International Financial Management

Balance of Payment
1. 2. 3. 4. 5. 6. Group : AAAA Fathi Nadirah Bt Jamlus Lily Haslinda Bt Abdul Razak Mohamad Anif bin Adenan Mohamad Shuhaidi bin Mahat Mohd Syafiq bin Mahayudin Nik Amira Farisya Bt Nik Kamarudin 11924 11967 11980 11995 12031 12101

Agenda
1. Balance of payment categories - Anif
i. ii. iii. Current Account Capital Account Financial Account

2.

Balance of Payment measure - Fathi

i. ii. iii. Basic balance Net liquidity balance Official reserve transaction balance

3. 4. 5. 6.

Domestic Savings and investment and the financial account. - Shuhaidi Link between current and financial account Amira Farisya Government budget deficit and current account deficit - Syafiq The current situation - Lily

Balance of Payment

Is like a double entry book keeping, ledger for a country. Eg : Malaysia

It balances the amount of money in and out of the country

Categories
Current Account

BoP

Capital Account

Financial Account

Categories
Current Account

BoP

Capital Account

Financial Account

Current Account

Records import (M) and Export (X) of goods, services, income and current unilateral transfers
If the credits exceed the debits, then a country is running a trade surplus. X>M If the debits exceed the credits, then a country is running a trade deficit. X<M

Trade in goods

Current transfer

4 Components of Current Account

Trade in services

Profit and income

Categories
Current Account

BoP

Capital Account

Financial Account

Capital Account

Capital account tracks movements of funds, for investment and loans into and out of a country.
A surplus in a capital account denotes that there are more money flowing into the country for investment than flowing out of the country.

A deficit in a capital account, otherwise, means there are more money flowing out of the country for investments.

Real estate A.k.a physical flow

Direct Investment

manufacturing

Local acquisition

Gold reserves

Net position in the IMF

Official reserve transaction

4 Components of Capital Account

Portfolio investment

Purchasing financial assets

Government capital
Government transaction outside a country

stocks

bonds

Categories
Current Account

BoP

Capital Account

Financial Account

Financial Account

Shows public and private investment and lending activities. Study shows that financial account can be a SUB-SECTION of the capital account. The name is somewhat misleading as it, rather than the capital account, records inflow and outflow of capital. For most countries, only current account and capital accounts are significant.

Real estate A.k.a physical flow

Direct Investment

manufacturing

Local acquisition

Gold reserves

Net position in the IMF

Official reserve transaction

4 Components Financial account of Capital Account

Portfolio investment

Purchasing financial assets

Government capital
Government transaction outside a country

stocks

bonds

Agenda
1. Balance of payment categories - Anif
i. ii. iii. Current Account Capital Account Financial Account

2.

Balance of Payment measure - Fathi

i. ii. iii. Basic balance Net liquidity balance Official reserve transaction balance

3. 4. 5. 6.

Domestic Savings and investment and the financial account. - Shuhaidi Link between current and financial account Amira Farisya Government budget deficit and current account deficit - Syafiq The current situation - Lily

Balance of payment measures

1. Basic balance
 Includes current account and long term capital but excludes ephemeral

 Alternative approach to measure deficit or surplus

 Less sensitive to short run fluctuations

Determine long term trends in a country s BOP

2. Net liquidity balance

Measure change in private domestic borrowing that is required to keep payments in balance without adjusting official reserves

Exports

Imports

Net liquidity

 Official reserves - total of a nation s holdings of tradable foreign currencies, gold reserves and special drawing rights (measure of a country s reserve asset with IMF)

Example : Total exports Total imports : RM163 billion : RM198 billion (RM 35 billion)  Negative value indicates that the country is facing deficit

What action to take?

Internal borrowing borrow from the private or government sectors  Selling bonds

3. Official reserve transactions balance

Measure the adjustment required in official reserve to achieve balance of payments equilibrium

Budget expenses Do we have to use the reserve? Income

Example: Income Budget expense = 163 billion = 198 billion = (35 billion)

 The negative value indicates the country is facing a deficit

Do we have reserve?

Yes

No

We have to borrow

Agenda
1. Balance of payment categories - Anif
i. ii. iii. Current Account Capital Account Financial Account

2.

Balance of Payment measure - Fathi

i. ii. iii. Basic balance Net liquidity balance Official reserve transaction balance

3. 4. 5. 6.

Domestic Savings and investment and the financial account. - Shuhaidi Link between current and financial account Amira Farisya Government budget deficit and current account deficit - Syafiq The current situation - Lily

National Income
Earning by a country from public consumption and savings

National Income

Consumption

Saving

[1]

National Spending
Expenditure of a country for consumption and investment

National Spending

Consumption

Investment

[2]

 [1] into [2]

National Income

National Spending

Saving

Investment

What if?

National Income

National Spending

Saving

Investment

Income > spending @ savings > investment Excess domestic investment Capital surplus

What did they do?

Invest overseas Buy financial assets
Stock Bond Real Estate

National income > National Spending

Saving > Investment

Financialaccount deficit

Net Capital Outflow

What if?

National Income

National Spending

Saving

Investment

Income > spending @ savings > investment Limited domestic investment Capital shortage

What did they do?

Sell their assets

Stock

Bonds

Real Estate

Or?

National income < National Spending

Saving < Investment

Financialaccount surplus

Net Capital Inflow

Current account
Export Import >0

Export

Import

Export

Import

<0

Agenda
1. Balance of payment categories - Anif
i. ii. iii. Current Account Capital Account Financial Account

2.

Balance of Payment measure - Fathi

i. ii. iii. Basic balance Net liquidity balance Official reserve transaction balance

3. 4. 5. 6.

Domestic Savings and investment and the financial account. - Shuhaidi Link between current and financial account Amira Farisya Government budget deficit and current account deficit - Syafiq The current situation - Lily

Link Between Current & Financial Account

Current Account

Capital Account

Financial Account

Balance of Payment

 State of an economy  Economic outlook  Strategies

Link Between Current & Financial Account

Current Account Financial Account

Measures trade-in goods, services, investment incomes and current transfers. Measures capital flows ; short term and long term.

Link Between Current & Financial Account

Current Account Deficit

Financial Account Surplus

IMPORT

EXPORT

Current Account Surplus

IMPORT

EXPORT

Financial Account Deficit

Link Between Current & Financial Account

Why Does Current Account & Financial Account Balance?

 If we import goods and services, we need an inflow of capital (financial flows) to be able to pay for them.

Link Between Current & Financial Account

Why Does Current Account & Financial Account Balance?

Example:

We import MYR 1m of clothes from China. We need to buy MYR 1m Trade in goods of Chinese Yuan. To get this foreign currency, we need an inflow of foreign currency in the financial account If the Chinese deposited MYR 1m of Chinese Yuan in our banks, the foreign currency comes to Malaysia. Short term capital flow
CREDIT DEBIT

MYR 1 mil MYR 1 mil

Agenda
1. Balance of payment categories - Anif
i. ii. iii. Current Account Capital Account Financial Account

2.

Balance of Payment measure - Fathi

i. ii. iii. Basic balance Net liquidity balance Official reserve transaction balance

3. 4. 5. 6.

Domestic Savings and investment and the financial account. - Shuhaidi Link between current and financial account Amira Farisya Government budget deficit and current account deficit - Syafiq The current situation - Lily

Government Budget Deficit & Current Account Deficit

When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue. When the government has a current account deficit, it means that they did not saving enough money to finance their private investment and government budget deficit. Government borrow money to fund the deficit by selling: Treasury Bills Long-term government bonds

How to Determine Government Budget Deficit & Current Account Deficit

Example :
1. What is Nation X Current Account Balance in $(million) based on the several data below: Private Saving = 200 Private Investment = 100 Government Spending= 300 Taxes = 100

How to Determine Government Budget Deficit & Current Account Deficit

1 2
Current-Account Balance National Spending Household Spending = Private Saving Surplus Government Budget Deficit Government Spending

Household Spending National Income

Private Investment Private Saving

Taxes

Government Budget Deficit Current-Account Balance

Government Spending National Income

Taxes

National Spending

Private Saving Surplus

Private Saving

Private Investment

How to Determine Government Budget Deficit & Current Account Deficit

Nation X has less Private Saving to fund Private Investment and Government Budget Deficit

Agenda
1. Balance of payment categories - Anif
i. ii. iii. Current Account Capital Account Financial Account

2.

Balance of Payment measure - Fathi

i. ii. iii. Basic balance Net liquidity balance Official reserve transaction balance

3. 4. 5. 6.

Domestic Savings and investment and the financial account. - Shuhaidi Link between current and financial account Amira Farisya Government budget deficit and current account deficit - Syafiq The current situation - Lily

Current Situation (Malaysia)

Malaysia s balance of payments strengthened into a surplus in the second half of 2010. The balance of payments position improved on account of a wider

current account surplus and narrowing in the financial account deficit, which eventually
registered a surplus. In particular, commodity exports performed well, buoyed by rising commodity prices. Meanwhile, strong inflows of foreign capital, given the abundance of global liquidity amid the multispeed global recovery, drove the turnaround in the financial account.
Resource: MALAYSIA ECONOMIC MONITOR (APRIL 2011), BRAIN DRAIN THE WORLD BANK

RM2.7bil deficit recorded in 2010 balance of payments

KUALA LUMPUR: Malaysia's overall balance of payments for 2010 recorded a deficit of RM2.7bil from a surplus of RM13.8bil in 2009, the Statistics Department said.

Deficit

The Star, Saturday March 5, 2011

Resource: DEPARTMENT OF STATISTIC MALAYSIA

Attributed mainly to lower surplus of goods

Increase in imports f.o.b. at faster pace than that of exports f.o.b.

Recorded a higher outflow on capital account

Net outflow on other investment narrowed

Higher net payments on income account

RM2.7bil deficit recorded in 2010 balance of payments

KUALA LUMPUR: Malaysia's overall balance of payments for 2010 recorded a deficit of RM2.7bil from a surplus of RM13.8bil in 2009, the Statistics Department said. The Star, Saturday March 5, 2011

Portfolio investment decreased

Lower net receipts on services account

Higher net payments on transportation

Both DIA and FDI registered higher values of investment.

Direct investment posted a lower net outflow

Recorded a surplus of RM15.9 billion, compared to RM17.9 billion registered in Q4 2010

Current account surplus widened to RM30.2billion

International reserves held by Bank Negara Malaysia increased by RM15.9 billion

Held RM344.5 billion as at end of March 2011

Financial account switched to an outflow

Current account surplus widened to RM30.2billion

Underpinned by higher surplus on goods account by RM10.1 billion

Goods
1. Exports f.o.b. increased by 3.5
2. percent. Growth in exports was attributed mainly to higher exports of crude

Services
1. Registered a deficit of RM1.3 billion from a surplus of RM0.9 billion in the last quarter. Due to lower net receipts on travel; decline in tourists arrivals.

Income
1. Higher net outlay of RM5.7 billion following the

Current Transfers
1. Net payments on
current transfers reduced marginally by RM0.3 billion (5.5 per cent).

petroleum, liquefied natural gas (LNG) and rubber. 3. China, Singapore and Japan were the top three
exports destinations.

2.

increase in net outlay on investment income of

RM5.2 billion (Q4 2010: RM3.3 billion).

International reserves held by Bank Negara Malaysia increased by RM15.9 billion

Financial account switched to an outflow

DIA - Higher net outflow 1. Major sectors attributed to DIA were wholesale & retail trade, financial & insurance, oil & gas and agriculture. Three countries of DIA were United Kingdom, Singapore and Indonesia.

FDI 1.

Higher net inflow FDI inflows were primarily channeled into manufacturing, oil & gas and financial & insurance Top three sources of FDI were from

Net inflow on portfolio

investment expanded while other investment registered

higher net outflow.

1.

Outflow on capital account narrowed to RM13.0 million 2.

2.

Singapore, Japan and Germany.

Larger surplus = RM15.9 billion (Q1) to RM61.7 billion (Q2) Lower current account surplus = RM25.9 (Q1) billion to RM23.4 billion (Q2) Higher International reserves held by BNM = RM15.9 billion(Q1) to RM61.7 billion (Q2) Financial account = outflow of RM17.7 billion (Q1) to net inflow of RM38.5 billion (Q2)

Lower current account surplus = RM25.9 (Q1) billion to RM23.4 billion (Q2)

Increment f.o.b. Exports

1. Arising mainly from higher exports of electrical & electronic products, palm oil & palm oil based products, and liquefied natural gas (LNG). Top export destinations were Singapore, China and Japan. Lower deficit in services Income account recorded higher net payments. Current transfers recorded a higher net outlay.

Higher International reserves held by BNM = RM15.9 billion(Q1) to RM61.7 billion (Q2) 1. 2. Higher net outflow Reversal in nonproduced non financial assets to an outflow. Financial account = outflow of RM17.7 billion (Q1) to net inflow of RM38.5 billion (Q2) 1. 2. Higher net inflow in FDI FDI primarily channeled into healthcare services, manufacturing, oil & gas, and wholesale & retail trade sectors. The top three sources of FDI were Japan, USA, and Mauritius.

2.

3. 4.

5.

3RD Quarter 2011 ? 4th Quarter 2011?

Overall balance of 2011?

Conclusion

 Balance of payment theory states that exchange rates keep appreciating and depreciating until the demand and supply for goods and services between countries involve hits equilibrium or in other word, balance. If a country is facing from a trade surplus, which means it exports are more than its import, the currency appreciate in value Whereas if a country is facing from a trade deficit, the import is more than its export, the currency goes down in value.

 One way or another, a country must balance its trade till it cancel out one another. A country has to find ways how to pay the imports if it exceed the exports.
Export a lot of capital, if other countries want your financial asset Use central bank reserves of foreign exchange Expatriates send money to the country to finance the import bill Last resort : IMF and World Bank

Thank you