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The External Wealth of Nations Mark II: Revised and

1. Excluding Luxembourg whose external position is available only from 2000 onwards lowers the value of FTGDP for industrial countries over the past five years by 15 to 20 percentage points without altering the overall trend Similarly excluding Hong Kong S A R where data are available since 1989 lowers JFIGDP for emerging markets without altering the overall trend 21 A test for a trend break is significant starting in 1994 If a single trend break is permitted over 1970 2004 the statistical test identifies 1998 is the most significant year The sample composition changes over time since data are missing for a number of non industrial countries for the early years of the sample 16 _ PEQA FDIA PEQL FDIL GEQGDP 3 QGDF GDP 3 where PEOA PEOL denotes the stock of portfolio eguity assets and FDIA FDIL denotes the stock of direct investment assets liabilities Figure 5 shows the evolution of GEOGDP for both country groups For the industrial group the figure shows three phases until 1985 the GEQGDP ratio was broadly stable from 1985 to 1995 it gradually increased since 1996 it increased much more rapidly save for the 2001 02 disruption from the reversal in global equity valuations The trend has been reasonably similar for emerging markets and developing countries with cross border equity positions growing strongly during the 1990s Indeed equity integration for these countries has gro
2. 17 While it is true that some of the offshore centers not included in the dataset hold large stocks of assets and liabilities relative to their size they are de facto pure intermediaries with trivial net positions Therefore they would not significantly alter the picture with regard to differences between global assets and liabilities although they may affect the breakdown between equity and debt 18 Foreign direct investment is the most problematic series from the point of view of measurement given that some countries report it at book value and others at market value 14 Thanks to the results of the portfolio survey it is possible to shed some more light on the discrepancy between portfolio equity assets and liabilities by comparing total liabilities reported by a country with the total assets that other countries claim to be holding in that location The latter information can be gleaned from the CPIS This is done in Table 1 which highlights how the portfolio equity liabilities reported by Ireland Luxembourg and the United States are substantially higher than the reported portfolio equity holdings in these economies by CP S reporting countries These results suggest that the source of the problem is the under reporting of claims on these countries For Ireland and the United States this is bolstered by additional bilateral evidence obtained by comparing the surveys on foreign holders of domestic equities conducted by such c
3. MIMF Working Paper The External Wealth of Nations Mark II Revised and Extended Estimates of Foreign Assets and Liabilities 1970 2004 Philip R Lane and Gian Maria Milesi Ferretti INTERNATIONAL MONETARY FUND O 2006 International Monetary Fund WP 06 69 IMF Working Paper Research Department The External Wealth of Nations Mark II Revised and Extended Estimates of Foreign Assets and Liabilities 1970 2004 Prepared by Philip R Lane and Gian Maria Milesi Ferretti March 2006 Abstract This Working Paper should not be reported as representing the views of the IMF The views expressed in this Working Paper are those of the author s and do not necessarily represent those of the IMF or IMF policy Working Papers describe research in progress by the author s and are published to elicit comments and to further debate We construct estimates of external assets and liabilities for 145 countries for the period 1970 2004 We describe our estimation methods and present key features of the data at the country and the global level We focus on trends in net and gross external positions and the composition of international portfolios distinguishing between foreign direct investment portfolio equity investment official reserves and external debt We document the increasing importance of equity financing and the improvement in the external position for emerging markets and the differing pace of financial integration between ad
4. bound on the country s total equity asset holdings The majority of countries report their holdings at market value However only very few countries have consistently reported their IIP over the whole sample period with the majority of countries starting to report after 1990 We therefore complement and integrate these stock estimates with balance of payments data on portfolio equity inflows and outflows As in Lane and Milesi Ferretti 2001a we construct market value estimates of portfolio equity assets and liabilities by using cumulated portfolio equity outflows for assets and inflows for liabilities adjusted so as to take into account fluctuations in stock prices These prices are measured with price indices for domestic and international stock markets where we typically assume that a country invests its foreign equity holdings in a world portfolio with weights identical to the Morgan Stanley Capital International s world index For portfolio equity foreign liabilities we assume that foreign investors hold a broadly based index of domestic shares such that the value of portfolio equity liabilities rises in line with the domestic stock market In this paper we use cumulative flows not only forward from an initial value as in Lane and Milesi Ferretti 20012 but also backward as is the case for example when a country first publishes a stock estimate toward the end of the sample to generate alternative series This extension is just
5. pe 15 El d Developing countries and emerging markets 10 L L 1 L 4 1 1 L L L L L L 1 1 L L L 1 L L 1 L 4 1 L L L L L 1 L L 1 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note Ratio of portfolio equity and FDI liabilities to total liabilities 39 Figure 7 External Debt and Official Reserves Emerging Markets and Developing Group 1970 2004 230 Gross external debt pct of exports 200 170 140 110 80 Ld 50 Official reserves a pct of exports m o OS 9 20 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note The series gross external debt is the sum of external debt liabilities for the entire emerging market and developing country group as percent of the sum of total exports of goods and services The series official reserves is the sum of official reserves for all countries of the group as a percent of the sum of total exports of goods and services Figure 8 Net Foreign Assets and GDP per Capita 40 All Countries 2004 300 e HKG udi e KWT e LIB UAE e QTR 200 F e SGP 150 F e TAI e SWI amp e LUX 100 M EBOT BAH NAM e SAU e NOR B UA e YEM IRN Z SWA 8ALG MAU MLT et E 9 LET e fen ecyp GER 0 CHN OMN RA eIND EGY GUA un hs KOR CAN WE e NEP e i M Je wey e t TE e Sue CZE NS I SARE di em AO pbi i S
6. to total debt liabilities has increased from 29 percent in 1998 to 64 percent in 2004 The growth in reserve holdings by emerging markets and developing countries stands out also when compared with developments in industrial countries while total holdings of reserves by both country groups were virtually the same in 1995 over 700 billion by 2004 total reserve holdings by emerging markets and developing countries just under 2 5 trillion exceed holdings in industrial countries by 900 billion C Net Foreign Asset Positions We begin our discussion by characterizing the distribution of net external positions at the end of 2004 the final year of our dataset Figure 8 plots the ratio of net foreign assets to GDP against log GDP per capita for the global sample of countries While the cross sectional correlation is significantly positive at 0 45 there is considerable variation in positions at any given level of development This is especially the case for the high income group of countries where the level of dispersion is much wider than for the lower income cohorts In terms of our country groupings the variation of GDP per capita explains over 40 percent of the cross sectional variance for industrial countries and less than 30 percent for emerging markets and developing countries Among the latter it is noteworthy that the largest creditor positions are disproportionately identified with oil producers and the richer Asian countries We tur
7. which we denote as emerging and developing Appendix 1 The separation is clearly artificial in some cases for example Hong Kong S A R and Singapore have considerably higher GDP per capita than several of the industrial countries A The Scale of International Financial Integration In Lane and Milesi Ferretti 2003 we constructed a volume based measure of international financial integration The large difference for holdings in Caribbean offshore centers is explained by the partial participation of these centers to the CP S For example the survey for the Cayman Islands did not cover mutual funds EE E IFIGDP PARU Q GDP where FA FL denotes the stock of external assets liabilities The ZFIGDP ratio provides a volume based measure of international financial integration Figure 3 plots this ratio for both the industrial group of countries and emerging markets and developing countries over the period 1970 2004 Over this period the ratio has increased by a factor of 7 from 45 percent in 1970 to over 300 percent in 2004 During the 1970s and 1980s the increase in international financial integration was fairly gradual JFIGDP reached 100 percent only in 1987 but an acceleration took place in the mid 1990s JFIGDP passed 200 percent in 1998 and 300 percent in 2004 7 The scale of international financial integration for the emerging markets developing countries group has also increased steadily over time tracki
8. 2f S CAN e FRA e swi 5 ITA e GER gt DENIO E usa e BEL E e AUT o 5 1 1 9 1 1 2 Z abo 100 50 JPN 50 100 130 10 F FIN e ESP e RETS 20 F PRT 22 e NZE 10 Net debt pct of GDP Figure 11b Net Equity and Net Debt Position Emerging Markets and Developing Countries 2004 T a Oo 4 o 2 9 KWTe HKG 8 i i A F MbG RWA B Re sar SRN 3 afo e 9 Nes H pope go o vem e 9 140 190 EA 290 z Obits r a Orbis N e o e esu sare g en Oe Gy R NS NAM ange he EMOR GEO e ec NS e ocz S e MT eMYyA 9 TUNA e BOL ESTe AN l e TTO e AZE Net debt pct of GDP Note Ireland and Luxembourg excluded from Chart 11a due to extreme values in both cases very high positive net debt and negative net equity AT References Bank of International Settlements Locational Banking Statistics available at http www bis org statistics bankstats htm Claessens Stijn 1997 Estimates of Capital Flight and Its Behavior Rev de Analisis Economico 12 June 3 33 Chinn Menzie John Rogers and Frank Warnock 2006 Exchange Rates and External Asset Positions mimeo Board of Governors of the Federal Reserve System Cuddington John 1986 Capital Flight Estimates Issues and Explanations Princeton Essay in International Finance 58 December Dooley Michael 1988 Capital Flight A Response to Differences in Financial Risks IMF Staff Papers 35 September 422 36 Gourinchas Pie
9. Economics and Finance 9 1 Federal Reserve Bank of New York 2005 Financial Integration and the Wealth Effect of Exchange Rate Fluctuations Federal Reserve Bank of New York Staff Report no 226 October Warnock Frank and Veronica E Warnock 2005 International Capital Flows and U S Interest Rates International Finance Discussion Paper 840 Board of Governors of the Federal Reserve System World Bank various years Global Development Finance Washington D C
10. Independent States 20 e Turkmenistan 0 NFA pct of GDP 2004 100 9 Ukraine Belarus Uzbekistan e Tajikistan e Armenia Moldova e Kazakhstan Georgia Kyrgyz Republic Azerbaijan 120 120 100 80 60 40 20 0 20 40 NFA pct of GDP 1997 Note NEA pct of GDP 2004 NFA pct of GDP 2004 250 200 150 e e tA e o 50 100 150 20 60 100 120 45 Figure 10f Change in NFA GDP 1996 2004 Middle East Kuwait Middle East e United Ara e Bahrain Yemen Republic of Algeria Egypt Jordam Moro Israel Syrian Arab Tunisia Lebanon L L L L L L L 150 100 50 0 50 100 150 200 250 NFA pct of GDP 1996 Figure 10g Change in NFA GDP 1996 2004 Western Hemisphere Venezuela Rep Bol Latin America 5 chile Colombia L e Haiti e Mexi Costa Rica Argentina Honduras 5 Brazil Dominican Republic El Salvador Trinidad and Toba Jamaica Ecuador e Panama L Bolivia 1 L 1 1 1 1 120 100 80 60 40 20 0 20 NFA pct of GDP 1996 Figure 10g excludes Nicaragua NFA of 171 of GDP in 1996 and 104 in 2004 46 Figure 11a Net Equity Position versus Net Debt Position Industrial Group 2004 66 50r e ICE NOR e SWE isl 30 e NET a R euk
11. Malta El Salvador Mauritius Equatorial Guinea Mexico Estonia Moldova Ethiopia Morocco Fiji Mozambique Gabon Myanmar Georgia Namibia Ghana Nepal Guatemala Nicaragua Guinea Niger Haiti Nigeria Honduras Oman Hong Kong S A R Pakistan Hungary Panama India Papua New Guinea Indonesia Paraguay Note Industrial countries in italics APPENDIX I Peru Philippines Poland Qatar Romania Russia Rwanda Saudi Arabia Senegal Serbia and Montenegro Singapore Slovak Republic Slovenia South Africa Sri Lanka Sudan Swaziland Syrian Arab Republic Taiwan Province of China Tajikistan Tanzania Thailand Togo Trinidad and Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Arab Emirates Uruguay Uzbekistan Venezuela Rep Bol Vietnam Yemen Republic of Zambia Zimbabwe 24 Table 1 Portfolio Equity Liabilities Reported By Destination And Investor Countries 2003 Aggregate data billions US Reported by Reported by destination country investor countries Ireland 479 151 Luxembourg 1 143 623 United States 1 827 1 274 Note reported portfolio equity liabilities are those that countries report in their International Investment Position Derived liabilities are the sum of portfolio equity assets that participants to the CPIS report to be holding in the given country Table 2 Portfolio Equity Liabilities Reported By Destination And Investor Countries 2003 Bilateral data billions US Re
12. also not captured by the stock data or if they represent a mismeasurement of underlying trade flows we would expect the sum of current account capital transfers and errors and omissions to be close to the change in net foreign assets If instead errors and omissions measure unrecorded capital inflows that are captured by the stock data something more likely to occur with unrecorded inflows than unrecorded outflows then the sum of the current account and capital transfers would be close to the change in net foreign assets Within the industrial group there is a number of countries where the difference between the change in net foreign assets and the cumulative current account is substantially positive primarily Switzerland but also the United States Canada and the United Kingdom While capital transfers explain the divergence for Canada linked to the move to Canada of wealthy immigrants during the 1990s as discussed in Lane and Milesi Ferretti 20012 the data suggest substantial cumulative capital gains for the United States and Switzerland In contrast the difference between changes in net foreign assets and the cumulative current account is substantially negative for the Netherlands Iceland Finland Sweden New Zealand and Spain and does not appear to be explained by capital transfers or errors and omissions Among the developing countries Table 8b shows that differences between cumulative current account balances and changes in
13. and Emerging Markets Developing Countries Group 1970 2004 350 m Industrial countries 250 200 150 A 100 Emerging and developing economies 50 970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note Ratio of sum of foreign assets and liabilities to GDP 1970 2004 36 Figure 4 Financial Integration versus Trade Integration Industrial Group and Emerging Markets Developing Countries Group 1970 2004 800 700 600 500 400 Industrial countries 300 200 a NT w Developing countries and emerging markets 100 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note Sum of external assets and liabilities in percent of sum of exports and imports Ln e Figure 5 International Equity Integration Industrial Country Group and Emerging Markets and Developing Country Group 1970 2004 40 20 00 80 Industrial countries 40 F 20 Developing countries and emerging markets 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note Ratio of sum of foreign portfolio equity and FDI assets and liabilities to GDP 38 Figure 6 Equity Share in External Liabilities Industrial Country Group and Emerging Markets and Developing Country Group 1970 2004 55 50 40 35 p 25 L Industrial countries 20 F
14. financial integration and international borrowing and lending requires a global perspective In that light we view the construction of albeit imperfect estimates of external positions for all major players in the international financial system as a crucial first step zd III THE DATASET A GLOBAL OVERVIEW Our dataset covers 145 countries over 1970 2004 and also reports data for the euro area as a whole We include all countries with income above US 1 billion in 2000 or US 2 billion in 2004 The only exceptions are 3 small international financial centers the Bahamas Barbados and the Netherlands Antilles plus Iraq and Afghanistan We report aggregate foreign asset and liability positions In addition we also include the breakdown between portfolio equity direct investment and debt categories We provide a complete span of data for the period 1970 2004 for 91 countries For a further 54 countries we report data for shorter periods A The World NFA Discrepancy Given the effectively global coverage of the data we can document not only regional and country trends but also address for the first time consistency issues between the world data on foreign assets and liabilities While the existence of a world current account discrepancy is well known and documented see for example the International Monetary Fund s Balance of Payments Statistics Yearbook and Marquez and Workman 2001 lack of data has so far prevented a sim
15. of GDP 2003 260 230 200 170 140 cA NFA pct of GDP 2004 N oo e oO 40 70 100 130 dd s Figure 10b Change in NFA GDP 1996 2003 Africa a5 E Africa OF Kenya s Ben Cameroon Sene m Mali 0G nUganda Nigeria amp Tanzania Zimbabwe Ethiopia Madagegca Rwanda 1ger Mozambique C te d Ivoire e Guinea 100 e Sudan 0 Togo Ghana eA 150 L Chad Congo Dem e Malawi 200 250 L 1 L L L 250 200 150 100 50 0 50 NFA pct of GDP 1996 Figure 10c Change in NFA GDP 1996 2004 Asia F Hong Kong S A R Asia Singapore Taiwan P o C H China P R Mainla Malaysia F R Nepal e pred Thailand e ke Cambodia Vietnama Pon Philippines Papua New Guinea LagA eople s Dem Rep Le 1 1 fi L 1 fi ji 1 1 fi L j 130 100 70 40 10 20 50 80 110 140 170 200 230 260 NFA pct of GDP 1996 44 Figure 10d Change in NFA GDP 1997 2004 Emerging Europe 40 Emerging Europe e Malta 20 Cyprus 0 20 Slovenia N a acedoniqy Romani ch Republic Slovak Republi e 40 Lithuania Slovak Republig FI ilgaria Turkey S e lt P Poland Latvia Z Croatia 80 100 Si Hungary Estonia 120 L L r 1 L L 1 120 100 80 60 40 20 0 20 40 NFA pct of GDP 1997 Figure 10e Change in NFA GDP 1997 2004 CIS Countries 40 Commonwealth of
16. of bonds issued by the domestic government The underlying stocks of external assets and liabilities are in general positive There are however a few exceptions The most common one relates to foreign direct investment For example a company investing 100 in equity of a firm overseas may borrow an amount of 110 from that firm via an intracompany loan In this case the stock of FDI abroad would be 10 see BPM5 and IMF 2003 It is also possible for domestic residents to be shorting equities in a foreign country in which case portfolio equity assets would be negative Be that as it may these occurrences are extremely rare in our data Our data classification follows the one described above but groups together portfolio debt and other investment reporting the stock of external debt assets and external debt liabilities Once an FDI investment is established all subsequent financial transactions between the parent and affiliate are classified under FDI including intrafirm debt assets and liabilities 7 Throughout the paper we measure net purchases of foreign assets by residents and of domestic assets by nonresidents with a positive sign In balance of payments statistics the former have a negative sign a s The decomposition between bonds and other investment is available only for countries that report the IIP However this reporting period is typically much shorter than the time span that our database covers Our methodolog
17. 2001 capital transfers such as debt forgiveness and net errors and omissions can also drive a wedge between the current account and the change in net foreign assets We come back to this issue below 20 for a selected group of emerging markets The weakening of the correlation is the counterpart to the accumulation of larger gross external holdings the importance of valuation effects is generally in proportion to the scale of the international balance sheet Tables 7a 7b show that the valuation channel typically implies larger short term volatility of changes in net foreign assets relative to the current account balance However it is also important to know whether the valuation channel merely raises volatility or also influences the long term evolution of the net foreign asset position While there is a strong cross sectional correlation between the cumulative current account balance and the change in the net foreign asset position over long time periods for both industrial countries and emerging markets Tables 8a 8b demonstrate that the cumulative divergence over time can be quite substantial These tables present data on the change in the net foreign asset position the cumulative current account cumulative capital transfers and cumulative errors and omissions To understand the link between these variables it is useful to abstract initially from capital gains and losses If errors and omissions measure unrecorded capital flows that are
18. Countries 20047 1 teet tou nae ette BRI 27 6 Correlation Between Current Account and Change in Net Foreign Assets Industrial Countries and Emerging Markets Annual Data 1971 2004 28 7a Standard Deviation of Current Account and Change in Net Foreign Asset Position Industrial Group 1972 2004 eie toe over oer Een ent aee ese rie ena e be das 29 7b Standard Deviation of Current Account and Change in Net Foreign Asset Position Selected Emerging and Developing Countries 1982 2004 sss 30 8a Cumulative Current Account and Change in Net Foreign Asset Position Industrial Group TO UA KAA WA AA c dM M LC DE 31 8b Cumulative Current Account and Change in Net Foreign Asset Position Selected Emerging Markets 190822004 ceperat edes Hd io qun ep da US QE M RP AR ena a Utd 32 Figures l 7 8 9 World NFA Discrepancy and Cumulative Current Account Discrepancy 1980 2004 ui AI AI NA Composition of the World NFA Discrepancy esses eene eene nnn International Financial Integration Industrial Group and Emerging Markets Developing Countries Group 1970 2004 sse Financial Integration versus Trade Integration Industrial Group and Emerging Markets Developing Countries Group 1970 2004 sss International Equity Integration Industrial Country Group and Emerging Markets and Developing Country Group 1970 2004 sss Equit
19. Net Foreign Assets Industrial Countries and Emerging Markets Annual Data 1971 2004 Industrial countries Emerging markets 1971 2004 0 41 0 66 1971 81 0 71 0 72 1982 92 0 63 0 73 1993 2004 0 32 0 54 Note Correlation of CA GDP ratio and D NFA GDP ratio for industrial countries and selected major emerging markets Israel Turkey South Africa Argentina Brazil Chile Colombia Mexico Venezuela India Indonesia Korea Malaysia Pakistan Philippines Thailand China 29 Table 7a Standard Deviation of Current Account and Change in Net Foreign Asset Position Industrial Group 1972 2004 CA GDP DNFA GDP United States 1 7 2 2 United Kingdom 1 8 4 5 Austria 1 7 3 3 Denmark 2 7 5 3 France 1 2 3 7 Germany 1 9 2 5 Italy 1 7 2 7 Netherlands 1 7 9 5 Norway 7 0 7 9 Sweden 2 9 8 8 Switzerland 4 8 12 0 Canada 2 2 3 6 Japan 1 4 2 8 Finland 4 2 22 8 Greece 2 1 6 5 Iceland 3 3 6 1 Ireland 4 3 14 3 Portugal 4 6 6 0 Spain 1 9 4 2 Australia 1 7 5 6 New Zealand 3 3 11 8 Note CA and DNFA are expressed as ratios to GDP 30 Table 7b Standard Deviation of Current Account and Change in Net Foreign Asset Position Selected Emerging and Developing Countries 1982 2004 CA GDP DNFA GDP Israel 3 5 6 6 Turkey 2 0 44 South Africa 2 5 6 6 Argentina 34 13 1 Brazil 2 7 4 3 Chile 29 5 4 Colombia 3 5 4 8 Mexico 2 7 34 Venezuela 7 1 8 5 India 1 0 1 7 Indonesia 3 6 6 6 Korea 3 9 4 0 Malaysia 8 8 11 4 Pakistan 3 2 3 0 Phi
20. YR ie d POL per ESP ETH rwa mz MOlcivPAE og kaze iam LAT CRPrTo e AUS KYRe e GUI pN GEO uc OGRE 100 SMDO SA SUD Ja noa ANG PAN o eHUN eNZE eICE i i Pag 2 AZE e TUNS LBN EST MYA LAO 150 4 3 6 7 8 9 10 11 Log GDP per capita Note Log GDP per capita current US dollars on horizontal azis NFA GDP ratio on vertical axis Correlation is 0 43 Graph excludes Brunei Darussalam estimated net foreign assets of 600 percent of GDP Sate Figure 9 Net Foreign Assets by Country Group percent of Group GDP 1980 2004 Other industrial countries United States BN S w Emerging and developing countries 20 25 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note The chart plots aggregate net foreign assets for the two country groups and the United States divided by each group country s GDP The group other industrial countries includes all industrial countries except the United States s4 Figure 10a Change in NFA GDP 1996 2004 Industrial Countries 80 Industrial countries 60 40 e Japan Belgiume 20 0 F Netherlands Sweden Canada Finlande eeDenm eltaly N Ireland e United States Spain Australia Portugal o 80 Greece Iceland 100 120 1 1 1 1 1 L L 1 120 100 80 60 40 20 0 20 40 60 80 Note Switzerland is not displayed NFA of 111 of GDP in 1996 and 131 of GDP in 2004 NFA pct
21. ader group of countries has begun to publish estimates of external assets and liabilities the so called International Investment Position IIP following the methodology described in the IMF Balance of Payments Manual fifth edition 1993 BPM5 We take these developments into account by incorporating national estimates of IIPs into our estimation methodology For most countries we use as a benchmark the official IIP estimates for recent years We then work backward with data on capital flows together with calculations for capital gains and losses to generate estimates for stock positions for earlier years back to 1970 in most cases Since there is much cross country variation in the reliability of the data on capital flows and estimated stock positions we employ a range of valuation techniques to obtain the most appropriate series for each country Before turning to a description of estimation issues in relation to individual categories on the international balance sheet it is useful to clarify the nature of the balance of payments and international investment position IIP data which form the backbone of our database The 5 revision of the Balance of Payments Manual IMF 1993 works on the basis of the residence principle hence external assets and liabilities as well as capital inflows and outflows refer However reported IIP estimates may have only incomplete coverage of a country s external position In those cases we use alte
22. al Globalization and Exchange Rates IMF Working Paper 05 03 January 2005b A Global Perspective on External Positions IMF Working Paper 05 161 July forthcoming in R Clarida ed G7 Current Account Imbalances Sustainability and Adjustment Chicago University of Chicago Press for NBER Lane Philip R and Frances Ruane 2006 Globalisation and the Irish Economy mimeo IIIS Trinity College Dublin Marquez Jaime and Lisa Workman 2001 Modeling the IMF s Statistical Discrepancy in the Global Current Account IMF Staff Papers 48 no 3 Obstfeld Maurice 2004 External Adjustment Review of World Economics 140 4 541 568 OECD 1972 Stocks of Private Direct Investments by DAC Countries in Developing Countries at End 1967 Paris OECD OECD various years External Debt Statistics Paris OECD Rogoff Kenneth 1999 Institutions for Reducing Global Financial Instability Journal of Economic Perspectives 13 21 42 Sinn Stefan 1990 Net External Asset Positions of 145 Countries Kieler Studien no 224 Institut f r Weltwirtschaft an der Universit t Kiel T bingen J C B Mohr Thomas Charles P Francis E Warnock and Jon Wongswan 2004 The Performance of International Portfolios International Finance Discussion Paper 817 Board of Governors of the Federal Reserve System Tille C dric 2003 The Impact of Exchange Rate Movements on U S Foreign Debt Current Issues in
23. countries are short debt long equity most notably the United States and the United Kingdom with the important exception of Japan which is long debt short equity In contrast emerging markets and developing countries are typically short equity with those countries with overall negative net liability positions having net liabilities in both debt and equity categories Finally we emphasize the importance of the valuation channel innovations to the net foreign asset position are significantly more volatile than the current account Differences between changes in net foreign assets and the current account balance are quite persistent in many countries and represent an important source of long term shifts in net external positions The rest of the paper is structured as follows In Section II we explain the methodology that was employed to generate estimates of foreign asset and liability positions The scale and scope of the dataset is described in Section III We discuss selected empirical findings in Section IV with some concluding remarks provided in Section V A web appendix provides detailed notes for each country appearing in the dataset IIl METHODOLOGY In the Mark I version of this dataset we employed a broadly uniform methodology to construct estimates of foreign asset and liability positions for 67 countries over 1970 1998 which relied extensively on cumulative flow data with valuation adjustments Since then a much bro
24. et errors and omissions can indicate unrecorded capital inflows or unrecorded net exports while negative errors and omissions can indicate unrecorded outflows or unrecorded net imports 33 Figure 1 World NFA Discrepancy and Cumulative Current Account Discrepancy 1980 2004 Share of world GDP 0 1 EN 2 F 3 H NFA discrepancy N N 4 L N Cumulative current account discrepancy 5 F 6 F 7 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note the cumulative current account discrepancy is the cumulative sum of the world current account residual given by the sum of current accounts of all countries from the World Economic Outlook database The NFA discrepancy is given by the difference between total assets and total liabilities of the 145 countries in the sample Both variables are scaled by world GDP 34 Figure 2 Composition of The World NFA Discrepancy 1980 2004 Share of world GDP 2 Ps 78 N FDI WMA nS M We cea Suc XN 7 0 Portfolio equity 1 F N me Nu NG 3 L TN TUN N gt za N J 4 F Debt x T N 5 F 6 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note All plotted series are the difference between world assets and world liabilities in the specific categories scaled by world GDP 235 Figure 3 International Financial Integration Industrial Group
25. far the largest receiver of unrecorded capital inflows On the other side a number of countries have experienced unrecorded capital outflows of the order of 20 percent of GDP or more with Russia Norway and Kuwait standing out in terms of absolute magnitudes While for Switzerland this does not necessarily bias its estimated net external position since unrecorded inflows may well be captured by the survey data used to calculate the HP of the country for countries experiencing unrecorded outflows it is less likely that the cumulative value of these flow is captured in the estimates of external assets More generally these figures provide a rough sense of the notable margins of uncertainty surrounding external accounts We also examine the composition of net foreign asset positions This is important since the average returns and risk profile associated with a given net foreign asset position depend on the composition of foreign assets and liabilities In Figure 11a we plot the net equity position against the net debt position for the group of industrial countries Ireland and Luxembourg are excluded as extreme outliers both have very high positive net debt and negative net 20 This does not necessarily bias its estimated net external position since unrecorded inflows may well be captured by the survey data used to calculate the international investment position of the country 19 equity positions This scatter diagram shows that t
26. hen be extended backwards using adjusted flows or the percentage change in the adjusted cumulative flow series For portfolio equity assets we can use estimated holdings in the United States as a lower bound B Direct Investment Assets and Liabilities The FDI category includes controlling stakes in acquired foreign firms in addition to greenfield investments In addition at least for some countries an increasingly important component of FDI is foreign property investment Our main data sources for the stocks of foreign direct investment are e JIP estimates e Estimates reported by UNCTAD s World Investment Report The majority of countries provide book value estimates of FDI assets and liabilities with only a relatively small number reporting market value estimates Again we complement existing stock estimates with cumulative flow measures with valuation changes designed to capture shifts in relative prices across countries e For market value series we adjust positions for shifts in stock market price indices similar to our method for portfolio equity holdings The threshold is 10 percent of an entity s equity Thus FDI encompasses minority stakes in addition to majority control The 10 percent threshold is intended to differentiate FDI from portfolio equity positions that are passive investments 12 This correction is subject to several caveats First if a country s FDI liabilities take the form of greenfield in
27. here is no systemic cross sectional relation between net debt and net equity the correlation is 0 02 Table 5a shows the matrix of net debt and net equity positions A substantial number of industrial countries including the United States and the United Kingdom display the hedge fund characteristic of being long in foreign equity and short in foreign debt while the only major industrial country to display the opposite pattern is Japan Figure 11b shows that for emerging markets and developing countries there is a typically a positive relation between net debt and net equity the correlation is 0 35 No country exhibits the short debt long equity profile as is documented in Table 5b 71 developing countries have net liabilities in both the debt and equity categories An interesting feature is that 31 of the 39 countries with positive net debt positions have negative net equity liabilities largely reflecting the high official reserves positions of the major recipients of FDI and portfolio equity inflows The documented cross country differences in portfolio structure in general and the importance of equity holdings in particular suggest that changes in the valuation of assets and liabilities can play an important role in driving net foreign assets in addition to net borrowing or lending Indeed in previous work we have argued that capital gains and losses on outstanding holdings of foreign assets and liabilities are quantitativel
28. ified by the large number of countries that have started reporting their IIP over the past few years See Chinn Rogers and Warnock 2006 and Warnock and Warnock 2005 for data on U S equity liabilities and Thomas Warnock and Wongswan 2004 for U S equity assets 10 For countries with large stock markets we use the world index excluding the home country Lane and Milesi Ferretti 2004 show that the geographical composition of foreign equity portfolios is systematically affected by bilateral factors such as trade linkages and gravity type variables however the global index is broadly appropriate as a valuation benchmark 9 In some cases the forward cumulative flow series yields estimates in line with the reported stock for recent years In other cases however the reported stock estimate is much larger than what the underlying flows in preceding years would justify suggesting that past capital flows have been underreported Calculating past holdings using adjusted cumulative flow backward would imply implausibly large initial stocks In these cases we extend the stock backward using the percentage change in the adjusted cumulative flow series or in some cases the percentage change in holdings vis vis the United States For countries that do not publish IIP data we can proxy the stock of portfolio equity liabilities for 2001 03 with the holdings in that country reported by participants to the CPIS Those holdings can t
29. ilar analysis for the stocks of external assets and liabilities That the world current account discrepancy and the difference between world investment income earnings and payments are systematically negative together with anecdotal evidence of underreporting of foreign assets suggests that measured world external liabilities will exceed assets Figure 1 shows that this is indeed the case The figure plots the cumulative value of the world current account discrepancy together with the difference between total external assets and liabilities measured in our dataset scaling both series by world GDP The co movement between the two series is striking all the more so in light of the fact that as described in the previous section the new version of our dataset is based to a much weaker extent on cumulative capital flows than the previous one We then decompose the global stock gap between the underlying asset categories This is done in Figure 2 which shows that portfolio equity holdings account for almost half of the world NFA discrepancy with the remainder accounted for by the debt category 16 For the former we can construct proxies of their gross external positions using the data sources discussed in the previous section However the substantial margin of error around these estimates and their large size relative to domestic economic activity makes it very difficult to construct a reasonably consistent series for the net external position
30. ines 7a d 7b d 7e d 7f d 7k d 7m d e National sources For industrial countries our previous work did not provide direct estimates of gross debt positions In this paper we use existing estimates of debt holdings overseas extended backward with capital flows with valuation adjustments often complemented with data from national sources The valuation adjustment is based on available information on the currency composition of debt assets and liabilities For example if a country s debt holdings are estimated to be entirely denominated in euros the value of holdings is estimated adjusting the past or subsequent holdings for changes in the end of year exchange rate between the euro and the U S dollar and adding or subtracting the flows occurring during the year For emerging markets and developing countries a measure of the stock of external debt liabilities is typically available from the World Bank and or the WEO for most of the entire sample period When necessary these series are extended with cumulative flow data with valuation adjustments to reflect the currency composition of debt positions Measuring debt assets is however much more complex The only comprehensive series of holdings of debt assets overseas by domestic residents is the IIP While it is now reported by around 100 countries it is often available only for recent years In addition historical data on capital outflows are often incomplete indeed some cou
31. ing a country s net external position but report their cumulative value separately In some cases our alternative data sources such as holdings by a country s residents in BIS reporting banks for unrecorded outflows or a country s survey of its liabilities for unrecorded inflows may capture part of these holdings With regard to the second reason the increased complexity of financial instruments and of the financial structure of companies together with the growing integration of international financial markets has complicated further the task of accurately measuring external positions In some cases the increase in the size of gross international transactions may overstate the extent of financial interdependence between different economies For example a U S financial institution can set up a mutual fund in an offshore center which in turn invests in the United States and whose shares are purchased by say euro area residents Rather than measuring simply a portfolio equity inflow in the United States from the euro area the data will record a portfolio equity inflow in the offshore center from the euro area and a corresponding outflow from the offshore center to the United States To some extent these developments are reminiscent of trends in goods trade where the ratio of value added to total exports may be very small While these problems need to be taken into account when interpreting the data understanding recent trends in global
32. lippines 4 9 3 7 Thailand 6 3 7 9 China 2 1 3 6 Note CA and DNFA are expressed as ratios to GDP d x Table 8a Cumulative Current Account and Change in Net Foreign Asset Position Industrial Group 1972 2004 1 2 3 4 5 Change Cumulative Difference Cumulative Cumulative in NFA current capital errors and account transfers omissions United States 23 1 38 4 15 2 0 2 2 4 Canada 9 2 16 5 7 4 9 5 4 3 United Kingdom 13 7 19 3 5 7 1 0 5 1 Switzerland 124 8 121 4 34 2 0 39 5 Austria 17 1 18 7 1 6 1 0 4 0 Germany 7 6 9 8 2 2 0 7 4 6 Australia 62 3 60 0 2 3 31 0 4 France 4 7 9 1 4 4 0 3 1 1 Norway 65 5 TET 6 2 0 2 28 6 Japan 37 6 44 1 6 5 1 6 0 4 Portugal 68 4 59 2 9 2 11 4 2 4 Ireland 19 3 4 8 14 5 5 7 2 2 Denmark 10 5 8 4 19 0 0 2 0 4 Italy 18 4 1 6 16 8 1 6 8 2 Greece 73 4 52 2 21 2 6 0 1 8 Spain 48 7 29 4 19 3 8 7 3 8 New Zealand 91 3 66 4 24 8 6 0 1 5 Sweden 9 5 17 9 27 4 0 8 11 2 Finland 10 7 21 2 32 0 0 5 1 3 Iceland 91 8 47 1 44 7 0 1 12 3 Netherlands 8 0 57 2 65 2 3 2 11 9 Note All variables are scaled by 2004 GDP The cumulative current account balance capital account balance and net errors and omissions are calculated over the period 1972 2004 while the change in NFA is the change in the net foreign asset position between end 1971 and 2004 Column 3 is the difference between columns 1 and 2 Positive net errors and omissions can indicate un
33. m 109 5 5 2 Germany 94 4 3 4 United States 272 9 2 3 China P R Mainland 97 3 5 9 Italy 137 7 8 2 Venezuela Rep Bol 21 2 19 7 Lebanon 4 2 21 4 Russia 145 6 25 4 Zambia 1 5 27 6 Norway 71 6 28 6 Bolivia 3 2 33 7 Ethiopia 2 8 34 8 Oman 9 7 39 4 Mozambique 2 6 42 7 Kuwait 56 6 109 2 Note The table reports the cumulative value of net errors and omissions A positive value of net errors and omissions can indicate unrecorded net capital inflows or unrecorded net exports and a negative value unrecorded capital outflows or net imports For Russia the data on net errors and omissions is augmented to include nonrepatriation of export proceeds which are classified as other investment outflows but are not used in the calculation of the stock of other investment holdings Source authors calculations based on IMF Balance of Payments Statistics xd e Table 5a Matrix of Net Debt and Net Equity Positions Industrial Countries 2004 NET EQUITY lt 0 gt 0 lt 0 6 11 NET DEBT gt 0 3 3 Table 5b Matrix of Net Debt and Net Equity Positions Emerging Markets and Developing Countries 2004 NET EQUITY lt 0 gt 0 lt 0 73 0 NET DEBT gt 0 31 8 Note Net Debt is the sum of debt assets and official reserves minus debt liabilities Net Eguity is the sum of portfolio eguity and FDI assets minus portfolio eguity and FDI liabilities 28 Table 6 Correlation Between Current Account and Change in
34. n next to the evolution of net external positions over time for large country groupings For this purpose it is useful to separate out the United States from other industrial countries Figure 9 plots the aggregate net foreign asset position scaled by the country group s GDP for emerging and developing countries other industrial countries and the United States from 1980 onward In addition to the well known deterioration in the U S net external position 4 The share of portfolio equity liabilities may be overstated in part because many countries report FDI liabilities at book value rather than at market value IMF 2003a 5 The broad trends in the data are analogous if we scale net foreign assets by world GDP net external positions do not sum to zero because of the global discrepancy described earlier The positions of the United States and emerging markets are scaled down relative to other industrial countries since the latter group is larger in size For a discussion of recent trends in global imbalances see Lane and Milesi Ferretti 2005b 18 the chart also highlights the dramatic improvement in the aggregate net external position of emerging markets and developing countries since the late 1990s As for other industrial countries the upward trend in their net external position was reversed since 2001 primarily because of a deterioration in Spain Italy Australia and the United Kingdom The evolution of net foreign assets i
35. n recent years is described in more detail in Figures 10a 10f with Table 3 providing correlations and group averages weighted by GDP Figure 10a and Table 3 show that there was relatively little change on average for the industrial countries with considerable cross sectional persistence No industrial country switched between creditor and debtor status with the most remarkable shift being the increased indebtedness of the United States Among emerging and developing regions emerging Europe the CIS and several Latin American countries experienced an expansion in net external liabilities over 1996 2004 However other regions underwent a significant improvement in their net positions the Middle East experienced the most dramatic gain followed by emerging Asia and Africa While the recent increase in oil prices is certainly important for the Middle East group the main impetus for emerging Asia has been a focus on improving the external balance sheet in the wake of the 1997 98 Asian and Russian financial crises We conclude the discussion of net external positions by briefly returning to the issue of measurement error see Section ILF Table 4 provides data on the cumulative value of net errors and omissions as of the end of 2004 For the purpose of the discussion we will refer to positive net errors and omissions as unrecorded capital inflows and negative errors and omissions as unrecorded capital outflows On the one side Switzerland is by
36. n the reliability of the estimates The following sub sections provide more detail by asset category on the construction of the data Details on individual country estimates are provided in the data appendix A Portfolio Equity Assets and Liabilities Portfolio equity holdings measure ownership of shares of companies and mutual funds that are below the 10 percent threshold the statistical convention for distinguishing between portfolio and direct investment We use three primary sources for the stocks of portfolio equity assets and liabilities The data and its appendix are available via the Internet at http www imf org external pubs ft wp 2006 data wp0669 zip 8 e Stock estimates as reported in the IP section of the IMF s International Financial Statistics IFS and Balance of Payments Statistics BOPS e the IMF s Coordinated Portfolio Investment Survey CPIS covering over 60 investor countries and territories which provides data on the geographical allocation of these entities portfolio asset holdings over 220 destination territories e Bilateral estimates on foreign holdings of portfolio equity assets in the United States and U S holdings of equity overseas constructed by Frank Warnock on the basis of U S Treasury data In particular the equity liabilities of a country derived from the CPIS provide a lower bound on that country s stock of equity liabilities and holdings in the United States provide a lower
37. nd Liabilities eere tere eerta tere eae e ere lieder 10 D Fiman ial Derivatives tect des ot ad co tasti ses EPA PU Ie bns agris beide page 11 Ez Official Reserves ii II IA eei de DM 12 Fe Measurement BIIOE t tesacuocce qus a icto ue D d sS CUIUS 12 II The Dataset A Global Overview eee e cree tiers tarte Tra e e iy e dete aep a 13 AC The World NFA Discrepaty aoo wakiruka 13 IV Selected Empirical Findings aco ead uo OA UMP Qa d ene euge Mensa disi eius 14 A The Scale of International Financial Integration lt w wwwwmwemmmmemmw 14 B Trends in External Capital Structute iei erre rate rent denne enar aim 16 C Net Foreign Asset Positions Je d ci cot rre ee s reed ig ao eai Sende mace eR ss 17 COT AITO RM usato ba e etg b PRI waa 21 App ndik c 23 RE PORE TCO onusta uten Ea MU Ma T LM NA WALA NA 47 Tables 1 Portfolio Equity Liabilities Reported By Destination And Investor Countries 2003 24 2 Portfolio Equity Liabilities Reported By Destination And Investor Countries 2003 24 3 Evolution of Net Foreign Asset Positions Industrial and Developing Regions 1996 2004 5o tits A medias OP sud Masini beatos neut pd tpa 25 4 Cumulative Value of Net Errors and Omissions 1970 2004 sere 26 5a Matrix of Net Debt and Net Equity Positions Industrial Countries 2004 27 5b Matrix of Net Debt and Equity Positions Emerging Markets and Developing
38. net foreign assets in emerging markets and developing countries can be substantial even over a protracted period of time As is discussed in Lane and Milesi Ferretti 20052 these differences can often be attributed to negative cumulative valuation effects In turn these result from a combination of exchange rate depreciation since debt liabilities are disproportionately in foreign currency and fast growing domestic asset valuations with portfolio equity and FDI liabilities rising in value over time The table also highlights the remarkable size of errors and omissions likely capturing unrecorded capital outflows particularly in the Philippines and Venezuela Table 8b and Figure 12b also shows the impact of debt reduction schemes which can drive a wedge between cumulative current account deficits and changes in net foreign asset positions i ya In sum the past decade has witnessed significant changes in net ezternal positions across the globe Emerging markets and developing countries as a group have experienced a substantial improvement in their aggregate external positions since the late 1990s driven in particular by developments in emerging Asia and the Middle East Other regions such as emerging Europe have accumulated substantial liabilities In industrial countries external positions have generally increased relative to GDP with debtors such as Australia Spain and the United States accumulating more liabilities and credi
39. ng closely trends for industrial countries until the early 1990s From then on however the acceleration in cross border asset trade by industrial countries was not matched by the emerging markets and developing country group where the pace has been much more gradual The difference between the two groups of countries is even starker when the evolution of international financial integration is compared with international trade integration Figure 4 displays the sum of external assets and liabilities scaled by the sum of imports and exports of goods and services For both groups the expansion of asset trade outstripped the expansion of product trade from the mid 1970s to the late 1980s with the ratio higher for industrial countries throughout the period From then onward the increase in the ratio for industrial countries was very rapid with the spectacular increase in asset trade outpacing a relatively modest expansion in goods trade For emerging markets trade in goods increased much more rapidly than for industrial countries during this period but the growth in asset trade was instead much slower than in industrial countries and therefore the ratio has remained broadly stable over the past 20 years Do these stylized facts hold for holdings of equity instruments as well To explore this issue we report a second measure of financial integration that focuses exclusively on portfolio equity and FDI holdings see Lane and Milesi Ferretti 2003
40. nly partly attributable to the decline in equity valuations during 2000 02 and also reflects a significant shift in the composition of capital flows with debt flows dominating in recent years However for emerging markets and developing countries the increase in the relative importance of equity liabilities has continued unabated in 2004 they accounted for half of total external 23 Trends for industrial countries are discussed more at length in Lane and Milesi Ferretti 2003 PX c liabilities Underlying this trend is a steady increase in the share of FDI which now accounts for about 75 percent of developing countries equity liabilities as well as a sharp increase in the value of the portfolio equity liabilities particularly during the past decade in line with the development of local financial markets The decline in the relative weight of debt in the external portfolio of developing countries and emerging markets has been accompanied on the asset side by rapid accumulation of official reserves Figure 7 which reports the ratio of external debt and official reserves to exports for the entire group of emerging and developing economies highlights these trends The dramatic decline in the aggregate ratio of debt to exports since the late 1980s is remarkable and holds also if we take the average or the median external debt to export ratio rather than the aggregate one As a result of these developments the ratio of official reserves
41. ntries only report data on net other investment flows for most of the sample period To address these shortcomings we again use a variety of methods For several countries we estimate the stock of debt assets as the sum of claims by nonbank domestic residents on BIS reporting banks reported by such banks and available from 1977 onward plus foreign assets by commercial banks and other banking institutions reported by ZFS The BIS series in particular may contain holdings accumulated through unrecorded financial flows for example capital flight We also construct series based on cumulative capital outflows backward in cases when the country starts reporting its IIP late in the sample and forward when no IIP data on debt asset holdings are reported or such value appears too low relative to the underlying capital outflows P Finally in some cases we combine holdings data from ZFS BIS and national sources with capital flow data to construct a series for debt assets D Financial Derivatives The stock of financial derivatives corresponds to the market value of the outstanding 14 The extensive literature on capital flight constitutes an early attempt to provide estimates of foreign asset holdings by domestic residents particularly for developing countries See for example Cuddington 1987 Dooley 1988 Claessens 1997 and the discussion below P For countries with significant unrecorded outflows we also make use of data on net e
42. of their external balance sheets has been substantially changed by the growth in the share of equity liabilities in total liabilities and the rapid growth in the accumulation of foreign reserves However this aggregate performance masks differences in trends particularly between emerging Europe and emerging Asia plus the Middle East the former has been rapidly accumulating net liabilities while the latter regions have been running large surpluses In terms of gross financial integration we have noted that the developing world has lagged behind the industrial countries in terms of the scale of cross border asset trade especially in the debt category We may expect some catch up by these countries in line with further progress in domestic financial development and external capital account liberalization That said the increasing prominence of the major emerging market economies as international investors is already reshaping the nature of international asset trade There is a rich set of potential applications of this dataset For instance in combination with data on international investment income and capital flows the dataset also makes it possible to study rates of return on holdings of foreign assets and liabilities on a much broader scale than was previously feasible This will deliver a greater degree of insight into the role played by the valuation channel in the international adjustment process 22 In terms of the research agenda
43. ountries with the data from the CP S As shown in Table 2 U S reported data on holders of U S equities are much higher for financial centers such as Singapore Switzerland and the United Kingdom than holdings reported by these financial centers This is a result to be expected these shares may be held by custodians in these countries on behalf of nonresidents There is also a large discrepancy between Canadian holdings reported by the United States and those reported by Canada As for Ireland the largest discrepancies are those with the United Kingdom and the United States which total over US 200 billion In sum while some progress can be made in determining where some of the underreported external assets are held it is much more difficult to establish which country s residents hold such claims Looking forward increased availability of bilateral data should allow countries to refine and widen the scope of their estimates particularly for assets held overseas IV SELECTED EMPIRICAL FINDINGS In this section we briefly present some general patterns in the data We first examine indicators of financial globalization Next we report findings on the composition of international balance sheets Finally we describe some features about the evolution of net foreign asset positions In presenting the data we occasionally divide countries into two groups long standing OECD countries which we denote as industrial and the remaining countries
44. ported by Reported by destination country investor countries Holdings in the United States Canada 203 152 Caribbean financial centers 227 24 Singapore 73 7 Switzerland 119 52 United Kingdom 229 174 Holdings in Treland Japan 15 3 United Kingdom 139 25 United States 95 22 Source IMF Coordinated Portfolio Investment Survey CPIS Ireland Lane and Ruane 2006 and United States Department of the Treasury Foreign Portfolio Holdings of U S Securities 25 Table 3 Evolution of Net Foreign Asset Positions Industrial and Developing Regions 1996 2004 Correlation NFA Y Regional Regional Difference 1996 2004 mean 1996 mean 2004 Industrial 0 82 0 9 6 1 5 3 Africa 0 80 60 4 43 8 16 6 Asia 0 91 10 7 17 9 28 6 Emerging Europe 0 52 24 2 49 5 25 3 CIS 0 65 7 8 4 0 3 8 Middle East 0 77 21 3 55 4 34 1 Western Hemisph 0 64 30 7 43 2 12 5 Note Correlation NFA Y 1996 2004 is intraregional correlation between NFA GDP ratios in 1996 and 2004 Means refer to regional averages weighted by GDP Difference is the change in the regional mean between 1996 and 2004 For Africa period is 1996 2003 and for CIS and emerging Europe it is 1997 2004 26 Table 4 Cumulative Value Of Net Errors And Omissions Selected Countries 1970 2004 Cumulative net errors and omissions Billions US pct of GDP Switzerland 140 6 40 9 Cambodia 1 7 34 8 Mauritius 1 6 26 9 Nepal 1 6 25 6 Bahrain 2 2 20 1 United Kingdo
45. ral financial crises and the reversal in global stock market values in 2001 02 Marked shifts in the composition of international balance sheets are also noteworthy with an increased reliance on debt liabilities as a source of external finance by major debtors most notably the United States whereas the emerging markets have increased the equity component in their external liabilities and accumulated significant official reserve assets We also examine recent developments in the evolution of net foreign asset positions Among the industrial countries there has been considerable persistence in the cross sectional distribution with the exception of the increase in the net external liabilities of the United States the identities of the major creditors and debtors in 2004 are the same as in 1996 Among other countries those in emerging Europe the Commonwealth of Independent States CIS region and the Western Hemisphere have experienced a significant increase in the scale of net external liabilities while Africa emerging Asia and the Middle East have all experienced significant improvements in their net external positions Lane and Milesi Ferretti 2001a 2003 20052 Tille 2003 Lane and Milesi Ferretti 2005b Lane and Milesi Ferretti 20052 Tille 2003 and Gourinchas and Rey 2005 Ee e We also highlight significant differences in the composition of countries external portfolios A significant number of industrial
46. recorded capital inflows or unrecorded net exports while negative errors and omissions can indicate unrecorded outflows or unrecorded net imports Belgium and Luxembourg are excluded because current and capital account data was reported jointly for the Belgium Luxembourg Monetary Union until 1999 32 Table 8b Cumulative Current Account and Change in Net Foreign Asset Position Selected Developing Countries 1982 2004 1 2 3 4 5 Change Cumulative Difference Cumulative Cumulative in NFA current debt errors and account forgiveness or omissions capital transfers Turkey 42 2 16 8 25 4 0 0 2 4 South Africa 6 1 1 0 7 0 0 0 2 4 Argentina 27 3 54 3 27 1 10 6 10 0 Brazil 35 0 32 6 2 4 2 0 2 2 Chile 20 9 31 7 10 8 5 5 4 4 Mexico 32 3 30 3 2 0 2 4 3 7 Venezuela Rep Bol 25 6 62 1 36 5 3 3 22 5 India 8 0 10 1 2 0 0 0 0 2 Indonesia 45 4 4 5 40 9 0 0 7 0 Korea 0 0 14 8 14 8 1 6 2 1 Malaysia 4 9 30 3 25 4 0 5 4 0 Philippines 39 8 6 4 33 4 3 5 19 6 Thailand 24 0 8 8 15 2 0 0 3 3 China P R Mainland 7 3 18 1 10 9 0 0 5 9 Note All variables are scaled by 2004 GDP The cumulative current account balance capital account transfers and net errors and omissions are calculated over the period 1982 2004 1989 2003 for debt forgiveness while the change in NFA is the change in the net foreign asset position between end 1981 and 2004 Column 3 is the difference between columns 1 and 2 Positive n
47. rnative methods and sources to come up with our own estimates T to claims and transactions between a country s residents and nonresidents International holdings and international transactions are classified in the following broad categories e Portfolio investment subdivided into equity securities and debt securities including bonds and money market instruments e Foreign direct investment which refers to equity participations above 10 percent e Other investment which includes debt instruments such as loans deposits and trade credits e Financial derivatives and e Reserve assets For each of these broad categories balance of payments data measure net capital inflows and outflows during a recording period and the IIP data measure the stocks of external assets and liabilities at the end of the recording period More specifically capital inflows measure net purchases or sales by nonresidents of domestic assets while outflows measure net purchases or sales of foreign assets by residents From this definition it should be clear that both capital inflows and capital outflows can also take negative values for example if nonresidents are net sellers of domestic shares in a given year portfolio equity inflows will be negative Similarly if a government repays a portion of its external debt the reduction in nonresidents claims on the government is recorded as a negative capital inflow because nonresidents are net sellers
48. rre Olivier and H l ne Rey International Financial Adjustment NBER Working Paper 11155 International Monetary Fund various years Balance of Payments Statistics Washington D C various years nternational Financial Statistics Washington D C 1993 Balance of Payments Manual 5 edition Washington D C 2003a Foreign Direct Investment Statistics How Countries Measure FDI Washington D C 2003b Three Current Policy Issues in Developing Countries World Economic Outlook Chapter II September Washington D C 2005 Globalization and External Imbalances World Economic Outlook Chapter III April Washington D C Coordinated Portfolio Investment Survey Database available at http www imf org external np sta pi datarsl htm Lane Philip R and Gian Maria Milesi Ferretti 2001a The External Wealth of Nations Measures of Foreign Assets and Liabilities for Industrial and Developing Countries Journal of International Economics Vol 55 pp 263 94 2001b External Capital Structure Theory and Evidence in H Siebert ed The World s New Financial Landscape Challenges for Economic Policy Berlin Heidelberg Springer Verlag 247 284 48 2003 International Financial Integration IMF Staff Papers Vol 50 Special Issue pp 82 113 Washington D C International Monetary Fund 2005a Financi
49. rrors and omissions to estimate the value of overseas debt holdings 12 derivatives contracts Only a few countries report separately data on the value of the outstanding stock of financial derivatives Whenever such data are available we include them in our dataset E Official Reserves As in our previous work we use IMF data on total reserves minus gold which include foreign exchange SDR holdings and the reserve position in the IMF supplemented by data from national sources Gold holdings are excluded primarily since the gold held by a central bank does not constitute a liability of another country F Measurement Error Clearly measurement error in our dataset is substantial for two main reasons The first is the incomplete reporting of balance of payments and especially IIP data and the second is the difficulty of tracking increasingly complex international financial transactions The first problem is particularly acute for countries in the Middle East sub Saharan Africa and small financial centers for which small errors in measuring gross positions translate into large errors in the measurement of net positions An additional source of error arises because of the discrepancy between current account transactions and financial flows the so called net errors and omissions an issue discussed at length in Lane and Milesi Ferretti 20012 In this dataset we do not make systematic use of net errors and omissions in calculat
50. there is clearly scope for a two pronged strategy In one direction much remains to be achieved in understanding the determinants of the cross country and time series variation in gross and net external positions especially for developing countries In the other direction our estimates of foreign asset and liability positions can be usefully employed in empirically investigating a wide range of hypotheses about the impact of international financial integration on macroeconomic performance We expect the EWN II dataset to stimulate a new wave of research on these questions by ourselves and by the wider research community Australia Austria Belgium Canada Denmark Finland France Germany Greece Iceland Ireland Italy Japan Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom United States Albania Algeria Angola Argentina Armenia Azerbaijan Bahrain Bangladesh Belarus Benin Bolivia Bosnia and Herzegovina Botswana EE Appendix Country Territory List Brazil Iran Islamic Republic of Brunei Darussalam Israel Bulgaria Jamaica Burkina Faso Jordan Cambodia Kazakhstan Cameroon Kenya Chad Korea Chile Kuwait China P R Mainland Kyrgyz Republic Colombia Lao People s Dem Rep Congo Dem Rep of Latvia Congo Republic of Lebanon Costa Rica Libya C te d Ivoire Lithuania Croatia Macedonia Cyprus Madagascar Czech Republic Malawi Dominican Republic Malaysia Ecuador Mali Egypt
51. tions vis vis the United States as reported by the U S Bureau of Economic Analysis C Debt Assets and Liabilities The debt category offers the greatest data challenges particularly in the measurement of foreign debt assets This category includes portfolio debt securities plus bank loans and deposits and other debt instruments Our main data sources are e The country s reported IIP e The World Bank s Global Development Finance database only for external debt liabilities of developing countries and emerging markets e The IMF s World Economic Outlook WEO database only for external debt liabilities of developing countries and emerging markets e The Quarterly External Debt Database QEDS jointly developed by the World Bank and the International Monetary Fund which brings together detailed external debt data that are published individually by countries that subscribe to the IMF s Special Data Dissemination Standard SDDS P e The IMF s CPIS for portfolio debt assets and indirectly portfolio debt liabilities e The Bank of International Settlements BIS data on a country s assets and liabilities vis a vis BIS reporting banks 3 These data can be found at the link http web worldbank org WBSITE EXTERNAL DATASTATISTICS EXTDECQEDS 0 m enuPK 180543 1 pagePK 64168427 piPK 64168435 theSitePK 1805415 00 html ES e Data on foreign assets and liabilities of banks and other banking institutions reported by ZFS l
52. tors such as Japan and Switzerland more assets With the increase in gross assets and liabilities the valuation effects induced by changes in exchange rates and asset prices have become an important source of fluctuations in countries external portfolios often swamping the effects of the underlying capital flows V CONCLUDING REMARKS The stylized facts described in this paper illustrate the fruitfulness of the EWN TI dataset as a comprehensive source of information on gross and net international investment positions despite the severe measurement problems Relative to the previous state of knowledge the greatly increased country coverage of the dataset is an important advance that will enable researchers to take a truly global view of developments in international financial trade This feature is especially important in understanding the dynamics of external imbalances Furthermore the extension of the dataset to include 1999 2004 provides important information on the financial globalization process in view of the ongoing increase in the scale of gross asset trade accompanied by substantial shifts in the composition of international balance sheets during this period An important contribution of this paper is to highlight the shift in the structure of the external portfolio for emerging market economies Taken collectively these countries have sharply improved their net foreign positions over the past decade Moreover the risk profile
53. ttendant revisions in the risk profiles of individual economies Finally the emergence of large external imbalances has led to renewed interest in the international adjustment mechanism and the dual role played by exchange rates in influencing both net capital flows and net capital gains on external holdings To improve our understanding of these phenomena we assembled a comprehensive and up to date dataset on the foreign assets and liabilities of advanced emerging and developing countries for the period 1970 2004 This updates and extends our initial contribution Lane and Milesi Ferretti 2001a which included estimates for the external portfolios of 67 countries over the period 1970 98 The new External Wealth of Nations Mark IT EWN II dataset covers over twice as many countries 145 in total incorporates an extensively revised methodology and draws upon a richer range of data sources In this paper we describe the construction of the dataset and provide a few illustrative stylized facts The virtually global coverage allows us to define world trends meaningfully as well as to investigate the scale of the global discrepancy in the measurement of foreign asset and liability positions Among the key stylized facts that emerge from an initial data analysis we highlight the further intensification in the degree of financial globalization during the past decade for both industrial and developing countries despite the occurrence of seve
54. vanced and developing economies We also show the existence of a global discrepancy between estimated foreign assets and liabilities and identify the asset categories that account for this discrepancy JEL Classification Numbers F32 Keywords International financial integration net foreign assets Author s E Mail Address plane tcd ie gmilesiferretti imf org We thank Marco Arena Vahagn Galstyan and Agustin Benetrix for excellent research assistance We also thank Michael Connolly John Fitzgerald Patrick Honohan Neil Humphries Per Martin R er Nicholas Tsaveas Frank Warnock and countless IMF colleagues for help in the provision of data as well as for useful comments Parts of this paper were written while Philip Lane was a visiting scholar at the International Monetary Fund Centre for Economic Performance LSE and Harvard NBER Philip Lane also gratefully acknowledges the financial support of a Government of Ireland Research Fellowship the Irish Research Council on Humanities and Social Sciences IRCHSS and the HEA PRTLI grant to the IIIS The data described in the paper are available via the Internet at http www imf org external pubs ft wp 2006 data wp0669 zip Contents Page T Tritt oa RR 4 IL Methodology AA waa 5 A Portfolio Equity Assets and Liabilities sw wmwwwmmmmenmnmmmwmnmamw mmama f B Direct Investment Assets and Liabilities oie e ec ide ed cH Y I teats 9 C Debt Assets a
55. vestments these may bear little relation to the activities represented by the firms on the domestic stock market Second some proportion of FDI is attributable to investment in residential and commercial properties Third the value of FDI includes the value of accumulated cash and liquid assets held by an affiliate the value of such treasury holdings again will not have a direct relationship with the stock market 10 e For book value series we use two alternative methods either cumulative U S dollar flows for countries with either very volatile real exchange rate measures or FDI concentrated in commodity producing sectors or extractive industries or cumulative flows adjusting outstanding holdings for fluctuations in real exchange rates as in Lane and Milesi Ferretti 2001a For example if the real exchange rate of a country appreciates relative to the U S dollar we assume that the U S dollar value of FDI holdings in the country correspondingly increases As in Lane and Milesi Ferretti 20012 our initial values are based on estimates by Sinn 1994 or for several emerging markets derived from OECD 1972 complemented with cumulative flows between 1967 and 1970 If data on FDI flows from the IMF s Balance of Payments Statistics are unavailable or incomplete we use FDI inflows and outflows reported by UNCTAD Finally for a few countries we extrapolate the evolution of FDI flows and stocks from their bilateral positions and transac
56. wn not only with respect to their GDP but also with respect to trade graph not shown unlike their total financial assets and liabilities This suggests a significant shift in the structure of these countries external portfolios an issue we take up in the next subsection B Trends in External Capital Structure The composition of international balance sheets has been the subject of wide discussion in recent years with an excessive reliance on debt finance perceived as increasing vulnerability and an equity based financing promoted as improving international risk sharing Rogoff 1999 Lane and Milesi Ferretti 2001b What do recent developments tell us about the trends in external capital structure While we describe developments for both large country groupings we focus more on the group of emerging markets and developing countries We first consider the share of equity portfolio and FDI liabilities in total liabilities EQSHARE _LIAB een S DHL it 4 Figure 6 shows the dynamics of EOSHARE _ LIAB for the industrial and developing country groups The trends are broadly similar a decline during the 1970s the flip side of the explosion in international debt trade during that decade and an increase in the 1980s and especially the 1990s For industrial countries the past five years have seen a reversal in EOSHARE _ LIAB with the 2004 value falling to 36 percent As explained in Lane and Milesi Ferretti 2005b this is o
57. y Share in External Liabilities Industrial Country Group and Emerging Markets and Developing Country Group 1970 2004 sss External Debt and Official Reserves Emerging Markets and Developing Country Group 1970 2 DO04 cau aet qt eer ente ok ier teta dede de in e edes Net Foreign assets and GDP per capita All Countries 2004 Net Foreign Assets by Country Group Percent of Group GDP 1980 2004 10a Change in NFA GDP 1966 2004 Industrial Countries eee 10b Change in NFA GDP 1996 2003 Africa 10c Change in NFA GDP 1996 2004 Asia 10d Change in NFA GDP 1996 2004 Emerging Europe 10e Change in NFA GDP 1997 2004 CIS Countries 10f Change in NFA GDP 1996 2004 Middle East 10g Change in NFA GDP 1996 2004 Western Hemisphere 11a Net Equity Position versus Net Debt Position Industrial Group 2004 1 1b Net Equity and Debt Position Emerging Markets and Developing countries 2004 JA I INTRODUCTION Global economic developments in recent years have demonstrated the importance of understanding international balance sheets Ongoing financial globalization the accumulation of larger stocks of gross foreign assets and liabilities has increased the magnitude of fluctuations in the value of cross border holdings whether scaled by GDP or domestic financial variables In addition there have been sizable shifts in the composition of asset and liability positions with a
58. y important in driving a wedge between the current account balance and changes in net foreign assets Table 6 shows that the correlation between these variables has declined over time falling from 0 71 in 1971 1981 to 0 33 in 1993 2004 for the industrial group and from 0 72 to 0 47 For financial centers with a large mutual fund industry the net portfolio equity position is likely to be negative because foreign owned shares in mutual funds are recorded as portfolio equity liabilities even though some of the assets of the mutual funds are invested in bonds and money market instruments 5 The cross sectional correlation when Ireland and Luxembourg are included is 0 996 Ireland and Luxembourg also are long in foreign debt and short in foreign equity reflecting their roles as major offshore centers for the global mutual fund industry 30 For a number of Middle Eastern countries such as Kuwait Qatar and Saudi Arabia portfolio equity holdings overseas are likely to be substantially underestimated This is because these countries do not report data portfolio equity outflows or holdings and partner country data such as the U S survey of portfolio equity liabilities only report aggregate holdings of Middle East oil exporters Any reasonable assumption about the extent of diversification of external asset holdings would imply that these countries have a positive net equity position 31 As discussed in Lane and Milesi Ferretti
59. y relies both on direct estimates of stocks assembled from a variety of sources and on indirect estimates constructed using cumulative flows with appropriate valuation adjustments The cumulative flow method can be illustrated as follows Denote by D the stock of holdings at the end of year t and by d the flow of net purchases during year t Let p be the U S dollar price of asset category D at the end of period for example the end of year stock market price index measured in dollars and p the average price of asset D during year t Then Pip 42g 1 Si D D t That is the value of holdings at the end of period t is the sum of holdings at the end of the previous period adjusted for valuation changes and net purchases during the year evaluated at end of year asset prices This updating formula can be used to obtain holdings D given an estimate of holdings D p v flows d and asset prices p or to back out D given D d and When series are constructed cumulating flows forward it is important to obtain initial values for 1970 or later starting years Our main general source for this purpose is the pioneering work of Stefan Sinn 1994 who constructed estimates of external asset and liability positions for 145 countries over 1970 87 For those countries where we construct historical data by cumulating flows backward from a stock measure dating after 1970 the data collected by Sinn provide a useful check o

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