Chapter

12. Banks and Other Sectors’ External Debt Statistics

Author(s):
International Monetary Fund
Published Date:
June 2003
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Introduction

12.1 In circumstances where controls on foreign borrowing are still in place, it is possible for the central bank to compile information on private sector borrowing from information provided by borrowers for regulatory purposes, such as when they seek approval for foreign borrowing. Also, commercial banks might well be required to report on foreign transactions of their private sector clients. However, as liberalization of financial transactions proceeds, and such information becomes less readily available, there is a need to develop methods of collecting data on private sector debt through other means. This chapter considers the collection of these data from banks and “other sectors” when financial transactions are liberalized. The measurement of external debt in the form of traded securities is covered in the next chapter.

12.2 From the standpoint of compiling external debt data, information collected at the level of the individual debt instrument provides the statistical agency with the greatest flexibility in meeting user requirements. Provided that sufficient detail on the characteristics of the instrument is supplied, potentially varied combinations of characteristics of external debt could be produced as users request (the method by which the compiling agency stores the information supplied could limit the possibilities). Also, instrument-by-instrument detail supports detailed quality checks. However, some compilers may find that it is only realistic to ask respondents to supply aggregate data. If so, the design of the survey form is particularly important because it needs to endeavor to meet all foreseeable data needs—it is unlikely that the form can be changed very frequently, not least because respondents will develop systems to compile the required information—and incorporate quality-control features (for example, cross-checks on the form itself or with related data collections). If the survey form is too complex, there could be a negative impact on quality as respondents may have difficulty supplying the required information.

12.3 It is recognized that for compilers, compiling comprehensive data for the private sector presents a greater degree of difficulty than for the public sector. Problems can arise from the limitations inherent in the available information sources. For instance, data on arrears may not be readily available from balance sheet reports, nor data for a debt-service schedule. Also, it may be difficult to monitor certain sectors of the economy, such as the household sector. In all such instances, the importance and relevance of the data needs to be weighed against the likely costs of collection, and, where appropriate, alternative sources and methods used to produce data of an acceptable degree of accuracy and reliability (for example, data from creditor sources).

Banks

Reporting of Debt

12.4 An important source of information on external debt is the banking sector. Banks are closely regulated in nearly all countries—and so are usually identifiable to the statistical agency—and have to report balance sheet data to central banks or regulatory agencies both for supervisory and monetary policy purposes. These reports can be a major source of information on the outstanding external debt of banks. External debt includes deposits of nonresident banks with domestic banks, deposits of other nonresidents with domestic banks, and other external liabilities, such as bonds and notes, and other debt securities owned by nonresidents and issued by domestic banks. Domestic banks include resident branches of foreign-owned banks.

12.5 It is essential that the reporting requirements that the central bank agrees with the commercial banks take account of the need for data on external debt. When changes in bank reporting are being considered, a task group could be formed that includes relevant statistical experts on external debt and other external statistics. In particular, attention must be paid to how external liabilities (and assets) are defined, and the external debt, and balance of payments, concept of residence (and not nationality or currency) should be used to determine what is an external liability or asset.

12.6 However, balance sheets typically do not contain sufficient detailed information on the maturity of loans and deposits; and additional information is required to calculate the debt service payment schedule for the banking sector.1 This is best achieved by obtaining and using information on individual external debt instruments. When these data are not available to the compiling agency, and depending on the type of debt liabilities, the compiler can estimate projected interest costs using position data and appropriate representative interest rates, but some indication of a payment schedule is required for projecting principal payments.

Offshore Banks

12.7 Data on the external debt of “offshore banks” should be collected and included in the gross external debt position. Some compilers argue that banks that are treated as “offshore” under exchange control and other regulations should be excluded from the coverage of external debt statistics because the banks borrow from and lend to nonresidents. In other words, debt of such “offshore banks” does not relate to developments in the domestic economy and should be excluded. However, even if netting is legally binding in the jurisdiction of one country, legal actions by third parties may prevent the local banking institution from enforcing its right of offset. Thus, if the loans of offshore banks become unrecoverable, these banks still need to find the resources to meet their debt obligations. Nonetheless, as noted in Chapter 2, in some economies separate identification of the gross external debt (and external assets) of resident “offshore banks” and other “offshore entities” is necessary because of the potential size of their liabilities relative to the rest of the economy.

Other Issues

12.8 In addition to their on-balance-sheet liabilities, the compiler could consider collecting data on outstanding guarantees given by banks. Banks do guarantee debts of private nonfinancial sector borrowers, and while not external debt of the banks, but rather the debt of other sectors, there is analytical interest in data on guarantees. Although data on bank guarantees most likely will cover only part of the private sector’s external debt, these data may be helpful in cross-checking data provided by other sectors.

12.9 Central government and public enterprises sometimes borrow from resident banks instead of directly from foreign lenders. The loans may be denominated in foreign currency, and the ultimate borrower, not the commercial bank, assumes the exchange risk. There is potential for double counting if the government reports the foreign currency loan as an external liability along with the bank. If the bank borrows externally, it is the bank not the government that has the external debt.

12.10 Also, other private sector entities may borrow foreign currency from resident banks, particularly if the nonbank private sector is not allowed to borrow directly abroad (so that the authorities have close control over capital flows). In these cases, the compiler has two sources of information: the private nonbank entity (perhaps from exchange control forms), and the reports of the bank. The preferred source is the bank because the bank has the external debt, and bank records are normally more comprehensive.

Other Sectors

Enterprise Surveys

12.11 When no comprehensive exchange controls exist, data on loans and other external debt of other sectors are best obtained through a periodic survey of those enterprises (including nonbank financial institutions) that are involved in external transactions.2 The accumulation of transactions data from the balance of payments, together with valuation adjustments, is commonly used to estimate position data between position surveys. The appendix to this chapter provides the methodology for such calculations.

12.12 To ensure good coverage of cross-border activity, it is necessary to develop and maintain a register of nonbank enterprises that have or could have significant cross-border assets and liabilities. Without a good register, serious discrepancies from reality could arise. Enterprises might be identified from customs forms—it seems likely that such entities will be involved in trade credit transactions—and/or from balance of payments reports, such as through a system that relies on bank reporting of individual transactions, and/or by the regulatory authorities, such as information held by foreign investment or monitoring boards. In Chapter 14, the practice of the Australian Bureau of Statistics is described, and this provides more ideas on how to develop a register, including the use of information from industry associations, newspaper articles, etc.

12.13 In developing a register of enterprises to approach, it is vitally important that the work be coordinated with the agency that has the responsbility for the national accounts, as well as the balance of payments compiling agency. Not only will balance of payments and national accounts compilers be interested in information on external liabilities, the national accounts compiling agency may already have developed a centralized national register of reporting entities and be collecting some of the information required. Alternatively, registers may have been developed in different agencies for particular sectors—for example, manufacturing enterprises, banks, etc.—and a register for external debt purposes may be built up by conducting an “exploratory” survey of all these enterprises, in order to identify those that have external positions.

12.14 In determining the reporting population, various approaches are possible:

  • Census: Including in the survey all members of the population;

  • Partial coverage collection: Including in the survey all enterprises above a certain threshold measured in terms of their dimensions (for example, nominal capital) or other variable (for example, significant cross-border activity);

  • Random sample: Including in the survey enterprises that are preferably selected according to rigorous sampling procedures, with the results “grossed” up for the whole population; and

  • Stratified random sample: A procedure that groups population components according to the size of selected activity so that enterprises within different strata have different probabilities of selection. Usually, this is a combination of the partial coverage and random sample options but is more sophisticated and might produce a high level of coverage while remaining relatively cost-effective.

12.15 It is usually preferable to approach enterprises that engage in a number of activities at the group level because they may have a central organization that handles the external financing transactions of the group. Also, approaching the enterprise at this level reduces the workload for the compiler. However, if external financing transactions are handled by several centers in a group, and/or the group covers more than one type of institutional sector (for example, a bank and a nonbank enterprise), arrangements should be made to collect data from each center, in consultation with the enterprise.

12.16 A survey of nonbank enterprises should cover loans from nonresident banks, securities issued abroad (both long- and short-term), trade credits, and other external liabilities. If the information on debt instruments is provided on an instrument-by-instrument basis, details collected could include name of lender, country and type of lender, currency, amount outstanding, start date of contract, due date of contract, scheduled payments of principal, interest payments, put options, and relationship between borrower and lender. Similar information could be required for securities, although the identity of the lender may be unknown to the borrower. Although this information is detailed, it should be readily available to the entity for its own accounting purposes and, in most instances, should be public knowledge. Also, if possible, it is preferable to collect liability and asset data together on the same survey form, not least because the balance-sheet approach introduces a consistency in its own right, while the development of external debt within an IIP statement, among other things, would focus attention on external assets as well as liabilities.

12.17 When developing survey forms, writing very clear reporting instructions is an essential but not easy task—different respondents must be clear about what types of transactions they should report. The overwhelming evidence from compilers is that report forms and instructions should be kept as simple as possible. Practical experience invariably shows that where compilers complicate the form and the instructions, perhaps to collect that extra bit of detail, the compiler is disappointed with the information received. Reporting instructions must be clear on concepts, on what is to be reported, and on who can be contacted at the statistical agency, together with telephone and fax numbers and e-mail addresses, in the event of the respondent having a question about the reporting requirements.

12.18 The compiler is advised to undertake form testing—that is, finding out from a sample of respondents whether the instructions are clear and workable before they become operational. Also, seminars and workshops explaining the reporting requirements for respondents are of value to both respondents and the compiling agency, and are encouraged by the Guide. On an ongoing basis, the maintenance of an electronic register that keeps track of respondents who have called and when, who was the contact person, their phone number, etc., is information that helps ensure a well-run statistical operation. Through such a register, corporate memory at the statistical agency can be developed.

12.19 Even so, private nonbank entities may be more reluctant than banks and the government to report to the compiling agency. How can they be “encouraged?” There are at least three important steps that can be taken.

  • As mentioned above, there should be legal backing for the surveys, so that as a last resort the compiler has some means of redress if the respondent proves unwilling to report. However, this legal backing must make clear that any data supplied will be used only for statistical purposes, and this statement must be honored in letter and spirit by the compiling agency. Nonbank respondents may well be reluctant to supply data if they believe the data will be shared among other agencies.

  • Other elements of government that have a policy interest in external assets and liabilities should be made aware of the reporting needs and encouraged to promote the need for good reporting whenever possible when dealing with private enterprises. Better data helps promote better-informed policy-making. In other words, the authorities should build the idea of good reporting into their policy objectives in this field. Often, those with policy responsibilities have access to senior officials in private entities and so can deliver the message of good reporting at a more senior level than might be available to the statistical agency.

  • The compiling agency along with other agencies responsible for statistics should encourage a “culture of reporting.” This is not easily achieved in a short time period and should not just cover external debt data, or the private nonbank sector. Steps to encourage a culture of reporting include meeting potential respondents and discussing issues of concern; developing report forms that as easily as possible fit in with management reporting systems and are not overly complex; and disseminating and promoting the final output in a transparent manner. If data are captured and compiled in an efficient manner and the output is seen to be important, private sector respondents are more likely to report.

12.20 Even if data are supplied, how can they be confirmed to be reliable? First, if data are supplied in a balance-sheet form this adds a degree of consistency in its own right. Also, if a publicly quoted company supplies data, published accounts from the company are likely to be available against which data can be checked.3 Second, wherever possible data should be cross-checked with other sources. For instance, transactions data can be compared with changes in position data if different sources are used. Net borrowing data from income and expenditure accounts, or profit and loss accounts of companies, can be compared with the buildup of net financial assets and liabilities because the two are interrelated. Income data could be compared with position data to see whether the implied rates of return on liabilities and assets are realistic. Data on nonbank liabilities to foreign banks could be cross-checked with the international banking statistics from the BIS, although conceptual differences between BIS and national data need to be taken into account.4 Some economies may make periodic requests to creditors to verify the status of loans that they have extended to organizations in the country, but nonresident creditors may be unwilling to provide information to foreign government agencies when private debtors are involved.

Other Approaches

Direct reporting companies

12.21 A variation of the enterprise surveys mentioned above is the establishment of so-called direct reporting companies (DRCs). DRCs are intended to constitute a representative sample of companies involved in cross-border activity, and to report on a regular and frequent basis to the compiling agency on transactions and positions with nonresidents. This approach, derived from an exchange-control-type administrative system, could be appropriately developed in a partially liberalized environment. In some countries, DRCs are divided into “general” and “partial” direct reporting companies.

  • General direct reporting companies (GDRCs) are companies or groups of companies, the volume of whose cross-border transactions exceeds a certain threshold in a given period. For GDRCs, with the exceptions of certain portfolio investment transactions (see below), all cross-border transactions are covered in the reports to the compiling agency, including flows via foreign accounts and netting. There may be no threshold for the items to be reported. The reports may give details of the currency, amount, economic nature, and geographical breakdown of the transactions. The reports of GDRCs may not include flows/positions concerning portfolio investment cash management and investment income when these transactions are conducted through resident commercial banks. Instead, these types of transactions/positions are reported by the domestic commercial banks involved in the particular transactions. However, if these transactions are carried out or held directly via foreign accounts, they remain under the responsibility of the GDRC in question to report, because the GDRC is the only domestic entity aware of these transactions/positions.

  • Partial direct reporting companies (PDRCs) are companies that hold accounts abroad or participate in an international netting arrangement through which payments are made or received. These companies are subject to direct reporting requirements when the monthly total of incoming and outgoing payments through the accounts exceeds the agreed threshold. The reports of PDRCs are similar to those of the GDRCs, but they cover only flows/positions via their foreign accounts and changes of position within these accounts. Other transactions/positions between PDRCs and nonresidents are reported by the resident banking sector.

Registers of external loans

12.22 Some external debt compilers use so-called registers of external loans to obtain data on loans received by the nonbank sector. These data, usually collected for exchange control purposes, allow monitoring of both loans from nonresidents and nonmarketable securities issued to nonresidents. If the exchange controls are abolished, the administrative accounting documents created for that purpose might be transformed into reporting documents for statistical purposes. The figures obtained from this source usually cover both loans between related (parent companies and affiliates) and nonrelated companies, and financing obtained through international bonds and notes, commercial paper, and other issuance programs.

Monitoring Short-Term Debt and Trade Finance

12.23 Monitoring short-term debt—that is, loans with an original maturity of one year or less—is of great importance because high levels of short-term debt can make an economy particularly vulnerable to shifts in market conditions and, in the case of trade credits, can have an important impact on real economy activity.5 However, monitoring such liabilities is a complex process, not the least because there are many small transactions and many participants. In particular, if foreign trade is large relative to total production, there are likely to be many enterprises that receive foreign short-term credits.

12.24 Short-term loans and trade finance could be covered by the kind of enterprise surveys, and other approaches, discussed above. While collecting data on a loan-by-loan basis has some advantages, information on private sector short-term debt is likely, for practical reasons, to be compiled only in aggregate. Because of the sheer number of transactions involved and their short maturity, information on short-term debt may not necessarily be easy to compile on a transaction-by-transaction basis for all categories of short-term debt.

12.25 Also, policymakers may require more up-to-date detailed information so that the short-term financing position of the economy can be closely monitored. For banks, this might include daily or weekly reports covering interbank lines—the amount, the confirming bank, etc.—because these lines are the core of external funding and sensitive to changes in perceived credit worthiness. Also, key borrowers might be asked to prepare monthly position reports on trade finance covering amounts, currency, counterpart country, and sector.

12.26 An alternative approach for those countries with balance of payments compilation systems that rely on banks’ reporting of individual transactions is to estimate the stock of trade credit debt by accumulating the transactions to the existing position data, taking account of exchange rate fluctuations. However, the main drawback of this approach is that banks may not identify trade credit accurately, or its coverage may not be comprehensive. For instance, new extensions of trade credit for importers might be better identified by banks than repayments of that credit, leaving trade credit stocks artificially high.6 Also, the recording of cross-border merchandise trade financed through direct credit between importers and their suppliers might be missed because it involves no payment transactions. Although comparing the level of imports recorded by customs with the import payment figures recorded through bank reports might get around this latter problem, there would be a need to ensure that the customs and the banks are taking a consistent approach to classifying and recording imports.

12.27 In the gross external debt position, trade financed or intermediated—such as through the discounting of bills—by a bank is not classified trade credit but rather as a loan or short-term security. However, Chapter 7 provided a table for the presentation of all trade-related credit because of its importance for the real economy.

Financial Derivatives

12.28 In the external debt statement, positions in financial derivatives should be recorded on a gross basis and valued at market prices. However, at the time of the preparation of the Guide, few countries had a system for measuring financial derivatives position data. Furthermore, in some countries the statistical recording of positions in financial derivatives is hampered by the existing accounting rules for banks and enterprises that do not require financial derivatives positions to be recorded on-balance-sheet and valued at market prices.

12.29 In some countries where information on stocks is available, it is based on regular reports from the largest players, particularly the banking sector. Indeed, available information indicates that derivatives markets are highly concentrated, and so a survey of the major banks and investment houses, which includes information on the counterparties to their derivatives positions, along with the major enterprises that borrow abroad, might cover a considerable amount of resident activity in financial derivative instruments. Given the complexities involved, when developing a financial derivatives survey, it is strongly recommended that it be coordinated with those responsible for other macroeconomic data series that also require information on financial derivatives. Also, it is important that data on market value of positions are collected, since the market value determines the asset or liability position of the financial derivatives contract. Chapter 7 includes tables that present the nominal or notional positions of foreign currency derivatives, and, if significant, interest rate derivatives. These data could also be collected.

12.30 By way of example, in a survey of financial derivatives positions the types of analytical detail that compilers might consider collecting include:

  • Product category: Forwards (including futures and swaps) and options;

  • Risk category: Exchange rate, interest rate, and other risk (perhaps, if significant, disaggregated into commodity, credit, and “other”); and

  • Counterparty information: General government, monetary authorities, banks, other financial institutions, other residents, and nonresidents.

12.31 While the Guide does not explicitly recommend the collection of data on the notional or nominal value for all risk types of financial derivatives, such information can be of analytical value. For instance, the nominal or notional amount provides some indication of the size of the risk transfers underlying financial derivatives instruments, while, as a quality check, the ratio of market to nominal value that is reported could be compared with the “normal” ratio derived from the BIS’s semiannual statistics on the open positions in the global over-the-counter (OTC) derivatives market.

12.32 The BIS semiannual derivatives data were introduced in June 1998.7 They cover the notional amounts and gross market values outstanding of the worldwide consolidated OTC derivatives exposure of major banks and dealers in the G-10 countries, with four main categories of market risk reported: foreign exchange, interest rate, equity, and commodities. Because they are not residence-based, the direct usefulness of the BIS data in the compilation of residence-based statistics is limited. Nonetheless, the BIS data do provide a good indication of the relative size and importance of different types of derivatives instruments, and, as mentioned above, of the relationship between market and notional amounts.

Direct Investment

12.33 The external debt statement includes information on liabilities of resident direct investment enterprises to foreign direct investors, and of resident direct investors to their foreign direct investment enterprises. Measuring direct investment activity is an integral element of balance of payments and IIP statistics. Many economies take a particularly close interest in direct investment activities because of the benefits this activity is perceived to bring to the economy. Thus, it is recommended that in compiling external debt, use be made of the information on direct investment in the balance of payments and IIP.8 Care must be taken to avoid double counting of securities, or other debt, in both direct investment and their instrument category. Direct investment takes precedence; for example, a bond issued by a resident direct investment enterprise and owned by its foreign direct investor is classified under direct investment rather than under debt securities (that is, equivalent to portfolio investment in the balance of payments).

Household Sector

12.34 Obtaining data on the external debt of the household sector is difficult. In many economies, the household sector will focus its borrowing on resident financial institutions, not least because of familiarity. However, with modern forms of communication and their ability to advertise products across borders, borrowing from abroad might become more prevalent. One method of collecting information might be to include foreign borrowing questions in a household survey of expenditures, income, financial assets, and liabilities.

12.35 For countries that rely on a bank reporting system, specific procedures are sometimes set up to capture data on cross-border asset and liabilities held by residents with nonresident financial institutions, since these positions are not covered by the resident banks’ reporting. Under these procedures, all households are obliged to report such positions to the central bank on a regular basis (monthly, quarterly, or annually). Also, transactions settled through these accounts abroad are to be reported by households, with the frequency and detail of individual reporting dependent on the scale of the activity undertaken.

Appendix: Estimating Position Data with Transactions Information

12.36 Changes in positions between end-periods are accounted for by up to four factors: transactions; changes in the price of debt instruments; changes in exchange rates; and other adjustments, such as reclassifications. For all instruments, there can be transactions and other adjustments, but not all instruments are affected by changes in prices or exchange rates. This appendix considers the estimation of position data using transactions data, starting with instruments that are relatively straightforward, and moving on to those that raise more complex issues. Because estimating positions for instruments whose prices change raises the most complex problems, a distinction is made between those instruments that are not traded and those that are.

Nontraded Debt Instruments

12.37 For nontraded instruments, a distinction needs to be made between those whose value is linked to the unit of account and those whose value is not.

Debt instruments with value linked to the unit of account

12.38 For a debt instrument issued in the unit of account, the estimation of position data with transactions data, in principle, is simply a case of adding transactions in the period to the previous position, and taking account of any other adjustments. However, even for such instruments, mismeasurement of position data is possible if the coverage of transactions data is not complete—for instance, due to incomplete population coverage—or if there is misreporting of transactions, including an inability of respondents to report transactions when they occur. Indeed, the compilation of position data through the accumulation of transactions data could lead to a significant mismeasurement over time, in such circumstances. Thus, even for nontraded instruments whose value is linked to the unit of account, there is a need to undertake position surveys from time to time, both to help ensure the quality of position data and also as a check on the reported transactions data.

Debt instruments with value linked to a foreign currency

12.39 For instruments whose value is linked to foreign currencies, not only is there a need to take account of the same factors as mentioned above, but also of the currency composition of transactions and positions.

12.40 It is recommended that if positions are to be calculated for instruments linked to a foreign currency, data best be compiled on a currency-by-currency basis. In other words, in the original currency, transactions in the period are added to positions at the end of the previous period, and after taking account of any other adjustments in the period, the end-period position is converted into the unit of account using the end-period exchange rate.9 The positions in all foreign currencies, plus that in the domestic currency, are aggregated into a total position.

12.41 Essential to such calculations is the availability, at some point in the past, of data on the currency composition of position data. For instance, if the currency composition of position data is available on an annual frequency at end-year, then in the absence of information on the currency composition of transactions data, quarterly position data could be estimated on the assumption that the currency composition of transactions is the same as in the observed end-year position data. Before making such an assumption, it would be necessary to check the observed changes in currency composition over a number of years—the less variable over time the proportions for each currency, the more robust the assumption might be. Once further end-year data are available, revisions to back data to reflect the new information are almost certain to be required.

12.42 In the absence of data on the currency composition of position data for the whole economy, one sector (for example, banks) might provide such information. A comparison between the currency composition of bank liabilities and those for other sectors could be made for periods when both are available. Provided that there is some similarity, the data from banks could be drawn upon to estimate the currency proportions for the rest of the economy, until new data for all sectors become available.

12.43 An alternative approach is to ignore the currency composition and, in effect, assume that all foreign currency liabilities are in the same currency. This “currency” could be the trade-weighted exchange rate or the known dominant currency in the country’s financial flows, such as the U.S. dollar. Under this approach, positions could be estimated by revaluing both the previous end-period position, the transactions during the period, and any other adjustment:10

where

K^t = estimated end-period position

Kt−1 = previous end-period position

Ft = transactions in the period in the unit of account

xt = end-period exchange rate

xt−1 = end-previous period exchange rate

x¯t = average period exchange rate

At = adjustment in the period

xa = exchange rate at the time the adjustment occurred.

In the above calculation, the exchange rate should be entered in terms of the number of units of the unit of account received for one unit of the foreign currency. The example below illustrates the principles involved.

12.44 Assume that country A’s gross external debt position was 1,000 in domestic currency terms at t– 1, all of which was owed in U.S. dollars, and that there are transactions of 150 in domestic currency terms during the period. There were no other adjustments. The exchange rate was 10 of the domestic currency to 1 U.S. dollar at t– 1, and 14 to 1 U.S. dollar at t, with an average rate during the period of 12 to 1 U.S. dollar:

12.45 Whichever approach is used to estimate end-period positions, in the absence of full currency information, there will be estimation weaknesses. Where end-period currency compositions are assumed for subsequent periods, clearly the actual currency composition of transactions could be different, and this is also true when using one sector’s data. Not making any assumption about currency composition is essentially akin to assuming that all other currencies move in an identical way in relation to the unit of account. In both cases, the more volatile the exchange rate, the greater the likelihood of mismeasurement. Even more so than for nontraded instruments linked to the domestic currency, frequent observations of position data for instruments whose value is linked to a foreign currency are recommended, otherwise significant mismeasurement could arise over time.

Traded Debt Instruments

12.46 Calculating positions with transactions data is particularly difficult for traded debt instruments, whose prices change from period to period. In addition to taking account of other adjustments, and, if need be, movements in exchange rates, as above, there is a need to take account of movements in market prices. One particular difficulty is that there are many traded instruments all with their own price. Also, unlike nontraded instruments, the debtor is unlikely to know the extent to which traded instruments are owned by nonresidents if nonresidents purchase instruments in domestic markets, or the debtor borrows in foreign markets. So, as noted in Chapter 13, the compiler cannot rely on the debtor for detailed information on traded instruments owned by nonresidents.

12.47 To make exact calculations, knowledge is required on the whole sequence of intraperiod prices, exchange rates, and transactions: such information may not be readily available to individual respondents, let alone national compilers. So, some simplifying assumptions or models are therefore needed to produce estimates.

12.48 The data model most widely employed in the field of external statistics is that recommended in various methodological publications prepared by the IMF.11 For this model, in addition to information on exchange rates, some estimate of market prices of the instruments is needed. As with exchange rates, the more detailed information available to the compiler, the better. For market prices, the simplest approach might be to base estimates on a representative government bond price(s) for domestic instruments, if available, and/or benchmark prices in other markets where domestic residents have issued instruments.

12.49 With the required information, the data model can be used for a variety of purposes: calculating transactions on the basis of position data; calculating positions with transactions data; or “validating” both sets of data. The first two variants are particularly useful when only one of these variables is measured directly; the third when both variables are measured, using either the same source or different sources or samples (in which case it is necessary to check on whether reported data on positions and transactions are mutually consistent). The model was originally employed to derive transactions data from positions data:

where

F^t = estimate of transactions

pt = end-period prices

p¯t = average period prices.

12.50 However, it can also be used to derive positions data with transactions data. Indeed, equation (12.3) is similar to equation (12.1), once the adjustment factor is introduced, except that equation (12.3) also includes price effects, based on period averages. If the value of the instrument is linked to the unit of account, then the exchange rate factors are redundant.

where

pa = price at which adjustment occurred.

12.51 The example below illustrates the principles involved. Again assume that country A’s gross external debt position was 1,000 in domestic currency terms at t– 1, all of which was owed in U.S. dollars, and there are transactions of 150 in domestic currency terms during the period. There were no other adjustments. The exchange rate was 10 of the domestic currency to 1 U.S. dollar at t– 1, and 14 to 1 U.S. dollar at t, with an average rate during the period of 12 to 1 U.S. dollar. The securities owed to nonresidents were valued at 1.1 at t– 1, at 1.045 at t, and at 1.066 during the period:

= 1,501.5 (estimated end-period total).

12.52 The accuracy of the model depends on the volatility of financial prices and transactions in the period covered; in particular, the accuracy of estimates is inversely related to the combined amount of intraperiod dispersion in prices and transactions. Estimated values would approach the “true” values when transactions are spread more uniformly and/or prices (including those of currencies) are less dispersed around their mean. Such conditions are more likely to prevail when the reference period chosen for compiling statistics is short (a month, or a quarter, rather than a year).

12.53 Also, accuracy improves when flows are small compared with the initial stock, in which case intraperiod valuation effects would be of secondary importance. As a consequence, lower-frequency statistics compiled using the model could still be reasonably accurate when transactions are very small, even in periods of highly dispersed prices and exchange rates.

12.54 In addition, research at the IMF (Committeri, 2000) has shown that the availability of more detailed financial information, allowing disaggregated estimates based on homogeneous groupings of instruments and currencies, results in estimates that are closer to the actual values of the relevant variables, irrespective of the intraperiod dispersion of prices and exchange rates. Creating homogeneous groupings might be achieved by collecting data on an instrument-by-instrument basis or on an aggregate basis, where information is collected by currency, maturity, and by type of instrument (such as whether the instrument has a fixed or variable rate of interest).

12.55 Clearly, the more periods over which estimates are carried forward, the greater the possibility that the estimates will diverge from “reality.” So, frequent observations of position data for instruments whose price can change are recommended.

12.56 The data model set out in equation (12.3) above also offers manageable formulas for estimating the reconciliation adjustment (equation (12.4)), and its price and exchange rate components:12

where

ADJt = total reconciliation adjustment between positions and transactions

ADJtprice = the price component of the total reconciliation adjustment

ADJtxrate = the exchange rate component of the total reconciliation adjustment.

Examples of the type of disaggregated information that could be collected from a balance sheet are set out in IMF (2000d), Monetary and Financial Statistics Manual (see, for instance, Box 7.1, p. 76).

IMF (1995), Balance of Payments Compilation Guide, provides practical advice on model survey forms for the compilation of balance of payments and IIP data.

Because accounting standards do differ in some respects from statistical standards, this approach may provide a broad rather than close check.

As was seen in some Asian economies in 1997–98, a sudden restriction on trade credit finance can depress imports, impacting on the production process and the level of exports when these activities have a high import propensity.

To counter this problem, some countries have developed their systems such that repayment of trade credit is assumed after a certain period of time (for example, three months). Any such approach should be supported by periodic direct surveys of trade credit positions.

A regular press release on these data is available on the Internet, at the BIS website, http://www.bis.org/statistics/index.htm.

In 2001, the IMF and OECD updated a survey of data availability, data sources, compilation practices, and methodology used to compile FDI data. The metadata for 56 individual countries and cross-country comparison tables are available on the IMF’s website at http://www.imf.org/external/np/sta/di/mdb97.htm.

For nontraded instruments, the amount of the change between end-period positions in domestic currency terms attributable to exchange rate variation is equal to the difference between the opening and closing positions, less transactions over the period in domestic terms less any other adjustments in domestic currency terms. For the calculation to be accurate, the transactions and other adjustments need to be translated into domestic currency at the exchange rate at the time they occurred.

The adjustment could increase or decrease positions.

See the IMF (1995), Balance of Payments Compilation Guide, paragraphs 732–43 and 778–83, and the IMF (1996), Coordinated Portfolio Investment Survey Guide, Appendix VIII, pp. 155–58. The BIS and the OECD contributed to the latter publication.

Adding equations (12.4a) and (12.4b) would not necessarily give equation (12.4), even if there were no “other adjustments.” The difference represents the compound effect in equation (12.4) of changes in p and x, which cannot be further divided into “price” and “exchange rate” elements. The difference will be zero only when either x or p is constant. See Committeri (2000), pp. 6 and 8. Assuming no “other adjustments,” one approach could be to estimate the exchange rate component first, and calculate the price component by residual; that is, subtract equation (12.4b) from equation (12.4).

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