Abstract

The reliability of country data reported for the world Current Account, Capital Account, and Financial Account has been a matter of concern since the 1980s. Tables 7 and 8 show that discrepancies existed in these accounts through the 1990s. Although the large, negative discrepancy for the world Current Account declined (see Table 7), this decrease probably masked large, offsetting imbalances. In particular, the imbalance in portfolio and other investment income increased. Imbalances in components of the world Financial Account also grew during the 1990s (see Table 8). Consequently, it is almost certain that data now being reported on both Current Account and Financial Account transactions contain substantial deficiencies. Authors of the Godeaux Report noted that deficiencies in data reported for the Financial Account were associated with deficiencies in data reported for Financial Account positions. This observation was confirmed, in respect to portfolio and other investment, by end-December 1997 estimates. (These estimates were previously discussed in the section on 1997 CPIS results.)

The reliability of country data reported for the world Current Account, Capital Account, and Financial Account has been a matter of concern since the 1980s. Tables 7 and 8 show that discrepancies existed in these accounts through the 1990s. Although the large, negative discrepancy for the world Current Account declined (see Table 7), this decrease probably masked large, offsetting imbalances. In particular, the imbalance in portfolio and other investment income increased. Imbalances in components of the world Financial Account also grew during the 1990s (see Table 8). Consequently, it is almost certain that data now being reported on both Current Account and Financial Account transactions contain substantial deficiencies. Authors of the Godeaux Report noted that deficiencies in data reported for the Financial Account were associated with deficiencies in data reported for Financial Account positions. This observation was confirmed, in respect to portfolio and other investment, by end-December 1997 estimates. (These estimates were previously discussed in the section on 1997 CPIS results.)

VULNERABILITY ANALYSIS

Since publication of the Godeaux Report, substantial expansion and evolution have occurred in exchange and over-the-counter markets for financial derivatives covering a range of financial risks. These markets now have the capacity, in effect, to change the currencies, maturities, and marketability of the financial instruments underlying associated derivative contracts. Cross-border trading of debt-related risks associated with changes in exchange rates and interest rates has also increased substantially. Much attention has been focused on the assessment of associated financial risks and the vulnerability of economies to external debt crises. There is concern that, in open capital markets, residents may move their assets abroad; nonresidents may repatriate their assets more rapidly; and funding from private sources may be provided through instruments with relatively short maturities, through instruments with acceleration clauses that can shorten maturities, or on a rollover basis. Another concern, which was expressed in the Godeaux Report, is that private sector issues of instruments in external markets may not be adequately captured by official reporting systems. Therefore, it is even more important that countries address, within the framework of IIP statements, deficiencies in the reporting of portfolio investment liabilities.

Users of vulnerability analysis have focused on contracts, such as financial derivatives, that embody specific financial risks. Debt-related risks that may create liquidity problems also deserve attention. Assessments of liquidity risk may focus on nonresident liabilities (whether or not liabilities owed to nonresidents and due in specific periods exceed liquid claims on nonresidents for the same periods), or on foreign currency (whether or not liabilities to be repaid in foreign currency during specific periods exceed liquid foreign currency assets for the same periods), or on both. Another approach to the measurement of liquidity risk is to consolidate the accounts of enterprises that are resident in different countries but have common owners. After the accounts of international enterprise groups are consolidated and attributed to the countries in which the groups are headquartered, the liquidity risks faced by these countries may be determined.

TREATMENT OF FINANCIAL DERIVATIVES

The definition and classification, for balance of payments purposes, of financial derivatives have changed since publication of the Godeaux Report. In the revised balance of payments presentation (see boxed material in section II), most financial derivatives are considered financial assets. In addition, financial derivatives are now recorded in separate functional categories within the Financial Account and the IIP. Financial derivatives are not classified as portfolio investment because investment income does not, as is the case with equities and debt securities, accrue from financial derivatives. Nor are financial derivatives classified as external debt; no principal amount is advanced to be repaid, and no investment income accrues.

In financial derivative markets, new financial derivatives are frequently created to offset existing derivative contracts. In addition, forward contracts often switch, from period to period, between asset and liability positions. Therefore, a common accounting practice is to report asset and liability positions on a net basis in IIP statements and external debt statistics, although gross reporting of assets and liabilities is the normal procedure.23

Attempts have been made to determine notional values that would exist for financial derivatives at dates stated in derivative contracts and to present this supplementary information, together with other contingent obligations, in relation to values of the financial instruments underlying financial derivatives. The use of a similar approach is being considered for the presentation of data on external debt. (See subsequent discussion on page 36.) The presentation of such supplementary information with data on financial derivatives and data on external debt has implications for the treatment of portfolio investment.

Because these methodological issues have arisen only recently and accounting standards for the treatment of financial derivatives in income and balance sheet statements have only recently been established for banks and nonbanks, countries are just now exploring the design of collection systems to support the compilation of data for financial derivatives. Only two countries reported financial derivative positions in the 1997 CPIS 24. For these reasons, it was concluded that little would be gained by attempting to collect data on financial derivatives through the 2001 CPIS. Data on financial derivative positions are, however, being shown—for the first time—in separate categories of the Financial Account and the IIP in the Balance of Payments Statistics Yearbook for 2000. (The cut-off date for reporting data is September 2001.) After countries become accustomed to reporting financial derivative positions in IIP statements, the collection of data on financial derivatives through subsequent surveys should be considered.25

DEVELOPMENTS IN METHODOLOGY FOR EXTERNAL DEBT STATISTICS

In order that the quality of external debt statistics should be adequate for assessing countries’ vulnerability to foreign exchange crises, the Inter-Agency Task Force on Finance Statistics decided in 1998 to revise the existing manuals on external debt.26 When published, the new External Debt Statistics: Guide for Compilers and Users will present methodological standards for the measurement of external debt and provide guidance on compilation methods and analytical uses of data. This guide is expected to strengthen the links between external debt and IIP statistics and address—in the context of external debt statistics—the treatment of residual maturity, currency denomination, sectoral classification of debtor, debt between related parties resident in different countries, government guarantees, arrears, and sectoral attribution of creditor. The Guide is likely to emphasize the importance of presenting information on financial derivative positions to facilitate the identification of financial risk exposure arising from financial derivative contracts.

The primary characteristics for the classification of external debt are sector, type of instrument (especially the traded/nontraded distinction), and maturity (both original and remaining). Of particular interest for the CPIS are the separate reporting of debt issues in domestic and foreign currency and the classification by institutional sector (general government, monetary authorities, banks, nonbank financial corporations, nonfmancial corporations, other) of debtors and creditors. To facilitate the compilation of data on traded external debt, the Guide will probably include a recommendation on the reporting of additional information about debt issued abroad and in the reporting economy. For CPIS results to serve as a useful source of partner country data on the marketable elements of external debt, it would be necessary to provide supplementary information on the sector of the creditor. The Guide is also likely to address the compilation of data on forward-looking indicators such as debt service schedules.

THE ADEQUACY OF DATA SOURCES

Deficiencies existed in the coverage and timeliness of data available for balance of payments statistics, external debt, and the IIP. The Godeaux Report described efforts made to obtain supplementary data—especially for banking and portfolio investment— from creditor country and market sources. Thus, partner country data on international bank lending (obtained from the BIS) were considered more comprehensive than data reported by some borrowing countries, and the BIS data were used to reduce global discrepancies in other investment.27 Before the 1997 CPIS was conducted, there were few opportunities to use partner country data for portfolio investment as a whole, although market data compiled by the BIS on international issues of debt securities were available to assess the quality of equivalent data reported by debtor countries.

Although the availability of IIP data and, by implication, that of external debt data has significantly improved since the Godeaux Report was issued, interest in using data from alternative sources to assist in the analysis of external debt has grown. Efforts to obtain supplementary data on the tradeable element of countries’ external debt are described subsequently. The effectiveness, or the lack thereof, of these efforts is assessed to determine how the 2001 CPIS can contribute to the reconciliation of partner country and data reported by countries on holdings of debt securities.

In December 1998, the BIS, IMF, OECD, and World Bank commenced quarterly dissemination (through their websites) of a joint table of statistics on external debt. The joint table brought together, mainly from creditor and market sources, data pertaining to external debt. Subcomponents of portfolio investment covered by the joint table comprise bank holdings of debt securities (creditor data), issues of Brady bonds (debtor data), and international issues of debt securities (market data). The joint table presents comprehensive statistics on loans and advances from banks to countries and on bank holdings of debt securities issued by countries. However, the table is limited. Only those banks located or headquartered in countries in which central banks participate in the BIS reporting system are covered. The portfolio investment assets of banks are not reported, by some OFCs, separately from other claims on nonresidents. Also, coverage of domestic issues of debt securities (usually in domestic currency) is incomplete and may not include some private placements. Moreover, because the BIS database for international securities issues does not provide information on the residency of holders, the assumption is made that international securities issued by residents of particular countries were all purchased by nonresidents. (It is well-known that some of these securities are repurchased by residents of the issuing country.) Therefore, the 2001 CPIS and future coordinated surveys should obtain information to address these deficiencies.

Additional data, beyond those required by the BPM5, could be compiled to assess financial risk. The additional information includes data on the foreign currency exposure of residents and nonresidents, on debt servicing, on various off-balance sheet items related to contingent obligations, and external debt data compiled on an ultimate risk basis.

Data sources available to debtor countries for the compilation of portfolio investment liabilities tend to be more reliable for debt securities issued by the monetary authorities, central government, nonfinancial public enterprises, and the banking sector and less reliable for issues of equity and debt securities by the nonbank, private sector. In markets in which securities trading is active, it may be difficult to track nonresident holdings of marketable instruments. Tracking problems exist for instruments issued domestically (commonly in domestic currency) and for instruments issued (commonly in foreign currencies) abroad.

By providing reliable information on the residency of current holders of equity and debt securities issued by residents, the CPIS can serve as a useful supplement to less than adequate data sources available to debtor countries. Moreover, the CPIS database is compiled according to the debtor/creditor principle recommended in the BPM5 for the recording of portfolio investment transactions and positions and, thus, also provides a disaggregation, by country of holder, of portfolio investment liabilities. Usually, this information cannot be determined by sources of data available to the debtor countries. The 2001 CPIS could therefore supplement the joint table by supplementing the BIS databases on international issues of securities and bank holdings of debt securities and by providing creditor country detail. On the debtor side, the 2001 CPIS could supplement data collection systems or validate data on the basis of data reported by residents. If the CPIS became a regular survey, it would provide a source of data for debt securities not covered in the joint table.

THE SPECIAL DATA DISSEMINATION STANDARD

The Special Data Dissemination Standard (SDDS) was established in 1996 to guide countries that wish to obtain greater access to international capital markets through dissemination of economic and financial data to the general public.28 In December 1998, the IMF Executive Board conducted a second review of the SDDS and approved a three-year transition period (ending on December 31, 2001) for countries to begin disseminating—within six months after the reference dates of the relevant annual statements—annual IIP data.29 Dissemination—within three months after the reference dates of the relevant quarterly statements—of quarterly IIP data was also encouraged. The SDDS for IIP data requires assets and liabilities to be classified in accordance with the BPM5 recommendation.

By the time the 2001 CPIS is conducted, all countries that adhere to the SDDS should have in place data collection systems that support the compilation of annual IIP data, and more and better global data on portfolio investment liabilities should thereby become available. Consequently, comparisons more meaningful than those made with 1997 CPIS data could be made between countries’ portfolio investment liabilities, and a clearer picture of deficiencies remaining in both CPIS and IIP data should emerge.

Also in December 1998, the board approved the inclusion in the SDDS of a separate category for data on external debt. The board’s approval was contingent upon the results of consultations with countries, data users, and other international organizations regarding an appropriate transition period for the introduction and use of the new category. After the consultations, the executive directors approved—at their third (March 2000) review of the SDDS—a three-year transition period for integrating the category for data on external debt. Quarterly external debt data covering four sectors (general government, the monetary authorities, the banking sector, and all other) must be disseminated no less than three months after the reference date for each quarter. Details (as prescribed in the BPM5) on types of instruments and original maturities are required, as well as disaggregations by short- and long-term maturities. Resulting data can be compared with data from the joint table.

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