The Macroeconomics of BOP/IIP Data: The Irish Case

Transcription

1 The Macroeconomics of BOP/IIP Data: The Irish Case CSO BOP Philip R. Lane IIIS, Trinity College Dublin and CEPR CSO BOP Workshop 23rd February 2012

2 Introduction Cross-border nancial ows - implications for macroeconomics and nancial stability Net ows - current account imbalance Net accumulated position - net international investment position (NIIP) Gross positions - level and composition of foreign assets and foreign liabilities

3 Current Account Current account de cit - level of domestic spending exceeds domestic output. Sensible in some scenarios but entails risks overheating pressure - real exchange rate appreciation, in ation upward pressure on asset markets (e.g. housing market) risk of a funding reversal (sudden stop) - disruptive scal volatility banking-sector volatility Globally, current account imbalances contracted since 2008 High-de cit countries - mainly through large recessions Fiscal impact; banking-sector impact

4 NIIP NIIP - cumulative current account balance, plus valuation changes, plus other changes NIIP - a key variable in macro models negative NIIP requires reduction in future spending levels negative NIIP requires real exchange rate depreciation negative NIIP constrains resolution of sectoral balance sheet problems (government; banks; HH) negative NIIP - funding risks if liabilities short-term Irish NIIP in 2006: -5.3% of GDP; NIIP in 2009: % of GDP Mainly, net other changes!

5 Gross Positions NIIP = FA FL Valuation changes Gains/losses on foreign assets Gains/losses on foreign liabilities Short-term liabilities - funding risks Mis-match issues (e.g. equity-type foreign assets, debt-type foreign liabilities) Macro risks Sectoral concentration risk (e.g. foreign property poor hedge for domestic property) Leverage risk Global shocks versus local shocks Risk management - risk diversi cation versus risk ampli cation

6 NIIP: Stylised Facts Ireland: cumulative net other term small until 2007; very large over Ireland now in top ten of net external debtors, due to these net other changes P

7 0 NFA vs CUMCA Figure: Cumulative Current Account Balance and Change in Net Foreign Asset Position,

8 Table: The World s Top Ten Debtors, 2010 NFA/GDP Iceland Hungary Portugal Bulgaria Ireland Greece Spain New Zealand Latvia Slovak Republic -72.9

9 Table: Evolution of Net External Position and Cumulative Current Account Balance. D(NFA) CUMCA D(NFA) CUMCA Iceland Hungary Portugal Bulgaria Ireland Greece Spain New Zealand Latvia Slovak Republic Note: Based on updated version of dataset reported in Lane and Milesi-Ferretti (2007).

10 Some Interpretations I Analysis confounded by Ireland s role as an international nancial centre Core international balance sheet obscured IFSC and non-ifsc inter-linked Ultimate ownership of FA, FL not visible Equity-debt mix driven by mutual funds (port. eq. liabilities) Measurement challenges Valuation of banks with large prop portfolio trading Switch to security-by-security measurement Exit/entry of large entities Asset restructuring

11 Table: Gross Size of International Balance Sheets IFI Top 10 Luxembourg 24,109 Ireland 3,361 Hong Kong 2,256 Bahrain 1,590 Malta 1,434 United Kingdom 1,308 Singapore 1,242 Iceland 1,220 Switzerland 1,096 Cyprus 1,085 Others United States 292 Germany 470 France 526 Japan 196

12 Some Interpretations II One approach - treat latest NIIP as best possible measure. But then need a consistent historical narrative of evolution of NIIP. Alternatively, ask if latest NIIP may be imperfectly measured Mis-measured net nancial ows cumulative net errors and omissions of 12 percent of GDP by 2010 plausibly re ect non-measured acquisition of foreign assets (e.g. capital ight during 2010) Mis-measured valuation e ects

13 0 Cumulative Net Errors and Omissions Figure: Cumulative Net Errors and Omissions. Note: Expressed as a ratio to GDP. Initial year for cumulation is 1998.

14 Some Interpretations III Valuation errors Valuation of FDI liabilities Write downs of Domestic-facing FDI equity (banks, retail,...)? Write downs of FDI equity of foreign-owned banks with signi cant prop trading desks? P

15 Some Interpretations IV Sectoral composition of net other changes? CSO publishes some sectoral IIP data - but not the allocation between ows and other adjustments IFSC/non-IFSC split not useful due to bilateral positions across these sectors Central Bank Quarterly Financial Accounts ROW sector and IIP should be close - but not in Irish data so far Aggregate sector data: no split between domestic and foreign counter-parties.

16 Some Interpretations V: The Core International Balance Sheet Signi cant reductions in external liabilities Foreign equity and subdebt investors in Irish banks; equity losses in other Irish rms reduction in value of equity liabilities of foreign-owned banks with large prop trading operations in Ireland Signi cant valuation losses in external assets foreign FDI assets, foreign loans by domestic banks foreign property acquisitions foreign portfolio assets of domestic pension funds, NPRF Core" international balance highly leveraged (external debt funding foreign equity assets and foreign property assets) - ampli ed losses during 2008/2010

17 Conclusions Net other changes in NIIP during extraordinarily large A coherent explanation very important in evaluating external dynamics Important project for the o cial sector More generally, surveillance of BOP/IIP key part of prudential policymaking