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U.S. international transactions, fourth quarter and year 1985.

U.S. International Transactions, Fourth Quarter and Year 1985

Fourth Quarter 1985

THE U.S. current-account deficit increased to $36.6 billion in the fourth quarter from $29.3 billion in the third (revised), largely because of an increase in the merchandise trade deficit to $39.5 billion from $33.0 billion. The surplus on service transactions decreased to $7.1 billion from $7.7 billion, and unilateral tranfers increased to $4.2 billion from $4.0 billion.

Merchandise trade.--Merchandise imports increased $7.2 billion, or 9 percent, to a record $92.5 billion. Volume increased 7 percent; prices increased 2 percent. The largest increase was in passenger cars from areas other than Canada, up $1.5 billion, or 24 percent. Other increases were in machinery, up $1.3 billion, or 9 percent; consumer goods, up $1.1 billion, or 6 percent; and automotive products from Canada and foods, each up $0.4 billion, or 7 percent and 8 percent, respectively. Petroleum imports increased $1.8 billion, or 14 percent, to $14.4 billion. The average number of barrels imported daily increased to 5.99 million from 5.34 million in the third quarter. The average price per barrel increased to $26.29 from $25.77. The increase in average price occurred despite sharp decreases in the spot market, particularly in December. The long delivery lead time probably was a factor in the price difference.

Merchandise exports increased $0.7 billion, or 1 percent, to $53.0 billion. Volume increased 2 percent. The increase was in agricultural exports, which increased $0.8 billion, or 12 percent, to $7.3 billion; volume increased 17 percent. The average price of corn decreased 8 percent, to the lowest level since the fourth quarter of 1982; soybeans, 6 percent, to the lowest level since the second quarter of 1976; and wheat, 1 percent, to the lowest level since the fourth quarter of 1978. Nonagricultural exports, at $45.6 billion, were unchanged both in value and volume. Decreases in automotive exports to Canada and in civilian aircraft were about offset by an increase in nonagricultural industrial supplies and materials.

Service transactions.--Net service receipts decreased to $7.1 billion from $7.7 billion. Among major components, receipts of income on U.S. direct investment abroad were unchanged at $11.0 billion; an increase in reinvested earnings was partly offset by a decrease in distributed earnings. Payments of income on foreign direct investment in the United States were $1.8 billion, down from $2.1 billion, as operating losses by a few companies reduced earnings. Receipts of income on other private investment were unchanged at $12.2 billion. Changes in outstanding claims and interest rates were offsetting. Payments of income on other private investment increased to $9.1 billion from $8.7 billion, reflecting a large increase in outstanding liabilities.

Foreign visitors spent $2.9 billion for travel in the United States, up 1 percent. Receipts from overseas visitors increased 4 percent to $1.6 billion, those from Canada were unchanged at $0.8 billion, and those from Mexico were $0.5 billion, down 7 percent due to a decrease in receipts from travel to the U.S. interior. U.S. travelers spent $4.3 billion in foreign countries, up 2 percent. Payments for travel to all major areas increased: Overseas, 1 percent to $2.8 billion, as an increase in the number of travelers more than offset a decrease in average expenditures; Canada, 4 percent to $0.7 billion; and Mexico, 2 percent to $0.9 billion.

Transfers under U.S. military agency sales contracts decreased $0.3 billion to $2.0 billion, the lowest since the second quarter of 1980; major delivery programs continued to be completed for many countries. Direct defense expenditures abroad were $2.9 billion, up $0.1 billion.

Other transportation receipts were $3.7 billion, up 5 percent. Receipts from ocean freight, ocean port services, and air freight all rose slightly. Transportation payments were $4.3 billion, up 5 percent. Ocean port services payments increased 5 percent and air freight payments, 25 percent, the latter due to combined increases in both import cargo volume and freight rates.

Net unilateral transfers were $4.2 billion compared with $4.0 billion. U.S. Government grants, particularly to countries in the Middle East, remained strong.

U.S. assets abroad.--U.S. assets abroad increased $22.4 billion compared with $12.7 billion. U.S. reserve assets increased $3.1 billion compared with $0.1 billion. The increase was accounted for by U.S. purchases of German, Japanese, and British currency in October that were part of co-ordinated intervention by industrial countries to foster an orderly appreciation of other currencies against the dollar.

U.S. claims on foreigners reported by U.S. banks increased $8.6 billion compared with $1.5 billion. The outflows were dominated by large inter-bank outflows at yearend, when it was advantageous for own foreign offices to borrow from U.S. parents rather than in the Eurodollar market to meet temporary yearend needs. (The outflows were reversed in January.) Japanese banks borrowed heavily when Japanese credit conditions were tightened in November and December. Also, U.S. bank holding companies transferred funds, some of which were apparently proceeds of earlier borrowings in the Euronote market, to own foreign offices. Partly offsetting was a reduction in U.S. residents' holdings of Eurodollar certificates of deposits.

Net U.S. purchases of foreign securities decreased to $1.5 billion from $1.7 billion. Net purchases of foreign stocks decreased despite continued sizable advances in stock prices. Some profit taking, especially through sales of Japanese stocks, probably contributed to the smaller purchases. Purchases of Canadian stocks remained strong. Foreign bonds newly issued in the United States were only $1.5 billion, as most activity was centered in the Eurobond markets. Major borrowers included Sweden, France, Japan, and New Zealand. In transactions in outstanding bonds, purchases of British gilt-edge bonds declined to $1.0 billion from $1.6 billion.

Net outflows for U.S. direct investment abroad were $8.7 billion compared with $7.1 billion. In equity capital transactions, some unusually large capital inflows from the sales of Canadian and Latin American affiliates by U.S. petroleum companies that had occurred in the third quarter were not repeated. In intercompany debt transactions, outflows from U.S. parents to pay down outstanding debt to their finance affiliates in the Netherlands Antilles continued.

Foreign assets in the United States.--Foreign assets in the United States increased $48.5 billion compared with $34.5 billion. Foreign official assets in the United States decreased $1.6 billion following a $2.4 billion increase. Monetary authorities in industrial countries drew down dollar assets for use in exchange market intervention. Assets of OPEC members decreased, and assets of other countries increased.

U.S. liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $20.5 billion compared with $6.5 billion. Nearly all of these inflows occurred in December, and most were from own foreign offices to foreign-owned banks in the United States to finance a large increase in credits extended by these agencies and branches.

Net foreign purchases of U.S. Treasury securities by private foreigners and international financial institutions remained relatively strong at $5.7 billion in the face of sharp declines in the dollar and in U.S. long-term interest rates. Foreigners purchased $7.1 billion in bonds and sold $1.4 billion in short-term securities. As in previous quarters, most purchases were by investors in Japan, who acquired $5.2 billion in bonds, compared with $6.2 billion in the previous quarter. The sharp rise in both short- and long-term Japanese interest rates in November and December and yen appreciation may have contributed to the slower pace of Japanese purchases. International and regional organizations, primarily the World Bank, purchased $3.1 billion in Treasury bonds. The purchases, occurring mostly in December, were financed partly by sales of $1.0 billion in short-term Treasury securities and a $1.0 billion decrease in deposits at banks in the United States.

Net foreign purchases of U.S. securities other than U.S. Treasury securities were a record $22.4 billion. New bond issues abroad by U.S. corporations were $12.5 billion; foreigners purchased $5.9 billion in outstanding bonds. Net purchases of U.S. stocks were a record $4.0 billion.

Sharply lower interest rates plus the ease and speed with which issues could be placed in the Eurobond markets let to a continuation of substantial debt financing by U.S. corporations, as corporations sought to refinance earlier debt or to assume new debt. In midsummer, German authorities liberalized regulations governing foreign placements in the German market; nearly $1.0 billion was placed in German marks by U.S. corporations in the fourth quarter.

Net foreign purchases of U.S. stocks were $4.0 billion. Purchases accelerated in the fourth quarter when the U.S. stock market rose 12 percent; purchases in December alone totaled $2.0 billion. Sharply declining long-term interest rates and lower foreign currency costs of U.S. stocks also encouraged purchases. Net purchases by Western Europe were more than triple those in the third quarter. Japan was a small net purchaser. Only Canadian purchases slowed to a virtual halt, probably influenced by the decline of the Canadian dollar against the U.S. dollar.

Net inflows for foreign direct investment in the United States were $1.5 billion compared with $6.0 billion. The decline was mostly due to a $4.4 billion shift in intercompany debt transactions to outflows of $1.5 billion, as several large inflows that occurred in the third quarter were not repeated.

The statistical discrepancy (errors and omissions in reported transactions) increased to an unrecorded net inflow of $10.4 billion from $7.5 billion.

U.S. dolloar in exchange markets.-- Although the dollar fell sharply immediately after the September 22 meeting of the Group of Five (France, Germany, Japan, United Kingdom, United States), it strengthened during most of October, as commercial and investor demand were strong. After Japanese money market interest rates rose nearly 200 basis points in early November and remained high through much of December, the dollar began to depreciate sharply against the yen. For the quarter, depreciation against the yen was 17 percent, compared with a 12-percent depreciation against most European Monetary System (EMS) currencies and 6 percent against the British pound. Against the Canadian dollar, the U.S. dollar appreciated 2 percent. Higher Canadian interest rates and stepped-up borrowing by Canadian authorities to finance intervention in exchange markets limited the depreciation of the Canadian dollar.

The Year 1985

U.S. dollar in exchange markets

The dollar appreciated nearly 6 percent against European currencies and 5 percent against the Japanese yen in January and February, aided by a temporary rise in U.S. interest rates (table C, chart 7). Limited intervention in exchange markets by U.S. monetary authorities, and much more extensive intervention by foreign monetary authorities, did little to stem enthusiasm for dollar assets. A resumption of the decline in U.S. interest rates, (which were already 3 percentage points lower than 6 months earlier), increased concerns over the lack of strength of the U.S. economy and difficulties of certain financial institutions, and the substantial amount by which the dollar had already risen contributed to the subsequent depreciation of the dollar that began in March.

That decline was largest against the British pound. There were heavy financial flows into sterling-denominated assets that carried interest rates over 400 basis points higher than U.S. rates. The high yields on gilt-edge bonds and other fixed income securities also encouraged heavy financial flows from EMS currencies. Consequently, even though interest rates in EMS countries fell less rapidly than in the United States, EMS currencies appreciated less against the dollar than did the British pound. The Japanese yen generally moved in line with the European currencies in this period, but the fluctuations against the dollar were narrower.

From its peak in March to the realignment of the EMS currencies in mid-July, the dollar depreciated nearly 17 percent against the British pound, 8 percent against the German mark and other EMS currencies, and 4 percent against the Japanese yen.

Starting in late August, the dollar began to appreciate, as expectations of an end to the U.S. interest rate decline prevailed. In the second week of September, it reached its highest level since late June.

In late September, the Group of Five announced that further orderly appreciation of major currencies against the dollar would be desirable in view of recent shifts in fundamental economic conditions. These shifts included more moderate growth in the United States, somewhat stronger growth in other countries, and convergence of inflation rates at a lower level. The announcement, together with subsequent coordinated intervention in exchange markets, contributed to a substantial depreciation of the dollar through yearend.

For the year, the dollar depreciated 21-24 percent against most Western European currencies and the Japanese yen.

The U.S. dollar appreciated 6 percent against the Canadian dollar in 1985. At times, particularly in late February and early March and then again in late November, Canadian authorities permitted interest rates to rise substantially above U.S. rates to stem the decline of the Canadian dollar. In addition, substantial exchange market intervention--supported by borrowings from Canadian charter banks, U.S. and foreign banks, and the Eurobond and U.S. bond markets --limited depreciation.

The dollar appreciated against currencies of most debt-burdened developing countries, which were subject to very high rates of inflation and numerous currency devaluations. The dollar depreciated only slightly against currencies of several newly industrialized countries in Asia.

Merchandise trade

The U.S. merchandise trade deficit increased to $124.3 billion in 1985 from $114.1 billion in 1984 (tables D, E). Imports increased $4.3 billion to $338.3 billion; volume increased 4 percent. An increase in nonpetroleum imports to $287.9 billion from $276.5 billion more than offset a decrease in petroleum imports to $50.4 billion from $57.5 billion. The 4-percent increase in the value of nonpetroleum imports followed increases of 29 percent in 1984 and 15 percent in 1983. Exports decreased $5.9 billion to $214.0 billion; volume increased 1 percent. Nonagricultural exports increased to $184.8 billion from $181.6 billion and agricultural exports decreased to $29.2 billion from $38.3 billion. The 2-percent increase in the value of nonagricultural exports followed a 10-percent increase in 1984.

The cumulative impact of earlier dollar appreciation continued to exert a major influence on merchandise trade in 1985. Thus, throughout much of the year, the competitiveness of U.S. goods in export markets continued to deteriorate, especially for the capital goods and industrial supply categories, as the foreign currency cost of U.S. manufactured goods rose faster than producer prices in major industrial countries abroad. In contrast, the relative costs of imports and U.S.-produced goods changed little, as the dollar cost of U.S. manufactured goods imports rose only slightly faster than U.S. producer prices (chart 8).

However, there was some evidence by the fourth quarter that import costs had begun to rise, particularly from those countries whose currencies had appreciated sharply against the dollar. The price increases were largest for autos, followed by sizable increases for metalworking, industrial, specialized, and electrical machinery. Prices of scientific instruments and photographic supplies were also up strongly. Until yearend, importers apparently absorbed higher costs through reduced profit margins.

There was also some evidence by the fourth quarter that the rise in the foreign currency cost of U.S. exports was slowing or, in some cases, had reversed. Fourth-quarter prices probably decreased for many types of electrical, industrial, and office machinery products. The rise in auto prices related to the yearend model changeover was an exception.

Another major determinant of trade patterns in 1985 was relative growth rates. The U.S. growth rate slowed, equaling the rate of a weighted average of European Communities countries and falling below that of key partners such as the United Kingdom, Canada, and Germany. Consequently, although nonagricultural export growth remained limited, nonpetroleum import growth slowed markedly. The slowdown from the strong increases in 1983 and 1984, when there was a wide gap in relative growth rates in favor of the United States, was reflected in all major commodity import categories and in slower rates of increase, or decreases, in deficits with all major geographic areas.

Nonpetroleum imports increased $11.4 billion, or 4 percent, to $287.9 billion; volume increased 7 percent. The largest increase was in automotive products from areas other than Canada, which increased $6.6 billion or 19 percent. Automotive products had increased 31 percent in 1984 and 23 percent in 1983. The increase was mainly due to strong sales of Japanese cars. The number of cars imported from Japan increased 16 percent, as did the number of Japanese cars sold. The Japanese share of total cars sold in the United States increased to 21 percent from 19 percent. In contrast to earlier years, the average price increased only 2 percent following increases of 10 percent and 8 percent in 1984 and 1983, respectively. Automotive products from Canada, which increased $1.8 billion, reflected continued strength in the number of domestic (U.S.) units sold.

Consumer goods increased $3.7 billion, or 6 percent, compared with a 31-percent increase in 1984 and an 18-percent increase in 1983. Textile imports, which are largely from newly industrialized countries in Asia, increased only 5 percent following a 38-percent increase. The slowing mirrored the pace of the U.S. economy, although expectations of future limitations on selected categories of these imports may have also contributed. Contrary to general developments, textile imports from Western Europe remained strong. Imports of radio and TV equipment and components increased 3 percent following a 53-percent increase. This deceleration also was in response to the slowing economy and, by yearend, to rising import costs.

Nonpetroleum industrial supplies, which had increased 22 percent in 1984 and 9 percent in 1983, decreased $4.2 billion or 6 percent. Imports of iron and steel products accounted for almost one-half the decrease.

Capital goods, which had increased 42 percent in 1984 and 12 percent in 1983, increased $2.4 billion or 4 percent. Civilian aircraft accounted for much of the increase. Other key capital goods--electrical machinery; business and office equipment (including computers); and scientific, professional, and service industry equipment-- which had paced strong imports in 1983 and 1984 were only sightly higher.

Petroleum imports decreased $7.1 billion, or 12 percent, to $50.4 billion, the lowest level since 1978. The average price per barrel decreased to $26.37 from $27.95. The average number of barrels imported daily decreased to 5.24 million from 5.62 million. Most of the decline was in imports from OPEC members. U.S. consumption of petroleum was unchanged from 1984, and stocks, excluding those for the Strategic Petroleum Reserve, decreased 7 percent.

Nonagricultural exports increased $3.2 billion, or 2 percent, to $184.8 billion; volume increased 4 percent. The largest increases were in completed civilian aircraft, up $2.6 billion, or 55 percent, and automotive products to Canada, up $2.0 billion, or 12 percent, reflecting strength in U.S. auto sales. After a substantial increase in 1984, capital goods other than civilian aircraft and parts decreased $1.8 billion, or 3 percent; key commodities such as electronic computers and parts, electrical machinery, and broadcasting and communications equipment were unchanged or declined. Nonagricultural industrial supplies decreased $2.4 billion, or 4 percent, partly due to a decline in metal and raw materials prices in world commodity markets throughout much of the year. Consumer goods decreased $0.9 billion, or 6 percent.

Agricultural exports decreased $9.1 billion, or 24 percent, to $29.2 billion, the lowest level since $24.3 billion in 1977. The strong dollar and excess global production, which led to competition from other suppliers as well as from local production in traditional markets, combined to reduce exports. The largest decrease was in wheat, down 40 percent, mostly due to reduced shipments to the Soviet Union. The volume of corn exports decreased 12 percent, and soybeans, 10 percent. These declines were magnified by further sizable drops in prices in world agricultural markets. The average price of soybeans decreased 22 percent; corn, 17 percent; and wheat, 5 percent. These decreases brought the cumulative price declines to 25 percent for wheat since its peak in late 1983, to 40 percent for corn, and to 48 percent for soybeans.

Most of the increase in the merchandise trade deficit in 1985 was with Western Europe and Japan (table F). With Japan, the deficit increased $6.4 billion to $43.4 billion; with Western Europe, $6.0 billion to $21.2 billion. The increases were less than one-half those in 1984, largely because of the slower rise in U.S. non-petroleum imports. With Canada, the deficit increased $1.0 billion to $17.1 billion. The increase in the deficit with newly industrialized countries in the Asia also was moderate compared with the increase in 1984. With these countries, the deficit increased $1.2 billion to $21.4 billion. That increase was more than offset by a decrease in the deficit with other developing countries, so that the deficit with all non-OPEC developing countries decreased $3.0 billion to $34.3 billion. The deficit with OPEC members decreased $1.8 billion to $11.3 billion.

Service transactions

Net service receipts were $21.4 billion compared with $18.2 billion (table G). Net direct investment income receipts rose to $26.3 billion from $12.9 billion; other portfolio investment shifted to net payments of $1.6 billion from net receipts of $6.2 billion. Net payments on other service transactions increased to $3.3 billion from $0.9 billion due to higher net travel, passenger fares, and transportation payments, and an increase in the deficit on military transactions.

Receipts of income on U.S. direct investment abroad were $35.3 billion compared with $23.1 billion. A shift from capital losses to capital gains resulting from the appreciation of major currencies against the dollar more than accounted for the pickup. Income before capital gains and losses--that is, operating earnings-- was slightly lower. Interest payments were also unchanged. Receipts of petroleum companies were unchanged while those of manufacturing and other companies increased, particularly those in Western Europe and Japan where currencies appreciated sharply against the dollar. Receipts of income on other private investment were $49.9 billion, down from $59.3 billion. The decline was nearly all due to lower interest rates. Receipts of income on U.S. Government assets abroad were nearly unchanged at $5.3 billion.

Payments of income on foreign direct investment in the United States were $9.0 billion compared with $10.2 billion. A substantial decrease in reinvested earnings more than accounted for the decline. Payments of income on other private investment were $35.5 billion, down from $38.5 billion. A sharp increase in liabilities to foreigners partly offset the impact of lower interest rates.

Net travel and passenger fare payments increased to $9.8 billion from $8.1 billion. Foreign visitors spent $11.7 billion for travel in the United States, up 2 percent from the previous year. Travel receipts from overseas were $6.6 billion, up 4 percent. Overall, there was less than a 1-percent drop in the number of visitors. The number of visitors from Oceania, the Caribbean, and Japan increased, but the number from Europe dropped 3 percent. Receipts from Canada fell 2 percent to $3.0 billion, mostly due to a decline in the number of auto travelers making long-term visits. Receipts from Mexico increased 5 percent to $2.0 billion. The number of Mexican visitors to the U.S. interior was up 2 percent.

U.S. travel payments totaled $17.0 billion, a 6-percent increase over 1984. Expenditures overseas increased 9 percent to $10.8 billion; the number of U.S. travelers also increased 9 percent, despite dollar depreciation. Expenditures in Canada were up 10 percent to $2.6 billion; the number of travelers increased 4 percent, mostly in response to appreciation of the U.S. dollar relative to the Canadian dollar. Travel payments to Mexico were $3.5 billion, down 2 percent.

Passenger fare receipts from foreign visitors for travel on U.S. flag carriers were unchanged at $3.0 billion. U.S. payments to foreign transocean carriers totaled $7.4 billion, a 13-percent increase that reflected a corresponding increase in the number of U.S. travelers on foreign flag carriers.

U.S. military transactions with foreigners resulted in net payments of $2.0 billion, up from $1.8 billion. Transfers under U.S. military agency sales contracts were $9.3 billion, a decrease of $0.8 billion, due to declines in or completion of major delivery programs. About one-half of the recipient countries had increased deliveries, but the declines among the others offset the increases by almost a two-to-one margin. U.S. direct defense expenditures abroad were $11.3 billion, a decrease of $0.5 billion. In 1985, the second consecutive year in which expenditures declined, decreases in construction activity and petroleum procurement were only partly offset by increased personnel expenditures.

Other net transportation payments were $2.0 billion, up from $0.9 billion. Receipts increased 4 percent to $14.3 billion. All major components were higher. Payments increased 11 percent to $16.3 billion. Ocean freight payments increased 14 percent to $8.6 billion; the volume of foreign flag imports, which accounts for 96 percent of total import volume, rose 25 percent. Air port expenditures payments increased 11 percent, to $3.0 billion, on an increase in U.S. airline traffic overseas.

Net unilateral transfers increased to $14.8 billion from $11.4 billion. Most of the step-up was due to additional grants to countries in the Middle East.

U.S. assets abroad

U.S. assets abroad increased $38.2 billion in 1985 compared with $20.4 billion in 1984.

U.S. official reserve assets increased $3.9 billion compared with a $3.1 billion increase. Limited acquisitions of German marks, Japanese yen, and British pounds occurred in the first quarter. Substantial acquisitions of the same currencies occurred in October as part of coordinated market intervention by industrial countries following the Group of Five meeting in late September. The U.S. reserve position with the International Monetary Fund (IMF) shifted to a $1.0 billion decrease from a $1.0 billion increase, mostly due to a drop in the amount of dollars obtained from the IMF by other countries. Holdings of special drawing rights increased $0.9 billion, nearly the same amount as in 1984.

U.S. claims on foreigners reported by U.S. banks increased $5.9 billion compared with $8.5 billion (tables H, I.) As in 1984, economic expansion in industrial countries abroad was moderate, limiting demand for credit, and borrowing policies of many developing countries, particularly those in Latin America, remained cautious. U.S. banks remained reluctant to make major new extensions of credit as supervisory authorities continued to monitor carefully bank loan exposure against debt-burdened countries and to require improved capital-asset ratios. The continued rise of attractive financing alternatives in the Eurobond and Euronote markets, prompted by the removal of withholding taxes on interest payments to foreigners in mid-1984 and the sharp decline in medium- and long-term borrowing rates, was an additional factor reducing the role of syndicated bank loans as a major source of credit in international markets.

Gross interbank activity was large. Claims on own foreign offices increased $20.1 billion, twice as much as in 1984. Nearly all the step-up reflected large outflows at yearend (which subsequently were quickly reversed). In addition, U.S. bank holding companies transferred to foreign offices several billion in funds that had apparently been borrowed earlier in the Euronote markets. Except for these special factors, there was little incentive for U.S. banks to fund foreign offices or supply funds to other foreign banks. The slowdown in interbank activity was more evident in claims on unaffiliated foreign banks, which decreased $8.9 billion following no change in 1984.

Claims on foreign public borrowers decreased $1.2 billion compared with a $3.8 billion increase. Most extensions of new credits in 1985 to debt-burdened countries were limited to refinancing earlier loans or to providing funds to bring interest payments on international debt current.

Claims of banks' domestic customers, payable in dollars, decreased $1.9 billion following a $2.0 billion decrease. Holdings of Eurodollar certificates of deposits were scaled back, both in response to the decline in interest rates and to the desire to reduce portfolio exposure abroad. Claims payable in foreign currencies increased $5.0 billion.

U.S. banks continued as net borrowers from the international credit markets in 1985 as the increase in liabilities more than offset the increase in claims. Net funds raised from abroad increased to $34.7 billion compared with $23.2 billion raised in 1984 (chart 9).

Net U.S. purchases of foreign securities rose $2.8 billion to $7.9 billion-- a near record--as U.S. interest in foreign stocks rose with strong market rallies abroad. New foreign bond issues in the United States were unchanged.

Net U.S. purchases of foreign stocks were $4.0 billion compared with $1.1 billion. U.S. residents became net purchasers of foreign stocks in the third and fourth quarters of 1984, when prices on most key foreign stock exchanges rose. Diversification into foreign stocks continued in 1985, reflecting both a rise in most foreign stock prices and appreciation of foreign currencies. Purchases of British stocks, where prices advanced 17 percent, were $0.7 billion. Purchases of French and German stocks, where prices advanced 57 and 21 percent, respectively, were $0.6 billion. Purchases of Japanese stocks increased strongly in the first quarter, but sales throughout most of the rest of the year resulted in net purchases of only $0.1 billion even though the market advanced 17 percent. Purchases of Canadian stocks were $1.2 billion, compared with net sales of $0.3 billion, in the face of an 11-percent depreciation of the Canadian dollar against the U.S. dollar.

New bond issues in the United States, nearly unchanged at $5.6 billion, remained at low levels as the U.S. market failed to attract much foreign borrowing. Although some of the largest and highest rated foreign borrowers came to the U.S. market, other foreign borrowers raised funds abroad, where attractive pricing alternatives and lower interest rates were offered in the Eurobond market. Canadian borrowers placed $2.2 billion, up from a low level last year; Western European issues were $1.5 billion, down somewhat from last year.

In transactions in outstanding bonds, U.S. investors continued their heavy acquisitions of British gilt-edge bonds, adding $5.3 billion to the $4.7 billion acquired mostly in the last half of 1984. High interest rates and offerings of currency-hedging options by several major U.S. dealers spurred purchases from mid-1984 through the first quarter of 1985. Thereafter, the British pound's substantial appreciation against the dollar, combined with continued high interest rates, maintained the attractiveness of these investments. U.S. residents sold $1.5 billion of their holdings of Latin American, Asian, Canadian, and international bonds.

Net outflows for U.S. direct investment abroad were $19.1 billion compared with $4.5 billion. The increase was due to a rise in reinvested earnings to $22.3 billion from $11.0 billion, reflecting a substantial boost in income from exchange rate gains; operating earnings were slightly lower. Intercompany debt inflows dropped sharply to $1.9 billion from $7.9 billion, as corporations borrowed directly in the Eurobond market rather than through their Netherlands Antilles finance affiliates as they had in the first half of 1984 (table J). Equity capital shifted to a net inflow of $1.3 billion from an outflow of $1.5 billion, largely the result of sales of Canadian and Latin American affiliates by U.S. petroleum companies.

Foreign assets in the United States

Foreign assets in the United States increased $123.1 billion compared with $97.3 billion.

Foreign official assets in the United States decreased $1.9 billion compared with an increase of $3.4 billion, as inflows from developing countries slowed by nearly one-half. Dollar assets of industrial countries increased $0.9 billion, compared with $0.4 billion. Quarterly fluctuations were substantial. Decreases occurred in the first and fourth quarters, when foreign monetary authorities intervened heavily in exchange markets. In the first quarter, most decreases were with European countries; in the fourth, most decreases were with countries in the Far East. In the second and third quarters, most countries took advantage of relatively calm exchange markets to add to their dollar holdings.

Dollar assets of OPEC members decreased $6.8 billion compared with $4.1 billion, as petroleum revenues continued to decline. Dollar assets of other countries increased $3.9 billion compared with $7.2 billion. Most of the slowdown was with newly industrialized countries in Asia. Dollar assets of Latin American countries increased about the same amount as a year earlier, partly reflecting deposits in the United States of proceeds of IMF- and commercial bank-sponsored financial aid packages.

Liabilities to foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $40.6 billion, compared with $31.7 billion. Liabilities payable in foreign currencies accounted for $7.6 billion of the 1985 increase, compared with $2.3 billion.

In contrast to 1984, most interbank borrowing was from own foreign offices rather than from unaffiliated foreign banks, and most borrowing from foreign offices was by foreign-owned banks, especially in the fourth quarter.

Interbank inflows to U.S.-owned banks were especially strong in February and early March when U.S. interest rates rose more rapidly than foreign rates and a large overnight Eurodollar interest differential favored offshore borrowing. The inflows coincided with a spurt in U.S. loan demand and temporarily tighter conditions in the money markets. With loan demand essentially flat through October and with U.S. interest rates below or only marginally higher than a weighted average of key foreign rates, inflows for those months were limited. Unusually large inflows to foreign-owned banks in November and December were mostly to finance a 12-percent advance in credit extended by these agencies and branches in the United States.

More attractive yields on U.S. Treasury bonds than on bank certificates of deposit may have shifted some funds flows to the securities markets throughout the year. A declining dollar may have slowed deposit inflows somewhat in the last half of the year (chart 10).

Net foreign purchases of U.S. Treasury securities by private foreigners and international financial institutions were $20.9 billion, close to last year's record $22.4 billion, despite a sharp decline in the dollar exchange rate and in U.S. long-term interest rates (chart 11). High yields on U.S. Treasury bonds relative to most foreign bond rates, expectations of rate declines and capital gains, and the July 1984 repeal of the U.S. withholding tax on interest payments to foreigners and related clarification of registration and certification requirements all contributed to foreigners' continued attraction to U.S. Treasury bonds. A third foreign-targeted issue of $1 billion was offered in June, bringing to $3 billion the amount offered since October 1984.

Residents of Japan accounted for $17.5 billion--the largest portion--of Treasury bond purchases, compared with $4.5 billion in 1984. Japanese purchases were mostly by insurance companies and pension funds, which had recently been permitted to expand the share of foreign securities in their portfolios. Investors sought the security of Treasury obligations and liquidity of the U.S. market, as well as interest rates that averaged 400 basis points higher than comparable Japanese rates. The interest differential apparently more than compensated for the foreign exchange risk. Also, favorable interpretation of the Japanese tax code in June 1985 encouraged purchases of zero-coupon Treasury bonds by permitting taxation of gains on the principal portion of the bond at capital gains rates. (No decision has yet been made on the tax treatment of the interest portion.)

In contrast to strong demand by Japanese residents, both Canadian and British residents were net sellers. Long-term rates in both countries, but especially in the United Kingdom, remained above those in the United States. Also, the British pound appreciated significantly against the dollar, as did a number of other European currencies. These countries had either net sales or only small increases in holdings. In 1984, Western European countries had been major net purchasers of bonds, accounting for about one-half of total purchases. Purchases of bonds by Caribbean countries more than doubled to $3.1 billion.

Mostly reflecting large U.S. corporate bond issues abroad, net foreign purchases of U.S. securities other than U.S. Treasury securities increased to a record $50.7 billion, compared with the previous record $13.0 billion in 1984. Foreigners purchased $46.0 billion in bonds, up from $13.8 billion, and $4.7 billion in stocks, a shift from net sales of $0.8 billion. In contrast to much of 1984, most bonds were placed directly in the Euromarkets or in national credit markets abroad rather than through finance affiliates in the Netherlands Antilles. The total amount raised was $37.6 billion, or nearly one-third of U.S. corporate bond borrowing from all sources in 1985. In 1984, U.S. corporations had borrowed $20.3 billion in bond markets abroad, a major portion of which financed large-scale mergers. That total, in turn, was nearly three times the amount of 1983 borrowing. Borrowing strength was encouraged by the sharp decline in interest rates and a desire to substitute long-term borrowing for syndicated bank credits.

Industrial corporations issued $13.8 billion, mostly in straight fixed-rate bonds, nearly triple the 1984 total (table K). Among them, petroleum and auto company issues were particularly large; those of computer and office machine companies were also sizable. Banking corporations issued $10.4 billion, mostly in floating-rate notes, more than four times the 1984 total. Nonbank financial institutions, including savings and loan companies and insurance companies, issued $7.1 billion in mortgage-backed securities --the first in overseas markets. Currency swap features enhanced dual-currency issues in the Eurobond market, as well as foreign currency issues placed in the Japanese, Swiss, and German markets.

Net foreign purchases of outstanding U.S. bonds were $8.4 billion, up from $3.4 billion. (Some of the 1985 transactions may be classified as new issues, but information necessary for such identification is not currently available.) Additional short- and intermediate-term corporate borrowing took the form of Euronote note issuance facilities and Eurocommercial paper.

Net foreign purchases of U.S. stocks were small compared with those of bonds. Foreigners purchased $4.7 billion compared with net sales of $0.8 billion a year earlier. Although U.S. market performance remained lackluster throughout most of the year and trailed far behind the rises in key foreign markets, a four-quarter selloff ended in the second quarter with a shit to small net purchases by Western European countries other than the United Kingdom. By the third quarter, British residents had become net purchasers, and by the fourth quarter, when there was a 12-percent rise in equity prices, most major areas contributed to a record quarterly inflow of $4.0 billion. Inflows and stock prices were buoyed by declines in long-term interest rates and some improvement in prospects for earnings advances. Also by the fourth quarter, dollar depreciation had significantly reduced the foreign currency costs of U.S. stocks.

Net inflows for foreign direct investment in the United States fell to $16.3 billion from $22.5 billion. Intercompany debt inflows in 1984 had been boosted by an unusually large inflow to acquire the remainder of a European petroleum company's U.S. operations. In 1985, intercompany debt inflows were reduced when a European parent converted much of the debt on the books of its U.S. construction affiliate into equity. Equity inflows decreased to $10.1 billion from $10.9 billion, as unusually large inflows in two transactions with Canada and Australia in 1984 were not matched by comparable size acquisitions in 1985. Reinvested earnings were $2.0 billion, compared with $3.7 billion.

The statistical discrepancy (errors and omissions in reported transactions) increased to an unrecorded net inflow of $32.7 billion from $30.5 billion.

Table: A.--Summary of U.S. International Transactions

Table: B.--Selected Transactions With Official Agencies

Table: C.--Indexes of Foreign Currency Price of the U.S. Dollar

Table: CHART 7 Indexes of Foreign Currency Price of the U.S. Dollar (January 1984=100)

Table: D.--Selected Balances on U.S. International Transactions

Table: E.--U.S. Merchandise Trade, Current and Constant (1982) Dollars

Table: CHART 8 Comparative Cost Indexes of Manufactured Goods

Table: F.--U.S. Merchandise Trade Balances by Area

Table: G.--U.S. International Service Transactions

Table: H.--Private Capital Flows, Net

Table: I.--U.S. Bank-Reported Claims and Liabilities by Type

Table: J.--Selected Direct Investment Transactions With Netherlands Antilles Finance Affiliates

Table: CHART 9 Private Bank-Reported Capital Flows

Table: CHART 10 U.S. and Foreign Interest Rates

Table: CHART 11 Net Purchases and Sales of U.S. Securities by Private Foreigners

Table: K.--New International Bond Issues by U.S. Borrowers

Table: L.--Selected U.S. Transactions With OPEC Members

Table: 1-2.--U.S. International Transactions

Table: 3.--U.S. Merchandise Trade

Table: 4.--Selected U.S. Government Transactions

Table: 5.--Direct Investment: Income, Capital, and Fees and Royalties

Table: 6.--Securities Transactions

Table: 7.--Claims on and Liabilities to Unaffiliated Foreigners Reported by U.S. Nonbanking Concerns

Table: 8.--Claims on Foreigners Reported by U.S. Banks

Table: 9.--Foreign Official Assets and Other Foreign Assets in the United States Reported by U.S. Banks

Table: 10.--U.S. International Transactions, by Area
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Author:Bach, Christopher L.
Publication:Survey of Current Business
Date:Mar 1, 1986
Words:7055
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