Oil and gold production and exports

Paramaribo, Suriname

November 7-9, 2012

Contents

1. Introduction ......................................................................................................................................... 4

4. Conclusion ......................................................................................................................................... 18

References .................................................................................................................................................. 19

Vulnerabilities in financial systems were at the centre of the financial crises in the 1990s and in 2007/08. Maturity and currency mismatches in the composition and size of assets and liabilities were prevalent and, as such, made the economy extremely vulnerable to sudden reversals of capital (Allen et al., 2002). In response to these problems, the so-called balance sheet approach was developed to examine the composition and size of liabilities and assets of financial institutions thoroughly (Toporowski & Cozzi, 2006). Mismatches in the composition and size of the assets and liabilities of companies and financial institutions were evident during the financial crisis in the Southeast Asian countries in 1997. The macroeconomic conditions of the Asian countries were relatively sound and there was no need for a devaluation for competitiveness or other macroeconomic reasons (Krugman, 1999). This balance-sheet approach considers the micro foundations of the economy in explaining the macroeconomic fragility (Prasetyantoko, 2006).

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2.International Investment position

Research on the causes of the financial crises produces a range of explanations. Allen et al. (2002) mention three generations of models in explaining financial crises. The first generation pointed to macroeconomic fundamentals, such as the government deficit and current account imbalances. The second generation of models resulted from the Mexican crisis in 1994-1995 and pointed to the liquidity mismatches, besides improper government policy responses and the case of self-fulfilling panic under investors. This notion of liquidity mismatches can be seen in the context of the balance sheet approach, through the assets and liabilities approach. The Asian crisis confirmed the balance sheet approach as it points to vulnerabilities in the balance sheet of financial institutions, which were evident after sudden outflows of capital. The third generation of models further elaborated on this approach and explained the relation between sudden capital outflows and financial crises.

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2.2 The IIP and the Balance of payments

The IIP is a statistical statement that shows at a given point in time the value and composition of: a)financial assets of residents of an economy that are claims on nonresidents and gold bullion held as reserve assets;
b)liabilities of residents of an economy to non-residents.

As such: NIIPt= NIIP t-1 + CAt, → NIIPt – NIIP t-1 = CAt,

This is the first channel, financial flows, through which the IIP changes.

Where :
A = Gross external assets
L = Gross external liabilities
KA = Value change of external assets
KL = Value change of external liabilities

Changes in the international investments position of countries that are fully integrated in the world economy and have well-developed financial sectors cannot be explained solely by their current account balances (Boonstra, 2006). Most industrial countries have built huge foreign assets and external liabilities resulting from globalization. Companies have invested oversees in new factories or by acquiring foreign companies, while investors have diversified their portfolios over currencies and countries (Boonstra, 2008).

Net international investment position
The stock of net foreign claims of Suriname on the rest of the world amounted to US$ 559 million at the end of 2011. As already mentioned, the net international investment position can be divided into four different channels, but in the case of Suriname the fourth channel, asset price changes, is not available. The breakdown of overall NIIP is as follows:

Vulnerabilities in the stocks of assets and liabilities
Allen et al. (2002) mentioned four types of risks, namely maturity and currency mismatches, capital structure imbalances and solvency risks. On an aggregate basis, the net external position is positive. Disaggregation into different institutional sectors points to different net external positions (see table 2).

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The monetary authorities and banks realized a comfortable net external position. Other sector, which consists of firms and households, proved to have a net liability external position (see table 3).

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accounted for less than 1% of total liabilities. This is negligible in terms of maturity mismatch risks. It follows that the net investment position of firms and households, although a net liability position, is considered stable and has no apparent underlying maturity risk. The assets and liabilities are both mostly denominated in US-dollar and, as such, changes in the exchange rate will have no effect, as there is no currency mismatch.

Source: Central Bank of Suriname

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Overall, the institutional sectors, whether on a disaggregated or an aggregated level, are currently not exposed to maturity or currency mismatch risks. The current stance of the composition and size of the external assets and liabilities partly reflects government policies towards financial transactions with non-residents. All financial transactions with regard to foreign direct investments, portfolio investments, and loans with non-residents are still subject to approval of

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References

Kwartaalschrift Economie, nummer 1.

Boonstra.W. (2008). National savings and the international investment position: what does the current account tells us? Zb.rad.Ekon.fak.Rij.vol 26, pg 9-40.

Lane, P. & Milesi-Ferretti, G.M. (2006). The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004, International Monetary Fund and CEPR.

Svavarsson, D. (2008). International investment position: market valuation and the effects of external changes, Monetary bulletin, 2008, 1. Economics Department, Central Bank of Iceland.