Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Development economics wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Currency war wikipedia , lookup
Economic globalization wikipedia , lookup
Financialization wikipedia , lookup
Exchange rate wikipedia , lookup
Fear of floating wikipedia , lookup
International factor movements wikipedia , lookup
Internationalization wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
International monetary systems wikipedia , lookup
CHAPTER ONE INTERNATIONAL FINANCIAL ENVIRONMENT Multinational Business v International Business Multinational Business refers to an enterprise that operates in more than one country having its headquarters in a single country whilst international businesses are enterprises that have branches scattered throughout the world and not having a traceable headquarters in any one country. International businesses are usually referred to as transnational corporations. Multinational Financial Activities Multinational financial activities range from the following areas of raising finance to fund their operations: 1. Internally generated finance; through branches or head office. 2. Netting off among branches. 3. Grants from the parent company. 4. Raising through equity market; local market or international market. 5. Raising through debt market; local, foreign and euro-bonds. 6. Raising through money market; local market or international market The following should be discussed in the context of the different needs (e.g. working capital requirements, capital expenditure, and so on) that are to be financed by the above sources of finance. Also in the context of the advantages and disadvantages of each of the following to the MNC and the providers of the finance. The following are the instruments that are usually used to finance international businesses: money market securities, Letters of Credit, Drafts, Bills of Lading, Forfeiting, Counter Trade, and Government Assistance to Exporters among others (to be discussed in Chapter 5). Goal of MNE Financial Management 1 There are so many goals that a multinational enterprise can have. These range from profit maximisation, corporate responsibility and so on. However the majority can be short term that is usually advanced by management (also called agents) because of their own needs and desires. On the other hand there are shareholders (also called principals) of these multinational corporations that have a long term horizon for the firm. However, the different views of agents and principals leads to the agency problem and it is the onus of the owners of the business to direct management and workers towards the overall goal of the firm that is shareholder’s wealth maximisation. The principals will then incur what is called agents costs. Hence the overall goal of any multinational corporation should be to maximise the shareholder’s value. INTERNATIONAL MONETARY SYSTEM The current world order of international monetary system’s history can be traced back to the end of World War Two when global leaders led by the United States gathered in Bretton Wood to map up a new order of the global monetary arrangement. Of interest is the birth the IMF and the World Bank as institutions that would foster the socio and economic development of the world. A variety of agencies have been established to facilitate international trade and financial transactions. These agencies often represent a collection of nations. A description of some of the more important agencies follows: International Monetary Fund The United Nations monetary and financial conference held in Bretton Woods, new Hampshire, in July 1944, was called to develop a structured international monetary system. As a result of this conference, the IMF was formed. The major objectives of the IMF set by the charter are to: promote cooperation among countries on international monetary issues, provide temporary funds to members attempting to correct imbalances of international payments, promote stability in exchange rates, promote free mobility of capital funds across countries, and promote free trade. It is clear that the IMF goals encourage increased internationalization of business. 2 Before 1973, when the exchange rates were maintained within tight boundaries, the IMF concentrated on removing currency exchange restrictions and ensuring currency convertibility, with the goal of encouraging international trade. The inception of floating exchange rates in 1973 and the onset of the 1974 -1975 recession caused concern by the IMF that countries would attempt to reduce their respective currency values as a means of stimulating exports and reducing imports. Thus, the IMF offered financing arrangements to countries experiencing large balance of trade deficits. During the international debt crisis that erupted in August 1982, the IMF provided financing to many of the countries experiencing debt-repayments difficulties. It worked with each of these countries individually to develop and implement that would improve their balance of trade positions. One of the key duties of the IMF is its Compensatory Financing Facility (CFF), which attempts to reduce the impact of export instability on country economies. While it is available to all IMF members, it is mainly used by developing counties. A country experiencing financial problems due to reduced export earnings must demonstrate that the reduction is temporary and beyond its control. In addition, it must be willing to work with IMF in resolving the problem. Each member country of the IMF is assigned a quota based on a variety of factors reflecting that country’s economic status. Members are required by the IMF to pay this assigned quota. The amount of funds that each member can borrow from the IMF is dependant on its particular assigned quota. The financing by the IMF is measured in special drawing rights (SDRs). The SDR is not a currency but simply a unit of account. It is an international reserve asset created by the IMF and allocated to member countries to supplement currency reserves. The SDRs value fluctuates in accordance with the value of five major currencies: US dollar, German mark, French franc, Japanese yen, and British pound This five-currency composite, designed January 1, 1981, replaced the prevailing 16-currency formula, which was more complex. Each of the five currencies represented by the revised formula was assigned weights (in accordance with their international importance) to determine the SDR value. The USD received 42% weight, the German mark 19%, and the remaining currencies each received a 13% weight. 3 The IMF played a major role in attempting to reduce adverse effects of the Asian crisis. In 1997 and 1998 it provided funding to various Asian countries in exchange for promises made by the respective governments to take specific actions intended to improve economic conditions. Though the IMF had good intentions, the funding agreements were not always successful. For example, the IMF agreed to a USD43 billion funding for Indonesia. The negotiations of the agreement were tense, as the IMF demanded that President Suharto break up some of the monopolize run by the Suharto’s friends and family members and to close some weak banks. Yet, citizens of Indonesia interpreted the closure of weak banks as a banking crisis and then withdraw their deposits from all banks. In January 1998, the IMF negotiated many types of economic reform, and Suharto agreed to them. However, the reforms may have been overly ambitious, and President Suharto did not accommodate the demands of the IMF to reform Indonesia’s economy. The IMF agreed to renegotiate terms in March 1998 in a continuing effort to rescue Indonesia, but these efforts signaled that a country did not have to meet the terms of the agreement to obtain funding. A new agreement was completed in April, and the IMF resumed its payments to support a bailout of Indonesia. In May 1998, Suharto abruptly discontinued subsidies for gasoline and food, which lead to riots. Suharto blamed the riots on the IMF and on foreign investors who wanted to acquire assets in Indonesia at depressed prices. World Bank The International Bank for Reconstruction and Development (IBRD) also referred to as the World Bank (WB) was established in 1944. Its primary objective is to make loans to countries in order to enhance economic development. For philosophy the WB’s objective is profit-oriented. Therefore, loans are not subsidized but are extended at market rates to governments (and their agencies) that are likely to make repayment. One of the WB’s key facilities is the Structural Adjustment Loan (SAL) facility established in 1980. The SALs are intended to enhance a country’s long-term economic growth. For example, SALs have been provided to Turkey and to some of the less developed countries (LDCs) that are attempting to improve their balance of trade. 4 Because the WB provides only a small portion of the financing needed agreements needed by the developing countries, it attempts to spread its funds by entering into co-financing agreements. Co-financing is performed in the following ways: Official aid agencies. Developing agencies may join the WB in financing development projects in low-income countries. Export credit agencies. The WB co-finances some capital-intensive projects that are also financed though export credit agencies. Commercial banks. The WB has joined the commercial banks to provide financing for private sector development. The World Bank has recently established the Multilateral Investment Guarantee Agency (MIGA), which offers various forms of political risk insurance. This is an additional means (along with its SALs) by which the WB can encourage the development of international trade and investment. International Development Association (IDA) The International Development Association was created in 1960 with country development objectives somewhat similar to those of the WB. Yet, its loan policy is more appropriate for less prosperous nations. The IDA extends loans at low interest rates to poor nations that cannot qualify for loans from the WB. Bank for International Settlements The Bank for International Settlements (BIS) attempts to facilitate corporation among counties with regard to international transactions. It also provides assistance to countries experiencing a financial crisis. The BIS is sometimes referred to as the “central banks’ central bank” or the “lender of last resort”. It played an important role in supporting some of the less developed counties during the international debt crisis in the early and the mid-1980s. INTERNATIONAL DEBT CRISIS 5 A debt crisis is situation where a country has accumulated a very large debt and it is unable to voluntarily continue to service it. History of The Debt Crisis Discussion in class. 1. Global economic shocks Sharp increase in oil prices (1979-1981) World wide recessions in the 1980s A sharp increase in the rate of interest (1979-1983) 2. Poor economic policies and planning 3. Unfavorable weather conditions 4. Protectionism from Europe Solutions to the Debt Problem 1. Embarking on ESAP ESAP leads to liberalization of the economy. It creates conditions that are favorable for investors hence it results in capital inflows. That is, both domestic and foreign investors will be attracted to invest in the country, leading to economic growth. 2. Debt rescheduling It was done in 1982 and the aim is to extend the repayments period of countries so that they can have a debt relief. 3. Debt cancellation and repudiation This is possible if a very powerful delegation is sent to the Paris Club to appeal for debt cancellation. 4. Debt Equity swaps Debt Equity swaps increase direct investment, proposal to sell shares in the export earnings of the debtors and in the indexation of payments to export prices would all charge the form of the debt. The price at which the debt is swapped for equity by the debtor country may afford the debtor some relief. 5. Increased concessionary lending 6 Increased concessionary lending to productive sectors only. In this case, the leader puts some strings or conditions to his funds. For example, the lender can order the borrower to invest in a certain sector and to sell to a specific country or region. BALANCE OF PAYMENTS Definition of the Balance of Payments Is a systematic record of the economic transactions between residents of the exporting country and residents of the foreign countries during a certain period of time or Is the difference between the total earnings on both invisible and visible items and total expenses. In order to know the position as regards international payments, government compiles records of transactions. This record of transactions is thus called the Balance of Payments (BOP). The balance of payments is a record of one country's trade dealings with the rest of the world. Any transaction involving Zimbabwean and foreign citizens is calculated in dollars. Dealings which result in money entering the country are credit (plus) items while transactions which lead to money leaving the country are debit (minus) items. Components of the Balance Of Payments The balance of payments can be split up into three sections: 1. the current account which deal with international trade in goods and services; 2. transactions in assets and liabilities which deals with overseas flows of money from international investments and loans; 3. Monetary Account which deals with foreign currency reserves and transactions with multilateral bodies. Current Account The current account consists of international dealings in goods (visible trade) and services (invisible trade). It records all transactions in goods and services, ie. visibles and invisibles. Receipt of interest , profits and dividends on loans and investments in foreign countries; earnings from tourism and transportation and remittances home of income earned by nationals working abroad are included in this account as invisibles. 7 Example of current account 1985 Debits $m Credits Visible imports 80 140 Visible exports $m Balance Јm 78 072 -2 068 Invisible imports 75 007 Invisible exports 80 027 5020 By referring to above table you can see that in 1985: Zimbabwe bought $80 140 million worth of goods made overseas. Zimbabwe sold $78 072 million worth of goods overseas. The difference between visible exports and imports is known as the balance of trade or visible balance. The amounted to -$2 068 million. Zimbabwe bought $75 007 million worth of foreign-produced services. Zimbabwe sold $80 027 million worth of services overseas. The difference between invisible exports and imports is called the invisible balance. This amounted to $5 020 million. Adding the balance of trade and balance on invisibles together gives the balance on the current account. A deficit on the current account means that more goods and services have been imported into the country than have been sold abroad. A surplus on the current account means more goods and services have been exported than imported. Transactions in Assets and Liabilities/ Capital account The transactions in assets and liabilities section of the balance of payments shows all movements of money in and out of the country for investment. This may be direct investment - investment in productive capacity (when firms invest in other countries to increase capital in these countries), or portfolio investment - investment in shares ,bonds or other assets in foreign countries. Changes in assets will be outflows from Zimbabwe, as Zimbabwean investors invest money overseas. These flows will be debits to the Zimbabwe’s Balance of Payments. Changes in liabilities will be credits to the Zimbabwean Balance of Payments as overseas investors invest money into the country (Zimbabwe) Monetary Account 8 This is also called the official financing account. It records changes in the country’s official foreign currency/exchange reserves (consisting usually of a mixture of gold and foreign currencies) plus transactions with the IMF and other financial institutions. Balance of Payments Problems Balance of payments deficit This is of concern especially in developing countries because it affects the ability of those countries to trade with other countries. A balance of payments deficit is a major problem if it is persistent. This can be the result of excessive purchases of foreign goods and services or excessive Zimbabwean investment overseas. Faced with existing or projected balance of payments deficits on the combined current and capital accounts a variety of policy options are available: Correcting a Balance of Payments Deficit 1. Long term capital from the rest of the world. This has the disadvantage of external indebtedness. 2. Using foreign currency reserves- this is a short term measure because most non-oil producing developing countries have very few months in which to exhaust this. 3. Attracting additional inflows of short-term capital by raising interest rates. Lack of stability in developing countries means that there is no guarantee funds will remain in the countries, i.e. there is capital flight. 4. Import substitution- this is the local production of previously imported goods. This requires the importation of capital equipment and protection of the infant industry by imposing tariffs or bans on imported goods. 5. Exchange control – this is designed to control foreign currency reserves. The foreign currency is rationed so that the most pressing needs of the country will be given top priority when the funds are allocated., eg. capital goods and essential raw materials. Measures also include import licensing as well as creating a state monopoly tasked to import essentials. 9 6. Use of multiple exchange rates- different rates for currencies/ transactions. Essentials such as exports, tourism and essential inputs for industry would have a separate rate(s) of exchange to encourage them while for nonessentials they would be discriminatory . In other words there is a multi-tiered market for foreign exchange. 7. Disguised depreciation- this is a policy whereby there is a deliberate effort by government to make imports more expensive. This includes raising import duties, taxing invisibles, taxing remittances abroad, subsidise exports, charging high fees on sales of foreign currency. This policy is deflationary and also has loopholes. 1. Devaluation- reducing the external value of a currency. This increases the volume of sales abroad. 2. Promoting ting export expansion- drawbacks of duty, export incentive schemes. 3. Encouraging more private investment and seeking more foreign assistance. Much of the foreign aid comes in the form of loans which have to serviced. Interest has to be paid on the loans. The principal has also to be repaid in future. Balance of Payments Surplus This is also a cause for concern because if it is persistent, partners may retaliate by introducing import controls etc. A surplus implies an overvaluation of currency and this leads to exports becoming less competitive on the world market. It could also be inflationary because , it is argued by monetarists that it leads to an increase in money supply. A persistent surplus could mean a depression of domestic living standards. Correcting a Balance of Payments Surplus An unwanted balance of payments surplus can be the result of excessive foreign investment in Zimbabwe. This will place a future strain on the invisible balance. A reduction in interest rates ( an outflow of funds on the capital account) or the scrapping of protectionist measures (restrictive exchange controls) will correct the surplus. 10