CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

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1 Directorate General of Economics, Statistics and Research June Updated on 15 th October 2014 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014 Balance of Payments Division. Statistics Department 1 Introduction Starting from the dissemination of data on 15 th October 2014, two significant changes have been carried out in the compilation of the Spanish Balance of Payments (BoP) and the International Investment Position (IIP) and other related statistics: the application of the new methodological manuals and of new information sources 1. In 2009 the IMF published the sixth edition of its BoP and IIP manual (BPM6). The year 2014 is the date agreed within the European Union (EU) for its implementation, with the aim of having sufficient time to adapt current reporting systems and to ensure the methodological consistency of the statistics compiled in the European Union countries. 2 Indeed, following decisions by the European committees entrusted with the statistics, the EU countries are setting in place the new manual throughout 2014 in coordination with the changes to adapt National Accounts to the new European System of Accounts (ESA) 2010, which will also be set in place during this year. 3 The specific month in 2014 for making the change varies across the different European countries, but quite a few, like Spain, set end-september or October 2014 as the changeover date. This choice of this date responds, first, to the fact that it coincides with the sending of the new time series to the European Central Bank (ECB) and to Eurostat, which will produce and subsequently disseminate the new euro area BoP and IIP; and, second, to the fact that it is coordinated with that of the adaptation of the National Accounts to the new ESA 2010, with revision of the time series. In October 2014 there has also been a significant change in the information sources used to compile the BoP and certain IIP headings. This change has been forced through owing to the change in the regulations on cross-border payments, which meant that the traditional system of reporting foreign transactions to the Banco de España could not be maintained. A fundamental pillar of that system was the reporting by banks of foreign 1 See the press release issued on 15th October 2014 on the Press Room section of the Banco de España's website. 2 Outside Europe, too, many countries are making the change in At end-2013, of the 184 countries worldwide reporting Balance of Payments data, only 36 had already made the change to BPM6. 3 See the press releases dated 12/06/2014, 25/09/2014 and 03/10/2014 on the INE website. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

2 transactions, both on their own account and on that of their customers, identifying the BoP item. Against the background of the setting-up of the Single Euro Payments Area (SEPA), it was considered that the obligation to report the BoP statistical item would hinder integration. Thus, as has occurred in other European countries, the Banco de España has had to revise its general BoP reporting system, moving towards direct reporting systems, surveys and the use of administrative or other types of sources that are already available. The changes in information sources are also going to affect the IIP and External debt in those headings that were still being calculated by accumulation of flows. Although the data for the opening months of 2014 already partly included results from the new reporting system, its full implementation, which has in some cases required the revision of time series, has taken place starting from the dissemination of the data on 15 th October 2014, coinciding with the implementation of the new manuals. 4 The starting point with data calculated from the new sources in the BPM6 will be the December 2012 IIP and the 2013 BoP. For previous periods, the requirements established by the ECB and Eurostat accept data converted to the BPM6 from statistics already calculated in BPM5. In headings in which there is a break in level owing to the incorporation of the new sources, the time series have been revised, being disseminated the most recent periods in October, and leaving the complete time series for dissemination in the following months. In the case of financial assets and liabilities, the breaks in level would be more appreciable in the IIP, with the stocks of the items most affected those that might be more likely to undergo backward revisions. Although the change in the reporting system has been obligatory, once the new system stabilises it will offer greater assurance of quality than the previous one. This is because it is based to a greater extent on direct reporting by the units operating with the external sector, in some cases, and because it is more integrated, in other cases, into the various information sources that measure related phenomena. However, it should be borne in mind that any system set in place for the compilation of such complex statistics, covering all sectors and all items or financial instruments, is not free from limitations. The new system has also its limitations. In this respect, it should also be stressed that, since the information sources and the estimation methods embedded in the new system are more numerous than in the previous one, the possibilities of making future changes and improvements to methods will increase manifold and this system should be considered more alive than the previous one in this respect. The changes in the various BoP and IIP headings are described in greater detail below. Section 2 discusses the methodological changes arising from the implementation of BPM6, and Section 3 addresses the changes relating to the inclusion of new information sources. 5 4 In its annual 2014 Programme, the National Statistical Plan acknowledged that these changes would take place in See Royal Decree 1017/2013 of 20 December This document is largely based on that drafted for the submission of this project to the standing committee of the Consejo Superior de Estadística (Spanish Higher Statistical Board), which ruled favourably and unanimously on the project in May. 2/17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

3 2 Methodological change: implementation of BPM6 Compared with its predecessor, BPM6 does not entail structural changes. Rather, it is an adaptation which, firstly, takes into account the advances made worldwide in technological developments and globalisation, and their effects on cross-border economic relations. Secondly, it seeks to further unify the terminology and classification of items, financial instruments and sectors with other closely related macroeconomic statistics, especially with the National Accounts. And, finally, in the financial sphere, it accords greater significance to the data of the economy s balance sheet, i.e. to the IIP. In the first respect, it notably improves the treatment of productive processes completed in different countries. Thus, excluded from the goods balance in the new manual are imports and exports transacted without a change of ownership and exclusively for the processing or repair of such goods, with only the amount of the processing or repair service being reflected in the services balance. This change is one of the most significant ones, in general, given its worldwide importance; it is not so significant in Spain s case. As to greater concordance with the National Accounts, the following may be highlighted: the change in nomenclature of some of the main accounts making up the current account, with income and current transfers being re-named primary and secondary income; the inclusion of FISIM (financial intermediation services indirectly measured) in the services account, with the related adjustments in the income account; the classification of direct investment on an asset and liability basis instead of according to the directional principle, although the latter will continue to be used for certain supplementary presentations of data. The changes are manifold. Appendix 8 of the BPM6 lists all the changes and refers to the paragraphs in the manuals where details are given for each one, explaining the previous and the new treatment. In some cases what are actually involved are not changes as such, but clarifications: there are areas where past experience has shown that certain principles have been interpreted differently in different countries, thereby hampering the international comparison of data, and, to avoid this, the treatment of certain operations has been clarified in greater detail. In these instances, the new manual naturally involves a change in practice for some countries and for others not. 6 Among all the points mentioned in the appendix Changes from BPM5 in the sixth edition of the manual, those that have had an impact on the Spanish BoP and/or IIP are explained below. Firstly, a summary table groups these changes depending on whether they are reclassifications between headings or changes in presentation (including those that entail greater detail) or involve a quantitative impact that passes through to the major aggregates (net current account and even the net lending/net borrowing of the economy or net IIP). As can be seen in Table 1, few changes impact the major aggregates. 6 Various European countries have begun to include sections on their websites explaining the changes to the BoP and to the IIP in In the case of the ECB, the information can be found in a special section under statistics/bop and IIP, including links to the websites of these countries. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

4 Table 1 Reclassification Presentation or breakdown Impact on major aggregates Processing and repairs are reclassified from goods to services Income and current transfers are grouped under Primary income and Secondary income Primary income includes reinvested earnings on investment funds Merchanting is reclassified from services to goods A new classification of Current transfers is introduced Allocations of SDRs are recognised as liabilities Communication services disappears as a heading and is split among different services items A new item Personal transfers is introduced Income accrued on portfolio investment in debt instruments is calculated following the debtor approach Included in services are financial intermediation services indirectly measured (FISIM), with the related adjustments in investment income Direct investment and related income are classified on an asset and liability basis instead of according to the directional principle Estimates of illegal activity are incorporated in goods and services Reinsurance are to be treated as direct insurance The income on reserves is not included under other investment but as a separate category Flows related to migrants' assets/liabilities caused by changes of residence are no longer registered as transfers in the Capital Account but are considered Other Changes in Volume Intellectual property arising from R+D is reclassified from the capital account (nonproduced assets) to services The sign convention is altered in the Financial Account for net data, which is now presented as the IIP: assets less liabilities Taxes and subsidies on products and production are not included under current transfers, but under the new heading of Primary income Other investment is broken down further The classification of debt securities into Bonds and notes and Money market instruments changes to short-term (equal to or less than one year) and long-term (over one year) Intercompany lending between related companies is only excluded from direct investment when the two entities, resident and non-resident, belong to certain financial sectors 4/17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

5 2.1 Methodological changes in the Current and capital accounts Goods and services account Reclassification of the processing and repair of goods. One of the features of globalisation is the location of the different phases of a company s productive process in various countries to better harness the comparative advantages of each. This phenomenon gives rise to inflows and outflows of goods, without their ownership changing, which was previous recorded under BPM5 in the merchandise account. Under BPM6, they are excluded from this account and only the manufacturing service cost is recorded under a new heading: Manufacturing services on physical inputs owned by others. Thus, the change of ownership principle is strictly applied, meaning that no merchandise transaction is recorded between the processor and the owner. In this same respect, inflows and outflows of goods for (or after) repair are excluded from merchandise imports and exports, and the amounts relating to repair costs are recorded in a new services category. This change has also been incorporated into the new ESA Reclassification of merchanting. Transactions of this type are moved from the services account to the goods account, where they are shown as a component other than general merchandise, specifying net and gross values. Also in this case, as in that of processing and repair services, the change is in response to the strict application of the principle of change of ownership of the goods. This change has also been included in the new ESA Inclusion of estimates relating to illegal activities in goods and in services. The estimates have been made by the INE, in the broader context of the estimation of illegal activities with or without an impact on the external sector, to include them in National Accounts re-based to 2010, which was disseminated in September for the first time. This change is not really a change in the manuals, since ESA 95 had already established that illegal activities should be included in the definition of production of the National Accounts. However, the logical difficulties in measuring such activities have generally delayed their inclusion in the various countries. Recently, the insistence of international agencies and the preparation by Eurostat of guidelines on methodological recommendations have led this point to be included in the changes to be introduced in The expense in imputed rents made by owners of real estate located in another ountry whenever they live temporarily in it is now incorporated to the Travel heading. Thus, expenses made by non-resident owners owing to a temporary residence in real estates in Spain are registered as travel income. In the reverse case, they are considered as travel expenses. This incorporation does not affect the net lending/net borrowing of the nation, as the increase in travel income/expense is compensated by an equivalent increase in investment income, given that the owner is imputed as investment income the same amount than he is allocated as expense in imputed rent. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

6 Communication Services are split and reclassified, disappearing as an separate item. On one hand, postage and courier services are included under transport services. On the other, telecommunications services are grouped together with computer and information services. The category Financial Intermediation Services Indirectly Measured (FISIM) is introduced. Resident or non-resident agents producing FISIM charge their services implicitly in the income they collect or pay. Under BPM5, income was not being adjusted for these amounts in the BoP and this treatment was one of the few methodological differences remaining between the BoP and the Rest of the world account in National Accounts. BPM6 equates the treatment to that in ESA 95, which remains unchanged in ESA Accordingly, the intermediation services charged implicitly in income should be estimated in order to adjust the latter and to present separately in the services account the amounts paid or collected implicitly for intermediation services. The treatment of reinsurance is equated to that of direct insurance. Under BPM5, direct insurance services were valued on the basis of the service charges included in total premia. The rest of the amount of the premia and the total claims were recorded in the current transfers account, except in the case of life insurance, which was calculated in the financial account as other investment. Conversely, in the case of reinsurance, all flows were counted in the services account, depending on whether the reinsurer was a resident (at net amount in exports) or non-resident (at net amount in imports). Under BPM6, reinsurance must be calculated in a manner consistent with direct insurance. This change has also been incorporated into the new ESA Primary income account This nomenclature, which was already being used in the System of National Accounts, is introduced for the BoP in the BPM6 to ensure consistency between the two sets of statistics. Thus, what was called Income and Current transfers in the BPM5 is now split between Primary income and Secondary income. The items included in primary income are: Compensation of employees Investment income Other primary income (taxes on production and on imports and subsidies 7 ) Included in primary income, within portfolio investment income, are reinvested earnings on investment funds, since they are considered to belong to their shareholders. The income of investment fund shareholders is defined as the income generated by the investment fund portfolio less operating expenses. When only part of this income is distributed to shareholders in the form of dividends, the retained earnings have to be classified as if they had been distributed to shareholders and the 7 This means the reclassification of payments to the EU related to the called Traditional own resources (customs rights, agricultural fiscal exactions and sugar and isoglucose production values) and of income from the EU through the European Agricultural Guarantee Fund (EAGF). 6/17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

7 shareholders had reinvested them in the fund. Therefore, income is recorded and, as the balancing item, an addition to the investment is recorded in the financial account. This change also removes an inconsistency between the methodology in the BoP manual and that in the SNA. Income earned on portfolio investment in debt instruments is estimated using the debtor approach. The BPM5 required the accrual principle to be applied, but did not specify the method in as much detail as the BPM6. Under the BPM6, interest is equal to the amounts the debtors will have to pay to their creditors over and above the repayment of the amounts advanced by the creditors. Interest accrual is determined at inception of an instrument and lasts until it is extinguished. This approach contrasts with the use of market rates which reflect market conditions and expectations currently (creditor approach) or at the time of purchase (acquisition approach). Income on reserves, which was previously included in other investment income, is now presented as a separate item Secondary income account As in the SNA, the primary income account is followed by the secondary income account, which includes current transfers. Note that current transfers were defined more broadly in the BPM5, where they included some items which in the BPM6 are now assigned to the primary income account. Also, the presentation of current transfers in the new manual is more detailed. The item Personal transfers, which is broader than Workers' remittances, is introduced. Personal transfers include all transfers between households regardless of the source of income of the sender and of the relationship between the households. As noted in goods and services, the treatment of reinsurance is the same as that of direct non-life insurance. Therefore, the amount of premiums in excess of that of insurance services and claims will be recorded as current transfers Capital account Intellectual property arising from R&D, such as patents or trademarks, is reclassified as produced assets and their purchase/sale is no longer included in the capital account, but rather in the services account. Flows related to migrants' assets/liabilities caused by changes of residence are no longer registered as transfers in the Capital Account but are considered Other Changes in Volume 2.2 Methodological changes in the financial account of the BoP and the IIP The changes in this heading generally have corresponding effects on the primary income account, in the related instruments and functional categories. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

8 Before describing the changes affecting each functional category, it should be mentioned that the sign convention is altered in the Financial Account for net data, which is now presented as the IIP: assets less liabilities. A positive sign in the net of the Financial Account comes to mean an outflow of funds Direct investment In the main presentation of the BoP and the IIP, direct investment is now classified on an asset and liability basis instead of according to the directional principle. In the BPM5, investments of opposite direction were netted, i.e. direct investments were classified as follows: Spanish investment abroad = A (claims of Spanish parent company on foreign subsidiary) B (liabilities of Spanish parent company to foreign subsidiary) + C (claims of subsidiaries on other subsidiaries of the same group). Investment in Spain from abroad = D (liabilities of Spanish subsidiaries to foreign parent companies) E (claims of Spanish subsidiaries on foreign parent companies) + F (liabilities of subsidiaries to other subsidiaries of the same group). In the main presentation of the BPM6, these investments are classified simply as assets (A, C, E) and liabilities (D, F, B). However, it is recommended to keep the directional principle for use as needed in supplementary presentations. It is specified more clearly that the debt of financial corporations is only excluded from direct investment if the two corporations resident and non-resident are deposit-taking corporations, investment funds or other financial intermediaries, except insurance corporations and pension funds Portfolio investment As noted above, reinvested earnings on investment funds are recorded as income attributable to the owners of investment fund shareholders and the balancing entry is an addition to investment in the financial account. The distinction between bonds and notes and money market instruments becomes strictly a distinction between short and long term (less or more than one year), and the nomenclature is changed accordingly Other investment Allocations of special drawing rights (SDRs) by the IMF to member countries are recorded as a liabilities-side transaction in Other investment. A more detailed breakdown of Other investment is introduced. Included as separate items are other equity (when it does not constitute direct investment or reserve assets, 8/17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

9 such as, for example, certain equity participations in international organisations) and assets/liabilities relating to insurance, pensions and standardised guarantees. However, this additional breakdown has not been used in practice because of the low weight of some components in relation to the more important ones in this category, namely loans and deposits. 3 Change in information sources 3.1 Background Since the Banco de España took responsibility for compiling the BoP in 1991, it had its own information system, under which the cross-border transactions of residents had to be obligatorily declared. This type of BoP system, known internationally as ITRS (International Transactions Reporting System), was common in other countries. It comprised: a Declaration by banks of the opening and closing balances of any account through which they carry out cross-border transactions, and of each and every one of the movements for their own or their customers account explaining the changes in these balances, along with an identification of the BoP item relating to the movement, as denoted in the Banco de España s classification. b Declaration by the holders (other than credit institutions) of accounts abroad, of the opening and closing balances of those accounts and of all movements, classified also by item, evidencing changes in balances. This system is supplemented by a declaration of offsetting transactions and a declaration of foreign loans. 8 Thus the Banco de España has been fulfilling its responsibilities thanks largely to its own information sources regulated by its circulars. However, in recent years, the progressively increasing complexity of the requirements of international organisations in the area of external statistics has led to information requirements which are hard to cover in an indirect declaration of receipts/payments. Also, the euro cash changeover, the integration of payment systems, globalisation (with an increase in intra-group flows of multinationals) and the increasingly high reporting thresholds introduced to enhance the efficacy of payment systems mean that systems of this type are becoming less suitable for measuring the economic phenomena addressed by external statistics. All this has led to systems of this type, used by most European countries, gradually being abandoned. 8 If, under any of the above mechanisms, i.e. a or b (or offsetting), a BoP item code relating to a loan was reported and the resident holder was not an entity registered with the Banco de España, the related circular required the Financial Transaction Number ( NOF by its Spanish abbreviation) assigned to that loan by the Banco de España to be identified. This NOF allowed the data from the abovementioned sources a and b to be compared with the loan registration database which provided numerous loan characteristics (including the relationship between firms which identifies the functional category to which the transactions are assigned or the stock where they are accumulated). This register received input from the compulsory reporting of loans when they were originated. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

10 Finally, in the context of the establishment of the SEPA, it was considered that the obligation to declare BoP statistical items hindered its integration. Note that the objective of implementation of the SEPA is precisely to make all payments (national or cross-border between all SEPA countries) equal in terms of simplicity, security and efficacy. Consequently, in 2012 the regulation on cross-border payments 9 was changed and a final date was set for the reporting of this information by banks. That date would, in any event, have required a change of system and forced countries like Spain still using the ITRS to replace it. For this reason, as has occurred in other European countries, the Banco de España has had to refocus the general BoP information system towards direct reporting systems, surveys and the use of administrative or other types of sources that are already available. In this process the Banco de España has proceeded gradually. Starting from its own information system, the ITRS, it progressively replaced this information (which covered all BoP headings) over time. This process was completed in 2014, when the previous system was discontinued. Examples of the use of information other than the ITRS include the Customs Department s external trade statistics, which have been used ever since the BoP has been compiled. Another case is the use of the EGATUR Spanish tourism expenditure survey to estimate tourism receipts, along with other indicators, after the euro cash changeover. Another area in which information sources other than the ITRS were also already being incorporated in the past was that of financial assets and liabilities. Apart from the use of stocks reported directly by credit institutions in their financial statements for the preparation of the IIP from the outset, also noteworthy is the incorporation of data reported under the specific system for marketable securities pursuant to Circular 2/2001, and subsequently Circular 3/2013, and the incorporation of data on stocks of direct investment equity from the Foreign Investment Register kept by the Ministry for Economic Affairs and Competitiveness. 3.2 Overview of change of sources The headings most affected by the change are those of the BoP in which the information from the ITRS was still fundamental and those of the IIP which, due to the lack of an information source for stocks, also had to be calculated using the aforementioned declaration of transactions. 10 The approach to the new information sources for the current account and capital account (except investment income) has differed considerably from that for the financial account, IIP and investment income. Notably, this entire process has been 9 Regulation (EU) No 260/2012 of the European Parliament and of the Council amending Regulation (EC) No 924/2009 on cross-border payments in the Community. 10 Note that the difference between the IIP figure in a given period and in the preceding one must be equal to the transactions taking place in that period plus any revaluations (price or exchange rate) plus other changes in volume (e.g. unilateral cancellations of debt) /17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

11 carried out in close cooperation with the INE (Spanish National Statistics Institute), both because of the information sources which had to be used, particularly for the current and capital accounts, and because of the need to ensure consistency between the Rest of the world account in the National Accounts and in the BoP. The three most notable new information sources are as follows. First, the INE s survey on international trade in services and other international transactions, which covers the majority of other services and the other current and capital account items able to be covered by a survey of these characteristics. Second, the direct declarations of foreign transactions and external positions by agents other than payment service providers (PSPs) to the Banco de España. 11 Third, the financial statements of credit institutions, which were already being used for the IIP and have been adapted to cover also the information needed to calculate the BoP, to enable the criteria of the new manual to be applied and to meet the new international requirements. The items unable to be covered by the aforementioned three sources are generally estimated by indirect methods usually combining various statistical or administrative sources that are already available. As mentioned in the introduction, the new system offers a greater assurance of quality than the previous one. This is because it is based to a greater extent on direct reporting by the units operating with the external sector, in some cases, and because, in other cases, it is more integrated into the various information sources used to measure related phenomena. The big advantage of the previous system, despite its limitations, was that it provided a rapid monthly figure which was very complete because it captured most of the transactions when they were settled. Contrastingly, in the new system a significant portion of the information sources are quarterly (even annual in a few cases) and the monthly ones, being derived from direct reporting, will probably have a somewhat longer time period for completing the information. The monthly data in the new system must be regarded with greater caution, particularly preliminary estimates until the quarterly revision Change of sources: description by heading Current and capital accounts In the current and capital accounts, the goods heading, which has the greatest weight in quantitative terms, is continued to be calculated using the Customs Department s external trade data as the main source. Another major heading which is not affected by the change in information sources is travel. Nor is the source change for current and capital transfers relating to flows to/from the European Union. In other items, the traditional sources are generally replaced by new ones and in some cases it has been necessary to revise the time series. 11 These disclosures are regulated by Banco de España Circular 4/ In Session 4 (Surveys for the compilation of external sector statistics) of the seminar "The use of surveys by central banks" sponsored by the Irving Fisher Committee, a useful comparative table of the characteristics of ITRS systems and of direct reporting was presented. See IFC Bulletin No 30, July 2009, on the Bank for International Payments website. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

12 The main information source to be incorporated in this part of the BoP is the Comercio Internacional de Servicios y otras operaciones internacionales ( CIS by its Spanish acronym) survey on international trade in services sponsored by the INE. This survey was designed initially to cover only the Other services headings. However, given the plans for discontinuing the ITRS and changing the methodological manuals in 2014, the INE and the Banco de España cooperated throughout 2012 on adapting this survey to the new methodological manuals, the 2013 data being the first data forthcoming from the survey adapted as follows: a Inclusion of new items, such that all those in the current and capital accounts able to be covered by a survey of this type were indeed covered; b Adaptation of the sample design to cover the population as far as possible, making use of the declaration of foreign transactions by PSPs. As mentioned above, from 2014 this declaration does not contain the BoP item codes 13 but it does identify residents and quantifies the amounts of foreign transactions. More details on the use of the CIS source and of other sources which will be used are given below Non-tourism services The main information source in the new system is, as discussed above, the CIS survey. The use of specific surveys on international trade in services to compile this heading, after systems such as the ITRS were discontinued, is quite common in the various European countries. 14 Some adjustments need to be made to calculate the services data on the basis of the CIS results. The first is to include an estimate of the transactions of units which, since they always operate below the threshold of 50,000 of the PSP reporting system, are outside the survey population. Second, in order to estimate goods transport, the habitual procedure continues to be used since it is not possible for companies declarations to be adapted to the applicable methodological principles or to have the coverage required. Insurance services also need to be estimated to a certain degree on the basis of the premiums and claims reported in the CIS. Finally, certain operations not covered by the CIS but for which information is available are added, such as the implicit service charged to the EU by general government for collecting the funds relating to traditional own resources. Given that the CIS survey is quarterly, to estimate aggregate monthly data and to provide a forward projection of the data of the corresponding three months before the figure for each quarter becomes available, an indicator on exports/imports of services companies according to the Tax Agency (AEAT) is used as a complementary indicator. 13 PSPs have to report receipts/payments received/ordered by their customers flowing from/to accounts open at non-resident PSPs. The fields reported are limited, in accordance with the new European legislation, to those available totally automatically in their operating procedures, which do not include the statistical item of the transaction or any information relating to the issuer/final recipient of the receipts/payments. Identification of the resident orderer/recipient of the transaction, of the country of the payment institution acting as counterpart of the transfer (not of its customer) and of the amount is available. Finally, the reporting threshold is 50, For example, the recent case of France can be noted. See Appendix II-D of the 2011 Annual report. The French Balance of Payments and International Investment Position. Banque de France /17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

13 Labour income For the estimation of labour income in the new system it was necessary to resort to indirect estimates which combine population data with average compensation data. The population data used are, in the case of receipts, from the Spanish Labour Force Survey (EPA). In the case of payments, the data are from authorisations and contracts of employment (for non-eu, non-efta countries) and from the InboundTourism Survey (FRONTUR) and the Tourism Expenditure Survey (EGATUR) on business travellers (EU or EFTA countries) 15. The data on average compensation are taken from the national accounts data of Spain for payments and the national accounts of counterparty countries for receipts, taking into account the economic activity. The information by economic activity is available in the population data for receipts and partially for payments. The basic estimate will be quarterly. Finally, note that the estimate of payments is supplemented with that of payments reported by general government on local employees hired in territorial enclaves in the rest of the world. The inclusion of new sources has made it necessary to revise the BoP labour income series Personal transfers and social benefits As discussed in Section 2, in BPM6, the heading workers remittances is now included in a more general heading, personal transfers, which aims to cover all transfers made between households, independently of the source of the income transferred, the relationship between the households or the purpose of the transfer. In practice, the discontinuation of the ITRS in 2014 has not meant a change in the calculation method of payments, 16 which was already based on other information sources. By contrast, the receipts from migrants remittances were still based on the ITRS data and, consequently, in this case it has been necessary to create a new estimation method. The information sources below are used in the new system for receipts. The first source is the data reported by payment institutions (remittance senders) to the Banco de España under BE Circular 3/2009 (which amends BE Circular 6/2001). This is one of the most frequently used sources of the various countries and has underpinned the estimation of workers remittances in the case of payments 17. It provides detailed information on the number and amount of their money transfer operations with a geographical breakdown. In the case of receipts, the countries from which these transfers are sent are essentially of two types: the countries of origin of recent immigrants to Spain (to which they may have returned); and countries with higher employment rates than Spain to which this population may have re-migrated. This suggests that the receipts channelled through these intermediaries basically relate to the foreign population which has resided previously in Spain and maintains links with our country. Taking into account the foregoing, an estimate of the remittances from Spaniards resident abroad is added to the receipts data. A more indirect approximation is used for this 15 The former are supplied by the Permanent Observatory on Immigration and the Subdirectorate General of Immigration of the Ministry of Employment and Social Security and the latter are supplied by the Tourism Studies Institute of the Ministry for Industry, Energy and Tourism. 16 See Álvarez de Pedro, Javier; García Cid, Mª Teresa and Tello Casas, Patrocinio: Workers Remittances in the Spanish Balance of Payments, Economic Bulletin of the Banco de España, July The data of remittance senders are increased to cover other possible channels of these flows. See the article quoted in footnote 16. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

14 purpose, by taking as an estimate of an average remittance that obtained from remittance senders and as the population of remittance senders that obtained from the Census of Spanish Residents Abroad (PERE), with certain restrictions on age and country of birth. As for social benefits, the basic information source for payments is the National Institute of Social Security (INSS) which provides the Banco de España with data on pension payments to non-residents. On the receipts side, information supplied by the INSS is also used, although the compilation method is more indirect Other current transfers and the capital account The new information sources for these items are the CIS survey, for all sectors, and the data on public transfers channelled through the Banco de España and the direct reporting of certain Ministries for the general government sector. For the latter, the data will be tested, additionally, with information provided by the Spanish National Audit Office (IGAE), although that source will not be available for producing the monthly data or for the initial quarterly estimates Financial account IIP and investment income Note, as regards financial assets and liabilities, first, that the analyses performed to assess the extent to which the change of information sources would mean a break in the series have taken as a reference the stocks and a backward revision of the IIP is only considered where the stocks calculated using the old and the new systems are significantly different. In the BoP, only those series of investment income where a break was observed have been revised. At international level examples can be found of significant revisions of stocks when changing from an accumulation-of-flows method to a source which provides data on stocks. 18 The main new information source which has been incorporated into the BoP, the IIP and the External Debt is the data reported to the Banco de España under Circular 4/2012 (rules for the reporting by residents in Spain of cross-border economic transactions and stocks of external financial assets and liabilities). Taking the initial stocks as those as at December 2012, firms which are not payment service providers report directly to the Banco de España transactions and stock of external financial assets and liabilities 19. It is worth noting that the information received through the reporting to the Banco de España of credit institutions financial statements has been revised in order to request the necessary changes to cover the BoP requirements 20. With these two changes, 18 See, for example, Supplements to the Statistical Bulletin. Monetary and Financial Indicators. Balance of Payments and International Investment Position, Volume 20, 26 May 2010, Banco de Italia. In the Methodological Appendix the replacement of the accumulation of flows system by the reporting of stocks in the area of portfolio investment is discussed. 19 As detailed above, the declaration of the PSPs contains the cross-border collections and payments as well as the transfers to/from abroad performed on behalf of their customers where these operations have as their source or recipient a PSP in another EU Member State or any other country. The data supplied only contain the information available to the PSPs and they can perform reporting automatically at no additional cost (basically the tax identification number of the resident account holder and the amount). This information cannot be incorporated directly into the External Statistics but it will be used in future to detect possible reporting failures under Circular 4/ The availability of data on stocks with the required frequency and breakdowns has been ensured for those headings least affected by changes in prices and for which it is feasible to obtain transactions as differences in stocks. Also ensured is a breakdown by currency which shows the details of the changes in stocks in those headings arising from changes in exchange rates and transactions. In other headings it was necessary to include the reporting of transactions in addition to the corresponding stocks /17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014

15 most of the information lost under the ITRS will be covered. However, in certain headings it has been necessary to look for alternative sources to complete this information Direct investment in unlisted equity The ITRS was used for all sectors in the BoP. At present, the data from the new direct reporting system of Banco de España Circular 4/2012 are used for ORSs. Furthermore, as mentioned above, the reporting of credit institutions financial statements, which to date only covered stocks, has been changed to also include financial transactions and income with the breakdowns and frequencies required for compiling the BoP. Credit institutions financial statements and the Foreign Investment Register (RIE) of the Ministry for Economic Affairs and Competitiveness for ORSs are continued to be used in the IIP. The transactions of the new system will be used only for the conversion to a quarterly basis of the RIE data and their forward projection changes Loans The ITRS was used for all sectors in the BoP. In the new BoP the data from the new direct reporting system of Banco de España Circular 4/2012 are used for ORSs and general government, and the reporting of credit institutions financial statements has been changed to cover the breakdowns and frequencies required to calculate the BoP. For the latter, the transactions will be obtained as differences in stocks adjusted for changes in the exchange rate and taking into account any other variations in volume reported separately by the institutions. The stock of asset-side and liabilities-side loans, of direct investment and of other investment for ORSs and general government was being calculated for the IIP based on the accumulation of transactions reported in the ITRS, adjusted for changes in the exchange rate. As from December 2012 (opening balance of the first declaration of 2013), data are available on the stock, transactions and other flows (changes due to the exchange rate, prices and other variations in volume) reported under Circular 4/2012. Thus, the previous system (accumulation of flows mostly reported indirectly by the banks) is radically different to the new system (based on the direct reporting of stocks and flows) Intercompany accounts Intercompany accounts are accounts between subsidiaries and parent companies or between companies in the same group in which mutual transactions are settled. In the previous system, holders of accounts abroad reported both the bank accounts and the intercompany accounts. The balances of intercompany accounts in the IIP and the changes in them in the BoP were assigned to direct investment as intercompany lending between related companies. These accounts were assigned to assets in keeping with their credit sign in the aggregate. Accounts relating to centralised cash management were exempt from the monthly reporting of accounts detailing opening and closing balances and all variations, and the only method for approximating stocks was the accumulation of flows. CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN /17

16 In the new system the balances of these accounts and the changes in them are reported monthly, and asset-side and liabilities-side accounts are processed separately. Consequently, due to this direct reporting, reported information on stocks is available, including cash-pooling accounts and, consequently, the procedure of accumulation of flows previously used in these cases is discontinued Trade credit This heading can be covered suitably due to the new reporting system with data from December In this case, there will be a break since no previous information exists in the previous system Deposits The ITRS has been used in the BoP for all sectors and, consequently, this source should be replaced by other alternatives. Thus, the reporting of credit institutions financial statements, which to date only covered stocks, has been modified to offer the information needed to cover the BoP requirements on income and the financial account and the latter flows are obtained as differences in stocks. The IIP of ORSs and general government is calculated by the accumulation of flows adjusted for changes in exchange rates. The data of the new direct reporting system which provides transactions, other flows, balances and income will be used for general government. For ORSs, the new system, particularly due to the significance of individuals in this heading and the reporting thresholds, achieves sufficient coverage. The potential coverage problems in this heading are not an issue for Spain alone but for other countries and are much debated at international level 21. The recommendation given in international fora in relation to this matter is to take as a reference the stocks of the Locational banking statistics by residence database of the BIS and if the latter are higher, they should be included in the IIP, as it has been our case. The national central banks of countries which collaborate with the BIS for the compilation of these statistics provide, inter alia, the data of liabilities-side deposits reported by deposit-taking institutions in their country, disaggregated by sector and country of holders resident in other countries. Thus, they can be taken as mirroring data for testing purposes and as a benchmark for the level of our assets Derivatives In the BoP, financial derivatives for all sectors were being calculated through the ITRS. In the actual system, the information on transactions is collected by means of direct reporting for the Banco de España, the OSRs and the general government, and for the credit institutions through their financial statements, also modified in this respect so as to offer all necessary information for the BoP requirements. 21 See, for example, Methodological changes in the compilation of the Euro Area Balance of Payments and International Investment Position, ECB November In the Statistics section of the ECB s website (Balance of Payments, methodological information) /17 CHANGES IN THE BALANCE OF PAYMENTS AND IN THE INTERNATIONAL INVESTMENT POSITION IN 2014