BALANCE OF PAYMENT Balance

Of
Payment

Presented to:
Dr. Mohamed Fekry

International Finance
 Team Members

⁃Ahmed Magdy
⁃Rania Mohamed
⁃Abdel-Rahman Basiony

Balance
Of
Payment
 Agenda
⁃What is BOP & Why we study it?
⁃What are the Nature of Transactions in BOP?
⁃How Transactions are Recorded?
⁃What are the Elements of BOP?
⁃How BOP has S&D with Financial Statements
⁃Impact of BOP with Macroeconomics
⁃Application on Egypt and USA BOP
⁃How BOP can Affect our Investment
Decision?
Balance
Of
⁃ Impact on International Trade
Payment
⁃ Impact on Capital Mobility
 What is BOP?
⁃ The balance of payments (BOP) is a summary of
all international financial and economic
transactions between domestic and foreign
residents (the country in question is their legal
home) for a specific country over a specified
period of time.
⁃ It represents an accounting of a country’s
international trade transactions in goods,
service and financial assets through import and
export as well as foreign aid and remittances
with the rest of the world for a period, usually a
quarter or a year.
Balance
Of ⁃ It accounts for transactions by businesses,
Payment
individuals, and the government.
 What is BOP?

Inflow financial and non

financial Assets

Country- A Rest of the world

“Resident”
(businesses, (businesses,
individuals, individuals, and
and the the government)
government)
Out flow financial and
non financial Assets

Balance
Of
Payment
 Why Study BOP?
⁃ BOP data is important to business managers, investors,
consumers, and government officials and policy maker
because the data simultaneously influences and is influenced
by other key macroeconomic variables, such as gross domestic
product (GDP), employment levels, price levels, exchange
rates, and interest rates.

Thus
⁃ Needed estimate changes in host-country economic policies that might be
driven by BOP events.
⁃ Indicate whether foreign exchange rate is expected to change or not, which
will be reflected on a firm trading with or investing in that country to
experience foreign exchange gains or losses.
Balance
Of ⁃ Changes in a country’s BOP may indicate the imposition or removal of controls
Payment over payment of dividends and interest, license fees, royalty fees, or other
cash disbursements to foreign firms or investors.
 Why Study BOP?
The BOP helps to
measure the country
competitiveness and
health in addition
forecast a country’s
market potential,
especially in the short
run.

⁃ Where if the country ⁃ It also reveals whether ⁃ Assist in evaluating

is experiencing trade the country produces the degree of its
deficit mostly will not enough economic international solvency
expand imports and output to pay for its (i.e. ability to meet its
will increase its growth. long-term debts and
exports. financial obligations).
Balance
Of ⁃ Opposite to the case
Payment of have a surplus
balance
 What is The Nature of
Transaction in BOP?
Inflow of Funds
Cr
⁃ French Tourist purchase of
Egyptian monuments in Egypt.
⁃ Egyptian employee in Saudi
transfer of 70% of his income to
his family in Egypt.
⁃ Algerian subsidiary of Egyptian
company, transfer profits to the
parent company in Egypt.
Balance Inflow Inflow
Of
Payment
Surplus
Outflow of Funds
Egypt Dr
⁃ Egyptian company build mobile
networks in Algeria.
⁃ Investor in Egypt purchased US
stocks using broker in India.
⁃ Egyptian subsidiary of USA
company(Pfizer Egypt), transfer
profits to the parent company in
US ( Pfizer New york).
Outflow Outflow
Deficit
 What are the Elements of BOP?
Balance of Payment

A- Current Account Trade Balance

Services Balance

Income Balance

Transfers

Transfers related to the

B- Capital Account purchase of Fixed assets
Reserve

C- Financial Account Direct Foreign Investment

Portfolio Investment

Other Capital Investment

Balance
Of D- Errors and Omissions
Payment
Net Error and Omission
Account
 What are the Elements of BOP?

Balance
BOP should always be in BALANCE.
Of
Payment
 A- Current Account
I. Goods trade. The export (inflow) and import( out flow) of goods is known as the goods trade.ie: Merchandise – tangible products
Example : computers.

II. Services trade. The export (inflow) and import (outflow) of services is known as the services trade.

⁃ Example : air lines Service and Banking service related to Imports and exports, Insurance & consultancy for customer located in
another country

Net export of goods and services

 Positive:

⁃ Excess exports over imports

⁃ Add to GDP

 Negative:

⁃ Excess imports over exports

⁃ Subtracted from GDP

III. Income. This is predominantly current income associated with investments that were made in previous periods.

⁃ Example (interest and dividend payments) received by investors on foreign investments in financial assets (securities).

IV. Current transfers. The financial settlements associated with the change in ownership of real resources or financial items are
called current transfers. Example:

Balance ⁃ Any transfer between countries that is one-way a gift or grant is termed a current transfer. (EX: US aid in Egypt),
Of
Payment ⁃ Transfer payments made by migrant or guest workers back to their home countries.
 B- Capital Account

⁃The Capital Account category has been

changed to separate it from the
financial
⁃The Capital Account includes the value
Financial and non financial assets
transferred across country borders by
people who move to a different
country.
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Of
Payment
 C- Financial Account
⁃ Direct investment, : represents the investment in fixed assets
in foreign countries that can be used to conduct business
operations. The purpose is to exert control over assets and gain
profit.
Example: French firm builds a new factory / purchases a
company in another country in another country
⁃ Portfolio investment, transactions involving long-term
financial assets (such as stocks and bonds) between countries
that do not affect the transfer of control and doesn’t exceed
10% ownership threshold of direct investment purpose only is to
earn profit
Example: the Egyptian company purchase of shares (not more
than 10% of ownership) in US company , or Purchases of debt
securities, bonds, interest-bearing bank accounts, the Net
⁃ Other asset investment: account consists of various short-
term and long-term trade credits, cross-border loans from all
Balance types of financial institutions, currency deposits.
Of
Payment
 D- Net Error & Omission
Account
⁃Because current and financial account
entries are collected and recorded
separately, errors or statistical discrepancies
will occur. The net errors and omissions
account ensures that the BOP actually
balances

Balance
Of
Payment
 Reserve Account
⁃ Is the total reserves held by official monetary
authorities within a country. These reserves are
normally composed of the major currencies
used in international trade and financial
transactions (so-called “hard currencies” like
the U.S. dollar, European euro, and Japanese
yen; gold)
⁃ The significance of official reserves depends
generally on whether a country is operating under a
fixed exchange rate regime or a floating exchange
rate system.
⁃ If a country’s currency is fixed, the government of
the country officially declares that the currency is
Balance convertible into a fixed amount of some other
Of
Payment
currency.
 Reserve Account

⁃Incase of excess supply If the country local

currency, to prevent the value of the
Egyptian from falling, the Egyptian
government would have to support the
Egyptian value by purchasing Egyptian
pounds on the open market (by spending its
hard currency reserves) until the excess
supply was eliminated.
⁃That’s not the case in Floating rate where
the government doesn’t have any control on
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Of
the currency value it is left to the market
Payment
supply and demand for local currency
 Impact of BOP with
Macroeconomics

Surplus Deficit

Reserve Account

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Of
Payment
 Impact of BOP with
Macroeconomics

BOP

Exchange Rate Interest Rate GDP

Fixed Exchange Rate Real Interest

Floating Inflation

Managed Floating

Balance
Of
Payment
 Fixed Rate
Demand

Country
Surplus
Cash in > Cash out

Balance
Of
Payment
 Fixed Rate
Supply

Country
Deficit
Cash in < Cash out

Balance
Of
Payment
 Floating

Surplus
Managed
by Supply &
Demand

Deficit

Balance
Of
Payment
 Floating – J Curve

Balance
Of
Payment
 Managed Floating

Capital Account

Domestic
Currency
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Payment
 Interest Rate

⁃the overall level of a country’s interest rates

compared to other countries has an impact
on the financial account of the balance of
payments. Relatively low real interest rates
should normally stimulate an outflow of
capital seeking higher interest rates in other
country currencies.

Balance
Of
Payment
 Inflation & Real Interest

⁃High rate of inflation in the domestic market

makes domestic goods expensive and
unattractive to the international market
resulting to reduction in demand for
exports. Moreover, because of high
domestic prices, residents prefer to buy
foreign goods, which imply increase in
imports. The result of falling exports and
increasing imports, because of high
domestic inflation.
Balance
Of
Payment Real Interest = Nominal Rate + Inflation Rate
 GDP

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Payment
 Application on Egypt and USA
BOP

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Payment
 How BOP can Affect our
Investment Decision?
⁃ Many MNCs are heavily engaged in
international business, such as exporting,
importing, or direct foreign investment in
foreign countries. The transactions arising from
international business cause money flows from
one country to another.
⁃ Financial managers of MNCs monitor the
balance of payments so that they can
determine how the flow of international
transactions is changing over time. The balance
of payments can indicate the volume of
transactions between specific countries and
may even signal potential shifts in specific
exchange rates. Thus, it can have a major
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Of
influence on the long-term planning and
Payment management by MNCs.
 Impact on International Trade

Is an Opportunity

Material MNCs Sales

Increase Sales and expand

Lower Price
operation

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Of
Payment
 Impact on International Trade

Removal of the Berlin Wall 1989

Single European Act 1992

GATT 1993

NAFTA 1993
Inception of the Euro 1999

Expansion of the
2004 : 2011
European Union

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Of
Payment
 Impact on International Trade

Cost of labor
Inflation
National income
Government policies
Restrictions on Imports Labor Laws
Subsidies for Exporters Business Laws
Restrictions on Piracy Tax Breaks
Environmental Restrictions Country Security Laws
Exchange rates

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 Impact on Capital Mobility

Capital
Flow

Contribute significantly to an Free flow of capital in and out of

an economy can potentially
economy’s development destabilize Economic activity.

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Payment
 Impact on Capital Mobility

Conduct
Maintain A
Allow Complete Independent
Fixed Exchange
Capital Mobility Monetary Policy
Rate
Simultaneously

Restricting capital Develop by A strictly

maintaining
inflows and A near-fixed (soft peg)
independent
outflows exchange rate regime monetary policy

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Of
Payment
 Impact on Capital Mobility

⁃A capital control is any restriction that limits

or alters the rate or direction of capital
movement into or out of a country.
⁃Capital controls may take many forms,
sometimes dictating which parties may
undertake which types of capital
transactions for which purposes—the who,
what, when, where, and why of investment.
⁃the impossible trinity requires that capital
flows be controlled if a country wishes to
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maintain a fixed exchange rate and an
independent monetary policy.
 Impact on Capital Mobility

⁃Capital controls may take a variety of forms

that mirror restrictions on trade.
Tax On A Specific Transaction
Limit The Quantity Or Magnitude Of Specific Capital Transactions
Prohibit Transactions Altogether
Other Controls
⁃In some cases capital controls are intended
to stop or thwart capital outflows and
currency devaluation or depreciation.
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 Thank You For Listening

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