Non-final working translation

A recent study shows that, in the balance of payments statistics, the German current account surplus would be around half a percentage point lower in relation to gross domestic product (GDP) if reinvested earnings for portfolio investment were recorded in the same way as for direct investment.[1] In line with international conventions, the official balance of payments statistics distinguish between cross-border investment in equity interests based on the investor’s ownership interest after the investment has been made, with shares of below 10% allocated to portfolio investment and shares of 10% or more recorded under direct investment. Where portfolio investment is concerned, reinvested earnings are not attributed to the investor’s income but rather to the enterprise’s savings. When it comes to direct investment, by contrast, they are seen as income and reinvestment on the part of the investor. If, regardless of the 10% threshold, reinvested earnings were to be classified as the investor’s savings and included in investment income, the model calculations suggest this would have lowered Germany’s current account surplus by €11.5 billion per year on average in the period from 2012 to 2020.

Corporate savings make a considerable contribution to national savings in Germany. Large, listed enterprises, in particular, are often at least partially owned by foreign investors.[2] In relation to GDP, Germany’s current account surplus would come to half a percentage point less if the corporate savings achieved were to be allocated proportionally to all owners. However, the surplus would have exceeded the threshold set by the European Commission’s Macroeconomic Imbalance Procedure (MIP) scoreboard every year since 2013, regardless of the calculation method used.

1 Large German current account surpluses

Germany has consistently posted current account surpluses since the start of the millennium. The highest figure to date was recorded in 2018, at €289 billion, or over 8% of Germany’s GDP. The surplus has fallen significantly since then, coming in at €249 billion or 5.9% of GDP in 2023. It dipped to 4.4% for a while in 2022 off the back of various temporary factors, such as the asymmetric response of imports and exports in the wake of the coronavirus pandemic or worsening terms of trade in response to the significant rise in energy prices following Russia’s war of aggression against Ukraine. These temporary factors subsided again in 2023, and Germany’s current account has now resumed its longer-term trend.

The degree to which the size of Germany’s current account balance is deemed appropriate is the subject of controversial international debate. For example, in its external sector report for 2024, the International Monetary Fund (IMF) once again noted that Germany’s current account balance could not be explained by the fundamentals.[3] The EU goes one step further, suggesting there may be a macroeconomic imbalance behind the surplus. It has thus regularly been calling for corrective action within the context of its MIP since 2013.[4] The Bundesbank has always emphasised that the balance primarily stems from private, market economy-based transactions over which the government has no direct influence and that the current account balance is therefore not an independent economic target variable in terms of German economic policy.[5]

2 Recording reinvested earnings in the current account

The study presented here examines how one component of the current account balance is calculated. It starts with the statistical preparation of this item of the balance of payments and explores aspects that precede the political considerations relating to the overall balance. The technical, statistical factors that determine the figure reported for the current account balance include in particular international conventions that specify how specific transactions are to be recorded in the balance of payments. The current accounting rules can be found in the sixth edition of the Balance of Payments Manual (BPM6), published by the IMF.[6]

The conceptual distinction made between direct investment and portfolio investment has a major impact on how retained earnings are recorded. BPM6 differentiates between firms that are controlled to a large extent by a single foreign owners and firms whose shares are in free float abroad – i.e. whose equity capital is widely dispersed among foreign investors. In the case of the latter, it is assumed that individual investors do not have any direct influence on corporate decisions. As a result, it always depends on who ultimately has the power to decide whether earnings should be distributed or invested.[7]

Retained and reinvested earnings on portfolio investment are not considered cross-border investment income from a statistical perspective. Retained earnings of a domestic direct investment enterprise classified as a subsidiary of a foreign direct investor are allocated to the investment income of this (foreign) investor. These retained earnings are recorded as reinvestment in the financial account. If the foreign shares are held in free float, however, the firm’s local management decides on the appropriation of profits. The balance of payments then only captures the distributed profit as cross-border investment income, while retained and reinvested earnings do not appear.[8]

The different methods of recording retained earnings for direct investment and portfolio investment may have an impact on the reported current account balance. Retained earnings are equivalent to corporate savings and have become increasingly important.[9] This may have an impact on the German current account balance because equity investments in the portfolio segment account for a larger share of Germany’s foreign liabilities than of its foreign assets. In turn, direct investment has a higher weighting on the assets side of the German international investment position than on the liabilities side. Including retained earnings as investment income in portfolio investment would therefore be expected to increase expenditure more strongly than receipts. This means that the investment income balance posted, and thus the current account balance, probably tend to be lower than in the calculation based on international standards.

Share of equities in Germany’s total foreign assets and foreign liabilities

Allocating firms’ retained earnings in free float]

The biggest challenge in calculating “modified investment income” lies in identifying the ownership of firms in free float and linking this ownership to the profits made by that firm. In its 2018 External Sector Report, the IMF itself drew attention to the fact that reinvested earnings are recorded differently in direct investment and portfolio investment. In a Technical Supplement, it calculated modified current account ratios which would result if retained earnings were allocated to the respective shareholders in portfolio investment as well.[1] Owing to a lack of firm-specific data, the IMF, like other studies on this topic, uses average, country-specific ratios on the retention of company profits and combines them with balance-of-payments data on primary income.[2] This method can be used to roughly estimate the share of the retained corporate earnings held by foreign portfolio investors.

The study presented here draws on firm-specific data on the ownership structures, yields and dividends of German firms in which non-resident investors hold an equity interest. This method is likely to provide more accurate estimates of the significance the treatment of retained earnings dependent on ownership has on the reported current account balance. Data on profits and dividends are taken from the commercial database Orbis by Bureau van Dijk. Since Orbis has no information on dividend payments for financial corporations, these data are taken from data provider Bloomberg. In 2020, the Orbis database covered around 80% of all listed German firms. As the database tends to cover larger firms, it provides a pretty good picture of the entire universe of companies listed on stock exchanges. The data are thus likely to include most of the recognisable cross-border profits of German firms.

Foreign equity interests in the German firms in question remained relatively constant between 2012 and 2020, hovering at around 59% on average. The balance sheet data on German firms’ dividends and profits are combined with information on the ownership structure. The Bundesbank’s “SHS-Base plus” statistics contain entries on foreign participating interests in German firms. All in all, data for the years from 2012 to 2020 were available for the study.

Share of foreign equity interests in German traded shares

The amount of retained earnings abroad that can be attributed to German portfolio investors can only be approximated. There are no uniform, comprehensive statistics on German portfolio ownership in individual foreign firms. This means that no data are available on the extent of German portfolio investors’ participation in a country’s individual firms. A possible approximation can be made using information on the total dividends flowing to German investors in securities from country \(i\) in year \(t\). Germany’s current account records these payments. The level of reinvested earnings is calculated from the rise in a firm’s equity that cannot be attributed to a capital increase from external financing. By aggregating this value across all firms, it is possible to estimate the country-specific ratio of reinvested earnings to dividends paid out. If this ratio is multiplied by German dividend income from country \(i\), the product can be used as an approximation value for the retained earnings of German investors in country \(i\) and year \(t\).[3] This assumes that the share of German portfolio investors in total retained earnings in a partner country corresponds to their share of the dividends that firms in this country pay out.

$$GR_{i,t}=\frac{\sum_{j}R_{j,i,t}}{\sum_{j}D_{j,i,t}}GD_{i,t}$$

Where \(GR_{i,t}\) = retained (reinvested) earnings in country \(i\) attributable to German shareholders; \(R_{j,i,t}\) = retained (reinvested) earnings of firm \(j\) in country \(i\) in year \(t\); \(D_{j,i,t}\)= distributed profits of firm \(j\) in country \(i\) in year \(t\); \(GD_{i,t}\) = German dividend information from country \(i\) in year \(t\).

The approximation value for corporate savings accrued to German investors should be interpreted with caution. If, for example, German portfolio investors invest primarily in firms with a low ratio of retained earnings to distributed profits, i.e. a high distribution ratio, the approximation value would be distorted upwards (and vice versa).[4]

The ratio of retained earnings to distributed profits is quite similar in most of the countries in question, including Germany, with the longer-term average at just above 1. The study defines the number of foreign partner countries taken into consideration such that, overall, it covers at least 95% of the foreign dividends of German securities investors each year from 2012 to 2020. This means that a total of 38 target countries are included in the study. Data provider Refinitiv Eikon provides information on the dividends and retained earnings of foreign firms. The ratio of retained earnings to dividends paid out is 1.06 based on the unweighted average from 2012 to 2020 and of the 38 countries. The corresponding figure for Germany is 1.07. This difference is negligible, especially in view of the existing estimation uncertainty.

Cross-border portfolio investment: attributable retained earnings

See International Monetary Fund (2018). In an update to the 2018 External Sector Report, it wrote: “While for direct investment equity, both paid out dividends and retained earnings are recorded in the current account income balance, for portfolio equity only paid out dividends are recorded. Consequently, retained earnings are reflected in IIP valuation changes only. This treatment is consistent with the BPM6 notion that retained earnings can be considered part of a formal agreement for remuneration on investment (and, hence, income) for the case of foreign direct investment equity (where a deliberate decision to retain earnings can be presumed) but not for portfolio equity. From an economic perspective, however, retained earnings can be considered income in both cases.”, International Monetary Fund (2019), p. 32.
See Adler et al. (2018) or Fischer et al. (2019).
Orbis provides the available firm-level data. They are based on the annual financial statements of non-resident enterprises. These show provisions for planned dividends, which are only paid out the following year. It is only then that they are reported as investment income in the current account. The study therefore uses the dividend distributions announced in the annual reports of the previous year. These do not, however, necessarily reflect the subsequent, actual distributions.
To approximate any potential measurement biases, Goldbach et al. (2024) also calculated the share of retained earnings in German attributable to non-residents using the formula outlined here (“macro” approach) and compared it with the results of the aforementioned study based on individual firm-level data (“micro” approach). The comparison shows that the macro approach tends to overstate the allocation of retained earnings to foreign portfolio investors (by around 10% on average). From this, it can be concluded that the haircut calculated for the German current account balance is, if anything, too low. The deduction would be larger if the retained earnings of non-resident firms attributable to German portfolio investors were calculated using the micro approach.

If retained earnings in the area of portfolio investment were to be recorded in the balance of payments as investment income, the current account balance reported would be lower than in the official statistics in all years under review. In the alternative method of calculating the balance, the largest difference in the German current account surplus to date would have been in 2017, at €23.5 billion. The smallest downward revision would have been in 2020 as a result of the coronavirus pandemic, when enterprises’ earnings and the associated savings were unusually low, meaning that the adjustment was also minor. Between 2012 and 2020, the potential (always negative) adjustment amounted to €11.5 billion or around 5% of Germany’s current account surplus on average per year.

In the economic policy debate, the German current account ratio is regularly a key topic in terms of the current account balance as a percentage of GDP. The European Commission’s scoreboard sets a threshold value of 4% here which, if exceeded, suggests that a closer analysis of the causes may be advisable. With the adjustments outlined here, Germany’s current account ratio would have been just under half a percentage point lower each year on average over the period from 2012 to 2020 than in the official calculation. However, it would have exceeded the threshold value defined by the European Commission’s scoreboard every year since 2013, regardless of the calculation method used.

Germany’s current account in relation to gross domestic product

3 List of references

Adler, G., D. Garcia-Macia and S. Krogstrup (2018), The measurement of external accounts, IMF Working Paper 19/132.

Chen, P., L. Karabarbounis and B. Neiman (2017), The global rise of corporate saving, Journal of Monetary Economics 89, pp. 1-19.

Deutsche Bundesbank (2014), Ownership structure in the German equity market: general trends and changes in the financial crisis, Monthly Report, September 2014, pp. 19-32.

European Union, Macroeconomic Imbalance Procedures, In-depth reviews.

Fischer, A.M., H. Groeger, P. Sauré and P. Yesin (2019), Current account adjustment and retained earnings, Journal of International Money and Finance 94, pp. 246-259.

Goldbach, S., P. Harms, A. Jochem, V. Nitsch and A. Weichenrieder (2024), Retained Earnings, Foreign Portfolio Ownership, and the German Current Account: A Firm-Level Approach, German Economic Review, Vol. 25 (2), pp. 127-145.

International Monetary Fund (2024), External Sector Report – Imbalances Receding, Washington D.C.

International Monetary Fund (2019), The External Balance Assessment Methodology 2018 Update, IMF Working Paper 19/65.

International Monetary Fund (2018), External Sector Report – Refinements to the External Balance Assessment Methodology – Technical Supplement, Washington D.C.

International Monetary Fund (2013), Sixth edition of the IMF's balance of payments and international investment position manual (BPM6), Washington D.C.

This article is based on a research paper by Goldbach et al. (2024).
See Deutsche Bundesbank (2014).
See International Monetary Fund (2024).
See European Union.
At the same time, the Bundesbank agrees with the IMF and the European Commission that it would make sense to lower certain barriers to investment in Germany and speed up bureaucratic procedures. However, these measures are not being suggested because of their impact on the current account balance, but because they make sense from an economic perspective – by helping to increase potential output, for example.
See International Monetary Fund (2013).
The criterion for distinguishing between them is an equity investment threshold of 10%: A stake of 10% or more is considered direct investment, and a stake of less than 10% is considered portfolio investment. Separate allocation and the aforementioned holding thresholds will be retained in the next version of the IMF's balance of payments manual (BPM7).
The retained profits of mutual funds are also allocated to the holders of mutual fund shares. In this respect, they are equivalent to direct investment.
See Chen et al. (2017).

Monthly Report – October 2024 Vol. 76 No 10

Monthly Report – October 2024 Vol. 76 No 10