How current account deficit increases foreign ownership

Question

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 · Answer

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.

Zee Tan · Answer

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.