INTERNATIONAL FINANCE

International Finance in Emerging Markets

Abstract

Emerging economies are considered intermediary, which means that they are in the course of accelerating to an open economy from a closed market economy. During this process they are constructing credibility in market. Examples of such emerging economies include China, Russia and eastern European nations. As an EME, a nation can embark on an economic transformation plan which will result in making that nation strong and achieve economic stability. It will also result in clearness and effectiveness in the capital market. An emerging market also transforms its system of rate of exchange because the confidence in economy is high when the currency of that nation is stable and strong, particularly when foreign investors are interested in investing. One primary feature of an emerging economy is the increment in investment from both local portfolio investors and foreign direct investors. If both foreign and domestic investors own the common stock, then only a portion held by foreign investors is considered to be foreign investment, and if only a threshold percentage is attained, that is deemed to give the foreign investor control of the business.

Table of Contents

Abstractii

Introduction1

Discussion1

Economic Growth2

Emerging Markets2

Brazilian Emerging Market4

Opportunities and challenges in emerging markets4

Globalization and Emerging Economies5

Investing in Emerging Economies6

Foreign Investment in Emerging Economies7

Major investors in Emerging Economies9

IMF10

World Bank12

GATT/WTO13

Policies of International Regulatory Agencies13

Devaluation13

Interest Rates14

Monetary Contraction14

Subsidy Policy14

Reform of Public Sector Enterprises15

Imbalance in Budget15

Social Costs15

Prices15

Savings15

Inappropriate Economic Policies16

Most Important Emerging Markets16

Conclusion18

References19

International Finance in Emerging Markets

Introduction

Economic activity in emerging markets continues to be robust, while growth in the developed markets has been subdued due to consumer deleveraging and sovereign debt issues in Europe and in the United States. Recently however, the emerging markets asset class has been facing headwinds to growth, specifically, rising inflation and speculative inflows of capital. Over the first half of the year, we believe that contraction monetary policy has been an impediment to growth in many countries (Agenor 2008).

The European debt crisis is having a negative influence on global growth, due to contagion fears. This is having an impact outside of Europe given that the global economy is so finely interconnected (Agenor 2008). Some of the indirect effects of the crisis, including increased volatility in global financial markets, the higher risk of interbank funding, cross-border deposit flight, and deleveraging of the peripheral European countries' subsidiary banks within the emerging markets are also factors (Agenor 2008). While we remain confident in the emerging markets' robust fundamentals, we are keenly aware that a potential default of the debt in any of the peripheral European countries would be expected to cause chaos in global markets and, in our view, emerging markets should not be considered as a safe haven (Agenor 2008).

In a perfect financial market, capital would flow freely as investors look for new investment opportunities. If a shock causes a slight change in supply of an asset, all investors can adjust their 'allocations to this asset by a marginal amount such that on aggregate, they would eliminate any excess return ...