financial environment

MARKETING MANAGEMENT

Financial Environment

CHAPTER OVERVIEW 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

HISTORICAL ROLE OF THE U.S. DOLLAR

DEVELOPMENT OF TODAY’S INTERNATIONAL 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


• 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


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)

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

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

FOREIGN EXCHANGE AND FOREIGN 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)


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


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


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

FOREIGN EXCHANGE AND FOREIGN 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

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

BALANCE OF PAYMENT

Current Account

Trade

Balance

Income

Current

Transfer

Service

Trade

Current Account

BALANCE OF PAYMENT

Direct Investment

Portfolio Investment

Other

Investment

Capital & Finance Account

BALANCE OF PAYMENT

Gold

Foreign Exchange

Special Drawing Right (RDR)

International Reserves Account

BALANCE OF PAYMENT

Easy 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

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

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

BALANCE OF PAYMENT

Reserve Foreign Exchange and Gold

BALANCE OF PAYMENT

• More Export

• Less Import

Trade Surplus

• Money supply

• Product Price

Inflation • Less Export

• More Import

Trade Balance

Internal Market Adjustment

BALANCE OF PAYMENT

• More Export

• Less Import

Trade Surplus

• Demand of foreign currency increase

Currency

Appreciate • Product Price

• Expensive

Trade Balance

External Market Adjustment

ECONOMIC AND FINANCIAL TURMOIL AROUND THE WORLD


The Root cause of ECONOMIC CRISIS


Highlight The Asian Financial Crisis of 1997-1998 The South American Financial Crisis of 2002


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


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


Oil Crisis

Global Economic Recession

The latter Half of the 1990s

• The Asian market has 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


• 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


Argentina Government fixed peso @ 1 U.S. dollar

overvalued the currency

Lack of competitiveness when other currencies depreciated

①Monetary System

Reason behind the crisis


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


The Property Bubble

The U.S. Subprime Mortgage Loan Crisis and the Subsequent Global Financial Crisis


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

GLOBAL PERSPECTIVE: RISING INFLATION 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.


GLOBAL PERSPECTIVE: RISING INFLATION 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



Consumer Response to the Recession


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.


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.

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)


(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


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".


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.


European Union VS Eurozone


1969 Pierre Werner, Former PM of Luxembourg, chaired a think tank on how EMU could be achieved by 1980.

1992 Maastricht Treaty spelled out guidelines toward EMU.

1999 Euro was launched as an invisible currency, used for accounting purposes.

2002 Euro banknotes and coins were introduced.

Historical Background of Eurozone


Pierre Werner Former PM of Luxembourg

(1913-2002)

Signing Ceremony of the Masstricht Treaty (7th February 1992)


Euro Banknotes and Coins


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.


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


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.


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

CHAPTER SUMMERY

• Financial environment 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)

financial environment

Education

currency exchange

foreign exchange rates5

floating exchange rates4

us currency

spot rate

major currency bloc

kinds of currency floats

currency didnt flow