The Netherlands richer thanks to better figures

At the end of 2011 too, the Netherlands was more than EUR 70 billion richer according to the market-value figures that DNB has estimated and published today for the first time on its website, in addition to the usual figures. According to the new statistics at the end of last year net foreign assets of the Netherlands amounted to almost EUR 300 billion.

How rich or poor a person is depends among other things on the measuring method used. The same holds true for a country. Each quarter, DNB makes an overview of Dutch foreign claims (assets) and liabilities. The resulting net foreign holdings also depend on the manner of measuring. For a most up-to-date and realistic picture, DNB looks through the eyes of the market, as prescribed by the IMF, but market values are not always available. How much, for instance, is a Canadian subsidiary of a Dutch company worth according to the market? This is unknown. The current practice for such a subsidiary, for lack of a better procedure, is to use the value entered in the books of the Dutch company. But the result is that the assets on the balance sheet of the Netherlands are underestimated. After all, the book value, for example, does not include the future profits to be realised in Canada, to which the market also assigns value. Conversely, foreign liabilities, i.e. direct investment by foreign companies in Dutch subsidiaries, are likewise underestimated.

Using both book and market values at the same time is not ideal for gaining a proper insight into Dutch net foreign holdings, also referred to as the net external assets. This may also be illustrated for individual companies such as Royal Dutch Shell. When holdings of foreign investors in this Dutch company are included at stock market value as Dutch liabilities, but the foreign subsidiaries at a (much) lower book value as assets, it is clear that the net foreign assets of the Netherlands are distorted. Other countries also experience this measuring problem. How the underestimations of subsidiaries work out on balance differs from country to country. It depends on the sums they represent. For the Netherlands, these are considerable. At year-end 2011, total outward equity holdings - in foreign subsidiaries - amounted to EUR 489 billion, inward equity holdings - in domestic subsidiaries - to EUR 271 billion. Such book values of subsidiaries are usually considerably below market value, sometimes even by tens of percents, as can be seen from the amounts by which the book values of their listed parent companies also lag behind the stock market value (market capitalisation). This particularly applies to assets (in terms of euros), which are the most substantial. As a result, Dutch net external assets are underestimated by several billions.
 
From now on, in addition to the usual book values of inward and outward direct investment, DNB will also be publishing estimates of the market values in order to provide a better insight. To this end, for each company listed in the Netherlands the stock market value and the book value (shareholders’ equity) will be compared. Differences will be attributed to the company units outside the Netherlands, the outward direct investment, in proportion to their assumed contribution to the company activity (as measured by the foreign contribution to profits or shareholders’ equity). Likewise, inward direct investment - by foreign companies in Dutch subsidiaries - is also converted from book value to market value. For this calculation, the shareholders’ equity of non-listed subsidiaries, i.e. their book value, will be assumed to be as much lower than the market value as the shareholders’ equity of listed companies in the Netherlands.
 
When outward and inward direct investment are converted to market value, Dutch net foreign assets turn out to be substantially higher. The higher the AEX, the greater on the whole the correction to Dutch net external assets (see the white bars in the right hand side of the Figure). In the period 2004-2011, the underestimation of Dutch net external assets in some quarters even approximated more than EUR 200 billion, more than a third of Dutch GDP. Stock market conditions played an important role in this respect. The more optimistic the investors, the greater the gap between market and book value. The better figures thus show that the Netherlands is richer than is generally assumed. Besides, net external assets after adjustment also show an upward trend, which better matches the large current account surpluses of the Netherlands. Reliable figures are all the more important, since the current account and external assets have come to play  a larger role in the excessive-deficit procedure and agreements made by European countries to better  monitor and prevent macro-economic imbalances.