International Investment Position

(IIP)

Presentation for

Data Producers and Users

Workshop

May 8-9, 2006May 8-9, 2006

SBP LRC KarachiSBP LRC KarachiNaseer AhmadJoint Director StatisticsState Bank of PakistanPh: 021 921 2571E-mail: naseer.ahmed@sbp.org.pk

I. INTRODUCTION

What is the IIP?

Why is it important?

Who should compile it?

Periodicity?

Data Sources?

How is it compiled? Compilation Methodologies?

Dissemination process & practices

Improvement plans?

Questions or suggestions?

What is the IIP?

• It is a balance sheet

• It is snapshot of the stocks

• At a specific point of time i.e. end of period

• Only for external financial assets and liabilities

• First time introduced in Pakistan

• IIP mirrors the financial account in the balance

of payments

Why is it important? Scope

• Assess economic relations with the rest of the world

• Monitor developments in external relations between

countries

• Measure degree of financial openness

• Monitor foreign external debt

• Indicator of external debt sustainability

• Indicator of financial stability

• International investment treaties

Who Should Compile it?

• IIP is an encouraged element for GDDS

• IIP is a prescribed element for SDDS

• Most commonly

• the central bank

• the central statistical office

• a foreign exchange control body

• a ministry (ministry of finance, economic affairs, or

international relations)

• More than one agency may collect and compile data

• Crucial for these agencies to coordinate among themselves

Who Should Compile it?

• Centralizing the tasks of balance of payments

and IIP compilation in one agency

– simplifies cross-checking of the external flow and

position data

– enhances overall consistency of the two datasets

Who Should Compile it?

• If different agencies produce external debt and IIP

– close cooperation required

– data on the external debt position can be considered as a

subset of the IIP

– both sets of statistics need to be consistent

• Coordinate the reporting requirements for respondents

– avoid having respondents report the same data to different

agencies

Periodicity and Timeliness

• Started with compilation of data on IIP showing stock

positions as on 31 December 2003 and

31 December 2004 on yearly periodicity

• International Standards -Yearly periodicity is required;

• Quarterly is encouraged

• Recommended timeliness is one year

Data Sources

Domestic Statistical Sources: • Banks' External Assets and Liabilities • Monetary Authorities’ External Assets and Liabilities • General Government External Debt • Surveys • Balance of Payments Statement

Domestic Non-statistical Sources

• Financial Statements• Foreign Investment Approval • Financial Press

How is it compiled?

Assets Direct investment

Portfolio investment

Financial derivatives

Other investment

Reserve assets

Liabilities Direct investment

Portfolio investment

Financial derivatives

Other investment

International Investment PositionAs On_____

IIP (Net) = Asset - Liabilities

How is it compiled?

• Opening Position Transactions Price changes Exchange rate changes Other adjustments (reclassifications, debt write-offs,

etc.)

= Closing Position

Residence and Time of recording

Residence• Only those assets and liabilities of residents that

represent claims on or liabilities to non-residents are recorded

Time of recording• A country’s external financial condition as of a specific

point in time (such as year-end).• Time of recording of financial items that constitute position

governed by the principle of accrual accounting

Valuation

In principle, all asset and liability positions should

be measured at market value

Assumes that such positions are continuously and

regularly revalued

Functional Types of Investment

• Financial instruments grouped according to the

intent of the resident holders or issuers Direct investment

Portfolio investment

Financial derivatives

Other investment

Reserve assets

Financial Assets and Liabilities

• Most financial assets are financial claims• Represented by financial instruments

– currency and deposits– loans– advances and other credits– securities - bills and bonds

• Financial assets that are not financial claims– monetary gold– SDRs allocated by the IMF– shares in corporations– financial derivatives

Direct Investment

• Objective - Resident in one economy (direct investor)

obtaining a lasting interest in an enterprise resident in

another economy (direct investment enterprise)

• Implies long-term relationship between the direct

investor and the direct investment enterprise

• Implies significant degree of influence by the direct

investor in the management of the enterprise.

Direct Investment

• Sole criterion is ownership of 10 percent or more

of the ordinary shares

• Classified by direction of investment

• Direct investment in reporting economy

• Direct investment abroad

• Includes the initial transaction establishing the FDI

relationship and all subsequent capital

transactions among affiliated enterprises

Direct Investment

• Covers all financial claims and liabilities between direct

investors and direct investment enterprises except:

– Financial derivatives

– Loan or debt guarantees provided by a direct investor or related

direct investment enterprise

– Transactions between affiliated financial intermediaries other

than transactions in equity or permanent debt

– Changes in insurance company technical reserves

Direct Investment

Components• Current Account

– Direct Investment income• Income on equity

– Dividends and distributed branch profits– Reinvested earnings and undistributed branch profits

• Income on debt (interest)

• Financial Account– Equity capital– Reinvested earnings (counter entry to income item)

– Other capital

Direct Investment

Equity Capital

• Equity in branches

• Shares in subsidiaries and associates• Non-cash acquisitions of equity (for example,

provision of capital equipment)

Direct Investment

Reinvested Earnings and Distributed Branch Profits

• The direct investor’s share

– in proportion to equity held

• of earnings that foreign subsidiaries and

associated enterprises do not distribute as

dividends and

• earnings that branches and other

unincorporated enterprises do not remit to direct

investors

Direct Investment

Other Capital

Intercompany borrowing or lending of funds, include:

• Loans

• Debt securities

• Suppliers’ (trade) credits

• Financial leases*

• Non-participating preferred shares

*Financial LeaseA contract in which the service provided by the lessor to the lessee is limited to financing equipment. All other responsibilities related to the possession of equipment, such as maintenance, insurance, and taxes, are borne by the lessee. A financial lease is usually noncancellable and must be fully paid out over its term.

Portfolio Investment

• Financial instruments in the form of equity and debt

securities

• Usually traded (or tradable) in organized markets

– Equity securities

– Debt securities

• Bonds and notes (long-term)

• Money-market instruments (short-term)

Portfolio Investment

• Further classified by institutional sector of resident holder

for assets/resident issuer for liabilities:

– monetary authorities

– general government

– banks

– other sectors

Financial Derivatives*

What is a financial derivative?Financial instrument linked to an underlying item such as:

– Another financial instrument (currency)– An indicator (price index)– A commodity (silver)

Through which financial risks such as: – Interest rate risk– Foreign exchange risk– Equity price risk– Commodity price risk or – Credit risk

Can, in their own right, be traded in financial markets

* To be covered in Session 3

Other Investment

• Residual category• All financial instruments other than those classified as

direct investment, portfolio investment, financial derivatives, or reserve assets

• Primarily classified by instrument and secondarily by sectors

• Recommend classification by original maturity (short and long term)

Other Investment

Instruments include:– Trade credits– Loans– Currency and deposits

• Other assets and liabilities– Miscellaneous accounts receivable and payable

• Interest payments in arrears, loan payments in arrears, taxes outstanding, prepayments of insurance premiums

– Capital subscriptions to nonmonetary international organizations

– Household equity in life insurance and commercial pension funds

Reserve Assets

External assets that are:

– foreign currency claims on a nonresident

– readily available to and under the effective control of

the monetary authorities

– to meet a balance of payments need

Reserve Assets

Classification distinguishes

– Monetary gold

– SDRs

– Reserve position in the IMF

– Foreign exchange

– Other claims

IIP- BOP

• Closely inter-related

• Changes that have occurred during the period

• Current account – investment income

– Payments and receipts on investment measured in the

IIP

• Financial account

– Financial transactions that contributed to the change in

positions

IIP- BOP

Reconciliation Statement

Opening Position

Transactions in Financial Account

Price changes

Exchange rate changes

Other adjustments (debt write-offs, reclassifications)

= Closing Position

Balance of

Payments

Financial Account Other Changes in Position

Position at

beginning of

period

Transactions

+

Price

Changes

+

Exchange

Rate

Changes

+

Other

Adjustments

+

Position at

end of period

=

IIP Assets

120

Liabilities 100

Net IIP 20

-15

5

-20

7

-

7

-2

4

-6

1

-2

3

111 Assets

107 Liabilities

4 Net IIP

Factors Accounting for Change in the International Investment Position

Dissemination process & practices

• Data are disseminated on SBP’s website

• Published in SBP annual report

Dissemination Format

Improvement plans?

• Improvements in enterprises data collection

• Enhance frequency

• Movement wise dissemination

• Country wise compilation

• Security wise compilation

• Currency wise compilation

Questions or suggestions are

most welcome!