## contryassessments ## Source details **Canonical URL:** [contryassessments](https://www.imf.org/-/media/files/publications/esr/2018/contryassessments.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2018/contryassessments.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2018/contryassessments.pdf.json) --- ### External sector assessment methodology and data - EBA models refined to better capture: - fundamentals: demographics, institutions and potential current account measurement biases; - macroeconomic policies: foreign exchange intervention and credit excesses; - other structural features affecting current account dynamics. - Full description of refinements in the 2018 ESR Technical Supplement. - Assessments combine model estimates and staff judgment; estimates are presented in ranges to reflect uncertainty. - External assessments based on data and IMF staff projections as of June 22, 2018. - External indicators discussed: the current account, the real effective exchange rate, capital and financial account flows and measures, foreign exchange and reserves, and the foreign asset or liability position. - Note: 2018 REERs estimated based on data available as of June 22, 2018. ### Cross-cutting implications and risks - Reliance on short-term, volatile portfolio flows raises vulnerability to sudden reversals (notably Argentina). - Composition of external liabilities matters: higher shares of portfolio and other investments increase rollover and FX risks. - Flexible exchange rates have acted as shock absorbers for several economies; reserve buffers remain important for crisis insurance. - Recurring policy recommendations across economies: fiscal consolidation and structural reforms to address CA gaps and improve competitiveness. ### Representative country findings, projections, and policy recommendations - Argentina - Overall: external position weaker than implied by medium-term fundamentals and desirable policies. - NIIP end-2017: 3.5 percent of GDP. - Total external liabilities: US$312 billion; portfolio and other investments: US$231 billion (about 75 percent); general government and central bank liabilities: US$163 billion. - Staff medium-term NIIP projection: -15 percent of GDP. - CA (2017): - Actual CA: -4.8 - Cycl. Adj. CA: -5.0 - EBA CA Norm: -1.7 - EBA CA Gap: -3.3 - Staff Adj.: 0.0 - Staff CA Gap: -3.3 - REER 2017 gap: between 17.5 and 32.5 percent above level implied by fundamentals and desirable policies; REER through May 2018 depreciated by 22 percent relative to 2017 average. - FX intervention and reserves: - BCRA sold around USD 10.2 billion in the spot market between March 3 and May 15 and accumulated USD 2.3 billion in the forward market (as of June 4). - Reserves as of June 8: USD 49.6 billion. - Reserve coverage at end-May 2018: around 76 percent of the ARA metric. - Policy recommendations: - Stronger fiscal consolidation announced for 2018-20 to reduce CA deficit. - Strengthen inflation targeting framework to lower nominal interest rates over medium term. - Progress on supply-side reforms to raise productivity, attract FDI, and reduce REER overvaluation. - Australia - Overall: external position in 2017 broadly consistent with medium-term fundamentals and desirable policies; AUD somewhat overvalued. - NIIP end-2017: -55 percent of GDP; improved in 2017 by 3 percent of GDP relative to 2016. - CA (2017): - Actual CA: -2.5 - Cycl. Adj. CA: -2.4 - EBA CA Norm: -0.6 - EBA CA Gap: -1.9 - Staff Adj.: -0.9 - Staff CA Gap: -1.0 - Staff-assessed CA gap range: -0.5 to -1.5 percent of GDP. - REER: - 2017 REER appreciated by 2.7 percent relative to 2016 average. - REER through May 2018 depreciated by 4 percent relative to 2017 average. - Staff assesses REER to be 0 to 17 percent above level implied by fundamentals and desirable policies. - Policy recommendations: - If growth weakens or commodity prices fall, further monetary accommodation warranted. - Planned gradual, medium-term fiscal consolidation to help narrow CA deficit by boosting national savings. - Belgium - Overall: external position in 2017 weaker than medium-term fundamentals and desirable policies imply. - NIIP (2017Q3): 50 percent of GDP. - Gross foreign assets: 488 percent of GDP; banking sector gross foreign assets: 88 percent of GDP. - External public debt: 65 percent of GDP as of 2017Q3. - CA (2017): - Actual CA: -0.2 - Cycl. Adj. CA: -0.3 - EBA CA Norm: 2.2 - EBA CA Gap: -2.5 - Staff Adj.: 0.0 - Staff CA Gap: -2.5 - Staff CA gap range: between -3½ to -1½ percent of GDP. - REER: EBA suggests overvaluation between 6 and 14 percent (CPI-based); staff assesses overvaluation range 3½ to 8½ percent (elasticity 0.42). - Policy recommendations: - Steady fiscal consolidation, reductions in labor taxes, continued wage moderation. - Productivity-enhancing structural reforms to address severe labor market fragmentation. - Brazil - Overall: external position in 2017 broadly consistent with medium-term fundamentals and desirable policies. - NIIP end-2017: -34 percent of GDP; external debt about 33 percent of GDP and 265 percent of exports. - NIIP projected to strengthen to around -30 percent of GDP over medium term. - Stabilizing CA requirement: CA deficit required to stabilize NIIP at -32 percent: 1.2 percent of GDP. - CA (2017): - Actual CA: -0.5 - Cycl. Adj. CA: -1.8 - EBA CA Norm: -2.4 - EBA CA Gap: 0.7 - Staff Adj.: 0.5 - Staff CA Gap: 0.2 - REER: - EBA indicates 9 to 23 percent overvaluation for 2017; staff estimated REER gap between -7 and 3 percent. - REER through May 2018 show depreciation by 11.4 percent relative to 2017 average. - Reserves: - Gross reserves end-2017: $374 billion, equivalent to 18.2 percent of GDP and around 160 percent of the IMF’s composite reserve adequacy metric. - Policy recommendations: - Raise national savings; fiscal consolidation (including federal spending cap and social security reform) to boost net public savings. - Structural reforms to improve competitiveness. - Canada - NIIP rose from 10.3 percent of GDP in 2016 to 18.7 percent of GDP in 2017, reflecting significant valuation gains on external assets. - Gross external debt: 115 percent of GDP, about a third short-term. - Medium-term NIIP projected to decline in line with sustained, albeit narrowing, CA deficits. - Overall assessment: external position in 2017 moderately weaker than implied by fundamentals and desirable policies; expected to strengthen medium term. - CA (2017): - Actual CA: -2.9 - Cycl. Adj. CA: -2.4 - EBA CA Norm: 2.2 - EBA CA Gap: -4.6 - Staff Adj.: -2.7 - Staff CA Gap: -1.9 - Staff-adjusted CA norm about 1.8 percent of GDP; CA gap between -3.4 and -0.4 percent of GDP. - REER: - REER appreciated by around 1.5 percent annual average between 2016 and 2017; unchanged through May 2018 relative to 2017 average. - EBA REER index: overvaluation 2.2 percent; level model: undervaluation around 6 percent. - Staff estimates REER overvalued by about 1 to 13 percent. - Capital flows and reserves: - 2017 CA deficit financed by net portfolio inflows of 4.9 percent of GDP; net FDI outflow 3.3 percent of GDP. - Canada has not intervened in FX since September 1998 (except internationally concerted interventions); limited reserves but standing swap arrangements with US Federal Reserve and four other major central banks. - Policy recommendations: - Improve labor productivity; invest in R&D and physical capital; promote FDI; develop services exports; diversify export markets. - Planned public infrastructure investment and credible medium-term fiscal consolidation. - Maintain tight macroprudential policies. - China - NIIP: positive but declined to 15 percent of GDP by end-2017 from 33 percent in 2007. - Gross foreign assets: 58 percent of GDP end-2017, dominated by reserves; gross liabilities: 43 percent of GDP, mainly inward FDI. - FX reserves: US$3.2 trillion by end-2017 (about 27 percent of 2017 GDP), US$138 billion higher than in 2016. - Overall assessment: external position in 2017 moderately stronger than warranted by fundamentals and desirable policies; renminbi in 2017 broadly in line with fundamentals. - CA (2017): - Actual CA: 1.4 - Cycl. Adj. CA: 1.4 - EBA CA Norm: -0.3 - EBA CA Gap: 1.7 - Staff Adj.: 0.0 - Staff CA Gap: 1.7 - Staff assesses CA 0.2 to 3.2 percent of GDP stronger than implied by fundamentals and desirable policies. - REER: - 2017 average REER depreciated by about 2.5 percent relative to 2016; REER through May 2018 appreciated by 3.4 percent relative to 2017 average. - 2017 EBA REER index regression: REER 5.3 percent lower than warranted; overall staff REER gap range -13 to +7 percent. - CA elasticity to REER estimated at 0.23. - Capital flows and reserves: - Net capital outflows declined to US$82 billion in 2017 (from US$647 billion in 2015). - Reserves rose by US$129 billion in 2017; reserves at 97 percent of IMF composite metric unadjusted for capital controls; 157 percent when adjusted for capital controls. - Policy recommendations: - Improve social safety net; SOE reform; more market-based financial system; attract inward FDI; pursue flexible, market-based exchange rate with better communication; use reserves to smooth excessive volatility. - Euro Area (aggregate and policy implications) - NIIP: recovered to around -1 percent by end-2017 from about -18 percent by end-2008. - Gross positions 2017: assets about 221 percent of GDP; liabilities about 222 percent of GDP. - CA (2017): 3.5 percent of GDP (cyclically adjusted 3.4 percent). - EBA and staff: - EBA CA Norm: 1.5 - EBA CA Gap: 1.9 - Staff Adj.: 0.6 - Staff CA Gap: 1.3 (range 0.6 to 2 percent of GDP). - Overall assessment: external position in 2017 moderately stronger than implied by fundamentals and desirable policies; imbalances at national level remain sizeable. - Policy recommendations: - Keep monetary policy accommodative until inflation durably converges; pursue banking union, capital markets union, fiscal capacity. - Country-level: strengthen private balance sheets, implement structural reforms, adopt more growth-friendly fiscal composition. - Germany - NIIP: 60 percent of GDP at end-2017; projected near 85 percent of GDP by 2022. - CA (2017): - Actual CA: 8.0 - Cycl. Adj. CA: 8.3 - EBA CA Norm: 2.8 - EBA CA Gap: 5.5 - Staff Adj.: 0.5 - Staff CA Gap: 5.0 - Staff assesses CA norm at 2-4½ percent of GDP. - REER: - CPI-based REER appreciated 1½ percent in 2017; ULC-based REER appreciated ½ percent. - Staff assessment for 2017: REER undervaluation of 10–20 percent; refined EBA level model yields undervaluation of 19 percent. - Capital flows: net portfolio flows almost ¾ of capital and financial accounts balance in 2017; over ⅔ net outflows toward European countries. - Policy recommendations: - More growth-oriented fiscal policy using fiscal space; structural reforms to foster entrepreneurship; pension reforms to reduce savings. - India (FY2017/18) - NIIP improved from -18.1 percent of GDP at end-FY2014/15 to -17.3 percent of GDP at end-2017. - Gross foreign assets: 24 percent of GDP; gross liabilities: 42 percent of GDP. - External debt about 20 percent of GDP; 48 percent USD-denominated; long-term external debt about 81 percent of total. - CA (FY2017/18): - Actual CA: -1.9 - Cycl. Adj. CA: -2.1 - EBA CA Norm: -3.0 - EBA CA Gap: 0.9 - Staff Adj.: 0.5 - Staff CA Gap: 0.4 - Staff-assessed CA gap range: -0.6 to +1.4 percent of GDP. - REER: - Average REER 2017 appreciated about 4.1 percent over 2016; May 2018 REER depreciated 3.6 percent relative to 2017 average. - EBA REER gaps large with estimation errors; staff REER range -7 to +5 percent for FY2017/18 based on CA gap. - Reserves and flows: - Spot FX intervention US$28 billion (1.1 percent of GDP) and net forwards increased by US$28.5 billion in 2017. - International reserves US$424.5 billion at end-March2018; about $412 billion end-May 2018. - Reserve coverage about 16.3 percent of GDP and about 7.5 months of prospective imports. - Policy recommendations: - Increase non-debt creating capital flows via FDI; consider gradual liberalization of portfolio flows; maintain exchange rate flexibility with limited intervention; continue structural reforms to improve competitiveness. - Indonesia - NIIP end-2017: -33½ percent of GDP (from -35¾ percent end-2016). - Gross external assets: 33¼ percent of GDP; gross external liabilities: 66¾ percent of GDP. - Gross external debt: 34¾ percent of GDP; 19¾ percent denominated in rupiah; 84½ percent maturing after one year. - CA (2017): CA deficit reached 1.7 percent of GDP in 2017. - Reserves end-2017: US$130.2 billion (13 percent of GDP, about 138 percent of IMF reserve adequacy metric, about 8 months of imports). - FX intervention: reserves fell by US$7 billion to US$124.9 billion in Feb–Apr 2018 due to intervention. - Policy recommendations: - Continue exchange rate flexibility; strengthen fiscal position via tax reforms; implement structural policies to boost participation in global value chains, ease FDI and non-tariff restrictions, and strengthen labor markets. - Korea - 2017 portfolio flows: non-resident portfolio inflows surged to $17.7 billion. - Reserves end-2017: $389 billion (25.4 percent of GDP); reserves around 107 percent of IMF composite reserve adequacy metric. - FX intervention: total net intervention in 2017 ~US$10 billion (0.7 percent of GDP), US$5 billion in forward markets; in 2018 net intervention as of end-April ~US$2 billion. - Assessment: intervention limited to disorderly market conditions; reserves provide sufficient buffer. - Malaysia - NIIP 2017: net liability position of 2 percent of GDP (2016: net assets about 5¼ percent of GDP). - Total external debt 2017: about 69.4 percent of GDP. - CA (2017): - Actual CA: 3.0 - Cycl. Adj. CA: 3.7 - EBA CA Norm: 0.6 - EBA CA Gap: 3.1 - Staff Adj.: 0.0 - Staff CA Gap: 3.1 - REER: EBA REER models estimate REER about 33–36 percent below warranted; staff assesses REER gap close to -6¾ percent (± about 2 percent). - Reserves end-2017: US$102.4 billion; mid-May 2018: US$109.4 billion; adequacy 118 percent of IMF composite metric as of end-2017. - Policy recommendations: medium-term fiscal consolidation, strengthen social protection and healthcare spending, address structural bottlenecks. - Mexico - NIIP 2017: -45.7 percent of GDP; gross assets 54.8 percent; liabilities 100.6 percent. - CA (2017): - Actual CA: -1.7 - Cycl. Adj. CA: -1.4 - EBA CA Norm: -2.5 - EBA CA Gap: 1.1 - Staff Adj.: 0.6 - Staff CA Gap: 0.5 - REER estimates vary; staff assesses REER gap range 4 to -12 percent; peso broadly in line with fundamentals. - Reserves end-2017: US$175.5 billion (15.3 percent of GDP); reserves at 123 percent of ARA metric and 271 percent of short-term debt. - Netherlands - NIIP end-2017: 74 percent of GDP; gross assets 1251 percent; liabilities 1177 percent. - CA (2017): - Actual CA: 10.2 - Cycl. Adj. CA: 10.3 - EBA CA Norm: 3.5 - EBA CA Gap: 6.8 - Staff Adj.: 0.0 - Staff CA Gap: 6.8 - Overall: external position substantially stronger than consistent with fundamentals and desirable policy settings. - Policy responses: expansionary fiscal policy, higher wage growth, structural reforms to raise productivity and reduce CA surplus. - Poland - NIIP 2017: -65 percent of GDP; gross liabilities 118 percent; gross assets 52 percent. - CA (2017): - Actual CA: 0.3 - Cycl. Adj. CA: 0.8 - EBA CA Norm: -1.7 - EBA CA Gap: 2.4 - Staff Adj.: 1.4 - Staff CA Gap: 1.0 - REER: staff assesses REER close to fundamentals with gap -5 to 0 percent. - Reserves end-2017: gross US$113 billion; net reserves about US$104.9 billion; net reserves ~95 percent of IMF ARA metric. - Russia - NIIP end-2017: 18 percent of GDP; gross assets 88 percent; liabilities 70 percent. - CA (2017): - CA balance: 2.3 percent of GDP in 2017. - EBA CA norm 2017: 3.8 percent; cyclically adjusted CA: 3.2; EBA CA gap: -0.5; Staff Adj.: 0.7; Staff CA gap: -1.3 (staff assesses -1¼ percent with confidence interval -2½ to 0 percent). - Reserves: international reserves rose to US$457 billion at end-March 2018; reserves at end-2017 equivalent to 264 percent of IMF reserve adequacy metric. - Policy recommendations: fiscal rule adherence, rebalance expenditure to capital and health, structural reforms to boost private sector. - Saudi Arabia - NIIP end-2017: net external assets 81 percent of GDP; reserves fell to $489 billion (71 percent of GDP, 28 months of imports, 470 percent of IMF reserve metric) at end-2017. - CA (2017): surplus 2.7 percent of GDP (from deficit 3.9 percent in 2016); staff CA gap: -2.0 (staff assesses CA gap -1 to -3 percent). - REER: staff estimates 2017 average REER gap 10-20 percent; expected to narrow with fiscal consolidation. - Policy recommendations: continued fiscal consolidation, energy price reforms, non-oil revenue measures, pursue structural reforms to diversify economy. - Singapore - NIIP 2017: 248 percent of GDP; CA surplus 19 percent of GDP in 2017. - Staff assesses 2017 CA substantially higher than warranted by 2.5–8.5 percent of GDP; staff CA gap: 5.5. - REER: staff assesses REER 4-16 percent weaker than warranted. - Official reserves MAS: US$280 billion (86 percent of GDP) in 2017. - Policy recommendations: higher public investment, structural reforms to improve labor productivity, gradual normalization of MAS policy to allow NEER appreciation. - South Africa - NIIP end-2017: 12 percent of GDP; gross external debt 49.6 percent of GDP; short-term external debt 14.2 percent of GDP. - CA (2017): - Actual CA: -2.5 - Cycl. Adj. CA: -2.5 - EBA CA Norm: 0.7 - EBA CA Gap: -3.2 - Staff Adj.: -1.9 - Staff CA Gap: -1.3 - REER: CPI-REER appreciated 12.4 percent on average in 2017; staff assesses REER overvaluation 0–10 percent. - Reserves end-2017: equivalent to 14.5 percent of GDP; covers 5½ months of imports; below composite adequacy metric (64 percent without CFMs, 70 percent with CFMs). - Policy recommendations: improve competitiveness, increase employment and savings, preserve government debt sustainability, accelerate labor/product market reforms, accumulate reserves as conditions allow. - Spain - NIIP end-2017: -81 percent of GDP; gross liabilities 242 percent of GDP. - CA (2017): CA surplus 1.9 percent of GDP. - EBA CA Norm: 1.4; EBA CA Gap: 0.1; Staff Adj.: 1.6; Staff CA Gap: -1.5. - REER: staff assesses 2017 REER gap 3 to 10 percent. - Policy recommendations: reduce structural fiscal deficit, continue labor/product market reforms, euro-area monetary accommodation to lift inflation. - Sweden - NIIP 2017: net IIP 9.6 percent of GDP in 2017, up 4.6 percentage points in the year. - CA (2017): Actual CA 3.3; Cycl. Adj. CA 3.6; EBA CA Norm 1.8; EBA CA Gap 1.8; Staff Adj. 0.2; Staff CA Gap 1.6 (range +/- 1.5 percent). - REER: as of May 2018, REER weakened by 5.8 percent relative to 2017 average; staff assesses krona undervalued by 0 to 10 percent. - Reserves: foreign currency reserves USD 54 billion in December 2017 (about 11 percent of GDP). - Policy recommendations: maintain accommodative monetary policy until inflation returns, consider mildly expansionary fiscal policy consistent with lower medium-term surplus target, implement reforms to sustain residential investment and migrant integration. - Thailand - REER assessment (2017): staff assesses REER 7 percent to 14 percent below levels consistent with fundamentals (elasticity 0.6); EBA index REER gap 6.4 percent; EBA level REER gap -2.1 percent. - Capital and financial account 2017: net negative balance 4 percent of GDP; outward FDI 4.6 percent of GDP; portfolio inflows 2.1 percent of GDP. - Reserves 2017: international reserves 44½ percent of GDP; reserves over three times short-term debt; 234 percent of IMF reserve metric unadjusted; 278 percent adjusted. - Assessment: reserves higher than adequacy metrics; no need to build up reserves; allow flexible exchange rate, intervene only to avoid disorderly conditions. - Turkey - NIIP deteriorated from -42 percent of GDP in 2016 to -53 percent at end-2017; total foreign liabilities 80 percent of GDP; debt liabilities 53 percent. - CA (2017): - Actual CA: -5.6 - Cycl. Adj. CA: -4.8 - EBA CA Norm: -0.9 - EBA CA Gap: -4.0 - Staff Adj.: -1.8 - Staff CA Gap: -2.2 (staff assesses range -1.2 to -3.2 percent of GDP). - REER: REER depreciated 10 percent in 2017; by May 2018 lira fallen additional 13 percent in real terms; staff assesses 2017 REER broadly in line (+/-10 percent). - Financing and reserves: - Gross external financing needs over 25 percent of GDP. - Gross reserves around $108 billion at end-2017 (82 percent of ARA metric); net international reserves declined to $31 billion. - Policy recommendations: - Tighter fiscal, quasi-fiscal, and monetary policies; macroprudential measures to slow credit growth; rebuild reserves; reforms to strengthen competitiveness and private saving. - United Kingdom - NIIP declined from -4.4 percent of GDP in 2016 to -12.8 percent in 2017. - CA (2017): - Actual CA: -4.1 - Cycl. Adj. CA: -4.0 - EBA CA Norm: 1.0 - EBA CA Gap: -5.0 - Staff Adj.: -2.0 - Staff CA Gap: -3.0 - REER: sterling depreciated 10 percent in 2016 and additional 5 percent from 2016 to 2017; as of May 2018 REER appreciated 1.9 percent relative to 2017 average. - Staff assesses REER between 0 and 15 percent above consistent level with fundamentals. - Policy recommendations: continue fiscal consolidation within medium-term framework; structural reforms to boost productivity; maintain macroprudential policies. - United States - NIIP: increased from -44.7 percent of GDP in 2016 to -40.5 percent of GDP in 2017; projected to decline by about 8 percent of GDP over next five years under baseline. - CA (2017): - Actual CA: -2.4 - Cycl. Adj. CA: -2.3 - EBA CA Norm: -0.7 - EBA CA Gap: -1.6 - Staff Adj.: -0.1 - Staff CA Gap: -1.5 - Staff assesses cyclically adjusted CA 1.0 to 2.0 percent of GDP lower than level implied by fundamentals. - REER: - REER appreciated about 18 percent between 2012 and 2016; depreciated about 0.6 percent in 2017; further 2.0 percent by May 2018 relative to 2017 average. - EBA and ESA estimates imply REER overvaluation in 8–16 percent range; staff assesses 2017 average REER moderately overvalued in 8-16 percent range. - Capital flows: net financial inflows about 1.8 percent of GDP in 2017. - Policy recommendations: - Fiscal consolidation to achieve general government primary surplus of about 1¼ percent of GDP (federal government primary surplus about 1½ percent of GDP). - Structural policies: upgrade infrastructure, education and training, support working poor, increase labor force growth, and resolve trade disputes without tariffs. _Italic: Source: contryassessments (excerpt)._ ### 1. Summary of EBA and Staff-Assessed CA Gaps, 2017 ___________________________________43 ### 1. Summary of EBA and Staff-Assessed CA Gaps, 2017 ### A. External sector assessment methodology and data - The External Balance Assessment (EBA) models were refined to better capture: - fundamentals: demographics, institutions and potential current account measurement biases; - macroeconomic policies: foreign exchange intervention and credit excesses; - other structural features affecting current account dynamics. - A full description of the refinements is in the 2018 ESR Technical Supplement. - Overall assessments combine model estimates and staff judgment; estimates are presented in ranges to reflect uncertainty. - External assessments are based on data and IMF staff projections as of June 22, 2018. - External indicators discussed include: the current account, the real effective exchange rate, capital and financial account flows and measures, foreign exchange and reserves, and the foreign asset or liability position. - Note: 2018 real effective exchange rates (REERs) are estimated based on data available as of June 22, 2018. ### B. Economies covered - The 30 systemic economies analyzed (chosen by equal weighting of global ranking in purchasing power GDP and nominal gross trade): Argentina; Australia; Belgium; Brazil; Canada; China; Euro area; France; Germany; Hong Kong SAR; India; Indonesia; Italy; Japan; Korea; Malaysia; Mexico; The Netherlands; Poland; Russia; Saudi Arabia; Singapore; South Africa; Spain; Sweden; Switzerland; Thailand; Turkey; United Kingdom; United States. ### C. Conceptual distinction: domestic vs. foreign policy gaps (illustrative two-country example) - External imbalances and policy gaps: - Country A: large CA deficit, large fiscal deficit, high public debt → domestic policy distortion requiring adjustment. - Country B: matching CA surplus but no policy distortions → no domestic policy gap; adjustment by Country A would eliminate Country B’s imbalance. - Implications: - Distinguishing domestic and foreign fiscal policy gaps is critical. - Eliminating a fiscal policy gap in a systemic deficit country helps reduce surplus imbalances in other systemic economies. ### D. Table summary (interpretation note) - Table 1 provides EBA and staff-assessed CA gaps for 2017 (in percent of GDP), with staff adjustments and staff REER gap ranges; staff estimates may not add due to rounding; staff CA gap refers to the mid-point of the CA gap. (Weighted average sum of staff-assessed CA gaps and discrepancies reported in the table.) ### E. Selected country-level substantive findings, projections, and policy recommendations - Argentina - Overall assessment: The external position is weaker than implied by medium-term fundamentals and desirable policies. - Foreign asset/liability position: - NIIP at end-2017: 3.5 percent of GDP. - Total external liabilities: US$312 billion; portfolio and other investments: US$231 billion (about 75 percent); general government and central bank liabilities: US$163 billion. - Staff medium-term NIIP projection: -15 percent of GDP. - Current account (2017): - Actual CA: -4.8 - Cycl. Adj. CA: -5.0 - EBA CA Norm: -1.7 - EBA CA Gap: -3.3 - Staff Adj.: 0.0 - Staff CA Gap: -3.3 - Staff estimates cyclically adjusted CA deficit to be 2.3 to 4.3 percent of GDP larger than implied by fundamentals and desirable policies. - REER: - REER estimated gap in 2017: between 17.5 and 32.5 percent above level implied by fundamentals and desirable policies. - REER through May 2018 depreciated by 22 percent relative to 2017 average. - Capital and financial accounts: - CA deficits largely financed by portfolio inflows; capital account openness now above 2001 level. - Reliance on short-term, volatile portfolio flows created risks that materialized in early 2018. - FX intervention and reserves: - BCRA sold around USD 10.2 billion in the spot market between March 3 and May 15 and accumulated USD 2.3 billion in the forward market (as of June 4). - Reserves as of June 8: USD 49.6 billion. - Reserve coverage at end-May 2018: around 76 percent of the ARA metric. - Policy recommendations: - Stronger fiscal consolidation announced for 2018-20 to reduce CA deficit. - Strengthened inflation targeting framework to lower nominal interest rates over medium term. - Progress on supply-side reforms to raise productivity, attract FDI, and reduce REER overvaluation. - Australia - Overall assessment: External position in 2017 broadly consistent with medium-term fundamentals and desirable policies, although the Australian dollar remains somewhat overvalued. - Foreign asset/liability position: - NIIP at end-2017: -55 percent of GDP. - NIIP improved in 2017 by 3 percent of GDP relative to 2016. - NIIP expected to remain around -55 percent of GDP over the medium term. - Current account (2017): - Actual CA: -2.5 - Cycl. Adj. CA: -2.4 - EBA CA Norm: -0.6 - EBA CA Gap: -1.9 - Staff Adj.: -0.9 - Staff CA Gap: -1.0 - Staff view: CA norm closer to -1.5 percent of GDP; staff-assessed CA gap range: -0.5 to -1.5 percent of GDP. - REER: - 2017 REER appreciated by 2.7 percent relative to 2016 average. - REER through May 2018 depreciated by 4 percent relative to 2017 average. - Staff assesses REER to be 0 to 17 percent above level implied by fundamentals and desirable policies. - Capital and financial accounts: - Mining investment funded predominantly offshore; net FDI inflows partially offset bank borrowing abroad. - Weighted average maturity of government bonds: 6.6 years; 90 percent of issue maturing by 2027. - Policy recommendations: - If growth weakens or commodity prices fall, further monetary accommodation would be warranted. - Planned gradual, medium-term fiscal consolidation should help narrow the CA deficit by boosting national savings. - Belgium - Overall assessment: The external position in 2017 was weaker than medium-term fundamentals and desirable policies would imply. - Foreign asset/liability position: - NIIP: 50 percent of GDP as of 2017Q3. - Gross foreign assets: 488 percent of GDP. - Gross foreign assets of banking sector: 88 percent of GDP. - External public debt: 65 percent of GDP as of 2017Q3. - Current account (2017): - Actual CA: -0.2 - Cycl. Adj. CA: -0.3 - EBA CA Norm: 2.2 - EBA CA Gap: -2.5 - Staff Adj.: 0.0 - Staff CA Gap: -2.5 - Staff CA gap range: between -3½ to -1½ percent of GDP (standard range +/- 1 percent). - REER: - EBA suggests REER overvaluation between 6 and 14 percent (CPI-based models); staff assesses REER overvaluation in range of 3½ to 8½ percent using an elasticity of 0.42. - Policy recommendations: - Steady fiscal consolidation, reductions in labor taxes, continued wage moderation. - Productivity-enhancing structural reforms, especially to address severe labor market fragmentation. - Brazil - Overall assessment: Brazil’s external position in 2017 was broadly consistent with medium-term fundamentals and desirable policies. - Foreign asset/liability position: - NIIP at end-2017: -34 percent of GDP. - External debt: about 33 percent of GDP and 265 percent of exports. - NIIP projected to strengthen to around -30 percent of GDP over medium term. - Stabilizing CA requirement: - CA deficit required to stabilize NIIP at -32 percent: 1.2 percent of GDP. - Current account (2017): - Actual CA: -0.5 - Cycl. Adj. CA: -1.8 - EBA CA Norm: -2.4 - EBA CA Gap: 0.7 - Staff Adj.: 0.5 - Staff CA Gap: 0.2 - Staff assesses CA broadly consistent with fundamentals and desirable policies. - REER: - EBA index and level methods indicate 9 to 23 percent overvaluation for 2017. - Staff estimated REER gap between -7 and 3 percent. - REER estimates through May 2018 show depreciation by 11.4 percent relative to 2017 average. - Capital and financial accounts: - Net FDI averaged 3.4 percent of GDP during 2015-17; CA deficits averaged 1.7 percent. - Flows have favorable risk profile but face downside risks from tighter global financial conditions, weak reform implementation, and political uncertainty. - FX intervention and reserves: - Flexible exchange rate; gross reserves at end-2017: $374 billion, equivalent to 18.2 percent of GDP and around 160 percent of the IMF’s composite reserve adequacy metric. - Policy recommendations: - Raise national savings; fiscal consolidation (including federal spending cap and social security reform) to boost net public savings. - Structural reforms to improve competitiveness. - Cross-cutting implications and risks highlighted across assessments - Reliance on short-term, volatile portfolio flows raises vulnerability to sudden reversals (notably Argentina). - Composition of external liabilities matters: higher shares of portfolio and other investments increase rollover and FX risks. - Flexible exchange rates have acted as shock absorbers for several economies; reserve buffers remain important for crisis insurance (reserves adequacy metrics cited for multiple economies). - Fiscal consolidation and structural reforms are recurring policy recommendations to address CA gaps and improve competitiveness. *Source: Fund staff estimates.* ### 10.3 percent of GDP in 2016 to 18.7 percent of ### contryassessments - 10.3 percent of GDP in 2016 to 18.7 percent of ### Canada — External position and NIIP - NIIP rose from 10.3 percent of GDP in 2016 to 18.7 percent of GDP in 2017, reflecting significant valuation gains on external assets. - Gross external debt remained broadly stable at 115 percent of GDP, of which about a third is short-term. - The NIIP is projected to decline in the medium term, in line with sustained, albeit narrowing, current account (CA) deficits. - Assessment: Canada’s foreign assets have a higher foreign currency component than its liabilities which provides a hedge against currency depreciation. The NIIP level and trajectory are sustainable. - Overall Assessment: The external position in 2017 remained moderately weaker than implied by medium-term fundamentals and desirable policies. Recent developments do not suggest a change in the assessment for 2017. In the medium term the external position is expected to strengthen as non-energy exports gradually benefit from improved price competitiveness and investment in services and manufacturing capacity. ### Canada — Potential policy responses - Improve labor productivity. - Invest in R&D and physical capital. - Promote FDI. - Develop services exports. - Diversify Canada’s export markets. - Planned increase in public infrastructure investment to boost competitiveness and improve the external position over time. - Implement a credible medium-term consolidation plan for fiscal policy to support external rebalancing. - Maintain tight macroprudential policies to ensure financial stability and support private sector saving. ### Canada — Current account (CA) Assessment 2017: background and metrics - CA deficit narrowed to 2.9 percent of GDP in 2017 (from 3.2 percent of GDP in 2016), driven by an improvement in the energy trade balance. - Financing: CA deficit largely financed by portfolio inflows which more than offset significant direct investment outflows. - Public and private savings-investment balances both increased by around 0.1 percent of GDP in 2017. - EBA estimates and staff metrics for 2017: - Actual CA: -2.9 - Cycl. Adj. CA: -2.4 - EBA CA Norm: 2.2 - EBA CA Gap: -4.6 - Staff Adj.: -2.7 - Staff CA Gap: -1.9 - Assessment: The EBA estimates a CA norm of 2.2 percent of GDP and a cyclically adjusted CA gap of -4.6 percent of GDP for 2017. Staff adjusts the CA norm to about 1.8 percent of GDP, with the CA gap between -3.4 and -0.4 percent of GDP. ### Canada — Real exchange rate (REER) - Background: REER appreciated by around 1.5 percent on an annual average basis between 2016 and 2017. Estimates through May 2018 show REER unchanged relative to the 2017 average. - Assessment: The EBA REER index model points to an overvaluation of 2.2 percent in 2017, while the REER level model points to an undervaluation of around 6 percent. Staff estimates the REER is overvalued by about 1 to 13 percent relative to medium-term fundamentals and desirable policies. ### Canada — Capital and financial accounts; FX intervention and reserves - Background (flows): - 2017 CA deficit financed by net portfolio inflows of 4.9 percent of GDP. - Non-resident purchases of corporate debt securities: 59 percent of portfolio net inflows. - Foreign acquisition of Canadian equities and government debt securities: 10 and 31 percent, respectively. - Foreign direct investment recorded a higher net outflow of 3.3 percent of GDP in 2017 (2.4 percent of GDP in 2016). - Assessment: Canada has an open capital account. Vulnerabilities limited by a credible commitment to a floating exchange rate and a strong and credible commitment to fiscal consolidation over the medium term despite near-term fiscal deficits slightly less than 1 percent of GDP. - FX intervention and reserves: - Canada has a free-floating exchange rate regime and has not intervened in the FX market since September 1998 (except internationally concerted interventions). - Canada has limited reserves but standing swap arrangements with the US Federal Reserve and four other major central banks (not drawn). - Assessment: Policies are appropriate; the floating regime and swap arrangements reduce the need for reserve holding. *Italic: Source: contryassessments - 10.3 percent of GDP in 2016 to 18.7 percent of GDP in 2017 (excerpt)* ### China — Overall assessment; assets, liabilities, and NIIP trajectory - NIIP remains positive but declined to 15 percent of GDP by end-2017 after peaking at 33 percent of GDP in 2007. - Gross foreign assets: 58 percent of GDP by end-2017, dominated by foreign reserves. - Gross liabilities: 43 percent of GDP, mainly inward FDI. - Reserve assets reached US$3.2 trillion by end-2017 (about 27 percent of 2017 GDP), US$138 billion higher than in 2016. - Assessment: NIIP-to-GDP ratio expected to remain strong with a modest decline over the medium term. NIIP not a major source of risk given high assets and FDI-dominated liabilities. Capital outflow pressures have subsided partially supported by CFMs, but pressures may resurface if private sector accumulates foreign assets faster than non-residents accumulate Chinese assets. - Overall Assessment: The external position in 2017 was moderately stronger compared with the level consistent with medium-term fundamentals and desirable policies. The renminbi in 2017 was broadly in line with fundamentals and desirable policies. Staff emphasizes need to address distortions affecting the saving-investment balance. ### China — Potential policy responses - Improve the social safety net. - SOE reform and open markets to more competition. - Create a more market-based and robust financial system. - Attract more inward FDI, ensure equal treatment for foreign investors. - Achieve a flexible, market-based exchange rate with better communication strategy. - Move toward a more market-based and transparent monetary policy framework; use reserves to smooth excessive volatility if needed. - Seek negotiated settlement to trade disputes to support the international trading system and global economy. ### China — Current account (CA) Assessment 2017: background and metrics - CA surplus: 1.4 percent of GDP in 2017 (1.4 percent of GDP cyclically adjusted), about 0.4 percentage points lower than in 2016. - Longer-term: CA surplus declined from about 10 percent of GDP in 2007. - EBA and staff metrics for 2017: - Actual CA: 1.4 - Cycl. Adj. CA: 1.4 - EBA CA Norm: -0.3 - EBA CA Gap: 1.7 - Staff Adj.: 0.0 - Staff CA Gap: 1.7 - Assessment: EBA current account norm for 2017 was -0.3 percent of GDP and EBA CA gap about 1.7 percent of GDP. Staff assesses the CA to be 0.2 to 3.2 percent of GDP stronger than implied by medium-term fundamentals and desirable policies. ### China — Real exchange rate (REER) - Background: 2017 average REER depreciated by about 2.5 percent relative to 2016, driven by NEER depreciation of 2.2 percent. Estimates through May 2018 show REER appreciated by 3.4 percent relative to 2017 average. - Assessment: 2017 EBA REER index regression estimates China’s REER 5.3 percent lower than levels warranted by fundamentals and desirable policies (compared with 2.7 percent higher in 2016). Overall staff assesses the REER to be broadly consistent with fundamentals and desirable policies, with the gap in the range of -13 to +7 percent. China’s CA elasticity to REER estimated at 0.23. ### China — Capital and financial accounts; FX intervention and reserves - Background (flows): - Net capital outflows declined to US$82 billion in 2017, down from US$647 billion in 2015 and US$646 billion in 2016. - Net direct investment inflows turned positive in 2017 as FDI inflows remained stable while Overseas Direct Investment declined over 50 percent. - Errors and omissions remained negative and persistently high (-1.8 percent of GDP). - Authorities increased enforcement of CFMs; some CFMs loosened and others tightened recently; framework to regulate cross-border financing introduced. - Assessment: Further capital account opening should consider domestic financial stability; prioritize shift to an effective float while using FX intervention to smooth excessive volatility; strengthen domestic financial stability prior to substantial further liberalization; step up efforts to encourage inward FDI. - FX reserves: - FX reserves rose by US$129 billion in 2017 after declining by US$513 billion in 2015 and US$320 billion in 2016. - Reserves stood at 97 percent of the IMF’s composite metric unadjusted for capital controls at end-2017 (down from 106 in 2016). - Relative to the metric adjusted for capital controls, reserves stood at 157 percent (down from 172 in 2016). - Assessment: Given partial capital account openness, reserves are considered adequate in the range indicated by the adjusted and unadjusted metrics. As transition to greater flexibility advances, intervention should be limited to smoothing excessive volatility. *Italic: Source: contryassessments - 10.3 percent of GDP in 2016 to 18.7 percent of GDP in 2017 (excerpt)* ### Euro Area — Overall assessment and NIIP trajectory - Background: - NIIP fell to about -18 percent of GDP by end-2008, recovered to around -1 percent by end-2017. - Gross foreign positions in 2017: assets about 221 percent of GDP; liabilities about 222 percent of GDP. - Net external liabilities remain high in some countries, including Spain and Portugal. - Assessment: Projections of continued current account surpluses suggest NIIP-to-GDP ratio will improve further, with the euro area expected to soon become a net external creditor absent large valuation differences. Overall NIIP financing vulnerabilities appear low, though large net external debtor countries face greater risk of sudden stops of gross inflows. - Overall Assessment: The external position of the euro area in 2017 was moderately stronger than implied by medium-term fundamentals and desirable policies. In 2018 the current account surplus is projected to shrink modestly as the region’s economic recovery continues. Imbalances at the national level remain sizeable and progress in reducing them slowed. ### Euro Area — Potential policy responses - Keep monetary policy accommodative until inflation durably converges to the ECB’s medium-term price stability objective to facilitate relative price adjustments across members. - Area-wide initiatives: banking union, capital markets union, fiscal capacity for macro stabilization to reinvigorate investment and reduce savings-investment imbalances. - Country-level policies: strengthen private sector balance sheets; implement structural reforms to enhance productivity and competitiveness; adopt a more growth-friendly composition of national fiscal policies. - Countries with stronger-than-warranted external positions should expand investment and promote structural reforms to raise potential and reduce current accounts. - Countries with weaker external positions should continue consolidating to reduce debt and increase buffers while undertaking competitiveness-enhancing reforms. - A more balanced policy mix and implementation of priority institutional and structural reforms would help reduce external imbalances, including within the euro area. ### Euro Area — Current account (CA) Assessment 2017: background - Background: The current account (CA) balance for the euro area in 2017 was at 3.5 percent of GDP (cyclically adjusted). *Italic: Source: contryassessments - 10.3 percent of GDP in 2016 to 18.7 percent of GDP in 2017 (excerpt)* ### 3.4 percent), having increased ### Euro Area and Selected Member States: External Sector Assessments (excerpts) ### Euro area — Current account (CA) - Background: - Actual CA: 3.5 - Cycl. Adj. CA: 3.4 percent), having increased steadily since 2011, when it was close to zero. - Most euro area countries are now running current account surpluses (apart from Cyprus, France, Greece, Latvia and Slovakia). - Import compression in the aftermath of the crisis and external competitiveness gains from price and wage adjustments have strengthened the current accounts of net external debtors, like Spain and Portugal. - Some large creditor countries, such as Germany and the Netherlands, continued to accumulate sizable surpluses, reflecting strong corporate and household saving and weak investment. - Assessment: - EBA CA Norm: 1.5 - EBA CA Gap: 1.9 - Staff Adj.: 0.6 - Staff CA Gap: 1.3 - Staff’s analysis indicates a higher CA norm, consistent with the assessed external positions of euro area member countries. - Considering uncertainties, staff assess the CA gap to be 1.3 percent, with a range of 0.6 to 2 percent of GDP for 2017. - Conclusion: The underlying CA is moderately stronger than the level implied by medium-term fundamentals and desirable policies. ### Euro area — Real exchange rate (REER) - Background: - The CPI-based real effective exchange rate appreciated by about 1.6 percent from 2016 to 2017. - Nominal appreciation was about 2.1 percent. - Estimates through May 2018 show that the REER has appreciated by 2.2 percent relative to the 2017 average. - Assessment: - EBA index REER model points to an overvaluation of about 2.2 percent in 2017. - Level REER model suggests an undervaluation of about 2.9 percent. - Staff assesses the euro area 2017 average real exchange rate gap of -8 to 0 percent. - Heterogeneity: REER gaps range from an undervaluation of 10-20 percent in Germany to overvaluations of 0–10 percent in several small to mid-sized euro area member states. - Policy implication: Net debtor countries need to improve external competitiveness; net creditor countries need to boost domestic demand. ### Euro area — Capital and financial accounts; FX intervention and reserves - Background: - Mirroring the 2017 CA surplus, the euro area experienced net capital outflows, largely driven by portfolio debt and FDI outflows. - These were tempered by inflows into portfolio equity and loans and other bank-related instruments. - Geography of gross capital inflows shifted with the global financial and sovereign debt crises, with inflows from the core euro area economies into the rest of the euro area diminishing. - Assessment: - Capital outflows in portfolio debt and inflows into portfolio equity likely arose in large part from the ECB’s monetary accommodation through its asset purchase program, which has lowered yields on debt and spurred interest in equity. - FX intervention and reserves: - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating. ### Technical notes (euro area aggregation) - The IMF EBA analysis for the euro area covers 11 euro area members: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain. - Assessments of CA and REER gaps for the euro area are derived from GDP-weighted averages of the assessments of the individual countries listed above. - When applying GDP-weighted aggregation for the euro area, the actual CA and the CA norm are corrected for reporting discrepancies in intra-area transactions, as the CA of the entire euro area is about 0.56 percent of GDP in 2017 less than the sum of the individual 11 countries' CA balances. --- ### France — Overall external assessment - Foreign asset and liability position and trajectory — Background: - NIIP has been below -13 percent of GDP since 2013, reaching a low of -20 percent of GDP in 2017. - Gross asset position stood at 289 percent of GDP in 2017. - Banks’ non-FDI related assets account for about a third. - Other non-bank financial institutions close to another third. - More than three-quarters of French bank’s foreign assets are in advanced economies (40 percent in other eurozone economies) and 7 percent in large emerging markets. - Gross liabilities stood at 309 percent of GDP in 2017, of which external debt is estimated at 194 percent of GDP (of this, the public-sector accounts for 55 percent of GDP, and banks for 87 percent of GDP). - Target 2 balances were at -€9.4 billion (-0.4 percent of GDP) at end-2017. - Assessment: - The NIIP is negative but its size and projected stable trajectory do not raise sustainability concerns. - Vulnerabilities due to external public debt and banks’ financing on the liability side, given significant bank debt maturing in 2018 (€60 billion, or 2.6 percent of GDP) and sizable financial derivatives (about 30 percent of GDP). - Overall assessment statement: - The external position in 2017 was moderately weaker than that implied by medium-term fundamentals and desirable policy settings. - Recent measures to improve competitiveness, including labor tax wedge cuts, CIT tax cuts, and labor and product market reforms are expected to strengthen the external position over the medium term. - Potential policy responses: - Steady fiscal consolidation and steadfast implementation of planned structural reforms (e.g., apprenticeship and vocational training reforms, as well as other product and service market reforms) would help improve competitiveness, reduce external imbalances, and support long-run growth. ### France — Current account (CA) assessment 2017 - Background: - The CA fell from around balance in 2000-05 to a deficit of 0.6 percent of GDP in 2017. - Persistent trade deficit of around 1 percent of GDP, on average, since 2012. - Over the last year, the CA balance improved by 0.2 percent of GDP on account of strong service export growth. - Assessment (numbers): - Actual CA: -0.6 - Cycl. Adj. CA: -0.6 - EBA CA Norm: 0.9 - EBA CA Gap: -1.6 - Staff Adj.: 0.0 - Staff CA Gap: -1.6 - Staff assesses that the CA gap in 2017 was between -2 to -1 percent of GDP. - Projection: The CA gap is projected to narrow further over the medium run as recent and planned structural and fiscal reforms reduce trade and fiscal deficits. ### France — Real exchange rate (REER) - Background: - The ULC-based REER for the whole economy appreciated by around 3-11 percent since the late 1990s. - France has lost about a third of its export market share in the 2000s. - CPI-based and ULC-based REER indicators appreciated by around 0.3-0.9 percent during 2017, and an additional 1.3-2.9 percent through May 2018 (relative to the 2017 average). - Assessment: - CPI-based index and level REER EBA models do not point to REER overvaluation (REER gap ranges between -2.2 to 4.1 percent). - The EBA CA gap model points to an overvaluation of around 4-8 percent (given an elasticity of 0.25 percent). - Staff’s assessment, based on EBA CA model estimates and other approaches, is an REER overvaluation in the range of 0 to 8 percent. ### France — Capital and financial accounts; FX intervention and reserves - Background: - The CA deficit has been financed mostly by debt inflows (portfolio and other investment). - Outward direct investment was generally higher than inward investment. - Financial derivative flows have grown sizably both on the asset and liability side since 2008. - The capital account is open. - Assessment: - France remains exposed to financial market risks owing to the large refinancing needs of the sovereign and banking sector. - FX intervention and reserves: - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. --- ### Germany — Overall external assessment - Foreign asset and liability position and trajectory — Background: - Germany’s NIIP reached 60 percent of GDP at end-2017; about twice the 2012 level. - NIIP of financial corporations other than MFIs is large and positive (57 percent of GDP), while that of the general government is large and negative (25 percent of GDP). - NIIP is expected to reach near 85 percent of German GDP and 4 percent of world GDP by 2022, as the projected CA surplus remains sizable through the medium term but is expected to be partly offset by valuation changes. - The stock of Germany’s Target2 claims on the Eurosystem surpassed €956 billion in May 2018 (28 percent of GDP). - Assessment: - With the implementation of quantitative easing measures by the ECB, Germany’s exposure to the Eurosystem has continued to widen. - Overall assessment statement: - Germany’s external position in 2017 remained substantially stronger than implied by medium-term fundamentals and desirable policy settings. - Staff projects a modest narrowing in the medium run, supported by a gradual realignment of price competitiveness, and continued strong domestic demand. - As Germany is part of the euro area, the nominal exchange rate does not flexibly adjust to the country’s external position; stronger wage growth relative to euro area trading partners is expected to contribute to realign price competitiveness within the monetary union. - Projected adjustment is partial; additional policy actions will be necessary for further external rebalancing. - Potential policy responses: - A more growth-oriented fiscal policy, making use of fiscal space to stimulate potential growth. - Structural reforms to foster entrepreneurship. - Pension reforms prolonging working lives to reduce savings, stimulate investment, and reduce external imbalances. - Current account (context): - The CA surplus has been widening since 2001. - It averaged 7.9 percent of GDP over the last five years, peaking at [text truncated in source]. *Source: https://www.imf.org/-/media/files/publications/esr/2018/contryassessments.pdf* ### 8.9 percent of GDP in 2015. In 2017 it was 8 percent of GDP. Ne ### contryassessments - 8.9 percent of GDP in 2015. In 2017 it was 8 percent of GDP. Ne ### Current account (CA) — Germany - Background findings: - Actual CA: 8.0 percent of GDP in 2017. - Cyclically adjusted CA: 8.3 percent of GDP in 2017. - CA surplus largely reflects large saving-investment surpluses of non-financial corporations (NFCs) and households, with rising savings of NFCs and fiscal consolidation accounting for the upward trend. - Net exports fell for the first time in 6 years, reflecting a deterioration in the terms of trade; CA balance with the rest of euro area continued to rise. - Norms and gaps: - EBA CA Norm: 2.8 percent of GDP. - EBA CA Gap: 5.5 percentage points. - Staff Adj.: 0.5 percent of GDP. - Staff CA Gap: 5.0 percentage points. - Staff assesses the CA norm at 2-4½ percent of GDP, with a midpoint ½ percent of GDP above the CA norm implied by the new EBA model of 2¾ percent. - Assessment summary: - The cyclically adjusted CA balance reached 8.3 percent of GDP in 2017, slightly below the 2016 level and 3¾ -6¼ percentage points stronger than the value implied by fundamentals and desirable policies. ### Real exchange rate — Germany - Background findings: - Yearly average CPI-based REER appreciated 1½ percent in 2017. - Yearly average ULC-based REER appreciated ½ percent in 2017. - Estimates through May 2018 show the REER appreciated by 1.3 percent relative to the 2017 average. - Assessment: - Staff’s assessment for 2017 is of a REER undervaluation of 10–20 percent. - The refined EBA REER Level model yields an undervaluation of 19 percent. - The undervaluation implied by the CA gap assessment using standard trade elasticities is 15–30 percent. ### Capital and financial accounts — Germany - Background findings: - In 2017, net portfolio flows constituted almost ¾ of the capital and financial accounts balance. - Direct investment was the second largest item (1/6 of total). - Over ⅔ of net outflows were toward European countries and 10 percent toward the Americas (mostly the US). - 80 percent of net inflows in 2017 originated from the EU. - Net investment by emerging countries represented about 40 percent of total. - Net direct foreign investment inflows and outflows recovered to historical highs in 2017 after a drop in 2016. - Assessment: - Safe haven status and the strength of Germany’s current external position limit risks. ### FX intervention and reserves — Germany - Background and assessment: - The euro has the status of global reserve currency. - Reserves held by euro area countries are typically low relative to standard metrics. - The currency is freely floating. --- ### Individual economy assessment — Hong Kong SAR #### Overall assessment and NIIP - Background findings: - NIIP reached around 409 percent of GDP as of end-2017, up from 275 percent in 2012. - Gross assets: about 1,605 percent of GDP. - Gross liabilities: about 1,196 percent of GDP. - Valuation changes: change in NIIP in past 5 years was over 200 percent of 2017 GDP compared with cumulated financial account balances of only 20 percent of 2017 GDP. - Income accrued to the large NIIP has been modest due to relatively low yields on assets and substantially higher payments on liabilities. - Direct investment accounted for a large and rising share of total assets and liabilities (37.6 and 52.6, respectively in 2016). - Assessment: - Vulnerabilities are low given the size of NIIP and its favorable composition, with large and stable stock of reserve assets as a share of total assets. #### Current account — Hong Kong SAR (2017) - Background findings: - Actual CA: 4.3 percent of GDP in 2017 (up from 4.0 percent in 2016). - CA surplus remains substantially lower than pre-global financial crisis average (around 10 percent in 2000-08). - Private saving declined from 34.4 percent of GDP in 2006 to 24.6 percent of GDP in 2017. - CA surplus projected at 3.1 percent of GDP in 2018. - Assessment: - Cyclically adjusted CA: 3.3 percent of GDP. - Staff’s quantitative assessment finds the cyclically adjusted CA at 3.3 percent is roughly in the mid-point of the CA norm range of 1.8 to 4.8 percent of GDP. - Staff CA Gap: 0.0 percent of GDP. - Given large valuation effects in the NIIP, the CA needs to be adjusted for measurement issues. #### Real exchange rate — Hong Kong SAR - Background findings: - REER essentially unchanged in 2017 (0.3 percent below the average REER in 2016). - HKD has depreciated by 4.0 percent in real effective terms through May 2018 compared with the 2017 average. - The weak side of the convertibility undertaking was triggered in April and May prompting the HKMA to sell USD. - Assessment: - Real exchange rate broadly consistent with medium-term fundamentals. - REER gap assessed by staff to be between -5 to +5. #### Capital and financial accounts — Hong Kong SAR - Background findings: - Open capital account; non-reserve financial flows moved from sizable net outflows in 2016 back to inflows in 2017. - Financial account is very volatile in portfolio and direct investment. - Banking system claims on mainland nonbank entities amounted to HK$5.5 trillion, or about 207 percent of GDP, as of 2017Q4 (up by 15 percentage points from a year earlier). - Assessment: - Large financial resources and proactive supervision limit risks from volatile capital flows. - Greater financial exposure to mainland China could pose risks if mainland growth slows sharply, but credit risk appears manageable given high origination and underwriting standards. #### FX intervention and reserves — Hong Kong SAR - Background findings: - Currency board arrangement; stock of reserves end-2017 equivalent to around 120 percent of GDP, unchanged from end-2016. - Reserves have since grown 2.1 percent (by March 2018). - In April and May of 2018 HKD hit the lower range of 7.85 prompting HKMA to sell USD under LERS. - Reserves increased by 2.1 percent by March 2018; short-term HKD money market interest rates expected to rise gradually. - Assessment: - Reserves are adequate for precautionary purposes and should continue to evolve in line with automatic adjustment inherent in the currency board system. - Hong Kong SAR also holds significant fiscal reserves. #### Policy recommendations — Hong Kong SAR - Maintain policies that support wage and price flexibility as US monetary policy tightens. - Continue robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and the Linked Exchange Rate System. --- ### Individual economy assessment — India #### NIIP and external position - Background findings: - NIIP improved from -18.1 percent of GDP at end-FY2014/15 to -17.3 percent of GDP as of end-2017. - Gross foreign assets: 24 percent of GDP at end-2017. - Gross foreign liabilities: 42 percent of GDP at end-2017. - External debt about 20 percent of GDP; 48 percent denominated in US dollars and 37 percent in Indian rupees. - Long-term external debt about 81 percent of total external debt. - Assessment: - External sector position in 2017/18 broadly consistent with fundamentals and desirable policies. - With CA deficits of about 2½ percent of GDP projected for the medium term, NIIP-to-GDP ratio expected to slightly deteriorate. #### Current account — India (FY2017/18) - Background findings: - Actual CA: -1.9 percent of GDP (FY2017/18). - Cyclically adjusted CA (EBA): -2.1 percent of GDP. - CA deficit estimated to have increased to about 1.9 percent of GDP in FY2017/18 from 0.7 percent of GDP in previous year. - Imports surged by 19 percent in FY2017/18; exports grew 10 percent in FY2017/18. - CA deficit expected to increase to about 2½ percent of GDP over the medium term. - Norms and gaps: - EBA CA Norm: -3.0 percent of GDP. - EBA CA Gap: 0.9 percent of GDP. - Staff Adj.: 0.5 percent of GDP. - Staff CA Gap: 0.4 percent of GDP. - Based on staff-assessed CA norm, CA gap is in the range of -0.6 to +1.4 percent of GDP. - Assessment summary: - Staff’s judgment: a CA deficit of about 2.5 percent of GDP is a more appropriate norm and consistent with the ES approach. - Positive policy contributions (negative credit gap, larger-than-desirable intervention, relatively closed capital account) offset by a negative unexplained residual that likely captures underlying competitiveness problems. #### Real exchange rate — India - Background findings: - Average REER in 2017 appreciated by about 4.1 percent over 2016 average. - As of May 2018 REER depreciated 3.6 percent relative to 2017 average. - Assessment: - EBA Index REER and Level REER regression approaches estimate gaps of 10.9 and 8.8 percent for the 2017 average REER, respectively, but have large estimation errors for India. - Based on the CA gap, the REER is assessed to be in line with fundamentals with the range of -7 to +5 percent for FY2017/18. #### Capital and financial accounts — India - Background findings: - Sum of FDI, portfolio, and financial derivatives flows (net) estimated at 1.9 percent of GDP in FY2017/18, slowing from 2.3 percent in FY2016/17. - Net FDI flows moderated to 1.2 percent of GDP in FY2017/18 from 1.6 percent in FY2016/17. - Spot FX intervention was US$28 billion (1.1 percent of GDP) and net forwards increased by US$28.5 billion in 2017. - International reserves reached $424.5 billion at end-March2018, increasing by about $55 billion since March 2017; reserves slightly declined to about $412 billion as of end-May 2018. - Reserve coverage currently about 16.3 percent of GDP and about 7.5 months of prospective goods and services imports. - Assessment: - Reserve levels are adequate for precautionary purposes relative to various criteria. - International reserves represent about 190 percent of short-term debt and more than 160 percent of the IMF’s composite metric. #### Policy recommendations — India - Increase non-debt creating capital flows through FDI to improve CA financing mix and contain external vulnerabilities. - Consider gradual liberalization of portfolio flows while monitoring reversal risks. - Maintain exchange rate flexibility with intervention limited to addressing disorderly market conditions. - Continue structural reforms to revamp business climate, ease domestic supply bottlenecks, and facilitate trade and investment liberalization to improve competitiveness and attract FDI. --- ### Individual economy assessment — Indonesia #### NIIP and external position - Background findings: - NIIP at end-2017: -33½ percent of GDP (compared with -35¾ percent at end-2016 and -40½ percent at end-2012). - Gross external assets: 33¼ percent of GDP (close to 40 percent were reserve assets). - Gross external liabilities: 66¾ percent of GDP. - Gross external debt: 34¾ percent of GDP at end-2017; 19¾ percent denominated in rupiah; 84½ percent maturing after one year. - One-third of government’s external debt (18 percent of GDP at end-2017) denominated in rupiah. - Assessment: - The level and composition of NIIP and gross external debt indicate Indonesia’s external position is sustainable and subject to limited roll-over risk. - Nonresident holdings of rupiah-denominated government bonds at 38 percent of the total stock (or 6 percent of GDP) at end-April 2018, combined with shallow domestic financial markets, make Indonesia susceptible to global financial volatility, higher US interest rates, and stronger US dollar. - Staff projections suggest the NIIP position as a percent of GDP will continue to strengthen over the medium term. #### Current account — Indonesia (2017) - Background finding: - Indonesia’s current account deficit reached 1.7 percent of GDP in 2017, an improvement from the peak of [text truncated in source]. #### Policy recommendations — Indonesia - Continued flexibility of the exchange rate and market-determined bond yields to underpin external stability. - Strengthen fiscal position by accelerating tax reforms, keep fiscal deficit below legal limit while allowing more infrastructure and social spending. - Implement structural policies to bolster global value chain participation and external competitiveness: ease FDI and non-tariff trade restrictions; strengthen labor markets by streamlining stringent job protection, improving job placement services, vocational training, and overall education. *Source: contryassessments - 8.9 percent of GDP in 2015. In 2017 it was 8 percent of GDP. Ne (PDF chapter/section).* ### 3.2 percent in 2013, as the economy has adjusted to the low commodity prices. Exports and imports started to pick up in ### contryassessments - 3.2 percent in 2013, as the economy has adjusted to the low commodity prices. Exports and imports started to pick up in ### Current account: background and outlook - Exports and imports started to pick up in Q4: 2016, as commodity prices bottomed out. - Over the medium term, a moderate increase in the current account deficit is expected from a rise in capital goods and raw material imports tied to infrastructure investment and a pickup in domestic demand. - A gradual increase in manufacturing exports, stronger demand from trading partners, and more favorable commodity prices should help limit the current account deficit. ### Current account: assessment - Staff estimates a CA gap of 0.1 percent for 2017, consistent with: - estimated cyclically adjusted CA balance of -1.6 percent of GDP - norm of -1.7 percent of GDP. 1/ - Taking uncertainties into account, staff assesses that a norm of -3.2 percent to -0.2 percent of GDP is appropriate. 2/ - This suggests a CA gap in the range of -1.4 percent to 1.6 percent of GDP for 2017. - Domestic policy gaps, including in social spending and reserve accumulation, as well as policy gaps in partner countries (particularly fiscal) are largely offset by the unexplained residuals of the model, which could reflect structural distortions in the labor market and barriers to FDI and trade. ### Key CA figures (reported) - Actual CA: -1.7 - Cycl. Adj. CA: -1.6 - EBA CA Norm: -0.8 - EBA CA Gap: -0.8 - Staff Adj.: -0.9 - Staff CA Gap: 0.1 ### Real exchange rate: background - The REER remained broadly stable between 2013 and 2016. - In 2017, the average REER appreciated by 1.2 percent relative to the average of 2016 due to a relatively higher inflation rate than its trading partners, as the average NEER depreciated by 0.7 percent. - Estimates through May 2018 show that the REER has depreciated by 4.3 percent relative to the 2017 average. ### Real exchange rate: assessment - The EBA index and level REER models point to an REER gap of about 2.1 percent to -5.5 percent for 2017. - Staff’s REER gap assessment is in the range of -9.4 percent to 7.2 percent (based on the CA assessment and estimated elasticities). - These ranges are described as being in line with each other and with staff assessments. ### Capital and financial accounts: flows and policy measures — background - In 2017, net capital and financial account inflows were 2.9 percent of GDP, sustained by: - net FDI inflows of 2.0 percent of GDP - net portfolio inflows of 2.0 percent of GDP - partly offset by net other investment inflows of -1.1 percent of GDP. - In the first quarter of 2018, net capital and financial account inflows declined to 0.7 percent of GDP, with net portfolio inflows of -0.5 percent of GDP. ### Capital and financial accounts: assessment - Net and gross financial flows have been relatively steady since the global financial crisis despite some short periods of volatility. - The contained current account deficit and strengthened policy frameworks, including exchange rate flexibility since mid-2013, have also helped reduce capital flow volatility. - Continued strong policies focused on strengthening the fiscal position, keeping inflation in check, and easing supply bottlenecks would help sustain capital inflows in the medium term. ### FX intervention and reserves: background - Since mid-2013, Indonesia has had a more flexible exchange rate policy framework; its floating regime has better facilitated adjustments in exchange rates to market conditions. - At end-2017, reserves were US$130.2 billion (equal to 13 percent of GDP, about 138 percent of IMF’s reserve adequacy metric, and about 8 months of prospective imports of goods and services), compared with US$116.4 billion at end-2016. - Contingencies and swap lines amounting to about US$81½ billion are in place. - In February–April 2018, international reserves fell by US$7 billion to US$124.9 billion mainly due to FX intervention in response to depreciation pressures on the rupiah. ### FX intervention and reserves: assessment - While the composite metric may not adequately account for commodity price volatility, the current level of reserves (US$124.9 billion at end-April) should be sufficient to absorb most shocks, with predetermined drains also manageable. - FX intervention should aim primarily at preventing disorderly market conditions, while allowing the exchange rate to adjust to external shocks. ### Technical background notes (selected) - 1/ As Indonesia is among the few outlier countries regarding adult mortality rates, the demographic indicators are adjusted to account for the younger average prime-age and exit age from the workforce. This results in an adjustor of -0.9 percentage point being applied to the model-estimated CA norm (-0.8 percent of GDP). - 2/ A range of +/-1.5 percent is added to reflect the fact that the EBA-regression estimates are subject to normal uncertainty (the standard error of the EBA norm is 1.5 percent). *Individually assessed economy: Indonesia (concluded) — Technical Background Notes and related assessments provided in the source content.* ### 7.2 percent of GDP in 2016. ### contryassessments - 7.2 percent of GDP in 2016. ### Korea — Capital flows, FX intervention, and reserves - Findings - Non-resident portfolio inflows surged to $17.7 billion as foreigners sharply expanded purchases of debt securities. - Equity inflows were strong; share of foreign ownership in the domestic stock market rose to 33 percent in end-2017. - The present configuration of net and gross capital flows appears sustainable over the medium term. - Korea has demonstrated the capacity to absorb short-term capital-flow volatility of magnitudes occurred over the last few years. - FX intervention and reserves background - Korea has a floating exchange rate. - Staff estimates total net intervention in 2017 was around US$10 billion (0.7 percent of GDP); US$5 billion was in forward markets. - In 2018, net intervention as of end-April is estimated to have been around US$2 billion. - Reserves increased steadily from 2009 through mid-2014, remained broadly stable through 2016, and increased by $18 billion in 2017 including valuation effects. - At end-2017, total reserves stood at $389 billion (25.4 percent of GDP). - Assessment and policy implication - Intervention appears to have been limited to address disorderly market conditions since 2015. - Foreign exchange reserves were around 107 percent of the IMF’s composite reserve adequacy metric in end-2017, providing a sufficient buffer against a wide range of possible external shocks. ### Malaysia — External position, current account, REER, capital flows, and reserves - Overall assessment and trajectory - NIIP averaged around 1.7 percent of GDP since 2010; in 2017 it turned into a net liability position of 2 percent of GDP (2016: net assets of about 5¼ percent of GDP). - Official reserves contribute most to net assets; net portfolio liabilities contribute most to net liabilities. - Total external debt was about 69.4 percent of GDP in 2017; about one-third denominated in local currency and more than one-half of medium-term maturity. - Assessment: NIIP is expected to rise gradually over the medium term, reflecting projected moderate current account surpluses. Balance sheet strengths, maturity and currency composition of external debt, presence of longer-term foreign portfolio investors, exchange rate flexibility, and adequate reserves provide resilience to potential external vulnerabilities. - Policy recommendations (high level) - Continue medium-term fiscal consolidation. - Accommodate spending needs for further improvements in social protection and public healthcare. - Address structural bottlenecks (labor market frictions: skills mismatch; low female participation; weak education quality) and improve physical infrastructure to support higher private investment and productivity. - Current account (2017) — background and assessment - Background: CA surplus declined by about 7 percentage points of GDP between 2010 and 2017; in 2017 CA surplus was 3 percent (2016: 2.4 percent). - Assessment (EBA and staff estimates): - Actual CA: 3.0 - Cycl. Adj. CA: 3.7 - EBA CA Norm: 0.6 - EBA CA Gap: 3.1 - Staff Adj.: 0.0 - Staff CA Gap: 3.1 - The refined EBA CA model estimates 2017 CA norm at 0.5 percent of GDP after cyclical and multilateral consistency adjustments; the 2017 cyclically adjusted CA is estimated at about 3.7 percent of GDP, leading to an estimated 2017 CA gap of 3.2 percent of GDP (±about 1 percent of GDP). - Unidentified residuals explain the entire CA gap, potentially reflecting structural distortions and country-specific factors not included in the model. Low public healthcare spending explains part of the excess surplus. - Projection: CA balance expected to remain in surplus, albeit lower, over the medium term, driven by smaller private sector net saving. - Real exchange rate (REER) - Background: Annual average REER depreciated by 1.7 percent in 2017; nearly 15 percent lower from its 2013 peak. Since late 2017 REER appreciated; in March 2018 it was up by 5.5 percent from its 2017 average. - Assessment: EBA REER models estimate Malaysia’s REER to be about 33–36 percent below what is warranted by fundamentals and desirable policies. Staff assesses the REER gap in 2017 was close to -6¾ percent (± about 2 percent). - Capital and financial accounts; policy measures - Background: Since the Global Financial Crisis, Malaysia experienced significant capital flow volatilities largely driven by portfolio flows in and out of the local-currency debt market. In 2017, the annual financial account balance was in a small surplus for the first time since 2011. Net capital inflows continued in the first four months of 2018. - Since late 2016, the Financial Markets Committee has implemented measures to develop the onshore FX market. - Assessment: Exchange rate flexibility and macroeconomic policy adjustments should continue to play the central role in response to capital flow volatility. A more holistic approach toward onshore market development, including phasing out of current capital flow management measures, would have potential benefits. - FX intervention and reserves level - Background: Gross foreign reserves stood at US$102.4 billion in 2017; as of mid-May 2018, gross reserves were US$109.4 billion. - Assessment: Under the IMF’s composite reserve adequacy metric (classifying Malaysia’s regime as “floating”), gross official reserves are within the adequacy range (118 percent of the metric as of end-2017). In case of disorderly market conditions reserves could be deployed. In the face of a capital inflow surge, a combination of further reserve accumulation and some exchange rate appreciation would be appropriate. - Technical background notes (selected numeric facts) - As of end-2017, gross external assets were 132 percent of GDP. - Nonresident holdings of domestically-issued debt (mainly MGS) were about 12.2 percent of GDP as of end-2017. - Since the Global Financial Crisis, the financial account balance fluctuated between net inflows of 17 percent of GDP in 2011Q2 and net outflows of 11.5 percent of GDP in 2014Q1. - Financial Markets Committee measures announced on December 2, 2016; additional measures in April, September, and November 2017. ### Mexico — NIIP, current account, REER, capital flows, and reserves - NIIP and external position - Mexico’s NIIP was -45.7 percent of GDP in 2017 (gross foreign assets and liabilities were 54.8 percent and 100.6 percent of GDP, respectively). - Over the past five years NIIP remained relatively stable at around -47 percent of GDP. - Portfolio liabilities stood at 43.5 percent of GDP in 2017, of which around one fifth were holdings of local-currency government bonds. - A predominant share of FX liabilities was denominated in US dollars (80 percent in outstanding federal government securities). - 95 percent of debt securities liabilities were long term, mainly FX-denominated (41 percent) and local currency-denominated government bonds (28 percent), with average maturities of 21 and 8 years, respectively. - Projection: NIIP-to-GDP ratio projected to decline marginally to about -44 percent by 2023. - Assessment - NIIP is sustainable, but large gross foreign portfolio liabilities could be a source of vulnerability in case of global financial volatility. A significant weakening of the peso could complicate policy making through balance sheet exposures. - Policy recommendations - Continue to rely on the floating exchange rate as the main shock absorber and use foreign exchange intervention solely to prevent disorderly market conditions. - Structural reforms to improve competitiveness and strengthen exports are essential for boosting growth while maintaining external sustainability. - Authorities committed to reducing the public sector borrowing requirement from 4.6 percent of GDP in 2014 to 2.5 percent in 2018; target met with a margin already in 2017. - The IMF Flexible Credit Line provides an added buffer against global tail risks. - Current account (2017) — background and assessment - Background: In 2017, the current account deficit narrowed to 1.7 percent of GDP (1.4 percent cyclically adjusted), from 2.1 percent in 2016. - Assessment (EBA and staff estimates): - Actual CA: -1.7 - Cycl. Adj. CA: -1.4 - EBA CA Norm: -2.5 - EBA CA Gap: 1.1 - Staff Adj.: 0.6 - Staff CA Gap: 0.5 - The EBA model estimates a cyclically adjusted CA norm of -2.5 percent of GDP in 2017, implying a CA gap of 1.1 percent of GDP. Staff estimates a somewhat smaller gap within the range of -0.5 and 1.5 percent of GDP. - Real exchange rate (REER) - Background: Average REER in 2017 was 2.2 percent stronger than the 2016 average. It appreciated by 15.5 percent relative to its January 2017 low. As of May 2018, the REER had depreciated by 2.4 percent relative to the 2017 average. - Assessment: Various approaches yield different estimates of undervaluation: - EBA level REER regression: 11.9 percent undervaluation in 2017. - Index approach: 23.2 percent undervaluation. - External sustainability approach: 1.5 percent undervaluation. - Staff-assessed CA gap implies REER undervaluation of 3.8 percent (applying an estimated elasticity of 0.13). - Considering all estimates, staff assesses Mexico’s REER gap to be in the range of 4 to -12 percent; the peso is broadly in line with fundamentals. - Capital and financial accounts; flows and assessment - Background: During 2010-14, a large share of capital inflows went into locally-issued government paper and other portfolio investments. In 2015-17 gross portfolio inflows slowed markedly. Net flows from local currency government securities were marginally negative in 2017. - Assessment: Long average maturity of sovereign debt and high share of local currency financing reduce exposure to depreciation risks. Banking sector is well capitalized and liquid. Strong presence of foreign investors leaves Mexico exposed to capital flow reversals and risk premium increases. Authorities have refrained from capital flow management measures. - FX intervention and reserves level - Background: Central bank committed to free-floating exchange rate; discretionary intervention used solely to prevent disorderly market conditions. At end-2017, FX reserves were US$175.5 billion (15.3 percent of GDP), down from US$178.0 at end-2016. - February 2017: Foreign Exchange Commission announced a new FX hedging program enabling the Bank of Mexico to offer up to US$20 billion of non-deliverable forwards (NDF) settled in pesos with maturity up to 12 months. NDF sales in 2017 totaled US$5.5 billion. As of mid-May 2018, no new NDF sales or other discretionary interventions had taken place in 2018. - Assessment: Reserves at 123 percent of the ARA metric and 271 percent of short-term debt (at remaining maturity) are judged adequate. Staff recommends maintaining adequate reserve levels over the medium term. The Flexible Credit Line arrangement complements international reserves to protect against global tail risks. - Technical notes - The current account norm estimate has a standard error of 1.4 percent. ### Netherlands — NIIP, current account, and policy implications - NIIP and external position - NIIP increased to 74 percent of GDP at end-2017 (gross assets and liabilities totaling 1251 and 1177 percent of GDP, respectively), rising from almost balanced NIIP at end-2009. - Net FDI stock reached 956 billion euro (130 percent of GDP) at end-2017. - TARGET2 assets on the euro system increased to reach 120 billion euro. - Over the medium term, NIIP expected to continue growing to about 100 percent of GDP, in line with projected sizable CA surpluses. - Assessment: Safe-haven status and sizable foreign assets limit risks from large foreign liabilities. - Overall assessment and policy responses - The external position in 2017 was substantially stronger than the level consistent with medium-term fundamentals and desirable policy settings. - Potential policy responses: - Expansionary fiscal policy planned by the new government, progress in repairing household balance sheets, and strengthening the banking system could support domestic demand to reduce excess external imbalances. - Higher wage growth, consistent with tighter labor market conditions, would help rebalancing within the monetary union. - Structural reforms to raise productivity of small domestic firms and encourage domestic productive investment, and pension reforms to reduce precautionary savings, would also reduce the CA surplus. - Current account (2017) — background and assessment - Background: CA surplus increased to 10.2 percent of GDP in 2017 (10.3 percent cyclically adjusted), driven by continued strong net exports. CA has been in surplus since 1981. - Assessment (EBA and staff estimates): - Actual CA: 10.2 - Cycl. Adj. CA: 10.3 - EBA CA Norm: 3.5 - EBA CA Gap: 6.8 - Staff Adj.: 0.0 - Staff CA Gap: 6.8 - The EBA CA model estimates a CA norm of 3.5 percent and a CA gap of 6.8 percent of GDP in 2017. Given structural factors (high corporate savings, liquidity of multinationals, possible favorable tax treatment) staff assesses the norm in a range of 1.5-5.5 percent of GDP and a corresponding CA gap of 4.8-8.8 percent of GDP. - Short-term and medium-term drivers: Short-term expansionary fiscal stance will put downward pressure on the surplus; medium-to-long-term declines in the surplus expected from private sector deleveraging, declining gas exports, and demographic trends including divestment by pension funds. *Italic: Source — contryassessments - 7.2 percent of GDP in 2016.* ### 1.7 percent, respectively, in 2017. The REER ### contryassessments - 1.7 percent, respectively, in 2017. The REER ### Real Effective Exchange Rate (REER) valuation (Netherlands) - The REER appreciated by an additional 0.9 percent through May 2018, relative to the 2017 average. - The EBA REER models indicate a range of overvaluation of 10.6 percent (index model) to slight undervaluation of 0.7 percent (level model) in 2017, largely attributable to unexplained residuals. - The staff-assessed CA gap implies a REER undervaluation of 9.2 percent (elasticity of 0.74). - Taking into account all estimates and the uncertainty surrounding the EBA REER results, staff assesses that the REER remained undervalued by around 10 percent within a range of 7–13 percent. ### Capital and financial accounts: flows and policy measures (Netherlands) - Background: Net FDI and portfolio outflows dominate the financial account. FDI outflows are driven by the investment of corporate profits abroad. On average, gross FDI outflows largely match corporate profits. - Assessment: The strong external position limits vulnerabilities from capital flows. The financial account is likely to remain in deficit as long as the corporate sector continues to invest substantially abroad. ### FX intervention and reserves level (Netherlands / Euro area) - Background: The euro is a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Technical background notes (Netherlands) - In comparison with last year, the EBA-estimated CA gap in 2017 (unexplained residual plus the contribution of identified policy gaps) widened by 3.2 percent of GDP, reflecting increasing unidentified residuals. - The larger gap reflects a higher cyclically adjusted CA surplus (from 8.9 to 10.3 percent of GDP) and a much lower CA norm (from 5.3 to 3.5 percent of GDP) due to the exclusion of the financial center dummy. - The larger external balance sheet, presence of large international corporations, and issues related to the measurement of the current account add uncertainty to this assessment. According to the DNB, half of the positions in assets and liabilities are attributable to subsidiaries of foreign multinationals. ### Poland — Overall assessment and external position - Net international investment position (NIIP) stood at negative 65 percent of GDP in 2017. - Gross liabilities increased to 118 percent of GDP, while gross assets remained at the level of 2016 (52 percent of GDP). - FDI (equity and debt) accounted for 45 percent of gross external liabilities in 2017, and is diversified across sectors and source countries. - Gross external debt was 72 percent of GDP at end-2017; a quarter of it is liabilities to direct investors. - The share of short-term debt (at remaining maturity) is 28 percent of total gross debt. - Currency mismatch stems from different shares of euro-, USD- and zloty-denominated instruments in gross assets and liabilities, making movements in bilateral exchange rates of these three currencies affect the NIIP. - Assessment: While sizable external debt, including short-term debt, presents a vulnerability, rollover risk is mitigated by the large share of debt FDI, which tends to be stable. Sizable reserves also help to mitigate liquidity risk that may arise from rolling over the large amount of short-term debt. - Overall Assessment: The external position in 2017 was broadly in line with medium-term fundamentals and desirable policies. The cyclically adjusted CA balance in 2017 is expected to decline going forward on accelerated absorption and utilization of EU funds. Reserves are sufficient to guard against external shocks and disorderly market conditions. Developments since end-2017 do not change the overall assessment. ### Poland — Potential policy responses - Policies should manage the cyclical upswing to preserve external balance. - This will require timely monetary policy responses to prevent nascent overheating pressures from becoming more widespread and migrating to consumer prices. - A gradual structural fiscal consolidation is also needed from a cyclical perspective and to lower the structural deficit in order to create space to absorb future costs of adverse demographics and the eventual decline in EU funds. ### Poland — Current account (CA) assessment 2017 - Background: Sizable CA deficits during 2004-14 have been replaced more recently by close-to-balance/small surplus positions, notwithstanding a significant primary income deficit. - Poland’s CA turned positive in 2017 at 0.3 percent of GDP, as the increase in the services surplus more than offset the decline in the goods surplus. - From a saving-investment perspective, the increase in the CA in 2017 was supported by low public investment due to delayed EU funds absorption. - Assessment: For 2017, the cyclically adjusted current account stood at a surplus of 0.8 percent of GDP, and the EBA CA norm was a deficit of -1.7 percent of GDP. - The resulting EBA gap of 2.4 percent of GDP reflects the sum of domestic and external policy gaps of 0.4 percentage points, and an estimation residual of 2.1 percentage points. - Delayed absorption and utilization of EU funds account for about 1.4 percentage points of the EBA gap. - Staff assesses that the CA was broadly in line with fundamentals and medium-term policies in 2017, with a CA gap range centered on 1 (± 1) percent of GDP. Key numeric indicators (Poland, 2017) - Actual CA: 0.3 - Cycl. Adj. CA: 0.8 - EBA CA Norm: -1.7 - EBA CA Gap: 2.4 - Staff Adj.: 1.4 - Staff CA Gap: 1.0 ### Poland — Real exchange rate (REER) - The annual-average REER depreciated by a cumulative 7¾ percent during 2014-16, largely on nominal depreciation vis-à-vis the US dollar and the Swiss franc, as the zloty tends to move in line with the euro. - The depreciation is consistent with NBP policy rate cuts in response to deflationary pressures and domestic policy uncertainties in the run-up to and following the 2015 election. - The REER appreciated by 3.2 percent on average in 2017 (6.7 percent from end-2016 to end-2017), mainly on account of nominal appreciation. - Between end-2017 and end-May 2018, the zloty weakened by about *Source: contryassessments - 1.7 percent, respectively, in 2017. The REER* ### 6.9 percent against the US dolla ### 6.9 percent against the US dolla ### Poland — Real exchange rate and external position - REER movements: - The zloty appreciated by 6.9 percent against the US dollar, and by 5.9 percent against the euro, with no intervention from the NBP. - Estimates through May 2018 show that the REER has appreciated by 6.4 percent relative to the 2017 average. - Model-based REER assessments for 2017: - EBA REER and CA models suggest an undervaluation of between 0 and 5 percent for 2017. - REER gap implied by the EBA CA model: -5 percent. - REER index model gap: -2.5 percent. - REER level model for Poland suggests an undervaluation of 16.9 percent, but the model has residuals of 14.6 percent and may not adequately capture equilibrium changes. - Staff assessment: - Staff assesses Poland’s REER in 2017 to have been close to the level consistent with fundamentals and desirable policy settings, with a gap in range of -5 to 0 percent. - Capital and financial accounts: - Background: capital account dominated by EU funds inflows for financing investment projects; temporary slowdown in EU funds absorption in 2016-17. - Net financial inflows have decreased and were volatile in recent years. - Foreign holdings of government debt securities: around 41.7 percent (indicating potential vulnerabilities). - Domestic banks increased holdings in 2017 in response to the introduction of the bank asset tax, which exempts government bonds. - Diversified foreign investor base mitigates risks. - FX intervention and reserves: - Gross international reserves were stable at US$113 billion at end-2017. - Net reserves increased from US$96.1 billion at end-2016 to about US$104.9 billion at end-2017 as the NBP built a precautionary reserve position. - Net reserves are now about adequate, standing at 95 percent of the IMF’s composite reserve adequacy (ARA) metric in 2017 (gross reserves are about 110 percent of the ARA metric). - Technical notes (selected): - The cyclically adjusted CA balance is assessed to be -0.7 (instead of model-implied 0.8) percent of GDP. - Identified policy gaps: domestic fiscal policy gap of -0.4 percentage points; net contribution of fiscal policies to the current account gap: +0.2 percentage points. Credit gap and health spending add 0.3 percentage points. Capital controls and reserves contribute -0.1 percent of GDP. - EBA estimation standard error for the 2017 CA norm: 0.6 percent of GDP. ### Russia — External position, current account, REER, and policy - Overall external position and NIIP: - NIIP at end-2017: 18 percent of GDP (marginally higher than in 2016 and up from 10 percent in 2013). - Gross assets: 88 percent of GDP; liabilities: 70 percent of GDP (split evenly between equity and debt). - Total external debt at end-2017: 34 percent of GDP, a 6 percentage point reduction from the year before. - No obvious maturity mismatches between gross asset and liability positions. - Historical NIIP path affected by unfavorable valuation changes and treatment of “disguised” capital outflows. - Assessment: - Projected current account surpluses suggest Russia will continue to maintain a positive IIP, lowering risks to external stability. - Official external assets have been increasing rapidly since the new fiscal rule; private sector deleveraging reduces risks further. - Worsening geopolitical tensions have weakened the exchange rate but have not altered the overall assessment; correction likely brought the REER closer to fundamentals. - Exceptional uncertainty due to evolving sanctions and their structural implications. - Policy recommendations: - Fiscal policy should operate within the parameters of the new fiscal rule to reduce oil price volatility impact on the non-oil sector. - Government expenditure should be rebalanced to capital spending while leaving space for higher health spending. - Renewed emphasis on structural reforms to invigorate the private sector to increase net savings and create room for higher investment over the medium term. - Current account (2017) — background and assessment: - CA balance: surged to 5 percent of GDP in 2015, fell to 1.9 percent of GDP in 2016, and rose to 2.3 percent of GDP in 2017. - EBA CA model norm for 2017: 3.8 percent of GDP; cyclically adjusted CA surplus: 3.2 of GDP; EBA CA gap: -0.5 percent of GDP. - Staff-adjusted contribution: 0.7; Staff CA gap: -1.3 percent of GDP. - Staff assesses the 2017 CA gap at -1¼ percent, with a confidence interval between -2½ and 0 percent. - Fiscal gap accounts for most of the CA gap; medium-term recommendation: tighten fiscal policy while raising infrastructure and health spending to rebuild buffers and save more oil wealth. - Real exchange rate (REER): - REER depreciated by over 35 percent between mid-2014 and February 2016; appreciated by 16 percent in 2017; remained about 15 percent below the pre-crisis level since mid-2017. - By May 2018, the REER had depreciated by 5.8 percent relative to the 2017 average, partly due to US sanctions in April. - Both EBA Level and Index REER models indicate a small undervaluation of around 5 percent. - Staff assesses the 2017 REER was between 0 and 10 percent above its equilibrium level (applying an estimated elasticity of 0.26). - Capital and financial accounts: - Net private capital outflows continued in 2017 but at a significantly slower pace than in 2014-15; private sector external deleveraging continued. - Over the medium term, structural outflows are expected to decline if investment climate improves. - Floating exchange rate and large international reserves provide buffers against accelerated capital outflows. - FX intervention and reserves: - International reserves rose to US$457 billion at end-March 2018, up from U$378 billion at end-2016, due to valuation effects and MoF FX purchases under the new fiscal rule. - International reserves at end-2017 were equivalent to 264 percent of the IMF’s reserve adequacy metric (considerably above the adequacy range of 100-150 percent). - An additional commodity buffer of $58 million is appropriate, translating into a ratio of reserves to the buffer-augmented metric of 195 percent. - Recommendation: limit large FX interventions to episodes of market distress. - Technical notes (selected): - Russia’s foreign assets are mostly in foreign currency (over 93 percent as of end-2017); liabilities predominantly in rubles (64 percent). - About three-quarters of external debt is denominated in foreign currency. - The 2017 CA norm for Russia is 2½ percentage points of GDP lower than under the previous methodology. - Commodity buffer computed in line with Annex III of the Guidance Note on Reserve Adequacy. ### Saudi Arabia — External balance, current account, REER, and reserves - External balance sheet and NIIP: - Net external assets: 81 percent of GDP at end-2017. - External assets declined by 10 percent of GDP during 2017 and 17 percent of GDP since their 2015 peak, largely due to a decline in central bank FX reserves. - External liabilities rose by 1.1 percent of GDP in 2017 mainly because of new government borrowing. - Projections: NIIP-to-GDP ratio to increase over the medium-term to around 92.6 percent of GDP in 2023 as the CA remains in surplus. - Assessment: - External position in 2017 was weaker than the level consistent with desirable medium-term fiscal policy settings. - Pegged exchange rate provides a credible policy anchor. - REER depreciated in 2017, but trend reversed with strengthening of the US dollar in recent months. - External adjustment driven primarily by fiscal policy due to oil-dominated exports and limited substitutability between imports and domestic goods. - Despite drawdown since 2015, reserves remain very comfortable by IMF metrics; external savings not sufficient from an intergenerational equity perspective. - Policy recommendations: - Continued fiscal consolidation short- and medium-term to strengthen the CA and increase saving for future generations. - Fiscal adjustment based on energy price reforms, non-oil revenue measures, and expenditure restraint. - Support fiscal adjustment with reforms to strengthen the fiscal framework and pursue structural reforms to diversify the economy and boost the non-oil tradables sector. - Current account (2017): - CA moved into a surplus of 2.7 percent of GDP in 2017 from a deficit of 3.9 percent of GDP in 2016. - Imports of goods fell by 7 percent; exports increased by 20 percent largely due to higher oil prices; import volumes fell by 9 percent while export volumes decreased by 1.5 percent. - Terms of trade improved by 22.5 percent in 2017 and projected to improve by a further 28.8 percent in 2018. - Trade balance rose to over 15 percent of GDP. CA surplus expected to increase to 9.3 percent of GDP in 2018 and then narrow over the medium-term as oil price declines. - Staff CA gap: -2.0 (staff assesses CA gap in range -1 to -3 percent of GDP in 2017). - Methodology-dependent CA gaps: -2.4 percent (EBA-lite macro-balance), -1.9 percent (external sustainability), -1.6 percent (alternative oil-exporters specification). - Real exchange rate (REER): - Riyal pegged to the US dollar at 3.75 since 1986. - REER in 2017 on average 15 percent above its 10-year average, gap declined to 10 percent by year-end. - Estimates through May 2018 show REER depreciated by 2.0 percent relative to the 2017 average. - Staff estimates average REER gap in 2017 in the range of 10-20 percent, but at the lower end by end-2017; expected to narrow as fiscal consolidation proceeds. - Capital and financial accounts: - Recorded net financial outflows increased in 2017. - Errors and omissions declined to 0.6 percent of GDP in 2017 compared with 10.3 percent of GDP in 2016. - FX reserves continued to fall but at a slower pace. - Analysis complicated by large errors and omissions in some years; strong reserves position limits immediate risks. - FX intervention and reserves: - Government developing a sovereign wealth fund by broadening PIF mandate; most foreign assets still held at the central bank. - Reserves fell to $489 billion (71 percent of GDP, 28 months of imports, and 470 percent of the IMF’s reserve metric) at end-2017, down from $727 billion in 2014. - Reserves are more than adequate for precautionary purposes per IMF metrics; continued fiscal adjustment needed to strengthen CA and increase savings for future generations. - Technical notes (selected): - NIIP may be underestimated given large errors and omissions in the BoP and inconsistencies between BoP and IIP. - At current oil production, a $1 change in the oil price results in a 0.4 percent of GDP first-round change in the CA balance. - Oil price assumptions: $70.7 in 2018, declining to $59.2 in 2023 ($53.2 in 2017). - EBA models do not include Saudi Arabia; staff considered three methodologies including intertemporal considerations for resource exporters. Estimated CA norms: 5.5 percent (constant real per capita annuity) and 2.7 percent (constant real annuity); EBA-lite CA norm: 4.6 percent; alternative oil-exporter specification norm: 3.8 percent. ### Singapore — NIIP, current account, REER, and policy levers - NIIP and external position: - NIIP increased to 248 percent of GDP in 2017 (highest since 2009; lower than pre-GFC peak of 265 percent of GDP in 2006). - CA surplus a main driver since the GFC; valuation effects also contributed in 2017. - NIIP projected to rise over the medium term. - Gross non-FDI liabilities: 472 percent of GDP in 2017 (predominantly cross-border deposit taking by foreign bank branches). - Mitigants: banks’ large short-term external assets and authorities’ close monitoring of banks’ liquidity risk profiles. - Official reserves and other official liquid assets are large. - Assessment: - External position in 2017 substantially stronger than consistent with fundamentals and desirable policies. - CA surplus of 19 percent of GDP in 2017, similar to 2016. - Staff assesses 2017 CA as substantially higher than warranted by fundamentals and desirable policies, by 2.5–8.5 percent of GDP. Staff CA gap: 5.5. - Fiscal balance contributed about 2 percent of GDP to identified policy gap. - Policy responses: - Higher public investment in infrastructure, human capital, and public health-care to moderate current account imbalances over the medium term by lowering net public saving. - Structural reforms to improve labor productivity, supporting a trend appreciation of the currency. - Gradual normalization of monetary policy by MAS to allow gradual NEER appreciation. - REER and FX: - REER depreciated by 1 percent year over year in 2017 due to low inflation; NEER appreciated by 0.2 percent year over year. - Estimates through May 2018 show REER has depreciated by 1.4 percent relative to the 2017 average. - Staff assesses the REER is 4-16 percent weaker than warranted by fundamentals and desirable policies; assessment subject to wide uncertainty. - Official reserves held by MAS: US$ 280 billion (86 percent of GDP) in 2017. - Current level of official external assets appears adequate; no clear case for further accumulation for precautionary purposes. - Capital and financial accounts: - Open capital account. Financial account deficit tends to rise during periods of lower global financial uncertainty. - 2017: financial account deficit narrowed substantially to 10 percent of GDP from 15-20 percent in 2014-16. - Drivers: decrease in outflows in other investments and resumed inflows in financial derivatives; sizable net inward FDI. - Assessment: financial account likely to remain in deficit as long as trade surplus remains large. - Technical notes (selected): - Singapore not included in EBA sample because it is an outlier; nonstandard factors make quantitative assessment subject to significant uncertainty. - Identified policy gaps driven largely by need for more fiscal spending to strengthen the social safety net. - Official external assets managed by GIC and Temasek amount to at least 70 percent of GDP. ### South Africa — External balance, CA, REER, and reserves - NIIP and external liabilities: - NIIP at end-2017: 12 percent of GDP (after rising to 16 percent in 2015). - Gross external debt rose to 49.6 percent of GDP at end-2017 from 26 percent at end-2008 due to increase in long-term debt. - Short-term external debt (residual maturity): 14.2 percent of GDP at end-2017. - Mitigants: comfortable external asset position and sizable rand-denominated share of external debt (about half). - Assessment: - External position in 2017 moderately weaker than implied by fundamentals and desirable policy settings. - Current account gap broadly unchanged in 2017; high reliance on non-FDI flows to finance CA deficit. - Structural rigidities result in slow pace of CA adjustment. - Policy responses: - Improve competitiveness, increase employment and savings: foster entry into key product markets (power generation, transportation, telecommunications); upgrades in infrastructure and education/skills within fiscal envelope; greater financial inclusion. - Preserve government debt sustainability; accelerate labor and product market reforms to continue attracting foreign inflows such as FDI. - Seize opportunities (e.g., large FDI transactions) to accumulate reserves to strengthen FX liquidity buffers. - Current account (2017): - CA deficit narrowed to 2.5 percent of GDP in 2017 from 2.8 percent in 2016. - CA deficit projected to widen to around 3 percent of GDP in 2018 as trade surplus moderates. - CA regression model estimates CA norm surplus of 0.7 percent of GDP; adjustment for demographic factors yields CA norm of -0.4 percent of GDP. - Cyclically adjusted CA in 2017: -2.5 percent of GDP; additional statistical adjustment of 0.8 percent of GDP leads to revised cyclically adjusted CA of -1.7 percent of GDP and CA gap of -1.3 percent of GDP. - Actual CA: -2.5; Cycl. Adj. CA: -2.5; EBA CA Norm: 0.7; EBA CA Gap: -3.2; Staff Adj.: -1.9; Staff CA Gap: -1.3. - Real exchange rate (REER): - After several years of REER depreciation, CPI-REER appreciated by 12.4 percent on average in 2017 relative to 2016. - As of May 2018, REER had appreciated an additional 5.6 percent relative to the 2017 average. - REER assessments: CA approaches point to overvaluation of 2–9 percent; REER approaches point to undervaluation between 7.4 percent (level approach) and 13.4 percent (index approach). Staff assesses REER overvaluation of 0–10 percent for 2017, broadly consistent with the CA gap. - Capital and financial accounts: - Net FDI flows at -1.7 percent of GDP in 2017 (fourth consecutive year with net FDI outflows). - Portfolio investment: 4.7 percent of GDP in 2017; main source of CA financing. - Gross external financing needs: 14 percent of GDP in 2017. - High reliance on non-FDI flows and high nonresident holdings of local financial assets pose risks, mitigated by floating exchange rate and domestic institutional investor base. - FX intervention and reserves: - Floating exchange rate regime; FX intervention rare. - International reserves equivalent to 14.5 percent of GDP at end-2017, down from 16 percent the year before. - Reserves cover 5½ months of projected imports but are below the IMF’s composite adequacy metric (64 percent of the metric without CFMs, 70 percent after considering them). - Assessment: reserve accumulation desirable as conditions allow, while maintaining primacy of inflation objective. - Technical notes (selected): - Demographic adjustor: -1.1 percent of GDP to model-estimated CA norm due to younger average prime-age and exit age from the workforce. - Combined adjustment to cyclically adjusted CA of 0.8 percent of GDP for SACU transfers and valuation changes. - ES approach implies stabilizing NIIP at emerging market peers’ benchmark (-35 percent of GDP) would require CA deficit of 1.4 percent of GDP; staff’s adjusted medium-term projection of CA deficit of 3.6 percent implies CA gap of -2.3 percent of GDP. - Long-run elasticity estimate of 0.27 applied to REER implies overvaluation of 2–9 percent; staff assesses REER overvaluation order 0–10 percent. ### Spain — NIIP, current account, REER, and policy advice - NIIP and external vulnerabilities: - NIIP: -81 percent of GDP at end-2017 (dropped from -35 percent in 2000 to -94 percent in 2009; improved by 14 percentage points since 2013). - Gross liabilities: 242 percent of GDP in 2017, with more than 2/3 as external debt. - NIIP share by general government and central bank increased from around ¼ in 2010 to ¾ in 2017; TARGET2 liabilities reached 32 percent of GDP by end-2017. - External vulnerabilities: large negative NIIP, large gross financing needs, and potential adverse valuation effects. - Mitigants: favorable maturity structure of outstanding sovereign debt (averaging 7 years) and ECB measures like QE lowering cost of debt. - Assessment: - External position in 2017 moderately weaker than consistent with medium-term fundamentals and desirable policy settings. - External position continues to gradually strengthen. - Staff assesses a CA norm guided by external sustainability objectives (strengthen NIIP to above -50 percent over medium term) yielding CA norm about 3 percent of GDP with range 2-4 percent, and CA gap of -2.5 to -0.5 percent of GDP. - Policy recommendations: - Reduce structural fiscal deficit to lower remaining imbalances. - Continue structural labor market reforms and faster implementation of product market reforms. - Continued euro-area monetary accommodation to lift inflation and support external demand and adjustment. - Current account (2017): - CA surplus: 1.9 percent of GDP in 2017 (fifth consecutive annual CA surplus). - EBA CA model suggests norm of 1.4 percent of GDP for 2017, roughly equal to cyclically adjusted CA of 1.5 percent of GDP; EBA CA gap: 0.1. - Staff adjustments lead to Staff Adj.: 1.6 and Staff CA Gap: -1.5. - Staff places more weight on external sustainability given large negative NIIP and sets a higher CA norm to strengthen NIIP. - Real exchange rate (REER): - In 2017, CPI- and ULC-based REER appreciated by 2 percent from 2016 averages. - As of May 2018, CPI-based REER and ULC-based REER appreciated an additional 0.6 to 2.0 percent relative to 2017 averages due to euro appreciation. - EBA REER models estimate an overvaluation in range 5.1 to 5.8 percent for 2017; CA model implies close-to-zero overvaluation. - Staff assesses 2017 REER gap in range of 3 to 10 percent, accounting for historical REER and NIIP sustainability risks. - Capital and financial accounts: - Financing conditions favorable; sovereign yields near historical lows. - Private sector deleveraging continued; TARGET2 liabilities increased during 2015-17 at average pace of 5 percent of GDP. - Recent net capital outflows explained in part by net FDI outflow. - Assessment: ECB actions, domestic reforms, and fiscal consolidation improved investor sentiment, but large external financing needs leave Spain vulnerable to sudden changes in market sentiment and spillovers. - FX intervention and reserves: - Euro is free floating and has global reserve currency status; euro-area reserves typically low relative to standard metrics. - Technical notes (selected): - EBA model suggests a CA norm of 1.4 percent of GDP with standard deviation of 1.3 percent. - Staff-guided CA norm of 2-4 percent of GDP necessary to strengthen NIIP by about 5 percent of GDP annually over the next 5-10 years. - Semi-elasticity of the CA to the REER estimated at 0.28. *Italic: Source — contryassessments - 6.9 percent against the US dolla (PDF chapter content provided).* ### 9.6 percent of GDP in 2017, up 4. ### contryassessments - 9.6 percent of GDP in 2017, up 4. ### Foreign asset and liability position and trajectory - Net IIP: "9.6 percent of GDP in 2017, up 4. 6 percentage points in the year." - Average annual increase in net IIP over the last decade: "about 0.7 percent of GDP." - Average CA surplus over the last decade: "5.3 percent of GDP." - Large errors and omissions: "averaged -2.9 percent of GDP in the past decade." - Gross liabilities: "278 percent of GDP in 2017, with about a third being external debt (91 percent of GDP)." - Vulnerabilities: rollover risk of external debt (including banks’ covered bonds) moderated by banks’ liquidity and capital buffers, strong FX reserves, and low public debt. ### Overall assessment - "Sweden’s external position in 2017 was moderately stronger than the level consistent with medium-term fundamentals and desirable policies." - Subsequent developments: "do not point to a change in the external position." ### Potential policy responses - Under current and prospective policies, "a decline in the current account surplus can be expected in the medium-term." - Monetary: "Accommodative monetary policy is supporting domestic demand growth, and some appreciation of the krona is expected when inflation returns to target." - Fiscal: "A mildly expansionary fiscal policy stance—consistent with converging to the lower medium-term surplus target—will also support demand going forward." - Investment: "Overall investment is solid, but it remains important to implement reforms to sustain the higher level of residential investment." - Labor market / integration: "Efforts to facilitate migrant integration into the labor market should continue in order to raise potential output and also reduce household uncertainties around the sustainability of Sweden’s strong social model." ### Current account (CA) — Assessment 2017 Background - CA balance: "estimated to have fallen to 3.2 percent of GDP in 2017, from 4.2 percent in 2016 and well below its average in the past decade (5.3 percent)." - Decline partly due to "an unusually large decline in net services (of 1.1 percent of GDP), with three-fifths of which coming from financial services and other unspecified services." Assessment and key metrics - "The cyclically adjusted current account was 3.6 percent of GDP in 2017, 1.8 percentage points above the cyclically adjusted EBA norm of 1.8 percent of GDP." - Note on model fit: "the estimated EBA norm for Sweden has been below the actual CA balance for the past two decades, suggesting that factors not captured by the model may also be driving Sweden’s savings-investment balances." - Staff assessment: "staff assesses Sweden’s CA gap at 1.6 percent of GDP in 2017, within a range of +/- 1.5 percent of GDP." - Tabulated values as reported in source: - Actual CA: 3.3 - Cycl. Adj. CA: 3.6 - EBA CA Norm: 1.8 - EBA CA Gap: 1.8 - Staff Adj.: 0.2 - Staff CA Gap: 1.6 ### Real exchange rate (REER) Background - "The Swedish krona was mostly unchanged in real effective terms in 2017 relative to its average level in 2016, as monetary policy in Sweden helped keep the yield curve broadly aligned with that of Germany." - "As of May 2018, the REER has weakened by 5.8 percent relative to the 2017 average." Assessment and valuation range - EBA REER results: "EBA analysis suggest a gap of -10 percent using the REER index and level approaches, respectively, for 2017." - ULC-based REER: "the ULC based REER index is only 3 percent below its 25-year average, well within its +/- 12.5 percent historical fluctuation range." - Applying a 0.25 semi-elasticity of CA to REER to the CA gap of "1.6 percent +/- 1.5 percent of GDP gives a valuation range for the krona of 0 to -12 percent." - Staff weighting and final assessment: "Given uncertainties related to EBA’s CA gap estimates for Sweden, staff gives greater weight to estimates from the EBA REER models and the ULC based REER position, and assesses the krona to be undervalued by 0 to 10 percent." - Outlook: "This REER gap is expected to be temporary, with the krona likely to appreciate in the medium term as monetary policy eventually normalizes." ### Capital and financial accounts: flows and policy measures Background - Large banks: "Given their size and funding model, Sweden’s large banks remain vulnerable to liquidity risks stemming from global wholesale markets even though banks have improved their structural liquidity measures in recent years." Assessment and measures - Desirable funding shift: "A further decline in banks’ short-term funding in favor of longer maturities is desirable over time." - Macroprudential: "Macroprudential policies, including planned increases in capital buffers of domestic banks, raising funding stability standards, and mortgage amortization regulations on the household side, can help contain vulnerabilities and hence potential liquidity risks." ### FX intervention and reserves level Background - Exchange rate regime: "The exchange rate is freely floating—Riksbank statements regarding their potential to intervene have not as yet been implemented." - Foreign currency reserves: "Foreign currency reserves stood at USD 54 billion in December 2017, which is equivalent to 20 percent of the short-term external debt of monetary and financial institutions (primarily banks) and about 11 percent of GDP." Assessment and recommendation - Reserves policy: "In view of the high dependence of Swedish banks on wholesale funding in foreign currency, and the disruptions in such funding that have occurred at times of international financial distress, it would not be appropriate to reduce Sweden’s existing reserves." - Regulation suggestion: "A further tightening of FX liquidity requirements on banks should be evaluated." _Italic: Source: contryassessments - 9.6 percent of GDP in 2017, up 4._ ### 3.4 percent relative to 2016 4/, while, as of May 2018, the REE ### contryassessments - 3.4 percent relative to 2016 4/, while, as of May 2018, the REE ### Thailand — External position and REER - Assessment of REER: - Using an elasticity of 0.6, staff assesses the 2017 REER to be 7 percent to 14 percent below levels consistent with medium-term fundamentals and desirable policies. - The EBA index REER gap in 2017 is estimated at 6.4 percent; the EBA level REER gap is estimated at -2.1 percent. - The REER appreciated more than 6 percent since 2005. - The gap is expected to narrow over the medium term as policy stimulus and structural reforms support domestic demand and a growth-driven real exchange rate appreciation process. - Capital and financial accounts (2017): - Capital and financial account balance has been negative since 2013; in 2017 the net negative balance amounted to 4 percent of GDP. - Outward FDI: 4.6 percent of GDP. - Outward portfolio investment: 2.6 percent of GDP (two-thirds equity securities). - Portfolio inflows: 2.1 percent of GDP (mostly long-term government and corporate securities). - Net other investment outflows: about 1 percent of GDP. - Authorities continued financial account liberalization, encouraging outward investment by residents. - FX intervention and reserves level (2017 and 2018Q1): - Exchange rate regime: classified as (de jure and de facto) floating. - International reserves were 44½ percent of GDP in 2017. - Reserves were over three times short-term debt, 234 percent of the IMF’s reserve metric unadjusted for capital controls, and 278 percent of the metric adjusted for capital controls. - Staff considers the unadjusted adequacy metric to be more appropriate. - International reserves (including net forward position) increased by US$41.7 billion (9 percent of GDP) during 2017, and further increased by US$12.1 billion (2½ percent of GDP) in 2018Q1. - Assessment: Reserves are higher than the range of the IMF’s adequacy metrics and there is no need to build up reserves for precautionary purposes. The exchange rate should move flexibly, acting as a shock absorber, with intervention limited to avoiding disorderly market conditions. ### Turkey — Overall external assessment and vulnerabilities - NIIP and liabilities: - NIIP deteriorated from -42 percent of GDP in 2016 to -53 percent of GDP at end-2017. - Total foreign liabilities: 80 percent of GDP. - Debt liabilities: 53 percent of GDP. - Short-term debt and non-resident holding of domestic portfolio debt amount to around 25 percent of GDP. - 40 percent of long-term debt is on adjustable interest rate terms. - 37 percent of private domestic debt is denominated in FX. - Non-debt external liabilities: 27 percent of GDP; FDI equity capital liabilities: 20 percent of GDP. - Assessment and projection: - Large negative NIIP and liability composition expose Turkey to liquidity shocks, sudden shifts in investor sentiment, and increases in global interest rates. - Turkey’s NIIP is projected to deteriorate further by about 5 percentage points of GDP by 2023 due to sustained CA deficits. - FX component of domestic debt poses balance sheet risk for corporates with potential to worsen bank asset quality. - Policy recommendations: - Tighter macroeconomic policies to reduce the large current account deficit, allow reserves to be rebuilt, raise the NIIP, and shift liability composition away from short-term debt. - Specifically: tighter fiscal, quasi-fiscal, and monetary policies to rein in domestic demand and imports. - Macroprudential policies to slow credit growth, improve quality of external financing, and lower FX exposure risks. - Monetary policy should aim at re-anchoring inflation expectations and building credibility of the inflation target. - CBRT should increase reserve coverage, while limiting FX sales to periods of excessive lira volatility. - Reforms to strengthen competitiveness and encourage private saving to sustain external rebalancing. ### Turkey — Current account and REER (2017 and May 2018) - Current account (2011–2017): - CA deficit narrowed from 8.9 to 3.8 percent of GDP between 2011 and 2016; widened to 5.6 percent of GDP in 2017. - Additional cyclical contribution to the CA deficit due to gold imports in 2017 estimated at 0.7 percent of GDP. - EBA and staff CA numbers (2017): - Actual CA: -5.6 - Cycl. Adj. CA: -4.8 - EBA CA Norm: -0.9 - EBA CA Gap: -4.0 - Staff Adj.: -1.8 - Staff CA Gap: -2.2 - Staff assesses the CA gap to be in the -1.2 to -3.2 percent of GDP range after adjustments. - REER: - REER depreciated by 10 percent in 2017 from the year before, standing 25 percent below its peak. - By May 2018, the lira had fallen an additional 13 percent in real terms relative to the 2017 average. - EBA REER Index and level approaches suggest REER undervaluation in 2017 in the range of 5-6 percent. - EBA CA approach points to REER overvaluation of around 14.5 percent. - ES approach suggests REER broadly in line with fundamentals. - Staff assesses the 2017 REER to have moved to the broadly in line range (+/-10 percent). ### Turkey — Capital flows, financing quality, and reserves (2017) - Financing and flows: - Quality of financing weakened in 2017 with a decline in net FDI (to below 1 percent of GDP) and higher portfolio inflows into government and bank debt securities. - Rollover rates on non-financial corporate external loans declined earlier in the year but have recovered. - Turkey has not made use of capital controls on either inflows or outflows. - Gross external financing needs are over 25 percent of GDP. - FX intervention and reserves: - Exchange rate: de facto and de jure floating. - CBRT stopped selling foreign exchange to commercial banks in 2016 though continues direct sales of FX to energy-importing SOEs. - Measures to support FX liquidity included 1-week FX deposit auctions, changes to the Reserve Option Mechanism, and accepting below-market rate lira payments for US dollar–denominated export rediscount credit repayments. - Gross reserves: around $108 billion USD at end-2017 (82 percent of the ARA metric). - Net international reserves declined to $31 billion USD. - Assessment: Given low reserve coverage of external financing requirements (less than half) and low net international reserves, further reserve accumulation is needed. ### United Kingdom — Overall external assessment and policy implications - NIIP and dynamics: - NIIP declined from -4.4 percent of GDP in 2016 to -12.8 percent of GDP in 2017. - Over the past five years, the NIIP has strengthened by 16 percentage points, reflecting a negative CA contribution (-24pp) more than offset by valuation and growth effects (35 percentage points and 5 percentage points, respectively). - Both gross assets and liabilities amount to over500 percent of GDP. - Assessment: - The external position in 2017 was weaker than implied by medium-term fundamentals and desirable policy settings. - Uncertainty is significant due to measurement issues and uncertainty about future trade arrangement with the EU. - Policy recommendations: - Continue the current fiscal consolidation plan within a medium-term framework to support external rebalancing. - Further structural reforms to broaden the skill base and invest in public infrastructure to boost productivity. - Maintain financial stability through macroprudential policies to support private-sector saving. - CA (2017) and staff assessment: - Actual CA: -4.1 - Cycl. Adj. CA: -4.0 - EBA CA Norm: 1.0 - EBA CA Gap: -5.0 - Staff Adj.: -2.0 - Staff CA Gap: -3.0 - Staff assesses the 2017 cyclically adjusted CA balance to be 1 to 5 percent of GDP weaker than the CA norm, with a mid-point of 3 percent of GDP. - REER (2015–May 2018): - Sterling depreciated by 10 percent in 2016 in real effective terms relative to 2015 and by an additional five percent from 2016 to 2017. - As of May 2018 the REER had appreciated by 1.9 percent relative to its 2017 average. - EBA REER level and index approaches suggest a gap of -9.3 and -10.0 percent, respectively, for 2017. - Overall, staff assesses the REER to be between 0 and 15 percent above the level consistent with fundamental and desirable policy settings. - Capital and financial accounts: - Portfolio investment and other investment are key components of the financial account given the UK’s role as an international financial center. - Large fluctuations in capital flows are inherent and a potential source of vulnerability, mitigated by sound financial regulation and supervision. - FX intervention and reserves: - The pound has the status of a global reserve currency. - Reserves held by the UK are typically low relative to standard metrics, and the currency is free floating. ### United States — External position, risks, and policy recommendations - NIIP and projection: - NIIP increased from -44.7 percent of GDP in 2016 to -40.5 percent of GDP in 2017. - Under staff’s baseline scenario, the NIIP is projected to decline by about 8 percent of GDP over the next five years due to a path of increasing current account deficits. - Assessment and risks: - The US external position was moderately weaker than implied by medium-term fundamentals and desirable policies in 2017. - Financial stability risks could surface from an unexpected decline in foreign demand for US fixed income securities; risk has risen with deterioration in the US medium-term fiscal outlook but remains moderate given the dominant status of the US dollar as a reserve currency. - Most US foreign assets are denominated in foreign currency and around 65 percent are in the form of FDI and portfolio equity claims. - Current account (2017) and drivers: - US CA deficit was unchanged between 2016 and 2017 at 2.4 percent of GDP (compared with 2.1 percent of GDP in 2013). - Non-oil balance reached a deficit of 2.0 percent of GDP in 2017 compared with a deficit of 0.6 percent of GDP in 2013. - Two opposing forces in 2017: a depreciating dollar and stronger private investment growth. - CA deficit expected to increase over the medium-term due to a stronger US economy and planned fiscal expansion, including the 2017 tax cuts. - Policy recommendations: - Fiscal consolidation to achieve a general government primary surplus of about 1¼ percent of GDP (a federal government primary surplus of about 1½ percent of GDP) to put the debt-GDP ratio on a downward path and address the CA gap. - Structural policies to strengthen export competitiveness within a tighter budgetary envelope: upgrade transportation infrastructure investment, enhance schooling and training, support the working poor, and increase labor force growth (including skill-based immigration reform). - Resolve trade and investment disagreements without imposing tariff and non-tariff barriers. *Source: Technical background and individual economy assessments as presented in the supplied IMF content.* ### 0.7 percent of GDP. The cyclically adjusted CA gap is -1.5 perc ### United States (concluded) ### Current account and CA gaps - Actual CA: -2.4 - Cycl. Adj. CA: -2.3 - EBA CA Norm: -0.7 - EBA CA Gap: -1.6 - Staff Adj.: -0.1 - Staff CA Gap: -1.5 - The cyclically adjusted CA gap is -1.5 percent of GDP for 2017, reflecting policy gaps (-0.6 percent of GDP) and an unidentified residual (about -1.0 percent of GDP). - The External Sustainability Approach estimates a CA gap of -2.2 percent of GDP. - On balance, staff assesses the 2017 cyclically adjusted CA to be 1.0 to 2.0 percent of GDP lower than the level implied by medium-term fundamentals and desirable policies. ### Real exchange rate - REER appreciated by about 18 percent between 2012 and 2016 and depreciated by about 0.6 percent in 2017. - As of May 2018, the REER had depreciated by a further 2.0 percent relative to the 2017 average. - Indirect estimates (based on the EBA current account assessment) imply the exchange rate was overvalued by 12 percent in 2017 (applying an estimated elasticity of 0.12). - EBA REER index model suggests an overvaluation of 8.1 percent. - EBA REER level model suggests an overvaluation of 14.4 percent. - External Sustainability Approach estimates a REER overvaluation of 12.5 percent. - Considering all estimates and their uncertainties, staff assesses the 2017 average REER to be moderately overvalued, in the 8-16 percent range, compared with the level implied by medium-term fundamentals and desirable policies. - The recent currency depreciation has reduced this gap. ### Capital and financial accounts: flows and policy measures - Net financial inflows were about 1.8 percent of GDP in 2017, compared with 2.0 percent of GDP in 2016. - Net portfolio investments increased by 0.2 percent of GDP year over year in 2017. - Other investments increased by 0.8 percent of GDP year over year in 2017. - These increases were partially offset by weaker net direct investments. - Assessment: The United States has an open capital account. Vulnerabilities are limited by the dollar’s status as a reserve currency with foreign demand for US Treasury securities supported by the stronger outlook for the US economy compared with key trading partners, the status of the dollar as a reserve currency, and, possibly, by safe-haven flows. ### FX intervention and reserves level - Assessment: The dollar has the status of a global reserve currency. - Reserves held by the United States are typically low relative to standard metrics. - The currency is free floating. *https://www.imf.org/-/media/files/publications/esr/2018/contryassessments.pdf* --- _Source: https://www.imf.org/-/media/files/publications/esr/2018/contryassessments.pdf_