1ECONOMIC ANALYSIS

COURSE: - CREDIT RISK MANAGEMENT

TOPIC: ECONOMIC ANALYSIS

SUBMMITTED TO: SHAHEEN SHAH ALAM GROUP MEMBERS: NAVEED SHERAZ (SPO9-MM0054) AZEEM AHMED (FA07-MB-0029)

SUBMMTION DATE: - 5TH JULY, 2010
July 5, 2010

2ECONOMIC ANALYSIS

CREDIT INITIATION:
Following analyses are conducted in the credit initiation process: 1- Economic Analysis 2- Industry Analysis 3- Market Analysis 4- Borrower’s Analysis This report is all about “Economic Analysis”. Economic Analysis is just the overview of the current economic condition. The economic indicators that can be used by any Credit Risk Analyst to analyze the economy with respect to the borrower’s business are discussed below:

ECONOMIC POLICY:
First of all, a credit analyst should study the current economic policies that have been implemented by the government. Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, National ownership, and many other areas of government interventions into the economy. Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties.

Types of economic policy
Almost any aspect of government has an economic aspect and so many terms are used. A few examples of types of economic policy include: Macroeconomic stabilization policy tries to keep the money supply growing, but not so quick that it results in excessive inflation. Trade policy refers to tariffs, trade agreements and the international institutions that govern them. Policies designed to create Economic growth Policies related to development economics, Redistribution of income, property, or wealth Regulation Anti-trust

July 5, 2010

3ECONOMIC ANALYSIS

Industrial policy

GROSS DOMESTIC PRODUCT (GDP):
The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living; though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose. A Credit analyst can determine the GDP in three ways, all of which should in principle give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. PRODUCT APPROACH: calculates the market value of value of goods and services. INCOME APPROACH: sums the income received by all producers in the country. EXPENDITURE APPROACH: calculates the all spending on final goods and services.

GROSS DOMESTIC PRODUCT CONTRIBUTION:
Economic analysis of Pakistan shows that each sector contributes differently to Pakistan’s GDP. Agriculture sector contributes 21% to GDP. 26% is contributed by Industrial sector. Meanwhile 53% is contributed by Service sector. A Credit analyst can view the contribution of the sector in which the borrower’s business exists.

PUBLIC SECTOR DEVELOPMENT PROGRAM:
Every year, the government allocates a heavy amount for Public Sector Development Program (PSDP). If the borrower’s business exists in public sector, then a credit analyst may easily conclude that the borrower’s business would heavily depend on Government Development projects.

INTEREST RATE:
While analyzing the overall economy, a credit analyst should also take the current market interest rate in his consideration. An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are fundamental to a capitalist society. Interest rates are normally expressed as a percentage rate over the period of one year. Interest rates targets are also a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment.

July 5, 2010

4ECONOMIC ANALYSIS

EXCHANGE RATE:
In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. If the borrower’s business concerns with either import of raw material or finished goods, or export of raw material or finished goods, the exchange rate would play a vital role in keep his business up and running. A credit analyst may also forecast the exchange rate by viewing the past and current trend.

FLUCTUATIONS IN INTEREST RATES:
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.

July 5, 2010