Data Requirements From Users on the International Investment Position

1. Data Requirements From Users on the International Investment Position Robert Heath Statistics Department, International Monetary Fund at the International Association of Official Statistics Conference on Reshaping Official Statistics Shanghai, China October 2008

2. Background • While the current account has traditionally played a central role in external sector analysis, in recent years the importance of the IIP has risen. • In 2007, external stability was the central focus of the IMF’s Executive Board new Decision on Bilateral Surveillance, • encompassing both the current account, and • net external asset position: the latter analyzed both in terms of its evolution and its structure. • This growing interest has resulted in more countries compiling IIP data.

3. What is the IIP • The IIP is a statistical statement that shows at a point in time the value and composition of: • foreign financial assets of residents; and, • liabilities of residents to nonresidents. • The difference is the economy’s net IIP. • Changes in the IIP between end-periods are made up of four elements • transactions in the financial account; • valuation changes caused by the exchange rate; • valuation changes caused by market prices; and • other changes in volume, such as arising from write-offs and reclassification of assets.

4. Analysis of the IIP: Structure of the economy Information on financial structure of an economy that can be gleamed from IIP data include: • An assessment of economic relations with the rest of the world, such as ability to attract foreign direct investment. • A measure of the degree of financial openness, such as the gross assets and liabilities vis-à-vis GDP. • An indication of financial structure and its changes over time, such as the size of foreign loans and deposits of the banking sector. • An indicator of future interest and dividend flows.

5. Analysis of the IIP: Exposuresand Vulnerabilities The types of exposures and vulnerabilities that can be explored using IIP data include: • An indicator of financial stability: the calculation of ratios such as external debt to GDP, and short-term debt to reserves. • An indication of the exposure to valuation changes in assets, such as through the type of instrument owned. • The capital structure: Whether there is a reliance on debt or equity financing. • An indicator of external debt sustainability.,

6. Balance Sheet Approach • The BSA focuses on the examination of stock variables in an economy’s sectoral balance sheets, • pays particular attention to the balance sheets of key sectors of the economy, and • the maturity, currency, and instrument attribution of assets and liabilities. • In essence, the BSA analysis recognizes that some of the potential sources of vulnerability such as currency and maturity mismatches, can create conditions that make an economy vulnerable to an external crisis. • Further, with the IIP, the BSA can be used to study the transmission of shocks across countries.

7. IIP by partner economy • There is growing interest by users in IIP by partner economy. • This type of analysis is the to-whom-from-whom approach • The IMF has been developing and promoting these datasets through its coordinated exercises. • Coordinated Portfolio Investment Survey, and the forthcoming Coordinated Direct Investment Survey • With the BIS’s International Banking Statistics (IBS), a comprehensive picture of bilateral positions in direct, portfolio, and deposit and loan data will be available. • The information on the CPIS and BIS’s IBS is available on the Joint External Debt Hub.

8. Currency composition • In analyzing the potential impact of exchange rate movements on economic activity and financial stability, • information on the currency composition is increasingly relevant as exchange rates become more flexible • The impact of exchange rate depreciations and appreciations on the domestic economy can vary depending upon the currency composition of external assets and liabilities. • Also, a depreciation coupled with large foreign currency debt can leave an economy (or sector) exposed to a loss of confidence; the transmission mechanism is often through the domestic banks.

9. Market price changes • Market price changes (other than arising from exchange rates) have been less explored than the valuation effects through exchange rate changes. • The current crisis has given focus to the importance of other price effects, and might stimulate further academic/user attention. • Analysis of market price changes raises the issue of risk sharing: in a more integrated world nonresidents bear part of domestic risk and, of course, benefit from favorable domestic shocks. • One area in which valuation issues have proved to be particularly important and little understood is in the measurement of foreign direct investment (FDI) equity positions.

10. Impact of derivatives • In the IIP, derivative claims and liabilities are included at market value. • But there is probably a need for the analysis to take into account the hedging strategy. • Recently, Australia and New Zealand have led the way with regard to work on foreign currency hedging • As illustrated by Australia’s paper on foreign currency exposure, • notional values can provide valuable information regarding the exposure to foreign exchange that has been covered through derivative positions.

11. Maturity mismatches • Mismatches between short-term liabilities and longer-term assets can expose an economy to liquidity and interest rate risk. • The IIP provides information on an original maturity basis for debt instruments. • But also important is information on debt coming due in the near term, • In BPM6, a supplementary (voluntary) item is included for the position in debt on a remaining maturity basis.

12. Interest-rate composition • Debt instruments may be classified as either variable-rate or fixed-rate. • Economies with large amounts of variable rate debt are vulnerable to a sharp increase in interest costs, • and hence adverse developments in the current account. • Those holding fixed-rate securities are more open to holding gains and losses. • In BPM6, the definitions of variable and fixed rate interest are discussed, • so allowing countries to compile a variable/fixed-rate split of debt instruments.

13. How is the IIP presented in BPM6? • BPM6 draws on the framework developed in BPM5, describing flows that arise outside of transactions in more detail than BPM5. • Debt instruments are separately identified, with additional breakdowns by remaining maturity and particularly currency (with the notional value of derivatives) emphasized. • BPM6 also gives emphasis to economic sectors. • In particular, unlike BPM5, it separately identifies the other financial corporations (other than deposit-takers). • It remains important that in compiling the IIP coverage of external assets and liabilities of residents is as comprehensive as possible.

14. Summary • Developments over the past decade have highlighted the importance of the IIP in assessing the external stability of an economy. • This has been reflected in growing user interest and, in the number of economies that compile IIP data (from under 40 in 1998 to over 110 today). • Within the IMF, when annual Balance of Payments Statistics Yearbook switches to BPM6 the IMF Statistics Department intends to publish tables of global aggregates of IIP data. • Nonetheless, the development and analysis of the IIP remains a work in progress.