Factors affecting E/R

Factors affecting E/R

1. DD for currency (inflow)

   • Current Account
     • 1. ↑ X revenue
       • 1.1 ↑ X competitiveness
         • Non-Price
           • Product Innovation
             • ↑ Quality
         • Price
           • Process Innovation
             • ↓ COP
       • 1.2 ⃤ In csr's T&P
         • e.g. from push-button phones (e.g. Nokia) to touch-screen phones (e.g. iPhone)
       • 1.3 Low relative Inflation Rates
         • Leads to increased price competitiveness
     • 3. Financial aid from foreign ctys
       • E.g. Afghanistan receiving more than $100 billion in foreign aid in the last decade
     • 2. Income sent to cty from abroad
       • 2.2 Profit repatriation from investment abroad
       • 2.1 Local workers overseas send income back to cty
         • More relevant for developing ctys (e.g. Philippines,Myanmar,Bangladesh) where job opportunities are scarce & working conditions are poor
   • Capital & Financial Account
     • 1. ↑ FDIs
       • ↓ corporate tax
       • ↑ Lab. Pdtvty
       • ↓ Unit lab. costs
       • ↓ Legal barriers to FDI
       • ↑ econ. performance
     • 2. Portfolio investment inflows
       • Short-Term
         • ↑ I/R
           • ↑Expected rate of return on ST k
         • expectations of future e/r appreciation
       • Long-Term
         • ↑ Relative potential for asset appreciation
           • (e.g. real-estate asset bubble formation in SG which led to increased LT portfolio investment in the form of real-estate purchases by foreigners)
   • Official Reserves Account
     • Central bank exchanges FOREX reserves for cty's currency

2. SS of currency (outflow)

   • Current Account
     • 1. ↑ Import Expenditure
       • 1.1 Improvements in competitiveness of foreign g&s
       • 1.4 Economic growth, ↑per capita y , ↑ purchasing power
       • 1.2 Changes in T&P (from domestic to foreign)
       • 1.3 High relative inflation rates
     • 2. Income from cty sent abroad
       • 2.1 profit repatriation from FDI firms
       • 2.2 foreign workers send income back to home cty
     • 3. Financial Aid to foreign cty
       • E.g. UAE channeling significant amt of its funds to support other countries like Egypt
     • 4. Repayment of external debt
       • E.g. US , UK, France , Germany (countries with the largest external debts)
   • Capital & Financial Account
     • 1. Direct Investment Abroad
       • ↑Expected profitability of investment abroad (factors mentioned under “Increased FDI”)
     • 2. Portfolio Investment outflows
       • Short Term
         • ↓ Relative i/r
         • ↑ expectations of future e/r depreciation
           • ↓ expected ROR on ST k
       • Long-Term
         • ↑expected profitability of LT portfolio foreign investments
   • Official Reserves Account
     • Central bank purchasing foreign currency with local $$