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International FinancialManagement

Balance of Payment

Group : AAAA

1. Fathi Nadirah Bt Jamlus 11924

2. Lily Haslinda Bt Abdul Razak 11967

3. Mohamad Anif bin Adenan 119804. Mohamad Shuhaidi bin Mahat 11995

5. Mohd Syafiq bin Mahayudin 12031

6. Nik Amira Farisya Bt Nik Kamarudin 12101


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Agenda1. Balance of payment categories - Anif

i. Current Account

ii. Capital Account

iii. Financial Account

2. Balance of Payment measure - Fathi

i. Basic balanceii. Net liquidity balance

iii. Official reserve transaction balance

3. Domestic Savings and investment and the financial account. - Shuhaidi

4. Link between current and financial account Amira Farisya

5. Government budget deficit and current account deficit - Syafiq

6. The current situation - Lily


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Balance of Payment

Is like a double entry book keeping, ledger for acountry.

Eg : Malaysia

It balances the amount of money in and out

of the country


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Categories

Current Account

Financial Account

Capital AccountBoP


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Categories

Current Account

Financial Account

Capital AccountBoP


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Records import (M) and Export (X) of goods,

services, income and current unilateral

transfers

Current Account

If the debits exceed the credits,

then a country is running a

trade deficit.

X < M

If the credits exceed the debits,

then a country is running a

trade surplus.

X > M


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4 Components

of CurrentAccount

Trade in goods

Trade inservices

Profit and

income

Current

transfer


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Categories

Current Account

Financial Account

Capital AccountBoP


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Capital account tracks movements of funds, for investment and

loans into and out of a country.

Capital Account

A surplus in a capital accountdenotes 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.


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4 Components

of CapitalAccount

Direct

Investment

Portfolio

investment

Government

capital

Official reserve

transaction

A.k.a

physical

flow

Real estate

manufacturing

Local acquisition

Purchasing

financial

assets

stocksbonds

Government

transaction

outside a country

Net position in the IMFGold reserves


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Categories

Current Account

Financial Account

Capital AccountBoP


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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.

Financial Account


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4 Components

of CapitalAccount

Direct

Investment

Portfolio

investment

Government

capital

Official reserve

transaction

A.k.a

physical

flow

Real estate

manufacturing

Local acquisition

Purchasing

financial

assets

stocksbonds

Government

transaction

outside a country

Net position in the IMFGold reserves

Financial account


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i. Current Account

ii. Capital Account


2. Balance of Payment measure - Fathi

i. Basic balanceii. Net liquidity balance







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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 countrys BOP


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2. Net liquidity balance

Measure change in private domestic borrowing that is required

to keep payments in balance without adjusting official reserves

Official reserves - total of a nations holdings of tradable foreign

currencies, gold reserves and special drawing rights (measure of a

countrys reserve asset with IMF)

Exports ImportsNet

liquidity- =


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Example :

Total exports : RM163 billion

Total imports : RM198 billion

(RM 35 billion)

Negative value indicates that the country is facing deficit

Internal borrowing borrow from the

private or government sectors Selling bonds

What

action totake?


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3. Official reserve transactions balance

Measure the adjustment required in official reserve to achieve

balance of payments equilibrium

Budget

expenses

Income

Do we have to

use the reserve?


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Example:

Income = 163 billion

Budget expense = 198 billion

= (35 billion)

Do we have

reserve?

No

Yes

We have to

borrow

The negative value indicates the country is facing a deficit


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i. Current Account

ii. Capital Account


2. Balance of Payment measure - Fathii. Basic balance

ii. Net liquidity balance







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National Income Earning by a country from public consumption and savings

National Spending

Expenditure of a country for consumption and investment

NationalIncome

Consumption Saving

[1]

NationalSpending

Consumption Investment [2]


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[1] into [2]

National SpendingNational Income InvestmentSaving


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What if?

Income > spending @ savings > investment

Excess domestic investment

Capital surplus

National SpendingNational Income InvestmentSaving


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What did they do?

Invest overseas

Buy financial assets

Stock Real EstateBond


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Net Capital Outflow

Saving > Investment

National income > National Spending

Financial-

accountdeficit


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What if?

Income > spending @ savings > investment

Limited domestic investment Capital shortage

InvestmentNational SpendingNational Income Saving


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What did they do?

Sell their assets

Stock BondsReal

Estate


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Or?


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Net Capital Inflow

Saving < Investment

National income < National Spending

Financial-

accountsurplus


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i. Current Account

ii. Capital Account










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Link Between Current & Financial Account

CurrentCurrent

AccountAccount

Balance ofBalance of

PaymentPayment

FinancialFinancial

AccountAccount

CapitalCapital

AccountAccount

State of an economy

Economic outlook

Strategies


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Current

Account

Measures trade-in goods,

services, investment incomes

and current transfers.

Financial

Account

Measures capital flows ; short

term and long term.


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CurrentCurrent

AccountAccount

DeficitDeficit

CurrentCurrent

AccountAccount

SurplusSurplus

IMPORT

EXPORT

EXPORT

IMPORT

FinancialFinancial

AccountAccount

SurplusSurplus

FinancialFinancial

AccountAccount

DeficitDeficit


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Why Does Current Account & Financial Account Balance?

Ifwe import goods and services, we need an inflow ofcapital

(financial flows) to be able to pay for them.


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Example:


Why Does Current Account & Financial Account Balance?

We import MYR 1m of clothes from China. We need to buy MYR 1m

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.

DEBITCREDIT

Short term capital flow

Trade in goods

MYR 1 mil

MYR 1 mil


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i. Current Account

ii. Capital Account










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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


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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


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Account Deficit

National

Spending

Household

Spending

Private

Investment

Government

Spending

TaxesNationalIncome PrivateSaving

= ++

= - -HouseholdSpending

Government Budget

DeficitTaxes

Government

Spending -=

-

National

Income

National

Spending

Current-Account

Balance=

Private

Saving

Private

Investment-

Private Saving

Surplus =

Current-AccountBalance

= Private SavingSurplus

GovernmentBudget Deficit

-1

2

3

4

5

6


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Account Deficit

Nation X has lessP

rivate Saving to fundPrivate Investment and Government

Budget Deficit


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i. Current Account

ii. Capital Account










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Current Situation

(Malaysia)


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Malaysias balance of payments

strengthened into a surplus in thesecond half of 2010.

The balance of payments position

improved on account ofa wider

current account surplus and

narrowing in the financial

account deficit, which eventuallyregistered a surplus.

In particular, commodity exports

performed well, buoyed by rising

commodity prices.

Meanwhile, strong inflows offoreign

capital, given the abundance of global

liquidity amid the multispeed globalrecovery, drove the turnaround in the

financial account.

Resource: MALAYSIA ECONOMIC MONITOR

(APRIL 2011), BRAIN DRAIN

THE WORLD BANK


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RM2.7bil deficit recorded in

2010 balance ofpayments

KUALA LUMPUR: Malaysia's overallbalance of payments for 2010

recorded a deficit of RM2.7bil from a

surplus of RM13.8bil in 2009, the

Statistics Department said.

The Star, SaturdayMarch 5, 2011Deficit

Resource: DEPARTMENT OF STATISTIC MALAYSIA


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RM2.7bil deficit recorded in

2010 balance ofpayments

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

Attributed

mainly to

lower

surplus ofgoods

Higher net

payments onincome

account

Increase in

imports f.o.b.

at faster pace

than that ofexports f.o.b.

Lower net

receipts on

services

account

Higher net

payments on

transportation

Recorded a

higher

outflow on

capitalaccount

Direct

investment

posted a

lower net

outflow

Both DIA and

FDI

registered

higher values

of investment.

Portfolioinvestment

decreased

Net outflow

on other

investmentnarrowed


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Recorded a surplus of

RM15.9 billion,

compared to RM17.9

billion registered in Q4

2010

Current account

surplus widened to

RM30.2billion

Financial account

switched to an

outflow

International

reserves held by

Bank Negara

Malaysia increased

by RM15.9 billion

Held RM344.5 billion

as at end of March

2011


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Current account

surplus widened

toRM

30.2billion

Underpinned by higher surplus on goods account

by RM10.1 billion

Goods

1. Exports f.o.b.

increased by 3.5percent.

2. Growth in exports was

attributed mainly to

higher exports ofcrude

petroleum, liquefiednatural gas (LNG) and

rubber.

3. China, Singapore and

Japan were the top threeexports destinations.

Services

1. Registered a

deficit of RM1.3

billion from a

surplus of RM0.9

billion in the last

quarter.

2. Due to lower netreceipts on travel;

decline in

tourists arrivals.

Income

1. Higher net outlay

of RM5.7 billion

following the

increase in net

outlay on

investment

income ofRM5.2 billion (Q4

2010: RM3.3

billion).

Current Transfers

1. Net payments oncurrent transfers

reduced marginally by

RM0.3 billion (5.5 per

cent).


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International

reserves held by

Bank Negara

Malaysia increasedby RM15.9 billion

1. Outflow on capital

account narrowed to

RM13.0 million

Financial account

switched to an

outflow

DIA - Higher net outflow

1. Major sectors

attributed to DIAwere wholesale &

retail trade,

financial &

insurance, oil & gas

and agriculture.

2. Three countries of

DIA were United

Kingdom,Singapore and

Indonesia.

FDI Higher net inflow

1. FDI inflows were

primarily channeledinto manufacturing,

oil & gas and

financial &

insurance

2. Top three sources of

FDI were from

Singapore, Japan

and Germany.

Net inflow on portfolio

investment

expanded while other

investment registeredhigher net outflow.


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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)


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Lower current account surplus =

RM25.9 (Q1) billion to RM23.4 billion

(Q2)

Increment f.o.b. Exports

1. Arising mainly from higherexports ofelectrical &

electronic products, palm oil &

palm oil based products, and

liquefied natural gas (LNG).

2. Top export destinations were

Singapore, China and Japan.

3. Lower deficit in services

4. Income account recorded higher

net payments.

5. Current transfers recorded a

higher net outlay.

Higher International reserves

held by BNM= RM15.9

billion(Q1) to RM61.7 billion

(Q2)

1. Higher net outflow

2. Reversal in non-

produced non financial

assets to an outflow.

Financial account = outflow of

RM17.7 billion (Q1) to net inflow

of RM38.5 billion (Q2)

3 The top three sources of FDI

were Japan, USA, and

Mauritius.

1. Higher net inflow in FDI

2. FDI primarily channeled into

healthcare services,

manufacturing, oil & gas,

and wholesale & retail trade

sectors.


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3RD Quarter 2011 ?

4th Quarter 2011?

Overall balance of 2011?


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Conclusion


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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 importis more than its export, the currency goes down in value.


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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 theimport bill

Last resort : IMF and World Bank


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