CHAPTER 1 QUESTION: IDENTIFY AND EXPLAIN TEN (10) MACROECONOMIC VARIABLES AFFECTING A NAMED BUSINESS ENVIRONMENT. HOW CAN THESE BE REGULATED? INTRODUCTION In today's world, no business operates in isolation without interacting with the environment where it operates. Irrespective of the nature of business whether public or private organization; manufacturing; service industry; local or international firm, its operations are inhibited by the environment in which it operates. During 2003-2007, Nigeria attempted to implement an Economic Empowerment Development Strategy (NEEDS).The purpose of NEEDS is to raise the country’s standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberalization, privatization, transparency and accountability (Gbadebo, 2008).
The popular view regarding the role of the financial sector, especially in a developing economy derives from its primary function of mobilizing financial resources from the savers and directing these resources into channels of desired development activities.Attention has been drawn to the relationship between real and financial developments in terms of the role of financial intermediation, monetization and capital formation in determining the path and pace of economic development. The linkage between financial sector development and real sector performance is through the mobilization of financial resources and the delivery of these resources to the investing public.Obviously if monetary policy is out of fume with the imperatives of the predominant channel of linkage between the financial sector and the rest of the economy, it is possible for the financial sector to become obstructive to economic growth and development. Definition of terms Precisely, in identifying and explaining macroeconomic variables affecting a named business environment like financial institutions; it will not be out of place to define the following terms; • Macroeconomics • Macroeconomics variables Business environment • Financial institution MACROECONOMICS: It studies economy-wide phenomena, including inflation, unemployment, and economic growth.
(Mankiw 2007). Also, it looks at the broad range of opportunities and challenges facing an economy as whole. MACROECONOMIC VARIABLES: These are parameters usually identify by economies of the world as key to helping successive government to achieve its objectives in the area of full employment, price stability, rapid economic growth and balance of payment.BUSINESS ENVIRONMENT: This can be defined as the general condition in which a business operates whether public or private.
Businesses generally operate in different environment which can be categorised as economic, socio-cultural, political, legal, technological, and international. FINANCIAL INSTITUTION: It is an organization duly licences to accept, mobilize deposit from the general public- corporate or individual and other valuables for the purpose of safe keeping, making such deposit available on demand. It equally serves as intermediary between the ultimate lender and the borrower.Funds are mobilized from the surplus units and made available to the deficit unit for investment purpose. CHAPTER 2 MACROECONOMIC VARIABLES AFFECTING FINANCIAL INSTITUTIONS OPERATING ENVIRONMENT.
Just like other business organizations, financial institutions are not immune from the effects of macroeconomic variables prevailing in their operating environment. The operation of a financial system is dependent on overall economic activity, and financial institutions are significantly affected by certain macroeconomic developments. Recent empirical analysis has shown hat certain macroeconomic developments have often pre-dated banking crises, which suggests that financial system stability assessments need to take into consideration the broad macroeconomic picture, particularly factors that affect the economy’s vulnerability to capital flow reversals and currency crises. The following list includes a set of indicators of macroeconomic developments or exogenous shocks that could affect the financial system.
? Economic Growth ? Balance of Payments ? Reserves and External Debt ? Inflation ? Interest and Exchange RatesEconomic Growth Aggregate Growth Rates. Low or declining aggregate growth rates often weaken the debt-servicing capacity of domestic borrowers and contribute to increasing credit risk. Recessions have preceded many episodes of systemic financial distress. Sectoral Slumps.
A slump in the sectors where financial institutions’ loans and investments are concentrated could have an immediate impact on financial system soundness. It deteriorates the quality of financial institutions’ portfolios and profitability margins, and lowers their cash flow and reserves.In transition economies, these problems may also arise due to lack of progress in the restructuring of state-owned enterprises. Balance of Payments Current Account Deficit.
A rise in the ratio of the current account deficit to GDP is generally associated with large external capital inflows that are intermediated by the domestic financial system and could facilitate asset price and credit booms. A large external current account deficit could signal vulnerability to a currency crisis with negative implications for the liquidity of the financial system, especially if the deficit is financed by short-term portfolio capital inflows.Financial crises that have immediate repercussions for the financial system may happen when foreign investors consider the current account deficit unsustainably large and, hence, shift their financial investments out of the country. Reserves and External Debt. A low ratio of international reserves (in the central bank and financial system as a whole) to short-term liabilities (domestic and foreign, public and private) is seen, particularly by investors, as a major indicator of vulnerability.
Another popular indicator of reserve adequacy is gross official reserves in months of imports of goods plus services.Total external debt and its maturity structure are important indicators as well. Terms of Trade. Past experience indicates that a large deterioration in the terms of trade has been a contributing factor to banking difficulties in many countries.
Small countries with high export concentration are the most vulnerable to banking crises induced by a sudden and large deterioration in the terms of trade. On the other hand, large improvements in the terms of trade have the potential of causing problems in the financial system through inflation and asset price bubbles. These impacts are exacerbated when the terms of trade improvement is transitory.Composition and Maturity of Capital Flows. The composition of capital flows (portfolio versus direct foreign investment; official versus private; highly leveraged institutions and investment banks versus commercial banks and trade finance) may also be a good indicator of potential vulnerability.
Countries are particularly vulnerable if their current account deficits are accompanied by low investment ratios, or by over-investment (low-productivity investments). Inflation Volatility in Inflation. Such volatility makes the accurate assessment of credit and market risks more difficult.Inflation is often positively correlated with higher relative price volatility, a factor that raises portfolio risk and erodes the financial institutions’ information base for planning, investment, and credit appraisal.
On the other hand, a significant and rapid reduction in the rate of inflation could lead to lower nominal income and cash flows, thereby adversely affecting the liquidity and solvency of financial institutions. In particular, in some cases banks can profit from the management of assets in a high inflation environment, and the sudden reduction of inflation exposes the weakness of their more traditional banking practices.In addition, collateral value could decline below the loan amount, particularly in cases of imprudent lending (including high ratios of loan to collateral valuation) prior to the turnaround in inflation. Interest and Exchange Rates Volatility in Interest and Exchange Rates.
The more volatile these rates are, the higher the interest rate and foreign exchange risks are for financial institutions. The vulnerability of the financial system will be higher given 1) a higher external debt burden, and 2) a higher share of foreign portfolio investments in total foreign investment.Volatility in exchange rates could cause difficulties for financial institutions because of currency mismatches between bank assets and liabilities. Past experience has shown that rising international interest rates increase the vulnerability of emerging markets (and their financial systems) in three ways: through the asset substitution channel (capital outflows), through an adverse impact on the creditworthiness of emerging market borrowers, and through an exacerbation of information problems in credit markets (e. g.
, adverse selection).On the other hand, declining international interest rates promote capital inflows that could contribute to risky lending booms. Moreover, volatile domestic and international interest rates could have damaging effects on the financial system both directly—if banks cannot avoid taking interest rate risk and indirectly through a deterioration of credit quality—if banks can shift interest rate risk to their customers. Level of Domestic Real Interest Rates. Unless the economy has high growth rates, financial institutions tend to be stressed under high real interest rates.Increasing real interest rates contribute to higher nonperforming loans.
On the other hand, persistent negative real interest rates could signal distortions in the financial system created by the government fixing of nominal interest rates (i. e. , financial repression). Exchange Rate Sustainability.
A large real appreciation could weaken the export sector’s capacity to service debt. On the other hand, a large devaluation could improve the capacity of the export sector to service its debt but, at the same time, it could weaken the debt-service capacity of non-export related domestic borrowers.Moreover, large changes in the exchange rate could put pressure on the financial system either directly by changing asset values, or indirectly via possible effects on the real economy. Exchange Rate Guarantees. The existence of implicit or explicit exchange rate guarantees and inconsistencies of monetary and exchange rate policies are major contributors to volatility in capital flows and excessive foreign currency exposures. Lending and Asset Price Booms Lending Booms (rapid growth of the ratio of bank credit to GDP).
Such booms have preceded severe financial crises.Rapid expansion in lending by financial institutions often occurs because of poor analysis of the quality of loan applications. In addition, a weak regulatory environment, including the presence of implicit or explicit public sector guarantees, could encourage excessive risk taking by individual financial institutions and contribute to risky credit expansions. Mortgage and other consumer lending and foreign currency loans have preceded recent lending booms, particularly in emerging market economies. Asset Price Booms.
Expansionary monetary policies, among other reasons, could contribute to excessive booms in the stock and real estate markets.A subsequent tightening of these policies has often led to large reductions in the value of stock and real estate and a downturn in economic activity, creating conditions for financial distress. Also, a capital market slump normally reduces financial institutions’ income and the value of investment portfolios and collateral. Contagion Effects Since a country’s financial system is linked to other countries’ systems through capital market flows and bilateral trade, the occurrence of financial crises in other countries could trigger a financial crisis or distress at the domestic level.Trade Spillovers. When a country experiences a financial crisis marked by a significant depreciation of its currency, other countries may suffer from trade spill over owing to the improved price competitiveness of the crisis country.
Financial Markets Correlation. Contagion risk is higher for countries that have similar macroeconomic characteristics or close financial links (such as through commercial banks, capital market flows) with the country in crisis.In particular, correlation between stock market prices, exchange rates, and interest rates in different countries is often seen as an indicator of the risk of contagion. A PICTORIAL REPRESENTATION OF MACROECONOMIC VARIABLES [pic] During 2003-2007, Nigeria has attempted to implement an Economic Empowerment Development Strategy (NEEDS). The purpose of NEEDS is to raise the country’s standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberalization, privatization, transparency and accountability (Gbadebo, 2008).
The popular view regarding the role of the financial sector, especially in a developing economy derives from its primary function of mobilizing financial resources from the savers and directing these resources into channels of desired development activities. Attention has been drawn to the relationship between real and financial developments in terms of the role of financial intermediation, monetization and capital formation in determining the path and pace of economic development.The linkage between financial sector development and real sector performance is through the mobilization of financial resources and the delivery of these resources to the investing public. Obviously if monetary policy is out of fume with the imperatives of the predominant channel of linkage between the financial sector and the rest of the economy, it is possible for the financial sector to become obstructive to economic growth and development. The monetary sector, in Nigeria, is expected to facilitate rather than obstruct economic growth and development and the design of the monetary policy must conform to the imperative of this channel.
It is presumed that the demand channel is predominant and as such, high interest rates and tight monetary policy are being relied upon to fight inflation. This strategy is clearly inconsistent with the current reality whereby the supply linkage channels between the banking sector and the economy are dominant. The bank lending rate indicate that the pursuit of high interest rates policy is injurious to general price level and as such affects our production output because demand declines and price of cement increases and this is the prevailing situation.In general terms, the government’s pursuit of high interest rates policy in Nigeria will obstruct rather than facilitate economic growth and development UNIVERSITY OF AGRICULTURE, ABEOKUTA (UNAAB) COLLEGE OF COLAMRUD, MBA 1 TERM PAPER IDENTIFY AND EXPLAIN TEN (10) MACROECONOMIC VARIABLES AFFECTING A NAMED BUSINESS ENVIRONMENT. HOW CAN THESE BE REGULATED? COURSE TITLE: MANAGERIAL ECONOMICS COURSE CODE: MBA 712 SUBMITTED BY: DARAMOLA AYOOLA A.
MATRIC NO: PG10/002 LECTURER: DR. AYINDE [pic]
