nEt fInAnCIAl worth AnD nEt lEnDIng/nEt borrowIng
As opposed to net worth, net financial worth is derived by disregarding the non-financial assets, only from the difference between net financial assets and liabilities.
In the case of non-financial corporations, net financial worth is typically negative (see Chart 3-25), the stock of liabilities significantly exceeds that of financial assets, as the funds raised for financing non-financial assets are of financial character, while non-financial assets are outside of the scope of financial account statistics.
The nominal value of net financial worth declined
The changes in the net financial worth from transactions is called in statistics net lending (+) or net borrowing (-). Non-financial corporations have typically net borrowing (Chart 3-26), as their investments are not covered by their profits, therefore they rely on external funds on lending by other sectors. The net borrowing of the sector was the highest at the end of the nineties, and in 2000. During the period of economic growth the boom of investments (gross fixed asset accumulation) induced the companies to raise significant financing resources. However, the deterioration of economic prospects at the beginning of two-thousand deterred
Chart 3-25
net financial worth of non-financial corporations nominally and as the percentage of the gDP
–200
Net financial worth (left-hand scale)
Net financial worth in per cent of GDP (right-hand scale) Sources: MNB.
Chart 3-26
Changes in net borrowing and investments of non-financial corporations as the percentage of the gDP
–5
* Consolidated data excluding the items of non-financial corporations between one another
** Value of gross accumulation of fixed assets according to national accounts
Sources: MNB, HCSO.
investments. Hereby, the pace of raising external funds slowed considerably, the increase of liabilities from transactions lessened and settled at a lower level. At the same time, the increase of financial assets from transactions did not change to the same extent, as companies invested the sources freed due to the investments not taken place in financial assets. As a consequence of the financial crisis broken out in 2008 the companies’ sources ceased flowing, the willingness to investment reached historical low levels. As a result, in 2009, non-financial companies became net savers.
In the years of the recession following the crisis, non-financial companies were characterised by balance sheet adjustments, the changes in financial assets and liabilities stemming from transactions remained around zero. year 2013 brought a change. Raising financial sources began, which flow rather in financial assets instead of targeting the launch of investments, thus, at the end of 2014 non-financial corporations were still net savers.
AssEts AnD lIAbIlItIEs struCturE
Gaining ground of the financial functions of non-financial companies is well observable in the breakdown of assets of companies by types (Chart 3-27). Financial assets have an increasing large share in the assets of the sector. While in 1995 non-financial assets composed nearly three fourth, 72 percent of the assets of non-financial companies, this ratio is today only 56 percent. The decline of the share of non-financial assets is mainly attributable to the vast growth of the stock of loans and equity and investment fund shares, which can be considered as the main instruments of inter-company financing. The share of loans in assets grew from 2 percent to 10 percent, while that of equity and investment fund shares from 6 percent to 15 percent in the period surveyed. However, no change is visible in the share of financial assets ensuring liquidity (5-6 percent), and in the share of other receivables21 typical of non-financial corporations (13-15 percent). The share of securities representing market investments reduced nearly to zero from the previous 2 percent. The stock of insurance, pension and standardized guarantee schemes and financial derivatives is insignificant along the entire time series.
The spreading of financial functions of non-financial corporations, gaining ground of loans and equity among assets is clearly connected to the strengthening
of inter-company relations, where the importance of both the ownership relations and lending relations is steadily increasing among non-financial corporations.
The share of participation of non-financial corporations in other resident non-financial corporations grew from 6 percent to 9 percent within the assets, while the stock of loans lent to resident companies totalled to 7 percent in 2013, whereas resident inter-company lending was not at all characteristic in the mind-nineties. In the past decade a number of groups of companies were founded or developed where part of the companies pursue asset management of group financing activities by rendering management and other services. Despite that the structure of balance sheet of such companies resemble much that of financial companies, they are to be considered as non-financial corporations, as the collective activity of the
Chart 3-27
structure of assets of non-financial corporations (non-consolidated data)
Per cent Per cent
Loans
Other accounts receivable – IC*
Other accounts receivable Financial derivatives
Insurance, pension and stand. guar. schemes Equity and investment fund shares – IC*
Equity and investment fund shares Loans – IC*
* IC: inter-company, i.e. assets vis-à-vis non-financial companies within the sector
Sources: MNB, HCSO.
21 other receivables are associated with receivables from customers and services rendered, and with items not yet received, financially not yet settled and with tax type receivables, paid advances.
group of companies is directed at the production of goods and non-financial services.
In the case of non-financial companies, on the liabilities side of the balance sheet (Chart 3-28) majority of liabilities is made up of loans and shares and other equity. Initially, in the liabilities shares and other equity
were dominant, and then the weight shifted gradually towards loans, especially in the period between 2003 and 2009. After 2009, as the consequence of the financial crisis, the dynamic growth of the stock of drawn loans halted. However, the strengthening of inter-company relations is most striking on the sources side related to the instrument of loans. overall, the share of shares and other equity within the liabilities declined from 57 percent to 49 percent, and that of loans grew from 20 percent to 33 percent. Meanwhile, the stock of debt securities (1-2 percent) and that of other liabilities (17-22 percent) hardly changed during the period surveyed. The low value of the stock of debt securities can be attributed to the fact that securities financing is not characteristic of Hungarian non-financial corporations. The stock of financial derivative is also insignificant. It is evident that non-financial companies have no non-financial assets at all on the sources side, as placement of deposit is possible only at specialised financial institutions. The value of insurance, pension and standardized guarantee schemes is also zero for Hungarian non-financial corporations, namely, pension schemes operated at corporate basis are not typical in Hungary.
tyPICAl forMs of CorPorAtE fInAnCIng
Clear conclusions as to the typical financing form of an economic sector cannot be drawn from the changes to the stock of liabilities. The stocks of different instruments are namely influenced by the effect of revaluations (price and rate changes) to various degrees. Based on the structure of sources, the most Chart 3-28
Changes to the structure of sources of non-financial corporations
100 Per cent Per cent
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Debt securities Loans Loans – IC*
Equity and investment fund shares Equity and investment fund shares – IC*
Financial derivatives Other accounts payable Other accounts payable – IC*
* IC: inter-company, i.e. liabilities vis-à-vis non-financial companies within the sector
Sources: MNB.
Chart 3-29
transaction data and revaluation data on loans taken and shares issued by non-financial corporations as a percentage of the gDP
typical form of financing non-financial corporations is apparently made from own sources, shares and other equity followed by raising external funds in the form of loans. By examining the component of the changes in stock, different conclusion can be drawn (Chart 3-29). Non-financial corporations funded their activities mostly through borrowing, i.e. transaction values are higher in the case of loans, shares and other equity are only dominant in the sources as a result of major positive revaluations typical for them.
From 2000 until 2009 transactions observable on loan instruments were well in excess of the transaction of shares. In these years, net borrowing was on average around 10 percent of the GDP, while the issue of share totalled to only 4 percent of the GDP. In 2010 this trend reversed and the transactions of shares and other equity exceeded each year the value of loan transactions. In the balance sheet adjustment period following the financial crisis, tightening was observable both on the loan supply and loan demand side. Non-financial corporations started to build down their debts. They held back their investments, reduced dramatically their material and personal expenditures, and spent the thus freed sources on the repayment of loans. This was most striking in 2010, where the value of net transactions of loans dropped to historical low level and amounted to only -4 percent of the GDP.
Previously there was no example of negative annual transaction value in the Hungarian financial account statistics, which can happen if the amount of loan repayments exceeds that of borrowing. Although from 2012 the value of loan transactions was positive, it is still below the level of previous years, amounting only to 2-4 percent of the GDP.
As opposed to loans, not the foreign exchange rates are the one that typically influence the transaction and revaluation data on equity (shares and other equity), but the changes to the market value of equity22. In the case of unlisted companies there is no active market, which could provide information on the market value of shares issued by them, therefore, in their case stock data on equity and the components of the changes in stock can be estimated by using the value of shareholders’ equity including the approved dividend.
In the case of equity, there is a transaction balance if equity is issued or withdrawn, and the value of these does not offset one another during a specific period. on the other hand, revaluation has different content for the two types of equity. In the case of quoted shares the revaluation reflects the changes in the actual market prices, i.e. the amount by which they worth more or less on the market compared to the previous period. However, in case of unquoted shares revaluation is established based on the remainder principle, and is influenced by mainly two factors. Revaluation is induced on the one hand by the profit generated by the corporations and left by the shareholders in the corporations, and on the other hand by the payment of dividend.
The value of net transactions for quoted companies is minor (Chart 3-30) as the result of the low number of companies. In contrast, the revaluation accounted on the shares issued by quoted companies is rather significant, it is as high as the value of revaluations accounted for unquoted companies. In the case of unquoted shares the value of net transactions is continuously positive, i.e. the value of capital
22 If a company keeps its books in a currency other than forint, the changes in the foreign exchange rate certainly influence equity, but only insignificantly.
Chart 3-30
transactions and revaluations of quoted and unquoted shares issued by non-financial companies as the percentage of the gDP
Transaction of unlisted shares and other equity
Revaluation of unlisted shares and other equity
Sources: MNB.
investments was always higher than that of disinvestments, and the number of newly established companies was higher than that of discontinuing companies. The investment willingness of holder sectors was the highest between 1997 and 1998 where the value of net transactions approximated 10 percent of the GDP. Following the crisis in 2008 transactions dropped significantly, and have not reached since then the level observed at the end of the 1990s and at the beginning of the 2000s. The outstanding value of 2011 was due to only a one-off transaction.