Part III. Sector Accounts Arij in ‘t veld 8-4-2019 REST OF THE WORLD Arij in ‘t veld

Part III. Sector Accounts 8-4-2019 Contents Rest of the world in ESA Geographical breakdown Concept of residency (exercise) Important transactions (exercise) Special purpose entities Data sources Challenges regarding ROW

ROW in ESA No real sector; non-resident units that have economic relationships with resident units Rest of the World accounts: overall view of the economic relationships between the national economy and the rest of the world From point of view of the rest of the world! (ESA 2010 1.117)   S.2 S.1A S.13 S.12B S.1 S.12A S.11

Geographical breakdown

Concept of residency

Concept of residency What is a resident unit? Resident units are those units which have a centre of economic interest on the economic territory of that country (ESA 2010 2.04)

Concept of residency Centre of economic interest A location (e.g. land or building) within the economic territory from which economic activities are engaged producing, financing, insuring, redistributing consuming owning land or buildings over a period of at least one year

Concept of residency Economic territory Geographic territory, administered by a government, within which persons, goods, services and capital can move freely Also included are for example: national air-space territorial enclaves (e.g. embassies, military bases, etc.) territorial waters part of the continental shelf (North Sea)

Concept of residency Economic territory

Concept of residency So, a resident unit is a unit that has a centre of economic interest on the economic territory of that country Exceptions: Units primarily engaged in consumption (households) that go abroad for short periods (less than a year). They include: - border workers - seasonal workers - tourists, patients, students - staff of international organisations that have headquarters in extra-territorial enclaves - representatives of the government (including their households) established in territorial enclaves

EXERCISE

Exercise Dutch citizen or not? The Dutch ambassador in Latvia Resident His Latvian secretary Non-resident A Dutch married couple that spends the summer months in Latvia A Dutchman who works at Statistics Netherlands but lives in Germany A subsidiary of a large Dutch multinational in Latvia A Japanese company (without legal status) on one of the Dutch isles A Dutch student who works in the summer months on a farm in France A Dutch student who studies (and lives) a couple of years abroad A very small country office of a Dutch aid organisation in Ethiopia Philips, the Dutch multinational, located in the Netherlands which equity capital is in foreign hands (more than 50 percent)

Important transactions Part III. Sector Accounts 8-4-2019 Important transactions Financial assets and liabilities Imports and exports of goods and services Property income flows Foreign direct investment (FDI)

Financial assets and liabilities

Imports and exports Trade in goods and services: Change of ownership of goods between residents and non-residents All services rendered by residents to non-residents and vice versa Problems: Transit trade (Rotterdam) Internal transfer pricing (within multinationals) Asymmetries between countries

Property income flows Income (interest, dividend, reinvested earnings) as a result of: Portfolio investment income: S.125: Insurance corporations and pension funds have large technical reserves S.123: Mutual funds Direct investment income: S.11: Non-financial corporations Other investment income: S.122: Interbanking positions

Foreign direct investment

Foreign direct investment An enterprise in which a non-resident investor owns 10% or more of the voting power or vice versa. Main transactions related to FDI: Financial accounts: AF.41 (Short term loans) AF.42 (Long term loans) AF.5 (Shares and other equity (real estate)) Non-financial accounts: D.41 (Interest) D.42 (Distributed income of corporations (= dividend)) D.43 (Reinvested earnings on FDI)

Foreign direct investment

Foreign direct investment The amount of profit that is distributed and the amount that is reinvested is a decision of the direct investor: therefore, all profit (D.42 and D.43) is attributed to the parent company When not 100% of the shares is owned by one company, then the dividend payments and RIE are divided proportionally among the shareholders D.43 has direct relationship with AF.5: RIE is actually an increase of the FDI

Foreign direct investment

Foreign direct investment

EXERCISE

Exercise FDI D.41 – interest D.42 – dividend D.43 – reinvested earnings AF.42 – long term loans AF.5 – shares

Exercise FDI Solution 1

Exercise FDI Solution 2

Exercise FDI Current acc. A Current acc. B Financial acc. A AF.5 75 AF.42 -100 A L Financial acc. B AF.42 -100 AF.5 100 A L

Special Purpose Entities Entities that mainly aim at performing sub-holding activities and raising funds to finance global group operations. Domiciled in The Netherlands because of favourable legal and fiscal regime.

Special Purpose Entities Charasteristics: Parent company is by definition based in ROW Enormous financial flows and positions and large property income flows Mainly little effect on macroeconomic aggregates Almost no direct relation with the Dutch economy For the purpose of analysing the Dutch RoW account, data are presented excluding transactions of SPEs.

Data sources Main source: Other sources: Balance of payments (transactions and stocks) Other sources: Supervision financial corporations (S12) Government statistics (S13) International trade statistics (goods and services) Statistic Financials of corporations (S11) International Investment Position

Source: balance of payments Processed by the Dutch Central Bank Direct reporting ± 2 000 main reporters on a monthly basis Population benchmark on a yearly basis Transactions in securities via depot statistics Trade in goods/services by Statistics Netherlands

Differences BOP and ROW Differences in presentation Conceptual or interpretation differences Actual basis vs continuous basis Classification differences Differences due to other sources Integration differences Data vintages

Co-operation with Dutch Central Bank (DNB) Goal of achieving consistency between BOP and ROW: 2006 covenant: compilation of sector accounts by Stat. Neth. Yearly: detailed agreement Twice a year: joined meeting of management Quarterly meetings on fine-tuning of the data: Fine-tuning of processes Explanation of data adjustments Regular meetings on conceptual issues: Blank spots Registration of insurance and pension transactions SPEs Treatment of FISIM in BOP Possible causes of statistical discrepancies

Challenges regarding ROW Blank spots (f.i. foreign assets of individuals) Differences between ROW and BOP Asymmetries between countries Different counterpart sector information Continuous basis vs. actual basis Globalisation: What is a resident entity and what is not? Accounting by multinationals (transfer pricing, intercompany services) SPEs

Part III. Sector Accounts Thanks for your attention 8-4-2019 REST OF THE WORLD Thanks for your attention