Net Foreign Assets (NFA)
The difference between a country’s total foreign assets and the total assets owned by foreigners within that country.
What are Net Foreign Assets (NFA)?
Countries must regulate the money flow and business transactions within their vicinity, as it connects with economic activity in each specific region. Likewise, the regulation of money flowing in and out of a country determines if a country is a net creditor or net debtor.
Net Foreign Assets (NFA) is the difference between a country’s total foreign assets and the total assets owned by foreigners within that country.
For example, if the US owns 1,00,000 assets abroad and foreigners residing within the US own 500,000 assets, you would take the difference between the assets owned abroad and those owned by the foreigners to achieve the total NFA.
A few examples that can be used in a transaction as part of the net foreign assets include stocks, bonds, and real estate.
To help countries manage the in and outflow of their money, the NFA can help regulate how much of their assets are being dealt with abroad while also accounting for their foreign assets.
Moreover, the net foreign assets must incorporate the balance of payments. As the IMF Data explains, the balance of payments is a balance statement made to regulate the flow of money coming in and out of the country.
Later in this article, the different subcategories of the balance of payments will be discussed in further detail.
Changes in the NFA Calculation
For years, the calculation above provided a general and broad understanding of a country’s net foreign assets. However, the formula has been slightly revised to consider the changing value of currencies worldwide.
To calculate a country's NFA, you can take the current account balance and the change in the value of the assets or liabilities.
Net Foreign Assets = Current Account Balance + / - Current Value of Assets/Liabilities
The current account balance is the total money held in the account, the money spent and received from overseas transactions.
In the revised formula, you can consider how the value of assets is constantly changing, and there is no "single" value for each asset. Similarly, a shifting economy provides credibility that there is traction and activity from its consumers and suppliers.
In the case of the NFA, asset values represent each country's current market supply and demand. As a fluctuating indicator, the supply and demand of any particular asset will eventually affect its worth.
For example, during the holiday season, consumer spending is at its highest. Individuals are highly inclined to shop for gifts and book travel vacations. The increased spending habits for such goods and services will provide an inlook into a shift in supply and demand needs.
Learn more on how to manage your finances and understand how to create financial statements and balance sheets.
Other factors included in Net Foreign Assets
Also included in determining the net foreign assets of a country are the subcategories that fall under the balance of payments:
- Transaction type
- Classification of payments
- Account Group
As stated, net foreign assets deal with international transactions and payments made to or from outside countries. For example, a merchandise import from Asia to the US would be considered an overseas transaction and vice versa.
Classification of payments implies whether a country debited or credited a payment. Take the first example of merchandise imports. An import from Asia to the US is debited to the US account because it is a purchase expense sent to the country.
A merchandise export leaving the US to Asia is credited to the US account as it is a payment made by Asia to the US for its goods. The forms of payment also help determine whether the account type is a current account or a capital and financial account.
Additionally, valuation plays a major role in each country's accounting aspects of net foreign assets. According to Accounting Tools, valuations determine the net balance of the assets or liabilities. Typically, the accounting methodology is accrual based.
On top of the accounting aspect, exchange rates are prevalent in calculating the net foreign asset.
As Britannica explains, the value of exchange rates is affected by the supply and demand of overseas purchasing, commonly known as floating exchange rates.
NFA Country comparisons
For reference, the World Bank holds globally used information on the net foreign assets of each country. Although only some countries have reported their current or changing NFA, the World Bank contains the financial run-down for countries worldwide.
To gain some insight as to where the countries stand, let’s take a closer look. First, the NFA hit an all-time low of -480 billion dollars globally. Since then, the values have gradually risen out of debt.
Within the US, the NFA has been valued at a little over 288 billion dollars, as recorded in 2020. Again, Iran is leading with the highest NFA, valued at almost 2.5 billion as of 2016. Conversely, Liberia ranks the lowest values recorded, at 0.09 billion in 2018.
For a more visual context, the World Bank also lays out a map that easily divides the NFA values for each country that has provided its data. Then, through careful map shading, viewers can get an overall view of where each country stands compared to others.
Also, remember that the revised calculation and constantly changing values of net foreign assets may or may not be representative of today’s current asset holdings. The data compared is the most up-to-date information posted.
Summary
In the overview, each country can calculate the number of assets owned by foreigners owned to gauge the total net foreign assets in the region.
An important consideration in the calculation is the changing value of assets. The supply and demand of specific products or services can shift, especially in a growing economy.
In determining the changing values of assets, valuation and exchange rates are commonly used in accounting and economic influence.
Additional factors that influence the value of the NFA are the different types of balance of payments.
International transactions dealing with the purchasing and selling of assets abroad. As the main form of transaction, NFA regulates international business between countries to determine its overall worth.
Whether the trading business is bought or sold, categorizing each payment helps establish if it is credited or debited.
Payment identification determines the financial account the involved countries hold. As stated earlier, the two main financial accounts are current accounts and capital and financial accounts.
Lastly, to understand where the world stands with its foreign assets and each country, the World Bank is a familiar source that offers a wide array of data.
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