The flow-oriented balance of payments statistics are closely related to the stock-oriented statistics on the international investment position. In combination, these two sets of statistics provide for a coherent recording of the transactions and positions of an economy vis-à-vis the rest of the world.
The international investment position is a statistical statement that shows at a certain point in time the value and composition of the stock of financial assets and liabilities of an economy vis-à-vis non-residents as well as the drivers of changes since the previous period.
38 The BPM6 classifies debt securities by their original maturity.
39 Since the amendment of 2000, financial derivatives have constituted a separate category in the balance of payments statistics. When the BPM5 was introduced, derivatives were included in the category of portfolio investments as a sub-group.
40 The financial crisis in Mexico and in Asia in the 1990s highlighted the fact that the definition of international reserve assets in the balance of payments statistics did not necessarily express the actual intervention potential monetary authorities had in the event of a financial crisis. In order to assess the actual liquidity position, additional information was needed, for instance on the value of derivative and forward positions, the stock of guarantees undertaken and other contingent liabilities (most of which are off-balance-sheet under the applicable accounting principles) Furthermore, information on the stock of short-term debt to the rest of the world by remaining maturity rather than by original maturity, on debt denominated in the national currency but tied to another currency etc. would have been required but could not be obtained from the standard balance of payments statistics. In 1996, after the Mexican crisis, the IMF elaborated a Special Data Dissemination Standard − SDDS in order to provide investors and the general public with reliable and up-to-date information on the most essential economic and financial statistics (GDP, consumer and producer price indices, monetary aggregates, balance of payments, international reserve assets etc., totalling 18 categories by now) of the economies active in the capital and money markets. Within the SDDS, separate reporting was introduced on international reserve assets and external debt. Based on the information collected and published on the statistical methodology and national practice of the various countries, anyone may assess the reliability of the published statistics. For further details of the SDDS, see http://dsbb.imf.org/Applications/web/sddshome/.
In the BPM6 reserve related liabilities must be disclosed as a memo item and the breakdown of certain positions by remaining maturity must be provided as supplementary information.
The difference between the two sides of the balance sheet, i.e. assets and liabilities, is an economy’s net external position (net assets or liabilities), which equals the country’s net worth originating in financial investments vis-à-vis the rest of the world. Calculated on the asset and liability side without equity securities, equity investment and financial derivatives, this difference yields the net international creditor or debtor position.
In economic terms, liabilities and debt are not synonymous. According to the generally accepted definition41, gross external debt comprises those debts of a country’s residents to another country’s residents that involve a repayment obligation (with or without the payment of interest) or, conversely, a interest payment obligation (with or without principal payment).
Based on this definition, direct investments in the form of equity (share, equity capital, reinvested earnings etc.) do not qualify as debt. Similarly, portfolio investments in equity securities also represent non-debt financing. That is because equity participation entails no repayment or interest payment obligation. Based on the definition, financial derivatives are not considered debt because at their inception there is no transfer of funds related to the instruments that would need to be repaid at a later date (no repayment obligation), and no interest accrues on them. The purpose of financial derivatives is not to provide funding to economic entities but to facilitate risk management and risk trading. Financing with financial instruments related to various types of equity and transactions with financial derivatives do not add to the country’s net external debt, therefore they are referred to as non-debt creating financing.42
Between two points in time, changes in the stock are driven by (1) transactions shown in the financial account of the balance of payments, (2) revaluation (exchange rate changes, price changes) and (3) other changes in stock (e.g., write-offs).
The structure of the international investment position by financial instrument is identical with the structure of the balance of payments financial account and it corresponds to the investment income categories of the current account.43 This serves the reconciliation of flow and stock data and the consistent accounting for earnings related to the various investment categories.
In the IIP, signs correspond to the effect on the stock: entries increasing the value of the stock are recorded with a “+” sign, entries decreasing the value of the stock, with a “−” sign, irrespective of the stock being assets or liabilities.
As positions have to be valued at market prices and exchange rates effective on the reference dates and then converted into the currency of compilation, the stock values calculated for the two different dates will differ on account of valuation changes even if no transactions have been performed in between. The value of stocks, however, may vary for reasons other than transactions or revaluation, including debt write-offs.44 The reclassification of certain items from one group to another to assure compliance with changed classification criteria also triggers other changes in stock. This occurs, for instance, when the 10 per cent threshold between direct investment and portfolio equity investments is exceeded. If an investor who was below this threshold in the previous period makes additional investments and exceeds the limit in the next period, the transaction carried out in the reference period is shown among direct investments in the financial account (although no retrospective adjustment is required in the financial account), whereas in the IIP, the amount recorded as portfolio investment in the preceding period must be reclassified as direct investment. Such reclassifications must be recorded among other changes in stock.
41 External Debt Statistics: Guide for Compilers and Users, IMF 2003: http://www.imf.org/external/np/sta/ed/guide.htm (p.7) (External Debt Guide).
42 Financial assets and financial liabilities in the statistical sense are significantly different from the corresponding accounting terms because in the accounting sense, direct investment instruments (direct investments on the asset side and own funds on the liability side) are not part of financial assets and financial liabilities. There is no contractual payment obligation attached to the ownership of such instruments, unlike in the case of loans or other debt instruments such as bonds.
43 With the exception of the separate presentation of income on reserve assets, which is introduced as a supplementary item only in the BPM6.
44 A write-off is the creditor’s unilateral act and as such it should not be confused with debt forgiveness, which is based on a mutual arrangement between the debtor and the creditor as discussed in the section on capital transfers.
Chart 6
Standard components of the international investment position
* Because direct investment is classified primarily on a directional basis, sub-items do not strictly conform to the overall headings of assets and liabilities. 1.5.3. Reserve position in the Fund 1.5.4. Foreign exchange