Description
decision-making process in selecting a target country and about managing the risks associated with this decision.
The Tower Associates
Country crises
• Currency Crisis
– Speculative attack on exchange value of currency leading to sharp depreciation
• Financial Crisis
– Severe disruption in financial markets
• Foreign Debt Crisis
– When a country cannot service its debt
• Banking Crisis
– Bank runs or failures cause banks to suspend internal convertibility of liabilities
Factors to be considered
• History of political instability • How well government manages economic conditions, how effective its policy actions are
(Immediate and short term effectiveness and consequence of government policy changes)
• Vulnerability
– – – – – Economy dominated by single industry? Fluctuations in commodity prices Interest rate changes Environmental issues Contagion
• Country’s sources and uses of funds • Amount of convertible currencies/foreign reserves
– Reserves equal to three months of imports are considered safe
How to obtain convertible currencies
• By exporting goods or services • By earning fees from overseas workers • From dividends or investment in convertible currency assets • From foreign direct investment • From foreign portfolio investments • Accumulation of international reserves
Economic Indicators of an impending Crisis
• Short term warning indicators: Variations or changes in
– – – – Stock market prices Real estate prices Real interest rates Real exchange rates
Very sharp rise (50% or more) followed by a sudden(20% or more) decline • Liquidity issues
– Money supply growth and domestic credit expansion – Sudden jump in FDI, portfolio inflows : limited capital absorptive capacity
• Indicators of foreign debt service
– – – – – Debt service ratio (exceeds 30%, exceeds 50%) Short term debt as a % of total debt Variable rate debt as a % of total debt Total foreign debt as a percentage of GDP Current account balance as a percentage of GDP (6%)
• Country A
• • • • • • • • • • • • • • Large, advanced and developing country Economic problems in 1980s Strong - Govt spending a % of GDP, deficit in the fiscal budget Weak – Domestic private investment as a % of GDP, inflation is high Currency floats freely Large industrial economy Experienced volatility in the past Vast Resources – transition to a more diversified competitive economy Role of private business investment increasing wrt govt Political instability possible Large developing country Well endowed natural resources - lacks infrastructure Not yet market economy – gradually moving Consumer prices, interest rates and exchange rates managed
• Country B
• Country C
• Country D
• • • • • • Large developing country Well endowed natural resources - lacks infrastructure Moving towards market economy Very entrepreneurial Wide disparity in income distribution Consumer prices, interest rates and exchange rates managed
Country A
• Political Risk is less and it is highly stable even though the inflows are unstable • Portfolio investment is a bit risky with investments in capital markets • There is high investor confidence due to overall picture of the country. The government finances is influenced by the high government expenditure and there is an increase in the deficit • The GDP growth is not sustainable due to the high level of government expenditure there is less investment by the private sector and there are inflows. • The exchange rate is expected to be depreciated and the main reasons being the high deficit, the high levels of inflation and the expected fall in the rate for lending. • Less inflation than previous years due to a decrease in credit growth and also a withdrawal of liquidity from the market.
Country B
• Portfolio investment is a quite risky with investments in capital markets. There is low investor confidence due to financial scenario of the country. • Inflows are volatile and there is focus on peak of the portfolio of investments. • Stable and growing FX reserves are present with good underlying fundamentals. • High inflation leads to the currency not getting appreciated but will also affect competitiveness of the country. • Depreciation is unlikely and liquidity will gradually decrease. There is a growing share of private investments and the GDP growth is fine.
Country C
• The country is characterised by control on levels of government spending and high levels of investment spending • There is a budget surplus and the level of GDP growth is quite good • Current account deficit is not expected to rise and there are low levels of inflation in the country • High levels of government controls over the macroeconomic variables leading to an economy less dependent on foreign inflows. • There has been a constant appreciation of the currency probably due to private investments low inflation and interest rates of the country • There are low inflows and a steady growth and stable inflows of foreign investment.
Country D
• The investment and the kind of inflows are highly volatile and the absolute levels of Foreign Direct Investment is also volatile although it has been falling as a percentage of the GDP. • The exchange rate is stable and appreciating due to increase in interest rate and also low levels of inflation. There is low growth in credit and low level of consumer spending and high levels of spending investment making it a cause of concern for the country. • There is high budget surplus and link between the growth rate , the inflation rate , the exchange rate and the interest rate is quite visible.
Thank You
doc_486562961.pptx
decision-making process in selecting a target country and about managing the risks associated with this decision.
The Tower Associates
Country crises
• Currency Crisis
– Speculative attack on exchange value of currency leading to sharp depreciation
• Financial Crisis
– Severe disruption in financial markets
• Foreign Debt Crisis
– When a country cannot service its debt
• Banking Crisis
– Bank runs or failures cause banks to suspend internal convertibility of liabilities
Factors to be considered
• History of political instability • How well government manages economic conditions, how effective its policy actions are
(Immediate and short term effectiveness and consequence of government policy changes)
• Vulnerability
– – – – – Economy dominated by single industry? Fluctuations in commodity prices Interest rate changes Environmental issues Contagion
• Country’s sources and uses of funds • Amount of convertible currencies/foreign reserves
– Reserves equal to three months of imports are considered safe
How to obtain convertible currencies
• By exporting goods or services • By earning fees from overseas workers • From dividends or investment in convertible currency assets • From foreign direct investment • From foreign portfolio investments • Accumulation of international reserves
Economic Indicators of an impending Crisis
• Short term warning indicators: Variations or changes in
– – – – Stock market prices Real estate prices Real interest rates Real exchange rates
Very sharp rise (50% or more) followed by a sudden(20% or more) decline • Liquidity issues
– Money supply growth and domestic credit expansion – Sudden jump in FDI, portfolio inflows : limited capital absorptive capacity
• Indicators of foreign debt service
– – – – – Debt service ratio (exceeds 30%, exceeds 50%) Short term debt as a % of total debt Variable rate debt as a % of total debt Total foreign debt as a percentage of GDP Current account balance as a percentage of GDP (6%)
• Country A
• • • • • • • • • • • • • • Large, advanced and developing country Economic problems in 1980s Strong - Govt spending a % of GDP, deficit in the fiscal budget Weak – Domestic private investment as a % of GDP, inflation is high Currency floats freely Large industrial economy Experienced volatility in the past Vast Resources – transition to a more diversified competitive economy Role of private business investment increasing wrt govt Political instability possible Large developing country Well endowed natural resources - lacks infrastructure Not yet market economy – gradually moving Consumer prices, interest rates and exchange rates managed
• Country B
• Country C
• Country D
• • • • • • Large developing country Well endowed natural resources - lacks infrastructure Moving towards market economy Very entrepreneurial Wide disparity in income distribution Consumer prices, interest rates and exchange rates managed
Country A
• Political Risk is less and it is highly stable even though the inflows are unstable • Portfolio investment is a bit risky with investments in capital markets • There is high investor confidence due to overall picture of the country. The government finances is influenced by the high government expenditure and there is an increase in the deficit • The GDP growth is not sustainable due to the high level of government expenditure there is less investment by the private sector and there are inflows. • The exchange rate is expected to be depreciated and the main reasons being the high deficit, the high levels of inflation and the expected fall in the rate for lending. • Less inflation than previous years due to a decrease in credit growth and also a withdrawal of liquidity from the market.
Country B
• Portfolio investment is a quite risky with investments in capital markets. There is low investor confidence due to financial scenario of the country. • Inflows are volatile and there is focus on peak of the portfolio of investments. • Stable and growing FX reserves are present with good underlying fundamentals. • High inflation leads to the currency not getting appreciated but will also affect competitiveness of the country. • Depreciation is unlikely and liquidity will gradually decrease. There is a growing share of private investments and the GDP growth is fine.
Country C
• The country is characterised by control on levels of government spending and high levels of investment spending • There is a budget surplus and the level of GDP growth is quite good • Current account deficit is not expected to rise and there are low levels of inflation in the country • High levels of government controls over the macroeconomic variables leading to an economy less dependent on foreign inflows. • There has been a constant appreciation of the currency probably due to private investments low inflation and interest rates of the country • There are low inflows and a steady growth and stable inflows of foreign investment.
Country D
• The investment and the kind of inflows are highly volatile and the absolute levels of Foreign Direct Investment is also volatile although it has been falling as a percentage of the GDP. • The exchange rate is stable and appreciating due to increase in interest rate and also low levels of inflation. There is low growth in credit and low level of consumer spending and high levels of spending investment making it a cause of concern for the country. • There is high budget surplus and link between the growth rate , the inflation rate , the exchange rate and the interest rate is quite visible.
Thank You
doc_486562961.pptx