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ANDEAN ECONOMIES: POLITICAL DEVELOPMENTS LIE AT THE HEART OF MACRO PROJECTIONS

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Daniel Velandia

Daniel Velandia / Chief Economist of Credicorp Capital

Daniel Velandia

Daniel Velandia

The region continues to adjust to a new scenario marked by lower commodity prices and slower global growth. That said, we expect Andean economies (i.e. Chile, Colombia and Peru) to post a faster pace of expansion next yearled by a recovery in private investment amid the expectation of higher confidence levels and a more supportive external environment. We project that the Peruvian economy will exhibit the highest GDP growth rate in the region in 2017 at 4.2% (2016F: 3.7%) driven by higher infrastructure investment as unlocking key large-scale projects that have been delayed for different reasons(e.g. the 2ndLine of the Lima Metro, the Southern gas pipeline and Lima airport) is one of the main goals of the new government. The approval of special legislative powers to the government for 90 days by the Congress and a recovery in sentiment by local agents in the last months, support this view. Likewise, factors as the proposed cut in VAT from 18% to 17% in 2017 and the fall in inflation will provide support to private consumption. All in all, non-primary sectors are expected to gain traction next year after the significant contribution of mining to growth in 2016.

On its part, the Colombian economy would post an expansion close to 2.7% in 2017 (2016F: 2.3%) mainly as a result of the positive impact of both the 4G infrastructure program and higher public investment. As to the former, 30 road projects have been awarded so far, with 17 of them having already reached the financial close; thus, we estimate that the effective execution of some of these projects may contribute up to 0.7pp to GDP growth next year. On the other hand, it is worth to mention that 2016 is the first year of the local and regional governments’ terms, leading to slow dynamism in public spending due to the usual operational learning process, a situation that typically changes in their second year of mandate (i.e. 2017).

Finally, we project that the Chilean economy will accelerate from ~1.5% in 2016 to 2.2% next year amidst the expectation of a gradual recovery in sentiment, the positive effect of low-for-long interest rates, and a stabilization of the labor market, factors that should create the scenario for a rebound in investment in a context of stabilization of the mining sector, which has continued to be a drag on growth. In general, the absence of significant fiscal and external unbalances implies that favorable conditions are present for the Chilean economy to gradually achieve growth rates closer to its potential in the upcoming years.Beyond all these country-specific factors, a gradual recovery in global economy and particularly, in main trading partners, should contribute to better prospects for the Andean economies ahead.

Having said all this, the relevance of politics for the future performance of economic activity in the three countries cannot be overstated. In Peru, while recent political developments have been positive (i.e. the granting of special legislative powers to the new government), it must be recalled that PPK’s party holds a minority of only 18 out of 130 seats in Congress. Our base case assumes that the Fuerza Popular party, which is led by Keiko Fujimori and holds a majority in Congress, will adopt a collaborative stance with the government in economic-related issues once Fujimori’s proposals on campaign in this regard were similar to those of PPK’s, while her participation in the 2021 elections cannot be ruled out. However, it does not necessarily mean that all economic proposals would be approved easily. In addition, to get the approval of other matters in Congress may prove harder, requiring political negotiation, so that the relationship between the two parties will be a factor to keep an eye on.

In the case of Colombia, the attention is focused on the approval of the long-awaited tax reform amid a tougher political environment caused by the NO victory in the peace deal’s plebiscite on October 2nd. We think that political incentives are aligned for the approval of the tax bill as: i) the approved 2017 budget, which excludes fresh revenues from a tax reform, entails no growth in real terms with investment falling 2.2%; thus, a tax reform would allow to introduce budget additions, which should be in the interest of Congressman as 2017 is a pre-electoral year, typically characterized by strong public spending; and ii) both presidential and congressional elections will be held in 2018, which should encourage political parties to take right now the proper measures that allow this huge fiscal issue to be solved by then. Regarding the peace deal, the current stage can be tough and even slow as it evolves negotiations among the government, the NO supporters, and the FARC,with time being a key factor as the bilateral ceasefire could not be maintained indefinitely amid no clear legal conditions for FARC militants. That said, we highlight that the government has recently mentioned that a new agreement could be reached before year-end.

Finally, current administration in Chile struggles with low popularity levels and lack of control over the political agenda; accordingly, attention is shifting to presidential elections (Nov-17) with the right-wing opposition looking competitive after October county elections, in which the right-leaning “Chile Vamos” emerged as the big winner with 38.5% of total votes against 37% for the ruling coalition, implying a heavy defeat for the left-wing “New Majority”. This leads us to believe that no additional initiatives will gain traction in Congress during this mandate, though the attention will be focused on the pension reform discussion in the upcoming months as it has gathered a lot of interest from the public. In general, proposals by candidates during next year’s presidential race should be a key factor for business sentiment.Former presidents Piñera and Lagos appear as front runners, but it is too early to tell. Coming from different political backgrounds, both names are moderate figures that would be very well received, in our view.

All in all, we think that conditions exist for a higher dynamism in activity in Andean economies in the upcoming years. In any case, politics will play a key role for this view to effectively materialize. Currently, political changes are happening in the three countries that may lift animal spirits next year, in our opinion; that said, we must acknowledge that recent developments globally have recalled us that, in politics, anything can happen.

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Why insurance needs Tesla’s autopilot too

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Why insurance needs Tesla's autopilot too 1

By Christian Wiens, CEO of Getsafe

Digitization is the industrial revolution of the 21st century. What does this mean for a data-driven industry like insurance? The answer is simple: Turn everything on its head and reinvent yourself under high pressure- the future of insurance is digital.

“Hello Timo, nice to see you. I’ll be glad to help you.” Carla records claims 24 hours a day, seven days a week and takes less than two minutes to evaluate and process them. Carla works for a digital insurer and is a chatbot by profession. While she is answering Timo, she contacts the bank in the background, which pays Timo back his money – the same day. This is not a dream, but already reality.

In the digital age, intelligent machines are the new workers on the assembly line, and data is the new raw material. This applies to almost all industries and applies in particular to the insurance world as insurance is based on mathematical models and probability calculations – in short: on data. The more data on which the calculations are based, the easier it is to derive and price risk profiles. Data therefore changes the core of the product “insurance” in three essential areas; the offer phase, in the event of a claim and in the long-term customer relationship.

In the offer phase, we will experience long-term personalized product bundles that fit customer needs much better – away from standardized and inflexible policies. If the insurer can better assess the needs of the customer on the basis of his past history or behaviour, he is in a position to put together tailor-made insurance packages.

For example, it would be conceivable to automatically adjust the insurance cover as soon as the customer’s life changes, for example if the customer gets married, buys a car or a property or travels abroad.

Customer experience in the event of a claim will also change dramatically. Fraud is still the biggest problem in the system, with 2 percent of the customer base causing 40 percent of the system’s inefficiency. According to estimates by the Association of British Insurers (ABI), one insurance fraud is detected every minute – amounting to economic losses of £3bn every year. Of the estimated worth of total fraud cases a year, £2bn goes undetected.

But what if insurers are better able to assess customers on the basis of data and know which customers they can trust – and which not? Credible customers could then benefit from immediate payment of the loss incurred, while the few “black sheep” would not even be accepted as customers or would be checked more closely in the event of a claim being reported.

The computer does not act uncontrolled, but within certain parameters defined by humans. This is comparable to processes in the manufacturing industry: Here, too, people define the exact parameters that are to be checked – controls are implemented by machines that are significantly less prone to errors. The situation is similar when it comes to insurance fraud: people make value judgements and specify which indicators can point to a case of fraud. They retain sovereignty over the entire process. The smart algorithm, on the other hand, is only the tool for evaluating and linking the many individual data points. Smart algorithms will reduce  employees’ workload, but will not replace them.

Finally, digitization will also change the long-term relationship between insurer and insured. Tomorrow’s insurance will not only settle claims, it could even prevent them arising. A better database will not only make it possible to calculate the probability and amount of loss more precisely, it will also make it easier to calculate the risk of loss. Digital systems and sensors can also help prevent possible claims. Telematic tariffs in motor vehicle insurance are already moving in this direction by promoting a prudent driving style.

Sensors on washing machines and industrial plants or intelligent smoke detectors are one thing – monitoring people in the health sector is another. Some health insurers reward sport activities, for example, if the customer can prove this with smart fitness watches. It remains to be seen to what extent customers are willing to exchange this personal data for premium refunds. In the long term, the legislator will also be asked to take action to ensure that the solidarity principle is not undermined.

However, the danger of increasing surveillance is countered by a clear increase in customer service, individualised services and flexibility on the customer side: Digital insurers rely on  customer’s self-determination and a positive insurance experience in an industry that sometimes appears to be immobile and non-transparent.

Digitalisation has reached the insurance industry, but has not yet shaken its foundations. That will change: Tomorrow’s insurance will have little in common with today’s structures and processes. The autopilot at Tesla will also come for insurance. Not all companies will be able to master this switch to become digital insurers.

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How ISO 20022 migration is changing the landscape in payments

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How ISO 20022 migration is changing the landscape in payments 2

By Paul Thomalla, Global Head of Payments at Finastra

The ISO 20022 standard is a catalyst for change in digitalisation and payments. The current edition of the standard was published in May 2013, and it’s been clear since then that the standard represents the future of payments messaging. This is due to the rich information, process automation and interoperability it enables. What started off in the Automated Clearing House world with the Single European Payments Area is increasingly becoming the de-facto standard for instant payments and for high-value payments worldwide. In fact, we estimate that all major payment systems and currencies will have moved over to ISO 20022 by the end of 2023.

Banks, meanwhile, will be able to get closer to their customers and offer better services. As this happens, the nature of the entire payments supply chain will change: there will be no one owner. Instead, consumers, corporates, banks, software vendors, fintechs and other stakeholders will all play a part.

Migration to ISO 20022 is moving at pace with one of two adoption models being taken. In the first approach, a ‘like-for-like’ migration occurs, which means data fields and messages are gradually moved over in compliance with the new ISO 20022 standard. However, the bank and client aren’t reaping the potential of the new standard as no further action has been taken. ‘Going native’ is the second approach. This allows extensive data sharing between banks and corporates unlocking a range of benefits including deeper insights into customers and partners, better accounting and financial data and more efficient payment processing. Data-rich messages can provide corporates with all the information they need to automatically reconcile transactions the moment they happen.

Banks deciding which way to move forward must remember that corporates have been waiting eight years for this new ISO 20022 functionality and if their bank is not able to deliver the promised benefits, they could decide to take their business elsewhere.

Planning the migration process

Deciding which approach to take is the first step in the migration process for banks. The main transition models being deployed to the market are: the ‘like-for-like’ translation model, or; for an ‘ISO-Native’ approach – either the complete overhaul model, or the hybrid model.

The translation model approach translates incoming MX messages to the SWIFT MT format and vice-versa for outgoing messages. This model is less disruptive and has a lower upfront cost. However, it involves high dependence on third parties resulting in less interoperability with fintechs and no new customer insight. The complete overhaul model allows organisations to execute a wholesale architecture transformation. This approach gives access to leverage rich data across the business including new insights on the market and customers. One negative aspect of this approach is the fact it is disruptive and requires a large upfront investment. Finally, the hybrid model works well for global banks where translation is needed across the board. This approach offers flexibility and the ability to localise strategic response, however it adds a level of complexity to users. The leading model is unclear, but banks must remember to align their payments operations with their chosen model.

Paul Thomalla

Paul Thomalla

That’s not to say that the adoption of ISO 20022 will be plain sailing. One challenge is that the standard describes an asynchronous messaging process. For banks which currently rely on return messages to confirm the successful completion of a payment transaction, this will cause significant upheaval, and is a change that underscores the need for everyone in the payments ecosystem to get ISO 20022 migration right. Banks will need to overhaul their business processes and operations to adapt to asynchronous messaging. This will in turn require new systems, such as Confirmation of Payee and Request to Pay.

The new format requires a fundamental change to the payments world, so the decision on which transition model best suits their needs isn’t to be taken lightly. Internal and external considerations will help banks determine next steps to successfully implementing ISO 20022. Internally, banks must ensure they have the right people to deliver this transformation, have processes in place to easily review and adapt back office functions and have the correct technology required for the migration. Our approach at Finastra has been to build a payments hub that is ISO 20022 native from the start – ready for widespread adoption across the industry. Banks must also look at external factors like customer impact, market share, competitors and regulatory constraints.

Benefits across the payments value chain

The adoption of ISO 20022 allows for additional, enriched data to be transferred within the payment instruction. The new format has more granular and better organised data elements as well as a consistent data dictionary across the payments chain to speed processing and improve compliance. This prevents misinterpretation and expensive manual interventions. All of this will facilitate improved processing and allow all agents in the payment to make more informed compliance decisions.

In the short term, including additional party and remittance information will help reconcile transactions. For example, QR codes are being used more widely on invoices, clearly identifying the beneficiary and facilitating automation in the back office. Looking at the medium term, institutions will be able to limit the resources they have to dedicate to exception handling and one-off investigations due to missing information or unstructured input that cannot be easily integrated into automated workflows. And finally, the benefits of ISO 20022 in the long term mean data that is properly structured and adhered to will support better regulatory compliance practices and financial crime monitoring.

The rewards of ISO 20022 make any temporary disruption more than worth it. We’re excited to enter a new era of payments messaging that will drive collaboration, innovation and efficiency through interlinked partner ecosystems.

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Agile thinking in times of uncertainty

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Agile thinking in times of uncertainty 3

By Caryn Skinner, Co-Director of Sharpstone Skinner

“Several times lately, I have finished my work, closed the laptop and sat staring out of the window of my spare room office worrying that I don’t have the answers. That my team are looking to me for guidance about the future…and I simply don’t know.” Paul Jackson-Cole, Executive Director of Engagement, Parkinson’s UK

A genuine, honest reflection from an impressive and successful leader. He has gravitas, is trusted and a great coach to his senior reports. He is also highly intuitive, with an innate ability to be a pioneering visionary who can then work with others to ground that vision into reality. And yet, he is stuck. He still has his instincts, yet with the world, in flux, he is finding it hard to convince his team to go with him because they need more tangible evidence to ground his ideas.

Gut-feel judgement is part of agile thinking which is a crucial leadership skill. In the financial world you may have finely honed other types of thinking as you need to show evidence, use data and put forward your thoughts in a rational way.

Agile thinking has five main features:

Systems thinking – investigating an issue from a broad perspective to understand the interdependencies

Possibility thinking – to be open-minded and generate a wide range of possibilities, the classic brainstorm

Logical analysis – to reach valid conclusions using clear, rational logic

Evidence-based thinking – identify core issues by analysing evidence from relevant resources

The fifth one is gut-feel judgement – relying on your gut instincts to provide valuable input for decisions.

Richard Branson says, “I rely far more on gut instinct than researching huge amounts of statistics”, and he’s not done too badly.

Mr Branson may make you shudder though, as it is quite an extreme view. Most of us use all or a few of them combined. Yet in this world of unknowns, your instincts may need to be more finely tuned. It isn’t easy to find evidence and interdependencies if we have never been in this situation before. Rational logic needs something tangible to test it against, the world feels nebulous at the moment. Being open-minded looks like a good option yet can get stifled because the possibilities are almost endless.

Here are some ways to tap into and use your gut-feel judgement:

  1. Know that your instincts are not woolly ideas but based on your years of experience. The thought has come from somewhere, an experience you have had, something you have read a conversation you had with a colleague.
  2. Feed and grow your instincts. The more exposure you have to your market the harder your instincts will work. Keep getting out and about, visit your people, talk to them, learn from them about the front-line challenges and successes.
  3. See your business through the eyes of your customer or client. Why do they like doing business with you, what would they like you to do better and does your business align with their needs.

Make your own observations about what’s next for your business rather than staring at spreadsheets of cold data. I heard about a trader who regularly walks the shops to see what’s selling and what isn’t, it informed her instinct about where the next investments might be.

  1. Keep in touch with the world around you, tune into what’s coming over the horizon. A client of ours was in marketing for a bank, he regularly spoke to his teenage nieces and nephews about how they communicated, how many digital “languages” they spoke and which social platform they used for what. They were his future customers and the conversations fuelled his instincts in discussions with the senior team around the bank going online and changing the way they communicated with customers.
  2. Trust your gut then test it against other types of thinking to ground it and help you sell it in. Others may not get your vision so painting the picture for them with more solid evidence will make your job easier.

It is an exciting area of leadership and one that, perhaps, has been overlooked in a world that can access evidence, stats and data at the swipe of a screen.

Next time you find yourself staring out of your home office window, let your thoughts wander, don’t evaluate them or crush any ideas that come to you, it might be that your gut is trying to tell you something.

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