Hot money

Hot money: It is the transfer of money from one country to another with the aim of achieving profit in a short period through the difference in the interest rate and changes in the expected exchange rate. It was given this name because of its entry and exit from and to the markets very quickly, which causes instability in the market. Hot money flows from the country with the same The low interest rate goes to the country with the highest interest rate, which has economic repercussions on the two countries, as the country to which the money flows increases the exchange rate of its currency, and the opposite happens to the country from which the hot money flows.

Types of hot money:

  • Investing in stocks, bonds and financial derivatives (short-term investments in foreign portfolios)
  • Short-term loans to foreign banks
  • Short-term investment loans to foreign banks

The impact of hot money on the economy of countries:

The following factors represent the risks of hot money to which the economy of the country receiving the hot money is exposed:

  • Creating a credit bubble due to a sudden influx of extremely hot money, causing asset prices to rise.
  • Increased demand and thus higher prices resulting from an increase in the amount of money and a transition to a situation in which a large amount of money chases a small amount of goods.
  • High exchange rates.
  • Causing major damage to the economy of the country from which the money left, as it will lead to a decline in asset prices, a collapse of the local currency, and a lack of financial liquidity in the local financial system.

Despite all of the above, hot money can play a positive role for countries that suffer from low foreign exchange reserves, which makes the flow of hot money an opportunity for these countries to increase their foreign exchange reserves in the short term and stimulate market movement, but it cannot be relied upon to produce real values in the future. gross domestic product.

As a result of economic openness, the interconnectedness of countries' economies and the peg of their currencies to the US dollar, any change in the US interest rate will lead to a lot of hot money leaving developing countries and heading to the United States of America, which will negatively affect the reserves of developing countries and the exchange rates of their currencies.

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