The winds of change: Implications in 2021 for IFCs
If 2020 has taught us anything, speculating about what may or may not happen in the year ahead, in an uncertain and complex world is fraught with difficulty. Nevertheless, some clear trends are emerging that will have an impact on International Finance Centres (IFCs) and the world in which they operate. These trends will influence and shape the IFCs strategic approach and priorities.
Here are the Top Ten themes that we anticipate will give IFCs food for thought in 2021:
1. The Biden Presidency
> A focus on domestic policy
> A return to multilateralism
> Re-framing of relationships with the WTO, the EU, and China
The fallout of one of the most divisive presidential elections in US history will continue to play out in 2021 on many levels. Whilst the close-run nature of the election made for compelling viewing, the narrow margin of victory in the vote will continue to frame the very character of a country that has become accustomed to a political impasse. Without control of the Senate, the Biden administration may well find it hard to push through what some see as the more radical elements of its policy programme. The aspirational democrat agenda could flounder as it comes up against the buffeting headwinds of the 'two tribes' culture of Republicans vs Democrats, a phenomenon that has dominated the political narrative in the US for more than a decade.
It's widely expected that the primary focus will be on domestic policy as President-Elect Biden gets his feet under the Oval Office table. Still, there will be globally critical repercussions of the change of Administration for the international stage too.
A return to multilateralism will likely feature, in clear contrast with the 'America First' approach pursued by former President Trump. US relations with the WTO, the EU, and China, are more likely to be framed very differently to the Trump era. And the first goodwill down payment will be the re-entry of the US into the Paris Climate Change Agreement. Notwithstanding, policy differences between the great powers will persist, as will the assertion of national interests.
> Positivity around the potential of international trade
> East-West tensions will persist
> US/EU dialogue more consensual
Beyond the US, geopolitics will continue to shape trade patterns with some adjustment in 2021, but not by too much. Overall, as HSBC's new Navigator report indicates, there is positivity around the potential of international trade. Still, the landscape is becoming more complex, as supply chains reform, and business becomes increasingly intra-regional.
East-West trade tensions will persist, accompanied by uncertainties around tariffs, trading parity, security and intellectual property. A US/EU axis may see China pivot to a more domestic and regional focus, whilst safeguarding its tech independence. For IFCs, the wider ASEAN region will become increasingly important.
In Europe, overall US/EU dialogue will become more consensual, in particular as clarity around Brexit finally emerges. Still, EU tech and digital tax regulation will likely continue to collide with US interests. Despite this, the Biden administration will court the EU as it faces off to an increasingly confident China.
3. Beating COVID-19
> Restoration of some sense of normality
> Slow, returning consumer and investor confidence
Of course, a great deal of 2021 will revolve around economic and societal recovery from the COVID-19 pandemic. The prospect of a widely available vaccine in early 2021 will provide hope for a restoration of some normality in day-to-day lives. However, the reality is that it will take some time for real recovery to emerge.
Early test results have provided markets with some confidence. Still, long-term effectiveness remains unproven, and the mass roll-out of vaccines will be a vast operational undertaking, with 200m doses planned through the COVAX collaboration over 2021.
After a year of suffering, the light at the end of the tunnel will provide much-needed consumer and investor confidence and help get the wheels of economies moving again. The road will be a long one, and the damage already done to communities, business and public finances run deep. So, put the champagne on ice, but don't pop the cork just yet.
4. The Great Reset
> Exciting and rapid pace of change and innovation
> A drive to address social inequalities
> A sharper focus on climate change and sustainability, considerable acceleration in 2021
In tandem with the public health effort to beat COVID-19, there will be efforts to shape economic and societal recovery.
The prospect of some seeing this as a once in a lifetime opportunity to innovate - to try new things, and bring new ideas to market that might never have worked before - will be exciting. McKinsey has estimated that in 2020 the world has vaulted forward five years in the space of a few months in terms of digital adoption. Many see an opportunity for progress, avoiding a snap back to the same mindsets and approaches that were prevalent pre-crisis.
However, this pace of change will not suit everyone, some markets will not recover at the same rate as others, and there will be those who are left behind. The desire to 'build back better' has seen business and political leaders reflecting on what this means for society as a whole. The will for collective progress is tangible, as is the drive to address social inequalities; and the way this will manifest won't be in an old or new normal, but through demands for a better, fairer normal.
Accompanying this will be a much sharper focus on climate change and sustainability – a trend that was already underway, but one that will see a considerable acceleration in 2021. The commitments made to the delayed UN climate change agenda will be telling.
5. The Debt Experiment
> Economic stimulus measures are likely to see debt go even higher than 2020
> Managing private and public budgets back to sustainable levels will continue to be a significant challenge
A striking impact of the pandemic has been the massive increase in public and private debt, as governments have quickly implemented some of the most significant public spending measures ever seen to support jobs, livelihoods and entire industries. Households have encountered rapid increases in unemployment with many turning to the credit and loan markets to prop up spending.
In 2020, global debt has risen to an all-time high of $257trillion – that's $32,500 for each of the 7.7 billion people in the world today and 3.2 times global annual output. Economic stimulus measures are likely to see debt go even higher over the coming months. Emerging market debt in particular currently totals more than $8.3 trillion, that's up 100% in ten years.
The level and extent of the debt is unprecedented, and managing public and private budgets back to a sustainable level will be one of the significant challenges for the coming years.
6. Private Capital
> Increased demand for private capital to play a role in economic recovery
> New forms of public/private partnerships will emerge
Strained public finances and escalating national debt, now at record levels, will have far-reaching consequences. This backdrop will see increased demand for private capital to play a role in economic recovery – with figures suggesting a total stock of some $2.3 trillion of private capital dry powder available and ready to deploy.
We were already seeing the critical contribution of private capital in 2019/20 as the industry moved increasingly into the institutional arena. In 2021, we can expect to see private capital put to work in a very new environment, where shortfalls in recovery funding and emerging markets encourage new forms of public/private partnerships.
7. Global Business Tax
> Significant implications of OECD plan - not least for large, mainly US tech companies
> A real risk to investment structures as OECD harmonises conflicting objectives of its members
There's no stopping the regulatory juggernaut, and in 2020 developments in the global business tax sphere were a key area of focus. Recent global events have slowed progress a little, but the OECD still plans to publish a plan in mid-2021, with new taxing rights and a global minimum business tax on the stocks.
There are significant implications – not least for the large, mainly US tech companies, who could feel the most impact from these developments. Then there is the political dimension, with the OECD endeavouring to harmonise the conflicting objectives of some of its largest members, with the EU waiting in the wings, ready to introduce its measures, should the multi-lateral solution falter. There is also the real risk to investment structures, which, if a carve-out is not confirmed, may be adversely impacted by these changes, making cross-border investment more complex and expensive, a scenario in which it's hard to see any winners.
8. Technology Wars
> Technology will remain front and centre in 2021, but there will be a new spotlight on national security
> We will see evolving approaches to state aid and antitrust lawsuits in the US and EU
2020 has undoubtedly been a year when digital has accelerated to become a vital part of the commerce infrastructure, enabling businesses to continue functioning, employees to stay connected, and customers to remain engaged remotely. However, whilst digital adoption has on one side of the coin opened up new frontiers for trade, it has also created new battlegrounds.
With technology set to remain front and centre in 2021, tech companies have emerged as politically influential powerhouses, in a digitally enabled – indeed digitally-reliant – world. A new spotlight has focused on national security, with different trading blocs and divergent economic interests taking opposing stances. We are also likely to see evolving approaches to state aid, and antitrust lawsuits in the US and EU, as the financial muscle of big-tech collides with the need to replenish the empty coffers of nations around the world that are facing large deficits.
9. Going Digital
> Mass migration of commerce to an online environment will endure in 2021
> Digital will change the office in 2021, playing a big part in the employee experience
The mass migration of commerce to an online environment in 2020, will endure in 2021 and beyond, as business adapts to a digital-first approach, with a transformative effect on consumer engagement.
Firms will harness every touchpoint to build customer loyalty in a fluid and fast-moving environment. Exceptional customer experience, delivered at highly competitive price points will become the norm, as data-driven marketing becomes ever-more tailored to individual consumers.
Essential for firms in multiple locations will be how they adopt digital tools in a sustained remote working environment. The office will look very different in 2021, as other models are experimented with. There may well be a new definition of what it means to come to 'the office', due to the increase of 'third space', 'hub and spoke' models, and straightforward home working. Technology will play a big part not just in the customer journey, but in the employee experience too.
> A likely movement toward a reform for resilience and calls for health for all
> We can expect wholesale changes in what health and healthcare mean both at home, and abroad
After a year where the pandemic has transformed how we live our lives, do our jobs and interact with friends, family and colleagues, it stands to reason that a focus on health will persist into 2021.
We are likely to see movement toward reforms that promote resilience and calls for health for all, with the aim of better safeguarding public health in the future. How healthcare is delivered will pivot too through, for example, the rise of telehealth, digital consultations, and a greater focus on care in the community and personal monitoring. We can expect wholesale changes in what health and healthcare mean in the coming years, both at home and abroad.
Implications for IFCs?
Some of these macro trends may not at first glance appear to have direct relevance to the world of IFCs, but they do all paint a picture of 2021 that IFCs firms should be weighing and reflecting upon, as they shape their post-pandemic strategy.
Overall, however, despite some persistent headwinds, there is a positive outlook for IFCs. The overriding feature of the coming year will be 'change', and IFCs are very good at adapting to change. Those with stable governments, strong fiscal positions and agile economies, are well-positioned to support trade and investment through periods of widespread change and will thrive.
In many ways, this is the moment for IFCs to shine, to showcase what they do and the value they bring. Strained public finances will see governments facing enormous debt challenges, private capital gaining in importance, impact investing, philanthropy and ESG high on the ‘build back better’ agenda, and regulatory change relentless.
But this is what IFCs and their firms do – they provide stable, no-nonsense platforms to support and direct capital flows, they provide the reassuring presence of the rule of law and clarity in a world of regulatory complexity.
And those like the Channel Islands, the BVI and the Cayman Islands, IFCS that start with strong fiscal positions, and that have invested in transformative digital programmes will be on the front foot to support the delivery of a digitally-oriented world that is prepared to innovate and innovate quickly. 2021 will provide real challenges, but IFCs have the tools to understand those challenges and provide solutions to them.
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