International Finance: UK Balance of Payments Trends

Recent trends and changes in the UK's balance of payments, current account, and capital account in international finance over the last five years.

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International Finance: UK Balance of Payments Trends

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Case Study 1

1. Overview on trend of the UK’s balance of payment (BOP)

It has been observed that the company's balance of payment has significantly declined in the last 5 years. Balance of payment for the UK existed at -£15552 million in the 2018 4th quarter which has been increased to a positive value of £22101 million in the 2019 3rd quarter. Nevertheless, again the balance of payment significantly decreased to a negative value of £1383 million in the 2024th quarter and became the highest negative in the third quarter of 2022 4th quarter to the value of -£21999 million. This balance of payment indicates that the UK purchases more products and services from the rest of the world in complete with export goods and services to other countries. On the other hand, Balance of current account (BCA) has been fluctuated at £2243 million in 4th quarter 2018 and declined to 605 in 1st quarter of 2019 and highly fluctuated in last five years. Whereas, BCA has been exists at five year lowest value at 445 in 3rd quarter of 2022. However, the UK has been increased at £1813million in 4th Quarter of 2022. Apart from this, current account balance of UK has been negative for entire last five years history due to high trade deficit. There are main reasons fod financial worst condition in trade deficit as well as Covid-19 pandemic which declined total business activity for entire 2 years such as 2020 and 2021.

2. Identification of causes of the UK’s current account changes in the last 5 years

The current account balance of any country mainly depends on some key aspects such as “trade imbalance, investment activities and business operations”

  • Trade imbalances: In the last few years the UK has faced low export in comparison which gives a negative impact on the current account. Many causes, including a strong pound that makes UK exports more costly, a reduction in manufacturing, and a desire for less-priced imported items, have contributed to this.
  • Exports of services: The UK enjoys a surplus in this sector, which includes businesses like financial services, consultancy, and education. During the pandemic situation, Tourist visitors have declined and students who come to the UK for better education avoid visiting the UK. As a result, the revenue of service has significantly declined.
  • Investment income: The UK generates a major part of its revenue from foreign investments, such as the earnings of UK subsidiaries. As opined by Nguyen and Dang, (2022), factors including low profitability in overseas subsidiaries, lower interest rates, and uncertainty in the global economy have had an influence on this revenue.
  • Main income: This covers wages from both international and domestic workers who are UK citizens. Factors like Brexit uncertainty, modifications to immigration laws, and general economic conditions have all had an impact on primary income (Shingil et al. 2022).
  • COVID-19 pandemic: The pandemic has adversely affected the UK's current account in a number of ways, including by causing supply chain disruptions on a worldwide scale, reducing foreign travel, and lowering trade and investment.

3. Overview of causes of the UK’s capital account changes in the last 5 years

Many variables, such as the following, have impacted the UK's capital account fluctuations during the past five years:

  • Investment from abroad: Historically, foreign capital has been drawn to the UK, notably in the banking and real estate sectors. Nonetheless, the COVID-19 outbreak and the uncertainties surrounding Brexit have reduced international investment inflows.
  • Portfolio investment: Investments made as part of a portfolio include acquisitions made by overseas investors of UK stocks, bonds, and other financial assets. As opined by Rawashdeh et al. (2022), changes in the state of the global economy and changes in investor perceptions about the UK have both had an impact on portfolio investments.
  • UK investment abroad: UK corporations investing abroad include those that purchase assets and activities there. Some political and non-financial aspects such as Brexit, and other variables also negatively influenced the amount of UK investment overseas.

Overall, there are several reasons for the decline in the capital account of the UK. Nevertheless, the financial crisis and the Covid-19 pandemic have had a major negative impact (Khan, 2023). In addition, the Brexit summit also negatively influenced investors interested to invest in the UK economy.

Case Study 2

Prediction for the pair of EUR/USD for the mid-term horizon

The performance of the currency of any container depends on the business activity as well as the demand for a currency in the global market. Based on BOP of the UK it has been observed that demand of domestic countries for the UK has been declining as investors along with other businesses EUR to perform business and investment activity in the UK. With the declining demand for EUR, it has been expected that the value and value of the EUR may decline in the upcoming 3 months. Besides that, other factors which also play a significant role in the worth and value of EUR incompletion with USD and other currencies are discussed below.

Balance of payment (BOP):

The BOP of the company has been significantly down even though the UK government has suffered from a negative balance of payment in the last 2 years such as in 2020 2021 and 2022. Indicates that companies need much foreign currency to buy products and services from foreign countries as compared with providing domestic currency to foreign investors and business institutes to purchase goods and services from domestic business organisations. The main reason behind negative BOP is a downfall in business activities in the UK along with business entities who are more interested in outsourcing their product and services as outsourcing cost is low incompletion with manufacturing cost. Therefore, based on the BOP balance of the UK, it has been predicted that the currency of the UK may decline in future due to global crises such as the war between Ukraine and Russia (Rodrigues and Lourenço, 2021). Apart from this current account of the UK also suffers from a deficit which occurs when a country imports excess goods and services compared with its export for the same financial year. However, in recent years, the current account surplus may assist EUR to fight with USD in future. However, capital accounts of the UK are also High flexing from 2018 to 2022 as it has been observed that in recent quarter capital account balance has significantly increased which indicates that UK Government have optimised its currency reserve in order to meet future requirement of funds for purchasing product and services from other foreign countries (Salih and Majeed, 2022).

Microeconomic indicators

The Macroeconomic aspect such as GDP has also given a negative impact on currency worth in the global market. A low GDP growth rate, high inflation and unemployment has created worthy consideration for UK people (Jadhav, 2020). On the other hand, high inflation and Brexit summit also optimise challenges for countries to increase or sustain financial value in the global market. Besides that, interest rates in the UK have also been low in recent years as compared with interest rates of the past year which also have a negative impact on overall currency value.

International parties

International parties like interest rate parity purchasing power parties also provide insight into the relative worth of a currency in comparison with other countries currencies or global markets. PPP suggested that the overall worth of currency between EUR to USD may be equal in the long run (Widanta et al. 2023). Whereas IRP suggested that the difference in interest rate between the two currently issued ways is equalised as it has been expected that investors may be able to invest in the future while the government has increased interest rates as well as provided additional opportunities to investors in the country.

Performance of EUR to USD in the last five years

The value of the Euro in comparison with USD is not too much fluctuating in the last 5 years. Nevertheless, it has been noted that after November 2020 worth of the EURO has been slowing downfall till 2022 September month. The value of EUR has been fluctuating at 1.2225 in January 2021 which declined to 1.1336 by September 2021 and 1.054 1 by March 2022 and it declined to below 1 by September 2022 to the value of 0.9799.

Prediction value of EUR to USD

Based on the performance of currency pairs between EUR and USD estimated at 1.1206 in May 2023 and 1.1410 for June 2023 and 1.1613 for July 2023. The increment of value of the EURO has declined in trade activities on a global level from America due to the global financial crisis and recession. Besides that, the UK has taken several initiatives such as introducing a £100 million additional fund in the economy to boost the UK economy and optimise the purchasing power of the public.

Questions

1. Tools or techniques for managing exchange exposure

A business entity needs to observe risk engaged in global business as well as transactions. However, in the paragraphs below some techniques have been discussed which need to be considered by businesses as per their preference and interest to avoid risk in global transactions as well as the exchange of currency.

  • Forward Contracts: A forward contract is a contract between two organisations and people or vice versa to convert currency in a fixed date or period at minimum exchange charges (Fraser et al. 2021). By enabling the firm to lock in an exchange rate for a future date and so lessen the impact of exchange rate swings, this technology can assist to minimise currency risk.
  • Currency Options: These allow the business the option—but not the duty—to exchange a specified sum of money at a predetermined exchange rate on or before a specific date (Katsikeas et al. 2020). This tool allows the company to protect against unfavourable exchange rate movements while also participating in favourable movements.
  • Currency Swaps: in this process, two people or organisations agree to exchange their both currency to exchange at a future date at a predetermined date. This technique has assist people to avoid the risk of currency fluctuation.
  • Invoice Currency: Invoicing the customer in the company's own currency, in this case, British pounds can help avoid exchange rate fluctuations. However, this may not be a feasible option if the customer insists on paying in euros.
  • Hedging Strategies: Hedging strategies can be implemented by taking offsetting positions in different currencies, such as buying euros for the amount of the accounts receivable and selling pounds. By doing this, the effects of exchange rate changes may be lessened.

2. Advantages and disadvantages of the gold standard

Advantage Explanation
Price stability Under the gold standard, the supply of money was limited by the amount of gold that a country had in reserve. This helped to stabilise prices and prevent inflation.
Predictable exchange rates Since currencies were pegged to a fixed amount of gold, exchange rates between countries were also fixed and predictable. This provided stability for international trade and investment.
Discipline on governments The gold standard imposed discipline on governments, as they were limited in their ability to print money and had to maintain a sufficient reserve of gold. This helped to prevent irresponsible government spending and monetary policies.
Disadvantage Explanation
Limited money supply Since the money supply was limited by the amount of gold in reserve, economic growth was also limited. Deflation and economic downturns resulted from the gold standard's inability to keep up with the demands of a developing economy.
Dependence on gold supply The gold standard was dependent on the supply of gold, which was subject to fluctuations in mining output and could be influenced by global political and economic factors. This made the system vulnerable to shocks and instability.
Fixed exchange rates Fixed exchange rates could lead to imbalances between countries, as their economic conditions and needs change over time. This could cause strains in international trade and investment.

Table 1: Advantages and disadvantages (Source: Nam et al. 2021)

Applicability Explanation
Not currently applicable The gold standard is not currently applicable as most countries have moved away from it towards a fiat currency system, where the value of money is not backed by a commodity. A fixed exchange rate system, like the gold standard, cannot successfully govern the world economy because it is too dynamic and complicated.

Reference

Journals

Fan, S. and Liu, Y., 2022. Analysis of the Resilience of Balance of Payments Using Comprehensive Evaluation. Journal of Mathematics, 2022.

Fraser, J.R., Quail, R. and Simkins, B. eds., 2021. Enterprise risk management: Today's leading research and best practices for tomorrow's executives. John Wiley & Sons.

Jadhav, B.R., 2020. India’s Balance of Payment Position: Trend Analysis. Studies in Indian Place Names.

Katsikeas, C., Leonidou, L. and Zeriti, A., 2020. Revisiting international marketing strategy in a digital era: Opportunities, challenges, and research directions. International Marketing Review, 37(3), pp.405-424.

Khan, M.A., 2023. Does Monetary Policy Solely Correct Disequilibrium in the Balance of Payment? Evidence From the Developing World. Journal of Central Banking Theory and Practice, 12(1), pp.57-85.

Nam, K., Dutt, C.S., Chathoth, P. and Khan, M.S., 2021. Blockchain technology for smart city and smart tourism: latest trends and challenges. Asia Pacific Journal of Tourism Research, 26(4), pp.454-468.

Nguyen, C.D.T. and Dang, H.T.T., 2022. The impact of foreign exchange rate on a balance of payments: Issues from Vietnam. International Journal of Advanced and Applied Sciences, 9(6), pp.1-8.

Rawashdeh, T., Al-Rdaydeh, M. and Hamouri, B., 2020. The Effect of International Currency Crises on the Balance of Payments: Evidence From Jordan. International Journal of Financial Research, 11(5), pp.275-284.

Rodrigues, C.F.D.S. and Lourenço, A.L.C.D., 2021. A CASE FOR INDUSTRIAL POLICY? FORECAST RESULTS FROM A DISAGGREGATED BOP-CONSTRAINED GROWTH MODEL FOR BRAZILIAN ECONOMY (2016-2025). Revista de Economia Contemporânea, 25.

Salih, K.K. and Majeed, B.N., 2022. The Impact of Exchange Rate on Balance of Payment and Economic Growth: An Empirical Evidence from Iraq for The Period of (2004-2019) Using the ARDL Model. QALAAI ZANIST JOURNAL, 7(3), pp.1009-1028.

Shingil, M.E., Ozdeser, H. and Saliminezhad, A., 2022. Investigation of Balance of Payment Constrained Growth Model: The Impact of Export Growth, Capital Flows, and Real Effective Exchange Rate on Growth of the UK. SAGE Open, 12(2), p.21582440221085011.

Widanta, A.A.B.P., Budhi, M.K.S., Purbadharmaja, I.B.P. and Setyari, N.P.W., 2023. Review On Tourism Competitiveness Strengthening In Order To Strengthen International Balance Of Payment. Baltic Journal of Law & Politics, 16(3), pp.876-888.

Websites

Investing, 2023: EUR/USD - Euro US Dollar for last Five years Available at: https://in.investing.com/currencies/eur-usd-historical-data?end_date=1681410600&interval_sec=monthly&st_date=1541010600 [Accessed on 14th April 2023]

Ons, 2023: Balance of payments of UK, Available at: https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/datasets/balanceofpaymentsstatisticalbulletintables

Reference

Journals

Fan, S. and Liu, Y., 2022. Analysis of the Resilience of Balance of Payments Using Comprehensive Evaluation. Journal of Mathematics, 2022.

Fraser, J.R., Quail, R. and Simkins, B. eds., 2021. Enterprise risk management: Today's leading research and best practices for tomorrow's executives. John Wiley & Sons.

Jadhav, B.R., 2020. India’s Balance of Payment Position: Trend Analysis. Studies in Indian Place Names.

Katsikeas, C., Leonidou, L. and Zeriti, A., 2020. Revisiting international marketing strategy in a digital era: Opportunities, challenges, and research directions. International Marketing Review, 37(3), pp.405-424.

Khan, M.A., 2023. Does Monetary Policy Solely Correct Disequilibrium in the Balance of Payment? Evidence From the Developing World. Journal of Central Banking Theory and Practice, 12(1), pp.57-85.

Nam, K., Dutt, C.S., Chathoth, P. and Khan, M.S., 2021. Blockchain technology for smart city and smart tourism: latest trends and challenges. Asia Pacific Journal of Tourism Research, 26(4), pp.454-468.

Nguyen, C.D.T. and Dang, H.T.T., 2022. The impact of foreign exchange rate on a balance of payments: Issues from Vietnam. International Journal of Advanced and Applied Sciences, 9(6), pp.1-8.

Rawashdeh, T., Al-Rdaydeh, M. and Hamouri, B., 2020. The Effect of International Currency Crises on the Balance of Payments: Evidence From Jordan. International Journal of Financial Research, 11(5), pp.275-284.

Rodrigues, C.F.D.S. and Lourenço, A.L.C.D., 2021. A CASE FOR INDUSTRIAL POLICY? FORECAST RESULTS FROM A DISAGGREGATED BOP-CONSTRAINED GROWTH MODEL FOR BRAZILIAN ECONOMY (2016-2025). Revista de Economia Contemporânea, 25.

Salih, K.K. and Majeed, B.N., 2022. The Impact of Exchange Rate on Balance of Payment and Economic Growth: An Empirical Evidence from Iraq for The Period of (2004-2019) Using the ARDL Model. QALAAI ZANIST JOURNAL, 7(3), pp.1009-1028.

Shingil, M.E., Ozdeser, H. and Saliminezhad, A., 2022. Investigation of Balance of Payment Constrained Growth Model: The Impact of Export Growth, Capital Flows, and Real Effective Exchange Rate on Growth of the UK. SAGE Open, 12(2), p.21582440221085011.

Widanta, A.A.B.P., Budhi, M.K.S., Purbadharmaja, I.B.P. and Setyari, N.P.W., 2023. Review On Tourism Competitiveness Strengthening In Order To Strengthen International Balance Of Payment. Baltic Journal of Law & Politics, 16(3), pp.876-888.

Websites

Investing, 2023: EUR/USD - Euro US Dollar for last Five years Available at: https://in.investing.com/currencies/eur-usd-historical-data?end_date=1681410600&interval_sec=monthly&st_date=1541010600 [Accessed on 14th April 2023]

Ons, 2023: Balance of payments of UK, Available at: https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/datasets/balanceofpaymentsstatisticalbulletintables

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