THE U.S. current-account deficit decreased to $23.7 billion in the
fourth quarter from $33.6 billion in the third. The decrease was
accounted for by a narrowing of the merchandise trade deficit to $22.9
billion from $32.9 billion. An increase in the services surplus to $3.2
billion from $2.2 billion was offset by an increase in unilateral
transfers to $4.0 billion from $2.9 billion.
Merchandise imports decreased $9.4 billion, or 11 percent, to $79.1
billion. Volume decreased 12 percent; prices increased 1 percent. Most
of the decrease–$9.0 billion, all in volume–was in nonpetroleum
imports. Imports of all major commodity categories decreased from very
high third-quarter levels. (Despite these decreases, import levels for
all major categories were substantially higher in the second half of the
year than in the first half.) The largest fourth-quarter decreases were
in capital goods, down $3.0 billion, partly reflecting a decrease in
office and business machines and equipment (including computers; in
nonfuel industrial supplies, particularly iron and steel products and
metals, down $2.0 billion; and in automotive products, down $1.4
billion. Petroleum imports decreased $0.4 billion, or 2 percent, to
$14.1 billion. The average number of barrels imported daily decreased
to $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 $56.3
billion; volume increased 2 percent. Agricultural exports increased
$0.6 billion, or 7 percent, to $9.7 billion; volume increased 13
percent. The volume of U.S. grain shipments to the U.S.S.R. doubled in
the fourth quarter. The increase in the value of exports occurred
despite of a large drop in their prices, which was a consequence of
record harvests in many parts of the world. Average prices of corn and
soybeans decreased about 15 percent each. Average prices of wheat
increased 1 percent. Nonagricultural exports were unchanged at $46.6
billion; volume was also unchanged. Substantial decreases in industrial
supplies and automotive products were partly offset by a $0.3 billion
increase 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 investment
abroad 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 were
offsetting. U.S. Government interest payments rose to $5.3 billion
from $5.1 billion. Net travel and passenger fare payments wre virtually
unchanged. The deficit on military transactions increased to $0.5
billion from $0.3 billion.
Net unilateral transfers were $4.0 billion. The $1.1 billion
increase occurred as Israel was paid the full amount of grant funds from
fiscal year 1985 economic support appropriations.
U.S. assets abroad increased $17.2 billion, in contrast to a $17.0
billion decrease in the third quarter. U.S. official reserve assets increased $1.1 billion compared with $0.8 billion. Much of the $0.8
billion increase in foreign currency holdings was special credit
extended to Argentina until proceeds of an International Monetary Fund
(IMF) loan became available. A small amount of credit was provided to
the Central Bank of the Phillipines and was repaid before the
quarter’s end. Limited intervention purchases of German marks
occurred in October.
Claims on foreigners reported by U.S. banks increased $5.6 billion
compared with a decrease of $16.9 billion. The low level of outflows
reflected the continuation of trends that have been evident over the
past 2-1/2 years–reduced external financing requirements in industrial
and in some developing countries, more cautious borrowing policies in
some developing countries, and a reluctance a U.S. banks to increase
their exposure in a number of debtor countries. An increase in claims
on public borrowers–mainly in October, as part of IMF-sponsored
adjustment programs–accounted for most of the capital outflows.
Volatile monthly interbank transactions resulted in substantial yearend
outflows to own foreign offices that more than offset large reductions
in claims on these offices in October.
Net U.S. purchases of foreign securities were $3.3 billion compared
with $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 because
interest rates abroad remained considerably lower than in the United
States. U.S. residents were net sellers of outstanding bonds in almost
all countries, except the United Kingdom, where they purchased $2.5
billion following $1.2 billion in third-quarter purchases. U.S.
residents were net purchasers of $0.7 billion of foreign stocks in the
fourth quarter–the same amount as in the third quarter–as markets in
many foreign countries continued to rise.
Net capital outlfows for U.S. direct investment abroad were $6.5
billion compared with inflows of $1.9 billion, as the issue of bonds
through finance affiliates in the Netherlands Antilles ceased and
outstanding debt to these affiliates continued to be repaid. Removal of
U.S. withholding taxes on interest payments to foreigners made it
possible for U.S. companies to issue Eurobonds directly at the same cost
as through these finance affiliates; consequently, U.S.
corporations’ borrowings shifted to Europe and to the portfolio
capital accounts (net foreign purchases of U.S. securities) from the
direct investment intercompany accounts, where Netherlands Antilles
borrowings were included.
Foreign assets in the United States increased $33.9 billion
compared with a $2.8 billion increase. Foreign official assets in the
United States increased $7.0 billion compared with a $0.8 billion
decrease (table B). In the third quarter, substantial dollar outflows
to industrial countries occurred as the dollar appreciated. These
outflows were reversed during the fourth quarter, when the dollar
temporarily depreciated; assets of industrial countries increased $2.7
billion. Assets of OPEC members increased $0.9 billion, as continued
outflows to Middle East and Asian members were more than offset by
inflows from Latin American members. Assets of other countries increased
$3.3 billion, largely from several newly industrialized countries in the
Liabilities to private foreigners and international financial
institutions reported by U.S. banks, excluding U.S. Treasury
securities, increased $3.4 billion compared with a $5.4 billion
increase. Large inflows from own foreign offices and unaffiliated banks
in November and December more than offset outflows in October, resulting
in only a small net inflow of funds for the quarter. Low demand for
funds by U.S. banks and rapidly declining U.S. interest rates were major
contributing 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 above
yields on bills and nearly 2.5 percentage points above rates on 90-day
bank certificates of deposit (CD’s). Also, new Treasury issues
were marketed solely to foreigners. The World Bank purchased large
amounts of U.S. bonds.
Net foreign purchases of U.S. securities other than U.S. Treasury
securities were $9.3 billion compared with $1.6 billion. Most purchases
were attributable to $8.6 billion in Eurobonds newly issued abroad by
U.S. withholding taxes on interest paid to foreigners on investments in
the United States and clarification of registration and certification
requirements on new issues abroad in the third quarter paved the way for
the surge in new issues. Borrowing in the Eurobond market was
significantly cheaper than in the U.S. market, as Eurobond rates
declined sharply. foreigners were net sellers of U.S. stocks in the
fourt quarter, $0.8 billion compared with $1.0 billion, as the U.S.
stock market continued lackluster. Purchases of outstanding bonds by
foreigners were $1.5 billion compared with $0.7 billion. High yields
and dollar appreciation made those holdings attractive compared with
bonds 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 $1.6
billion from $2.5 billion, and intercompany account debt inflows
increased to $1.6 billion from $1.4 billion.
The dollar’s appreciation was temporarily interrupted from
early October to mid-November, when it declined 2 percent against
European Monetary System (EMS) currencies and sterling, partly
reflecting heavy intervention in exchange markets by foreign montetary
authorities (table C). However, the decline was more than reversed by
yearend, and the dollar rose 2.4 percent from the end of September to
the end of December against the trade-weighted average of 10 major
currencies (chart 3, table C). (The dollar rose further to new highs in
the first 2 months of 1985.)
The Year 1984
U.S. dollar in exchange markets
From December 1983 to December 1984, the dollar appreciated 12
percent on a trade-weighted average basis against 10 major currencies.
Relatively high U.S. interest rates for most of the year, the strength
of 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 an
8-percent decline against most EMS currencies and sterling from
mid-January through mid-March, when concern arose about the strength of
the U.S. economic expansion and about the future course of nominal and
real interest rates. Simultaneously, the investment climate abroad
appeared to improve as industrial activity strengthened, especially in
Germany. Capital flowed out of dollars, mainly into marks, both from
other EMS countries and the United States.
When the U.S. expansion continued and was accompanied by large
private and public demands on the credit markets, U.S. interest rates
rose strongly while foreign interest remained virtually unchanged. By
the end of June, the interest differential in favor of dollar-denominated assets was the largest since 1982. Capital inflows
helped finance U.S. banks’ domestic loan expansion, large-scale
mergers and acquisitions, and the trade and Federal budget deficits.
Foreign investors also participated in the brief stock market rally in
late July and August and in the bond market rally that began about a
month earlier and continued for the remainder of the year.
The dollar’s appreciation was again temporarily interrupted
when it declined 2 percent against most EMS currencies and sterling from
early October to mid-November. There was substantial intervention in
exchange markets by German and, to lesser extent, other foreign monetary
authorities, from mid-September through early October, combined with
limited U.S. intervention. Despite further declines in U.S. interest
rates that virtually elimiated a weighted average of key foreign rates,
the dollar’s decline was reversed, and by yearend, it reached
all-time highs against most European currencies.
The dollar appreciated 21 percent against the British pound in
1984. In the first half of the year, large interest differentials
favored capital flows ot the United States. During the second half,
petroleum prices weakened rapidly, and the long coal strike held down
the rise in industrial production.
The dollar appreciated less against the Japanese yen–6 percent–as
anticipated output and inflation performance in Japan was better than in
many others countries. Relatively high interest rates on U.S. short-
and longterm investments and the U.S. Treasury’s foreign-targeted
issues attracted a large part of record capital outflows from Japan. In
addition, large-scale diversification of asset holdings by Japanese
insurance companies and other institutions followed recent easing of
restrictions 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 to
stop the especially rapid decline of the Canadian dollar from March
through mid-July. Canadian monetary authorities borrowed heavily from
Canadian and U.S. banks, from other foreign banks, and in the Eurobond
market to prevent further decreases in Canada’s international
reserves. The Canadian dollar stabilized from August through December,
and, with the pickup in capital inflows toward yearend, the Canadian
authorities repaid borrowings from banks on its standby credit
facilities. also at yearend, the new Canadian Government was
considering removal of some restrictions on inflows of foreign capital
to finance direct investment.
The U.S. merchandise trade deficit increased to $107.4 billion in
1984 from $61.1 billion in 1983 (tables D, E). Imports increased $66.5
billion, or 25 percent, to $327.8 billion; volume increased 26 percent.
Nonpetroleum imports accounted for most of the increase. Exports
increased $20.1 billion, or 10 percent, to $220.3 billion; volume
increased 8 percent. Nonagricultural exports accounted for most of the
Cumulative dollar appreciation since late 1980 was a major factor
increasing the deficit in 1984. Appreciation substantially decreased
the competitiveness of U.S. goods in export markets, especially for the
large capital goods and industrial supply categories, as the foreign
currency cost of U.S. manufactured goods exports rose much 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 X).
Relative growth rates also had an important influence on trade
patterns in 1984. Since 1981, real growth in the United States had
exceeded that of its industrialized trading partners by about two-thirds
of a percentage point on average. In 1984, the gap in growth rates was
more than four times as large. As the U.S. expansion substantially
outpaced the recovery abroad, U.S. imports increased by record amounts
from industrial countries (especially Japan and Canada) and from
non-OPEN developing countries. Export growth was mostly restricted to
selected industrial countries–Canada, where there was a record
increase, and Japan and some countries in Western Europe, where there
were limited increases. Exports to Mexico were also up strongly.
Financing constraints in most debt-burdened developing
countries–and currency devaluations in some–continued to limit U.S.
export expansion, particularly to Latin America (which has been an
important market for U.S. machinery and capital goods). Some developing
countries in Latin America experienced strong real output expansion and
export growth to the United States. Exports to the United States from
the 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 export
expansion, 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 deficit
with Japan increased to $34.0 billion from $19.6 billion. The deficit
with Canada increased much less, to $15.5 billion from $10.5 billion,
because a record $9.3 billion increase in exports offset much of the
record $14.3 billion increase in imports. Among the developing
countries, the surge in imports from the newly industrialized countries
in the Far East increased the deficit to $19.1 billion from $11.4
billion. In contrast, the rise in imports from Latin America, including
several major debtor countries, increased the deficit only to $16.0
billion 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 major
nonpetroleum commodity categories increased by substantial amounts; many
exceeded record annual increases that occurred in 1976-80, the last
period of strong import growth. The largest increase was in capital
goods, which increased $19.2 billion, or 47 percent. As in 1983, growth
was paced by electrical machinery, business and office machines
(including computers), and scientific, professional, and service
industry equipment. Consumer goods increased $14.9 billion, or 32
percent; both manufactured durable and nondurable goods–including
textiles, radio and TV equipment and components–increased. Nonfuel
industrial supplies and materials increased $12.7 billion, or 27
percent, in spite of several voluntary agreements with Brazil, Western
European countries, and Japan to limit shipments of certain types of
steel products. Automotive products from areas other than Canada (mainly
Japan) increased $7.0 billion, or 28 percent. Much of the increase in
passenger cars was due to higher average prices, which increased 10
percent following an 8-percent increase in 1983; the number of units
imported increased 8 percent. The share of Japanese autos in U.S. sales
slipped to 19 percent from 21 percent. Automotive products from Canada
increased $6.1 billion, or 36 percent, reflecting a substantial increase
in the number of domestic (U.S.) units sold.
Petroleum imports increased $3.5 billion, or 6 percent, to $57.3
billion. The aveage price per barrel decreased to $27.95 from $28.37 in
1983. The average number of barrels imported daily increased to 5.60
million from 5.20 million, reflecting a 4-percent increase in
consumption in 1984. Imports from OPEC members increased 5 percent to
$23.5 billion; combined imports from Canada, Western Europe, and Mexico
increased 9 percent to $21.7 billion. Throughout the year, but
particularly in the last half, spot prices of crude were well below
prices posted by OPEC members.
Nonagricultural exports increased $18.3 billion, or 11 percent, all
in volume, to $181.9 billion. Among the largest advances, automotive
exports to Canada increased $3.3 billion, or 27 percent; electronic
computers and parts, $3.4 billion, or 25 percent; chemicals, $2.4
billion, or 14 percent; electrical machinery, $1.7 billion, or 13
percent, and broadcasting and communications equipment, $1.0 billion, or
15 percent. Most increases were related to trade with Canada and
Mexico, which together accounted for two-thirds of the increase in
nonagricultural exports. Exports to Canada increased $9.1 billion, or
22 percent, and exports to Mexico increased $2.9 billion, or 40 percent.
Agricultural exports increased $1.8 billion, or 5 percent, to $38.4
billion; volume was unchanged. The volume of soybean shipments declined
a record amount–more than 23 percent. However, the tight supplies in
the wake of the 1983 drought led to sharply higher prices for soybeans
through mid-1984, limiting the decline in value to slightly more than 8
percent. Prices dropped sharply in the last half of the year. In
contrast, the volume of wheat exports rose substantially in both value
and volume, despite somewhat lower prices. The volume of corn exports
was virtually unchanged from the previous year’s low level, despite
a 10-percent price decline in the last half of the year.
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 to
a deficit of $1.1 billion from a $4.6 billion surplus, mostly due to an
increase in the deficit on travel and passenger fare transactions and a
shift to a deficit on military transactions.
Receipts of income on U.S. direct investment abroad were $23.6
billion, up from $20.8 billion. The pickup reflected moderate expansion
abroad, although, as in 1983, the rise in earnings was centered in
nonpetroleum affiliates in a few European countries and Japan.
Continued strength in earnings of automotive affiliates in Canada was
associated 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 Latin
American currencies, remained large–about $7.3 billion–for the second
consecutive year. Second, net interest payments increased, although not
by as much as in 1983. Distributed earnings increased to $15.2 billion
from $14.9 billion. Reinvested earnings were $12.8 billion compared
with $9.1 billion.
Payments of income on foreign direct investment in the United
States were $11.2 billion, up from $6.7 billion. Earnings of
nonpetroleum affiliates accounted for most of the increase. Reinvested
earnings were $4.5 billion compared with $1.4 billion. Distributed
earnings were $3.6 billion compared with $3.0 billion. Net interest
payments were $3.1 billion compared with $2.3 billion; the increase was
largely due to stepped-up borrowing to finance the acquisition of a
large 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-reported
claims and higher average interest rates. Reduced external financing
requirements and U.S. banks’ concern about their exposure abroad
limited the increase in claims. Receipts of income on U.S. Government
assets abroad were $5.2 billion, up from $4.8 billion. Payments of
income on other private investment were $38.4 billion compared with
$29.1 billion. Higher average interest rates more than offset a smaller
increase 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 in
payments relative to receipts was attributable to substantial dollar
appreciation and expansion of the U.S. economy in 1984. Travel payments
to overseas areas were $9.8 billion, up 18 percent, following a
16-percent increase in 1983. The 1984 increase was largely due to an
increase in the number of U.S. travelers, particularly to Western
Europe; departures were up 14 percent. Travel receipts from overseas
areas were $6.4 billion, up 2 percent, as dollar appreciation
contributed to a 5-percent drop in the number of visitors. Most of the
drop was in visitors from Latin America, the Caribbean, and the United
Kingdom, partly offset by an increase from the Far East. Receipts from
Mexico fell 4 percent to $1.9 billion; payments to Mexico increased 3
percent. Travel receipts from Canada fell 2 percent to $3.1 billion;
expenditures in Canada increased 9 percent to $2.4 billion, as average
expenditures of travelers to Canada increased strongly.
U.S. military transactions with foreigners resulted in net payments
of ,1.6 billion, a shift from net receipts of $0.5 billion. Transfers
under 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 aircraft
deliveries led to a $2.2 billion reduction in transfers to Saudi Arabia.
No aircraft deliveries and lower armored vehicle deliveries were
reflected in a $0.5 billion reduction in transfers to Egypt. U.S.
direct defense expenditures abroad were $11.9 billion, down $0.4
billion–the first decrease since 1975. Pay to U.S. military personnel
abroad increased $0.9 billion, mostly in Germany. Pertroleum purchases
declined $0.6 billion to $1.1 billion, the lowest level since 1978.
Construction in Saudi Arabia by the U.S. Army Corps of Engineers under
military sales contracts declined $0.5 billion to $1.4 billion, as
current projects neared completion and projects in the planning stage
Other net transportation payments were $1.0 billion, a shift from
net receipts of $0.5 billion in 1983. Receipts were $13.7 billion, an
increase of 7 percent. Payments were $14.7 billion, an increase of 19
percent. Both increases reflected the strength of U.S. imports–on the
receipts side in ocean port service receipts from foreign flag vessels
in U.S. ports, and on the payments side from import charges for cargoes
carried 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 procedures
under 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 other
grants 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 marks
in intervention operations in the first, third, and fourth quarters. In
the fourth quarter, a small amount of short-term financing was provided
to the Central Bank of the Philippines until IMF financing could be
arranged; it was repaid in the same quarter. ABout one-half of the
increase in U.S. holdings of foreign currencies was special credit to
Argentina, 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 United
States and abroad providing new credits. Agreement with commercial
banks was reached at the end of December. (Argentina’s borrowing
from the United STates was repaid in mid-January.)
Claims on foreigners reported by U.S. banks increased $7.3 billion
compared with $25.4 billion (tables H, I). Despite moderate expansion
in industrial countries abroad, international demand for U.S. bank
credit was weak, because credit demands were largely met from other
sources–especially the Eurobond markets where interests rates declined
sharply in the second half of the year. In addition, improved external
payments positions, as well as more cautious borrowing policies, in some
developing countries somewhat lessened credit needs. On the supply
side, U.S. banks were generally hesitant to increase their foreign
exposure in the face of continuing financial difficulties in a number od
developing countries. Also, U.S. supervisory authorities continued to
pressure banks, especially in the second half of the year, to improve
the quality of their loan portfolios, to tighten accounting standards
applied to substandard loans, and to increase capital-asset ratios.
Much of the second-quarter increase in claims was related to the
financing of mergers in the United States. U.S. companies borrowed
large amounts from foreign banks, who in turn satisfied some of the
demand for funds through interbank borrowing from U.S. banks. Much of
the merger-related borrowing began to be repaid by the end of the
quarter, as borrowers substituted funds from the U.S. commercial paper
and the Eurobond markets for relatively costly bank funds.
Also in the second quarter, large withdrawals from the banks
abroad–particularly from foreign offices of U.S. banks–temporarily
reflected concerns over actual and potential losses from substandard
loans at a few large banks in the United States. To offset these
withdrawals, 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 was
reversed. In addition, lage credits to foreign banks dropped sharply,
as merger-related corporate borrowing subsided.
Banks’ own claims on their own foreign offices increased $9.3
billion, compared with $16.7 billion; in particular, branches in the
Caribbean, United Kingdom, and the Far East required less funding as
their loan demand dropped sharply. Claims on foreign public borrowers
increasd ,3.5 billion compared with $11.8 billion; the increase mainly
reflected credits established by agreements between private banks, the
IMF, and several debtor countries in Latin America to refinance portions
of overdue public debt principal and interest.
Banks’ claims for domestic customers’ accounts decreased
$3.4 billion, compared with a $6.0 billion decrease. Money market
mutual funds sold off a smaller amount of Eurodollar CD’s than in
the preceding year.
Although funds supplied by U.S. banks to foreigners decreased
sharply in 1984, funds raised by U.S. banks from abroad decreased by
about the same amount. Thus, the net funds (inflows) raised from abroad
were $20.2 billion, down only slightly from the $23.7 billion raised in
1983 (chart 6).
Net U.S. purchases of foreign securities were $4.8 billion compared
with $7.7 billion. The decrease was mainly attributable to purchases of
foreign stocks, which declined to $1.1 billion from $4.0 billion. Major
foreign stock markets rose little in the first half of 1984 (in contrast
to their strong rise throughout 1983), and U.S. residents were net
sellers on balance. However, when stock prices resumed their rise in
the second half–especially in markets in the Netherlands, Germany, and
Hong Kong–net purchases were moderately strong. (The U.S. market, by
comparison, was only slightly higher in the second half than in the
first half of the year.) Despite the strong rise in the Japanese market
throughout 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 in
long-term floating rate issues by the Swedish Government to refinance
its bank borrowings. High U.S. interest rates relative to Eurobond
rates and limited demand by Canadian borrowers restrained new issues.
Canadian new issues dipped from $2.3 billion in 1983 to $1.1 billion in
1984. In both years, Canadians relied heavily on borrowings from the
Eurobond market, partly because U.S. rates were not much lower than
Canadian rates and partly because the Canadian dollar declined against
the U.S. dollar.
Trading in outstanding bonds, up sharply to $1.3 billion, was
marked by a substantial increase in purchases from the United Kingdom to
$4.7 billion. Purchases of British Treasury gilt securities, guaranteed
against foreign exchange risk by U.S. investment and brokerage houses,
and purchases of outstanding (seasoned) Eurobonds, probably accounted
for much of the increase. Net sales were registered against nearly all
other areas. Redemptions increased to $3.0 billion from $2.1 billion.
Net outflows of capital for U.S. direct investment abroad were $6.0
billion compared with $4.9 billion. An increase in reinvested earnings,
which resulted from the pickup in economic activity abroad, was partly
offset by a decrease in equity investments abroad and a small decrease
in intercompany debt inflows.
Several large-scale mergers and acquisitions dominated intercompany
account debt and related equity capital transactions, especially in the
second quarter. There were large borrowings through Netherlands
Antilles finance affiliates, with over one-half of the $3.5 billion
total associated with a single large merger-related transaction. In
another large transaction, a U.S. company borrowed to purchase a
petroleum company’s European mining and marketing operations. A
third transaction resulted in an equity inflow from a U.S.
company’s sale of most of its interests in Australian mining
properties to an Australian company and a partly offsetting outflow from
the U.S. company’s subsequent purchase of a share in the Australian
company. (Related transactions appear in the capital account for foreign
direct investment in the United States.)
Another factor affecting intercompany debt flows in the fourth
quarter was the cessation of inflows through finance affiliates in the
Netherlands Antilles. The cessation occurred because removal of U.S.
withholding taxes on interest payments to foreigners made it possible
for U.S. companies to borrow directly from foreign sources at the same
cost as through these finances affiliates. In the first three quarters,
intercompany debt inflows from these finance affiliates had been
substantial, averaging over $2.0 billion per quarter (table J). (U.S.
corporations’ direct borrowing is recorded in the portfolio capital
For the year, equity outflows, at $1.1 billion, were about
one-quarter of the annual outflows in 1983. Intercompany account debt
inflows dropped to $7.9 billion from $9.0 billion. Reinvested earnings
were $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 1984
compared with an $81.7 billion increase in 1983.
Foreign official assets in the United States increased $3.0
billion, following an increase of $5.3 billion. Dollar assets of
industrial countries increased only $0.2 billion compared with $10.2
billion. Small reductions in assets (outflows) of most Wesern European
countries in the first quarter were reversed early in the second, when
the dollar’s appreciation resumed. Outflows in the third quarter
were more than offset by inflows in the fourth, reflecting substantial
exchange market intervention by foreign monetary authorities. There was
a 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 last
half of the year.
Dollar assets of other countries increased $7.0 billion compared
with $3.8 billion. The increase was mainly concentrated in the assets
of several newly industrialized countries in the Far East. The dollar
assets of a few countries in Latin America increased much less, mainly
reflecting deposits of proceeds of IMF- and commercial bank-sponsored
financial packages in the United States.
Liabilities to foreigners and international financial institutions
reported by U.S. banks, excluding U.S. Treasury securities, increased
$27.6 billion, compared with $49.1 billion. In the first half of the
year, strong demand for funds from abroad was related to the U.S.
economic expansion and U.S. Treasury financing needs, and resulted in a
sharp rise in interest rates and further dollar appreciation. A
substantial part of these inflows represented proceeds of earlier
commercial paper borrowing by U.S. bank holding companies that were
deposited abroad and subsequently drawn upon by the U.S. parent bank.
Another factor contributing to the strong rise in liabilities was the
previously mentioned large-scale merger financing.
With the flattening of domestic loan demand at midyear, a large
decline in U.S. interest rates, and rapidly diminishing financing needs
for mergers, dollar inflows dropped rapidly in the second half of the
year. Also, asset preferences of foreign investors shifted when
attractive investment opportunities in U.S. Treasury securities became
available as a result of U.S. tax law changes and as long-term rates on
Treasury securities fell less rapidly than short-term rates on bank
Reflecting the flattening U.S. loan demand after midyear,
banks’ own liabilities to their own foreign offices increased $2.0
billion in 1984, compared with $25.6 billion increase in 1983. Partly
offsetting was a pickup in liabilities to unaffiliated foreign banks
(mainly foreign-owned banks) to an increase of $14.4 billion, compared
with an increase of $9.9 billion. These inflows remained relatively
strong, even toward yearend, despite the decline in U.S. interest rates.
Purchases of U.S. Treasury securities by private foreigners and
international financial institutions were a record $22.5 billion in
1984, nearly triple 1983 purchases. With interest rates on bonds
averaging more than 2.5 to 3.0 percentage points above yields on bills
and bank CD’s, purchases of bonds rose substantially in the first
three quarters. In the fourth quarter, purchases increased more,
following the previously mentioned changes in the U.S. tax law and the
clarification of registration and certification requirements. Some U.S.
investment firms repackaged Federal agency and U.S. Treasury securities
in the form of stripped interest coupons, which were sold separately as
zero-coupon securities in bearer form to foreigners. The U.S. Treasury
directly 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 of
borrowing), were marketed only abroad in special registered form, and
were not eligible for resale to U.S. residents for 90 days.
Due to large U.S. corporate bond issues overseas, net foreign
purchases of U.S. securities other than U.S. Treasury securities
increased 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, and
sold $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 well
as by businesses worldwide, resulted in record issues of Eurodollar and
other bonds estimated at $108 billion, up from $77 billion, in
international markets. In contrast, worldwide international bank
credits dropped to an estimated $52 billion from $60 billion.
An unprecedented volume of funds was raised by U.S. corporations in
overseas markets. In addition to $10.7 billion issued directly in the
Eurobond markets from the United States, U.S. corporations also tapped
the Eurobond market for $9.9 billion through their finance affiliates in
the Netherlands Antilles. The combined amount was triple the 1983
In the first half of the year, much of the borrowing was to finance
large-scale mergers and acquisitions either directly, or indirectly, by
replacing the short-term bank debt that had initially been used. In the
second half of the year, rapidly declining long-term rates and dollar
appreciation 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 the
year, when the stock market was essentially flat–in contrast to its
record breaking advance from mid-1982 to mid-1983–foreigners sold $1.8
billion 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 record
purchases 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 last
half of the year. Yields on U.S. bonds exceeded those available in
national markets in Germany, Japan, and United Kingdom by considerable
amounts. In addition, the dollar appreciated against all three
Net inflows of capital for foreign direct investment in the United
States increased to $21.2 billion from $11.3 billion. Equity and
intercompany account debt inflows were substantially higher than a year
ago. Record quarterly inflows occurred in the second quarter when
intercompany account debt inflows increased $3.6 billion to $4.4
billion. That quarter’s increase largely reflected a loan from a
British affiliate to a U.S. subsidiary to purchase by a tender offer the
remaining shares of a petroleum company. Also, equity capital inflows
increased $2.6 billion to $3.3 billion, largely because a foreign
company established a new U.S. holding company to acquire the U.S. and
foreign properties of a U.S. company (referred to in the section on U.S.
direct investment capital flows). For the year, intercompany account
debt inflows were $8.4 billion compared with $4.0 billion, and equity
inflows were $8.2 billion compared with $5.9 billion. Reinvested
earnings increased to $4.5 billion from $1.4 billion.
The statistical discrepancy (errors and omissions in reported
transactions) increased to an unrecorded net inflow of $30.0 billion
from $9.3 billion.