What is the Net International Investment Position (NIIP)?
The Net International Investment Position (NIIP) is the balance value when external assets are adjusted for external liabilities. The external assets are the foreign assets owned by the country’s government, companies, and citizens. The external liabilities are the foreigners-owned domestic assets.
The Net International Investment Position measures a country’s financial position relative to the world. If the value of the NIIP is positive, it indicates that the domestic economy is a net creditor, and if the value is negative, the domestic economy is indicated to be a net debtor. The NIIP plus the value of the non-financial assets provide the net worth of an economy.
- When the Net International Investment Position (NIIP) is combined with non-financial assets value, the result provides an economy’s net worth. NIIP is a measure of a country’s financial condition and its suitability to take on more financial credit.
- A country’s current account and fluctuations in the market value changes the value of the NIIP.
- A positive value NIIP implies that the country is a net creditor, while a negative value indicates that the country is a net debtor.
Factors Affecting the Net International Investment Position
The change in the Net International Investment Position is given by:
Net International Investment Position = CA + Valuation Changes
- CA – Current account
Current account is a country’s net income plus direct payments and trade balance. When all purchases of a country can be funded by the residents of a country, it indicates that the current account is balanced. The government, companies, and individuals are the residents of a country, and income plus savings are the funds. Purchases include all government spending, consumer spending, as well as spending by the companies. The current account is a component of the balance of payments of a country.
The current account reflects the overall borrowing needs of a country. For example, if a country experiences a deficit in the current account, it will need a foreign country to lend it the equivalent amount. Thus, the Net International Investment Position of the country changes with a change in its current account.
The changes in the market value of external assets and liabilities of a country are the valuation changes. The changes are due to changes in stock prices, appreciation or depreciation in the currency, etc. Let us look at an example to understand the effect of valuation changes on the NIIP.
Consider a local U.S issuer owns 30 shares in the German automobile manufacturer Mercedes-Benz. Let the share price be 10 euros, and the exchange rate is $2 per euro. Suppose foreigners hold 50 U.S bonds, and $8 is the price per bond.
External assets = 30 * €10 = €300 = €300 * 2 = $600
External liabilities = 50 * $8 = $400
Hence, Net International Investment Position = External Assets – External Liabilities
= $600 – $400 = $200
A positive NIIP indicates that the country is a net creditor.
Now, suppose the euro depreciates with the new exchange rate as $1 per euro. Then,
External assets = 30 * €10 = €300 = €300 * 1 = $300
External liabilities = $400 (unchanged since the U.S bonds are expressed in dollars)
Hence, NIIP = $300 – $400 = -$100
It implies that a change in the exchange rate caused the net creditor nation to become a net debtor of every other nation of the world.
Metrics for Assessing the NIIP
1. Net International Investment Position to Gross Domestic Product (GDP) Ratio
2. Net International Investment Position to Total Financial Assets Ratio
The ratios are used by financial investors to measure a country’s creditworthiness. A negative value for the ratios indicates that the country is susceptible to the unpredictability of global financial markets. When a country accumulates a large negative Net International Investment Position before a crisis strikes, it may not be able to enter the financial market at the time of crisis, and hence, may need financial assistance from other countries to cover the budget deficits.
Historically, many of the countries with the highest negative NIIP value managed to decrease the deficits in their current account and gradually reduce the external liabilities. However, it may not be sufficient to restore full confidence in cases where a high level of debt is reflected by the large negative NIIP. For lowering the negative Net International Investment Position to acceptable levels, large surpluses may be required.
CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: