U.S. international transactions, fourth quarter and year 1984 Essay

THE U.S. current-account deficit decreased to $23.7 billion in thefourth quarter from $33.6 billion in the third. The decrease wasaccounted for by a narrowing of the merchandise trade deficit to $22.9billion from $32.

9 billion. An increase in the services surplus to $3.2billion from $2.2 billion was offset by an increase in unilateraltransfers to $4.0 billion from $2.

9 billion. Merchandise imports decreased $9.4 billion, or 11 percent, to $79.1billion. Volume decreased 12 percent; prices increased 1 percent. Mostof the decrease–$9.0 billion, all in volume–was in nonpetroleumimports. Imports of all major commodity categories decreased from veryhigh third-quarter levels.

(Despite these decreases, import levels forall major categories were substantially higher in the second half of theyear than in the first half.) The largest fourth-quarter decreases werein capital goods, down $3.0 billion, partly reflecting a decrease inoffice and business machines and equipment (including computers; innonfuel industrial supplies, particularly iron and steel products andmetals, down $2.

0 billion; and in automotive products, down $1.4billion. Petroleum imports decreased $0.4 billion, or 2 percent, to$14.1 billion.

The average number of barrels imported daily decreasedto $27.59 from $27.91. Price declines accelerated after October 15,when Norway reduced the prices of its crude oils. Merchandise exports increased $0.6 billion, or 1 percent, to $56.

3billion; volume increased 2 percent. Agricultural exports increased$0.6 billion, or 7 percent, to $9.7 billion; volume increased 13percent. The volume of U.S.

grain shipments to the U.S.S.R.

doubled inthe fourth quarter. The increase in the value of exports occurreddespite of a large drop in their prices, which was a consequence ofrecord harvests in many parts of the world. Average prices of corn andsoybeans decreased about 15 percent each. Average prices of wheatincreased 1 percent.

Nonagricultural exports were unchanged at $46.6billion; volume was also unchanged. Substantial decreases in industrialsupplies and automotive products were partly offset by a $0.3 billionincrease in capital goods, largely electronic compouters and parts,civilian aircraft and parts, and construction machinery. Net service receipts increased to $3.2 billion from $2.2 billion.Among major components, receipts of income on U.

S. direct investmentabroad were $6.0 billion compared with $4.

6 billion; capital losses(largely exchange-rate related) continued to limit the rise in income.Decreases in receipts and payments of other private income wereoffsetting. U.S. Government interest payments rose to $5.3 billionfrom $5.1 billion.

Net travel and passenger fare payments wre virtuallyunchanged. The deficit on military transactions increased to $0.5billion from $0.

3 billion. Net unilateral transfers were $4.0 billion. The $1.1 billionincrease occurred as Israel was paid the full amount of grant funds fromfiscal year 1985 economic support appropriations. U.S. assets abroad increased $17.

2 billion, in contrast to a $17.0billion decrease in the third quarter. U.S. official reserve assets increased $1.1 billion compared with $0.8 billion. Much of the $0.

8billion increase in foreign currency holdings was special creditextended to Argentina until proceeds of an International Monetary Fund(IMF) loan became available. A small amount of credit was provided tothe Central Bank of the Phillipines and was repaid before thequarter’s end. Limited intervention purchases of German marksoccurred in October. Claims on foreigners reported by U.S. banks increased $5.6 billioncompared with a decrease of $16.

9 billion. The low level of outflowsreflected the continuation of trends that have been evident over thepast 2-1/2 years–reduced external financing requirements in industrialand in some developing countries, more cautious borrowing policies insome developing countries, and a reluctance a U.S. banks to increasetheir exposure in a number of debtor countries. An increase in claimson public borrowers–mainly in October, as part of IMF-sponsoredadjustment programs–accounted for most of the capital outflows.Volatile monthly interbank transactions resulted in substantial yearendoutflows to own foreign offices that more than offset large reductionsin claims on these offices in October. Net U.S.

purchases of foreign securities were $3.3 billion comparedwith $1.3 billion. Bonds newly issued in the United States increased to$1.5 billion from $0.

9 billion, but remained at a low level becauseinterest rates abroad remained considerably lower than in the UnitedStates. U.S. residents were net sellers of outstanding bonds in almostall countries, except the United Kingdom, where they purchased $2.5billion following $1.2 billion in third-quarter purchases.

U.S.residents were net purchasers of $0.7 billion of foreign stocks in thefourth quarter–the same amount as in the third quarter–as markets inmany foreign countries continued to rise. Net capital outlfows for U.

S. direct investment abroad were $6.5billion compared with inflows of $1.9 billion, as the issue of bondsthrough finance affiliates in the Netherlands Antilles ceased andoutstanding debt to these affiliates continued to be repaid. Removal ofU.S. withholding taxes on interest payments to foreigners made itpossible for U.

S. companies to issue Eurobonds directly at the same costas through these finance affiliates; consequently, U.S.corporations’ borrowings shifted to Europe and to the portfoliocapital accounts (net foreign purchases of U.S. securities) from thedirect investment intercompany accounts, where Netherlands Antillesborrowings were included.

Foreign assets in the United States increased $33.9 billioncompared with a $2.8 billion increase. Foreign official assets in theUnited States increased $7.0 billion compared with a $0.

8 billiondecrease (table B). In the third quarter, substantial dollar outflowsto industrial countries occurred as the dollar appreciated. Theseoutflows were reversed during the fourth quarter, when the dollartemporarily depreciated; assets of industrial countries increased $2.

7billion. Assets of OPEC members increased $0.9 billion, as continuedoutflows to Middle East and Asian members were more than offset byinflows from Latin American members. Assets of other countries increased$3.

3 billion, largely from several newly industrialized countries in theFar East. Liabilities to private foreigners and international financialinstitutions reported by U.S. banks, excluding U.S. Treasurysecurities, increased $3.4 billion compared with a $5.

4 billionincrease. Large inflows from own foreign offices and unaffiliated banksin November and December more than offset outflows in October, resultingin only a small net inflow of funds for the quarter. Low demand forfunds by U.S. banks and rapidly declining U.

S. interest rates were majorcontributing factors. Some capital inflows shifted to purchases of U.S.Treasury securities, which were $9.5 billion compared with $5.1 billion;Treasury bonds, at 11.

75 percent, were nearly 3 percentage points aboveyields on bills and nearly 2.5 percentage points above rates on 90-daybank certificates of deposit (CD’s). Also, new Treasury issueswere marketed solely to foreigners. The World Bank purchased largeamounts of U.S.

bonds. Net foreign purchases of U.S. securities other than U.

S. Treasurysecurities were $9.3 billion compared with $1.6 billion.

Most purchaseswere attributable to $8.6 billion in Eurobonds newly issued abroad byU.S. withholding taxes on interest paid to foreigners on investments inthe United States and clarification of registration and certificationrequirements on new issues abroad in the third quarter paved the way forthe surge in new issues.

Borrowing in the Eurobond market wassignificantly cheaper than in the U.S. market, as Eurobond ratesdeclined sharply. foreigners were net sellers of U.S. stocks in thefourt quarter, $0.

8 billion compared with $1.0 billion, as the U.S.stock market continued lackluster. Purchases of outstanding bonds byforeigners were $1.5 billion compared with $0.7 billion. High yieldsand dollar appreciation made those holdings attractive compared withbonds in most foreign markets.

Net inflows on foreign direct investment in the United States were$4.7 billion compared with $5.3 billion.

Equity inflows dropped to $1.6billion from $2.5 billion, and intercompany account debt inflowsincreased to $1.6 billion from $1.4 billion. The dollar’s appreciation was temporarily interrupted fromearly October to mid-November, when it declined 2 percent againstEuropean Monetary System (EMS) currencies and sterling, partlyreflecting heavy intervention in exchange markets by foreign montetaryauthorities (table C).

However, the decline was more than reversed byyearend, and the dollar rose 2.4 percent from the end of September tothe end of December against the trade-weighted average of 10 majorcurrencies (chart 3, table C). (The dollar rose further to new highs inthe first 2 months of 1985.) The Year 1984 U.S. dollar in exchange markets From December 1983 to December 1984, the dollar appreciated 12percent on a trade-weighted average basis against 10 major currencies.Relatively high U.S.

interest rates for most of the year, the strengthof the U.S. expansion and success in maintaining low inflation, and U.S.economic and political stability all contributed to the appreciation.Economic and political uncertainties abroad also played a part.

The dollar’s appreciation was temporarily interrupted by an8-percent decline against most EMS currencies and sterling frommid-January through mid-March, when concern arose about the strength ofthe U.S. economic expansion and about the future course of nominal andreal interest rates. Simultaneously, the investment climate abroadappeared to improve as industrial activity strengthened, especially inGermany. Capital flowed out of dollars, mainly into marks, both fromother EMS countries and the United States. When the U.S.

expansion continued and was accompanied by largeprivate and public demands on the credit markets, U.S. interest ratesrose strongly while foreign interest remained virtually unchanged.

Bythe end of June, the interest differential in favor of dollar-denominated assets was the largest since 1982. Capital inflowshelped finance U.S.

banks’ domestic loan expansion, large-scalemergers and acquisitions, and the trade and Federal budget deficits.Foreign investors also participated in the brief stock market rally inlate July and August and in the bond market rally that began about amonth earlier and continued for the remainder of the year. The dollar’s appreciation was again temporarily interruptedwhen it declined 2 percent against most EMS currencies and sterling fromearly October to mid-November. There was substantial intervention inexchange markets by German and, to lesser extent, other foreign monetaryauthorities, from mid-September through early October, combined withlimited U.S. intervention. Despite further declines in U.

S. interestrates that virtually elimiated a weighted average of key foreign rates,the dollar’s decline was reversed, and by yearend, it reachedall-time highs against most European currencies. The dollar appreciated 21 percent against the British pound in1984. In the first half of the year, large interest differentialsfavored capital flows ot the United States.

During the second half,petroleum prices weakened rapidly, and the long coal strike held downthe rise in industrial production. The dollar appreciated less against the Japanese yen–6 percent–asanticipated output and inflation performance in Japan was better than inmany others countries. Relatively high interest rates on U.S. short-and longterm investments and the U.S. Treasury’s foreign-targetedissues attracted a large part of record capital outflows from Japan.

Inaddition, large-scale diversification of asset holdings by Japaneseinsurance companies and other institutions followed recent easing ofrestrictions on capital outflows and deregulations of capital markets. The dollar appreciated 6 percent against the Canadian dollar.Increases in Canadian interest rates in line with U.S. rates falied tostop the especially rapid decline of the Canadian dollar from Marchthrough mid-July. Canadian monetary authorities borrowed heavily fromCanadian and U.S.

banks, from other foreign banks, and in the Eurobondmarket to prevent further decreases in Canada’s internationalreserves. The Canadian dollar stabilized from August through December,and, with the pickup in capital inflows toward yearend, the Canadianauthorities repaid borrowings from banks on its standby creditfacilities. also at yearend, the new Canadian Government wasconsidering removal of some restrictions on inflows of foreign capitalto finance direct investment. Merchandise trade The U.S.

merchandise trade deficit increased to $107.4 billion in1984 from $61.1 billion in 1983 (tables D, E). Imports increased $66.

5billion, or 25 percent, to $327.8 billion; volume increased 26 percent.Nonpetroleum imports accounted for most of the increase. Exportsincreased $20.

1 billion, or 10 percent, to $220.3 billion; volumeincreased 8 percent. Nonagricultural exports accounted for most of theincrease.

Cumulative dollar appreciation since late 1980 was a major factorincreasing the deficit in 1984. Appreciation substantially decreasedthe competitiveness of U.S. goods in export markets, especially for thelarge capital goods and industrial supply categories, as the foreigncurrency cost of U.S.

manufactured goods exports rose much faster thanproducer prices in major industrial countries abroad. In contrast, therelative costs of imports and U.S.-produced goods changed little, as thedollar cost of U.S. manufactured goods imports rose only slightly fasterthan U.S.

producer prices (chart X). Relative growth rates also had an important influence on tradepatterns in 1984. Since 1981, real growth in the United States hadexceeded that of its industrialized trading partners by about two-thirdsof a percentage point on average. In 1984, the gap in growth rates wasmore than four times as large. As the U.S. expansion substantiallyoutpaced the recovery abroad, U.S.

imports increased by record amountsfrom industrial countries (especially Japan and Canada) and fromnon-OPEN developing countries. Export growth was mostly restricted toselected industrial countries–Canada, where there was a recordincrease, and Japan and some countries in Western Europe, where therewere limited increases. Exports to Mexico were also up strongly. Financing constraints in most debt-burdened developingcountries–and currency devaluations in some–continued to limit U.

S.export expansion, particularly to Latin America (which has been animportant market for U.S. machinery and capital goods). Some developingcountries in Latin America experienced strong real output expansion andexport growth to the United States.

Exports to the United States fromthe newly industrialized countries in the Far East (Hong Kong, Korea,Singapore, Taiwan) increased by record amounts. Reflecting the strength of U.S. import demand and limited exportexpansion, the trade balance with Western Europe shifted to a deficit of$13.9 billion from a surplus of $1.

0 billion in 1983, and the deficitwith Japan increased to $34.0 billion from $19.6 billion. The deficitwith Canada increased much less, to $15.5 billion from $10.5 billion,because a record $9.

3 billion increase in exports offset much of therecord $14.3 billion increase in imports. Among the developingcountries, the surge in imports from the newly industrialized countriesin the Far East increased the deficit to $19.

1 billion from $11.4billion. In contrast, the rise in imports from Latin America, includingseveral major debtor countries, increased the deficit only to $16.0billion from $13.4 billion.

The exception within this group was Mexico,where the deficit decreased to $6.0 billion with $7.7 billion (Table F). Nonpetroleum imports increased $63.0 billion, or 30 percent, to$270.

5 billion; volume increased 27 percent. Imports of all majornonpetroleum commodity categories increased by substantial amounts; manyexceeded record annual increases that occurred in 1976-80, the lastperiod of strong import growth. The largest increase was in capitalgoods, which increased $19.2 billion, or 47 percent. As in 1983, growthwas paced by electrical machinery, business and office machines(including computers), and scientific, professional, and serviceindustry equipment. Consumer goods increased $14.9 billion, or 32percent; both manufactured durable and nondurable goods–includingtextiles, radio and TV equipment and components–increased.

Nonfuelindustrial supplies and materials increased $12.7 billion, or 27percent, in spite of several voluntary agreements with Brazil, WesternEuropean countries, and Japan to limit shipments of certain types ofsteel products. Automotive products from areas other than Canada (mainlyJapan) increased $7.

0 billion, or 28 percent. Much of the increase inpassenger cars was due to higher average prices, which increased 10percent following an 8-percent increase in 1983; the number of unitsimported increased 8 percent. The share of Japanese autos in U.S. salesslipped to 19 percent from 21 percent.

Automotive products from Canadaincreased $6.1 billion, or 36 percent, reflecting a substantial increasein the number of domestic (U.S.) units sold. Petroleum imports increased $3.5 billion, or 6 percent, to $57.

3billion. The aveage price per barrel decreased to $27.95 from $28.

37 in1983. The average number of barrels imported daily increased to 5.60million from 5.20 million, reflecting a 4-percent increase inconsumption in 1984. Imports from OPEC members increased 5 percent to$23.

5 billion; combined imports from Canada, Western Europe, and Mexicoincreased 9 percent to $21.7 billion. Throughout the year, butparticularly in the last half, spot prices of crude were well belowprices posted by OPEC members. Nonagricultural exports increased $18.

3 billion, or 11 percent, allin volume, to $181.9 billion. Among the largest advances, automotiveexports to Canada increased $3.3 billion, or 27 percent; electroniccomputers and parts, $3.

4 billion, or 25 percent; chemicals, $2.4billion, or 14 percent; electrical machinery, $1.7 billion, or 13percent, and broadcasting and communications equipment, $1.0 billion, or15 percent. Most increases were related to trade with Canada andMexico, which together accounted for two-thirds of the increase innonagricultural exports.

Exports to Canada increased $9.1 billion, or22 percent, and exports to Mexico increased $2.9 billion, or 40 percent. Agricultural exports increased $1.8 billion, or 5 percent, to $38.4billion; volume was unchanged.

The volume of soybean shipments declineda record amount–more than 23 percent. However, the tight supplies inthe wake of the 1983 drought led to sharply higher prices for soybeansthrough mid-1984, limiting the decline in value to slightly more than 8percent. Prices dropped sharply in the last half of the year. Incontrast, the volume of wheat exports rose substantially in both valueand volume, despite somewhat lower prices. The volume of corn exportswas virtually unchanged from the previous year’s low level, despitea 10-percent price decline in the last half of the year. Service transactions Net service receipts were $17.

0 billion compared with $28.1 billion(table G). Declines in net income receipts, direct and portfolio, were$1.7 billion and $3.7 billion, respectively. Other services shifted toa deficit of $1.1 billion from a $4.6 billion surplus, mostly due to anincrease in the deficit on travel and passenger fare transactions and ashift to a deficit on military transactions.

Receipts of income on U.S. direct investment abroad were $23.6billion, up from $20.8 billion. The pickup reflected moderate expansionabroad, although, as in 1983, the rise in earnings was centered innonpetroleum affiliates in a few European countries and Japan.

Continued strength in earnings of automotive affiliates in Canada wasassociated with the second consecutive year of strong U.S. auto sales.Two factors limited the increase in earnings. First, capital losses,mostly reflecting dollar appreciation against both European and LatinAmerican currencies, remained large–about $7.

3 billion–for the secondconsecutive year. Second, net interest payments increased, although notby as much as in 1983. Distributed earnings increased to $15.2 billionfrom $14.9 billion. Reinvested earnings were $12.8 billion comparedwith $9.1 billion.

Payments of income on foreign direct investment in the UnitedStates were $11.2 billion, up from $6.7 billion. Earnings ofnonpetroleum affiliates accounted for most of the increase. Reinvestedearnings were $4.5 billion compared with $1.4 billion.

Distributedearnings were $3.6 billion compared with $3.0 billion.

Net interestpayments were $3.1 billion compared with $2.3 billion; the increase waslargely due to stepped-up borrowing to finance the acquisition of alarge U.S. company. Receipts of income on other private investment were $58.9 billion,up from $51.4 billion, reflecting a small increase in bank-reportedclaims and higher average interest rates.

Reduced external financingrequirements and U.S. banks’ concern about their exposure abroadlimited the increase in claims.

Receipts of income on U.S. Governmentassets abroad were $5.

2 billion, up from $4.8 billion. Payments ofincome on other private investment were $38.4 billion compared with$29.1 billion. Higher average interest rates more than offset a smallerincrease in bank-reported liabilities.

Payments of income on U.S.Government liabilities increased to $19.8 billion from $17.7 billion.

Net international travel and passenger fare payments increased to$7.8 billion from $5.1 billion. As in 1983, the large increase inpayments relative to receipts was attributable to substantial dollarappreciation and expansion of the U.S. economy in 1984.

Travel paymentsto overseas areas were $9.8 billion, up 18 percent, following a16-percent increase in 1983. The 1984 increase was largely due to anincrease in the number of U.S. travelers, particularly to WesternEurope; departures were up 14 percent. Travel receipts from overseasareas were $6.

4 billion, up 2 percent, as dollar appreciationcontributed to a 5-percent drop in the number of visitors. Most of thedrop was in visitors from Latin America, the Caribbean, and the UnitedKingdom, partly offset by an increase from the Far East. Receipts fromMexico fell 4 percent to $1.9 billion; payments to Mexico increased 3percent. Travel receipts from Canada fell 2 percent to $3.

1 billion;expenditures in Canada increased 9 percent to $2.4 billion, as averageexpenditures of travelers to Canada increased strongly. U.S.

military transactions with foreigners resulted in net paymentsof ,1.6 billion, a shift from net receipts of $0.5 billion. Transfersunder U.S. military agency sales contracts decreased $2.5 billion to$10.

2 billion, mainly due to large delivery reductions to Saudi Arabia and Egypt. Reduced construction activity and the absence of aircraftdeliveries led to a $2.2 billion reduction in transfers to Saudi Arabia.No aircraft deliveries and lower armored vehicle deliveries werereflected in a $0.5 billion reduction in transfers to Egypt. U.

S.direct defense expenditures abroad were $11.9 billion, down $0.4billion–the first decrease since 1975. Pay to U.

S. military personnelabroad increased $0.9 billion, mostly in Germany. Pertroleum purchasesdeclined $0.

6 billion to $1.1 billion, the lowest level since 1978.Construction in Saudi Arabia by the U.S. Army Corps of Engineers undermilitary sales contracts declined $0.

5 billion to $1.4 billion, ascurrent projects neared completion and projects in the planning stagewere postponed. Other net transportation payments were $1.0 billion, a shift fromnet receipts of $0.5 billion in 1983.

Receipts were $13.7 billion, anincrease of 7 percent. Payments were $14.7 billion, an increase of 19percent. Both increases reflected the strength of U.

S. imports–on thereceipts side in ocean port service receipts from foreign flag vesselsin U.S. ports, and on the payments side from import charges for cargoescarried on foreign flag vessels. Net unilateral transfers were $11.2 billion, up from $8.

7 billion.Some of the rise reflected revisions in U.S. Government proceduresunder which appropriated grant funds remaining from earlier fiscal years(1982 and 1983) were made available to foreign military sales customers.Thus, grants financing military purchases more than doubled, and othergrants increased strongly. U.S. assets abroad U.

S. assets abroad increased $21.2 billion in 1984 compared with a$49.5 billion increase in 1983.

U.S. official reserve assets increased $3.1 billion compared with$1.2 billion. U.

S. authorities acquired small amounts of German marksin intervention operations in the first, third, and fourth quarters. Inthe fourth quarter, a small amount of short-term financing was providedto the Central Bank of the Philippines until IMF financing could bearranged; it was repaid in the same quarter. ABout one-half of theincrease in U.S. holdings of foreign currencies was special credit toArgentina, created by purchases of $0.5 billion equivalent in pesos,until proceeds of an IMF loan, approved in September, became available.IMF disbursement was contingent upon commercial banks in the UnitedStates and abroad providing new credits.

Agreement with commercialbanks was reached at the end of December. (Argentina’s borrowingfrom the United STates was repaid in mid-January.) Claims on foreigners reported by U.S. banks increased $7.3 billioncompared with $25.4 billion (tables H, I). Despite moderate expansionin industrial countries abroad, international demand for U.

S. bankcredit was weak, because credit demands were largely met from othersources–especially the Eurobond markets where interests rates declinedsharply in the second half of the year. In addition, improved externalpayments positions, as well as more cautious borrowing policies, in somedeveloping countries somewhat lessened credit needs. On the supplyside, U.S. banks were generally hesitant to increase their foreignexposure in the face of continuing financial difficulties in a number oddeveloping countries. Also, U.S. supervisory authorities continued topressure banks, especially in the second half of the year, to improvethe quality of their loan portfolios, to tighten accounting standardsapplied to substandard loans, and to increase capital-asset ratios. Much of the second-quarter increase in claims was related to thefinancing of mergers in the United States. U.S. companies borrowedlarge amounts from foreign banks, who in turn satisfied some of thedemand for funds through interbank borrowing from U.S. banks. Much ofthe merger-related borrowing began to be repaid by the end of thequarter, as borrowers substituted funds from the U.S. commercial paperand the Eurobond markets for relatively costly bank funds. Also in the second quarter, large withdrawals from the banksabroad–particularly from foreign offices of U.S. banks–temporarilyreflected concerns over actual and potential losses from substandardloans at a few large banks in the United States. To offset thesewithdrawals, unaffiliated foreign banks borrowed heavily from U.S.banks, and U.S. parent banks deposited funds in their foreign offices.In the third quarter, as those concerns abated, the process wasreversed. In addition, lage credits to foreign banks dropped sharply,as merger-related corporate borrowing subsided. Banks’ own claims on their own foreign offices increased $9.3billion, compared with $16.7 billion; in particular, branches in theCaribbean, United Kingdom, and the Far East required less funding astheir loan demand dropped sharply. Claims on foreign public borrowersincreasd ,3.5 billion compared with $11.8 billion; the increase mainlyreflected credits established by agreements between private banks, theIMF, and several debtor countries in Latin America to refinance portionsof overdue public debt principal and interest. Banks’ claims for domestic customers’ accounts decreased$3.4 billion, compared with a $6.0 billion decrease. Money marketmutual funds sold off a smaller amount of Eurodollar CD’s than inthe preceding year. Although funds supplied by U.S. banks to foreigners decreasedsharply in 1984, funds raised by U.S. banks from abroad decreased byabout the same amount. Thus, the net funds (inflows) raised from abroadwere $20.2 billion, down only slightly from the $23.7 billion raised in1983 (chart 6). Net U.S. purchases of foreign securities were $4.8 billion comparedwith $7.7 billion. The decrease was mainly attributable to purchases offoreign stocks, which declined to $1.1 billion from $4.0 billion. Majorforeign stock markets rose little in the first half of 1984 (in contrastto their strong rise throughout 1983), and U.S. residents were netsellers on balance. However, when stock prices resumed their rise inthe second half–especially in markets in the Netherlands, Germany, andHong Kong–net purchases were moderately strong. (The U.S. market, bycomparison, was only slightly higher in the second half than in thefirst half of the year.) Despite the strong rise in the Japanese marketthroughout the year, U.S. residents were net sellers of Japanese stocks,as they were of Canadian stocks, which declined in price. Foreign new bond issues in the United States were $5.4 billion,compared with $5.1 billion. Of the 1984 amount, $1.5 billion was inlong-term floating rate issues by the Swedish Government to refinanceits bank borrowings. High U.S. interest rates relative to Eurobondrates and limited demand by Canadian borrowers restrained new issues.Canadian new issues dipped from $2.3 billion in 1983 to $1.1 billion in1984. In both years, Canadians relied heavily on borrowings from theEurobond market, partly because U.S. rates were not much lower thanCanadian rates and partly because the Canadian dollar declined againstthe U.S. dollar. Trading in outstanding bonds, up sharply to $1.3 billion, wasmarked by a substantial increase in purchases from the United Kingdom to$4.7 billion. Purchases of British Treasury gilt securities, guaranteedagainst foreign exchange risk by U.S. investment and brokerage houses,and purchases of outstanding (seasoned) Eurobonds, probably accountedfor much of the increase. Net sales were registered against nearly allother areas. Redemptions increased to $3.0 billion from $2.1 billion. Net outflows of capital for U.S. direct investment abroad were $6.0billion compared with $4.9 billion. An increase in reinvested earnings,which resulted from the pickup in economic activity abroad, was partlyoffset by a decrease in equity investments abroad and a small decreasein intercompany debt inflows. Several large-scale mergers and acquisitions dominated intercompanyaccount debt and related equity capital transactions, especially in thesecond quarter. There were large borrowings through NetherlandsAntilles finance affiliates, with over one-half of the $3.5 billiontotal associated with a single large merger-related transaction. Inanother large transaction, a U.S. company borrowed to purchase apetroleum company’s European mining and marketing operations. Athird transaction resulted in an equity inflow from a U.S.company’s sale of most of its interests in Australian miningproperties to an Australian company and a partly offsetting outflow fromthe U.S. company’s subsequent purchase of a share in the Australiancompany. (Related transactions appear in the capital account for foreigndirect investment in the United States.) Another factor affecting intercompany debt flows in the fourthquarter was the cessation of inflows through finance affiliates in theNetherlands Antilles. The cessation occurred because removal of U.S.withholding taxes on interest payments to foreigners made it possiblefor U.S. companies to borrow directly from foreign sources at the samecost as through these finances affiliates. In the first three quarters,intercompany debt inflows from these finance affiliates had beensubstantial, averaging over $2.0 billion per quarter (table J). (U.S.corporations’ direct borrowing is recorded in the portfolio capitalaccounts.) For the year, equity outflows, at $1.1 billion, were aboutone-quarter of the annual outflows in 1983. Intercompany account debtinflows dropped to $7.9 billion from $9.0 billion. Reinvested earningswere $12.8 billion compared with $9.1 billion. Foreign assets in the United States Foreign assets in the United States increased $92.8 billion in 1984compared with an $81.7 billion increase in 1983. Foreign official assets in the United States increased $3.0billion, following an increase of $5.3 billion. Dollar assets ofindustrial countries increased only $0.2 billion compared with $10.2billion. Small reductions in assets (outflows) of most Wesern Europeancountries in the first quarter were reversed early in the second, whenthe dollar’s appreciation resumed. Outflows in the third quarterwere more than offset by inflows in the fourth, reflecting substantialexchange market intervention by foreign monetary authorities. There wasa net decrease in dollar assets of other leading countries. Dollar assets of OPEC members decreased $4.2 billion compared with$8.6 billion, although there was virtually no net decrease in the lasthalf of the year. Dollar assets of other countries increased $7.0 billion comparedwith $3.8 billion. The increase was mainly concentrated in the assetsof several newly industrialized countries in the Far East. The dollarassets of a few countries in Latin America increased much less, mainlyreflecting deposits of proceeds of IMF- and commercial bank-sponsoredfinancial packages in the United States. Liabilities to foreigners and international financial institutionsreported by U.S. banks, excluding U.S. Treasury securities, increased$27.6 billion, compared with $49.1 billion. In the first half of theyear, strong demand for funds from abroad was related to the U.S.economic expansion and U.S. Treasury financing needs, and resulted in asharp rise in interest rates and further dollar appreciation. Asubstantial part of these inflows represented proceeds of earliercommercial paper borrowing by U.S. bank holding companies that weredeposited abroad and subsequently drawn upon by the U.S. parent bank.Another factor contributing to the strong rise in liabilities was thepreviously mentioned large-scale merger financing. With the flattening of domestic loan demand at midyear, a largedecline in U.S. interest rates, and rapidly diminishing financing needsfor mergers, dollar inflows dropped rapidly in the second half of theyear. Also, asset preferences of foreign investors shifted whenattractive investment opportunities in U.S. Treasury securities becameavailable as a result of U.S. tax law changes and as long-term rates onTreasury securities fell less rapidly than short-term rates on bankCD’s. Reflecting the flattening U.S. loan demand after midyear,banks’ own liabilities to their own foreign offices increased $2.0billion in 1984, compared with $25.6 billion increase in 1983. Partlyoffsetting was a pickup in liabilities to unaffiliated foreign banks(mainly foreign-owned banks) to an increase of $14.4 billion, comparedwith an increase of $9.9 billion. These inflows remained relativelystrong, even toward yearend, despite the decline in U.S. interest rates. Purchases of U.S. Treasury securities by private foreigners andinternational financial institutions were a record $22.5 billion in1984, nearly triple 1983 purchases. With interest rates on bondsaveraging more than 2.5 to 3.0 percentage points above yields on billsand bank CD’s, purchases of bonds rose substantially in the firstthree quarters. In the fourth quarter, purchases increased more,following the previously mentioned changes in the U.S. tax law and theclarification of registration and certification requirements. Some U.S.investment firms repackaged Federal agency and U.S. Treasury securitiesin the form of stripped interest coupons, which were sold separately aszero-coupon securities in bearer form to foreigners. The U.S. Treasurydirectly sold $2.0 billion of foreign-targeted securities to foreigners.These securities were priced 30 basis points less than comparable U.S.Treasury securities (thus lowering the Treasury’s cost ofborrowing), were marketed only abroad in special registered form, andwere not eligible for resale to U.S. residents for 90 days. Due to large U.S. corporate bond issues overseas, net foreignpurchases of U.S. securities other than U.S. Treasury securitiesincreased to a record $13.0 billion, compared with $8.6 billion in 1983.Foreigners purchased $13.6 billion in bonds, up from $2.2 billion, andsold $0.6 billion in U.S. stocks, a shift from record stock purchases of$6.4 billion. The strong demand for funds by U.S. corporations, as wellas by businesses worldwide, resulted in record issues of Eurodollar andother bonds estimated at $108 billion, up from $77 billion, ininternational markets. In contrast, worldwide international bankcredits dropped to an estimated $52 billion from $60 billion. An unprecedented volume of funds was raised by U.S. corporations inoverseas markets. In addition to $10.7 billion issued directly in theEurobond markets from the United States, U.S. corporations also tappedthe Eurobond market for $9.9 billion through their finance affiliates inthe Netherlands Antilles. The combined amount was triple the 1983total. In the first half of the year, much of the borrowing was to financelarge-scale mergers and acquisitions either directly, or indirectly, byreplacing the short-term bank debt that had initially been used. In thesecond half of the year, rapidly declining long-term rates and dollarappreciation favored foreign placement and spurred investor demand. After being net purchasers of stocks in the first quarter,foreigners became net sellers by midsummer. In the second half of theyear, when the stock market was essentially flat–in contrast to itsrecord breaking advance from mid-1982 to mid-1983–foreigners sold $1.8billion in stocks. Western Europeans, who had been net purchasers of$4.0 billion in 1983, were net sellers of $2.8 billion in 1984.Canadians continued as net purchasers of stocks; including recordpurchases in the first quarter, the total for the year was $1.7 billion,up from $1.2 billion. Net foreign purchases of outstanding bonds were $2.9 billion,compared with $1.9 billion; most purchases were concentrated in the lasthalf of the year. Yields on U.S. bonds exceeded those available innational markets in Germany, Japan, and United Kingdom by considerableamounts. In addition, the dollar appreciated against all threecurrencies. Net inflows of capital for foreign direct investment in the UnitedStates increased to $21.2 billion from $11.3 billion. Equity andintercompany account debt inflows were substantially higher than a yearago. Record quarterly inflows occurred in the second quarter whenintercompany account debt inflows increased $3.6 billion to $4.4billion. That quarter’s increase largely reflected a loan from aBritish affiliate to a U.S. subsidiary to purchase by a tender offer theremaining shares of a petroleum company. Also, equity capital inflowsincreased $2.6 billion to $3.3 billion, largely because a foreigncompany established a new U.S. holding company to acquire the U.S. andforeign properties of a U.S. company (referred to in the section on U.S.direct investment capital flows). For the year, intercompany accountdebt inflows were $8.4 billion compared with $4.0 billion, and equityinflows were $8.2 billion compared with $5.9 billion. Reinvestedearnings increased to $4.5 billion from $1.4 billion. The statistical discrepancy (errors and omissions in reportedtransactions) increased to an unrecorded net inflow of $30.0 billionfrom $9.3 billion.

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