Solved: Consider the situation of La Naci n a hypothetical

Latin Americ

Consider the situation of La Nación, a hypothetical Latin American country. In 2010, La Nación
was a net debtor to the rest of the world. Assume that all of La Nación’s foreign debt was dollar
denominated, and at the end of 2010, its net private foreign debt was $75 billion and the official
foreign debt of La Nación’s treasury was $55 billion. Suppose that the interest rate on these
debts was 2.5% per annum (p.a.) over the London Interbank
Offering Rate (LIBOR), and no principal payments were due in 2011. International reserves of
the Banco de Nación, La Nación’s central bank, were equal to $18 billion at the end of 2010
and earn interest at LIBOR. There were no other net foreign assets in the country. Because La
Nación is growing very rapidly, there is great demand for investment goods in La Nación.
Suppose that residents of La Nación would like to import $37 billion of goods during 2011.
Economists indicate that the value of La Nación’s exports is forecast to be $29 billion of goods
during 2011. Suppose that the Banco de Nación is prepared to see its international reserves fall
to $5 billion during 2011. The LIBOR rate for 2011 is 4% p.a.
a. What is the minimum net capital inflow during 2011 that La Nación must have if it wants to
see the desired imports and exports occur and wants to avoid having its international reserves
fall below the desired level?
b. If this capital inflow occurs, what will La Nación’s total net foreign debt be at the end of
2011?

Consider the situation of La Naci n a hypothetical Latin Americ

ANSWER
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