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Multinational Finance of USA Essay

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Updated: Oct 13th, 2021

Introduction

In analyzing the business environment and investment climate of a country, it is paramount that one evaluates all aspects of that country. The positive and negative attributes, political and sector reviews.

The country on review is the U.S.A, the largest economy in the world.

Country risk assessment

There are various extensive methods that are used to determine a country’s credit risk. Some of the approaches used include qualitative analysis which focuses on the financial, macroeconomic, legal, regulatory, and political aspects of a country.

The quantitative analysis on the other hand evaluates the ratings and rates a country according to these scores.

Other methods used in calculating the credit risk of a country include the econometric and modernization approach, analytical approach touching on crisis typology, principal component analysis, logic analysis, and non-linear conditional analysis on threshold level and breaking points (MH BOUCHET/CERAM-Global finance 2008)

The country’s risk rating information can be obtained from numerous credit rating agencies and institutions. Some of their institutions include;

  • Business Environment Risk Index (BERI)
  • Dun and Bradstreet, Moody’s, S&P, Fitch
  • Institutional Investor
  • Frost and Sullivan
  • Euro Money
  • Fraser Institute
  • Credit Risk International (Paris)
  • Coface and Ducroire
  • Heritage Foundation
  • Transparency International
  • DBRS (MH BOUCHET/CERAM-Global finance 2008)

Overall county risk assessment

The USA country risk assessment according to Coface is to be evaluated based on the following parameters

  • potential and apparent advantages and weaknesses
  • country rating
  • industries overview
  • major macroeconomic indicators
  • means of payment and collection methods
  • payment incidents index
  • risk assessment (Coface North America 2008)

Advantages and Disadvantages

The USA is the largest and most developed economy portends the same inherent benefits and drawbacks to a potential investor. The advantages and disadvantages are analyzed below.

Advantages

The USA is a huge country with a population of over 300 million people. This large population provides a huge market for investors and companies alike. The other factor that makes the USA market attractive is the huge spending power of its consumers.

The education standard in this market is also another benefit. High-quality research and innovations are developed each year from American universities hence the continued economic development.

The education sectors’ ability to produce all-rounded individuals who can be employed in different kinds of sectors and in any part of the country coupled with favorable labour laws is another advantage of the USA.

The other benefit that an investor gains by operating in the USA is the fact that the Government (Federal Reserve) monetary policies takes into account the effects of inflation by formulating policies focussed on strong growth and employment (Coface North America 2008).

Disadvantages

Despite all the benefits associated with such a huge and highly developed economy, there are some drawbacks as well. Key among these include.

The ever-widening gap of the current account deficit fuelled by the low domestic savings rate and slowing down of the manufacturing sector is one of the disadvantages. The result of this is the fact that most people will have uncertain futures because of a lack of enough savings.

The recent sub-prime crises that hit the stock market exposed one of the major weaknesses of the USA economy which is dependent on stocks and interest. The collapse of Bear Stearns and numerous mortgages foreclosures depict this dependence. There have been assertions that the USA economy is headed for a recession.

The huge market that has high energy requirements coupled with high oil dependence is another serious drawback. The oil prices have been rising and this could jeopardize the sectors that depend solely on oil for their energy requirements.

Many Americans do not have healthcare insurance and this does not augur well with the development of the economic well-being of the citizens. The problems witnessed with the pensions are also other challenges.

Country rating

According to Coface, the USA is rated as A1 but watch listed since 2007 for any negative factors. The business climate rating is also A1.

This rating indicates that the political and economic environments are at their best with the chance of corporate defaults being minimal on average (Coface North America 2008).

Other country rating agencies have rated the USA highly (MH BOUCHET/CERAM-Global finance 2008).

Industries overview

The construction industry in the USA declined substantially in 2007 culminating in the dwindling fortunes for the leading home builders. The consumer demand has been slow. The other factor affecting the housing sector is the sub-prime mortgage loss.

The retail industry will have mixed fortunes in 2008. Retailers dealing in home appliances will decline because of the low demand for housing. However, the retailers dealing with high-end products will continue to grow.

The automotive industry in the country will continue to decline with GM, Ford facing stiff competition from Toyota, Nissan, and other Asian manufactures. The greenhouse gas emission also poses a challenge to American automakers.

The steel industry will achieve modest growth driven by public investments in infrastructure. However, the strong growth is hampered by the decline in the construction and automotive industries.

The paper industry on the other hand will have varying effects on the different players in the industry. Importers will have to bear the consequences of weakening the dollar which means extra cost, while the exporters will benefit. Those companies manufacturing paper and package materials face higher risks due to the costs of distribution bearing in mind the weakening dollar.

The chemicals and plastic industry will also be affected by the slowing down of the construction of properties and car sales. This decline however will be offset by the favorable exports and rising selling price.

Insolvency cases

The number of bankruptcies has been on a steady decline over the past 10 years.

The bankruptcy recorded by the Administrative Office of the Courts and American Bankruptcy Institute indicates a fall from a high of 44,196 in 1998 to a low of 20,152 in 2007.

Major macroeconomic indicators

The country has realized a slowdown in the economy over the recent years with the growth declining from 3.6% in 2004 to a paltry 1.7% expected this year.

Means of payment and collection methods

In the USA, it is not possible for creditors to sue debtors for recovery of amounts owed as per the exchange law in case the payments were in form of cheques and bills of exchange. However, this is possible in other countries according to the 1930/31 Geneva Convention on the uniform treatment of cheques and bills of exchange.

Other forms of payment include certified cheque cashiers cheques and promissory notes.

Bank transfers are done using SWIFT, an e-network by the Society for Worldwide Interbank Financial Telecommunication. SWIFT transfers work well in an environment of trust. It is also faster and cheaper.

CHIPS- the Clearing House Interbank Payments System run by private financial institutions and Federal Funds Service System by Federal Reserve are used when dealing with larger amounts

Debt collection

In case of difficulties in debt collection, the parties can use the courts although it is expensive. Out-of-court settlement arbitration or Alternative Dispute Resolution can also be used because they are cheap and take a shorter duration to resolve.

The American courts are divided into two; the Federal District Court and the County Court. The Supreme Court provides the federal rules of civil procedure used at the federal level. Each state, however, has its own rules of civil produce.

Some of the distinct features in the American judicial system include the fact that before a trial, there is a process called the “discovery phase” where the concerned parties require the other to ‘furnish’ evidence and witnesses before a trial. The problem with this process is the fact that it could take a long duration and be costly.

Juries can also be used in trials. A jury constitutes persons with no legal knowledge. The jury is required to produce a verdict based on the facts presented.

The payment incidents index

The USA Payment Incidents Index is slightly above the world average. This is driven by the corporate payment trends and solvency ratings which are good although only for the exporting companies.

Risk assessment –U.S.A

The economic growth is expected to decline this year due to the credit crunch although it is expected that the exports will reverse some of these negatives in the economy.

Over the recent months, the housing sector has been hit by a severe decline with most unit-linked mortgage holders losing their properties due to foreclosures. The default rates are continuing to rise up hence the cost of mortgage refinancing being stringent.

Consumer spending represents 70% of the total GDP. It is expected to slow down given the rising gas prices as well as low disposable income (Coface North America 2008)

The capital acquisitions (9.3% of GDP) will be boosted by the availability of cash flows and low interests rates (43% of GDP)

Export (12% of GDP) is expected to grow robustly hence minimizing the lack of demand in the domestics market.

The solvency and corporate payment trend rates are good particularly for those companies exporting. Domestic market companies are however faced with credit problems due to lack of liquidity in the market. The severely hit sectors are the housing, care home related retiling, services to private individuals, textile and clothing, and electronics (TV, video hi-fi) (Coface North America 008)

Buying bonds from the government

All the credit agencies have rated USA as having stable economic and political environments. Some of the ratings are as below

Coface

A1 (both country and business)

Fitch- -long-term foreign currency AAA

  • short term foreign currency F1+
  • long term local currency AAA

Institutional investor ranked 9th in the world OECD.

It is apparent from the ratings above that USA is a fairly stable economy in terms of political and economic factors (Fitch Ratings 2008).

Investing in the bonds in the USA therefore will not be risky considering the good credit ratings and payment history.

The Coface Payment Incidents Index which shows the payment and default trends of companies indicates that the USA is slightly above the world average.

The political risk of the country, on the other hand, is large as a result of a change in the USA politics and political scene bearing in mind that it is an election year. The election could bring that uncertainty in the policies to be adopted.

According to Ian Bremmer, President of Eurasia Group, the 2008 election could result in the adoption of protectionist policies hence hampering the already existing trade agreements, increased focus on sovereign wealth funds in the U.S.A market hence scaring away the potential investors (Bremmer, 2008)

Basically, it is less risky to harvest in the U.S.A government bonds as compared to other countries. The effects of the credit crunch have led to falling stock prices and have made investors invest in relatively safe treasury bonds. The increased demand however is affected the yields on these bonds.

Securities of local (U.S.A) companies

The US economy has been declining in the recent past. This has major effects on the companies operating locally and solely relying on the US market.

The credit crunch (subprime credit crunch) which has led to the lack of liquidity in the market has even made the financial position of these companies worse.

The financial markets have been falling down in the face of the liquidity crisis and the downturn in the economy.

The affected parts of the economy include the home building, the automotive industry, home-related retailers, textile- clothing hi-fi, TV, video, and the service sectors.

Most of these sectors have witnessed falling profitability and faced with the liquidity crisis, it is only bound to get worse for these companies whose main market is the U.S.A.

The domestic demand has been dropping fuelled by the low consumer spending. Consumer spending in the US accounts for 70% of the GDP.

The significance of consumer spending on the overall performance of the economy causes a domino effect on the other sector and industries in the economy.

The securities (stock, bond) of these companies are therefore expected to fall as a result of the negative performance in the economy.

The security prices especially equities are largely affected by the profitability prospects of a company. Ideally, higher reported profitability means the stock prices will rise and vice versa. Therefore with the falling profits of local companies, their securities are then expected to fall.

The manufacturing sector in the USA

The manufacturing sector in the USA is the driving force behind the employment and competitiveness of the economy as a whole. The sector is the leading in the production of manufactured goods and accounts for at least 90% of all registered patients in the USA. Therefore it is the bedrock for innovation (Manufacturing.gov 2003).

The manufacturing sector has however faced many challenges ranging from changing technology to the removal of trade barriers hence the free flow of goods and capital resulting in stiff competition.

The lack of manufacturers’ representation in the executive branch departments is one of the setbacks facing the manufacturing sector. The lack of such representation has affected the support the manufacturers get.

Global economic growth is also another challenge affecting the US manufacturing sector. The global economic growth has been slowing down thereby affecting the demand for American goods.

Costs associated with manufacturing e.g. healthcare costs, energy costs, legal, challenges, regulatory costs, taxes are contributing significantly to the rising costs of manufacturing.

The rise in these costs reduces the competitiveness of American manufactures and hence making the goods manufactured expensive.

The American manufacturers also have to improve on the innovation and use of technology in order to enhance the global competitiveness.

The focus on education and skills is also important. The USA Colleges produces far less technical graduates compared to the countries in Asia e.g. China and India. The net effect of this is the low levels of research and innovations (Manufacturing.gov 2003).

Any investors in the manufacturing sector in the USA will have to grapple with these challenges.

Despite the challenges facing US manufacturing the rating agencies have given the US a good business rating.

The USA is rated as number 6 in the world on the global competitiveness in the year 2007 with the country topping the index in 2008. These ratings were done by the World Economic Forum (MH BOUCHET/CERAM-Global finance 2008). This rating focuses on institutions, infrastructure, macroeconomy health and primary education, higher education and training, market efficiency, technological readiness, business sophistication, and innovation.

IMD growth Competitive Index 2007 also rates the USA as the highly competitive country in the world. It focuses on economic performance, government efficiency, business efficiency, and infrastructure.

The World Bank Doing Business in 2008 ranks the USA as third based on 10 indicators.

Coface Business Climate Rating ranks USA as A1 which is less risky to invest in.

Based on all these ratings, it is clear that the USA is a less risky market to invest in and any investment in the manufacturing sector is safe.

Although these ratings do not specifically rank the manufacturing sector, it is safe to assume that the manufacturing sector is largely included in these ratings.

References

Manufacturing.gov (2003). Manufacturing in America. Web.

Coface North America (2008). Country Risk Rating. The USA. Web.

Fitch Ratings (2008). Sovereigns. Issuers. Web.

MH BOUCHET/CERAM-Global finance (2008). Country risk Analysis. Sovereign Risk Rating. Web.

OECD (2008). Country Risk Classification. Prevailing Country risk Classification. Web.

Bremmer, I (2008). A Political Risk Outlook for 2008. Web.

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