What Is The Balance Of Payments?The balance of payment (BOP) is the method countries use to monitor all

international monetary transactions at a specific period of time. Usually, the

BOP is calculated every quarter and every calendar year. All trades

conducted by both the private and public sectors are accounted for in the

BOP in order to determine how much money is going in and out of a country.

If a country has received money, this is known as a credit, and, if a country

has paid or given money, the transaction is counted as a debit. Theoretically,

the BOP should be zero, meaning that assets (credits) and liabilities (debits)

should balance. But in practice this is rarely the case and, thus, the BOP can

tell the observer if a country has a deficit or a surplus and from which part of

the economy the discrepancies are stemming.

The balance of payments dividend The BOP is divided into three main categories: the current account, the

capital account and the financial account. Within these three categories are

sub-divisions, each of which accounts for a different type of international

monetary transaction. 

The current Account

The current account is used to mark the inflow and outflow of goods and

services into a country. Earnings on investments, both public and private,

are also put into the current account. Within the current account are credits

and debits on the trade of merchandise, which includes goods such as raw

materials and manufactured goods that are bought, sold or given away

(possibly in the form of aid). Services refer to receipts from tourism,

transportation (like the levy that must be paid in Egypt when a ship passes

through the Suez Canal), engineering, business service fees (from lawyers or

management consulting, for example), and royalties from patents and

copyrights. When combined, goods and services together make up a

country's balance of trade (BOT). The BOT is typically the biggest bulk of a

country's balance of payments as it makes up total imports and exports. If a

country has a balance of trade deficit, it imports more than it exports, and if

it has a balance of trade surplus, it exports more than it imports. 

Receipts from income-generating assets such as stocks (in the form of

dividends) are also recorded in the current account. The last component of

the current account is unilateral transfers. These are credits that are mostly

worker's remittances, which are salaries sent back into the home country of

a national working abroad, as well as foreign aid that is directly received. 

The capital Account The capital account is where all international capital transfers are recorded.

This refers to the acquisition or disposal of non-financial assets (for example,

a physical asset such as land) and non-produced assets, which are needed

for production but have not been produced, like a mine used for the

extraction of diamonds. The capital account is broken down into the

monetary flows branching from debt forgiveness, the transfer of goods, and

financial assets by migrants leaving or entering a country, the transfer of

ownership on fixed assets (assets such as equipment used in the production

process to generate income), the transfer of funds received to the sale or

acquisition of fixed assets, gift and inheritance taxes, death levies, and,

finally, uninsured damage to fixed assets.

The Financial AccountIn the financial account, international monetary flows related to investment

in business, real estate, bonds and stocks are documented. Also included are

government-owned assets such as foreign reserves, gold,  special drawing

rights (SDRs) held with the International Monetary Fund, private assets held

abroad, and direct foreign investment. Assets owned by foreigners, private

and official, are also recorded in the financial account. 

The Balancing ActThe current account should be balanced against the combined-capital and

financial accounts. However, as mentioned above, this rarely happens. We

should also note that, with fluctuating exchange rates, the change in the

value of money can add to BOP discrepancies. When there is a deficit in the

current account, which is a balance of trade deficit, the difference can be

borrowed or funded by the capital account. If a country has a fixed asset 

abroad, this borrowed amount is marked as a capital account outflow.

However, the sale of that fixed asset would be considered a current account

inflow (earnings from investments). The current account deficit would thus

be funded.

When a country has a current account deficit that is financed by the capital

account, the country is actually foregoing capital assets for more goods and

services. If a country is borrowing money to fund its current account deficit,

this would appear as an inflow of foreign capital in the BOP.

Liberalizing the AccountsThe rise of global financial transactions and trade in the late-20th century

spurred BOP and macroeconomic liberalization in many developing nations.

With the advent of the emerging market economic boom - in which capital

flows into these markets tripled from USD 50 million to USD 150 million from

the late 1980s until the Asian crisis - developing countries were urged to lift

restrictions on capital and financial-account transactions in order to take

advantage of these capital inflows. Many of these countries had restrictive

macroeconomic policies, by which regulations prevented foreign ownership

of financial and non-financial assets. The regulations also limited the transfer

of funds abroad. But with capital and financial account liberalization, capital

markets began to grow, not only allowing a more transparent and

sophisticated market for investors, but also giving rise to foreign direct

investment. For example, investments in the form of a new power station

would bring a country greater exposure to new technologies and efficiency,

eventually increasing the nation's overall gross domestic product  by

allowing for greater volumes of production. Liberalization can also facilitate

less risk by allowing greater diversification in various markets.

Balance of Payment problem arises when an economy has to take loans in

order to balance the balance of payment.

First, we must know the situation of Balance of Trade. A deficit Balance of

Trade means that the country imports good and services which together in a

year exceeds the value of exports the country could achieve.

This deficit can be met by net receipts on invisibles etc that are not part of

the exports or imports or the balance of trade.

So, if such current receipts of income, interest, fees or other invisible

earnings are more than the current payments of similar type, it helps meet

the deficit in the balance of trade. But, these current net receipts may not be

positive, in which case the current account has a deficit. Also, if these net

receipts are positive but lower in absolute terms as compared to the deficit

in the balance of trade, the current account balance will still be negative.

With negative current account balance, one cannot now pay for the

repayment of past borrowed capital. So, you have entered into a balance of

payment problem. The only way to solve this problem is to take further loans

from the foreigners. For some time foreigners will give you fresh loans so

that they can get their past loans repaid. But if the ba;ance of trade is

negative year after year for long periods and so do the receipts on current

account , the economy will be running current account deficit year after year

and the current account deficit will continue to grow and to make the

balance of payment balance, more and more foreign loans will have be

raised. So, the first way to solve a balance of payment problem is to go on

borrowing more. But the foreigners will lose faith on you if the balance of

payments is in growing problem year after year for long. The economy will

not be given loans by the foreigner’s ad infinite. First, they will start charging

higher interest on loaned they give your country and then start giving only

short-term loans and then finally your economy gets in default situation and

trapped in high debt.

So, your economy as a defaulter in repayment of loans or even for imports

already made, the only second way to solve the problem is to beg for

rescheduling the foreign loans. They foreigners might give some more time

to repay past loans but will not give you any fresh loans. So, you are now

deemed. No other country will trade with you. So you go to the IMF or the

World Bank to get loans that would help the country to repay the past loans

taken from private parties, banks etc and even the IMF and the World Bank.

Now, they will certain help your country with fresh loans but only under

certain conditions. What are these conditions? These conditions are nothing

but that you implement economic measures that will over a few years make

your balance of trade positive and current account balance positive so that

after a few years you have the capability to repay all past and new loans

taken from foreigners, foreign banks/ financial institutions, international

fiancé bodies. Since you have willing avoided taking correct economic

policies for long, you landed yourself in this position of final bankruptcy in

which situation you are just about going to be declared outcast and ineligible

for any financial transactions or trade with any other country. Only

international smugglers can help you only for exploiting your country.

You then have no option left for continuing with wrong economic policies. So

now you force yourself into doing the correct things that the economy should

have done long time back. (this is what is called economic reforms, opening

up, privatization, macro-economic stabilization, drastic reduction in budget

and fiscal deficit by stopping the country's profligate tendency to spend as

much as possible to get popular support for your political party to remain in

govt. power, globalization, dismantling govt. controls and oppression of your

citizens, reducing all kinds of administrative actions to distort and kill the

competitive market mechanism).

What should you have done long time back, you start doing that now. So, the

new policies you pursue are:

1. Devalue your currency by a big percentage in one or two or three

installments in quick succession so that foreigners can find your goods

cheaper to buy and your exports go up rapidly.

2. With devaluation imports become costlier for your countrymen. As a result

they start reducing their imports. 

3. You stop taking or renewing short maturity loans from abroad.

4. You allow foreign investment to take place and mostly in the form of

equity of companies and not much fresh debt inflows from abroad.

5. Your balance of payments problem starts getting less severe now. But the

process has been sustained. So now you take policies that will help exports

to go up at much faster rate than the imports.

6. To encourage exports you change your customs procedure, you improve

the efficiency of your ports, announce lower taxes on income out of exports.

7. You star privatizing the inefficient white elephant public sector companies

and allow fresh capacity in investments by private sector without trying to

impose conditions of price and distribution controls, licensing for new plants

and capacity. So the foreign direct investment and liberated private take

their own risks and set up state of the art state technology based, factories

to produce at adequately large scale to be produce goods that are cost

efficient, of high quality so that not only domestic consumers gain but even

foreigners would like to buy your products

8. You start strict budgetary control to reduce your budget and fiscal deficits.

9. You allow stock exchanges and capital markets to become efficient so that

investors feel comfortable and allow foreign institutional investors to trade in

the shares and debentures of your country's companies.

10. You remove inerest ciontrols and private the nationalized/ public sector

banks.

11. You allow free markets to operate without Govt. directives and

intervention.

As a result of all these your country's export starts rising fast, your factories

and farms become more efficient, your rationalize your tax subset\y system .

You start creating infrastructure; allow private and foreign enterprise to build

modern factories and farms to enhance the efficiency of the economy. You

change your labor unions stance from one of being violent to one of being

reasonable and disciplined.

All this enhance your capacity to increase your economy's ability to export.

You may also start giving sops to exporters.

Producing later and ensuring setting up of large capacity firms and farms

operating at scales that would enjoy scale economies larger output of

industry, agriculture and services.

In the ultimate sense becoming globally cost efficient in the production of

most items, is a pre-requisite to become a competitive exporter and increase

exports. With increasing the exports of goods and services, you cannot solve

the balance of payment problem on a sustained basis.

Read the Notes below for better understanding in technical terms:

1. The balance of payments, (or BOP) measures the payments that flow

between any individual country and all other countries. It is used to

summarize all international economic transactions for that country during a

specific time period, usually a year. The BOP is determined by the country's

exports and imports of goods, services, and financial capital, as well as

financial transfers. It reflects all payments and liabilities to foreigners

(debits) and all payments and obligations received from foreigners (credits).

Balance of payments is one of the major indicators of a country's status in

international trade, with net capital outflow.

The Balance of Payments is the sum of the Current Account and the Capital

Account and the Financial Account. The Balance of Payments Identity states

that:

Current Account + Capital Account + Financial Account + Net Errors and

Omissions = Change in Official Reserve Account 

A country will have a negative balance of payments (a net decrease in

official reserves, net errors and omissions, or some combination) if the net of

the current account, the capital account and the financial account is a deficit.

Similarly, there will be a positive balance of payments (a net increase in

official reserves, net errors and omissions, or some combination) if the net of

the current, the financial and the capital account results in a surplus. The

basic principle behind the identity is that a country can only consume more

than it produces (a current account deficit) if it is supplied capital from

abroad (a capital account surplus). From Alfred Marshall's Money, Credit, and

Commerce, "In short, when a country lends abroad ₤1,000,000 in any form,

she gives foreigners the power of taking from her ₤1,000,000 of goods".

Components

The Balance of Payments for a country is the sum of the current account, the

financial account and the capital account, and the change in official reserves.

The current account is the sum of net sales from trade in goods and services,

net factor income (such as interest payments from abroad), and net

unilateral transfers from abroad. Positive net sales to abroad corresponds to

a current account surplus; negative net sales to abroad corresponds to a

current account deficit. Because exports generate positive net sales, and

because the trade balance is typically the largest component of the current

account, a current account surplus is usually associated with positive net

exports.

The Income Account or Net Factor Income, a sub-account of the Current

Account, is usually presented under the headings "Income Payments", as

outflows, and "Income Receipts", as inflows. If the Income Account is

negative, the country is paying more than it is taking in interest, dividends,

etc. For example, the United States' net income has been declining

exponentially since it allowed the Dollar's price relative to other currencies to

be determined by the market to a point where income payments and

receipts are roughly equal. The difference between Canada's Income

Payments and Receipts have been declining exponentially as well since its

central bank in 1998 began its strict policy not to intervene in the Canadian

Dollar's foreign exchange.[2] The various subcategories in the Income

Account are linked to specific respective subcategories in the Financial

account. From here, economists and central banks determine implied rates

of return on the different types of capital exchanged in the Financial

Account. The United States, for example, gleans a substantially larger rate of

return from foreign capital than foreigners from domestic capital.

When analyzing the current account theoretically, it is often written as a

function X of the real exchange rate, p, domestic GDP, Y, and foreign GDP,

Y*. Thus the current account can be written as X(p, Y, Y*). According to

theory, the current account X should increase if (1) the domestic currency

depreciates (p increases), (2) domestic GDP decreases, or (3) foreign GDP

increases. A domestic currency depreciation makes domestic goods

relatively cheaper, boosting exports relative to imports. A decrease in

domestic GDP reduces domestic demand for foreign goods, lowering imports

without affecting exports. An increase in foreign GDP increases foreign

demand for domestic goods, increasing exports without affecting imports.

Current account =

Trade Balance 

Net Exports (Exports - Imports) of Merchandise (tangible goods) 

Net Exports (Exports - Imports) Services (such as legal and consulting

services) 

+ Net Factor Income From Abroad (such as interest and dividends) 

+ Net Unilateral Transfers From Abroad (such as foreign aid, grants, gifts,

etc.) 

Capital Account

The capital account "records the international flows of transfer payments

relating to capital items". It therefore records a country's inflows and

outflows of payments and transfer of ownership of fixed assets (capital

goods). Examples of such goods could be factories and so on. Summing up:

the Capital Account accounts for the transfer of capital goods. 

Financial Account

The financial account is the net change in foreign ownership of domestic

financial assets. If foreign ownership of domestic financial assets has

increased more quickly than domestic ownership of foreign assets in a given

year, then the domestic country has a financial account surplus. On the other

hand, if domestic ownership of foreign financial assets has increased more

quickly than foreign ownership of domestic assets, then the domestic

country has a financial account deficit

The accounting entries in the financial account record the purchase and sale

of domestic and foreign assets. These assets are divided into categories such

as Foreign Direct Investment (FDI), Portfolio Investment (which includes

trade in stocks and bonds), and Other Investment (which includes

transactions in currency and bank deposits).

Financial account =

Increase in foreign ownership of domestic assets - Increase of domestic

ownership of foreign assets 

Current Account

This section covers the flow of goods, services and income in and out of a

given country and also financial aid from governments abroad:

Trade in goods is also known as trade in visibles or tangibles, 

Trade in services is also known as trade in invisibles or intangibles. 

Income refers not only to the money given back from investments made

abroad (attention!: investments are recorded in the financial account but

income from investments is recorded in the current account) but also to the

money sent by individuals working abroad that send money to their families

back home (this is usual only in diasporas and developing countries).

(source: see book reference list) 

Net Errors and Omissions

This is the last component of the BOP and only exists to correct any possible

errors made in accounting for the three other accounts. These errors are

common to occur due to the complexity of the calculations. It is often

referred as "the balancing item". (source: see book reference list)

Official reserves

The official reserves account records the current stock of reserve assets (and

often simply referred to as foreign exchange reserves) available to and

controlled by the country's authorities for financing of international payment

imbalances, foreign exchange intervention and other uses.[3] Reserves

include official gold reserves, foreign exchange reserves, and IMF Special

Drawing Rights (SDRs), all denominated in foreign currency (although the

amounts may be expressed in any relevant unit). Changes in the official

reserves account for the differences between the capital account and current

account, and effectively represent foreign exchange interventions; the

magnitude of these changes will depend on monetary policy.

According to the standards published by the IMF in the IMF Balance of

Payments Manual, net decreases of official reserves indicate that a country is

buying its domestic assets, usually currency or bonds, to support its value

relative to whatever asset, usually a foreign currency, that they are selling in

exchange. Countries with large net increases in official reserves are

effectively attempting to keep the price of their currency low by selling

domestic currency and purchasing foreign currency, increasing official

reserves. For countries with floating exchange rates, the official reserves will

tend to change less, and be used as another tool of monetary policy to

influence intervention by directly controlling the domestic money supply (by

buying or selling foreign currency); however, this usage has been challenged

by economists such as Milton Friedman who in an interview on Icelandic

television said that a central bank can control an exchange rate or control

inflation but cannot do both:

Interest in official reserve positions as a measure of balance of payments

greatly diminished after 1973 as the major countries gave up their

commitment to convert their currencies at fixed exchange rates. This

reduced the need for reserves and lessened concern about changes in the

size of reserves.

Countries that attempt to control the price of their currency will tend to have

large net changes in their official reserves. Some of the most extreme

examples include China and Japan. In 2003 and 2004, Japan had an outflow

of reserves, yen, by more than equivalently one third of one trillion US

Dollars if calculated using exchange rates prevailing at the time. Note that

the reported deficit of official reserves representing an outflow of yen on this

publication is not in accordance with the IMF standards.

Balance of Payments Equilibrium

A Balance of Payments Equilibrium is defined as a condition where the sum

of debits and credits from the Current Account and the Financial Account

equal to zero; in other words, equilibrium is where

Current Account + Financial Account = 0 

This is a condition where there are no changes in Official Reserves. When

there is no change in Official Reserves, the balance of payments may also be

stated as follows:

Current Account = - Financial Account or 

Current Account Deficit (Surplus) = Financial Account Surplus (Deficit) 

Canada's Balance of Payments currently satisfies this criterion.

History

Historically these flows simply were not carefully measured, and the flow

proceeded in many commodities and currencies without restriction, clearing

being a matter of judgement by individual banks and the governments that

licensed them to operate. Mercantilism was a theory that took special notice

of the balance in payments and sought simply to monopolize gold, in part to

keep it out of the hands of potential military opponents (a large "war chest"

being a prerequisite to start a war, whereupon much trade would be

embargoed).

As mercantilism gave way to classical economics, these crude systems were

later regulated in the 19th century by the gold standard which linked central

banks by a convention to redeem "hard currency" in gold. After World War II

this system was replaced by the Breton Woods institutions (the International

Monetary Fund and Bank for International Settlements) which pegged

currency of participating nations to the US dollar, which was redeemable

nominally in gold. In the 1970s this redemption ceased, leaving the system

without a formal base. Some consider the system today to be based on oil, a

universally desirable commodity due to the dependence of so much

infrastructural capital on oil supply. Since OPEC prices oil in US dollars, the

US dollar remains a reserve currency, but is increasingly challenged by the

euro, and to a small degree the Japanese yen.

The United States has been running a current account deficit since the early

1980s. The U.S. current account deficit has grown considerably in recent

years, reaching record high levels in 2006 both in absolute terms ($758

billion) and as a fraction of GDP (6%). This interpretation of the data,

however, is disputed by Milton Friedman (Balance of Trade) claiming that

cheaper, riskier, foreign capital is exchanged for "riskless", expensive, US

capital and that the difference is made up with extra goods and services.

Nevertheless, Friedman's interpretation is incomplete with respect to

countries that interfere with the market prices of their currencies through the

changes in their reserves.

I am going to mention here five country BOP.

Japan’s balance of payment

Japan's current account surplus decreased to 9.6 trillion yen in 2011, down from 17.9 trillion yen in 2010, mainly because the balance on goods turned to a deficit. The capital and financial account shifted to net inflows of 6.3 trillion yen in 2011 from net outflows of 12.0 trillion yen in 2010, registering net inflows for the first time in seven years due to a decrease in net purchases of foreign securities by Japanese investors (outflows) and an increase in net purchases of Japanese securities by foreign investors (inflows) under portfolio investment. Reserve assets continued to increase, rising by 13.8 trillion yen in 2011, compared to an increase of 3.8 trillion yen in 2010, due to foreign exchange interventions and an increase in investment income on reserve assets.

Japan's Balance of Payments

UAE Balance of Payments 

The balance of payments is the country’s primary record of all trade and financial transactions conducted with the outside world. These transactions reflect the economic strength of the national economy and the degree of its adaptability to changes in the global economy since they gauge the size and structure of both exports and products, including factors that influence them such as the size of investments, employment levels and pricing. As an oil exporter, oil and natural gas exports have allowed the United Arab Emirates (UAE) to sustain a current account surplus for many years, but changes in the oil prices cause this surplus to fluctuate widely from one year to year.The decline in oil prices during 2009, led to a noticeable deficit in UAE’s balance of payments due to the decline in the hydrocarbon revenues and exports, as the average price of UAE’s Murban crude oil, produced by Abu Dhabi National Company, reached USD 63.7. However, during 2010, Murban crude oil price increased to reach USD 79.85.

Abu Dhabi Murban Crude Oil Price [Avg, USD/Barrel]

Consequently, UAE’s current account surplus, the main component of the balance of payments, surged to AED 41.3 billion (2010), compared to AED 28.8 billion (2009). This surplus was attributed to the increased oil exports beside the high per-barrel prices in the global markets. Correspondingly, the current account balance reached 3.8% of GDP in 2010.

UAE’s Balance of Payments

This was also accompanied by a large improvement in the capital and financial account resulting from an increase in direct investment inflow to AED 7.1 billion (2010) from AED 4.7 billion (2009) along with a decline in the outflow to AED 7.4 billion compared to AED 10 billion (2009). Besides, funds outflow by banks in 2010 also plunged to AED 4.7 billion from AED 36.28 billion (2009).As a result of this, the capital and financial account achieved a surplus of nearly AED 7.4 billion in 2010 compared to the AED 35.5 billion deficit in 2009.Accordingly, UAE’s balance of payments has turned from the AED 22.5 billion fiscal deficit in 2009 to AED 26.9 billion surplus in 2010. Furthermore, it is forecasted that the country’s current account will post a robust surplus in 2011. This is expected to be driven by higher oil prices and a sustained recovery in tourism and exports as well as the country’s increasing reputation as a safe haven in a volatile region

Balance of payment of UK

The UK trade / current account of the balance of payments figures for 2011. Has there been a noticeable improvement in our trade performance given

the 25% depreciation of sterling in recent years? Which parts of the trade accounts have improved? What are some of the key underlying trends? Follow the charts and the brief commentary on each.

The balance of payments (BOP) records financial transactions made between consumers, businesses and the government in one country with others. The BOP figures tell us about how much is being spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries and markets.

At AS level (unit 2) you need to focus on the current account of the balance of payments

The current account

In 2011, there was a current account deficit of £29.0 billion, compared with a deficit of £48.6 billion in 2010. The 2011 deficit is equivalent to 1.9 per cent of GDP. The OECD is forecasting that the UK will move back into a current account surplus by 2013.

Trade in Goods

Trade in goods includes items such as:* Manufactured goods* Semi-finished goods and components* Energy products* Raw Materials* Consumer goods i) Durable goods and (ii) Non-durable goods e.g. foods* Capital goods (e.g. equipment)

The deficit on trade in goods was £99.7 billion in 2011, the highest on record, compared with £98.5 billion in the previous year.

The trade deficit on oil widened by £6.4 billion to £11.2 billion in 2011

The trade deficit on finished manufactured goods narrowed by £9.5 billion to £50.4 billion - rising exports of manufactured products suggest that the lower exchange rate has provided a competitive boost to our export sectors. Can this continue to help the re-balancing of the UK economy?

Trade in Services

Trade in services includes the exporting and importing of intangible products – for example, Banking and Finance, Insurance, Shipping, Air Travel, Tourism and Consultancy.

Britain has a strong trade base in services with over thirty per cent of total export earnings come from services. Indeed the success of our service sector industries has been one of the strong points in tour economic performance over the last twenty years

The surplus for trade in services was a record £71.9 billion in 2011, an increase of £10.1 billion compared with 2010. Exports increased by £13.0 billion - the increase in exports was mainly in financial services and other business services. The increase in imports was mainly in financial services and transportationservices.

Here are some areas where a growing trade surplus reveals the UK to have a strong competitive advantage in service businesses

The diverging path of trade deficit and trade surplus for goods and services is shown clearly in the chart below

Net investment income

Net investment income comes from interest payments, profits and dividends from external assets located outside the UK.

For example a UK firm may own a business overseas and send back some of the operating profits to the UK. This would count as a credit item for our current account as it is a stream of profits flowing back into the UK.

Similarly, an overseas investment in the UK might generate a good rate of return and the profits are remitted back to another country – this would be a debit item in the balance of payments accounts.

Transfers

Transfers into and out of a country include foreign aid payments. For the UK the net transfers figure is negative each year, mainly due to the UK being a net contributor to the budget of the European Union. As a rich nation, the UK makes sizeable foreign aid payments to many other countries

The annual deficit on current transfers was £22.2 billion in 2011, £1.8 billion higher than in 2010 and the highest on record. The current transfers deficit with EU institutions increased by £0.6 billion in 2011.

Balance of payment

CURRENT ACCOUNT

The current account balance recorded a lower surplus of RM9.5 billion for the period of July - September 2012, as compared to RM9.6 billion in the preceding quarter. This lower surplus was reflected in:

Goods account: lower surplus RM25.5 billion (Q2 2012: RM29.4 billion); and Current transfers: the net payments widened to RM4.7 billion (Q2 2012: -

RM4.6 billion).

Meanwhile, income and services account recorded lower net payments of RM7.9 billion (Q2 2012: -RM11.7 billion) and RM3.4 billion (Q2 2012: -RM3.6 billion), respectively.

Year-on-year, the surplus on current account balance declined by RM17.9 billion to register RM9.5 billion from RM27.4 billion in Q3 2011. This was due to a lower surplus on goods by RM12.2 billion, and higher net outflow on both income and services by RM4.0 billion and RM2.3 billion, respectively.

Meanwhile, current transfers recorded lower net payments by RM0.5 billion from -RM5.3 billion in Q3 2011.

During January - September 2012, the current account balance recorded RM37.2 billion, reduced by RM37.6 billion from RM74.7 billion posted in the same period of 2011. This was attributed to:

Goods account : lower surplus of RM90.7 billion (2011: RM111.2 billion); Services account : higher net payments of RM10.7 billion (2011: -RM4.3

billion); and Income account : higher net payments of RM28.2 billion (2011: -RM16.6

billion).

Goods AccountIn the quarter under review, the goods account registered a lower surplus of RM25.5 billion as compared to RM29.4 billion in the previous quarter. This was due to decrease in exports f.o.b by 1.8 per cent relative to increase in imports f.o.b by 0.5 per cent. 

Exports f.o.b decreased to RM174.4 billion compared to RM177.7 billion in Q2 2012. This was mainly contributed by lower exports for crude petroleum, palm oil & palm oil based products and rubber products. The top three exports destinations were Singapore, The People's Republic of China, and Japan. 

Imports f.o.b increased slightly to RM148.9 billion (Q2 2012: RM148.2 billion). The share of imports by end-use for three major categories was intermediate goods (64.3 per cent), capital goods (16.5 per cent), and consumption goods (8.0 per cent). The top three imports sources were The People's Republic of China, Singapore, and Japan.

Year-on-year, the surplus on goods decreased by RM12.2 billion to RM25.5 billion from RM37.7 billion recorded in the same quarter last year. This was due to increase in imports f.o.b by RM10.0 billion to RM148.9 billion (Q3 2011: RM138.9 billion) and decrease in exports f.o.b by RM2.3 billion to RM174.4 billion (Q3 2011: RM176.7 billion).

Cumulatively for three quarters, exports f.o.b rose by RM10.6 billion or 2.1 per cent to RM526.1 billion while imports f.o.b rose by 7.7 per cent or RM31.1 billion to RM435.3 billion. This had resulted in a lower surplus on goods account of RM90.7 billion from RM111.2 billion in the same period of 2011.

Services Account

In Q3 2012, exports of services remained the same as previous quarter to register RM28.9 billion. This constitute of:

transportation : RM3.4 billion (Q2 2012: RM3.3 billion); travel : RM14.8 billion (Q2 2012: RM14.4 billion); and other services : RM10.7 billion (Q2 2012: RM11.0 billion), mainly contributed

by other business services RM6.2 billion, computer and information services RM1.5 billion, and construction services RM1.0 billion.

Meanwhile imports of services recorded RM32.3 billion, a decrease of RM0.1 billion from RM32.4 billion registered last quarter. The components that contributed to total payments of services account were:

transportation : RM10.2 billion (Q2 2012: RM10.4 billion); travel : RM9.1 billion (Q2 2012: RM9.0 billion); and other services : RM12.8 billion (Q2 2012: RM12.8 billion), mainly contributed

by other business services of RM6.2 billion, construction services of RM1.6 billion, and both royalties & license fees and computer & information services of RM1.2 billion each. 

On net basis, the services account recorded lower net payments of RM3.4 billion from RM3.6 billion last quarter. This was mainly due to lower net payments on transportation by RM0.3 billion and higher net receipts on travel by RM0.2 billion.

Year-on-year, exports on services increased marginally by 0.3 per cent to RM28.9 billion from RM28.8 billion in Q3 2011, whilst imports on services recorded higher payments increased by 7.8 per cent to RM32.3 billion from RM29.9 billion a year ago. This led to higher net payments by RM2.3 billion to -RM3.4 billion from -RM1.1 billion in the same period last year. This was mainly due to lower net receipts of travel account by RM2.2 billion.

In the first nine months of 2012, exports of services widened to RM85.7 billion, an increase of 5.7 per cent from RM81.1 billion, while imports recorded RM96.4 billion (2011: RM85.3 billion), an increase of 13.0 per cent. On net basis, services account saw higher net payments of RM10.7 billion from RM4.3 billion. This was attributed to lower net receipts on travel by RM3.4 billion and higher net payments on both transportation and other services by RM1.9 billion and RM1.2 billion, respectively.

Income AccountDuring July - September 2012, the income receipts recorded RM11.4 billion increased by RM2.5 billion from RM9.0 billion in Q2 2012. Compensation of employees remained RM1.0 billion and investment income attained RM10.4 billion (Q2 2012: RM8.0 billion). The investment income comprises of:

direct investment abroad (DIA): higher receipts of RM3.8 billion (Q2 2012: RM3.5 billion), mainly generated from financial & insurance, oil & gas, and information & communication sectors;

portfolio investment: higher receipts of RM1.3 billion (Q2 2012: RM0.8 billion); and

other investment: higher receipts of RM5.4 billion (Q2 2012: RM3.6 billion).

However, income payments (debit) recorded RM19.4 billion, decreased by RM1.3 billion from RM20.7 billion in Q2 2012. Of the total payments, compensation of employees recorded RM1.8 billion (Q2 2012: RM1.6 billion) while investment income posted RM17.6 billion (Q2 2012: RM19.0 billion). The investment income was derived from:

foreign direct investment (FDI): lower payments of RM14.6 billion (Q2 2012: RM15.4 billion), mainly generated from manufacturing, financial & insurance, and oil & gas sectors;

portfolio investment: lower payments of RM2.5 billion (Q2 2012: RM2.8 billion); and

other investment: lower payments of RM0.4 billion (Q2 2012: RM0.8 billion).

On net basis, the income account deficit reduced to RM7.9 billion from RM11.7 billion previously. This was primarily due to a lower net payments in investment income amounting to RM7.2 billion (Q2 2012: -RM11.1 billion), while compensation of employees recorded higher net payments of RM0.7 billion (Q2 2012: -RM0.6 billion).

Year-on-year, income receipts (credit) decreased by RM2.5 billion to RM11.4 billion from RM14.0 billion in the same period last year. Meanwhile, income payments (debit) increased by RM1.4 billion to RM19.4 billion from RM17.9 billion previously. This led to higher net payments by RM4.0 billion to RM7.9 billion from RM3.9 billion.

On cumulative basis, for the period January - September 2012, income receipts (credit) declined by RM7.3 billion to RM30.1 billion (2011: RM37.4 billion) whereas income payments (debit) increased by RM4.3 billion to RM58.3 billion (2011: RM54.0 billion). This resulted to higher net payments by RM11.6 billion to RM28.2 billion (2011: -RM16.6 billion).

Current TransfersIn the third quarter 2012, both receipts and payments decreased to record RM1.4 billion (Q2 2012: RM2.3 billion) and RM6.1 billion (Q2 2012: RM6.9 billion), respectively. On net basis, this account recorded higher net payments RM4.7 billion (Q2 2012: -RM4.6 billion).

Year-on-year, net payments narrowed by RM0.5 billion from RM5.3 billion a year ago. Current transfers receipts recorded RM1.4 billion (Q3 2011:RM1.3 billion), while payments posted RM6.1 billion (Q3 2011:RM6.5 billion). The first nine months of the year saw the net payments on current transfers decreased by 6.3 per cent to RM14.6 billion from RM15.6 billion recorded in the same period of last year.

CAPITAL ACCOUNT

In Q3 2012, the net outflow decreased to RM42.0 million from RM67.0 million last quarter. This was due to lower outflow on both capital transfers and nonproduced nonfinancial assets which recorded RM24.0 million (Q2 2012: -RM34.0 million) and RM18.0 million (Q2 2012: -RM33.0 million), respectively.

Year-on-year, the capital account recorded lower net outflow by RM17.0 million to RM42.0 million from RM58.0 million last year. Meanwhile, during January - September 2012, capital account experienced higher net outflow of RM275.0 million from RM139.0 million posted in the same period of last year.

FINANCIAL ACCOUNT

In the current quarter, the financial account reverted to a net outflow of RM8.7 billion from net inflow of RM5.4 billion reported previously. This was due to a swing in both portfolio investment from net outflow of RM5.0 billion to net inflow of RM27.6 billion and other investment to net outflow of RM38.1 billion from net inflow of RM5.9 billion. On the contrary, direct investment recorded lower inflow RM1.9 billion from RM3.5 billion.

Year-on-year, the financial account registered a lower net outflow by RM13.8 billion to RM8.7 billion from RM22.5 billion posted in the corresponding period of last year. This was mainly due to a turnaround in portfolio investment to an inflow of RM27.6 billion from an outflow of RM28.0 billion.

Cumulatively for the three quarters, financial account switched to a net outflow of RM13.6 billion from a net inflow of RM22.5 billion. The main contributor to the reversal was due to higher net outflow of other investment amounting to RM58.3 billion (2011: -RM4.4 billion).

Direct InvestmentDirect investment posted a lower net inflow of RM1.9 billion from RM3.5 billion during previous quarter. Both DIA and FDI recorded higher investments, of which:

DIA: a higher net outflow of RM7.7 billion from RM2.5 billion previously. The investments were largely reflected by financial & insurance, wholesale & retail trade, real estate, and oil & gas sectors. The top three immediate investing countries were Singapore, United Kingdom, and Thailand.

FDI: a higher net inflow of RM9.6 billion from RM6.1 billion in Q2 2012. The investments were mainly channelled into manufacturing and oil & gas sectors. The top three sources of FDI were Singapore, United States, and Australia.

Year-on-year, direct investment showed a reversal to a net inflow RM1.9 billion from a net outflow RM3.9 billion. This was mainly attributed to lower net outflow in DIA amounting to RM7.7 billion from RM13.0 billion last year.

In the first nine months of 2012, direct investment experienced higher net outflow by RM2.2 billion to RM4.0 billion (2011: -RM1.8 billion). Both DIA and FDI recorded lower investments of RM27.1 billion (2011: -RM32.0 billion) and RM23.2 billion (2011: RM30.1 billion), respectively.

Portfolio InvestmentPortfolio investment recorded a net inflow of RM27.6 billion, turned around from net outflow of RM5.0 billion previously. Similarly, year-on-year, portfolio investment switched to net inflow from net outflow of RM28.0 billion in Q3 2011.

Meanwhile, for the period January - September 2012, portfolio investment recorded higher net inflow of RM47.9 billion from RM28.4 billion posted in the same period last year.

Other InvestmentIn Q3 2012, other investment reversed to an outflow of RM38.1 billion from net inflow of RM5.9 billion registered last quarter. This was mainly due to a reversal in private sector investments to a net outflow RM38.0 billion from a net inflow of RM6.1 billion.

Year-on-year, other investment turned around to net outflow of RM38.1 billion from net inflow RM9.7 billion attained in the same period of 2011. Such circumstances were solely reflected by a reversal of private sector investments to net outflow of RM38.0 billion from net inflow of RM10.2 billion in Q3 2011. Meanwhile, for the period of January to September 2012, other investment recorded a substantial outflow of RM58.3 billion against RM4.4 billion in 2011.

 

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