What Are Net Foreign Assets (NFA)?

Net foreign assets (NFA) determine whether a country is a creditor or debtor nation by measuring the difference in its external assets and liabilities. NFA refer to the value of overseas assets owned by a nation, minus the value of its domestic assets that are owned by foreigners, adjusted for changes in valuation and 澳洲幸运5官方开奖结果体彩网:exchange rates.

A nation's NFA position is also defined as the cumulative change in its 澳洲幸运5官方开奖结果体彩网:current account, which is the sum of the 澳洲幸运5官方开奖结果体彩网:balance of trade, net income over time, and net current transf🍒ers ove⛎r time.

Understanding Net Foreign Assets (NFA)

The NFA position indicates whether the nation is a net creditor or debtor to the rest of the world. A positive NFA balance means that it is a net lender, while a negative NFA balance shows that it is a 澳洲幸运5官方开奖结果体彩网:net borrower.

An alternative definition of “net foreign assets” from 澳洲幸运5官方开奖结果体彩网:the World Bank is that it is the sum of foreign assets held by monetary authorities and deposit money banks, less their foreign 澳洲幸运5官方开奖结果体彩网:liabilities.

Relating a nation’s NFA position to a cumulative change in its current account is conceptually easy to understand since an e💛ntity’s debt position at any point in time is the su💃m total of its past borrowing and lending activity. If an entity’s borrowings total $500, but it has loaned out $1,500, it is a net creditor in the amount of $1,000.

Likewise, if a nation runs a 澳洲幸运5官方开奖结果体彩网:current account deficit of, say, $10 billion, it has to borrow that amount from foreign sources to finance the 澳洲幸运5官方开奖结果体彩网:shortfall. In this case, borrowing $10 billion would incr𝓰ease its foreign liability and reduce its NFA position by that amount.

Valuations and Exchange Rates Effect on🌼 Net Foreign Assets (NFA)

In addition to the current account position, 澳洲幸运5官方开奖结果体彩网:valuation and exchange rate changes should be taken into account to get a true picture of the NFA position. For example, foreign governments hold trillions of dollars in U.S. 澳洲幸运5官方开奖结果体彩网:government bonds. If interest r✃ates rise and U.S. government bonds decline ꦉin price, this would have the effect of reducing the overall value of these nation's U.S. government bond holdings, and their NFA, too.

Exchange rate fluctuations can also have a significant effect on the NFA position. Appreciation of a nation’s currency against that of other nations will decrease the value of both foreign currency-denominated assets and liabilities, while depreciation will increase the value of these overseas assets and liabilities. Thus, if the nation is a net debtor, 澳洲幸运5官方开奖结果体彩网:currency depreciation will increase its foreign currency debt burden.

The NFA position itself can drive changes in exchange rates since chronic current account deficits can prove unsustainable over time. Currencies of nations with a significantly negative NFA position and growing current account deficits can come under attack from currency 澳洲幸运5官方开奖结果体彩网:speculators, who may seek to drive it lower.