Faculty of Business and Economic

Department of Finance and Banking

FINN432

Project (Part 1)

By: Abdallah beetillow

Supervised by: Seri Ghanem

Spring 2019\2020
Case 1.1:

1. What are the pros and cons of Argentine peso devaluation?

The advantages of choosing the scenario of devaluing peso are the
opportunities for increasing the Argentinean competitiveness regarding
the export/import relations, the openness to more trade perspectives, the
reduced levels of unemployment within the country, and the general rise
in the economic development.

Nevertheless, the peso devaluation can result in the unequal

redistribution of wealth among the debtors and creditors as the
participants of the economic relations and negative effects on banks in
relation to the distribution and control of the bank capital and associated
liabilities as well as on many private companies.

2. Given these pros and cons, what is the likelihood that Argentina will
devalue its peso?
In spite of the obvious advantages of devaluing peso, the costs of the
process are also significant and threatening in relation to the further
effective development of the Argentinean economy. That is why, the
devaluation of peso can be connected with the other alternative
procedures such as dollarization in order to achieve the most intensive
economic growth and to respond to the country’s needs.

Such negative consequences of devaluation as the pressure on the

Argentinean banks and their capitals along with the equity reduction and
intensified devaluation in the future cannot be discussed as desirable
with references to the discussed economic situation in the country.

3. What are the pros and cons of dollarization?

The alternative scenario for improving the economic situation in
Argentine is the focus on dollarization in order to contribute to the
country’s exchange rate stability and the general economic progress.
From this point, the perspective of dollarization has a lot of advantages
for the Argentinean economy.

Thus, the Argentinean peso can be discussed as not credible in

comparison with the other currencies, and dollarization can change the
situation for better with the focus on the dollar’s credibility. Much
attention is paid to the possibilities of intensifying the economic
development within the country with the help of the effective
dollarization.

Moreover, it is possible to rely on the interest rates which can become

lower, and this situation can contribute to the overall economic situation
in Argentine. Nevertheless, there can also be negative consequences of
dollarization which are the loss of seignorage and the usage of
dollarization as the ‘lender of last resort’.

These two consequences are too threatening to the economy of

Argentine that is why it is impossible to state strictly about the effects of
dollarization on the country’s financial and economic spheres.

4. What are the likely consequences of peso devaluation for the Mega
project?

Devaluation of peso is characterized by the negative impact on private

companies, as a result, devaluation can be discussed as negative for the
Mega project.

Moreover, any negative changes in unemployment rates can lead to

decreasing the factual and economic activities of the company. In spite
of all the benefits of devaluation, the Argentinean economy can become
more vulnerable, and the Mega project can be influenced by these
processes intensively.

5. What effects would dollarization likely have on the Mega project?

Dollarization can be more contributing to the development of the Mega

project because the focus on the credible and strong currency can lead
to the effective economic and trade relations with the international
partners, and this sphere is important for the Mega project.

Furthermore, if dollarization is the logical step after devaluation of peso,

this situation is advantageous for the Mega project because of
emphasizing the economic perspectives of the discussed changes. The
new currency regime can also open new prospects for the development
of private organizations in Argentine.

From this point, relying on dollarization, the leaders of the Mega project
can gain more benefits and profits from the economic situation in the
country. The actions of the currency board can be considered as
supportive in relation to dollarization as the best approach to change the
economic situation in the country.

This factor is also important from the point of the Mega project’s leaders
because they should adapt to the changes in the economic and financial
environments quickly in order to contribute to the company’s intensive
progress.

6. What alternatives are available to stimulate Argentina’s economic growth

independent of exchange rate policy?

To avoid the negative consequences of choosing the ineffective variant

of the exchange rate policy, it is possible to refer to the alternatives
initiated by the government in order to stimulate the Argentinean
economic growth without references to the significant dependence on
the effects of devaluation of peso or dollarization.

Such economic approaches as devaluation or dollarization are too

painful for the countries’ economic progress because of changing the
principles and standards associated with the country’s currency.

That is why, it is important to focus on such methods as the decrease of

the budget deficit and encouragement of developing the private
economy sector, the decrease of interest rates and decrease in
international debts. Furthermore, it is also necessary to focus on
stabilization of the political situation in Argentine to affect the economy
and financial spheres positively.
Case1.2:

1. How does Brazil hope to control its current account deficit

through a tight monetary policy? What alternatives are available to
control Brazil’s current-account deficit?

A tight monetary policy will raise real interest rates and slow down
growth, which should act to curb imports without affecting exports.
However, increased real interest rates could also lead to a capital inflow.
Since the flip side of a capital inflows a current account deficit, this policy
might not work. Alternatively, Brazil could and should cut its massive
government deficit, which is the equivalent of dissaving. Given the
fundamental macroeconomic identity savings investment = exports –
imports cutting the budget deficit by raising saving relative to investment
should reduce Brazil’s current-account deficit.

2. How will Brazil’s tight money policy affect its fiscal deficit? How will it
affect Brazil’s real (inflation-adjusted) interest rates, both short-term and
long-term rates?

In an open economy, fiscal policy also affects the exchange rate and the

trade balance. In the case of a fiscal expansion, the rise in interest
rates due to government borrowing attracts foreign capital. The first
impact of a fiscal expansion is to raise the demand for goods and
services.
The key issue Brazil had was underemployment, and excessive account
deficits. Fernando Cardoso hoped to control the current account deficits
with tight monetary policies by supporting the currency (real), and
preventing the trade deficits.
Overall, the plan was successful in targeting inflation, even though the
fiscal reform was not as efficacious as expected and despite the fact that
Brazil was still facing an uncomfortable debt.
3. Why have Brazil’s interest rates generally fallen in recent years?
Low interest rates may encourage people to convert currencies into
Brazilian currency, and that serves the Brazilian economy, which suffers
from inflation, and also which encourages investors to invest in Brazil.
Moreover, Banks and other financial institutions have found that
speculating against the real is an expensive and difficult proposition
because the Banco do Brazil maintains a wide range of controls on the
foreign exchange market. One of the most onerous and costly requires
that buyers of dollars deposit a large portion of them in special, low-
interest accounts with the central bank. In times of intense speculative
pressure, the central bank has cut the interest rate paid on these
accounts to zero. Thus investors who borrowed raise and converted
them to dollars would start losing money the moment they deposited
them with the central bank, unless the real fell enough to offset the loss
of interest.

4. How would reform and privatization of the social security system improve
Brazil’s savings rate? What would be the likely consequences of this
improvement for Brazil’s current-account balance and the real’s value?
Explain.

One of Brazil's fundamental problems is its bloated pension system,

especially for government employees, under this program, many civil
servants are able to retire at age 45 with a fat pension, then take a
second job. The result of this and other government programs rife with
waste is Brazil is running a huge and growing budget deficit. Reforming
the social security system would reduce the government deficit, which
would raise the net saving rate in Brazil and lower the current-account
deficit. Privatizing the system would raise saving still more by forcing
people to realize that the way to increase their retirement benefits is to
save more today rather than lobby politicians for higher social security
benefits. The real's value would undoubtedly rise for several reasons.
First, by taking decisive action to rectify a politically touchy issue, the
Brazilian government would demonstrate that it had the will to do the
right thing even it was politically unpopular. Second, reducing the budget
deficit would lessen the chances that Brazilian will revert at a later date
to monetizing the deficit. Investors would correctly infer from the greater
likelihood of Brazilian fiscal and monetary discipline a lower future rate
and a stronger real.

5. What are the costs and benefits of using currency controls to

defend the real?

The costs and benefits of using currency controls to defend the Real:
Benefits: End to Brazil's runaway inflation, declining interest rates,
currency stabilization and increased investor's confidence in the
economy. Rather than devaluing the currency, the traditional response
by Brazilian governments faced with speculative attacks, Brazil’s central
bank —the Banco Central do Brazil—has defended the Real Plan by
doubling the basic interest rate to 43% (see Exhibit I 2.5) and spending
the nation's dollar reserves to buy up excess raise (plural of real). In
early November 1997, Cardoso also managed to push through Congress
some budgetary reforms along with $18 billion in spending cuts and tax
increases, equivalent to more than 2% of GDP. The real’s defense is not
cost-free, however. The high real interest rates are expected to slow
GDP growth in 1998 to 1.5%, from 3%in 1997. They are also pushing up
the unemployment rate and worsening the credit quality of Brazil's
banks.

6. Why might speculators view the real as being overvalued? Based on the
data in the case, what is your best estimate as to the real’s degree of
overvaluation?

Brazil’s current account deficit is mounting, its foreign exchange reserve

are falling , and financial markets are getting nervous that the real will
suffer the same fate as that of the Asian currencies . The loss of
confidence in the real is showing up in the form of capital fight , with 10$
billion fleeing Brazil in the two weeks of October 1997 alone .
We can see what has happened to the real value of the real by using the
economic data in Exhibit l4.2. According to these data, the value of the
real at the end of 1993, just after the real plan was implemented, was
0.119/$ or 8.40$/real. At the end of 1997, the real was worth
0.90$(1/1.116). over this same period, was can use the same economic
data to compute cumulative Brazilian inflation of 1.541%, in contrast to
cumulative U.S inflation over this period of 11.1% (cumulative inflation
from year 1 through year n equals (1+i1)(1+i2)….(1+in), where i1 is the
inflation rate in year 1). Using equation 8.6, the real value of the real by
the end of 1997 was 13.23$.

E=e ((1+i1) ^2 / (1+i) ^2) = 0.90*(16.41/1.111) = 13.23

7. What are the tradeoffs that President Cardoso must consider in

deciding whether to accelerate the real’s depreciation?

Financial markets will be concerned that the Real's will suffer

the same fate as Asian currencies. The loss of confidence in the
riyal appears as a flight of capital, with $ 10 billion fleeing Brazil
in the last two weeks of October 1997 alone.
Preventing budget reforms that would allow him to control the
fiscal deficit that was a driver of hyperinflation and thus
institutionalize the new macroeconomic stability in Brazil.

Brazil faces financial problems before the crisis in 1998. There

was a large current account deficit, runaway public spending,
and massive external debt. The result: pressure to devalue the
real currency, linking crawl, and the Asian financial crisis, as
investors lost confidence in developing countries, large capital
inflows from Brazil, and the difficulty of safeguarding linking
crawl.
8. Could Brazil have avoided the recessionary impacts of its monetary
policy if it had devalued the real instead?

The resort to doubling the value of interest and spending the

national dollar’s reserves to buy the excess riyal slowed the
GDP growth, as it worked to raise the percentage of the
unemployed and exacerbate the quality of credit. This plan
benefits the rich at the expense of the poor who are the first to
lose their jobs. It is possible for Brazil to devalue its currency
instead, and that the people are aware of the strong link
between devaluation and inflation.
During periods of economic slack, a loose fiscal-easy money
policy can be apply. It is highly simulative. Consist on budget
stimulus and rapid growth in bank reserves. The option is to
give devaluation a chance, to let the markets push the currency
(real) down, without raising interest rates.

9. What would a Brazilian devaluation do to the currencies and economies

of Argentina and Chile, its neighbors and largest trading partners?

The depreciation of the currency indicates the presence of

losses among the holders of the Brazilian currency, and thus
the purchasing power of it will decrease, which indicates that
the currency cannot be an answer to whoever holds it.
This led to economic chaos and erosion of living standards.
This would make trade more expensive for Brazil, and thus
reduce it.

This graph show Brazil’s Crawling Peg Leads to a Gradual

Devaluation of the Real against the U.S. Dollar:
10. What is the link between Brazil’s budget deficits and its historical
hyperinflation?

The fiscal deficit was a major driver of inflation. The greater the
fiscal deficit, the greater the inflation, because in that period
the volume of debt on Brazil was large, so it is natural to raise
the interest rate, which generally increases prices for all goods.
Brazil has also suffered a history of a large budget deficit, and
when the deficit rises, the printed money will increase, so
hyperinflation will occur, and therefore spending on interest
payments on bonds issued by them increases the fixed budget
deficit.
11. What mix of fiscal and monetary policy would you recommend to
President Cardoso? Should he devalue or defend the real?

Policy changes threatening lower inflation caused by currency stability

are likely to be politically risky.
President Cardoso remains committed to defending the Real Plan, but
he faces several key challenges domestically and abroad. His package
of fiscal reforms requiring constitutional amendments has progressed
slowly through the balkanized Brazilian legislature; in their absence, the
government continues to run deficits and has limited room to relax its
interest and exchange rate policies if it wants to keep inflation under
control. Some foreign investors remain concerned about the viability of
Brazil's exchange rate policy because of the country's fiscal and current
account deficits. The government thus has to contend with the possibility
of capital flight or a speculative attack that could draw down foreign
reserves a critical level and force a devaluation.
The main issue is not devaluation or preserving the legacy, but the need
for reform in the structure of the Brazilian economy. The public sector
budget needs to be greatly reduced. Privatization of the social security
system. Accelerating the privatization of state-owned companies. Tax
relief and regulatory ratification.
 Outline

- Goal of the project:

The goal of the project is to identify the impact of exchange rate
policies such as the devaluation of the currency and the dollar on the
country's economy significantly.
And how to present an economic agenda to control inflation and
promote sustainable economic growth.
It also aims to analyze the reasons for the success of the real plan (in
reducing and controlling the rate of inflation), and the reasons for the
plan's failure (in low economic growth, high unemployment, and
macroeconomic instability in the form of a financial budget and
balance. Deficit payments).
In addition, to explain weak economic fundamentals such as the
chronic current account deficit and high inflation rates in general, they
have currencies that are devalued. A devaluation, if organized and
gradual, improves a country's export competitiveness and may
improve its trade deficit over time. But the sudden and large
devaluation of the currency may frighten foreign investors who fear
that the currency may decrease further and lead them to withdraw
portfolio investment outside the country, which increases the
downward pressure on the currency.
Because changes in exchange rates have macroeconomic effects on
a nation’s economy, nations need to think about what exchange rate
policy they should adopt.

- Theories of International Business:

1- Comparative Advantage:

There is competition between Argentina and Brazil. Argentina sends

30% of the volume of exports to Brazil. Therefore, the depreciation of
the Brazilian currency makes Argentina less competitive in its most
important market, so a real devaluation as well it gives Brazilian
 producers a competitive advantage Their Argentine counterparts in
the Argentine The market as well. On the other hand, Argentina can
devalue its currency, which leads to an improvement in the
competitiveness of its exports. Likewise, a currency devaluation
stimulates its economy and reduces unemployment and the recent
effects will help to boost government tax revenues as well and can
reduce unemployment compensation and other social spending,
which may It gives it a competitive advantage with its counterpart
Brazil, which has a high rate of unemployment and inflation during
this period.
Brazil is also the largest market in Latin America (accounting for
about 45% of Latin America's GDP) and provides a platform for
investments across the region.

2- Imperfect market theory:

Market imperfections theory is a trade theory that arises from

international markets where perfect competition doesn't exist. In other
words, at least one of the assumptions for perfect competition is
violated and out of this is comes what we call an imperfect market.
We know that a perfect market isn't really attainable.
Therefore, the Argentine currency, like all other currencies, has
weaknesses, and that the devaluation of its currency will lead to
special problems and the reason is that most of Argentina's
obligations are denominated in dollars. A devaluation of the peso
would lead to a redistribution of wealth to creditors from debtors.
Peso devaluation would also reduce the equity of Argentine banks
and private companies. Even if all domestic private and public dollar
denominated debt were to be honored in pesos, a devaluation of the
peso would put substantial pressure on bank capital.

3- Product cycle theory:

Theory suggesting that a firm initially establish itself locally and

expand into foreign markets in response to foreign demand for its
 product; over time, the MNC will grow in foreign markets; after some
point, its foreign business may decline unless it can differentiate its
product from competitors.
The current account deficit in Brazil, which was progressively
increasing, and its foreign currency reserves declined, which makes
foreign investors lose confidence in the Brazilian currency, and they
flee with capital abroad, this shows that foreign investment in Brazil at
first was successful, but the difficulty of adapting to continuing The
value of the currency changes and acclimatization to the conditions
and fluctuations that Brazil is constantly exposed to, which causes it
to lose competitiveness with Brazilian companies, which are
acclimatized to these changes. This problem faces many foreign
investments, which in the beginning are a rising company and
Continuous evolution but over time lose their competitiveness with
companies from the same origin of this country and is accustomed to
the vagaries of the country.

- International business methods:

1- International trade:

Is a relatively conservative approach that companies can use to

penetrate markets (by export) or to obtain supplies at low cost (by
import). This is the approach involves minimal risk because the
company does not expose any of its capital to risk. If the company is
exposed to a decrease in its export or import, it can reduce or reduce
it Stop this part of its business at a low cost.
The volume of Argentine exports to Brazil amounts to about 30% of
the volume of Argentine exports, therefore any change in the value of
the Brazilian flag affects Argentina, especially if there is a decrease in
the value of the Brazilian currency that will cause significant losses to
Argentine exports, and this helps Brazilian investors and harms
Argentine investors And when that happens, Argentina will reduce its
exports to Brazil to reduce the damages it might be exposed to.
 Another example of global trade is that Brazil exports coffee to most
parts of the world, which constitutes about 80% of its coffee exports.

2- Licensing:

Giving permission to a person is to allow him to do something and to

have permission or permission to do so. It is also the permission
granted by an official authority for a person to engage in a specific
project, and it is not transferable. And sometimes the license is called
a license. As for a patent, it is owned by the owner of the invention,
and its registration alone enables him to exploit his invention.
The hardline Congress has prevented President Cardoso from
implementing budget reforms that allow him to control the fiscal deficit
that was the driver of hyperinflation and thus institutionalization of
Brazil's newly discovered macroeconomic stability. These reforms,
which include tax renewal, civil service, the social security system
and key privatization, will allow industries from telecommunications to
mining Brazil to consolidate the economic gains already achieved,
giving investors more confidence In the future of the economy,
accelerate the future of Brazil growth rate.

3- Franchising:

It is a contract between two parties, legally and economically

independent, whereby one of the two parties is called the franchisor
by granting the other party and it is called the franchisor agreeing to
use one or more intellectual and industrial property rights or technical
knowledge to produce a commodity or distribute its products for a
specific period of time which is extendable.
Wessen Development Inc (WDI)is considering entering into a joint
venture with IRSA, the largest developer of shopping malls in
Argentina, to create a new shopping A commercial center on the
 outskirts of Buenos Aires. the new It will include the shopping mall,
codenamed Mega Jumbo supermarket, 150 outlets, movie Sixteen
stage theater and video game center And a bowling alley, which
indicates that a (WDI)company will take permission from the Jumbo
supermarket to operate.
In another scenario that was mentioned in the article on property
rights, the central bank reduced the ownership rights granted to
Argentine banks and private companies, this indicates that property
rights can be controlled through a contract that was done at the
beginning of granting property rights.

4- Joint Ventures:

A commercial company that is held between two or more companies

that practices an apparent partner that deals with others, so that the
company is limited to the special relationship between the partners
that it is permissible to prove the company between the partners by
all means of proof. It consists of two parties for the purpose of
eliminating common needs.
WDI is contemplating entering a joint venture with IRSA, the largest
developer of shopping malls in Argentina, to construct a new
shopping mall on the outskirts of Buenos Aires. The new shopping
center, codenamed Mega, would include a Jumbo supermarket, 150
retail outlets, and a movie theater with sixteen screens, a video game
center, and a bowling alley. Mr. Lanning believes there is still much
room for growth in shopping centers, especially outside of Buenos
Aires.

5- Acquisitions of Existing Operation:

An acquisition occurs when one company buys another. Acquisitions

allow firms to have full control over their foreign business and to
quickly obtain a large portion of foreign market share.
6- Establishing New Foreign Subsidiaries :

Establishing a foreign subsidiary also enables a parent company to

expand its target consumer and to introduce its products and services
to a new group of prospects.
In Brazil a branch is different than a subsidiary. Opening a subsidiary
company in Brazil is less complicated than opening a branch. By law,
any foreign company can be a partner, investor or shareholder in a
Brazilian company, making the Brazilian company a subsidiary of the
foreign entity. The Brazilian company will then be fully governed by
law and will have the same rights and responsibilities as any other
company.
Brazil is carrying out economic reforms to attract foreign investors, so
foreign investors open branches of their companies in Brazil to
expand the scope of their work, but these branches are subordinate
to the laws of the Brazilian market and not to the laws of the country
in which the headquarters of the company is located.

- International opportunities:

1- Investment Opportunities:

Investment opportunity means “anything, tangible or intangible, that is

offered, offered for sale, sold, or traded based wholly or in part on
representations, either express or implied, about past, present, or
future income, profit, or appreciation.
Argentina has limited recreational facilities, so there are successful
investment opportunities in the field of entertainment, as Aramex has
done to build a new shopping center in the suburbs of Buenos Aires,
such as opening theaters, entertainment centers and restaurants, so
it will lead to citizens seeking entertainment because of the shortage
that Argentina suffers from facilities Entertaining.

The low inflation and the stability of the Brazilian currency leads to
encouraging investment opportunities in Brazil, and this helps in that
 Brazil needs foreign capital in order to develop its economy, in
addition to the reforms undertaken by President Cardoso that include
the renewal of the tax system, civil service, social security and the
privatization of industries. Major from telecommunications to mining, it
will allow Brazil to consolidate impressive economic gains, give
investors more confidence in the future of the economy, and
accelerate Brazil's growth rate.
2- Financing Opportunities:

Is the process of providing funds for business activities, making

purchases or investing. Financial institutions such as banks are in the
business of providing capital to businesses, consumers, and investors
to help them achieve their goals.

Argentina has a limited lender of-last-resort capacity through its

Contingent Repurchase Facility, which offers a temporary source of
funds to illiquid banks. This facility, which was arranged in 1996,
gives Argentina the option to sell government bonds to a group of
international banks under a repurchase agreement. Another cost of
dollarization would be the Argentine government’s loss of seignorage.
Currently, the currency board stands ready to convert pesos into
dollars but it invests its dollars in interest-bearing assets. These
assets would have to be sold off to get the cash to replace the pesos
currently in circulation.

- Exposure to international flow of funds:

1- Current Account:

Is a country's trade balance plus net income and direct payments.

The trade balance is a country's imports and exports of goods and
services. The current account also measures international transfers of
capital.
Brazil suffered from the current account deficit despite President
Cardoso’s many reforms that encouraged investment in Brazil, which
also led to an increase in Brazil’s exports. However, Brazil’s current
account deficit is escalating, its foreign currency reserves are
 declining, and financial markets are concerned about the real would
suffer from a loss of confidence.
A tight monetary policy will raise real interest rates and slow down
growth, which should act to curb imports without affecting exports.
However, increased real interest rates could also lead to a capital
inflow. Since the flip side of a capital inflows a current account deficit,
this policy might not work. Alternatively, Brazil could and should cut
its massive government deficit, which is the equivalent of dissaving.
Given the fundamental macroeconomic identity savings investment =
exports –imports cutting the budget deficit by raising saving relative to
investment should reduce Brazil’s current-account deficit.

2- Capital Account:

The capital account is a record of the inflows and outflows

of capital that directly affect a nation's foreign assets and liabilities. It
is concerned with all international trade transactions between citizens
of one country and those in other countries.
One of the problems cited by opponents of convertibility is that
Argentina is particularly vulnerable to external shocks because of its
currency board, which pays the peso on an equal footing with the
dollar and requires full monetary support from international reserves.
Any global turmoil of capital markets, as happened during the
Mexican, Asian, Russian and Brazilian crises, leads to capital
outflows abroad, which pushes interest rates up and restricts the
government's access to international debt markets.

- Factors Affecting International Trade Flows:

1- Inflation:

If a country’s inflation rate increases relative to the countries with

which it trades, its current account will be expected to decrease, other
things being equal. Consumers and corporations in that country will
most likely purchase more goods overseas (due to high local
inflation), while the country’s exports to other countries will decline.
Brazil in 1994, inflation reached 50% per month, which leads to the
collapse of its economy completely, as it leads to a loss of confidence
 in the Brazilian economy by foreign investors, and this leads to a
decrease in the wills of the Brazilian current account, otherwise
inflation also leads to a devaluation Currency that means those
countries that send it to Brazil, the former President "Cardoso" (1995-
2002) made several attempts to reform the Brazilian economy, where
he set up the "Real" plan that was aimed at integrating the local
economy into the global economy. And his reform efforts went in the
direction of adopting free-market policies and foreign borrowing, as
the external debt increased from 150 to 250 billion dollars during his
presidency, and this inflation in the debt has been to the crisis of lack
of confidence in the Brazilian economy, whether from the international
agencies that provide it or the authorities, investors and foreigners.
Cardoso policies also tended towards offering high interest debt
securities, which made investors to abandon investment in order to
buy government bonds so that they could have internal debt of 900%,
and thus his attempts to deviate more burdens on future generations
were not achieved in production but It is only advanced in the
financial sector, an increase in debts, and a greater complexity, not a
confidence package.

2- National Income:

National income is an uncertain term which is used interchangeably

with national dividend, national output and national expenditure. On
this basis, national income has been defined in a number of ways. In
common parlance, national income means the total value of goods
and services produced annually in a country.
Brazil is one of the largest economies in the countries of Latin
America, as it is one of the largest fast growing economies in the
world, and it has a great competitive ability, which makes its national
income high, but Brazil in the nineties was suffering from a large
inflation and deficit in its current account, which affected this Output
and national income, national income is the difference between the
return that Brazil receives and the expenditures it makes.
Among the factors that affect the size of the national income are the
size and nature of production elements, the size of lands suitable for
cultivation, the investments that exist within the state and the
 percentage of returns from them, as well as the size of foreign
investment that is inside the state by paying many costs to the
investee’s country, there is no doubt that the state’s economic policy
has an impact Large and direct on the productive capacity of society
and therefore on its national income. Among these policies are the
state's tax, financial, monetary, foreign trade and employment policy.
Of course, these policies have a positive or negative impact on
economic activity.
3- Government Restrictions:

Governments have policies that you may take in terms of the

economy. They may place restrictions on the economy and you can
provide facilities for investors and the economy in general.
The restrictions here are intended to set laws on the economy and
many obstacles such as raising the value of taxes and customs on
imported goods in order to limit citizens from purchasing imported
goods and tendencies to local goods.
In Brazil, banks and other financial institutions have found that
speculation against the riyal is a costly and difficult proposition
because Banco do Brazil maintains a wide range of controls in the
foreign exchange market. One of the most difficult and costly ones
requires that dollar buyers deposit a large portion of them into special
low-interest accounts with the central bank. In times of intense
speculative pressure, the central bank cut the interest rate paid on
these accounts to zero. Consequently, the investors who borrowed
the riyal and converted it into dollars will start to lose the money the
moment they deposit it with the central bank, unless the real one
drops enough to compensate for the loss of interest.

4- Exchange Rates:

Each country has its own currency that benefits in internal payment
processes. It is necessary to use foreign currencies when it conducts
commercial or financial relations between companies operating inside
the country with companies operating outside it, and the importing
companies need the currency of the exporting country to pay for the
value of the imported goods, and thus have to go to The exchange
 market to buy the currency of the country is the source of this
process, and in reality it is not the companies that trade with the
outside that need international currencies, but every person who
travels outside the country in which he resides needs the currency of
the country he wants to go to, he was a tourist and finds himself then
forced To do exchange forecasts. The change in the exchange rate
and the instability of the currency creates great losses for investors,
especially foreign investors. The low price of the Brazilian currency
greatly affects Argentina, especially since Argentina sends more than
30% of its exports to Brazil, and therefore the low value of the
Brazilian currency will make Argentine businesses less able to
Competition in the Brazilian market, just as high interest rates, low
access to capital or a devaluation will slow economic growth or even
push the country into a deep recession.

This chart shows the change in currencies:

- Factors affecting DFI:

1- Privatization:

Privatization occurs when a government-owned business, operation,

or property becomes owned by a private, non-government party. Note
that privatization also describes the transition of a company from
 being publicly traded to becoming privately held. This is referred to as
corporate privatization.
Privatization processes are used by countries to achieve economic
gains, especially in the case of the deteriorating economic situation in
the country, as Brazil did in 1997 when Brazil was suffering from large
inflation and its economic situation is in constant decline. Indeed, the
privatization processes that it carried out helped it reduce the financial
and commercial deficit in it so, a large share of privatization came
with approximately $ 7.4 billion from privatization and foreign
investment that bought government companies, and received $ 17
billion in 1997 and $ 22 billion in 1998 in privatization.

2- Potential Economic Growth:

Potential economic growth is also known as trend growth and is

measured by the estimated annual change in a
country's potential level of national output. Potential growth is driven
by improvements in long run aggregate supply (LRAS).
Economic growth is the most important factor that leads to the
recovery of countries. Perhaps there are several factors that affect
economic growth, including the available economic resources, the
state’s constituents, and the strength of their economic movements
and the size of their exports. Growth can lead to economic stagnation
and a rise in the value of the state’s deficit. This is what happened in
Argentina and Brazil.
This graph shows the economic growth in Brazil:
3- Tax Rates:

In a tax and economic system, the tax rate describes the

percentage of the tax burden that is imposed on a work or person.
There are many methods used to assess the tax rate, including:
legal, intermediate and marginal.
The tax system is considered one of the most important sources of
income and affects the economy of countries as well. For example,
in Brazil in 1997, revenues reached nearly $ 18 billion, and this is a
large number for countries.
Also, the countries that impose high tax rates on investments that
lead to reducing the proportion of foreign investment in the
country, when the Brazilian President Cardoso undertook several
reforms to improve the Brazilian economy after suffering from a
very bad situation, the President returned to the imposed tax sleep
and adjusted it and reduced the value of taxes imposed This
attracted foreign investors to the country.

- Decisions to use international financial markets motives

for investing in foreign markets:

1- Economic Conditions:

Economic conditions may sometimes affect foreign investment

decisions, such as the reforms undertaken by the Brazilian President
that would change the status of the American market, such as an
amendment to the laws of taxes, currency stability and privatization
processes, which led to the encouragement of Argentine investors to
invest in the Brazilian market.

2- Exchange Rate Expectations:

An exchange rate is the value of one nation's currency versus the

currency of another nation or economic zone.
 Exchange rate expectations play a pivotal role in almost all monetary
models of the open economy. Therefore, it is extremely important to
have experimental insights about
How exchange rate expectations are actually shaped. In order to
understand the behavior of forecasters in the foreign exchange
markets.
Banks and other financial institutions have found that speculation
against the riyal is a costly and difficult proposition because Banco do
Brazil maintains a wide range of controls in the foreign exchange
market. One of the most difficult and costly ones requires that dollar
buyers deposit a large portion of them into special low-interest
accounts with the central bank. In times of intense speculative
pressure, the central bank cut the interest rate paid on these
accounts to zero. Consequently, the investors who borrowed the riyal
and converted it into dollars will start to lose the money the moment
they deposit it with the central bank, unless the real one drops
enough to compensate for the loss of interest.

3- International diversification:

This process is done to try to reduce risks by investing in more than

one country. By diversifying across countries whose economic ties
are not ideally linked, investors can usually reduce their returns
change.

- Motives for Providing Credit in Foreign Markets Creditors:

1- High foreign interest rates:

Some countries experience a shortage of loanable funds, which can

cause market interest rates to be relatively high, even after
considering default risk. Foreign creditors may attempt to capitalize
on the higher rates, thereby providing capital to overseas markets.
Yet, relatively high interest rates are often perceived to reflect
relatively high inflationary expectations in that country. To the extent
that inflation can cause depreciation of the local currency against
others, high interest rates in the country may be somewhat offset by a
weakening of the local currency over the time period of concern. The
relation between a country’s expected inflation and its local currency
 movements is not precise, however, because several other factors
can influence currency movements as well. Thus, some creditors may
believe that the interest rate advantage in a particular country will not
be offset by a local currency depreciation over the period of concern.
2- Exchange rate expectations:

Creditors may consider supplying capital to countries whose

currencies are expected to appreciate against their own. Whether the
form of the transaction is a bond or a loan, the creditor benefits when
the currency of denomination appreciates against the creditor’s home
currency.

3- International diversification:

Creditors can benefit from international diversification, which may

reduce the probability of simultaneous bankruptcy across borrowers.
The effectiveness of such a strategy depends on the correlation
between the economic conditions of countries. If the countries of
concern tend to experience somewhat similar business cycles,
diversification across countries will be less effective.

- Motives for borrowing in foreign market:

1- Low interest rates:

Some countries have a large supply of funds available compared to

the demand for funds, which can cause relatively low interest rates.
Borrowers may attempt to borrow funds from creditors in these
countries because the interest rate charged is lower. A country with
relatively low interest rates is often expected to have a relatively low
rate of inflation, which can place upward pressure on the foreign
currency’s value and offset any advantage of lower interest rates. The
relation between expected inflation differentials and currency
movements is not precise, however, so some borrowers will choose
to borrow from a market where nominal interest rates are low, since
they do not expect an adverse currency movement to fully offset this
advantage.
- Factors influence exchange rate movements:

1. Relative Inflation rates:

Changes in relative inflation rates can affect international trade

activity, which influences the demand for and supply of currencies
and therefore influences exchange rates.
Relatively high interest rates are often perceived to reflect relatively
high inflationary expectations in that country. To the extent that
inflation can cause depreciation of the local currency against others,
high interest rates in the country may be somewhat offset by a
weakening of the local currency over the time period of concern. The
relation between a country’s expected inflation and its local currency
movements is not precise, however, because several other factors
can influence currency movements as well. Thus, some creditors may
believe that the interest rate advantage in a particular country will not
be offset by a local currency depreciation over the period of concern.

2. Interest Rate:

Changes in relative interest rates affect investment in foreign

securities, which influences the demand for and supply of
currencies and therefore influences exchange rates.
Low interest rates may encourage people to convert currencies
into Brazilian currency, and that serves the Brazilian economy,
 which suffers from inflation, and also which encourages investors
to invest in Brazil.
Moreover, Banks and other financial institutions have found that
speculating against the real is an expensive and difficult
proposition because the Banco do Brazil maintains a wide range of
controls on the foreign exchange market. One of the most onerous
and costly requires that buyers of dollars deposit a large portion of
them in special, low-interest accounts with the central bank. In
times of intense speculative pressure, the central bank has cut the
interest rate paid on these accounts to zero. Thus investors who
borrowed raise and converted them to dollars would start losing
money the moment they deposited them with the central bank,
unless the real fell enough to offset the loss of interest.

3. Government Controls:

A fourth factor affecting exchange rates is government controls.

The governments of foreign countries can influence the equilibrium
exchange rate in many ways, including (1) imposing foreign
exchange barriers, (2) imposing foreign trade barriers, (3)
intervening (buying and selling currencies) in the foreign exchange
markets, and (4) affecting macro variables such as inflation,
interest rates, and income levels.

4. Expectations:

The outlook for currency exchange plays an important role in trade

operations. When the exchange rates in Brazil are low compared
to the Argentine currency, this will affect the profits of Argentina
and investors as well.

5. Relative Income Levels:

The level of per capita income affects the change in interest. If the
per capita income level is high, then the demand for the goods will
be more, so the interest will decrease because there is a large
amount on the product, but if the per capita income is low, then the
 demand will decrease and that will lead to higher benefits to offset
practical losses of the demand.
The currency of Brazil’s currency depreciation and increased
unemployment have led to inflation in interest rates on goods to
offset losses.

- Assessment Of Purchasing Power Parity:

One popular macroeconomic analysis metric to compare economic

productivity and standards of living between countries is purchasing
power parity (PPP). PPP is an economic theory that compares
different countries' currencies through a "basket of goods" approach.
The purchasing power in Brazil is higher than the purchasing power in
Argentina because the Brazilian economy is stronger than the
Argentine economy, so the Brazilian economy needs constantly for
goods imported from other countries.
- Multinational Capital Budgeting

Multinational capital budgeting, like traditional capital budgeting,

focuses on cash inflows and outflows associated with long-term
investments. Multinational capital budgeting techniques are used in
foreign direct investment analysis.
Like investments made in Argentina in Brazil, it pumps a large capital
to Brazil through the payment of interest, taxes, and the other to the
government.
- Assessment Of International Trade Financ0ng the Host
Country of Project:

International trade in Palestine is largely limited, because states do

not control the crossings and borders between countries, and the
pressure that the occupying authorities are making on the state of
Palestine, but if there was no occupation, the situation would be very
different, because the strategic location of Palestine, which mediates
the world, and the resistance it possesses Palestine is very strong to
help it establish commercial relations with the world, in addition to that
there is a large workforce in Palestine, and minds capable of
investing and able to be creative.