Financial Factors for Forecasting - Essay Example

3. Major Economic and Financial Factors for Forecasting Before establishing operations in a foreign market, multinational corporations see it fit that they evaluate the economic profile of the country. Though the question seems to imply a dichotomy between economic and financial data to be used for forecasting, the latter can actually be categorized under the former. Indeed an analysis of economic indicators includes data on Finance and Financial markets and also includes the analysis, determination and derivation of data in the following subjects: Balance of payments, Cyclical indicators, Government finance (as to differentiate it to Private Finance), Housing and construction (availability of infrastructures), Output, capacity, and capacity utilization of existing and planned infrastructures, Merchandise trade, National accounts, Labor market, Population, Prices and Wholesale and Retail trade Some specific items under the broad categories mentioned includes the amount of potential customers and their preference, trends in economic growth and operating expenses such as wages, costs of local supplies, taxes and other expenditures, operations and profitability of competitors, planned economic ventures and differences in currency denominations. Also included is the determination of availability of resources, inflation rates, external debt payments as a measure of the credibility and involvement of the governing institutions of the country. Equally important issues that must be considered are risks such as insolvency of the buyer, risk of protracted default or the failure of the buyer to pay the amount due within six months after the due date, risk of non-acceptance and surrendering economic sovereignty. There are also political risks (which would influence economic conditions) that must be taken into consideration such as the risk of cancellation or non-renewal of export or import licenses, conflict risks, risk of expropriation or confiscation of the importers company, risk of the imposition of an import ban after the shipment of the goods, transfer risk or the imposition of exchange controls by the importers country or foreign currency shortages. The World Bank currently has a numerical measure/ ratings in determining the ‘business friendliness’ of countries. The financial database would include data on the following: Commodities/Futures which includes exchange-traded futures, including synthetic nearby contracts for all major commodities/futures Derivatives such as banker acceptances, caps/floors, forward rate agreements, index options, interest-rate options/swaps/swap options, and zero-coupon swap-yield curves Equity concepts such as adjusted and unadjusted prices, volume, dividend data, corporate actions, fundamental information, and global equity pricing and fundamentals data Money markets: certificates of deposit, commercial paper, discount, certain currency deposit and interbank bid/ask/deposit fixings, and policy rates Exchange rates which may include historical data and data on emerging markets Fixed income: benchmark yield curves, mortgage bonds/rates, repurchase agreements, and sovereign debt Financial Indexes Stock markets data which can include concept, geography, source, and frequency Commitment of Traders Data when available. It would seem that forecasting would require voluminous data. This would indeed be the case for some forecasting projects. However, some ventures would only require some data depending on the forecast models and equations they are using. 4.0 Factors for Globalization There are many reasons why business firms are going global foremost of which to seek new markets. The logic behind this is the same as that of opening of another branch in another region of the country of origin. Branches are established to be able to capture the market effectively. Establishing operations in another country translates to millions of potential customers for individual based products and hundreds of agencies which may avail of the services of the company. For example, the presence of Procter and Gamble in most parts of the world enables it achieve billions in sales that would not have been possible if they have confined their operations to the population of the country of origin. Companies are also influenced by the desire to seek raw materials which are being depleted and becoming too costly from the country of origin. One would also find that companies gain competitive advantages in availing of cheap labour and benefits from lower taxes. When people in the United States call a helpline or make an airline reservation, they may be connected to someone in India who has been trained to speak English with an American accent. Other English speakers around the world prepare tax returns for U.S. companies, evaluate insurance claims, and attempt to collect overdue bills by telephone from thousands of kilometers and a number of time zones away. This set-up is due to the lower labor costs of Indian employees as compared to Americans who also require certain benefits and form unions. Most experts attribute globalization to improvements in communication, transportation, and information technologies. For example, not only currencies, but also stocks, bonds, and other financial assets can be traded around the clock and around the world due to innovations in communication and information processing. A three-minute telephone call from New York City to London in 1930 cost more than $300 (in year 2000 prices), making instant communication very expensive. Today the cost is insignificant. Advances in transportation have allowed U.S. corporations to subcontract manufacturing to foreign factories. For example, in the early 2000s the Guadalajara, Mexico, factory of Flextronic International made pocket computers, Web-connected TVs, computer printers, and even high-tech blood-glucose monitors, for a variety of U.S. firms. Low transportation costs enabled Flextronic to ship these products around the world, and the North American Free Trade Agreement (NAFTA) made the Mexico location more attractive to Flextronic. Advances in communication and information technologies have helped slash the cost of processing business orders by well over 90 percent. Using a computer to do banking on the Internet, for example, costs the banking industry pennies per transaction instead of dollars by traditional methods. Over the last third of the 20th century the real cost of computer processing power fell by 35 percent on average each year. Vast amounts of information can be processed, shared, and stored on a disk or a computer chip, and the cost is continually declining. People can be almost anywhere and remain in instant communication with their employers, customers, or families 24 hours a day, 7 days a week, or 24/7 as it has come to be known. Some companies also go global to avoid political and regulatory hurdles such as employee benefits and environmental regulations. Entering new markets also signifies entering new cultures which may help the company in providing innovation and diversity in the product and service line of the company. 5.0 Forecasting Country Risks The field of forecasting is concerned with approaches to determining what the future holds. It is also concerned with the proper presentation and use of forecasts. Forecasts may be conditional. That is, if policy A is adopted then X is likely, but if B is adopted then Y is most likely to occur. Often forecasts are of future values of a time-series; for example, the number of babies that will be born in a year, or the likely demand for compact cars. As with all inquiries, the knowledge where forecasting country risks come from is “research.” In brief, you need to know about the relevant causal relationships. The knowledge of various theories will prove to be helpful. For example, in many situations it is useful to know the economic theory that an increase in the price of a thing will tend to lead to a decrease in demand for it, and vice versa. Experts will tend to know about evidence from prior research, such as which causal (explanatory) variables are important, and the direction and magnitude of relationships. The analysis of risks falls into two categories. One is trends, the other is current but compared characteristics. In the case of trends, the matter is relatively simple, although perhaps somewhat deceptive. If there is a record of expropriation, the new investor obviously needs to be concerned. If the current government of a host country has previously nationalized foreign industry, potential investors obviously need to pay attention to the possibility that they, too, could be nationalized. Similarly, a history of civil strife and especially the occurrence of ongoing wars indicate a high likelihood that direct damage could occur to the investment or that contracts could be repudiated under war circumstances. The second approach is to examine current societal attributes and the circumstances under which losses have occurred before, either in that same country or others like it. If high levels of ethnic tension are often followed by open ethnic conflict, for example, that civil strife could result in damage to businesses or in forced abandonment of the investment, as happened in 1994 in Algeria. There are broad categories which are needed to be analyzed for determining categories. These include an assessment of the legal risks such as lack of precision in the legislation and possibility of change in the legislation. Monetary risks comprise of issues such as exchange rate fluctuations, non-convertibility of the local currency into foreign currencies, and non-transferability. Economic risk analysis includes investigation on macroeconomic factors such interest rates and Gross Domestic Product. One cannot also do away with political risk analysis such as expropriations, nationalizations, non-compliance with the contract and inefficiency of administrative authorities. There is also a need to investigate interference risks or the tendency of public authorities to take a direct intervention in the management of the project. Lastly, the forecaster could also include in the forecasts a note on force majeure events such as natural risks, industrial risks, internal socio-political risks and risks of war or armed conflict. Forecasting methods can be classified first as either subjective or objective. Subjective (judgmental) methods are widely used for important forecasts. Objective methods include extrapolation (such as moving averages, linear regression against time, or exponential smoothing) and econometric methods (typically using regression techniques to estimate the effects of causal variables). The decision to which method will be used depends on the situation and some companies would usually have their internal forecast models that they deemed to be appropriate. Read More