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Capital Flows and the Foreign-Exchange Reserve

The surplus on the current account of the balance of payments is estimated to be kr. 6 billion in 1997 and private capital imports kr. 38 billion. The foreign-exchange reserve increased by kr. 43 billion excluding value adjustments since the central government's repayments on foreign loans were kr. 1 billion, cf. Table 5. Portfolio investments were characterized by substantial securities transactions to and from abroad. Non-residents' net purchases of government and mortgage-credit bonds amounted to kr. 45 billion in 1997, against kr. 30 billion in 1996. However, at the same time

Table 5 Capital flows

residents' net purchases of foreign securities amounted to kr. 25 billion in 1997, compared to kr. 11 billion in 1996. Portfolio investments are specified in Table 31 of the Appendix of Tables.

At the beginning of the 1990s non-residents hedged part of the exchange-rate risk on purchase of krone-denominated bonds by e.g. raising loans in Danish kroner to finance their bond purchases. The foreignexchange market was therefore not affected by the entire net purchase. In recent years non-residents have also purchased krone-denominated bonds for considerable amounts, but without an equivalent increase in hedging activity, cf. Chart 16. As a result the net purchases have increased non-residents' demand for kroner, which is offset by a narrowing of the interestrate differential to abroad, a strengthening of the krone and net purchases of foreign exchange by the Nationalbank.

In recent years the Nationalbank has purchased and sold foreign exchange in order to dampen the day-to-day fluctuations in the krone rate, cf. Chart 17. In 1997 the Nationalbank's purchases and sales of foreign exchange were also designed to stabilize the krone very close to its central rate against the D-mark. The Nationalbank's foreign-exchange market operations entailed an increase in the foreign-exchange reserve in 1997 by kr. 45 billion including value adjustments to kr. 130 billion, cf. Chart 18.

In the autumn of 1997 the foreign-exchange reserve increased temporarily when the central government raised short-term foreign loans to ensure a positive balance on the central government's account with the Nationalbank. From time to time the strong fluctuations in the central government's payments make such borrowing necessary.

In January 1998 the foreign-exchange reserve increased as a consequence of the central government's sale of shares in Tele Danmark to abroad for kr. 21 billion. This increase is temporary, since during 1998 the proceeds from the sale will be used to reduce the central government's foreign debt. From this point the requirement of a positive balance on the central government's account with the Nationalbank will leave no scope to further reduce the foreign-exchange reserve via an isolated reduction of the central government's foreign debt.

When the Nationalbank purchases foreign exchange the banks' net position with the Nationalbank improves. The Nationalbank's foreign-exchange purchases over the last few years have gradually improved the banks' net position and since the spring of 1997 the banks' account with the Nationalbank has constantly shown a positive net balance, cf. Chart 19. The substantial day-to-day fluctuations in the banks' net position are related to the central government's receipts and disbursements. For the year as a whole the central government does not affect the overall liquidity, since the

central-government deficit (the gross financing requirement excluding redemption of foreign loans) is financed in full by the issue of kronedenominated government bonds.

The monetary-policy instruments are independent of the banks' net position with the Nationalbank. The monetary-policy instruments comprise the

following: overnight current-account deposits and weekly market operations whereby the banks can borrow via repurchase agreements or place funds by purchasing certificates of deposit.

Via the weekly repurchase agreements the banks are supplied with liquidity in return for government securities as collateral. These loans are repaid after 14 days and the collateral is returned to the banks. Simultaneously, the Nationalbank absorbs liquidity on a weekly basis by selling certificates of deposit to the banks. The maturity of the certificates of deposit is 14 days. In the weekly market operations the banks normally borrow/place funds to ensure that their current-account balances are large enough to cover fluctuations in the liquidity requirement during the following week. If large liquidity deficits or surpluses in the coming week are predicted due to very large central-government receipts or disbursements the Nationalbank will in its fine-tuning operations extraordinarily repurchase/sell certificates of deposit during the week.

With effect from May 1, 1997 the limits to the accrual of interest to the banks' current-account deposits were abolished so that the total deposit on each bank's current account accrues interest at the current-account rate. Under the previous system no interest was accrued on deposits which exceeded the limits. The limits were introduced in 1992 in order to stimulate the banks' interest in creating an effective money market. Today the market operates smoothly and the limits are no longer necessary.