4.6.5 Relationship between the financial account and the exchange rate (HL only) Notes

Economic Reforms and Exchange Rate Dynamics in Atlantica

1. Reforms to Improve Investment Climate
Atlantica has recently undertaken a series of reforms aimed at boosting investor confidence and attracting foreign investment. Some of these reforms include:

• Deregulation and Reduced Bureaucracy:
  The government has streamlined administrative procedures and reduced red tape, making it easier for businesses to operate. This deregulation lowers the cost of doing business and speeds up the process of starting new enterprises.
• Tax Incentives and Lower Corporate Taxes:
  Atlantica has introduced tax breaks and reduced corporate tax rates to encourage both domestic and foreign investment. These measures increase after-tax returns, making investments in Atlantica more attractive.
• Improved Infrastructure and Technological Upgrades:
  Investments in modern infrastructure, such as transportation networks and digital connectivity, have enhanced the overall business environment. Better infrastructure facilitates smoother business operations and access to global markets.
• Political Stability and Transparent Governance:
  With a stable political environment and transparent governance practices, investors face less uncertainty. Political stability and low corruption are key factors that reduce the risk premium associated with investment.

2. Capital Inflows and Currency Appreciation
As a result of these reforms, Atlantica experiences significant capital inflows:

• Capital Inflows:
  Foreign investors, both through direct and portfolio investment, convert their own currency into Atlantica’s currency to take advantage of the improved investment climate.
• Increased Demand for Atlantica’s Currency:
  The surge in demand for Atlantica’s currency, driven by the desire to invest in its growing economy, pushes up the currency’s value.
• Appreciation:
  This results in an appreciation of Atlantica’s currency.