What are Net Foreign Assets (NFA)?
Net foreign assets (NFA) determines whether a country is a creditor or debtor nation by measuring the difference in its external assets and liabilities. Net foreign assets (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 exchange rates.
- Net foreign assets (NFA) determines whether a country is a creditor or debtor nation by measuring the difference in its external assets and liabilities.
- A nation's net foreign assets (NFA) position is also defined as the cumulative change in its current account, which is the sum of the balance of trade, net income over time, and net current transfers over time.
- Net foreign asset (NFA) metric can be impacted by valuation and exchange rate changes.
Understanding Net Foreign Assets (NFA)
A nation's net foreign assets (NFA) position is also defined as the cumulative change in its current account, which is the sum of the balance of trade, net income over time, and net current transfers over time. The net foreign assets 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 net borrower.
Relating a nation’s NFA position to its cumulative change in its current account is conceptually easy to understand, since an entity’s debt position at any point in time is the sum 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 current account deficit of say $10 billion, it has to borrow that amount from foreign sources to finance the shortfall. In this case, borrowing $10 billion would increase its foreign liability and reduce its net foreign asset position by that amount.
Valuations and Exchange Rates Effect on Net Foreign Assets
In addition to the current account position, 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. government bonds. If interest rates rise and U.S. government bonds decline in price, this would have the effect of reducing the overall value of these nation's U.S. government bond holdings, and therefore of their net foreign assets.
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, 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 speculators who may seek to drive it lower.