The international investment position (IIP) is a statistical snapshot that shows the value and composition, at a particular point in time, of:

  • the financial assets of the residents of an economy that represent claims on non-residents, plus gold bullion held as a reserve asset;
  • the liabilities owed by the residents of an economy to non-residents. 

The net IIP is calculated as the difference between an economy’s external financial assets and liabilities, and can be positive or negative. If it is positive, it means that the country has a net external asset position; conversely, if it is negative, it has a net external liability position.

In the euro area, external financial assets comprise all euro area residents’ holdings relative to other countries outside the area (non-residents), including debt and equity securities issued by non-residents, loans granted to non-residents and deposits at non-resident banks.

External financial liabilities, on the other hand, include all financial instruments issued by euro area residents and held by non-residents, such as debt and equity securities, deposits by non-residents at euro area banks and loans from non-euro area residents to euro area residents.

How are financial positions classified?

Financial positions (like financial transactions) are grouped by type of investment or functional category, and then by resident sector and financial instrument. The main categories are as follows.

  • Direct investment: cross-border investments whereby a resident in one economy assumes control of (or a significant degree of influence over) the management of an enterprise resident in another economy.
  • Portfolio investment: cross-border transactions and positions involving debt or equity securities, other than those included in direct investment or reserve assets.
  • Financial derivatives and employee stock options: these are classified based on the class of the corresponding financial instrument. This category has to do with risk transfer rather than the supply of funds or other resources.
  • Other investment: a residual category that includes all positions and transactions other than those included in direct investment, portfolio investment, financial derivatives and employee stock options and reserve assets.
  • Reserve assets: external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, intervening in exchange markets to influence the currency exchange rate and other related purposes (e.g. to maintain confidence in a currency and an economy).

How does the IIP relate to the balance of payments?

The net IIP reflects the difference between a country’s position of assets and liabilities relative to the rest of the world at a given point in time. The value of these positions may vary over time owing to:

  1. transactions in financial assets or liabilities, which are recorded in the financial account (a component of the balance of payments);
  2. revaluations, which can be broken down into:
    • price variations, i.e. gains or losses on financial assets and liabilities arising from changes in market prices;
    • exchange rate variations, i.e. gains or losses arising from changes in exchange rates;
  3. other volume changes, which mainly account for statistical reclassifications (changes in institutional sectors or reclassifications of financial instruments, migration of residents, etc.).

 

Related explainers

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What is foreign direct investment?

What is external debt?