of Financial Projects
LatinAmerica Economics and Politics
Thegrowth of all the countries in the Latin America is projected todeteriorate. Since the GDP of the Latin America and the Caribbean isdeteriorating year after year, Columbia, Peru and Brazil are amongthe countries whose economies are expected to fall. However, therewere expectations of Mexico’s growth to improve from the year 2014to facilitate the economy, but the rest parts of Latin America growthwere anticipated to remain close to potential. In terms of prioritiesof policy, there are two main policy challenges that are integratedby financial economies. The first challenge is that the sentiment ofthe investor toward the emerging markets is very fragile and thesecond challenge is that secular commodity price boom has petered outand the activity has been constrained by the supply-side bottlenecks.The economy of these countries is likely to stagnate if the economicpoles will not change.
Inthe year 1817, offshoring was taking place and it was the facilitatorof development of international trade (Grossman & Esteban, 2006).Two centuries later, the international trade theory continues to bedominated by thinking about exchange and production of completegoods. However, information technology facilitated production processbreaks up even though countries such as England and Portugal arestill producing goods from their start to the final stage. Using anew paradigm, this whole issue can be understood well throughstudying international trade since paradigm emphasizes on both theexchange of complex goods and the trade in particular tasks (Grossman& Esteban, 2006). On the other hand, policy makers should havegreat care about the entrepreneurs who seem to be better in thepopulation since entrepreneurship is an ultimate driver of growth aswell as development. The main reason for slow development is lack ofinnovation, but entrepreneurs facilitate innovation.
Grossman,M., & Esteban, R., (2006). TheRise of Offshoring: It’s Not Wine for Cloth Anymore. PrincetonUniversity
Reinhart,C. M. (2000). The mirage of floating exchange rates. AmericanEconomic Review,65-70.
Saunders,A., Cornett, M. M., & McGraw, P. A. (2006). Financialinstitutions management: A risk management approach(Vol. 8). McGraw-Hill/Irwin.
Mexicoand China are the major importers and exporters in the world ofeconomy. However, the economy of China is growing significantly whilethat of Mexico has stagnated leading to rise of a great concern. Inthe year 1995, china was on the top list of the developing economiesin the recipient of FDI while Mexico was second on the list afteropening itself to trading that made it stagnate whereas china wasrapidly growing (Timothy & Kim, 2010). The factors or reformsthat blocked Mexican growth are insufficient financial institutions,insufficient rule of law, and labor market rigidities. In future,these factors or reforms might affect china since they have not yetattained a sufficient economic level of development. In spite ofthat, china has been doing well due to lack of some of these factorsor reforms. These countries are classified as either open or closeddepending on their economic characteristics (Timothy & Kim,2010).
Reformshave failed to work in Mexico’s favor due to having lower thanaverage for intermediate goods and tariffs on capital. An averagetariff on capital imports as well as intermediate goods possesses anegative effect on the development of a country. Comparing China andMexico, china has higher than average tariffs. Lack of contractenforcement and inefficient financial system are other majorcontributors of the Mexico’s stagnation (Timothy & Kim, 2010).All the countries in Latin America have recorded a positive result inits attempts to curb inflation through inflation targetinginitiative. Various tests were used in assessing the impacts ofinflation targeting. Some of these tests include time series, panelregressions, and treatment effect. These tests incorporate variousformulas in its assessment and they proved to work perfectly (José& Fernando, 2012).
Theforeign direct investment (FDI) appraisals differ with the decisionsof domestic capital budgeting decisions. The foreign investmentsexpose companies to the collection of new as well as complex risksthat are not encompassed in the domestic context. However, the FDIcontributed to large increases in profit variance for the investingorganizations (Naylor & Boardman, 2011). The foreign investmentoptions were believed to have substantial value as opposed tounderlying cash flows in NPVs. The options were found to be force putoption whereby it is assumed that force signed an agreement toincrease the investment’s liquidity. The other option is theforce’s call option whereby it is considered as a force thatcreated a call option for a phase 2 investment (Naylor &Boardman, 2011).
José,G. & Fernando, T. (2012). Inflationtargeting works well in Latin America, Cepal review 106,April2012.
Naylor,M. J., & Boardman, J. (2011). RealOptions in Foreign Investment: A South American Case Study.Massey University, New Zealand.
Timothy,J., & Kim, J., (2010). Why have economic reforms in Mexico notgenerated growth? Journalof economic literature, 484,pp. 1005-1027.
TheForeign Exchange Rate and Interaction with Other Markets
Afterthe Mexico’s economic crisis in 1995, the government decided toadopt a variable foreign exchange rate regime because it is morereliable and sustainable. The quality of the quality of the advicesprovided to the treasury should take both the professional andexperiential aspects of the foreign exchange markets as it is on thecontemporary market. The role of the foreign exchange advisor to thegovernment is to ensure that the government makes the best decisionswhile maintaining a stable foreign exchange rate in the country.Other facets of the economy are directly or indirectly affected bythe foreign exchange. Some of these facets include economic growth,merchandise trade, capital flows, inflation, interest rates, and theinfluence of the local currency on the international stage. However,it is the interest of the government to intervene when the foreignexchange market has a lot of downward or upward pressure based on thebest advice of a foreign exchange officer to keep it from negativelyaffecting these aspects.
Therationale for choosing Mexico is because it is among the countriesthat recently had adopted the floated exchange rate regime after thefailure of the fixed regimes in the mid-1990s. Mexico has come out asa notable country for other economies on the importance and pros of avariable exchange rate regime. The behavior of the economy was a veryimportant paradigm that informs the advice to give the Secretary ofthe Treasury on the decisions to take so that the country gets thebest out of its recent developments on the foreign exchange market.Foreign exchange decisions factor in the position that the Mexicanforeign exchange market takes on the international foreign exchangemarkets and that of Latin America. One of the decision was to easeinflation since the country relies heavily on oil as the major sourceof energy. The other decision was on interest rates. High interestrates discourage investors since it makes the cost of capitalunaffordable.
Andersen,T. G., Bollerslev, T., Diebold, F. X., & Vega, C. (2002). Microeffects of macro announcements: Real-time price discovery in foreignexchange(No. w8959). National bureau of economic research.
Domaç,I., & Mendoza, A. (2004). Is there room for foreign exchangeinterventions under an inflation targeting framework? Evidence fromMexico and Turkey. Evidencefrom Mexico and Turkey (April 22,2004).World Bank Policy Research Working Paper,(3288).
Obstfeld,M., Rogoff, K. S., & Wren-lewis, S. (1996). Foundationsof international macroeconomics(Vol. 30). Cambridge, MA: MIT press.
Dollarizationand corruption have no direct relationship in the way they affect theeconomy. Latin American countries have a high level of dollarizationand a high rate of corruption that affects the financial system.There is not a correlation between the high levels of corruption andcorruption in Latin American financial systems. Latin American hasbeen a victim of governments that are concerned with power ratherthan the instituting policies due to corruption. There has been aneffort to avert regulatory and supervisory in countries withcorruption from the offshore intermediation practices, but in amanner that is not open for public scrutiny. On the other hand,dollarization caused a surge in loans and foreign currency depositsof most Latin American countries right after the damaged economies ofthe 1990s began to recover. The government declined to take actionsthat could inhibit further dollarization and transactions in foreigncurrencies, especially the US dollar continued unchecked (LARG,2005). Latin American countries that had a highly dollarizedfinancial system that experienced high fiscal deficits as well(Garcia, 2001).
Themacroeconomic effect of the dollarization of Latin American financialsystems required prudent monetary policy interventions. These effectsinclude underpricing of credit risk in the capital market, liquidityrisks, and limited independence in monetary policy. Dollarization canconfer immense benefits as well as costs to the economies anddomestic operation of financial institutions. It encourages thecentral banks to ensure efficiency of the general financial system(Garcia, 2001). Some scholars have indicated that dollarization isnot sustainable in the long-run since the dollar has also witnessedbouts of devaluation relative to other key world currencies such asthe Yen and the Euro (Garcia, 2001).
Frieden,Jand Stein, E. (2001). TheCurrency Game Exchange Rate Politics in Latin America.Washington, D.C. Johns Hopkins University Press.
Garcia,M. (2001). DolIarization:The recolonization of Latin America.Retreived from: International Socialist Review
LARG(2005). Dollarizationin Latin America.” Latin America Research GroupFederal Research Bank of Atlanta.
Bankingin Latin America
TheLatin America financial systems are mainly bank-based. Prides ofLatin America are having the highest intermediation spreads asopposed to those in the other banking markets (Maude, 2006). Ascompared to other regions, Latin America is known to have, lessefficient banks, elevated interest rates, as well as huge reserverequirements. A large quantity of funds arrives in Latin America fromthe home countries of the privileged individuals stacked in suitcaseswith bankers carrying many of the suitcases. Bankers are proficientat scheming multifaceted deals to assist their rich customerstransport money out of their states, such as sham investmentcompanies, offshore trusts, and analogous foreign exchange swaps thatevade national banks.
Somecountries in Latin America such as Chile offer the best investmentopportunities. Other international organizations have played a partin sustaining Chile`s growth economically. Chile’s GDP is alwaysrising despite the economic crisis experienced in the preceding year(CIA, 2015). The central bank foresees Chile would grow in the comingyears in terms of performance (Maude, 2006). Various forms ofinvestment can be undertaken. These forms of investment includefreely exchangeable currency, concrete physical assets, and variousforms of technology, foreign loans as well as debts capitalizationand profits capitalization as described below. Additionally, foreignbanks have a number of benefits in Latin America countries. Forinstance, small overseas banks in Chile as well as Peru compared tothe domestic banks lend a smaller amount to SMEs. On the other hand,medium and large overseas banks raise their loan for SMEs morerapidly than the home banks. Foreign banks also decrease Chile’sdisclosure to the state. However, foreign banks are more efficientand stable since they absorb after deposed shock (Chorafas, 2014).
Chorafas,D. N. (2014). Banks,bankers, and bankruptcies under crisis: Understanding failures andmergers during the great recession.
CIAWorld Factbook.(2015). Chile.Retrieved fromhttps://www.cia.gov/library/publications/the-world-factbook/geos/ci.html
Maude,D. (2006). Globalprivate banking and wealth management: The new realities.Chichester, England: John Wiley & Sons.