From the July 1999 SURVEY OF CURRENT
BUSINESSHarlan W. King directed the preparation of the estimates; Christopher A. Gohrband prepared several of the accounts with the assistance of Elena Nguyen, and Douglas B. Weinberg prepared the direct investment accounts at current cost.
The net international investment position of the United States—U.S.-owned assets abroad less foreign-owned assets in the United States—at yearend 1998 was a negative $1,239.2 billion with direct investment valued at the current cost of tangible assets, and it was a negative $1,537.5 billion with direct investment valued at the current market value of owners' equity (table A, chart 1)./1/ For both measures, the net positions were more negative in 1998 than they were in 1997. The net foreign ownership of assets in the United States remains a small, but increasing, share of the total financial wealth of all U.S. households—4.2 percent at yearend 1998, up from 3.2 percent at yearend 1997.
The net position on both bases became more negative mainly as a result of large net financial inflows and strong price appreciation in foreign-owned assets in the United States (table B). This appreciation, which reflected the steep rise in U.S. stock market prices from yearend 1997 to yearend 1998, greatly increased the value of foreign holdings of U.S. stocks and of owner's equity of foreign direct investment in the United States. U.S.-owned assets abroad also increased as the result of financial outflows and price appreciation, but the increase, which was mostly limited to U.S.-owned European stocks, was significantly smaller than that in foreign-owned assets in the United States. The net exchange rate adjustment principally reflected the effect on U.S.-owned foreign stocks of the appreciation of European and some Asian currencies against the U.S. dollar in 1998; this appreciation was partly offset by the depreciation of Canadian and Latin American currencies.
In 1998, U.S. assets abroad in a few categories increased strongly as a result of large net financial outflows and of price and exchange rate appreciation. U.S. direct investment abroad on both valuation bases increased as a result of record net outflows that were bolstered by heavy acquisitions in certain countries. At market value, the increase was augmented by a large increase in owner's equity as a result of the steep rise in European stock prices. U.S. holdings of foreign stocks increased as a result of rising European stock prices, appreciation of European currencies, and strong net U.S. purchases, mostly in the first half of the year. U.S. purchases near yearend were bolstered by two exceptionally large acquisitions of U.S. companies through exchanges of stock with U.S. shareholders./2/ U.S. holdings of foreign bonds were restrained by heightened risk aversion in the second half of the year, as markets reacted to Russia's debt moratorium and Brazil's financial problems. In this more cautious environment, U.S. purchases were mainly new bond issues of highly rated foreign borrowers. U.S. banks' and nonbanking concerns' claims on foreigners increased considerably less in 1998 than in 1997, reflecting slower economic growth in many industrial countries and financial and economic problems in many emerging countries.
Foreign assets in the United States increased as a result of sizable net private financial inflows and continued large price appreciation in foreign holdings of U.S. stocks. Record inflows into U.S. corporate securities and foreign direct investment were attracted by sustained U.S. economic growth, low and stable inflation, long-term interest-rate differentials favoring dollar assets, and rising asset prices. In particular, foreign holdings of U.S. corporate bonds advanced as a result of record net foreign purchases and rising U.S. bond prices; concurrently, foreign investors shifted away from U.S. Treasury bonds as their yields declined to low levels. Taking advantage of this strong demand and shift in preferences, U.S. corporate borrowers, especially U.S. federally sponsored agencies, issued near record amounts of new bonds abroad. Foreign holdings of U.S. stocks increased as a result of both large price appreciation and strong net purchases, mainly in the first half of the year. Foreign direct investment in the United States on both valuation bases increased as a result of record financial inflows, including the two exceptionally large acquisitions through exchanges of stock with U.S. shareholders. Even excluding these acquisitions, direct investment inflows were still strong, reflecting other acquisition activity and strong business conditions in the United States. The market value of foreign direct investment was further augmented by the sharp rise in U.S. stock prices. U.S. liabilities to foreigners reported by U.S. banks and nonbanking concerns increased much less in 1998 than in 1997, a record year; banks slowed their short-term funding from abroad, and foreigners reduced their U.S. deposits. In addition, international bond funds withdrew funds from U.S. securities dealers to meet the liquidity needs associated with capital market uncertainties in the second half of the year.
This article presents the major changes in U.S. assets abroad and in foreign assets in the United States, including direct investment valued both at current cost and at market value, in 1998. Tables 1, 2, and 3 at the end of the article present detailed estimates of the yearend positions.
Revisions.—The estimates of the U.S. international investment position have been revised back to 1976. For yearend 1997, the net negative position has been revised from $1,223.6 billion to $968.2 billion with direct investment at current cost and from $1,322.5 billion to $1,066.3 billion with direct investment at market value (table 4). The major sources of these revisions are in U.S.-owned foreign securities of Europe, and to a lesser extent, of Latin America, that were uncovered in a recent U.S. Treasury benchmark survey. On the current-cost basis, sizable revisions to the direct investment positions, both U.S. direct investment abroad and foreign direct investment in the United States, reflected the incorporation of improved estimates of the current-cost adjustment in the valuation methodology. On the market-value basis, large revisions reflected the incorporation of revised source data. (For more information, see the box "Improvements in the Estimates.")
Claims on foreigners reported by U.S. banks increased $28.1 billion, to $1,013.9 billion, in 1998, reflecting a sharp slowdown in U.S. banks' lending abroad to the lowest level since 1994 and a withdrawal of U.S. security dealers' lending to foreign-based investment funds (table C). Lending overseas was affected by the economic slowdown abroad, especially in Asia, and by banks' increased focus on customer creditworthiness, particularly after the Russian default and the heightened financial problems in Brazil late in 1998. In particular, exposure to emerging-market countries and Japan was reduced. U.S. lending to Europe, which was boosted by strong merger and acquisition activity, and to Canada was strong; most of the lending was by European- and Canadian-owned banks in the United States. U.S. banks' claims of foreign-owned banks in the United States were also boosted by a transfer of business to U.S. offices from Europe by recently merged European banks.
U.S. banks' own claims payable in dollars increased $26.6 billion, to $734.8 billion, sharply less than in the prior years; banks reduced their exposure, mainly to emerging-market countries and Japan, where economic recession and troubled financial conditions reduced demand for bank credit. Foreign-owned banks in the United States lent to affiliates in Europe, where credit demand was underpinned by ongoing merger and acquisition activity. U.S.-owned banks provided only temporary funding to offices in Caribbean banking centers, so that claims changed little. Claims reported by U.S. securities dealers decreased sharply, reflecting cutbacks on renewing credit to international bond funds in the United Kingdom and Caribbean; this decrease followed heightened concerns about risk in the aftermath of the near collapse of a large U.S. hedge fund in September.
U.S. banks' domestic customers' claims payable in dollars decreased $2.0 billion, to $184.4 billion, as U.S. depositors became more cautious in their dealings with banks exposed to overseas financial difficulties.
U.S. banks' own and customers' claims payable in foreign currencies increased $3.5 billion, to $94.7 billion. Banks sharply reduced their claims on Japan in the first half of the year and increased their foreign currency claims on Europe in the second half.
Foreign securities held in U.S. portfolios increased $229.6 billion, to $1,969.0 billion, in 1998./3/ This increase reflected substantial price appreciation in U.S. holdings of Western European stocks and net U.S. purchases of foreign stocks and bonds in the first half of the year that were augmented by the two exceptionally large acquisitions through exchanges of stock with U.S. shareholders in the fourth quarter. Net exchange rate appreciation mostly reflected the appreciation in European currencies and the Japanese yen against the U.S. dollar in 1998. Excluding the two large exchanges of stock, U.S. investors shifted to net sales of foreign securities, especially in the second half of the year, when Russia and Brazil encountered financial difficulties, economic weakness continued in Asia, and a large U.S. hedge fund nearly failed. In this unsettled financial environment, the share of U.S. pension fund assets abroad declined to 14 percent from 18 percent, and new investment in U.S. mutual funds that specialize in foreign assets fell by two-thirds. Some mutual funds had withdrawals, especially emerging market targeted funds.
U.S. holdings of foreign stocks increased $206.1 billion, to $1,407.1 billion (table D). The increase resulted from $80.3 billion in price appreciation, primarily in Western European stocks, from $77.6 billion in net purchases, which included the two large exchanges of stock, and from $48.0 billion in exchange rate appreciation, reflecting the appreciation of European and Asian currencies against the dollar. Excluding the two exchanges of stock, U.S. investors reduced their holdings in the year: Following the Asian crisis late in 1997, net purchases remained weak in the first half of 1998, and as a result of the financial turbulence of the second half of 1998, U.S. investors became net sellers.
U.S. holdings of foreign bonds increased $23.4 billion, to $561.8 billion (table E). Net purchases slowed to $25.1 billion, as U.S. asset managers limited the additions to their overseas exposure and focused on highly rated foreign new issues in the U.S. market. Price appreciation of $18.4 billion, primarily in industrial countries' bonds, nearly offset the $20.1 billion effect of exchange rate depreciation, mainly in Canadian and emerging countries' currencies. Despite the drop in U.S. long-term interest rates, foreign new bond issues in the United States slowed sharply; in particular, new issues of Latin American and Asian emerging countries faced elevated risk premiums in the second half of the year, when markets reacted to unfolding problems in Russia and Brazil. U.S. investment in highly rated corporate bonds from Western Europe, Canada, and Japan continued strong. Net sales of outstanding bonds of emerging countries more than doubled.
U.S. direct investment abroad at current cost increased $119.2 billion, to $1,123.4 billion, in 1998; at market value, it increased $356.0 billion, to $2,140.5 billion (table F). Direct investment net financial outflows increased to a record $132.8 billion. Equity outflows accelerated to a record, and intercompany debt outflows tripled; in contrast, reinvested earnings decreased slightly, mainly as a result of reduced earnings of foreign affiliates in Asia and Latin America. Acquisition activity was particularly strong in the United Kingdom, Canada, and Australia. U.S. financial flows to several emerging-market countries slowed as a result of economic and financial problems in those countries.
At current cost, the large financial outflows accounted for most of the increase in the position. At market value, the financial outflows were augmented by a substantial increase in U.S. owner's equity, primarily as a result of the steep rise in European stock prices in 1998.
Claims on unaffiliated foreigners reported by U.S. nonbanking concerns increased $33.8 billion, to $596.2 billion, considerably below the 1997 record increase. U.S. depositing at banks in the United Kingdom and the Caribbean slowed significantly, and funding from U.S. financial firms to their foreign finance affiliates, which surged in the first quarter, fell off as capital markets abroad became unsettled later in the year.
U.S. official reserve assets increased $11.2 billion, to $146.0 billion in 1998. The U.S. reserve position at the International Monetary Fund (IMF) was boosted by dollar borrowing from the IMF by Russia, Korea, Indonesia, and Brazil. Foreign-currency reserves increased mainly because of coordinated intervention purchases of Japanese yen in midyear and because of exchange rate appreciation in holdings of Japanese yen and German marks.
U.S. Government assets other than reserve assets increased $0.4 billion, to $82.4 billion, as new U.S. Government credits to foreigners slightly exceeded repayments.
Foreign official assets increased $0.3 billion, to $836.1 billion, in 1998, as net financial outflows were more than offset by price appreciation in holdings of U.S. corporate securities and U.S. Treasury bonds. Disruptions in exchange markets, especially those resulting from Russia's and Brazil's problems, led to sales of dollar assets by several industrial and developing countries. These countries mainly liquidated deposits and short-term Treasury obligations so that they could intervene in exchange markets by buying their currencies with dollars. OPEC countries also reduced their assets in the Unites States.
U.S. liabilities to private foreigners and international financial institutions reported by U.S. banks increased $46.1 billion, to $1,017.1 billion, in 1998. This increase represented a marked slowdown from the record inflows in 1997. In 1998, U.S. banks borrowed less from abroad to finance their lending, especially to the overseas interbank market. In addition, foreign incentives to deposit in U.S. banks lessened as U.S. short-term interest rates fell and as the dollar depreciated against European currencies and the Japanese yen after midyear. In addition, international bond funds withdrew funds, mostly from U.S. securities dealers, in order to meet liquidity needs as capital market uncertainties escalated in the second half of the year (table G).
U.S. banks' own liabilities payable in dollars increased $23.7 billion, to $805.4 billion. Early in 1998, U.S. banks repaid some large-scale borrowings from banks abroad that had been made in the final quarter of 1997, partly to finance their overseas interbank lending. In midyear, U.S. borrowing from abroad resumed, mostly from banks in the Caribbean and Europe; this borrowing was primarily to finance lending to home offices by Canadian- and European-owned banks in the United States. Later in the year, Japanese-owned offices in the United States stepped up their borrowing from home offices in Japan to replace heavy withdrawals by unaffiliated foreign banks; home office funds were tapped to avoid the elevated risk premiums that would have applied to funds borrowed in the United States as a result of the continued financial problems with Japanese banks. U.S. dollar liabilities of foreign-owned banks were also boosted by a transfer of business to U.S. offices from Europe by recently merged European banks. U.S.-owned banks limited their borrowing from overseas, mostly from Caribbean offices, as U.S. domestic deposit inflows were ample. Deposits were withdrawn from U.S. banks, especially by unaffiliated residents in Western Europe and the Caribbean banking centers, as concern over cross-border risk increased and as the dollar depreciated against European currencies and the Japanese yen. International bond funds also withdrew funds from U.S. securities dealers to meet margin calls and to limit losses in the aftermath of the near collapse of a large U.S. hedge fund.
U.S. banks' custody liabilities payable in dollars, which represent U.S. nonbanks' short- and medium-term borrowing from banks abroad, increased $38.8 billion, to $110.6 billion. The substantial increase was bolstered by a surge in the third quarter, when longer term capital markets became unstable.
U.S. bank's liabilities payable in foreign currencies decreased $16.4 billion, to $101.1 billion, as banks reduced their foreign currency borrowing from, and lending to, customers overseas.
U.S. Treasury securities held by private foreigners and by international financial institutions increased $65.1 billion, to $727.3 billion, in 1998 (table H). The increase reflected intermittent net purchases of U.S. Treasury securities—nearly two-thirds less than the near record in 1997—and price appreciation in U.S. Treasury bonds as the yield on the benchmark 30-year Treasury issue fell to its lowest level since 1967. Foreign purchases were attracted by widening yield differentials favoring U.S. Government bonds over most foreign government bonds, by a relatively strong dollar in the first half of the year, and by investors' flight to safety and liquidity when capital markets were disrupted in the second half of the year. The slowdown in U.S. Treasury securities may also be attributed to a surge of foreign investments in higher yielding U.S. corporate securities.
Western European holdings of U.S. Treasury securities rose moderately, reflecting a marked slowdown in purchases as rising stock and bond prices in Europe and a weakening dollar in the second half of the year reduced investor demand after record buying in 1997. Asian holdings increased, mainly reflecting strong purchases when global concerns mounted about the risks in emerging markets in the second half of the year. Large holdings in the Caribbean were reduced slightly, as price appreciation was offset by strong sales by international bond funds. Holdings of all other countries gained as a result of price appreciation.
U.S. currency held by foreigners increased $16.6 billion, to $228.3 billion; large shipments to Eastern Europe, including Russia, were reduced partly because currency-importing banks had difficulty raising funds for payment and partly because new market developments enabled Russia to obtain recirculated, counterfeit-resistant U.S. currency from European banks. Shipments to Latin America increased, reflecting increased demand for U.S. currency as a result of deteriorating financial conditions in a few countries in the second half of the year.
Foreign holdings of U.S. securities, other than U.S. Treasury securities, increased $443.1 billion, to $2,021.8 billion, in 1998; the increase was bolstered by record net foreign purchases of U.S. bonds and by substantial price appreciation of U.S. stocks. Net purchases of U.S. corporate bonds and of federally sponsored agency bonds surged in the first half of the year, when foreign investors were attracted by the rise in U.S. bond prices, by the higher yields on U.S. issues than on most other industrial countries' bonds, and by the U.S. dollar's strength in exchange markets. Demand was also spurred by a shift to higher yielding corporate issues when interest rates on U.S. Treasury bonds fell to their lowest level since 1967. Foreign holdings of U.S. stocks increased as a result of sharply higher U.S. stock prices in 1998 and of strong foreign net purchases in the first half of the year. The brisk-paced U.S. economy and steady growth in corporate earnings contributed to these strong inflows.
Foreign holdings of U.S. corporate and agency bonds increased $185.5 billion, to $900.7 billion, mainly as the result of $170.5 billion in record net purchases that were encouraged by a nearly 2-percent rise in bond prices in 1998. U.S. borrowers, especially U.S. federally sponsored agencies, issued $87.1 billion of new bonds overseas; these bonds were mainly high-quality, mortgage-backed securities that became even more attractive in a low-interest-rate environment and the financial market turmoil after midyear. U.S. nonbank financial corporations remained heavy issuers, but at a level slightly below that in 1997, and U.S. banks reduced their issuance by two-thirds, partly as a result of the ample availability of alternate funding. Nearly two-thirds of the new issues were dollar denominated, and over two-thirds were straight fixed rate; the use of floating-rate notes slowed sharply. Strong foreign demand was also evident in large net purchases of outstanding U.S. bonds. Foreign holdings are highly concentrated in the United Kingdom, where lead underwriters of U.S. overseas issues reside, in Japan, and in the Caribbean (table I).
Foreign holdings of U.S. stocks increased $257.6 billion, to $1,121.1 billion, reflecting $210.0 billion in price appreciation and a near-record $47.5 billion in net foreign purchases. Holdings were bolstered by a 27-percent increase in U.S. stock prices in 1998. Net foreign purchases were especially strong in the first half of the year. In the second half, purchases slowed when investors became concerned about a possible global economic slowdown and when confidence was jolted by the near failure of a large U.S. hedge fund. Consequently, Asian investors and Caribbean-based mutual funds sold off large amounts of U.S. stocks. Western European investors' interest in U.S. stocks was robust throughout the year. Canadian and Japanese holdings also increased; net sales, which accelerated in 1998, partly offset the strong price gains (table J).
Foreign direct investment in the United States valued at current cost increased $114.7 billion, to $878.7 billion, in 1998; at market value, it increased $551.7 billion, to $2,194.1 billion (table K). In 1998, net financial inflows of $193.4 billion exceeded the 1997 record. Net equity inflows increased sharply to a record level, boosted by the two exceptionally large acquisitions through exchanges of stock with U.S. shareholders; reinvested earnings increased, but less than in 1997; and net intercompany debt inflows increased slightly. At current cost, the record net financial inflows were partly offset by a large, negative valuation adjustment (mainly related to the two exceptionally large acquisitions); this adjustment is made to reconcile market-based transactions values with much smaller book values, which are the bases for valuing nontangible assets—such as patents and copyrights—in the current-cost estimates. At market value, net financial inflows were boosted by substantial price appreciation in owners' equity that resulted from the steep rise in U.S. stock prices.
Liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns increased $7.2 billion, to $460.8 billion, down from the 1997 record increase of $106.8 billion. U.S. corporate borrowing from foreign banks and financial inflows to U.S. financial affiliates from foreign financial affiliates both slowed markedly in the second half of the year, when overseas markets became unsettled.
Footnotes:
1. This issue also contains a companion article, "Direct Investment Positions for 1998: Country and Industry Detail." The detailed estimates presented in that article are available only on a historical-cost basis.
2. For more information on these transactions, see page 52 in "Direct Investment Positions for 1998: Country and Industry Detail" in this issue.
3. These estimates incorporate the preliminary results from the U.S. Treasury Department's and the Federal Reserve System's Benchmark Survey of U.S. Ownership of Foreign Long-term Securities as of December 31, 1997. A list of U.S. foreign portfolio holdings by country of issue is presented in tables D and E. For more information, see page 67 of "U.S. International Transactions, Revised Estimates for 1982–98" in this issue.
