Summary n°1 — GRETA ARSEGO

The Accounting Perspective of a Country

1.1 Financial statements of a country

Objective: find an agent’s solvency.
For a company it is rather easy because it’s published, but for individuals or
countries it’s more complex.
We should proceed just as the country was a company, asking these questions:
How much does the agent make?
How much does the agent spend?
How much does the agent own?
How much does the agent owe?
The first two in the income statement, the others in the balance sheet.

1.2 Balance sheet of a country

A country has a list of assets:
a. natural resources
b. physical capital
c. labor
d. technological knowledge
e. institutional infrastructures
f. national external assets
Liabilities:
a. national external liabilities
The amount of A+L=National wealth

Are Resource-Rich Countries Rich?

generally ys, but let’s not confuse it. If in the case of Venezuela the government
was better, then the country could be extremely rich because of great resources
of oil, but the institutional infrastructures are very damaged. So yes, they could
but not always. Also the case of many African countries.

1.3. The Income Account of a Country

GDP is not the same as GNP.
GDP considers the income originating from companies, individuals within the
borders, the second considers what the country makes even internationally as
long as the company abroad has its residency in the country.
The income is part of the GDP of the country where the economic activity that
generates it takes place, whoever owns the assets that generate it.
The difference between the two is called NFI, net foreign income.

Net disposable income is a more general indicator, namely the total income of
the country. Includes the net foreign transfers.
We can write GDP as sum of Consumption, Investment and Government
spending and Net exports
GDP=C+I+G+NX
Therefore, NDI = GNP + NFT
= GDP + NFI + NFT
= C + G + I + NX + NFI + NFT
YOU CAN LOOK AT THE GDP FROM THE POINT OF VIEW OF SPENDING OR
PRODUCTION

1.4. The Balance of Payments of a Country

External income and flows are registered in the Balance of Payments, that
contains CA (NX+NFI+NFT) and FA (position of credit or debit in the rest of the
world), current and financial assets.
CA can be negative→ deficit; positive→ surplus
FA negative→ financial outflow if country lends; positive→ financial inflow if
country borrows)
CA is the income-spending gap of the country: a CA deficit in a given period just
means that a country is spending more than its disposable income of the period.
Similarly, a CA surplus indicates that a country spends less than its disposable
income of the period.
CA is the difference between income and spendings. If it's positive it’s spending
less, if it's negative it's spending more than the income. Savings are defined as
income minus spending in consumption and rearrange the above identity to
make them visible as follows NDI – (C + G) – I = CA Or S – I = CA

→ CA = saving-investment gap

1.5. Current Account, External Debt and Country Solvency

Solvency is determined by the ability to pay debt obligations. explosive
debt/income ratio may cause insolvency. Per se, current account deficits
deteriorate the external debt position of a country, pushing its debt to GDP ratio
up. However, that can be offset by GDP growth, leading to debt to GDP ratio
stability. Peru example.

Only focusing on the external debt to GDP evolution isn’t enough for country
solvency analysis. Its sovereign nature implies that its decision to default
depends not only on its ability to service debt, but also on its willingness to do it,
which itself may depend on political and social factors.

So to help understand the whole picture, there are additional information like
the answers to these questions:
1. What is the recent evolution of the external debt to GDP ratio? →debt
stability based on recent past trends
2. What is the country borrowing for, consumption or investment?
→prospects for debt stability based on the expected returns associated with the
use of the borrowed resources.
3. Who are the main lenders? → willingness of borrowers to repay even if
economic difficulties of the country