The inflation rate of a country can affect financial planning in multinational c

Question

The inflation rate of a country can affect financial planning in multinational corporations since the value of receivables in each country can face significant devaluation if the inflation rates are high. Your company has operations in the following countries: Belarus, Costa Rica, Finland, Iceland, Paraguay, Thailand, and Zimbabwe. Use the Country Comparator on the globalEDGE site to rank the risk of devaluation of your company's receivables from highest to lowest, based on the most recent data available for each country. What precautions can your company take in the countries at the tip of this list to minimize the risk?

Explanation / Answer

Comparison Country Inflation, consumer prices (annual %)

Belarus:- 18.2%

Finland:- 1.044%

Iceland:- 2.035%

Costa Rica:-4.515%     

Paraguay:- 5.029%

Zimbabwe:- -0.217%  

Thailand:- 1.895%

Inflation:-

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. The value of a dollar does not stay constant when there is inflation.

Deflation or negative inflation:-

Deflation, or negative inflation, happens when prices fall because the supply of goods is higher than the demand for those goods. This is usually because of a reduction in money, credit or consumer spending.

Firstly the government set an inflation target of CPI 2% to -1% for good reasons. The fear is that if inflation is too low, we may start to get problems associated with deflation. So we can say 2% to -1% is ideal inflation rate for a country.

From data we can say that countries like Belarus, Costa Rica and Paraguay are victim of inflation as the inflation rate is very high from the moderate rate which is 2%. High inflation rate is the indication of high growth rate as the value of local currency will be low and the value of dollar will be high as a result of this loan repayment will become easy for these companies which have high inflation rates.

The countries like Finland, Iceland, Zimbabwe and Thailand has inflation rate between 2% to -1% which shows that country is less affected by inflation. Low inflation is an indication of low growth, if inflation has fallen to 0%, it suggests that there is intense price pressure to encourage spending and the recovery is very fragile. Falling prices can encourage people to delay buying expensive luxury goods.

In low inflation, it becomes harder than expected for people to pay back their debts. As the difference between local currency and dollar is less. As a result of this companies will hard to pay loan and growth will be slow.

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