Net International Investment Position Research Articles

Macroeconomic imbalance procedure (MIP) scoreboard indicators and their predictive strength of ?multidimensional crises?

Research background: The evaluation of the predictive strength of MIP indicators in relation to crises is extremely important for the process of coordinating the economic policies of the EU countries. MIP is one of the pillars of the economic crisis prevention procedure. Predictive power of individual indicators has not been tested before their introduction.
 Purpose of the article: Evaluation of the predictive strength of fourteen MIP indicators in relation to multidimensional crises in the EU countries.
 Methods: We used ordered probit model to test the ability of MIP indicators to correctly predict episodes of ?multidimensional crises? (as defined by the authors) in the period between 2008 and 2017 in all EU Member States.
 Findings & Value added: We defined ?multidimensional crises?, combining several negative phenomena into one limited dependent variable. This work is also novel in its application of probit regression to test the predictive strength of MIP indicators with an ordered probit model. We identified five MIP variables which were statistically significant in predicting ?multidimensional crises? for all EU countries: net international investment position, nominal unit labour cost index, house price index, private sector credit flow and general government gross debt. Other variables turned out to be less important or not effective in crises prediction.

Global imbalances from the flow and stock perspective

The objective of the paper is to identify global payment imbalances from the flow and stock perspective in the years of 2000-2017 as well as to define the causes of differences in the development of global imbalances in both of the analysed aspects. In order to achieve the objective, current account balances and international investment positions that are systemically significant to economies were analysed with the use of descriptive statistics techniques and specific analytical indicators. From the conducted studies it arises that after the outbreak of the global financial crisis, the global flow imbalance declined, whereas the global stock imbalance rose significantly. The demonstrated divergence was caused by insufficient changes in current account balances (flow imbalances) in order to cause a decrease in net international investment positions (stock imbalances) systematically significant to economies and by a weakened impact of the transactions registered in the balance of payment (flows) on the change of an international investment position (stock).

Is Private Debt Excessive?

Private debt stocks have increased significantly around the world. As a by-product, several countries have accumulated large negative net international investment positions, while the debt overhang threatens potential growth. High debt also creates additional difficulties for policy makers, by affecting the channels of monetary policy transmission. Gauging the extent to which private debt is excessive helps to understand the risks to global financial stability and the policy challenges going forward. Accordingly, the current article proposes methodologies to benchmark the debt of non-financial corporations (NFC) and households by comparing debt-to-GDP ratios to a threshold beyond which the probability of a banking crisis becomes relatively high (prudential benchmark), borrowing from the literature on early-warnings, and to the level of debt that can be justified by economic fundamentals (fundamentals-based benchmark). The latter are computed on the basis of an empirical econometric analysis of the determinants of debt accumulation. The median prudential benchmark for NFC debt is around 85% of GDP, while for household debt it is about 55%. For fundamental-based benchmarks, the median lies at about 75% for NFCs and is close to 50% for households. Median corporate debt clearly surpassed both fundamentals-based and prudential benchmarks in the period 2007–2014. In contrast, median household debt has been consistently below its prudential benchmark, albeit quite close in 2010. However, household debt did exceed the fundamentals-based benchmark from 2007 to 2010. Both benchmarks can be used together in macroeconomic surveillance to assess debt from complementary perspectives.

Trends in the Development of the Balance of Payments and the International Investment Position of Russia

The article deals with the economic and statistical analysis of trends in the development of statistical data on the balance of payments and the international investment position of Russia over the past 15 years, indicating the sustainable development of the foreign economic sector of the Russian economy.The article begins with addressing the scope and subject matter of the study of the balance of payments and the international investment position of the country. Then the author examines external economic activities for each of the three periods depicting the influence of the crisis phenomena in the global economy in 1998, 2008 and 2014. Within these periods the author considers the interaction of the world and Russian economies, serious reduction of the external sector of the Russian economy in these periods of crisis and generally the deterioration of the results of foreign economic activity of the country. Comparing the balance of payments and international investment position before and after crisis periods it is possible to note the good state government management of the external sector of the Russian economy, which helped to restore the balance of payments of the country and to increase its net international investment position after the crisis.On a final note, it is concluded that the most effective and efficient for external regulation in a crisis is the so called profitable method when the expense of centralized redistribution of income and cash management of financial flows, is formed in the margin in the markets, determines the scale and direction of cash flows, are governed by incorporated in the cost of exported products yield. The market method with the help of tariff pricing and regulation does not allow to fully control and predict the vector of cash flows in a crisis, redistribute profitability between sectors of the economy and even “save” borrowers in crisis situation.

American hegemony: intellectual property rights, dollar centrality, and infrastructural power

How does dollar centrality persist in the face of continuous US current account deficits and a steadily worsening net international investment position? Two mechanisms create a structural basis for dollar centrality, explaining how dollars enter global credit markets and why surplus countries continue to hold dollar-denominated assets. First, institutional structures deriving from late development suppress domestic demand in major current account surplus countries, making them reliant on external demand for growth. Local banks recycle those dollars into the global economy, creating huge dollar liabilities and assets on their balance sheets. This locks them into continued use of the dollar and reliance on the US Federal Reserve during crises. Second, US firms participating in the global unbundling of production have constructed commodity chains in which they capture disproportionate shares of global profits through their control over Intellectual property. These profits sustain valuations and thus the attractiveness of dollar-denominated assets. Routinization in use of the dollar and compliance with Trade-Related Aspects of Intellectual Property Rights (TRIPS) and US controlled commodity chains creates infrastructural power in Michael Mann’s sense. This routinization sustains US geo-economic power in the face of persistent current account deficits and growing net international debt relative to US gross domestic product.

Benchmarks for net international investment positions

Applied analysis aimed at assessing which value of the NIIP is appropriate for a given country is relatively scarce, and the few existing papers on the topic estimate one-size-fits-all NIIP benchmarks (e.g., Catão and Milesi-Ferretti, 2014). This paper estimates country-specific NIIP benchmarks on a sample of 65 advanced and emerging economies according to two different criteria: consistency with economic fundamentals (NIIP norms, obtained as cumulated current account norms) and prudence against the risk of external crises (NIIP prudential thresholds, obtained as the threshold of the NIIP variable interacted with relative income per capita that maximises signal power in predicting external crises). The median for the country-specific NIIP norms is around −17% of GDP, while the median for prudential threshold is about −44%. The two benchmarks are negatively correlated across countries, highlighting a tension between factors underpinning the scope for external borrowing and debt tolerance. Gaps between actual and NIIP benchmarks are highly persistent, but help predicting subsequent medium-term NIIP changes better than the NIIP level, thus confirming the usefulness of country-specific reference values. The adjustment of the NIIP in response to NIIP gaps is asymmetric, with a significant adjustment limited to negative gaps, with the exception of countries with a positive net position in foreign currency.

A key currency view of global imbalances

This study divides the world into currency zones according to the co-movement of each currency with the key currencies. The dollar zone groups economies that produce well over half of global GDP. The euro zone now includes almost all of Europe and some commodity producers, but remains less than half the size of the dollar zone. The dollar zone share has shown striking stability despite big shifts across zones over time. These include the demise of the sterling zone and the expansion of the DM/euro from northwestern Europe to Europe and beyond.Global imbalances look very different from a currency perspective. In the 2000s, the dollar zone’s current account improved and became more or less balanced around the time of the Global Financial Crisis (GFC), even as the US current account plumbed all-time lows. The dollar zone’s net international investment position was also balanced around the time of the GFC. Thus, neither flow nor stock readings on the dollar zone support widespread predictions in the early 2000s of an imminent dollar crash. In fact, most of the secular widening of current accounts occurred within currency zones, where by construction investors bear relatively limited currency risk.Our account of the dollar’s dominance rests not on the US economy’s size but rather on the size of the zone with limited currency risk vis-a-vis the dollar. In such a world, the rise of another large economy poses the question not of relative size but rather of re-alignment of third currencies. What if the renminbi becomes a key currency alongside the dollar and the euro? Already some emerging market currencies are co-moving with the renminbi against the dollar. On current evidence, a renminbi zone would shrink the dollar zone, and widen its current account deficit.

Population Ageing and Poland’s International Investment Position

The aim of this paper is to try to evaluate the impact of population ageing on Poland’s international investment position in the next five decades. To that end, a literature review was carried out along with a comparative analysis of measures of population ageing in Poland and other countries using logical deduction. The results of the study show that the expected intensive progress of population ageing in the 2020–2065 period will contribute to an increased demand for foreign capital, an increasingly negative international net investment position as well as unfavourable changes in the structure of foreign liabilities. The influx of foreign capital caused by population ageing might not translate into the expected maintenance of / increase in the rate of economic growth, while the substantial negative net international investment position may become a barrier to development in subsequent periods.

Institutional Mechanisms for Regulating External Imbalances in the European Economic and Monetary Union

The relevance of the research is driven by the need to reveal modern factors and specifics of structural financial imbalances typical for regional integrated associations by an example of the European Union and to assess new mechanisms for regulation of disparities and investment cooperation development in a region. The subject of the research is the factors, trends and consequences of the division of EU countries into creditors and debtors by parameters of external debt financing; structure and directions of cross-border financial flows; and net international investment position based on the analysis of statistics related to types, structure and scale of external imbalances in the euro area as well as to methods and institutional mechanisms for their regulation. The purposes of the research were to reveal the acuteness of external imbalances in the countries of the European Economic and Monetary Union (EMU) in the financial sphere as a factor of macroeconomic destabilization in the region and systematize measures for strengthening and development of various institutional mechanisms to level off the remaining structural imbalances and expand the channels of investment in the real economy as part of the project to create a sustainable renovated EMU in the period until 2025 It is concluded that new more developed forms of regional financial integration, including the creation of the Banking Union and the Union of Capital Markets, the European Monetary Fund and the European Fund for Strategic Investment, are strategically important as effective institutions for regulation of external financing imbalances and support of investment in the economic development.

Impact of the ECB Quantitative Easing on the French International Investment Position

This paper aims at estimating the impact of the recent Asset Purchase Programs implemented by the ECB – known as Quantitative easing (QE) – on external assets and liabilities recorded in one economy’s International Investment Position (IIP). Our analysis focused on the case of France. We start by describing the recent evolution of the four main items constituting the French IIP; namely Portfolio Investments, Other Investments, Derivatives and Direct Investments. We observe ample, albeit temporary, variations of these items surrounding QE programs. This analysis is complemented by an econometric approach in which we consider as QE variables both the announcements of the programs and their actual implementation. QE measures do impact all the items of the French IIP. Announcements – and particularly the one of January 2015 – play a stronger role compared to the amounts purchased. We also decompose changes in the IIP into flows and valuation effects and show that the latter is the most reactive to QE measures. Finally, we establish counterfactual scenarios to quantify what France’s IIP would have been in the absence of QE. The strong impact observed following the announcement of January 2015 is rapidly counterbalanced; which suggests an over-adjustment phenomenon at the beginning of the program. This analysis allows estimating the outcome of the policy on the net IIP and thus on international wealth transfer. Consistently with our previous findings, we observe a robust impact at the beginning of the program which is then partly offset.

Understanding the global imbalance from the perspective of processing trade value added of China

ABSTRACTThe paper first exams the overall global imbalance by using the Net International Investment Position and then extracts its change with current account balance and merchandise trade deficit between China and the US. The research goes beyond the traditional interpretation of the phenomenon through the analysis of these outsourcing activities to the network method of redistributing the value added of products through the trade balance among partners. The estimation result of the paper shows that the US–China trade deficit is just about half of the value under the traditional statistics and only contribute to 23.8 per cent, not the 46.2 per cent originally, of the cumulative current account balance growth of the US from 2000. The external imbalance is the result of international division of labour and its elimination relies on the effort of both China and the US to rebalance their domestic economies.

Short and Long Term Determinants of the Net International Investment Position Resulting from the Balance of Payments of the European Monetary Union Countries

The paper aims at analysing the level, composition and factors determining changes of the net international investment position (NIIP) of the euro area countries. Although the improvement in the euro area’s NIIP during the period from 2Q2012 to 2Q2016 was largely driven by current account surpluses in 13 out of 19 countries, there is a visible difference between the NIIP changes and their components in the surplus and deficit countries. The group of net foreign assets countries increased its position primarily by running current account surpluses reflecting mainly a positive balance on goods and, on a minor scale, a positive primary income balance. The NIIP in the group of net foreign liabilities countries deteriorated although the cumulative current accounts were in surplus for this period. Here, the current account improvement was largely driven by services which, in contrast to the net foreign asset countries, were in surplus. In turn, the cumulative primary income in the group of net foreign liabilities countries was in minus. Statistical analysis aimed at estimation of determinants of the changes in the NIIPs over the subsequent quarters shows that their short term behaviour was on a large scale positively driven by the changes of valuation effect resulting, for example, from exchange rates and prices movements. It should not be surprising that the signs which indicate the direction of valuation effect on the NIIP pattern are different in the short and long term. It should be stressed that the valuation effect influence decreases over time since valuation gains and losses overlap and largely neutralise each other. Nevertheless, combined losses were higher than total gains and therefore its impact on the NIIP was negative in the analysed period. On the other hand, the EMU current account surpluses were repetitive and persistent, being the main factor behind the improvement of the cumulative euro area NIIP changes.

Assessing the sustainability of external imbalances in the European Union

AbstractWe assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of 22 EU countries using two complementary approaches. First, we employ time‐series stationarity tests of current account balance‐to‐GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilises the NIIP and the NED. We find that there is sustainability of the CA balance in eight countries, NIIP in five countries and NED in 10 countries, whereas there is evidence of a lack of sustainability in five debtor nations and three creditor nations. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of structural breaks, and valuation effects via exchange rate and interest rate changes.

O. Klymenko, S. Mala, Н. Matviienko. International investment position of Ukraine: possibilities for improvement in the context of tax policy changes.

This article is devoted to the analysis of Ukraine’s International Investment Position (IIP) for the purpose of identifying ways to improve it. The authors investigated the IIP of the main countries of the world. They identified the countries of the European Union with the highest net IIP deficit relative to GDP. This article analyzes the dynamics and structure of Ukraine’s assets and liabilities to determine how they came to be. This article also identifies the main risks, advantages, and disadvantages of foreign direct investment flows in Ukraine. The article will suggest that improved fiscal policy, including tax legislation, will enhance Ukraine’s IIP. A sound tax policy promotes foreign investments into the country’s economy, can structurally improve the investment position, and prevents uncontrolled capital outflow. It is necessary to adopt a package of anti-Base Erosion and Profit Shifting (BEPS) laws against tax evasion and against disclosure of other property information to implement the capital transfer tax. The article identifies the main advantages of this model of taxation.

Unwinding External Stock Imbalances? The Case of Italy’s Net International Investment Position

This paper is a case study of an (almost complete) adjustment of Italy’s external stock imbalance. After reaching a peak of around 25 per cent of GDP in early 2014, Italy’s net external debtor position has steadily decreased, reaching less than 7 per cent of GDP at the end of 2017. The contribution of this work is twofold. First, it reviews the main developments in Italy’s net international investment position (NIIP) since 1999. Second, it reports a baseline projection of Italy’s NIIP over a medium-term horizon, as implied by current account balance forecasts. Since this projection ignores the role of valuation adjustments, the study also provides an analysis of their sensitivity to a set of potential movements in exchange rates and equity or bond markets.

The Sustainable Welfare Index: Towards a Threshold Effect for Italy

GDP, as a key parameter for macro-economic policy, has long been criticized. One of the better known monetary alternatives to GDP is the ISEW, a synthetic proxy of sustainable welfare. Theoretical and methodological limitations of this indicator have been identified and several refinements or extensions proposed, GPI for example. Building on these approaches, this article presents a new composite flow-oriented indicator directly comparable with GDP. The proposed Sustainable Welfare Index (SWI) is calculated for the Italian case over the 1960–2014 period. The estimate of SWI over an extended period of fifty-four years, provides evidence for a previously undetected “threshold effect” in Italy by means of a flow-oriented indicator – unlike GDP, SWI per capita stops increasing in 1991. Empirical results show that the level of sustainable welfare in Italy stops growing mainly because of a rise in income inequality, a decline in non-paid domestic work and a worsening of the net fixed capital formation and net international investment position.

Comparison of External Exposure of Central and Eastern-European States as a Factor Threatening Financial Security of Their Economies

Central and Eastern-European countries are strongly linked to the international economic and financial systems, which results in their dependence on foreign capital and on the upturn in the global markets. This situation also makes them vulnerable to external shocks. Resilience of the economies of CEE countries was additionally diminished by their relatively quick and uncompromising opening up to the process of globalization and European integration. All the economies subject to scrutiny have quite a substantial external debt level (reaching 55–139% of GDP), their net international investment position is quite strongly in the negative (constituting 25–71% of GDP). They are also characterized by high level of foreign liabilities (85–350% of GDP), a significant degree of trade openness (export and import of goods and services amounting to 41–94% of GDP), considerable rate of foreign liquid portfolio investments (even as much as 32% of GDP). Another common feature is the strong financial support received from the EU budget, with CEE countries being its net beneficiaries (with the accumulated value of funds received from the EU budget in 2004–2015 at the level of 21–42% of GDP). It should be borne in mind that Lithuania, Latvia, Estonia, Slovenia and Slovakia are members of the Eurozone, i.e. operate an international currency, which improves their creditworthiness and augments the trust of the global markets. What seems not without significance for investors is the fact that the IMF classified these five CEE countries – as well as the Czech Republic – as advanced economies. In light of the above, it should be stated that the Polish economy is characterized by a relatively strong external exposure relative to the creditworthiness the country boasts. This exposure increases Poland’s vulnerability to shocks and makes it less immune thereto. These circumstances partially explain the higher estimation of the risk premium for investments in Poland, which reduces the state’s opportunities and prospects of development in comparison with other CEE economies. It should be stressed that when assessing the external exposure one must take into account not only its particular characteristics, but also the economic and political stability of a given country – or, more specifically and importantly, their assessment by financial markets.

Household Wealth & the Net International Investment Position

Aggregate household wealth dynamics are closely associated with fluctuations of the economy. However, the linkages between household wealth dynamics and cross-border financial holdings have remained unexamined. Thanks to the recent assembly of an essential dataset, this paper assesses these co-movements in selected advanced economies. We establish that increases in net household wealth are associated with deteriorations of the Net International Investment Position (NIIP). This pattern is primarily driven by valuation changes in wealth (mostly through house price appreciation). Overall, we find that capital gains on household wealth are strongly related to the accumulation of net external debt liabilities, a key indicator of financial vulnerability.

Iceland's Capital Controls and the Resolution of its Problematic Bank Legacy

Iceland’s capital controls were imposed in October 2008 in order to prevent massive capital flight and a complete collapse of the exchange rate. The controls were in place for more than eight years, primarily because of the risk of large outflows of domestic holdings of the failed Icelandic banks. As argued in a precursor to this paper (Baldursson and Portes, 2014), significant restructuring of domestic holdings of foreign creditors of the banks was required before the controls could be lifted. Such a restructuring was finally accomplished in January 2016. Broadly in line with the recommendations of Baldursson and Portes (2014), the resolution involved a voluntary – in much the same sense as the Greek debt restructuring was voluntary – restructuring of the banks’ debt, under which most of the Icelandic krona assets of the banks were relinquished to the state or tied up in Iceland. An attempt at resolving so-called ‘offshore kronas’ – the remains of the carry trade into Iceland in the years before the 2008 crisis – failed resulting in a dispute with international investors. We model the strategic interaction between Iceland and creditors on the resolution of the failed banks as well as the interaction between Iceland and investors on the resolution of the offshore krona holdings. The model explains why the bank resolution was successful and why the offshore krona auction was not. Resolution of the old banks will cut Iceland’s public debt, but it will still be substantially higher than before the crisis. The net international investment position of Iceland has, however, turned positive and is stronger than it has been in decades. In March 2017, the capital controls were removed in practice, albeit not by statute. Inflow measures remain.

Assessing the Sustainability of External Imbalances in the European Union

We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of EU countries using two complementary approaches. First, we employ both time-series and panel-data stationarity tests of current account balance-to-GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilizes the NIIP and the NED. We find that there is sustainability of the CA balance mainly in a few surplus countries whereas there is more concern about the sustainability of the NIIP or NED in countries with a credit position than in countries with a debit position. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of important structural breaks, and valuation effects via the exchange rate.