Page 207 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes
Did u know? Developing countries are more vulnerable than mature economies to balance
of payments difficulties because of high import propensities and a heavily skewed
dependence on few exports.

The balance of payment indicators include:
Percentage increase in imports/Percentage increase in Gross Domestic Product (this ratio
shows the income elasticity of demand for exports).

Foreign income elasticity of demand for the exports.
Under or overvaluation of the exchange rate, on a purchasing power parity basis.
Current Account/GNP (a measure of the country’s net external borrowings relative to
country size).

Effective Exchange Rate Index (measures the relative movements in domestic and
international prices).

Imports of goods and services/GDP.
Non-essential consumer goods and services/Total imports.
Exports to 10–15 main customers/Total exports.
Exports of 10–15 main items/Total exports.
External reserves/Imports.

Reserves as % of imports (goods and services).
Exports as % of imports (goods and services).

Economic Performance
Economic performance can be measured in terms of a country’s rate of growth and its rate of
inflation. The inflation rate can be regarded as a proxy for the quality of economic management.
Thus, the higher the inflation rate, the lower the creditworthiness rating. The economic
performance can be measured by a set of ratios that focus on the long-term growth prospects and
any economic imbalances of the economy.

The significant ratios that can be used to measure economic performance are:
Gross National (or domestic) Product per capita (this ratio measures the level of
development of a country).

Gross Investment/Gross Domestic Product. (This ratio is called the propensity to invest
ratio and captures a country’s prospects for future growth. The higher the ratio the higher
the potential economic growth.)
Inflation (Change in consumer prices as an annual average in %. This measures the quality
of economic policy).

Money supply (serves as an early indicator for future inflation).
Gross Domestic Savings/Gross National Product.
Political Instability

There have been several occasions when sovereign borrowers with the capacity to service their
external debts have defaulted for purely political reasons. Political instability undermines the

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