Net external position sees significant rise once again

Germany’s net external position stood at €1,771 billion at the end of 2017, thus amounting to around 54% of nominal gross domestic product. The German net external asset position rose by €169 billion year-on-year. This rise was fuelled by net capital exports (€280 billion) and primarily reflected the current account surplus of the previous year. The euro’s appreciation resulted in exceptionally strong exchange rate effects, meaning that valuation changes and other adjustments[1] had a significantly dampening effect overall (-€111 billion). Claims on non-residents were up on the year by 1.1% to €8,357 billion, while liabilities fell by around 1.1% to €6,585 billion. Stocks increased on both sides of the balance sheet as a result of cross-border transactions, while the strength of the euro, in particular, significantly reduced them.

Surplus in portfolio investment

In portfolio investment, the surplus increased further by €169 billion to €382 billion; a positive external balance was recorded here in 2015 for the first time since the mid-1980s. This growth in net external assets was driven by the buoyant acquisition of foreign securities by residents as well as by the sale of domestic securities by non-resident investors.

At the end of 2017, resident investors held foreign securities totalling €2,934 billion, up by €110 billion (3.9%) on the previous year. The bulk of this growth was attributable to purchases amounting to €105 billion. Non-transaction-related changes contributed only slightly to the increase in securities holdings (€5 billion). Positive valuation adjustments resulting from market price effects outweighed the dampening effect on valuations resulting from the strength of the euro. Every investment class except for short-term debt securities benefited from the purchases. This reflected, amongst other things, German investors’ keen interest in what were often higher-yielding foreign securities, given the low interest rate environment. Demand for foreign investment fund shares was especially pronounced. As positive market price effects and only moderate negative adjustments owing to the exchange rate were additionally identifiable here, holdings increased by €70 billion. Foreign shares amounted to €46 billion more at the end of 2017 than at the end of 2016 – a rise in value primarily attributable to favourable market price valuations – while the transaction-related changes resulting from the net purchase of these securities amounted to just €14 billion. Furthermore, residents purchased a considerable volume of long-term foreign debt securities (€47 billion). However, extensive negative valuation effects resulted in a decline in holdings in this asset class (-€5 billion) on the year, particularly on account of the euro’s strength. 

At €2,552 billion at the end of 2017, non-resident investors held around 2.2% fewer German securities in their portfolios than at the end of 2016. Sales and redemptions to the tune of €95 billion were counterbalanced by valuation gains totalling €32 billion, inter alia. The main driving force behind this development was long-term public sector debt securities, which were again offloaded in large volumes by foreign investors (€65 billion). The very low interest rates, which were even negative in many maturity segments, a drop in circulation of public sector bonds (redemptions exceeded gross sales), and, above all, asset sales to the Bundesbank, which purchased a considerable amount of domestic securities under the expanded asset purchase programme (APP), played a role here. The depletion of non-residents’ holdings of German long-term government bonds was exacerbated by negative valuation effects and other adjustments, meaning that they ultimately stood €110 billion below the prior-year value. Furthermore, foreign investors offloaded a large volume of short-term public debt securities (€21 billion).[2] In 2017, they showed little interest, in net terms, in domestically issued shares (-€1 billion); however, holdings of these securities rose strongly, mainly owing to favourable market price effects, and exceeded the previous year’s value by €58 billion. 

Further expansion in direct investment

Cross-border relations between enterprises continued to expand in 2017. German direct investment abroad was up on the year by a total of €58 billion (3.1%) to €1,926 billion. Germany’s transaction-related direct investment abroad (€112 billion), which is recorded using the financial account, was significantly dampened by non-transaction-related changes (€54 billion). Negative valuation effects resulting from exchange rate developments made the biggest impact here. German investors boosted their equity capital to affiliated enterprises abroad in particular. The stock of direct investment debt instruments also exceeded the previous year’s value. Non-resident enterprises, in turn, augmented their equity capital in German affiliated enterprises in 2017. Although intra-group lending was expanded to an even greater extent, negative valuation effects and other adjustments brought down the actual recorded increase. Overall, foreign direct investment in Germany reached a value of €1,380 billion at the end of 2017, exceeding the prior-year value by €52 billion (3.9%). Germany’s net external assets from direct investment stood at €546 billion at the end of 2017, and were thus only slightly up on the figure for the end of 2016 (+€6 billion). 

Other investment: surplus falls again

Other investment, comprising loans and trade credits (where these do not constitute direct investment) as well as currency and deposits, saw a drop of €12 billion in Germany’s positive net asset position, bringing it down to €691 billion. Claims on non-residents rose by 2.6% to €2,854 billion. The Bundesbank’s asset position grew by €157 billion, primarily because of an increase in TARGET2 balances in 2017. This also reflected the effects of the APP.[3] The assets of monetary financial institutions domiciled in Germany, by contrast, were around €82 billion lower than in the preceding year. Other financial corporations and the government sector also had lower claims on non-residents than at the end of 2016. By contrast, liabilities to non-residents rose by 4.0% to €2,163 billion. The main factor driving this rise was the Bundesbank’s higher liabilities to non-residents (+€80 billion) as foreign central banks and international financial institutions upped their deposits with the Bundesbank. 

Slight decline in reserve assets

The Bundesbank’s reserve assets amounted to around €167 billion at the end of 2017, and were therefore down on the previous year by around €9 billion. This decline mainly reflected negative valuation effects, which were chiefly due to the increased value of the euro.
 

Footnotes:

1. Other adjustments include write-downs on uncollectible credit claims, changes in sector classifications and changes in the functional category of a financing instrument, as well as statistical discrepancies between the international investment position and the balance of payments due to differing data sources, for example. Only the first and the last-cited factors had a bearing on the change in the net external position.
2. With the publication of the international investment position data for 2017, a methodical change is applied retroactively for the debt securities on the liabilities side back to the final quarter of 2015. While German debt securities held abroad have been cumulated from the balance of payments transaction data, stock data from the Bundesbank’s securities issues statistics are now used to determine non-residents’ holdings. Holdings of liabilities in this class of securities have consequently been higher since the fourth quarter of 2015. The new calculation method is in line with the ECB’s guidelines. It also offers the advantage of further approximating the results of the international investment position and those of the financial accounts.
3. See Deutsche Bundesbank, The impact of Eurosystem securities purchases on the TARGET2 balances, Monthly Report, March 2016, pp. 53-55 and Deutsche Bundesbank, The increase in Germany’s TARGET2 claims, Monthly Report, March 2017, pp. 30-31.