1. ESTP Course
Balance of Payments – Introductory course Paris, May 2014 International Investment Position

2. 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.

3. 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).

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

5. 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.

6. 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.

7. 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.

8. 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).

9. Conceptual Framework: Valuation
Particular valuation issues:
Memorandum and supplementary items for impaired loan assets (BPM6 paras ):
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.

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

11. 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.

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

13. 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.

14. 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.

15. 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).

16. 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.

17. 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.

18. 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.

19. Conceptual Framework: Classification
Asset/liability presentation.
Directional principle presentation (paras , 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)

20. 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).

21. 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.

22. 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, …

23. 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

24. 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.

25. 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.

26. 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

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

28. 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.

29. 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

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

31. 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.