International Banking and Trade Finance

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

3. Balance of Payments • “A measurement of all transactions between domestic and foreign residents over a period of time” Madura page 39

4. Measure of all transactions between domestic and foreign residents 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 country’s past economic transactions with other countries • - like a “national” chequing account balance book

6. 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

7. 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

8. 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 Country’s 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

11. 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

12. 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

13. 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

14. 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)

15. 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

16. 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$

17. IMF 181 countries - promotes int’l monetary cooperation MAIN PURPOSES • facilitate the expansion and balanced growth of int’l 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.htm

18. IMF 181 countries - promotes int’l 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.htm

19. IMF 181 countries - promotes int’l monetary cooperation Key Duties • CFF - Compensatory Financing Facility • purpose is to reduce the impact of export instability on country economies

20. 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.htm

21. World Bank ORIGINS:Official name: International Bank for Reconstruction and DevelopmentFounded to help reconstruct European Countries after WW IIhttp://www.worldbank.org

22. World Bank Activities:Today 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.

23. World Bank Activities:In 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.

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

25. 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

26. 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

27. 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