How important is it to have an understanding of macro and microeconomics?

One of the most important macroeconomic variables is the Exchange rate.

and in this article, we will see a case study of one of the most promising emerging markets "EGYPT" as per many consulting firms in 2022.

The story happened after a factory located in the Delta region secured financing worth USD 5M at the end of 2015. In 2016, when the devaluation occurred, raising the exchange rate from 7.7EGP/1 USD to 19.6EGP/1 USD, the finance contract was based on payment in the local currency.

This led to a significant escalation in the total debt, soaring from EGP 38 million to EGP 100 million.

The client later filed for bankruptcy and the bank lost part of his assets (Finance given to the client) in recovering the debt.

As per my previous experience as a credit risk analyst, one of my main responsibilities was doing financial analysis for the Corporations by analyzing historical performance from the audited financial statements and projecting the future performance through analyzing the opportunities such as the growth in population which increases demand in most cases and also, changes the model for most of the factories from full automation into labor-intensive industries.

The mitigation tool commonly used at this time was 'forward deals'

"Worth mentioning is that these risks only apply to businesses involved in import and export transactions."

A "forward deal" in FX is an agreement to exchange currencies at a set rate on a future date, reducing risks from currency fluctuations in international trade.

But the most important tool was the ability of the business to shift those price fluctuations to the final customer, and in case of competition with imported goods, the competitive edge and mitigation tool is sourcing the raw materials from the local market if applicable.

The upper hand happens when the business has the full capacity to shift the increase in costs and decrease in margins on the final customer.

"In conclusion, knowledge of macroeconomic variables is crucial in analyzing the feasibility of any project or business, and extensive research on the targeted market has to be conducted to make informed and feasible financial decisions."

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