Sibos 2013 Day Four Blog: Opportunities abound in the Middle East and Asia, while Geopolitics requires Constant Vigilance

Alan Raes, chief executive (CEO) for the Middle East and North Africa (MENA) and Asia Pacific (APAC) at SWIFT kicked off the final day at Sibos 2013 by describing how interconnected and vibrant the Middle East and Africa (MEA) actually are, with business growth of 27% per year and US$50bn in trade between the two regions. While MEA faces challenges, including political instability and a concentration of industries, he said it is in a great location to take advantage of the north-to-south shift and offers fabulous opportunities for development. 

The keynote speaker, Mashreq Bank’s CEO Abdul Aziz Al Ghurair, focused on four areas in discussing the Gulf Cooperation Council (GCC) region. First, although the Mideast makes headlines daily due to turmoil and unrest, the GCC countries in general – and the United Arab Emirate (UAE) in particular – are an oasis for stability and growth. Second, the GCC has the twelfth largest economy in the world and all of its member countries have been successful in diversifying away from oil. Third, the transport, healthcare and other infrastructure has developed rapidly. And finally, both the onshore and offshore banking sectors are strong. The GCC and UAE, he said, have all the ingredients to be a global centre for trade.

Getting Asia Right: From Strategy to Execution

Along with this being MEA day, there was plenty of discussion about Asia and a panel of experts shared their views on how banks as well as corporates can succeed in a region that has dozens of countries, more than 2,000 languages and gross domestic product (GDP) exceeding US$16 trillion.

Andrew Sheng, president of Fung Global Institute – a think tank on global issues from an Asian perspective – expanded on the breadth of opportunities by sharing that understated numbers in GDP, due to the ‘grey economy’, creates huge potential. In addition, cash usage of 60% or higher in countries like India means those banks that get in first with mobile solutions will be the winners. Bank of China director Linhui Teng added that average growth typically 3-4% higher than the rest of the world makes Asia attractive as well. Intra-regional trade is increasing and HSBC head of project management Stephan Levieux cited the example of Korea, where the top export market in 2005 was the US. However, today Korea exports more to China than to the US and Europe combined.

To be successful, said Levieux, companies need to have a clear strategy, understand the importance of patience and show long-term commitment. To reach the market, Sheng added, banks need to enhance their services, such as offering remittances that are as easy to do as in the informal remittance sector and providing more services on mobile phones. DBS Bank’s head of securities and fiduciary services, Ee Fong Soh, added that banks need to cater to consumers in a number of markets, who have moved from traditional banking and now use automated teller machines (ATMs), the internet and mobile phone as well as kiosks.

Soh noted, however, that many Asian countries still have restrictions on currency, foreign ownership of stock and conversion back to an international currency. Moreover, “what is written in black and white may not be black and white”, meaning that it is not just the letter of the law but the spirit of the law companies need to understand. Sheng noted, too, that the many bilateral trade agreements springing up hurt small and medium-sized enterprises (SMEs) because today’s supply chains are multilateral not bilateral. In addition, the current set of banking rules are for sophisticated markets and Asian financial systems are very basic. Thus regulations should be reconsidered and focus on the real issues in the region, such as shadow banking, in order for Asia to fix the issues of jobs, bringing transactions costs down and creating growth.

Responding to a question from the moderator on how to ‘get Asia right’ Levieux said it is clarity of thought, understanding the opportunities and executing against them that are key.  Soh concurred that a clear strategy is critical. Sheng said, very simply, ”execute or be executed.” 

Myanmar: A Dialogue with the Central Bank

Myanmar is of intense interest in the Asia Pacific region and beyond, as rapid change and an untapped market of 65m people offers tremendous opportunities. Participants at Sibos had a rare opportunity to hear from Central Bank of Myanmar deputy governor, Set Aung, and director Khin Sandar about the changes that are underway.

Aung said that while Myanmar has been asleep for many decades and previous governments devised quick fixes that created problems, the current government is in the process of developing multi-dimensional policies focused on growth. During the first year and a half after the country opened up, the government concentrated on political development and national reconciliation. Now, it is working in parallel on economic and social development as well as environmental policy. 

A key objective is to come up with reliable, sustainable and inclusive development that includes rural development and poverty reduction. Since regulations are essential, the government is working to amend or repeal old laws to create a favorable investment and business climate. The central bank law was put in place just a month ago, for example, and legislation such as the companies’ law that is more than a hundred years old, as well as the investment law, is being revised. One aspect of the policies will be three special economic zones (SEZs). Aung expects that the biggest of these will have connections to the southern corridor through Thailand, Cambodia and Vietnam to the Pacific Ocean and will be a free zone for export export-oriented and domestic-oriented industries alike.

Aung expects development to be rapid, with telecoms density, for example, jumping from 9% now to 86% by 2018. The government is also working on electrical power schemes and looking for independent power producers as well as power purchase agreements from foreign companies.  

Sandar said that for the large value payments there will be an electronic payment system and fund transfers provided by a local service provider, with a replacement for the currently manual clearing system in the offing. The Myanmar Payments Union (MPU) has a three-part roadmap that will leverage the newly-established national switch, so banks can issue domestic cards, accept international cards and issue international debit or prepaid cards. Myanmar also intends to access the Association of Southeast Asian Nations (ASEAN) region through the MPU. Aung added that foreign financial institutions (FIs) can already open representative offices and engage with domestic FIs for equity participation or joint ventures, and foreign financial institutions will be able to enter the market as soon as the financial institutions law is revised, most likely by the end of this year. There is a plan for the capital market to be up and running in 2015.  

 

Joining the Cloud

As corporates and banks alike face strong pressure for cost reduction, despite having implemented many cost-saving measures already, more of them are looking at outsourcing and using cloud computing. Bottomline Technologies business development director Marcus Hughes and Sterci’s marketing and pre-sales director, Frederic Viard, discussed how companies are going about the shift.

Viard explained that the options in cloud computing range from a private cloud, that is an internal network with no access from the external world, to a public cloud like SWIFT, and there are hybrid models as well. Cloud companies can offer banks and corporates software as a service (SaaS), a platform as a service where the firm’s platform is hosted as a service, or infrastructure as a service where the business runs its own application in the cloud.

Drivers for banks to use cloud computing include cost reduction, removing SWIFT complexity, the ability to focus on the core business, having another firm deal with regulation, and making it easier to add functionality for clients. For corporates, the benefits include easier connectivity with multiple banks, enabling secure access to banks, and achieving compliance for mandates such as the single euro payments area (SEPA), accessing value-added services, increasing systems reliability and leveraging business continuity plans. 

Hughes and Viard said that cloud computing offers a secure reliable service for both banks and corporates, and what is especially important today is the user experience, intuitive access and mobile services.  

The Tipping Point for Renminbi (RMB) Internationalisation

With interest in the pace of internationalisation of China’s renminbi (RMB) growing, Monash University professor Jonathan Batten and BNP Paribas senior strategist Chi Lo shared their views on the current status of the currency.  

Batten believes that we are at least a decade away from reaching a tipping point for the RMB, and there has to be continued development in China before that point is reached. While Chinese exporters may request settlement in RMB, imports into China are more often in US dollars (USD) and companies are pre-disposed to settling in dollars. Lo added that raw materials trade is priced in USD, and unless this changes the speed of RMB becoming a major world settlement currency will be slow. The currency also has to be highly efficient and transparent, and he believes the RMB is far from being transparent. 

At the moment, Batten said, much of the volume in the RMB is interbank and linked with foreign exchange (FX) trading rather than being linked to genuine demand in offshore markets. He also noted that there are inefficiencies in the Chinese economy and the government does not want these inefficiencies to be arbitrated away. 

Closing Plenary

In the closing plenary, SWIFT chief information officer (CIO) Mike Fish and SWIFT deputy chairman Stephan Zimmerman provided their observations on the key topics of discussion at Sibos 2013. 

Fish summed up the Technology Forum as a study of contrasts, with a divergence of opinion. Financial inclusion, mobile, big data, cloud computing and cyber-security were constant themes throughout the Forum.

The hottest topic was cyber-security and how to protect against a cyber-war that is escalating in frequency and severity. He added that big data is an unfulfilled potential, with plenty of issues around the lack of standards, lagging technologies, governance, custody, data ownership and regulatory compliance. And finally, another constant topic was how to bridge the generational divide between the younger generation, which has grown up with smartphones and laptops, and established workers who are accustomed to older technology.

Ian Bremmer, president of political risk research and consultancy Eurasia Group, then focused on three trends in geopolitics and the implications for business in his closing keynote address.

First, he said, the US no longer wants to be the ‘global policeman’ for dilemmas such as Syria, while other advanced industrial democracies such as Germany and Japan are busy focusing on their own economies. In the absence of leadership, he said, you end up with not the G20 or G7, but G-0! He thus sees this as a period of geo-political creative destruction, with the US wanting to do less, allies distracted, and emerging markets that are different in capabilities Going forward, Bremmer said, there will be more global institutions that have no leadership or organisations with leadership that are not global, rather than US-led global institutions. 

A second key trend is emerging markets, where politics matters as much as economic outcomes. Emerging markets are drivers of economic growth, yet also more volatile. Economic growth is thus more unstable than in the world before the 2008 financial crisis and volatility must be priced in.

Finally, an area where politics drives market outcomes is China, which will soon be the world’s largest economy yet still be poor, authoritarian and state-capitalist. While China will grow, it will also have a system that does not easily co-exist with the countries that used to control the world’s economic architecture.

The implication is that several types of places will thrive in this environment. The first is “rogues with friends”, which will flout international norms more easily and create more instability. On the positive side, Bremmer said several other categories of countries will also do well. The first is those with the ability to play with different models, such as the UAE, Singapore, Indonesia, Turkey and Brazil. The second is countries that are situated to hedge. A third group is countries that are ‘anti-fragile’ and take advantage of crises as they occur, such Japan. And the fourth category is those where stability still really matters, which means the US will continue to be strong.

In closing the SIBOS conference, SWIFT CEO Gottfried Leibbrandt thanked the host city Dubai and said he looks forward to seeing everyone in Boston in 2014.

Conclusion

Delegates at Sibos 2013 said that while they were tired after four or more full days of meetings with clients and participating in a full range of conference sessions, the conference was very successful and full of learnings as well as business opportunities.

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