The Dutch current account surplus in 2013 came to 10.2% of gross domestic product (GDP). At over 3.3%, interest income from abroad constitutes a major item on the current account. This interest income can be calculated in different ways, which has important consequences for the current account balance.
Different methods, different outcomes
For the sake of international comparability, all countries are required to adhere to the IMF guidelines when drawing up their balance of payments. These prescribe the debtor approach method for determining interest income and expenditure, which determines interest flows based on the yield to maturity at issuance. This generally equals the coupon rate and does not change during the term to maturity. If all countries were to use this approach, all incoming and outgoing interest flows would balance out at zero. This is in line with one of the founding principles of balance-of-payments statistics, which is an important reason for statisticians to opt for this method. A drawback of this method is that the interest income recorded in this manner is not in line with investment practice.
The acquisition approach is a method that is more consistent with investment practice. It calculates interest income based on the yield to maturity at the moment of acquisition. For the calculation of interest expenditure, the yield to maturity at issue is still leading. An important drawback of this method is that worldwide interest flows do not add up to zero, as the interest expenditure of the issuer does not change, while interest income on the other hand does. However, because the acquisition approach incorporates possible price gains in the yield to maturity, this method does form a better match with investment practice.
Interest income under the acquisition approach may differ widely from that based on the debtor approach. This is clear from Chart 1, which shows interest income based on the two methods.
Chart 1: Interest income on Dutch and German government bonds