Scale is important, but rarely used

Net International Investment Status (“NIIP”) is a very important, but rarely used, indicator of a country’s financial health, as Les Nemeth explores in his latest column on corporate finance.

NIIP is the difference between a country’s external financial assets (including assets owned abroad by residents and its subsidiaries) and its liabilities (including government and private debt and corporate equity of foreigners).

You can say that NIIP expresses the net financial value of a country. A positive balance indicates that the country is a creditor country; A negative balance indicates that it is a debtor country. It is often expressed as a percentage of a country’s GDP.

The NIIP chart identifies countries that readers may find interesting. So what does scanning these numbers tell us?

There are many superstars in NIIP, countries where NIIP is over 100%. These countries include Hong Kong, Singapore, Norway, the Netherlands, etc. These countries are not only rich; The increased NIIP also provides resistance to weather crises.

Then there are the NIIP extremists, such as Montenegro, Greece, and, surprisingly, Ireland, which has an NIIP of less than -100%. (Ireland is a special case, driven by decisions by multinational corporations to locate intellectual property there.) In times of crisis, especially when foreigners liquidate their positions in those countries’ assets, the performance of these countries can be quite negative.

The situation in Central and Eastern Europe

It is interesting to note that Central European countries are usually found at the mid to low end of the scale, with Austria slightly positive (13.4%), the Czech Republic and Slovenia slightly negative (-9.6% and -12.5%), then Hungary, Poland and Croatia (between – 40 and -50%), followed by Bulgaria and Romania.

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While Japan has a respectable NIIP as a percentage of GDP (62.8%), the sheer size of its economy gives it the largest NIIP in absolute terms (US$3.376 trillion).

The position of the great powers: China, Russia and the United States is also interesting. Both Russia and China have positive NIIP scores, while the United States has a high NIIP score of 64.9%.

This may be considered surprising given the massive debts and stock holdings of US corporations (including multinational corporations) abroad, but the level of US foreign debt and foreign holdings in US stocks are more important.

While a significantly negative US NIIP is unlikely to be a cause for concern in the near term, the positive spread between what US investors earn abroad and what foreign investors earn in the US could put the country in a very difficult position. . Determine if interest rates will suddenly rise.

Also, the trend in the US NIIP has been negative over time. If the trend continues, there may come a point where foreign investors lose confidence. If you look at the graph, you will see that the absolute number of indirect investment schemes in the United States is so huge (about $14 trillion) that the loss of confidence will have global repercussions.

NIIP could be an interesting or statistical tool for the future. For example, in a purchase or investment process, it can be useful to know the NIIP of the country in which you are investing from a risk management perspective. One measure of government performance is debt as a percentage of GDP. The NIIP is likely to be at least a useful measure.

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Nemethy is not the CEO of Euro-Phoenix Financial Advisers Ltd. (www.europhoenix.com), a Central European corporate finance company. He is a former banker, author of Business Exit Planning (www.businessexitplanningbook.com) and past president of the American Chamber of Commerce in Hungary.

This article was first published in the print issue of the Budapest Business Journal on October 8, 2021.

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