CFA CFA General How current account deficit increases foreign ownership

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How current account deficit increases foreign ownership

  • This topic has 3 replies, 3 voices, and was last updated 3w by Zee Tan.
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    • SbS
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      DM(developed market) country running CAD(current account deficit) with EM(emerging market) country would build up DM country assets held by EM.

      Please explain this statement.

    • Zee Tan
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      If a country runs a current account deficit, it means that the country is importing more than it is exporting. There will then a surplus on the financial / capital account, increasing foreign claim on the country’s assets.

      For example, a current account deficit could be financed by foreign multinational investment or asset purchases, so in your example, there will be a build-up of the developed market’s country assets held by the emerging market.

      This is exemplified in real-life by countries such as the United States and United Kingdom, which both run current account deficits.

    • gontata
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      Related question – does that mean it’s OK for a country to continuously run a current account deficit?

    • Zee Tan
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      Although current account surpluses tend to be reported as “good” or “healthy”, while deficits are often regarded as “bad”, a current account deficit itself is neither good nor bad.

      Current account also refers to the amount of capital flowing in and out to finance government and business spending.

      • Current account surplus = exporting capital, net lender
      • Current account deficit = importing capital, net borrower

      So whether a current account deficit is good or bad depends on what’s happening to the money you’re borrowing. If you’re investing the money that has a higher rate of return than the interest you’re paying, then you’re fine.

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