Foreign Investment in Guangdong: New Incentives Announced

Guangdong province, China’s manufacturing heartland, has announced new measures to attract foreign investment.

On December 1, the Guangdong provincial government issued a report delineating 10 policies to expand the province’s openness to foreign investors and foreign capital.

The measures are in support of the State Council’s Measures to Expand Opening-up and Actively Utilize Foreign Investment (Guo Fa [2017] No. 5) and the Measures to Promote Foreign Capital Growth (Guo Fa [2017] No. 39). They include policies to improve Guangdong’s business environment, promote fair competition between foreign and domestic companies, expand market access, and offer investment incentives.

The 10 measures for relaxing foreign investment:

  1. Further expand market access, including relaxing ownership limits and/or operation scope in the following industries:
    • Special vehicle manufacturing;
    • New energy vehicle manufacturing;
    • Ship design;
    • Regional aircraft and general aircraft maintenance;
    • Human resources service agencies;
    • International maritime transport companies;
    • Railway passenger transport companies;
    • Construction and operation of gas stations;
    • Internet service and call centers;
    • Performance brokerages;
    • Brokerage, banking, securities, futures, and life insurance companies;
    • Law firms jointly owned by Hong Kong/Macau investors and domestic investors; and
    • Hong Kong/Macau airlines will be treated as special domestic airlines.
  2. Increase the use of financial incentives for foreign investment for the 2017-2022 period, including:
    • For new projects worth more than US$50 million, replenishment projects worth more than US$30 million, and for multinational or regional headquarters worth at least US$10 million, the provincial government will give financial bonuses worth no less than two percent of the year’s actual investment amount, capped at RMB 100 million (US$15.1 million).
    • For Fortune 500 companies and leading global companies with actual investments (new projects or replenishment projects) in manufacturing worth over US$100 million in one year, and newly established IAB (new generation of information, automatic equipment, and bio-pharmaceuticals) and NEM (new energy, new material) projects with actual investments of no less than US$30 million in one year, the provincial government will provide financial support on a case-by-case basis.
    • For multinational or regional headquarters that contribute over RMB 10 million (US$1.5 million) to provincial revenue, 30 percent of the contributions will be awarded to the company in a lump sum payment, capped at RMB 10 million (US$1.5 million).
    • Local governments can provide other financial incentives based on provincial incentive standards.
  3. Strengthen the use of land security, including land-use incentives for Fortune 500 companies, regional headquarters, and advanced factories.
  4. Support innovation and research & development (R&D), including financial support for foreign R&D institutions and encourage participation in the development of public service platforms.
  5. Increase financial support, particularly for Fortune 500 companies, global industry leaders, and cross-border mergers and acquisitions.
  6. Strengthen personnel support, including incentives and visa conveniences for high-level foreign talent.
  7. Strengthen the protection of intellectual property rights, including by accelerating the construction of the China (Guangdong) Intellectual Property Protection Center.
  8. Enhance the level of investment and trade facilitation, including the full implementation of the Negative List and access to national treatment.
  9. Optimize the environment for attracting foreign investment in key parks, including implementation of administrative streamlining in eligible development zones and other supportive policies.
  10. Improve the use of foreign investment guarantee mechanisms, including setting up a coordinated mechanism to coordinate and solve the key problems that prevent investment in Guangdong.

The measures represent a step forward in boosting Guangdong’s competitiveness in attracting foreign investment. Although Guangdong is China’s richest province by GDP, and already one of the most open to foreign investment, rising labor and land costs have seen many businesses relocate their manufacturing operations to lower cost alternatives, such as Western China, Vietnam, and India.

Some areas in Guangdong have been successful in upgrading their local economies beyond low-value manufacturing. Most notably, Shenzhen has emerged as a hub for innovation and high-tech startups, and also boasts a robust financial sector.

Guangzhou has also had success in moving up the value chain, by producing higher-end goods like automobiles and high-tech products, while surrounding cities like Foshanhave also benefited from regional integration and high-tech manufacturing.

The new measures reflect Guangdong’s continued desire to attract high quality capital-heavy investments; many of the policies specifically state a preference for Fortune 500 companies or recognizable industry leaders.

Stephen O’Regan, Senior International Business Advisory Associate at Dezan Shira & Associates in Guangzhou said, “These new regulations certainly show a more open approach by the Guangdong government towards foreign investment, particularly in trying to attract high level talent. However, many smaller companies still find it difficult to incorporate in China; the country is lowering entry barriers only for already strong enterprises.”

According to O’Regan, “The new policies show a step in the right direction, but overseas SMEs may still find it difficult to enter the south China market without more government support”. In this environment, local expertise proves valuable.

O’Regan noted that SMEs can still benefit from some of the new measures both directly and indirectly, as well as other regional incentives. He explained, “Many of Guangdong’s cities offer incentives and subsidies that foreign SMEs find attractive. The Guangdong government is ultimately paving the way for more foreign SME investment by making it easier to access incentives.”


Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Preview: Vietnam’s New 2018-2023 FDI Strategy Shifts From Low-Cost Labor To High-Tech Industry

Vietnam’s Ministry of Planning and Investment, with the assistance of the World Bank, is currently drafting a new FDI strategy for 2018-2023 focusing on priority sectors and quality of investments, rather than quantity. The new draft aims to increase foreign investment in high-tech industries, rather than labor-intensive sectors. Manufacturing, services, agriculture, and travel are the four major sectors in focus in the draft.

Sectors in focus

The four major sectors in focus are:

  • Manufacturing – It includes high-grade metals, minerals, chemicals, electronic components, plastics and high-tech;
  • Services – Includes MRO (maintenance, repair, and overhaul) along with logistics;
  • Agriculture – Includes innovative agricultural products i.e. high-value products such as rice, coffee, seafood and;
  • Travel – High-value tourism services

Investment priority

The draft prioritizes FDI investments on a short-term and medium-term basis. In the short-term, industries with limited opportunities for competition will be prioritized.

Industries include:

  • Manufacturing/Production – Automotive and transport equipment OEMs and suppliers;

In the long-term, the emphasis is on sectors that focus on skills development, including:

  • Manufacturing – Manufacturing of pharmaceuticals and medical equipment;
  • Services – Services include education and health services, financial services, and financial technology (Fintech);
  • Information technology and intellectual services

The draft also includes recommendations about the further removal of entry-barriers and optimizing incentives for foreign investors such that their effect on the economy is maximized.

FDI in 2017

In the first 11 months of 2017, the total FDI capital including newly registered, additional funds and share purchase value reached US$ 33.09 billion, a year-on-year increase of 82.8 percent. FDI disbursed is expected to reach US$ 16 billion, an increase of 11.9 percent over the same period last year.

The processing and manufacturing sector received the highest capital at US$ 14.95 billion, accounting for 45.2 percent of the total. Electricity production and distribution and real estate attracted US$ 8.37 billion and US$ 2.5 billion respectively.

Japan was the leading investor amongst 112 investing countries, accounting for 27 percent of the total FDI at US$ 8.94 billion, followed by Korea and Singapore with a total registered capital of US$ 8.18 billion and US$ 4.69 billion.

Ho Chi Minh attracted the highest FDI with a total registered capital of US$ 5.68 billion, accounting for 17.2 percent of the total investment capital. Bac Ninh followed at US$ 3.28 billion, while Thanh Hoa province ranked third with a total registered capital of US$ 3.16 billion.

Need to do more

Going forward, Vietnam has to ensure that it moves away from a low labor cost economy to one focusing on technology and skilled labor. The government has to do more than just attract investments into high-value added activities. Vietnam should also focus on diversifying FDI sources, enabling domestic firms, and increasing investments in infrastructure.

Majority of the foreign investments in Vietnam are from Korea, Japan, and Singapore. Rather than been over-dependent on Asian countries, Vietnam has to promote itself further and increase investments from the EU, US, and other countries outside Asia-Pacific. With the EU-Vietnam FTA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnam has an opportunity to increase investments from countries outside Asia.

Foreign firms in Vietnam are offered huge tax and other incentives such as exemptions or reductions in corporate income tax, import duties, and VAT. However, domestic firms that already lack the capital and technology of foreign firms are not provided any of those incentives, further hampering their growth. The government has to find a fine balance between providing incentives to domestic and foreign firms to improve competitiveness. To increase linkages, the government can incentivize foreign firms engaged with local firms, if it wants FDI to have a long and positive effect on the economy.

One key sector not mentioned in the draft is infrastructure. As the country progress and investments increase, infrastructure will play a crucial role in the economic development. Infrastructure projects, which are in dire need of funds in Vietnam cannot be fulfilled by the domestic sector and would require foreign capital. The government has to prioritize infrastructure projects and incentivize foreign investments to reduce the increasing gap between the current and needed investment levels. Infrastructure projects such as roads, railways, power grids, ports, and industrial parks should be a priority for the government going forward.

Once the draft is finalized by the Ministry of Planning and Investment, we will have further clarity regarding the scope of their strategy.


Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Why Italian Companies Are Investing In India’s Smart Cities And Second Tier Manufacturing Hubs

During the 2015 financial year (FY), Italian companies invested US$334.7 million into India. In the first half of the 2016FY – according to India’s Department of Industrial Policy and Promotion (DIPP) – Italian investments into India already reached US$319.6 million.

Indeed, cumulative Italian investment into India is set to reach US$2 billion by 2020.

Italian companies are taking notice of India’s manufacturing capabilities and growing domestic consumer market. Italian companies are investing in India’s urban growth: participating in India’s Smart Cities Initiative while utilizing the country’s burgeoning tier II cities as strategic manufacturing sites.

Foreign direct investment in India

Since 2014, India’s Prime Minister Narendra Modi has promoted India as an investment destination and global hub for manufacturing, design, and innovation.

India is streamlining bureaucracy and eliminating regulatory bottlenecks, appealing to foreign investors who are impressed with India’s rapid growth but weary of the country’s notorious red tape. In the last three years, the Indian government has eased 87 rules governing foreign direct investment (FDI) across 21 sectors including traditionally conservative sectors such as railway infrastructure and defense.

These reforms are paying off.

In the 2016FY India reported US$62.3 billion in FDI inflow – retaining its ‘crown’ as the top location for greenfield investment for the second consecutive year. In October, 2017, the World Bank ranked India at 100 in its Ease of Doing Business global rankings, a commendable improvement from its 130 ranking in 2016.

 Italian companies look to tier II cities

According to the Italian Embassy in India, there are approximately 600 Italian companies currently operating in the country. To put this figure in perspective, 1,500 German companies and 750 French companies are also active in India.

The highest FDI inflows from Italy to India sector wise include:

  • Automobile at 54 percent;
  • Services at 6 percent; and
  • Railways at 4 percent.

Traditionally, Italian companies have gravitated towards India’s major cities such as Delhi and Mumbai. But, with rapid urban growth, Italian manufacturers are identifying India’s growing tier II cities as strategic sites for doing business. These smaller cities offer competitive labor and real estate prices and are making dramatic improvements in connectivity and infrastructure.

For instance, Bonfiglioli, an Italian manufacturer of gearboxes and gear motors, will be investing US$13 million by February 2018 in order to expand their existing manufacturing plants near the southern city of Chennai as well as to establish a new facility in the western city of Pune.

Manufacturing in India’s tier II cities not only provides foreign companies with more direct access to India’s domestic market but serves as an export base to neighboring Asian countries.

‘Smart Cities’ offers new opportunities for Italian companies

During his recent diplomatic visit to India, Italian Prime Minister Paolo Gentiloni identified India’s ‘Smart City Mission’ as an important site for cooperation between the two nations. In 2014, the Indian government announced ambitious plans to transform 100 tier II and tier III cities into ‘Smart Cities’ by drastically improving connectivity and digitization, adequate housing, mobility, and waste management.

Italy currently has one of the highest number of ‘Smart Cites’ in Europe. As Gentiloni commented, Italian companies offer solutions in areas of urban rehabilitation, technological design, waste management, affordable housing, and energy management.

By investing in India’s planned urban growth, Italian companies are simultaneously improving their own opportunities in urban centers where they operate. Improving connectivity and infrastructure in tier II cities will increase the productivity of Italian manufactures while making their products more mobile.

As Indian cities continue to grow, Italian investors can both shape and harness this momentum – expanding their presence not just in India but in nearby Asian markets.

Urbanizing India an ideal investment destination

India is becoming an increasingly important investment destination for Italian companies. Italy’s government and private sector are working together to create deeper economic ties between the two nations. In April 2017, Italy’s largest business delegation to date visited India led by Ivan Scalfarotto, deputy minister for economic development.

Diplomatic visits and business delegations will only shine a brighter spotlight on India’s market potential. As investment into India’s urban growth continues, Italian companies will view India as a strategic manufacturing hub – providing competitive rates and direct access to growing markets.


Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Money Talks: China’s Purse Strings Direct Pakistan’s War On Terror

China is being lauded as Pakistan’s new partner, in the fight against regional terrorism, by offering soft loans in the interests of securing the China-Pakistan corridor, with some 71,000 Chinese nationals reportedly visiting the country in 2016.

Following this week’s BRICS summit, hosted by China, it is clear the region is looking for more than sheer military might, as offered by the US, in order to shore up future security. When President Trump accused Pakistan of continuing to provide a “safe haven to agents of chaos, violence and terror”, he failed to recognise that the South Asian nation has, in fact, made great strides in improving the security situation following a costly four-year crackdown on domestic insurgent groups.

These improvements are reflected in Pakistan’s macroeconomic performances since 2012, not least due to the relative confidence of investors in the $55 billion China-Pakistan Economic Corridor (CPEC), as part of China’s ambitious Belt and Road Initiative. As the Trump administration battles to define its foreign policy in Afghanistan and beyond, China’s intentions are easier to read: investors, rather than soldiers, are the key to peace in Pakistan.

Pakistan’s own war on terror has carried a substantial price tag, in both human and economic costs. The armed forces, which already siphon one-quarter of Pakistan’s $36 billion annual budget, saw a 9 percent rise in defence spending this fiscal year in addition to a 10 percent pay increase.

At the same time, the country’s current budget deficit more than doubled to $12 billion in 2016. With overt and covert anti-terror funds from the US reducing to a trickle, Pakistan is being forced to look further afield for allies who are willing to defend its position in the region, as well as inject the economy with much needed funding. Enter China.

In late August, Islamabad postponed a scheduled meeting with the Acting US Special Representative for Pakistan and Afghanistan, Alice Wells. Instead, the Chinese Special Envoy on Afghan Affairs Ambassador, Deng Xijun, arrived in the capital for crucial discussions with Pakistani authorities on the implications of Trump’s Afghan strategy. The move signalled the solidification of Pakistan-China relations, at the expense of the long standing, though often uneasy, US-Pakistan partnership.

Since the beginning of 2016, China has lent Pakistan more than $1 billion to help stave off a looming foreign exchange crisis. Further, Pakistan has become increasingly reliant on Chinese CPEC investment, creating a special 15,000-strong force to protect the project, a pertinent move following Islamic State’s killing of two Chinese nationals in June this year.

The 43 projects that currently form CPEC’s vision have led to triple the number of Chinese nationals that call Pakistan home, reaching 30,000 this year. A further 71,000 Chinese nationals visited on short-term visas in 2016. Both China and Pakistan, then, have a vested interest in rooting out domestic insurgent groups, a position miles away from Trump’s recent threats.

Nonetheless, China’s expanding reach in South Asia has exacerbated tensions with Pakistan’s neighbours. India, especially, has been a vocal critic of the CPEC project, given it is planned to pass through Pakistan-occupied Kashmir.

After boycotting the Belt and Road Forum hosted by Beijing in May, New Delhi is determined to resist the spread of Chinese soft power in the region. At the same time, Islamabad has shown concern over Trump’s emerging friendship with Indian Prime Minister Narendra Modi, labelling a joint statement by the two leaders as “singularly unhelpful” in achieving stability in South Asia. With Sino-Indian relations continuing tosour, India and Pakistan appear to be pitching their flags with the US and China respectively.

The US undoubtedly needs Pakistan as an ally in fighting regional crime and terrorism, especially as its efforts spill over into the neighbouring nations of Afghanistan and India. If the US won’t play ball, China, and its seemingly bottomless pockets, will. While Pakistan is unlikely to cut off ties with the US entirely, Trump’s tough talk risks destabilising the balance of power in the region in China’s favour.



Joanna Eva is a Political Risk Analyst at Global Risk Insights. As originally appears:

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

International Private Equity Firms Commit Capital To Kenya’s Retail Sector

GDP growth in Kenya has averaged 5.2% over the past ten years, making it one of the most compelling success stories in Africa. While some of the fastest growing African economies lost their footing due to poor oil and commodity prices in recent years, Kenya emerged with consistent growth.

Although climbing wages and rapid urbanization in Nairobi has resulted in rising demand for modern retail, the present market remains underserved, leaving room for significant expansion. The present size of organized retail real estate in Nairobi is currently less than 400,000 sqm. This existing void is luring multiple international private equity groups to Kenya.

Rising PE Deals in Kenya’s Retail Real Estate  

Retail sales in Kenya grew by 4.8% in 2016, outperforming the other two major markets in Africa – Nigeria and South Africa.

UK-based Momentum Global Investment has recently launched its second fund targeting an amount of USD 250 million over the next 8 years. A sizeable amount of proceeds from the fund are earmarked to be invested in developing shopping malls in Kenya. Previously Momentum Global has launched Momentum Africa Real Estate Fund (MAREF) in partnership with South Africa based Eris Property. The fund has raised USD 170 million, following capital commitments from 18 investors. Seeking a net IRR of 18% for its investors, the fund’s strategy will primarily involve deploying capital in high growth retail and office markets of sub Saharan Africa- Kenya, Nigeria, Mozambique, and Ghana.

Chinese investors alongside Kenya based Centum Investments have launched the Two River Malls in Nairobi. Alongside malls, the project will comprise of 5-star hotels, commercial buildings, and residences. The Aviation Industry Corporation of China (Avic) has bought a 38.9% stake in the project, following an investment of USD 397 million. This is termed as the largest direct investment by a Chinese company in Kenya. Centum that holds 58% stake in the project have also received funding from UK based Old Mutual. Once completed, the USD 800 million project will be spread across a sprawling area of 400,000 Sq. M. The iconic project has reinforced the confidence among international investors in Kenya’s booming retail sector.

Previously in 2015, Actis-backed Garden City Mall was opened in Nairobi. One of the largest retail destinations in East Africa, the project is spread over 33,500 sqm. UK based Actis has also introduced its 3rd Africa focused real estate fund dubbed as ARE3.  Seeking investment from various pension funds, sovereign wealth funds and development finance institutions, the fund has raised USD 500 million- substantially higher than the initial intended amount of USD 400 million. The fund will aggressively invest into the commercial real estate sector of Sub Saharan African including Kenya. However, the amount intended for Kenya has not been disclosed.

Sound Macroeconomic Fundamentals Will Attract Investors

Going forward, more capital inflows are expected in Kenya, as investors remain sanguine about the prospect of economy.  After an expected growth of 5.5% in 2017, the Kenyan economy is poised for further acceleration in 2018 and 2019, with projected growths of 5.8 and 6.1% respectively.


The Five Biggest Risks Facing Emerging Market Investors Right Now

Ashmore called the rally in Emerging Markets (EM) loudly and clearly, but we have been less vocal about the associated risks. This should not be confused with complacency: we strongly believe that there is no such thing as a risk-free investment anywhere, even in EM. To clear up any confusion on this point, this report focuses squarely on the risks facing EM after a year of strong performance. We examine both the risks emanating from within the asset class as well as those coming to the asset class from abroad.

The Main Risks In EM Right Now


We have elaborated on the strong return prospects for EM asset classes in recent notes, but this report focuses squarely on the risks facing EM investors right now. As such, this report is for the jittery. We see five broad categories of risk facing EM right now, namely EM systemic risks, country-specific risks, China, risks relating to US interest rates and the Dollar and finally shorter-term sentiment drivers. We critically evaluate each of these risk categories before summarising our conclusion.

After a lot of good news…

EM performance began to turn positive more than 18 months ago due to a combination of extremely high real, nominal and comparative yields, thirteen year low real exchange rates, a pick-up in growth led by exports and very benign technicals. A mild tail wind also began to emerge from developed economies as monetary authorities, especially in the US, turned more hawkish. The prospect of higher rates and scaled back asset purchases began to chip away at prospects for further capital gains in the QE-driven developed markets. Thus, in 2016, EM local currency bonds – “the most hated asset class on Planet Earth” and a very good ‘early warning’ indicator of the EM outlook – surprised many investors by returning 10% in Dollar-terms and this year, the asset class has gone on to do even better, clocking up more than 15% return in Dollar terms, year to date. EM equities have done even better, returning 11.19% in 2016 and 30.45% so far this year. There is obviously a bit of irrationality at play here since capital gains in EM are still modest relative to the capital gains in developed markets in recent years and EM still offers dramatically better carry than developed market assets, but some investors are nevertheless experiencing jitters and asking: what can go wrong here? In the following paragraphs we outline the five broad potential sources of risk facing EM investors right now.

Risk #1: EM systemic risks

Barring a global outbreak of the plague, a foreign invasion and World War III, we see five types of external shocks which could potentially pose a systemic threat to the entire EM asset class. The good news is that EM just survived four of them and the fifth – a US border adjustment tax – now looks unlikely to materialise. The four potentially lethal shocks, which EM countries have already weathered are: (a) the massive capital flight episode we now know as the Taper Tantrum; (b) the 45% rally in the US Dollar versus EM currencies between late 2010 and the end of 2015; (c) the halving of commodity prices in 2014; and (d) the start of the Fed hiking cycle in December 2015. Not only did EM countries have to face these shocks in very rapid succession, but they also had to cope with some very serious concurrent pessimism about China. In general, the investor community decided to shoot and ask questions later. They sold heavily, which inflicted even further headwinds on EM. Indeed, by late 2015 EM bond yields had been pushed to higher levels than in 2006, when the Fed had rates at 5.25%. EM countries were in effect forced to live with a de facto full normalisation of US Fed policy in the midst of the largest easing episode ever in global financial history.

With hindsight, we can now see that the 2013-2015 was a profound robustness test for EM. Perceived EM vulnerability to a sequence of shocks initially sparked heavy selling. Investors then went on to mistake the resulting price volatility for riskiness. And ultimately they ended up seriously under-estimating EM resilience and overselling the asset class. It is now very clear that EM fundamentals not only weathered the Developed Markets Crisis of 2008/2009, but also the perceived EM systemic risks as they unfolded in 2013-2015. Very few countries and corporates defaulted. There were hardly any serious balance of payments problems anywhere. IMF programs were only extended to a very small number of the most vulnerable and poorest countries in the world. The single thing that proved genuinely vulnerable was investor sentiment. And it is precisely the resulting mismatch between investor sentiment and resilient EM fundamentals over this period, which forms the basis for the strong EM performance in 2016 and 2017 and we see more upside to come over the next few years as the QE trades continue to unwound.

Risk #2: Country-specific EM shocks

The single largest concern about country-specific blow-ups in EM is that one such episode might morph into an asset class wide rout – so-called contagion. In the bad old days a crisis in, say, a few Asian countries would not only trigger indiscriminate selling across the entire EM asset class, but would also unleash serious fundamental economic stresses and thus create so-called self-fulfilling prophecies, that is, sell-offs, which find ex-post justification in real world economic crises.

The good news is that this link between financial instability and economic crisis has been thoroughly broken in the EM asset class. EM has not experienced self-fulfilling prophecies since 1998 and the reason is simple and irreversible: EM countries are today largely self-financing through the development of local pension systems. This means that even heavy selling by foreign investors – such as EM experienced between 2013 and 2015 – is typically offset by local buying, which keeps yields from spiking to terminal levels. Notice also how IMF programs are rarely needed these days for the same reason. Of course, the lower debt levels, large stocks of FX reserves and better overall macroeconomic management in most EM countries also helps to insulate them from the erstwhile damaging effects of external shocks.

That is not to say that EM countries do not experience shocks. In fact, a small number of EM countries – typically you can count them on one hand – screw up every year. These episodes are almost always selfinflicted, although occasionally a few EM countries are sent reeling by external shocks, typically if they happen to be very economically undiversified, such as single-commodity exporters (not that there are very many such countries left in the universe of EM bond issuers these days). Despite the often shrill media attention afforded to such events the reality is that defaults are extremely rare and recovery rates are often high. Of course, the vast majority of idiosyncratic shocks do not even end in default and typically turn out to be excellent opportunities for specialist active EM managers to generate alpha.

Brazil is a classic case in point: a recent survey by Credit Suisse showed that foreigners still hold fewer than 13% of Brazilian bonds despite a +60% rally (in Dollar terms) in the Brazilian local bond market in 2016. This means that most non-specialist foreign investors completely missed this trade. The same was the case in Russia in 2015, when Russia was the best performing external debt market in the world largely as a result of irrational bearishness on the part of investors due to the fall in oil prices and the Crimea troubles the year before.

When investors evaluate country-specific risks in EM they also need to take into account the fact that EM is now a very diverse asset class with more than 80 indexed individual markets in government fixed income alone. This means that investors will never again experience a situation, such as 2001, when a single country, Argentina, could account for 20% of the benchmark index. This does not justify blindly buying into such country-specific shock episodes, however. After all, such events do occasionally result in large permanent losses. Recent examples include Belize’s default on a USD 500m bond and the collapse of the Mozambique ‘tuna bond’. Still, the rational approach is to recognise that the odds of making money during EM stress episodes are heavily skewed in favour of those who buy into weakness and that the best way to mitigate the risks is to work with active specialist managers many of whom will confess that they secretly wish there were more EM blow-ups. Unless and until more blow-ups occur, however, the best way to think of EM fixed income is that of an attractive yield play occasionally punctuated by great alpha opportunities around rare country-specific shocks.

Risk #3: China

China has maintained high, gently declining growth rates for many years amidst low stable inflation, but this has not prevented markets from cultivating a narrative about China as a country lurching from hard landing to overheating, seemingly with nothing in between. China reforms more than any other country. Still, the country is regarded by many investors as hugely risky, because, so the narrative goes, China’s debt stock is unsustainable, which is why growth is slowing, which in turn explains why capital is trying to flee the country. Since China also imports a lot of commodities many investors think that EM’s fortunes are directly linked to China’s.

In our view, this is actually a good thing, because China is opening itself to international trade and China is set to be some 2-3 times larger than the US economy by 2050.Between now and then China will increase its consumption share of GDP and therefore start to absorb more imports from the rest of the world. Clearly, EM should position to take advantage of this.

We also strongly disagree with the view that China is heading for some kind of crisis. Most of the common market rhetoric about China is downright wrong. China’s debt stock is not unsustainable. Growth is slowing due to deep and broad reforms, not debt. And outflows of capital reflect a temporary imbalance due to a healthy desire on the part of China’s savers to diversity their savings portfolios by adding foreign assets pending foreign investors adding to their China positions, which they will only do after China has joined the main benchmark indices.

The view that EM countries are commodity producers – and therefore terribly exposed to China – is also very outdated. Two thirds of EM countries are today net commodity importers and China trades more with developed countries than with EM countries in terms of trade as a share of DM and EM GDP. In fact, we think EM countries could become even safer if they traded far more with China. China is 38% of EM GDP, but only 9% of EM trade is with China. There is no doubt that a major slowdown in China would hurt some EM countries, but the biggest pain would be felt in developed markets, whose bond markets are also more vulnerable to a crisis in China on account of China’s large holdings of developed market bonds within its USD 3trn of FX reserves.

Risk #4: US-specific shocks Trump has been great for EM. Despite Trump, however, US markets do pose a greater risk for EM than, say, Europe or Japan, because the bulk of liquid EM currency crosses are versus the Dollar and the bulk of EM external debt trades as a spread over the US Treasury curve. In previous hike cycles, such as 1994 and 2004 the risks associated with US monetary policy normalisation were fully priced into EM before the hikes even began and EM performed strongly once hikes got underway. The same has been the case this time around: EM began to perform shortly after the first hike in December 2015. If anything, the risks have been even more overstated by the markets in this cycle.

After all, between 2013 and December 2015, EM literally priced in a full normalisation of US monetary policy by pushing local bond yields even higher than where they were back in 2006 when the Fed Funds rate was 5.25%. With the target Fed Funds rate unlikely to get back to 5.25% for a while this was irrational. The fact that EM countries had to cope with such egregious mispricing was unfortunate, but it also means that now they are not particularly vulnerable to a bit of Treasury volatility around current low levels of yields.

It is a similar situation with respect to the Dollar. The value of EM currencies declined by 45% against the Dollar between 2010 and 2015 and EM survived the experience despite frequent panics over alleged FX mismatches, etc. It is difficult to see a sustained decline in EM currencies versus the Dollar after such large moves and even more difficult to see how weaker currencies could pose major fundamental risks to EM countries, when they are already basking in strong export recoveries at the current competitive levels of real exchange rates.

Having said that, there is no doubt that the US economy is edging ever so slowly towards full employment and it is only prudent to expect the Fed to react. In addition to evaluating the risks to EM associated with a normalisation of US monetary policy within the context of financial and economic conditions in EM so it is essential to understand the US context. In this respect, the Fed would ordinarily be willing to hike at the first whiff of inflation had this been a normal business cycle, because the Fed would feel confident that a recession, should one occur, would be shallow and short-lived. However, this cycle is different in two important respects: first, it is unclear whether a recession would be shallow or short-lived. The debt load is heavy, productivity is very low and the Dollar is overvalued. Moreover, the Fed can only cut three times, but is three cuts enough to haul the US economy out of a recession? The fiscal powder is also running low and large sections of Congress are ideologically opposed to greater government spending. Secondly, valuations in financial markets are distorted due to years of excessive reliance on monetary stimulus in preference to reforms and deleveraging. Tightening could therefore trigger a stock market crash, which would only make a recession even deeper and longer. In this cycle it is therefore far safer for the Fed first to deflate asset bubbles before hiking rates meaningfully. Once the bubbles are deflated the Fed can then hike more safely in the knowledge that if a recession should occur at least it will not be made worse by a concurrent asset price collapse.

These considerations lead us to expect the Fed to focus on scaling back asset purchases ahead of raising rates beyond what is already fully priced into the market (and therefore not risky). Current benign inflation pressures also make it easier for the Fed to justify scaling back asset purchases ahead of hiking rates, especially if inflation is low in part due to structural reasons.

If we are right that the path towards monetary policy normalisation involves unwinding QE before material rate hikes, then the Dollar falls and US stock markets deliver ever diminishing marginal returns as risk willing capital seeks better returns elsewhere in the global economy, though the US Treasury market may attract more inflows as investors rotate out of even more overbought bonds in Europe.

Risk #5: Short-term sentiment drivers

The most likely source of EM volatility in the near-term is investor behaviour. Year-end is approaching and after a year of very strong performance some investors will want to take profits (the somewhat inane practice of year-end position squaring). We do not expect much downside, if any and we do not expect the associated volatility to translate into actual losses, i.e. defaults or anything like it. The extent of price volatility will be low, because positioning in EM among institutional investors remains extremely light. Pullbacks will be caused mainly by momentum jockeys and institutional investors should view this as an opportunity to close underweights by adding to positions ahead of what we expect to be strong real money inflows to the asset class in 2018.

Another potential short-term driver could be improving sentiment about the US. Certainly, hopes are rising for higher inflation and even a modest tax reform in the US. There are also hopes in some quarters that President Donald Trump will scale down ideology in favour of greater pragmatism. These hopes are based on recent US support for a UN-backed resolution on North Korea and agreements between Trump and Democrats over the “Dreamers” program, hurricane relief and the debt ceiling extension. A less ineffective US government should bring temporary relief for the Dollar. Again, however, we stress that the broader outlook for the Greenback remains troubled due to low productivity, high debt levels, valuations as well as pregnant positioning among the big swingers, such as central banks, sovereign wealth funds and most pension and insurance players.


EM fundamentals have just passed a profound robustness test involving pricing in a full normalisation of Fed policy, severe capital flight, a commodity crash and a crazy Dollar rally. These shocks coincided with morbid and unfounded China pessimism. It is therefore time to revise the widely held view that EM countries are fragile. They are clearly not. In evaluating the risks facing EM now it is extremely important not to lose sight of the big picture: QE was like a giant tsunami of liquidity, which washed out of EM and into developed markets. QE pushed developed market asset prices to unsustainable levels and created great value in EM, especially since EM economies held up so well during the QE period relative to asset prices. QE liquidity is now flowing back to EM and will likely continue to do so for several years. This will boost EM growth, which in turn will improve public finances, reduce already declining default rates and justify lower spreads. EM currencies have plenty of room to appreciate further before they approach the ceilings of established real exchange rate ranges. Since positioning is light investors should not even fear volatility too much for now at least. There are plenty of risks out there, but they are mainly located in developed economies, which have far more debt, declining productivity, overvalued asset prices and weaker growth. As if this was not enough, politics is getting worse too. Above all, QE, the biggest source of capital gains in developed markets in recent years, is about to be scaled back. With no carry on offer the prospect is for outright losses.



Jan Dehn is the head of research at Ashmore Group Plc, a specialist emerging markets asset manager with over US$ 50 billion under management.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

How To Set Up In The Philippines

Under the Foreign Investment Act, 1991, which was amended in 2015, a vast majority of industries in the Philippines are completely open to overseas investment, allowing 100 percent foreign ownership in most cases. The country managed to attract over US$ 7 billion of FDI in 2016, 25 percent more than the previous year. The UNCTAD World Investment Prospects survey positions the Philippines as the 11th most promising host country for investment over the period 2016-18. In order to best leverage the advantageous conditions, such as widely spoken English and access to the ASEAN Economic Community, the most effective market entry model must be chosen by entrants.

Entry Models

There are a range of entry modes to choose from when investing in the Philippines. Each one is governed by different rules and, as such, each is suitable for different functions and business models. Below, the four main methods of entry are outlined.


Companies can enter the Philippines by establishing as a corporation. This means registering a new legal entity with the Securities and Exchange Commission (SEC) in the Philippines. The structure of a corporation is such that the individual assets of the owners are legally separate from those of the company. Corporations come in two forms:

Filipino corporation – minimum of 60 percent Filipino equity ownership;
Foreign-owned domestic corporation – greater than 40 percent foreign equity ownership
The distinction between the two alternatives is important when it comes to land ownership and tax-incentive programs. Corporations can operate all functions of a business, and are typically profit-oriented enterprises. According to the World Bank’s Doing Business guide, setting up a corporation is a complex and long-winded process taking at least 28 days, four days longer than the Asia Pacific average.

Foreign-owned domestic corporations serving the Filipino market require a minimum of five shareholders and at least US$200,000 of paid in capital. The paid in capital can be reduced to US$100,000 if the corporation is involved in advanced technology or employs 50 direct employees. If the corporation is an ‘export market enterprise’ – defined as exporting at least 60 percent of its goods or services – the required capital is reduced significantly to P5000 (US$ 100).

Foreign-owned domestic corporations face the same tax conditions as local corporations: 30 percent corporate income tax and 12 percent VAT on local sales. Foreign corporations can register for numerous tax incentive with the Philippine Economic Zone Authority.

Branch Office

A branch office is a profit-oriented subsidiary of a foreign enterprise that engages in the activities of its parent company in the Philippines. This is the typical structure for business process outsourcing, such as call centers or back offices for multinational firms, which located in the Philippines due to low local wages as well as the large number of fluent English speakers. The establishment of a branch office typically takes three to four weeks from the time of filing with the SEC.

Similar to corporations, the capital requirements are US$200,000 for domestic market serving enterprises and P5000 (US$ 100) for export-oriented companies. The taxation of branch offices is also similar, with 30 percent corporate income tax and 12 percent VAT on local sales. However, branch offices also have to pay a 15 percent profit remittance tax on repatriation of profits to the parent company.

Representative Office

A representative office differs from a branch office in that it is not legally allowed to derive income. The key function of a representative office is to act as a liaison between the parent company and clients or partners in the Philippines. The minimum paid in capital for a representative office is a US$30,000 remittance from the parent company, which must be used for operational expenses. The average set up time for a representative office is similar to a branch office, three to four weeks from the date of application.

Regional HQ

There are two distinct types of regional headquarters: Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ). The graphic below shows what operations are legally allowed for both RHQs and ROHQs.

Regional or Area Headquarters (RHQ) are non-income generating offices of a foreign corporation. RAHQs are not allowed to participate in any management, marketing, or sales activities on behalf of branch offices in the Philippines or the mother company. Similar to representative offices, the main purpose of RHQs is to be a coordination and communication hub for subsidiaries, affiliates, and branches in the Asia Pacific region. The minimum paid in capital is US$50,000, to be used for the running of the office. Managerial and technical expatriate staff members will be taxed at 15 percent of gross compensation, rather than using the tiered income tax system.

On the other hand, a Regional Operating Headquarters (ROHQ) is an office of a multinational typically used for back-office functions. ROHQs are allowed to derive income only from affiliates of the parent company. ROHQs are afforded a special corporate income tax rate of 10 percent on taxable net income, as opposed to 30 percent for corporations and branch offices. In addition, 12 percent VAT is payable on local sales and 15 percent profit remittance tax on repatriation of profit. Similar to RAHQs, a 15 percent final withholding tax on the income of managerial and technical employees is payable rather than the standard income tax system. The minimum paid in capital for ROHQs is US$200,000.


Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

State Divestment: Exciting Opportunities For Investors

For the last few years, equitisation continues to be a focus for the Vietnamese government. The government hopes that equitisation will increase the efficiency and improve the management of the State-owned enterprises (SOE) which have been suffering from inefficiency for years. In addition, the much required capital raised from divestments will also assist the government to reduce its growing debt and fund infrastructure projects. In August 2017, the government released Decision No.1232/2017/QD-TTg approving a list of 406 state-owned enterprises to be divested during 2017-2020.

2017 Divestment Policy

The new decision not only lists the 406 approved companies marked for divestments but also includes mechanisms to accelerate and increase the efficiency of the divestment process. This has been included to address issues faced by investors during previous divestments, such as delay in the transfer of ownerships and lack of clarity in valuation.

There is also a provision allowing the rate of divestment and number of divested entities to increase in the next four years depending on the market.

Divestments until now

The number of SOEs has decreased drastically from 6,000 in 2001 to 700 in 2016. The number of industries with State investment has dropped from 60 in 2001 to 19 in 2016.

Divestments in 2016

In 2016, 56 enterprises were approved for equitisation. The total value of these firms was US$ 1.5 billion (VND 34 trillion), of which the State capital was valued at US$ 1.07 billion (VND 24.4 trillion). The stakes sold to investors were worth US$ 307.7 million (VND 7 trillion), those sold to workers were worth US$ 17.16 million (VND 388 billion), and shares sold at public auctions were worth US$ 189 million (VND 4.3 trillion).

Businesses under State Capital Investment Corporation (SCIC), state-owned holding company were able to earn more revenues than expected such as Bao Minh Joint Stock Company (148 percent higher than the planned revenue), Binh Minh Plastic Joint Stock Company (131 percent), Vietnam Construction and Import-Export Joint Stock Corporation, and Vinaconex (114 percent).

Return on equity for firms such as Vinamilk and FPT Telecom were also higher than expected, at 42 and 29 percent respectively.

Divestments in 2017

Until now, total revenue from divestment is expected to add VND 19 trillion (US$ 835.2 million) to the budget based on the value of the share of state capital expected to be divested from 135 enterprises. Based on share prices on the stock exchange, it can reach up to VND 29 trillion (US$ 1.28 billion).

The total number of approved SOEs stands at 375, with a total capital of VND 108.5 trillion (US$ 4.8 billion). Total capital expected to be divested during 2017-2020, stands at VND 64.5 trillion (US$ 2.8 billion). These figures exclude SOEs belonging to the Ministry of National Defence, Ministry of Public Security, Ho Chi Minh City People’s Committee, the State Capital Investment Corporation (SCIC), and SOEs selling capital under the PM’s separate decisions. If we include the SOEs under the mentioned government agencies, then the total state-owned capital can be over VND 100 trillion (US$ 4.4 billion) at least.

Major divestments

In here, we will discuss the major divestments in the shipping, oil & gas, beverage, and airlines industry.

Shipping and Ports

Vinalines, the country’s largest shipping company is aiming to reduce its stake in ocean shipping companies, but will maintain ownership in marine logistics companies to ensure the development of marine logistics network and reduce losses in ocean shipping companies. In addition, the company is also divesting its stake in ports.

Vinalines’ seaports earned VND307 billion ($13.58 million) in profit in the first half of 2017, while marine logistics companies earned VND838 billion ($37.06 million) in profits. Ocean shipping companies witnessed a loss of VND904 billion ($39.98 million).

Vinalines is due to make an initial public offering (IPO) in December this year and make its debut as a joint stock company in April next year. Currently, it owns a fleet of ships with a capacity of more than two million tonnes, accounting for 25 percent of the nation’s total capacity.

Oil and Gas

Vietnam National Oil and Gas Group (PetroVietnam) will complete the divestment from several subsidiaries by 2020. They are allowed to retain their entire holdings in only the parent company PetroVietnam, National Southern Spill Response Centre (Nasos), and PetroVietnam Manpower Training College.

Subsidiaries being divested until 2019 include PVI Holdings, Phuoc An Port Investment and Exploitation Oil and Gas JSC, Green Indochina Development JSC, SSG Real Estate JSC, PetroVietnam Trade Union Finance JSC, PetroVietnam Construction Joint Stock Corporation, and PetroVietnam Maintenance and Repair JSC. In addition, stakes in PetroVietnam Gas Corporation, PetroVietnam Transportation Corporation, Binh Son Refinery and Petrochemical Co., Ltd., and PV Power will also be reduced to less than 50 percent.

In addition, stakes in PetroVietnam Gas Corporation, PetroVietnam Transportation Corporation, Binh Son Refinery and Petrochemical Co., Ltd., and PV Power will also be reduced to less than 50 percent.

PetroVietnam reported a revenue of VND247 trillion ($10.8 billion) in the first six months of 2017, up VND31.5 trillion ($1.3 billion) compared to the same period last year, including an after-tax profit of VND13.1 trillion ($572.8 million), up VND2.6 trillion ($113.6 million).


Vietnam Airports Corporation (ACV) and Vietnam Airlines (VNA) are going to divest large stakes for future funding requirements. ACV will sell off 20 percent of its state stake in 2018 and 10.4 percent in 2019, while VNA will sell 35.16 percent in 2019, thus reducing state ownership in the firms to 65 percent and 51 percent, respectively.

These divestments offer a chance for foreign investors to enter the aviation market. There already is a considerable interest from investors for both the entities. The aviation industry in Vietnam contributes US$6 billion annually to the GDP and grew 29 percent year on year in terms of passengers in 2016.

Already Paris Aeroport has become ACV’s strategic investor and ANA has acquired 8.8 percent stake in VNA for VND2.38 trillion ($108 million).


The two state-owned breweries, Saigon Beer Alcohol Beverage Corp. (Sabeco) and Hanoi Beer Alcohol Beverage Corp. (Habeco) have already attracted considerable interest from foreign investors. The beer market grew 9.3 percent in 2016 in comparison to previous year.

Already firms such as Heineken, San Miguel, Thai Beverage Public Company, Asahi Group Holdings and Kirin Holdings have shown interest.

Later in the year, the government will release further details about their divestment plans.


Other major divestments include Vinamilk, Vietnam Southern Food Corporation (Vinafood), Vietnam Urban and Industrial Development Investment Corporation (IDICO), Vietnam Rubber Group (VRG), companies under Vietnam Electricity Corporation (EVN), Song Da Corporation, and MobiFone.

Changes in divestment policy

The 2017-2020 plan is different in various aspects from the 2011-2015 plan. In the 2011-2015 plan, only SOEs in real estate, securities, finance/banking, insurance, and investment funds were allowed to be divested. This led to revenues from sales to be confined within the SOEs and only changed the investment portfolio of SOEs.

In contrast, for 2017-2020, the divestment will lead to a change in the state’s portfolio of assets. From now onwards the sales revenue from divestments will be directed towards public investments projects unlike in 2011-2015, when revenue was held by the SOEs, leading to an increase in the state capital in the business.

In the recent divestment policy, the government has also added a provision to divest in installments, with the rate fixed at 20 to 36 percent of the total holding. This has led to an increase in the number of divested SOEs.

Investment challenges

The major investment hurdles faced by foreign investors include unfair valuations, unable to acquire a controlling stake, and delays in transfer of ownership.

Investors have often highlighted the delay in the process of transferring stakes from ministerial or provincial people’s committee level to SCIC that handles divestments. To reduce delays, the government in their recent decision, has asked the people’s committees in each city/province to report prior to the 25th of the last month of each quarter as well as on December 25 each year, to the Steering Committee for Enterprise Innovation and Development, Ministry of Finance (MoF), and Ministry of Industry and Trade (MoIT) for progress.

Investment considerations

Equitisation offers investors an opportunity to enter the market in major industries such as food & beverage, telecommunications, aviation, energy, shipping, and retail and invest in companies with a dominating market share.

Investors should ensure clarity about management control, corporate governance practices, technology transfer, organizational structure, and future options for increasing stake in the SOEs.

In addition, investors should carefully identify the decision makers to influence negotiations. Decision makers in SOEs not only includes the management members, but also the government officials in agencies overseeing the divestment process.


Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Frontera Announces Partnership With Closir, Pioneering Digital Investor Relations Platform

Two Investment Technology Companies Cooperate to Democratize Access to Corporate Management Teams in Frontier and Emerging Markets

When the MSCI Emerging Markets Index was first launched in 1988, the entire market capitalization of the 10-country index was US$35 billion, equivalent to less than 1% of the world’s total equity market value.

Today, less than 30 years later, that index has grown to include 24 countries and its market capitalization now rests at over US$4 trillion, or approximately 10% of global market capitalization.

With index providers currently consulting on the potential reclassification of Saudi Arabia, Nigeria and Argentina to emerging markets, the coming years are expected to see an exceptionally large expansion.

Despite the increasing interest in these markets, most of the relevant research and data is most easily available to the largest financial institutions, and remains cost-prohibitive for smaller investors.

But recently the investment research and analysis industry, like many other elements of the traditional banking business model, has found itself under increasing pressure from rapid innovation in financial technology, or ‘FinTech’. The ongoing disruption and changing regulations are leveling the playing field to create new opportunities for companies that are able to efficiently address segments using technology.

One of the leading companies disrupting the model for delivery of data on emerging markets investment strategy is event-driven investment intelligence firm Frontera.

Frontera’s team of experienced emerging markets researchers and analysts provide daily support to asset managers, hedge funds, individual investors, and the broader global business community. Frontera covers capital markets and political risk analysis in over 100 countries within Frontera PRO, its premium research service.

Frontera also provides its premium clients with access to a number of technology-driven integrations to further enhance the platform’s capabilities.  Today Frontera is pleased to announce a strategic partnership with Closir, a digital investor relations and corporate access platform based in London.

Closir’s innovative platform helps buy-side institutional investors to organize face-to-face management meetings, conference calls and bespoke investment trips with emerging markets companies that fall outside of mainstream broker coverage, effectively automating what has traditionally been a grueling process for market participants.

The new partnership between the two companies will provide Frontera clients with full access to Closir’s automated digital investor relations technology.

According to Frontera, equity research on companies that are not typically covered in mainstream sell-side research are in high demand amongst Frontera PRO subscribers.  The partnership with Closir enables Frontera clients to build their own coverage map and directly request calls and meetings with publicly listed companies of any size in frontier and emerging markets.

“Frontera’s mission is to become the emerging markets investor’s most valuable information resource.  Our partnership with Closir provides yet another useful service that helps our clients to better analyze the opportunities in our coverage universe,” said Kevin Virgil, Co-founder and CEO of Frontera.

“We’re looking forward to working with Closir,” said Tyler Cicirello, Co-founder and COO at Frontera. “Both companies have an intense commitment to support the global finance and investment industry that we serve and we’re excited to grow together.”

“We believe emerging and frontier markets present significant investment opportunities and are leveraging technology to make a global investor feel local, anywhere. We look forward to working with Frontera to empower global investors as traditional business models are challenged by structural changes,” said Michael Chojnacki, founder and CEO of Closir.

As two leading next-generation investment technology companies, Closir and Frontera are unified by a common mission to democratize emerging markets investing, and help both institutional and individual investors gain full access to under-represented capital markets.

You Don’t Need To Worry About Pakistan…Yet

What actually happened?

The timeline below provides details on what transpired that led to a resignation from the PM of Pakistan which continued Pakistan’s record, that no PM has ever served the full 5-year term in the country’s 70-year history.

The KSE100 is down -13% from its high on May 25, but actually up +2% since PM Sharif’s resignation.  If you read no further, this should at least comfort you that things will likely be okay.

What is going to happen?

The Pakistan Muslim League (Nawaz Sharif’s political party) has made it clear that they want Shehbaz Sharif to lead the party until elections next year.  Shehbaz Sharif is currently serving his third term as Chief Minister of Punjab, Pakistan’s largest, most populous province.  Shehbaz is no different than his brother Nawaz.  The same groups will do well and this is likely to result in a material degree of stability.

Shehbaz was also implicated in the Panama Papers but has managed to evade court investigations and actions.  In the meantime, you have Shahid Khaqan Abassi leading the country which can only be good for business.  Abassi is the founder of the most commercially successful airline in Pakistan, Air Blue in addition to being an engineering graduate from UCLA and George Washington University with significant work experience in the United States.  Like the Sharifs he is a businessman and is strongly in favor of maintaining conditions conducive to a growing economy that is open for business.

Under Shehbaz’s leadership, Punjab province has continued to experience significant growth.  The average salary in Lahore is now over $10,000 per year, significant infrastructure projects have been completed and the environment can be described as very favorable for businesses.  It is anticipated that this should not provide any near-term risks to investments that you may have in Pakistan.

Thoughts on the whole situation

What is truly noteworthy is the stability the country has experienced during this time.  There have been numerous accusations of the military’s involvement but we do not subscribe to this belief.  Certainly, the military remains the most important institution in Pakistan, but it seems clear to us according to our sources within the country that the military played no role in this investigation or its results.

There were no major riots in the country or violence because of the court’s decision.  This is remarkable, despite a security apparatus that was ready for the worst.  This heartens us on Pakistan’s future prospects.  The court must also be recognized in acting in complete independence and arriving at a judgment that would be unimaginable 20 years ago, the efforts to bolster the independence and power of the judiciary in the Lawyer’s Movement has cemented a judiciary that will not shy away from asserting its constitutional powers.  What is equally impressive is how quickly this matter was resolved.  Within 7 months of an investigation being opened and in a little over a year since the Panama leaks came out, this matter has been resolved.  For context, the United States is 8 months into an investigation on Russia’s involvement in US elections with no end in sight.  Pakistan acted quickly.

Special recognition needs to be made for the Joint-investigation team which produced a 275-page report within 5 weeks.  Most importantly, the report was well-detailed and had meaningful insights.  “Fontgate” was a remarkable find that reminds us of TV law dramas or the hook for a John Grisham novel.

Concerns on the horizon

Imran Khan, the world-famous Cricketer is the leader of Pakistan’s Tehreek-e-Insaaf (PTI) party which by many estimates is the favorite to win the election next year.  However, rather conveniently a scandal erupted this week where a former PTI member Ayesha Gulailai has come out and accused Imran Khan of sending her inappropriate text messages and harassment.

The allegations will be investigated with the support of new PM Abassi, and this is an area of concern.  It is all too convenient that a party member would leave PTI at the very moment that the Pakistan Muslim League has a new leader and the country has a new Prime Minister unless the two situations are linked somehow.  PM Abassi must be very careful with his level of involvement in any investigations that occur.  Any perceived mistreatment of Imran Khan could have PTI supporters creating trouble all over the country.

At this time we are cautious, but do not think this will have an impact on investments.  We recommend no change in approach or outlook after PM Sharif’s resignation.  We do advise heightened awareness of political events in Pakistan.  No one should invest in Pakistan or Frontier Markets without contingency plans, and events such as this are certainly a reminder that you should have a contingency plan in place and revisit it at least annually.


This article was written by Investment Frontier.

Saudi Arabia Shouldn’t Be On Your Radar – Until This Happens

At some point, Saudi Arabia will be knocking at your door.

The country will want you – or rather, your friendly neighbourhood emerging market ETF – to buy shares in its big national oil company, Saudi Aramco.

Aramco is planning to go public in late 2018 or early 2019… in what will probably be one of the biggest stock offerings ever. And there’s already a lot of interest. The New York and London stock exchanges are allegedly fighting over who gets to host the IPO.

So at some point, you (or your fund manager) might be thinking about investing in this oil-rich state.

But this is one market that – unless a few things change dramatically – you should avoid.

Let me explain…

Saudi Arabia’s challenges

Saudi Arabia hasn’t been on the radar of many investors.

For a long time, it’s been notoriously closed off to most outsiders. So even if you wanted to visit, it’s not at all easy (more on this later).

Then there’s its one-trick pony of an economy.

Saudi Arabia has the world’s second-largest oil reserves. And it’s the largest oil producer on Earth. Oil makes up around 55 percent of its gross domestic product (GDP).

This means that Saudi Arabia’s economy is very closely tied to the price of oil. That’s good when the price of oil is strong. But it’s bad when it’s weak. And, in any case, being at the mercy of something you can’t control is a dangerous situation – whether you’re a factory worker about to be displaced by a robot, or the world’s 20th-largest economy.

Also, the country is located in one of the most geopolitically volatile regions on Earth – near Iraq, Iran, Yemen and Syria. If there’s one thing that spooks investors… it’s conflict.

Things (may be) changing…

In May, U.S. President Donald Trump visited the country and declared his support for Sunni Arab nations like Saudi Arabia. He also proposed a multibillion-dollar arms deal between Saudi Arabia and the U.S.

Then in June, a new crown prince (and heir to the throne) was appointed. Mohammed bin Salman has been described as the real power behind the throne of his father, King Salman.

And he’s spearheading a national transformation program known as “Vision 2030” – a set of economic reforms designed to wean Saudi Arabia off its oil addiction, privatise state-owned enterprises and curb state spending.

The centerpiece of this is an initial public offering (IPO) of 5 percent of Saudi Aramco, the largest oil company in the world. (An IPO is when a company raises capital by selling shares to investors for the first time.) The company produces 12 million barrels per day – far more than its closest competitors, as this graph shows.

Saudi Arabia values the company at US$2 trillion. That’s four times the size of Apple and more than five times the size of ExxonMobil. It could be the largest IPO in history. That’s why investors are taking notice.

These things need to change…

Every asset, or market, has its price… and finding undervalued and underappreciated assets is part of the art of investing. But Saudi Arabia needs to make a lot of changes before average investors should consider the market…

1. Open up the country

Three years ago, I was exploring a number of markets around the world that were off the beaten track. I went to Iran, Zimbabwe, Venezuela and Kyrgyzstan, among other hotspots. To get to the places that didn’t like foreigners, I became good buddies with a handful of visa services that could work magic.

But Saudi Arabia was a nut I couldn’t crack. Unless you had a very specific purpose and a local sponsor that was willing to jump through numerous hoops to sponsor you, you weren’t going to Saudi Arabia.

And that hasn’t changed. Saudi Arabia doesn’t grant visas to tourists. So if you want to visit the country, you either need to have family there, or get an individual or business to sponsor you and pay for your visa.

I’d guess that in the run-up to Aramco going public, Saudi Arabia will make it a lot easier for investors to visit the country.

But the default position of Saudi Arabia still seems to be keeping outsiders out. And anywhere that wants your money, but doesn’t welcome you, is somewhere you should think twice about before investing.

2. Focus on good corporate governance

When I started analysing markets in Russia in the mid-1990s, companies treated their financial results like they were state secrets.

Any kind of request for information – whether you were a shareholder or an analyst – was viewed with deep suspicion. That was partly because during Soviet times, information was viewed as power… and by letting someone else in on your knowledge, you were reducing your own status and power.

That’s (largely) changed. But it took a very long time for companies in Russia to understand that sharing information increases your power – it doesn’t reduce it.

Unfortunately, Saudi Arabia and Aramco have the same view on information…

The Natural Resource Governance Institute, an independent, non-profit organisation, has raised concerns about corporate governance in the country. It branded Aramco one of the least transparent state-owned enterprises involved in extractive industries (ranking it 64 out of 74 companies around the world).

A big company like Aramco will have all the trappings of transparency, as it will be required to. But this culture of secrecy will take a long time to really change. And until investors can truly understanding what’s going on, they’re going to remain disappointed.

3. Diversify

Saudi Arabia’s new crown prince is working to diversify the country. But its economy is still all about oil… So when the price of oil crashes, it spells trouble.

Just look at what happened during the last major oil crash – from 2014 to 2016.

As oil prices plunged from US$105 to less than US$30 per barrel, Saudi Arabia’s growth plummeted. Its GDP went from 3.5 percent growth in 2015 to only 1.4 percent in 2016. That was the lowest amount of growth since the global economic crisis.

Meanwhile, the country’s debt skyrocketed. Its national debt increased by about 619 percent from 2014 to 2016. And it saw a record annual budget deficit of nearly US$98 billion in 2015. That’s 15 percent of GDP.

And the country’s stock exchange fell around 50 percent from 2014 to its low in 2016.

With oil prices steady in recent months in a range, things have stabilised. Saudi Arabia’s stock market is up 3 percent so far this year. But the economy is predicted to run a huge budget deficit (where government expenditures exceed revenues) of 7.7 percent of GDP. And the IMF estimates that oil prices would need to bounce back to US$84 a barrel to balance the books in 2017. It expects Saudi Arabia’s GDP growth to be just 0.4 percent.

And Aramco’s president and CEO recently described the outlook for oil supplies as “increasingly worrying” with around US$1 trillion in investments lost during the downturn and fewer new deposits being unearthed.

So until Saudi Arabia shows some real signs of being able to diversify, its economy is going to remain volatile. That makes it a tricky place to invest.

Stay away for now

Until Saudi Arabia addresses its challenges, be wary of investing there.

The bubbling tensions and conflicts in the region are a distracting roadblock to reform. And until investors can visit the country and truly understand what’s going on in the country and with Aramco, they’re going to be disappointed. The lack of diversification in the economy is a long-term challenge.

Does that mean Saudi Arabia is a bad place to invest by default? Not necessarily. But right now it’s hard to find a compelling reason to buy.


Kim Iskyan is a Lead Analyst and Editor at Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

How To Invest In Latvia

Latvia, a small country of just under 2 million people, is perpetually overlooked, even when compared to its small neighbours, Estonia and Lithuania. Hockey fans in the 90s may remember Latvia as the birthplace for NHL All-Star Sandis Ozolinsh, but usually the country will elicit a confused look when referenced.

Its economy went through a massive boom after joining the EU in 2000, but experienced an equally large busts as a result of the financial crisis in 2008. Economic growth was among the worst in the world during that period, with GDP falling by 18% in Q4 of 2009 and unemployment up to almost 23%. However, the country has since turned it around and is back on track.

Latvia’s stock exchange is part of the Nasdaq Baltic Indices, where its main index, OMX Riga, has more than doubled in value over the past 2 years. It is currently the best performing frontier market in 2017!


Latvia’s economy has picked up speed lately and grew by 4% yoy as of Q1 2017, up from an average of roughly 2.5% over the past few years. With a GDP per capita of under $14,000 USD, it is poorer than its neighbours Lithuania and Estonia, but much wealthier than most of the frontier markets we look at.

The economy is well diversified and has an Economic Complexity Score of 0.75, good for 33rd in the world. As expected of a small, relatively developed country, services dominate the economy.

Here is a visualization of Latvia’s main exports:

Latvia’s credit rating is currently investment grade: A- with S&P, A3 with Moody’s, and A- with Fitch.

Notable Companies in Latvia:

  • Latvenergo (SOE): largest company in Latvia, a hydroelectric SOE that generates the majority of Latvia’s electricity
  • Latvian Railways (SOE): second largest company in Latvia, another SOE that owns the railway lines in Latvia
  • Latvijas Gaze (Listed, Secondary List): Latvian natural gas company with a monopoly in the Latvian market, largest Latvian company by market cap
  • Olainfarm (Listed, Main List): largest chemical/pharmaceutical manufacturer in the Baltic region, second largest Latvian company by market cap
  • Latvijas kuģniecība (Listed, Main List): oil tanker company that owns a range of transport ships
  • Grindeks (Listed, Main List): another pharmaceutical company that focuses on heart and cardiovascular medicine

Is It Safe To Invest In Latvia?

According to our Investment Safety Rankings, Latvia is ranked #30 on our list, making it a very safe country to invest in.

Can Foreigners Invest In Latvia?

Yes, foreigners are allowed to invest in Latvia. As a small country it welcomes foreign investment, and as a member of Nasdaq/OMX, it is easy for foreigners to invest in local equities and bonds.

Nasdaq / OMX Riga Snapshot:

In operation since: 1993, as the Riga Stock Exchange

Location: Riga, Latvia

Market hours: 10:00 to 16:00

Currency: Euro (EUR)

Market Capitalization (as of July 2017): 957 billion EUR total (407 billion on Main List, 550 billion on Secondary List)

Local Listed companies (as of July 2017): 25 listed stocks (5 on Main List, 19 on Secondary List, 1 on Alternative Market)

Taxes: 15% on capital gains, 10% on dividends

Foreign currency controls: none, part of the EU

Main Index: OMX Riga Index:

How the Riga Stock Exchange / Nasdaq Riga is Structured:

Latvia’s stock market is integrated with Estonia and Lithuania as part of the Baltic Regulated Market owned by Nasdaq. This means that stocks from all 3 countries are listed as part of the same market to reduce barriers to entry between them.

There are three different sections of the Baltic Regulated Market: the Baltic Main List, which contains the most actively traded shares, the Baltic Secondary List, which is a step below, and First North (Baltic MTF) which is an Alternative Market.

Local Companies Listed on the Baltic Regulated Market:

There are 25 companies total listed on the exchange, market cap as of 17 July 2017:

How to Invest in Latvian Stocks and Nasdaq Riga:

As a member exchange of Nasdaq OMX, Latvia’s stocks are hosted on a modern trading infrastructure. You need to open a brokerage account with any member of the exchange, which you can find here.

There are 21 different firms that operate on the Riga exchange, many of which will also allow you to trade in Estonia and Lithuania. We recommend contacting one of the more specialized brokerage firms who are used to dealing with foreign investors.


This article was written by Investment Frontier.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.