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U.S. international transactions, fourth quarter and year 1986.

U.S. International Transactions, Fourth Quarter and Year 1986

Fourth Quarter 1986

THE U.S. current-account deficit increased to $36.8 billion in the fourth quarter from $35.3 billion in the third, largely because of an increase in the merchandise trade deficit to $38.4 billion from $37.1 billion. The surplus on service transactions decreased to $5.5 billion from $6.0 billion, and net unilateral transfers decreased to $3.9 billion from $4.2 billion.

Merchandise trade.--Merchandise imports increased $2.8 billion, or 3 percent, to a record $95.7 billion. Volume decreased 1 percent; prices increased 4 percent, mostly in automotive products, capital goods, and foods. The largest increases in value were in consumer goods, up $1.2 billion, or 6 percent, and in nonmonetary gold and passenger cars from Canada, each up $0.9 billion, or 70 and 34 percent, respectively. Nonmonetary gold replenished U.S. dealer stocks following Bureau of the Mint purchases for the minting of the new American Eagle gold coin. The largest decreases were in passenger cars from areas other than Canada, down $0.6 billion, or 6 percent, and lumber from Canada, down $0.3 billion, or 18 percent. The decrease in passenger cars reflected an 18-percent decrease in the number of cars imported from South Korea and a 9-percent decrease in the number from Japan. The decrease in lumber was due to the imposition of a 15-percent duty on imports from Canada in October as a result of a U.S. ruling that Canadian lumber products sold in the United States were being subsidized. (Subsequently, the United States and Canada reached an agreement, effective in early January, under which Canada imposed a 15-percent export tax and the United States removed its duty.) Petroleum imports were nearly unchanged at $8.0 billion. The average number of barrels imported daily decreased to 6.91 million from 7.64 million; the average price per barrel increased 11 percent to $12.73 from $11.42.

Merchandise exports increased $1.6 billion, or 3 percent, to $57.3 billion; the increase was all in volume. Agricultural exports increased $0.6 billion, or 9 percent, to $7.1 billion. Volume increased 13 percent. Shipments of soybeans to Western Europe accounted for nearly all of the increase, as supplies from Brazil, a major exporter to Western Europe, were limited by drought. The average price of several major crops decreased sharply to the lowest levels since the mid-1970's: corn, 14 percent; soybeans, 5 percent; and cotton, 4 percent. The average price of wheat increased 2 percent and of rice 22 percent. Nonagricultural exports increased $1.0 billion, or 2 percent, to $50.2 billion; the increase was all in volume. Among major components, machinery increased $0.8 billion, or 5 percent; and nonagricultural industrial supplies, $0.6 billion, or 5 percent. Nonmonetary gold decreased $0.9 billion, or 56 percent, following substantial third-quarter shipments to Japan for the minting of Japanese commemorative gold coins.

Service transactions.--Net service receipts decreased to $5.5 billion from $6.0 billion in the third quarter. Among major components, receipts of income on U.S. direct investment abroad decreased to $9.2 billion from $9.5 billion; the decrease was more than accounted for by a decline in capital gains. Payments of income on foreign direct investment in the United States were down slightly to $0.9 billion. Receipts of income on other private investment were unchanged at $10.9 billion, and payments of income on other private investment increased to $10.2 billion from $9.4 billion.

Foreign visitors spent $3.5 billion in the United States, up 6 percent. Receipts from overseas visitors increased 6 percent to $2.1 billion; those from Canada, 6 percent to $0.8 billion; and those from Mexico, 4 percent to $0.5 billion. U.S. travelers spent $4.5 billion in foreign countries, up 1 percnet. Payments for overseas travel increased 1 percent, as an increase in average expenditures more than offset a 15-percent decline in the number of travelers. Payments to Canada decreased 1 percent to $0.8 billion, and payments to Mexico increased 5 percent to $1.0 billion.

Transfers under U.S. military agency sales contracts increased $0.5 billion to $2.9 billion, due to a bunching of deliveries of aircraft. Direct defense expenditures were unchanged at $2.9 billion.

Other transportation receipts were $3.9 billion, up 4 percent, due to a rise in ocean freight receipts. Transportation payments were $4.3 billion, up 2 percent, due to a rise in air freight payments from higher import volume.

Net unilateral transfers.--Net unilateral transfers were $3.9 billion compared with $4.2 billion. U.S. Government grants to countries in the Middle East were down somewhat from the third quarter.

U.S. assets abroad.--U.S. assets abroad increased $32.9 billion compared with $28.2 billion in the third quarter. U.S. reserve assets decreased $0.1 billion. The reserve position with the International Monetary Fund (IMF) continued to decline, and the increase in holdings of foreign currencies was mostly accounted for by interest earnings.

U.S. claims on foreigners reported by U.S. banks increased $29.9 billion compared with $19.3 billion. Interbank claims, mostly of foreign-owned offices, on banks in Japan increased $18.3 billion, as Japanese banks continued to borrow heavily to finance, in part, their international lending operations. Interbank claims of U.S.-owned offices on financial centers in the Caribbean and the United Kingdom increased moderately for the quarter. The strong increase at yearend was largely reversed in January.

Net U.S. sales of foreign securities were $2.7 billion compared with $0.4 billion, due to a sharp selloff in foreign stocks. Net sales of stocks were $1.7 billion compared with $1.0 billion. Sales of Japanese stocks more than accounted for total fourth-quarter sales. There were also net sales of stocks of most European countries. Partly offsetting, new issues of foreign bonds in the United States increased as U.S. interest rates fell further. Major borrowers included New Zealand, Canada, several Scandinavian countries, and international financial institutions. In transactions in outstanding bonds, net purchases of U.K. gilt-edge securities slackened to $2.0 billion from $4.2 billion. Sales of bonds to Japanese and other Southeast Asian residents were substantial.

Net outflows for U.S. direct investment abroad were $5.7 billion compared with $8.0 billion. Capital gains due to exchange rate appreciation and intercompany debt outflows both decreased.

Foreign assets in the United States.--Foreign assets in the United States increased $59.6 billion compared with $69.5 billion in the third quarter. Foreign official assets in the United States increased $0.8 billion following a $15.4 billion increase, as Western European and Japanese intervention purchases of dollars slowed markedly. Dollar assets of OPEC members decreased substantially, and dollar 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, in creased $35.3 billion compared with $30.1 billion. The increases in both quarters were boosted by the international activities of Japanese banks, which included funding of strong loan demand at agencies and branches of foreign banks in the United States. In addition, in the fourth quarter for countries other than Japan, there were strong credit demands by U.S. firms for U.S. bank credit partly to finance acquisitions, and by U.S. banks to meet reserve requirements at yearend against the sharp rise in time deposits that occurred in December.

Net sales of U.S. Treasury securities by private foreigners and international financial institutions were $2.7 billion compared with $0.5 billion. The increase, which was more than accounted for by Japan, reflected declining U.S. yields and substantially higher yields available on foreign government bonds and corporate securities.

Net foreign purchases of U.S. securities, other than U.S. Treasury securities, were $11.8 billion compared with $17.2 billion. New bond issues abroad by U.S. corporations were $7.3 billion; lower interest rates led to a continuation of substantial refinancing activities and assumption of new debt, the latter partly to finance acquisitions. Foreigners purchased $4.8 billion in outstanding bonds.

Transactions in U.S. stocks shifted to net forign sales of $0.3 billion from net purchases of $4.5 billion. Heavy net sales by European countries and a drop in net purchases by Japan were concentrated in October, when U.S. stock prices dropped 3 percent. By December, these countries had returned as net purchasers, as prices rose 5 percent.

Net inflows for foreign direct investment were $14.4 billion compared with $5.6 billion. Numerous acquisitions, including two very substantial ones, were financed by both equity and debt inflows, supplemented with substantial amounts of funds acquired from U.S. banks. Tax reform legislation made it advantageous to complete acquisitions before yearend.

The statistical discrepancy (errors and omissions in reported transactions) shifted to an unrecorded net inflow of $10.2 billion from an outflow of $6.0 billion.

U.S. dollar in exchange markets.-- In the fourth quarter, the U.S. dollar depreciated 3 to 4 percent against European currencies; in contrast, it appreciated 3 percent against the Japanese yen and 4 percent against the British pound (table C, chart 3). The dollar hit new lows against the German mark as exchange markets remained skeptical following the Group of 5 and Group of 7 finance ministers' meetings in September. Japanese monetary authorities lowered their discount rate and suggested some stimulative fiscal measures in October, leading to a rise of the dollar against the yen. Monetary authorities in the United Kingdom raised interest rates and intervened heavily in exchange markets in November to strengthen the pound.

The dollar declined sharply in late December, as the demand for German marks increased despite a rise in French and Belgian interest rates to discourage speculation against those currencies.

The Year 1986

U.S. dollar in exchange markets

The dollar fell sharply during 1986, nearly 20 percent against a tradeweighted quarterly average of the currencies of 10 industrial countries, bringing the cumulative decline since the second quarter of 1985 to 39 percent. Against a broader average of 22 OECD currencies, the decline during 1986 was less, 5 percent, and the cumulative decline 13 percent. Early in the year, interest rate movements contributed to depreciation against all major currencies except the Canadian dollar, as U.S. long-term interest rates declined and short-term rates resumed their decline after several quarters of relative stability. The rapid decline in petroleum prices contributed indirectly to depreciation because major industrial oil importers, such as Germany and Japan, were thought to benefit more than the United States, and their currencies tended to strengthen as petroleum prices declined. The lowering of official interest rates in early March in the United States, Japan, and several European countries left international interest differentials virtually unchanged, and had little impact on exchange markets.

Upward pressures on the German mark (and Swiss franc) continued, leading to a realignment of currencies in the European Monetary System (EMS) in April. The realignment did little to slow the rise of EMS currencies against the dollar. Upward pressures on the Japanese yen also mounted, due to continued large Japanese current-account surpluses, favorable impacts of declining commodity and petroleum prices, and large capital inflows for purchases of securities.

From August to November, European monetary authorities, in a renewed effort to maintain the new EMS parties, stepped up exchange market intervention. During the same period, Japanese authorities lowered interest rates and proposed stimulative fiscal measures, resulting in a temporary rise in the dollar. However, renewed rapid depreciation of the dollar developed in the last weeks of the year.

In contrast, the dollar appreciated sharply against the British pound in the second half of the year. The impact of weak oil prices on British export revenues and Government income combined with concern about the direction of British monetary and fiscal policy sent the pound down 6 percent against the dollar and more against continental European currencies. The depreciation of the pound occurred despite large increases in both long- and short-term interest rates and sizable exchange market intervention purchases, particularly in November. British authorities also borrowed in the Eurobond market during the autumn months to replenish international reserves.

The U.S. dollar was unchanged against the Canadian dollar for the year, although Canadian authorities at times had to borrow heavily in the Eurobond market to maintain exchange stability.

The dollar depreciated slightly, or even appreciated, against the currencies of most newly industrialized countries in Southeast Asia, which continued to accumulate large current-account surpluses. However, the U.S. dollar depreciated 10 percent against the Taiwan dollar.

Merchandise trade

The U.S. merchandise trade deficit increased to $147.7 billion in 1986 from $124.4 billion in 1985 (tables D, E). Imports increased $30.6 billion to $369.5 billion, or 9 percent; volume increased 15 percent. An increase in nonpetroleum imports to $335.6 billion from $288.3 billion more than offset a decrease in petroleum imports to $33.9 billion from $50.5 billion. The 16-percent increase in the value of nonpetroleum imports followed increases of 5 percent in 1985 and 29 percent in 1984. Exports increased $7.3 billion to $221.8 billion, or 3 percent; volume increased 7 percent. Nonagricultural exports increased to $194.8 billion from $184.8 billion, and agricultural exports decreased to $26.9 billion from $29.6 billion. The 5-percent increase in the value of nonagricultural exports followed an increase of 2 percent in 1985 and 10 percent in 1984.

Dollar depreciation began to affect merchandise trade significantly in 1986. Throughout much of the year, the price competitiveness of U.S. goods in export markets increased, especially for the capital goods and industrial supply categories, as the foreign currency cost of U.S. manufactured exports decreased 7 percent while a weighted average of producer prices for manufactured products in major industrial countries abroad was unchanged. In contrast, the dollar cost of U.S. manufactured imports increased 5 percent while U.S. producer prices declined (chart 4).

A more detailed look at price patterns indicates considerable diversity. Prices of imports were significantly higher at yearend 1986 than a year earlier for those major commodity categories in which trade is most often denominated in foreign currencies --capital goods, consumer goods (nonfood), and autos (table F). These three categories accounted for 63 percent of import trade in 1986. Other import prices--for petroleum, industrial supplies, and most foods--declined sharply, as raw materials and commodities prices fell in world markets where these transactions are usually denominated in dollars. A 31-percent increase in coffee prices more than offset declines in prices of other foods.

Price declines for exports by yearend 1986 were small and limited to capital goods, which accounted for 36 percent of export trade. Industrial supplies, materials, and foods all reflected substantially lower prices in world markets. Consumer goods prices increased as did auto prices.

Several factors helped limit import price changes during 1986. First, earlier dollar appreciation continued, with a lagged impact, to limit import price increases. Second, the dollar depreciated only slightly, or even appreciated, against currencies of most newly industrialized countries in Southeast Asia. When combined with import trade of Canada and Mexico, most of which is denominated in dollars and therefore should not be expected to be affected by exchange rate changes, these three areas accounted for over 36 percent of U.S. imports. Third, foreign exporters probably reduced profit margins, which had been greatly inflated by dollar appreciation in 1980-84, to lessen price increases to U.S. consumers in order to maintain market shares. Fourth, dollar depreciation reduced production costs of countries exporting to the United States, particularly major foreign industrial importers of petroleum and other raw materials denominated in dollars.

Relative growth rates in real domestic demand also exerted an important influence on U.S. trade. Although differentials between U.S. and foreign growth narrowed, the strength in U.S. domestic demand continued to boost expenditures on U.S. imports as well as domestically produced goods. Relatively weak domestic demand abroad limited the growth of U.S. exports.

Imports.--Nonpetroleum imports increased $47.2 billion, or 16 percent, to $335.6 billion; volume increased 13 percent. The largest increase was in automotive products from areas other than Canada, which increased $12.8 billion or 32 percent. Automotive products from these areas had increased 20 percent in 1985 and 31 percent in 1984. In 1986, the number of autos imported from Japan increased 7 percent as did the number of autos sold. The Japanese share of total autos sold in the United States remained at 21 percent. However, in contrast to 1985, prices of Japanese autos rose substantially--11 percent compared with 2 percent. The number of relatively low-priced autos imported from Korea increased substantially. Automotive products from Canada were about unchanged.

Consumer goods increased $12.7 billion, or 19 percent, up from a 6-percent increase. Textile imports, mostly from newly industrialized countries in Southeast Asia, increased 19 percent. Imports of electronic appliances, including televisions, radios, and video equipment, increased 20 percent.

Capital goods increased $11.7 billion, or 18 percent, up from a 4-percent increase. Much of the 1986 increase was in nonelectrical machinery --business and office equipment (including computers), and scientific, professional, and service industry equipment. These commodities had also paced the import surge in 1984. Electrical machinery, which had decreased in 1985, rebounded strongly.

Nonpetroleum industrial supplies increased $6.2 billion, or 10 percent, following a 5-percent decrease. Iron and steel imports continued to decline, although less than in 1985. Paper and paper products increased $7.7 billion, or 8 percent, and building materials (including lumber from Canada) increased $6.4 billion or 11 percent. Nonmonetary gold imports increased $4.7 billion; nearly all of the imports during the second and third quarters were subsequently shipped to Japan for the minting of commemorative gold coins. Additional sizable imports in November were to replenish U.S. dealer stocks following U.S. Bureau of the Mint purchases for the minting of the new American Eagle gold coin.

Petroleum imports decreased $16.6 billion, or 33 percent, to $33.9 billion, the lowest level since 1976. Prices dropped sharply early in the year but recovered slightly toward yearend after OPEC members agreed to limit production. For the year, the average price per barrel decreased to $14.72 from $26.41. Partly in response, the average number of barrels imported daily increased to 6.53 million from 5.24 million, mostly from Saudi Arabia, Venezuela, and Nigeria. U.S. consumpotion of petroleum increased 3 percent from 1985, and stocks, excluding those for the Strategic Petroleum Reserve, increased 6 percent. U.S. production decreased 3 percent.

Exports.--Nonagricultural exports increased $10.0 billion, or 5 percent, to $194.8 billion; volume increased 7 percent. By the fourth quarter, volume was 10 percent higher than the fourth quarter a year earlier. The largest increase was in capital goods, up $3.5 billion. Among capital goods, computers and parts, broadcasting and communications equipment, and scientific and business equipment increased following no gain in 1985. Consumer goods increased $1.6 billion or 12 percent. Nonagricultural industrial supplies increased $4.4 billion or 8 percent; the increase was nearly all due to the previously mentioned Japanese purchases of nonmonetary gold. The gold had been imported into the United States earlier. Iron, steel, and coal shipments were lower. Shipments of lumber and related products, mostly to Japan, increased 12 percent. Low metals and raw materials prices, which continued to fluctuate around levels reached in the 1982 recession and in several cases were more almost one-third below peaks in 1980, continued to depress the value of most materials exports. Automotive exports decreased $0.6 billion, or 3 percent; slightly higher exports to areas other than Canada (including assembly plants in Mexico) were more than offset by a sharp decrease in shipments to Canada.

Agricultural exports decreased $2.7 billion, or 9 percent, to $26.9 billion, the lowest level since 1977. Volume decreased 1 percent for the year, but increased in the second half. Sizable price declines in world agricultural markets continued: The average price of soybeans declined 9 percent; corn, 18 percent; and wheat, 16 percent. These decreases brought the cumulative declines in prices to 42 percent for wheat since a peak in early 1981, to 40 percent for corn, and to 36 percent for soybeans. Exports continued to be restrained by competition from other suppliers and by importers' increased local production, partly reflecting record or near-record crops of cotton and grains. Also, the dollar exchange rate changed relatively little against currencies of major competitors, such as Canada and Australia, and appreciated against currencies of others, such as Argentina and Brazil. Partly offsetting, the Food Security Act of 1985 lowered price supports beginning with the 1986 crop year and contributed to volume increases in the third and fourth quarters.

Balances by area.--The merchandise trade deficit with Japan increased $11.1 billion to $54.6 billion; with Western Europe, $7.2 billion to $28.6 billion; and with the newly industrialized countries in Southeast Asia (Hong Kong, Korea, Singapore, Taiwan), $7.4 billion to $28.8 billion (table G). The deficit with Latin America decreased $3.8 billion to $11.4 billion, and with OPEC members other than those in Latin America $0.7 billion to $5.9 billion.

Service transactions

Net service receipts were $22.3 billion in 1986 compared with $21.7 billion in 1985 (table H).

Receipts of income on U.S. direct investment abroad were $39.1 billion compared with $34.3 billion. Most of the increase was due to larger capital gains from appreciation of major foreign currencies against the dollar. Operating earnings were essentially flat, as lower petroleum earnings were offset by moderate increases in both manufacturing and other industries. Interest payments decreased $0.9 billion due to reductions in debt of finance affiliates in the Netherlands Antilles. Receipts of income on other private investment were $45.2 billion compared with $50.2 billion, the result of a decline in interest rates that more than offset the increase in bank-reported claims (table I). Receipts of income on U.S. Government assets were $6.3 billion compared with $5.5 billion. Most of the increase was due to the second Polish Debt Rescheduling Agreement; the agreement --which covered obligations maturing January 1, 1982, to December 31, 1984--entered into force September 8, 1986. (Related transactions appear in the U.S. Gvernment credits and long-term assets, repayments, and short-term assets accounts.)

Payments of income on foreign direct investment in the United States were $6.5 billion compared with $8.1 billion. Lower operating earnings of petroleum companies accounted for the decrease. Operating earnings of other companies, particularly those of automotive and other wholesale trade affiliates, were relatively flat, as exchange rate movements substantially increased foreign production costs. Payments of income on other private investment were $38.8 billion compared with $35.4 billion. The decline in interest rates more than offset the increase in liabilities reported by banks, resulting in lower bank payments; however, the rise in payments on bonds associated with increased U.S. corporate borrowing abroad was more than offsetting. Payments of income on U.S. Government assets were $22.4 billion compared with $21.3 billion.

Net travel and passenger fare payments decreased to $8.3 billion from $9.2 billion. Foreign visitors spent $12.9 billion for travel in the United States, up 11 percent from the previous year. Travel receipts from overseas were $7.9 billion, up 19 percent: The number of visitors from Europe was up 28 percent; from Latin America, 18 percent; and from Japan, 11 percent. Receipts from Canada increased 5 percent to $3.2 billion, due to an increase in the number of auto and air travelers. Receipts from Mexico decreased 6 percent to $1.9 billion; the number of Mexican visitors to the U.S. interior fell 12 percent.

U.S. travel payments totaled $17.8 billion, an 8-percent increase over 1985. Expenditures overseas increased 3 percent to $10.6 billion. The increase was due to higher expenditures of U.S. travelers. This increase in expenditures, as well as a decrease in the number of travelers, resulted from the drop in the dollar's value. Travelers to Europe decreased 20 percent, but those to the Far East increased 12 percent. Expenditures in Canada increased 22 percent to $3.3 billion, as the number of travelers increased 12 percent. Travel payments to Mexico totaled $3.9 billion, up 10 percent, as the number of travelers to Mexico's interior increased 10 percent and the number of border crossers increased 2 percent.

Passenger fare receipts from foreign visitors traveling on U.S. flag carriers increased 13 percent to $3.4 billion: The number of visitors on U.S. flag carriers was up 22 percent. Increases were largest from Latin America, 48 percent, and Europe, 33 percent. U.S. payments to foreign transocean carriers totaled $6.8 billion, a 7-percent decrease. The number of U.S. travelers on foreign flag carriers fell 4 percent due to a 15-percent drop in travel on European carriers.

U.S. military transactions with foreigners resulted in net payments of $2.4 billion, down from $2.9 billion. Transfers under U.S. military sales contracts were $9.6 billion, an increase of $0.6 billion. A surge in aircraft deliveries in the second half of the year was partly offset by a continued decline in construction activity abroad. U.S. direct defense expenditures abroad were $12.0 billion, virtually unchanged. As in 1985, decreases in construction activity and petroleum procurement, now the lowest in years, were offset by increased personnel expenditures due to the lower value of the dollar.

Other net transportation payments were $1.8 billion, down slightly from a year earlier. Total receipts increased 5 percent to $14.7 billion. Ocean port expenditure receipts increased to $5.6 billion due to a 17-percent increase in import tonnage carried on foreign flag vessels. Air freight receipts increased 13 percent to $0.8 billion. Total payments increased 4 percent to $16.5 billion. Ocean freight payments increased 2 percent to $8.5 billion as tanker volume for crude petroleum imports rose 26 percent. Air freight payments increased 23 percent, mostly due to a rise in average freight rates. Air port expenditure payments declined 5 percent as fuel prices dropped.

Net unilateral transfers.--Net unilateral transfers increased slightly to $15.1 billion. U.S. Government grants increased strongly. Most of the step-up was due to additional military grants to countries in the Middle East, financed partly by unutilized funds from prior years' budget appropriations. Economic support and project and technical assistance grants under the Foreign Assistance Act were stable, but grants under programs for use of agricultural products dropped by one-third.

U.S. assets abroad

U.S. assets abroad increased $99.8 billion in 1986 compared with $32.4 billion in 1985.

U.S. official reserve assets.--U.S. official reserve assets decreased $0.3 billion compared with a $3.9 billion increase. Increases in foreign currency assets were limited to interest earnings of $0.7 billion and $0.2 billion in Mexican currency acquired in short-term support operations. The United States did not intervene in exchange markets. The U.S. reserve position with the IMF decreased $1.5 billion. As in 1985, the drop was mostly due to a decline in dollars obtained from the IMF by other countries and a deceleration in IMF lending to those countries. Special drawing rights increased $0.2 billion compared with $0.9 billion.

Claims reported by banks.--U.S. claims on foreigners reported by U.S. banks increased $57.3 billion compared with $0.7 billion (tables J, K). In contrast to 1985 when there was little incentive for U.S. banks to lend, claims increased by a substantial amount in 1986, especially in the third and fourth quarters. Most of that step-up was in the interbank market, and more than one-half of that, in turn, was accounted for by the international activities of Japanese banks.

Japanese international financial activity had expanded rapidly since mid-1984, when restrictions on both inflows and outflows of capital were eased. The result was to broaden the international use of the yen and increase Japanese residents access to international financial markets. In effect, a growing part of Japanese domestic credit flows was diverted from the more regulated Japanese domestic market to the international markets. Japanese banks funded their international lending activity, to a large extent, with deposits collected through their offices in London and in Southeast Asian market centers, and to a lesser extent, through offices in the United States. In the United States, interbank claims, mostly of foreign-owned offices, on banks in Japan increased $31.7 billion, accounting for more than 50 percent of the total increase in U.S. claims in 1986.

Other interbank activity, particularly by U.S.-owned banks on offices in the Caribbean and in the United Kingdom, also increased, especially in the third and fourth quarters. Part of the increase was attributable to European banks' growing involvement in the securities markets and their issuance of sizable amounts of floating-rate notes taken up in large measure by other banks. Also, these banks were reported to have accumulated large inventories of securities that were to a large extent funded in the interbank market. In other transactions with offices in the Caribbean and United Kingdom, U.S. banks' foreign currency claims increased $9.2 billion, partly to accommodate a shift in preferences to yen-denominated assets.

Outside the interbank market, claims on newly industrialized countries in Southeast Asia decreased and discretionary lending to problem debtor countries was limited. As a result of internationally negotiated loan rescue packages, there was a small increase in U.S. claims on foreign public borrowers in Latin American. Banks' claims for domestic customers' accounts reflected significant purchases of Eurodollar certificates of deposit from banks in the United Kingdom for U.S. money market mutual funds.

U.S. banks continued as net borrowers from the international credit markets in 1986, but the increase in claims was larger than the increase in liabilities. Net funds raised from abroad decreased to $20.1 billion from $39.7 billion (chart 5).

Foreign securities.--Net U.S. purchases of foreign securities were $4.8 billion compared with $8.0 billion. U.S. purchases of foreign stocks dropped sharply, more than offsetting a step-up in new bond issues and redemptions of outstanding bonds.

Net U.S. purchases of foreign stocks were $1.6 billion, down from $4.0 billion. Net purchases were limited to the first half of the year; net sales occurred during the second half, when most foreign stock markets leveled off after 15-18 months of uninterrupted rise. Net U.S. purchases of Japanese stocks began to slacken in the second quarter and shifted to substantial net sales in the third and fourth, accounting for most of the annual decline. Institutional investors perceived these equities to be overvalued relative to their earnings prospects. Net purchases of Western European stocks also shifted to sales in the second half, but sales were smaller than those of Japanese stocks; for the year, purchases increased about one-half as much as in 1985. Substantial exchange rate gains were realized upon the sale of both Japanese and Western European stocks.

New bond issues in the United States were $6.7 billion compared with $5.6 billion. Although issues were low in the first three quarters, they increased in the fourth, when high-rated borrowers in New Zealand, Canada, Scandinavia, and international financial institutions were attracted by a further decline in U.S. interest rates (chart 6).

In transactions in outstanding bonds, net redemptions were $3.4 billion compared with $2.1 billion, and net sales of outstanding bonds were $0.2 billion compared with net purchases of $0.5 billion. There were substantial sales of Japanese bonds, as Japanese interest rates were at post-World War II lows, and of bonds to other Southeast Asian residents, especially in Hong Kong. Offsetting these sales was a large increase in U.S. holdings of British gilt-edge bonds, as investors added $13.3 billion to the $5.4 billion acquired in 1985. The 250-basis point rise in gilt rates beginning in March to 300 basis points above comparable U.S. rates by yearend, combined with dollar appreciation against sterling in the last half of the year, increased the attractiveness of these investments to U.S. residents. Several major U.S. dealers continued to offer currency hedging options on these securities to offset currency flucturations.

Direct investment.--Net outflows for U.S. direct investment abroad were $32.0 billion compared with $18.8 billion. Most of the increase was due to an outflow of intercompany debt of $11.0 billion compared with $0.4 billion. Over $6.4 billion of the outflow was for repayment of debt to finance affiliates in the Netherlands Antilles (table L). Other outflows were to fund transportation affiliates. Net equity inflows, at $1.3 billion, were smaller than a year earlier, largely reflecting the nonrecurrence of two unusually large transactions in 1985. Reinvested earnings increased $1.6 billion to $22.2 billion.

Foreign assets in the United States

Foreign assets in the United States increased $213.3 billion in 1986 compared with $127.1 billion in 1985.

Foreign official assets.--Foreign official assets in the United States increased $33.4 billion compared with a decrease of $1.3 billion. Increases were particularly large in the second and third quarters, when industrial countries intervened heavily in exchange markets in an attempt to slow the dollar's rapid decline.

Dollar assets of OPEC members decreased $8.6 billion compared with $6.6 billion, as petroleum revenues declined further. Dollar assets of other countries increased $14.2 billion, compared with $4.1 billion; much of the 1986 increase was accounted for by a Southeast Asian country.

Liabilities reported by banks.--Liabilities to foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $77.4 billion compared with $40.4 billion. Liabilities to Japan increased by a substantial amount, reflecting the step-up in their international banking activities. Part of the increase was to fund a 19-percent increase in loan demand at branches and agencies of foreign banks in the United States in the second half of the year.

Much of the increase in interbank transactions with other countries occurred in the third and fourth quarters. Large inflows through Caribbean offices in August may have partly reflected the temporary narrowing of U.S. and Eurodollar interest rate differentials, along with strong demand by banks for funds to purchase municipal bonds. Less favorable tax treatment of such purchases was to begin in 1987. In the fourth quarter, exceptionally large inflows occurred partly to finance acquisitions prior to the ending of favorable tax treatment at yearend afforded by the "General Utilities rule,' and partly to meet substantial yearend financing demands by banks. (The "General Utilities rule' permitted the exchange of assets in acquisitions without any tax consequences. The new tax law, effective January 1987, repeals that treatment and requires that taxes be paid on the appreaciated value of the assets exchanged.) Liabilities denominated in foreign currencies to offices in Caribbean and U.K. banking centers increased $14.1 billion.

U.S. Treasury securities.--Net foreign purchases of U.S. Treasury securities by private foreigners and international financial institutions were $9.3 billion compared with $20.5 billion. Treasury bond yields fell further, as did the decline in the dollar's value, particularly against the Japanese yen. Japanese net purchases accounted for less than one-fifth of total net purchases compared with 85 percent in 1985, as Japanese residents shifted purchases to other types of securities, both in the United States and abroad. In contrast, purchases by British residents shifted from net sales to large net purchases.

U.S. securities.--Net foreign purchases of U.S. securities other than U.S. Treasury securities increased to a record $70.7 billion, surpassing the previous record of $50.9 billion in 1985. Foreigners purchased $39.4 billion in Eurobonds issued abroad by U.S. corporations, up slightly from $37.6 billion, and $17.2 billion in U.S. stocks, more than triple net purchases of $4.9 billion in 1985 (chart 7).

Further declines in interest rates stimulated continued refinancing activity in the Eurobond market. In addition, financing demands for acquisitions remained strong. Although total U.S. corporate bond borrowing from all sources increased to $210 billion from $134 billion, the overseas portion dropped to 19 percent from 28 percent.

Industrial corporations increased their borrowing abroad to $16.6 billion, but borrowing dropped substantially in the last half of the year (table M). Borrowing by bank holding companies fell by more than one-half, to $4.1 billion, mostly in floating-rate notes, while borrowing of nonbank financial institutions, including brokerage houses, almost doubled to $12.3 billion.

As in 1985, straight fixed-rate bonds accounted for about 60 percent of total borrowing, or $24.2 billion. Floating-rate notes dropped to only $1.6 billion in the first half, but rebounded to $6.5 billion in the second half. Zero-coupon issues were virtually nonexistent, as foreign rulings on tax treatment of deferred interest and capital gains were adverse, especially for Japanese investors. Convertible issues nearly tripled to $3.0 billion, coinciding with the rise of U.S. stock prices and increased interest in Euroequities.

Nearly three-quarters of total borrowing remained denominated in dollars. Borrowing denominated in Swiss francs and Japanese yen each doubled to $3.7 billion and $3.4 billion, respectively. More than one-half of the yen borrowing occurred in the first quarter, and more than three-quarters of the Swiss franc borrowing occurred in the first half of the year.

Net foreign purchases of outstanding bonds were $14.0 billion, compared with $8.4 billion. (Some of the 1986 transactions may eventually be classified as new issues, but information necessary for such identification is not currently available). Additional short- and intermediate-term U.S. corporate borrowing involved increased use of Euronote note issuance facilities and Eurocommercial paper.

Net foreign purchases of U.S. stocks were $17.3 billion compared with $4.9 billion (chart 8). Strength in foreign purchases, which had begun in mid-1985, continued in 1986 when U.S. market prices increased 20 percent, mostly in the first half of the year. While net purchases remained strong throughout much of the year, all major European countries shifted to net sales in October, which resulted in net sales for the fourth quarter. By December, nearly all of these same countries had returned as net purchasers. For the year, net purchases by British residents were $4.6 billion, a $2.9 billion increase. Swiss purchases increased to $1.7 billion after small net sales. Japanese purchases increased $3.0 billion to $3.3 billion.

Direct investment.--Net inflows for foreign direct investment in the United States were a record $25.6 billion compared with $17.9 billion. Equity capital inflows increased to $17.7 billion from $11.9 billion, due to numerous sizable acquisitions, especially in the last half of the year. Acquisitions were spurred by significant appreciation of foreign currencies over the past 2 years, cost incentives to shift production to the United States, and the tax considerations mentioned previously. Low-cost debt, both in the United States and abroad, also contributed to acquisitions, especially in the fourth quarter. Funding from abroad was supplemented by substantial funding from U.S. sources. Intercompany debt inflows were $8.4 billion, up from $4.8 billion. Reinvested earnings were a negative $0.6 billion, compared with a positive $1.1 billion, due to the previously mentioned drop in operating earnings of petroleum companies.

The statistical discrepancy (errors and omissions in reported transactions) increased to an unrecorded net inflow of $27.1 billion from $23.0 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: D.--Selected Balances on U.S. Iinternational Transactions

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

Table: F.--U.S. Merchandise Trade, Price Indexes (Fixed Weights): Change from Same Period One Year Earlier

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

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

Table: I.--Other Private Income

Table: J.--Private Capital Flows, Net

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

Table: L.--Selected Direct Investment Transactions with Netherlands Antilles Finance Affiliates

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

Table: N.--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, Royalties and License Fees, and Other Private Services

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

Photo: CHART 3 Indexes of Foreign Currency Price of the U.S. Dollar (January 1985=100)

Photo: CHAPTER 4 Comparative Cost Indexes of Manufactured Goods

Photo: CHART 5 Private Bank-Reported Capital Flows

Photo: CHART 6 U.S. and Foreign Interest Rates

Photo: CHART 7 Net Purchases and Sales of U.S. Securities by Private Foreigners

Photo: CHART 8 Private Foreign Transactions in U.S. Stocks
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Author:Bach, Christopher L.
Publication:Survey of Current Business
Date:Mar 1, 1987
Words:6988
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