FOREIGN DEBT &
FOREIGN INVESTMENT
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FOREIGN DEBT
• Foreign debt may be defined as the amount
of money that a country’s residents, both
public and private, owe to the rest of the
world.
• It is important to distinguish between gross
and net foreign debt. Gross foreign debt is
the total amount borrowed from nonresidents. Net foreign debt is gross foreign
debt minus resident’s lending to overseas.
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FOREIGN DEBT
• Many people view foreign debt as a
disadvantage for a country, although most
countries do have a foreign debt.
• However, foreign debt can be an
advantage since it can provide an increase
in a nation’s productive capacity, output,
employment and living standards.
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DEBT SERVICING
• Repaying foreign debt requires payment of the
original sum borrowed, plus interest on that
debt. The interest that is paid is known as debt
servicing.
• The debt servicing ratio is the foreign debt
interest payments as a proportion of export
income. It gives an indication of the capacity of
an economy to pay the costs associated with its
level of foreign debt and thus the cost of debt to
the economy.
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VIEWING FOREGN DEBT
• Foreign debt is the accumulation of a
country’s current account deficits over time.
Hence foreign debt can be seen as:
(i) a nation’s imports and income paid to
overseas residents is greater than the
value of exports and income received.
(ii) national expenditure exceeding national
income, i.e. a nation spending more than
it earns.
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VIEWING FOREIGN DEBT
(iii)the difference between
national investment and
national savings. If a
country does not have
sufficient domestic savings,
it must borrow to finance it’s
investment which must come
from overseas.
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CONSEQUENCES OF
FOREIGN DEBT
• Foreign debt has several consequences
for a country:
(i) falling credit ratings – this will increase
the interest rate that the country will
have to pay on future borrowings since
lenders perceive a greater lending risk
(ii) the increased interest payments lower
the country’s standard of living as more
income is diverted from consumption 7
CONSEQUENCES OF
FOREIGN DEBT
• High debt levels also increase
the vulnerability of an economy
to deteriorating world economic
conditions e.g. if the country’s
currency depreciated, this will
immediately increase the size of
the foreign currency
denominated debt further
increasing interest payments. 8
REDUCING FOREIGN DEBT
• There are several ways to reduce a
country’s foreign debt:
(i) Increasing international
competitiveness (microeconomic
reform). Growth in exports will
reduce the CAD and hence foreign
debt.
(ii) Increasing the savings pool - this will
reduce the borrowings required to fund
investment
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REDUCING FOREIGN DEBT
(iii)Monetary policy to maintain low
inflation rates will improve export
competitiveness and our CAD – this will
also preserve the real purchasing
power of savings and will act to
improve the level of domestic savings.
(iv)Use of fiscal and monetary policy
to reduce aggregate demand –
this will discourage import
demand which contributes to
foreign debt.
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FOREIGN INVESTMENT
• Foreign investment may be
defined as the stock of
financial assets in a country
owned by foreign residents,
and financial transactions in
the balance of payments
which increase or decrease
this stock of financial assets.
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FOREIGN INVESTMENT
• Foreign investment
can be categorised
into two main groups
– direct investment
and portfolio
investment.
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DIRECT INVESTMENT
• Direct investment represents
funds invested in an enterprise
involving at least 10%
ownership and enabling
influence over the key policies
of the enterprise. It is usually
stable and long term and
generally adds to the country’s
productive capacity.
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PORTFOLIO INVESTMENT
• Portfolio investments do not
result in ownership or control of
enterprises, i.e. less than 10%
ownership. These include
financial assets like shares on
the stock market (less than 10%
of total shares) and bonds.
Portfolio investment is generally
unstable and speculative.
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DEBT vs. EQUITY
• Foreign investment can be in two
forms:
– Debt investments are where enterprises
borrow funds from overseas to finance
investment (foreigners do not own
domestic assets) – portfolio investment
usually takes this form.
– Equity investments are where foreigners
invest in the ownership of domestic
assets – direct investment usually takes
this form.
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BENEFITS OF FOREIGN
INVESTMENT
• There are many benefits of foreign investment:
– Creates employment
– Technological development through technology
transfer
– Provision of capital
– Introduction of superior research and development
(R&D) and managerial and technical expertise
– Improvements in productivity, growth and
competitiveness in export and import
competing industries
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COSTS OF FOREIGN
INVESTMENT
• There are two major arguments against
foreign investment:
– Loss of control over economic decision
making – this may conflict with
Government policy or public wishes.
National sentiment may oppose foreign
ownership for emotional or nationalistic
reasons
– Debt servicing costs – payments to
investors add to the incomes section of
the CAD. This may require more
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borrowings increasing foreign debt
We wish to thank our supporter:
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