RDP 9405: External Debt and Liabilities of Industrial Countries 3. Comparability of Data

Because the data for the industrial countries are derived from different national sources, they are not always directly comparable. This study makes no attempt to overcome these difficulties.

3.1 Coverage

As noted above, full international investment position statistics are available for only eighteen of the industrial countries. Coverage of the other countries is limited by lack of data on equity holdings, both direct and portfolio. To the extent that the IMF guidelines are followed, each country's statistics should include the same range of financial instruments (see footnote 3). In practice, this is unlikely to be the case. Countries may not all include the same instruments in their statistics and even when they do, the method of estimating the size of the stock of the various instruments may differ. Because not enough detail is provided on the coverage of instruments included by the individual countries, the full extent of this problem cannot be determined.

3.2 Valuation

The IMF's Balance of Payments Manual states that all assets and liabilities should be measured at market value. Many countries do not, however, follow this approach^[11]. These differences in valuation methods will limit the comparability of the data across countries. The problem will be most acute in the case of equity and is much less of a problem in the case of debt, the focus of this paper. In a period of secular increases in the market price of equity, book value estimates of a country's external equity assets and liabilities (the most common alternative valuation method) will understate their market value. On the other hand, while the market value of a debt instrument, such as a bond, will fluctuate relative to its face value when market interest rates change, there should be no long-run divergence between book and market values so long as there is no long-run trend in interest rates^[12].

There are a number of different ways in which equity is valued by the industrial countries in the sample. Italy and Japan value at historic cost, since their stock data are constructed by the accumulation of flows. Canada values all equity at book value. While exchange rate changes will be captured, other valuation effects will be ignored. Most other countries adopt a mixed approach; portfolio equity holdings are measured at market value while direct investment equity is at book value.^[13] Australia, New Zealand and the United States appear to be the only countries to value all equity at market prices.

The United States is the only country to publish data at both book and market values. The impact of different valuation methods can be seen by comparing the most recent data; net direct investment equity assets are 2.8 per cent of GDP measured at book value while at market value they are 5.1 per cent of GDP. A study of UK data discussed in UBS Global Research (1994) points to a similar effect, with the book value of net direct investment in 1989 estimated at around half that of the market value.

These examples illustrate the potential discrepancies that can arise between measures at book and market value: countries that measure their equity position at book value will, other things equal, tend to have lower gross equity assets and liabilities. When a country's gross equity assets and liabilities are in balance (that is their net equity position is zero) these valuation effects will, however, tend to net out.

Footnotes

For Australia, the ABS uses guidelines that attempt to approximate market valuation as closely as possible. “Those financial assets, other than corporate equities, that can be realised on demand or at short notice or that cannot be readily transferred from one transactor to another are valued at nominal or face value. These assets include deposits, loans and accounts receivable. From 30 June 1992, bills of exchange and bonds are valued at market value. Prior to that date, they are valued at face value... from 30 June 1980 shares (or corporate equities) are measured at market value, or where no market exists, at net asset values. Prior to that date, data on the paid-up value of equity stocks were collected...” ABS (1994), p. 90. [11]

Some difference will also arise due to the valuation of gold holdings. In this paper, as for other financial instruments, we use the national valuation. [12]

To the extent that companies revalue their asset and liabilities, direct investment at book value may tend towards market value estimates (see the IMF Balance of Payments Manual (1993)). [13]