The External Balance Sheet of the United Kingdom: Implications for Financial Stability?

Abstract

In 2000, UK gross external assets and liabilities grew by more than 20%, boosted particularly by international mergers and acquisitions and international banking activity. In net terms, UK external liabilities fell moderately but remained substantial, at about 13% of annual GDP. This fall was associated with changing nominal values of UK external assets: the currency denomination of UK external assets and liabilities means that, other things being equal, a lower exchange rate reduces UK net external liabilities via revaluation changes. As reported in last year's article in this annual series, the UK net liability position may be misleading: UK net external assets are probably underestimated because of the way foreign direct investment is calculated. Policy-makers in the international community have focused on identifying key tools that could be useful for monitoring and analysing external balance sheet vulnerabilities. The second section of this article looks at the extent to which the United Kingdom can compile and assess the IMF's set of key indicators of external vulnerability.