Understanding National Accounts: Revaluation and Wealth Impact Analysis

1. Agenda item 4 UNECE – National AccountsFinancial Accounts Michael Connolly – National Accounts, CSO Ireland April 2010

2. Theory and Practice of Holding Gains and Losses – Is the importance of revaluation reflected in the National Accounts ? Vaclav Rybacek, Czech Statistical Office WGGNA - Merchanting

3. Structure of Paper • Theoretical arguements - wealth v’s saving • Changes in Net wealth resulting from changes in relative prices • Savings are Disposable income less final consumption • Practical issues – compilation of revaluation account • Discussion and Conclusions UNECE – Financial Accounts

4. Theory and Practice - Holding Gains and Losses • Discussion on the link between Savings and Revaluation • Purpose of National Accounts to provide database on consumption and savings behaviour of agents • Highlights the fact that Use of Disposable income account excludes revaluations UNECE – Financial Accounts

5. STOCK –FLOW FOR QUOTED EQUITY Holding gains/losses Revaluation = +10 National Accounts Income

6. Theoretical Arguements - Wealth v’s Saving • The impact of Holding Gains/Losses on consumption behaviour • Wealth effect - gains on Financial assets or real estate gains (capital account) have an impact on consumption • Keynes windfall gains and losses - exclude from disposable income • High volatility of gains/losses – not sufficiently strong permanent component => exclude holding gains from Disposable Income • Revaluation not considered as a source of consumption or saving in SNA/ESA UNECE – Financial Accounts

7. Theory and Practice - Holding Gains and Losses • Example given of the use of the proceeds of sale of CEZ shares to fund pension reforms – is this revaluation or disinvestment and reinvestment? • Distinction between “expected” and “pure” holding gains • Some link between production and expected holding gains - is this related to the projection of future earnings? • Impact of tax on gains – included in non-financial accounts while impact of gains are excluded UNECE – Financial Accounts

8. STOCK –FLOW FOR QUOTED EQUITY 1. OS +T+OC+R = CS Holding gains/losses Revaluation = 0 2. OS + (S - GCF) +OC+R = CS (substituted T with saving – capform) UNECE – Financial Accounts

9. Theoretical Arguements - Wealth v’s Saving • Don’t really know if transactions are always equivalent to saving less capital formation • How does disinvestment fit into this analysis? • For any asset, the balance sheet change, the difference between S (Saving) and I (CapForm) are taken up by financial investment (also I) • Therefore for any given asset-liability the balance sheet change is equal to I (investment) and revaluations plus other changes UNECE – Financial Accounts

10. Theoretical Arguements - Wealth v’s Saving • Therefore for any sector the net sum of net worth changes • Δ Net Worth = Saving +Reval and Other changes • The net revaluation can provide a potential source of funds – wealth effect • Actual withdrawal from accumulated assets is disinvestment WGGNA - Merchanting

11. Compilation of Revaluation Accounts • Quantification of revaluation is a difficult task - asymmetric information from two sides of a financial transaction • Use of single source - assets side to produce accounts • Data sources – • Surveys transactions, revaluation and other changes reported • Banking statistics and admin data - transactions and revaluation derived from stock data • Derivatives and securities other than shares most problematic UNECE – Financial Accounts

12. Compilation of Revaluation Account • Discussion regarding Table 1 - how is it that the financial assets and liabilities do not balance for the overall economy ? Does it exclude ROW ? • “Rise in net worth caused by Non-financial assets.” Is this a structural point related to the Czech Republic only? • Some further elaboration if possible in relation to AF.7 Other Payables data issues. WGGNA - Merchanting

13. Observations • IFRS 9 - introduces the revaluation effect into the Profit and Loss accounts for corporations • It is clear that revaluation or holding gains/losses have an impact on consumption and disposable income • The savings measure is more correctly required to reflect the total of disposable income over final consumption • Importance of revaluations in business cycle analysis through real and neutral holding gains/losses UNECE – Financial Accounts

14. Conclusions • Careful how we think about reval • We can have a wealth effect arising from revaluations • Once we liquidate these assets with positive revaluation we have a disinvestment - offset by another investment • The proceeds are used to invest elsewhere or in bank deposits or Capital Formation. • The dominant strategy in an ever rising price level environment is to be a holder of non-financial assets (property) and a debtor ??? WGGNA - Merchanting

15. Financial Accounts in Hungary Csaba Ilyes, Head of Financial Accounts Division, Magyar Nemzeti Bank (Central Bank of Hungary) UNECE – Financial Accounts

16. Purpose and Characteristics • Development of the Financial (transactions) and Balance Sheet (positions) Accounts in Hungary since 2003 • Quarterly and Annual time series from 1990 • Principles • valuation, substance over form etc. • Accruals accounting • Market prices • ∑ components of changes of stocks ≡ changes in stocks • Correspondence between assets and liabilities • Consistency - consolidated/non consolidated – annual/quarterly UNECE – Financial Accounts

17. Purpose and Characteristics • Market valuation and difficulties with non-traded securities • Methodologies – Accruals, Position plus accrued interest, Institutional sectors • Presentation, stock –flow, consolidation, • Quarterly vs annual accounts, revisions etc. • Institutional Units - Institutional Sectors • Data sources UNECE – Financial Accounts

18. Data • Data sources: • Central Bank(BOP, Monetary Statistics, Securities stats) • Annual reports of Corporations • Supervisory reports (Pension Funds, Investment Funds etc.) • Tax Returns for corporate balance sheets • Government budgetary data • NPIs from CSO UNECE – Financial Accounts

19. Data • Data hierarchy (1. Securities, 2.BOP 3.MFI Balance Sheets.......8. NPIs) • Data gaps - cash, loans,insurance technical reserves, derivatives and other receivables are incomplete? • NFCs, h/h good quality • Estimations - flows from stocks, valuations from currency changes • Net lending /borrowing - less reliable that for Non-Financial Accounts • Impact of inflation on income and positions • Co-operation with CSO/Central Bank to reduce imbalances B9/B9f UNECE – Financial Accounts

20. Conclusions and Questions • Use of a single source at instrument level - good for symmetry assets/liabilities - could obscure data problems • Quality of household data - “Financial Accounts of Households are of high quality” related to financial intermediaries • Substantial use of Administrative records – align with ESA /SNA accounting standards UNECE – Financial Accounts

21. Conclusions and Questions • Is it really appropriate to measure difference between B.9 and B.9f as a % of GDP? • Are the B.9 and B.9f for Govt and Corporations generally positive and ROW and H/Holds generally negative? • What about SPEs in Hungary? • Financial Accounts can be compiled by Central Bank or NSI - which is optimal? Does it depend on who is the BOP compiler? UNECE – Financial Accounts

22. Thank you for your attention WGGNA - Merchanting