Financial environment[Global Marketing Management]

1. MARKETING MANAGEMENT

2. Financial Environment
CHAPTER OVERVIEW
1.Historical role of the U.S. Dollar
2.Development of today’s international money system
3.Fixed versus floating exchange rates
4.Foreign exchange and foreign exchange rates
5.Balance of payment
6.Economic and financial turmoil around the world
7.Marketing in the euro area

3. HISTORICAL ROLE
OF THE U.S. DOLLAR

4. DEVELOPMENT
OF TODAY’S INTERNATIONAL MONEY SYSTEM
•Free Floating exchange rates could not work.
•maintained the exchange rate by tying its currency to the U.S. dollar
•Each government have to maintain its own currency didn’t flow ± 1 %
•Currencies were to establish par value in terms of gold
•A country experiencing a balance-of-payments deficit would experience devaluation pressure on its current value.
•IMF & IBRD
Post World War II , New Hampshire 1944
Goal : To bring economics prosperity and hopefully a long term peace to the world
1960s, the US currency was under pressure from a combination of factors. August ,1971 Richard Nixon to suspend the convertibility of the dollar to gold.
The Bretton Woods Conference

5. DEVELOPMENT
OF TODAY’S INTERNATIONAL MONEY SYSTEM
•Surveillance
•Technical Assistance
•Lending by the IMF
Special drawing rights ( SDRs)
To provide additional liquidity to support growing world trade.
Value = weight average of basket of four currencies U.S. dollar Japanese Yen Euro and British pound
International Monetary Fund(IMF)
IMF is an organization of 188 countries

6. DEVELOPMENT
OF TODAY’S INTERNATIONAL MONEY SYSTEM
Jim Yong Kim
President, World Bank Group
Jim Yong Kim became the 12th president of the World Bank Group on July 1, 2012.
•Founded in 1944
•To help Europe recover from World War II,
•Works with middle-income and credit worthy poorer countries - to promote sustainable, equitable and job creating growth, reduce poverty and address issues of regional and global importance.
The International Bank for Reconstruction and development (World Bank)

7. FIXED VS FLOATING
EXCHANGE RATES
The free (clean) float Is the closest approximation to perfect competition . No government intervention and traded by buyers and sellers
• A managed (dirty) float Limited amount of government intervention to soften sudden swings in the value of a currency. Purpose of maintaining an orderly, less volatile foreign exchange market.
Kinds of Currency floats

8. FIXED VS FLOATING
EXCHANGE RATES Currency Blocs
•Developing countries that depend on their trading relationship with a major country
•Economic growth tend to use the currency of the principal country
•Global economy is increasingly dominated by 3 major currency bloc--The U.S. dollar , the EU’s euro, the Japanese yen

9. FOREIGN EXCHANGE
AND FOREIGN EXCHANGE RATES
one of the most fundamental determinants of exchange rate
•The exchange rate between the currencies of 2 countries makes the purchasing power of both currencies equal
Purchasing Power Parity (PPP)

10. FOREIGN EXCHANGE
AND FOREIGN EXCHANGE RATES
The Economist publishes a PPP study every year based on McDonald’s Big Mac hamburger. i.e. The cheapest burger in the chart is in South African
•1.68$ = 47% of the U.S price
•South African rand is 53% undervalued relative to the U.S. dollar, based on the Big Mac dollar-PPP *Average price for a Big Mac in U.S. in 2009 = 3.54$
Forecasting Exchange Rate Fluctuation

11. FOREIGN EXCHANGE
AND FOREIGN EXCHANGE RATES Factors Influencing Foreign Exchange Rate
Macroeconomic Factors
•Relative Inflation
•Balance of Payment s
•Foreign Exchange Reserves
•Economic Growth
•Government Spending
•Money Supply Growth
•Interest Rate Policy
Political Factors
•Exchange Rate Control
•Election Year or Leadership Change
Random Factors
•Unexpected /unpredicted event in a country

12. FOREIGN EXCHANGE
AND FOREIGN EXCHANGE RATES
Spot market
Immediate delivery .The spot rate is the present value of a currency. This rate is constantly changing due to trading on the currency exchange.
Forward market
A rate applicable to a financial transaction that will take place in the future .
Advantage: avoid the risk of currency fluctuations “ currency hedging”
Term of purchase: 30 days, 60 days, 90 days from the
date of purchase.
Currencies: EU’s , The British pound, Canadian dollar,
Yen, Swiss Franc , U.S. dollar
Spot VS Forward Foreign Exchange

13. FOREIGN EXCHANGE
AND FOREIGN EXCHAANGE RATES
The extent to which a foreign company changes dollar prices of its products in the U.S. market as a result of exchange rate fluctuations Exchange Rate Pass-Through

14. BALANCE OF PAYMENT
Current
Account
Capital and financial Account
International Reserve Account
Balance of Payment
•Trade Account
•Service Account
•Income Account
•Current transfer
•Direct Investment
•Portfolio Investment
•Other Investment
•Gold
•Foreign Exchange
•SDR
Errors and Omissions

15. BALANCE OF PAYMENT
Current Account
Trade Balance
Income
Current
Transfer
Service
Trade Current Account

16. BALANCE OF PAYMENT
Direct
Investment
Portfolio
Investment
Other Investment Capital & Finance Account

17. BALANCE OF PAYMENT
Gold
Foreign Exchange
Special Drawing Right (RDR)
International Reserves Account

18. BALANCE OF PAYMENT Easy to understand
•Trade Account >> Import , Export
•Service Account >> Service, travel, transport
•Income and Currency Transfer>> Money in/out flow
•Capital and Financial Acct >> Capital Transaction
Trade
Income &
Currency Transfer
Current Account
Service
Current
Account
Capital and Financial Account
Balance Of Payment

19. BALANCE OF PAYMENT
Bank of Thailand
EC_XT_046 : Balance of Payments (Summary)
(Unit : Millions of Baht)
Last Updated : 30 May 2014 14:31
Retrieved date : 13 Jun 2014 20:20
2010 p
2011 p
2012 p
2013 p
1
Exports (f.o.b.)
6,675,068.11
7,020,565.52
6,927,604.03
2
Imports (f.o.b.)
5,122,934.60
6,160,220.42
6,831,798.39
6,719,924.40
3
Trade balance
937,249.42
514,847.70
188,767.13
207,679.63
4
Net services, primary income and secondary income
-624,305.43
-237,927.49
-233,837.55
-281,554.47
5
Current account balance
312,943.99
276,920.21
-45,070.41
-73,874.85
6
Capital account
7,718.63
-1,198.01
7,245.72
8,744.44
7
Financial account
794,947.66
-235,751.81
426,709.19
-7,005.62
8
Central Bank
84,139.53
-5,392.10
32,403.48
-143,659.50
9
General government
113,274.68
102,814.82
203,076.68
130,740.88
10
Other depository corporations
330,330.69
-275,259.34
505,683.76
-36,977.08
11
Other sectors
267,202.76
-57,915.19
-314,454.73
42,890.08
12
Other financial corporations
85,566.64
-149,640.81
-358,089.21
96,018.56
13
Nonfinancial corporations, households, and NPISHs
181,636.12
91,725.62
43,634.49
-53,128.49
14
Net errors & omissions
-128,984.66
-4,900.39
-225,915.09
-90,483.48
15
Overall balance
986,625.62
35,070.00
162,969.40
-162,619.51

20. BALANCE OF PAYMENT
Bank of Thailand
International Reserves
Last Updated : 06 Jun 2014 14:30
Retrieved date : 14 Jun 2014 00:09
2009
2010
2011
2012
2013
1
(Millions of US Dollars)
2
Gold
2,934.74
4,598.56
7,734.63
8,281.74
5,960.81
3
SDRs
1,522.98
1,496.90
1,494.30
1,495.26
1,443.68
4
Reserve position in the IMF
360.68
377.42
695.22
724.98
805.7
5
Foreign currency reserves
133,599.17
165,656.01
165,199.60
171,105.98
159,022.34
6
Total
138,417.59
172,128.90
175,123.77
181,607.96
167,232.53
7
Net Forward Position
15670
19596
31246.27
24143
22950
8
(Millions of Baht)
9
Gold
97,900.23
138,646.69
245,211.28
253,645.03
195,651.67
10
SDRs
50,805.25
45,131.82
47,373.96
45,795.25
47,386.10
11
Reserve position in the IMF
12,032.03
11,379.21
22,040.62
22,203.85
26,445.38
12
Foreign currency reserves
4,456,734.91
4,994,528.80
5,237,323.01
5,240,462.80
5,219,590.15
13
Total
4,617,472.44
5,189,686.54
5,551,948.88
5,562,106.93
5,489,073.30
14
Exchange Rate (End of Period) 2/
33.359
30.15
31.703
30.627
32.823

21. BALANCE OF PAYMENT Reserve Foreign Exchange and Gold

22. BALANCE OF PAYMENT
•More Export
•Less Import
Trade Surplus
•Money supply
•Product Price
Inflation
•Less Export
•More Import
Trade Balance Internal Market Adjustment

23. BALANCE OF PAYMENT
•More Export
•Less Import
Trade Surplus
•Demand of foreign currency increase
Currency
Appreciate
•Product Price
•Expensive
Trade Balance External Market Adjustment

24. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD

25. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD The Root cause of ECONOMIC CRISIS

26. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD Highlight
The Asian Financial Crisis of 1997-1998
The South American Financial Crisis of 2002

27. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
CHINA
JAPAN
Southeast Asian Countries(SACS)
Yuan Renmimimbi devaluation
in 1994: R5.7/$ to R8.7/$
Yen depreciation in 1994–97: 99.7yen/$ to 126.1yen/$
Currency pegged to U.S. dollar
Lost cost competitiveness for SACS
Worsened balance of payments for SACS
SACS’ currency depreciation
(The end of pegged currency)
Investor Speculation
MECHANISM OF THE ASIAN FINANCIAL CRISIS

28. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
1997
Thailand lost almost 60 percent of its baht’s purchasing power in dollar terms
Malaysian ringgit lost some 40 percent of its value
Korean won was similarly hit toward the end of 1997 and depreciated 50 percent against the U.S. dollar in less than two months
Indonesia whose rupiah lost a whopping 80 percent of its value in the last quarter THE WORST

29. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Oil Crisis
Global Economic Recession
The latter Half of the 1990s

30. •The Asian market has recovered from the crisis
2000
•Asia’s GDP grew at 3.5%, exceeding the average growth rate for the 1990s.
•Asian developing countries’ GDP growth continued to > 5%
•Asia’s merchandise trade growth was realized primarily by intra- regional trade, which rose by 20% to $950 billion
•China’s surging import demand and increased purchase of investment goods, semi-manufactured goods and machinery parts have sustained output and exports in many East Asian economies
2003
•Asia’s developing economies had sustained robust growth boosted by domestic demand, regional trade, and a steady inflow of investment until 2008
2008

31. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
•Argentine currency had lost ~40% of its value since the government freed it from the dollar in December 2001.
•Unemployment rate ~25%.
•Bank accounts remained frozen.
•The economy whopping 8%
In 2002
In 2001
•The largest debt default in Argentina [Unlike the Asian financial crisis].
•Government stop payment ~ $141 billion in foreign debt.
The South American Financial Crisis and Its Aftermath

32. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Argentina Government fixed peso @ 1 U.S. dollar
overvalued the currency
Lack of competitiveness when other currencies depreciated
①Monetary System
Reason behind the crisis

33. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Reason behind the crisis
Years of chronic government deficit spending
More debt
Interest rate up
More companies were closed More people were laid off
The debt burden increased
IMF refused to make an advance payment on a previously agreed loan
The economy became paralyzed
②Government Debt

34. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
The Property Bubble The U.S. Subprime Mortgage Loan Crisis and the Subsequent Global Financial Crisis

35. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Financial Crises in Perspective
To sustain their strong economic performance
•Commercial and investment banks
•Stock exchanges
The Asian countries remain strong and attractive with respect to their “economic” fundamentals
Strong financial institutions

36. GLOBAL PERSPECTIVE: RISING INFLATION IN EMERGING ECONOMIES
The soaring inflation in emerging economies.
In 2008 > the average world inflation rate had grown to 5.5%, the highest since 1999., With the relatively low inflation rates of 3.9% in the United States and 3.3 percent in the euro area
The surge in the prices of food and oil.
ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD

37. GLOBAL PERSPECTIVE: RISING INFLATION IN EMERGING ECONOMIES
The soaring inflation in emerging economies.
In 2008 > the average world inflation rate had grown to 5.5%, the highest since 1999., With the relatively low inflation rates of 3.9% in the United States and 3.3 percent in the euro area
The surge in the prices of food and oil.
Policymakers view as
a short-term supply shock
using price controls
and subsidies
ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD

38. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Consumer Response to the Recession

39. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Company
Short-term orientation
To maximize year-to-year profit(or minimize loss)
Serve stockholders’
speculative needs
Long-term orientation
tolerates some short-term loss for the benefit of future gains.
Serve customer needs
To modify marketing strategies in various ways to address the consumer needs.
To pull out
of the market
Corporate Response to the Recession.

40. ECONOMIC AND
FINANCIAL TURMOIL AROUND THE WORLD
Corporate Response to the Recession.
•Pull-out.
•Emphasize a product’s value.
–Develop a promotion
–Ads helps to enhance quality image
•Change the product mix.
–Pushing relatively inexpensive product lines & de-emphasizing expensive lines.
•Repackage the goods.
–Repackaging products to suit consumers’ declining purchasing power.
•Reduce size  Cheaper
•Maintain stricter inventory.
–Just-in-Time  reduce unnecessary inventory & improve their product
•Look outside the region for expansion opportunities.
•Increase advertising in the region.
•Increase local procurement.

41. MARKETING IN THE
EURO AREA
European Union (EU)
•Economic and political union
•Origins from European Economic Community in 1958
•Initially founded by 6 countries (Bel, Fra, Ger, Ita, Lux & Ned)
•At present, 28 member states
•Area: 4,381,376 km2
•Population: 505,665,739 (2013)

42. MARKETING IN THE
EURO AREA
(1)Belgium
(2)Germany
(3)France
(4)Italy
(5)Luxembourg
(6)Netherlands
(7) Denmark
(8) Ireland
(9) UK
(26) Bulgaria
(27) Romania
(13) Austria
(14) Finland
(15) Sweden
(10) Greece
(11) Spain
(12) Portugal
(16) Cyprus
(17) Czech
(18) Estonia
(19) Hungary
(20) Latvia
(21) Lithuania
(22) Malta
(23) Poland
(24) Slovakia
(25) Slovenia
Enlargement of the EU

43. MARKETING IN THE
EURO AREA
1st July 2013 Croatia: 28th EU Member
Lithuanian President Dalia Grybauskaitė presented Croatian President Ivo Josipović with a basketball team T-shirt bearing the number 28 and the phrase "One team - one dream".

44. MARKETING IN THE
EURO AREA
Euro Area (Eurozone)
•Official launch: 1st January 1999
•Single currency: Euro
•At present, 18 member states
•Population: 332,839,084 (2012)
•Inflation rates, budget deficit, debt-to- GDP ratio, exchange rate & long-term interest rates
•European Exchange Rate Mechanism (ERM II)
•Lithuania meets Eurozone criteria, set to become 19th member on 1st January 2015.

45. MARKETING IN THE
EURO AREA
European Union VS Eurozone

46. MARKETING IN THE
EURO AREA
1969Pierre Werner, Former PM of Luxembourg, chaired a think tank on how EMU could be achieved by 1980.
1992Maastricht Treaty spelled out guidelines toward EMU.
1999Euro was launched as an invisible currency, used for accounting purposes. 2002 Euro banknotes and coins were introduced.
Historical Background of Eurozone

47. MARKETING IN THE
EURO AREA
Pierre Werner
Former PM of Luxembourg
(1913-2002)
Signing Ceremony of the Masstricht Treaty (7th February 1992)

48. MARKETING IN THE
EURO AREA
Euro Banknotes and Coins

49. MARKETING IN THE
EURO AREA
Ramifications of Euro for Marketers
1)Price Transparency
•Prices of products shown in euro; price differentials become clear to consumer.
•Will greater transparency push prices downwards?
•For many goods and services, some costs and standard differences still justify significant price gaps.
•Survey of 2,100 firms (1997): 65% viewed “greater price transparency” as one of the key areas of cost saving.

50. MARKETING IN THE
EURO AREA
Ramifications of Euro for Marketers
2) Intensified Competitive Pressure
•Pressure to lower prices has increased.
•Measures implemented to lower costs (eg. mergers and acquisitions) 3) Streamlined Supply Chains
•Efficient supplies singled out.
•Partnerships with suppliers

51. MARKETING IN THE
EURO AREA
Ramifications of Euro for Marketers
4) New Chances for SMEs
•Limits of huge costs and currency fluctuations lessen. 5) Adaptation of Internal Organizational Structures
•Past, firms maintained operations in each country to match supply and demand within each country for economies of scale.
•Operating offices were reduced; overlapping operations were ceased.

52. MARKETING IN THE
EURO AREA
Ramifications of Euro for Marketers
6) EU Regulations Crossing National Boundaries
•EU = Supranational trait
•EU’s complex regulatory process
•Confusion on EU-wide rules end and member state laws

53. CHAPTER SUMMERY
•Financial environment always changes, based on income growth, balance of payments position, inflation, exchange rate fluctuations and political events.
•Immediate consequences of exchange rate fluctuations on pricing should be aware.
•Cost competitiveness has become an extremely important strategic issue.
•Eurozone is theoretically aimed for economic stability. Practically, there are many barriers (eg. different languages, cultures, social insurance, retirement programs)