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Corporate behaviour and the balance of payments

Leslie Hull

Balance of payments data are sometimes used to try to predict currency or financial crises. A high current account deficit relative to GDP, a large proportion of external debt relative to equity flows, and a large proportion of investment portfolio flows versus longer-term debt or direct investment have been considered ‘warning signals” of potential impending financial crises in some economies. Using balance of payments data for these purposes suggests the need for a careful understanding of what underlies the data. This article aims to further our understanding of some of the elements in New Zealand’s balance of payments current account and financial account data so that we can make more insightful interpretations of developments in the balance of payments. It provides several examples of how corporate financing choices could affect measured flows. Because of legal arrangements, certain corporate transactions may result in the overstatement of one type of capital flow relative to another in economic terms. Therefore, analysis of capital flows at face value could be misleading when interpreting the flows from a macro-financial stability perspective.