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International Investment Position
(IIP)Presentation forData Producers and Users
WorkshopMay 8-9, 2006SBP LRC Karachi

• Naseer Ahmad
• Joint Director Statistics
• State Bank of Pakistan
• Ph 021 921 2571
• E-mail naseer.ahmed_at_sbp.org.pk

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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?

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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

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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

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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

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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

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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

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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

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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

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How is it compiled?
International Investment Position As On_____

• Assets
• Direct investment
• Portfolio investment
• Financial derivatives
• Other investment
• Reserve assets

• Liabilities
• Direct investment
• Portfolio investment
• Financial derivatives
• Other investment

IIP (Net) Asset - Liabilities
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How is it compiled?

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

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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 countrys 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

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Valuation

• In principle, all asset and liability positions
  should be measured at market value
• Assumes that such positions are continuously and
  regularly revalued

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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

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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

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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.

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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

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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

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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

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Direct Investment

• Equity Capital
• Equity in branches
• Shares in subsidiaries and associates
• Non-cash acquisitions of equity (for example,
  provision of capital equipment)

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Direct Investment

• Reinvested Earnings and Distributed Branch
  Profits
• The direct investors 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

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Direct Investment

• Other Capital
• Intercompany borrowing or lending of funds,
  include
• Loans
• Debt securities
• Suppliers (trade) credits
• Financial leases
• Non-participating preferred shares

Financial Lease A 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.
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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)

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Portfolio Investment

• Further classified by institutional sector of
  resident holder for assets/resident issuer for
  liabilities
• monetary authorities
• general government
• banks
• other sectors

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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
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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)

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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

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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

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Reserve Assets

• Classification distinguishes
• Monetary gold
• SDRs
• Reserve position in the IMF
• Foreign exchange
• Other claims

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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

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IIP- BOP

• Reconciliation Statement
• Opening Position
• Transactions in Financial Account
• Price changes
• Exchange rate changes
• Other adjustments (debt write-offs,
  reclassifications)
• Closing Position

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Factors Accounting for Change in the
International Investment Position
Balance of Payments
Financial Account Other Changes in Position Other Changes in Position Other Changes in Position Other Changes in Position Other Changes in Position
Position at beginning of period Transactions Price Changes Exchange Rate Changes Exchange Rate Changes Other Adjustments Other Adjustments Position at end of period
IIP Assets 120 Liabilities 100 Net IIP 20 -15 5 -20 7 - 7 -2 4 -6 -2 4 -6 1 -2 3 1 -2 3 111 Assets 107 Liabilities 4 Net IIP


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Dissemination process practices

• Data are disseminated on SBPs website
• Published in SBP annual report

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Dissemination Format
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Improvement plans?

• Improvements in enterprises data collection
• Enhance frequency
• Movement wise dissemination
• Country wise compilation
• Security wise compilation
• Currency wise compilation

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Questions or suggestions are most welcome!
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Tanks all of you