The international investment position of the United States at yearend 2004

Survey of Current Business, July, 2005 by Elena L. Nguyen

THE net international investment position of the United States was -$2,484.2 billion (preliminary) at yearend 2004, compared with -$2,156.7 billion (revised) at yearend 2003, with direct investment valued at current cost (table 1, chart 1). The value of foreign-owned assets in the United States continued to exceed the value of U.S.-owned assets abroad.

[GRAPHIC OMITTED]

The -$327.5 billion change in the net investment position from yearend 2003 to yearend 2004 was largely due to substantial net foreign purchases of U.S. Treasury securities and U.S. corporate bonds. The impact of these net purchases was partly offset by appreciation of most foreign currencies against the U.S. dollar, which raised the dollar value of U.S.-owned as sets abroad, especially of U.S.-owned foreign stocks. In addition, increases in stock market prices raised the value of U.S. holdings of foreign stocks somewhat more than they raised the value of foreign holdings of U.S. stocks.

On an alternative valuation basis with direct investment valued at the current stock market value of owners' equity, the net investment position was -$2,542.2 billion (preliminary) at yearend 2004, compared with -$2,372.4 billion (revised) at yearend 2003. This article features estimates valued at the current cost of direct investment; however, estimates valued at the stock market value of direct investment are mentioned when the two valuations of direct investment differ substantially. The differences between the two methods are limited to the valuation of direct investment. All financial flows and all asset and liability positions except direct investment are identical under both of these valuation measures.

With direct investment valued at current cost, U.S.-owned assets abroad increased to $9,052.8 billion at yearend 2004 from $7,641.0 billion at yearend 2003 (table A).

* Net financial transactions increased the value of U.S. investments abroad by $855.5 billion in 2004 (table B), up sharply from $328.4 billion in 2003. The increase was mostly accounted for by substantial increases in claims reported by U.S. banks and nonbanking concerns and in U.S. direct investment abroad.

* Valuation adjustments increased the value of U.S. investments abroad by $556.3 billion (table B). Price appreciation of foreign stocks increased the value of U.S. holdings of foreign stocks, and exchange-rate appreciation of foreign currencies raised the dollar value of most U.S. investments abroad.

With direct investment valued at current cost, foreign-owned assets in the United States increased to $11,537.0 billion at yearend 2004 from $9,797.7 billion at yearend 2003.

* Net financial transactions increased the value of foreign investments in the United States by $1,440.1 billion in 2004 (table C), up from $889.0 billion in 2003. The increase was mostly accounted for by substantial increases in net foreign purchases of U.S. securities and in liabilities reported by U.S. banks.

* Valuation adjustments increased the value of foreign investments in the United States by $299.2 billion (table C). Price appreciation of U.S. stocks increased the value of foreign holdings of U.S. stocks.

This article presents the major changes in U.S.-owned assets abroad and in foreign-owned assets in the United States in 2004. Tables 1 and 2 at the end of this article present estimates of the yearend positions by type of investment.

Changes in U.S.-Owned Assets Abroad

Bank and nonbank claims

U.S. claims on foreigners reported by U.S. banks and securities brokers increased a record $414.7 billion, to $2,174.0 billion, in 2004. The increase was mostly as a result of financial outflows of $356.1 billion. U.S. banks' own claims denominated in dollars increased to $1,658.1 billion from $1,311.4 billion (table D). Most of the increase in claims reflected interoffice transfers of funds to meet increased demand abroad, probably related to a pickup in syndicated loans, mergers, and corporate debt refinancings. Claims on other foreigners, mostly securities brokers and dealers, also picked up as a result of increased foreign activities in the U.S. securities market; resale agreements with hedge funds in the Caribbean increased substantially.

U.S. banks' domestic customers' claims denominated in dollars increased to $360.6 billion from $344.9 billion. U.S. banks' claims payable in foreign currencies increased to $155.2 billion from $103.0 billion.

U.S. claims on foreigners reported by U.S. nonbanking concerns increased to $801.5 billion from $597.0 billion, reflecting a large increase in U.S. deposits, mostly in Caribbean banking centers (table D).

Foreign securities

U.S. holdings of foreign securities increased $482.9 billion, to $3,436.7 billion, in 2004. The increase was mostly accounted for by valuation adjustments of foreign stocks.

U.S. holdings of foreign stocks increased $440.6 billion, to $2,520.1 billion, in 2004. Stock price appreciation of $210.1 billion, exchange-rate appreciation of $147.4 billion, and net U.S. purchases of $83.2 billion all contributed to the increase in U.S. holdings. Foreign stock prices (based on Morgan Stanley broad market indexes) appreciated 11 percent in local currency, the second consecutive year of double-digit appreciation, following 3 years of price depreciation. In U.S. dollars, foreign stock prices appreciated 18 percent, outperforming U.S. stock prices, which appreciated 9 percent.