma Sohoni[/caption]

Reshma Sohoni migrated to the US from India at the age of 10, moved to France to pursue an MBA at INSEAD, and now calls London home.

She says she feels “as Indian as American, and as American as European”. She understands a foreigner’s plight after years of travel, and can empathise with the struggles of entrepreneurs.

Sohoni also understands the disclipline, initiative and perseverance required to break through barriers and succeed. “I’ve been fortunate enough that over my career I’ve been in leadership and decision-making roles,” she told The Fintech Times. “So, it’s really built up a ‘muscle’ where I can make fast decisions on limited information – and I can do this with conviction.”

In 2007, Sohoni and Saul Klein co-founded Seedcamp, a UK venture capitalist firm with a portfolio including unicorns (start-ups valued at more than $1bn) such as Revolut, TransferWise and UiPath. Seedcamp-backed companies have, by May this year, secured more than $4bn in follow-on funding.

When Sohoni first crossed paths with Klein, she found that they shared a common mission to shift mindsets and boost support for start-ups in Europe.

“Our origin story, as with many things disruptive, has to do with frustration,” she explained. “It has to do with envisioning a 10- to 20-year opportunity.”

Seedcamp is a pre-series A fund that’s focused on — but not limited to — supporting European start-ups with strong leadership teams, impactful tech ideas and high growth potential. Seedcamp brings more than just capital to the table; it introduces companies to investors with sector-specific experience and long-term vision. It has created an ecosystem where founders can as easily find mental health support as mentorship and networking opportunities.

Over the past decade, Sohoni and the Seedcamp crew have cultivated relationships with some founders with world-changing potential. “Day-to-day, I work with our team and our companies on wide-ranging topics that help push them from those difficult early days into being household names,” she says. “I love the process of building something from nothing, which takes nothing short of excellence.

“At Seedcamp, we get to do that over and over again, across many different sectors. It’s exciting to see hard work and game-changing connections come together.”
Seedcamp has built a sector-agnostic portfolio of smart products and brilliant founders, backing more than 330 new enterprises. Financial, property and health tech companies feature prominently in the Seedcamp portfolio, and Sohoni predicts personalised health-tech to be the breakthrough development.

“Every industry is getting disrupted and reconstituted for the better,” she said in an interview with Sifted. “Our thesis is that if we invest at the intersection of society, health and finance, we will be investing wisely.”

As a recognised industry thought-leader and member of the UK’s Digital Economy Council, Sohoni advises the UK government on technology and start-up policies. She calls for better support systems for working parents, likening the lack of government support to a levied penalty on parenthood.

“Taxes, poor childcare policies and a lack of high-quality nurseries … essentially handcuff one parent to (the) home,” she said. “When you add up all of the costs for childcare, you can essentially end up paying to work — even if you’re a two-income working couple.

“On top of that, companies don’t put maternity policies in place early enough. They don’t consider handovers properly. All in, the sheer cost of childcare is so daunting it is no wonder one parent often drops out of the typical workforce.”

Sohoni speaks from experience, as the mother to two young boys born some five years apart. She took three months of maternity leave for her first child, but was working online almost immediately. For baby number two, she took six months of fully paid maternity leave, and rarely logged-in online or went into the office.

There are benefits and trade-offs to each approach, she now recognises, and mothers are often forced to choose between nurturing family or advancing professional ambitions.

“Being one of the very few women founders of a top-tier VC fund, it is a difficult feeling to accept,” she admits. “And not even the most empathetic man or father can attest to the experience of it. Essentially you feel lapped in a marathon, and it is very difficult to come back from.”

There may never be a “right time” for working women to have kids, but Seedcamp — where working mothers make up 40 percent of the team — offers some flexible and practical options.


CBRE: Approaching Shadows of Data Opacity and Risk From Flexible Office Market

[caption id="attachment_13591" align="alignright" width="196"] Author: David Casas Alarcón, CBRE Property Management Accounting Lead[/caption]

We live in a world that offers and value tailored convenience. We are accustomed to the smartphone, the internet, transit options and retail offerings delivering more flexibility than ever before.

New business models cater for people’s preferences, disrupting retail and hospitality sectors. Office space has its own catalyst for change — one that addresses companies’ desire for more flexibility while putting the focus on the human experience of the workplace. Flexible space solutions mean lease agreements that can be procured quickly, with variable terms, and little capital improvement required.

This brings profound implications for occupiers and investors, challenging many aspects of the established office leasing model.

Sub-leasing office space

Co-working is the category that has shown the biggest growth over the past four years. Operators lease office space to the landlord, and sub-lease it to individuals, providing shared areas with the equipment and services of a state-of-the-art corporate workplace.

Co-working brands were pioneered by a wave of entrepreneurs seeking a fresh workplace approach and came to the fore after the 2008 global financial crisis.

This was driven by shifts in lifestyle, along with the spread of cloud computing, VPNs, fast wifi and 4G (soon 5G) connectivity. It was a dramatic expansion in the range of spaces where office work is conducted.

About co-working…

Many co-working companies have adapted their space and services for a corporate audience, with a hybrid of private offices and co-working spaces. This model has driven unprecedented growth, with more than 900,000 square metres of space added in European markets in 2019, representing 56 percent of the new “flex space”.

High dependency and investors

The CBRE 2019 Global Investor Intentions Survey revealed that investors are intrigued by flexible-workspace opportunities — but are still assessing potential risks.

Most investors indicated that the higher the proportion of co-working space in a building, the worse it was for long-term capital values.

"Many co-working companies have adapted their space and services for a corporate audience, with a hybrid of private offices and co-working spaces. This model has driven unprecedented growth, with more than 900,000 square metres of space added in European markets in 2019, representing 56 percent of the new “flex space”."

Lease Terms

The rise of flex space will probably mean a drop in average lease lengths. Flex space operators don’t demand traditional commitments and restrictions from their users to provide income security. It is not yet known how this variable income stream will function during economic downturns.

Flex tenants rarely have strong covenants, so buildings with high flex concentrations are susceptible to more risk than those where flex space is just a small proportion of the total rent roll.

[caption id="attachment_17186" align="aligncenter" width="589"] Figure 1: Investors risk appetite compared with 2019. Source: CBRE Research, Global Investor Intentions Survey, 2014 to 2019.[/caption]

Impact on Yields

Limited exposure to flexible space has not had a noticeable impact on yields. Developers and investors may benefit from diversification and the operator’s ability to use communal spaces.

Lack of tenant track record and underlying tenancy risk typically increases an asset’s risk profile. Buildings where flexible space represents greater than 50 percent of Rentable Building Area (RBA) have so far traded at a discount. Recent deals on the Continent have shown a decreasing yield differential, although the current cycle and the absence of quality investment product will have to be taken into account.

[caption id="attachment_17187" align="aligncenter" width="586"] Figure 2: Purchase level expectation compared with the previous year. Source: (see figure 1 above)[/caption]

Opaque market Data

As the flexible segment grows, it becomes harder to have a clear view on real occupancy and rent cost levels. Space which is listed as let could still be on the market. Some larger corporate deals will be well documented, but the majority of short-term deals are almost impossible to track.

This means that real vacancy rates and supply levels become more opaque, and calculation methods prone to distortion. The rents paid by final users are also obscured, making it harder to agree development or investment decisions based on current forecast pricing and supply levels.

The incorporation of flexible space to the investment portfolio has the potential to increase and diversify a building’s income stream. Tenants command higher rental rates and improve effective occupancy relative to a traditional office lease. But this can be difficult to achieve, and there is little transparency about rental revenue and effective occupancy for the major flex operators — predominantly private companies.

Landlords often do not negotiate a profit-sharing agreement, or share any potential increase in revenue to cover the risk. The relationship remains a traditional one, which introduces additional risk because of the creditworthiness, lease longevity and variable business models of flex space operators.

About the Author

David Casas Alarcón is an economist from the university of Malaga, Spain, with more than a decade of experience in the real estate and finance industries. In 2012, he took over the role of Outsourcing Analyst for Capgemini Consulting, where he advised the company’s real estate clients on the most efficient solutions for financial process externalisation. Since 2016, Alarcón has been part of the CBRE Corporate Outsourcing Hub in Warsaw, which drives the finance process transformation for property management and other CBRE business lines across Europe, Middle East and Africa (EMEA), delivering efficiencies and compliance.

About CBRE

CBRE Group, Inc is a commercial real estate services and investment firm. It is the largest company of its kind in the world. It is based in Los Angeles, California and operates more than 450 offices worldwide and serves clients in more than 100 countries.

CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. The CBRE Global Investors subsidiary sponsors real estate investments via investment funds and direct investments that it manages.