Reports suggest that almost 80 percent of China’s household wealth is tied up in real estate. Therefore, a decrease in property value could make homeowners feel poorer and less willing to spend. Press offices in China’s state council and the ministries of finance, housing and taxation haven’t made any comments on this topic as of this writing.

But this news was met with widespread protests from some retired senior party members, saying they themselves couldn’t afford to pay any additional taxes. It was also mentioned that the tax proposal is becoming a potential social-stability issue. Fearing a fallout on a larger scale, Han Zheng, senior vice-premier of the state council advised against imposing the levy too widely for now to Xi Jinping. To make the process smoother, the test tax run in some regions has been scaled back to 10 from 30 cities and officials are still trying to decide how to set the tax rate for the pilot initiative and whether to offer discounts and exemption areas. A new law aimed at advancing the tax across the country is not going to be finalised until around 2025, as mentioned in some reports.

China implementing test runs before rolling out property tax
One of the ideas making rounds is to gradually test the tax implementation and reaction of people in big cities, including Shanghai and the municipality of Chongqing in central China, which both have levied an annual charge on second homes or high-priced houses since 2011. Some other places that are under discussion are the southern boomtown Shenzhen and the province of Hainan, both of which are designated by Xi Jinping as the testing grounds for building a socialist market economy.

The city of Hangzhou, in Zhejiang is also expected to join the tax-pilot program. The eastern province is home to the business empire of Jack Ma and it has already been named as a place to pilot Xi Jinping’s policy aimed at reducing inequality.

On the other hand, local governments, which get roughly a third of their revenue from selling land to property developers, are worrying that a property tax would cause demand for land to drop and hurt their revenues that amount to around $1 trillion in 2020. Richer regions are expected to implement property taxes first and experts have also recently identified that the property tax will be first implemented in some cities that are not too bad at the moment, in terms of their property market. The cities that are not so well to do will also have to follow this after the top-tier ones. Experts say that it is expected that China is likely to take a tiered approach with differentiated rates depending on the city. In the US, some wealthy regions have property tax rates of 2-3 percent while in others it is much lower.

A property tax will also give local authorities a new source of income. They can start by reinvesting in public services and infrastructure investment which could very likely generate fiscal revenue equal to 70-80 percent of and sales revenues. If this sustains, it has the potential to help local governments slowly cut their reliance on land sales. If local governments use these funds locally, it would go against the idea of general prosperity. Additionally, the implementation of property tax will increase investors’ holding costs of real estate assets, which will help channel some housing stocks into the market from homeowners.

It goes without saying that developers will face a slowdown in the inventory, which will put further pressure on their cash flow and stress their liquidity. But the implementation of property tax will also boost the cost of holding real estate. In China, around 60 percent of urban household assets are tied up in real estate with only 20.4 percent property accounting for financial assets including stocks and bonds. Comparatively, in the US households hold over 40 percent of their wealth in financial assets.

Effect on other sectors
According to a report by Rhodium Group, land transactions and sales revenues in China are falling by record margins. In the southern city of Guangzhou, the local government sold less than half of the 48 parcels of land offered in a late September auction, with only five parcels sold above their asking price. Going by the data collected from 100 cities, Rhodium Group’s report suggested that land sales dropped by 43 percent in the first three weeks of September since last year, and the decrease only added to the worry of the financial strains on many localities across the country.

In other sectors, Xi Jinping’s campaign to squeeze what he views as capitalist excess out of the Chinese system has already impacted growth. Sales, employment and other activities in the service sector are hit hard because of the policy tightening, resulting in the reduction in growth. State banks and funds are facing intense scrutiny regarding their ties with big private sector companies and are also pulling back. Experts say that Beijing is clearly willing to risk rising economic costs. This, in turn, begs the question, how far authorities will push the property sector.

Xi Jinping has also hinted that this could be caused due to his economic cleanup effort. In a recent speech, the Chinese President mentioned that daring to struggle is the distinct character of their party and the beginning of a new journey of building a modern socialist country is bound to be met with tests and risks. For the past four decades, Chinese society moved from people living in housing provided by their work units to a broad open market. A less controversial alternative to the tax proposal centres on affordable housing provided by state firms.

Going by this ideal, China would essentially start following the dual-track system again where the government offered to house. This was the beginning of China’s housing reform that started in the late 1990s. But recently, it has been observed that the focus was exclusively on commercialisation. According to some officials and advisers, returning to our previous tax system could help the leadership make China more equal. The dual-track housing system will help state-owned enterprises and companies controlled by the central government return to affordable housing. A financing firm owned by the provincial government of Yunnan, in southwestern China is one of the very first ones to spring into action. Last month, the Yunnan government announced that Yunnan Construction Investment Group will team up with state banks to expand the supply of affordable housing.

Challenges faced on the way
There are a lot of people who believe that earlier attempts to implement property tax in China failed because of resistance from wealthy and politically connected elites, particularly in cities such as Beijing, Guangzhou, Shenzhen and Hangzhou along with local government officials across the country. Experts have also pointed out that a potentially bigger problem for the government to implement property tax is the fear of the instability that could be caused by a market crash. It has been speculated in the markets that once prices stop going up, they tend to go down.

If something similar happens to Chinese property prices, not only will this terribly affect the banking system, but it would also reverse the major source of wealth accumulation among Chinese households. Recently, China’s real estate sector has been making global headlines because Evergrande, the world’s most indebted property developer is in debt of $300 billion in liabilities. According to official data, October registered the first month-on-month decline in new home prices across 70 of China’s biggest cities for the first time in over six years, which indicated that a slowdown is already creeping in the housing market.

The road ahead
Eventually, Xi Jinping plans on imposing a nationwide property tax, but this decision has been faced with strong resistance from China’s political elite, who argue that implementing it could crash China’s economy. Some experts have noted that the upper class might want to keep their worth of personal property fortunes away from the knowledge of tax collectors. Despite potential pushback from the rich and powerful, property tax plans are gaining traction at the top levels of China’s government. As mentioned earlier, China’s top legislative body has already approved the plan of going through a test run before implementing property tax in undisclosed urban areas of the country.

It is important to keep in mind that the absence of property tax in China is not a quirk in the legal system. It is a policy that is responsible for fundamentally shaping and distorting China’s economic boom. For a while now, experts have agreed that imposing a real estate tax is necessary to weed out the most unsustainable elements of China’s economic rise; pointing towards the immense real estate prices.

Nevertheless, overcoming the hurdles necessary to transition to a nationwide property tax has proved insurmountable to China’s leaders for well over a decade.

The post China to roll out new property tax appeared first on International Finance.

Qetaifan Island North, the first entertainment island in Qatar, is situated closest to the Lusail Stadium where FIFA 2022 will be inaugurated. It will be a fan-favorite tourist destination that will have unique elements and attractions that can be enjoyed by the whole family. The project is inspired by the Qatari culture and the luxurious hotel is handled by Rixos. The entertainment island comes with the beach club, diversified waterfronts, a linear park along the island, a mosque, school, and world-class spas.

The residential and commercial properties will serve the tournament, but the tourists and fans can also avail themselves water taxis for transportation from Qetaifan Island North in order to avoid crowds and traffic to the stadium.

Keeping in mind the proximity of Qetaifan Island North to Lusail International Stadium, it is expected Qatar will see a high influx of tourists before and during the World Cup. The game is being held for the first time in the Middle East and Qetaifan Island North will provide all the needs for the visitors. The island will also be inaugurating temporary floating hotels for the first time.

It is worth mentioning that Qetaifan Island North features seven beaches, which makes it the city’s distinct waterfront destination. The island spans approximately 1.3 million square meters with 830,000 square meters of attractions.

Qatar is preparing in full swing to host the greatest football event in the world, and people in the country have something big to look forward to. Qetaifan Island North will be ready to welcome all football fans and tourists to Qatar.

The post Qetaifan Island North Is Gearing Up for FIFA World Cup 2022 appeared first on International Finance.

Nigel Green, CEO of DeVere, the world’s largest independent financial consultancy, told International Finance, “Action by British banks has fallen short on climate change over the last decade and a half for several reasons. However, I think the main issue is the 2007-2008 global financial crisis. Banks were, in most cases, spectacularly caught off guard by the crash. In the fallout, they were understandably busy dealing with the new regulatory landscape that prevailed in the aftermath, evolving client expectations and, for some, the massive financial penalties that were imposed on them. As a result, corporate social responsibility obligations were way down their to-do list. They were too focused on regrouping. They were in survival mode. However, simultaneously, the rest of the world was waking up to the very real issue of climate change.”

And, as the beginning of this year has demonstrated, a lot is going to change for British banks and the economy at large. Of late, Britain has been witnessing a growing appetite for financial support in sustainable projects, as clients expect banks to be able to show environmental credentials. “This is why challenger, paperless banks with stronger green credentials, such as Vault, are filling the void left by traditional banks, especially in terms of what clients expect firms to be doing today and in the future when it comes to the environment,” Green said. “They are also, of course, getting serious because green investments are outperforming the market and are, therefore, good for their clients and profitable for them.”

British banks know the path forward
The global talk about the Paris Agreement on climate change and what it can do to the economy has put a lot of pressure on British banks. “Despite allegations that some banks are simply ‘greenwashing,’ I have not seen much evidence of this. I think that most are finally getting serious about this subject,” Green said. For example, NatWest and Lloyds of London have pledged to reduce their emissions linked to the loan book by half. However, the levels of their emissions are yet to be worked out. In another example, Barclays has already announced a host of green finance products to help clients finance sustainable developments in the country and globally. These green finance products are mainly designed to channel investments into environment-friendly activities and green initiatives leading to a successful low-carbon economic transition.

NatWest has made its action on climate change an integral part of its rebrand under the leadership of new chief executive Alison Rose. Last November, it launched the first green mortgage, which allows borrowers to enjoy lower-interest rates while purchasing an energy-efficient home. The green mortgage for new customers might be a relatively small move, but this year is anticipated to see NatWest’s efforts on a large scale as it aims to target an expansive customer base. Lloyds, on its part, has become increasingly active in financing clean energy projects. Because it is one of the country’s biggest providers of car finance, it has strategic plans to expand lending for electric vehicles. Again, British banks are likely to come under the scanner with the country preparing to host the UN COP26 climate summit in Glasgow in 2021-end. “This should provide positive impetus for the industry,” Green said.

Barclays has worked with Sustainalytics, a leading independent global provider of environmental, social and corporate governance research and ratings to investors, to develop a Green Product Framework, which will be used to identify sustainable projects that will have a beneficial impact on the environment and demonstrate full support of green financing activity. Although Barclays has refused to halt fossil fuel lending, it is optimistic that setting a carbon limit on its activities will lower emissions. The work of British banks “will sharpen the industry’s focus on the issue of climate change for sure. It is a significant step to ensure that banks are playing their part,” Green explained.

British banks remain quite bullish about their progress in fulfilling climate goals over a series of announcements and product launches that are slated for this year. “I think that they will be compelled to make real advancements, not only by regulators but by pressure and expectations from their clients,” Green said. “Those banks that are slow to respond will face not only increased regulatory and public scrutiny but also limited growth. In 2021, and moving forward, banks can no longer afford to ignore climate change.”

Another fact that points to the real efforts by British Banks is the recently licenced Oxbury Bank’s world’s first-ever carbon-offset savings account, known as Oxbury Forrest Saver, which provides a huge opportunity for British savers to help in the transition to a low-carbon future. The money that would be earned in interest from the Oxbury Forrest Saver accounts will be used to finance tree-planting projects. This is especially important for savers because a new survey commissioned by Triodos shows that 65 percent of the respondents are clueless about their savings—whether they are supporting fossil fuel developments in some form. An even higher percentage of respondents expect banks and savings providers to be transparent about their investment. In this movement, the government seeks to enforce disclosure mandatory by 2025.

Obviously, this still requires the government to take the initiative. And, as known, Bankers for Net Zero initiative backed by an influential group of MPs, is assembling banks, regulators and businesses to enable banks to fully support their clients, speed up the net-zero transition and deliver on the government’s climate change vision. According to its official website, the initiative is built to explore two crucial aspects of the climate change action: How can British banks support key sectors in the net zero transition? What is required in terms of policy and regulation to finance a rapid transition?

World-class green finance research hubs
Interestingly, the government will be investing £10 million for world-class green finance research hubs that will be based in Leeds and London. The two cities will house hubs designed for driving green finance and investment globally. These hubs are slated to open in the coming months in collaboration with a set of British institutions such as University of Oxford, University of Leeds and Imperial College London. Their potential ability to provide world-class data and analytics to financial institutions around the world will help banks, lenders, investors and insurers to make wise investment decisions by taking into account the environmental and climate change impact.

This advancement is essentially what the country needs to step up its game on a global level. It could even create new opportunities in the form of positioning Leeds and London as global centres for green finance—a promising logic that could take it to the next level of promoting green finance and protecting the global economy from climate risks.

According to the Energy and Clean Growth Minister Anne-Marie Trevelyan, “Climate change is the biggest issue that we need to tackle to protect our planet for our children and grandchildren. While the government has invested billions of pounds so we can end the UK’s contribution to climate change, we will not reach our net zero target without mobilising private capital and unleashing the power of the free market. The UK Centre for Greening Finance and Investment in London and Leeds will encourage financial services to turn the tide of their investments and focus on sectors and companies that have a smaller environmental footprint. Doing so will support industries and businesses to develop clean green innovations, creating thousands of jobs across the country—ensuring we build back greener,” as reported.

Back to sustainability bonds and carbon taxes
In 2019, the London Stock Exchange already expanded its green bond segment into a comprehensive Sustainable Bond Market that will incorporate sustainable, social and issuer-level segments. Essentially, these segments offer a host of opportunities for investors transparency and sustainability-related debt instruments. By the numbers, 155 green bonds, nine social bonds, seven sustainability bonds and 77 green issuers from 23 countries and regions are listed on the Sustainable Bond Market, raising £51 billion so far. With that, its strong-record is likely to continue.

This, now seems clear, is the year for Britain to get to the bottom of green finance. British Finance Minister Rishi Sunak plans to launch the country’s first green government bonds. These bonds will be created to finance environment-friendly investments and even encourage the Bank of England to focus deeper on climate change action. It is reported that the finance minister is also urged to reduce the 20 percent value added tax on energy efficient projects. In the case of carbon taxes, any progress that was vouched for by the International Monetary Fund in October might be slow. This is because the budget deficit of £400 billion is still worked on, marking the largest since the second world war. However, it does seem like the country has taken a slow approach to environmental taxes.

The post Britain is on a mission to build back greener appeared first on International Finance.

In contrast, FDI in Latin America dropped by 37 percent during the same period. The European Union also suffered a 71 percent drop to an estimated $110 billion from $373 billion in 2019. Among the EU members, 17 of them registered a drop in FDI during the period. In the US, FDI inflows dropped 49 percent from over $250 billion in 2019 to $134 billion in 2020. According to UNCTAD, global FDI fell from $1.5 trillion in 2019 to just under $860 billion last year, which is a 40 percent decline. When it comes to Southeast Asia, the region registered a 31 percent contraction led by a 68 percent contraction in Malaysia, 50 percent in Thailand, 37 percent in Singapore, 24 percent in Indonesia, and ten percent in Vietnam.

UNCTAD said in its report, “FDI inflows to developed countries fell drastically by 69 percent to values last seen almost 25 years ago. Of the global decline of $630 billion, almost 80 percent was accounted for by developed economies. At an estimated $229 billion, inflows in developed economies were only one third of the low point after the global financial crisis of 2009. Multinational enterprises (MNEs) significantly reduced new equity investments. In combination with lower M&A activity this resulted in a market decline in the equity component of FDI to near zero. Intra-company loans turned negative (-$134 billion) as parent firms withdrew or were paid back loans from their affiliates, strengthening their balance at home. Contrary to earlier expectations and despite significantly lower profit levels, reinvested earnings in foreign affiliates remained relatively stable, declining by only 6 percent.”

China becomes the biggest recipient of FDI in 2020
Last year, China was the largest recipient of foreign direct investment in 2020 despite the coronavirus pandemic, which originated in the Chinese city of Wuhan in 2019. China attracted foreign direct investments worth $163 billion in 2020. The US, on the other hand, attracted FDI inflows of $134 billion only. In the previous year, the US registered $251 billion in inflows, while the mainland had received $140 billion. However, in 2020 China dethroned the US to take the top spot.

According to data compiled by the Organisation for Economic Cooperation and Development, the total stock of foreign investment remains much larger in the US when compared to China. It also must be noted that China recorded a decline in FDI inflows in the first quarter of 2020, however, growth soon picked up during the remaining three quarters of the year. According to data released by China’s Commerce Ministry, FDI inflows contracted by 11 percent in the first quarter, but it grew by 8.4 percent and 20 percent in the second and third quarter respectively.

When FDI in the US peaked in 2016 at $472 billion, China registered FDI inflows of $134 billion. Since then, investment in China has continued to rise. In contrast, investment in the US has fallen each year since then. Even more noteworthy, FDI flows into China’s IT services leaped by over 28 percent in 2020. The service sector in China registered the largest share of FDI in the same year. China’s cross-border merger & acquisition activity jumped by 54 percent during the period, mostly in China’s IT and pharma sectors. Foreign investment in China’s high-tech industries was also up by more than ten percent last year. The Netherlands and Britain increased their investment in China by 48 percent and 31 percent respectively during the period.

Nigel Green, the chief executive of deVere Group said, “China’s benchmark index the CSI 300, which tracks shares on the Shanghai and Shenzhen stock exchanges, jumped nearly two percent as investors around the world rush for exposure to the People’s Republic’s economic recovery from the Covid pandemic. These fresh impressive gains for Chinese equities come after an incredible year in 2020 in which the index added more than 27 percent.

“This trend of piling into Chinese stocks can be expected to continue throughout 2021 as investors seek growth. China’s rebound is quite remarkable, compared to other major economies, many of which are once again rolling out stricter restrictions to stop the spread of Covid amid a tsunami of new cases. The country has just reported increased industrial output and retail sales towards the end of 2020, bolstering expectations of further robust growth in 2021, adding fuel to the nation’s stock markets and currency as well as those economies that get a boost from domestic spending within China. Of course, all of this will not go unnoticed by investors looking for yield.

“But as 2020 showed us with perhaps too much clarity, things can change quickly and so-called ‘certainties’ can shift overnight. Therefore, as ever, it is essential that investors have a truly diversified portfolio. This includes across geographical regions, assets classes, sectors and currencies. A good fund manager that can secure global exposure and actively seek out opportunities in Asia, especially in China, will best position investors to reap rewards in 2021. China, but also Asia in general, has massive potential and will likely outperform the rest of the world in 2021. However, investors must not get giddy and forget about the importance of diversification – the investor’s best tool to capitalise on opportunities and mitigate risks.”

Building on an impressive performance in 2020, FDI into China continued to increase in January 2021. According to the Chinese Commerce Ministry, FDIs in January increased by 4.6 percent year-on-year to reach $14.2 billion. Data released by the ministry further revealed that foreign investment in the services industry amounted to ¥68.46 billion in January, which is an increase of around 11 percent year-on-year. The sector alone accounted for 74.7 percent of the country’s total FDI in January. Other sectors that also did well are wholesale and retail trade. These sectors saw FDI climb 27.2 percent year-on-year during the period. Also, the accommodation and catering industries witnessed a 71.5 percent increase in foreign investment.

According to the Ministry of Commerce, the services sector in China registered 11 percent rise in FDI amounting to $10.1 billion. Similar to January 2021, the services sector also attracted the largest share of FDI in 2020 as well. Last year, FDI in China’s service sector rose by 13.9 percent yearly to $120 billion and accounted for a record portion of overall FDI.

Global FDI is moving into Asia
Despite the pandemic and economic uncertainties, Asia has attracted the highest number of FDI last year, helped by China’s strong performance. Along with China, India too has posted positive FDI inflow growth. In India, the growth was driven by its fast growing service sector which has attracted a large list of foreign investors. Surging levels of FDI were also reported in the financial and science-based services and IT sectors. This is a result of large US multinationals entering the Indian sub-continent to tap into the potential of India’s vast domestic market as well as counter China in this aspect.

Asia is currently leading the global economy with FDI inflows either picking up or at least showing signs of a potential rise from last year’s negative growth patterns. In contrast, the European Union suffered a 71 percent drop in FDI last year. The UK and Italy, which have been hit hard by the pandemic and have recorded high mortality rates, attracted no new investments. Germany, which is the largest economy in Europe, saw a 61 percent drop in FDI inflows as well in 2020. Similarly, FDI inflows in Latin America also declined by 37 percent during the same period.

When it comes to the Association of Southeast Asian Nations (ASEAN) countries, their FDI inflows were largely negative last year, however, several of its member nations are getting back on track in attracting growing levels of FDI. This is attributed to the recently-agreed regional trade agreements. Leaders from ten Southeast Asian countries, as well as South Korea, China, Japan, Australia and New Zealand have signed a mammoth trade agreement that will define trade and commerce in the Asia Pacific (Apac) region for decades. Called the Regional Comprehensive Economic Partnership (RCEP), it’s a trade agreement signed by Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand, and Vietnam. It is noteworthy, that even though India was part of the initial negotiations, they decided to back out after growing pressure from the opposition and other stakeholders back home.

ASEAN’s FDI inflows slowdown
While China’s FDI inflow climbed four percent last year, the ten-member ASEAN regional bloc saw FDI declined by 31 percent, which amounts to $107 billion for 2020. According to UNCTAD’s Investment Trends Monitor, ASEAN saw growth of around $70 billion in greenfield investments last year. Interestingly, in 2019, ASEAN registered a decline of 14 percent when it came to greenfield investments.

The levels of FDI inflows do vary from country to country. Some countries did register a far greater drop in FDI inflow last year when compared to other ASEAN members. Vietnam too registered an FDI inflows drop of around ten percent in 2020 to around $20 billion for the year, when compared to its FDI inflows in 2019.

According to UNCTAD, Singapore’s FDI inflows plunged by 37 percent last year amounting to $58 billion. Despite a plunge, which is similar to levels during the financial crisis of 2009, Singapore still held pole position as ASEAN’s largest recipient of foreign investment in 2020.

Indonesia also registered a drop in FDI inflows by 24 percent in 2020, according to Indonesia’s Investment Coordinating Board. FDI inflow in Indonesia last year amounted to $18 billion. This is mainly because of the widespread lockdown measures introduced to curb the spread of the virus during the first half of last year. FDI inflows in Indonesia have picked up since then, rising by a yearly 1.1 percent during the third quarter of 2020. FDI inflows registered strong growth in the fourth quarter as well, rising by nearly 5.5 percent. A major chunk of the funds came from investors in China and Singapore. The sectors that attracted these FDI were telecoms, transportation, warehousing and utilities.

The UNCTAD report further revealed that Thailand and Malaysia were especially negatively impacted when it came to FDI. However, Malaysia’s Department of Statistics argues that by taking account of an alternative measure, in the form of ‘gross FDI inflows’, then for the first nine months of 2020, investments into Malaysia were up by 5.8 percent on the previous year, amounting to $26.8 billion in that period. Malaysia’s FDI inflow did register growth in the fourth quarter reaching $1.5 billion as a result of the lifting of its restrictions and lockdown measures previously introduced. This proves that Malaysia continues to be a major investment destination and attract global investors. Most of the foreign investments came into the country from its neighbouring countries such as Thailand, Singapore and Japan. A major chunk of the investments went to the manufacturing, finance and retail trading sectors.

One country that did well compared to the other ASEAN members, is the Philippines. The country registered an increase in inward direct investment of 29 percent to $6.4 billion during the period. The Philippines’ impressive performance was the result of surging net equity capital investments which rose by 48.6 percent during the first 11 months of 2020. Sectors such as manufacturing, banking and insurance, and property attracted the major portions of the funds, which came from investors in countries such as Japan, Singapore, the Netherlands, and the US.

India to emerge as China’s potential challenger
Similar to China, India also registered high FDI records in 2020. According to India’s Ministry of Commerce and Industry, during the second and third quarter of 2020, FDI inflows increased by $58.4 billion despite India recording the highest number of Covid-19 cases during the period. This is a 22 percent increase in FDI inflow when compared to the same period in 2019. It is the highest ever recorded during the first eight months of a financial year. The ministry further revealed that around $43.8 billion were invested as equity capital alone. India and China were the only two countries that registered FDI growth last year.

During the month of November, India recorded a growth of 81 percent year-on-year, which stood at $10.2 billion. Around $7.6 billion went to sectors such as banking, finance, insurance, R&D, testing and analysis and outsourcing, while around $7.4 billion went towards computer hardware and software. Other sectors that also benefited from strong FDI include retail and wholesale trade, telecoms, tourism and automobile production. According to the UNCTAD report, India is attracting record numbers of deals in IT consulting and digital sectors, including e-commerce platforms, data processing services and digital payments.

A major portion of FDI inflows in India came from Singapore. It contributed around $8.3 billion to India’s FDI inflow in 2020. Singapore was followed by the US in second, which overtook Mauritius, investments totaling $7.12 billion. US technology giants buying up Indian tech ventures helped the US topple Mauritius and take the second spot. The US was also helped by former US President Donald Trump’s relationship with Indian Prime Minister Narendra Modi.

Other countries that also made significant contributions include the UK with $1.35 billion FDI and France with $1.13 billion. Also, holding company jurisdictions, notably the Cayman Islands and the Netherlands, contributed $2.1 billion and $1.5 billion in FDI inflow respectively. India was helped by FDI policy reforms made by the government to boost FDI amid a global recession. Other factors that also helped India include investment facilitation and ease of doing business. Like China, India also has a big service sector that attracts foreign investors at a very large scale. This could possibly mean that India could be China’s worthy competitor when it comes to competing for FDI, and not the US. The very fact that the US’s FDI inflows dropped by 49 percent in 2020 and has been declining in the last couple of years, whereas India’s FDI inflows grew 22 percent year-on-year during the first eight months of the financial year proves it.

The post Why China is winning the FDI race appeared first on International Finance.

Moreover, since hydrocarbon is the major source of revenue for these countries, tax revenues only comprise a small percentage of the total government income. Corporate and household tax rates in these economies are also on the lower side since hydrocarbon revenues are the preferred source of budget revenue. In recent years, these economies have made significant investments in sectors such as fintech, tourism, hospitality, technology and real estate.

However, the outbreak of the Covid-19 pandemic has mired the diversification ambitions of the GCC economies, which comprises the Kingdom of Saudi Arabia, the Sultanate of Oman, Kuwait, Bahrain, the UAE and Qatar. These governments need to boost investments in industries such as healthcare, technology and telecommunications to fulfil their diversification goals as current efforts are not up to the mark. Export diversification has been limited amid a steady surge in the share of non-hydrocarbon output towards GDP. Further diversification will make these economies less reliant on hydrocarbon output.

The Covid-19 effect has changed the landscape
The Covid-19 pandemic has walloped the oil segment as Brent crude prices slumped to $23 in April 2020, from $64 per barrel at the beginning of 2020. The oil prices are poised to remain below $50 per barrel throughout this year. Therefore, it will affect the GCC nations’ fiscal position, which is expected to run last year deficit budget averaging 9.2 percent and this year’s 5.7 percent.

The sustainability of hydrocarbon revenues has always been a concern for the GCC economies for many years. The oil and gas reserves are expected to be exhausted in the long run. Economies such as Oman are at a very critical stage as reserves are expected to become less within the next 25 years.

Oil revenues are expected to slump due to the possible downturn in the global demand starting around 2040. This will spur clean energy demand and implementation while enhancing storage and efficiency. The GCC nations have already invested in financial assets worth $2 trillion and have also injected capital into their respective sovereign wealth funds for a robust future.

While speaking to International Finance, Martin Hvidt, Associate Professor, University of Southern Denmark said, “The effects of Covid can be two-fold. Firstly, it can delay any current attempts at diversification, simply because the economies lack money or secondly, the Covid, exactly because the economies are stressed (the 2014 oil price collapse + the Covid effects), opens up for hard policy choices. In other words, both the decision-makers and the population likely see themselves in a new situation, where the need to reform the economies through drastic measures become evident for all. So, the situation can be used as a stepping stone for more fundamental reforms, eg. in the labour market.”

According to IMF estimates, before the pandemic, GCC economies will deplete their conserved wealth by 2034, unless they deploy stringent and substantial fiscal and economic reforms. IMF said that international oil companies and producing states have come to recognise that alternative energy sources, alongside greater efficiency, are already eroding demand.

In a report, it said, “While Gulf producers like Saudi Arabia and the UAE are developing new industries in preparation for a post-oil era, they’re not moving quickly enough to avoid running out of cash. Regional governments will likely need to cut spending further, save more and introduce broad-based taxation to make ends meet. A further decline in oil prices this year, in the face of geopolitical tensions and threats the coronavirus poses to growth, is making that task even harder. Should global oil demand trend downward before those plans take root, the countries would have to cope with their longer-term economic problems even sooner. The world’s demand for oil is expected to grow more slowly and eventually begin to decline in the next two decades.”

Diversification ambitions must turn real
The diversification ambitions of the GCC economies have been driven by a slump in hydrocarbon reserves and revenues while motivating the economies to develop products outside the oil and gas segment. The private segment activity in the economies still depends on government-backed projects and consumption that are backed by the revenues generated from the oil and gas sector. The policymakers must float alternate ideas without depending on the oil and gas segment and also overcome the flaws of the previous diversification plans.

The GCC economies must avoid projects that require support from the government or subsidies, and are expected to diversify their revenue streams through sovereign wealth funds. Economies should encourage their citizens to get involved in wealth and economic diversification efforts, which also include savings and investments.

Martin Hvidt said that diversification is a process, that inevitably demands significant changes in society. Diversification can only be achieved if the private sector comes to play a much more prominent role in the economic landscape of the Gulf countries. As such diversification implies that the state-led approach, where very large parts of the economy are tied to public sector spending must imply changes. This might be uncomfortable for the current rulers in that the changes in the social contract (could imply less support for the rulers) and also for the private sector which is used to a different mode of operation. One major change will be to provide incentives for the nationals, that are the citizens of the Gulf countries, to seek jobs in the private sector.

He said, “So far public sector jobs are preferred, due to better pay, shorter working hours etc. As such, for diversification to work, incentives must be changed, so private sector employment is a real alternative to the national population. Other challenges include the size of the economies and the size of the markets, the low technological level among the national population as a consequence of former rentier policies etc. Saudi has a good potential to build a domestic sector, that can be provided with domestic products (market of 30 million inhabitants), while Qatar, Bahrain etc. are small indeed.”

Resources are bliss for the GCC
Natural resources are abundant among the GCC economies. They can enhance the lives of their citizens, develop their infrastructure, and assure a robust future without dependence on oil. In terms of infrastructure, the nations have built modern cities and established a solid foundation for future economic development. The HDI of GCC economies is above 0.8, placing them collectively ahead of other Middle Eastern and MENA economies.

But still, GCC economies have not fully utilised their resources to fulfil diversification goals. The economies are stubbornly dependent on hydrocarbons despite good sustainability ideas and economic development strategies.

The economies have to replace fossil fuel production with goods and services that are not dependent on the oil sector. Furthermore, the government must replace revenues attracted from the oil segment with revenues derived from the non-oil segment including other activities such as boosting non-oil exports and FDI followed by moderating government spending.

Oil and gas production continues to represent over 40 percent of GDP in most of the economies despite making some progress in the past few years. However, the numbers are less in the UAE with 30 percent followed by 18 percent in Bahrain.

Economic activities such as construction and infrastructure development are still fostered by the revenue generated from the oil and gas segment. Bahrain’s GDP contribution from the oil and gas segment is less because its majority of the oil reserves are depleted. However, economic activity still runs strong because of the oil segment.

Hydrocarbon accounts for 70 percent of the total revenue except for the Kingdom with 68 percent and the Emirates with 36 percent. However, there are many diverse revenue streams in the two nations which are attracted by economic activities related to oil and gas.

How can GCC economies succeed?
Firstly, the economies will have to eliminate or cut the structural barriers towards innovation, enhance local capabilities and inject capital in R&D. The economies must establish a top-notch infrastructure that fosters technology and innovation at the same time, particularly in areas such as digital infrastructure and clean energy. There should be competition in the delivery of services to consumers and businesses.

The economies must cut regulatory barriers towards the implementation of cutting-edge technologies such as advanced analytics, drones and AI. For example, implementing robust data protection regulations to maintain a stable baseline, while encouraging consumers to safeguard their data and use new technologies. The government should enhance the quality of local education by focusing on topics such as technology, maths, science including soft skills such as problem-solving, creativity and many more.

Martin Hvidt, said, “Market size is an important factor. Thus UAE (ten million) and KSA (30 million) are best positioned to build a diversified economy, that initially aims to supply the local market. Furthermore, quite a bit of diversification has already taken place in these countries in sectors such a building material, food supply, tourism and within or related to the oil and gas sector, for eg. aluminum smelting, petrochemicals etc.”

Goods and services play a major role in economic diversification
Middle Eastern economies largely produce goods and services, mainly for domestic consumption. The goods and services include business services, manufactured goods, agricultural products, etc. However, the majority of the citizens and ex-pats living in the Middle East are driven by the vast quantities of imported goods and services. Therefore, domestic goods and services will not replace the exported ones soon.

To achieve economic diversification, new goods and service should be produced other than hydrocarbons and their derivatives, that can be imported outside the GCC. In this context, the Middle Eastern economies have to buckle up their seats to achieve what they want.

In 2018, 90 percent of total exports in Kuwait and Qatar comprised hydrocarbons and related products. While more than 80 percent of total exports happened in the Kingdom and the Sultanate. Furthermore, 50 percent of the total exports were carried out in the Emirates and Bahrain.

FDI is vital too
FDI is a powerful tool in measuring a nation’s potential competitiveness, which reflects the ambitions of foreign companies to invest in an economy or not. FDI is lagging among the GCC nations. Only these two economies’ FDI inflows (as a share of GDP) that were higher than the world average of 2.5 percent between 2015 and 2019: the Emirates and the Sultanate.
The GCC nations’ FDI net inflow was only 1.1. percent of GDP, which is less than the half of global average. The weak inflow so FDI is due to a volatile business environment in most of the GCC nations. Therefore, firms that don’t have great insiders may find it difficult to enter the market.

Moreover, frequent policy change also affects the whole scenario which may bring limitations on work permits from specific economies, limitations of abroad fund transfer and cutting off economic ties with neighbouring economies. This kind of policies often possess a threat to international, and even local, businesses in terms of policy uncertainty. GCC nations had the luxury of making arbitrary policy decisions and even costly policy mistakes when revenue from oil and gas were flourishing. However, the scenario has changed and has compelled the economies to be more responsive to the needs and concerns of investors.

The road ahead for the GCC?
Martin Hvidt said, “Fundamentally it is all a matter of implementing policies while they still have income from oil and gas which can finance such policies and thus can ease the transformation from non-diversified economies to diversified ones that build on the normal way economies without abundant natural reserves operate under, that is where the educational level, skills, and hard work of the population are the main drivers behind the wealth of the countries. So, the overall blueprint – at least in our neoliberal era – to implement structures in the economy that facilitates incentives to produce. As a part of the diversification strategy, several countries aim to become knowledge-based economies. Qatar, UAE and KSA are moving forward in this direction. Most visibly UAE has created the Mars mission (they have placed a spacecraft in orbit around Mars just this week) to inspire their young generations to pursue studies within STEM sciences. And so, does KSA. At the heart, the futuristic city NEOM under construction is an attempt to make a huge laboratory that can train the youth in the knowledge base or what is now called Fourth Industrialisation Revolution technologies.”

The GCC governments have a great chance to bolster their diversification ambitions as they have learnt a strict lesson from the pandemic which hampered the global oil industry. Therefore, the governments can plan and take stringent measures that are buoyant, diversified and based on innovation and research.

With the current global scenario, the GCC economies are expected to ramp up their economic diversification efforts. Policymakers must think out of the box to do something new and innovative to generate quick results. They can cut down on budgets and instead prioritise the development of vital elements needed to build a robust and effective post-hydrocarbon economy.

GCC nations have to further cut down public services, benefits and limit employment opportunities for rent-seeking in the private segment; to establish a resilient post-oil future. The GCC governments should ramp up their efforts to integrate both women and youth into the labour market and float new incentives to push nationals to work for the private sector. Most importantly, the governments should invest in reskilling and retaining their workforce.

It will be interesting to watch how GCC economies respond towards economic diversification in the coming years. If the GCC economies are successful in establishing non-oil economic diversification then the rest of the world is expected to see the brand-new Middle East.

The post GCC establish economic diversification amid Covid-19 appeared first on International Finance.

The lira remained stable and the purchasing power of citizens rose on the back of the income per capita crossing the $10,000 per annum threshold. But then something happened. In 2012, the then-central bank governor Erdem Basci used a different method known as ‘interest rate corridor’ for the ‘creation of multiple interest rates’, in response to opposition to interest rate hikes and to satiate the market conditions.

Long story short, a lot of push and pull on the matter took place—and yet the currency remained relatively stable to the point that $1 was still equivalent to two liras. However, concerns for the market began in 2016 when the central bank came under the leadership of its new governor who was no longer able to make independent monetary decisions. After that, things went south: For the first time, credit risk known as CDS, was passed over 300 points, and in the following months the dollar-lira exchange rate had passed 3.8. Two years later, investor sentiment shook again with the announcement that a new presidential system would be introduced and extraordinary powers will be granted to the head of state. The dollar value fell equivalent to over four liras.

Already, the Turkish economy is burdened with a huge current account deficit accumulated over the years. Its annual deficit in 2018 was expected to be more than $55 billion, which was supposed to be financed by an inflow of investors cash. The value of lira nosedived in August of that year and more than 34 percent of its value was lost against the dollar—resulting in a currency crisis.

Volatility and vulnerability of the lira

The lira is considered to be one of the most volatile and vulnerable currencies in the world. The pandemic has pushed its value to a record low over the past few months. By numbers, its value has been down by 20 percent to 25 percent against the dollar since the start of last year. Tatiana Lysenko, a global emerging markets economist at S&P Global, told International Finance, “In our view, it is not the low value but currency volatility—and more broadly, the lack of policy transparency and predictability that has a negative impact on investment and investors’ interest.”

To begin with, investors are concerned whether companies that borrowed to profit from a construction boom will be able to repay loans in dollars and euros, because the weak lira means that there is an increase in the pay back amounts. Tomasz Noetzel, a banking analyst who covers Eastern Europe at Bloomberg Intelligence, told International Finance, “Sentiment towards the country and currency largely depends on the central bank’s credibility to deliver on the inflation target. Recent Turkish central bank actions are the first steps to restore that credibility.”

The boom and bust cycle 

Following the serious cracks, the coronavirus pandemic has only upset the Turkish economy even more. The economy contracted by 9 percent in the second quarter of 2020 which points to its worst year-on-year performance in a decade. According to the Turkish Statistical Institute, the fall in GDP is considered historic compared to the first quarter at a seasonal and calendar adjusted 11 percent, even though it was less steep than expected. A degree of optimism was floating around despite the contraction, as “the drastic contraction in activity in the second quarter was followed by a sharp recovery in the third quarter. This was driven by vigorous quasi-fiscal and monetary stimulus and strong export demand that was supported by exchange rate depreciation, as mentioned above,” Rauf Gonenc, a senior economist in the Economics Department of OECD told International Finance.

In Gonenc’s view, the rebound in industrial production was particularly strong. “Business investment remained weak, but job retention programmes in the formal sector reduced employment losses. Still the unemployment rate for new entrants to the labour market and in particular young workers soared to 25 percent in August (the latest month for which data is available),” Gonenc said. “Weakness in tourism activity which accounts for 4 percent of GDP and 7 percent of total employment had adverse spin-offs in tourist regions, despite a partial turnaround in the second half of the summer, thanks to an upturn in domestic tourism demand and visitor inflows from certain countries such as Russia. In the third quarter Turkey experienced one of the strongest quarter-on-quarter recoveries among OECD countries.”

However, Lysenko said that the near-term outlook looks much weaker as far as growth is concerned. “This reflects the worsening pandemic situation, lower demand from the eurozone, as well as the adjustment after an exceptionally strong recovery in the third quarter, as interest rates have risen and the credit stimulus is being withdrawn,” she said. “Exports should drive growth next year [2021]. The recovery in tourism will come with a lag, although there is an upside from a faster deployment of a vaccine that would reactivate travel globally. We expect GDP growth to average 3.6 percent next year [2021] and 3.3 percent in the medium term.”

The Turksih economy grew nearly 7 percent in the third quarter—outperforming G20 and China. “That was driven by massive credit expansion which in turn resulted in heightened inflation and lira weakness,” Noetzel said. The exceptionally rapid economic recovery of the Turkish economy and pressures on the lira are “two sides of the same coin” Lysenko explained. The reason for widening of the current account deficit is prompted by two combined factors: The massive credit stimulus that propelled a recovery in domestic demand and imports coupled with a slump in revenues from exports and tourism. That said, “a fast recovery came at the expense of a return of macroeconomic imbalances, balance of payments vulnerabilities and currency volatility,” she added. This could be a sound reason for the recovery to slow again in the last quarter of 2020. OECD had foreseen it to be a weak quarter.

Low investments, lost revenues and risk perceptions 

Gonenc explained that policy support was scaled down to contain the excessive current account deficit, inflation and exchange rate depreciation in summer months. “The central bank has raised its effective funding rate and credit interest rates increased substantially; public banks have reduced their credit expansion; and external demand has also weakened,” he said.

Currently, the world is used to watching a downward economic trend as a result of the pandemic, but Andy Birch, principal economist at IHS Markit puts an interesting spin to the weak lira, in an interview with International Finance, that it is a “reflection of the low investor interest in Turkey more than a cause of the low investor interest.” Heightened lira volatility is not good for the Turkish economy and investment decisions. When Gonenc talked about the weak currency’s impact on investments and investor interest, he said there are two different impacts depending on background conditions. First: When the weakness of the currency and exchange rate volatility are perceived as structural, they can worsen risk perceptions, risk premia and dent investor interest. Capital outflows tend to be stronger and capital inflows weaker than in comparable economies. Second: In contrast, low asset prices and high yields make investments in Turkey more attractive. “Provided that expectations improve and the future is perceived as more stable and predictable than the past, this can stimulate stronger and less volatile capital inflows than in comparable economies,” Gonenc added.

Certainly, the pandemic has brought in its powerful act into the Turkish economy by adding to the “pressures of domestic companies and banks and their ability to repay external obligations,” Birch said. Bankruptcies and lost revenues are playing a big part behind the scenes in pushing companies to approach banks to restructure their loans, in turn causing a need for banks to turnaround and restructure their own repayments.

According to Birch, the weak lira is raising risks that Turkish companies and banks will be unable to meet heavy external repayment obligations in the short-term. “Those Turkish companies that earn large shares of their earnings domestically but borrowed internationally are particularly vulnerable due to the growing mismatch between lira earnings and obligations in dollars. The continued depreciation of the lira also fuels inflationary pressures within Turkey. Annual inflation further accelerated in the final months of 2020, reflecting the impact of the record lows of the lira,” he said.

Investors are worried about the risk of a rising inflation in the country and even a balance-of-payment crisis. In the context of 2020, Douglas Winslow, director of the Sovereign team at Fitch Ratings, told International Finance, “Lira weakness reflects greater pressure on Turkey’s balance of payments and weaker confidence. In the near-term, lira’s weakness contributed to higher inflation, of 14.6 percent in December, and a rise in the share of bank deposits held in foreign currency. It also pushed up holdings of gold which alongside the collapse in tourism and higher imports due to earlier strong policy stimulus has widened the current account deficit to 4.2 percent of projected GDP so far this year [2020]. These contribute to falling foreign exchange reserves, and ongoing weak investor sentiment. The lower level of the lira however will also have some positive impact on the competitiveness of Turkish exports which can provide support over time to the balance of payments position.”

It is reported that there are mounting concerns in relation to depleted currency reserves, expensive foreign currency interventions and a trend is observed among Turks purchasing foreign currencies. Noetzel reiterates that the key threat of the weak lira is heightened inflation which in turn leads to higher interest rates. “The central bank has for long done nothing to address and the recent November and December move will likely help to ease inflation expectations,” he said. “Weak lira may also cause some asset quality trouble for the banks.”

A bright side to the Turkish economy

According to Lysenko, Turkey is a catching up economy with a young and growing population. With an adaptable and resilient private sector, the country offers many opportunities for profitable investment. “Recent changes of leadership at the Ministry of Finance and the central bank have improved investor sentiment, but it is too early to say whether these changes are part of a broader strategy to return to more conventional and transparent macroeconomic policies over the medium term,”she added.

Another relief here is that major economies fared worse in the second quarter, while Turkey outpaced some of its peers like Mexico which contracted more than 17 percent on a quarterly basis. For Turkey, “we project the economy to grow by 2.9 percent and 3.2 percent respectively in 2021 and 2022,” Gonenc said. The country’s GDP recovered in the third quarter “buoyed by a government-induced surge of credit that fueled the economy, providing a strong boost to both household consumption and gross fixed capital formation,” Birch said. “However, this strong credit expansion has been a contributing cause for the ongoing lira depreciation. With the replacement of the central bank head and the finance minister President Erdogan seems to have allowed a pivot to more restrictive economic policies which should provide some support for the lira.”

The central bank is in distress 

It seems that “subjugation of the central bank to political control has severely undermined both investor confidence in the country and subverted the value of the lira,” Birch said, further explaining that “with the central bank’s institutional integrity undermined, it has pursued growth at the expense of economic stability, keeping its main policy rate below the prevailing rate of inflation for several months.” In the big picture, “these steps have served to lower interest rates and to undermine the value of the lira.”

Will the restrictive policies promise a wholesome benefit to the economy? “Tightening credit conditions combined with an intensification of Covid-19 infection and reintroduction of weekend lockdowns will limit the future economic gains,” Birch said. In light of the current circumstances, early 2021 will be undermined by the double impact of tighter economic policies and the struggle with the pandemic. However, growth should resume in the beginning of the second half of 2021, as vaccines are distributed and economic activity slowly normalises across the globe.

Optimism around the stabilisation of the lira points to the replacement of the governor and finance minister which is “indeed a pivot to more restrictive economic policies aimed at stabilisation of the economy,” Birch said. But  given the “nature of the replacement of the positions, it does little to rebuild the institutional integrity of the central bank. However, assuming President Erdogan allows monetary policy to remain more restrictive for at least 4 to 5 months, the lira could avoid the deep lira losses being noted in late October and early November,” he added. Allowing tight monetary policy will exacerbate the economic downturn in early 2021, but it will also provide enough stability so that monetary policy could begin to be relaxed in mid-2021—when perhaps foreign service inflows could return and provide an alternative support for the lira.

That said, lira’s structural weakness might continue into the year given the three complex factors: Rising tensions in the Eastern Mediterranean might hurt the country’s external trade; lira’s rapidly depreciating value coupled with the administration’s policy leading to more weakness could escalate costs for the Turkish economy; and  liquidity shortages might strain economic growth—overall forming a loop back to feeding lira’s weakness. However, the year 2021 is hoped to be different following President Recep Tayyip Erdogan’s shift to more conservative policies, as reported.

The post Is the Turkish lira on the edge? appeared first on International Finance.

It is reported that there are 643 technology hubs on the continent, with significant numbers spotted in Nigeria, Egypt, Kenya and South Africa. That said, 41 percent of the technology hubs are incubator facilities, while 24 percent of them are innovation hubs and 14 percent of them are accelerators. These hubs are collectively considered pivotal to the continent’s technology business. 

According to a research carried out by Briter Bridges and AfriLabs, Nigeria has the highest ratio of hubs pointing to 90. Meanwhile, South Africa followed second with 78, Egypt with 56 and Kenya with 50 across the 34 countries that the study covered. The research report titled Building a Conducive Setting for Innovators to Thrive observed that the majority of survey hubs on the continent have received funding that is less than $100,000. Shockingly, 62 percent of the hubs have below 10 paid employees. 

A re-discovered learning is that underutilisation of talent will not foster technology growth. Ibrahim Youssry, the general manager of Microsoft Middle East & Africa Emerging Markets, told International Finance, “According to the African Development Bank, 12 million young Africans enter the workforce each year. This means the continent could have a larger pool of Information Technology talent by 2035 than the United States, China and India combined.” The continent is witnessing a revolution in new cloud and data centre capacity, with a growth forecast of 80 percent and 50 percent, but there are constraints that need to be removed. 

Microsoft plays a big role in Africa’s cloud

This is profound news. Microsoft, for example, is observed to be spending more than $100 million on a cloud development centre which will employ 500 staff in the next five years. Currently, it has a data centre in Cape Town and Johannesburg. “Since Microsoft first opened its offices in Africa, we have witnessed incredible growth on the continent—more internet connectivity, more digital capability, and more innovation. Africans have expanded the applications of technology, changing the way communities bank, farm and even access healthcare,” Youssry explained. 

The establishment of cloud data centres have positioned Microsoft as the first public cloud provider offering cloud services on the continent. “Therefore, we see an increasing number of technology companies like Microsoft investing in local data centre infrastructure. We were the first global provider to deliver cloud services from data centres on the continent with the launch of two new enterprise-grade data centre regions in Africa, based in Cape Town and Johannesburg in 2019. Also, in 2019, Microsoft launched Edge Nodes in Kenya, Nigeria and Egypt to bring its customers a faster network and enhanced access to cloud services,” he said. 

“The continent’s growing demand for cloud services is driving ever-increasing opportunity for digital transformation in the market. Even before Covid-19, organisations across Africa were embracing the potential of cloud to engage their customers more effectively and optimise operations,” Youssry explained. “Already, the use of cloud among medium and large organisations was near pervasive.” It is worth noting that Microsoft has been investing in Africa since 2013. The 4Afrika initiative, for instance, was pivotal as it opened doors for the company to closely work with governments, partners, startups and young entrepreneurs to develop greater access to the internet and promote relevant technologies on the continent.  “Investing in digital transformation to help boost the region’s economic development is more important than ever and cloud is a key factor in enabling that transformation.” 

For Africa, the trend in promoting new technologies is evolving. But there is a stubborn challenge. A report states that ‘a multitude of dictatorships’ in various countries like Sudan, Zimbabwe and Chad among others that face Internet shutdowns is making predictions on investment returns quite difficult for companies. But Youssry remains optimistic about the continent’s technology potential. “While there was great optimism at the start of the decade with bold ambitions for growth and success, the pandemic has challenged African organisations and governments. But technology offers a real opportunity for the continent to recover and reimagine the future.”

MARI is making a difference

Microsoft is even expanding its footprint to reach new African regions. It is seeking to build up presence in Egypt, Nigeria, Kenya and South Africa, while Angola is on its radar. In the big picture, the cloud service delivered by Microsoft on the continent will help local companies to move their businesses to the cloud in a secure manner. “At Microsoft, we are very fortunate to have played a part in realising this potential, building strong partnerships to accelerate digital transformation and create sustained societal impact,” Youssry said. “A big milestone for this investment came last year with the launch of our first Africa Development Centre (ADC). The two sites in Nairobi, Kenya and Lagos, Nigeria serve as a premier centre of engineering for Microsoft, where world-class African talent can create solutions for local and global impact.”

For that reason, Microsoft created the new Microsoft Africa Research Institute (MARI) in Kenya, which will be co-located with the Africa Development Centre. The research institute will focus on foundational research to improve productivity in three prime areas: work, health and society. First: Several organisations in Kenya are using technology to create new organisational structures which will enable creation of new artificial intelligence and  machine learning solutions on a global scale. Second: The institute will explore how artificial intelligence-enhanced mobile technology can improve the effectiveness of healthcare interventions. Third: The institute will present itself as an ideal platform for addressing some of the biggest societal challenges. It will even demonstrate how analytics can be used to improve work on the ground and address problems globally. The mission of the institute is to ‘understand, build and deploy cloud and artificial intelligence technologies’ on the continent. What is interesting about the institute is that it not only seeks to draw the essence of the continental opportunities, but also to address local challenges to build the technology of the future. 

In 2019, 17 African countries presented their progress on achieving the Sustainable Development Goals at the United Nations. Although the progress was identifiable, it required radical interventions to achieve those ambitious goals. The answer to that was already clear: cloud computing. Several American companies have been in action for building their cloud services on the continent. There are four fundamental pillars that need to be in place for cloud computing to add value to the continent’s development. These pillars are skills development, policy and safeguards that ensure privacy and security of all data and infrastructure that provides reliable and affordable access to the Internet.

According to Youssry, the growth of cloud computing has been greatly assisted by the rising number of undersea cables connecting the continent to the rest of the world. In an example, Google launched its Project Link initiative which is essentially building links between undersea cables, ISPs  and mobile networks. The company’s first metro fibre network was rolled in Kampala in 2015 and expanded into Ghana, where it plans to build over 1,000 kilometres of fibre in Accra, Tema and Kumasi. The initiative has also evolved in the CSquared business and Google has committed an additional $100 million to boost its expansion into the African continent. 

Is data colonisation rampant? 

But the heart of the issue here is the fear of data colonisation for African countries, and their subsequent efforts in implementing laws that might dwarf growth.  Although the growth of big technology companies is a boon to the economy—extraction, monopolisation and monetisation are forming the crux of data colonisation. For what it is worth, this is a prevalent problem beyond Africa. According to the United Nations for Trade and Conference, there are pronounced gaps in cyber law adoption that are leaving consumers vulnerable to global crises, such as the coronavirus pandemic. 

The organisation found that only 66 percent of the countries of the world protect consumer data privacy. This is despite an estimated fact that there would be a 11 percentage point increase in adoption of data protection and privacy legislation between 2015 and 2020. This finding simply highlights how vulnerable Africa is amid the pandemic, especially in comparison to its European counterparts. To make the difference more obvious, 96 percent of European countries have data protection laws in place—and then the number drops to only 50 percent of countries in Africa. 

The continent is technologically diverse yet nascent in its own way. Although it trails the developed part of the world in digital penetration and capabilities, it still offers vast datasets for big technology companies. But the relative lack of data protection policies and restricted understanding of how valuable data is—is the trigger for data colonisation. Because data is a valuable commodity and deserves full protection—African policymakers must proactively develop a pan-African strategy for cross-border data flows. 

Contrasting theories on data localisation

For the uninitiated, cross-border data flows are crucial to ensure secure provision of mobile money-enabled remittance services that cannot be compromised. According to a report published by GSMA, data localisation requirements can directly impact the ability of emerging markets to capture the full potential of mobile money to reduce remittance cost—which has become a cause for concern for mobile and digital players. The regime usually involves: Data storage requirements and data processing requirements. By definition, data storage requirements point to certain datasets, such as government data and personal data of national citizens, which are hosted in data centres in the national territory. On the other hand, data procession requirements point to activities related to data entry, manipulation and processing. In this case, management takes place domestically. 

There are mixed views about data localisation laws. One school of thought is that these laws can result in: Improved data security; robust privacy protection for citizens’ personal data; easy access to data and control; and creation of local jobs for establishing data centres. The second school of thought is that data localisation laws will sever access to cloud services, which in turn can potentially dwarf technology growth, because cloud is becoming the lifeblood of African economy—and is absolutely essential for it to flourish in the fourth industrial revolution. For that reason, governments should enable companies to access the cloud without restrictions in accordance with global standards. The positive effects of that will lead to an increase in international investment, stimulate growth of local technology companies and build resistance to cyber attacks at large. 

Does the law dwarf economic modernisation?

Nigeria, Rwanda, Kenya and South Africa have vouched for data localisation. These laws might have been in response to the growing concerns of African governments, but they have come at a cost. Take Nigeria, for example, where the data localisation framework specifically underlines its ‘clear negative trade balance’ in the Information Technology sector. Although few governments are investing efforts to control data colonisation on the continent—there are real concerns stemming from those efforts for policymakers. For one, there is very little evidence to prove that data localisation has led to outcomes in line with the first school of thought.  

Even in the economic aspect of things, the benefits of data localisation is only observed for some local companies that own data centres and have fewer employees. More importantly, what it seems occurred is that these laws have not led to an increase in foreign direct investment from big technology companies that are seeking to establish their infrastructure on the continent. In hindsight, data localisation laws are more of a trade barrier, making cloud computing burdensome and hindering economic modernisation. 

Policymakers in action 

To combat these problems, African policymakers can consider the European Union’s General Data Protection Regulation as a benchmark for building a framework that fits with the current circumstances and capabilities through public-private cooperation. In this context,  Youssry said “Microsoft has long standing commitments to privacy and with the understanding that our customer data belongs to them, we have regularly taken steps to give customers more information and more choice, including being the first large company to voluntarily extend strong privacy protections offered under the GDPR to customers from around the world.” 

Already, the continent is found to have transformed itself during the pandemic and it will  continue to see results if the regulations are favourable. “Covid-19 pandemic had an unprecedented effect on digitisation. We saw two years’ worth of digital transformation in the first two months of the pandemic—and Africa has been no exception,” Youssry explained. “From the outset, business leaders have viewed technology as key to overcoming challenges posed by Covid-19 and helping them thrive in a post-pandemic world. According to PwC, 80 percent of African CEOs cite operational efficiency as a key growth driver. A further 62 percent want to accelerate automation in the workplace post-pandemic”

To achieve that, companies will need to embrace the cloud, which is ‘foundational to digital transformation’. Youssry pointed out that The Cloud in Africa 2020 report shows that companies in sub-Saharan Africa are already increasingly leveraging cloud technologies to drive digital transformation. More than half of all respondents to the survey believed that over a quarter of their applications will have moved to the cloud by the end of next year. So what is really needed is a comprehensive data flows framework that will allow local startups and big technology companies to scale across the continent. After all, the Internet of Things and data-driven insights are important for the continent to thrive in the fourth industrial revolution.

The post An interactive view of cloud computing in Africa appeared first on International Finance.

According to Petrobras, it was greatly helped by the performance at the Buzios Field and improved corrosion-treatment efforts at its subsalt fields. It said that, “The records demonstrate good operational performance despite the challenging scenario of 2020, with greater focus on world-class assets in deep and ultra-deep waters where Petrobras has displayed a large competitive advantage.”

The company further revealed that total oil and natural gas output also reached a record 2.84 million bpd of oil equivalent, which topped the previous record of 2.79 million bpd also set in 2015.

It was reported last month that Brazil-based independent oil and gas company 3R Petroleum Oleo e Gas is set to acquire an onshore oilfield from state-owned oil behemoth Petrobras. Petrobras earlier announced that it had received offers from 3R Petroleum Oleo e Gas and Eneva for its Urucu oil and gas cluster in the interior state of Amazonas. Oil production at the fields was 2,145 barrels per day (bpd) in November.

Earlier, it was reported that Petrobras is in talks with a global consortium to sell its natural gas fields. The consortium consists of Brazil’s 3R Petroleum and Norway-linked DBO Energy among others. The Peroa cluster would be among the first offshore all-gas fields sold by Petrobras. It is located off the coast of Espirito Santo state.

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The biggest advantage of renewable hydrogen is that it burns clean, leaving residual water vapour, which is impressive to a world that is highly exposed to heat-trapping emissions. “As a fuel, hydrogen has the characteristics of high energy density while producing nothing but water as a by-product,” says Bond. It can also act as an energy storage medium, when there is surplus energy from wind turbines or solar panels, which can be used to power electrolysis. “Once hydrogen is created through electrolysis it can be used in stationary fuel cells to provide fuel for vehicles, or even stored as a compressed gas, cryogenic liquid or wide variety of loosely-bonded hydride compounds for later use,” he explains.

This is not the first time that renewable  hydrogen has become so popular. There have been multiple cycles of it being put in the spotlight, as early as the 1970s. BloombergNEF had carried out an interview with  the CEO of Ballard Power Systems in 2005, who then said that in 2010 they were going to be selling hundreds and thousands of fuel cell systems. “Of course, that didn’t happen,” says Martin Tengler, a BloombergNEF lead hydrogen analyst. “Fast forwarding to 2009-2010 the manufacturers believed strongly that it would happen by 2015.” This time around it is the push to decarbonise economies or sectors that will actually see new developments take place in renewable  hydrogen. “In our view, this time is going to be different because for the first time in history the focus is not on ‘let us use hydrogen because it is very cool as fuel for cars or something like that’ but it has more to do with ‘let us use hydrogen for decarbonisation or sectors that need to be decarbonised,’” Tengler says.

Market competitiveness depends on carbon price 

Today, producing renewable hydrogen using electrolysis from renewable energy has become technically viable and it is moving quickly toward achieving the most critical aspect of economic competitiveness. “It is mainly driven by two important factors: reducing the cost of renewables and system integration challenges owing to the growing share of intermittent renewable power,” says Suchitra Sriram, an associate director of Energy & Environment at Frost & Sullivan Asia-Pacific. This supply option is slowly gaining centre ground. There is global urgency to mitigate carbon emissions. For that reason, “countries have started to show commitment to decarbonise their economies,” she says, pointing to the European Union which seeks to become carbon neutral by 2050 and China has already committed to the same target by 2060.

Analysts at Goldman Sachs are bullish on the long-term prospects of renewable  hydrogen. They estimate the market could be worth $11.7 trillion by 2050, split between Asia, the US and Europe. The European Commission’s Energy Roadmap for 2050 has proposed to use excess electricity to split water molecules into hydrogen and oxygen, and store the former for later use. The fact that hydrogen can replace fossil fuels as feedstock in various processes is making it a versatile resource that can help to decarbonise economies. Tengler reiterated that the only reason renewable  hydrogen is going to take off this time is because there is a need for decarbonisation, which implies that it will be used to decarbonise certain sectors.

Can renewable hydrogen become competitive with SMR hydrogen? And could it be a viable option for tackling climate change? Some say that introducing a carbon price backed with the right kind of policies can scale up quickly and affordably. “There will be a market for renewable hydrogen. We will need all available colors of hydrogen if we really want to reach the target of Paris agreement regarding the limitation of temperature increase,” Adamo Screnci, vice president of the Clean Hydrogen Business Unit at Total told International Finance.

Using fossil fuels in certain sectors today also means it is the cheapest. Truth be told, it is never going to be cheaper to produce steel with hydrogen compared to coal or ammonia with hydrogen, or natural gas for that matter. “What is going to be needed is a carbon price which is high enough to make hydrogen competitive. It might be different based on countries and how much fossil fuels cost,” Tengler said. “On average, one of the most promising sectors we found is the making of steel, because the carbon price required for that will be only around $50/tonne by 2050 assuming hydrogen at $1/kg.” By competitiveness, a lot depends on carbon prices which in turn points to policy. The market size will depend a lot on decarbonisation policies around the world.

Wood Mackenzie has carried out research to understand the competitiveness of renewable hydrogen. On average, the cost of hydrogen produced from natural gas is $1.5–3/kgH2, while renewable hydrogen produced from solar PV or onshore wind is around $2.5–6/kgH2. Optimists like Thierry Lepercq, founder of Soladvent specialising in hydrogen said that the combined power of super-cheap solar and electrolysis and development of the midstream infrastructure should decrease the cost of renewable  hydrogen to $1.5 per kg by 2025, and further decrease it to $1 by 2030, matching the cost of natural gas in Europe. Mackenzie analysts estimate that, going forward, renewable hydrogen will be competitive with hydrogen produced from natural gas with an end date of 2040. Other developments like ‘effects of scale, plant automation and plant load maximisation’ can reduce the cost of electrolysis plants to $300 per kilowatt by 2025 and to $200 per kilowatt in 2030.

“Competitiveness of renewable hydrogen is still not there, except for niche markets. We still need some scale effect in terms of technology to bridge the gap,” says Screnci, showing optimism that he is “convinced this will come soon, with some incentives and the fact that almost every nation has now an hydrogen plan to allow the development of this technology.”

Decarbonising energy-intensive industries and economies  

If the idea of powering economies with hydrogen seems popular, it is. Now some of the world’s largest power companies are strongly lobbying for renewable hydrogen to achieve full decarbonisation because electrification will be a tough option to decarbonise energy-intensive industries such as aviation, heavy transport and certain industrial operations such as iron, steel and chemicals. According to Suchitra, the global energy systems operate on a vertical industry value chain that aligns specific fuels to particular application markets, and significant amounts of energy is lost during the process in the form of waste heat and lower energy efficiency. This model cannot persist if countries pursue carbon neutral goals and it needs to be replaced with an integrated energy system. To that end, it is pertinent to move away from silos to establish a link between the diverse energy carriers, infrastructure and consumption sectors.

“It can play a critical role in establishing this link at every stage where hydrogen can augment the power system for renewables, can be easily transported, distributed and stored, and can be used in varied applications safely, “ Suchitra said. “Establishing this new energy infrastructure will create jobs at every level of the industry value chain that can help economies to recover from the Covid-19 pandemic in the long term.”

Renewable hydrogen has transitioned from the laboratory to an industry that is expected to provide at least 20 percent  of the world’s energy over the next couple of decades. “With this scale up comes tremendous opportunities for cost reduction, economies of scale and improved competitiveness versus incumbent fossil fuels. We are already seeing a number of industries where power generation from renewable  hydrogen is approaching price parity with traditional generation,” Bond says.

Igniting a powerful storage strategy 

Essentially, the transition to renewable low-carbon economy is governed by the availability of energy storage. “We have plenty of energy in the world—all it takes is just two minutes of sun rays on the earth to transfer the same amount of energy as humans use in totality in a year—but its capture and storage has been the challenge,” says Bond. Recently, Boris Johnson had expressed his interest in transforming the UK into a ‘big bet’ on wind power, hydrogen and carbon capture and storage as part of the government’s zero-emissions strategy.

“In recent years we have made substantial progress in photovoltaics and wind turbines to the point where in some regions the production costs per kWh are already lower than for natural gas. The storage of the electricity produced by solar and wind farms has been more of a challenge and hydrogen along with batteries is offering the solution,” Bond said. “However, important development for the long-term storage and transportation of renewable energy is the use of renewable  ammonia—an excellent chemical carrier of Hydrogen. This involves using hydrogen produced through the renewables-powered electrolysis of water, together with nitrogen sourced from the air, to create renewable  ammonia which can then be stored safely as a liquid at room temperature until needed. renewable  ammonia is several times more energy dense than renewable  hydrogen alone, making it an excellent hydrogen carrier in transport or off grid applications.”

HyDeploy makes a point 

The UK is already developing projects to assess the role of renewable hydrogen. HyDeploy, a pioneer hydrogen energy project, has demonstrated that a blend of up to 20 percent renewable  hydrogen can be used to heat and cook at homes. “The hydrogen for HyDeploy is produced using an electrolyser and is also used in 30 commercial buildings on campus.  It has played a very active part in the promotion of hydrogen as an alternative to ‘natural’ or fossil gas,” Andy Lewis, Innovation Project Manager at HyDeploy told International Finance.

“We have held campus tours and a highly successful webinar which attracted around 200 attendees. The Keele University demonstration will continue until March 2021 and a report will be published in May or June which will be launched at Westminster. There will then be a larger demonstration of blending on a public network in Gateshead,” Lewis explains. It seems that 100 homes on Keele University’s private gas network have been using a hydrogen blend for several months and they are quite positive replacing it with fossil fuels.

Lewis said if the same technology were to be applied across the UK, “we would instantly save six million tonnes of carbon dioxide which is equivalent to taking 2.5 million cars off the road.  We are now talking to the government to encourage it to adopt the HyDeploy approach nationally.” This development is anticipated to bring two benefits for the country. First: It will allow customers to replace fossil fuels with hydrogen showing them that it can play the same role. Second: It will give investors time to build hydrogen production plants to meet demand that might increase from 2025 onward if the government adopts renewable  hydrogen as part of its energy strategy.

It could be argued that the government should give a clear statement that it will include hydrogen in its energy strategy which is slated for next year “This would give investors the confidence to start building hydrogen infrastructure and it would create a market for hydrogen,” says Lewis. The UK government needs to make “necessary changes in regulations so that hydrogen can be used in the gas pipelines either as a blend or as 100 percent. Then, the government would have to think about incentives and subsidies to help customers move to new renewable  energy in an affordable way.”

AlkaMem is a game-changer in the electrolysis process

HyDeploy is not alone. AFC Energy, meanwhile, has developed two engagements with renewable  hydrogen: one as a user and the other as an enabler. Extreme E which is pioneering an off-road rally for electric vehicles will be recharged through the company’s hydrogen fuel cells. “As the demand for hydrogen increases such as through use in fuel cells for power generation, we believe we will see a greater demand for renewable  hydrogen—and the increased scale combined with new technological advances will lead to a virtuous circle of lowering prices,” says Bond.

In regard to its second engagement, the research facility in Surrey is where it has developed a technology known as AlkaMem that will enable greater efficiency in the production of renewable  hydrogen at a lower cost compared to incumbent technologies. AlkaMem is distinctive because it will be a game-changer for the production of renewable  hydrogen as the relative energy intensity of electrolysis which splits water into hydrogen and oxygen is observed to be a huge challenge for the industry.

Germany will ramp up production capacity in the next decade 

Germany, on the other hand, is making its vision in renewable  hydrogen come true, by pledging to ramp up its production capacity to 5 GW by 2030 and 10 GW by 2040. When Economy Minister Peter Altmaier presented the national hydrogen strategy in June, it became obvious that the country wants to become the global leader in hydrogen technology. Immediate progress is seen in terms of allocating funds for renewable  hydrogen development. It is reported that €7 billion of the economic stimulus package is spent to promote renewable  hydrogen to ‘make it market-ready and create a demand-driven market’.

“Germany has announced a target which is well funded of $10 billion between 2020 and 2030 for the development of hydrogen. These investments will be spent on different things such as producing hydrogen using electrolysis and parts of it will be used for how to import hydrogen from overseas,” says Tengler. In fact, a group of oil and utility companies are planning a 130-kilometre hydrogen pipeline to supply industrial customers in north-west Germany. These companies are interested in the production of renewable  hydrogen, and the proposed pipeline will be built under the streets in Lower Saxony at Lingen for flowing hydrogen to chemical plants and refineries.

In March, BloombergNEF published its hydrogen economy outlook which found that for hydrogen to scale up, policies are needed that are not there yet. “We are in October and the situation has changed significantly which is attributable to all that has been happening in the European Union,” says Tengler. This started when the European Union made an announcement on its target of producing hydrogen with 40 gigawatts of electrolysers by 2030, while potentially importing another 40 gigawatts worth of hydrogen from overseas.

Then came the pledges by different European Union members like Germany, France and the Netherlands, while Spain and Portugal have released drafts regarding hydrogen. “So if we sum up the financial commitments that would be required to meet all these targets then this will be enough to get us to more than $450 billion in investments and subsidies from governments,” says Tengler. “We think that the European Union targets themselves could be enough to achieve those numbers that I mentioned will help us to get to that optimistic trajectory.”

Africa’s devotion to renewable hydrogen with H2 Atlas project 

The goal to replace fossil fuel with renewable hydrogen is not something that is only encouraged by the developed part of the world. It is refreshing to know that Africa has become a significant player in the renewable hydrogen trajectory. Launched in June, the H2-Atlas Africa project, which maps green hydrogen generation potential across the continent, is an important development to its work in this space. The SADC Centre for Renewable Energy and Energy Efficiency (SACREEE) and the Southern African Science Service Centre for Climate Change and Adaptive Land Management are joining forces to coordinate the project in the Southern African Development Community (SADC) region.

Currently, the project is in the first phase of a joint initiative of the German Federal Ministry of Education and Research and African partners in the Sub-Saharan region (SADC and ECOWAS countries). The main objective of the project is to identify the potentials of renewable hydrogen production from renewable energy sources in those regions. For the ECOWAS region, in particular, West African Science Service Center on Climate Change and Adapted Land Use (WASCAL) and ECOWAS Regional Centre for Renewable Energy and Energy Efficiency (ECREEE) are actively taking part in the project.

What is interesting about the H2-Atlas-Africa project is that it intends to support and strengthen sustainable development through a hydrogen economy. Identifying the potentials of renewable hydrogen is needed for the continent because it will transform it into an exporter of renewable hydrogen—and uplift its position in international energy markets—expanding its growth opportunities beyond fintech space. The project is mainly focused on sub-Saharan Africa, in terms of assessing its potential in producing renewable hydrogen. A report published by Sacree said that the project will add more value to the continent’s upscale by focusing on select areas such as ‘derailed technologies, environmental, economic and social feasibility assessment taking present and future local energy demands into consideration’.

Buy-in into the green hydrogen economy concept

In September, it was reported that Sasscal was holding virtual national team engagement meetings with all participating SADC countries to begin the project. These countries include Angola, Zambia, Zimbabwe, Mozambique, South Africa, Botswana, Tanzania and Namibia among others. The vision of the meeting was to discuss the modalities for national data that will be collected for the project. Dr Jane M. Olwoch, SASSCAL’s Executive Director, during the meeting, said, “Green Hydrogen project isn’t a project like others, it is a programme as we seek emission-free and sustained future as we transition from fossil fuel to renewable energy.”

In fact, South Africa has come up with a buy-in into the green hydrogen economy concept that is intriguing and exceeding expectations, for the development of the sector. Private sector companies are expressing their interest to sign Memorandums of Understanding, while others are looking for ways to push development into the renewable energy sector. That said, the green hydrogen Atlas-Africa project is helping to make profound advancements in the region, and highlighting the value of the region’s platinum group metals which might be in sync with the renewable hydrogen economy. Interestingly, SADC has hosted a series of metals and minerals used in the hardware that produces solar and wind power for generating clean electricity. This is found to decarbonise the nature of hydrogen.

Total’s efforts in renewable hydrogen play 

Hydrogen is already an important molecule for refineries. It is in fact used in large amounts for hydrodesulfurisation, methanol production and intermediate production, becoming more of an energy vector. For that reason, oil and companies like Total are looking at this opportunity where renewable  hydrogen can be used in various domains of applications. Total is gaining momentum in the renewable  hydrogen play with the development of a specific project known as ECO2MET, which is targeting a 1MW range electrolyser based on the high temperature technology, with a very high efficiency rate of 90 percent.

The demonstration plant will be installed in “our Leuna refinery in Germany, one of the most advanced petrochemical hubs,” says Screnci. This plant will produce renewable hydrogen that will be combined with carbon dioxide to make clean Methanol. In another development, Total announced its ambition to achieve net-zero emissions by 2050 together with the society for its global business across its production and energy products used by its customers. “On September 30, we have added an intermediate and strong goal for Europe which concentrates 60 percent of our Scope 3 emissions worldwide, with a commitment to reduce our emissions by 30 percent by 2030, becoming the first energy company to firmly commit at this level and within this timeframe,” Screnci explains.

Certainly, renewable  hydrogen can contribute to decarbonisation of the gas sector, either produced with carbon capture, utilisation and storage or from renewable energy. Screnci said a zero-carbon hydrogen can be mixed with gas to decrease the carbon dioxide content and in the near future a potential dedicated network can be implemented that would become the backbone of the European hydrogen system. The developments and plans aside, there are often unspoken problems in reaching the market’s full potential.

A lot of it will depend on government policies and regulations to drive investments into the market. Based on the ongoing research and developments, renewable  hydrogen is expected to become competitive in select markets by 2030. Obviously, a clear framework is necessary to kick-start large scale projects that will drive costs down. “On top of that, we need a carbon price that will make the transition economically viable to create a real market where growth will be inevitable,” says Screnci.

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Analysts at IHS Markit, told International Finance, “The global oil price collapse and coronavirus disease 2019 (Covid-19) pandemic are dual shocks affecting Kuwait’s economy. Real GDP is expected to contract this year by the most since the 1990-91 Gulf War amid shutdown measures to combat the Covid-19 virus, projected at -9.9 percent, with only a partial recovery of 2.1 percent in 2021, driven by non-oil GDP. Oil-sector GDP is expected to contract sharply as Kuwait reduces crude output by 9.1 percent in 2020 and another 7.2 percent in 2021 amid OPEC production cuts, as oil prices are expected to remain relatively low. IHS Markit expects Brent oil prices to average $41 per barrel in 2020 and $47 in 2021, down from $64 in 2019.” It is reported that the government is drawing out from the General Reserve Fund at a rate of 1.7 billion dinars each month, pointing to the fact that the liquidity will soon be exhausted if oil prices continue to remain weak and if the economy is not able to borrow from local and international markets. 

The liquidity crisis is a wake up call

Neha explained that the “current liquidity crisis has been brought about by the impact of the pandemic on the economy as well as the slide in oil prices.”  

All of this is happening at a moment when the government has estimated a budget deficit of 14 billion dinars in the current fiscal year. In the absence of borrowing in the medium to long-term there will be stringent measures implemented to public spending, and the Future Generations Fund will deplete in the coming decades, therefore disturbing the welfare of the State and its citizens. 

Amid all this downcast, Moody’s has cut Kuwait’s debt rating and reaffirmed that its ‘liquidity resources are nearing depletion’, on the back of the Finance Minister Ali Al-Sheatan’s announcement that the State might not be able to pay wages in November. Although the statement stoked panic on social media, the current scenario might have not fully reflected the country’s relatively strong financial conditions. What makes it difficult to get a grip on the matter is that Kuwait has long outdone other countries for maintaining the levels of sovereign investments and creating national wealth funds. In fact, it was the first nation in the world to have established the sovereign wealth fund in 1953, and despite having such a historic record, the State is mired in political tensions between the government and legislators in the National Assembly, dwarfing its economic growth.  

Analysts pointed out that the “fiscal deficits have been financed instead by drawing down Kuwait’s sovereign wealth assets. Kuwait Investment Authority assets are among the largest in the world, which the International Monetary Fund estimates at around $560 billion which is equal to 410 percent of the GDP as of 2019-end. However only the General Reserve Fund within the Kuwait Investment Authority is currently available for fiscal deficit use, with assets having declined to an estimated $55 billion which is equal to 40 percent of the GDP as of 2019-end, of which only around half is estimated to be liquid. Therefore, the General Reserve Fund’s readily-available funds are likely nearly depleted or will be soon.” 

Kuwait has been drawing down the General Reserve Fund to meet the deficits which is estimated to reach more than 11 percent of the GDP this year, compared to a 4.8 percent surplus last year, observed the International Monetary Fund. “Accessing the Future Generations Fund, which forms the remainder of Kuwait Investment Authority’s assets, would require special approval. However, this could be a lengthy process given the disagreements between the government and the parliament,” analysts said. 

The gridlock is limiting the scope to pass the debt law 

It is concerning that the government is failing to pass a public debt law to tackle the liquidity crisis. According to Neha, adding to the weakness in Kuwait’s present economic growth conditions is the pressure from the deadlock over the proposed debt law which would allow Kuwait to issue debt internationally. In July, the government had formally submitted a public debt law to the parliament which would allow the State to borrow $65 billion over the next three decades, including 8 billion dinars to financially support the current budget deficit.  

Good financial health is the lifeblood of any economy, but the State’s government and the parliament have been at odds over the debt law—leading up to a gridlock instead. “In order to ease the liquidity crisis, the government is working to pass debt legislation that would allow Kuwait to access overseas debt markets. However, this legislation is being challenged by government-parliament gridlock. To push forward through the liquidity crisis, we see that the government has tapped into its reserve fund, while also cutting back on  its budget,” Neha said. 

The gridlock on the debt law has become more like a litmus test for the State to fully understand its financial health. Moody’s Analytics in its report said “The recent deadlock on the funding situation directly threatens the government’s ability to function and pay salaries, which represents a significant escalation in the brinkmanship between the two branches of government.”

Recently, Kuwait elected a new parliament.  Prior to that, analysts said “the government has been unable to issue new debt since October 2017 owing to postponed debt legislation, helping to contain public debt at 12 percent of GDP in 2019. The parliament has rejected the draft debt law, although it could be passed by emergency decree.” Moody’s has warned the government that the gridlock and the ineffective debt management might weaken the State’s financial strength in the coming years. 

The former parliament had repeatedly declined the bill which was developed to allow the State to access international debt markets. “Amidst the liquidity crisis, Kuwait has had to slash its 2020-2021 budget expenditure, and more austerity measures could be expected going forward if Kuwait is not able to secure borrowings through international debt markets,” Neha said. In fact, other Gulf states have already tapped those international debt markets over the last few years leading to more issuances when oil prices crashed earlier this year. The Kingdom of Saudi Arabia, for example, made it happen. 

“The proposed debt law would essentially allow Kuwait to tap into international debt markets—something that Kuwait’s  GCC counterparts are currently using. In effect, passage of the legislation would allow Kuwait to borrow from  overseas debt markets and thereby alleviate some of the ongoing liquidity pressures. Parliament-government gridlock over the legislation is not something that has recently emerged. The need to finalise the legislation however, has gained more importance in recent times amidst the coronavirus pandemic,” Neha added. 

Three years ago, the State had initiated its debut in Eurobond issuance with a subsequent lapse in the public debt-related legislation limiting the government’s ability to issue these bonds thereafter. The bond sale at the time saw more than $20 billion in investor bids, with the $3.5 billion 5-year and $4.5 billion 10-year bonds sold at a yield of 2.8 percent and 3.6 percent respectively. Despite the greater focus on the legislation, Neha said that “boosting Eurobond issuance would help the State tide through the ongoing liquidity crisis, and we see that Kuwait’s GCC counterparts have resorted  to this strategy as well and have been able to raise funds through the same.”

Declining oil prices, in part, might affect FGF 

Another stumbling block directly attributable to the financial crisis is that the Future Generations Fund automatically receives 10 percent of the State’s oil revenue each year. Currently, oil prices are at some $40 per barrel which is well below what is needed to maintain the budget of Opec member states. As part of the budget public sector salaries and subsidies account for 71 percent of spending for the 2020-2021 fiscal year. “Oil production is expected to recover only 2.5 percent in 2021 as oil prices are expected to remain relatively low,” analysts explained. In response to the crisis, it is reported that the State was considering selling 2.2 billion dinars worth of General Reserve Fund assets to the Future Generations Fund, as an alternative measure to plug the deficit. Another option would be to borrow directly from the central bank. It seems that the General Reserve Fund had 1.1 billion dinars left. 

In July, Finance Minister Barak Al-Sheatan in a statement said, “The government looks forward to the legislative authority’s cooperation.” On the other hand, lawmakers had called for more visibility from the State regarding the use of these funds, repayment options and the government’s plan to reduce heavy dependence on oil. In the last fiscal year, oil exports accounted for 89 percent of revenues in the State. “The liquidity crisis has forced the government to tap into its reserve fund, in turn weakening the long-term financial security of Kuwait, as this fund was primarily designed for a time when oil reserves  would be depleted,” Neha explained. 

It perhaps might not be entirely beneficial to the State even if it managed to pass a debt law without a ceiling, because Moody’s estimates that at least $90 billion would still be needed to plug the deficit until 2024. The growing liquidity risks is a huge liability for the State and despite that it has not sought access to its sovereign wealth fund which was established for future generations as a financial protection when the oil runs out. “While raising debt or tapping the Future Generations Fund would help cover funding needs, it would not solve Kuwait’s long-term need for diversification away from its dependence on oil, which constitutes around 90 percent of fiscal revenue and exports, and 45 percent of GDP,” analysts added. “However, it would give the government more time to enact fiscal and structural reforms.”

Economic unrest leads to cut in expenditures 

The important point here is what will be the government’s first task to mitigate the building up risks: anticipated inadequacy in payment of wages, depleting funds, weak oil prices and economic contraction. Arguably, this unrest is encouraging the government to issue between $13 billion and $16 billion in public debt by the end of the fiscal year ending March 2021, if the parliament approves the long-awaited debt law. But for now, the State will have to control its financial crisis, which is drawing down the General Reserve Fund. In September, the government had approved a cut in budgets of State entities by at least 20 percent, and is even considering making an annual State revenue transfer of 10 percent to the Future Generations Fund. It is reported that the move might help the State to save $3 billion in the current fiscal year. 

The second task is to limit spending as a combined result of these factors. “The government for example has indicated cash limitations in regards to upcoming State salary payments. Extensive deepening of austerity measures through curtailed government spending and tax hikes would hinder the economy’s recovery process from the Covid-19 induced slowdown,” Neha said. In September, the Ministry of Finance had amended the estimates for the fiscal year budget of 2020-2021 with revenues at 7.5 billion dinars and expenditures at 21.5 billion dinars. This amendment makes a huge difference because in January the State had estimated revenues of 14.8 billion dinars and expenditures of 22.5 billion dinars for the fiscal year budget. 

The act of diversifying a country’s source of income is also implemented through value-added tax, which the State will enforce next year. The tax authorities have announced that it will finally introduce a 5 percent value-added tax from April 1, 2021. For that reason, a decree was issued for the next year’s implementation of value-added tax on goods and services, excluding rent, food supplies, school fees and public transport. The introduction of value-added tax is the first time in the history of the State’s economics. Kuwait is part of the Gulf Cooperation Council and all six member countries had agreed to implement a value-added tax of 5 percent by the end of next fiscal year. For the State, things appear to be getting worse as “the government has faced difficulty in cutting expenditure, especially on salaries, as it seeks to prevent rising unemployment and social unrest. At the same time, development of the private sector is a multi-year process. Therefore, as an alternative, the government has been accelerating the Kuwaitisation drive, and thousands of foreign workers have already left Kuwait this year,” analysts said. 

The former parliament had unanimously agreed to pass a new law that does not include the proposed quota system for expatriate nationalities in the State. The new law was passed after introducing amendments to the proposed quota system in an attempt to ‘rebalance’ its population. It necessitates the government to establish new mechanisms to reduce the number of foreigners within the next one year, taking into account the number of expatriates present in the State, the national development plan and the requirement of expatriate workers. “Government officials have suggested that the share of expatriates be reduced dramatically from 70 percent of the population to as low as 30 percent, possibly within a year, to improve private-sector employment of Kuwaitis and reduce outward remittances, which amount to 11 percent of GDP annually,” analysts said. “However, such a large demographic change, fully implemented in a short period, would reduce Kuwait’s population by more than half and result in a sharp contraction in GDP.” 

Over the last few years, expatriates were brought into the State to carry out specialised jobs and unskilled labour, which accounts for nearly  3.4 million of people. In October, it was reported that the parliament had already requested to replace all expatriate jobs in the government over the next one year. This move was long-anticipated  because the government had already announced in June that it will impose a ban on expatriates in Kuwait Petroleum Corporation and its subsidiaries within that period. With employment even less equally distributed, there might be freezing of all applications from expatriates and not renewing contracts for existing employees. 

Shortening the economic distress won’t be easy

The central bank had published a monthly report which found that the foreign exchange reserves had decreased by 1 percent in July from the previous month. That said, the State’s reserves had decreased to 13.78 billion dinars in July compared to 13.92 billion dinars in June. “Kuwait’s growth recovery extending into 2021 and beyond is expected to be gradual,” Neha said. 

The depleting oil prices triggered by the protracted pandemic have stoked urgency in the State’s debt management—and if necessary actions are not taken in time it would rapidly deplete the cash reserves. “Covid-19 has once again exposed the GCC’s vulnerabilities to oil price fluctuations, following the mid-2014 oil price  crash. For Kuwait and the GCC region at large, economic diversification is becoming increasingly important to mitigate  risks attached to high energy reliance, ease liquidity shortages, and improve macroeconomic stability,” Neha said. “We are expecting to  see a renewed push for diversification across the GCC at large which should help in the mitigation of economic shocks.”

Although Standard & Poor’s has pointed out that the Kuwaiti economy is dependent on oil revenues generated from 90 percent of exports, on the bright side, economic recovery is anticipated to gain momentum next year, similar to the global trend, although it might take place gradually. “The tapering of oil production cuts starting January 2021 would help boost Kuwait’s economic recovery process. It is possible that this tapering could be delayed in the context of a weakened 2021 global oil demand outlook. A  prolonged deadlock over the debt legislation stands to lead to a further deterioration in Kuwait’s 2021 outlook,” Neha concluded. With the newly elected parliament, there could be changes to Kuwait’s debt law impasse.

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