Net Foreign Assets (NFA)

Net Foreign Assets (NFA)

Definition

Net foreign assets (NFA) measure the difference between a country’s external assets and its external liabilities:

NFA = Foreign assets owned by residents − Domestic assets owned by non‑residents

A positive NFA means the country is a net creditor to the rest of the world; a negative NFA means it is a net debtor.

How NFA relates to the current account

The change in a country’s NFA over time equals its current account balance plus valuation and exchange‑rate effects. Conceptually, NFA reflects the cumulative sum of past net lending or borrowing with the rest of the world.

• If a country runs a current account surplus, it is lending to the rest of the world and NFA increases.
• If it runs a current account deficit, it is borrowing from abroad and NFA decreases.

Example: If a country borrowed $500 but lent $1,500, its NFA would be +$1,000. If a country runs a $10 billion current account deficit, its NFA falls by $10 billion (ignoring valuation effects).

Valuation and exchange‑rate effects

NFA is affected not only by flows (the current account) but also by changes in asset prices and exchange rates:

• Valuation changes: Price declines in foreign assets (e.g., bond price drops when interest rates rise) reduce the market value of holdings and lower NFA.
• Exchange‑rate changes: Appreciation of the domestic currency reduces the domestic‑currency value of foreign‑currency‑denominated assets and liabilities; depreciation increases those values.
• For a net debtor, currency depreciation raises the domestic‑currency burden of foreign‑currency debt.
• For a net creditor, depreciation increases the domestic‑currency value of its foreign assets.

Because valuation effects can be large and sudden, they can materially alter a country’s NFA even if the current account flow is small.

Why NFA matters

• Indicator of external sustainability: Persistent negative NFA and rising current account deficits can signal vulnerability to external shocks.
• Exchange‑rate pressure: Large or worsening negative NFA can attract speculative pressure on a currency, potentially forcing adjustments.
• Policy guidance: NFA helps policymakers assess external balance, foreign exchange reserve adequacy, and the need for adjustment in saving, investment, or exchange‑rate policy.

Measurement caveats

• Valuation methods and market prices can cause volatility in reported NFA.
• Some assets are hard to value or may be omitted (e.g., unrecorded holdings, illiquid assets).
• Differences in data sources and accounting practices across countries can complicate comparisons.

Key takeaways

• NFA = foreign assets owned by residents − domestic assets owned by non‑residents; positive = net creditor, negative = net debtor.
• NFA changes with the current account (flows) and with valuation and exchange‑rate movements.
• Exchange‑rate depreciation raises the domestic‑currency value of foreign liabilities, worsening NFA for net debtors.
• Large negative NFA can signal external vulnerability and increase the risk of currency pressure.