ESTP Course Balance of Payments – Introductory course Paris, 22-23 May 2014 International Investment Position

Conceptual Framework International investment position (IIP) - see BPM6 Chapter 7. Increasing emphasis on IIP in new manual – title, chapter order, detail: Reflects views of data users.

Conceptual Framework Rests on general principles that apply to whole of international accounts: Valuation and timing (Chapter 3); Units and residence (Chapter 4); Instrument classification (Chapter 5); Functional categories (Chapter 6).

Conceptual Framework International investment position: (BPM6 paras 7.1-7.7) stock of external financial assets and liabilities: "stock" requires valuation and timing; "external" requires definition of residence; Net IIP: difference between owned and owed.

Conceptual Framework Integrated IIP Statement (Table 7.1): stocks measured at different points in time and explanation of the changes between them. beginning-of-period value; + changes during period: transactions (financial account); other flows (other changes in financial assets and liabilities account): other changes in volume, revaluation due to exchange rate movements, other price changes; = end-of-period value.

Conceptual Framework: Relationship with Other Statistics Link to investment income (current account): payments and receipts on investment measured in IIP; interest, dividends, distributions; yield on investment: ratio of income to corresponding value of asset/liability; useful for analysis; useful for data checking.

Conceptual Framework: Relationship with Other Statistics National net worth: IIP is a component of the balance sheet of an economy; National balance sheet = IIP + resident-to-resident financial assets/liabilities + nonfinancial assets; IIP + nonfinancial assets = national net worth.

Conceptual Framework: Valuation current market prices, where possible, but proxies may be used if observable market prices not available; nominal values for non-market items. Particular valuation issues: Guidance on proxies for untraded equity (BPM6 para 7.16) common for direct investment, also arises for portfolio and other; recent transaction price; net asset value; price/earnings ratio; adjusted book values; own funds at book value; prorated totals (global enterprise group).

Conceptual Framework: Valuation Particular valuation issues: Memorandum and supplementary items for impaired loan assets (BPM6 paras 7.45-7.56): primary valuation is nominal value, but it is recognized as giving an incomplete view; fair value, if possible: the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction- a market-equivalent value; nonperforming loans: payments of principal and interest are past due by three months (90 days); loan loss provisions.

Conceptual Framework: Timing time when claims and liabilities arise. based on accrual accounting: timing of ownership change; proxy by when recorded in books.

Conceptual Framework: Residence Residents/nonresidents: Same as in a previous lecture based on institutional units (households, nonfinancial corporations, corporations, general government, NPISH); center of predominant economic interest in the economy; (intend to) engage in economic activities on a significant scale from a location in the economic territory; land treated as owned by residents; includes special purpose entities etc. incorporated in the economy.

Conceptual Framework: Residence Residence – practical issue: For tradable securities, issuer may not know the identity and residence of the holder.

Conceptual Framework: Classification Assets and Liabilities: Components of balance sheets of resident units; Only financial assets and liabilities are in the IIP. Assets - issuers are nonresidents; Liabilities – holders are nonresidents.

Conceptual Framework: Classification Instrument split (BPM6 Chapter 5). Equity, debt, and other + more detailed SNA/MFSM instruments. Equity claims and liabilities (residual claim on assets): Listed shares, unlisted shares, and other equity; Investment fund shares.

Conceptual Framework: Classification Instrument split: Debt instruments (principal and interest, fixed according to a predetermined formula): Debt securities; Currency and deposits; Loans; Insurance technical reserves, pension entitlements, provisions for standardized guarantees; Trade credit and advances; Other accounts payable/receivable. Other instruments: Financial derivatives (transfers risk, rather than providing resources); Monetary gold (gold bullion has no counterpart liability).

Conceptual Framework: Classification Functional categories (same as financial account of the BOP): Direct investment; Portfolio investment; Financial derivatives (other than reserves) and employee stock options; Other investment; Reserve assets.

Conceptual Framework: Classification Direct investment: General concept: Control or influence on enterprise. Practical definition: 10% or more of voting power; Avoid uncertainty and discretion of subjective criteria.

Conceptual Framework: Classification Direct investment: equity: obtained by acquisition of shares, goods in kind, re-invested earnings; debt instruments (borrowings). reverse investment: equity - less than 10% if 10 percent or more is mutual direct investment; debt (main component; often trade credit). investment between fellow enterprises (neither is investor in the other): equity - less than 10%; debt.

Conceptual Framework: Classification Asset/liability presentation. Directional principle presentation (paras 6.42-6.45, Box 6.4): Direct investment abroad (outward direct investment): = Claims of resident direct investors on their direct investment enterprises abroad; - Liabilities of resident direct investors to their direct investment enterprises abroad (reverse investment); + Claims of resident enterprises on fellow enterprises abroad (if ultimate controlling parent is resident); - Liabilities of resident enterprises to fellow enterprises abroad (if ultimate controlling parent is resident). + Claims of resident enterprises on fellow enterprises abroad (if ultimate controlling parent is unknown or there is no ultimate controlling parent)

Conceptual Framework: Classification Directional principle presentation Direct investment in the reporting economy (or inward direct investment): = Liabilities of resident direct investment enterprises to their direct investors abroad; - Claims of resident direct investment enterprises on their direct investors abroad (reverse investment); + Liabilities of resident enterprises to fellow enterprises abroad (if ultimate controlling parent is nonresident). - Claims of resident enterprises on fellow enterprises abroad (if ultimate controlling parent is nonresident); + Liabilities of resident enterprises to fellow enterprises abroad (if ultimate controlling parent is unknown or there is no ultimate controlling parent).

Conceptual Framework: Classification Portfolio investment: Negotiable instruments; Equity or debt usually traded in organized markets; Investment is for purpose of portfolio diversification rather than exerting influence over management.

Conceptual Framework: Classification Portfolio investment Two instruments: Equity securities: Holdings less than 10% of voting power. Debt securities: Long term (> 1 year) - bonds, notes, debentures, ... Short term - treasury bills, commercial paper, bankers’ acceptances, …

Conceptual Framework: Classification Portfolio investment Securities repurchase agreements : Treated as collateralized loan; That is, not treated as change of economic ownership of the security, just change in legal title; So repo not treated as portfolio investment Can be difficult to identify

Conceptual Framework: Classification Financial derivatives (other than reserves) and employee stock options: Risk management objective; Linked to another instrument or other value; Insulate against price changes. Forward-type contracts and options.

Conceptual Framework: Classification Other investment: Residual for instruments not included elsewhere; Consists of: Other equity; Currency and deposits; Loans; Insurance technical reserves etc.; Trade credit and advances; Other accounts receivable/payable.

Conceptual Framework: Classification Reserve assets: Assets available to and under control of monetary authorities; Consist of: Monetary gold; SDRs; Reserve position in IMF; Currency and deposits. Debt and equity securities Financial derivatives (for purposes of reserve management only) Other claims

Conceptual Framework: Classification Additional splits: By sector; By maturity; By currency.

Conceptual Framework: Classification Additional splits: By sector Central bank (monetary authorities where relevant); Deposit-taking corporations, except the central bank; General government; Other sectors: Other financial corporations; Nonfinancial corporations, households, and NPISHs.

Conceptual Framework: Classification Additional splits: By maturity Original maturity : Short-term - one year or less; Long-term - more than one year. Remaining maturity: Remaining maturity of one year or less on long-term instruments for positions data

Conceptual Framework: Classification Additional splits: By currency Foreign currency In total; specific currencies Domestic currency

Conceptual Framework: Classification Off-balance sheet liabilities: Examples include: one-off guarantees; unfulfilled loan commitments; other contingent liabilities. If such obligations to nonresidents are significant, compilers should provide supplementary data.