Unrestricted BoF Online 4 2014 [English abstract] Net errors and omissions of the Finnish balance of payments Anni Salo The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Bank of Finland. Bank of Finland Financial Stability and Statistics 8.4.2014
Contents 1 Net errors and omissions of balance of payments 3 2 External liabilities 5 3 External assets 7 More information 8 List of charts Chart 1. Finland s cumulated net errors and omissions 3 Chart 2. Main items of Finnish balance of payments 4 Chart 3. Cumulated NEO of Finland, before and after revisions 6 Chart 4. Stock of external liabilities in debt securities, before and after revisions 6 BoF Online Editor-in-Chief Jenni Hellström ISSN 1796-9123 (online) Postal address Street address Snellmaninaukio Email Swift SPFB FI HH PO Box 160 Phone +358 10 8311 firstname.surname@bof.fi Business ID 0202248-1 FI-00101 HELSINKI, FINLAND Fax +358 9 174 872 www.bof.fi Domicile Helsinki
8.4.2014 BOF ONLINE [ENGLISH ABSTRACT] UNRESTRICTED 1 Net errors and omissions of balance of payments Balance of payments (BOP) and international investment position (IIP) statistics contain some of the most important economic indicators. Accurate data is vital for economic analysis, forecasting and policy decisions. By definition the items in BOP sum to zero. In reality, however, current account and financial account never even each other out completely, and BOP is balanced by a balancing item called the net errors and omissions (NEO), a statistical difference. In theory, the cumulated NEO should approach zero. Although NEO is a normal part of the statistical framework, a substantial and persisting NEO undermines the credibility, reliability and usability of BOP data. The NEO of Finnish BOP has traditionally been negligible, but since 2008 there has been a persisting imbalance in the Finnish BOP reflected by a growing negative cumulated NEO, compromising the reliability of the statistics (see figure 1). Thus analyzing the reasons behind the increased NEO and correcting for it has been considered to be of importance at the Bank of Finland. Chart 1. Finland s cumulated net errors and omissions Cumulated net errors and omissions 10 EUR bn 0-10 -20-30 -40-50 -60-70 2000 2005 2010 Source: Bank of Finland. Suomen Pankki Finlands Bank Financial Stability and Statistics 4 2014 3
UNRESTRICTED BOF ONLINE [ENGLISH ABSTRACT] 8.4.2014 In principal the errors can lie in any of the BOP items, but when observing current account, financial account and NEO together (see figure 2) it seems evident that the main problems lie in the financial account. Chart 2. Main items of Finnish balance of payments 20 15 10 5 0-5 -10-15 Errors and omissions Capital account EUR bn Current account Financial account -20 2000 2005 2010 Source: Bank of Finland. A negative NEO arising from financial account can be caused by overestimated external liabilities or underestimated external assets or both. Both potential sources of errors have been considered at the Bank of Finland, with the work on external liabilities resulting in methodological changes in the compilation of statistics and published revisions. The work on external assets still remains theoretical. Several different lines of approach have also been considered at the Bank of Finland 1, and there may also be issues that have not been taken under consideration. As of 2014 the compilation of BOP and IIP statistics has been transferred to Statistics Finland and in closer connection with the financial accounts statistics. This larger framework will hopefully give more insight on the reasons behind the increased NEO and on how to solve the remaining problems. It is however probable, that behind the altered behavior of the NEO are the changes in the global financial markets and there is no simple solution to this complicated problem. 1 See Finland s balance of payments Annual review 2011 2012/III, http://www.suomenpankki.fi/en/tilastot/maksutase/pages/vuosikatsaukset.aspx. 4 4 2014 Financial Stability and Statistics Suomen Pankki Finlands Bank
8.4.2014 BOF ONLINE [ENGLISH ABSTRACT] UNRESTRICTED 2 External liabilities One of the specific areas of analysis on the external liabilities featured the statistical compilation of portfolio investment liabilities and the question of whether the current BOP compilation method overestimates the share of foreign holdings in total portfolio investment liabilities. The reason for this was identified as the growing use of foreign custodians by Finnish institutional investors and the problems it caused for the compilation of statistics. The results of the residual method based on alternative sources showed that the current statistical method indeed overestimates foreign portfolio investment liabilities. The residual method essentially affords a simple way to calculate the foreign share of portfolio investment liabilities. Instead of collecting data directly on foreign holdings of domestic securities, the focus is on the domestic counterpart. The method requires reliable data on both the total amount of portfolio investment liabilities issued and the domestic share of such liabilities. Deducting the domestic share of debt securities from total liabilities yields a residual that is the amount of foreign holdings. What appears to be a simple calculation involves in practice a complex analysis that must take account of a large array of different types of variables. 2 Stocks and flows of liabilities of the central government, monetary financial institutions and non-financial corporations have been revised as of data for 2008 onwards based on results using the residual method. The first major revisions were published in March 2013 3, the second in September 4. The revisions have substantially improved the cumulated residual item, by 6.4 bn. euro (see figure 3), and reduced the stock of external liabilities in debt securities by on average 9 bn. euro (see figure 4). Revisions to NEO based on the residual method are a significant step in correcting the residual item, and the results of analysis have so far been encouraging. The residual method will be incorporated in the compilation of Finnish BOP and IIP statistics during 2014. At the moment the revisions are made on a monthly basis but with delay. Once the residual method is fully employed, there should be no need to further revise the data. However, as some 2 A more detailed presentation of the residual method is available on the Bank of Finland website: http://www.suomenpankki.fi/en/tilastot/maksutase/documents/appendix_methodology_30092013_en.pdf. 3 See the monthly BOP news release, March 2013, Appendix, http://www.suomenpankki.fi/en/tilastot/maksutase/documents/appendix_methodology_27032013_en.pdf. 4 See Finland s balance of payments Annual review 2012, http://www.suomenpankki.fi/en/tilastot/maksutase/pages/vuosikatsaukset.aspx. Suomen Pankki Finlands Bank Financial Stability and Statistics 4 2014 5
UNRESTRICTED BOF ONLINE [ENGLISH ABSTRACT] 8.4.2014 three quarters of the NEO still remain to be accounted for, it is clear that the term is affected by an array of issues. Chart 3. Cumulated NEO of Finland, before and after revisions After revisions Before revisions 10 EUR bn 0-10 -20-30 -40-50 2008 2009 2010 2011 2012 Source: Bank of Finland. Chart 4. Stock of external liabilities in debt securities, before and after revisions After revisions Before revisions 200 EUR bn 180 160 140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 Source: Bank of Finland. 6 4 2014 Financial Stability and Statistics Suomen Pankki Finlands Bank
8.4.2014 BOF ONLINE [ENGLISH ABSTRACT] UNRESTRICTED 3 External assets The substantial remaining NEO indicates that the external assets of Finland are underestimated. By correcting the official external assets with an estimate of the missing external assets the NEO could then be further reduced through revising Finland s international investment position and flows of international investments. The underestimation of external assets is a common characteristic of the balance of payments and international investment position framework. This is due to the many constraints and restrictions that the compilers of statistics face. The limited coverage of some investor sectors and the challenges of valuing assets in market prices are the most pressing issues in the Finnish BOP and IIP statistics. Limited coverage leads to underestimation of external assets of households, non-profit institutions serving households, municipalities and non-financial corporations, as external assets held with foreign custodians and wealth intentionally hidden from the authorities in order to evade taxes are automatically omitted from the statistics. Problems with valuating unlisted FDI assets according to their market value can also lead to underestimation of external assets as some of the external assets are presently valued at book value, which are likely to be lower compared to their market value. The external assets of Finland and the potential problems associated with the compilation have been analyzed at the Bank of Finland, but at the moment the results are theoretical and no revisions have been scheduled for publication. 5 Even though econometric modeling could lead to realistic estimates of the missing external assets, using these estimates as statistically meaningful data could be difficult. 5 For an extensive discussion on the external wealth of Finland, Salo (2013). Suomen Pankki Finlands Bank Financial Stability and Statistics 4 2014 7
UNRESTRICTED BOF ONLINE [ENGLISH ABSTRACT] 8.4.2014 More information Bank of Finland 2012: Finland s balance of payments Annual review 2011 2012/III. http://www.suomenpankki.fi/en/tilastot/maksutase/documents/finland's_balance_of_pay ments_2011_2012_en.pdf. 2013: Revisions improve balance of payments. Monthly BOP news release, appendix. http://www.suomenpankki.fi/en/tilastot/maksutase/documents/appendix_methodology_27 032013_en.pdf. 2013: Finland s balance of payments Annual review 2012 2013/III. http://www.suomenpankki.fi/en/tilastot/maksutase/documents/finland's_balance_of_pay ments_2012_2013_en.pdf. 2013: Residual method an alternative approach to compilation of foreign liabilities. http://www.suomenpankki.fi/en/tilastot/maksutase/documents/appendix_methodology_30 092013_en.pdf. Salo, Anni, 2013. The external wealth of Finland. Master s thesis seminar essay, University of Helsinki. Available from the author, anni.salo@bof.fi. 8 4 2014 Financial Stability and Statistics Suomen Pankki Finlands Bank