Macroeconomic Performance Indicators

 Treasury professionals are always influenced and guided by macroeconomic performance and movement of macroeconomic variables such as interest rate, exchange rate, national savings and investment etc. Therefore, a brief discussion on macroeconomic performance, operation of open economy macroeconomics, and macroeconomic accounts would not be out of place here for treasury professionals. Macroeconomic performance of a country can be judged by examining its macroeconomic accounts (national income account, fiscal account, monetary account and external sector account), which contain many macroeconomic variables like gross domestic products (GDP), the unemployment rate, inflation etc.

 GDP  is the most comprehensive measure of total output of an economy. It is the measure of the market value of final goods and services produced in a country during a year. There are two ways to measure GDP: one, nominal GDP which is measured in actual market prices and second, the real GDP which is calculated in constant or invariant prices. Movement in real GDP is one of best measure of economic performance of a country.

 Of all the macroeconomic indicators, unemployment is most directly felt by the individuals. The unemployment rate is the percentage of the labor force that is unemployed. The labor force includes all employed persons and those unemployed individuals who are seeking jobs. It excludes those without work but not looking for jobs. The unemployment rate tends to reflect the state of the business cycle: when output is falling (recession), the demand for labor falls, and the unemployment rate rises.

Macroeconomic performance also hinges on price stability or controlling inflation. The most common measure of the overall price level is the consumer price index, known as CPI. It measures the cost of a fixed basket of goods (including items such as food, shelter, clothing, medical care etc.) bought by the average urban/rural consumer. We consider changes in the overall price levels as the rate of inflation, which denotes the rate of growth of the price level from one year to the next. When prices decline, we call it deflation.

The macroeconomic performance of a country can be influenced by the government through adopting two major macroeconomic policies tools: Fiscal policy and Monetary Policy.                             

The fiscal policy is concerned with government revenue and expenditures. Government expenditures come in two distinct forms: one, government spending on goods and services, and two, government transfer payment. Govt. expenditures affect the overall level of spending in the economy and thereby, influence level of GDP.

 

The other part of fiscal policy, government revenues, is involved with government tax and non-tax sources of income. Taxation affects the overall economy in two ways: one, taxes affect people‘s income (disposable or spendable income) and second, taxes affect the prices of goods and factors of production.

The second major macroeconomic policy is monetary policy, which central bank conducts through the management of money, credit, and banking system. By changing the money supply, the central bank can influence many financial and economic variables such as interest rates, stock prices, housing prices, and foreign exchange  rates.  Restricting  the  money  supply  leads  to  higher  interest  rates  and  reduced investment, which, in turn, causes a decline in GDP and lower inflation. If the central bank is faced with a business downturn, it can increase the money supply and lower interest rate to stimulate economic activity.

 

Other than fiscal and monetary policies, countries often seek income policy, concerned with direct control over prices and wages and external sector policy such as trade policy, exchange rate policy etc.

Pros and Cons of Asset and Liability Management

 Many firms can gain from implementing ALM frameworks because it's crucial for them to completely comprehend their assets and liabilities. An organization can manage its liabilities strategically to better position itself for upcoming uncertainty, which is one of the advantages of implementing ALM.

 

An organization can identify and quantify the risks on its balance sheet and lessen the risks brought on by a mismatch  between  assets  and  liabilities  by  using  ALM  frameworks.  Financial organizations  can increase efficiency and profitability while lowering risk by strategically aligning assets and liabilities.

 

The difficulties in putting in place a suitable framework are one of the drawbacks of ALM. There is no universal framework that can be used by all organizations due to the stark disparities between them. Companies would therefore need to create a special ALM framework to record certain objectives, risk levels, and regulatory limitations.

 

ALM is a long-term plan that incorporates projections and datasets that are prospective. Not all businesses will have easy access to the information, and even then, it needs to be translated into quantitative statistical metrics.

 

Last but not least, ALM is a coordinated procedure that manages the overall balance sheet of an organization. It calls for extensive departmental cooperation, which can be difficult and time-consuming.

 

Thus, asset and liability management, at its heart, is a strategy used by financial institutions to mitigate risks brought on by a mismatch between assets and liabilities. The mismatches are typically brought on by modifications to the financial environment, such as shifting interest rates or liquidity needs. By upholding liquidity needs, controlling credit quality, and ensuring adequate operating capital, a whole ALM framework focuses on long-term stability and profitability. ALM is a coordinated process that employs frameworks  to  control  an  organization's  complete  balance  sheet,  unlike  other  risk  management techniques. Long-term liabilities are reduced and assets are invested as efficiently as possible.

According  to  the  type  of  risk  involved,  financial  institutions  have  traditionally  managed  risks individually. However, it is currently viewed as an obsolete strategy due to the financial landscape's development.  Macro-level  asset  management  and  risk  mitigation  are  the  main  focuses  of  ALM procedures, which cover things like market, liquidity, and credit concerns. ALM is an ongoing process that continuously examines risks, in contrast to traditional risk management techniques, to make sure that a business is staying within their risk tolerance and abiding by regulatory frameworks. ALM procedures are being used by businesses including banks, insurance firms, pension funds, and asset managers throughout the financial industry.