‘Pakistan is cautiously back on the global investment radar,’ says Chief Executive, International, ANZ
Farhan Faruqui, currently serving with ANZ Bank as the first ever Asian member of their Executive Board. Prior to joining ANZ, Farhan had a long association with Citibank spanning over 20 years, heading several African and Central European countries, with his last role as Head of Citibank Corporate and Investment Banking for countries in Asia and Pacific regions. Based in Hong Kong, he is one of the best known Pakistan origin bankers in Asia, Central Europe and Africa. BR Research recently sat down with Farhan and discussed matters relating to global economic affairs and Pakistani economy, especially in the context of Chinese investment in Pakistan. Below are edited excerpts of the conversation.
BR Research (BRR): We have looked at some data that shows north of $500 billion of Chinese OFDI are in Hong Kong, which goes around the world. We want to understand, how does one figure about the difference between Chinese and Hong Kong money, considering a lot of money in Pakistan has flowed through Hong Kong?
Farhan Faruqui (FF): A Chinese company based in, for example, Beijing, may set up an international arm in Hong Kong, which basically becomes the investment arm for any assets acquired outside of China. The funds may flow from China to Hong Kong to capitalize that business, and then be used to make acquisitions outside of China.
But in effect, the flow of funds through and into Hong Kong is originated out of China. Remember that Hong Kong is a special administrative region of China and therefore it is not so much an external flow out of China, but rather the beneficial use of one of its territories as a free-market, stage-post for investment.
There are typically the following types of transactions that intersect with Hong Kong. One is the Chinese outbound/inbound flow of capital that is routed through Hong Kong-based, but Chinese-funded, entities. Second is trade, either originating from China or coming to China through Hong Kong. And the Third are Hong Kong companies themselves investing in global assets. Hong Kong in itself is a big market, but it also benefits from being the trade and capital bridge between China and the rest of the world.
For Chinese originated transactions the strategic decision will typically happen in China but the execution may be conducted out of Hong Kong. So we may have to address both, if we are talking in a CPEC context.
BRR: Having been trained the Anglo-Saxon way, the Pakistani business community seems unsure of the Chinese way of thinking and the mindset. Given your level of interaction with the Chinese, how do you see it?
FF: The biggest advantage for Pakistanis is that the Chinese have a huge amount of affection for Pakistan. There is a common fondness, which can be built on. However, we must appreciate that the Chinese are fundamentally commercial in their business interests, and we have to offer them a compelling proposition.
There are two drivers to Chinese thinking: Firstly, the policy aspect, driven by the government, such as One Belt One Road (OBOR); and secondly, for the private sector, where you have to make a commercially viable proposition for them. It has to further China’s ambitions or make economic sense, at the end of the day.
In terms of mindset, the Chinese are typically long-term players. A short-term mindset does not work with them. They are typically more relationship-oriented, and want tangible interactions with mutual respect and a long-term commitment.
If you look at the genesis of Chinese outbound FDI, you can see Chinese thinking and long-term mind-set at work. Firstly, China rose as the largest producer of aluminum and iron ore, and the largest consumer of oil and gas, aluminum, iron ore and most commodities. Their second big drive was to acquire technology and IP. The third drive is to build infrastructure, to better utilize their surplus capital and accommodate their expanding regional economic aspirations.
BRR: Some circles suggest that there is a big bubble of sorts being formed in the Chinese banking and real estate sectors. What are your thoughts on it? Is it just a typical Western propaganda or is there some substance to the matter?
FF: There is no question about the fact that there has been significant investment in property. However, we have seen the banks fairly active in tightening terms and while NPLs have increased, there hasn’t been a hard landing.
We can also acknowledge that debt has fueled much of the domestic and global expansion of China’s state owned enterprises and there is a bit of a reckoning that the Government is working through.
My personal view is that credit tightening will happen, which may restrict growth. But, they can by and large manage the debt part. The impact on growth is going to play out, but I am not seeing a crisis.
BRR: Moving on, we have seen foreign banks exiting Pakistan in the past five years. How do you see the global banking scenario in general and Pakistan specifically?
FF: Within Asia, lots of large global banks typically have two or three core businesses: the retail/consumer banking business; the SME client base; and the large corporate/Investment banking franchise.
Changes in regulation and the economic environment (low interest rates, fee caps, diminishing margins etc) have put a lot of pressure on the retail business especially for those banks that lack scale. It’s getting increasingly harder to deliver returns and succeed in this space without scale in every market in which one operates. Further, technology is leveling out the playing field so it’s not just the increasing efficiencies of local banks, but also of non-bank entrants with whom we need to now compete.
For the SME business also, scale and a commensurate risk appetite is critical to build a profitable client franchise.
In my opinion, many International banks will find it challenging to continue allocating scarce capital to these two areas and it’s a great opportunity for local banks to become the supplier of credit for their home markets.
What I think you’ll see, is International banks increasingly playing in the corporate space where they are advantaged by network, regional synergies, global distribution and global access to markets.
BRR: What are your views on global economy? There are views that global stagnation may further deepen and lead to major dent in trade flows.
FF: My greatest concern is that the geopolitical environment, or rather the complexity and uncertainty created by it, have the potential to short-circuit the economic growth that we are starting to see now.
In terms of trade flows, I think there is a risk that populist policies prevail, for example in the USA and in Europe. Where this leads to tariffs and renegotiations of trade agreements, I have some concerns. We don’t want to see a trade war and I am hopeful we see all coming together for workable solutions.
Outside of that, I think there is a real possibility this time for the growth to be real and have legs.
BRR: There are a lot of possible financing money options that Pakistan may have: such as, on-shore, off-shore, IFIs and the likes. What options in your understanding does Pakistan have?
FF: To my mind, it is not just the type of financing options, but also the cost of those options. This is the crux of the matter.
Our best options are export credit and multilateral funding from a cost and tenor standpoint. We need to build more capability around public-private partnership structures as well to attract both domestic and foreign debt and equity from the private sector to fund our development.
Pure commercial debt to support inbound FDI is driven by a combination of sovereign rating and the credit risk of the project. While it may be possible to mitigate the credit risk by creating structural enhancements, the country risk aspect remains a function of issues like security, stability, politics, economic growth, and so forth. While these factors are on the mend in Pakistan, they continue to be priced into our credit thus increasing cost of projects. This in turn leads to higher return asks from investors.
BRR: How should Pakistan go about resolving these issues?
FF: Sustainable security improvement is of paramount importance, and that remains the biggest upside in terms of financing volumes and cost.
BRR: Do you not think our security situation has improved? What is the perception from the outside?
FF: I feel it has improved. But important for investors that this improvement is time tested. Pakistan is cautiously back on the radar for investors and, in my opinion, offers incredible opportunities.
BRR: Given all the hype and strategic depth of CPEC, do you think China can still go on and invest irrespective of a drastic improvement in some of these factors?
FF: I think the investment is going to be paced on how well we perform. While China is open and keen to do business in Pakistan they, like other investors, will want to see continued progress.
It is up to us (Pakistan) to make it an attractive destination on an ongoing basis. So far, a substantial part of the investment is coming from the government and state owned enterprises but we need to attract private sector interest from China as well.
BRR: Are we far off from that point?
FF: I don’t think so. We just need to keep going! There is a shifting reality and we need to sustain it, articulate it better and create an enabling environment that allows investors to access it with greater ease and transparency.
BRR: How do you see the human resource talent and its utilization in Pakistan?
FF: Our talent is a big concern. Not because we do not have it, but because we severely under-leverage and under-develop it. We export it too much and do not create an environment to entice it back to Pakistan. Our talent is the biggest challenge and remains one of our most under exploited resources.
Firstly, the biggest opportunity for talent in Pakistan is demographics driven – women. As a country, we need to remove barriers and to drive greater female participation in the workforce. We can’t get the most talented people when we’re only focusing on the male half of the population.
Secondly, I think that under-employment, rather than unemployment, is a big issue in Pakistan. We have talented young people looking to us for development and opportunities to grow. We need to step up and think more about addressing talent creation on home soil.
Lastly, we do not encourage international talent in our country with many highly skilled Pakistanis working abroad and there is little done to attract them back. We have to have a talent plan for the country that addresses these three issues.
