Balance of Payments
Ing. Tomáš Heryán, Ph.D.
International Business Finance
FIU/NAIFA
• The measurement of different forms of international economic transactions
between the residents of a country and foreign residents
– The resident is a economic concept, and it includes individuals, firms,
nonprofit communities, and the government
• The statistical record of a country's international transactions over a
certain period of time presented in the form of double-entry bookkeeping
• The statistical statement that summarizes economic transactions between
residents and non-residents for a certain period of time and for a specific
economy. The basic structure of the balance of payments includes the
current, capital and financial accounts, of which foreign exchange reserves
are a part
Definition of the balance of payments
Balance of Payments (International Business Finance – presentation 06)
• BOP influences and is influenced by other variables, such as gross
domestic product, employment levels, price levels, exchange rates, and
interest rates
• Government policymakers need the data of BOP to evaluate the general
competitiveness of domestic industries, to set the exchange or interest rate,
to determine the monetary and fiscal policy, etc.
• BOP data is also important for MNEs as it is a gauge of a nation's
competitiveness or health
Importance of the balance of payments
Balance of Payments (International Business Finance – presentation 06)
• For a multinational enterprise, both home and host country BOP data is
important because:
– BOP is an indication of pressure on a country's foreign exchange rate
– Change in a country's BOP may signal the imposition or removal of controls
in various sorts of payments, e.g., removal of the capital outflow control may
reduce the balance of the financial account in BOP
– A forecast of a country's market potential (especially in the short run), e.g.,
a country with trade deficit may welcome investments that can increase its
exports
Importance of the balance of payments
Balance of Payments (International Business Finance – presentation 06)
• Each of the following represents an international economic transaction that
is counted in and captured in the Czechia's BOP:
– A Czech subsidiary of a foreign multinational enterprise acts as a distributor
for the enterprise's products and sells the goods in the Czech market
– A firm based in Czechia manages the construction of a major water treatment
facility in a foreign country
– The Czech subsidiary of a foreign firm pays profits (usually by distributing
dividends to shareholders) back to the parent firm in its home (foreign)
country
– A Dutch mutual fund purchases a Czech corporate bond through an
investment broker in Czechia
Typical BOP transactions
Balance of Payments (International Business Finance – presentation 06)
• Double-entry bookkeeping, i.e. each transaction is recorded by at least two
entries of the same value, first as income (credit entry) and the second
time as an expense (debit entry)
• The BOP must balance
– It cannot be in disequilibrium unless something has not been counted or has
been counted improperly
– It is incorrect to state that the BOP is in disequilibrium
• Recording of only those transactions which take place between residents
and non-residents
– The economic interest of the participants in the transaction is decisive for the
determination of residence
Main principles of BOP compilation
Balance of Payments (International Business Finance – presentation 06)
• Recording of flows on an accrual basis, i.e. at the time at which economic
value is created, transformed, exchanged, transferred, or extinguished, in
the case of receivables and liabilities on a change of ownership
• Valuation of transactions at market prices
• Changes which do not represent transactions (for example influences of
exchange rate fluctuations, price fluctuations and so on) are not recorded
in the balance of payments
• Transactions executed in foreign currencies are converted to the home
currency at the exchange rate valid at the time of transaction or average
exchange rate for the reported period
Main principles of BOP compilation
Balance of Payments (International Business Finance – presentation 06)
• In 2014 countries launched implementation of the sixth edition of the
Balance of Payments and International Investment Position Manual
(BPM6) released by the International Monetary Fund in 2009
– This follows the fifth edition (BPM5) released in 1993
• BPM6 provides a standard framework enhancing international
comparability of data through internationally adopted guidelines
• BPM6 is consistent with all versions of the System of National Accounts
(2008 SNA, ESA 2010, BD4)
• BPM6 logically connects BOP with the country's international investment
position
Conceptual changes in BOP compilation
Balance of Payments (International Business Finance – presentation 06)
• New terms introduced
– „Primary income“ and „secondary income“ in the current account
– „Net acquisition of financial assets” and „net incurrence of liabilities” instead of „debits”
and „credits” in the financial account
– „Net lending/net borrowing“ as the balancing item for the financial account or the
current and capital accounts together
• Presentation of foreign direct investment is now on a „gross“ basis (asset/liabilities
principle) instead of former „directional principle“, which would net out reverse
investment
• Sign convention changed in the financial account
– Positive signs are no longer used for inflows and negative signs for outflows
– A positive number indicates an increase in assets or liabilities and a negative number
the opposite (a decrease)
Main changes introduced with BPM6
Balance of Payments (International Business Finance – presentation 06)
Comparison of the sign convention
Balance of Payments (International Business Finance – presentation 06)
BOP accounts BPM5 BPM6
Current account, revenues + +
Current account, expenditures - +
Balance on Current account Revenues+Expenditures = +/- Revenues-Expenditures = +/Revenues
on capital transfers + +
Expenditures on capital transfers - +
Balance on Capital account Revenues+Expenditures = +/- Revenues-Expenditures = +/Net
acquisition of financial assets (net
domestic/foreign capital inflows in BPM5)
- +
Net incurrence of financial assets (net
domestic/foreign capital inflows in BPM5)
+ +
Balance on Financial account
Capital inflows + Capital
outflows = +/Net
acquisition of financial
assets - Net incurrence of
financial assets = +/-
Comparison of BOP structure
Balance of Payments (International Business Finance – presentation 06)
BPM5 BPM6
Current account Current account
Trade balance (Goods) Goods and services
Balance of services
Balance of incomes Primary income
Current transfers Secondary income
Capital account Capital account
Financial account Financial account
incl. Official reserve assets
Balance of errors and omissions Net lending (+) / net borrowing (-)
Change of official reserves Net errors and omissions
• BPM5 identity
Current account + Capital account + Financial account + Errors and
omissions = - (Change of official reserve assets)
• BPM6 identity
Current account + Capital Account + Net errors and omissions = Financial
account
Net lending (+) / net borrowing (-) + Net errors and omissions = Financial
account
Comparison of basic BOP identities
Balance of Payments (International Business Finance – presentation 06)
Simplified BOP structure
Balance of Payments (International Business Finance – presentation 06)
1 – Current account
1.A – Goods and services
1.B – Primary income
1.C – Secondary income
2 – Capital account
3 – Financial account
3.1 – Direct investment
3.2 – Portfolio investment
3.3 – Financial derivatives (other than reserves) and employee stock options
3.4 – Other investment
3.5 – Reserve assets
4.3 – Net lending (+) / net borrowing (-) (balance from current and capital account)
4.4 – Net lending (+) / net borrowing (-) (balance from financial account)
4.5 – Net errors and omissions
Structure of the current account
Balance of Payments (International Business Finance – presentation 06)
CURRENT ACCOUNT
Goods and services Primary income
Trade balance (goods) Compensation of employees
Services Investment income
Manufacturing services Direct investment
Maintenance and repair services Dividends
Transport Interest
Travel Portfolio investment
Construction Other investment
Insurance Reserve assets
Financial services
ICT services Secondary income
Operating leasing services
Other business services
Personal, cultural services
Government goods and services
• The current account shows flows of goods, services, primary income, and
secondary income between residents and nonresidents
• The current account typically dominated by the balance of goods and
services and particularly by the trade balance (goods)
• The primary income account presents amounts payable and receivable in
return for temporary use to another entity of financial resources, labor, or
non-produced nonfinancial assets
• The secondary income account shows redistribution of income generated
by one economy to another
– Personal transfers, an expansion of the previous concept of “workers’
remittance”, are still the foremost item of this account
Current account
Balance of Payments (International Business Finance – presentation 06)
Current account balance in selected countries
Balance of Payments (International Business Finance – presentation 06)
Current account imbalances (% of world GDP)
Balance of Payments (International Business Finance – presentation 06)
Structure of the financial account
Balance of Payments (International Business Finance – presentation 06)
FINANCIALACCOUNT
Direct investment – assets Other investment – assets
Equity capital and investment fund shares Currency and deposits
Intercompany lending Loans
Direct investment – liabilities Trade credit and advances
Equity capital and investment fund shares Other
Intercompany lending Other investment – liabilities
Portfolio investment – assets Currency and deposits
Equity capital and investment fund shares Loans
Debt securities Trade credit and advances
Portfolio investment – liabilities Other
Equity capital and investment fund shares Reserve assets
Debt securities
Derivatives – assets
Derivatives – liabilities
• The financial account shows acquisitions of assets and liabilities,
identified under the categories
• Direct investment – in which the investor exerts some explicit degree of
control over the assets (at least 10 % of equity capital)
• Portfolio investment – in which the investor has no control over the assets
• Financial derivatives – contract that derives its value from the
performance of an underlying entity (futures, options, swaps)
• Other investment – consists of various short-term and long-term trade
credits and advances, cross-border loans, currency deposits, bank deposits
and other financial assets and liabilities
Financial account
Balance of Payments (International Business Finance – presentation 06)
Financial account in China
Balance of Payments (International Business Finance – presentation 06)
Official reserve assets – top 20 countries
Balance of Payments (International Business Finance – presentation 06)
Development of foreign reserves
Balance of Payments (International Business Finance – presentation 06)
Balance of payments of Czechia (mil. CZK)
Balance of Payments (International Business Finance – presentation 06)
2010 2011 2012 2013 2014 2015 2016
1 – Current account -141 776,5 -84 800,8 -63 313,0 -21 784,4 7 882,6 11 283,1 52 641,9
1.A – Goods and services 118 865,3 156 759,2 201 424,3 237 332,5 275 601,6 266 069,9 351 695,9
1.B – Primary income -249 929,8 -223 345,4 -237 527,8 -249 018,7 -260 789,0 -254 838,1 -271 762,0
1.C – Secondary income -10 712,0 -18 214,6 -27 209,4 -10 098,1 -6 930,1 51,4 -27 292,0
2 – Capital account 37 596,4 12 710,1 53 011,0 82 436,6 32 318,6 101 895,3 53 509,7
3 – Financial account -122 338,9 -74 763,6 11 688,7 68 307,5 59 416,2 175 781,9 117 678,4
3.1 – Direct investment -94 990,5 -46 804,8 -121 261,1 7 437,5 -80 382,8 49 748,1 -140 957,2
3.2 – Portfolio investment -150 353,3 -5 780,7 -54 847,6 -92 837,9 90 268,9 -164 135,0 -169 532,4
3.3 – Financial derivatives (other than
reserves) and employee stock options
4 747,8 3 673,8 -8 617,8 -4 736,8 -6 046,2 -4 769,9 11 291,1
3.4 – Other investment 76 832,2 -8 622,1 115 941,8 -29 746,7 -17 546,4 -56 366,8 -146 644,2
3.5 – Reserve assets 41 424,9 -17 229,7 80 473,5 188 191,5 73 122,7 351 305,5 563 521,2
4.3 – Net lending (+) / net borrowing (-)
(balance from current and capital account)
-104 180,1 -72 090,7 -10 302,0 60 652,2 40 201,2 113 178,3 106 151,6
4.4 – Net lending (+) / net borrowing (-)
(balance from financial account)
-122 338,9 -74 763,6 11 688,7 68 307,5 59 416,2 175 781,9 117 678,4
4.5 – Net errors and omissions -18 158,8 -2 673,0 21 990,7 7 655,3 19 214,9 62 603,5 11 526,8
Current account of Czechia (mil. CZK)
Balance of Payments (International Business Finance – presentation 06)
-400000
-300000
-200000
-100000
0
100000
200000
300000
400000
Goods and services
Primary income
Secondary income
Current account
Financial account of Czechia (mil. CZK)
Balance of Payments (International Business Finance – presentation 06)
-400000
-300000
-200000
-100000
0
100000
200000
300000
400000
500000
600000
700000
Direct investment
Portfolio investment
Financial derivatives
Other investment
Reserve assets
Financial account
THANK YOU FOR YOUR
ATTENTION
J