Transcript Net Exports

Financial
Liberalization
• 1. Current Account represents the net sum of
trade in goods and services, primary income and
secondary income: NX +NFI.
a. Net Exports
1. Trade balance refers to net export (export less
import) of goods
2. Net Services, defined as the net export (export
less import) of services.
b. + c. Net Factor Income
b. Primary Income comprises compensation of
employees (wages, salary) and investment income
c. Secondary Income refers to donation or grant
paid to or received from nonresidents
Meta Data
Balance of Payments
nit : Millions of Baht)
Current account
a. Goods and services (NX)
1. Goods (Trade Balance)
Exports (f.o.b.)
Imports (f.o.b.)
2. Net Services
Services receipts
Services payments
b. Primary income
Primary Income receipts
(1) Compensation of employees
(2) Investment income
Primary Income payments
(1) Compensation of employees
(2) Investment income
c. Secondary income
Balance of Payments Table
2005
(302493)
(134816)
142235
4406673
4264438
(277052)
800545
1077596
(336302)
99032
n.a.
99032
435334
n.a.
435334
168625
2010
312944
598735
937249
6060184
5122935
(338515)
1084154
1422669
(476312)
161698
40501
121197
638011
41841
596169
190522
2011 p
180637
195270
514848
6675068
6160220
(319577)
1266314
1585892
(344427)
219152
52994
166158
563579
42942
520637
329794
Savings &Current Account
• Gross National Savings: GNI – Consumption
(Publ. + Private)
• GDP = Consumption + Gross Capital Formation
+ Net Exports (Exports – Imports)
• GNI = GDP + NFI
• GNS – GCF = NX + NFI = Current Account
Capital & Financial Account
Net {Non Reserve} Capital Inflows
Two Parts
• Capital Account: Transfers of copyright, patents,
mineral rights, debt forgiveness by govt
• Financial Account: Vast bulk of international
capital movements [Inflows less outflows]
– Inflows: Foreign purchases of domestic securities, FDI,
loans from foreign banks.
– Outflows: Domestic purchases of foreign securities,
FDI, loans from domestic banks
Types of Capital Flows
• Direct Investment reflects the lasting interests of
nonresidents of an economy in a resident entity.
A direct investor may invest in equity capital,
lending to affiliates, or reinvested earnings.
• Portfolio Investment refers to transaction that
involves buying and selling of equity securities,
debt securities in form of bonds, notes, money
market instruments
• Other Investment includes loans, trade credits,
deposits as well as other account receivables and
payables
Balance of Payments
Foreign Currency Received (Credit)
Exports (+)
Income Receipts (+)
{Non reserve} Capital Inflows (+)
Foreign Currency Paid (Debit)
Imports (-)
Income Payments (-)
{Non reserve} Capital Inflows (-)
Credits – Debits = Increase in Reserves
Link
Overall Balance = Current Account + Capital & Financial Account
Accounting
Bank of T hailand
(Unit : Millions of Baht)
5 Current account balance
6 Capital account
7 Financial account
14 Net errors & omissions
15 Overall balance
EC_XT _046 :
2012 p
-46,397.97
7,245.72
440,990.47
-238,868.81
162,969.40
Balanc e of
2011
130,456.55
-1,198.01
-25,304.36
-68,884.19
35,070.00
Payments
2005
-302,492.94
n.a.
282,756.78
241,173.02
221,436.87
• Current Account + Capital & Financial Account
should equal increase in Reserve Assets.
• Not all financial transactions measured.
• CA + C&FA + NEO =Overall Balances
• NEO = Uncounted Inflows
Balance of Payments Equation
Current
Account
+
Net
Capital Inflows
=
Overall Balance
(increase in
reserves)
What if economy runs a current account deficit?
• What if current account or capital inflows is too low to
balance (i.e too much imports/not enough exports)
Not enough
buyers for
domestic
currency
goods
Current
Account
+
Too many
buyers for
foreign
currency
assets
Net
Capital Inflows
≠
Overall Balance
(increase in
reserves)
What if economy runs a current account deficit?
Net
Capital Outflows
Not enough
buyers for
domestic
currency
goods
Current
Account
Too many
buyers for
foreign
currency
assets
Two Possibilities
• Floating Exchange Rates – Changes in the
exchange rate equalize forex market.
• Pegged Exchange Rate – Changes in reserve
assets equalize forex market.
Flexible Exchange Rate: Not enough demand for domestic
currency causes exchange rate to depreciate.
• Domestic goods and assets become more competitive
and create more capital inflow and greater current
account
Current
Account
Current
Account
+
Net
Capital Inflows
Net
Capital Inflows
=
Overall Balance
(increase in
reserves) = 0
Central Bank
does not
participate in
the market
Fixed Exchange Rate: Central bank must use forex reserves to
buy domestic currency to absorb pressure on its value
• Central bank spends its stock of foreign currency.
Overall Balance
(increase in
reserves)
Current
Account
+
Net
Capital Inflows
=
Overall Balance
(increase in
reserves)
Not enough demand for domestic currency causes
exchange rate to depreciate.
Net
Capital Outflows
Current
Account
Current
Account
Net
Capital Outflows
Falling price of currency makes domestic
goods & financial assets more competitive
Central bank must use forex reserves to buy
domestic currency to absorb pressure on its value.
Net
Capital Outflows
Current
Account
Net
Capital Outflows
What if economy receives a surge in inflows?
Current
Account
Hot Money
Net
Capital Outflows
Hot Money
• What if economy receives a surge in inflows?
Net
Capital Inflows
Current
Account
+
=
Overall Balance
(increase in
reserves)
Money coming into the economy drive foreign exchange payments out of balance.
Hot Money: Fixed Exchange Rate
Central bank buys incoming foreign currency ?
Overall Balance
(increase in
reserves)
Net
Capital Inflows
Current
Account
+
Purchase of foreign currency boosts reserves.
=
Overall Balance
(increase in
reserves)
Hot Money: Flexible Exchange Rate
Increase demand for domestic currency causes appreciation.
Net
Capital Inflows
Current
Account
Current
Account
+
=
Overall Balance
(increase in
reserves) = 0
More expensive currency reduces
export competitiveness drives the
trade balance into deficit.
Excess demand for domestic currency causes exchange
rate to appreciate?
Current
Account
Current
Account
Net
Capital Outflows
Net
Capital Outflows
Floating exchange rates
Central bank purchases inflows and increases
reserves
Current
Account
Net
Capital Outflows
Net
Capital Outflows
Official Reserve Assets 2010
$3,500,000,000,000.00
$3,000,000,000,000.00
$2,500,000,000,000.00
$2,000,000,000,000.00
$1,500,000,000,000.00
$1,000,000,000,000.00
$500,000,000,000.00
$0.00
FINANCIAL CRISIS
International Financial Crises
• Currency Crises – Loss of credibility of fixed
exchange rate system.
• Banking Crisis – Sudden collapse of the
domestic banking system.
• Systemic Financial Crisis/Sudden Stops –
Breakdown of system of international capital
flows.
• Sovereign Debt Crisis – Gov’t unable to pay-off
debts
IMF World Economic Outlook, 1998
Devaluation/Revaluation
• Devaluation of the currency occurs when
central bank operating an exchange rate peg
increases the number of domestic dollars
needed to purchase one foreign dollar.
• Revaluation is a decrease in domestic currency
price of foreign dollars.
Currency Crises
• Market believes that exchange rate will be
devalued in the near future.
• Lenders demand higher interest rates to lend in
domestic dollars to compensate for loss of
value after devaluation.
• Central bank must use its foreign reserves to
buy domestic currency and prop up exchange
rate.
• If pain of interest rates is too painful or loss of
reserves too severe, central bank may be forced
to devalue.
ERM Crisis
Go for the Jugular
• In 1980’s, European economies constructed a
system of linked currencies called the
Exchange Rate Mechanism.
• Inflationary German fiscal policy following reunification led to high DM interest rates.
• To maintain link, other Euro currencies needed
to have interest rates too high for their own
situation.
• In Sept. 1992, markets expected a
delinking/devaluation of currencies.
Currency Crisis
• Speculation against the
pound forced Bank of
England to raise interest
rates and buy pounds in
forex markets.
• Pain of interest rates
was viewed as too
severe and B of E was
forced to abandon the
peg.
Pounds/DM
0.42
0.41
0.4
0.39
0.38
0.37
0.36
0.35
0.34
0.33
0.32
1992 1992 1992 1992 1992 1992 1992 1992 1992 1992 1992 1992
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Principal Global Indicators Database
Banking Crises
• Bank Runs – Sudden withdrawal of deposit base
forcing bank closures or gov’t assistance.
– Solvency Crisis: Banks have substantial amounts of
loans gone bad and thus have insufficient funds to
repay depositors.
• Swedish Banking Crisis, 1991 Link
– Liquidity Crisis: Sudden deposit withdrawal requires
liquidation of otherwise sound assets.
• Bank of East Asia,
2008 Link
Roles of Banking System
Why Not Finance Corporate Sector w/ Stocks and Bonds?
Banks accept deposits from retail customers and
make larger, longer-term loans.
• Information: Banking institutions study creditworthiness of borrowers.
• Monitoring: Banks can enforce covenants and
conditions on lending.
• Liquidity : Deposits easily used for necessary
transactions
Link
Systemic Crisis
Bank failure can be contagious
1. Interbank Lending
2. Panic conditions
Link
Lender of Last Resort
• Banking system sufficiently important that gov’ts
will usually protect depositors and prevent mass
bankruptcies.
– Liquidity Crisis: Lend at penalty rates against good
collateral. Walter Bagehot, 1840’s. Link
– Solvency Crisis: Recapitalize banks through gov’t
purchase of equity, diluting or destroying shareholder
value.
• Moral Hazard: Banks creditors and (sometimes
owners) are protected from consequences of
risky behavior.
Fragile banking system makes high interest rates untenable and
can lead to fears of devaluation (especially if central bank funds
used to bailout banking system)
Banking
Crisis
Currency
Crisis
Exchange rate devaluation can damage balance sheets if balance
sheets (deposits or borrowings) are dollarized.
Financial Crises
• Sudden Stops: Foreign investors herding behavior and
short-termism lead them to move in and out of countries
rapidly.
– “The greatest concern I have is that capital account
convertibility would leave economic policy in a
typical ‘emerging market’ hostage to the whims and
fancies of two dozens or so thirty-something country
analysts in London, Frankfurt, and New York. ” Dani
Rodrik, 1998
Sudden Stops
• International hot money (short-term lending) is
subject to herding behavior from international
financial market.
Link
– Rapid inflows and rapid outflows.
• When capital inflows stop, either those can be
replaced with forex reserves, or domestic
borrowers will face bankruptcy.
– Domestic firms can no longer finance investment
– Demand, GDP, and employment fall.
– Devaluation of currency.
Balance of Payments Equation
Current
Account
+
Net
Capital Inflows
=
Overall Balance
(increase in
reserves)
Sudden Stop
• What if capital flows out?
Current
Account
=
+
Overall Balance
(increase in
reserves)
Net
Capital Inflows
Money going out of the economy drive foreign exchange payments out of balance.
Sudden Stop
Increase demand for domestic currency causes depreciation.
Current
Account
Current
Account
+
=
Net
Capital Inflows
Overall Balance
(increase in
reserves) = 0
Depreciation leads to
currency account reversal.
East Asian Crisis
Link
Current Account % of GDP
20
15
10
5
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
-5
-10
-15
Indonesia
Malaysia
Thailand
Korea
1999
2000
2001
2002
Foreign Reserves
Measures of Adequate Reserves
• Import Coverage: Reserves > Imports for 2-3
Months
• Greenspan-Guidotti Rule: Reserves exceed
100% of debt due within one year.
Link
Buildup Foreign Reserve Assets
350000.000
Reserves (excluding gold)
300000.000
Millions of US$
250000.000
200000.000
150000.000
100000.000
50000.000
0.000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Indonesia
Korea, Republic of
IMF Financial Statistics
Malaysia
Thailand
Korea
Short-term External Foreign Currency Debt Korea
180
160
140
Billion US$
120
100
80
60
40
20
0
Dealing with Sudden Stops
• Modern Approach
Swap lines Link
Link
The debate over financial globalization
• Broad agreement (among economists at least) that
trade liberalization is beneficial and leads to faster
growth
→ Free trade in good and services makes countries better off
• In contrast, much controversy over whether the
liberalization of international financial flows is
desirable
→ Free trade in financial assets may not make countries
better off
Capital Controls
• Stock Market: Limits on foreigners holdings of
shares, possibly in certain sectors.
• Financial Institutions: Limits on businesses of
foreign banks, insurance co’s.
• Restrictions on Direct Investors – Requirements
of Domestic Partners
• Currency Controls: Limits on domestic and
foreign residents to exchange currency
http://www.imf.org/external/pubs/ft/fandd/2010/09/dataspot.htm
Liberalization and Economic Growth
i.
Capital Deepening: Absent capital mobility,
national investment must be financed with national
savings. In low savings countries, investment may
be slow.
ii. Allocative Efficiency: Capital mobility allows
seeking out the highest rate of return. Investment
can go to locations where it has the highest
productivity.
iii. Technology Transfer: Foreign investors may bring
along techniques of production.
Empirical
Evidence:
Economic Growth
• Kose, Prasad,
Rogoff, and
Wei: 2006: “it
remains difficult
to find robust
evidence that
financial
integration
systematically
increases
growth.”
summary of 40
studies. .
Link
Reaping the Benefits of Financial Globalization
Empirical evidence shows that the benefits of opening
capital account are mixed.
•
But there are several
factors which have been
shown to allow countries
with open capital
accounts to:
A. Increase risk-sharing ;
B. Increase economic
growth;
C. Reduce the likelihood of
crises.
Keys to Benefiting from Globalization
1. Financial sector development. Wellregulated domestic financial markets
2. Institutional Quality. Low corruption, high
transparency, good corporate governance.
3. Sound Macroeconomic Policies. Low
deficits and price stability.
4. Trade Integration. High degree of trade
openness.
http://www.imf.org/external/pubs/
ft/fandd/2007/03/kose.htm
Nominal Anchors
• Nominal Anchors act as the measure of currency value
maintenance which orient the activities of the central
bank.
• Exchange Rate Targets: Maintain value
relative to another currency or basket of
currencies.
• Inflation Targets: Maintain value relative
to a basket of goods.
How to Liberalize
• During the early 1990’s, some authors argued
in favor of a “big bang” approach to capital
account liberalization.
• Since mid-1990’s, taking empirical evidence in
mind, IMF has adopted a more moderate
approach referred to as sequencing or
‘integrated approach’
Integrated Approach
(1) capital account liberalization is best undertaken
against a background of sound and sustainable
macroeconomic policies;
(2)domestic financial reform should be
complemented by prudential regulation and
supervision, and financial restructuring policies;
(3) liberalization of capital flows by instruments
and/or sectors should be sequenced to take into
account concomitant risks—in general, long-term
and non-debt creating flows (especially FDI)
should be liberalized before short-term and debtcreating flows;
Link
Final Exam
• ECON2000 L1 19-Dec-13 16:30-19:30 , G017
• Cumulative
• Bring: Writing materials, calculator, 1 A4 size
piece of paper with handwritten notes on
both sides
• Office Hours: WF 9-11:30 Dec. 4-18
Troubles with Inflation
1. Unpredictable inflation generates risk for:
- borrowers and lenders
- workers and employers
2. High inflation generates losses of purchasing
power for people who hold money.
Money is a tool of liquidity, becomes less useful when
subject to a high inflation tax.
Importance of Nominal Anchors
• Commitment to nominal anchor can stabilize
the value of money and implement low and
stable inflation.
• Visible, credible commitment to nominal
anchor implements low inflation expectations
in financial markets and private sector.
Great Inflation of the 70’s & 80’s
CPI Inflation, % Annual Rate
35
30
25
20
15
10
5
OECD
East Asia
Subsaharan Africa
20
09
20
05
20
01
19
97
19
93
19
89
19
85
19
81
19
77
19
73
19
69
19
61
-5
19
65
0
Latin America
Inflation Targeting
List of
Inflation
Targeting
Countries
Rose
A Stable International Monetary
System Emerges: Inflation
Targeting is
Bretton Woods, Reversed
De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks
Exchange rate
arrangement
(Number of
countries)
Monetary Policy Framework
Exchange rate anchor
U.S. dollar (66)
Currency board
arrangement (13)
Hong Kong SAR
Other conventional
fixed peg
arrangement (68)
Bangladesh
Mongolia
Sri Lanka
Vietnam
China
Crawling peg (8)
Managed floating
Cambodia
with no preLao P.D.R.
determined path for Myanmar
the exchange
rate (44)
Independently
floating (40)
Composite
(15)
Singapore
Vanuatu
Inflation
targeting
framework
Other
(7)
Brunei
_
(44)
Other
_
(33)
Indonesia
Thailand
Malaysia
Pakistan
India
Korea
Philippines
Japan
Why Exchange Rate Stability?
Why Exchange Rate Anchor?
• Easily measurable & visible benchmark for
maintaining value of the currency.
• Stabilizes international trade and finance.
Why Exchange Rate Instrument?
• Forex markets most liquid market in frontier
markets.
Link