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![ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
•Argentine currency had lost ~40% of its value since the government freed it from the dollar in December 2001.
•Unemployment rate ~25%.
•Bank accounts remained frozen.
•The economy whopping 8%
In 2002
In 2001
•The largest debt default in Argentina [Unlike the Asian financial crisis].
•Government stop payment ~ $141 billion in foreign debt.
The South American Financial Crisis and Its Aftermath](https://image.slidesharecdn.com/financialenvironment-140825224543-phpapp01/75/Financial-environment-31-2048.jpg)
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Financial environment
1. The document discusses key topics related to international finance and marketing, including the historical role of the US dollar, development of the international monetary system, fixed vs floating exchange rates, foreign exchange rates, and balance of payments. 2. It provides details on factors that influence exchange rates like inflation, current accounts, and interest rates. It also explains concepts such as purchasing power parity, spot rates, and forward rates. 3. Several sections cover economic crises around the world, from the Asian financial crisis to rising inflation in emerging markets. It analyzes the causes and impacts of these crises as well as corporate and consumer responses.
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Financial environment
- 1.
- 2. Financial Environment CHAPTEROVERVIEW 1.Historical role of the U.S. Dollar 2.Development of today’s international money system 3.Fixed versus floating exchange rates 4.Foreign exchange and foreign exchange rates 5.Balance of payment 6.Economic and financial turmoil around the world 7.Marketing in the euro area
- 3. HISTORICAL ROLE OFTHE U.S. DOLLAR
- 4. DEVELOPMENT OF TODAY’SINTERNATIONAL MONEY SYSTEM •Free Floating exchange rates could not work. •maintained the exchange rate by tying its currency to the U.S. dollar •Each government have to maintain its own currency didn’t flow ± 1 % •Currencies were to establish par value in terms of gold •A country experiencing a balance-of-payments deficit would experience devaluation pressure on its current value. •IMF & IBRD Post World War II , New Hampshire 1944 Goal : To bring economics prosperity and hopefully a long term peace to the world 1960s, the US currency was under pressure from a combination of factors. August ,1971 Richard Nixon to suspend the convertibility of the dollar to gold. The Bretton Woods Conference
- 5. DEVELOPMENT OF TODAY’SINTERNATIONAL MONEY SYSTEM •Surveillance •Technical Assistance •Lending by the IMF Special drawing rights ( SDRs) To provide additional liquidity to support growing world trade. Value = weight average of basket of four currencies U.S. dollar Japanese Yen Euro and British pound International Monetary Fund(IMF) IMF is an organization of 188 countries
- 6. DEVELOPMENT OF TODAY’SINTERNATIONAL MONEY SYSTEM Jim Yong Kim President, World Bank Group Jim Yong Kim became the 12th president of the World Bank Group on July 1, 2012. •Founded in 1944 •To help Europe recover from World War II, •Works with middle-income and credit worthy poorer countries - to promote sustainable, equitable and job creating growth, reduce poverty and address issues of regional and global importance. The International Bank for Reconstruction and development (World Bank)
- 7. FIXED VS FLOATING EXCHANGE RATES The free (clean) float Is the closest approximation to perfect competition . No government intervention and traded by buyers and sellers • A managed (dirty) float Limited amount of government intervention to soften sudden swings in the value of a currency. Purpose of maintaining an orderly, less volatile foreign exchange market. Kinds of Currency floats
- 8. FIXED VS FLOATING EXCHANGE RATES Currency Blocs •Developing countries that depend on their trading relationship with a major country •Economic growth tend to use the currency of the principal country •Global economy is increasingly dominated by 3 major currency bloc--The U.S. dollar , the EU’s euro, the Japanese yen
- 9. FOREIGN EXCHANGE ANDFOREIGN EXCHANGE RATES one of the most fundamental determinants of exchange rate •The exchange rate between the currencies of 2 countries makes the purchasing power of both currencies equal Purchasing Power Parity (PPP)
- 10. FOREIGN EXCHANGE ANDFOREIGN EXCHANGE RATES The Economist publishes a PPP study every year based on McDonald’s Big Mac hamburger. i.e. The cheapest burger in the chart is in South African •1.68$ = 47% of the U.S price •South African rand is 53% undervalued relative to the U.S. dollar, based on the Big Mac dollar-PPP *Average price for a Big Mac in U.S. in 2009 = 3.54$ Forecasting Exchange Rate Fluctuation
- 11. FOREIGN EXCHANGE ANDFOREIGN EXCHANGE RATES Factors Influencing Foreign Exchange Rate Macroeconomic Factors •Relative Inflation •Balance of Payment s •Foreign Exchange Reserves •Economic Growth •Government Spending •Money Supply Growth •Interest Rate Policy Political Factors •Exchange Rate Control •Election Year or Leadership Change Random Factors •Unexpected /unpredicted event in a country
- 12. FOREIGN EXCHANGE ANDFOREIGN EXCHANGE RATES Spot market Immediate delivery .The spot rate is the present value of a currency. This rate is constantly changing due to trading on the currency exchange. Forward market A rate applicable to a financial transaction that will take place in the future . Advantage: avoid the risk of currency fluctuations “ currency hedging” Term of purchase: 30 days, 60 days, 90 days from the date of purchase. Currencies: EU’s , The British pound, Canadian dollar, Yen, Swiss Franc , U.S. dollar Spot VS Forward Foreign Exchange
- 13. FOREIGN EXCHANGE ANDFOREIGN EXCHAANGE RATES The extent to which a foreign company changes dollar prices of its products in the U.S. market as a result of exchange rate fluctuations Exchange Rate Pass-Through
- 14. BALANCE OF PAYMENT Current Account Capital and financial Account International Reserve Account Balance of Payment •Trade Account •Service Account •Income Account •Current transfer •Direct Investment •Portfolio Investment •Other Investment •Gold •Foreign Exchange •SDR Errors and Omissions
- 15. BALANCE OF PAYMENT Current Account Trade Balance Income Current Transfer Service Trade Current Account
- 16. BALANCE OF PAYMENT Direct Investment Portfolio Investment Other Investment Capital & Finance Account
- 17. BALANCE OF PAYMENT Gold Foreign Exchange Special Drawing Right (RDR) International Reserves Account
- 18. BALANCE OF PAYMENTEasy to understand •Trade Account >> Import , Export •Service Account >> Service, travel, transport •Income and Currency Transfer>> Money in/out flow •Capital and Financial Acct >> Capital Transaction Trade Income & Currency Transfer Current Account Service Current Account Capital and Financial Account Balance Of Payment
- 19. BALANCE OF PAYMENT Bank of Thailand EC_XT_046 : Balance of Payments (Summary) (Unit : Millions of Baht) Last Updated : 30 May 2014 14:31 Retrieved date : 13 Jun 2014 20:20 2010 p 2011 p 2012 p 2013 p 1 Exports (f.o.b.) 6,675,068.11 7,020,565.52 6,927,604.03 2 Imports (f.o.b.) 5,122,934.60 6,160,220.42 6,831,798.39 6,719,924.40 3 Trade balance 937,249.42 514,847.70 188,767.13 207,679.63 4 Net services, primary income and secondary income -624,305.43 -237,927.49 -233,837.55 -281,554.47 5 Current account balance 312,943.99 276,920.21 -45,070.41 -73,874.85 6 Capital account 7,718.63 -1,198.01 7,245.72 8,744.44 7 Financial account 794,947.66 -235,751.81 426,709.19 -7,005.62 8 Central Bank 84,139.53 -5,392.10 32,403.48 -143,659.50 9 General government 113,274.68 102,814.82 203,076.68 130,740.88 10 Other depository corporations 330,330.69 -275,259.34 505,683.76 -36,977.08 11 Other sectors 267,202.76 -57,915.19 -314,454.73 42,890.08 12 Other financial corporations 85,566.64 -149,640.81 -358,089.21 96,018.56 13 Nonfinancial corporations, households, and NPISHs 181,636.12 91,725.62 43,634.49 -53,128.49 14 Net errors & omissions -128,984.66 -4,900.39 -225,915.09 -90,483.48 15 Overall balance 986,625.62 35,070.00 162,969.40 -162,619.51
- 20. BALANCE OF PAYMENT Bank of Thailand International Reserves Last Updated : 06 Jun 2014 14:30 Retrieved date : 14 Jun 2014 00:09 2009 2010 2011 2012 2013 1 (Millions of US Dollars) 2 Gold 2,934.74 4,598.56 7,734.63 8,281.74 5,960.81 3 SDRs 1,522.98 1,496.90 1,494.30 1,495.26 1,443.68 4 Reserve position in the IMF 360.68 377.42 695.22 724.98 805.7 5 Foreign currency reserves 133,599.17 165,656.01 165,199.60 171,105.98 159,022.34 6 Total 138,417.59 172,128.90 175,123.77 181,607.96 167,232.53 7 Net Forward Position 15670 19596 31246.27 24143 22950 8 (Millions of Baht) 9 Gold 97,900.23 138,646.69 245,211.28 253,645.03 195,651.67 10 SDRs 50,805.25 45,131.82 47,373.96 45,795.25 47,386.10 11 Reserve position in the IMF 12,032.03 11,379.21 22,040.62 22,203.85 26,445.38 12 Foreign currency reserves 4,456,734.91 4,994,528.80 5,237,323.01 5,240,462.80 5,219,590.15 13 Total 4,617,472.44 5,189,686.54 5,551,948.88 5,562,106.93 5,489,073.30 14 Exchange Rate (End of Period) 2/ 33.359 30.15 31.703 30.627 32.823
- 21. BALANCE OF PAYMENTReserve Foreign Exchange and Gold
- 22. BALANCE OF PAYMENT •More Export •Less Import Trade Surplus •Money supply •Product Price Inflation •Less Export •More Import Trade Balance Internal Market Adjustment
- 23. BALANCE OF PAYMENT •More Export •Less Import Trade Surplus •Demand of foreign currency increase Currency Appreciate •Product Price •Expensive Trade Balance External Market Adjustment
- 24. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD
- 25. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD The Root cause of ECONOMIC CRISIS
- 26. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Highlight The Asian Financial Crisis of 1997-1998 The South American Financial Crisis of 2002
- 27. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD CHINA JAPAN Southeast Asian Countries(SACS) Yuan Renmimimbi devaluation in 1994: R5.7/$ to R8.7/$ Yen depreciation in 1994–97: 99.7yen/$ to 126.1yen/$ Currency pegged to U.S. dollar Lost cost competitiveness for SACS Worsened balance of payments for SACS SACS’ currency depreciation (The end of pegged currency) Investor Speculation MECHANISM OF THE ASIAN FINANCIAL CRISIS
- 28. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD 1997 Thailand lost almost 60 percent of its baht’s purchasing power in dollar terms Malaysian ringgit lost some 40 percent of its value Korean won was similarly hit toward the end of 1997 and depreciated 50 percent against the U.S. dollar in less than two months Indonesia whose rupiah lost a whopping 80 percent of its value in the last quarter THE WORST
- 29. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Oil Crisis Global Economic Recession The latter Half of the 1990s
- 30. •The Asian markethas recovered from the crisis 2000 •Asia’s GDP grew at 3.5%, exceeding the average growth rate for the 1990s. •Asian developing countries’ GDP growth continued to > 5% •Asia’s merchandise trade growth was realized primarily by intra- regional trade, which rose by 20% to $950 billion •China’s surging import demand and increased purchase of investment goods, semi-manufactured goods and machinery parts have sustained output and exports in many East Asian economies 2003 •Asia’s developing economies had sustained robust growth boosted by domestic demand, regional trade, and a steady inflow of investment until 2008 2008
- 31. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD •Argentine currency had lost ~40% of its value since the government freed it from the dollar in December 2001. •Unemployment rate ~25%. •Bank accounts remained frozen. •The economy whopping 8% In 2002 In 2001 •The largest debt default in Argentina [Unlike the Asian financial crisis]. •Government stop payment ~ $141 billion in foreign debt. The South American Financial Crisis and Its Aftermath
- 32. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Argentina Government fixed peso @ 1 U.S. dollar overvalued the currency Lack of competitiveness when other currencies depreciated ①Monetary System Reason behind the crisis
- 33. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Reason behind the crisis Years of chronic government deficit spending More debt Interest rate up More companies were closed More people were laid off The debt burden increased IMF refused to make an advance payment on a previously agreed loan The economy became paralyzed ②Government Debt
- 34. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD The Property Bubble The U.S. Subprime Mortgage Loan Crisis and the Subsequent Global Financial Crisis
- 35. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Financial Crises in Perspective To sustain their strong economic performance •Commercial and investment banks •Stock exchanges The Asian countries remain strong and attractive with respect to their “economic” fundamentals Strong financial institutions
- 36. GLOBAL PERSPECTIVE: RISINGINFLATION IN EMERGING ECONOMIES The soaring inflation in emerging economies. In 2008 > the average world inflation rate had grown to 5.5%, the highest since 1999., With the relatively low inflation rates of 3.9% in the United States and 3.3 percent in the euro area The surge in the prices of food and oil. ECONOMIC AND FINANCIAL TURMOIL AROUND THE WORLD
- 37. GLOBAL PERSPECTIVE: RISINGINFLATION IN EMERGING ECONOMIES The soaring inflation in emerging economies. In 2008 > the average world inflation rate had grown to 5.5%, the highest since 1999., With the relatively low inflation rates of 3.9% in the United States and 3.3 percent in the euro area The surge in the prices of food and oil. Policymakers view as a short-term supply shock using price controls and subsidies ECONOMIC AND FINANCIAL TURMOIL AROUND THE WORLD
- 38. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Consumer Response to the Recession
- 39. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Company Short-term orientation To maximize year-to-year profit(or minimize loss) Serve stockholders’ speculative needs Long-term orientation tolerates some short-term loss for the benefit of future gains. Serve customer needs To modify marketing strategies in various ways to address the consumer needs. To pull out of the market Corporate Response to the Recession.
- 40. ECONOMIC AND FINANCIALTURMOIL AROUND THE WORLD Corporate Response to the Recession. •Pull-out. •Emphasize a product’s value. –Develop a promotion –Ads helps to enhance quality image •Change the product mix. –Pushing relatively inexpensive product lines & de-emphasizing expensive lines. •Repackage the goods. –Repackaging products to suit consumers’ declining purchasing power. •Reduce size Cheaper •Maintain stricter inventory. –Just-in-Time reduce unnecessary inventory & improve their product •Look outside the region for expansion opportunities. •Increase advertising in the region. •Increase local procurement.
- 41. MARKETING IN THE EURO AREA European Union (EU) •Economic and political union •Origins from European Economic Community in 1958 •Initially founded by 6 countries (Bel, Fra, Ger, Ita, Lux & Ned) •At present, 28 member states •Area: 4,381,376 km2 •Population: 505,665,739 (2013)
- 42. MARKETING IN THE EURO AREA (1)Belgium (2)Germany (3)France (4)Italy (5)Luxembourg (6)Netherlands (7) Denmark (8) Ireland (9) UK (26) Bulgaria (27) Romania (13) Austria (14) Finland (15) Sweden (10) Greece (11) Spain (12) Portugal (16) Cyprus (17) Czech (18) Estonia (19) Hungary (20) Latvia (21) Lithuania (22) Malta (23) Poland (24) Slovakia (25) Slovenia Enlargement of the EU
- 43. MARKETING IN THE EURO AREA 1st July 2013 Croatia: 28th EU Member Lithuanian President Dalia Grybauskaitė presented Croatian President Ivo Josipović with a basketball team T-shirt bearing the number 28 and the phrase "One team - one dream".
- 44. MARKETING IN THE EURO AREA Euro Area (Eurozone) •Official launch: 1st January 1999 •Single currency: Euro •At present, 18 member states •Population: 332,839,084 (2012) •Inflation rates, budget deficit, debt-to- GDP ratio, exchange rate & long-term interest rates •European Exchange Rate Mechanism (ERM II) •Lithuania meets Eurozone criteria, set to become 19th member on 1st January 2015.
- 45. MARKETING IN THE EURO AREA European Union VS Eurozone
- 46. MARKETING IN THE EURO AREA 1969Pierre Werner, Former PM of Luxembourg, chaired a think tank on how EMU could be achieved by 1980. 1992Maastricht Treaty spelled out guidelines toward EMU. 1999Euro was launched as an invisible currency, used for accounting purposes. 2002 Euro banknotes and coins were introduced. Historical Background of Eurozone
- 47. MARKETING IN THE EURO AREA Pierre Werner Former PM of Luxembourg (1913-2002) Signing Ceremony of the Masstricht Treaty (7th February 1992)
- 48. MARKETING IN THE EURO AREA Euro Banknotes and Coins
- 49. MARKETING IN THE EURO AREA Ramifications of Euro for Marketers 1)Price Transparency •Prices of products shown in euro; price differentials become clear to consumer. •Will greater transparency push prices downwards? •For many goods and services, some costs and standard differences still justify significant price gaps. •Survey of 2,100 firms (1997): 65% viewed “greater price transparency” as one of the key areas of cost saving.
- 50. MARKETING IN THE EURO AREA Ramifications of Euro for Marketers 2) Intensified Competitive Pressure •Pressure to lower prices has increased. •Measures implemented to lower costs (eg. mergers and acquisitions) 3) Streamlined Supply Chains •Efficient supplies singled out. •Partnerships with suppliers
- 51. MARKETING IN THE EURO AREA Ramifications of Euro for Marketers 4) New Chances for SMEs •Limits of huge costs and currency fluctuations lessen. 5) Adaptation of Internal Organizational Structures •Past, firms maintained operations in each country to match supply and demand within each country for economies of scale. •Operating offices were reduced; overlapping operations were ceased.
- 52. MARKETING IN THE EURO AREA Ramifications of Euro for Marketers 6) EU Regulations Crossing National Boundaries •EU = Supranational trait •EU’s complex regulatory process •Confusion on EU-wide rules end and member state laws
- 53. CHAPTER SUMMERY •Financialenvironment always changes, based on income growth, balance of payments position, inflation, exchange rate fluctuations and political events. •Immediate consequences of exchange rate fluctuations on pricing should be aware. •Cost competitiveness has become an extremely important strategic issue. •Eurozone is theoretically aimed for economic stability. Practically, there are many barriers (eg. different languages, cultures, social insurance, retirement programs)