Post on 02-Nov-2014
description
transcript
The Balance of Payments
(or chapter 3)
2
Talk Agenda
• How nations measure int’l economic activity?
• Define Current Account, Capital/Financial Account?
• How can one use the BOP sub-accounts to make financial decisions?
• What leads to capital flight? Some History.
• Some Q & A (I ask the Q, you give the A)
3
The Balance of Payments Balance of Payments (BOP):
measures all international economic transactions b/n residents & foreign residents.
• Monetary and fiscal policy must take the BOP into account at the national level
• BOP data may be important– Indicates pressure on exchange rate– May signal imposition/ removal of controls over
payments, dividends, interest. – Helps forecast country’s market potential
4
For example…
BOP transactions (US side)• Daimler-Chrysler purchases manufacturer in Chicago.
• GM China pays dividends to parent in US.
• An American tourist purchases a necklace in India.
• A Mexican lawyer purchases US bond via investment broker in Cleveland.
Rule of thumb: “follow the cash flow”
5
B of PA. Current Account
A. Net exports/imports goods&services (Balance of Trade)
B. Net Income (investment income from direct portfolio investment plus employee compensation
C. Net transfers (sums sent home by migrant abroad)
B. Capital Account
Capital transfers related to purchase and sale of fixed assets such as real estate
C. Financial Account
A. Net foreign direct investment
B. Net portfolio investment
C. Other financial items
D. Net Errors and Omissions
Missing data such as illegal transfers
E. Reserves and Related Items
Changes in official monetary reserves including gold and foreign exchange reserves
Σ (A:E) = Overall Balance
Basic Balance = A+B+C
Overall Balance = A+B+C+D
6
BOP Accounting The BOP must balance How to measure international economic activity?
• Is it an international economic transaction?
• How do flow of goods/services/assets/money translate in debits & credits?
• Bookkeeping procedures for BOP?
Mistakes are common… BOP is a flow statement, not a stock statement.
• Main transactions in BOP:– Exchange of real assets.
– Exchange of financial assets.
7
The Current Account Goods Trade or Balance of Trade (BOT) – export/import of
goods. Services Trade – export/import of services (financial,
construction, and tourism). Income – predominately current income associated with
investments made in previous periods, + wages & salaries paid to non-resident workers.
Current Transfers – financial settlements due to change in ownership of real resources or financial items. Any transfer b/n countries which is one-way, a gift or a grant.
CA typically dominated by export/import of goods, for this reason Balance of Trade (BOT) is widely quoted.
8
For example…•Trade balance
•Debit: Sun Microsystems buys LCDs from Hong Kong.
•Credit: Singapore Airlines buys Boeing jet.
•Trade in services
•Debit: American rents an apartment in Singapore.
•Credit: TUI - Germany places an ad in the NYT.
•Income payments
•Debit: Honda US pays dividend to Honda Japan.
•Credit: Bank Austria pays salary to rep in NY office.
•Unilateral Current Transactions
•Debit: Peace Corps pays US volunteer teachers in Bosnia.
•Credit: TotalFina pays tuition of employee for Stern MBA.
9
The Current Account1997 1998 1999
Goods exports 682 672 687Goods imports (876) (917) (1030)
Goods trade balance (BOT) (194) (245) (343)
Services exports 255 261 270Services imports (167) (183) (191)
Services trade balance 88 78 79
Income receipts 257 258 276Income payments (251) (265) (295)
Income balance 6 (7) (19)
Current transfers, credits 8 9 9Current transfers, debits (49) (53) (57)
Net transfers (41) (44) (48)
US Current Account, 1997-1999 (US$ bn)
10
U.S. Trade Balance vs. Balance on Services & Income, 1985-99 (US$ bn)
-$350
-$300
-$250
-$200
-$150
-$100
-$50
$0
$50
$100
$150
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Balance on goods Services & income
Source: International Monetary Fund, Balance of Payments Statistics Yearbook, 2000.
11
The Capital/Financial Account Capital account: transfers of fixed assets, real estate,
acquisitions/disposal of non-produced/non-financial assets
Financial account: three components; classified by degree of control, • Direct Investment – Net balance of capital which is
dispersed from and into US for the purpose of exerting control over assets.
– E.g. US company acquires foreign company stake (-)
– Foreign company acquires US company stake (+)
– foreign direct investment (FDI): 10%+ of voting shares acquired.
12
The Capital/Financial Account• Portfolio Investment – Net balance of capital which
flows in/out of US but does not reach 10% ownership.– No voting or control rights over the asset. – Purchase/sale of equity securities.– Purchase/sale of debt securities.
– E.g. T-bill purchases by foreigners (net portfolio investment)– E.g. US$ debt issues by foreign companies/ governments.
– Risk/Return motivated.– Far more volatile than FDI.
• Other Investment Assets/Liabilities –Short & long-term trade credits, cross-border loans, currency & bank deposits, & other accounts receivable and payable in cross-border trade.
13
Direct Investment Concerns• How much shall the country control the direct
investments?– What can foreigners buy?
– Land, real estate sale to foreigners limited (Eastern Europe)
– Certain stock can not be purchased (China, Russia)
– How shall profit be distributed?– Profit drain?
– Many foreign firms in US reinvest most of their profits.
14
The Capital/Financial Account
Direct investment abroad (105) (146) (151)Direct investment in the US 106 186 276
Net direct investment 1 40 125
Portfolio InvestmentAssets purchased by US residents, net (119) (136) (129)Assets purchased by foreign residents, net 386 269 342
Net portfolio investment 267 133 213
Other InvestmentOther investment assets (264) (47) (159)Other investment liabilities 265 27 136
Net other investment 1 (20) (23)
Financial Account Balance 269 153 315
US Capital/Financial Account, 1997-1999 (billions of US$)
15
For example…•Direct Investment
•Debit: Ford builds factory in Australia.
•Credit: Ford sells its factory in UK.
•Portfolio Investment
•Debit: US investor buys BASF stock @ Frankfurt Stock Exchange
•Credit: Korean gov’t buys US T-bills to hold as forex reserves.
•Other investment
•Debit: HP deposits $10m in a bank account in London.
•Credit: HP generates accounts receivable in Canada.
16
US Financial Account, 1985-99 (US$ bn)
Source: International Monetary Fund, Balance of Payments Statistics Yearbook, 2000.
-$100
-$50
$0
$50
$100
$150
$200
$250
$300
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Net direct investment Net portfolio investment Net other investment
17
Current & Financial/Capital Account Balances, US, 1992 - 1999 (US$ bn)
Source: International Monetary Fund, Balance of Payments Statistics Yearbook, 2000.
-$400
-$300
-$200
-$100
$0
$100
$200
$300
$400
1992 1993 1994 1995 1996 1997 1998 1999
Current account Financial/capital account
18
The Other Accounts Net Errors and Omissions – Account is used to
account for statistical errors and/or untraceable monies within a country
Official Reserves (ORA) – total reserves held by official monetary authorities within a country. • Comprised of major currencies used in international
trade and financial transactions, & reserve accounts (SDR) held @ IMF.
– Important indicator for countries w/ fixed exchange rate regimes
– Need to maintain parity rate w/ official reserves.
19
The Balance of Payments in Total1997 1998 1999
A. Current Account (140.55) (217.13) (331.48)
Goods exports FOB 681.65 672.29 686.66Goods imports FOB (876.37) (917.19) (1029.92)
Goods trade balance (BOT) (194.72) (244.90) (343.26)Services exports 255.29 260.69 269.58Services imports (166.51) (182.68) (191.30)
Services trade balance 88.78 78.01 78.28Income credit 257.35 258.45 276.17Income debit (251.16) (264.66) (294.65)
Balance on Goods, Services & Income 6.19 (6.21) (18.48)Current transfers, credits 8.47 9.33 9.41Current transfers, debits (49.27) (53.36) (57.43)
B. Capital Account 0.35 0.64 (3.50)
Capital account credit 0.35 0.64 0.49Capital account debit 0.00 0.00 (3.99)
Total, Groups A plus B (140.20) (216.49) (334.98)
C. Financial Account 269.04 153.59 314.64Direct invesment 1.02 40.27 124.64
Direct investment abroad (105.02) (146.05) (150.90)Direct investment in the US 106.04 186.32 275.54
Portfolio investment assets (118.98) (136.00) (128.59)Equity securities (57.58) (101.24) (114.40)Debt securities (61.40) (34.76) (14.19)
Portfolio investment liabilities 385.60 269.33 342.19Equity securities 67.85 41.95 98.07Debt securities 317.75 227.38 244.12
Other investment assets (263.94) (46.60) (159.45)Monetary authorities 0.00 0.00 0.00General government 0.07 (0.42) 2.75Banks (141.12) (35.57) (69.86)Other sectors (122.89) (10.61) (92.34)
Other investment liabilites 265.34 26.59 135.85Monetary authorities (18.85) 6.88 24.71General government (2.86) (3.48) (1.37)Banks 171.31 30.27 80.10Other sectors 115.74 (7.08) 32.41
Total, Groups A through C 128.84 (62.90) (20.34)
D. Net Errors and Ommisions (127.83) 69.65 11.63
Total, Groups A through D 1.01 6.75 (8.71)
E. Reserves and Related Items (1.01) (6.73) 8.73
US Balance of Payments, Analytic
Presentation, 1997-1999
Q:
Why did FDI increase so much?
20
What if…? BOP shows surplus:
• D > S for that currency.
• Allow currency value to increase,
• Or accumulate foreign reserves.
BOP shows deficit:• S > D for that currency.
• Devalue currency,
• Or use official reserves to support currency.
21
Capital Mobility
Very important for BoP these days… Some history on it
• 1860-1914 –increasing capital openness, countries adopted gold standard
• 1914-1945 – couple of wars & depression
• 1945-1971 –”Annees des miracles” of international trade
• 1971-2003 – floating exchange rates, financial volatility, rapidly expanding capital flows
22
Source: “Globalization and Capital Markets,” Maurice Obstfeld and Alan M. Taylor, NBER Conference Paper, May 4-5, 2001, p. 6.
Low
High
Capital Mobility
18801860 1900 1920 1940 1960 1980 2000
•
••
•1880
1900
1914
1860
Gold Standard1880-1914
Capital Mobility
••1960
1971
Bretton Woods1945-1971
•
• 1980
2000
Float1971-2000
•1918
•
Interwar, 1914-1945
1929
1925
•1945
•
23
Capital Flight How to move capital across borders:
• International payments, regular bank transfers.
• Transfer by bearer (smuggling).
• Transfer of collectibles/ precious metals.
• Money laundering– Off-shore zones & tax heavens.
• Invoicing international trade transactions.– Transfer pricing
24
Where can I find this in … BOP?
– Calpers (the Cal mutual fund) buys shares of stock on the Tokyo & London stock exchanges?
– American tourist pays hotel in Paris w/ AMEX credit card (US issued)?