🗊Презентация International business management

International Business Management Economic Risk – Economic Risk for Developing and Emerging Economies Dr Michael Wynn-Williams wm82@gre.ac.uk

Economic risk analysis Question : Is my money safe in that country? Answer : Evaluate the Macro economic health of the country Some factors to consider :

Economic Risk Analysis (ERA) IMF uses quantitative analysis for evaluating economies Economic risk is present in all countries, but most significant in developing and emerging economies Guidelines devised at Greenwich evaluate the security of doing business in the country Developing and emerging countries tend to trade in a narrow range of products and depend on cash flow The three main measures of a country’s financial standing: GDP – how much is it producing? Inflation – how well controlled? Current Account – are the imports affordable? The first part of compulsory Exam Question 1 uses simple IMF-style quantitative formulas to measure economic performance against a standard The second part of the question identifies and evaluates the main economic factors in order to make a qualitative investment decision in the country

ERA Exam question Part I: Quantitative data

Finding the data Most of the data is available from the World Bank The data is for all countries, not just developing economy clients of The Bank One piece of data, for the current account/GDP, comes from the IMF World Economic Outlook (WEO) In the exam the data will comprise the World Bank figures + CAD/GDP The data sheet will be a Word file

1. GDP Growth Question: is the economy growing at a sustainable rate? Answer: target 2.0-3.0% developed, 6.0-10.0% emerging and 7.0-11.0% developing economies Gross domestic product (GDP) measures everything produced in the country regardless of nationality Real (constant prices) GDP increases show genuine growth in the economy Positive, steady growth is always good but the gains may be unevenly distributed Undesirable GDP conditions: High growth – rising wages, inflation, imports and interest rates Low growth – poor exploitation of resources, poor competitiveness, low wealth creation Recession – wealth destruction, hysteresis effects

GDP Growth around the world As more resources are brought into use the sustainable rate of growth falls

GDP Growth targets Need to find a balance between a booming economy and recession An overheating economy with high inflation is usually treated with high interest rates A recessionary economy with low inflation is usually treated with low interest rates Stagflation (low growth, high inflation) is a challenging paradox! Sustainable GDP growth target depends on the economy Developed – slow and steady at 2.0-3.0% Emerging – relatively high rate 6.0-10% Developing – relatively very high growth 7.0-11.0% Rate of return should match the risk

GDP Risk and Return for Emerging economies Sustainable high rates of growth as unemployed resources are brought into the economy – e.g. migration from countryside to cities

GDP Risk and Return for Other economies Developing Developed

2: Inflation – % Consumer Prices

inflation

Inflation and Risk/return Most central banks are targeting 2.0% CPI inflation Some central banks will accept overshoots and undershoots for short periods, others (e.g. ECB) will accept only an undershoot On balance, 0.0-2.0% inflation is probably considered low risk World Bank data shows inflation as GDP deflator

3. Current Account Deficit – CAD

Current Account Deficit – CAD

Current Account Deficit – CAD

Developed Country Comparison: Usa Our analysis shows that GDP growth and inflation are both low risk However, CAD/GDP is over the line, meaning it is high risk. Indeed, it is never expected to be within guidelines! Is it realistic to say the USA is “high risk” compared to emerging economies?

Criticism of the IMF Quantitative approach Many feel that the IMF style of analysis does more harm than good Criticisms: It is a creature of the US and Europe It has a neo-liberal agenda for low government spending, privatisation and debt repayment It treats all countries the same IMF’s defence It is invited by the host government It is the last resort – everything else has failed The worse the taste the better the medicine

ERA exam question Part ii: FDI investment decision The second half of Exam Question 1 concerns the best target for foreign direct investment (FDI) [15 marks] The decision of which sector of the economy to invest in can only be based on the information in the datasheet. There are three sectors to choose from: Agriculture Industry Services The FDI decision should identify and analyse the most appropriate economic factors

Factors influencing FDI The economic factors that are appropriate to the FDI decision depend upon the nature of the investment – it is therefore an opportunity for creative thinking by entrepreneurs FDI entrepreneurs need to analyse trends in the data to uncover any new opportunities It is also important to identify specific data that indicates new opportunities To help you remember the most important factors, we have a Greenwich mnemonic: GLIFTS

Greenwich mnemonic - GLIFTS

Using GLIFTS

Other interesting data… An entrepreneur will browse data looking for items of interest This is when your creativity reaches its peak! Some data that might catch your eye and deserve further consideration:

Seminar task Come prepared with your calculators. We will be doing two sets of exercises Working out the ERA for an emerging country – data sheets available in the tutorial folder Considering the country as a candidate for investment

sources World Bank <http://databank.worldbank.org/data/views/reports/ReportWidgetCustom.aspx?Report_Name=CountryProfile&Id=b450fd57> IMF (for CAD/GDP) – latest World Economic Outlook report <http://www.imf.org/external/ns/cs.aspx?id=28> Australia CAD/GDP – Mr Wood.com.au <http://economics.mrwood.com.au/statistics/goal/goalcadgdp.asp> US Debt Service – Creditflowinvestor.com <http://www.creditflowinvestor.com/FederalDebtService.htm> IMF paper on MRR – Boorman, J. and S. Ingves (2001), Issues in Reserves Adequacy and Management <http://www.imf.org/external/np/pdr/resad/2001/101501.pdf> Bank of England current account information sheet <http://www.bankofengland.co.uk/publications/speeches/2006/speech271.pdf> IMF guide to financial terminology <http://www.imf.org/external/pubs/ft/eds/Eng/Guide/file6.pdf> UN debt service ratio definition <http://esl.jrc.it/envind/un_meths/UN_ME069.htm>