Multinational Financial Management

1
International Banking and Trade Finance
Chpt 2
2
Chapter 2

• Balance of Payments page 39
• The Current Account
• The Capital Account
• Exchange Rate
• IMF and the World Bank

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Balance of Payments

• A measurement of all transactions between
  domestic and foreign residents over a period of
  time Madura page 39

4
Balance of Payments

• Current account
• balance of goods and services
• net trade interest and dividend payments
• unilateral transfers

exports
imports
5
Balance of Payments

• BOP accounts provide a system for documenting
  economic transactions during a given period
  between 2 countries
• A BOP statement documents a countrys past
  economic transactions with other countries
• - like a national chequing account balance
  book

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Balance of Payments

• 2 basic concepts
• 1. The statement is made up of balances, which
  show either surplus or deficit
• 2. The total statement must be a balance

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Balance of Payments

• Statements are in 4 major Sections
• 1. The Current Account- imports and exports of
  goods and services
• 2. The Capital Account- investments and loans
• 3. Errors and Omissions
• 4. The Official Reserve Account- changes in
  response to the surpluses or deficits in the
  Current and Capital Account
  page 85 86 in text

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Balance of Payments

• Explanation of Balances5 categories

1. Balance of Trade- imports and exports of JUST
goods 2. Balance of Goods and Services 3.
Current Account- goods services short term
capital transfers 4. Basic Balance - goods
services long term capital transfers 5. The
Official Settlements Account- changes in
response to the surpluses or deficits in the
Current and Capital Account

9
Balance of Payments
Careful analysis of a Countrys BOP statements
should be made before considering doing business
in the country. This information can help you
evaluate risk.
10
Balance of Payments Trends in Trade

• NAFTA
• free trade block of US, Canada and Mexico
• European trade
• Single European Act
• increased intra-european trade
• eastern european trade changes
• importing larger amounts of goods and services
• Trade agreements around the world

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Balance of Payments Trends in Trade

• GATT trade agreement
• 117 countries agreed to lower tariffs
• trade barriers slowly eliminated until year 2000
• European capital flow
• much capital shifting to eastern Europe
• German reunification
• redirection of funds increased US interest rates

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Factors affecting Current Account

• 1. Inflation
• higher rates relative to other countries affects
  trade
• increased imports and decreased exports
• 2. National income
• increases (decreases) relative to other countries
• current account decreases (increases)
• greater wealth implies greater need for foreign
  goods

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Factors affecting Current Account

• 3. Government restrictions
• tariff (tax on imported goods)
• increases prices lowers demand on imported
  goods
• increases current account of the country
• US tariffs on apparel and farm products
• tariffs imposed in different countries on a case
  of imported beer
• US 0.1235, Europe 2.93, China 14.64

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Factors affecting Current Account

• 4. Exchange rates
• a currency valued in terms of another currency
• increase in exchange rate suggests decrease in
  current account
• exported goods would cost more, thus decreasing
  demand for the good
• assumes price-elastic goods (sensitive to price
  changes)

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4X - Foreign Exchange

• History
• Currency value used to be based on stock of gold
  the government held in central bank.This was the
  Fixed Exchange Rate System
• Problems developed when money was printed, and
  not backed by gold
• In 1976 the world changed to a
• Floating Exchange Rate System

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4X - Foreign Exchange

• Floating Exchange Rate System
• this system determines the value of a currency
  according to the demand for it, and the supply on
  the international 4X markets
• clean float - no government intervention
• dirty float - government intervention
• current system is managed rates, not exactly free
  floating
• small economies tie their rate to major trading
  partners
• ie. Hong Kong dollar used to be pegged at 6
  HK to 1 US

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IMF

• 181 countries - promotes intl monetary
  cooperation
• MAIN PURPOSES
• facilitate the expansion and balanced growth of
  intl trade
• promote currency exchange stability
• establishment of multilateral system of payments
• help countries with temporary balance of payments
  difficulties

http//www.imf.org/external/np/exr/facts/glance.ht
m
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IMF

• 181 countries - promotes intl monetary
  cooperation
• MAIN ACTIVITY
• Lends money to members who have trouble meeting
  financial obligations - BUT, only on the
  condition that they undertake economic reforms to
  eliminate these difficulties for their own good.

http//www.imf.org/external/np/exr/facts/glance.ht
m
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IMF

• 181 countries - promotes intl monetary
  cooperation
• Key Duties
• CFF - Compensatory Financing Facility
• purpose is to reduce the impact of export
  instability on country economies

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IMF

• Areas of Activity
• Surveillance
• It appraises its members exchange rate policies
• Analyses their general economic situation
• Financial assistance to IMF member countries
• Technical assistance
• re fiscal and monetary policy

http//www.imf.org/external/np/exr/facts/glance.ht
m
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World Bank

• ORIGINSOfficial name International Bank for
  Reconstruction and DevelopmentFounded to help
  reconstruct European Countries after WW II
  http//www.worldbank.org

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World Bank

• ActivitiesToday it is involved in development
  aid for poor countriesLends money for long-term
  development projects.Works with the IMF to
  resolve debt problems in the Developing WorldHas
  made mistakes in giving money to corrupt
  regimes.Made environmental mistakes ie. Gave
  money for a highway through Brazilian jungle.

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World Bank

• ActivitiesIn situations where war has ended,
  the World Bank acts to facilitate the transition
  to sustainable peace after hostilities cease and
  to support economic and social development.

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• World Investment Flows
• - Portfolio Investment
• stocks, bonds, securities, T-bills
• - Direct Investment
• mfg. plants, warehouses, processing operations,
  representative offices

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Why FDI Exits

• Land, Resources and some types of business cannot
  be relocated
• If a company wants access, they have to go there
• eg. Mining operations, forest harvesting
• If your customer moves overseas, you may follow
  to continue to be able to supply
• eg. Autoparts companies

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Why FDI Exits

• Some companies set up operations overseas because
  manufacturing locally is cheaper than exporting
  and paying the shipping costs
• Companies also setup mfg. Overseas in low-wage
  areas to make products that are then sent back to
  customers in the Home Country, or to a 3rd market
• eg. Japanese companies mfg. Electronic goods in
  Malaysia, and export to the USA

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Concerns of the Host Country

• Jobs for citizens
• Additional taxes
• Technology
• Attraction to other types of companies
• loss of economic control
• vulnerability to employment crisis if co. leaves