macroeconomics project grp4

8/3/2019 Macroeconomics Project Grp4

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Submitted by:Harshit Jain (20)Pooja N Joukani (22)K. Abhinay (23)Shashank Kanodia (24)Amit Kumra (26)

Group 4

Macroeconomic Analysis of

France as an Investment Opportunity


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FRANCE:

Is the largest west-European country, fifth largest economy and possesses the second-

largest Exclusive Economic Zone in the world

Is the founding member state of the European Union and is the largest one by area

Is a major power for several centuries with strong cultural, economic, military and political

influence in Europe and in the world

Enjoys a high standard of living as well as a high public education level

Is the most visited country in the world, receiving 82 million foreign tourists annually

Is the founding member of the United Nations, and a member of G8, G20, NATO, OECD,

WTO, and the Latin Union

Macroeconomic Analysis of FRANCE as an Investment option


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FRANCE:

Is one of the five permanent members of the UN Security Council

Is a mixed economy which combines extensive private enterprise & state enterprise

Is a part of a monetary union, the Euro zone and of the EU single market

Was the world's sixth-largest exporter of manufactured goods in 2009

The fourth-largest importer of manufactured goods in 2009

Ranks 4th in the Fortune Global 500.



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Current GDP : 1956.59 Billion (2010)GDP Growth Rate: 0.75%

(Source: Tradingeconomics.com,INSEE National Statistics)



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Comparison of recoveries, current Against past average - GDP, euro area

(Source: European Economic Forecast)



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Exports: 33016.0 Million Euros

Imports: 36812.0 Million Euros

Macroeconomic Analysis of FRANCE as an Investment option(Source: The Economist)


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Sector-wise contribution to GDP

France is currently ranked 14th

out of 169 countries in UNs HDI - 2010

Sector Service Industry Agriculture

Percentage.(Major Contributors)

78.9(Tourism, Transportation)

19.3(Aircraft, Equipments)

1.8(Grains, Wines, Spirits)

Frances HDI trends based on consistent time series data

Years Life Expectancy atbirth

Expected years ofschooling

Mean years ofschooling

GNI per capita(PPP US$)

HDI Value

1980 74.1 12.6 6.0 22513 0.711

1985 75.3 13.0 6.4 23562 0.731

1990 76.6 14.0 7.1 27026 0.766

1995 77.8 15.7 8.3 28048 0.807

2000 78.9 15.6 9.3 32011 0.834

2005 80.4 16.2 9.8 33397 0.856

2010 81.6 16.1 10.4 34341 0.872

( Source: UNs Human Development Report 2010)


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Business Confidence: 98

Tax Reliefs: Frances research tax credit is the best in Europe

It covers 50% of R&D expenses the first year, 40% the second year and 30% forsubsequent years up to 100 million (and 5% of expenses above this threshold)

A powerful instrument for encouraging partnership research in France andEurope

Expenses incurred on operations subcontracted to French and European public-sector research bodies are assessed at 200%, which amounts to a doubling of thetax credit

All R&D expenses are taken into account



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THUMBS UP

Second-largest consumer market in

Europe

France is one of the most developedcountries

Market share of 23.3% of total

investments in Europe

Low initial costs of set up

Major electricity needs satisfied fromnuclear power

A sovereign debt rating of AAA Revised GDP growth estimates from

0.75% to 1.4%

Liberalization of Economy

THUMBS DOWN

Government spending equalled 52.3

percent of GDP.

Governments dominance continues in

major sectors of the economy.

The top personal income tax rate is 40

percent. The top corporate tax rate is34.4 percent

The government subsidizes agricultural

production.


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We suggest the investor to invest in France with along time horizon as there exists some volatility

in the short term with slow growth during the

initial period of investment.



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Current Unemployment Rate: 10% (2010)The Finance Ministry predicted a total of 71,000 jobs have been lost in 2010

(Source: www.tradingeconomics.com)



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France has 10% unemployment , 34% of whom have been out of work for one year

Increasing illegal immigration crisis

France swings between two extremes: a two-tier society & short-term contracts

Only 9% of the workforce belongs to a union

Generation S

France has Europe's highest rates of female employment (81% of women aged between 25

and 49 are in work)

Elite industrial model

High minimum wages



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Can be availed by the French people even if they are not staying in France. There is not onlyincome help, but very generous housing subsidy and energy bills payment and other

benefits also.

The amount of the daily allowance cannot be lower than 26.66 or higher than 75% of the

daily reference wage

The minimum period for the payment of benefits is 122 days and the maximum period 730days for private-sector employees aged below 50, and 1,095 days for employees over 50

Measure Public Expenditure as % of GDP

Year 2004 2005 2006 2007 2008

Full

EmploymentBenefits

1.63 1.53 1.34 1.2 1.14

Direct Job

Creation

0.23 0.18 0.20 0.20 0.15

Benefit

Administration

0.08 0.08 0.07 0.07 0.05

(Source: www.oecdstats.org)


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Extensive use of short-time work schemes

A More Flexible Labour Market

A new Contract act



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THUMBS UP

Worlds third leading country in terms of

hourly productivity (ILO)

Productivity per worker, on both an

hourly and an annual basis, is 20% higher

than the European average

The French labour force is highlyqualified and versatile and adapts easily

to new methods of working

Frances education system free and

open to all is recognized as one of the

best in the world.

THUMBS DOWN

Has high unemployment levels of around10%

High minimum wages, highunemployment benefits and illegalimmigration

Rigid job-market rules

The non-salary costs and social securitycontribution of employing a worker are

very high Dismissing an employee can be difficult

Restrictions imposed and heavy payrolltaxes deter job creation


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Therefore France is not a very attractiveinvestment option considering the high

unemployment levels and rigid labourmarket rules.



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Current Interest Rate: 1 % (2010)

(Source: TradingEconomics.com; European Central Bank)



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In the Euro Area, interest rate decisions are taken by the GoverningCouncil of the European Central Bank (ECB)

In France, interest rates ceilings exist for all credit to consumers. These

are calculated quarterly by the National Bank on the basis of the marketrates for different categories of credits

Low interest Rates and its impact

Existence of Carry Trades



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THUMBS UP

French Governments plan ofoffering loans to the extent of 40

per cent of investment to IndianCompanies willing to invest inFrance, at zero per cent interestrate

The costs of living and doingbusiness is also low

Enough liquidity in the systemand businesses can borrow

money at cheap rates

THUMBS DOWN

A lower interest rate relative tothose in other countries will tend

to result in a decrease in theamount of funds flowing intoFrance

The ECB has decided to start

buying government bonds ofweak euro-zone countries toprop up their funding efforts


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Therefore, ceteris paribus, it is viable to set up in Franceas cost of capital is low and there is easy availability ofcredit.

However from an investment point of view, low interestrates only help carry trades for currency traders but it isnot advisable to invest in France because of interest rate

differential.



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Current Inflation Rate: 1.59% (2010)

(Source: www.tradingeconomics.com, INSEE)



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Inflation Rate in France is determined using Consumer Price Index (CPI)

Inflation is below the ECBs 2 percent target due to :a. Food prices being almost stableb. Drop in Oil and commodity prices compared to historic highsc. Downturn in economic activity

End of deflationary scenario due to price and wage dynamics remainingpositive

Inflation stickiness- detrimental to economic growth for two reasons:a. It harms Frances external competitivenessb. It leads to a loss of purchasing power



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(Source: Tradingeconomics.com, INSEE)

Degree of optimism that consumers feel about the overall state of the economy Determines spending activity and if confidence is lower, consumers tend to savemore than they spend, prompting the contraction of the economy.

Consumer Confidence: -34 EUR


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THUMBS UP

ECB unlikely to tighten

Monetary Policy due to lowinflation rate

Enough liquidity in thesystem

THUMBS DOWN

Low consumer confidence

level leading to reducedspending

Present inflation rate inFrance is 1.59 % which is

too low to depict effectivedemand


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We conclude that an investor thinking of amanufacturing set up can proceed ahead with the

investment in France but should not rely only on

domestic consumption for its growthopportunities



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(Source: INSEE)

Current Fiscal Deficit as a % of GDP: 8.3% (2010)



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Parameters Fiscal deficitas % of GDP2010

Need for

reduction in

the fiscal

deficit

2010-2020

Spontaneousgrowth aftercrisis

Growth that

stabilises

fiscal deficits

Requiredgrowth toreduce fiscaldeficits

Percentage -8.3 8.6 1.25 2.2 3.5

Maastricht Treaty & Stability and Growth PactIn 1992, the Maastricht Treaty implemented criteria for fiscal convergence between the

potential EMU participants. These criteria required annual budget deficits to be held to 3%of GDP and the gross debt-to-GDP ratio reduced to 60% in order to ensure the avoidance

of excessive borrowing by member states.

More Focus on Social VAT


(Sources: DataStream, Natixis)


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THUMBS UP

New pension age Bill passed bythe French Parliament

Austerity Measures

Increasing growth andreductions in public subsidies

THUMBS DOWN

Fiscal deficit figures of Franceare at alarmingly high levels of

around 8% of GDP High government spending

which is of the tune of 52% ofthe GDP taking into account thehigh government spending on

unemployment benefits andpension benefits to seniorcitizens of France

Govt. debt to GDP is around 77percent


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We conclude that for an investor wanting toinvest in France this is not the appropriate time

and would advice him to restrain till the fiscal

deficit level falls to manageable levels for theFrench Government and as per the Maastricht

Treaty (


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Current Value: 3860.16

(Source: www.tradingeconomics.com)



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Stock Market Capitalization To GDP Ratio is 74.4% for France


(Source: http://www.bov.com/filebank/documents/1-12_Gevit%20Duca.pdf)


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The CAC 40- The benchmark French stock market index

GDP and market capitalization of France is very small

The index gained 22 % after the recession hit France

French stock exchange operates with a cycle of 6-7 years

The average PE of CAC 40 has been around 19 and the EPS is 200


74.4

52.3

106.8

Ratio of Market

Capitalisation to GDP

2009

2008

2007


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(Source: http://www.forecast-chart.com/historical-cac-40.html)



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THUMBS UP

The P/E ratio has been around 19which means the valuation is

slightly on higher side

Stock market capitalization/GDPfor France is 74.4% whichindicates that the market is fairly

valued as compared to emergingeconomies like India, China,Brazil and Russia

THUMBS DOWN

The French president's approvalrating has

plummeted in the wake ofgrowing discontent over hisretirement reform plan.


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An investor who wants to invest in France purely in termsof Equity investment via stock exchange route will have towait till political certainty is achieved.



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State control over several state-owned companies in the areas of transportation, energy,

and communications (30 % of workforce is employed by the state)

Pension Crisis extending the retirement age from 60 years to 62 years

Nicolas Sarkozys declining popularity

In mid-November France takes over the 12-month presidency of the G20, and in 2011 theG8 as well

Analysis:

- Uncertainty will prevail in France for some time as it prepares itself for the next

Presidential Election in 2012- These political uncertainties will have to be factored in before taking a call on investmentsbeing made in France

- Based on the present political scenario we conclude that investor should not invest &should ideally wait till some political stability is achieved and there is a clear direction ofpolicy



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Classes and Caste

Too Top Down

Language barrier

Still believes in solidarity and social cohesion, in small farmers and local markets.

The illegal immigration problem

Youth Unemployment

Ethnic strife due to former colonies separating out

Analysis:

France has not given a very positive signal towards all social groups. These factors alongwith possible language barriers have to be factored in while investing in France



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Strong protection of property rights and a relatively efficient legal framework

Same rules, regulations, rights, obligations and available State Aid for allcompanies whether they are French or not

Foreign investment free of any administrative restrictions

Streamlined administrative formalities

Start-up Support

Bureaucratic financial, regulatory, and accounting systems yet consistent withinternational norms

Well developed capital markets - Foreign investors participate freely

Secure contractual agreements & professional judiciary



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Transparent regulations, but officials have wide discretion to imposeunwritten performance requirements

Strong protection of intellectual property rights

No generalized screening of foreign investment, but acquisitions in somesensitive sectors require approval

Long payment cycle of up to 90 days for business transactions in effect ofwhich, the buyer gets a free three month credit period

Relaxed visa rules to attract more Indian students to study thereAnalysis:

We conclude that as far as legal parameters are concerned an investorcan surely look out for an investment in France



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USD to 1Euros(Source: Euro exchange rates in USD, ECB)

Current Exchange Rate: 1= $1.36469



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The French currency-Euro is the single currency shared by (currently) 16of the European Union's Member States, which together make up theeuro area

Major reasons for adoption Euro

Management of Euro: By the European Central Bank (ECB) and thenational central banks which together compose the Eurosystem

Flexible Exchange Rates



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Currencies pegged to the euro: Some 56 countries around the worldhave adopted an exchange rate regime entirely or partly anchored on theeuro as a safety measure

Impact of Euro on Financial Markets:i. Competition among the Private Sector str.ii. Competition b/w models of financialiii. Competition b/w regulators & legislatorsiv. Competition b/w Sovereign Issuers

Reasons for decline in Euro: Greece Crisis, Oil price increase in 1999-2000, Structural weaknesses in European Economies, Changes in capitalmarket activity & ECB policies



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THUMBS UP

The general trend of decline in the value

of Euro favours exports and substitutesimports

Due to existence of a single currency

private competition has boomed which

could significantly benefit its external

competitiveness thus attracting foreign

direct investments. The increase in competition has been

very marked in sovereign debt marketswhich has delivered some of the most

spectacular benefits to investors.

Both the equity market and the private

bond market have experiencedunprecedented development over the

past few years attracting foreign

institutional investments.

THUMBS DOWN

The exchange rates are bilateral, so

greater volatility in the $/euro rate, forexample, causes problems for risk-averse

investors on both sides of the Forex

market

Greater volatility in exchange rates due

to the ECB policies as well has scared offrisk averse investors.


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We conclude that an investor looking out for aninvestment in manufacturing set up can proceed with hisinvestment as a depreciated currency (Euro) works in the

favour of exports by virtue of making French goods costcompetitive and for an investor looking for an investmentin capital markets & Forex market in particular we wouldadvice him to practice restrain on account of prevailing

exchange rate volatility.



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Frances economic freedom score is 64.2, making its economy the 64th freest inthe 2010 Index of Economic Freedom

France is attractive not only for North American and Asian investors, but also forEuropean partners who accounted for 68% of foreign job-creating investment

23,000 foreign companies currently have a base in France, employing over 2.8million people, double the figure only 10 years ago

460 billion of public-private investment anticipated by 2020

Infrastructure Support: France has one of the longest and safest road networksin Europe, TGV high-speed trains and Five of Europes main ports .



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Research and Partnerships: 71 innovation clusters , Financial and taxsupport for R&D activities

Sustainable Development: Frances goal is to remain a world leader in

de-carbonized energy by maintaining its lead in nuclear energy anddeveloping its renewable energy capacity. France has devoted 21% of itseconomic stimulus plan lending to green growth

France is the host country for the ITER (International Thermonuclear

Experimental Reactor) project, which involves designing and building anexperimental fusion reactor capable of producing virtually clean andunlimited energy for industrial use



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At last count, Indian companies hadinvested an aggregate 363 million inFrance creating 8,000 jobs. PresidentNicholas Sarkozy is due to visit India inDec 2010. During Sarkozys visit, Indiaand France are likely to sign a $2-billion defence deal

Considering Indias high energyconsumption needs in the future,France is going to play a key role insupply of nuclear reactors and fuel,given its expertise in the field. It was

the first nation to sign a deal with Indiaafter India obtained a waiver from theNuclear Supplies Group. Indiancompanies therefore must be on thelookout for investment opportunitiesin the nuclear energy sector.

INDIAS ENERGY CONSUMPTION(PROJECTION)

(Source: Draft Report of the Expert Committee on IntegratedEnergy Policy, Planning Commission, Govt. of India)



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The present values of macroeconomic factors namely interest rates,inflation and exchange rate are pretty conducive for setting up amanufacturing plant in France, particularly an R & D centre wherein theFrench government provides a lot of tax reliefs but at the same time an

investor needs to exercise caution on account of high fiscal deficit andhigh unemployment

Better targeted private R&D expenditure will also stimulate total factorproductivity, improve the competitive position of the country andstrengthen the labour market

Fiscal deficit although very high at around 8 percent of GDP this year, istargeted to fall to 3 percent by 2013



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France provides very good infrastructural support which in turn isconducive for setting up of a business in France and moreover as theglobal economy rebounds there is going to be an increase in touristinflows and by virtue of it being the most preferred tourist destination, it

would help the French economy or rather GDP to improve further

Although social security benefits are expected to slow down in line withunemployment benefits as the labour market is set to deteriorate lesssharply than in 2009, Frances high benefits are detrimental andinefficient utilization is one of the main bottlenecks of the Frencheconomy.



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For an investor aiming for capital investments through stock marketinvestments we would advice them to practice restrain as there exists aforeseeable political instability and negative interest rate differentialwhich may erode his wealth in short to medium term

Therefore we conclude that investor with a short term time horizonshould not invest in France whereas an investor who has a horizon ofgreater than 3 years should invest in France by way of a manufacturingset up and not in the stock market or generally available financialinstruments



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www.indexmundi.com

www.economist.com www.tradingeconomics.com

www.economictimes.com

www.x-rates.com

www.wikipedia.org

www.ecoworld.com/energy-fuels/nuclear-power-in-india.html

INSEE - National Institute of Statistics and Economic Studies - www.insee.fr/en European Central bank - www.ecb.int/

Report released from the Invest in France Agency (IFA). The report, entitled, "2010 France

Attractiveness Scoreboard,"

Heritage Foundation - 2010 Index of Economic Freedom

United Nations Human Development Report, 2010 Macro structural bottlenecks to growth in EU Member States - Directorate-General for

Economic and Financial Affair - EUROPEAN COMMISSION

European Economic Forecast - Spring 2010

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