Tuesday, October 3, 2017

The current account: where do we stand?

Here are the estimates of the current account of the Balance of Payments as currently provided by the CSO:

BoP Current Account Unadjusted

As we have explained before the recent changes of the current account are telling us close to nothing about the underlying external position of the economy.  Making the * adjustments used to determine GNI* doesn’t offer much and only gets us to this:

Bop Current Account Star Adjustments

The modified current account adjusts for the net income of redomiciled PLCs (which ultimately doesn’t accrue to Irish residents) and the depreciation of foreign-owned aircraft for leasing and intangible assets (which accrues to non-residents through the repayment of debt rather than income).  These adjustments may have given us a better level indicator of national income, GNI*, but still left us with a current account that offered little insight.

In our previous effort, we made a further adjustment for the acquisition of these aircraft for leasing and intangible assets.  That is because these items are imported but the purchases are not funded from domestic sources so any deficit that results from these is not reflective of the underlying position of the economy.  Any such deficits are funded by intra-company lending.  Using figures for the investment in these assets gets us to:

Bop Current Account Acquisition Adjustments

This is undoubtedly an improvement and the orange line reflects what we might expect an underlying current account to do.  It deteriorates up to 2008, then shows some improvement and returns to balance in 2014.  However, it is what happened then that suggested all was not what it seemed to be.  Yes, we probably would have expected the underlying current account to continue improving in 2015 and 2016 but the improvements here seemed too large and by 2016 the orange line is showing a surplus of €13 billion.

The issue seems to be related to imports of R&D services and we tried to explore the implications of this for GNI* here.  The issue is whether expenditure on R&D activity should be treated as intermediate consumption (thus reducing profits) or a capital item (investment).  The move to new national accounting standards sees R&D spending treated as a capital item but certain issues remain in the introduction of a consistent treatment across the national accounts and the balance of payments.

Although R&D spending is treated as a capital item in the national accounts it is still treated as intermediate consumption for balance of payments purposes.  The previous post runs through this in more detail but when a consistent treatment is taken it is likely the outflows of profits will increase by the amount of spending on R&D service imports (as almost all of this is undertaken by foreign-owned MNCs.)

It’s all becoming messy now but if we make a further adjustment for imports of R&D services this is what we get:

Bop Current Account R and D Adjustment

That looks about right.  The balance has been adjusted down for all years but this difference increases for 2015 and 2016 when R&D service imports really ramped up.  The green line reflects what we would think an underlying current account balance would look like and has steady improvement to a small surplus in 2016 unlike the rapid increases of the earlier attempt.

So let’s put this underlying measure relative to GNI* to see what we get (though we have some issues over how R&D service imports are influencing that).

Bop Current Account Underlying to GNI star 

As the label shows it is quite the journey from the official estimate of the current account to this derived underlying measure.  There may be some issues here and there but it seems to fit the bill.  The current account deficit that began to open in 2004 and 2005 and looks like it returned to something close to balance last year after a number of years of sustained improvements.  We’ll take that.  For now.

Here is a table showing the adjustments made. Click to enlarge.

Bop Current Account Adjustments Table

And to conclude here is something which may or may not change the underlying position – R&D exports.  All the focus has been on onshoring of IP but it seems like there is also IP going in the other direction with a surge in IP exports in recent years (albeit at a scale much much smaller than what has been happening in the other direction).

Bop Current Account R and D Exports

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