The year 2021 has seen a rapid recovery in global GDP from the depths of the COVID-induced recession, further increases in equity prices around the world, especially in the United States, and a widening of account surpluses and deficits. running. This latest development reflected both the strength of the recovery and the rebound in commodity prices, particularly oil and gas, which swelled the external balances of exporting countries to the detriment of importers.
The combined effect of these factors has reduced the aggregate size of global creditor and liability positions relative to global GDP. The dominant factor was the rise in the denominator, driven by strong growth and rising inflation.
The debtor position of the United States
However, as in 2020, the largest net debtor position, that of the United States, has increased further. It accounts for nearly 80% of US GDP, a level unseen in major economies for more than 50 years.[1] Three factors contributed to the increase: increased US borrowing abroad, US consumers spending more on goods, the appreciation of the US dollar (which reduces the dollar value of US assets in other currencies), and above all a further sharp increase in US stock prices (up 25% during the year, according to the Morgan Stanley Capital International index), which increases the value of stocks and factories owned by foreigners in the USA
Should the increase in the debtor position of the United States give rise to concern? As noted here, some factors mitigate concerns: the deterioration in the external position is mainly due to rising asset prices, which also increases overall US wealth, and measurement issues related to FDI may overestimate liabilities Americans. A US stock market correction (as happened dramatically in 2022) tends to improve the external position (by reducing the value of US stocks and factories owned by non-residents), and a depreciation of the US dollar will likely contribute to the external adjustment both through its impact on net exports (boosting exports and discouraging imports) and through its valuation effects (by increasing the dollar value of US foreign currency assets). However, the US dollar has continued to appreciate this year and the US current account deficit is expected to widen further in 2022 as foreign demand cools and US demand remains strong.
Valuation gains from rising US asset values
Who have been the beneficiaries of the increase in asset values in the United States? As in 2020, countries with large sovereign wealth funds, which hold significant foreign equity and investment in the United States, top the list. These include Norway and several Gulf States (including Kuwait, Saudi Arabia and the United Arab Emirates). The creditor positions of these countries also benefited from the increase in oil revenues, which widened the current account surpluses.[2]
But the country where the external position has improved the most is Canada. It is now the 8e largest creditor country, with net assets of approximately US$1.17 trillion. Canada holds a large share of its foreign assets in the United States and therefore benefits greatly from the rise in US asset prices. In addition, its currency has depreciated against the dollar, increasing the value of its US dollar assets relative to its Canadian dollar liabilities. Canada’s position as a major creditor contrasts sharply with its tendency to borrow abroad. Since the end of 2009, Canada’s cumulative net external borrowing has amounted to US$500 billion, but its net external position has improved by almost $1.4 trillion: strong increases in the value of its Assets outside the United States played a crucial role.
Main creditors and China’s external position
This table shows the largest net creditors in absolute terms at the end of 2021, as well as the position relative to domestic GDP and the evolution compared to 2020. The deterioration of China’s external position is surprising: in 2021, it has recorded a large current account surplus, and it holds large holdings of U.S. assets.
Examining the data provides an explanation. First, Chinese assets in the US are predominantly bonds, which have not increased in value in 2021. Second, Chinese equity portfolio assets are concentrated in Hong Kong, where the stock market has lost value in 2021. Third, the Chinese renminbi appreciated in 2021, including against the dollar. Chinese liabilities are denominated at least partly in renminbi – so their dollar value has increased. By contrast, their foreign currency holdings, including FDI and reserves, are partly denominated in other currencies, such as the euro or emerging market currencies, and their dollar value has declined accordingly with the firming. of the US dollar. Finally, China’s net loans abroad are well below its current account surplus, its external accounts being characterized by a large negative gap (“net errors and omissions” in the balance of payments) between the two. This could reflect unrecorded capital outflows from China (which would not be reflected in its official net creditor position) or some overvaluation of the current account balance.
[1] Of all the economies with a GDP above $500 billion (roughly the size of Austria or Norway in 2021), only Spain’s net debtor position has exceeded that amount relative to domestic GDP in the last 50 years. last years.
[2] As with the other countries in the chart, Spain’s position in US dollars has improved due to the depreciation of the euro against the dollar (Spain’s liabilities are mostly in euros), while the he improvement in Australia’s position reflects both large US equity holdings (which have risen in value) and a depreciation of the Australian dollar, which has reduced the US dollar value of its liabilities.
