Chapter

XIII. The International Investment Position

Author(s):
International Monetary Fund
Published Date:
April 1996
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680. The IIP statement shows, at a particular point, the stock of an economy’s external financial assets and liabilities. An economy’s external financial assets consist of claims on nonresidents and of monetary gold and SDRs held by the monetary authorities. The difference between an economy’s financial assets and liabilities is the economy’s net international investment position. When financial liabilities exceed financial assets, an economy has a negative net international investment position.

681. In concept, an IIP statement is similar to a balance sheet, which shows the assets, liabilities, and net worth of an economic unit at a particular point. However, there is an important difference between an economy’s net international investment position and an economy’s net worth. An economy’s holdings of nonfinancial assets, which are not measured in the international investment position, are also included in the calculation of an economy’s net worth. For most economies, the value of nonfinancial assets far exceeds the value of claims on nonresidents (plus SDRs and monetary gold).

682. There is a close relationship between the international investment position and the balance of payments. The BOP financial account measures an economy’s transactions in external financial assets and liabilities. Obviously, these transactions have an impact on the stock of external financial assets and liabilities measured in the international investment position. However, over time, there are other factors (such as price changes) that also cause changes in stock values; the impact of these other factors is also reflected in the international investment position.

683. The international investment position is also closely related to the investment income component of the BOP current account. Investment income consists of income accruing on external financial assets and liabilities. If all other things are equal, the greater the stock of external financial assets and liabilities, the greater the investment income accruing on these financial assets and liabilities.31

684. There is also an indirect relationship between the BOP current account and the international investment position. Because of the double entry nature of the balance of payments, the current account balance must be offset by an equivalent balance (with opposite sign) in the capital and financial account. 32 As the financial account impacts directly upon the international investment position, to the extent that the financial account offsets the current account balance, the current account indirectly affects the international investment position. These aspects of the relationship between the international investment position and the balance of payments are explored in further detail in paragraphs 690–702.

Balance Sheets and the International Investment Position

685. A balance sheet shows, at a particular point, an economic unit’s assets, nonequity liabilities, and net worth. Net worth is equal to the difference between assets and nonequity liabilities. The net worth of an enterprise consists of enterprise assets attributable to the owners.

686. In theory, a balance sheet exists for all economic units—that is, the government, enterprises, and households—within an economy. As shown in illustration 13.1, a balance sheet can be divided into components and sub-components. Assets can be split into real and financial assets; the latter can be divided into claims on residents and claims on nonresidents. Nonequity liabilities can be classified as liabilities to residents and liabilities to nonresidents. The net worth (which is also called equity) of an enterprise can be divided into net worth attributable to resident owners and net worth attributable to nonresident owners.

Illustration 13.1Components of a Balance Sheet
AssetsLiabilities
A.1 Real assets (e.g., land, machinery, consumer durables, inventories)L.1 Nonequity liabilities to residents
L.2 Nonequity liabilities to nonresidents
A.2 Financial assetsNet worth
A.21 Claims on residents in the form of equityN.1 Net worth of enterprises attributable to resident owners
A.22 Other claims on residentsN.2 Net worth of enterprise attributable to nonresident owners
A.23 Claims on nonresidents, SDRs, and monetary goldN.3 Net worth of households and government

687. If balance sheets could be prepared for all economic units within an economy, a balance sheet could be derived for the economy as a whole. Such a derivation would involve two steps: (1) the summation of balance sheet items from all economic units and (2) consolidation. Consolidation results in the cancellation of offsetting assets and liabilities involving two resident counterparts. For example, a household has a deposit account with a resident bank. The account is shown as an asset on the household’s balance sheet and as a liability on the bank’s balance sheet. However, the assets and liabilities of the economy as a whole are not affected by this position. Therefore, this position can be eliminated from the balance sheet of the economy.

688. Consolidation, on an economy-wide basis, of the balance sheet entries shown in illustration 13.1 would eliminate the entries for A.21, N.1, A.22, and L.1. After consolidation, an economy’s balance sheet could contain the entries shown in illustration 13.2.

689. The entries denoted A.23 (financial assets—claims on nonresidents, SDRs, and monetary gold), L.2 (nonequity liabilities to nonresidents), and N.2 (net worth attributable to nonresident owners of enterprises) in illustration 13.2 are recorded in an economy’s international investment position. However, calculation of an economy’s net worth (entry N.3 in illustration 13.1) requires consideration of an economy’s real assets (entry A.1). In other words, an economy’s net worth is equal to its net international investment position plus its holdings of real assets.

The Relationship Between the International Investment Position and the Balance of Payments

690. The international investment position measures an economy’s stock of external financial assets and liabilities; the BOP financial account measures transactions in these assets and liabilities. Transactions in assets and liabilities also affect the stock of these assets and liabilities. For example, on January 1, an enterprise has $100 in a bank account and, on January 15, deposits (transaction) another $15. On January 31, the value (stock) of the enterprise bank account has obviously been affected by the transaction. In fact, as there are no other transactions and no other changes, the stock of financial assets at the end of January is equal to the stock of financial assets at the beginning of January plus the deposit transaction.

Illustration 13.2Consolidated Balance Sheet of an Economy
AssetsLiabilities
A.1 Real assets (e.g., land, machinery, consumer durables, inventories)L.2 Nonequity liabilities to nonresidents
A.23 Financial assets#x2014;claims on nonresidents, SDRs, and monetary goldNet worth

N.2 Net worth of enterprises attributable to nonresident owners

691. However, an enterprise may own an asset with a market price that changes on a day-to-day basis. For example, on January 1, an enterprise owns 10 shares in another corporation and, on that date, the stock market price of these shares is $10 per share. The value of enterprise holdings is therefore equal to $100 (10 x $10). During January, the enterprise does not purchase or sell any shares and, on January 31, the stock market price of the shares has increased to $12 per share. The value of enterprise holdings on January 31 is therefore $120 (10 x $12). In other words, a change attributable to price changes, which are not recorded in the balance of payments, occurred in the stock of financial assets. Therefore, an international investment position can, over time, change as a result of factors that are not reflected in the balance of payments.

692. Other non-transaction changes also occur. External financial assets or liabilities may be denominated in currencies other than the currency (the unit of account) in which the international investment position is prepared. Changes in the rates at which the other currencies and the unit of account are exchanged consequently affect the values of assets or liabilities. For example, Cromania compiles its international investment position in Cromanian dollars (C$) and on an annual basis. On December 15, 1993, a Cromanian bank borrows US$ 1,000 from a German bank. At the end of 1993, the C$/US$ exchange rate is C$ 1 = US$ 1. Therefore, the value of Cromania’s liability (measured in its international investment position in terms of Cromanian dollars) at the end of 1993 is C$ 1,000. There are no further transactions in 1994. At the end of 1994, Cromania’s exchange rate depreciates to C$ 1 = US $0.8, and the value of Cromania’s liability (in terms of C$) increases to C$ 1,250. Thus, the values shown in Cromania’s international investment position changed over time even though there were no transactions.

693. The foregoing example illustrates an important result. When the unit of account depreciates against the currency of denomination, the impact—in terms of the unit of account—of exchange rate changes will be positive. The corollary is that when the unit of account appreciates, the impact of exchange rate changes will be negative.

694. In addition to transactions, price changes, and exchange rate variations, other adjustments may have an impact on the level of an economy’s external financial assets and liabilities. These adjustments include the allocation or cancellation of SDRs, the monetization or demonetization of gold, reclassifications, write-offs, and measurement errors.

695. Even though monetary gold and SDRs are not claims on another party, by convention, these items represent financial assets. However, because monetary gold and SDRs do not represent claims, there are no transactions associated with the creation or extinguishment of these instruments.33 Nevertheless, the creation or extinguishment of these instruments does have an impact on the changes in values shown in IIP statements.

696. Reclassifications (typically resulting from changes in investment motivations of creditors) of assets and liabilities affect the composition of IIP statements. Such reclassifications are not considered transactions as there is no provision of economic values by one party to another. For example, an investor purchases, for $600, 6 percent of the shares of a nonresident enterprise. A week later, the investor purchases, for $500, another 5 percent of the shares of the same enterprise. The first transaction is classified as portfolio investment. The second transaction, which raised the investor’s shareholding above the 10 percent threshold, is classified as direct investment.34 The 6 percent of shares purchased in the first transaction is then reclassified from portfolio investment to direct investment as these shares now constitute part of the direct investment shareholding. The reclassification is not recorded in the balance of payments; it is a non-transaction adjustment that explains the change in IIP statements from one period to the next.

697. In addition, write-offs of bad debts are not considered BOP transactions. However, such writeoffs affect the values of financial assets and are reflected in non-transaction adjustments that explain changes in IIP statements from period to period.

698. In practice, measurement errors also have an impact on the reconciliation of statements. Such errors may arise from—for example—the use of different sources to measure stocks and transactions, reporting errors made by data providers, or sampling. If different samples are used to measure stocks and transactions, or if there are changes from period to period in samples used to measure stocks, the sample error present in any sample survey contributes to reconciliation errors. Although some measurement errors may be unavoidable, they should be kept to a minimum. Any significant, unexplained changes in IIP statements should be investigated and resolved.

Table 13.1Reconciliation of Essendonia’s IIP Statements
Changes in Position Reflecting:
ItemPosition as of December 31, 1994Transactions*Price ChangesExchange Rate ChangesOther AdjustmentsPosition as of December 31, 1995
Assets
Direct investment1,100+106+94+203+351,538
Portfolio investment850+328+78+162–351,383
Other investment2,320–1,345+384–131,346
Reserve assets1,640+32+107+322+722,173
Total+5,910–879+279+1,071+596,440
Liabilities
Direct investment3,104–158–45+95–162,980
Portfolio investment252+29+12+13+18324
Other investment2,445+866+242+73,560
Total5,801+737-33+350+96,864
Net International Investment Position**109-1,616+312+721+50-424

A positive sign denotes a net increase in assets or liabilities; a negative sign denotes a net decrease. This sign convention differs from that used in BOP statistics.

Assets minus liabilities

A positive sign denotes a net increase in assets or liabilities; a negative sign denotes a net decrease. This sign convention differs from that used in BOP statistics.

Assets minus liabilities

699. Period-to-period changes in a country’s international investment position can be explained in terms of BOP transactions, price changes, exchange rate changes, and other adjustments. To facilitate analysis of both the international investment position and the balance of payments, countries are encouraged to publish—at least for broad aggregates—tables showing the reconciliation of changes in the international investment position. An example is provided in table 13.1.

700. The international investment position is also closely related to the investment income component of the current account. This component measures income accruing on an economy’s external financial assets and liabilities. The relationship between stocks and income is often expressed in terms of yields, which—in simple form—can be determined by expressing income as a percentage of the average stock of investment to which that income relates. The higher the yield, the greater the rate of return on an investment. Yields are affected by many factors, including (in the case of dividends and other types of income in the form of profits) the profitability of the enterprise in which an investment is made, the general level of interest rates pertaining to the currency in which the investment is denominated, and the riskiness of the investment. The yield on a particular investment may change over time—as a result of changes in the market value of the investment or in the income accruing on the investment—or the yield may remain fixed. The yield remains fixed (1) when the market value of an investment is not subject to price changes (as is typically the case with instruments like deposits and loans) and the income is fixed or (2) when relative changes in the value of an investment and the income on the investment are the same.

701. Because of the important relationship between stocks recorded in the international investment position and investment income, analysis of the international investment position and the balance of payments is often enhanced by presenting these two sets of statistics together. For example, table 13.1 could be usefully augmented by the addition, on the right-hand side of the table, of a column listing the investment income accrued on Essendonia’s external financial assets and liabilities during 1995.

Illustration 13.3
StocksValuation Changes*
Beginning

of Period
End of

Period
ChangeTransactions*TotalPriceExchange

Rate
In millions of £stg.10.0011.20+ 1.20–2.40+3.60+3.60
Exchange rate1.71.61.751.8
In millions of $Z17.0017.92+0.92–4.20+5.12+6.48–1.36

A positive sign denotes a net increase in assets; a negative sign denotes a net decrease. This sign convention differs from that used in BOP statistics.

A positive sign denotes a net increase in assets; a negative sign denotes a net decrease. This sign convention differs from that used in BOP statistics.

702. There is no direct relationship between IIP and BOP transactions other than those recorded in the financial account or as investment income. However, there is an indirect relationship because, in the BOP double entry accounting system, the balance recorded in the financial account must be matched by a balance of the same magnitude but opposite sign in all of the other items. Therefore, to the extent that a BOP entry made outside the financial account has an offsetting entry in the financial account, the current account transaction affects the international investment position.

Calculation of Price and Exchange Rate Changes

703. The impact of price changes on an economy’s external financial assets and liabilities can be directly measured only in exceptional circumstances, and the impact of exchange rates can never be directly measured. Therefore, to show these items in the IIP reconciliation, the compiler (or data provider) typically resorts to indirect measurement. The following example illustrates the calculation of such valuation changes.

704. At the beginning of an accounting period, the central bank of Zebraland holds 10 units, each valued at £stg. 1 million, of British government securities. During the period, 2 units are sold at the market value of £stg. 1.2 million each. The remaining 8 units further appreciate in market price, to £stg. 1.4 million each, by the end of the period.35 The exchange rate of the pound sterling (£stg.) vis-à-vis the Zebraland dollar ($Z), which is the unit of account used to compile Zebraland’s IIP and BOP statistics, is £stg. 1 = $Z l.7 at the beginning of the period, £stg. 1 = $Z l.75 at the time of the transaction, and £stg. 1 = $Z l.6 at the end of the accounting period. The average exchange rate for the period is £stg. 1 = $Z 1.8. For Zebraland, the values (expressed in millions of £stg and in millions of $Z) of stocks, transactions, and valuation changes in these securities are shown in illustration 13.3.

705. Stock data at the beginning and end of the period and transaction values were calculated in terms of Zebraland dollars by applying the relevant exchange rates shown in the table. The total change in stocks was derived by calculating the difference between opening and closing balances. The total valuation change was derived as a residual by deducting transactions from the total change in stocks. As shown in the table, the total valuation change consists of two components. The valuation change reflecting—in terms of the transaction currency (pounds sterling)—the change in the price of the financial claim is equal to the total valuation change because exchange rate changes do not have any influence on this item. The price change in Zebraland dollars was calculated by multiplying the price change in pounds sterling by the period average for the rate at which pounds sterling and Zebraland dollars were exchanged.36 The valuation change reflecting the change in the exchange rate of the transaction currency vis-à-vis the recording unit of account was derived as a residual. Both types of valuation changes in an economy’s external financial assets and liabilities are excluded from the balance of payments.

706. The foregoing example contained no other adjustments, such as reclassifications or write-offs. If required, such adjustments are deducted, along with transactions, from the total change in stocks in the calculation of valuation changes. Other adjustments are converted from the currency of denomination to the unit of account by using the exchange rate prevailing on the dates the adjustments took effect. If such information is unavailable, period average exchange rates could be used.

707. In practice, the collection of statistics on valuation changes can sometimes be very difficult. To compile these figures on the basis of balance sheet data only, the compiler must know the amount outstanding whenever a change in the market price took place. This information must include any change resulting from fluctuation—in relation to the unit of account in which the BOP statement is compiled—of the exchange rate for the currency in which the asset is denominated. This method of measuring valuation changes is not feasible in a period when exchange rates fluctuate frequently. Therefore, it is suggested that compilers collect data on transactions, and that valuation changes be calculated by deducting transactions from changes derived from opening and closing balances. In addition, allowance should be made for reclassifications or changes in coverage of the economy or its residents because these changes also affect the outstanding amounts of external assets and liabilities.

708. When the unit in which a financial item is denominated differs from the unit in which the BOP statement is expressed, total changes in value should be calculated by first converting the outstanding amounts to the desired unit of account and then calculating the difference. The impact of exchange rate changes on total changes in stocks can only be derived as a residual.

Classifying the International Investment Position

709. The primary type of classification in an economy’s IIP statement is the distinction between assets and liabilities. For portfolio investment, reserve assets, and other investment, assets and liabilities are measured on a strict gross basis. For direct investment, a directional basis (abroad or in the reporting economy) of measurement is used. Recorded under assets is an economy’s direct investment abroad, which is equal to the claims of resident direct investors on direct investment enterprises located abroad minus the claims of these direct investment enterprises on the resident direct investors. Recorded under liabilities is direct investment in the compiling economy, which is equal to the claims of nonresident direct investors on direct investment enterprises located in the reporting economy minus the liabilities of the nonresident direct investors to the resident direct investment enterprises.

710. The second level of classification applied to the international investment position is that of function. Four functional types of investment are identified: direct investment, portfolio investment, other investment, and reserve assets. The definitions of these functional types of investment are the same for the international investment position and the balance of payments.

711. The third level of classification in the international investment position is by instrument of investment. Different instruments of investment are identified for different functional types of investment. For example, direct investment is divided into (1) equity capital and reinvested earnings and (2) other capital; portfolio investment is divided into equity securities and debt securities (bonds and notes, money market instruments and financial derivatives). The definitions of each instrument are the same for the international investment position and the balance of payments.

712. Instruments recorded as portfolio investment and other investment are further subdivided by domestic sector. For assets, this sector is that of the asset holder. For liabilities, the sector of the debtor is recorded. The trade credits, loans, and other components of other investment are also cross classified by original maturity—that is, long- or short-term.37

713. The classification systems adopted for the international investment position and the BOP financial account are closely related and very similar. The main difference between the two is the type of primary classification. The international investment position is divided primarily into asset and liability components; the BOP financial account is divided primarily by functional type of investment. A close relationship also exists between the classification of investment income in the BOP current account and in the IIP classification, although the former is far less detailed (in terms of BOP standard components) than the latter.

Valuation of the International Investment Position

714. The principle of valuation used in compilation of the balance of payments and the international investment position is market valuation. Such consistency is important when analysis of both sets of statistics is undertaken concurrently.

715. In the BPM, market prices are defined as amounts of money that willing buyers pay to acquire something from willing sellers; the exchanges are made between independent parties and on the basis of commercial considerations only. This definition obviously pertains to transactions, and the international investment position measures stock positions. When transactions in financial assets and liabilities occur on or very close to the reference date for the international investment position, the market prices pertaining to the transactions are good measures of the market prices of the stock positions attributable to the transactions. However, for stock positions for which there are no very recent transactions, alternative measures of market value are necessary. For instruments that are readily tradable, the mid-point of bid and offer rates (typically available from an organized exchange) on the date for which the international investment position is being prepared or the recent transaction price of a similar instrument could be used. A range of market value proxies, which are discussed subsequently, could be used for other types of instruments.

Equity Instruments (other than life insurance)

716. It should be possible to value positions in equity investments involving shares (stocks) in publicly traded enterprises by using information from stock exchanges on bid and offer rates or recent transaction prices. This method will probably be possible for most portfolio investment and some instruments classified under direct investment-equity. For valuing other types of equity investment (for example, equity investment by a parent enterprise in a wholly owned subsidiary), alternative methods should be used. Probably the best alternative method is the net asset value method.

717. The net asset method of valuation involves subtracting the value of enterprise nonequity liabilities from assets; the difference is equal to enterprise net asset value attributable to shareholders. Net asset value divided by the number of shares outstanding equals net asset value per share; to establish the value of a particular shareholder’s investment, the number of shares held by the investor is multiplied by the net asset value per share.38

718. To obtain—by the net asset value method—good quality estimates of the market values of investments, enterprise assets (in particular) and nonequity liabilities must be valued at current market prices and not at historical cost. If enterprise accounts are not prepared on this basis, the compiler could, in significant cases, seek supplementary information from the enterprise in order to make the necessary adjustments.

719. If an enterprise is unable to provide such information, the compiler could adjust those components of the enterprise balance sheet most likely to be subject to price changes. The compiler could make such adjustments by using information about (1) the times at which assets were acquired or liabilities incurred and (2) price movements (typically established from price indexes) for the particular class of asset or liability.

720. Alternatively, the compiler could establish an estimate of the market value of an equity investment by using price movements for a similar type of investment to adjust transactions associated with that investment. For example, in 1990, a direct investor acquires 50 percent of an enterprise in the chemical industry for $100 million. Between 1990 and 1994, the price of publicly traded shares of chemical enterprises increases by an average of 35 percent. The market value of the direct investor’s holding at the end of 1994 could then be estimated at $135 million.39 More sophisticated models could be developed. For an example, see the model discussed in paragraphs 721–722 of the Balance of Payments Compilation Guide for measuring the stock of direct investment in land. For a general discussion of deriving stocks from transactions in the area of portfolio investment, see paragraphs 740–743 of the Guide. Another possibility for establishing the market value of equity investment is to obtain a directors’ valuation of the enterprise.

Life Insurance

721. The surrender values of life insurance policies represent possible proxies for the market values of these policies. The surrender value is the amount that an insurance enterprise would pay a policyholder to redeem a policy prior to the expiration of the policy term.

Financial Derivatives

722. Options should be valued on the basis of market prices prevailing on the date on which the IIP statement is prepared. If no market exists for a particular type of option, market value can be approximated by using a financial formula known as the Black-Scholes formula. (This formula is quite complex; however, compilers need not understand its exact nature.) Most organizations with significant options operations use (in their balance sheets or supplementary accounts) this or similar formulae to value their positions. Therefore, in practice, the compiler should accept the valuation of option positions provided by principals unless there is serious doubt as to the validity in terms of market valuation principles.

723. For the international investment position, financial derivatives other than options are valued by reference to market prices of similar instruments. If the derivatives being valued are traded infrequently, they could be valued by calculating the net present value (NPV) of the future transactions and receipts expected under the contract. (For an explanation of NPV, see illustration 13.4.) If the NPV of future transactions is positive—that is, net receipts are expected—the derivative contract should be shown in the international investment position as an asset. On the other hand, if net payments are expected, the contract should be shown as a liability. Enterprises with significant positions in derivative contracts will, at least in management reports, probably value derivative positions in a similar manner.

Other Securities

724. Current market prices should be used to value other types of tradable investments (e.g., bonds and bills) for IIP positions. For debt securities not readily tradable, the NPV (as described in illustration 13.4) of future payments could be used to estimate market value. Alternatively, such debt securities could be valued at issue prices, plus the amortization of any discounts or premiums, plus any non-discount interest accrued but not due for payment.40 (The amortized discount or premium would be reflected as income in enterprise accounting records and used to adjust the balance sheet value of the asset or liability.) The values derived from this method differ from those derived by using the NPV method to the extent that interest rates change between the date a security is issued and the date for which the international investment position is being compiled. On conceptual grounds, the NPV method is preferred.

Illustration 13.4Net Present Value (NPV)
The net present value (NPV) of any financial instrument can be established by dividing the expected net future receipts (that is, receipts minus payments) associated with the instrument by a relevant discount factor. The discount factor is the compound interest rate relevant to the currency in which the instrument is denominated and to the debtor institution. For example, if the interest rate for U.S. dollars applicable to a particular enterprise is 10 percent per annum, payments due in two years should be divided by 1.21 (1.12) to establish the present value of those payments.
Formally:
PV = FA ((1 + i)n) in which
PV = present value
FA = future amount receivable or payable
i = an appropriate interest rate (expressed as a decimal)
n = number of periods before amount becomes due
NPV = SUM(PVR) - SUM(PVP) in which
PVR = present value of future amounts receivable
PVP = present value of future amounts payable
If the NPV of an instrument is positive (that is, the PV of future amounts receivable is greater than the PV of future amounts payable), the instrument is a financial asset. If the NPV is negative (that is, the PV of future amounts receivable is less than the PV of future amounts payable), the instrument is a liability.

725. Alternatively, it may be possible to derive stocks of investment from transactions. (See paragraphs 740–743 of the Balance of Payments Compilation Guide for further information.)

Monetary Gold, SDRs, Reserve Position in the International Monetary Fund, and Use of Fund Credit and Loans from the Fund

726. Monetary gold is valued, in the international investment position, by reference to prevailing market prices for gold; monetary gold should not be valued at acquisition price or some other notional value such as SDR 35 per ounce. Holdings of SDRs are valued at face value (in SDRs) and converted to the unit of account as appropriate. The valuation of a country’s reserve position in the Fund is based on the IMF’s calculations (in SDRs) and converted to the unit of account as appropriate.41

727. A country’s use of Fund credit is also valued according to IMF calculations. In national currency terms, this amount equals the value of any purchases plus “maintenance of value payments” prescribed by the IMF. These maintenance of value payments maintain a constant position in SDR terms and are treated as exchange rate changes, rather than transactions, in the IIP reconciliation (in national currency terms). Loans from the Fund are valued according to the amount outstanding (in SDRs) and converted to the unit of account as appropriate.

Loans Traded in Secondary Markets

728. In recent years, loans to a number of heavily indebted countries have been subject to significant discounts in secondary markets. To conform with the market value principle, secondary market quotations—not legal obligations—are the basis for valuation of positions in these instruments. However, debtor countries are likely to value obligations on the basis of amounts that they are contractually obliged to repay, and this practice leads to asymmetries between debtor and creditor positions.

Other Instruments

729. For IIP purposes, other (nontradable) assets and liabilities (such as loans, deposits, currency, and trade credits) are valued on the basis of the face value of amounts outstanding plus any interest accrued but not due for payment. In general, such values are considered acceptable proxies for market values.

730. Because the values of nontradable debt instruments are typically not subject to price changes, the procedure for deriving stocks from transactions is relatively straightforward if the compiler has information on the currencies in which the instruments are denominated. If the compiler has a base period estimate of stocks, he or she simply adjusts for any write-offs, reclassifications, or other non-transaction adjustments in order to derive estimates of stocks of investment (in the currency of denomination) for successive periods. These estimates of stocks are converted to the unit of account by using the exchange rates applicable to the dates to which the estimates relate. The impact of exchange rate changes can then be derived as the difference (in the unit of account) between IIP statements and transactions (plus, when necessary, other adjustments).

A Practical Example of IIP Compilation

731. The following example illustrates the nature of the international investment position and the kind of information that could be used to construct an IIP statement. The example contains information available to the BOP compilers of Zebraland and the December 31, 1991 IIP statement derived from this information.

(1) BOP compilers in Zebraland prepare a consolidated balance sheet dated December 31, 1991. This consolidated balance sheet is based on balance sheets prepared, on a historical cost basis, by the direct investment enterprises in Zebraland. All direct investment enterprises in Zebraland are 50 percent owned by nonresident direct investors; the other 50 percent of shares are owned by residents.

Consolidated Balance Sheet of Zebraland as of December 31, 1991(in millions of Zebraland dollars)
Assets
Land and structures in Zebraland100
Machinery60
less depreciation–15
Loans to unrelated nonresidents22
Bank accounts with resident banks48
Trade credits extended to unrelated nonresidents17
Total assets232
Liabilities
Loans from nonresident direct investors14
Loans from resident banks74
Trade credits received from unrelated nonresidents8
Zero-coupon bonds issued to unrelated nonresidents
Value at issue15
Accrued interest7
Total liabilities118
Net worth
Subscribed capital100
Accumulated retained earnings14
Total net worth114

Further investigations by BOP compilers revealed that the market value, as of December 31, 1991, of land and structures held by direct investment enterprises was $Z 140 million.

(2) In 1991, nonresidents were, for the first time, allowed to purchase shares in enterprises traded on the Zebraland stock exchange. In 1991, the value of nonresident share purchases was $Z 60 million. The average stock exchange index in 1991 was 120. The stock exchange index at the end of 1991 was 132.

(3) A survey of importers and exporters, which included the direct investment enterprises, established that, as of December 31, 1991, outstanding trade credit extended by Zebraland enterprises was $Z 35 million and outstanding trade credit received was $Z 28 million.

(4) Zebraland’s banks, which are not direct investment enterprises, reported the following foreign assets and liabilities, which were valued on the basis of market values, as of December 31, 1991.

The information is presented in millions of Zebraland dollars.

Assets
Deposits with unrelated banks15
Investment in fixed assets held by branches abroad35
Loans to branches abroad180
Securities issued by foreign governments45
Liabilities
Deposits of unrelated banks24
Loans from unrelated foreign banks65
Commercial paper (3-month) held by nonresidents82
Perpetual bonds held by nonresidents26

(5) The Debt Management Office of the Zebraland government reported the following information, in millions of Zebraland dollars, regarding Zebraland’s foreign liabilities:

Face value of outstanding loans to government as of December 31, 1991140
Face value of government securities on issue as of December 31, 199170
Face value of outstanding private enterprise loans guaranteed by the Zebraland government as of December 31, 1991126

With regard to government securities, the policy of the Zebraland government is to issue 10-year bonds at face value. The BOP compilers found that, because of changes in interest rates, these bonds were trading, on average, at a 10 percent discount from face value.

The government does not guarantee the debt of direct investment enterprises or that of Zebraland’s banks.

(6) The Central Bank of Zebraland reported the following information on holdings of reserves as of

Monetary gold20,000 ounces
SDRsSDR 5 million
Reserve position in the International Monetary FundSDR 4 million
Holdings of U.S. Treasury BondsUS$ 20 million
$US deposits with German banksUS$ 17 million

The BOP compilers determined that, at the close of trading on December 31, 1991:

The market price of gold was $Z 400 per ounce.

The midpoint $Z/$US exchange rate was US$ 1 = $Z 2.

The SDR/$US exchange rate was SDR 1 = US$ 1.2.

Statement of Zebraland’s International Investment Position as of December 31, 1991

*Numbers in parentheses refer to sources of information used to compile the items. When appropriate, notes describing the compilation method are provided at the end of the table.

(in millions of Zebraland dollars)
Assets
Direct investment abroad
Equity capital and reinvested earnings
Claims on affiliated enterprises35(4)
Portfolio investment
Debt securities-banks45(4) See Note 1
Other investment
Trade credits-other sectors35(3) See Note 2
Loans
Banks180(4) See Note 3
Other sectors22(1)
Deposits-banks15(4)
Reserve assets
Monetary gold8(6) See Note 4
SDRs12(6) See Note 5
Reserve position in the Fund9.6(6) See Note 6
Foreign exchange
Currency and deposits-with banks34(6)
Securities-bonds and notes40(6)
Total foreign financial assets435.6
Liabilities
Direct investment in Zebraland
Equity capital and reinvested earnings
Liabilities to direct investors77(1) See Note 7
Other capital
Liabilities to direct investors14(1)
Portfolio investment
Equity securities-other sectors66(2) See Note 8
Debt securities
Bonds and notes
General government63(5) See Note 9
Banks26(4)
Other sectors22(1) See Note 10
Money market instruments-banks82(4)
Other investment
Trade credits-other sectors28(3) See Note 11
Loans
General government140(5)
Banks65(4)
Other sectors126(5)
Currency and deposits-banks24(4)
Total foreign liabilities733
Net international investment position-297.4
Notes to Zebraland’s Statement of International Investment Position as of December 31, 1991

The information is insufficient to classify the securities as bonds and notes or money market instruments.

Trade credits extended by direct investment enterprises are included in this estimate.

It is assumed that bank loans to branches abroad do not represent permanent debt capital.

Valued at market values ($Z 400 per ounce)

SDR 5 converted to US$ and then converted to $Z by use of market exchange rates

SDR 4 converted to US$ and then converted to $Z by use of market exchange rates

Direct investors’ share (50 percent) of net worth, at book values, of enterprise (114) plus impact of revaluing land to market values (140–100)

The market value was calculated by multiplying the value of acquisitions made in 1991 by the stock exchange index at the end of 1991 and then dividing the result by the average stock exchange index for 1991.

The face value of government securities held by nonresidents was discounted by 10 percent to derive a proxy for market valuation.

Zero coupon bonds issued by direct investment enterprises. The accrued interest has been added to the value at issue; the resulting amount should be a reasonable proxy for market valuation.

Trade credits received by direct investment enterprises are included in this estimate.

Notes to Zebraland’s Statement of International Investment Position as of December 31, 1991

The information is insufficient to classify the securities as bonds and notes or money market instruments.

Trade credits extended by direct investment enterprises are included in this estimate.

It is assumed that bank loans to branches abroad do not represent permanent debt capital.

Valued at market values ($Z 400 per ounce)

SDR 5 converted to US$ and then converted to $Z by use of market exchange rates

SDR 4 converted to US$ and then converted to $Z by use of market exchange rates

Direct investors’ share (50 percent) of net worth, at book values, of enterprise (114) plus impact of revaluing land to market values (140–100)

The market value was calculated by multiplying the value of acquisitions made in 1991 by the stock exchange index at the end of 1991 and then dividing the result by the average stock exchange index for 1991.

The face value of government securities held by nonresidents was discounted by 10 percent to derive a proxy for market valuation.

Zero coupon bonds issued by direct investment enterprises. The accrued interest has been added to the value at issue; the resulting amount should be a reasonable proxy for market valuation.

Trade credits received by direct investment enterprises are included in this estimate.

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