The Balance of Payments II Capital Account International Finance CFVG-May 2009 Professor: M.H. Bouchet
<ul><li>Balance of payments </li></ul><ul><li>Accounting framework  and statistical record of all the economic and financi...
<ul><li>Double bookkeeping:  S ummary statement  that records as a credit (+) any transaction resulting in a receipt from ...
<ul><li>Risk assessment is rooted in balance of payments analysis! </li></ul><ul><li>Trade flows and competitiveness  </li...
US Current account deficit -7% PBI  US Treasury, IMF US$ billion
Major net Importers of Capital Source: IMF 2007
Major net Exporters of Capital Source: IMF 2007
* The US CAD dilemma * <ul><li>2007-08 external deficit= US=760 billion  </li></ul><ul><li>CAD= -6,6% of GDP  </li></ul><u...
The US CAD dilemma… revisited (1) <ul><li>Large US CAD, though: </li></ul><ul><li>The US net liabilities have risen less t...
The US CAD dilemma… revisited (2) <ul><li>A dollar depreciation alone will NOT curb the US deficit quickly, because: </li>...
<ul><li>Capital account </li></ul><ul><ul><li>R eflects changes in country’s ownership of assets </li></ul></ul><ul><ul><l...
Capital account <ul><li>The financial analyst must focus not only on the  volume  of financing flows to match the financin...
The Capital Account <ul><li>Capital account </li></ul><ul><li>+ (-) Direct investment (non debt creating flows) </li></ul>...
Table of Uses and Sources
The Capital/Financial Account <ul><li>The  Capital Account  of the balance of payments measures all international economic...
The Financial Account <ul><li>Financial assets can be classified in a number of different ways including the length of the...
<ul><li>The Financial Account consists of three components: </li></ul><ul><ul><li>Direct Investment  – in which the invest...
Sources of external financing <ul><li>Official bilateral + multilateral </li></ul><ul><li>Paris Club (government to govern...
Developing countries that have relied  less  on foreign capital have grown faster!  (IMF/03-2007)
Where do capital flows go ?
Who finances whom? Current account balances of OECD (30) and EMCs (160)  US$ billion Source: IIF, IMF-WEO 2009
EMCs shrinking current account surpluses
Net external capital sources for EMCs  IIF/IMF US$ billion
Private flows  & FDI are a key source of growth financing for EMCs Source: IIF-2009
Net Private Capital Flows to E MCs (Equity, FDI, Portfolio, Banks + non-banks)   Billion of US$ Source: IIF/IMF
Net FDI and portfolio capital flows to EMCs  US$ billion Source: IMF/IIF
<ul><li>1. Direct investment and portfolio investment </li></ul><ul><li>The difference between direct investment and portf...
What is FDI? <ul><li>Foreign direct investment  = purchase of real assets abroad for the purpose of acquiring a lasting in...
FDI’s Benefits and challenges <ul><li>Currency appreciation  </li></ul><ul><li>Reduced  scope for independent macroeconomi...
Source: US GAO 02/2008
FDI Flows worldwide  in % of total volume Source: CNUCED/2007 Total= $1833 billion * IDE In = $81 billion, et IDE Out= $11...
Total FDI inflows in US$ trillion Post-2003 bounceback has been driven by OECD markets.  FDI flows to EMCs will remain buo...
OECD* (65%) EMCs  (35%) ASIA (50%) LATIN AMERICA (25%) GLOBAL ECONOMY EMCs LATIN  AMERICA   MEXICO (15%) CHILE (10%) PERU ...
30 most attractive Emerging markets for FDI <ul><li>India </li></ul><ul><li>Russia </li></ul><ul><li>Vietnam </li></ul><ul...
TOP 25 Global Confidence Index AT Kearney 2007
Most attractive emerging markets High Risk Lows Risk
China: FDI Flows In billions of US$ Source: OECD
Financial self-sustaining process = high saving rate, stronger banking sector= < dependance on external capital flows Sour...
FDI Flows in Vietnam (BOP source) In millions of US$,  actual disbursed as of 08 Source: IMF Jan-April 09: VN attracts US$...
Overview of FDI in Vietnam <ul><li>Opening of the Vietnamese economy to FDI in 1987, fast growth of the 1990s, rapid incre...
Main sources of FDI in Vietnam <ul><li>WHO? </li></ul><ul><li>USA </li></ul><ul><li>South Korea </li></ul><ul><li>Hongkong...
FDI in Vietnam by Sector
TOP 10 INVESTOR NATIONS IN VIETNAM
Contribution of FDI to Vietnam’s Economy <ul><li>FDI companies contribute 13.3 % to GDP, 23% to export, 25% to state budge...
France: FDI Flows In & Out Ratio OUT/IN= 1,8 Source: FMI & OCDE 2008
Outsourcing and job losses in Europe Source: European Fondation for the improvement of living and working conditions/2006
Outsourcing and sectoral job losses in Europe Source: European Restructuring Monitor/2006
Offshoring and job losses in Europe
<ul><li>2. Other capital   is a residual category that groups all the capital transactions that have not been included in ...
Gross private capital flows to LACs
<ul><li>3. Change in reserves </li></ul><ul><li>Reserves include: </li></ul><ul><li>Hard currency assets + Monetary gold (...
<ul><li>Foreign Exchange Reserves </li></ul><ul><li>The largest component of total international liquidity. It includes mo...
Vietnam’s foreign exchange reserves
China’s rising official reserve assets US$ billion Source: IMF 2006/IIF
<ul><li>4. Counterpart items: offsetting amounts </li></ul><ul><li>Counterparts items are analogous to unrequited transfer...
<ul><li>5. Net errors and omissions </li></ul><ul><li>Statistical difficulties involved in gathering balance of payments d...
Net errors and omissions ? <ul><li>An  examination of the size and direction of NE&Os may shed some light on the accuracy ...
In millions of US$ Source: IIF
Vietnam’s errors & omissions in US$ million
Russia:  Net Errors & Omissions   US$ billion Source: IMF-IFS/IIF
Peru and Capital flight
6. Exceptional Financing <ul><li>IMF Drawings </li></ul><ul><li>World Bank’s HIPC Initiative </li></ul><ul><li>London Club...
IMF Disbursements and Repayments In SDR million Credits Repayments
Total IMF Credit Outstanding for all Members
Risk Management and BOP Analysis   + Export of goods f.o.b. -  Imports of goods f.o.b. =  Trade balance +/-  Exports/Impor...
External Finance Analysis: The dual face of  Country Risk <ul><ul><li>Liquidity Risk </li></ul></ul><ul><li>Debt Service R...
Liquidity and Solvency Thresholds <ul><li>Stock variable </li></ul><ul><li>Solvency  = Debt/GDP < 100%  (should always les...
US Payments statistics: the basic balance <ul><li>Basic balance = balance on current account and long-term capital </li></...
US International Investment Position <ul><li>US-owned assets abroad: $6473 </li></ul><ul><li>US government assets: $244 (o...
Net US external investment position in US$ billion Source: IMF-2009 International assets-International Liabilities
Net US external investment position in US$ billion <ul><li>FRB of NY: Current issues in economics and finance, December 20...
The History of the U.S. Balance of Payments   Stage I : The U.S. is a  young debtor nation  (1770-1870) -Current account d...
Stage IV : The U.S. is a  mature creditor nation  (1945-1980) -Merchandise deficit --  exports < imports  but an investmen...
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2.2. Balance Of Payment Capital Account To Finance Ca Deficit

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International Finance related issues.
The Capital Account of the balance of payments measures all international economic transactions of financial assets. It is divided into two components:
+ The Capital Account
+ The Financial Account.
Capital Accounts consist of:
- Direct Investment – in which the investor exerts some explicit degree of control over the assets.
- Portfolio Investment – in which the investor has no control over the assets nor any participation in the management.
- Other Investment – consists of various short-term and long-term trade credits, cross-border loans, currency deposits, bank deposits and other capital flows related to cross-border trade.

DSR - Debt Service Ratio:
The Debt Service Ratio - DSR is the percentage of a borrower's income that will be used to pay off a loan. It is one of the factors a lender will use to assess your application. Most lenders set the maximum DSR from 30% to 30%, which means that the loan repayments should not take up more than that part of your salary. This ensures that you will be able to pay off your loan comfortably, with little to no risk of defaulting or going bankrupt. The DSR may be calculated based on your monthly, weekly or fortnightly earnings.

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  • 2.2. Balance Of Payment Capital Account To Finance Ca Deficit

    1. 1. The Balance of Payments II Capital Account International Finance CFVG-May 2009 Professor: M.H. Bouchet
    2. 2. <ul><li>Balance of payments </li></ul><ul><li>Accounting framework and statistical record of all the economic and financial flows that take place over a specified time period between residents of the reporting country and the rest of the world </li></ul><ul><li>The time period itself is arbitrary but it is common practice to supply balance of payments data on a monthly, quarterly and yearly basis (IMF) </li></ul><ul><li>Flows refer to income and expenditure or changes in levels of outstanding assets and liabilities. </li></ul><ul><li>The accumulation of flows leads to asset or debt stocks. </li></ul>
    3. 3. <ul><li>Double bookkeeping: S ummary statement that records as a credit (+) any transaction resulting in a receipt from the rest of the world and as a debit (-) any trans a ction resulting in a payment </li></ul><ul><li>These transactions lead to changes in supply and demand for foreign exchange, hence an impact on exchange rates, reserve assets and on foreign exchange markets </li></ul>
    4. 4. <ul><li>Risk assessment is rooted in balance of payments analysis! </li></ul><ul><li>Trade flows and competitiveness </li></ul><ul><li>Structural or short-term deficits? </li></ul><ul><li>Exchange rate variations </li></ul><ul><li>External financing flows </li></ul><ul><li>Capital flight </li></ul><ul><li>Debt crisis! </li></ul>
    5. 5. US Current account deficit -7% PBI US Treasury, IMF US$ billion
    6. 6. Major net Importers of Capital Source: IMF 2007
    7. 7. Major net Exporters of Capital Source: IMF 2007
    8. 8. * The US CAD dilemma * <ul><li>2007-08 external deficit= US=760 billion </li></ul><ul><li>CAD= -6,6% of GDP </li></ul><ul><li>Need to shrink the deficit by boosting exports and reducing import growth with a weaker $ </li></ul><ul><li>BUT need to finance the deficit by attracting US$2,4 billion/day foreign capital inflows with stronger $! </li></ul><ul><li>Capital sources = surplus countries = Germany + China + Japan + India + Korea </li></ul><ul><li>Need to maintain positive real interest rates to enhance the dollar attractiveness and competitiveness </li></ul><ul><li>Engine of world growth ? </li></ul>
    9. 9. The US CAD dilemma… revisited (1) <ul><li>Large US CAD, though: </li></ul><ul><li>The US net liabilities have risen less than the cumulative CAD </li></ul><ul><li>Decline in US net liabilities/GDP </li></ul><ul><li>Minimal debt servicing burden (the global status of the $ leads to massive purchases of UST bills, hence low rate of interest) </li></ul><ul><li>NYFed staff report n°271 12/2006 </li></ul>
    10. 10. The US CAD dilemma… revisited (2) <ul><li>A dollar depreciation alone will NOT curb the US deficit quickly, because: </li></ul><ul><li>Use of the dollar in international trade transactions (all US exports and imports are invoiced in $, hence insensitivity to exchange rate changes): Asia </li></ul><ul><li>Market share concern of foreign exporters, hence desire to remain competitive in the large US market) </li></ul><ul><li>High marketing and distribution costs of US imports might insulate the final consumption price of imported goods </li></ul><ul><li>However, foreign demand for US goods will increase </li></ul>Fed RB NY, June 2007
    11. 11. <ul><li>Capital account </li></ul><ul><ul><li>R eflects changes in country’s ownership of assets </li></ul></ul><ul><ul><li>Reflects international market access </li></ul></ul><ul><ul><li>Financing flows lead to changes in e xternal debt stock, and to future debt servicing payment outflows </li></ul></ul><ul><ul><li>Financing sources: debt, equity/FDI, international borrowing in the capital markets (Eurobonds, Eurocredits, official financing, ODA, short-term flows…) </li></ul></ul>
    12. 12. Capital account <ul><li>The financial analyst must focus not only on the volume of financing flows to match the financing requirements of the current account deficit, but also the nature of financing sources (private/public) and the sustainability of the financing (short term/long term, volatility, currency mismatch, floating/fixed rates, repayment conditions…) </li></ul>
    13. 13. The Capital Account <ul><li>Capital account </li></ul><ul><li>+ (-) Direct investment (non debt creating flows) </li></ul><ul><li>+ (-) Portfolio investment (NDCF) </li></ul><ul><li>+ (-) Other long-term capital (private + official) </li></ul><ul><li>+ (-) Other short-term capital (private + official) </li></ul><ul><li>+ (-) Net errors and omissions </li></ul><ul><li>+ (-) Counterpart items </li></ul><ul><li>+ (-) Change in reserves </li></ul><ul><li>= Capital account balance </li></ul><ul><li>+ Exceptional Financing (or arrears) </li></ul>From less liquid items to more liquid items!
    14. 14. Table of Uses and Sources
    15. 15. The Capital/Financial Account <ul><li>The Capital Account of the balance of payments measures all international economic transactions of financial assets. It is divided into two components: </li></ul><ul><ul><li>The Capital Account </li></ul></ul><ul><ul><li>The Financial Account </li></ul></ul><ul><li>The Capital Account is minor (in magnitude), while the Financial Account is significant. </li></ul>Source: Eiteman/Pearson
    16. 16. The Financial Account <ul><li>Financial assets can be classified in a number of different ways including the length of the life of the asset (maturity) and the nature and source of the ownership (public or private). </li></ul><ul><li>The Financial Account, however, uses a third method. This focuses on the degree of investor control over the assets or operations. </li></ul>
    17. 17. <ul><li>The Financial Account consists of three components: </li></ul><ul><ul><li>Direct Investment – in which the investor exerts some explicit degree of control over the assets </li></ul></ul><ul><ul><li>Portfolio Investment – in which the investor has no control over the assets nor any participation in the management </li></ul></ul><ul><ul><li>Other Investment – consists of various short-term and long-term trade credits, cross-border loans, currency deposits, bank deposits and other capital flows related to cross-border trade </li></ul></ul>
    18. 18. Sources of external financing <ul><li>Official bilateral + multilateral </li></ul><ul><li>Paris Club (government to government credits) </li></ul><ul><li>Export insurance credit agencies (Eximbanks) </li></ul><ul><li>IFIs </li></ul><ul><li>RDBs </li></ul><ul><li>Private </li></ul><ul><li>FDI </li></ul><ul><li>Portfolio Investment </li></ul><ul><li>London Club (International bank loans; company-to-company bank loans ) </li></ul><ul><li>Working capital lines </li></ul><ul><li>Shortterm Trade credits </li></ul><ul><li>Bonds & International debt securities </li></ul>
    19. 19. Developing countries that have relied less on foreign capital have grown faster! (IMF/03-2007)
    20. 20. Where do capital flows go ?
    21. 21. Who finances whom? Current account balances of OECD (30) and EMCs (160) US$ billion Source: IIF, IMF-WEO 2009
    22. 22. EMCs shrinking current account surpluses
    23. 23. Net external capital sources for EMCs IIF/IMF US$ billion
    24. 24. Private flows & FDI are a key source of growth financing for EMCs Source: IIF-2009
    25. 25. Net Private Capital Flows to E MCs (Equity, FDI, Portfolio, Banks + non-banks) Billion of US$ Source: IIF/IMF
    26. 26. Net FDI and portfolio capital flows to EMCs US$ billion Source: IMF/IIF
    27. 27. <ul><li>1. Direct investment and portfolio investment </li></ul><ul><li>The difference between direct investment and portfolio investment resolves around whether or not the investor intends to take an active role in the management of the enterprise whose assets are being acquired. </li></ul><ul><li>When the investor’s purpose is to have an effective voice in the management of the foreign enterprise, it is considered as a direct investment. Examples : </li></ul><ul><li>Bonds, debentures and the like are portfolio investments in so far as they confer no management or voting rights on their owners (ST and relatively volatile investment) </li></ul><ul><li>Foreign branches, wholly owned subsidiaries and joint ventures are clearly direct investments (depending on percentage!) </li></ul>
    28. 28. What is FDI? <ul><li>Foreign direct investment = purchase of real assets abroad for the purpose of acquiring a lasting interest in an enterprise and exerting a degree of influence on that enterprise’s operations. </li></ul><ul><li>Greenfield investment : new investment in a physical structure in an area where no corporate facilities previously existed (complete ownership and therefore full control over management) </li></ul><ul><li>Strategic partnerships : formal alliance (joint venture, licensing agreement, distributorship, or agency contract) between two enterprises, with mutual participation in certain activities (advertising, branding, product development, etc.). </li></ul><ul><li>Mergers and acquisitions : two or more companies decide to pool their assets to form a single new company. Hence, one of the previously existing companies ceases to exist. An acquisition does not necessarily constitute a merger if the preexisting companies continue to exist. </li></ul>
    29. 29. FDI’s Benefits and challenges <ul><li>Currency appreciation </li></ul><ul><li>Reduced  scope for independent macroeconomic policy actions </li></ul><ul><li>Greater exposure to external shocks </li></ul><ul><li>Demands for protection in local markets </li></ul><ul><li>Lesser control of foreign owned domestic industry </li></ul><ul><li>Disruption of national capital markets, asset inflation </li></ul><ul><li>Risk of rising volatility in financial and exchange markets </li></ul><ul><li>Additional resources available for  productive investment </li></ul><ul><li>Risk sharing with the rest of the world (equity) </li></ul><ul><li>Greater external market discipline on macroeconomic policy </li></ul><ul><li>Greater exploitation of comparative economic advantages </li></ul><ul><li>Enhanced access to technology, information, ideas and management skills </li></ul><ul><li>Broader access to export markets through foreign partners </li></ul><ul><li>Training and  broader exposure of national staff </li></ul><ul><li>Greater liquidity to meet domestic financing needs </li></ul><ul><li>Broadening and deepening of national capital markets </li></ul><ul><li>Improvement of financial sector skills </li></ul>Challenges Benefits
    30. 30. Source: US GAO 02/2008
    31. 31. FDI Flows worldwide in % of total volume Source: CNUCED/2007 Total= $1833 billion * IDE In = $81 billion, et IDE Out= $115 billion (OCDE et BDF) France= $81 billion* (7,1% of total)
    32. 32. Total FDI inflows in US$ trillion Post-2003 bounceback has been driven by OECD markets. FDI flows to EMCs will remain buoyant in 2007-10, averaging over US$400bn per year, but growth rates will be modest as privatisation tails off and the global economy slows.
    33. 33. OECD* (65%) EMCs (35%) ASIA (50%) LATIN AMERICA (25%) GLOBAL ECONOMY EMCs LATIN AMERICA MEXICO (15%) CHILE (10%) PERU (4%) CHINA (36%) ASIA GLOBAL FDI FLOWS 2008 = $1500 billion Source: IIF, OECD/UNCTAD $92 billion * 30 countries - Mexico
    34. 34. 30 most attractive Emerging markets for FDI <ul><li>India </li></ul><ul><li>Russia </li></ul><ul><li>Vietnam </li></ul><ul><li>Ukraine </li></ul><ul><li>China </li></ul><ul><li>Chile </li></ul><ul><li>Latvia </li></ul><ul><li>Slovenia </li></ul><ul><li>Croacia </li></ul><ul><li>Turkey </li></ul><ul><li>Tunisia </li></ul><ul><li>Thailand </li></ul><ul><li>Korea </li></ul><ul><li>Malaysia </li></ul><ul><li>Macedonia </li></ul><ul><li>UAE </li></ul><ul><li>Arabia Saudita </li></ul><ul><li>Slovakia </li></ul><ul><li>México </li></ul><ul><li>Egypt </li></ul><ul><li>Bulgaria </li></ul><ul><li>Rumania </li></ul><ul><li>Hungary </li></ul><ul><li>Taiwan </li></ul><ul><li>Bosnia </li></ul><ul><li>Lituania </li></ul><ul><li>Brasil </li></ul><ul><li>Morroco </li></ul><ul><li>Colombia </li></ul><ul><li>Kazajstan </li></ul>Σ Economic + Political risk Market potential AT Kearney GRDI
    35. 35. TOP 25 Global Confidence Index AT Kearney 2007
    36. 36. Most attractive emerging markets High Risk Lows Risk
    37. 37. China: FDI Flows In billions of US$ Source: OECD
    38. 38. Financial self-sustaining process = high saving rate, stronger banking sector= < dependance on external capital flows Source: OCDE
    39. 39. FDI Flows in Vietnam (BOP source) In millions of US$, actual disbursed as of 08 Source: IMF Jan-April 09: VN attracts US$6,35 billion in registered FDI, down 17% compared to 08, mostly in services.
    40. 40. Overview of FDI in Vietnam <ul><li>Opening of the Vietnamese economy to FDI in 1987, fast growth of the 1990s, rapid increase in FDI inflows 1988-1996, drop in the 1997-98 Asian crisis, rise since 2004, WTO since 2007. </li></ul>
    41. 41. Main sources of FDI in Vietnam <ul><li>WHO? </li></ul><ul><li>USA </li></ul><ul><li>South Korea </li></ul><ul><li>Hongkong </li></ul><ul><li>UK </li></ul><ul><li>Taiwan </li></ul><ul><li>Singapore </li></ul><ul><li>Japan </li></ul><ul><li>France </li></ul><ul><li>Netherlands </li></ul><ul><li>Malaysia </li></ul><ul><li>WHERE? </li></ul><ul><li>Sectors </li></ul><ul><li>Industry </li></ul><ul><li>Real estate </li></ul><ul><li>Oil </li></ul><ul><li>Mining </li></ul><ul><li>Tourism </li></ul>60%
    42. 42. FDI in Vietnam by Sector
    43. 43. TOP 10 INVESTOR NATIONS IN VIETNAM
    44. 44. Contribution of FDI to Vietnam’s Economy <ul><li>FDI companies contribute 13.3 % to GDP, 23% to export, 25% to state budget revenues. </li></ul><ul><li>However, FDI attracted into Vietnam is by regional standards still modest </li></ul><ul><li>FDI-driven employment: 750,000 workers </li></ul><ul><li>Registered FDI in 2007= $20 billion </li></ul><ul><li>First 4 months 2008= $7,6 billion (∆ 42%) and disbursed FDI= $4,1 billion (∆ 26%) </li></ul><ul><li>First 4 months 2009: $6,35 billion (down 17%) </li></ul>
    45. 45. France: FDI Flows In & Out Ratio OUT/IN= 1,8 Source: FMI & OCDE 2008
    46. 46. Outsourcing and job losses in Europe Source: European Fondation for the improvement of living and working conditions/2006
    47. 47. Outsourcing and sectoral job losses in Europe Source: European Restructuring Monitor/2006
    48. 48. Offshoring and job losses in Europe
    49. 49. <ul><li>2. Other capital is a residual category that groups all the capital transactions that have not been included in direct investment, portfolio investment end reserves. </li></ul><ul><li>Two categories: </li></ul><ul><li># Long-term capital </li></ul><ul><li># Short-term capital </li></ul><ul><li>Non-negotiable instruments > 1 year or more such as London Club bank loans and mortgages, syndicated credits, euroloans... </li></ul><ul><li>* Financial assets < 1 year, such as currency, deposits and bills, interbank credit lines, trade credits… (Source: BIS) </li></ul>
    50. 50. Gross private capital flows to LACs
    51. 51. <ul><li>3. Change in reserves </li></ul><ul><li>Reserves include: </li></ul><ul><li>Hard currency assets + Monetary gold (gold held by the authorities as a financial asset) </li></ul><ul><li>Special drawing rights (SDRs): reserves created by IMF as book-keeping entries and credited to the accounts of IMF member countries according to quotas </li></ul><ul><li>Reserve position in the Fund: (member’s quota + other claims on the Fund) </li></ul>
    52. 52. <ul><li>Foreign Exchange Reserves </li></ul><ul><li>The largest component of total international liquidity. It includes monetary authorities’ claims on non-residents in the form of bank deposits, treasury bills, short-term and long-term government securities, and other claims usable in the event of balance of payments need, including non-marketable claims from inter-central bank and intergovernmental arrangements, without regard as to whether the claim is denominated in the currency of the debtors or the creditors. </li></ul><ul><li>A + sign in the BOP means a financing flow in the capital account, i.e., a decrease in the stock of reserves ! </li></ul>
    53. 53. Vietnam’s foreign exchange reserves
    54. 54. China’s rising official reserve assets US$ billion Source: IMF 2006/IIF
    55. 55. <ul><li>4. Counterpart items: offsetting amounts </li></ul><ul><li>Counterparts items are analogous to unrequited transfers in the current account. </li></ul><ul><li>They arise because of the double entry system in balance of payments accounting and refer to adjustments in reserves owing to monetization of gold, allocation or cancellation of SDRs and revaluation of the various components of total reserves. </li></ul><ul><li>These BOP items do not stem from international transactions. </li></ul>
    56. 56. <ul><li>5. Net errors and omissions </li></ul><ul><li>Statistical difficulties involved in gathering balance of payments data (and capital flight!). </li></ul><ul><li>Other sources of E&Os: </li></ul><ul><li>leads and lags in trade flows, underinvoicing of exports and overinvoicing of imports, undeclared short-term capital movements… </li></ul>
    57. 57. Net errors and omissions ? <ul><li>An examination of the size and direction of NE&Os may shed some light on the accuracy of BoP estimates. The adoption of the double entry accounting system means that the net sum of all credit and debit entries should equal zero. </li></ul><ul><li>In practice, any discrepancies are recorded in NE&Os, reflecting the net effect of differences in coverage, timing and valuation. An amount > 5% of the gross sum of merchandise exports and imports is a source of concern! </li></ul>
    58. 58. In millions of US$ Source: IIF
    59. 59. Vietnam’s errors & omissions in US$ million
    60. 60. Russia: Net Errors & Omissions US$ billion Source: IMF-IFS/IIF
    61. 61. Peru and Capital flight
    62. 62. 6. Exceptional Financing <ul><li>IMF Drawings </li></ul><ul><li>World Bank’s HIPC Initiative </li></ul><ul><li>London Club debt reduction and restructuring workouts </li></ul><ul><li>Paris Club debt relief </li></ul><ul><li>Debt swap transactions </li></ul>
    63. 63. IMF Disbursements and Repayments In SDR million Credits Repayments
    64. 64. Total IMF Credit Outstanding for all Members
    65. 65. Risk Management and BOP Analysis + Export of goods f.o.b. - Imports of goods f.o.b. = Trade balance +/- Exports/Imports of non-financial services + /- Investment income/expenditures (credit/debit) + (-) Private/Official unrequited transfers = Current account balance +/- FDI +/- Portfolio capital Flows + LT Capital Inflows - Debt Servicing Payments +/- ST Capital Flows Reserve Variation
    66. 66. External Finance Analysis: The dual face of Country Risk <ul><ul><li>Liquidity Risk </li></ul></ul><ul><li>Debt Service Ratio : </li></ul><ul><li>(P+I/X) </li></ul><ul><li>Interest Ratio (I/X) </li></ul><ul><li>Current account/GDP </li></ul><ul><li>Reserve/Import R/M/12 ratio ( 12 -in months ) </li></ul><ul><li>Elasticity of exports </li></ul><ul><li>Growth rate of exports/ Average external interest rate </li></ul><ul><li>Solvency Risk </li></ul><ul><li>(ability to pay one's debts) </li></ul><ul><li>Debt/Export ratio </li></ul><ul><li>Debt/GDP ratio </li></ul><ul><li>Debt/Reserves </li></ul><ul><li>ST Debt/Reserves </li></ul>
    67. 67. Liquidity and Solvency Thresholds <ul><li>Stock variable </li></ul><ul><li>Solvency = Debt/GDP < 100% (should always less than 100%) </li></ul><ul><li>Debt/Exports < 150% (should always less than 150%) </li></ul><ul><li>Reserves/months of Imports > 6 months </li></ul><ul><li>Flow variable </li></ul><ul><li>Liquidity = Debt Service ratio < 33% of X Interest/X ratio < 25% </li></ul>
    68. 68. US Payments statistics: the basic balance <ul><li>Basic balance = balance on current account and long-term capital </li></ul><ul><li>It puts “below the line” changes in reserves and all short-term capital movements (including errors & omissions). It stresses the importance of demand management policies affecting net international transactions in goods and services </li></ul>
    69. 69. US International Investment Position <ul><li>US-owned assets abroad: $6473 </li></ul><ul><li>US government assets: $244 (official reserves) </li></ul><ul><li>US private assets: $6229 </li></ul><ul><li>FDI: $2302 </li></ul><ul><li>Foreign securities: $1847 </li></ul><ul><li>Non-bank claims: $891 </li></ul><ul><li>US Bank claims: $1455 </li></ul><ul><li>Foreign-owned assets in the US: $9079 </li></ul><ul><li>Foreign official assets: $1133 </li></ul><ul><li>FDI: $2007 </li></ul><ul><li>US Treasury securities: $504 </li></ul><ul><li>Corporate bonds: $1690 </li></ul><ul><li>Corporate stocks: $1170 </li></ul><ul><li>US currency: $297 </li></ul><ul><li>US bank liabilities: $1407 </li></ul>
    70. 70. Net US external investment position in US$ billion Source: IMF-2009 International assets-International Liabilities
    71. 71. Net US external investment position in US$ billion <ul><li>FRB of NY: Current issues in economics and finance, December 2005, N°12: </li></ul><ul><li>End-2004: - 2500 billion, or 22% of GDP, but the US earned US$36 billion more on its foreign assets than it paid out to service its foreign liabilities! </li></ul><ul><li>Despite the surge in net liabilities, investment income has remained positive, largely because US MNCs earn a higher rate of return than do foreign firms operating in the US. The continuing buildup in liabilities, however, will push the US income balance negative , hence boosting the CAD! </li></ul>
    72. 72. The History of the U.S. Balance of Payments Stage I : The U.S. is a young debtor nation (1770-1870) -Current account deficit due to the need to import most goods and inability to produce many goods for export. -Capital account surplus due to a great deal of foreign investment in the U.S. in the areas of roads, farming, cattle ranches, railroads, and canals. Stage II : The U.S. is a mature debtor nation (1870-1920) - Current account deficit due to large investment income being paid back to foreign investors based on the investment of stage I. Merchandise account in surplus -- exports > imports. Stage III : The U.S. is a young creditor nation (1920-1945) -Huge surplus in the current account due to large volume of postwar (WWI) exports. -Capital account in deficit due to a great deal of U.S. investment in Europe for postwar reconstruction. Source: http://www.digitaleconomist.com/bop_4020.html
    73. 73. Stage IV : The U.S. is a mature creditor nation (1945-1980) -Merchandise deficit -- exports < imports but an investment income surplus with a slight net surplus overall. -Capital account is in deficit largely due to postwar (WW II) reconstruction in Europe and Japan. Stage V : (1980- ) -Large (and growing) deficit in the merchandise accounts (Trade Deficit) and slight surplus in the investment income accounts. -Large surplus in the capital account partially to finance the above merchandise deficit (foreign individuals and banks lending money to individuals in the U.S.) Additionally, since the U.S. has had a low inflation rate since 1982 and consistent economic growth , the U.S. has been a good place to invest relative to the rest of the world. However the current inflow of capital investment could eventually lead to large investment income payments in the near future. The investment income surplus may soon be eroded thus worsening the current account deficit.

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