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Innovation in New Zealand 2003

Balance of PaymentsSources and Methods

2004

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Innovation in New Zealand 2003

Published in September 2004 by

Statistics New ZealandTe Tari Tatau

Wellington, New Zealand

Catalogue Number 52.001ISBN 0-478-26958-7

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Preface This publication describes the conceptual framework of New Zealand's balance of payments (BoP) and international investment position (IIP) statistics and the data sources and methods used to compile them. Its purpose is to help users understand the statistics. It explains what the statistics measure, how they may be interpreted, how they relate to other economic series, how they are produced, where they are published and why they are subject to varying degrees of accuracy and reliability. This is the fourth edition of Sources and Methods, the third having been published in 2001. This new edition preserves the original concept of the manual and brings no major redesign to the previous edition. The text has been revised, expanded and updated with the objective of incorporating relevant changes as the BoP statistical reporting framework continues to grow in both breadth and depth. I would like to express my thanks to the large number of enterprises and individuals, both in the private and public sectors, which provide data. Without their cooperation, we would not be able to prepare the statistics referred to in this publication. Brian Pink Government Statistician

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Contents Page

Preface 1

Abbreviations 5

Chapters 1 Introduction 7

2 Conceptual framework 11

3 Classification 19

4 Data dissemination and related Issues 29

5 Current account overview 37

6 Goods 39

7 Services 45

8 Income 55

9 Current transfers 61

10 Capital transfers 65

11 The financial account and the international investment position statement

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12 Direct investment 77

13 Portfolio investment 85

14 Financial derivatives 91

15 Other investment 95

16 Reserve assets 99

17 Quality of data 103

18 The balance of payments and the relationship to the national accounts 113

Appendixes 1 Data sources used in the compilation of New Zealand's BoP and IIP statistics

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2 Data methodologies used in the compilation of BoP and IIP components 129

3 Chronology of major events affecting BoP statistics 133

4 Frequently asked questions and common fallacies in the BoP and the IIP 139

Index 145

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Abbreviations ABS Australian Bureau of Statistics ADRs American Depository Receipts AIIS Annual International Investment Survey ANZAC Australian and New Zealand Army Corps ANZSIC Australian and New Zealand Standard Industrial Classification APEC Asia Pacific Economic Co-operation ASEAN Association of South East Asian Nations BF Business Frame (Statistics New Zealand's central register of

businesses) BoP Balance of Payments BPM4 Balance of Payments Manual Fourth Edition BPM5 Balance of Payments Manual Fifth Edition CAB Current Account Balance CAS Capital Account Survey cif Cost, insurance and freight CPI Consumer Price Index DIS Domestically Issued Securities fob Free on board ELP Survey of English Language Providers EU European Union Eurostat Statistical Office of the European Communities FRAs Forward Rate Agreements GDP Gross Domestic Product HOTP Hot Off The Press IIP International Investment Position IMF International Monetary Fund IRD Inland Revenue ISIC International Standard Industrial Classification ITSS Survey of International Trade in Services and Royalties IVS International Visitors Survey MFAT Ministry of Foreign Affairs and Trade MFS Managed Funds Survey NCT Net Capital Account Transactions NFI Net Foreign Investment nie Not included elsewhere NRWT Non-Resident Withholding Tax NZDF New Zealand Defence Force NZHSC New Zealand Harmonised System Classification 1996 NZISC New Zealand Standard Institutional Sector Classification 1996 NZIS New Zealand Immigration Service NZSE New Zealand Stock Exchange OIC Overseas Investment Commission ODA Official Development Assistance OECD Organisation for Economic Co-operation and Development OET Overseas Exchange Transactions QES Quarterly Employment Survey QIIS Quarterly International Investment Survey RBNZ Reserve Bank of New Zealand SDR Special Drawing Right SDT Survey of Debit Transactions SNA93 System of National Accounts 1993 SORT Survey of Returned Travellers SORNZ Survey of Returned New Zealanders SOTW Survey of Outbound Tour Wholesalers UN United Nations vfd Value for duty

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Chapter 1 IInnttrroodduuccttiioonn

Purpose of this publication 1.1 The balance of payments (BoP) and international investment position (IIP) are some of New Zealand's key economic statistics. Put simply, the BoP measures economic transactions between New Zealand residents and the rest of the world. It also draws a series of balances between inward and outward transactions, provides an overall net flow of transactions between New Zealand residents and the rest of the world, and reports how that flow is funded.

Economic transactions include: • exports and imports of goods such as agricultural products, raw materials, machinery

and transport equipment, computers, white goods and clothing • exports and imports of services such as international transport, travel and business

services • income flows such as dividends and interest earned by foreigners on investments in

New Zealand and by New Zealanders investing abroad • financial flows such as investment in shares, debt securities and loans • transfers, which are offsetting entries to any one-sided transactions listed above, such

as foreign aid and funds brought by migrants to New Zealand. 1.2 In recent years, with growing interest in the level of foreign investment and debt, more emphasis has been placed on New Zealand's IIP statistics. These statistics measure the level (or stock) of foreign investment in New Zealand and New Zealand investment abroad at the end of a period. The difference between foreign investment in New Zealand and New Zealand investment abroad is referred to as New Zealand's net IIP. The IIP statistics may be split to show, separately, New Zealand's foreign debt and equity investment. The latter provides a measure of the foreign ownership of New Zealand enterprises (through share holdings) and of New Zealand ownership of foreign enterprises.

1.3 This publication aims to provide, for New Zealand's BoP and IIP statistics, a comprehensive understanding of their:

• underlying conceptual framework • classification of data items • presentation and publication • data sources and methods • data quality • relationship to broader economic statistics as defined in the system of national

accounts.

Users and uses of statistics 1.4 A wide spectrum of audiences requires information about BoP and IIP concepts, sources and methods. This ranges from users with broad, general needs for information about the main aggregates (eg students, teachers and the general public) to those with specialised needs relating to particular data items (eg the Reserve Bank of New Zealand (RBNZ), the New Zealand Treasury, economic agencies, the International Monetary Fund (IMF) and international credit rating agencies.)

1.5 This publication is aimed mainly at the more detailed user of BoP and IIP statistics and aims to provide a substantial guide to how Statistics New Zealand (Statistics New Zealand) compiles these statistics. Due to the constantly changing economic environment and the need for frequent evaluation of data sources and methods, this publication will in time become dated. Users should, therefore, keep abreast of changes to data sources and methods announced from time to time in

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the quarterly BoP and IIP Hot Off The Press releases. However, Statistics New Zealand updates this publication periodically.

International statistical standards 1.6 Statistics New Zealand has always attempted to follow, wherever possible, the international standards relating to BoP and IIP statistics. There are several reasons for this. First, domestic and foreign analysts will be assured that New Zealand's official BoP and IIP statistics comply with objective, coherent international standards that reflect current, global analytic needs. Second, New Zealand is a member of the international community and international users need comparable data for comparison between countries. Third, New Zealand, as a formal member of organisations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), needs to submit its various economic statistics in conformity with standards set by those organisations. Fourth, a method of data validation is required for New Zealand to compare and reconcile its data with those of other countries. For this to occur, statistics need to be as comparable as possible. 1.7 To facilitate such consistency and to provide guidelines for its members, the IMF has issued the Balance of Payments Manual (BPM), the first edition of which appeared in 1948 and the most recent (fifth) edition in 1993. The conceptual framework of the New Zealand BoP corresponds to that underlying the fifth edition of the IMF Manual, referred to as BPM5.

1.8 In New Zealand's BoP statistics, BPM5 was implemented in several stages over three years. The first stage was in July 1998 when Statistics New Zealand published the March 1998 quarter BoP and the year ended March 1997 IIP and BoP financial account statistics as a developmental series on a fifth edition presentation basis. The changes were limited to renaming categories and reclassifying existing information.

1.9 Stage two was introduced with the release of the June 1999 quarter BoP statistics. The changes included:

• redefining the current account to exclude items of a capital nature, for example migrants' capital transfers

• presentational changes to the BoP statement to reflect the redefinition of the current account, so that the BoP statement now comprises a current account and a capital and financial account

• expansion of the classification of services • introducing changes in the compilation of services.

1.10 The remaining BPM5 changes were introduced and released as part of the June 2000 quarter BoP release. These include:

• revising the methodology for insurance services • calculating interest income on an accrual basis rather than a due for payment basis • using the creditor accrual approach for interest on government debt securities • using a 10 percent or more ownership criteria as the basis for determining direct

investment and the associated reinvested earnings, with less than 10 percent ownership representing portfolio investment. (Previously a 25 percent or more ownership threshold was used for direct investment.)

• making the definition of direct investment symmetrical, so that for both inwards and outwards direct investment the single direct investor approach is used. (Previously a cumulative approach was used for inwards direct investment and a single direct investor approach for outwards direct investment.)

• excluding foreign currency deposits held with resident banks from the reserves component

• collecting stock data for financial derivatives.

Revisions to BMP5

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1.11 Work is under way at the IMF on revising the BPM5. The revised manual is due for release in 2008. The IMF distributed to compilers an annotated outline for the revision in April 2004. The revision of the manual has become appropriate because of developments in the international economic and financial environment since the publication of BPM5. As the revision process progresses, measures needed to update the New Zealand's BoP data collection framework will become clearer.

1.12 Statistics New Zealand initiatives currently under way in the Services area aiming at better meeting the needs of users and the requirements of the new Manual on Statistics of International Trade in Services are consistent with the work expected to be required for the revised BoP manual. Work is expected to be required to align our current financial account and IIP practice with the new External Debt Guide. This work will feed into requirements for the revised BoP manual. In addition, the revised manual is expected to update the reporting standards for a number of financial account and IIP topics, such as the treatment of reverse transactions, accrued interest, and financial derivatives. Statistics New Zealand will be liaising with users of BoP and IIP statistics to ensure they are informed about major changes proposed for the BoP and IIP and their impact on the data series.

Structure of this publication 1.13 Chapter 2 explains the concepts and terms used in BoP and IIP statistics. It also explains the double-entry accounting system that underscores the statistics, the concept of residency, economic transactions, the valuation and time of recording of transactions, the reconciliation of BoP and IIP statistics, and other important conceptual issues. 1.14 Statistics need to be arranged in a coherent structure to support their use for a wide variety of purposes. The BoP statement provides a classification of economic transactions and similarly, the IIP statistics are broken down by various levels of classification. Chapter 3 explains the nature of these classifications and describes the more important ones. Some of the lesser classifications are left to later chapters.

1.15 Chapter 4 outlines Statistics New Zealand’s publication strategy for BoP and IIP statistics. It also explains the presentation of the statistics, commencing with the summary BoP and IIP statistics and moving to more detailed statistics and the use of analytic measures such as seasonal adjustment and trend.

1.16 Chapter 5 provides an overview of the current account.

1.17 Chapters 6 to 10 describe in some detail the concepts, additional classifications, sources and methods applicable to the major components of the current and capital accounts of the BoP. A table is shown at the end of each chapter summarising data sources and estimation methods applicable. Chapter 6 describes the goods component of the current account; Chapter 7 describes services; Chapter 8 income; Chapter 9 current transfers; and Chapter 10 describes the capital account.

1.18 Chapter 11 elaborates in more detail than Chapter 2, the BoP financial account and its close relationship to the IIP. It provides a background for the next five chapters, which explain direct investment (Chapter 12), portfolio investment (Chapter 13), financial derivatives (Chapter 14), other investment (Chapter 15) and reserve assets (Chapter 16).

1.19 Chapter 17 examines the quality of BoP and IIP statistics. It provides an analysis of the accuracy and reliability of the statistics and the factors influencing quality.

1.20 Chapter 18 explains the relationship between BoP and IIP statistics and broader economic statistics that are articulated in the system of national accounts. This is an important chapter for those wishing to have a better understanding of the linkages between the external sector and other sectors of the economy.

1.21 The appendices detail the data sources (Appendix 1) and selected data methodologies (Appendix 2) used in the compilation of components of the BoP and IIP statistics. The chronology of New Zealand's BoP development and related events are illustrated in Appendix 3, while Appendix 4 highlights some frequently asked questions and common fallacies in BoP statistics.

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Earlier concepts, sources and methods publications 1.22 The first concepts, sources and methods publication for the BoP was published by Statistics New Zealand in 1982. A second and more comprehensive edition was published in 1991 following the introduction of new data sources required as a result of deregulation of the foreign exchange market in December 1984. The 2001 version of the Sources and Methods handbook was first published in June 2001, with this update published in August 2004. While each of the previous publications still serves as a useful reference to the history of BoP and IIP statistics in New Zealand, the present publication revises and updates them.

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Chapter 2 CCoonncceeppttuuaall FFrraammeewwoorrkk

Definition

Balance of payments

2.1 New Zealand’s balance of payments (BoP) is a statistical statement that records the value of New Zealand’s transactions in goods, services, income and transfers with the rest of the world, and the changes in New Zealand’s financial claims on (assets), and liabilities to, the rest of the world.

2.2 The BoP statement comprises: • the current account, which records transactions in goods, services, income and current

transfers • the capital account, which records capital transfers and the acquisition/disposal of non-

produced, non-financial assets • the financial account, which records transactions involving New Zealand claims on

(assets), and liabilities to, non-residents. International investment position

2.3 The international investment position (IIP) is closely related to the BoP financial account. BoP measures transactions (also referred to as flows), while the IIP measures the level (also referred to as stock) of assets and liabilities held at particular points in time.

2.4 The IIP shows the opening and closing balances of the stocks of investment. The changes in these balances are reconciled in the IIP. Financial transactions included in the reconciliation statement are equivalent to the transactions measured in the financial account of BoP. This is illustrated in Figure 2.1, which shows the relationship between BoP and IIP statements. The column shows the accounts of the BoP, while the row shows the IIP. Common to both row and column is the financial account of the BoP (referred to as 'transactions' when presented in an IIP format). This financial account shows, for the relevant accounting period, the financial transactions that arise from, or are the counterparts to, the transactions in the current and capital accounts. Correspondingly, it also reflects the change in New Zealand's IIP over the reference period due to those financial transactions and other changes in the position reflecting price changes, exchange rate changes and other changes such as reclassifications and write-offs.

2.5 Classifications such as assets and liabilities, type of investment (direct investment, portfolio investment, financial derivatives, other investment and reserve assets) and instrument of investment are used consistently in both the financial account of the BoP and the IIP. These follow the IMF standards.

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Figure 2.1:

Relationship between the New Zealand Balance of Payments and International Investment Position

Balance of payments CURRENT ACCOUNT Goods Credits Debits Services Credits Debits Income Credits Debits Current Transfers Credits Debits Balance on Current Account

CAPITAL ACCOUNT Capital Transfers Acquisition/disposal of non-produced, non-financial assets Balance on Capital Account

Inte

rnat

iona

l Inv

estm

ent P

ositi

on

Position at the beginning of period New Zealand Investment Abroad Direct Investment Portfolio Investment Other Investment Financial Derivatives Reserve Assets Foreign Investment in New Zealand Direct Investment Portfolio Investment Other Investment Financial Derivatives Net International Investment Position

FINANCIAL ACCOUNT Transaction changes Direct Investment Abroad In New Zealand Portfolio Investment Assets Liabilities Other Investment Assets Liabilities Reserve Assets

Balance on Financial Account

Other changes in position reflecting Price Changes Exchange Rate Changes Other Adjustments

Position at the end of the period New Zealand Investment Abroad Direct Investment Portfolio Investment Other Investment Financial Derivatives Reserve Assets Foreign Investment in New Zealand Direct Investment Portfolio Investment Other Investment Financial Derivatives Net International Investment Position

Net errors and omissions (The sum, with sign reversed, of the balances on the current, capital and financial accounts)

Balance of payments – a double-entry system 2.6 Conceptually, an economic transaction has two sides: something of economic value is provided and something of equal value is received. The double-entry recording system in the BoP reflects this. When an economic value is provided (eg a shipment of apples) a credit entry is made, and when an economic value is received (eg a payment for the apples) a debit entry is made. For example, when an exporter sells (provides) goods to a non-resident, the exporter may receive cash (a financial asset) or another type of financial asset (eg a trade credit claim) in return. The export is represented by a credit entry and the financial asset acquired is represented by an offset debit entry. An understanding of the double-entry recording system is necessary for a complete understanding of BoP statistics.

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2.7 Under the double-entry system, by definition credit entries must equal debit entries. Credit entries are required for exports of goods and services, income receivable and increases in liabilities or reductions in assets. Likewise, debit entries are required for imports of goods and services, income payable and increases in assets or reductions in liabilities. Where something of economic value is provided without something of economic value in exchange (ie without a quid pro quo), the double-entry system requires an offset to be imputed (a transfer entry) of equivalent value. For example, food exported as aid requires a credit entry for the goods provided and a debit transfer as the aid offset.

2.8 Table 2.2 sets out the conventions for the system. Table 2.3 illustrates how the double-entry system is applied.

Table 2.2:

The Conventions for the Double-entry Recording System Credit entries: Debit entries:

Exports of goods and services. Imports of goods and services.

Income accruing to residents from non-residents.

Income accruing to non-residents from residents.

Transfers, offsetting debit entries. Transfers, offsetting credit entries.

A reduction in an economy’s foreign assets, or an increase in foreign liabilities.

An increase in an economy’s foreign assets or a reduction in foreign liabilities.

Table 2.3:

Examples of the Double-entry Recording System Credit Debit 1. A container of apples (value 500) is exported to non-residents for foreign exchange (ie the apples are provided and the bank payment (bank deposit) received)

Goods 500 Foreign currency assets, bank deposits 500

2. Aid as medical supplies (value 150) is provided to non-residents (ie a good is provided and a transfer is imputed)

Goods 150 Current transfers 150

3. A loan (value 100) is repaid by a resident enterprise to a non-resident enterprise (ie reducing a liability to a non-resident and a reduction in bank deposits)

Loan repayment 100 Bank deposits, foreign currency, assets 100

2.9 It follows that, in principle, under a double-entry accounting system, the net sum of credit and debit entries must be zero. In practice, however, data for BoP estimates is often derived from different data sources and inconsistencies can occur. Some transactions are not measured accurately (errors), while others are not measured at all (omissions). There may also be timing differences in recording the transactions in BoP. Therefore, in order to ensure that the net sum of the credit and debit entries is zero, a balancing item which reflects these

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errors and omissions is included. The item is included within the financial account as the Net Errors and Omissions item. (For more detail refer to Chapter 4.)

Essential concepts 2.10 Essential concepts guiding the compilation of New Zealand's BoP and IIP statistics are:

• transactions are recorded between residents of New Zealand and residents of other countries

• transactions are recorded at their market value. Foreign currency transactions are converted to their New Zealand dollar equivalent

• transactions are recorded at the time ownership changes, or, in the case of services, when the service is performed.

Residence

2.11 In compiling New Zealand's BoP and IIP statistics, the New Zealand economy is conceived as comprising the economic entities that have a closer association with the territory of New Zealand than with any other territory. Such economic entities are described as residents of New Zealand. Any economic entity which is not regarded as a resident of New Zealand is described as a non-resident. New Zealand's territory is defined to include the territories lying within its political frontiers and territorial seas and in the international waters over which it has exclusive jurisdiction.

2.12 The residents of New Zealand comprise:

• Resident general government agencies, ie all government departments, local government bodies in New Zealand and New Zealand embassies, consulates and military establishments located overseas. Conversely, the embassies and consulates of foreign governments in New Zealand are considered to be non-residents.

• Resident financial and trading enterprises, which include all enterprises engaged in the production of goods and services on a commercial or equivalent basis within the territory of New Zealand. Enterprises may be incorporated or unincorporated; privately or government owned and/or controlled; and locally or foreign owned and/or controlled. The definition of an enterprise in terms of the territory in which it is located often makes it necessary to divide a single legal entity into a head office operating in one economy and a branch operating in another. Resident enterprises include New Zealand branches of foreign companies but exclude foreign branches of New Zealand companies.

• Resident non-profit bodies, which are those in which individuals and/or enterprises combine, as owners, to produce goods and services within the territory of New Zealand for purposes other than to provide a financial return for themselves. Examples are churches, charitable organisations and representative business organisations such as chambers of commerce.

• Resident households and individuals, which broadly encompass all persons residing in the territory of New Zealand for one year or more, whose general centre of interest is considered to be New Zealand. New Zealand's official diplomatic and consular representatives, New Zealand's armed forces, other New Zealand Government personnel stationed abroad and their dependants, and New Zealand students studying abroad are also treated as New Zealand residents. Their centre of interest is considered to be New Zealand even though they may be abroad for one year or more. Generally, the centre of interest of persons visiting New Zealand for less than one year is considered to be outside New Zealand and they are, therefore, regarded as non-residents. However, if they stay for one year or more they are considered to be residents for BoP purposes. Irrespective of their length of stay foreign diplomatic, consular, military and other government personnel, their dependants, and foreign students studying in New Zealand are regarded as non-residents.

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2.13 Within the concepts of residency a number of ‘special cases’ exist: • In accordance with the convention adopted for BoP statistics, land can be owned only

by a resident of the country where the land is located. The implication for BoP recording is that the actual non-resident owner is considered to have a financial investment (equity) in a notional resident enterprise, which in turn acquires ownership of the land. Such a transaction would be construed as an increase in foreign investment in the country in which the land is situated. The exception to this rule concerns land purchased or sold by a foreign embassy. This is because the land shifts from one economic territory to another and is thus included in the sale or purchase of non-produced, non-financial assets.

• The inclusion of the value of aircraft, ships and any other mobile equipment in the New Zealand BoP depends on whether they are purchased outright or financially or operationally leased. Where they are purchased outright, they are regarded as being resident and the value is included in BoP merchandise flows.

o A financial lease is one in which all of the risks and benefits associated with the ownership of an asset are transferred to the lessee, whether or not title to the asset is actually transferred. In such cases, the mobile equipment is regarded as being resident and an ownership change is imputed. The value is included in New Zealand BoP merchandise flows.

o An operational lease is one in which there is an agreement to use assets for a specified period of time in exchange for rent. The risks and benefits remain with the lessor. No change of ownership occurs and none is imputed. The lease payments are recorded under 'Other business services'. For more detail, refer to Chapter 7.

Valuation

2.14 To be useful in analysis, and to provide meaningful indicators of cross-border economic activity, it is important that BoP and IIP statistics carry values that have economic meaning. It is also important, given the double-entry accounting system used, that a uniform valuation is adopted. This means that the credit and debit entries of each transaction, which in practice may be derived from independent sources, should be valued at the same price. In addition, a uniform valuation is essential to sum different types of transactions on a consistent and comparable basis. The use of a uniform valuation principle aids understanding by users. Moreover, statistics for different countries will not be comparable unless both parties to a transaction adopt the same valuation principle. It is also important to use a principle that is consistent with national accounting principles. For all these reasons, market price is used for valuing transactions.

2.15 Market price is the amount of money that a willing buyer pays to acquire something from a willing seller, when such an exchange is between independent parties and involves only commercial considerations.

2.16 For the most part, the price at which a transaction is recorded in the accounts of the transactors, or in the administrative records used as data sources, will be the market price or a very close approximation of it. This valuation is known as the transactions price and is the practical valuation basis used in the BoP, both because it aids consistent recording of credits and debits and because of its usual proximity to the ideal market valuation.

2.17 In compiling BoP statistics, however, one or more of the conditions needed to establish a market price may be absent. For example, the parties to a transaction may not be independent but may be related or affiliated in some way. In practice, the transaction price is the price at which a transaction is generally recorded in the accounts of the transactors. No attempt is made to ascertain whether or not these values are truly market prices. Some transactions may be one-sided. Goods or financial assets may pass from one party to another, or a service may be provided, without the second party providing anything of value in return. The effect on international accounts caused by this 'transfer pricing' is not considered to be large, as transfer pricing to avoid tax is illegal.

2.18 Transactions and stock positions originally denominated in foreign currencies need to be converted to New Zealand dollars using market rates of exchange prevailing at the time of the

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transaction (BoP) or at the reference date (IIP). Transactions should be converted at the mid-point of the buying and selling exchange rates applying at the time of transaction. Stocks should be converted at the mid-point of the buying and selling exchange rates applying at the beginning or end of the period. In practice, the actual rate used varies according to the source of the transaction or stock data.

Time of recording

2.19 The time of recording of transactions in BoP and IIP statistics is, in principle, the time of change of ownership (either actual or imputed). Under the double-entry system, both sides of a transaction should be recorded in the same period. This is consistent with the principle of accrual accounting, which requires that transactions be recorded when economic value is created, transformed, exchanged, transferred or extinguished.

2.20 Change of ownership is considered to occur when legal ownership of goods changes, when services are rendered and when income accrues. In the case of transfers, those which are imposed by one party on another, such as taxes and fines, should ideally be recorded at the moment at which the underlying transactions or other flows occur giving rise to the liability to pay; other transfers should be recorded when the goods, services etc change ownership.

2.21 For financial transactions, the time of change of ownership is taken to be the time when transactions are entered in the books of the transactors. That is taken to be the time when a foreign financial asset or liability is acquired, relinquished by agreement, sold or repaid. The commitment or pledging of an asset does not constitute an economic transaction, and no entry should be shown unless a change of ownership actually occurs in the period covered. Likewise, entries for loan drawings should be based on actual disbursements and not on commitments or authorisations. Entries for loan repayments should be recorded at the time they are due rather than on the actual payment date.

2.22 While both sides of a transaction should be recorded in the same period, in practice the time of recording of transactions in BoP and IIP statistics will reflect the practices in data sources and may diverge from the principle of time of change of ownership. For New Zealand, transactions in goods credits (exported goods) are mainly recorded at the time when goods are shipped, as this is assessed to be a generally good practical approximation of the time when ownership changes. Goods debits (imported goods) are recorded when customs records relating to the movement of the goods across the frontier are processed, again in the expectation that this is the best practical approximation to change of ownership that can generally be achieved. In both cases, however, timing adjustments are made for certain very high total value goods (consignment goods such as dairy products) to record them in the time period in which change of ownership occurs. For the remainder of the current account, the time of the recording of transactions generally complies with the time of change of ownership. Exceptions occur mainly because record-keeping practices of some data providers may not be on this basis. Financial account transactions usually are recorded appropriately, that is, when the parties record transactions in their books. However, some transactions may be derived from information supplied by intermediaries who are not party to the transactions and who may not be aware of the time of change of ownership. Also, some enterprises may adopt accounting practices that lead to inconsistent time of recording. A simple example is that different enterprises may close off their accounts at different times of day.

2.23 The time of recognising the stock of a foreign financial asset or liability follows naturally from the time of recording of a transaction in that asset or liability. For example, if a transaction is undertaken to acquire a foreign financial asset, there will also be a consequential increase in the stock of foreign financial assets at the end of that period. Of course, if the asset is disposed of before the end of the period, it will not contribute to the stock statistics to be recorded for the period, but the disposal will have given rise to another transaction to be recorded for the period.

2.24 There are certain situations in which no change of ownership legally occurs, but where transactions are nonetheless considered to have occurred for BoP purposes. These situations include:

• Financial leases. A financial lease is regarded as a method of obtaining all the rights, risks and rewards of ownership of real resources without holding legal ownership. Although legal ownership remains with the lessor during the term of the lease, all the

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risks and responsibilities apply to the lessee. In these cases, the basic nature of the transaction is given precedence over its legal form by imputing a change of ownership of the resource to the lessee. As a result of this imputation, a financial liability is recognised and lease payments are classified as partly loan repayments in the financial account and partly interest in the current account, rather than as services in the current account.

• Goods imported into or exported from New Zealand for processing and return. The value of goods entering or leaving New Zealand for processing and returning to the country of origin after processing should be recorded on a gross basis, ie recording the goods both when they enter (as imports) and when they leave (as exports), even though there is no legal change of ownership of those goods. A symmetrical treatment should be applied to New Zealand goods exported for processing and return. The basis for this treatment is that such goods lose their identity during processing by being transformed or incorporated into different goods. On the other hand, for goods undergoing repairs, only the value of the repair, not the gross value of the goods, is included in goods credits or debits.

• Transactions between a head office overseas and a branch in New Zealand. In this case the branch is treated as a New Zealand resident (separate legal entity) and any flows between it and its overseas head office are BoP transactions.

Recording of transactions – gross vs net 2.25 Entries for current and capital account items are generally treated so that credits for each component are recorded separately from debits. Current and capital account transactions, in this context, are described as being recorded gross. 2.26 Gross recording contrasts to the recording of transactions in the financial account, which are mainly on a net basis, eg the component 'Foreign Direct Investment in New Zealand' represents the sum of the flows increasing that investment less the flows decreasing that investment. Both credits and debits are presented as positive numbers. Therefore, where the result for 'Foreign Portfolio Investment in New Zealand' (a credit item) is a net withdrawal of investment, this is represented by a negative number.

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Chapter 3 CCllaassssiiffiiccaattiioonn

Introduction 3.1 Balance of payments (BoP) and international investment position (IIP) statistics need to be arranged in a coherent structure to facilitate their use and adaptation for purposes such as policy formulation, analytical studies, projections, bilateral comparisons and regional and global aggregations. BPM5 contains a standard classification and a list of components of the BoP and IIP. The standard was developed taking into account the views of national compilers and analysts, and the requirement to harmonise concepts and definitions with related international statistical standards and classifications. The classification also reflects the separation of categories that may exhibit different economic behaviour, may be important in a number of countries, are readily collectable, and are needed for harmonising with other bodies of statistics. Statistics New Zealand, as part of its commitment to international standards, and after consulting extensively with users, has adopted the BPM5 classification.

3.2 This chapter describes the standard BoP and IIP classification. It also describes a number of subsidiary classifications prescribed by the BPM5. The standard components and subsidiary classifications are described in more detail in subsequent chapters, such as Chapter 6 (Goods) and Chapter 7 (Services).

Standard balance of payments classification 3.3 The standard BoP classification comprises two main accounts – the current account and the capital and financial account. Transactions classified to the current account include goods and services, income and current transfers. Within the capital and financial account, the capital account includes capital transfers and the net acquisition or disposal of non-produced, non-financial assets. The financial account includes transactions in financial assets and liabilities. Transactions in current account and capital account items are generally shown on a gross basis (gross debits and credits separately). Transactions in financial account items are mainly recorded on a net basis.

Current account 3.4 Table 3.1 shows the standard classification of the current account. Each of the broad categories is described briefly below, while individual component items are described in detail in subsequent chapters.

Goods and services

3.5 Goods and services are divided into separate components for goods and services. Goods comprise most movable goods that change ownership between New Zealand residents and non-residents. Separate entries are shown for general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers, and non-monetary gold.

3.6 Services comprise services traded between New Zealand residents and non-residents, together with some transactions in goods where, by international agreement, it is not practical to separate the goods and services components (eg goods purchased by travellers are classified to services).

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Table 3.1:

Current Account – Detailed Standard Components

Income

3.7 Income refers to income earned by New Zealand residents from non-residents and vice versa. Income covers compensation of employees and investment income. Compensation of employees comprises wages, salaries and other benefits earned by individuals from economies other than those in which they are residents, as well as earnings from extra territorial bodies such as foreign embassies, which often employ staff from the economy in which they are located. Statistics New Zealand does not currently collect data for this item in its BoP statistics. Investment income comprises income earned from the provision of financial capital and is classified into direct investment income, portfolio investment income and other investment income.

Current transfers

3.8 Transfers represent offsets to the provision of resources between residents and non-residents with no economic value in return (eg the provision of food aid). Current transfers are distinguished from capital transfers and the latter are included in the capital account. Current transfers directly affect the level of disposable income and influence the consumption of goods and services for the donor and the recipient economies. Current transfers represent the offset to the provision of resources that are normally consumed within a short period (less than 12 months) after the transfer

Credit Debit

Goods and services

Goods General merchandise Goods for processing Repairs on goods Goods procured in ports by carriers Non-monetary gold

Services Transportation Travel Communication services Construction services Insurance services Financial services Computer and information services Royalties and licence fees Other business services Personal, cultural and recreational services Government services, nie

Income

Compensation of employees Investment income Direct investment income Portfolio investment income Other investment income

Current transfers

General government Other sectors

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is made. In the example of food aid, the food is presumed to be consumed within 12 months of it being received. The classification of current transfers is by sector, ie into general government and other sectors.

Capital and financial account 3.9 Table 3.2 outlines the standard components of capital and financial account.

Capital account

3.10 The capital account comprises both capital transfers and the acquisition and disposal of non-produced, non-financial assets (eg copyrights). Land purchases and sales associated with embassies and other extra territorial bodies are included in acquisition and disposal of non-produced non-financial assets. Capital transfers entries are required where there is no quid pro quo to offset the transfer of ownership of fixed assets, or the transfer of funds linked to fixed assets (eg aid to finance capital works), or the forgiveness of debt. Forgiveness of debt occurs when there is a mutual agreement between the debtor and creditor to extinguish the debt. Capital transfers also include the counterpart to the transfer of net wealth by migrants, referred to as migrants' transfers.

Financial account

3.11 The financial account comprises transactions in foreign financial assets and liabilities between New Zealand residents and non-residents. The main components used in the financial account are discussed in conjunction with the IIP classification in paragraphs 3.15 onwards.

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Table 3.2: Capital and Financial Account – Detailed Standard Components

Credit Debit

Capital account Capital transfers Acquisition / disposal of non-produced, non-financial assets

Financial account Direct investment Abroad Equity capital

Reinvested earnings Other capital

In New Zealand Equity capital

Reinvested earnings Other capital

Portfolio investment Assets Equity securities Debt securities Liabilities Equity securities

Debt securities Other investment

Assets Trade credits

Loans Currency and deposits Other assets

Liabilities Trade credits

Loans Currency and deposits Other liabilities

Financial derivatives Assets Liabilities Reserve assets

Monetary gold Special drawing rights Reserve position in the IMF Foreign exchange

Other claims

Standard international investment position classification 3.12 The IIP statement measures New Zealand's stock of external financial assets and liabilities, whereas the BoP financial account measures transactions (flows) in these assets and liabilities. Hence, the classifications used in the financial account and IIP need to be consistent.

3.13 Table 3.3 outlines the standard classification of the IIP statement. This statement presents the stock of financial assets and liabilities at the end of any period. However, the complete reconciliation statement shows the opening and closing positions and the change in position due to financial transactions and other changes.

3.14 The components of changes in position in Table 3.3 include financial transactions (recorded in the financial account of the BoP), price changes, exchange rate changes and other adjustments. These components are presented in Table 3.3 as column headings.

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Table 3.3:

International Investment Position – Standard Components Changes in position reflecting

Position at beginning of period

Transactions Price changes

Exchange rate

changes

Other adjust- ments

Position at end of

period

New Zealand Investment abroad – Net Assets Direct investment abroad Equity capital and reinvested earnings Other capital Portfolio investment Equity securities Debt securities Other investment Trade credits Loans Currency and deposits Other assets Financial derivatives Assets Reserve assets Monetary gold Special drawing rights Reserve position in the IMF Foreign exchange Other claims Foreign Investment in New Zealand – Net Liabilities Direct investment in New Zealand Equity capital and reinvested earnings Other capital Portfolio investment Equity securities Debt securities Other investment Trade credits Loans Currency and deposits Other liabilities Financial derivatives Liabilities 3.15 Items in the financial account and IIP statement are presented using different classifications. The main ones are type of investment, assets and liabilities, instrument of investment, sector, and original contractual maturity of financial instruments.

3.16 A comparison of the IIP statement and the BoP financial account shows two minor differences. First, in the financial account the primary classification is by type of investment (direct, portfolio, financial derivative, other investment, and reserve assets), whereas in the IIP the asset and liability classification takes precedence. Second, in the category of direct investment in the financial account, reinvested earnings are shown separately whereas in the IIP statement, where no separate market price valuation of reinvested earnings exist, reinvested earnings are grouped into a composite category for equity and reinvested earnings.

Type of investment 3.17 The type of investment used in New Zealand's BoP and IIP consists of five broad categories:

• Direct investment capital refers to capital provided to, or received from, an enterprise by an investor in another country (ie an individual, enterprise or group of related individuals or enterprises) who is in a direct investment relationship with that

24

enterprise. A direct investment relationship exists if the investor has an equity interest in an enterprise resident in another country of 10 percent or more of the ordinary shares or voting stock. The direct investment relationship extends to branches, subsidiaries and to other businesses where the enterprise has significant shareholding. Chapter 12 sets out the direct investment definition in detail.

• Portfolio investment refers to transactions in equity and debt securities (apart from direct investment and reserve assets). Debt securities comprise bonds and notes and money market instruments. In comparison with direct investment, it indicates investment where the investor is not assumed to have any influence in the operation of the enterprise.

• Financial derivatives are secondary instruments linked to, but separate from, a specific financial instrument, or indicator or commodity through which specific financial risk can be traded in its own right.

• Other investment is a residual category that captures transactions not classified to direct investment, portfolio investment, financial derivatives or reserve assets of the compiling economy. Other investment covers trade credits, loans (including financial leases), currency and deposits, and a residual category for any other assets and liabilities.

• Reserve assets refer to those foreign financial assets that are available to, and controlled by, monetary authorities such as the Reserve Bank of New Zealand for financing or regulating payments imbalances. Reserve assets comprise: monetary gold, special drawing rights, reserve position in the IMF and foreign exchange held by the Reserve Bank.

Assets and liabilities 3.18 A financial asset is generally in the form of a financial claim on the rest of the world that is either represented by a contractual obligation (such as a loan) or is evidenced by a security (such as a share certificate). Two financial assets – monetary gold and special drawing rights in the IMF – are not claims on the rest of the world. They are, however, included in international investment assets because they are readily available for payment of international obligations. A liability represents a financial claim of the rest of the world on New Zealand. Assets and liabilities in the IIP statement are components of the balance sheet of an economy with the rest of the world. In the financial account the asset and liability classifications in essence reflect, respectively, transactions in claims on non-residents (assets) and in claims by non-residents (liabilities).

3.19 In the IIP, the difference between assets and liabilities is the net international investment position.

3.20 For direct investment, in both the BoP financial account and the IIP, the main classification is by direction of investment, ie direct investment abroad and direct investment in New Zealand. Direct investment abroad is derived by netting liabilities of the New Zealand direct investors to their direct investment enterprises against claims on their direct investment enterprises abroad. Similarly, direct investment in New Zealand is derived after netting claims of the New Zealand direct investment enterprises against their liabilities to those direct investors abroad.

Instrument of investment 3.21 Several instruments of investment are also identified. Some of these are applicable to only one type of capital. For example, the instrument reinvested earnings is applicable only to direct investment, while monetary gold and special drawing rights are used for reserve assets only. 3.22 The major instruments and grouping of instruments identified in BoP and IIP statistics include:

• monetary gold • special drawing rights • foreign exchange

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• reserve position in IMF • equity • reinvested earnings • debt securities • trade credit • loans • other assets/liabilities.

3.23 To make statistical presentations less cluttered, similar instruments may be combined into groups or combined with certain types of investment. For example:

• trade credit, loans, deposits and other forms of finance, including all debt securities, but excluding equity capital and reinvested earnings, between non-financial enterprises in a direct investment relationship, are combined and shown only as other direct investment capital. Similar aggregation applies to finance between a financial enterprise and a non-financial enterprise and between financial enterprises only in case of permanent debt

• bonds, bills, notes and money market instruments within portfolio investment are shown separately but under a heading of debt securities

• a number of financial assets held by the Reserve Bank, and available for use as reserve assets (currency and deposits, bills, bonds, notes and money market instruments), are grouped under the category foreign exchange.

Table 3.4 shows the instrument classification used within each type of investment.

Table 3.4:

List of Instruments within Each Type of Investment Direct investment(1) Equity capital

Reinvested earnings Other capital

Portfolio investment Equity securities Debt securities

Bonds and notes Money market instruments

Other investment Trade credit Loans Currency and deposits Other assets/liabilities

Financial derivatives Reserve assets

Monetary gold Special drawing rights Reserve position in the IMF Foreign exchange

Currency and deposits Securities Financial derivatives

(1) Includes all types of financial instruments between related parties except for financial derivatives which are included under its own component category.

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Foreign equity and debt 3.24 At a broader level, instruments may be combined to show foreign equity and foreign debt. Foreign equity includes equity capital, reinvested earnings and equity securities. Foreign debt is a residual item containing all other instruments. They may be compiled on a gross basis (eg foreign debt/assets and liabilities) or on a net basis (eg net foreign debt).

Sectorisation – institutional sector classification 3.25 An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities. Institutional units are assigned to an institutional sector by reference to their attributes of economic objectives, function, behaviour, control and ownership. For example, Producer Enterprises operate to produce a physical output in order to generate a profit. Financial Intermediaries provide financial services in order to generate a profit and Households consume goods and services and they also supply labour. Sometimes an intermediate classification of business type, based mainly on legal character, is used as an aid in the process of classifying by institutional sector. 3.26 At the most aggregated level, the 'New Zealand Standard Institutional Sector Classification 1996’ (NZSIC 96) categories are:

1 Producer Enterprises 2 Financial Intermediaries 3 General Government 4 Private Non-Profit Organisations Serving Households 5 Households 6 Rest of the World

3.27 In the BoP statistical framework, it is recommended that financial account and IIP statistics be presented on an institutional sector basis, in other words, providing an institutional approach to sectorisation. Therefore, the sector of the domestic creditor for assets and the sector of the domestic debtor for liabilities are identified. The four sectors that are distinguished in the BoP and IIP standard components are: Banks, General Government, Monetary Authorities, and Other Sectors. Table 3.5 shows the concordance between the BoP sector classification and the NZSIC 96 classification.

Table 3.5:

BoP Sector Classification and the New Zealand Standard Institutional Sector Classification 1996 (NZSIC 96)

BoP Sector Classification Equivalent NZSIC 96 Description

Banks

2 Financial Intermediaries: 22 Depository Organisations, only

The Banks sector comprises all resident units that engage in financial intermediation as a principal activity and that have liabilities in the form of deposits. It includes banks (commercial, savings and development banks licensed under the Banking Act, or which have been created under government legislation) and other depository institutions (saving and loan associations, credit unions or co-operatives, and building societies).

General Government

3 General Government General Government consists of: (i) government units that exist at each level of government; (ii) social security funds operated at each level of government; and

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(iii) non-profit institutions that are majority financed and controlled by government units.

Monetary Authorities

2 Financial Intermediaries: 21 Central Bank, only

The monetary authorities sector, which is based on a functional concept, includes the central bank institutional unit (or currency board, monetary agency, etc) and certain operations carried out by the central bank. Such operations include the issue of currency, maintenance and management of international reserves and the operation of exchange stabilisation funds.

Other Sectors

1 Producer Enterprises 2 Financial Intermediaries: 23 Other Financial Organisations except Insurance and Pension Funds and 24 Insurance and Pension Funds 4 Private Non-Profit Organisations Serving Households 5 Households

Other sectors comprise non-financial corporations, insurance companies, pension funds, other non-depository intermediaries, private non-profit institutions, and households.

3.28 The sectorisation of the portfolio investment, financial derivatives and other investment in the BoP and the IIP serves to strengthen the links between the international accounts, the SNA93 and IMF statistical systems such as money and banking, government finance and international banking. The sector classification is excluded from direct investment, as the domestic sector of the direct investor/investee is not considered important for explaining the behaviour of direct investment.

3.29 Within the current and capital accounts, sectorisation is also applied to current and capital transfers, where a split between general government and other is used.

Other financial classifications 3.30 Other classifications in the financial account and the IIP include the domicile of liabilities issued by residents, drawings and repayments for long-term liabilities in the form of both trade credits and loans, the residual maturity structure of financial claims and liabilities and the currency of assets and liabilities.

Country classification 3.31 The general principles applying to the compilation of a global BoP statement for New Zealand can be applied to the preparation of a statement for New Zealand's transactions with an individual country or a group of countries. Statistics New Zealand publishes the stock and flows of direct investment (both debits and credits) statistics by country and by country groupings on a regular basis.

Industry classification 3.32 The objective of the industry classification is to identify groupings of businesses that carry out similar economic activities. The Australian and New Zealand Standard Industrial Classification (ANZSIC) 1996 is used in New Zealand IIP statistics. International comparability is maintained by the alignment of ANZSIC with the International Standard Industrial Classification of All Economic Activities (ISIC). Statistics New Zealand has industry data available for total international

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investment (stocks) based on the assets/liabilities compilation approach from the 31 March 1999 year onwards.

3.33 Data is published for the following divisions: • Agriculture, Forestry and Fishing • Mining • Manufacturing • Electricity, Gas and Water Supply • Construction • Wholesale Trade • Retail Trade • Accommodation, Cafes and Restaurants • Transport and Storage • Communication Services • Finance • Property and Business Services • Government and Administration • Education • Health and Community Services • Cultural and Recreational Services • Personal and Other Services.

3.34 BoP financial account data is collected on a consolidated basis. Where possible the top New Zealand enterprise of a group of enterprises in common ownership is surveyed and provides consolidated group data. The industry for foreign investment in New Zealand is determined by the enterprise in the group that has the most employees at the four digit ANZSIC level. This industry classification is then used to classify transactions with non-residents by all companies in the group. This same ANZSIC code is used for any overseas investments made by that parent enterprise or its New Zealand subsidiaries, thus New Zealand's investment overseas by industry is determined by the major industry of the New Zealand group.

Revision to industry classification 3.35 The Australian Bureau of Statistics (ABS) and Statistics New Zealand commenced a joint review of the ANZSIC in July 2000 with the aim of addressing the weaknesses in the current classification and replacing it with one which best reflects contemporary and future views of industries. A draft classification is scheduled to be completed in 2004 with the final classification being published in early 2005.

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Chapter 4 DDaattaa DDiisssseemmiinnaattiioonn aanndd RReellaatteedd IIssssuueess

Objectives 4.1 Statistics New Zealand’s objective in publishing balance of payments (BoP) and international investment position (IIP) statistics is to provide useful information about New Zealand's economic transactions with the rest of the world. Broadly, the users of New Zealand's BoP and IIP statistics are:

• those engaged in financial market operations, policy development and the provision of advice and analysis, including New Zealand Government agencies, especially the New Zealand Treasury and the RBNZ

• the domestic and international news and information media, particularly the financial media

• the New Zealand public, to which the provision of independent financial performance indicators for the nation are an important feature of the democratic process

• the IMF in its international economic monitoring and assessment role • agencies engaged in financial risk assessment, eg credit rating agencies.

4.2 As a member of the IMF, New Zealand is obliged, under Article VIII of the Articles of Agreement, to produce BoP and IIP statistics. This information is used by the IMF in its ongoing monitoring role and in its Article IV consultations which, in New Zealand's case, usually occur each year. The IMF's staff report resulting from these consultations is available from the IMF's website, www.imf.org.

4.3 To meet the needs of these users, Statistics New Zealand's objectives are to publish quarterly BoP and IIP statements and an annual series with additional information using a March reference period. The level of detail in the published quarterly series is intended to be sufficient to provide a useful basis for analysis and assessment of the country's external financial situation. Compared with the quarterly series, the annual series has further breakdowns of some components and presents country and industry breakdowns of direct investment. For more in-depth analysis and assessment, further breakdowns of the statistics may be available on request. Availability of statistics from such requests is subject to constraints such as quality considerations at detailed disaggregations and the need to safeguard the confidentiality of data provided by individual respondents.

4.4 Accompanying the statistics in quarterly and annual Hot Off The Press (HOTP) and other publications, Statistics New Zealand provides analysis intended to inform readers of the key features of the latest statistics and the factors influencing them, and how the latest results relate to the longer time-series.

Publication 4.5 The timetable detailing the release dates of all of Statistics New Zealand's statistical outputs is published approximately six months in advance. BoP and IIP statistics for each quarter are published within 13 weeks of the end of the reference quarter, eg the statistics for the March quarter are published in the last week of June. The annual series is published within six months of the end of the March reference year. The quarterly BoP and IIP statistics are made available to all users simultaneously at 10:45am on the day of release. The statistics are made available in printed form – HOTP – and electronically on the Statistics New Zealand web site and on INFOS, Statistics New Zealand's public access electronic database. A media conference is held at 10:30am on the day of release at Statistics New Zealand's offices in Wellington. Attendees are confined to the venue until the release time of 10:45am. The conference is open to the public, the main attendees being financial analysts and journalists. At the conference, Statistics New Zealand BoP staff present the statistics and are available to answer questions and engage in discussion.

4.6 The Hot Off The Press catalogue number for the BoP and IIP release each quarter is 08.503. The Statistics New Zealand website address is www.stats.govt.nz, where BoP and IIP statistics can

30

be located by looking under Economy/Balance of Payments. The tables contained in the HOTP are presented on the website as Microsoft Excel files and are downloadable free of charge. Within INFOS, the BoP and IIP series are identified by series identifiers. These can be determined from the HOTP tables or found in the INFOS index. Accessing data from the INFOS database incurs a fee.

4.7 In meeting the needs of the various groups of users, BoP and IIP statistics encompass: • a summary BoP statement featuring the major aggregates and balances of the current

account and capital and financial accounts • detailed breakdowns of the BoP current account aggregates: goods, services, income

and transfers. Many series are presented in unadjusted form and with seasonally adjusted and trend estimates

• breakdowns of the BoP financial account aggregates: direct investment, portfolio investment, financial derivatives, other investment and reserve assets

• summary IIP statements, on both a BoP basis showing the functional role of investment relationships, and on a balance sheet basis focussing on the composition of individual assets and liabilities. Both these statements present a net IIP. In addition, the balance sheet presents net debt and net equity positions

• more detailed analysis of New Zealand's IIP, with breakdowns of international assets and liabilities by currency, type of instrument and residual maturity

• indicative estimates of the extent of hedging of New Zealand's foreign currency overseas debt as at 31 March, which are released as a supplement to the March quarter BoP and IIP statistics.

4.8 Compared with the quarterly series, the annual series provides further breakdowns of the financial account and the IIP. The additional breakdowns include:

• the stock and flow of total investment by selected country groupings and for the top 10 countries

• the stock and flow of direct, portfolio and other investment by selected country groupings and for the top 10 countries

• international assets and liabilities by industry.

4.9 Further breakdowns of the statistics may be available on request from users. The delivery of such breakdowns may be subject to a fee.

Data collection framework 4.10 The source data and information used in compiling BoP and IIP statistics that is collected and processed each quarter includes:

• administrative data, eg Non-Resident Withholding Tax data from the IRD and customs records of imports and exports published each month as Overseas Merchandise Trade statistics

• financial market information, including interest and exchange rates and share prices. Much of this information is taken from publicly available information sites, including those published by the Reserve Bank. Market participants specifically supply some of the information

• surveys conducted by other entities. Some of the data used is purchased by Statistics New Zealand from other organisations that operate an appropriate survey. Statistics New Zealand has input into the design of the majority of these surveys. One example is the International Visitors Survey operated by a marketing company for the Ministry of Tourism (which supplies quarterly data measuring exports of travel services in the current account). Another example is the quarterly Managed Funds Survey. This is a joint RBNZ/Statistics New Zealand operation, which supplies data for the current account component of Income (credit) and the financial account and IIP components of Portfolio Investment, Financial Derivatives and Other Investment (assets)

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• surveys of New Zealand resident enterprises conducted by Statistics New Zealand. These surveys operate with the approval of the Minister of Statistics and their completion is therefore a compulsory requirement as set out in the Statistics Act 1975. These surveys are directed at resident New Zealand enterprises which have been identified as being relevant for BoP and IIP statistics. However, in some cases the actual respondent to the survey is an overseas located parent or owning entity. The legal requirement to complete the survey still applies to the New Zealand resident entity named in the survey.

Timing of availability of source data 4.11 The timing of publication of BoP and IIP statistics is constrained by the availability of source data of appropriate quality.

4.12 Merchandise trade exports and imports data is collected monthly and is published as a separate Overseas Merchandise Trade release each month. The data required for BoP adjustments to overseas trade data is compiled quarterly; the overseas trade data is then adjusted for BoP concepts and published each quarter as the BoP current account component Goods.

4.13 Services data is primarily survey based, notably the International Transportation Survey and the Survey of International Trade in Services and Royalties. As noted in the previous section, exports of travel services data is obtained from the International Visitors Survey.

4.14 International investment income data is obtained from the Quarterly International Investment Survey and the Managed Funds Survey. These surveys, together with the Quarterly Nominees Survey, are the sources of the BoP financial account and IIP data.

4.15 Survey populations and samples are maintained using Statistics New Zealand's central register of businesses, the Business Frame (BF), and other sources. The BF is updated using GST registrations and other sources. Other sources used for BoP surveys include notifications of approvals issued by the Overseas Investment Commission (OIC) and news media information. Survey questionnaires are despatched, either in printed or electronic form, at the end of each reference quarter. Respondents to the surveys are requested to return completed questionnaires within 21 days. Not all respondents achieve this timeframe due to, for example, their own accounts not being completed in time, or the limited availability of information in respect of some, usually large and complex, transactions. Where late or partial response occurs, alternative dates for supply of data are determined with respondents. In some cases the arrangements provide for respondents to provide estimates in the first instance, replaced later by actual data. Where a respondent is unable to supply data in time for inclusion in the release of statistics, or does not complete the survey, then Statistics New Zealand may estimate data for the enterprise.

4.16 Response rates to the surveys are used as one indicator of data quality. BoP surveys rank their respondents according to the importance of each enterprise to the survey in terms of data contribution. The targeted response rate for key enterprises is 100 percent, and for non-key enterprises 80 percent. It is very unusual not to meet these targets.

4.17 Once data is received, it is captured, edited and validated. The editing process is intended to identify and eliminate inconsistencies within the individual enterprise data captured. The edits focus on the current reference period (eg an edit will give a warning if liabilities, but no interest, were reported) and comparisons between the opening positions of the current and the closing positions of the previous reference period (eg a warning will be given if assets are reported in the current period but not in the previous period). Resolution of edits frequently requires contact with the respondent. Validation of the data involves comparing reported survey data with other available information, such as news media reports of major events (eg mergers and acquisitions), and published company accounts.

4.18 Once the source data has been collected, input and validated, it is then aggregated into BoP and IIP components. Further analysis of the aggregated data then occurs, the main emphasis being on consistency within and between the aggregates, and the relationship of the aggregates to known real world events that are expected to impact on the statistics. Further changes to the data may occur as a result of this process.

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4.19 Once the data is finalised, final tables are generated, and the HOTP release is prepared. The HOTP contains tables of the latest statistics with a time series, commentaries and graphs.

4.20 The HOTP commentaries and accompanying graphs are intended to illustrate the key points and trends in the statistics by:

• providing insight into the latest statistics and what they disclose about New Zealand's international financial situation

• providing reference on how the statistics relate to the full time series • providing information on measurement and methodological issues and developments • bringing to attention any revisions to previously published statistics.

Revisions 4.21 The policy for revising BoP and IIP statistics is that at each new release of quarterly statistics, the previous quarter's statistics will be revised where necessary. These are termed 'quarterly revisions'. At each fourth quarter, revisions will be introduced to past periods as required. These are termed 'annual revisions' and are introduced at the release of the March quarter statistics. This policy applies to the BoP statement and to the IIP. The objective of the policy is to meet accuracy requirements, while at the same time ensuring stability in the series over a four-quarter period. The alternative is to revise any period as required at each release, a practice which would very likely result in changes to a variable number of periods at each release. The need for very significant revisions arising outside this revisions cycle would be determined on a case by case basis, balancing the needs of stability in the series against the integrity of the statistics.

4.22 Quarterly revisions typically arise from: • birthing enterprises to the survey during the survey period with data arriving too late to

be included in the first release of statistics for the period • data from existing survey respondents arriving too late for inclusion in the first release.

In some cases estimates are made for these non-respondents at first release and these estimates are then replaced by actual data at second release

• restatements of data by survey respondents and the correction of errors made in processing the data.

4.23 Annual revisions typically arise from: • validation of previously supplied data against company accounts • conceptual and methodological changes • periodic reviews and census benchmarks.

Presentation of statistics 4.24 Following the IMF's recommendations in its BPM5, New Zealand's BoP statistics are presented in a set of accounts:

• the current account, recording transactions in goods, services, income and transfers • the capital account, recording transactions in capital transfers and non-produced non-

financial assets, eg patents, copyrights • the financial account, recording transactions in financial assets and liabilities, both

equity and debt instruments.

4.25 In these accounts the statistics are presented first at higher levels of aggregation, then at progressively lower levels of disaggregation. The annual series present greater levels of disaggregation than do the quarterly series, as the annual series is less subject to revisions and confidentiality limitations.

4.26 Current and capital account data is presented on a gross basis, while financial account statistics are presented net, eg the component Foreign Direct Investment in New Zealand represents the sum of the flows increasing that investment less the flows decreasing that investment. The flows (credits and debits) are presented as positive numbers. Where the result for,

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say, Foreign Portfolio Investment in New Zealand (a credit item) is a net withdrawal of investment (ie decreases in investment exceed increases), this is represented by a negative number.

4.27 Credit entries in the current and capital accounts represent the export of goods and services, investment income earned and the offsetting entries to resources received by residents without payment required. In the financial account, credit entries represent net changes in New Zealand's financial liabilities to the rest of the world, eg a positive result for the component Foreign Portfolio Investment in New Zealand represents a net increase in that investment, while a negative result represents a net withdrawal of Foreign Investment from New Zealand.

4.28 Debit entries record the opposite side of the account, ie in the current account, imports of goods and services, investment income attributed to non-resident investors and the offsetting entries to resources supplied to non-residents without payment required. In the financial account, debit entries represent the net change in New Zealand's financial claims over the rest of the world.

4.29 While BoP statistics report transactions over a period of time, the IIP reports financial positions at specific points in time, typically quarter-end or year-end.

4.30 New Zealand's IIP statistics are reported in two formats: BoP, and International Assets and Liabilities, which is a presentation on a balance sheet basis. The same net IIP result is obtained in each format.

4.31 The BoP format of IIP follows the same presentation as the BoP financial account, with functional breakdowns of the aggregate positions of Direct Investment, Portfolio Investment, Other Investment, Financial Derivatives and Reserve Assets. The annual IIP statement has additional breakdowns of these major components compared with the quarterly statement.

4.32 The presentation of the IIP on an International Assets and Liabilities (balance sheet) basis presents the statistics by equity and lending/borrowing, with net equity and net debt positions. There are further breakdowns of borrowing/lending by sector, by instrument type, by currency and by residual maturity.

4.33 A further set of statistics illustrates the relationship between the BoP financial account transactions and the IIP financial positions. This is the Reconciliation Statement.

4.34 Movements between the IIP from one period to another are explained in the Reconciliation Statement. Several factors account for movements between positions. BoP financial account transactions are one of these factors. The Reconciliation Statement illustrates the contributions to the change between positions. These contributions include financial transactions, changes due to market price and exchange rate movements, and changes due to other effects, such as write-offs and reclassifications.

The concept of a 'balance' 4.35 To aid analysis, each of the BoP accounts is further subdivided into major components and component balances. A component 'balance' is the credits less debits for a particular component, or group of components. A negative sign represents a deficit (debits greater then credits) while a positive sign represents a surplus. The major current account balance is the balance on current account, which is made up of the sum of the balances on goods and services, and income and current transfers. In New Zealand's BoP, the balance on capital account is of relatively low significance. The balance on financial account represents the difference between the net change in foreign investment in New Zealand and the net change in New Zealand investment abroad.

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Table 4.1:

Key Balances Used in Balance of Payments Analysis = Goods balance = Goods credits =

– Goods debits

+ Services balance = Services credits

Current account balance

Goods and services balance

– Services debits

+ = Income credits

Income balance

– Income debits

+ Current transfers balance

= Current transfers credits

– Current transfers debits

= = Capital transfers credits

=

Capital account balance

Capital transfers balance

– Capital transfers debits

= credits (disposal)

+

Net acquisition/disposal of non- produced, non-financial assets – debits (acquisition)

+

Financial account balance

= = Direct investment abroad

Direct investment balance

– Direct investment in New Zealand

+ = Portfolio investment assets

Portfolio investment balance

– Portfolio investment liabilities

+ = Other investment assets

Capital and financial account balance

Other investment balance

– Other investment liabilities

+ Reserve assets

Net errors and omissions 4.36 As described in Chapter 2, a BoP statement is constructed on a double-entry accounting basis. Therefore, both sides of the account should always balance in the accounting sense. In practice this is seldom the case. The main reasons for this are:

• the variety of data sources used • the probability that some transactions will not be captured • the probability that only one side of some transactions will be captured • the possibility of errors in reporting, including timing of reporting, and compilation

errors.

4.37 The net errors and omissions item, also called 'the residual', is inserted into the BoP accounts as a balancing item to ensure that, in the accounting sense, the sum of the BoP current, capital and financial accounts balance.

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4.38 In the New Zealand BoP, the residual is always entered on the credit side. Therefore, the residual can be either positive or negative. The residual can be calculated by one of two means:

• the sum of all the current, capital and financial account credits (inflows), less the sum of all the debits (outflows) or

• the current account balance, plus the net flow of the capital and financial accounts.

4.39 A positive residual indicates that the sum of the credits (inflows) is less than the sum of the debits (outflows). A negative residual indicates that the sum of the debits is less than the sum of the credits.

4.40 The size and sign of residuals can provide an indication of the accuracy of the overall BoP data. For example, large residuals persistently of positive sign can indicate systemic under-reporting of credit flows (or alternatively over-reporting of debit flows) in any of the BoP accounts; current, capital or financial. A large one-off residual, of whatever sign, can indicate under or over-reporting in a particular period. Residuals which more or less alternate over several periods may indicate self correcting data. These could relate to timing of reporting. The sign, size and behaviour of the residual provide the economic statistician with a guide as to where efforts for quality improvement are needed.

Seasonally adjusted estimates and trend analysis 4.41 Quarterly BoP statistics are subject to large, short-term movements, both irregular and seasonal, which make the interpretation of trends in the original series difficult. To aid analysis of the underlying movements and trends in the statistics, seasonally adjusted current account series are presented alongside the original, unadjusted series.

4.42 Seasonally adjusted and trend series help to reveal the underlying behaviour of a series. While seasonally adjusted series have had the seasonal component removed, trend series have had both the seasonal and the irregular components removed. Examples of large irregular events are the purchase of two navy frigates in the quarter of June 1997 and December 1999, respectively, and the purchase of three naval helicopters in the quarter of September 2001 and March 2002, respectively. Trend estimates reveal the underlying direction of movement in a series and are likely to indicate turning points more accurately than are seasonally adjusted estimates.

4.43 The adjusted balance on current account is the sum of the adjusted goods, services, income and current transfers balances. The smoothed, seasonally adjusted current account balance (the trend) is formed in the same way.

4.44 The seasonally adjusted series are produced using the X-12-ARIMA seasonal adjustment package. The trend estimates are based on a five-term Henderson moving average of the seasonally adjusted series, with adjustment of outlying values.

4.45 Towards the end of the series, trend estimates are subject to change owing to the use of new data points in the estimation process as they become available. The main reason behind this is that the trend is calculated as a 'centred moving average' of the seasonally adjusted series. This concept is best explained by the following example:

The trend for the December 2003 quarter published in the December 2003 quarter HOTP is a weighted average of the seasonally adjusted series from the June 2003 quarter to the December 2003 quarter, the quarter the trend is being calculated for and the two previous quarters. In the March 2004 quarter HOTP, the December 2003 quarter trend is a weighted average of the seasonally adjusted series from the June 2003 quarter to the March 2004 quarter. Similarly, the December 2003 quarter trend released in the September 2004 quarter is a weighted average of the June 2003 quarter to the September 2004 quarter. The inclusion of new seasonally adjusted points into the weighted average stops once there is a trend involving the two previous and two following seasonally adjusted points. It is the process of adding new seasonally adjusted points that causes most of the trend revision.

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4.46 Seasonally adjusted values are also subject to some revision, as they are also calculated using the 'centred moving average' technique. Generally these revisions are not as great as for the trend.

4.47 Revisions can be particularly large if an observation is treated as an outlier in one period, but is found to be part of the underlying movement as further observations are added to the series. All trend estimates are subject to revisions each quarter, but normally only the last two or three estimates are likely to be substantially altered.

4.48 The importation of very large value items are large, one-off events, or outliers in statistical terms, and have implications for the seasonal adjustment process. A number of such events of major significance have occurred in recent history, such as the importation of ANZAC frigates in the June 1997 and the December 1999 quarters, and the purchase of naval helicopters in the September 2001 and the March 2002 quarters. In these instances, prior to calculating the seasonally adjusted and trend estimates of imports, the goods balance and the current account balance, the data is adjusted; that is, the value of the merchandise is removed. On completion of the adjustment process, the value of the merchandise is then reinstated to the seasonally adjusted series (which adjusts for seasonal variation) but not the trend series (which adjusts for seasonal and irregular movements). This process improves the ability of the seasonally adjusted and trend estimates to describe the underlying movement.

Other Statistics New Zealand outputs related to BoP statistics 4.49 Overseas Merchandise Trade. These are monthly statistics of merchandise trade exports and imports. These statistics are used in the compilation of the BoP current account component Goods.

4.50 Overseas Trade Indexes. Published quarterly, overseas merchandise trade price and volume indexes measure changes in the levels of both prices and volumes of imports and exports of merchandise trade on a quarterly and annual basis. The overseas services trade indexes measure changes in the levels of prices only of imports and exports of services to and from New Zealand on a quarterly basis.

4.51 National Accounts. BoP data is used in compiling the external transactions account. The relationship between the BoP and National Accounts is the subject of Chapter 18.

4.52 The above statistics can be accessed from the Statistics New Zealand website, www.stats.govt.nz, by looking under Economy/Export & Imports or Economy/Prices for the latest results for overseas trade and trade indexes, and Economy/National accounts.

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Chapter 5 CCuurrrreenntt AAccccoouunntt OOvveerrvviieeww

Introduction 5.1 The current account measures all transactions (other than those in financial assets and liabilities) that involve economic values and occur between resident and non-resident entities. It also includes offsets to current economic values provided or acquired without something of economic value in exchange. Table 5.1 shows the make-up of the current account components in the New Zealand BoP statistics for the year ended 31 March 2004.

5.2 There are four major components within the current account, ie those involving transactions of real resources (goods, services and income) and those that are offsets to transactions provided or acquired without a quid pro quo (current transfers).

5.3 A 'balance' is the credits less debits for a particular item, or group of items. A negative sign represents a deficit, while a positive sign represents a surplus.

Table 5.1:

Current Account Overview Year ended March 2004

NZ$ (Millions) Credits Debits Balance Goods 29,109 29,706 -597 Services 10,966 9,777 1,190 Income 2,369 8,851 -6,482 Current Transfers 1,318 1,128 190 Total Current Account 43,762 49,462 -5,700 Data may not add to stated totals due to rounding.

Goods and services 5.4 Goods comprise most movable goods that change ownership between New Zealand residents and non-residents. Separate entries are shown for general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers, and non-monetary gold.

5.5 Services comprise services provided between New Zealand residents and non-residents. Also included are some transactions in goods where, by international agreement, it is not practical to separate the goods and services components (eg goods purchased by travellers are classified to services).

5.6 The difference between a service and a good is that for a service: (i) there is no physical object over which ownership rights can be claimed; and (ii) a service cannot be traded separately from its production.

Income 5.7 Income refers to income earned by New Zealand residents from non-residents and vice versa. Income covers compensation of employees and investment income. Compensation of employees comprises wages, salaries and other benefits earned by individuals from economies other than those in which they are residents. Statistics New Zealand does not currently collect data for this item. Investment income comprises income earned from the provision of financial capital and is categorised into direct, portfolio and other investment income.

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Current transfers 5.8 Transfers represent offsets to the provision of resources between residents and non-residents with no quid pro quo in economic value (eg gifts of food, clothing, medical supplies, provision of medical aid). Current transfers represent the offset to the provision of resources that are normally consumed within a short period (less than 12 months) after the transfer is made. In the example of medical aid, the medicine is presumed to be consumed within 12 months of it being received.

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Chapter 6 GGooooddss

Concepts and definitions 6.1 Goods covers all movable merchandise goods, with a few specified exceptions, the ownership of which changes from a New Zealand resident to a non-resident. The goods included in this item are valued at their market value and recorded in the period in which the change of ownership occurs. Table 6.1 shows the goods component in the New Zealand BoP current account for the year ended 31 March 2004.

6.2 Goods are divided into five components: general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers and non-monetary gold.

6.3 General merchandise covers most moveable goods that are exported to, or imported from, non-residents by residents and that undergo changes in ownership (actual or imputed). This component is derived by taking the overseas merchandise trade data, sourced from customs documentation, and adjusting it to fit BoP concepts.

6.4 Goods for processing cover exports (or imports in the compiling economy) of goods crossing the frontier for processing abroad and the subsequent re-import (or export in the compiling economy) of the goods. Such goods are valued on a gross basis, before and after processing. This item is an exception to the change of ownership principle. New Zealand BoP includes the value in exports and imports but does not show it as a separate component as it is confidential.

6.5 Repairs on goods cover repair activity on goods provided to or received from non-residents on ships, aircraft, etc. The repairs are valued at the repair prices (fees paid and received) and not at the gross value of the goods before and after repairs. In the New Zealand BoP the value is included in general merchandise. It is not published separately as this component is confidential.

6.6 Goods procured in ports by carriers covers all goods (such as fuel, provisions, stores, and supplies) that ships and aircraft procure abroad (or in the compiling economy). Excluded from this component are the services provided to carriers such as towing and port fees, which are covered under the transportation component of services.

6.7 Non-monetary gold covers the export and import of gold, such as unrefined gold, bullion and coins. It does not include gold that is held as a reserve asset (monetary gold) by the Reserve Bank. Monetary gold transactions occur only between monetary authorities and their counterparts in other countries or international monetary organisations. They are recorded within the reserve assets component of the financial account.

Table 6.1:

Goods Year ended March 2004

NZ$ (Millions) Credits Debits

Total Goods (F.O.B.) 29,109 29,706 General Merchandise 28,442 29,456 Overseas Trade 28,606 32,395

BoP Conceptual Adjustments -165 -2,939 Goods for processing C C Repairs on goods C C Goods procured in ports by carriers C C Non-monetary gold 231 20

C Confidential data. Data may not add to stated totals due to rounding.

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Valuation 6.8 The market price should in principle be used for valuation, but in the case of goods, transactions prices are used as the closest approximation to market prices.

6.9 The value of goods is the total cost of the good at the time it is at the customs frontier of the exporting country. This is called free on board (f.o.b.). The f.o.b. value includes the value of the good itself, plus any costs involved in getting the good to the customs frontier from which the good is exported. This also includes the cost of loading the good on board a carrier at the frontier.

6.10 Export values are reported in Customs documentation as f.o.b. values by exporters or their agents. In cases where the value of the good is not known, the f.o.b. is assessed on the basis of prices current at the time of export. An example of this is goods sent on consignment where the selling price is not known until the goods are sold abroad. Adjustments are made to key consignment exports to collect the actual value the goods were sold at (see Conceptual Adjustments below).

6.11 Import values are reported in customs documentation as c.i.f. (cost, insurance and freight) and as vfd (value for duty). The c.i.f. represents the cost of buying the goods and bringing them to the country of import. The vfd, on which customs duty is based, equates approximately with the f.o.b. value of the goods in the exporting country, though the former often excludes special export packaging and other costs incidental to delivering the goods on board ship. Further differences may arise from price fluctuations between the purchase date and the date of shipment, and from different export and domestic price levels. The v.f.d. value is considered to be a reasonable proxy for imports f.o.b.

6.12 Currency conversion is carried out for both exports and imports. When import documents are processed by the New Zealand Customs Service, foreign currency amounts are converted to New Zealand dollars. The exchange rates used are set by the Customs Service on a fortnightly basis. Export values given in foreign currencies are converted by Statistics New Zealand into New Zealand dollars when the statistics are processed by Statistics New Zealand, using weekly exchange rates.

Coverage and timing 6.13 In principle, transactions in goods should be recorded in the BoP when ownership changes. The change of ownership rule adopted for measuring goods ensures in principle that the component is consistent as to coverage and timing with other components in the BoP. The international standards for overseas trade statistics, however, are based instead on physical movements of goods across the customs frontier.

Although the goods that change ownership internationally are for the most part the same goods that move across the frontier, the ownership changes and the movements do not always occur at exactly the same time.

Clearly, it is impossible for any statistical organisation to track and record every international transaction undertaken to the exact time of the change of ownership. For this reason, convenient proxies are used where available and reasonable. In the New Zealand case, customs data is an obvious, convenient and reliable source for the majority of merchandise goods transactions.

The time at which the customs entry is made is used as a proxy in most cases for the time of change of ownership in New Zealand BoP statistics. The assumptions made are:

• that the values reported to New Zealand Customs Service are market values at the time of change of ownership

• that the imports have arrived in New Zealand in the same reporting period as they left the exporting country.

For the vast majority of merchandise goods items, these assumptions are considered valid.

6.14 Exports, prior to August 1997, were generally recorded in the calendar month in which documents were processed by the New Zealand Customs Service. This often meant that goods exported in one month did not appear in export statistics until the following month.

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From August 1997, exports have been recorded by month of export. This change was made when the New Zealand Customs Service introduced new processing systems.

6.15 In general, imports are recorded in the calendar month in which the New Zealand Customs Service processes documents. This sometimes means that goods imported in one month do not appear in import statistics until the following month. Import documents are normally processed by the New Zealand Customs Service within a few days of the goods becoming available for discharge from the wharf. However, some goods are cleared early under a pre-clearance scheme, while other goods remain some time in the custody of a port company before the importer obtains the goods and delivery documents.

6.16 Goods that might not cross the customs frontier, but that should be treated as merchandise in the New Zealand BoP, are:

• ships, aircraft and oil drilling rigs operated by a New Zealand resident which may not enter New Zealand

• goods consumed on New Zealand-owned, offshore installations, such as oil rigs, or New Zealand ships and New Zealand aircraft

• goods salvaged and fish caught by New Zealand fishing companies' ships and sold abroad directly

• goods purchased in foreign countries by the New Zealand Government for its own use in those countries

• goods lost or destroyed after ownership has been acquired by the New Zealand importer but before they have crossed the frontier.

6.17 Goods that might cross the customs frontier without a change of ownership, and which should not be included under merchandise, are:

• returned exports and imports • machinery, drilling and transportation equipment shipped under an operational lease

arrangement • direct transit trade (eg goods in transit) • shipments by a given country to that country's military and diplomatic establishments

overseas • goods lost or destroyed after having crossed the customs frontier, but before having

been delivered by the exporter • goods temporarily exported and imported, not for sale. For example, display equipment

for trade fairs and exhibitions, and stage and circus equipment.

Where possible, adjustments are made to the administrative records to meet BoP concepts.

Conceptual adjustments 6.18 Conceptual adjustments are made to the general merchandise component of goods to bring the data provided via customs documentation in line with BoP concepts.

6.19 Four types of adjustments are made: • coverage, where the overseas merchandise trade statistics include or exclude items

that should be treated differently according to BoP concepts • timing, where the time of change of ownership is other than the period in which the

transaction was entered in the overseas merchandise trade statistics • valuation, where the value declared at the customs frontier is clearly not appropriate as

a proxy for market value • classification, where the customs system has included goods which should be

classified elsewhere in the BoP.

6.20 For exports of goods, the principal conceptual adjustments are: • timing and valuation adjustments for goods leaving New Zealand without a change of

ownership, ie goods on consignment. The commodity exports for which adjustments

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are made include kiwifruit, apples and pears and dairy produce. Data is received about actual sales from exporters and is used to adjust the values provided to customs

• timing adjustments for significant goods which have left New Zealand in one period but are known to have changed ownership in a previous or subsequent period

• coverage adjustments for goods which are operationally leased, as there is no change of ownership. Adjustments are made only for large items with a value of more than $1 million.

6.21 For imports of goods, the principal conceptual adjustments are: • coverage adjustments for goods which are operationally leased. Adjustments are made

only for large items with a value of more than $1 million • adjustment for reclassification of non-resident freight and insurance to transportation

and insurance, respectively, under services. Insurance and freight is removed from imports by deducting imports v.f.d. from imports c.i.f.

• timing adjustments for significant goods which have entered New Zealand in one period but are known to have changed ownership in a previous or subsequent period. The treatment of the first ANZAC frigate is an example of this type of adjustment. See Box 6.1 and Table 6.2

• timing and valuation adjustments for the value of oil stocks held overseas by New Zealand resident oil companies.

Box 6.1:

Timing adjustment – the Anzac frigates The HMNZS Te Kaha, valued at $563 million, changed into New Zealand ownership in the June 1997 quarter, but did not arrive in New Zealand waters until the September 1997 quarter. In the overseas merchandise trade statistics the frigate was recorded as an import in the September 1997 quarter, because that is the period in which the frigate crossed the border. Timing adjustments were made to the BoP statistics (refer to Table 6.2 below), so that the frigate was recorded as an import in the June 1997 quarter, as that is when the change of ownership occurred. New Zealand's second frigate, HMNZS Te Mana, valued at $631 million, changed into New Zealand ownership and was delivered in the December 1999 quarter. As both events occurred in the same quarter, no timing adjustment was needed for BoP.

Table 6.2:

Example of Adjustments to General Merchandise Trade Statistics to Reflect the Import of the Frigates

NZ$ (Millions) June 1997 Quarter September 1997 Quarter

General Merchandise ( BoP) 563 0 Overseas Merchandise Trade 0 563 Conceptual Adjustments 563 -563

Commodity classification 6.22 Statistics New Zealand uses the following commodity classification systems to present its international merchandise trade data:

• the Harmonized Commodity Description and Coding System, or Harmonized System (HS) 2002

• the Standard International Trade Classification (SITC, Rev.3) • the Classification by Broad Economic Categories (BEC).

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Data sources and methods 6.23 The bulk of goods data comes from overseas merchandise trade statistics, which are compiled from customs documentation completed by exporters, importers and their agents. Information to adjust for changes in the value of goods sold on consignment comes from customs documentation, which identifies exporters as having significant consignment transactions. The need for many of the larger adjustments is identified by Statistics New Zealand staff from media reports, which are then followed up with the appropriate importer or exporter. Table 6.3 shows a summary of the data sources used for the compilation of the goods component in the New Zealand BoP statistics.

Data quality 6.24 Goods is the single largest component in the current account. General merchandise, which is derived from overseas merchandise trade statistics, is the largest component of goods. The quality and timeliness of overseas merchandise trade data is dependent on the quality and timeliness of export and import entries provided by exporters/importers and their agents to the New Zealand Customs Service. Before the data is released for statistical purposes it is validated and any errors detected are corrected.

6.25 Areas which affect the accuracy of overseas merchandise trade data are: • the imputation of incorrect values on customs documentation • the application of the cut-off level of $1,000 for the processing of customs

documentation, which leads to an under-valuation in merchandise trade for goods valued below this threshold

• the increasing levels of items purchased over the internet, which may include intangibles (eg downloadable software).

Table 6.3:

Summary of Sources and Methods – Goods Component Data source Method of estimation

General merchandise

Overseas Merchandise Trade Statistics Survey of International Trade in Services and Royalties (ITSS) Consignment surveys

Compiled from source with conceptual adjustments made as necessary.

Goods for processing

Overseas Merchandise Trade Statistics Data for this category is confidential.

Repairs on goods Survey of International Trade in Services and Royalties (ITSS) International Transportation Survey

Compiled from source and data is confidential.

Goods procured in ports by carriers

Overseas Merchandise Trade Statistics Compiled from source and data is confidential for imports.

Non-monetary gold Overseas Merchandise Trade Statistics Compiled from source.

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45

Chapter 7 SSeerrvviicceess

Concepts and definitions 7.1 In a broad sense services are products other than physical goods. There are two differences between goods and services:

• there is no physical object over which ownership rights can be established • a service cannot be traded separately from its production.

The production of a service is linked to an arrangement made between a producer in one economy and a consumer in another economy prior to the time that production occurs. Services are recorded in the BoP when the service is delivered or received. Services in the BoP context exclude those that are purely for labour services. These are recorded as compensation of employees under income.

7.2 Table 7.1 shows data for the main service categories for both exports and imports in the New Zealand current account for the year ended 31 March 2004. Travel and transportation are New Zealand’s two main service types. Travel exports account for over half of total services exports, and travel imports nearly one third of total services imports. Transportation services account for 23 percent of exports and 35 percent of services imports.

7.3 The distinction between goods and services is sometimes blurred and some goods may have services elements and vice versa.

Goods that are classified under services comprise: • goods acquired by travellers for their own use, for both New Zealand residents while

travelling overseas and for non-residents while they are visiting New Zealand. These goods are included in travel services

• goods acquired in New Zealand by foreign governments, employees and their dependants to be used within New Zealand by the acquirer, and goods acquired and used overseas by the New Zealand Government, employees and their dependants. These goods are included in government services nie

• goods that do not cross frontiers and are acquired and disposed of in the same recording period, ie merchanting. The gross margin on these goods is included in other business services.

Valuation 7.4 The market price should, in principle, constitute the basis for valuation. However, in the case of services, transaction prices are used as the closest approximation to market prices.

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Table 7.1:

Trade in Services

Year ended March 2004 NZ$ (Millions)

Credits Debits Total Services 10,966 9,777 Transportation 2,213 3,399 Travel 6,821 3,115 Business 745 .. Personal 6,076 .. Education 1,419 .. Health 12 .. Other 4,645 .. Communication 295 277 Construction 47 5 Insurance 72 288 Financial 37 78 Computer and information 165 164 Royalties and licence fees 196 747 Other business services 873 1,462 Merchanting and other trade-related services C 81 Operational leasing services C 564 Miscellaneous business, professional and technical

services 628 817

Legal, accounting, management consulting and public relations

246 205

Advertising, market research and public opinion polling

29 147

Research and development 50 29 Architectural, engineering and other technical

services 140 86

Agricultural, mining and on-site processing services 4 8 Other(1) 159 341

Personal, cultural and recreational 118 84 Government services nie 129 159 (1) Other includes: management fees, personnel supply, photographic, printing, property management, membership

subscriptions, other services, consultancy not elsewhere classified and operational leasing. .. Data not available. C Confidential data. Data may not add to stated totals due to rounding.

Transportation services 7.5 Transportation services measure the value of transactions between the compiling economy and another economy of services provided through carriers (eg ships and aircraft) by their operators, and goods and services consumed by carriers in the course of their operations. The types of services provided through carriers include the carriage of freight (exports and imports) and passengers. Other transportation services covered include the charter of carriers and airport and harbour expenses.

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The BPM5 standard presentation shows transportation services broken down into sea, air and other. However, New Zealand is not able to provide this breakdown due to the confidentiality of key components within transportation services.

7. 6 Related items that are excluded from transportation are: freight insurance, which is included in Insurance Services; repairs of port and airfield facilities, which are included in Construction Services; goods procured in ports by non-resident carriers and repairs on vessels and aircraft, which are included in Goods; and rentals and charters of carriers without crew, which are included in Operational Leasing Services.

7.7 Passenger transportation services relate to the services performed in the international transportation of persons, ie the international transportation of non-residents by resident carriers and that of residents by non-resident carriers.

Other services for which passengers make expenditures on board carriers, or for which they pay charges to carriers, such as those for excess baggage and for personal effects that accompany them, are also included.

In order to avoid practical difficulties in determining the residency of passengers, the following convention has been adopted in the New Zealand BoP statistics: international passenger fares sold within New Zealand are deemed to be sold to New Zealand residents; likewise, international passenger fares sold in foreign countries are deemed to be sold to foreign residents.

7.8 Freight services cover the services performed by residents and foreign residents on the movement of goods. Shipment of goods is always considered to begin at the customs frontier of the exporting country. The main purpose of specifying this convention is to provide a basis for recording the shipment of merchandise, consistent with a uniform free on board (f.o.b.) valuation basis for the merchandise component.

Therefore, shipment of New Zealand's goods beyond the customs frontier is treated as if it were a service performed for the importer. The procedure in the New Zealand BoP is:

• enter as credits all services performed by New Zealand residents on its exports, once these have been loaded on board the carrier at the New Zealand customs frontier

• enter as debits all services performed by foreign residents on New Zealand imports, once these have been loaded on board the carrier at the customs frontier of the country from which they are exported.

7.9 Other transportation services cover the provision of stevedoring, airport and harbour fees, pilotage, towage, maintenance and repair. Also included are fees associated with the provision of passenger and freight transportation.

Travel 7.10 Travel covers goods and services acquired for personal use by New Zealanders travelling abroad, or foreigners travelling in New Zealand. A traveller is a person who intends to stay for less than one year in a country of which he/she is not resident, for any purpose. There are a number of exceptions to this:

• individuals, and their dependants, stationed abroad at military or diplomatic facilities. Expenditure by these individuals in foreign economies is included in government services nie

• individuals employed within a country other than their home country for less than 12 months are treated as foreign workers. Any personal expenditure by them is treated as part of travel

• students and medical patients are recorded within travel, regardless of the length of their stay within the reporting economy. This is because their centre of economic activity is still their home country and not the economy they are currently residing in.

7.11 All goods and services acquired by travellers from the country where they are travelling and for their own use or to give away are recorded under travel. These goods and services may either be paid for by the traveller (or on his/her behalf), or be provided without a quid pro quo. Examples are free room and board received. Goods and services to be recorded under travel include

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accommodation, meals, entertainment, transportation within the economy visited, gifts and souvenirs, etc.

7.12 There are two major components within travel, business travel and personal travel. Business travel covers individuals travelling abroad for all types of business activity, employees of international organisations on official travel and employees doing work for enterprises that are not resident in the economies in which the work occurs.

7.13 Personal travel covers travellers going abroad for purposes other than business. Items included are leisure activities such as holidays, participation in sports and other recreational and cultural activities, visiting friends and family, and travelling for educational and health-related purposes. Education and health related travellers are further breakdowns within personal travel. Education related travel covers all expenditure by students, such as fees and living expenses. Health related travel covers all expenditure by medical patients, such as accommodation and living expenses, as well as hospital charges and physician fees.

Communication services 7.14 Communications services cover two main types of international communication transactions between residents and non-residents:

• telecommunication services cover the transmission of sound, images or other information by telephone, telex, telegram, cable, broadcasting, satellite, electronic mail, facsimile services, etc, and include business network services, teleconferencing and support services

• postal and courier services cover the pick-up, transport and delivery of letters, newspapers, periodicals, brochures, other printed matter, parcels and packages by national postal administrators and other operators. Also included are post office counter and mailbox rental services.

Construction services 7.15 Construction services cover the work performed on construction projects and installations by employees of an enterprise in locations outside the economic territory of the enterprise. Although work is generally of a short-term nature, the one-year rule is applied flexibly. Goods imported by the enterprise for use in projects are included in construction services rather than goods.

7.16 Where the construction work is carried out by setting up a subsidiary or a branch, then the subsidiary or branch is treated as a resident entity of the economy where the construction activity takes place. All transactions undertaken by the subsidiary or the branch with its parent company are then recorded under direct investment.

Insurance services 7.17 Insurance services cover the provision of various types of insurance by non-residents to residents and vice versa. All types of insurance and reinsurance are included, such as freight insurance on goods, reinsurance and other forms of direct insurance, including life, marine, general, fire and accident, health, aviation.

The insurance services component measures the value of insurance services provided by a country to foreign residents (the credit item) and the value of insurance services purchased by residents from foreign resident insurers (the debit item). Also included are commissions or fees earned or paid for the provision of insurance services.

7.18 Insurance is classified into two types, non-life insurance and life insurance. This is mainly due to the different nature of non-life and life insurance. In the case of life insurance, there is a certainty that a claim will be paid out and there is often a substantial lag between the payment of life insurance premiums and the payment of claims. Non-life insurance, however, has no certainty that a claim will be paid and the lag between the payment of premiums and receipt of claims is often much smaller.

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7.19 Insurance is split into two components: (i) the service component, which is the part of the premium that pays the insurance company for the service it provides; and (ii) the transfer component, which is the part that the insurance company keeps and then transfers back to the policyholder when a claim is made. The service component is recorded in the current account under goods and services/insurance services, while the second component is recorded in the current account under current transfers.

7.20 In the New Zealand BoP, for non-life insurance, the service component is calculated by multiplying the total amount of insurance premiums paid less claims received and vice versa by the five year average domestic service charge ratio. Added to this is any commission or fee income earned by agents and brokers in placing cross-border insurance transactions.

7.21 Freight insurance is treated in the same manner as the valuation of goods. For exports, the value of insurance up to the customs frontier is included within the f.o.b. value of the good being exported, as it is deemed that the exporter has purchased the insurance. Once the good has gone beyond the customs frontier, any insurance is regarded as being provided by the importer and is recorded as part of the importing economy.

Freight insurance is derived directly from the overseas merchandise trade statistics for imports from the total value of imports and the import service ratio is applied to the overseas merchandise trade exports statistics to calculate the freight insurance on exports of goods.

Financial services 7.22 Financial services cover financial intermediary and auxiliary services conducted between residents and non-residents. This includes intermediary service fees, such as those associated with letters of credit, bankers’ acceptances, lines of credit, financial leasing and foreign exchange transactions. This also includes commission and other fees related to transactions in securities, brokerage and placements of issues, underwritings, redemptions, asset management and futures trading. Excluded are transactions covering insurance services (as these are included in Insurance services).

7.23 Financial services also conceptually include Financial Intermediation Services Indirectly Measured (FISIM), which estimates the value of the services provided by financial intermediaries for which no explicit charges are made. Whenever financial intermediaries take deposits or make loans, a service is being provided, and interest rates on deposits and loans include an implicit service element. The imputed service charge on deposits and loans is included in financial services and an equivalent and offsetting adjustment is made to investment income. There are practical difficulties in measuring FISIM. There are no estimates for FISIM in the New Zealand BoP statistics.

Computer and information services 7.24 Computer and information services cover computer data and news-related services between residents and non-residents.

• Computer services cover transactions involved with systems analysis, programming and maintenance, computer-related consultancy, the maintenance and repair of computer hardware, data entry, processing, outsourcing and facilities management and systems integration. Excluded are royalties and licence fees for computer software, the leasing of computer hardware and the export or import of computer hardware.

• Information services cover transactions involved with the provision of news, photographs and direct non-bulk subscriptions to newspapers and periodicals. Also included are database services, conception, data storage and the dissemination of data, both on-line and through magnetic media.

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Royalties and licence fees 7.25 Royalties and licence fees cover payments and receipts between residents and non-residents for the authorised use of intangible, non-produced, non-financial assets and proprietary rights (eg patents, copyrights, trademarks, industrial processes, franchises) and the use, through licensing agreements, of produced originals or prototypes (eg manuscripts, films). Included in this category are software royalties and fees the distribution rights to television, radio and film. The IMF treats distribution rights to television, radio and film as being part of personal, cultural and recreational services, while New Zealand treats them as part of royalties and licence fees.

Other business services 7.26 Other business services cover a variety of services transactions. It is divided into three components: (i) merchanting and other trade-related services; (ii) operational leasing; and (iii) miscellaneous business, professional, and technical services.

7.27 Merchanting and other trade-related services cover two areas. • Merchanting is defined as the purchase of a good by a New Zealand resident from a

non-resident and the subsequent resale of the good to another non-resident. During the process the good does not enter or leave New Zealand. The value of this service transaction is calculated as the difference between how much the good is purchased for and how much it is sold for.

• Other trade-related services cover commission on goods and services transactions between: (i) resident merchants, commodity brokers, dealers and commission agents; and (ii) non-residents merchants, commodity brokers, dealers and commission agents.

7.28 Operational leasing covers the resident/non-resident leasing (rental) and charters (without crew) of ships, aircraft and other transportation equipment such as railway cars and oil rigs without crew. Computer hardware and construction equipment is also included. Where a ship or aircraft is chartered for the purpose of transporting freight or passengers and the lessee does not operate the vessel, no operational lease occurs and the transaction is included under transportation services. Excluded from operational leasing is the rental of equipment under financial leases, the leasing of telecommunication equipment, films and real estate and the leasing of equipment with crew. Financial lease payments are included in Income. Due to confidentiality, data collected in the operational leasing component is sometimes published within Other Business Services.

7.29 Miscellaneous business, professional and technical services covers the following services transactions:

• Legal services cover legal advisory and representation services in any legal, judicial and statutory procedures; drafting services of legal documentation and instruments; certification consultancy; and escrow and settlement services.

• Accounting, auditing, bookkeeping and tax consultancy services cover the recording of commercial transactions for businesses and others; examination services of accounting records and financial statements; business tax planning and consulting and preparation of tax documents.

• Business and management consultancy and public relations services cover advisory, guidance and operational assistance services provided to businesses for business policy and strategy and the overall planning, structuring and control of an organisation. Included are management auditing, financial management, market management, human resources, production management and project management consultancy, and advisory, guidance and operational services related to improving the image of clients and their relations with the general public and other institutions.

• Advertising, market research and public opinion polling services transacted between residents and non-residents covers the design, creation, and marketing of

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advertisements by advertising agencies; media placement, including the purchase and sale of advertising space; exhibition services provided by trade fairs; promotion of products abroad; market research; and public opinion polling.

• Research and development services cover those services transacted between residents and non-residents and which are associated with basic research, applied research and experimental development of new products and processes. In principle, such activities in the physical sciences, social sciences and humanities are covered. Included is the development of operating systems that represent technological advances. Excluded are technical studies and consultancy work (both included in business and management consultancy, public relations services).

• Architectural, engineering and other technical services cover transactions between residents and non-residents related to architectural design of urban and other development projects; planning and project design and supervision of dams, bridges, airports, turnkey projects, etc; surveying, cartography, product testing and certification, and technical inspection services. Mining engineering is excluded and included in mining services.

• Waste treatment and depollution services includes the treatment of radioactive and other waste; stripping of contaminated soil; cleaning up of pollution, including oil spills; and restoration of mining sites. Also included are all other services that relate to the cleaning or restoring of the environment. This component is not collected by Statistics New Zealand.

• Agriculture, mining and other on-site processing services covers the following:

o Agricultural services which are incidental to agriculture, such as the provision of agricultural machinery with crew, harvesting, treatment of crops, pest control, animal boarding, care and breeding services, and also services in hunting, trapping, forestry and logging, and fishing.

o Mining services cover services provided at oil and gas fields including drilling, derrick building, repair and dismantling services, oil and gas well casing cementing; services incidental to mineral prospecting and exploration; mining engineering and geological surveying.

o Other on-site processing services cover on-site processing of, or work on, goods that have been imported without change of ownership and processed but not re-exported to the country from which the goods were consigned (but instead either sold in the processing economy or sold to a third economy), or vice versa.

• Other services cover services transactions between residents and non-residents such as placement of personnel, security and investigative services, translation and interpretation, photographic services, building cleaning, real estate services to business and any other business services that cannot be classified to any of the business services listed above. Also included is the residual category of management fees. This category covers payments between related enterprises for services that cannot be specifically classified to any other component.

Personal, cultural and recreational services 7.30 Personal, cultural and recreational services cover two sub-categories: (i) audio-visual and related services; and (ii) other cultural and recreational services.

• Audio-visual and related services comprise services and associated fees related to the production of motion pictures, radio, television programs and musical recordings. Included are receipts and payments for rentals, fees for actors, directors, producers, etc; fees for distribution rights of films, television, etc.

• Other cultural and recreational services comprise other services such as those associated with museums, libraries and other sporting, cultural and recreational services. Also included is the provision of correspondence courses rendered abroad by teachers or doctors.

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Statistics New Zealand is currently unable to provide accurate splits between these components. Fees for distribution rights for film, television, etc are included as part of Royalties and licence fees and not as part of Personal, cultural and recreational services as is the international standard.

Government services nie 7.31 Government services nie is a residual category covering government service transactions (including those of international organisations) not contained in the other 10 services components above. Included are all transactions by embassies, consulates, military units and defence agencies with residents of economies in which the embassies, consulates, military units and defence agencies are located and all transactions with other economies. Excluded are transactions with residents of the home economies represented by the embassies, consulates, military units and defence agencies and transactions in the commissaries, post exchanges and similar of these embassies and consulates.

Classifications 7.32 The services classification used in New Zealand’s BoP statistics follows BPM5 and the more detailed OECD-Eurostat classification.

Data sources and methods 7.33 Services data is sourced from a range of surveys and models. The surveys are both quarterly and annual and are either sample surveys or full coverage surveys. Some of the data collected is not released separately and must be aggregated with other components/items in order to protect individual enterprise's confidentiality. A summary of data sources used to compile services data is illustrated in Table 7.2.

Data quality 7.34 Services data is sourced from both surveys and models. Both types of data sources have specific quality issues relating to the coverage and measurement of service transactions. The data quality issues relating to each of the major service categories are described below.

Travel credits

7.35 Travel credits data is sourced from the Ministry of Tourism’s International Visitors Survey. Departing travellers are interviewed at New Zealand’s International airports. The accuracy of the expenditure reported on goods and services consumed by travellers is based on their recall. The survey is lengthy, which means that interviewers do not have much time to query any unusual amounts reported by travellers.

Travel debits

7.36 Travel debits are currently estimated using a data model. The model is based on the number of New Zealand travellers returning to New Zealand recorded by the Immigration Services from arrival cards. Expenditure data is obtained from the Survey of Returned New Zealanders (SORNZ), which was last carried out in 1994. This expenditure is adjusted for inflation by changes in the Consumer Price Index. The spending patterns of travellers used in the model are based on the results of this survey, but the spending patterns, types of travellers and travel behaviour are likely to have changed since then.

Insurance

7.37 There are problems with identifying resident enterprises that insure directly overseas. This group of enterprises is also fluid as they often switch between using a foreign broker and a New Zealand broker. The value is probably understated.

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Other services (credits and debits)

7.38 There are a number of factors that affect the quality of other services data. These include: • the rapidly changing nature of the survey population and the diverse range of service

activities. These factors affect the overall survey coverage and coverage of individual service categories

• bundling of services. In some instances different service categories are bundled together and reported under one service category, while in other instances, it is common for services to be bundled together with goods

• often service transactions are reported at the time when payment is made or received rather than when the actual service activity is undertaken.

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Table 7.2:

Summary of Sources and Methods – Services Component Data source Method of estimation

International Transportation Survey

Most of transportation data is sourced from this survey.

Overseas Merchandise Trade Statistics

Overseas Merchandise Trade Statistics provide operationally leased aircraft data, ships stores and bunkering.

Survey of International Trade in Services and Royalties (ITSS)

The ITSS provides data on mail services.

Transportation

Independent Requests The independent requests are made to key fuel providers and catering companies that provide services to non-resident airlines.

International Visitors Survey (IVS)

The IVS is a survey run by a marketing company for The Ministry of Tourism. Further details on this survey are in Appendix 2.

The New Zealand Travellers Expenditure Model

The New Zealand Travellers Expenditure Model is further explained in Appendix 2.

English Language Providers Survey

Collects data on all institutions that offer English language courses to non-residents studying in New Zealand.

Travel

Ministry of Education Provides information on student numbers, which combined with the ELP survey, is used to estimate the expenditure of foreign students studying in New Zealand.

International Insurance Survey

The International Insurance Survey collects data on underwriting, reinsurance, brokers and enterprises that insure overseas.

Insurance Model The raw data from the Insurance Survey is modelled to take into account the service component.

Insurance

Overseas Merchandise Trade Statistics

The Overseas Merchandise Trade Statistics provides the data used to calculate the freight insurance component of insurance.

New Zealand Immigration Service (NZIS) The Treasury Ministry of Foreign Affairs and Trade (MFAT) New Zealand Defence Force (NZDF)

These government departments provide a varied range of information that makes up Government services.

Government Services

Benchmark Survey on Foreign Embassies & Model

The Survey on Foreign Embassies is used to model the expenditure by foreign embassies in New Zealand.

Survey of International Trade in Services and Royalties (ITSS)

The ITSS provides most of the information within Other services.

Other Services

International Transportation Survey

The International Transportation Survey supplies data on operational leasing payments for vessels and aircraft and educational services provided by flight simulators.

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Chapter 8 IInnccoommee

Introduction 8.1 In economic statistics, income refers to earnings from the use of the factors of production (labour, land and financial capital). In the BoP, therefore, income credits refer to the return (income earned) from providing non-residents with the use of labour or financial capital, while income debits refer to the return (income paid) to non-residents made for use by residents of foreign labour or international financial capital. Income is recorded in the period in which the economic benefits arising from the use of the factors of production are enjoyed by the user. Income can be valued using the returns to the providers of the factors of production. Specifically, labour factor income is valued using the compensation accruing to employees in the period, and financial capital income is valued using the investment income that accrues to the providers of the capital during the period. In New Zealand's BoP statistics, there is no measure for compensation of employees. It is thought to be small, but development work is under way to look into data sources that could be used to estimate this component. Table 8.2 shows the standard components of Investment Income in BoP statistics. 8.2 Table 8.1 illustrates the relative importance of investment income in New Zealand BoP statistics for the year ended 31 March 2004. It shows that:

• overall, New Zealand has a large investment income deficit for each category of investment income (direct, portfolio and other investment income)

• direct investment income debits are large, reflecting the size of the underlying investment in New Zealand

• portfolio investment income debits are significant for New Zealand, reflecting the inflow of foreign capital as a result of the issue of government and private sector debt security issues.

Table 8.1:

Investment Income Year ended 31 March 2004

$NZ (Millions) Credits DebitsInvestment Income 2,369 8,851Direct investment income 794 4,954 Income on equity 940 4,500 Income on debt -147 454Portfolio investment income 774 2,195Other investment income 801 1,703Data may not add to stated totals due to rounding. 8.3 Investment income comprises of income derived from the ownership of international financial assets. Other forms of earnings, such as those from renting mobile equipment or from the use of an intangible, non-financial asset such as a copyright or patent, are treated as fees for a service and included under operational leasing services and royalties and licence fees, respectively. In BoP standards it is specified that there can be no cross-border ownership of immovable assets (land and buildings), so a notional domestic enterprise is established to account for land and buildings owned by an overseas investor. The return on that investment is then treated as direct investment income.

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Table 8.2:

Income – Standard Components Credit Debit Compensation of employees Investment income Direct investment income

Dividends and distributed branch profits Reinvested earnings and undistributed branch profits

Income on debt Portfolio investment income Income on equity Income on debt Other investment income

Investment income 8.4 Investment income credits refer to the income accruing to New Zealand residents from the provision of financial capital to non-residents (evidenced by ownership of foreign financial assets). Investment income debits refer to the income accruing to non-residents from the provision of financial capital to New Zealand residents (evidenced by their ownership of New Zealand's financial assets).

8.5 Investment income is primarily classified by direct, portfolio and other investment income (these terms are described in paragraph 3.17). The classification of direct investment income mirrors the classification for direction of investment (see paragraph 3.20) and the classification of portfolio and other investment income implicitly mirrors the asset and liability classification applied to the financial account transactions and the IIP. For direct and portfolio investment, separate data is provided for income on equity and income on debt. Within direct investment, income on equity is further divided into dividends and distributed branch profits, and reinvested earnings and undistributed branch profits. For portfolio investment, income on equity is synonymous with dividends. While financial derivatives are a type of financial instrument, they are created by the issuers without the provision of financial capital. Therefore there cannot, in concept, be any income accruing to the use of financial derivatives. Any capital gain or loss on these instruments, as with all other financial instruments, is included, when realised, in the financial account.

8.6 The direct investment income credit entry represents income earned from direct investment enterprises abroad less any income earned by foreign direct investment enterprises from their New Zealand direct investors (ie it is a net position). Similarly, the debit entry represents income earned by direct investors abroad from their New Zealand direct investment enterprises less income earned by those enterprises from their direct investors abroad.

This netting process can result in the recording of:

• a negative credit entry: income earned by New Zealand direct investors from their foreign direct investment enterprises is exceeded by income earned from the New Zealand direct investors by the foreign direct investment enterprises

• a positive debit entry: income earned by foreign direct investors from their New Zealand direct investment enterprises is exceeded by income earned by the New Zealand direct investment enterprises from their direct investors abroad.

Valuation 8.7 Investment income is measured before the deduction of withholding taxes, which are recorded in current transfers. Investment income, when denominated in foreign currency, is converted to New Zealand dollars at the mid-point exchange rate at the time the income is earned. Holding gains and losses are not included in income. When holding gains and losses are realised they are

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included in the financial account, and when unrealised they are included in the price change component in the IIP.

Time of recording 8.8 Investment income is measured on an accrual basis. The earnings of direct investors from their ownership of direct investment capital are recorded in the period that the direct investment enterprises earned their operating and other current income. Dividends in direct and portfolio investment are measured in the period in which they are declared payable. Reinvested earnings in direct investment enterprises are measured as the direct investors' equity share of their current earnings less declared payable and distributed profits of branches (ie withdrawals by the head office). Interest income is accrued in the period in which it is earned. For an explanation of the impact of accrued interest income on the financial account refer to Box 11.1. 8.9 In the case of portfolio debt securities, a number of difficulties are encountered in collecting interest income accrued from liability issuers and asset holders. They occur because both issuers and holders may adopt historical cost accounting or include holding gains and losses. In economic statistics, however, these are excluded from measures of income and are included in the financial account. As a result, Statistics New Zealand derives income on long-term government debt securities on a full accrual basis (ie income is calculated by applying current market yields to the market value of the outstanding securities). The current yields are applied to the average stock of securities for a quarter (ie half the opening plus half the closing stock), valued at market value. For short-term securities, reported income is assumed to be a good proxy for accrued income because the very short duration of the instruments means that yield changes can have less impact.

Equity and interest income 8.10 Dividends are earnings distributed to the shareholders of an incorporated enterprise. Dividends represent income that is declared payable without a binding agreement between the creditor and the debtor, ie dividends are regarded as discretionary. Stock dividends, ie shares issued in lieu of cash, are included in dividends with an offsetting entry in equity investment in the financial account. Bonus shares issued, which represent the substitution of one type of equity for another (eg paid-up capital for reinvested earnings), or simply the division of shares, are not regarded as dividends. Income earned on non-participating preference shares, which are regarded as debt and not equity instruments, is excluded from dividends and included in interest. Liquidating dividends are regarded as a financial transaction and again are not recorded as dividends. Distributed branch profits refer to the distribution of income of branches and other unincorporated enterprises to their owners. As with dividends, income distributed in this way is at the discretion of the owners.

8.11 Reinvested earnings and undistributed branch profits refer to that part of the undistributed income of a direct investment enterprise that is attributable to direct investors in the enterprise. Undistributed income attributable to direct investors is included as investment income in the current account, with a corresponding offsetting entry in the financial account. This treatment is adopted because it is considered that direct investors, through their significant influence on the operations of the direct investment enterprise, are able to determine the level of distributed income and therefore the reinvested earnings of the direct investment enterprise. In the case of an incorporated direct investment enterprise, attribution of reinvested earnings to the direct investor is in the proportion of the direct investor's holding of voting shares to the total voting shares issued by the direct investment enterprise. If the direct investment enterprise is unincorporated, the proportion used is that represented by the ownership interest of the direct investor. Attributing reinvested earnings to shareholders is not extended to portfolio investors because they are not able to influence the level of distributed and undistributed income.

8.12 Interest is measured through the return to the providers of financial capital, evidenced by holdings of debt (non-equity) instruments, such as non-participating preference shares, debentures, bonds, bills, notes, loans, deposits, financial leases and accounts receivable. It is a non-discretionary payment because it accrues on a continuous basis over the period of the provision of capital and is evidenced by a contractual agreement between creditor and debtor.

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8.13 Within portfolio investment debt securities, separate components are shown for bonds and notes, including debentures (long-term instruments) and money market instruments (short-term instruments).

8.14 Other investment income (ie other than that from direct or portfolio investment) measures interest earned by residents from claims on non-residents and interest earned by non-residents on resident liabilities to non-residents. It includes interest earned from deposits, loans and trade credits. Interest earned on loans includes that part of financial lease payments construed to represent interest on loans and, in the past when the facility has been used, interest related to the use of IMF credit and loans. Other investment income also includes net charges on holdings of special drawing rights. (Net charges on holdings of special drawing rights are the charges by the IMF for the allocation of special drawing rights to New Zealand, less the interest earned by New Zealand for the special drawing rights held.)

Measuring direct investment earnings 8.15 Direct investment equity earnings are measured on the basis of the direct investors' equity share of the current operating performance and other current income and transfers of the direct investment enterprise. Operational earnings represent income from the normal operations of the enterprise and do not include holding gains and losses. Examples include gains and losses resulting from valuation changes (eg revaluation of fixed assets and investments, inventory write-offs), equipment sales due to business closure, write-off of intangibles (eg goodwill) because of unusual developments in a period, research and development expenditure write-offs, bad debt or expropriation write-offs, abnormal provisions on long-term contracts, and exchange rate losses. Earnings of direct investment enterprises are measured after deducting provision for corporate taxes (considered to be payable by the enterprise and not the owners) and depreciation of fixed capital. Depreciation should be calculated at current replacement cost taking into account the expected life of the asset (based on normal wear and tear and foreseen obsolescence). Businesses in the Quarterly International Investment Survey are asked to report earnings on this basis, but some businesses have difficulties in calculating earnings strictly in accordance with the ideal measure, although the differences may not be material.

8.16 Direct investors' share of net losses, other than holding gains and losses, of the direct investment enterprise, is recorded as negative income. That is, for New Zealand's investment abroad, losses are recorded as a negative credit, and for foreign investment in New Zealand, losses are reported as negative debit. This is to maintain the relationship that income on direct investment abroad is recorded as a net credit, while income on direct investment in New Zealand is recorded as a net debit (see paragraph 8.6).

Data sources and methods 8.17 A summary of the data sources used is presented in Table 8.3. Investigations are currently under way to establish data sources for compensation of employees. The investment income data is derived mostly from surveys that collect financial flows and stock information. The Quarterly International Investment Survey (QIIS) is the main source of data for direct investment income and other investment income. Portfolio investment income is derived from a variety of surveys. For portfolio investment income credits, the data sources are the Managed Funds Survey (MFS) and QIIS, while for income debits, the Quarterly Nominees Survey and QIIS are used. These surveys are supplemented with a data model that is used to derive income on long-term government debt securities held abroad. The Quarterly Nominees Survey also provides income on dividends received by non-residents on their holdings of New Zealand equity securities. In addition to QIIS, the MFS also provides data for other investment income credits.

Data quality 8.18 Investment income is one of the key components that drive the current account balance in the New Zealand BoP statistics. The coverage and measurement of investment income is directly dependent on the coverage of the stock and flows of financial capital. The surveys currently used

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provide good coverage of the stock of international financial assets and liabilities. The income data reported by companies on their international financial assets and liabilities are sourced from their quarterly management accounts. For some companies data reconciliation is required between management and statutory accounts which can lead to revisions to quarterly data.

8.19 The income data currently published departs from the standard BoP concepts in a number of cases. Dividends data is reported on a paid basis rather than the recommended declared basis. This is due mainly to the inability of the respondents to provide data on the correct basis. Converting the data to the correct reporting basis for Statistics New Zealand would be a time-consuming exercise for the respondents. At present, Statistics New Zealand does not make any in-house adjustments to convert to the recommended reporting basis. Respondents in the QIIS are asked to report interest income relating to debt securities on financial assets and liabilities on a full accrual basis (using the creditor approach), but in practice a large majority of them report interest using the debtor approach. The creditor approach requires interest to be calculated by applying current market yields to the market value of the debt outstanding. The debtor approach, on the other hand, requires interest to be calculated by applying the interest rate applicable at the time of the issue to the historical value (face) of the securities. There is an ongoing international debate on the merits of using the two different approaches to calculating interest income.

8.20 The quarterly surveys which collect data on income, financial account flows and stock are designed to provide coverage only at the 95 percent level for the stock of financial assets and liabilities data. The Annual International Investment Survey (AIIS) is designed to provide coverage for the remaining 5 percent non-sampled estimate for the stock of financial assets and liabilities. Thus, the AIIS does not collect any data for income flows relating to the 5 percent stock of assets and liabilities. Given that the 5 percent non-sampled estimates for the stock of assets and liabilities are small in comparison of the overall aggregates, BoP does not derive any estimate for income flows.

8.21 There is no coverage for income earned on investments held abroad by New Zealand resident households either directly (in their own custody) or via overseas intermediaries (overseas custodians). Note that an estimate for the stock of portfolio assets held abroad by New Zealand resident households is included in the IIP statement.

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Table 8.3:

Summary of Sources and Methods – Income

Component Data source Method of estimation Compensation of employees Currently under investigation Estimate is currently believed to be small.

Investment income

Direct investment income (debits & credits)

Quarterly International Investment Survey (QIIS) This survey has 95 percent coverage at stock levels.

QIIS provides data on dividends, distributed branch profits, reinvested earnings and undistributed branch profits. It also provides data on interest accrued on debt securities that are issued and held between related parties.

Quarterly International Investment Survey

QIIS provides income data relating to the ownership of foreign equity and debt securities.

Quarterly Managed Funds Survey (MFS)

The MFS collects income data on portfolio assets by instrument.

Quarterly International Investment Survey

QIIS provides data on dividends distributed and interest accrued to non-residents from their holdings of equity and debt securities in New Zealand.

Quarterly Nominees Survey

The Nominees Survey collects dividends paid to non-residents on their holdings of New Zealand equity securities.

Portfolio investment income (credits & debits)

Accrued Income on long-term Government Debt Securities Estimate

Income on long-term government debt securities is calculated on a full accrual basis. That is, income is calculated by applying current market yields (interest rate) to the market value of the outstanding securities. The current yields are applied to the average stock of securities for a quarter valued at market value. For short-term securities, reported income is assumed to be a good proxy for accrued income because the very short duration of the instruments means that yield changes can have less impact.

Other investment income (credits & debits)

Quarterly International Investment Survey

QIIS collects data on interest income earned and paid on other investment assets and liabilities. Income data is collected at an instrument level for other investment. QIIS also collects income earned by the RBNZ and the Treasury on the Government's official reserve assets.

Managed Funds Survey MFS also collects interest accrued on other assets held abroad.

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Chapter 9 CCuurrrreenntt TTrraannssffeerrss

Concepts and definitions 9.1 Most of the entries within the balance of payments (BoP) record transactions in which real or financial resources, such as goods, services and financial or non-financial assets, are supplied or received in exchange for resources of equal value. In instances where resources are supplied without any exchange taking place, such as gifts or grants, the transaction is classified as being one-sided and lacking an offsetting entry. The double-entry system requires that an offsetting entry be made for each transaction undertaken. Therefore, where resources are provided with there being no exchange of goods, services, or financial or non-financial assets, the offsetting entry is designated as a transfer. Transfers are separately distinguished into current transfers or capital transfers and are recorded in the current account and the capital account, respectively.

9.2 Current transfers directly affect the level of disposable income and influence the consumption of goods and services for the donor and the recipient economies. Capital transfers consist of the transfer of ownership of a fixed asset, the forgiveness of a liability, and the transfer of cash that is linked to, or conditional on, the acquisition or disposal of a fixed asset. The transfers made by migrants as they move to a new country are an example of a capital transfer. Where a transfer is considered as being current by one party and capital by the other party, both should be treated in the BoP as capital.

9.3 Current transfers are classified by institutional sector within the compiling economy. These institutional sectors are representative of the compiling economy's point of view and are either general government or other.

9.4 Table 9.1 shows the credit and debit entries for current transfers in the New Zealand BoP statistics for the year ended 31 March 2004.

Table 9.1:

Current Transfers Year ended March 2004

$NZ (Millions)

Credits Debits Current Transfers 1,318 1,128 General government 907 438 Other sectors 412 692 Data may not add to stated totals due to rounding.

General government sector 9.5 General government transfers comprise current transfers between the New Zealand government sector and non-residents. Examples are:

• benefits and pensions received from overseas governments for foreign residents living within New Zealand (credits) and benefits and pensions the New Zealand Government pays to New Zealand residents living abroad (debits)

• foreign nation licence fees, including maritime safety charges and customs collections • foreign aid from public sector organizations, eg food, clothing, medical supplies • regular contributions paid to international organisations to which New Zealand belongs • withholding taxes that non-residents pay to the New Zealand Government on their

earnings in New Zealand.

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Other sectors 9.6 Other sectors transfers include current transfers involving New Zealand residents (excluding the Government) and non-residents. Examples are:

• withholding tax paid by New Zealand residents to foreign governments on earnings overseas

• net premiums and claims on non-life insurance (see the Insurance component of Services for more detail)

• foreign aid provided/received by the private sector, eg food, clothing, medical supplies • workers' remittances to families abroad • contributions to cultural, charitable and scientific organisations by the private sector;

and • other personal transfers, principally involving individual receipts or payments to/from

non-residents as gifts, inheritances, alimony, lottery spending and winnings, private sector pension payments and other payments between individuals.

Valuation 9.7 The valuation of transfers should use the market values of the real and financial resources to which the transfers are offset. If it is not possible to obtain market values, those resources should be valued on the basis of explicit costs incurred in their provision or on the basis of amounts that would be received if the resources were sold. Where the donor and the recipient value the resources differently, the donor-assigned value is used as the basis of recording.

Data sources and methods 9.8 Various government departments and other public sector agencies provide all the data on general government sector transfers. Most of the data comes via the Treasury and the Ministry of Foreign Affairs and Trade (MFAT).

9.9 For other sector transfers, data models are used to derive the estimates. Data on non-life insurance transfers is sourced from the Insurance Model and the Quarterly Insurance Survey. Personal and workers’ remittance data comes from the Personal Transfers Credits and Debits Models. A summary of the data sources used to compile the current transfers component is illustrated in Table 9.2.

Data quality 9.10 Most of the data for current transfers is administrative data and is of good quality. Data models provide the rest of the data. Data models are by their very nature not as accurate as actual data. Despite improvements to methodologies used, estimates for other sector current transfers may not adequately capture the changing composition of other current transfers.

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Table 9.2:

Summary of Sources and Methods – Current Transfers

Component Data source Method of estimation General government sector

The Treasury Ministry of Foreign Affairs and Trade (MFAT) Inland Revenue (IRD)

Government departments provide data on the non-resident withholding tax (NRWT), New Zealand foreign aid abroad, resource licence fees, benefits and pensions paid to non-residents in New Zealand, and remittances of pensions and benefits paid to New Zealanders overseas. Official Development Assistance (ODA) is sourced from MFAT.

Other sector

Non-life insurance transfers

Insurance data model and the Quarterly Insurance Survey

The Quarterly Insurance Survey provides data on premiums paid and received, which is then used in the Insurance Model to calculate the service charge.

Foreign tax paid The Treasury IRD

The withholding tax New Zealand residents pay to foreign governments is collected by the IRD and sourced from the Treasury.

Other current transfers Data Models This data model calculates the level of current transfers made by individuals. It includes personal remittances, workers' remittances and foreign aid.

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Chapter 10 CCaappiittaall AAccccoouunntt

Concepts and definitions 10.1 The capital account covers all transactions that involve the receipt or payment of capital transfers and the acquisition or disposal of non-produced, non-financial assets. Table 10.1 shows the capital account transactions in the New Zealand BoP statistics for the year ended 31 March 2004. The standard components of the capital account are illustrated in Table 10.2.

Table 10.1:

Capital Account Summary Year Ended 31 March 2004

$NZ(millions) Credits Debits

Capital Account 1,576 814

Capital Transfers 1,576 810

Acquisition/disposal of non-produced, non-financial assets

0 3

Data may not add to stated totals due to rounding.

Capital transfers 10.2 Capital transfers are transactions that involve the transfer of ownership of fixed assets; transfer of funds linked to, or conditional upon, the acquisition or disposal of fixed assets; or the forgiveness of debt, as agreed between both parties.

10.3 Capital transfers are initially classified into general government and other sectors.

General government transfers are divided into debt forgiveness and other.

• Debt forgiveness occurs when a government creditor in one economy formally agrees, through a contractual arrangement, with a debtor in another economy to forgive all, or a portion, of the obligations of the debtor to the creditor. The amount 'forgiven' is treated as a capital transfer from the creditor to the debtor.

• Other mainly reflects investment grants, which consist of capital transfers of cash, or

of kind, made by governments to non-residents or vice versa, to finance all or part of the costs of acquiring fixed assets. New Zealand has not recorded any of these transactions recently in its BoP statistics. Other sectors’ transfers are dominated by migrants’ transfers.

Migrants’ transfers

10.4 Migrants' transfers constitute, for New Zealand, the most significant component of the capital account. Migrants are defined as individuals (other than students, medical patients or diplomatic, military or similar personnel stationed abroad) who move to a new country and are expected to stay there for at least one year. In principle, migrants' transfers include all the net worth of the migrant in his or her former persona as a non-resident (immigrant) or resident (emigrant). Net worth includes household and personal effects, movable capital equipment, funds transferred by the migrant at the time of change of residency, and the ownership of real estate and investments, less any financial liabilities. Transfers of personal effects and equipment should be recorded as imports of goods by the economy receiving the immigrant, with an offset in migrants' transfers. Generally the amounts

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involved in migrants' transfers of goods are not large, and no attempt has been made to measure these in the goods account of the New Zealand BoP statistics, so that no offsetting capital transfers entries are required. Funds transferred and other assets and liabilities should be recorded, by the economy receiving the immigrant, as an increase in financial assets (or reduction in liabilities) offset by a migrant's transfer. Generally, however, only the cash transactions are captured in the financial account, and therefore capital transfers have so far only been required to offset this element of migrants' funds.

Table 10.2:

Capital Account – Standard Components Credit Debit Capital Transfers General Government Debt forgiveness Other Other Sectors Migrants’ transfers Debt forgiveness Other Acquisition/disposal of non-produced, non-financial assets

Acquisition or disposal of non-produced, non-financial assets 10.5 The acquisition or disposal of non-produced, non-financial assets comprises two types of transactions:

• the purchase or sale of intangible, non-financial assets, such as patents, copyrights, trademarks, franchises and licences; and

• the acquisition of land by a government or international organisation or the disposal of such land.

10.6 In the case of transactions involving land, the owner is considered to have a financial investment (equity) in a notional resident enterprise, which in turn acquired ownership of the land. This excludes land sold to or by a foreign embassy, as this involves a transaction between two economic territories and is thus treated as the sale or purchase of a non-produced or non-financial asset.

Valuation 10.7 The valuation for capital transfers is treated, conceptually, the same as current transfers, in that the valuation of transfers should be the market values of the real and financial resources to which the transfers are offset.

10.8 The acquisition/disposal of non-produced, non-financial assets are valued at the transaction value of the assets acquired or disposed of.

Data sources and methods 10.9 In New Zealand there has been no known private sector debt forgiveness to date. Migrants' transfers are compiled using a data model. Migration data and information obtained from the New Zealand Immigration Service, including data on funds to be transferred and funds actually

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transferred, are used in modelling migrants' transfers. Data on the acquisition and disposal of non-produced non-financial assets is collected in the Survey of International Trade in Services and Royalties (ITSS). A summary of data sources for capital account in the New Zealand BoP statistics is presented in Table 10.3.

Data quality 10.10 Transaction data in acquisition or disposal of non-produced non-financial assets is largely ad-hoc and as a result it is difficult to identify respondents engaged in them.

Table 10.3:

Summary of Sources and Methods – Capital Account

Component Data source Method of estimation Capital transfers General government sector

Debt forgiveness

Other transfers

No debt forgiveness transactions have occurred recently. (A watching brief on the relevant Treasury Account is maintained). No other transfers transactions are known to have occurred to date.

Other sectors Debt forgiveness

No debt forgiveness transactions are known to have occurred to date.

Migrants’ transfers

Migrants’ transfers data is collated through the use of a model.

The model is used to estimate the funds that immigrants bring with them to New Zealand and emigrants take to other countries.Migration data and information from the New Zealand Immigration Services is used in modelling migrants' transfers.

Other transfers No other transfers transactions are known to have occurred to date.

Acquisition/disposal of non-produced, non-financial assets

Survey of International Trade in Services and Royalties (ITSS)

The ITSS collects data on the purchase and sale of intangible assets.

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Chapter 11 TThhee FFiinnaanncciiaall AAccccoouunntt aanndd tthhee IInntteerrnnaattiioonnaall IInnvveessttmmeenntt PPoossiittiioonn SSttaatteemmeenntt

Introduction 11.1 The financial account covers all transactions, including the creation and liquidation of financial claims, associated with change of ownership in international financial assets and liabilities during a period. On the other hand, the international investment position (IIP) is the balance sheet of the stock of international financial assets and liabilities at a point in time. The IIP may be viewed more broadly as a reconciliation statement, showing the levels of New Zealand's international assets and liabilities at two successive points in time and the components of change. It includes financial transactions (as recorded in the balance of payments (BoP) financial account) and non-transaction changes (price changes, exchange rate changes and other adjustments). The relationship between the financial account and the IIP is described in Chapter 2.

Concept of a financial asset 11.2 The concept of a financial asset relates to a claim by an entity on another entity. The existence of such a claim generally will be recorded on two balance sheets – that of the issuer of the debt as a liability and that of the holder of the claim as an asset.

Certain financial assets that are not matched by a liability in another transactor's books, namely, monetary gold and special drawing rights in the IMF, are also included in these statistics.

11.3 Assets, to be recognised, must represent actual legal claims. Options and other derivative instruments are therefore included in the definition, but authorisations, commitments or extensions of unused lines of credit and contingent obligations are excluded.

11.4 Certain other items are recognised as financial assets. These include:

• imputed financial lease claims for goods under a financial leasing arrangement, where the imputed change of ownership of the good is matched by a financial claim (ie a financial asset of the lessor and a liability of the lessee) – repayments of such leases are divided into interest and debt components, with the interest being recorded in the investment income part of the current account and the debt reduction as a repayment in the financial account

• equity of an enterprise in an unincorporated enterprise (a branch) which it has established in another country – the head office is considered to have a financial claim on the branch covering the financial and non-financial assets, less any liabilities, of the branch

• imputed equity claims on immovable assets such as land and structures located in one economy and owned by a resident of another economy – ownership is imputed to a resident entity in the economy of location over which the non-resident owner has a financial claim.

Valuation and time of recording 11.5 The general principles covering valuation and time of recording are set out in Chapter 2. These state that:

• market prices should be used to value transactions and stocks • where financial instruments are denominated in a foreign currency, these should be

converted at spot exchange rates • the time of ownership change should be the basis of recording financial transactions

and stocks.

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11.6 Transactions should be recorded on an accrual basis. This requires that some items, representing the difference between the accrual and cash record, have to be recorded as components of the financial account. For example, income in the current account is recorded when earned. The difference between income earned and cash settlement when payment becomes due is included in the accounts as a net financial transaction in the underlying instrument (see Box 11.1 for a description). Similarly, the prepaid premiums and unpaid claims on insurance (ie the difference between premiums earned and claims payable on the one hand and premium and claim payments on the other) should be recorded as financial transactions. Every effort is made in data collections to adhere to these principles, and data in the financial account and the IIP are considered to approximate them.

Box 11.1:

The Impact of Accrual Accounting of Income on the Financial Account In the BoP, income should be recorded during the period or periods in which the economic benefits arising from the use of the factors of production are enjoyed by the user, and measure the use of those factors (see paragraph 8.1). Following from this concept of income, interest should be recorded on an accrual basis and not just at the time interest payments are actually made, and should reflect current market rates of interest in the accounting period. Entries are required in both the income account for the income accrued, and the financial account for the liability to settle the claim for payment of the income. The liability for the accrued interest is to be recorded as a transaction in the financial account in the instrument on which the income accrues. The implementation of full accrual accounting for income in surveys is complicated by the prevalence of historical cost accounting, and by the use of residual 'accrual' accounts and other accounting practices that do not meet statistical requirements. For non-tradable debt (eg trade credit, loans, deposits) it is assumed that historical cost is generally a reasonable approximation of current market rates, and respondents can report the amounts accrued over time. However, for tradable debt securities (bonds and notes and money market instruments), the differing accruals practices of respondents, and the asymmetries between counter-parties in reporting the same transactions, mean that summing such reported 'accrued' amounts cannot produce meaningful statistics.

Classification 11.7 The broad classifications of the financial account and the IIP are set out in Tables 3.2 and 3.3, respectively. More detailed standard components are shown in Tables 12.2, 13.2, 14.1 and 15.2. The classifications follow international recommendations and facilitate comparisons with other statistical data sets. They reflect important elements of finance such as the type of investor, the type of financial instrument used and the original/residual contractual maturity of the instrument. For assets and liabilities in the IIP it is analytically useful to know what caused the changes in position between periods, ie whether the changes have been brought about by transactions or by valuation changes, exchange rate changes or other volume adjustments.

Type of investment 11.8 The primary classification is by functional category or type of investment (direct investment, portfolio investment, financial derivatives, other investment and reserve assets) as described in paragraph 3.17. This is elaborated further in the following chapters. Different categories of investment exhibit different behavioural characteristics. For example:

• a direct investor has a significant influence on the management of a direct investment enterprise and may have a number of specific objectives associated with that investment;

• a portfolio investor is more concerned with having a suitable portfolio which will maximise income and capital appreciation (or minimise losses) on the portfolio as a whole, and is less concerned with exercising any influence on the companies in which the investment occurs;

• an exporter offering trade credit may be concerned with maximising sales;

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• a financial enterprise may wish to attract deposits and offer loans to good-risk clients; and

• the central bank, through its management of official reserves, is concerned, inter alia, with intervention in exchange markets, although the return on the investment of reserves is also a consideration.

Assets and liabilities 11.9 The importance of this classification has been described earlier (paragraphs 3.18 to 3.20), where it is noted that for portfolio, financial derivatives and other investment, the main classification is by asset and liability; the reserves component contains only assets. For direct investment, the main classification is direction of investment (ie direct investment abroad or direct investment in New Zealand). Within each direction of investment, separate data is recorded for direct investment assets and liabilities.

Sector 11.10 For analytical purposes the components of portfolio investment, financial derivatives and other investment are classified to four sectors according to the institutional sector classification of the resident creditor or debtor. In addition, for analysis of foreign debt and equity markets, and for comparison with other statistical systems such as the national accounts, the components of direct, portfolio, financial derivatives and other investment are all classified to the four resident sectors – the monetary authority, general government, depository institutions and other sectors. For a more detailed description of institutional sector classification in New Zealand refer to Chapter 3, Table 3.5.

Instrument 11.11 A classification of the financial account by instrument is useful in analysing the form of the international investment and its changing composition over time. It also helps to compare with domestic financial statistics. A range of instruments are identified in the New Zealand BoP statistics. A description of each instrument is given in Box 11.2. Some of these instruments are applicable to only one type of capital, eg the instrument reinvested earnings is used only for direct investment, while monetary gold and special drawing rights are used only for reserve assets. Reinvested earnings are not strictly an instrument of investment, but rather a component of direct investment in equity capital. However, because of their importance, traditionally they have been shown separately in tables classifying investment flows by instrument. This practice is followed in the New Zealand BoP statistics.

Long- and short-term investment

11.12 Long-term refers to debt issued with a maturity of more than 12 months while short-term is debt with a maturity of less than and equal to one year. While the distinction between long-and short-term investment based on original contractual maturity is less important than it used to be, it is still a core data requirement in the External Debt Statistics. Currently data for New Zealand's IIP statistics are compiled on a time remaining to (residual) maturity basis, as users find this information far more useful than on an original maturity basis. The data for loans is also collected on an original maturity basis. To extend this to other instruments would require changes to the existing survey collections. A proxy data series based on original contractual maturity can be derived for bonds and notes and money market instruments. Bonds and notes have distinct long-term characteristics while money market instruments are considered short-term instruments.

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Box 11.2:

Description of Financial Instruments Monetary gold is gold usually held by the Reserve Bank as part of New Zealand's reserve assets. The creation or extinction of monetary gold is referred to as monetisation/demonetisation of gold and is included in the other adjustment item of the international investment position. Foreign exchange consists of the Reserve Bank's holdings of securities and currency and deposits. Currency and deposits consist of foreign and domestic notes and coins, transferable deposits which are exchangeable on demand and freely transferable, and other deposits such as fixed term deposits and those redeemable at short notice. Also included are banks' nostro and vostro accounts. Special Drawing Rights are international reserve assets created by the IMF to supplement the reserves of IMF member countries. They are not regarded as liabilities of the IMF. The creation or extinction (should the latter occur) of Special Drawing Rights is referred to as allocation/cancellation of Special Drawing Rights and is included in the other adjustment item of the IIP. Reserve position in the IMF consists of two elements: (i) foreign currency amounts that a country may draw from the IMF at short notice and without conditions; and (ii) indebtedness of the IMF under a loan agreement. Equity is that part of the issued capital of an incorporated enterprise, or the equivalent in an unincorporated enterprise, which acknowledges a claim to the residual value and income of the enterprise after the claims of all other creditors have been met. It includes ordinary and participating preference shares in an incorporated enterprise, equity in an unincorporated enterprise such as a branch, units in incorporated trusts and non-withdrawable share capital of building societies and credit unions. Non-participating preference shares are included in debt securities. Reinvested earnings, a component of direct investment, comprise the undistributed income of a direct investment enterprise which is attributable to its direct investor in another economy. It is an imputed transaction with offsetting entries in investment income and the financial account. While this component is separately identifiable in the BoP, it is not separately identified in the IIP statement, where it is included in equity capital.

Debt securities consist of two instruments:

Bonds and notes (including debentures, non-participating preference shares and negotiable long-term certificates of deposit) are instruments issued for more than 12 months which give the holder the unconditional right to a pre-determined income and, except for perpetual bonds and debentures, to a fixed amount on a specified date as repayment of principal. Money market instruments are instruments (such as treasury bills, commercial paper and bankers' acceptances, short-term certificates of deposit, and short-term notes issued under a note issuance facility) issued for less than or equal to one year, usually traded at a discount (depending on the interest rate and time remaining to maturity) in organised markets, and give the holder the unconditional right to receive a pre-determined amount on a specified date.

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Financial derivatives are secondary securities linked to specific financial instruments, indicators or commodities, and give the holder a qualified right to receive a benefit (cash, a primary financial instrument, the underlying commodity, etc) at some future date. Derivatives are usually tradable and have a market value, and include options (on currencies, interest rates, commodities, indices, etc), traded financial futures, warrants, and currency and interest rate swaps. Trade credit covers deferred and advanced payments (prepayments) for goods and services, including progress payments for internationally traded goods. Loans include the direct lending of funds from a creditor (lender) to a debtor (borrower) where the lender receives a non-negotiable document or instrument. Included are loans to finance trade, other loans and advances (including mortgages), financial leases and repurchase agreements where the enterprise acquiring the securities does not become their registered holder. Other assets and other liabilities include such items as miscellaneous accounts receivable and payable, prepaid insurance premiums and outstanding claims on insurance.

Industry 11.13 Industry-classified statistics should be treated with some caution as they do not necessarily reflect the industry in which the funds are ultimately employed. This reflects the fact that data for the entire enterprise group is classified to the predominant activity of the enterprise, even though the enterprise may be involved in a broad range of activities.

11.14 For foreign investment in New Zealand, an additional problem in analysing industry statistics stems from the fact that a significant proportion of the total level of foreign investment in New Zealand is in the form of borrowing by enterprises classified to the finance industry. This category includes enterprises, such as banks, which commonly borrow funds as principals and then on-lend to clients in other industries. In such cases, the classification of investment transactions reflects the industry of the immediate liability holder rather than the industry of end-use of the funds. Relationship between international investment position and external debt 11.15 Within the BoP and IIP statistics, the instrument of investment may be assigned to either equity or debt. Debt instruments are defined as those other than equity instruments. A country's external debt is therefore a subset of the financial liabilities in its IIP statistics. To present a complete understanding of a nation's foreign debt situation, it is necessary to show its external debt assets (its debt claims on the rest of the world), its external debt liabilities (gross debt liabilities to the rest of the world), and its net external debt (the net sum of debt liabilities and debt assets).

11.16 Table 11.1 shows New Zealand's IIP and the split between foreign equity and debt from 2002 to 2004. The table also shows the gross asset and liability components of the IIP and of net equity and net debt.

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Table 11.1:

International Assets and Liabilities(1)

As of March 31 NZ$ (millions)

2002 2003 2004 New Zealand's International Assets

Equity Assets 28,981 26,056 35,091 Lending 59,112 62,241 59,018 Banks 28,022 28,901 27,811 General government 4,219 4,130 4,478 Monetary authorities 5,195 5,671 6,702 Other sectors 21,676 23,540 20,028 Total International Assets 88,092 88,297 94,109

New Zealand's International Liabilities Equity Liabilities 48,604 50,720 59,985 Borrowing 138,104 137,971 141,630 Banks 71,139 72,108 80,950 General government 19,108 17,691 18,175 Monetary authorities 961 8 6 Other sectors 46,896 48,164 42,499 Total International Liabilities 186,709 188,691 201,615

New Zealand's Net International Asset Position Net International Equity -19,624 -24,664 -24,894 Net International Debt -78,993 -75,730 -82,612 Net International Asset Position -98,616 -100,394 -107,506 (1) This table is prepared on a balance sheet basis. Note: Data may not add to stated totals due to rounding.

Hedging of foreign currency debt 11.17 Statistics New Zealand collects information on the measures employed by New Zealand businesses to hedge (manage the foreign currency risks) their foreign currency overseas debt on an annual basis. The information is collected from a sample of New Zealand companies who contribute most to foreign currency overseas debt. The survey asks respondents to state the percentage of their foreign currency liabilities that are: (i) hedged using financial derivative contracts; (ii) hedged against balance sheet assets; (iii) naturally hedged (eg hedged against expected future exports receipts); and (iv) not hedged at all.

Reconciliation of gross assets and liabilities with direction of investment 11.18 The difference between the concepts of gross assets and liabilities on the one hand, and New Zealand investment abroad and foreign investment in New Zealand on the other, centres on the treatment of direct investment claims and liabilities between enterprises in a direct investment relationship. The concepts of gross assets and liabilities are needed for reconciliation with SNA93-based statistics, while New Zealand investment abroad and foreign investment in New Zealand (both net concepts as described below) are used in IIP-based statistics. To arrive at net New

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Zealand investment abroad from New Zealand's gross assets (claims on the rest of the world, monetary gold and special drawing rights), it is necessary to:

• add the liabilities of New Zealand direct investors to their affiliates abroad (to arrive at net claims)

• deduct the claims on direct investors (because these are reflected in foreign investment in New Zealand).

Data collection for New Zealand BoP financial account and the IIP 11.19 Box 11.3 provides an illustration of the data collections used for the compilation of the BoP financial account and the IIP statement on a quarterly basis. A mixture of Statistics New Zealand's own sources and those of the Reserve Bank of New Zealand is used to collect the relevant data.

11.20 The key data collections for the financial account and IIP include: • the Quarterly International Investment Survey (QIIS) • the Quarterly Nominees Survey • the Reserve Bank’s Managed Funds Survey • direct request for data from the Reserve Bank and the Treasury.

Box 11.3:

Data Collection for Financial Account and IIP

Data Collection StrategyBOP and IIP International Financial Institutional Sector of Data Collection Standard Component Assets/Liabilities the Survey Respondents Vehicle

Direct Investment Assets & Liabilities Monetary Authorities No transactions to (Transactions, stock levels report & income flows) General Government

Quarterly International Banks Investment Survey (QIIS)

Finance Sector Other Sectors

Quarterly International Investment Survey (QIIS)

Non-finance sector

Portfolio Investment Assets Monetary Authorities(Transactions, stock levels Direct Inquiry to The & income flows) General Government Reserve Bank of New Zealand

(RBNZ) & The Treasury Banks

RBNZ's Managed Funds Survey Other Sectors & QIIS

Liabilities Monetary Authorities RBNZ's Survey of Monthly Return of New Zealand Interest General Government Bearing Securities held for

Non-residents Banks

QIIS & Statistics Other Sectors New Zealand's Nominee Survey

Other Investment Assets & Liabilities Monetary Authorities(Transactions, stock levels Direct Inquiry to RBNZ & income flows) General Government & The Treasury

Banks

QIIS Other Sectors

Reserve Assets Assets Monetary Authorities(Transactions, stock levels) Direct Inquiry to RBNZ

General Government & The Treasury

BanksNo transactions to

Other Sectors report

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The Quarterly International Investment Survey (QIIS) 11.21 There are two versions of the survey questionnaire, one for the finance sector and the other for the non-finance sector of the sampled population. The survey measures the amount and type of capital required to finance New Zealand’s current account deficit. QIIS is a sample survey of more than 500 businesses each quarter. The survey collects the stocks and flows of financial assets and liabilities data of New Zealand residents with non-residents. Additional breakdowns such as country and maturity profiles are also collected in the same survey. QIIS is designed to collect data at the 95 percent coverage level for the stock of international financial assets and liabilities. The Annual International Investment Survey is designed to collect data on the 5 percent non-sampled estimate for the stock of international assets and liabilities to be included with the results of QIIS. The survey is also designed to act as an exploratory survey for new births during the year.

Quarterly Nominees Survey 11.22 The Nominees Survey captures data on non-resident holdings of New Zealand equity securities held via New Zealand nominee companies. The data from this survey, together with the data on overseas ownership of New Zealand equity securities from QIIS, gives an accurate picture of the total holdings of New Zealand equity securities by non-residents.

The Quarterly Nominees Survey complements data captured by the Reserve Bank’s own nominee survey. The latter survey collects data on New Zealand debt securities held by non-residents with a domestic nominee.

Managed Funds Survey 11.23 The MFS is a joint survey undertaken with the Reserve Bank. Statistics New Zealand uses the Reserve Bank’s Managed Funds survey for data on New Zealand’s portfolio investments overseas. The survey collects the stock and flow of portfolio assets invested overseas by New Zealand fund managers on behalf of their New Zealand clients.

Data requests from the RBNZ and the Treasury 11.24 Direct requests for data are made to the Reserve Bank and the Treasury on the overseas activities and dealings they undertake on behalf of the New Zealand Government.

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Chapter 12

DDiirreecctt IInnvveessttmmeenntt

Introduction 12.1 Direct investment is investment undertaken by an entity resident in one economy in an enterprise resident in another economy. The purpose of the investment is to obtain or sustain a lasting interest in the enterprise and exercise a significant degree of influence in its management. The entity undertaking the investment is referred to as the direct investor and the enterprise in which the investment takes place is referred to as the direct investment enterprise.1 These terms are described in Box 12.1.

Box 12.1:

Definitions of Direct Investment Enterprise and Direct Investor

A direct investment enterprise is an incorporated or unincorporated enterprise in which a direct investor owns 10 percent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise). Direct investment enterprises comprise branches (unincorporated enterprises), subsidiaries (incorporated enterprises that are more than 50 percent owned by the direct investor), and associates (incorporated enterprises that are between 10 and 50 percent owned by the direct investor). A direct investor may be an individual; an incorporated or unincorporated private or public enterprise; an associated group of individuals or enterprises; a government or a government agency; an estate or trust; or an international organisation which has an investment of 10 percent or more in a direct investment enterprise in an economy other than the one in which the direct investor resides. An enterprise that has significant long-term operations in more than one economy is divided into separate entities in each economy. These entities are always in a direct investment relationship: the head office constitutes the direct investor and its branches constitute the direct investment enterprises. 12.2 The concept of direct investment is intended to identify a form of investment which differs markedly from other forms, ie:

"The benefits that direct investors expect to derive from a voice in management are different from those anticipated by portfolio investors having no significant influence over the operations of enterprises. From the viewpoint of direct investors, enterprises often represent units in a multinational operation, the overall profitability of which depends on the advantages to be gained by deploying the various resources available to the investors in units located in different economies. Direct investors are thereby in a position to derive benefits in addition to the investment income that may accrue on the capital that they invest (eg the opportunity to earn management fees or other sorts of income). Such extra benefits are likely to be derived from the investors' associations with the enterprises over considerable periods of time. In contrast, portfolio investors are primarily concerned about the safety of their capital, the likelihood of appreciation in value, and the return generated. Portfolio investors will evaluate, on a separate basis, the prospects of each independent unit in which they might invest and may often shift their capital with changes in these prospects, which may be affected by short-term developments in financial markets." (BPM5, p. 86)

1 The concept of direct investment as set out above is consistent with BPM5. This is also the basis for the definition adopted in the second edition of the OECD Detailed Benchmark Definition of Foreign Direct Investment. In BPM5, a direct investment relationship is deemed to exist between two enterprises (a direct investor in one country and a direct investment enterprise in another country) when one has an equity interest in the other of at least 10 percent. The BPM5 definition is more precise than that used in BPM4, which left compilers to choose a range of equity links between 10 and 25 percent in which a direct investment relationship could be deemed to exist and, further, did not elaborate on how the definition should be applied down an ownership chain.

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12.3 Direct investment transactions comprise not only the initial equity transaction establishing the relationship between the direct investor and the enterprise, but also all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated. Besides equity and loans, direct investment also includes all other forms of finance extended between the direct investor and the direct investment enterprise. In addition, equity and other investments acquired by the investor before triggering the direct investment threshold are reclassified from portfolio or other investment to direct investment in the IIP. Such reclassifications are recorded as 'other adjustments to changes in position' in a reconciliation statement.

12.4 In the case of banks and other financial intermediaries (depository institutions) in a direct investment relationship, only equity transactions and permanent debt (capital acquired for business expansion/growth) transactions between them are included in direct investment, while other forms of finance are excluded; the latter are included, as appropriate, in portfolio and other investment.

12.5 The direct investment relationship extends to the direct investment enterprise's subsidiaries and associates unless the direct investment enterprise itself is an associate. The definition of the direct investor is broad in that it may cover associated individuals or enterprises; this associated group may extend beyond a single economy. Therefore, any financial transactions between a member of the direct investor group and a member of the investee group are classified as direct investment (unless the transactions are non-equity or non-permanent transactions between depository institutions – see paragraph 12.4).

12.6 Table 12.1 illustrates the financial transactions for New Zealand's direct investment abroad and foreign direct investment in New Zealand during the year ended 31 March 2004, as well as the overall levels of direct investment abroad and in New Zealand at the end of the period. It is evident from the table that:

• the level of foreign direct investment in New Zealand is much larger than New Zealand's direct investment abroad

• the level of equity capital and reinvested earnings make up the largest part of direct investment

• other capital is negative for New Zealand's direct investment abroad, which reflects the fact that the New Zealand direct investors’ liabilities to their overseas affiliates exceeded the non-equity claims for the year ended March 2004.

Table 12.1:

Direct Investment Transactions and Levels NZ$ (Millions)

Financial Transactions Year ended March 2004

Position at End of Period As of March 31, 2004

Directinvestment

abroad

Directinvestment in

NZ

Direct investment

abroad

Directinvestment

in NZ Direct investment 1,293 3,895 13,390 64,289 Equity capital and reinvested earnings 1,448 741 12,177 45,238

Other capital -155 3,154 1,212 19,051 Data may not add to stated totals due to rounding.

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Standard international investment position classification 12.7 The IIP statement measures New Zealand's stock of external financial assets and liabilities, whereas the BoP financial account measures transactions (flows) in these assets and liabilities. Hence the classifications used in the financial account and the IIP are consistent. Refer to Chapter 3 for details.

Treatment of offshore financing subsidiaries 12.8 Financing subsidiaries are set up by multinational enterprises in various jurisdictions to facilitate financing of investments by the parent enterprise in their local and/or world-wide operations. The best known financing subsidiaries are those set up in the Netherlands Antilles, Bermuda and Ireland. They are principally set up to raise funds and to take advantage of tax obligations. The OECD manual on direct investment recommends that all transactions with financing subsidiaries be treated as direct investment transactions. It is acknowledged that in the majority of cases the net position with these subsidiaries would be negative. In the New Zealand BoP, transactions with these financing subsidiaries are recorded under direct investment.

Transactions in land/real estate 12.9 Land and structures that are directly owned by non-residents are considered to be owned by notional resident units (shelf companies) that are in a direct investment relationship with the legal owners of the land. The IMF recognise that there may be difficulties associated with using surveys to measure transactions in land, mainly due to the difficulty in approaching the 'principle entities' engaged in the transaction, which may include numerous, small private investors. Often, purchases of New Zealand land by foreign investors are conducted by setting up an entity in New Zealand. The entity set up has often been extended funds to purchase the land. Transactions relating to the purchase of land by non-residents in New Zealand and by New Zealand residents abroad using entities are captured in the Quarterly International Investment Survey. The survey does not separately identify whether funds sourced from overseas are used for the purpose of purchasing land.

Treatment of construction activity 12.10 The BoP treatment of construction work undertaken in one economy by a construction enterprise resident in another economy is complex and depends largely on the residency status attributed to the enterprise engaged in the construction work. To be classified as a resident unit in the host economy for the purpose of construction activity, all of the following conditions must be met:

• the enterprise must maintain or expect to maintain its presence in the host economy for more than one year

• separate and appropriate records are kept in respect of the enterprise's work in the host economy (that is, income statement, balance sheet, transactions with the parent enterprise)

• the enterprise operates a bank account in respect of local operations • income taxes are paid to the host economy.

If these conditions are met, then the construction activity is regarded as being carried out by a notional branch resident in the host economy that is in a direct investment relationship with the parent enterprise in another economy. If these conditions are not met, then the activity is attributed to a non-resident enterprise (from the point of view of the host economy) and the acquisition of output by the host economy is regarded as an import of a service.

Transactions in respect of construction activity undertaken in New Zealand by foreign companies and construction undertaken overseas by New Zealand companies on a long-term basis and involving the establishment of a subsidiary or a branch are recorded under direct investment. The relevant data is collected in the Quarterly International Investment Survey. The BoP treatment of construction activity in New Zealand by foreign companies is consistent with that used in the New Zealand national accounts.

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Classification

Direction of investment

12.11 The primary classification in direct investment statistics is the direction of investment. Investment by resident direct investors in direct investment enterprises abroad is labelled as outward investment (or direct investment abroad). Investment in resident direct investment enterprises by overseas direct investors is referred to as inward investment (or direct investment in New Zealand). The definitions associated with New Zealand direct investment abroad are symmetrical with those for foreign direct investment in New Zealand.

12.12 Within each direction of investment, separate data in respect of assets and liabilities is collected in the Quarterly International Investment Survey. Some cases of reverse equity investment (including reinvested earnings) exist, although they are rare. Reverse equity investment occurs where the direct investment enterprise has an equity interest in its direct investor. If the reverse equity is below 10 percent then, to arrive at direct investment abroad, equity investment (including reinvested earnings) by the direct investment enterprise in the direct investor is deducted from the direct investor's equity investment in the direct investment enterprise. However, the current practical treatment is to record the reverse equity that is below the 10 percent threshold as portfolio investment. If the reverse participation is at or above 10 percent, then direct investment equity relationships are established and measured in both directions. This particular rule is followed rule in practice.

12.13 While instances of reverse equity participation are very rare in New Zealand, it is more common for direct investors to incur liabilities to their direct investment enterprises. This is recognised in the other capital component in Table 12.2, where separate data is shown for direct investment assets (claims) and liabilities. In order to arrive at other capital for New Zealand investment abroad, liabilities are netted against assets (net lending). Similarly, in order to arrive at other capital for foreign investment in New Zealand, assets are netted against liabilities (net borrowing).

Types of capital

12.14 Within direct investment, the distinction is maintained between equity capital (including reinvested earnings) and other capital. Unless the direct investor and the direct investment enterprise are both depository institutions, all debt instruments, including bonds and notes, money market instruments, financial derivatives, trade credit, loans, etc between enterprises in a direct investment relationship are included in other capital.

Table 12.2:

Direct Investment – Standard Components

Direct investment abroad Equity capital Reinvested earnings(1) Other capital Claims on affiliated enterprises Liabilities to affiliated enterprises Direct investment in New Zealand Equity capital Reinvested earnings(1) Other capital Claims on direct investors Liabilities to direct investors (1) In the IIP statement reinvested earnings are included with equity capital. 12.15 The conceptual framework for reporting financial derivatives in the BoP and the IIP initially led to the inclusion of financial derivatives between affiliated enterprises in direct investment. Statistics New

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Zealand currently does not collect data in a way to enable the publication of such a breakdown under direct investment.

Valuation of the stock of direct investment in equity capital 12.16 In measuring the value of equity capital (including equity in branches), much of which is never traded or is traded infrequently, the following principles are applied:

• For listed enterprises, the market value of the equity positions are to be reported using a recent transaction share price. If recent transaction prices are not available, the midpoint of the quoted buy and sell prices of the shares on their main stock exchange, at the reference date specified, provides a useful approximation.

• For unlisted enterprises, if a market value of the shares is not available the respondent is asked to estimate the market value by one of the following methods (in order of preference): net asset value, a recent transaction price or director's valuation.

12.17 The net asset value of an enterprise is equal to total assets, including intangibles, less non-equity liabilities and less the paid up value of non-voting shares. Ideally, assets and liabilities should be valued at market value. If this is the case, the net asset value may be regarded as providing a good approximation of the market value. Even in such cases, the net asset value may still be less than a willing buyer would be prepared to pay for the equity, as the enterprise may have a higher perceived value as a going concern. Often, historical costs (as distinct from current values) are used by enterprises to value assets and liabilities on balance sheets. To the extent that assets are not revalued to reflect market values, the calculation of net asset value based on such balance sheets will have further deficiencies as a proxy for market value.

Data sources and methods 12.18 The data sources and methods used to estimate the component of direct investment are detailed in Table 12.3. The main data source used is the Quarterly International Investment Survey (QIIS). QIIS provides a detailed breakdown of the stocks and flows of direct investment by type of instrument and by country of non-resident investor/investee. The other data source used is the Annual International Investment Survey (AIIS) which provides data on the 5 percent non-sampled estimate of the stock of direct investment in New Zealand and New Zealand direct investment abroad.

Relationship between direct investment statistics and Overseas Investment Commission data 12.19 While Overseas Investment Commission (OIC) statistics may appear at first glance to be a useful source for data on foreign direct investment in New Zealand, there are substantial differences between these statistics and the New Zealand BoP and IIP statistics. These include differences in coverage, concepts and timing. For example, the OIC data measures proposals approved in the relevant period only. It does not cover investment levels, investment income, or actual transactions and other changes in inward or outward investment. All these aspects are covered in BoP and IIP statistics. In some situations, approved projects do not proceed. Also, the OIC adopts a different concept of 'foreign interest'. For example, if a New Zealand subsidiary of a non-resident enterprise purchased land in New Zealand using funds sourced within New Zealand, the OIC would include the full amount in its approvals statistics as it would regard the subsidiary as a 'foreign interest'. However, this transaction would be excluded from BoP and IIP statistics as the subsidiary would be regarded as a New Zealand resident entity and the financing of the purchase would not involve changes in foreign financial assets or liabilities.

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Table 12.3:

Summary of Sources and Methods – Direct Investment

Component Data source Method of estimation

Quarterly International Investment Survey (QIIS)

QIIS collects data on net transactions, level of investment, price change, exchange rate change and other adjustments for both New Zealand's direct investment abroad and foreign direct investment in New Zealand. QIIS is designed to collect data at the 95 percent coverage level for the stock of direct investment assets and liabilities.

Direct Investment

Annual International Investment Survey (AIIS)

AIIS collects data on the level of New Zealand's direct investment abroad and foreign direct investment in New Zealand. The AIIS data provides coverage for the 5 percent non-sampled estimate for the stock of direct investment assets and liabilities, not covered by QIIS. The estimate for the 5 percent of the stock of direct investment in New Zealand and direct investment abroad in AIIS is derived using certain assumptions about the data in the survey. In some instances these assumptions may not be entirely valid.

Data quality 12.20 Current data collection provides good coverage of investors involved in direct investment activities. A number of gaps which existed in direct investment data in the past have now been filled with the establishment of the Quarterly International Investment Survey. These include the net asset value of branches in the IIP and also the additions and withdrawals of equity capital in a branch operation in the BoP. The introduction of Statistics New Zealand's Quarterly Nominees Survey has provided another avenue to check the consistency of data reported by companies between direct and portfolio equity investments.

12.21 As part of the move towards BPM5 (ie from the June 2000 quarter), the definition of direct investment for both inward and outward direct investment was aligned to achieve symmetry. Previously a cumulative approach was used for inwards direct investment and a single direct investor approach was used for outwards direct investment.

12.22 The threshold (ie 10 percent of voting capital) now used to distinguish direct and portfolio investment is consistent with the one recommended in BPM5. Prior to the June 2000 quarter, a 25 percent threshold was used.

12.23 The use of non-market prices to value the stock of direct investment assets and liabilities remains an issue for some companies in the QIIS and often companies use net asset value to measure the stock of equity in their unlisted (non-trading) subsidiaries. In doing so, the value of assets and liabilities reported in their balance sheet may be at historical cost rather than at current cost or market values.

12.24 The stock of direct investment in New Zealand and New Zealand's direct investment overseas, sourced from the AIIS, is based on certain assumptions about the data reported by respondents. The AIIS has been designed for small to medium-sized survey respondents and as such the data requirements have been kept simple. In the process, details about the investor/investee relationship of enterprises have not been incorporated in the data request. Assumptions about the investor and investee relationships are made and are based on the country data collected in the survey. In some cases, these assumptions may not be valid, leading to misclassifications of assets and liabilities between direct, portfolio and other investment. Since the contribution of AIIS data to the overall stock of direct investment assets and

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liabilities is small, the inaccuracy in the classification of direct investment data is considered to be acceptable. 12.25 New Zealand does not strictly follow the recommended basis for recording reverse direct investment where the reverse equity threshold is below 10 percent. Instead of recording the less than 10 percent reverse investment as an offset to the equity investment the recommended way, New Zealand records this under portfolio investment.

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85

Chapter 13 PPoorrttffoolliioo IInnvveessttmmeenntt

Introduction 13.1 Portfolio investment consists of equity and debt securities that are not classified to either direct investment or reserve assets. Equity securities include shares, stocks, American Depository Receipts (ADRs) or similar documents that usually denote ownership of equity. The level of equity ownership that denotes portfolio investment is taken as being less than 10 percent ownership in an entity. Investment in mutual funds and investment trusts (unit trusts) are also included under portfolio equity. Debt securities include tradable instruments such as bonds and notes, debentures (long-term instruments) and money market instruments (short-term instruments such as treasury bills, commercial and financial paper).

13.2 The financial transactions and the overall levels of New Zealand’s portfolio investment assets and liabilities are illustrated in Table 13.1. The following features are demonstrated in the table:

• equity securities make the greatest contribution to New Zealand’s portfolio investment assets • debt securities make up the largest part of New Zealand’s portfolio investment liabilities.

Table 13.1:

Portfolio Investment Transactions and Levels NZ$ (Millions)

Financial Account TransactionsYear ended March 2004 Position at End of Period

As of March 31, 2004 Assets Liabilities Assets Liabilities

Portfolio Investment

3,290

6,947

33,165

73,199

Equity Securities

3,224 694 22,914 14,747

Debt Securities

66 6,253 10,252 58,452

Data may not add to stated totals due to rounding.

13.3 Portfolio investment in equity capital is more passive in nature than direct investment in equity capital because the portfolio investor has virtually no ability to influence either the managerial decision-making for the enterprise in which investment takes place or the return on that investment (a direct cause of investing less than 10 percent in an enterprise). Transactions within portfolio investment equity securities include the take-up of new issues of securities as well as purchases and sales of existing securities on secondary markets. Transactions may take place on organised markets (such as stock exchanges) or, on occasion, off-market (bypassing the stock exchange), and they may take place in New Zealand or abroad on the over the counter market.

Classification 13.4 The standard component of portfolio investment as recommended by the IMF in the BPM5 is shown in Table 13.2. Portfolio investment is primarily split into foreign assets (claims on non-residents) and liabilities (obligations to non-residents). Within these categories, equity securities and debt securities are separately identified. Debt securities are further sub-divided into two categories: (i) bonds and notes; and (ii) money market instruments. Both equity and debt securities are also split by resident institutional sector, namely general government, monetary authorities, banks (depository institutions) and other sectors. The standard outputs in the Statistics New Zealand BoP and IIP series are set out in Tables 3.2 and 13.3 of this Sources and Methods. The standard Statistics New Zealand output presentation is to disaggregate portfolio investment into equity and debt securities. These outputs differ from the IMF

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presentation shown below by not presenting a sectoral breakdown of portfolio investment, and by not disaggregating debt securities into bonds and notes, and money market instruments.

Table 13.2:

Portfolio Investment: Standard Components Credit Debit Equity securities General government (assets only)

Monetary authorities Banks

Other sectors Debt securities Bonds and notes General government Monetary authorities Banks

Other sectors Money market instruments

General government Monetary authorities Banks

Other sectors

Valuation of the stock of portfolio investment 13.5 Survey respondents are asked to report market values at the reference date (the end of a quarter) when reporting portfolio investment. For listed equity securities the method of valuation requested is listed price, while for unlisted securities the net asset value method is recommended. For debt securities, respondents are asked to report at market value at the date specified. If that value is not available, they are asked to report in order of preference one of the following methods: yield-to-maturity, discounted present value, issue price plus amortisation of discount, or another mark-to-market basis.

Data sources and methods 13.6 The data sources and methods used to estimate the various components of portfolio investment are detailed in Table 13.3. In summary these are the Quarterly International Investment survey (QIIS) which collects both asset and liability data, the Quarterly Managed Funds Survey (QMFS), the Quarterly Survey of New Zealand Nominees, and the Quarterly Official Sector collection. The variety of data sources used reflects the nature of portfolio investment, ie funds can be invested using a number of different channels, and may be held under custody with either a domestic or an overseas custodian.

13.7 On the asset side (New Zealand investment abroad), the data sources are the QMFS and the QIIS. The bulk of the transaction and stock data comes from the QMFS. This survey is a collection undertaken jointly by the Reserve Bank of New Zealand (RBNZ) and Statistics New Zealand. The survey collects data from New Zealand fund managers who invest significant levels of funds abroad on behalf of other New Zealand residents. The data is captured at an instrument level, thus enabling classification of portfolio assets into equity and debt securities. In some instances, estimates are derived for net transactions data where these are not reported directly by the respondents. The Annual Managed Funds Survey (AMFS) captures position data from smaller fund managers once per year. The results are presented as an addendum item to the IIP, and the AMFS is used to update the sample for the quarterly survey. The QIIS provides net transactions and stock data on portfolio assets and liabilities, together with an instrument breakdown, currency and maturity profiles of these assets and liabilities.

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13.8 These collection vehicles, QMFS and QIIS, are directed at New Zealand resident entities. In addition to investing abroad via New Zealand fund managers (data collected in the QMFS survey), New Zealand resident individuals invest abroad on their own account, either directly or using the services of intermediaries, ie using channels not covered by the collection mechanism in place. Statistics New Zealand estimates the value of equity shareholdings in overseas companies directly held by New Zealand individuals. Up to May 2004, estimates as at June 2000 and 2001 had been completed. The estimates are considered not to be of sufficient quality to be incorporated in the IIP statement. The estimates for investment in Australia use survey data collected by Statistics New Zealand and by the Australian Bureau of Statistics (ABS) and are considered relatively robust. The estimates of investment in other countries uses a variety of sources and methods, including survey data, enquiry to overseas companies or their share registries, assumptions made about ratios of investment via fund managers versus other channels, and builds on RBNZ work on this subject. The resulting estimates for investment in the rest of the world are considered to be of significantly lesser quality than the estimates of investment in Australia. Consequently, the estimates of equity shareholding in overseas companies directly held by New Zealand individuals are attached as an addendum item to the IIP statement.

13.9 On the liabilities side, the data sources are QIIS, a quarterly survey of New Zealand Nominees, and data sourced from the RBNZ on foreign holdings of New Zealand issued debt securities. The QIIS is used to collect stocks and net transactions data on New Zealand issued shares and debt securities owned by non-residents. A quarterly survey of New Zealand Nominees is used to capture data on New Zealand issued equity securities (shares) held by non-residents via resident nominees. The data forms a significant proportion of the measured level of foreign portfolio equity investment in New Zealand, and is in addition to portfolio equity data collected in the QIIS. The Nominees survey collects stock data, while the net transactions data is derived using information on average share prices and the number of shares held during the quarter.

13.10 The RBNZ supplies data each quarter in respect of New Zealand government debt securities issued in New Zealand and held by non-residents. The RBNZ supplies administrative services in respect of these securities, and reports data on foreign holdings of the securities to Statistics New Zealand for inclusion in the BoP and IIP statistics. Net transactions data for these securities are estimated by Statistics New Zealand using data provided by the RBNZ (further information is presented in Appendix 2). The sectoral classification of the securities in the BoP and IIP statistics is General Government. The RBNZ also supplies data each quarter in respect of debt securities issued by the other government sector (eg local authorities), and the private sector.

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Table 13.3:

Summary of Sources and Methods – Portfolio Investment

Component Data Source Method of Estimation New Zealand portfolio investment abroad: o Equity

securities o Debt securities

Quarterly International Investment Survey (QIIS)

QIIS collects data on portfolio assets held by New Zealand residents directly overseas. The data covers equities and debt securities. The survey collects levels of investment, net transactions, exchange rate changes and other adjustments for portfolio investment assets. The data is used in the financial account, IIP and balance sheet. The QIIS is designed to provide 95 percent coverage of the stock of portfolio investment assets.

Annual International Investment Survey (AIIS)

The AIIS collects stock values of portfolio investment assets by instrument. Transactions and other changes data are not collected. The data is used in the IIP and balance sheet. The survey is targeted at smaller enterprises in the Other sector (eg New Zealand private sector companies). The survey is designed to provide for the coverage of the 5 percent non-sampled estimate of the stock of portfolio investment.

Quarterly Managed Funds Survey (QMFS)

The QMFS collects data on funds invested overseas by New Zealand fund managers on behalf of other New Zealand residents. Data is collected for equity, debt securities and other financial investments abroad. The data collected for each instrument type is stock positions at the start of the survey period, the changes in those positions due to transactions, exchange rates changes, market price changes and changes due to other effects (eg write-offs) resulting in the stock position at the end of the survey period.

Foreign portfolio investment in New Zealand: o Equity

securities o Debt securities

Quarterly International Investment Survey (QIIS)

QIIS collects data on portfolio liabilities of New Zealand residents to overseas investors. The survey collects levels of investment, net transactions, exchange rate changes and other value adjustments for portfolio investment liabilities. The data is used in the financial account, IIP and balance sheet. The QIIS is designed to provide 95 percent coverage of the stock of portfolio investment assets.

Annual International Investment Survey (AIIS)

The AIIS collects the stock of portfolio investment liabilities by instrument. The data collected provides for the coverage of the 5 percent non-sampled estimate of the stock of portfolio investment.

Quarterly Nominees Survey

The Nominee Survey collects data on the number of shares and the market value of shares held by non-residents in a New Zealand enterprise via resident nominee companies. The net transactions data is derived using the quarterly change in the number of shares held by non-residents times an average share price during the quarter.

Reserve Bank quarterly returns

This RBNZ supplies data on debt securities issued by the New Zealand government. In addition, securities issued by other government, and private sector entities and held by non-residents is supplied.

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Stock data is supplied. Net transactions in government securities are derived as a residual by first deriving market price change of the securities outstanding.

Addendum items Data source Methodology Assets New Zealand Portfolio Investment abroad: o Equity

securities

Annual Managed Funds Survey

This is a joint RBNZ/Statistics New Zealand survey run once per year, collecting data as at 31 December. The survey is targeted at less significant fund managers. The data collected is position data. Transactions and other changes data (change due to exchange rates, market price and write-offs) is not collected. The survey results are presented as an addendum item to the IIP.

Equity shareholding in overseas companies directly held by New Zealand individuals

Estimation uses Statistics New Zealand and ABS data for investment in Australia. Estimates for other countries use a variety of sources and methods, and are significantly less reliable.

Data quality 13.11 International financial flows in the form of portfolio investment have increased significantly in the last decade, reflecting the liberalisation of financial markets, financial innovation and the changing behaviour of investors. Historically, portfolio investment has been undertaken by either domestic or overseas-located financial intermediaries. While this is still the norm, recent advances in technology now make it possible for end investors to access world-wide capital markets directly themselves. A considerable degree of complexity is involved in collecting data on portfolio investment, particularly the net transactions data.

13.12 From the June quarter 2000, coverage of the stock of equity liabilities has improved with the introduction of the Quarterly Nominees Survey. Previously, the only source used to collect foreign investment in New Zealand company shares was the companies themselves. These companies did not always have ready access to information identifying the beneficial owners of their company’s shares, and were unable to report all such shareholdings. This was important where, for example, shares were held by overseas residents through a New Zealand nominee. From June 2000, the Quarterly Nominees Survey closed that gap, resulting in improved coverage of portfolio equity liability positions.

13.13 Some net transactions data in the financial account are estimated. Transactions in New Zealand company shares held by foreign investors via resident nominees are estimated. Net transactions in debt security liabilities of the government are estimated, and, for the debt security assets and liabilities of banks. The estimation methodology used for government securities uses information provided by the RBNZ (including maturity date, prevailing interest rate and coupon rate). In respect of bank sector securities, the methodology used to estimate net transactions also estimates market price change, and relies on the use of prevailing interest rates. Time to maturity for individual securities is not collected. The resulting estimates are considered less reliable than the methodology used for government securities. Extensive arrays of information (eg share prices, movement in share indices, yields on long-term bonds) are used in the estimation methodologies to derive estimates for net transactions data in portfolio assets and liabilities. The external information used to derive net transactions data is collected during each quarter by Statistics New Zealand. Overall, the stock data for portfolio assets and liabilities is deemed to be more accurate than the net transactions data.

13.14 The collection mechanism in place for the BoP financial account and the IIP is targeted at New Zealand resident entities, and measures the investing activities of those entities. New Zealand individuals and households are outside the scope of those collections, except that the managed funds data collections measure the investment activities of New Zealand residents (households, individuals and entities) undertaken using the fund managers as a vehicle. The investment activities of New Zealand

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residents (individuals and households) undertaken on their own account are not currently represented in the statistics.

13.15 Measuring the activities of individuals/households investing abroad and the placement of such investments in their own custody or with a foreign custodian are difficult for BoP data compilers world-wide. There is no viable way to identify this population group. Statistics New Zealand estimates once per year the value of equity shareholdings in overseas companies directly held by New Zealand individuals. These estimates are considered to be of a lesser quality than that required for official statistics, and are therefore presented as an addendum item to the IIP statement.

13.16 An issue that impacts on the quality of portfolio investment data is the use of non-market prices to value portfolio assets and liabilities by some respondents. This is particularly relevant to debt securities issued by resident enterprises that are held by non-residents. Debt securities held by the government and the banking sector are generally reported on a market-value basis. Those issued or held by the other sector are usually reported on a face-value basis. The size of the debt security issues for the other sector is small in relation to the total debt issues by New Zealand residents.

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Chapter 14 FFiinnaanncciiaall DDeerriivvaattiivveess

Introduction 14.1 International statistical standards recognise financial derivatives as financial instruments within the system of national accounts and balance of payments statistics. Financial derivatives have a market value. They are financial instruments that are mostly traded or considered tradable because they can be offset in organised markets. Financial derivatives are used for a number of purposes, including risk management, hedging, arbitrage between markets and speculation.

14.2 Financial derivatives enable parties to trade specific financial risks (eg interest rate risk, currency, equity and commodity price risk, credit risk) with other entities who are more willing, or better suited, to take or manage these risks – typically, but not always, without trading in a primary asset or commodity. The risk embodied in a derivative contract can be traded either by trading the contract itself, such as with an option, or by creating a new contract which embodies risk characteristics that match, in a countervailing manner, those of the existing contract owned.

14.3 Financial derivatives are a type of financial instrument created by the issuers without the provision of financial capital. Therefore there is no income accruing on the use of financial derivatives. Thus all financial derivative transactions are recorded in the financial account of BoP and international investment position statistics.

Definition 14.4 Financial derivatives are secondary instruments linked to, but separate from, a specific underlying financial instrument or indicator, or commodity, through which specific financial risk can be traded in its own right. Examples of derivatives include options, futures, warrants, currency and interest rate swaps. The major types of derivatives are described in Box 14.1.

14.5 Transactions in financial derivatives are treated as separate transactions rather than as an integral part of the value of underlying transactions to which they may be linked. Financial derivative contracts are usually settled by net payments of cash. This often occurs before maturity for exchange traded contracts such as commodity futures. Cash settlement is a logical consequence of the use of financial derivatives to trade risk independently of ownership of an underlying item. However, some financial derivative contracts, particularly involving foreign currency, are associated with transactions in the underlying item.

Valuation 14.6 The value of a financial derivative derives from the price of an underlying item, such as an asset or index. Unlike debt instruments, no principal amount is advanced to be repaid and no investment income accrues. Because the future reference price is not known beforehand, the value of the financial derivative at maturity can only be anticipated, or estimated. The reference price may relate to a commodity, a financial instrument, an interest rate, an exchange rate, another derivative, a spread between two prices, or an index or basket of prices. An observable reference price for the underlying item is essential for calculating the value of any financial derivative. If there is no observable prevailing market price for the underlying item, it cannot be regarded as a financial asset.

14.7 Values recorded for financial derivatives do not include fees paid to financial intermediaries to establish or trade in them. Such fees are classified as financial services in the current account. Similarly, margin payments made between two entities as security against future obligations are recorded in the currency and deposit category of the component other investment, rather than as financial derivatives.

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Box 14.1:

Main Types of Financial Derivatives Derivatives may be included under the direct investment, portfolio investment or reserve assets components. The conceptual treatments of some of the more common financial derivatives are described below. Note that Statistics New Zealand does not derive any estimate for transactions data in the financial account with respect of financial derivatives. Options and warrants Options are contracts in which both the price and the time for buying or selling are specified, and give the holder the right, but not an obligation, to buy (call options) or sell (put options) a particular financial instrument or commodity from or to another entity (the option writer). They can relate to equities, commodities, foreign currencies, interest rates, etc. Creating and exercising the option contracts, as well as secondary trading in options, all constitute transactions for BoP purposes where the holder and the writer are residents of different countries. Payment of the option price is treated in the BoP under the financial derivatives component of portfolio debt securities, as an increase in financial assets of the buyer and an increase in financial liabilities of the seller. Theoretically, the option price consists of a financial asset and a service charge, and the latter component should be considered as a financial service. However, it is not possible to isolate the service component and the full purchase price is recorded in the financial account. Corresponding treatments are accorded options in the IIP statement, where the value recorded in the transactor's books is used. Warrants are a form of option; they are usually written by an enterprise on its own shares and are treated similarly to other options.

Futures

Futures are contracts between two parties to exchange, at a specified time and price, a real or financial asset for another financial asset. Such contracts can cover commodities, equities, currencies, interest rates and other financial instruments, and are all considered to be financial in character. Where the two parties are residents of different countries, tradable futures are recorded in both the BoP and the IIP in a manner similar to options.

Swaps

Swaps are contracts, usually relating to interest rates or currencies, between two entities who agree to exchange cash flows over time on a notional amount of principal. Interest rate swaps involve the exchange of cash flows related to interest rates that are different in nature, eg fixed and floating rates, two different floating rates. Cross currency interest rate swaps, sometimes known as currency swaps, involve the exchange of cash flows related to interest rates and an exchange of principal amounts at an agreed exchange rate at the end of the contract. There may also be an exchange of principal at the beginning of the contract with subsequent payments to amortise the principal over time in accordance with the swap contractual terms. While the BPM5 treatment was to include in the current account net cash flows related to interest rate swaps, more recently agreement has been reached internationally to change the standard and record such net settlements under the financial derivatives component of the financial account in a similar manner to other derivatives. Statistics New Zealand records its data according to the recent international agreement. Where a swap has been undertaken to hedge a loan or other commitment, the underlying repayments of the principal of the primary investment are valued and classified to the financial account in accordance with the relevant debt instrument, and not at the hedged rate in the derivative. Forward rate agreements Forward rate agreements are arrangements associated with interest rates, in which two entities agree on a settlement cash flow based on the difference between an agreed interest rate and prevailing rates, at a future date, applied to a notional amount of principal. The settlement amount is recorded in the financial account at the time of settlement in a similar way to swaps (again this is different to the recommendation in BPM5, but is consistent with later international agreements on revisions to the standards). The IIP will include the market value of the forward rate agreements in levels, price changes to that level over time, and the final settlement transaction. Forward foreign exchange contracts Forward foreign exchange contracts involve the exchange of funds in one currency for funds in another currency at a specified rate at a future date.

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Classification 14.8 Financial derivatives is classified as a standard component of the BoP financial account and the IIP and as a sub-component category under direct investment and as an instrument category for foreign exchange under reserve assets. Any derivative transactions undertaken by related parties are to be recorded under direct investment while those undertaken by the central monetary authorities for the management of risks associated with reserves are recorded under reserve assets. All other derivatives transactions are recorded under its own component.

14.9 Table 14.1 shows the standard component of financial derivatives in the BoP and the IIP. Financial derivatives are primarily split into assets (claims on non-residents) and liabilities (obligations to non-residents). Both assets and liabilities are further split by resident institutional sector, namely general government, banks and other depository institutions, and other sectors. For more detail, refer to Chapter 3, Table 3.5.

Table 14.1:

Financial Derivatives – Standard Components

Financial Derivatives Assets

Monetary authorities General government Banks Other Sectors

Liabilities Monetary authorities General government Banks Other Sectors

14.10 Statistics New Zealand's current data collections do not separately identify derivatives between related parties, thus it cannot be recorded under direct investment in the IIP statement. However, data on derivatives relating to the management of reserve assets are collected separately and these are currently recorded under foreign exchange, which is part of reserve assets.

Data sources and methods 14.11 The data sources used to compile financial derivatives data are illustrated in Table 14.2. Data on stock positions in financial derivatives are sourced from two main data sources, the Quarterly International Investment Survey and the Managed Funds Survey. The surveys collect derivatives in a net asset and net liability position (gross data) by country of the non-resident counter-party. At present the surveys do not collect any transactions data in derivatives or any breakdowns on the types of derivatives, eg swaps, options, FRAs. Statistics New Zealand does not derive any estimates for net transactions from the stock data. The difference between the opening and the closing positions data is recorded as other changes in the IIP.

14.12 The data collected includes derivative contracts undertaken for hedging, arbitrage or for speculative purposes. No attempt is made in the surveys to identify the different purposes for undertaking derivative contracts.

14.13 Statistics New Zealand currently collects information on the extent of hedging undertaken by New Zealand enterprises to manage their foreign currency overseas borrowing. The survey asks respondents to report on the percentage of their foreign currency liabilities that are hedged using various means such as: (i) by financial derivative contracts; (ii) against balance sheet assets; (iii) naturally hedged (eg hedged against expected future exports receipts); and (iv) not hedged at all. Statistics New Zealand will continue to collect supplementary information on hedging of foreign currency overseas liabilities on an annual basis and publish it as part of the March quarter BoP and IIP statistics.

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Table 14.2:

Summary of Sources and Methods – Financial Derivatives Component Data source Method of estimation

Quarterly International Investment Survey (QIIS)

QIIS collects the market value of derivatives contracts that are outstanding at the end of the quarter.

Respondents are asked to report the stock data on a gross basis (ie report net asset and net liability positions separately.

QIIS also collects derivatives contracts undertaken by the Reserve Bank and Treasury to manage risks associated the reserve assets.

Financial derivatives

Managed Funds Survey (MFS)

The MFS collects the market value of derivative contracts that are outstanding at the end of the quarter.

Respondents are asked to report the stock data on a gross basis (ie report net asset and net liability positions separately).

Data quality 14.14 Statistics New Zealand has recently started collecting financial derivatives data in its quarterly BoP surveys, so the experience and expertise in collecting and analysing such data is still developing. The majority of respondents are also finding data requirements relating to financial derivatives new and are in the process of building their knowledge and systems to provide the data. A number of issues have been identified which impact on the quality of the data reported. Some of the key issues are: (i) the difficulty some respondents have in identifying the residency status of the counterparty, (ii) the difficulty in untangling bundled transactions (ie the separation of derivatives and the underlying instrument when they are bundled/embedded together); and (iii) the inability of some respondents to provide gross data. These issues have been discussed with some of the major respondents and they are being resolved progressively. Once Statistics New Zealand is confident about the quality of the data on the stock positions, further work will be undertaken to collect transactions data.

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Chapter 15 OOtthheerr IInnvveessttmmeenntt

Introduction 15.1 This chapter examines one of the broad standard components of the financial account, other investment, which consists of trade credits, loans, deposits and other instruments.

15.2 Table 15.1 illustrates the financial transactions and the overall levels of other investment during the year ended 31 March 2004. It is evident from the table that:

• New Zealand’s other investment liabilities (foreign investment in New Zealand) outweigh its assets, with the majority of liabilities consisting of loans, and currency and deposits

• loans also make up a large proportion of other investment assets • other investment liabilities decreased during the year to March 2004, largely due to a

substantial decrease in loan liabilities during this time.

Table 15.1:

Other Investment – Transactions and Levels NZ$ (Millions)

Financial TransactionsYear ended March 2004

Position at End of PeriodAs of March 31, 2004

Assets Liabilities Assets Liabilities

Other Investment 1,272 -289 23,400 47,576

Trade Credits C C 2,127 2,229

Loans 2,558 -1,134 18,379 29,942

Currency and Deposits -481 1,526 2,770 15,053

Other Instruments C C 123 352C Confidential data. Data may not add to stated totals due to rounding. 15.3 Other investment is the residual category of finance measured in the BoP and IIP statistics. The standard components of other investment are set out in Table 15.2. Other investment includes investments that are not included in direct investment, portfolio investment, financial derivatives and reserve assets, hence its residual nature.

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Table 15.2:

Other Investment – Standard Components Credit Debit Trade Credits

General government Other sectors

Loans Monetary authority Long-term Short-term General government Long-term Short-term Banks Long-term Short-term Other sectors Long-term Short-term

Currency and Deposits Monetary authorities General government Banks Other sectors

Other Instruments Monetary authorities General government Banks Other sectors

Valuation of the stock of other investment 15.4 Trade credits, loans and deposits are examples of instruments which cannot be readily transferred from one transactor to another. In principle, they are valued at market value. In the Quarterly International Investment Survey, respondents are asked to value these instruments at market value or face value as an approximation for market value.

Classification 15.5 As with portfolio investment, other investment is primarily split into foreign assets (claims on non-residents) and liabilities (obligations to non-residents). The assets and liabilities are then further split into four major instrument categories: trade credits, loans, currency and deposits, and other instruments.

Data sources and methods 15.6 A summary of the data sources used to compile other investment data in the New Zealand BoP and IIP statistics is detailed in Table 15.3. The main data sources used for the compilation of other investment assets and liabilities in the New Zealand BoP and IIP statistics are the Quarterly International Investment Survey and the Managed Funds Survey (MFS). The MFS provides stock and net transactions data on other investment assets only.

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Data quality 15.7 The surveys currently used to collect data provide a comprehensive coverage of the stock of other investment assets and liabilities. Some respondents are unable to report transactions data on a gross basis. For instruments such as trade credits and deposits, which are generally high volume transactions, only net data is reported. The integrated framework of QIIS and MFS collections provides a useful check on the quality of the net transactions data. Both surveys collect data on stocks, net transactions and price and other changes in a reconciliation format.

Table 15.3:

Summary of Sources and Methods – Other Investment

Component Data source Method of estimation

Quarterly International Investment Survey (QIIS)

QIIS collects the levels of investment, net transactions, price change, exchange rate change and other changes for other investment assets and liabilities by type of instrument.

QIIS also collects the maturity profile of the stock of assets and liabilities by type of instrument.

QIIS is designed to provide 95 percent coverage of the stock of other investment assets and liabilities.

Managed Funds Survey (MFS)

The MFS collects both stock and net transactions data on other investment assets by type of instrument.

Other investment (assets & liabilities)

Annual International Investment Survey (AIIS)

The AIIS collects the stock of other investment assets and liabilities by type of instrument.

The data collected provides for the coverage of the 5 percent non-sampled estimate of the stock of other investment.

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Chapter 16

RReesseerrvvee AAsssseettss

Introduction 16.1 New Zealand's official reserve assets are held by the New Zealand Treasury and the Reserve Bank of New Zealand. New Zealand's reserve assets are the financial claims on non-residents denominated in foreign currencies that are available to these organisations. The reporting of reserves is designed to provide a comprehensive account of a country's official reserve assets and related obligations. This information is used in assessing a country's external vulnerability. The holding of reserve assets provides the Reserve Bank with the capacity to intervene in the foreign exchange market in the event of, for example, a currency crisis.

16.2 Table 16.1 illustrates the financial transactions and the overall levels of reserve assets held during 2003-2004. As shown in the table, most of New Zealand's reserve assets are held as financial assets denominated in foreign currencies. These assets comprise debt securities such as bonds and notes, money market instruments and deposits. The net market value of financial derivative contracts with non-residents held in respect of reserve assets are taken into account when calculating reserves (net asset positions add to reserves, net liability positions subtract from reserves).

16.3 Changes in the level of holdings of reserves are recorded in the balance of payments as New Zealand investment abroad (debits). Positive figures represent increases in holdings of reserves (increase in assets), while negative figures represent decreases in holdings of reserves (decreases in assets). The stock of reserves is recorded in the international investment position statement as a component of New Zealand investment abroad.

Table 16.1:

Reserve Assets Transactions and Levels NZ$ (Millions)

Financial Transactions Year ended March 2004

Position at End of Period As of March 31, 2004

Assets Liabilities Assets Liabilities Reserve Assets

2,327

10,093

Monetary gold 0 0 Special drawing rights 8 45 Reserve position in the IMF 101 828 Foreign exchange 347 4,554 Other claims 1,871 4,665 Data may not add to stated totals due to rounding.

16.4 Reserve assets comprise the foreign currency denominated financial claims on non-residents that are readily available to, and effectively controlled by, the monetary authorities for meeting BoP needs. To qualify as a reserve asset, an official sector financial asset must actually exist. Lines of credit that could be drawn are not reserve assets because they do not constitute existing claims. Assets that are pledged or encumbered in other ways are excluded from reserves, as they are not readily available. Only external claims actually owned by the monetary authorities are regarded as reserve assets. The assets held must also be liquid, convertible and marketable.

16.5 The standard components that make up official reserve assets include monetary gold, special drawing rights, reserve position in the IMF, foreign exchange and other claims. The classification of these assets is shown in Table 16.2 below.

• Monetary gold is gold held by the monetary authorities as reserve assets.

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• Special Drawing Rights (SDRs) are created by the IMF to supplement the existing reserves of member countries. The holdings of SDRs are included in reserve assets.

• New Zealand's Reserve position in the IMF represents the amount of SDR and foreign currency amounts readily available to New Zealand from the IMF, and the indebtedness of the IMF that is readily available to New Zealand.

• Foreign exchange consists of foreign currency holdings, foreign currency deposits, securities and financial derivatives. Foreign currency holdings and deposits comprise short-term deposits and loans redeemable on demand with foreign central banks, the Bank of International Settlements (BIS) and other banks. Foreign currency securities comprise liquid, marketable debt securities issued by non-residents, such as bonds and notes, and money market instruments. Only those financial derivative positions that pertain to the management of reserve assets are recorded.

• Other claims are a residual category that includes claims not included elsewhere. In New Zealand BoP statistics, the value of this component is typically zero.

Table 16.2:

Reserve Assets – Standard Components Debit Monetary gold Special drawing rights Reserve position in the IMF Foreign exchange Currency and deposits Securities

Financial derivatives Other claims

16.6 Transactions in reserve assets are recorded at market value at the date of transaction and are converted to New Zealand dollars at the mid-point of the appropriate buy and sell exchange rates. Reserve asset positions reported in the IIP are valued as at the reference date. These positions reconcile with the positions reported by the Reserve Bank in its Table E1, published in the Reserve Bank Bulletin and on the Reserve Bank's website at www.rbnz.govt.nz.

Data sources and methods 16.7 The source of reserve assets data is the Quarterly International Investment Survey. A questionnaire tailored to the specific circumstances of the Reserve Bank and the New Zealand Treasury is completed each quarter by each of these organisations. The data sources and methods used to compile the component of reserve asset are shown in Table 16.3.

Table 16.3:

Summary of Sources and Methods – Reserve Assets Component

Data source Method of estimation

Reserve assets Quarterly International Investment Survey (Official Sector)

Data on the levels of investment, financial transactions, price and exchange rate changes is provided by the Reserve Bank and the New Zealand Treasury.

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Data quality 16.8 The current survey provides a comprehensive coverage of reserve assets. The data is provided each quarter directly by the New Zealand Treasury and the Reserve Bank. Data is reported with detailed breakdowns such as instrument and country. However, transactions data relating to foreign exchange is often difficult to report.

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Chapter 17 QQuuaalliittyy ooff DDaattaa

Introduction 17.1 To be of most benefit to users, statistics need to be a reasonable and timely measure of the real world economic events to which they relate. There are a number of dimensions to high quality statistics. They need to be:

• relevant to users' needs (ie measure the concepts in which users are interested) and consistent with related statistics

• accurate and reliable (ie not subject to large revisions).

This chapter considers these aspects of quality and then illustrates some of the factors that influence data quality. Issues of data quality relating to each of the components in the New Zealand BoP statistics are covered in detail in the preceding chapters. A brief summary of these quality issues is also presented in Table 17.1.

The balance of payments conceptual framework follows international standards 17.2 An important aspect of quality is that the concepts, definitions and classifications used in a body of statistics are relevant to, and understandable by, users (domestic and international), internally coherent and able to be linked to other bodies of statistics. The conceptual framework underlying New Zealand's BoP statistics has been developed over the years with these objectives in mind.

17.3 The framework used by Statistics New Zealand in the compilation of BoP statistics is based upon the recommendations contained in the fifth edition of the Balance of Payments Manual (BPM5) produced by the International Monetary Fund (IMF). As most countries follow IMF statistical standards for BoP statistics, comparisons can be made between New Zealand's BoP statistics and those of other countries. The BoP statistics are fully compatible with those for the national accounts (Statistics New Zealand93). These standards have been developed on the basis of the needs of key users involved in macroeconomic analysis and policy formation. 17.4 Within this conceptual framework Statistics New Zealand attempts to make the statistics as useful as possible by classifying the data in ways which users have requested. For example, foreign borrowing transactions are classified in a number of ways, ie by debt instrument, currency of the debt and institutional sector of the borrower.

What is meant by accuracy? 17.5 In principle, BoP statistics should be compiled by summing the foreign accounts, whether actual or notional, of every economic unit (ie every government body, business and household) in New Zealand. Alternatively, each transaction, whether actual or notional, between a resident of New Zealand and a non-resident could, in principle, be measured. Other things being equal, if this were possible, the resulting statistics would be a true measure of BoP activity. In practice, however, neither approach is feasible. Economic units do not maintain 'foreign accounts' (ie many units are not interested in identifying their counter-parties according to whether they are resident or non-resident), nor do they compile accounts for a subset of their counter-parties. In addition, many accounting practices adopted by businesses and others do not conform to the requirements of national and international statistics. Also, of course, the cost of accessing every individual transaction would be huge. Instead, the statistician produces estimates of notional true values by combining data from a wide variety of sources, reflecting varying valuations, coverage, frequency, detail and timeliness.

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17.6 Frequently, the data available to the statistician may only approximate the concept that it is desired to measure. For example, the conceptual framework calls for the inclusion in the BoP of merchandise exports and imports that have changed ownership between a resident and a non-resident. In practice, merchandise trade statistics, compiled from customs documents which measure goods crossing the customs frontier whether or not they change ownership, are used as the main source in estimating merchandise trade activity in the BoP. Although adjustments to a change of ownership basis are made for significant transactions that are not on this basis, it is not practical to identify all such cases.

17.7 Because of this variability in the appropriateness of source data for BoP purposes, the data available at any particular stage in the estimating cycle will inevitably contain errors. 'Accuracy' in this context, therefore, refers to how closely an estimate measures the activity it purports to measure.

Accuracy and reliability 17.8 In considering the quality of BoP statistics, it is useful to make a clear distinction between the concepts of accuracy and reliability. They can be defined as follows:

• accuracy is the proximity of an estimate (especially the final, or fully-revised, estimate) to some notional true value

• reliability is the proximity of initial and intermediate estimates for a particular period to the final estimate for that period.

17.9 Thus, in the extreme, an estimate may be completely inaccurate but entirely reliable. That is, it bears no resemblance to the true value but, because of the absence of better information, the initial estimate is never revised. The opposite extreme case may also occur. That is, it may be possible to produce highly accurate estimates at long time lags while early estimates are poor and subject to considerable revision.

17.10 In practice, accuracy and reliability tend to be interwoven. Ideally, as the estimate for a particular period passes through a sequence of revisions, the size of revisions gets smaller (the statistic becomes more reliable) and the estimate moves closer to the true value (the statistic becomes more accurate). In BoP statistics this is generally the case, but not always.

Factors influencing quality

Introduction

17.11 Apart from the fact that data may be practically available only on a slightly different basis from that called for in the conceptual framework, there are a number of other factors that have a bearing on the perceived quality of BoP statistics. They include:

• timeliness • collection methodology • time of recording • valuation • coverage • methodological deficiencies • conceptual and methodological changes • revisions policy.

Timeliness

17.12 There is an important trade-off between the accuracy and reliability of estimates and the timeliness of their release. To meet the decision-making needs of users, there is pressure to produce statistics on as timely and frequent a basis as possible. To the extent that complete or accurate data may not be available within the desired timing, or can be obtained only at unacceptably high cost, there will be compromises in data quality. Generally, significant improvements in timeliness can be made only at the

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expense of detail, accuracy, reliability or additional resources.

17.13 Statistics New Zealand releases quarterly BoP and IIP statements within 13 weeks of the end of each reference quarter. The level of detail in the published quarterly series is intended to be sufficient to provide a useful basis for analysis and assessment of New Zealand's external financial situation. Within this publication timeframe, the required response rates for the surveys are achieved. However, there are some instances where the published data include estimates provided by respondents instead of actual data. These estimates are replaced with actual data in the following quarter. Additional breakdowns of some components are published on a March year basis within six months.

Collection methodology

17.14 Where estimates are based on the results of a sample survey, rather than complete enumeration, they are subject to sampling error. Sampling procedures are used in some survey sources contributing to the New Zealand BoP and IIP statistics. They are:

• the Survey of International Trade in Services and Royalties • the International Visitors Survey • the Quarterly International Investment Survey • the Quarterly Managed Funds Survey.

17.15 The relative sampling errors for the main aggregates from these surveys are generally small. For some of the more detailed breakdowns, relative standard errors can be high.

17.16 For those estimates based on a partial collection, in which data is collected only from units with activity above a certain threshold, estimates of the activity of the smaller units which are not approached are based on their contribution to estimates for an earlier benchmark period. The activity of these units is checked periodically and, where it exceeds the threshold, they are added to the sample collection. However, this methodology may lead to inaccuracies if the activity of the units that are not approached changes significantly from the contribution they made to earlier benchmark estimates.

Time of recording

17.17 BoP statistics are sensitive to the time of recording of transactions, and imbalances will be present if the credit and debit entries for a single transaction are recorded in different time periods. Such time-of-recording differences arise particularly where different data sources are used for capturing the two sides to any transaction. For example, merchandise imports information will generally be recorded (as a debit) in the period in which customs documents are lodged in New Zealand. While this time is generally a good practical approximation to the change of ownership of merchandise imports, some goods may change ownership at an earlier or later point in time. In that case, while the associated financing (payment, trade credit or other settlement) would be correctly reported for that earlier or later period by either the owner or the financial intermediary involved, the imports will be understated in the earlier or later period and overstated when the recording occurs. There is a consequent effect on the aggregates and balances in both periods. While efforts are made to detect and correct for any significant recording departures from the time of change of ownership in compiling the principal components of the accounts (eg consignment exports for the goods components), it is not possible to compensate for them all.

Valuation

17.18 As with the time of recording of transactions, if different valuations are used in measuring the credit and debit entries of a transaction, there will be both inaccuracies and imbalances in the accounts. Although market valuation is the standard valuation principle for the accounts (often approximated by transactions values), and a standard principle for converting from foreign currencies is prescribed, some source data may not conform. For example, if a non-resident buys shares in a New Zealand enterprise from a resident, the financing of the transaction may be captured through intermediaries at the actual transaction price involved, but the change in ownership of the shares may have to be approximated, based on changes over time in the stock of such shares held by the non-resident multiplied by an average share price for the period. While efforts are made to get as close as possible to the preferred basis of valuation, this will not always be feasible and there will be valuation errors in the statistics.

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Coverage

17.19 Under-coverage of BoP transactors typically stems from the difficulties in identifying all the entities engaged in particular types of international transactions. For example, since the removal of most types of restrictions on international capital flows in May 1985, maintaining a comprehensive source of all transactors (entities, individuals, organisations) involved in financial activities abroad is difficult. The coverage of individuals investing directly abroad and entrusting securities with a foreign custodian is difficult for BoP data compilers worldwide. There is no viable means of identifying this population group. Coverage of transactors involved in other services is also difficult due to the rapidly changing survey population and the diverse range of service activities.

Methodological deficiencies

17.20 Even where the population of transactors with international flows can be identified, the only data readily available from those transactors or from administrative sources may indistinguishably include domestic and international transactions. Other deficiencies can arise because the distinctions embodied in definitions and classifications are not made in the source data. Also, in cases where existing methodology relies on assumptions and approximations, or on indirect measures, some level of inaccuracy is unavoidable.

Conceptual and methodological changes

17.21 The concepts and methods used in preparing Statistics New Zealand's BoP statistics are regularly reviewed and changes are made periodically where this improves compliance with international standards. Statistics New Zealand has recently moved all its financial account data collections to a BPM5 basis. This resulted in moving the direct investment threshold from 25 percent to 10 percent, collecting interest income data on an accrual basis, collecting data on financial derivatives and excluding foreign currency deposits held with resident banks from the reserves component. Methodological changes that change the basis of compilation results in one-off revisions to statistical series that may be substantial. Similarly, other one-off revisions to statistical series from methodological changes, eg benchmark surveys that improve coverage, are also quite often substantial. These types of changes are considered to improve the accuracy of the statistics and should not be seen to detract from their reliability.

Revisions policy

17.22 The frequency and timing of the application of revisions to data series may influence the apparent nature of errors and user perceptions of quality. For example, in some countries, revisions may be stockpiled for many periods and then applied simultaneously. Between these major updates there will be an artificial impression of reliability in the statistics which may be misleading for users unfamiliar with the revisions practice. On the other hand, some stockpiled revisions may offset each other, which will tend to lessen the impact of the revisions when they are applied. But this will be at the cost of releasing less accurate statistics between updates. 17.23 Statistics New Zealand's policy for revising BoP and IIP statistics is that at each new release of quarterly statistics, the previous quarter's statistics will be revised where necessary. At each fourth quarter, revisions will be introduced to past periods as required. These annual revisions are introduced at the release of the March quarter statistics. This policy applies to the BoP statement and to the IIP. The objective of the policy is to meet accuracy requirements while at the same time ensuring stability in the series over a four-quarter period. The alternative is to revise any period as required at each release, a practice which would very likely result in changes to a variable number of periods at each release. The treatment of the need for significant revisions arising outside this revisions cycle is determined on a case by case basis, balancing the needs of stability in the series against the integrity of the statistics.

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Measures to monitor quality

Net errors and omissions

17.24 An examination of the size and direction of the net errors and omissions item may shed some light on the accuracy of estimates. The adoption of the double-entry accounting system of recording means that, in principle, the net sum of all credit and debit entries should equal zero. In practice, such equality rarely exists and any differences are recorded in the net errors and omissions item. The item reflects the net effect of differences in coverage, timing and valuation, as well as errors and omissions that occur in compiling all the individual component series. Therefore, both users and statisticians can focus on the net errors and omissions item as an immediate and systematic indicator of the quality of the BoP statistics.

17.25 Persistently large net errors and omissions figures in one direction (negative or positive) may be taken as an indication of serious and systematic errors. However, a small figure does not necessarily mean that only small errors and omissions have occurred, since large positive and negative errors may be offsetting. Offsetting errors may be either related or unrelated, resulting from a measurement problem affecting either both sides or only one side of a transaction. If positive and negative net errors and omissions tend to offset each other in successive periods, errors may be due to timing differences in data reported by the different sources used to estimate the credit and debit sides of a transaction.

Examination of the statistical processes

17.26 The compilation processes for BoP and IIP statistics are complex and poor procedures at any one step in the process may lead to an inaccurate result. Therefore, management of these processes involves ensuring that, at each phase, objectives are set, monitored and evaluated. Careful attention is paid to:

• identifying the population of businesses and households undertaking certain types of international activity

• ensuring that sample frames and/or collection frames and estimation procedures are up-to-date

• design and testing of questionnaires to ensure that they are understood and can be completed by respondents

• obtaining a 100 percent response rate for key companies and an 80 percent response rate for non-key companies

• implementing and monitoring standards for data entry, verification and analysis, and publication procedures

• ensuring that overall management procedures and computer systems are efficient and effective

• ensuring confidentiality and thus the integrity of relations with respondents.

17.27 Where data models are used, they are examined to ensure that data sources and estimation procedures continue to be appropriate and accurate. Management of these processes gives the statistician a good feel for the quality of the data, so that errors are corrected, or procedures established to minimise them. Apart from this, reviews are undertaken regularly of collections and procedures to ensure that they are consistent with their objectives. Where there is an assessment that data quality problems cannot be fixed, these are drawn to the attention of users as appropriate.

Examination of series over time

17.28 Series are analysed to check whether their behaviour over time provides a good explanation of economic activity, or whether they behave in erratic and inexplicable ways. Often, related series are examined to determine whether a ratio formed by two or more series behaves in an appropriate way. An example of such a ratio is investment yields, ie comparing investment income with the level of international investment for various types of instruments of investment.

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Data confrontation

17.29 Data confrontation studies, in which the same or similar data items provided in different collections are compared and reconciled, if possible on an enterprise by enterprise basis, but also for groups of data providers, have proved useful in improving quality. Data confrontation at this detailed level has been very useful, for example, in identifying deficiencies and improving data quality in IIP and financial accounts statistics. It is also useful in resolving problems with definition of units reporting in the different surveys, or where classifications are employed differently. That is, it also helps in identifying errors from statistical compilation as well as reporting differences by providers. Getting access to unit record data from surveys run by other government departments or private sector organisations can be difficult due to public concerns about data sharing. The respondent's consent is required before any data confrontation of unit record can take place.

Subjective assessment of accuracy 17.30 Compilation of BoP and IIP statistics is a complex task. Given the variety of data sources and methods used, there is no single comprehensive measure of the quality of these estimates. Nevertheless, each of the quality indicators described previously provides a partial insight into the quality of the statistics. To get an overall picture, all measures need to be viewed together, while taking account of their limitations. At best, such an assessment can only be subjective.

17.31 Table 17.1 provides a summary of the quality issues discussed under each of the BoP components within this document.

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Table 17.1:

Summary of Data Quality Issues by Component Component

Data quality issues

CURRENT ACCOUNT

Goods The quality of the Goods component is dependent on the quality and timeliness of export and import entries provided by exporters and importers and their agents to the New Zealand Customs Service. The undercoverage of transactions has an impact on the quality of data. Specific areas of undercoverage relate to: (i) adjustments (timing and valuation) not being made for some goods that are sold on consignment; (ii) sales of goods that do not cross the customs frontier and that should be reported but some may not be; and (iii) goods bought via the Internet. Currently, customs documentation is processed only for goods valued at more than $1,000. Those below this threshold are not processed, thus not recorded in the merchandise trade statistics. A second factor that may give rise to data quality issues is the use of non-market-based valuation practices in reporting the data. Such practices include the use of non-current exchange rates to convert from foreign exchange values to New Zealand dollars and the use of non-market values (transfer pricing) by respondents when reporting the customs entry values.

Services Travel credits Travel credits data is sourced from Tourism New Zealand's International Visitors Survey. The interviews for the survey are undertaken in the three main airports of New Zealand. The accuracy of the expenditure reported on goods and services consumed by travellers is based on their recall. The survey is lengthy which means that interviewers do not have much time to query any unusual amounts reported by travellers. Also, the methodology used to derive the non-tuition expenditure of foreign students needs to be updated. The assumptions upon which the current estimates are based may no longer apply, as the mix and number of foreign students change.

Travel debits Travel debits is currently estimated using a data model. The model is based on data collected from the Survey of Returned New Zealanders (SORNZ) which was last carried out in 1994. The spending patterns of travellers used in the model are based on the results of this survey but the spending patterns, types of travellers and travel behaviour are likely to have changed since then.

Insurance There are problems with identifying resident enterprises that insure directly overseas. This group of enterprises is also fluid as the enterprises often switch between a foreign broker and a New Zealand broker.

Other services (credits and debits) The Other Services estimate is derived from the results of a quarterly survey and is supplemented with a non-sampled estimate. The non-sampled estimate is derived from a Census of Other Services that was conducted in the late 1990s. A number of factors affect the quality of other services data. These include: • The rapidly changing nature of the survey population and the diverse

range of service activities. These factors affect the survey coverage and the coverage of service categories.

• Bundling of services. In some instances different service categories are bundled together and reported under one service category, while in

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other instances, it is common for services to be bundled together with goods.

• Often service transactions are reported at the time when payment is made or received rather than when the actual service activity is undertaken.

Income Currently, Statistics New Zealand provides no estimates for transactions relating to Compensation of Employees for both Income credits and debits. The data on investment income are sourced from the Quarterly International Investment Survey (QIIS). This sample survey aims to cover 95 percent of the measured stock of assets and liabilities. The remaining five percent of the stock of assets and liabilities is captured from an annual survey. Estimates derived from this survey (referred to as the non-sampled estimates) are included in the quarterly IIP statement; however, no estimates are derived for income flows. The Annual Managed Funds Survey (AMFS) collects data from smaller fund managers who are not in the quarterly Managed Funds Survey. No income data is collected on the stock of assets held abroad by these fund managers nor is an estimate made in the current account. An estimate is derived for the stock of directly held assets (shares) abroad by New Zealand individuals; however no income flows are currently estimated.

Current transfers The Current Transfers component is sourced from a combination of administrative data for government transfers and a data model for other sectors, particularly transactions involving individuals. The data model needs updating as the assumptions built into it may no longer apply.

CAPITAL ACCOUNT Capital transfers

The migrants’ transfers estimate is currently derived using a data model. Migration data and information obtained from the New Zealand Immigration Service are used in the model. The issue of concern is that the model may not reflect adequately the timing of the transfer of funds for business migrants.

FINANCIAL ACCOUNT Direct, portfolio and other investment

Refer also to issues raised on Investment Income. The data on financial account investment flows are sourced from a Quarterly International Investment Survey (QIIS). This sample survey aims to cover 95 percent of the measured stock of assets and liabilities. The remaining five percent of the stock of assets and liabilities is captured from an annual survey. Estimates derived from this survey (referred to as the non-sampled estimates) are included in quarterly IIP statement; however, no estimates are derived for investment flows. The Annual Managed Funds Survey (AMFS) collects data from smaller fund managers who are not in the quarterly Managed Funds Survey. No investment flow data is collected relating to the stock of assets held abroad by these fund managers, nor is an estimate made in the financial account. Although Statistics New Zealand estimates the stock of directly held assets (shares) abroad by New Zealand individuals, currently it derives no estimate for the associated investment flows. Data models are used to estimate investment flow data for trade credits for the non-bank sector and for bonds, notes and money market instruments for the banking sector. These data models need to be updated.

Financial derivatives The main issue relates to the reporting of embedded derivatives. These are derivatives where it is difficult to distinguish the underlying instrument from the derivative. The identity of the counter-party is sometimes unknown.

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No transaction data is collected at the moment as this is anticipated to be difficult for respondents to report. The difference between the two stock positions is currently attributed to other changes within the IIP. Currently, Statistics New Zealand does not provide estimates for investment flows associated with financial derivatives in the financial account. Due to the nature of these instruments – their status often changes from being positive (an asset) to negative (liability) – estimating the flows at present time poses significant challenges.

Reserve assets The reporting of transaction data is difficult, especially for securities held as foreign exchange that are frequently traded in the secondary markets.

INTERNATIONAL INVESTMENT POSITION

New Zealand investment abroad Foreign investment in New Zealand

The valuation of the stock of direct investment is an issue for some respondents. Net asset value is commonly used to value the stock of direct investment for unlisted enterprises. However, assets and liabilities are often reported in the balance sheets on a historical cost basis rather than at current cost. An area of undercoverage for the IIP relates to the stock of assets invested abroad by smaller fund managers. An estimate for this already exists; however, this is not currently included in the IIP statement proper. A data model is used to estimate investment in overseas equities by New Zealand individuals and households and where such investments are held in their own custody or with a foreign custodian. The estimate is derived using a number of information sources and assumptions. Refer to Appendix 2 for details. The estimate is not included in the IIP statement but is provided as an addendum item. Moreover, the methodology used needs updating. The ownership of New Zealand land/property by foreign individuals is an area where undercoverage of reporting is likely. The valuation method used for the stock of investment is another area of concern. Instead of reporting on a market value basis, some respondents, particularly small and medium companies, report using non-market values.

Measures to improve data quality in BoP and IIP 17.32 Statistics New Zealand has recently undertaken a major review of its framework for the BoP and IIP statistics in order to identify, in a systematic and comprehensive manner, major data quality issues, and to determine the most effective ways to address these concerns. The identified data quality issues, along with complementary considerations – meeting evolving user data needs and complying with international reporting standards – will shape the Statistics New Zealand medium- and long-term strategy to improve the quality of BoP and IIP statistics. For details on the review, its findings and proposed approaches refer to BoP Quality Plan, published on the Statistics New Zealand website.

17.33 Several areas where data quality issues are viewed as potentially significant may be the subject of high-priority, major developments. These include:

• estimating income and financial account flows associated with the stock of assets and liabilities derived from the non-sampled quarterly survey population

• in BoP and IIP statistics, improving estimates of the stock of investment held directly abroad by New Zealand individuals, including the associated financial and income flows generated by the assets

• in BoP and IIP statistics, extrapolating the 31 December estimates of the stock of investment held abroad by smaller fund managers, and the associated financial and income flows generated by the assets

• improved estimates of non-tuition type expenditure of foreign students in New Zealand

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• improving the coverage, valuation and recording of certain transactions in goods (issues affected are transfer pricing, goods sold on consignment and use of customs exchange rates)

• improving the estimation, or replacing estimation with data collection, of net transactions (investment flows) data for bonds and money market instruments for the banking sector

• improving the coverage and accuracy of the stock, income and investment flows of New Zealand's debt securities held by non-residents.

17.34 Statistics New Zealand has a number of major initiatives under way to improve the overall quality of BoP and IIP statistics.

• Since 2000 a project has been under way at Statistics New Zealand to update the benchmark estimate and develop a new quarterly estimation methodology for the Travel Debits component in BoP. A new benchmark survey (Survey of Returned Travellers, SORT) that collects data on the expenditure of New Zealanders travelling abroad was introduced in the September 2002 quarter. The plan for deriving the quarterly estimate for Travel Debits is to rate forward the new benchmark estimate using information collected from recently introduced surveys. These surveys collect data from organisations in New Zealand that facilitate travel-related expenditure by New Zealanders abroad. The expected outcomes of this project are:

o an updated benchmark estimate for Travel Debits (reflecting current expenditure patterns of New Zealand travellers)

o a quarterly estimation methodology that uses current expenditure information for estimating travellers expenses

o a breakdown of expenditure abroad by a selected group of countries.

• Statistics New Zealand has initiated a project with the aim of updating the Other Services benchmark estimate and improving the methodology for deriving the quarterly estimate of Other Services (excluding travel, transportation and insurance) in the current account. The expected outcomes of this project are:

o a robust benchmark estimate for Other Services o a collection strategy that produces robust estimates by country o a higher degree of compliance with international reporting standards for services

statistics o an improvement in the ability to meet data needs of policy agencies.

17.35 A number of other quality improvement initiatives are undertaken on an ad-hoc basis or part of the ongoing tasks to improve data quality. These include:

• investigation of new developments in financial markets as they occur • regular internal audits of existing data collections and compilation practices • investigation into possible reconciliation of BoP and IIP data with major trading partners, in

particular Australia • regular studies of factors that may contribute to the net errors and omissions item.

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Chapter 18 TThhee BBaallaannccee ooff PPaayymmeennttss aanndd tthhee RReellaattiioonnsshhiipp ttoo tthhee NNaattiioonnaall AAccccoouunnttss

Introduction 18.1 Conceptually, the balance of payments ( BoP), including the international investment position (IIP), form part of the broader system of New Zealand's national accounts. The national accounts provide a comprehensive and systematic set of statistics for the New Zealand economy, with information on economic transactions, other changes in the levels of assets and liabilities, and the levels of assets and liabilities themselves. The New Zealand national accounts have generally been compiled according to the System of National Accounts and, as mentioned elsewhere, the New Zealand national accounts are aligned with SNA93. Linkages between the New Zealand BoP and national accounts are reinforced by the fact that, as in many other countries, the New Zealand BoP statistics are compiled first and subsequently included in the national accounts.

18.2 The information in this chapter relates to the national accounts on an SNA93 basis, which is explained in the Hot Off The Press: Upgraded National Accounts (cat 08.501) and expanded on in the New Zealand System of National Accounts (1999) published late 2001.

18.3 The national accounts are a closed system in which both ends of every transaction involving a resident economic entity are recorded. A set of accounts is introduced to capture transactions that involve economic relationships with non-resident entities. These accounts are known as the rest of the world accounts and are presented from the perspective of non-residents rather than residents. Consequently, entries in the BoP (which show transactions from the perspective of residents) are reversed in the presentation of the rest of the world accounts. The accounts for resident entities, which consist of the production, income and accumulation accounts, are described in more detail below.

18.4 Two important accounting differences occur when one compares the BoP and the national accounts. First, each transaction is recorded twice in the BoP (double-entry) and four times in the national accounts (quadruple-entry). This is because in the BoP the activity of only one transactor is recorded, that of the resident entity (with a non-resident entity), whereas in the national accounts the activity of both transactors is recorded (ie the activity of either two residents or a resident and a non-resident). Second, in the BoP, transactions are shown from the perspective of the resident entity, whereas in the national accounts, transactions are shown from the perspective of the resident in the production, income and accumulation accounts and from the perspective of the non-resident in the rest of the world account.

Relationships between national accounts and balance of payments concepts and classifications 18.5 Because the BoP, including the IIP, forms an integral part of the national accounts, there is complete concordance between them in concept and classification, although the extent of cross-classifications may differ between the two systems.

18.6 The BoP and national accounts identify resident producers and consumers identically, and both invoke the same concepts of economic territory and centre of economic interest. Both use market prices as the primary concept of valuation of transactions and they adopt identical concepts of accrual accounting. The systems use identical conversion procedures to convert transactions that take place in foreign currency to New Zealand's currency.

18.7 While for some purposes it would be convenient if classifications used in the rest of the world accounts and the BoP accounts were identical, differences between the two are justifiable because, on occasions, they serve different purposes. For example, in the BoP financial account, precedence is given to classification of transactions by type of investment (ie direct, portfolio, reserve assets, other), whereas in the rest of the world financial account the instrument of investment is the primary classification. More important is the fact that concepts, definitions and classifications are consistent between the two systems.

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The production, income and capital accounts of the national accounts

18.8 The national accounts tables reflect the basic aspects of economic life (production, income, consumption, accumulation and wealth). The tables at the end of the chapter show the main accounts in the national accounts annual publication. The tables illustrate the main structure of the national accounts aggregates with particular reference to external transactions.

18.9 For many analysts, Gross Domestic Product (GDP) is the key economic aggregate, as it measures the total value added for the New Zealand economy in any period. GDP may be measured as:

• the total value of output less the cost of goods and services used in the production process (intermediate consumption) – this is referred to as the production approach

• the value of income accruing from the production process to each of the factors of production (plus net taxes on production and imports) – this is referred to as the income approach

• total final expenditure on goods and services during the period – the expenditure approach.

18.10 Conceptually, these measures are equal, but because different data sources are used to measure each approach, the measures may differ in practice, which is reflected in the statistical discrepancy item. Up to March 1997 New Zealand’s national accounts are benchmarked to balanced annual supply and use tables. This ensures that the three measures of GDP are equal on an annual basis, though there will still be a statistical discrepancy in the latest years.

18.11 Table 18.1 shows the GDP and Expenditure Account for the whole economy, showing the components of the expenditure approach and the income approach to measuring GDP. The income based measure of GDP shows the components of factor income, namely compensation of employees, gross operating surplus, plus taxes less subsidies on production and imports. The expenditure based measure of GDP is derived as final consumption expenditure by government and households, plus changes in inventories and investment in fixed capital formation, plus exports minus imports of goods and services, plus (or minus) the statistical discrepancy. Exports and imports are the same as the BoP components, exports and imports of goods and services. For the purpose of discussion here, all values are in current prices.

18.12 Table 18.2 shows the National Income and Outlay Account, showing the derivation of the use of national disposable income, gross national income and national disposable income. Gross national income is equivalent to GDP plus primary income receivable from non-residents less primary income payable to non-residents. These primary income items are the same as the BoP income components used in the derivation of gross saving (gross disposable income less consumption) and net saving (gross saving less consumption of fixed capital). To derive gross disposable income, net secondary income receivable from non-residents is added to gross national income; secondary income items are equivalent to the net current transfer components in the BoP. The segment of Table 18.2 dealing with use of gross disposable income shows the derivation of gross saving (gross disposable income less consumption) and net saving (gross saving less consumption of fixed capital). Table 18.2 illustrates how the various BoP income and current transfers components affect the nation's saving.

18.13 Table 18.3, the National Capital Account, shows the link between gross saving and net lending/ borrowing (to/from the rest of the world). The latter is derived as gross saving (saving plus consumption of fixed capital) plus net capital transfers from non-residents less inventories and investment in fixed capital and the net acquisitions of non-produced, non-financial assets from non-residents. The items net capital transactions and net acquisitions of non-produced, non-financial assets are both sourced from the BoP capital account. The capital account was introduced in the BoP to emphasise this clear relationship between the BoP and the national accounts.

Rest of the world accounts of the national accounts

18.14 There are four accounts for the rest of the world in the national accounts. These are:

• the External Income and Use of Income Account • the External Capital Account • the External Financial Account • the External Balance Sheet Accounts and Accumulation and Revaluation Accounts.

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As mentioned in paragraph 18.3, the external transactions accounts are required to close the system of national accounts and, while essentially the same as the BoP accounts, they are compiled from the perspective of the non-resident transactor. Table 18.4 illustrates the combination of the external income and use of income account with the external capital account. This is essentially the current and capital accounts of the BoP. The reader should be able to readily identify the counterpart entries in Tables 18.1 and 18.2.

18.15 The various relationships among the key aggregates may be expressed algebraically. The equations in Table 18.5 show the relationships between the current account balance (CAB) and saving and investment, and between net foreign investment (NFI) and saving, investment and net capital account transactions (NCT).

18.16 The following tables are illustrative of national accounts produced annually. The data included in Tables 18.1 to 18.4 are for the year ended 31 March 2003. Annual figures for national accounts for the year ended 31 March 2004 were not available at the time this revised manual was published.

Table 18.1: Consolidated Accounts of the Nation

Gross Domestic Product and Expenditure Account Year ended 31 March 2003

NZ$ (Millions)Compensation of Employees 55,095 Gross Operating Surplus 58,086 Taxes on Production and Imports 16,787 Less Subsidies 389 Gross Domestic Product 129,579

Final Consumption Expenditure Private Households 75,387 Private Non-profit Organisations Serving Households 1,757 Central Government 20,072 Local Government 2,674

Change in Inventories 674 Gross Fixed Capital Formation 26,626 Gross National Expenditure 127,190

Exports of Goods and Services 41,836 Less Imports of Goods and Services 39,911 Balance on External Goods and Services 1,925

Expenditure on Gross Domestic Product 129,115

Statistical Discrepancy 464

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Table 18.2:

National Income and Outlay Account Year ended 31 March 2003

NZ$ (Millions) Use of Income Final Consumption Expenditure

Private Households 75,387 Private Non-profit Organisations Serving Households 1,757 Central Government 20,072 Local Government 2,674

Total Final Consumption Expenditure 99,890

Saving 5,579 Use of National Disposable Income 105,468

Income Compensation of Employees 55,095 Compensation of Employees from the Rest of the World, Net - Gross Operating Surplus 58,086 Taxes on Production and Imports 16,787 Less Subsidies 389 Investment Income from the Rest of the World, Net -7,093 Gross National Income 122,486

Current Transfers from the Rest of the World, Net 134 Gross National Disposable Income 122,620

Less Consumption of Fixed Capital 17,153 National Disposable Income 105,468

Memorandum: Actual Final Consumption

Total Final Consumption Expenditure 99,890 of which: Actual Individual Consumption of Households 90,576 Actual Collective Consumption of Central Government 7,189 Actual Collective Consumption of Local Government 2,125

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Table 18.3:

National Capital Account Year ended 31 March 2003

NZ$ (Millions)Change in Inventories 674 Gross Fixed Capital Formation

Private 22,309 Central Government (1) 2,421 Local Government (1) 1,896

Purchase of Non-Produced Non-Financial Assets from the Rest of the World, Net -47 Net Lending to the Rest of the World -3,534 Capital Accumulation 23,719

Saving 5,579 Consumption of Fixed Capital 17,153 Capital Transfers from the Rest of the World, Net 1,452 Finance of Capital Accumulation 24,183

Statistical discrepancy -464

(1) Includes all government-owned producer enterprises.

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Table 18.4:

External Account Year ended 31 March 2003

NZ$ (Millions)Current

Income from the Rest of the World Exports of Goods 30,696 Exports of Services 11,140 Compensation of Employees - Investment Income 2,346 Current Transfers 1,301 Total Income from the Rest of the World 45,483

Payments to the Rest of the World Imports of Goods 29,882 Imports of Services 10,029 Compensation of Employees - Investment Income 9,439 Current Transfers 1,167 Balance on the External Current Account -5,034 Total Payments to the Rest of the World 45,483

Capital

Capital Transfers from the Rest of the World 2,221 Less Capital Transfers to the Rest of the World 769 Capital Transfers from the Rest of the World, Net 1,452

Balance on the External Current Account -5,034 Capital Receipts -3,581

Purchase of Non-Produced Non-Financial Assets from the Rest of the World, Net

-47

Net Lending to the Rest of the World -3,534 Capital Disbursements

-3,581

Memorandum: Investment Income Investment Income from the Rest of the World 2,346 of which: Reinvested earnings on overseas direct investment 272

Investment Income to the Rest of the World 9,439 of which: Reinvested earnings on direct investment in New Zealand 2,094

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Table 18.5:

Relationships among Key Aggregates

1 GDP (Gross Domestic Product) = C + G + I + X - M From Table 18.1, we know that GDP

Equals consumption by households (C) and government (G), plus investment in fixed capital and inventories (I) or where separately identified,

investment in fixed capital (IF) and investment in inventories (IV), plus exports less imports of goods and services (X-M)

2 GNDY (Gross National Disposable Income) = GDP + NY + NCT From Table 18.3 we know that gross national disposable income (GNDY)

equals GDP plus net income receivable from non-residents (NY) plus net current transfers receivable from non-residents (NCT)

3 GNDY = C + G + I + X - M + NY + NCT For GDP in equation 2, substitute C + G + I + X - M from equation 1

4 CAB (Current Account Balance) = X - M + NY + NCT From the balance of payments we know that the current account balance

equals exports minus imports of goods and services (X-M) plus net income from abroad (NY) plus net current transfers from abroad (NCT)

5 GNDY = C + G + I + CAB Same as equation 3 with CAB replacing X - M + NY + NCT (see equation 4)

6 S (Gross Saving) = GNDY - C - G From Table 18.3 we know that gross saving (S)

equals GNDY minus household and government expenditure (C + G)

7 S = I + CAB From equations 5 and 6 we know that S = C + G + I + CAB - C - G and C and G cancel out

8 CAB = S - I

9 NFI (Net Foreign Investment) = CAB + NKT = S - I + NKT = net lending/borrowing

NFI (net foreign investment) equals current account balance (CAB) plus net capital account transactions (ie net capital transfers) (NKT) less net purchases of non-financial, non-produced assets) equals gross saving less investment + net capital account transactions equals net lending/borrowing.

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Appendix 1 DDaattaa SSoouurrcceess UUsseedd iinn tthhee CCoommppiillaattiioonn ooff NNeeww ZZeeaallaanndd''ss BBooPP aanndd IIIIPP SSttaattiissttiiccss

This appendix shows data sources used in the compilation of BoP components, including components of, and data models for, the IIP. The data source is from Statistics New Zealand, unless specifically attributed to other departments or agencies.

Source

Description Contributes to BoP Components

Overseas Merchandise Trade Data

Overseas Merchandise Trade Data

Overseas merchandise trade data measures the quantity and value of moveable goods exported to or imported from non-residents. Overseas merchandise trade data is sourced from customs documentation, and adjusted to fit BoP concepts. The BoP concept is based on a change of ownership principle, while overseas merchandise trade data is not. It captures goods as they cross the customs frontier, regardless of ownership. Overseas merchandise trade statistics are published on a monthly basis with separate releases for exports and imports.

Current Account Goods:

General merchandise Goods for processing Repairs on goods Goods procured in ports by

carriers Non-monetary gold

Services: Insurance Transportation

Statistics New Zealand Enterprise Surveys Survey of International Trade in Services and Royalties (ITSS)

The ITSS is a quarterly sample survey that collects data from enterprises that import or export selected services. Services measured in this survey include communications services, computer and information services, financial services, royalty and licence fees, repairs and other trade related services. The ITSS also collects data on the purchase and sale of intangible assets. The sample is approximately 740 enterprises. A response rate of 100 percent of key and 80 percent of non-key enterprises is required. An annual birth survey and regular benchmark census surveys are also conducted.

Current Account Goods: General merchandise Repairs on goods Services:

Communication Construction Computer and information Royalties and licence fees Financial services Other business services Personal, cultural and

recreational services Transportation – air, other

Capital Account Acquisition/disposal of non-produced, non-financial assets

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International Transportation Survey

The International Transportation Survey collects data about international transport transactions. Resident airlines and shipping companies are surveyed, along with the New Zealand agents or offices of non-resident airlines and shipping operators. The survey collects data on goods procured in foreign ports by resident transport operators, and goods acquired in New Zealand ports by foreign transport operators. Information is also collected from key fuel providers and catering companies that provide services to non-resident airlines. There are seven quarterly and two annual transportation questionnaires. All known transport operators and providers are included in the survey. A response rate of 100 percent of key and 80 percent of non-key enterprises is required. The survey population is approximately 100 enterprises.

Current Account

Goods: General merchandise

Services: Transportation Other services

Quarterly International Investment Survey (QIIS)

The QIIS collects data on the stock and flows of foreign financial assets and liabilities of New Zealand residents. It collects data on the breakdown of foreign investment in New Zealand and New Zealand’s investment abroad by country, industry, type of instrument, maturity, currency and by type of asset and liability. The QIIS population includes banks, corporate enterprises, the Reserve Bank and the Treasury. The QIIS sample survey population is approximately 340 enterprises. A response rate of 100 percent of key and 80 percent of non-key enterprises is required. QIIS is designed to obtain 95 percent of the stock of financial assets and liabilities.

Current Account Investment income:

Direct investment income Portfolio investment income Other investment income

Financial Account

Direct investment Portfolio investment Other investment Reserve Assets

International Investment Position

Direct investment Portfolio investment Financial derivatives Other investment Reserve assets

Quarterly Nominees Survey

The Quarterly Nominees Survey collects data on the value of the stock of New Zealand's equity securities held by non-residents, and the associated dividends paid out. The nominee survey population consists of five major New Zealand nominee companies. The response rate is required to be 100 percent.

Current Account Investment income:

Portfolio investment income

Financial Account Portfolio investment

International Investment Position

Portfolio investment

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Quarterly Managed Funds Survey (QMFS)

The Quarterly Managed Funds Survey (QMFS) is a quarterly survey that has been carried out jointly by the Reserve Bank and Statistics New Zealand since 1998. The QMFS collects data (by type of instrument) on the stock and flows of New Zealand's overseas assets and the income earned from these assets. The QMFS is a sample survey and the current quarterly population consists of 17 New Zealand fund managers. The response rate is required to be 100 percent.

Current Account Investment income:

Portfolio investment income Other investment income

Financial Account Portfolio investment Other investment

International Investment Position

Portfolio investment Other investment

Hedging of Foreign Currency Overseas Liabilities Survey

The hedging survey is an annual supplement to the information gathered by the Quarterly International Investment Survey. The QIIS gathers information on overseas assets and liabilities, while the hedging supplement collects information on the management of risks relating to foreign currency borrowing of New Zealand companies. In previous years, the survey has collected for the top 80 percent of enterprises foreign currency liabilities by value. In 2003, a new stratified sampling methodology was put in place. This methodology was implemented so that all foreign currency liabilities could be accounted for. The sample had a population of 51 enterprises and the response rate was 92 percent.

International Investment Position

Supplementary information on Financial Derivatives

Annual Managed Funds Survey (AMFS)

The AMFS is jointly conducted by The Reserve Bank of NZ and Statistics New Zealand. It measures the stock of investment held (both in NZ and abroad) by those fund managers that were not in the QMFS. The survey population was 57.

Current Account Investment income:

Portfolio investment income Other investment income

Financial Account Portfolio investment Other investment

International Investment Position

Portfolio investment Other investment

Survey of English Language Providers (ELP)

The ELP is an annual survey designed to measure the revenue earned by New Zealand English language schools for education services provided to non-residents studying in New Zealand. Results from the ELP, combined with data from the Ministry of Education, are used to estimate the expenditure of foreign students studying in New Zealand.

Current Account

Services: Travel

124

The survey population covers all New Zealand private, polytechnic and university English language schools with non-resident students. The ELP is a sample survey covering approximately 100 academic institutions in New Zealand.

Consignment Surveys

Consignment surveys provide data used to make conceptual adjustments to merchandise trade figures, in line with BoP concepts. Consignment surveys are carried out for the consignment exports of apples and pears, dairy products and kiwifruit. This is then used to estimate the market value of these exports. Traditionally, New Zealand has conducted a considerable portion of trade on a consignment basis. In the case of consignment goods, the market value has often not been determined when the goods cross the border, and no change of ownership has occurred. There are three respondents in the population. A 100 percent response rate is required.

Current Account

Goods: Merchandise trade consignment adjustments

Quarterly International Insurance Survey

The International Insurance Survey consists of four questionnaires designed to collect data on international insurance transactions between New Zealand residents and non-residents. The data collected includes life and non-life insurance and reinsurance transactions between New Zealand individuals, enterprises, or underwriters and non-residents. The enterprises surveyed are those who have been previously identified as having international insurance transactions. The International Insurance Survey is a sample survey of approximately 135 enterprises. A response rate of 100 percent of key and 80 percent of non-key enterprises is required.

Current Account Services:

Insurance

Current transfers: Other sector current

transfers

Annual International Investment Survey (AIIS)

The Annual International Investment Survey collects data on the stock of financial assets and liabilities of New Zealand enterprises (mainly from the other sector). AIIS is designed to obtain the 5 percent non-sampled estimate for the stock of financial assets and liabilities that are not captured by the Quarterly International Investment Survey (QIIS).

International Investment Position

Direct investment Portfolio investment Other investment

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AIIS has a population of approximately 3,000 respondents. A response rate of 100 percent is required for key respondents and an overall response rate of 80 percent is required. The classification of data into direct, portfolio and other investment is based on certain assumptions.

Collections from Households and Individuals International Visitors Survey (IVS)

The International Visitors Survey is run by a marketing company for Statistics New Zealand and the New Zealand Tourism Board and is used to determine the travel credits component in the BoP. Prior to the availability of IVS data, the information was sourced using the Reserve Bank's monthly overseas exchange transactions record. The target population for the International Visitors Survey is all overseas visitors aged 15 and over who have been in New Zealand for less than 12 months, and who depart from one of New Zealand's three main international airports. At least five thousand (5,000) completed interviews are carried out per annum.

Current Account Services:

Travel

Other Official Sources Treasury and Inland Revenue (IRD)

The New Zealand Treasury provides data on both the receipt and payment of non-resident withholding tax. Non-resident withholding tax is paid to the IRD by non-residents on the interest and dividends they earn from their investments in New Zealand. New Zealanders pay non-resident withholding tax on the income from their overseas investments to the appropriate tax authority.

Current Account

Current transfers: Government transfers

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Work and Income New Zealand (WINZ)

Work and Income New Zealand provides data on government current transfers. These include pension and benefit payments paid by the New Zealand Government to other governments in respect of New Zealand citizens living in other countries. It also includes benefit and pension payments received by the New Zealand Government in respect of foreign residents living in New Zealand.

Current Account Current transfers:

Government transfers

New Zealand Immigration Service (NZIS)

Information obtained from the New Zealand Immigration Service (NZIS) is used by Statistics New Zealand to estimate migrant transfers inflows.

Capital Account Capital transfers:

Migrant transfers model

Reserve Bank of New Zealand (RBNZ)

The Reserve Bank's Domestically Issued Securities (DIS) data provides information on domestically issued securities held by non-residents directly, and via a New Zealand nominee company. When the survey began in 1985 it collected information on government stock and Treasury bills only. In December 1992 it was extended to include details on both government and non-government securities held on behalf of non-residents.

Current Account Investment Income:

Portfolio investment income

Financial Account Portfolio investment

International Investment Position

Portfolio investment

Ministry of Foreign Affairs and Trade

The Ministry of Foreign Affairs and Trade provides data on government transfers such as foreign aid. A periodic survey of New Zealand aid organisations run by the Ministry of Foreign Affairs and Trade is incorporated into the model of personal transfers. It also provides data on the purchase and sale of building and fixed assets by foreign governments in New Zealand and New Zealand Government overseas.

Current Account Services:

Government services nie Current transfers:

Government transfers Personal transfers (model)

New Zealand Defence Force

The New Zealand Defence Force provides data on peacekeeping roles and expenditure by New Zealand military personnel while located overseas.

Current Account Services:

Government services nie

Ministry of Education Data from the Ministry of Education is incorporated into estimates of the expenditure of international students studying in New Zealand.

Current Account Services:

Travel

Department of Internal Affairs

The Department of Internal Affairs provides data on the revenue generated through processing official documentation.

Current Account Services:

Government services nie

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Trade New Zealand Trade New Zealand provides information on the operating expenses of their offices overseas.

Current Account Services:

Government services nie Health and Hospital services providers

Estimations of health expenditure of non-residents are extrapolated from Health and Hospital Services (formerly Crown Health Entities) data.

Current Account Services:

Travel

Miscellaneous Data Sources Consumer Price Index (CPI)

The CPI measures quarterly changes in the price of a 'basket' of goods, which represents the average expenditure of New Zealand households. The data is incorporated into the personal transfers model.

Current Account Current transfers:

Personal transfers

New Zealand Stock Exchange

Information from the New Zealand Stock Exchange is obtained via the weekly NZSE diary, and customised data requested quarterly. This information is then used in the nominees questionnaire to calculate net transactions for the quarter.

Financial Account Portfolio Investment

Quarterly Employment Survey (QES)

The QES measures quarterly estimates of the changes in and levels of average hourly and average weekly (pre-tax) earnings, average weekly paid hours, and the number of filled jobs. The data is incorporated into the personal transfers model.

Current Account Current transfers:

Personal transfers

Foreign Embassies The expenditure of foreign embassies in New Zealand was measured in 1999 in a benchmark survey.

Current Account Services:

Government services nie

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Appendix 2 DDaattaa MMeetthhooddoollooggiieess UUsseedd iinn tthhee CCoommppiillaattiioonn ooff BBooPP aanndd IIIIPP CCoommppoonneennttss Data Methodology Title and Data Source

Estimation Methodology Contributes to BoP and IIP Broad Level Components

1) Travel by foreign residents in New Zealand methodology

International Visitors Survey (IVS) Statistics New Zealand migration data Foreign student spending in New Zealand

This methodology measures expenditure in New Zealand by overseas tourists. The IVS operated between the September 1986 quarter and the December 1994 quarter but not continuously. It recommenced in the June 1995 quarter and has operated since then. Results from this survey have been incorporated in travel credits from the June 1995 quarter. In periods where the survey data was not available, quarterly estimates were extrapolated. Travel credits are separated into Business and Personal components. The Personal component is further split into Education, Health and Other. Overseas visitors’ business expenditure is estimated from the IVS. Education expenditure is derived from an annual survey of English Language Providers and Ministry of Education data. Health expenditure is derived from Crown Health Entity data. Other expenditure is personal expenditure from the IVS minus the expenditure of people reporting education as their main reason for visiting New Zealand.

Services: • Travel credits

2) Travel by New Zealand residents overseas methodology

Survey of Returned New Zealanders (SORNZ) Statistics New Zealand migration data Exchange rate indices Consumer price indices

This methodology measures the expenditure of New Zealanders while travelling overseas. Quarterly estimates are extrapolated from results from the 1991-1992 SORNZ, a sample survey of returned New Zealanders. Quarterly movements in visitor days that New Zealanders spend overseas on trips of less than 12 months duration are used to rate forward the benchmarked expenditure. This data is converted to current prices by adjusting for exchange rates and overseas consumer price indexes. Data from four countries – Australia, the United Kingdom, Japan and the United States is used. Weightings are then applied to split the total expenditure data into business and personal expenditure.

Services: • Travel debits

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3) Insurance methodology Quarterly surveys of resident insurers, agents and brokers, and resident enterprises which place insurance directly with non-resident insurers. Freight Insurance of goods is sourced from the merchandise trade figures. The average domestic service charge ratio (ADSCR) is sourced from the Annual Enterprise Survey.

This methodology applies a service charge to the surveyed insurance data. General (non-life) insurance and life insurance are treated differently. General insurance premiums paid are divided into two components. The service component is the part of the premium that pays the insurance company for the service it provides. The transfer component is the part that the insurance company keeps and then transfers back to the policyholder when a claim is made. The service component is measured by multiplying the total amount of insurance premiums exported or imported by the five-year average domestic service charge ratio. The average domestic service charge ratio (ADSCR) is the ratio of the domestic insurance service charge to total domestic premiums, where the service charge is calculated as premiums minus claims. The service component is recorded in the current account under insurance services, while the transfer component is recorded in the current account under current transfers. International transactions in life insurance services are considered small. For life insurance imports the service charge is calculated as premiums minus claims, then added to insurance services.

Services: • Insurance services Current transfers: • Other sector, Non-life

insurance transfers Financial account • Other investment

4) Expenditure by foreign embassies in New Zealand methodology

Foreign Embassy Survey Consumer price index (CPI)

The estimate of expenditure by foreign embassies in New Zealand is derived from a survey of foreign embassies undertaken in 1999. Estimates are CPI adjusted.

Services: • Government services nie

credits

5) Migrants’ transfers methodology

Statistics New Zealand migration data NZIS immigration data

The migrants' transfers methodology is used to estimate the funds that immigrants bring with them to New Zealand and emigrants take to other countries. Migration data and information obtained from the New Zealand Immigration Service, including data on funds to be transferred and funds actually transferred, is used. Migrants' transfers debits is calculated by estimating average cash transfers for groups of emigrants by using Statistics New Zealand’s migration data ie numbers of permanent and long-term departures by country of next permanent residence, by citizenship and by age. Migrants' transfers credits is calculated by

Capital transfers • Migrants' transfers

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estimating average cash transfers for groups of immigrants by using Statistics New Zealand migration data such as the number of permanent and long-term arrivals by country of last permanent residence, by citizenship and by age. Data from the NZIS is also used ie the number of migrants entering New Zealand through different immigration policy schemes, the investment amounts transferred and information relating to settlement transfers for certain migrant categories.

6) Personal transfers (remittances) methodology

Ministry of Foreign Affairs and Trade (MFAT) Survey of International Aid Quarterly Employment Survey NZIS immigration data OET data Average real disposable income index Average quarterly exchange rate index Consumer price index External migration index Trade weighted index

This methodology is used to estimate remittances made or received by New Zealand residents. Personal transfers include private sector foreign aid as well as gifts of cash from residents of one country to residents of another, including workers' remittances, which covers current transfers by employees who are migrants, to their families abroad. The methodology relies on benchmark surveys, immigration data and Overseas Exchange Transactions (OET) data, with all three sources being adjusted using current value indicators and indexes. The private sector aid estimate is obtained from an annual survey of New Zealand aid organisations, which since 1994 has been conducted by MFAT. The estimate of gifts of cash from New Zealand residents to non-residents is derived from Overseas Exchange Transactions (OET) data extrapolated using statistical methodology.

Current transfers: • Other sector, Other

transfers

7) Accrued interest income on government bonds methodology

RBNZ data on domestically issued securities

This methodology is used to estimate the accrued interest income on long-term government bonds issued in New Zealand and held by non-residents. Accrued interest income is estimated by multiplying average levels of each type of long-term government bond by (the applicable interest rate prevailing, the coupon rate, the time to maturity and the nominal value of the bond held) average yield for the quarter.

Investment Income (debits) • Portfolio investment income • Government sector –

interest on bonds

8) Investment in overseas equity securities by fund managers methodology

Managed Funds Survey (MFS)

Since the September 2003 quarter respondents are required to split the flows data into net transactions, changes due to exchange rate fluctuations, market price changes and other changes.

This methodology contributes a portion of the data for the component: Portfolio Investment (debits) • Equity securities

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9) Investment in New Zealand equity securities by nominees methodology

Quarterly Nominees Survey

This methodology is used to estimate financial transactions in New Zealand equities by non-residents. Net transactions is calculated as the change in the number of shares held by non-residents over the quarter multiplied by the daily average share price. The methodology is adjusted where necessary, for example in the case of bonus issues of shares where the number of shares changes without a transaction occurring.

This methodology contributes a portion of the data for the component: Portfolio Investment (credits) • Equity securities

10) Investment in money market instruments and bonds and notes methodologies

Quarterly International Investment Survey (QIIS) – banks and financial intermediaries sector Managed Funds Survey (MFS)

These methodologies are used to estimate net transactions in money market instruments and bonds and notes by excluding price effects from changes in stock positions between quarters. The market price change is calculated by applying the absolute change in interest rate movements (using the inverse change in interest rates to give the change in market prices) over the quarter to the average value of the outstanding assets or liabilities. Net transactions is then calculated as a residual of closing balance less market price changes , exchange rate variation and opening balance.

This methodology contributes a portion of the data for the component: Portfolio Investment (credits and debits) • Debt securities • Bonds and notes • Money market instruments

11) Investment by New Zealand individuals in overseas equities methodology

This methodology is used to estimate investment in overseas equities by New Zealand individuals and households and where such investments are held in their own custody or with a foreign custodian. The estimate is derived using a number of information sources and assumptions. An estimate for Australia is obtained by subtracting the portfolio equity investment by companies and fund managers from total New Zealand portfolio equity investment in Australia. The balance is assumed to be holdings of individuals in Australia. The ratio of managed funds holdings to direct holdings for Australia is then scaled down according to information about New Zealand portfolio holdings in other countries to produce estimates for those other countries. The combined results form the estimate of direct holdings by New Zealand individuals.

This methodology does not contribute a portion of the data for the IIP component; it merely serves as an appendix thereof. Portfolio Investment (debits) • Equity securities

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Appendix 3 CChhrroonnoollooggyy ooff MMaajjoorr EEvveennttss AAffffeeccttiinngg BBooPP SSttaattiissttiiccss Year Month Event 2004 July The results for the Survey of English Language Providers released for the

year ended 31 March 2004.

May BoP Quality Plan is released for discussion. The quality plan is a strategy for addressing the major causes for concern over the quality of the BoP statistics. It contains a long term development strategy to improve balance of payments data both quantitatively and qualitatively.

May The results of the first four quarters of the Survey of Returned Travellers (SORT) data released as a Hot Off the Press.

March Trade in Services Feasibility Study commenced to investigate the feasibility of collecting data on international trade in services at the level of detail specified in the Manual on Statistics of International Trade in Services.

2003 June Survey of Debit Transactions introduced. This survey collects information from NZ travellers using debit cards, or credit cards accessing debit accounts, while overseas.

Survey of Tour Wholesalers introduced to collect data on purchases of wholesale overseas travel services to determine the level of prepaid travel expenses of NZ travellers overseas. Used to improve Travel Debits estimation.

2002 September

Survey of Returned Travellers (SORT) introduced to update procedures used for calculation of Travel Debits in the Balance of Payments. Run over 8 quarters, the survey will be used to provide a new benchmark for Travel Debits in the BoP Current Account, and to provide a basis for estimation of Travel debits in the future. Annual Managed Funds Survey introduced. Conducted jointly by the RBNZ and Statistics New Zealand, the survey is held at the beginning of the year to measure the stock of investment (both in NZ and abroad) held by those fund managers not in the quarterly managed funds survey.

2001 June April

Complete balance of payments ( BoP) and international investment position (IIP) statistics published as an ongoing quarterly series beginning with the June 2000 quarter. Estimates of equity shareholding in overseas companies directly held by NZ individuals introduced. The financial account surveys conducted by BoP capture only the overseas assets held by NZ enterprises not individual persons. The estimate is presented as an addendum item in the International Investment Position. Annual International Investment Survey introduced.

2000 September

The BPM5 changes to insurance services are introduced to the June 2000 quarter and are backdated to the June 1996 quarter.

The remaining BPM5 changes are introduced for the investment income component and released as part of the June 2000 quarter current account, ie: • calculating of interest income on an accrual basis rather than a due for

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June March

payment basis • using the creditor accrual approach for interest on government debt

securities • using a 10 percent or more ownership criteria as the basis for

determining direct investment and the associated reinvested earnings, with less than 10 percent ownership representing portfolio investment. Previously a 25 percent or more ownership threshold was used for direct investment

• making the definition of direct investment symmetrical, so that for both inwards and outwards direct investment the single direct investor approach is used. Previously a cumulative approach was used for inwards direct investment and a single direct investor approach was used for outwards direct investment

• excluding foreign currency deposits held with resident banks from the reserves component.

The Quarterly International Investment Survey (QIIS) is introduced for the June 2000 quarter. This survey replaces the Annual Total Overseas Debt, the Annual Capital Investment and the Quarterly International Investment Income Surveys. Quarterly Nominees Survey is introduced.

1999 September June March

With the release of the June 1999 quarter current account, Statistics New Zealand introduced the bulk of the changes required to meet 5th edition guidelines (BPM5) for the current and capital accounts. The changes included: • redefining the current account to exclude items of a capital nature, eg

migrants capital transfers • presentational changes to the BoP statement to reflect this redefinition

of the current account, so that the BoP statement now comprises three accounts; current, capital and financial

• expansion of the classification of services • introducing changes to the compilation of services. Travel debits model reviewed – no changes made. Census of English Language Providers Survey introduced. Non compulsory questionnaire sent to foreign embassies and consulates to update the estimate of Foreign Government expenditure in New Zealand. Census of International Trade in Services and Royalties conducted. The debt threshold, used to select respondents, in the Annual Overseas Debt survey is raised from $10million to $50 million. The consignment surveys for meat and fish cease, with the last quarter being the March 1999 quarter. Introduction of a cut-off threshold based on an enterprise's annual GST sales and/or the number of full time equivalent employees introduced to the Annual Capital Survey.

1998 December November

Annual Real Estate Survey discontinued. BoP Exploratory Survey discontinued due to sourcing improvements made to business frame. ABS consultant reviews: • the New Zealand strategy for the development of a quarterly financial

account • other methods and processes on the BoP division.

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July March

The first stage in the development of BoP statistics on a fifth edition presentation basis was released. This developmental series began with the March 1998 quarter and the March 1997 Annual BoP and IIP. Information on the hedging of New Zealand’s foreign currency denominated overseas debt is collected and published as a supplement to the Overseas Debt Release.

1997 December March

New Zealand participates in the International Monetary Fund's Co-ordinated Portfolio Investment survey. The RBNZ’s Managed Funds Survey data is incorporated into the capital account statistics for the March 1997 year. The Total Overseas Debt survey ceases as a quarterly collection, following the March 1997 quarter. Future data collected on an annual basis.

1996 December September

A new sample survey is introduced to collect quarterly investment income data for the private sector. This replaces the survey introduced in March 1992. Non-resident withholding tax is included with the release of the December 1996 quarter BoP statistics. The data is backdated to the March 1994 quarter and is included in General Government Transfers. The Import Orders survey ceases, with July being the last month of data released.

1995 November June April March

BoP Capital Account Feasibility Study undertaken. The International Visitors Survey (IVS) recommences with the June 1995 quarter being the first quarter. Non-resident holdings of domestically issued securities included. As a result portfolio investment estimates revised back to 1992. Estimate of net assets of business migrants left behind in their former country removed from the statistics. Statistics New Zealand survey on private international aid replaced with information from Ministry of Foreign Affairs and Trade.

1994 November March

Survey of Users of BoP and IIP statistics undertaken. Repurchase agreements (repos) are included for the first time in the International Investment Position. Survey of Returned New Zealand Travellers Survey (SORNZ) ceased as an ongoing survey.

1993 September June

The International Visitors Survey is again discontinued, with the September 1993 quarter being the last quarter. A redesigned overseas debt questionnaire is introduced in the June 1993 quarter.

1992 December October

August June

Investment in domestically issued securities by non-residents through New Zealand nominee companies is incorporated in BoP statistics. Reintroduction of the International Visitors Survey for travel credits. First international investment position statistics published for the years 1989, 1990 and 1991. Monthly Import Orders Survey reinstated. Harmonisation project with Australia to attempt to reconcile service and investment flow data.

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May March January

Results from the expanded Annual Survey of Private Sector International Aid incorporated and taken back to June 1990. Quarterly Investment Income sample survey introduced. Annual Real Estate Survey introduced.

1991 December October September

August

May April January

Questions on related company debt and interest added to the Quarterly Total Overseas Debt Survey. Non compulsory questionnaire sent to foreign embassies and consulates to get an estimate of Foreign Government expenditure in New Zealand. Monthly Foreign Exchange Dealers Survey discontinued. Monthly Import Orders Survey discontinued. (Reinstated August 1992.) Results of Quarterly Survey of Consignment Exports of Kiwifruit incorporated and taken back to June 1989. Quarterly Oil Stock Adjustment reflecting the timing of change of ownership classification introduced and taken back to March 1988. Improved quarterly and annual Passenger Services data introduced and taken back to June 1988. Improved quarterly model for estimating Travel: Debits introduced and taken back to December 1984. International Trade in Services 1989 Census results incorporated and interpolated back to June 1984. Improved estimate of personal remittances to the Pacific Islands in New Zealand dollars introduced and taken back to June 1985. Estimate of net assets of business migrants left behind in their former country introduced. Nostro/Vostro questionnaire, for the banking sector, introduced to collect data for the 1990/91 year. Survey of Returned New Zealand Travellers introduced as an on-going monthly survey.

1990 December July

March

BoP Survey Management System becomes operational. Questions on the Interest paid on Overseas Debt added to the Quarterly Total Overseas Debt Survey. Revised Monthly Survey of Import Orders introduced. Redesigned Annual Capital Investment Survey questionnaires introduced. Annual Survey of Private Sector International Aid expanded.

1989 November

September June

April

Estimates of fish exported as charter payment in kind to overseas owners of chartered fishing vessels introduced. Improved data source introduced for interest received on overseas assets by official institutions. Monthly BoP estimates discontinued. Quarterly Total Overseas Debt Survey introduced. Quarterly Survey of Consignment Fish Exports introduced. Census of International Trade in Services conducted. Direct exchange of output data with other countries initiated.

1988 December November

Quarterly Survey of Consignment Dairy Product Exports introduced. One-off all term Overseas Debt Survey conducted.

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June May

BoP Exploratory Survey introduced. Monthly Foreign Exchange Dealers Survey revamped. Quarterly International Insurance Survey introduced. Improved measure of interest on private sector long-term overseas debt introduced. Estimates of interest on domestic issues of New Zealand government stock paid to non-residents introduced. Cabinet approved additional funding for the BoP development.

1987 June March

Quarterly Survey of Consignment Apple and Pear Exports introduced Quarterly Survey of Consignment Kiwifruit Exports introduced. Quarterly International Transportation Survey introduced.

1986 December September July June

Quarterly estimates of interest payments on the overseas debt of Government Owned Corporations taken back to June 1983. Quarterly estimates of private sector interest payments from overseas bank accounts taken back to June 1984. Monthly BoP statistics released. Quarterly Consignment Meat Exports Survey introduced. Improved estimation methodology introduced for Transportation Credits and Debits. Department of Tourism and Publicity's International Visitors Survey introduced. Monthly Foreign Exchange Dealers Survey introduced. Quarterly Long -Term Overseas Debt Survey introduced.

1985 September

March

'Overseas Exchange Transaction Replacement Project' strategy paper written. New Zealand dollar floated. Limits on foreign ownership in New Zealand financial institutions, advertising agencies and fishing processors abolished. Announcement that the Government was willing to consider requests from foreign investors for up to 100 percent ownership in virtually all areas except rural land and air.

1984 December November

October

Exchange Control regulations eased (effectively abolished). Unrestricted access to New Zealand capital market granted to overseas-owned companies operating in New Zealand. Abolition of restrictions prohibiting New Zealand financial institutions from borrowing overseas. Abolition of rules governing private overseas borrowing.

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Appendix 4 FFrreeqquueennttllyy AAsskkeedd QQuueessttiioonnss aanndd CCoommmmoonn FFaallllaacciieess iinn tthhee BBooPP aanndd tthhee IIIIPP This appendix aims to answer some of the frequently asked questions concerning the balance of payments (BoP) and highlights some of the misconceptions under the Fallacies section.

Frequently asked questions Why do we measure balance of payments statistics? The balance of payments is one of New Zealand's key economic statistics and is a measure of the country's overall performance. As a member of the IMF, New Zealand is obliged, under the Articles of Agreement, to produce international balance of payments (BoP) and international investment position (IIP) statistics. Who uses balance of payments statistics? The major users of BoP and IIP statistics are: • the New Zealand Government in its management of the economy through monetary and

fiscal intervention • the IMF in its international economic monitoring and assessment role • agencies engaged in financial risk assessment, eg credit rating agencies • those engaged in financial market operations, policy development and the provision of advice

and analysis, including the New Zealand Treasury and the Reserve Bank of New Zealand • the news media • the New Zealand public. Why use the IMF standard? There are several reasons for this: • domestic and foreign analysts will be assured that New Zealand's official BoP and IIP

statistics comply with objective, coherent international standards that reflect current, global analytic needs

• New Zealand is a member of the international community and both New Zealand and international users need comparable data for comparison among countries

• New Zealand, as a formal member of organisations such as the IMF and the OECD, needs to submit its various economic statistics in conformity with standards set by those organisations

• a method of data validation for New Zealand to compare and reconcile its data with those of other countries. For this to occur, statistics need to be as comparable as possible.

What is the current account? The current account records all transactions other than those in financial assets and liabilities that involve economic values and occur between residents and non-residents. It consists of the imports and exports of goods, services, income and current transfers. For New Zealand the account is prepared on a quarterly basis. The transactions recorded include those of the private sector as well as the government The current account is often likened to the country's cheque account because it covers the country's day to day transactions. Refer to Chapter 5 for details.

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What is the financial account? The financial account records transactions in New Zealand's financial assets and liabilities with the rest of the world. It covers all transactions associated with flows of investment capital and changes of ownership in foreign financial assets and liabilities. Financial account categories include direct investment, portfolio investment, financial derivatives, other investment and reserve assets. Refer to Chapter 11 for details. For New Zealand the account is prepared on a quarterly basis. The transactions recorded include those of the private sector as well as the government What is the international investment position (IIP)? The IIP statement is the financial balance sheet of New Zealand. It records New Zealand's level of international assets and liabilities and is closely related to the financial account. The BoP records flows, while the IIP records the stock of assets and liabilities. The IIP includes the same component categories as those in the financial account of the BoP. The IIP also provides information on a country’s net debt position with the rest of the world. For more detail refer to Chapter 11. The holdings recorded include those of the private sector as well as the government What are conceptual adjustments in the BoP? Conceptual adjustments are changes made to the source data so that they comply with the concepts and principles of the BoP. For example, overseas merchandise trade data is sourced from customs documentation which measures the value of goods crossing the border. In the BoP, however, goods transactions are not recorded until there is a change of ownership. This creates a timing issue, as some goods cross the customs frontier but are not yet sold. Such items include goods sold on consignment, which are goods that are shipped overseas to be sold at a later date. Customs records these as exports, but according to BoP concepts, no transactions are recorded until they are sold to a non-resident. Why change from BPM4 to BPM5? The fourth edition of the BoP was published in 1977 and since then many changes have occurred in the global economy, eg the liberalisation of financial markets, innovations in financial instruments and growth in the volume of international trade in services. The IMF introduced the fifth edition of the balance of payments manual (BPM5) in 1993 in order to reflect these changes as well as to harmonise BoP statistics with the National Accounts. What are the main structural differences between BPM4 & BPM5? The table below illustrates the changes in structure between BPM4 and BPM5.

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BPM4 BPM5 Current Account Merchandise Trade Services Investment Income Transfers Capital Account Direct Investment Portfolio Investment Other Capital Reserve Assets

Current Account Goods Services Income Current Transfers Capital Account Capital Transfers Acquisition/disposal of non-produced, non-financial assets Financial Account Direct Investment Portfolio Investment Other Investment Financial Derivatives Reserve Assets

What is the distinction between travel and transportation? Transportation services include shipping, land and aircraft transportation transactions between residents and non-residents. This includes international airfares. Travel covers goods and services acquired from an economy by non-resident travellers. Travellers are those people visiting another country, for personal or business reasons and who stay for less than 12 months. Exceptions to the 12-month rule are students and patients. They are regarded as residents of their home economy regardless of their length of stay abroad.

What is a transfer? A transfer is an offsetting entry for a one-sided transaction. In simple terms, a one-sided transaction is when something is given for nothing. Most BoP transactions involve the exchange of one thing for another. For example, in the case of exported goods, a credit entry is recorded under merchandise trade exports, and a debit entry is the payment made for those goods. The double-entry principle is satisfied. Donations for foreign aid, on the other hand, do not satisfy the double-entry principle so an offsetting entry is required. That offsetting entry is called a transfer. In this case a credit entry is recorded for merchandise trade exports, and the debit entry is recorded under current transfers. What is the difference between a current transfer and a capital transfer? A capital transfer involves the transfer of ownership of fixed assets or the transfer of funds linked to them without any counterpart transaction. Migrants' transfers and debt forgiveness are examples of capital transfers. Current transfers directly affect the level of disposable income and influence the consumption of goods and services, an example being if New Zealand gave a foreign country a gift of medical supplies. How does the BoP fit into national accounts? Linkages between the New Zealand BoP and national accounts are reinforced by the fact that the BoP statistics are compiled first and subsequently included in the national accounts. Because the BoP, including the IIP, forms an integral part of the national accounts, there is complete concordance between them in concept and classification, although the extent of cross-classifications may differ between the two systems.

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The BoP and national accounts identify resident producers and consumers identically, and both invoke the same concepts of economic territory and centre of economic interest. Both use market prices as the primary concept of valuation of transactions and they adopt identical concepts of accrual accounting. The systems use identical conversion procedures to convert transactions which take place in foreign currency to New Zealand's currency. Both gross domestic product and the BoP current account incorporate exports and imports of goods and services. GDP is concerned with what a closed end economy is producing as a whole, while the BoP is concerned only with transactions with the rest of the world. For more details refer to Chapter 18. A number of overseas companies film movies in New Zealand. How are they treated in the BoP? Much of New Zealand's earnings from film production within New Zealand are recorded as investment flows in the financial account of the BoP statement, rather than under services in the current account. When a foreign film company sets up an entity or company while filming in New Zealand, any financial transactions undertaken by the company in New Zealand will be regarded as resident to resident transactions and thus excluded from the BoP. An example of this would be if, say, a Japanese film company set up an enterprise in New Zealand to undertake the actual film production. The latter activity would be attributed to New Zealand's domestic production and would be out of the BoP scope. The financial injection from Japan into the New Zealand enterprise would be treated as direct investment within New Zealand's BoP financial account, ie there would be no service transaction recorded. For the latter to occur, the New Zealand enterprise would need to contract services directly to non-residents. This type of arrangement is also common for construction activity. What was the impact of the frigates that were imported? The frigates were both recorded as imports during the quarter in which they changed ownership. The importation of a frigate is a large one-off event that greatly affects the value of imports in the period for which it is recorded. In statistical terms this is called an outlier. The change of ownership of the frigate HMNZS Te Kaha took place in the June 1997 quarter, but the ship did not pass into New Zealand waters until the September 1997 quarter. Merchandise trade statistics recorded the $563 million vessel as being imported in the September 1997 quarter when it crossed the frontier. A timing adjustment had to be made because, according to BoP concepts, the transaction should be recorded when ownership changes. The change of ownership and delivery of the frigate HMNZS Te Mana, valued at $631 million, both occurred in the December 1999 quarter, so no timing adjustments were necessary. What are the seasonally adjusted and trend series? Quarterly BoP statistics are subject to large, short-term movements, both irregular and seasonal, which make the interpretation of trends in the original series difficult. Seasonally adjusted and trend series aid analysis of these underlying movements. The seasonally adjusted series has the seasonal component removed using a 'centred moving average'. In the trend series, the effects of both seasonal and irregular variations, such as the frigate import, have been removed from the data. Trend estimates are likely to indicate turning points more accurately than are seasonally adjusted estimates. For more detail refer to Chapter 4.

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Are capital gains recorded as investment income in the BoP? No, all holding gains and losses are excluded from the investment income component of the BoP. They are included as part of the value of the investment capital in the IIP. All realised gains and losses arising from transactions are included in the financial account. Unrealised valuation changes are included as price changes (reconciliation item) in the IIP statement. How do financial derivatives affect the current account? They do not affect the current account. All financial derivatives are conceptually recorded in the financial account of the BoP and the IIP. Unlike debt instruments, there are no principal amount advanced to be repaid and thus there is no investment income accruing to a counterparty. While an interest rate swap contract does involve an exchange of cash related to interest receipts or payments, it does not involve the provision of capital from a counterparty to another. The swap does not alter the cost of capital but rather it manages the cash flows by changing the risk exposures. How are undistributed/reinvested earnings of companies recorded in the BoP? These earnings comprise the direct investor's share in proportion to equity held of: • earnings that foreign subsidiaries and associated enterprises do not distribute as dividends • earnings that branches and other unincorporated enterprises do not remit to direct investors

(head office). These earnings are attributed to the direct investor. The direct investors are deemed to have received such earnings and then simultaneously reinvested them into the same enterprise. In the absence of actual cash flows, transactions are imputed in the BoP. Undistributed earnings are recorded as part of direct investment income (acknowledging the notional receipt of the income). An offsetting entry with opposite sign is made in the financial account, under direct investment, undistributed earnings, to reflect the direct investor's increased investment in the subsidiary or the unincorporated enterprise. For more detail refer to Chapter 11.

Fallacies Fallacy #1: The BoP measures payments only The BoP not only measures transactions that generate a payment or a receipt for a particular time period, it encompasses all financial transactions that are undertaken with non-residents. Transactions include both exchanges and transfers. An exchange involves the exchange of something of equal economic value between two parties. There are two parts to an exchange transaction, and neither of them is necessarily a 'payment'. For example, if New Zealand exported goods to another country, the offsetting entry may be a debt incurred by that country for those goods. This transaction is recorded in the BoP, yet no payment has taken place. Rather, an obligation to pay has been undertaken. A transfer is an offsetting entry for a 'one-sided' transaction. An example of a transfer is when the New Zealand Government provides aid in the form of goods to another country. A credit entry is recorded for merchandise trade exports and the offsetting debit entry is recorded under current transfers. Neither of these transactions is a 'payment'. For investment it is often believed that the financial account records only the cash flows of dividends and distributions. In actual fact there are many transactions that have nothing at all to do with cash flows. Some examples of financial flows are reinvested earnings, borrowing and lending funds, purchase and sale of equity securities, debentures, financial derivatives and changes in currency and deposits.

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Fallacy #2: Balances Within the BoP there are many types of 'balances'. These include the goods balance, balance on services, balance on investment income, transfers balance and the current account balance. In practice these items are either surpluses or deficits; they very rarely balance. Using the term balance for these items can be misleading. Fallacy #3: The BoP is just merchandise trade statistics The BoP statement is a way of viewing how New Zealand interacts financially with the rest of the world. It is a statement summarising our day to day income and expenditure and our investment decisions with other countries. As such, the BoP is more than just merchandise trade statistics; it summarises all New Zealand's international financial transactions over a given period of time, including: • exports and imports of goods and services • the cost of transporting exports and imports internationally • how much New Zealanders spend overseas while on holiday and how much foreign tourists

spend while on holiday in New Zealand • how much New Zealand spend servicing its overseas debt • how much New Zealand earns from its investments overseas • how much foreign investors earn from their investments in New Zealand • all international financial transactions. Statistics New Zealand compiles New Zealand's BoP statistics in accordance with recommendations contained in the fifth edition of the Balance of Payments Manual, produced by the International Monetary Fund. Fallacy #4: The BoP only includes transactions between residents and non-residents There are some scenarios that affect the BoP that do not involve transactions between New Zealand residents and non-residents: • Two New Zealanders can have a transaction that can theoretically be included in the BoP, eg

the sale of a foreign bond by a resident in one sector to a resident in another sector of the New Zealand economy. The overall aggregate data is not affected, only the resident sector classification.

• Two foreigners can have a transaction which can be included in the BoP, eg the sale of a New Zealand company's shares to a Canadian resident by an Australian resident. Again the overall aggregate data is not affected, but the country allocation of the non-resident creditor is.

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Index A Accounting services, 7.29 Accrued Income, Box 11.1 Acquisition/disposal of non-produced Non-financial assets, 3.10, 10.5, 10.10 Advertising services, 7.29 Architectural services, 7.29 Audio-visual and related services, 7.30 B Balance of payments, 2.1, Figure 2.1, 2.2 Bonds and notes, Box 11.2 Bonus shares, 8.10 Branches, Box 12.1 Business travel, 7.12 C Capital account, 3.10, 10.1 Capital and financial account, Table 3.2 Capital transfers, 3.10, 10.2, 10.3 Change of ownership, 2.20 Classification, 3.3, 11.7 Communication services, 7.14 Compensation of employees, 3.7, 8.1 Computer and information services, 7.24 Conceptual adjustment, 6.18 - 6.21 Conceptual framework, 2.10 Construction services, 7.15 Country classification, 3.31 Courier Services, 7.14 Credit entries, 2.7, Table 2.2, 4.28 Cultural services, 7.30 Currency and deposits, Box 15.1, 15.2 Current account, Table 3.1, 3.4, 5.1 Current transfers, 3.8, 9.2 Customs frontier, 6.9 D Data confrontation, 17.29 Data models, Appendix 2 Data quality, 17.1, Table 17.1 Debit entries, 2.7, Table 2.2 Debt forgiveness, 3.10, 10.3 Depository corporations, Table 3.5 Direct investment, 3.17, 3.28, 11.8, 12.1-12.6 Direct investment enterprises, Box 12.1, 12.1 Direct investor, Box 12.1, 12.1 Distributed branch profits, 8.5, 8.10 Dividends, 8.5, 8.10 Double-entry system, 2.7, Table 2.2, 2.9 E Education-related travel, 7.10, 7.13 Engineering services, 7.29 Equity,13.1, 13.3, Box 11.2 External Debt, 11.15

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F Financial account, Table 3.2, 3.11 Financial assets and liabilities, 3.18, 11.2 Financial derivatives, 3.16, Box 11.2, 14.2-14.3 Financial instruments, Box 11.2 Financial intermediaries, 7.23, 12.4, 13.11 Financial Intermediation Services Indirectly Measured, 7.23 Financial leases, 2.13 Financial services, 7.22 Financial transactions, 2.4, 2.21, 3.14, 4.35, 11.1, 11.5 Foreign aid, 9.6 Foreign exchange, Box 11.2, 16.5 Foreign medical patients, 7.10, 7.13 Foreign students, 7.10, 7.13 Forward foreign exchange contracts, Box 14.1 Forward rate agreement, Box 14.1 Free on board, 6.9, 7.8 Freight insurance, 7.21 Freight service, 7.8 Futures, Box 14.1 G GDP, 18.9 General merchandise, 6.3 Gifts, 7.11, 9.1, 9.6 Goods, 5.4, 6.1 Goods for processing, 6.4 Goods procured in ports, 6.3 Government services nie, 7.31 Gross assets and liabilities, 2.26 I Income, 3.7, 5.7, 8.1 Industry, 3.32, 3.33, 3.34, 3.35 Information services, 7.24, Table 3.4 Instruments of investment, Table 3.4, 11.11, Box 11.2 Insurance services, 7.17, 7.19 Interest, 8.13 International investment position, 1.2, 2.3, 2.4, 3.12 International Monetary Fund, 1.6, 1.7, 4.2 International Visitor Survey, 7.35 Investment income, 3.7, 8.3-8.5 L Labour income, 8.1 Land, 10.6, 12.9 Legal service, 7.29 Licence fees and royalties, 7.25 Loans, Box 11.2, 15.1, 15.4 Long-term investments, 11.12 M Management consulting services, 7.29 Market price, 2.10 Media services, 7.29 Medical patients, 7.10 Merchanting services, 7.27 Migrants transfers, 10.4 Mobile equipment, 2.14, 8.3 Monetary gold, Box 11.2, 16.5 Money market instruments Box 11.2

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N National accounts, 18.1, 18.3 National Income and Outlay Account, 8.12 Net asset value, 12.16, 12.17 Net errors and omissions, 4.37-4.40, 17.24 Net international investment position, 1.2, 3.19, 4.7 Net liability position, 14.1, 16.2 Non-monetary gold, 6.7 Non-produced non-financial assets, 3.10, 10.1, 10.5 Non-residents, 2.11 O OIC, 12.19 Oil drilling rigs, 6.16 Operational leasing services, 2.14 Options, Box 14.1 Other business services, 7.26 Other capital, 12.13 Other investment, 3.17, 11.8, 15.3 Other investment income, 3.7, 8.5, 8.14 Other trade related services, 7.27 Other transportation services, 7.9 P Partial collection, 17.16 Passenger transportation services, 7.7 Personal, cultural and recreational services, 7.30 Personal travel services, 7.13 Portfolio investment, 3.17, 13.1, 13.3 Postal services, 7.14 Price changes, 2.4, 3.14, 11.1 R Reclassification, 2.4, 4.35, 6.21, 12.3 Reconciliation statement, 2.4, 3.13, 4.34 Recreational services, 7.25 Reinvestment earnings, 3.16, 3.21, 8.5, 8.8, 8.11, 12.6 Repairs on goods, 3.5, 5.4, 6.5 Reserve assets, 3.17, 3.21, 16.1, 16.4 Reserve position in the IMF, Box 11.2, 16.5 Residents, 2.12 Reserve equity investment, 12.12 Revisions, 4.21-4.23, 4.47, 17.22 Royalties and licence fees, 7.25, 7.30 S SDRs, 16.5 Seasonally adjusted estimates, 4.41-4.48 Sectorisation, 3.25-3.29 Short-term investments, 11.12 Swaps, Box 14.1 T Telecommunications services, 7.14 Time of recording, 2.19, 2.22, 17.17, 17.18 Trade credits, 3.17, 8.14, 15.1 Transportation equipment, 7.28 Transportation service, 7.2, 7.5 Travel services, 4.10, 7.3, 7.10-7.13 Trend estimates, 4.7, 4.42, 4.44, 4.45

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U Undistributed branch profits, 8.5, 8.11 W Warrants, 14.4, Box 14.1 Withholding taxes, 8.7, 9.5 Workers remittances, 9.6 Write-offs, 2.4