5302.0 - Balance of Payments and International Investment Position, Jun 1998  
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Feature Article - Measuring Portfolio Investment


This article was published in the June quarter 1998 issue of Balance of Payments and International Investment Position (ABS Cat NO. 5302.0, p18-24)

Introduction
1 Changes in international capital markets during the 1980s opened new possibilities for raising capital, investing, and hedging risk; and a wide range of new participants emerged in these markets. The increasing importance of borrowing and lending in the form of securities led to a surge in the issuance of bonds in international markets. Banks and securities firms expanded their operations into foreign markets after the deregulation of security markets in many countries. New channels opened through which securities could be bought and sold in foreign markets, and cross-border securities trading increased sharply. Institutional investors such as pension funds, insurance companies and investment trusts diversified heavily into foreign securities, as restrictions on investment activities were lifted in many countries, notably Japan. Increasingly, large investors dealt in foreign markets or directly with foreign issuers of securities. The trend to diversified portfolios also increased considerably the demand by private individuals for foreign securities.

2 Faced with these changes, balance of payments compilers throughout the world have found it increasingly difficult to measure portfolio capital flows. At the global level, there were large imbalances in the components of portfolio investment throughout much of the 1980s and 1990s, partly because the activities of new participants were not sufficiently covered by the statistical data sources used. The extent of these global imbalances was first highlighted by the report, in 1992, of the International Monetary Fund’s (the IMF’s) Working Party on the Measurement of International Capital Flows. This study found that recorded portfolio liabilities far outweighed portfolio assets at the worldwide level. Theoretically, external aggregate assets should equal external aggregate liabilities if perfectly measured. However, external assets were understated by as much as $US400 billion even in 1988, and judging from available transactions data collated by the IMF, the understatement appears to have further increased in the 1990s.

3 Concerned by such discrepancies, the IMF Committee on Balance of Payments Statistics decided in 1993 to promote the idea of a Coordinated Portfolio Investment Survey (CPIS). While some countries, such as Australia, already conducted surveys to measure portfolio investment, there had not been a coordinated international approach. The proposed CPIS was to be coordinated both in terms of timing and design, and to spread best statistical practice among countries. Some 30 countries agreed to participate in the CPIS which was conducted at the reference date of end-December 1997.

4 This article outlines the main features of the CPIS, presents the results obtained from the Australian collection, and indicates where future action will occur.

Purpose of the CPIS
5 The purpose of the CPIS has been to improve estimates of portfolio investment in the form of equity and long term debt securities. Specifically, the objectives were :

  • To collect comprehensive information, with geographical detail, on the stock of cross-border equities and long term bonds and notes held by Australian residents for use in the compilation or improvement of international investment position (IIP) statistics on portfolio investment capital. The IIP statistics, in turn, can provide information to check the coverage of recorded estimates of portfolio investment capital flows, and of the associated investment income transactions recorded in the balance of payments.
  • To exchange, so far as confidentiality constraints permit, the bilateral statistics. When the results of the CPIS become available, the participating countries, with the assistance of the IMF’s Statistics Department, plan to exchange these statistics among themselves and with other countries. By exchanging comparable statistics
and aggregating them, participating countries should be able to improve their estimates of non-resident holdings of their portfolio investment liabilities as well as associated capital flows and investment income data. Information on the
geographic distribution of non-resident creditors also becomes known.

Concept of portfolio investment
6 The compilation and presentation of ABS international investment position statistics conform with the prevailing international statistical standard, namely the IMF’s Balance of Payments Manual, Fifth Edition (BPM5). These statistics are classified in several ways with the primary classification based on type of investment. There are four broad categories—direct investment, portfolio investment, other investment and reserve assets.

7 Direct investment is a category of international investment that reflects the objective of an investor in one economy (the direct investor) obtaining a significant on-going interest in an enterprise resident in another economy (the direct investment
enterprise). The significant on-going interest implies a degree of influence by the direct investor in the management of the direct investment enterprise. In BPM5, evidence of this significant interest is defined as ownership of 10% or more of the equity of a direct investment enterprise. Portfolio investment is cross-border investment in equity and debt securities (other than direct investment). Reserve assets are those financial instruments available to and controlled by the Reserve Bank of Australia for balance of payments management purposes, such as financing imbalances and managing exchange rates. Other investment is a residual group that comprises many different kinds of investments.

8 Within these categories further classification levels occur based upon factors relating to general analytical usefulness. For example for portfolio investment, the type of instrument is the primary classification (i.e. equity and debt securities). Corporate equities include company shares, investment fund units, and documents denoting ownership of equity (for example, American Depository Receipts). Debt securities are broken down into bonds and notes, money market instruments, and financial derivatives. Bonds include marketable bonds, debentures, and notes that have an original contractual maturity of more than one year. Long-term negotiable certificates of deposit are also treated as bonds.

9 The focus of the CPIS was on the equity securities and the long term debt securities (i.e. bonds and notes) classified to portfolio investment.

CPIS methodology
10 To assist countries with limited experience in the collection of portfolio investment data, the IMF prepared a reference document, Coordinated Portfolio Investment Survey: Survey Guide, which was released in August 1996. The IMF noted that surveys could primarily target end-investors, custodians (that is, financial institutions that administer or manage non-resident securities on behalf of residents) or a combination of both. In addition, the IMF noted that data could be collected either on an aggregated or on a security-by-security basis. The former approach, relies on the survey respondents to aggregate, allocate and value all of their international portfolio investment. By contrast, in the latter approach, respondents are asked for details of the quantity and other information about each security held, while data on the market value of each of these securities could be determined from a suitable commercial database which prices securities. Although the estimates obtained through either approach are conceptually the same, collecting data on a security-by-security basis has the potential of providing more information on, for instance, currency attribution, yields on securities, etc.

11 Since Australia already collects much of the relevant data required through the quarterly Survey of International Investment (SII) from end-investors on an aggregate basis, there was only limited additional information to obtain.
12 However, to improve the quality of the geographical detail of portfolio investment assets that were to be obtained from the December quarter 1997 SII, the existing sample survey was supplemented by additional resident enterprises that were known to have relevant portfolio investment activity. As a consequence, the totals for portfolio investment in foreign equity and long term debt securities obtained from the CPIS are slightly different from the corresponding estimates obtained from the regular quarterly survey, where a coverage estimate is made for the small contributors that are not included in that regular survey.

13 In addition, during the December quarter 1997 survey, respondents were urged to take particular care in determining the country attribution of securities investments and to identify the residence of the issuer rather than report the residence of the non-resident fund manager which has been occurring in past reporting in the SII. As a result, the country data obtained are of a high quality and are more reliable than similar data from previous surveys.

14 CPIS data requirements are consistent with the SII in all aspects except for the treatment of securities lending and repurchase agreements. The SII treats securities exchanged under these agreements as having changed ownership while the CPIS does not. For this reason, three supplementary questions were added to the December quarter 1997 SII to separately identify the impact of securities lending and repurchase agreements as at the end of the quarter.

Results of the survey
15 Table F1.1 shows that, at 31 December 1997, the level of Australian portfolio investment abroad, as measured through the CPIS, stood at $50,360 million for equity securities and $11,413 million for long term debt securities. Australian residents' investment in foreign equity securities was dominated by investment of $21,893 million (or 43%) in US equities. Other significant holdings of equity securities were in the UK, $7,783 million (15%); countries in the European Union (apart from the UK), $8,296 million (16%); and Japan, $5,386 million (11%). Australia’s investment abroad in the form of long term debt securities was also heavily focused in the USA ($5,627 million or 49%), while Germany ($1,192 million) and the UK ($1,135 million) each accounted for a further 10%.

16 Due to the reasons outlined in paragraphs 12–14 above, the data shown for total equity securities and total long term debt securities in Table F1.1, differ slightly from the corresponding data shown in Table 32 on page 60 of this publication.

Future direction
17 The IMF will act as a central clearing house for the compilation of aggregate data from those countries which have undertaken the CPIS and will supplement it with additional data in respect of central bank holdings. The IMF will provide the resultant data to participating countries as well as non-participating countries. Confidentiality constraints will be observed. By exchanging comparable statistics, countries should be able to improve their estimates of non-resident holdings of their portfolio investment liabilities as well as associated capital flows and investment income data.

18 This international project is recognised as an important initial step in being able to understand and identify gaps in statistical collections and methodologies for measuring portfolio investment. It is likely that the IMF will consider recommending that an international joint project such as this will be repeated in the future.

19 For further information on the Coordinated Portfolio Investment Survey, contact Betty Gruber, Director of International Investment Section, on (02) 6252 5601 or Fax (02) 6252 6164.


TABLE F1.1: LEVELS OF AUSTRALIAN PORTFOLIO INVESTMENT ABROAD, By country - 31 December 1997
Country of issuerMarket value of equity securities ($m)Market values of long term debt securities ($m)
Argentina67. .
Austria6114
Belgium109n.p.
Bermudan.p.. .
Botswanan.p.. .
Brazil244. .
British Virgin Islands n.p.. .
Canada610247
Cayman Islands. .n.p.
Chile6. .
China, People's Republic of67n.p.
Colombian.p.. .
Croatian.p.. .
Czech Republicn.p.. .
Denmark130130
Egyptn.p.. .
Fijin.p.n.p.
Finland182n.p.
France2071237
Germany20331192
Greece33. .
Hong Kong1222159
Hungary37n.p.
India76. .
Indonesia102. .
Ireland, Republic of67n.p.
Israel16n.p.
Italy1257269
Japan5386616
Jordann.p.. .
Kazakhstann.p.. .
Korea, Republic of103163
Luxembourgn.p.n.p.
Malaysia193n.p.
Mexico182n.p.
Myanmarn.p.. .
Netherlands112152
New Caledonian.p.. .
New Zealand130245
Norway156. .
Pakistan6. .
Panaman.p.. .
Papua New Guinean.p.. .
Peru40. .
Philippines68. .
Polandn.p.. .
Portugal79. .
Romanian.p.. .
Russian Federationn.p.. .
Saudi Arabian.p.. .
Singapore295n.p.
Slovak Republicn.p.. .
South Africa82n.p.
Spain463140
Sri Lankan.p.. .
Sweden 691185
Switzerland1711n.p.
Syrian.p.. .
Taiwan103. .
Tanzanian.p.. .
Thailand57. .
Tongan.p.. .
Turkey73. .
United Kingdom77831135
United States of America218935627
Venezuelan.p.. .
Viet Namn.p.. .
Zimbabwen.p.. .
Asia unspecified1. .
Europe unspecified3123
Unallocated742484
Sum of confidentialised countries301515
Total all countries50 36011 413
COUNTRY GROUPS (A)
APEC(b) 304177179
ASEAN(c) 715n.p.
EU(d) 160793401
OECD4640210394
(a) For details of country groups, see the Appendix in the 1996-97 edition of Balance of Payments and International Investment (Cat No. 5363.0).

(c) Excludes Viet Nam.

n.p. not available for publication but included in the sums of confidentialised countries and totals where applicable.		(b) Excludes Papua New Guinea, the contribution of which is not material to the APEC total.

(d) Excludes Luxembourg, the contribution of which is not material to the EU total.

. . not applicable