Balance of international payments

- Service balance:

Including revenues and expenditures from services of transportation, tourism, insurance, post, telecommunications, banking, construction information and other activities between residents and non-residents. Similar to the import and export of goods, the export of services creates a supply of foreign currency, so it is recorded on the balance side and has a positive sign; the import of foreign currency creates a demand for foreign currency. The factors affecting the value of service exports are the same as the factors affecting the value of service exports and imports are the same as the factors affecting the value of goods exports and imports.

- Income balance:

+ Workers' income: is the salary, bonus and other income in cash and kind paid by residents to non-residents or vice versa. Factors affecting the income of workers abroad.

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+ Investment income: is income from direct investment profits, interest from investment in valuable papers and interest due on loans between residents and non-residents.

- Unilateral current account balance:

Non-refundable aid, gifts, presents and other transfers in cash or in kind for consumption purposes transferred by non-residents to non-residents and vice versa. Unilateral current transfers reflect the redistribution of income between residents and non-residents. Receipts that generate foreign currency supply (domestic currency demand) should be recorded on the credit side (+), while expenditures that generate foreign currency demand should be recorded on the debit side (-).

). The main factor influencing one-way transfers is the goodwill and affection between residents and non-residents.

We see that the balance of services, income and one-way current transfers cannot be observed with the naked eye, so they are called invisible balances. Thus, the current balance can be represented as:

Current account balance = visible balance + invisible balance

In summary, income received by residents from non-residents that generates a supply of foreign currency should be credited, and income paid to non-residents that generates a demand for foreign currency should be debited. All payments by public or private sectors are included in this calculation. For most countries, the trade balance is the most important component of the current account. However, for some countries with large foreign assets or liabilities, net income from loans or investments may account for a large proportion.

Since the trade balance is the main component of the current account, and net exports are equal to the difference between domestic saving and domestic investment, the current account is also expressed by this difference.

Together with the capital account, and changes in foreign exchange reserves, it forms the balance of payments. The current account is in surplus when a country exports more than it imports, or when it saves more than it invests. Conversely, the current account is in deficit when a country imports more or invests more. A large current account deficit implies that a country has limited resources to finance its imports and investments in a sustainable manner. According to the IMF, if the current account deficit as a percentage of GDP is greater than 5, a country is considered to have an unhealthy current account deficit.

2.2.2. Capital balance

The capital account (also called the capital balance) is a part of a country's balance of payments. It records all transactions in assets (including real assets such as real estate or financial assets such as stocks, bonds, and currencies) between residents of the country and residents of other countries. When the claims on foreign assets by residents of the country are greater than the claims on domestic assets by residents abroad, the country has a capital account surplus (or net capital inflow). By convention, net capital inflow must equal the current account deficit.

The financial account (or investment account) is a part of the capital account that records transactions in financial assets.

Capital and interest accounts:

Suppose that the capital account is initially in balance at the domestic interest rate r. When the interest rate rises to r', the capital account becomes surplus. If the interest rate falls to r , the capital account becomes deficit. Since capital is closely related to the interest rate, the capital account balance is also closely related to the interest rate.

When domestic interest rates rise, investment becomes more attractive, so capital inflows increase, while capital outflows decrease. The capital account balance thus improves. Conversely, if domestic interest rates fall, the capital account balance worsens.

When foreign interest rates rise, the capital account balance will worsen. And, when foreign interest rates fall, the capital account balance will improve.

Capital account and exchange rate:

When the domestic currency appreciates against foreign currencies, which also means that the nominal exchange rate falls, capital inflows will decrease, while capital outflows will increase. As a result, the capital account will deteriorate. Conversely, when the domestic currency depreciates (the exchange rate increases), the capital account will improve.

2.2.3. Basic balance

As analyzed above, the current account records items of income

The current account balance is a measure of the relationship between residents and non-residents, which reflects the ownership of assets between residents and non-residents. Therefore, the current account balance has a long-term impact on the stability of the economy, especially on the exchange rate of the economy.

The sum of the current account and the long-term account is called the primary account. The stability of the primary account has a long-term impact on the economy and the exchange rate. Therefore, the primary account is of interest to economic analysts and policymakers.

Basic balance = current account + long-term capital account

Volatile items such as short-term capital and changes in foreign reserves

2.2.4. Overall balance

If the statistics work reaches absolute accuracy (ie, errors and mistakes are zero), the overall balance is equal to the sum of the current balance and the capital balance. In reality, due to many complex statistical problems in the process of collecting data and establishing the International Financial Reporting Standards, errors and mistakes often arise. Therefore, the overall balance is adjusted to the sum of the current balance and the capital balance and the error item in the statistics. We have:

Overall balance = current account + capital account + errors and omissions

2.2.5. Official financing balance

The official balance of payments (OFB) includes the following items:

- Change in national foreign exchange reserves (ΔR)

- Credit to the IMF and other central banks (L)

- Change in reserves of other central banks in the currency of the country establishing the balance of payments (≠)

OFB = ΔR + L + ≠

It is a fact that when foreign exchange reserves increase, we record a debit (-) and when they decrease, we record a credit (+), so confusion often occurs here. This is explained as follows:

We imagine that the Vietnamese nation is divided into two parts, including the Central Bank and the rest excluding the Central Bank (called the economy - NKT). The criteria for dividing the Central Bank and NKT are: The Central Bank has the function of intervening in the supply and demand of foreign currency in the foreign exchange market, while the economy does not have the function of intervening. According to the rules of international monetary policy established on the basis of the economy, therefore, the intervention activities of the Central Bank in the foreign exchange market (buying and selling domestic currency) to impact the economy are considered as the relationship between residents and non-residents. When the Central Bank intervenes to sell foreign currency, it causes foreign exchange reserves to decrease, while increasing the supply of domestic currency for the economy, so we must record a credit (+). When the Central Bank intervenes to buy foreign currency, it causes foreign exchange reserves to increase, while increasing the demand for foreign currency for NKT, so we must record a debit (-).

2.2.6. Errors and omissions

OB + OFB = 0

→OB = - OFB

→CA+K+OM= - OFB

→OM =-(CA+K+OFB)

The last equation shows that the balance of the error and error item is the difference between the official compensation balance and the sum of the current account and the capital account. Because the official compensation balance, current account and capital account are always determined (always shown as a specific number on the CCTTQT), the above equation is applied to the balance of error and error when preparing the CCTTQT in practice.

3. International trade surplus and deficit

The balance sheet is prepared according to the principle of double-entry accounting, so the sum of the credit entries is always equal to the sum of the debit entries, but with opposite signs. This means that, in general, the balance sheet is always balanced. Therefore, when we talk about the surplus or deficit of the balance sheet, we are talking about the surplus or deficit of one or a group of partial balances, not about the entire balance sheet.

In principle, the surplus or deficit of the international trade balance is determined

by two methods:

 Method of determining surplus and deficit of each component balance.

 Accumulation method.

3.1. Trade surplus and deficit

TB=XM

Thus, the trade balance is the difference between the value of exports and the value of imports of goods.

Trade surplus: X > M, indicating:

- Revenue from non-residents > expenditure on non-residents

- Foreign currency supply > foreign currency demand

Trade balance deficit: X < M, given:

- Revenue from non-residents < expenditure on non-residents

- Foreign currency supply < foreign currency demand

The analysis of the trade balance plays a great role in the economy, because: The trade balance is the main component of the current account balance, Trade deficit and surplus often determine the status of the current account balance. The trade balance promptly reflects the movement trend of the current account balance. This happens because customs agencies often provide timely data on import and export of goods, while the collection of data on services, income and current transfers is often slower, meaning there is a certain time deviation.

Because of the importance of the trade balance, most developed countries publish their balance sheet status monthly.

To balance the trade balance, the main measures often applied will affect the volume of imported and exported goods through the forms of tariffs, quotas, etc. and affect the public's psychology of consuming imported goods.

3.2 Current account surplus and deficit

The current account balance includes the 'Tangible' and 'Intangible' balances, so overall it is more important than the trade balance.

Formula to determine:

CA = TB + Se + Ic + Tr = Kl + Ks+  R

- Current account surplus when: ( X – M + Se + Ic + Tr ) > 0

A surplus in the current account (CA > 0) means that receipts from non-residents are greater than payments to non-residents. This means that the net value of securities issued by non-residents in the hands of residents has increased. The supply of foreign currency is greater than the demand for foreign currency.

- Current account deficit when: ( X – M + Se + Ic + Tr ) < 0

A current account deficit (CA < 0) means that residents' income from non-residents is less than their expenditure on non-residents. This means that the net value of securities issued by non-residents in the hands of residents falls. The supply of foreign currency is less than the demand for foreign currency.

- Most economists believe that the current account balance is ideal for analyzing a country's foreign debt. The reason can be explained as follows: The current account balance is directly related to the total foreign debt of a country. A balanced current account balance indicates that the total foreign debt of a country remains unchanged (the country is neither a creditor nor a debtor). A surplus current account balance reflects an increase in the country's net assets to the rest of the world (the country's position as a creditor). Conversely, a deficit current account balance reflects an increase in the country's net debt to foreign countries (the country's position as a debtor).

CA = 0, in the long run

Assuming a balanced current account, that is: ( X- M + Se + Ic + Tr ) = 0

Because in the long run the effect of central bank intervention is neutral, we can consider the change in central bank foreign exchange reserves to be zero, that is:  R= 0

- Kl + Ks = 0. There are 2 possibilities

+ Case 1: Kl < 0 and Ks > 0. If the short-term capital inflow is large and balanced by the long-term capital outflow, it can threaten the country's future payment capacity, leading to increased pressure and devaluation of the domestic currency.

+ Case 2: Kl > 0 and Ks < 0. If the long-term capital inflow is larger and balanced by the short-term capital outflow, it will create a more stable macroeconomic environment to maintain stable exchange rates, interest rates and implement the national economic development strategy.

CA = 0 in the short run

In the short run, long-term investments are considered constant, meaning Kl=0, Ks +  R = 0, there are 2 possibilities:

+ Case 1:  R > 0 and Ks < 0. This is the state when short-term capital outflows are offset by a decrease in national foreign exchange reserves. In reality, this situation can occur in the short term, when the Central Bank attempts to balance speculative short-term capital flows abroad by intervening to sell reserves in the foreign exchange market to protect the exchange rate, that is, to prevent the domestic currency from depreciating. Therefore, even though the current account balance is balanced, there is still pressure to depreciate the domestic currency or to increase the domestic interest rate, if the Central Bank does not continue to intervene to sell foreign currency in the foreign exchange market.

+ Case 2:  R < 0 and Ks > 0. This is the state when short-term capital flows in, increasing the national foreign exchange reserves. In reality, this situation can occur when the central bank increases the domestic interest rate to prevent short-term capital flows out and attract more short-term capital flows in to protect the exchange rate from continuing to increase (ie preventing the domestic currency from continuing to depreciate).

Current account balance analysis is very important in macroeconomic management because the state of this balance directly affects exchange rates, interest rates, economic growth, inflation and ultimately the overall balance. To influence the state of the current account balance, more comprehensive fiscal and monetary measures are needed than just international trade policy measures.

Balance of international payments - 2

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