11.12. The broad classifications of the financial account and international investment position are set out in tables 3.2 and 3.3, respectively. More detailed standard components are shown in tables 12.4, 13.3, 14.2 and 14.3. The classifications follow international recommendations, bring out different behavioural characteristics and facilitate comparisons with other statistical data sets. They reflect important elements of finance such as the type of investor, the type of financial instrument used, the original contractual maturity of the investment, the type of client, etc. For assets and liabilities in the international investment position it is analytically useful to know what caused the changes in position between periods, i.e. whether the changes have been brought about by transactions or by valuation changes, exchange rate changes or other volume adjustments.
Type of investment
11.13. The primary classification is by functional category or type of investment (direct investment, portfolio investment, other investment and reserve assets) as described in paragraph 3.17, and it is elaborated further in the following chapters. It illustrates that different categories of investment exhibit different behavioural characteristics. For example:
- a direct investor has a significant influence on the management of a direct investment enterprise and may have a number of specific objectives associated with that investment; whereas
- a portfolio investor is more concerned with having a suitable portfolio which will maximise income and capital appreciation (or minimise losses) on the portfolio as a whole, and is less concerned with exercising a particular influence on the companies in which the investment occurs;
- an exporter offering trade credit may be concerned with maximising sales;
- a financial enterprise may wish to attract deposits and offer loans to good risk clients; and
- the central bank, through its management of official reserves, is concerned, inter alia, with intervention in exchange markets, although the return on the investment of reserves is also a consideration.
Assets and liabilities
11.14. The importance of this classification has been described earlier (paragraphs 3.18 to 3.20), where it is noted that, for portfolio and other investment, the main classification is by asset and liability; the reserves component contains only assets. For direct investment, the main classification is direction of investment (i.e. direct investment abroad or direct investment in Australia). Within each direction of investment, separate data are recorded for direct investment assets and liabilities.
11.15. For analytical purposes within the balance of payments context, the components of portfolio investment and other investment are classified to four sectors according to the institutional sector classification of the resident creditor or debtor. In addition, for analysis of foreign debt and equity markets, and for comparison with other statistical systems such as the national accounts, the components of direct, portfolio and other investment are all classified to the four resident sectors. These sectors are defined in box 11.2.
11.2 DEFINITION OF SECTORS
|General government comprises departments of state and similar entities that are the agents or instruments of Commonwealth, State or local governments. These are resident entities whose goods and services are provided free of charge, or at nominal prices well below their cost, to other general government bodies or the public or both. |
Reserve Bank refers to Australia’s central bank.
Depository corporations comprise banks and other depository corporations. Banks include trading, savings and development banks, which are licensed under the Banking Act to act as banks or which have been created under Commonwealth or State legislation. This category excludes the Reserve Bank. Other depository corporations encompass various depository institutions defined in Australia under the Financial Corporations Act.
Other sectors comprise non-financial corporations, insurance companies, pension funds, other non-depository financial intermediaries, central borrowing authorities, private non-profit institutions and households. Central borrowing authorities are entities set up by State and Territory Governments to centralise the borrowing and financial assets management of both general government and public trading enterprises within the relevant State or Territory.
11.16. A classification of the financial account by instrument of investment is useful in analysing the form international investment is taking and its changing composition over time. It also helps comparison with domestic financial statistics. A range of instruments of investment is identified in the Australian balance of payments. A description of each instrument is given in box 11.3. Some of these instruments are only applicable to one type of capital, e.g. the instrument reinvested earnings is only used for direct investment, while monetary gold and Special Drawing Rights are only used for reserve assets. Reinvested earnings are not strictly an instrument of investment, but rather a component of direct investment in equity capital. However, because of their importance, traditionally they have been shown separately in tables classifying investment flows by instrument; this practice is followed in the Australian balance of payments.
11.3 DESCRIPTION OF FINANCIAL INSTRUMENTS
|Monetary gold is gold held by the Reserve Bank as part of Australia’s reserve assets. The creation or extinction of monetary gold is referred to as monetisation/demonetisation of gold and is included in the other adjustment item of the international investment position.|
Foreign exchange consists of the Reserve Bank of Australia’s holdings of securities and currency and deposits. Currency and deposits consist of foreign and domestic notes and coin in circulation, transferable deposits which are exchangeable on demand and freely transferable, and other deposits such as fixed term deposits and those redeemable at short notice. Also included are banks’ nostro and vostro accounts.
Special Drawing Rights are international reserve assets created by the IMF to supplement the reserves of IMF member countries. They are not regarded as liabilities of the IMF. The creation or extinction (should the latter occur) of Special Drawing Rights is referred to as allocation/cancellation of Special Drawing Rights and is included in the other adjustment item of the international investment position.
Reserve position in the IMF consists of two elements: (i) foreign currency amounts that a country may draw from the IMF at short notice and without conditions, and (ii) indebtedness of the IMF under a loan agreement.
Equity is that part of the issued capital of an incorporated enterprise, or the equivalent in an unincorporated enterprise, which acknowledges a claim to the residual value and income of the enterprise after the claims of all other creditors have been met. It includes ordinary and participating preference shares in an incorporated enterprise, equity in an unincorporated enterprise such as a branch, units in incorporated trusts, and non-withdrawable share capital of building societies and credit unions. Non-participating preference shares are included in debt securities.
Reinvested earnings, a component of direct investment, represents the undistributed income of a direct investment enterprise which is attributable to its direct investor in another economy. It is an imputed transaction with offsetting entries in investment income and the financial account. While this component is separately identifiable in the balance of payments, it is not separately identified in the international investment position statement, where it is included in equity capital.
Debt securities consist of three sub-instruments:
Bonds and notes (including debentures, non-participating preference shares and negotiable long-term certificates of deposit) are instruments issued for more than twelve months which give the holder the unconditional right to a pre-determined income and, except for perpetual bonds and debentures, to a fixed amount on a specified date as repayment of principal.
Money market instruments are instruments (such as treasury bills, commercial paper and bankers’ acceptances, short-term certificates of deposit, and short-term notes issued under a note issuance facility) issued for less than or equal to one year, usually traded at a discount (depending on the interest rate and time remaining to maturity) in organised markets, and give the holder the unconditional right to receive a pre-determined amount on a specified date.
Financial derivatives are secondary securities linked to specific financial instruments, indicators or commodities, and give the holder a qualified right to receive a benefit (cash, a primary financial instrument, the underlying commodity, etc.) at some future date. Derivatives are usually tradable and have a market value, and include options (on currencies, interest rates, commodities, indices, etc.), traded financial futures, warrants, and currency and interest rate swaps.
Trade credit covers deferred and advanced payments (prepayments) for goods and services, including progress payments for internationally traded goods.
Loans include the direct lending of funds from a creditor (lender) to a debtor (borrower) where the lender receives no security evidencing the transaction or receives a non-negotiable document or instrument. Included are loans to finance trade, other loans and advances (including mortgages), financial leases, repurchase agreements where the enterprise acquiring the securities does not become their registered holder, and use of IMF credit and loans from the IMF. The latter category comprises Australia’s drawings on and repayments to the IMF’s Compensatory Finance Facility. Australia repaid its last obligation under that facility in the December quarter 1983.
Other assets and other liabilities include such items as miscellaneous accounts receivable and payable, prepaid insurance premiums and outstanding claims on insurance.
Long- and short-term investment
11.17. While the distinction between long- and short-term is less important than it used to be, it is still used in the delineation of debt instruments in portfolio investment (where bonds and notes are long-term and money market instruments are short-term) and in the other investment component. Long-term refers to debt issued with an original maturity of more than twelve months; short-term debt is debt with an original maturity of less than or equal to one year. Australia’s international investment statistics also provide data on time remaining to maturity.
Domiciled in Australia and abroad
11.18. In tables which show foreign debt, the debt liabilities are classified to domiciled in Australia or domiciled abroad. For debt securities, this refers to whether a debt security is issued in Australia or abroad. For other debt instruments, such as deposits and loans, it refers to country of residence of the institution accepting the deposit or providing the loan. Therefore, deposits taken by Australian institutions are classified as debt domiciled in Australia, and loan liabilities to the rest of the world as debt domiciled abroad. Trade credit liabilities are classified as domiciled abroad.
11.19. Industry-classified statistics should be treated with some caution as they do not necessarily reflect the industry in which the funds are ultimately employed. This reflects the fact that data for the entire enterprise group are classified to the predominant activity of the enterprise, even though the enterprise may be involved in a broad range of activities.
11.20. For foreign investment in Australia, an additional problem in analysing industry statistics stems from the fact that a significant proportion of the total level of foreign investment in Australia is in the form of borrowing by enterprises classified to the finance and insurance industry. This category includes enterprises, such as banks, which commonly borrow funds as principals and then on-lend to clients in other industries. In such cases, the classification of investment transactions reflects the industry of the immediate liability holder rather than the industry of end-use of the funds.