This chapter was prepared by Laura Papi.
The standard formula used is CA*/GDP=(r-g) D/GDP, where the CA* denotes the noninterest current account balance that has to be financed via debt-creating flows, r the average real interest rate paid on external debt, g the real GDP growth rate and D the country’s total external debt.
The Citigroup’s US$12.5 billion acquisition of Banamex, expected to be completed in the fourth quarter of 2001, is reflected in an increase in assets in 2001, but in subsequent years, these assets are assumed to be partially drawn down and hence would be a nondebt creating source of current account financing.
The concept of foreign liabilities is broader than external debt. For example, it includes also the stock of foreign direct investment.
The estimates of Lane and Milesi Ferretti were 40.6 percent of GDP and 43.2 percent of GDP at end-1997.
The formula used in these calculations is: CA**/GDP= (r’-g) NFL/GDP, where CA** denotes the balance on goods, nonfactor services and transfers, r’ the average net real rate on foreign liabilities (this would be the foreign interest rate for the part of foreign liabilities accounted for by external debt, and dividend payments on equity investments and such minus the rate earned on foreign assets).
Chinn and Prasad (2000), “Medium-term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration,” NBER Working Paper 7581, March 2000 and IMF Working Paper WP/00/46.
Terms of trade volatility is expected to increase savings, due to a higher degree of uncertainty.
Isard, Faruqee, and Prasad (2000), “Proposed saving-investment norms for nonindustrial countries”, IMF mimeo.
Milesi-Ferretti and Razin (1996), “Current Account Sustainability,” Princeton Studies in International Finance, No. 81, October.
However, as the private corporate sector has been the main intermediary of capital inflows in recent years, either on its own account or for the financing of PIDIREGAS projects, closer monitoring is warranted. It is possible that the sample used to gather information about the foreign exchange (FX) position of the corporate sector is not representative of the whole economy or that on-lending practices to smaller enterprises, which do not have access to international capital markets, are transferring the FX risk to firms that are less well equipped to bear it.