Balance of payments crisis

Commerce

A balance of payments crisis is a macroeconomic phenomenon, which takes place when the level of a country's reserves changes. Producing distortions in the decisions of economic agents.

A modification that occurs due to a change in expectations about exchange rates in order to maintain it. This situation causes economic agents to vary their decision-making.

In the foreign exchange market, when a central bank proceeds to devalue a currency, due to different economic problems, it is common for all assets valued in that currency to suffer a decline in value. In other words, profitability decreases in the country in question and at the same time its competitiveness.

Simultaneously, this idea is related to the fact that profitability abroad will increase and it will be more attractive for agents to take their investment there. For this reason, the central bank will try to maintain the level of the exchange rate, so it will buy domestic currency and sell foreign currency. That is when the reduction in reserves occurs.

The basic imbalance generated by these changes is that less is entered than is spent in terms of the national currency in the inflow and outflow of capital, creating a gap or deficit in the balance of payments that must be compensated with the aforementioned. On the other hand, many of the changes in expectations are often caused by so-called speculative attacks.

Consequences of a crisis in the balance of payments

One of the direct consequences of the emergence of balance of payments crisis is the appearance of the concept of capital flight. A capital flight that occurs, where the private sector seeks higher returns from the hand of assets in foreign currency and harming the public sector.

In most cases, this fact only aggravates the effects of the crisis for the country.

Crisis prevention methods in the balance of payments

There are some points that mark the direction that a country must follow in order to avoid a crisis of this type.

Among these points is the fact of taking care of the health and strength of its public finances. In this way, trying not to relapse into excessive levels of external debt, as well as the constant improvement of its international competitiveness, through exports.

Current account balance

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