## Online Annex 1.1. Forecasting Net International Investment Positions

## Source details

**Canonical URL:** [Online Annex 1.1. Forecasting Net International Investment Positions](https://www.imf.org/-/media/files/publications/esr/2023/english/ch1annex.pdf)

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- [Markdown version](/-/media/files/publications/esr/2023/english/ch1annex.pdf.md)
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### Methodology
- Framework: vector autoregression (VAR) to forecast a country’s net international investment position (NIIP) conditional on future values of relevant variables and allowing for uncertainty around these conditioning variables.
- Conceptual drivers: changes in NIIP mainly determined by financial returns and trade balances (Adler and Garcia-Macia 2018).
- Key modelling note: model assumes no structural breaks in the economic relationships over both the historical and the forecast horizon.

### VAR specification
- Variables included (seven): net exports, foreign assets, foreign liabilities (all relative to GDP), GDP growth, the nominal exchange rate, returns on foreign assets, returns on foreign liabilities.
- Reduced-form VAR (algebraic specification from source):
  y_t = 훼 + A_1 y_{t−1} + A_2 y_{t−2} + u_t
  - y_t is the vector of the variables listed above; α is a constant; u_t are the residuals.
  - Estimated coefficients A_1 and A_2 produce unconditional forecasts.
- Conditional forecasts methodology: follow Antolín-Díaz, Petrella, and Rubio-Ramírez (2021); rely on the April 2023 World Economic Outlook (WEO) forecasts of net exports, growth, the exchange rate, and returns on assets and liabilities.
- Data: annual data from 1979 to 2021 for Spain and the United Kingdom.
- Confidence bands: 68 percent confidence bands of conditional forecasts mostly fall within the 68 percent confidence bands of unconditional forecasts.

### Forecasting mechanics and interpretation
- Conditional forecasts obtained by having the VAR pin down a mix of future shocks (u_{T+1,T+h}) that produce the WEO projections while allowing for uncertainty; statistical properties of the shock mix derived from the distribution of historical data.
- Exchange rate convention: an increase in the nominal exchange rate (local currency per US dollar) corresponds to a depreciation.

### United Kingdom: key projections and drivers
- NIIP path (exact figures from source):
  - 2022 NIIP: –17 percent of GDP
  - 2025 NIIP: –10 percent of GDP
  - 2028 NIIP: –13 percent of GDP (remains above its 2022 level)
- Main drivers cited:
  - Slight increase in the forecasted return on assets compared with the return on liabilities.
  - Forecasted depreciation of the pound in 2023 that slowly reverts thereafter.
  - Persistent increase in net exports.
- Uncertainty and comparative forecasts:
  - Considerable uncertainty places the 2028 NIIP in the range of –25 to –5 percent of GDP in 2028.
  - WEO-projected NIIP values for 2028 (about –20 percent) fall in the lower half of the 68 percent interval of the conditional VAR forecast.

### Spain: key projections and drivers
- NIIP path (exact figures from source):
  - 2022 NIIP: –63 percent of GDP
  - 2028 NIIP: about –50 percent of GDP
- Comparative WEO projection:
  - WEO-projected NIIP values of –40 percent of GDP in 2028 (noted as somewhat higher than, but not statistically different from, the VAR forecast).
- Dynamics over forecast horizon:
  - NIIP deteriorates initially in 2023, then increases persistently through 2028.
- Main drivers cited:
  - Trade channel: forecasted value of the euro persistently lower compared with the value during the last 10 years, resulting in persistent positive net exports over the forecast horizon.
  - Positive growth over the full forecast horizon increases the NIIP via the effect on its denominator, GDP.

### Figures and notes (as presented)
- Figures illustrate historical values, conditional forecasts with 68 percent confidence bands, WEO forecasts, and unconditional forecasts with confidence bands for:
  - Net Exports; GDP Growth; Return on Assets; Return on Liabilities; Nominal Exchange Rate (local currency to US dollar); Net International Investment Position.
- Figure notes emphasize:
  - Solid black lines show historical values.
  - Red solid line shows the conditional forecast for the NIIP with 68 percent confidence bands (red shaded area).
  - Orange dashed line shows the IMF World Economic Outlook (WEO) forecast for the NIIP.
  - Blue lines show the WEO forecasts for the other variables with confidence bands (blue shaded area).
  - Grey dashed lines show unconditional forecasts with confidence bands.

*Prepared by Lukas Boer (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/esr/2023/english/ch1annex.pdf_