## ch3 — Box 1.1 and Selected 2018 Individual Economy Assessments (chapter excerpt)

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### Criteria for wording and labels (Box 1.1)
- Wording for current account and REER gaps:
  - When comparing the cyclically-adjusted current account to the current account norm, the wording “higher” or “lower” is used, corresponding to positive or negative current account gaps, respectively.
  - A quantitative estimate of the staff’s view of the REER gap is generally reported as [–] percent “over” or “under” valued.
- Ranges considered broadly consistent with fundamentals:
  - Current account gaps in the range of +/– 1 percent of GDP are generally consistent with external positions labeled in line with fundamentals.
  - REER gaps in the range of +/– 5 percent are generally consistent with external positions labeled in line with fundamentals, although REER ranges vary depending on exchange rate semi-elasticities which differ significantly across countries.

### Mapping of CA Gap / REER Gap to overall assessment (Table 3.A, elasticity −0.2)
- CA Gap > 4% ; REER Gap < −20% : description fragment "... substantially stronger ..."
- CA Gap [2%, 4%] ; REER Gap [−20%, −10%] : description fragment "... stronger ..."
- CA Gap [1%, 2%] ; REER Gap [−10%, −5%] : description fragment "... moderately stronger ..."
- CA Gap [−1%, 1%] ; REER Gap [−5%, 5%] : "The external position is broadly in line with fundamentals and desirable policy settings."
- CA Gap [−2%, −1%] ; REER Gap [5%, 10%] : description fragment "... moderately weaker ..."
- CA Gap [−4%, −2%] ; REER Gap [10%, 20%] : description fragment "... weaker ..."
- CA Gap < −4% ; REER Gap > 20% : description fragment "... substantially weaker ..."

### Two-country example: assessing imbalances and role of policies (Box 3.1)
- Setup:
  - Country A: large current account deficit, large fiscal deficit, high public and external debt.
  - Country B: current account surplus (matching Country A’s deficit), large creditor position, no policy distortions.
- Overall external assessment:
  - Country A has an external imbalance reflecting its large fiscal deficit; its exchange rate would look overvalued.
  - Country B would have an equal and opposite surplus imbalance; its exchange rate would look undervalued.
- Policy gaps and implications:
  - Country A: domestic policy distortion that needs adjustment (rein in fiscal deficit and limit financial excesses).
  - Country B: no domestic policy gaps; adjustment by Country A would automatically eliminate Country B’s imbalance.
  - Critical to distinguish between domestic and foreign fiscal policy gaps.
  - Elimination of the fiscal policy gap in a systemic deficit economy would help reduce excess surpluses in other systemic economies.
- Differences in individual write-ups:
  - Country A write-up would emphasize vulnerabilities from international liabilities and recommend fiscal consolidation and financial restraint.
  - Country B write-up would find no fault with policies and note that external rebalancing depends on other economies’ adjustments.

### Selection of economies covered (Table 3.B)
- The 30 systemic economies analyzed in detail were generally chosen based on:
  - Each economy’s global rank in terms of purchasing power GDP (as used in the IMF’s World Economic Outlook).
  - The level of nominal gross trade.
  - Degree of financial integration.
- Economies listed: Argentina; Australia; Belgium; Brazil; Canada; China; Euro area; France; Germany; Hong Kong SAR; India; Indonesia; Italy; Japan; Korea; Malaysia; Mexico; Netherlands; Poland; Russia; Saudi Arabia; Singapore; South Africa; Spain; Sweden; Switzerland; Thailand; Turkey; United Kingdom; United States.

### Substantive cross-cutting guidance and labels usage
- Use of quantitative ranges and explicit wording aligns CA-gap results and REER-gap estimates to descriptive fragments (e.g., “moderately stronger”, “broadly in line”).
- Staff adjusts model-implied norms and gaps to account for country-specific factors (measurement issues, identified policy gaps such as fiscal or health spending, commodity price swings, valuation effects).
- REER gap reporting preserves uncertainty ranges and explicitly notes when staff-assessed REER gaps fall within the ± 5 percent interval described as broadly in line with fundamentals.

### Abbreviations and acronyms (selected)
- Adj. adjusted
- ARA assessing reserve adequacy
- BOP balance of payments
- CA current account
- CFM capital flow management measure
- CPI consumer price index
- Cycl. cyclically
- E&O errors and omissions
- EBA External Balance Assessment
- ECB European Central Bank
- eop end of period
- FDI foreign direct investment
- FX foreign exchange
- IIP international investment position
- NIIP net international investment position
- NPL nonperforming loan
- QE quantitative easing
- REER real effective exchange rate
- ULC unit labor cost

*Source: ch3 - Box 1.1). The criteria for applying the labels on the — 2019 External Sector Report (chapter content).*

### Box 1.1). The criteria for applying the labels on the

### ch3 - Box 1.1). The criteria for applying the labels on the overall external positions

### Criteria for wording and labels
- Wording for current account and REER gaps:
  - When comparing the cyclically-adjusted current account to the current account norm, the wording “higher” or “lower” is used, corresponding to positive or negative current account gaps, respectively.
  - A quantitative estimate of the staff’s view of the REER gap is generally reported as [–] percent “over” or “under” valued.
- Ranges considered broadly consistent with fundamentals:
  - Current account gaps in the range of +/– 1 percent of GDP are generally consistent with external positions labeled in line with fundamentals.
  - REER gaps in the range of +/– 5 percent are generally consistent with external positions labeled in line with fundamentals, although REER ranges vary depending on exchange rate semi-elasticities which differ significantly across countries.

### Table 3.A — Description in External Sector Report Overall Assessment (CA Gap / REER Gap at elasticity −0.2)
- CA Gap > 4% ; REER Gap < −20% : description fragment "... substantially stronger ..."
- CA Gap [2%, 4%] ; REER Gap [−20%, −10%] : description fragment "... stronger ..."
- CA Gap [1%, 2%] ; REER Gap [−10%, −5%] : description fragment "... moderately stronger ..."
- CA Gap [−1%, 1%] ; REER Gap [−5%, 5%] : "The external position is broadly in line with fundamentals and desirable policy settings."
- CA Gap [−2%, −1%] ; REER Gap [5%, 10%] : description fragment "... moderately weaker ..."
- CA Gap [−4%, −2%] ; REER Gap [10%, 20%] : description fragment "... weaker ..."
- CA Gap < −4% ; REER Gap > 20% : description fragment "... substantially weaker ..."

### Selection of economies covered
- The 30 systemic economies analyzed in detail were generally chosen based on:
  - Each economy’s global rank in terms of purchasing power GDP (as used in the IMF’s World Economic Outlook).
  - The level of nominal gross trade.
  - Degree of financial integration.

### Box 3.1 — Two-country example: assessing imbalances and role of policies
- Setup:
  - Country A: large current account deficit, large fiscal deficit, high public and external debt.
  - Country B: current account surplus (matching Country A’s deficit), large creditor position, no policy distortions.
- Overall external assessment:
  - Country A has an external imbalance reflecting its large fiscal deficit; its exchange rate would look overvalued.
  - Country B would have an equal and opposite surplus imbalance; its exchange rate would look undervalued.
- Policy gaps:
  - Country A: domestic policy distortion that needs adjustment.
  - Country B: no domestic policy gaps; adjustment by Country A would automatically eliminate Country B’s imbalance.
- Individual economy write-ups differences:
  - Country A:
    - Capital flows and foreign asset and liability sections would note vulnerabilities from international liabilities.
    - Potential policy response would focus on rein in the fiscal deficit and limit financial excesses.
  - Country B:
    - With no domestic policy distortions, the write-up would find no fault with policies and note that adjustment among other economies would help reduce the imbalance.
- Implication:
  - Critical to distinguish between domestic and foreign fiscal policy gaps.
  - Elimination of the fiscal policy gap in a systemic deficit economy would help reduce excess surpluses in other systemic economies.

### Table 3.B — Economies covered in the External Sector Report (listed)
- Argentina
- Australia
- Belgium
- Brazil
- Canada
- China
- Euro area
- France
- Germany
- Hong Kong SAR
- India
- Indonesia
- Italy
- Japan
- Korea
- Malaysia
- Mexico
- Netherlands
- Poland
- Russia
- Saudi Arabia
- Singapore
- South Africa
- Spain
- Sweden
- Switzerland
- Thailand
- Turkey
- United Kingdom
- United States

### Abbreviations and acronyms (selected from source)
- Adj. adjusted
- ARA assessing reserve adequacy
- BOP balance of payments
- CA current account
- CFM capital flow management measure
- CPI consumer price index
- Cycl. cyclically
- E&O errors and omissions
- EBA External Balance Assessment
- ECB European Central Bank
- eop end of period
- FDI foreign direct investment
- FX foreign exchange
- IIP international investment position
- NIIP net international investment position
- NPL nonperforming loan
- QE quantitative easing
- REER real effective exchange rate
- ULC unit labor cost

*Source: ch3 - Box 1.1). The criteria for applying the labels on the — 2019 External Sector Report (chapter content).*

### SECTION 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### ch3 - SECTION 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### Brazil — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was broadly in line with the level implied by medium-term fundamentals and desirable policies. The current account is projected to weaken as the cyclical recovery, especially investment, strengthens.
- Potential Policy Responses:
  - Raise national savings to provide room for a sustainable expansion in investment.
  - Fiscal consolidation, including from the federal spending cap and social security reform, to boost net public savings.
  - Structural reforms to reduce the cost of doing business to strengthen competitiveness.
  - Foreign exchange intervention, including through the use of derivatives, can be appropriate to alleviate disorderly market conditions in the foreign exchange market.

### Brazil — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP was –32.1 percent of GDP at end-2018, slightly weaker than the 2011–17 average (about –29 percent of GDP).
  - Over the medium term, NIIP projected to strengthen gradually to about –30 percent of GDP, as GDP growth and valuation effects deriving from Brazil’s long dollar position offset current account deficits (of about 2 percent of GDP).
  - FDI accounts for about half of all liabilities.
  - External debt rose since the global financial crisis to about 33 percent of GDP and 265 percent of exports.
- Assessment:
  - NIIP has remained negative and is currently at the same level as in 2011.
  - Short-term gross external financing needs are moderate, at about 6 percent of GDP.
  - Capital flows and the exchange rate are particularly sensitive to global financing conditions.
  - The CA deficit required to stabilize the NIIP at –35 percent is 1.5 percent of GDP.
- Key statistics (2018 % GDP):
  - NIIP: –32.1
  - Gross Assets: 47.9
  - Res. Assets: 20.1
  - Gross Liab.: 80.0
  - Debt Liab.: 22.9

### Brazil — Current Account
- Background:
  - CA deficit widened from 0.5 percent of GDP in 2017 to 0.8 percent in 2018 due in part to a modest pickup in domestic demand.
  - CA expected to gradually widen to about 2 percent of GDP in the medium term as the recovery continues.
  - Risks: terms-of-trade fluctuations, unwinding of cross-border integration, and trading partner growth, tilted to the downside.
- Assessment:
  - Cyclically adjusted CA in 2018 was –2.1 percent of GDP, reflecting a still large negative output gap.
  - EBA estimates suggest a CA norm in 2018 of –2.9 percent of GDP.
  - Staff assesses a CA norm between –1.9 and –2.9 percent of GDP, considering NIIP vulnerabilities, financial risks from public debt, and sensitivity to global financial conditions.
  - Conclusion: CA is broadly in line with the level implied by fundamentals and desirable policies.
- Key statistics (2018 % GDP):
  - Actual CA: –0.8
  - Cycl. Adj. CA: –2.1
  - EBA CA Norm: –2.9
  - EBA CA Gap: 0.8
  - Staff Adj.: –0.5
  - Staff CA Gap: 0.3

### Brazil — Real Exchange Rate
- Background:
  - After appreciating in 2016–17, the REER depreciated by about 10 percent in 2018, partly reflecting political uncertainty ahead of the presidential elections.
  - As of May 2019, the REER had depreciated by 1.4 percent relative to the 2018 average.
- Assessment:
  - EBA REER index and level methodologies indicate a 9.4 percent undervaluation and 2.1 percent overvaluation, respectively, for 2018.
  - Consistent with the CA gap, staff assesses the REER gap to be in the range of –3 to 6 percent.
  - Staff assessed REER gap of –1.5 percent is within the (± 5 percent) interval generally described as broadly in line with fundamentals.

### Brazil — Capital and Financial Accounts; FX Intervention and Reserves
- Capital and Financial Accounts — Background:
  - Brazil continues to attract sizable capital flows.
  - Net FDI has fully financed the CA deficits since 2015 (averaging 3.3 percent of GDP during 2015–18, whereas CA deficits averaged 1.5 percent).
  - Net portfolio outflows averaged 0.8 percent of GDP during 2016–18.
  - Interest differentials, broadly adequate external buffers, and envisaged reforms should support portfolio inflows, but rigidities in the budget, financial sector, and labor and product markets may weaken investor interest if not addressed.
- Capital and Financial Accounts — Assessment:
  - Weaker than expected global growth, tightening of global financial conditions, and weak implementation of envisaged reforms are downside risks to capital flows.
- FX Intervention and Reserves — Background:
  - Floating exchange rate.
  - Gross reserves remained broadly constant in 2018, at $375 billion at end-2018, some 20 percent of GDP and about 163 percent of the IMF’s composite reserve adequacy metric.
- FX Intervention and Reserves — Assessment:
  - Flexible exchange rate has been an important shock absorber.
  - Reserves are adequate relative to various criteria, including the IMF’s reserve adequacy metric.
  - Authorities should retain strong buffers, with intervention limited to addressing disorderly market conditions.

---

### Canada — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was weaker than implied by medium-term fundamentals and desirable policies. Adjustment will take time due to structural shifts in resource allocation, lost production capacity, and productivity underperformance. Recent developments do not suggest a material change in the assessment for 2018.
- Outlook: The current account is expected to weaken in 2019 and then strengthen over the medium term as nonenergy exports gradually benefit from improved price competitiveness and investment in services and manufacturing capacity.
- Potential Policy Responses:
  - Improve labor productivity, invest in research and development and physical capital, promote foreign direct investment, develop services exports, and diversify export markets to boost nonenergy exports.
  - Planned increase in public infrastructure investment to boost competitiveness and improve the external position in the medium term.
  - A credible medium-term consolidation plan for fiscal policy to support external rebalancing.

### Canada — Foreign Asset and Liability Position and Trajectory
- Background:
  - Despite running a CA deficit, Canada’s NIIP improved since 2010, reaching 23.1 percent of GDP in 2018 (up from 20.6 percent in 2017 and –18 percent in 2010), largely due to valuation gains on external assets.
  - Gross external debt increased to 121 percent of GDP, of which about one-third is short term.
- Assessment:
  - Foreign assets have a higher foreign currency component than liabilities, providing a hedge against currency depreciation.
  - NIIP level and trajectory are sustainable.
- Key statistics (2018 % GDP):
  - NIIP: 23.1
  - Gross Assets: 235.1
  - Debt Assets: 59.9
  - Gross Liab.: 212.0
  - Debt Liab.: 105.3

### Canada — Current Account
- Background:
  - CA deficit narrowed to 2.6 percent of GDP in 2018 (from 2.8 percent in 2017), driven by an improvement in energy exports, partly offset by import growth.
  - CA deficit partially financed by equity portfolio inflow and deposits, more than offsetting direct investment outflows.
- Assessment:
  - EBA estimates a CA norm of 2.0 percent of GDP and a cyclically adjusted CA gap of –5.0 percent of GDP for 2018.
  - EBA gap widened relative to 2017 as CA improvement was less than expected given output gap movements.
  - Staff adjustments (considering CA measurement issues, authorities’ demographic projections and current immigration targets, and the steeper-than-usual discount between Canadian oil prices and international prices) lead staff to assess the CA lower than warranted by fundamentals and desired policies, with a gap in the range between –0.6 and –3.6 percent of GDP.
- Key statistics (2018 % GDP):
  - Actual CA: –2.6
  - Cycl. Adj. CA: –3.0
  - EBA CA Norm: 2.0
  - EBA CA Gap: –5.0
  - Staff Adj.: 2.9
  - Staff CA Gap: –2.1

### Canada — Real Exchange Rate
- Background:
  - REER depreciated by about 0.5 percent on an annual average basis between 2017 and 2018.
  - As of May 2019, the REER had depreciated by about 2.3 percent relative to the 2018 average.
- Assessment:
  - EBA REER index model points to an overvaluation of 2.1 percent in 2018, whereas the REER level model points to an undervaluation of about 6.9 percent.
  - Staff views the REER level model could overstate the extent of undervaluation.
  - Consistent with the staff-assessed CA gap, staff assesses the REER to be overvalued in the range of 2 to 13 percent.

### Canada — Capital and Financial Accounts; FX Intervention and Reserves
- Capital and Financial Accounts — Background:
  - CA deficit in 2018 was partially financed by net portfolio inflows and deposits; nonresident investors mostly purchased corporate debt securities.
  - FDI recorded a lower net outflow of 0.6 percent of GDP in 2018 (3.3 percent of GDP in 2017).
- Assessment:
  - Canada has an open capital account.
  - Vulnerabilities are limited by a credible commitment to a floating exchange rate.
- FX Intervention and Reserves — Background and Assessment:
  - Free-floating exchange rate; no intervention in the foreign exchange market since September 1998 (except participating in internationally concerted interventions).
  - Limited reserves, but central bank has standing swap arrangements with the US Federal Reserve and four other major central banks (not drawn on these swap lines).
  - Policies appropriate to Canada’s circumstances; commitment to floating regime together with swap arrangements reduces the need for reserve holding.

---

### China — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was broadly in line with the level consistent with medium-term fundamentals and desirable policies. This represents a change from earlier assessments when the external position was judged to be moderately stronger.
- Context: Trend decline in CA surplus since the 2007 peak is largely structural, reflecting progress in rebalancing; the sharp decline in 2018 was partly supported by higher commodity and semiconductor prices.
- Potential Policy Responses:
  - Gradual closing of domestic policy gaps in fiscal and credit areas, accompanied by reforms addressing distortions to sustain higher consumption and lower overall saving.
  - Priorities include:
    - Improving the social safety net.
    - SOE reform and opening markets to more competition.
    - Creating a more market-based and robust financial system.
    - Taking steps to attract more inward FDI, including ensuring equal treatment of foreign and domestic investors.
    - Moving more to a flexible, market-based exchange rate.
    - Adopting a more market-based and transparent monetary policy framework and communications.

### China — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP remains positive but declined to 15.9 percent of GDP by end-2018 after peaking at 33 percent of GDP in 2007.
  - Deterioration driven by reduction in CA surplus, valuation changes, and sustained high GDP growth.
  - Gross foreign assets were 55 percent of GDP by end-2018, dominated by foreign reserves.
  - Gross liabilities were 40 percent of GDP, mainly reflecting inward FDI.
  - Reserve assets stable at US$3.1 trillion by end 2018 (about 24 percent of GDP).
- Assessment:
  - NIIP-to-GDP ratio expected to remain strong, with a modest decline over the medium term in line with the projected CA.
  - NIIP is not a major source of risk at this point: assets remain high and liabilities are mostly FDI related.
  - Capital outflow pressures have remained subdued, despite pressures on the US dollar–renminbi bilateral exchange rate during the second half of 2018.
  - No substantial net outflow pressures currently, although such pressures may resurface if the private sector seeks to accumulate foreign assets faster than nonresidents accumulate Chinese assets.
- Key statistics (2018 % GDP):
  - NIIP: 15.9
  - Gross Assets: 54.6
  - Res. Assets: 23.6
  - Gross Liab.: 38.7
  - Debt Liab.: 13.0

### China — Current Account (partial)
- Background:
  - The CA surplus declined further in 2018, reaching 0.4 percent of GDP in 2018, about 1 percentage point lower than in

*Source: ch3 - SECTION 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS (PDF).*

### 2017. This mainly reflects a shrinking trade balance (driven by high import volume growth) and a continued increase in t

### ch3 - 2017. This mainly reflects a shrinking trade balance (driven by high import volume growth) and a continued increase in t

### China — Current Account and External Position
- Background:
  - CA surplus declined substantially from a peak of about 10 percent of GDP in 2007.
  - Drivers: strong investment growth, REER appreciation, weak demand in major advanced economies, technological upgrades in manufacturing, and a widening of the services deficit (tourism).
  - Recent contributors to CA narrowing: shrinking trade balance (driven by high import volume growth), continued increase in the services deficit, and higher commodity and semiconductor prices.
  - Outlook: In line with continued rebalancing, the CA surplus is expected to gradually decline further over the next few years.
- Assessment (EBA and staff metrics):
  - EBA methodology: cyclically adjusted CA exceeds the norm by 0.8 percent of GDP.
  - Staff assesses the CA to be broadly in line with fundamentals and desired policies with a CA gap range of –0.7 to +2.3 percent.
  - EBA-identified policy gaps: net –0.3 percent (mainly loose fiscal policy and excessive credit growth vs. inadequate health spending); residual accounts for other factors, including distortions encouraging excessive savings.
  - Key figures: Actual CA: 0.4; Cycl. Adj. CA: 0.3; EBA CA Norm: –0.4; EBA CA Gap: 0.8; Staff Adj.: 0.0; Staff CA Gap: 0.8

### China — Real Exchange Rate (REER)
- Background:
  - 2018 average REER appreciated by about 1.4 percent relative to 2017, driven by NEER appreciation of 1.5 percent.
  - Estimates through May 2019: REER depreciated by about 0.2 percent relative to the 2018 average.
- Assessment:
  - 2018 EBA REER index regression: China’s REER at the same level as warranted by fundamentals and desirable policies (compared with 5.3 percent lower in 2017).
  - Large uncertainties related to outlook and portfolio allocation shifts.
  - Staff REER gap range: –11.5 to 8.5 percent.
  - Note: staff assessed REER gap of –1.5 percent is within the (± 5 percent) interval generally described as broadly in line with fundamentals.

### China — Capital and Financial Accounts; Policy Guidance
- Background:
  - Capital flows: small net capital inflow of US$30 billion in 2018 (compared with net capital outflows of US$103 billion in 2017; record outflows of US$647 billion in 2015 and US$646 billion in 2016).
  - Capital account remains relatively closed de jure.
  - Policy measures: 20 percent reserve requirement on FX forwards (a CFM) reintroduced; administrative measures to control the exchange rate reimposed in August 2018.
- Assessment and policy recommendations:
  - Further opening of the capital account should consider domestic financial stability due to likely larger two-way gross flows and balance sheet adjustments.
  - Prioritize shift to an effective float while using FX intervention to counter disorderly market conditions.
  - Strengthen domestic financial stability before substantial further liberalization.
  - Step up efforts to encourage inward FDI to generate growth spillovers and improve corporate governance standards.

### China — FX Intervention and Reserves
- Background:
  - FX reserves declined by US$67 billion in 2018 (after rising by US$129 billion in 2017).
  - Staff estimates: after adjusting for valuation changes and return on reserves, change reflected minor net FX sales during market pressure episodes; estimates subject to margin of error (could include no intervention).
- Assessment:
  - Reserves at end-2018: 90 percent of IMF’s composite metric unadjusted for capital controls (down from 106 percent in 2016 and 97 percent in 2017).
  - Relative to metric adjusted for capital controls: 143 percent (down from 156 percent in 2017).
  - Decline in ratios driven by higher broad money (M2) growth, external debt, and other liabilities.
  - Given partial capital account openness, reserves considered adequate in range indicated by adjusted and unadjusted metrics.
  - Staff assesses current level of reserves to be adequate.
  - As transition to greater flexibility advances, intervention should be limited to smoothing excessive volatility.

*Italic: Source: ch3 - 2017. This mainly reflects a shrinking trade balance (driven by high import volume growth) and a continued increase in t — IMF chapter content excerpt.*

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### Hong Kong SAR — Overall Assessment
- The external position in 2018 was broadly in line with the level implied by medium term fundamentals and desirable policies.
- The CA surplus has declined relative to its pre-2010 level due to structural factors, including opening of the mainland capital account and changes in offshore merchandise trade activities.
- Short-term movements in the REER largely reflect US dollar developments as a result of Hong Kong SAR’s LERS.
- Flexible goods, factor, and asset markets continue to support the LERS.

### Hong Kong SAR — Potential Policy Responses
- Macroeconomic policies are broadly appropriate.
- Maintain policies that support wage and price flexibility to preserve competitiveness.
- Continue robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and the LERS.

### Hong Kong SAR — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP reached about 357 percent of GDP as of end-2018, up from 275 percent in 2012.
  - Gross assets: about 1,510 percent of GDP.
  - Gross liabilities: about 1,154 percent of GDP.
  - Valuation changes were sizable and positive; the change in NIIP during 2014–18 (150 percent of 2018 GDP) far exceeded the cumulative financial account balances (20 percent of 2018 GDP).
  - Income accrued to the large NIIP has been modest owing to relatively low yields on assets and substantially higher payments on liabilities.
- Assessment:
  - Vulnerabilities are low given the positive NIIP and its favorable composition.
  - Reserve assets are large and stable (117 percent of GDP at end-2018).
  - Direct investments account for 38 percent of total assets and 53 percent of total liabilities in 2018.
  - Portfolio liabilities accounted for only 13 percent of total liabilities at end-2018.
- Key statistics (2018, % GDP):
  - NIIP: 356.7
  - Gross Assets: 1,510.3
  - Debt Assets: 515.2
  - Gross Liab.: 1,153.6
  - Debt Liab.: 394.2

### Hong Kong SAR — Current Account (2018)
- Background:
  - CA surplus peaked at about 15 percent of GDP in 2008.
  - CA surplus estimated at 4.3 percent of GDP in 2018, down from 4.5 percent in 2017.
  - 2018 decline driven by a larger trade deficit in goods due to higher oil prices and robust domestic demand, partially offset by higher services and income balances.
  - Private saving declined from 34.4 percent of GDP in 2006 to 22.9 percent of GDP in 2018, accounting for most of the drop in the CA surplus.
  - CA surplus projected to be about 3.5 percent of GDP over the medium term.
- Assessment:
  - Staff’s quantitative assessment: projected cyclically adjusted CA at 4.5 percent is midpoint of CA norm range of 3.0 to 6.0 percent of GDP.
  - CA gap range: –1½ to 1½ percent of GDP.
  - Given large valuation effects in the NIIP and discrepancies between stocks and flows, the CA needs adjustment for measurement issues.
- Reported indicators:
  - Actual CA: 4.3
  - Cycl. Adj. CA: 4.5
  - Staff CA Gap: 0.0

### Hong Kong SAR — Real Exchange Rate
- Background:
  - REER dynamics largely determined by the HK dollar/US dollar peg and subdued inflation.
  - REER appreciated by about 20 percent between 2012–17, then depreciated by 1.9 percent in 2018 compared with the 2017 average.
  - The weak side of the convertibility undertaking was triggered several times since April 2018, prompting the HKMA to sell US dollars.
- Assessment:
  - Based on elasticity estimates for similar economies and uncertainties of an offshore trading and financial center, staff assess the REER gap to be between –5 and 5 percent.
  - Note: The midpoint of the staff assessed REER gap is within the (± 5 percent) interval generally described as broadly in line with fundamentals.

### Hong Kong SAR — Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Open capital account as a financial center.
  - Nonreserve financial flows moved from sizable net inflows in 2017 to outflows of similar magnitude in 2018.
  - Financial account typically very volatile; influenced by mainland financial conditions, cross-border linkages, US monetary policy expectations, and arbitraging in FX and rates markets.
- Assessment:
  - Large financial resources and proactive supervision/regulation limit risks from volatile capital flows; deep and liquid markets also mitigate risk.
  - Greater financial exposure to mainland China could pose banking sector risks if mainland growth slows sharply and stress emerges in sectors like export-oriented manufacturing or real estate.
  - High origination and underwriting standards in Hong Kong SAR banks imply manageable credit risk.

### Hong Kong SAR — FX Intervention and Reserves Level
- Background:
  - Currency board arrangement.
  - International reserves built up as the HK dollar was often pushed to the strong side of its trading range, particularly after the global financial crisis.
  - Stock of reserves at end-2018: equivalent to about 117 percent of GDP, lower than at end-2017 but above end-2015.
  - Since April 2018, HK dollar hit the lower range of the convertibility undertaking of 7.85 a few times; HKMA sold US dollars under the normal functioning of the LERS.
  - As liquidity is drained, short-term HK dollar money market interest rates will continue to rise gradually, closing the gap with the LIBOR and reducing HK dollar depreciation pressure.
- Assessment:
  - Reserves are adequate for precautionary purposes and should continue to evolve in line with the automatic adjustment inherent in the currency board system.
  - Hong Kong SAR also holds significant fiscal reserves built up through strong fiscal discipline.

---

### India — Overall Assessment
- The external sector position in 2018 was broadly in line with the level implied by fundamentals and desirable policies.
- India’s low per capita income, favorable growth prospects, demographic trends, and development needs justify running CA deficits.
- External vulnerabilities remain, highlighted by bouts of turbulence in 2018.
- Economic risks: volatility in global financial conditions, an oil price surge, and a retreat from cross-border integration.
- Progress made on FDI liberalization; portfolio flows remain controlled.
- India’s trade barriers remain significant.

### India — Potential Policy Responses
- Rein in fiscal deficits while enhancing credit provision through faster cleanup of bank and corporate balance sheets and strengthening public bank governance.
- Improve the business climate, ease domestic supply bottlenecks, and liberalize trade and investment to attract FDI, improve CA financing mix, and contain external vulnerabilities.
- Consider gradual liberalization of portfolio flows while monitoring reversal risks.
- Maintain exchange rate flexibility as the main shock absorber; limit intervention to addressing disorderly market conditions.

### India — Foreign Asset and Liability Position and Trajectory
- Background (as of end-2018):
  - NIIP improved to –15.9 percent of GDP from –17.3 percent of GDP at end-2017.
  - Gross foreign assets: 22.2 percent of GDP.
  - Gross foreign liabilities: 38.1 percent of GDP.
  - Bulk of assets: official reserves and FDI.
  - Liabilities composition: other investments (39 percent), FDI (37 percent), portfolio equity (13 percent), debt (10 percent).
  - External debt: about 20 percent of GDP; about half denominated in US dollars and 36 percent in Indian rupees.
  - Long-term external debt: about 80 percent of total.
  - Short-term external debt on a residual maturity basis: 43 percent of total external debt and 55.8 percent of FX reserves.
- Assessment:
  - With projected CA deficits, NIIP-to-GDP ratio expected to weaken marginally.
  - Moderate level of foreign liabilities reflects gradual capital account liberalization focused on attracting FDI.
  - External debt moderate compared with other EMs, but short-term rollover risks remain elevated.
- Key statistics (2018, % GDP):
  - NIIP: –15.9
  - Gross Assets: 22.2
  - Res. Assets: 14.5
  - Gross Liab.: 38.1
  - Debt Liab.: 18.3

### India — Current Account (2018 / fiscal year 2018/19)
- Background:
  - CA deficit estimated at 2.5 percent of GDP in fiscal year 2018/19, up from 1.9 percent of GDP in the previous year due to higher commodity prices and strong domestic demand.
  - Robust export growth supported by partners’ strengthening demand and rupee depreciation.
  - Medium-term CA deficit expected to remain about 2½ percent of GDP.
- Assessment:
  - EBA cyclically adjusted CA deficit: 2.5 percent of GDP in fiscal year 2018/19.
  - EBA CA regression norm: –3.4 percent of GDP for fiscal year 2018/19, with a standard error of 1.4 percent, implying an EBA gap of 0.9 percent.
  - Staff judgement: a CA deficit of about 2½ percent of GDP is financeable over time.
  - Historical limits: global financial markets cannot be counted on to reliably finance a CA deficit above 3 percent of GDP.
  - FDI flows not yet sufficient to cover protracted large CA deficits; portfolio flows are volatile.
  - Staff-assessed CA gap range: –1.0 to 1.0 percent of GDP.
- Reported indicators:
  - Actual CA: –2.5
  - Cycl. Adj. CA: –2.5
  - EBA CA Norm: –3.4
  - EBA CA Gap: 0.9
  - Staff Adj.: –0.9
  - Staff CA Gap: 0.0

### India — Real Exchange Rate
- Background:
  - Average REER in 2018 depreciated by about 3.8 percent from its 2017 average.
  - As of May 2019, the rupee had appreciated by about 7.7 percent in real terms compared with the average REER in 2018.
- Assessment:
  - EBA REER Index and REER level models estimate REER gaps of 5.4 and 2.5 percent, respectively, for 2018.
  - External stability approach estimates a REER gap of about –2.0 percent.
  - Based on staff-assessed CA gap, REER gap assessed to be in the range of –6 to 6 percent for fiscal year 2018/19.
  - Note: The midpoint of the staff assessed REER gap is within the (± 5 percent) interval generally described as broadly in line with fundamentals.

### India — Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Sum of FDI, portfolio, and financial derivative flows (net) estimated at 0.8 percent of GDP in fiscal year 2018/19, down from 2 percent in fiscal year 2017/18.
  - Net FDI inflows: 1.3 percent of GDP in fiscal year 2018/19 (unchanged).
  - Net portfolio flows: negative by 0.5 percent of GDP in fiscal year 2018/19 due to equity and debt outflows in spring and fall 2018.
- Assessment:
  - Yearly capital inflows relatively small; given modest FDI, portfolio and other investments are critical to finance the CA.
  - Portfolio debt flows have been volatile; exchange rate sensitive to these flows and global risk aversion shifts.
  - Attracting more stable financing sources is needed to reduce vulnerabilities.

### India — FX Intervention and Reserves Level
- Background:
  - Authorities responded to market pressure in fall 2018 with exchange rate flexibility and FX intervention.
  - Spot foreign exchange sales: US$26 billion (1 percent of GDP) in 2018.
  - Net forwards decreased by US$31.5 billion in 2018.
  - International reserves: $411.9 billion at end-March 2019, down about $12.5 billion from March 2018.
  - Reserve coverage: about 15.2 percent of GDP and about 6.7 months of prospective imports of goods and services.
- Assessment:
  - Reserve levels adequate for precautionary purposes relative to various criteria.
  - International reserves represent about 155 percent of short-term debt and 149 percent of the IMF’s composite metric.

---

### Indonesia — Overall Assessment
- The external position in 2018 was assessed to be moderately weaker than implied by medium-term fundamentals and desirable policies.
- Exchange rate flexibility and trade-related policy actions (import compression and export promotion) together with broadly stable (projected) commodity prices are expected to modestly reduce the current account deficit over the medium term.
- External financing appears sustainable, although the large share of foreign portfolio holdings makes the economy vulnerable to a sharp tightening of global financial conditions.

### Indonesia — Potential Policy Responses
- Boost competitiveness through higher infrastructure and social spending while maintaining fiscal sustainability via revenue mobilization.
- Structural policies to bolster global value chain participation, ease FDI and nontariff trade restrictions, and strengthen labor markets and worker skills (examples: streamlining stringent job protection, improving job placement services, vocational training, and overall education).
- Continue exchange rate flexibility and market-determined bond yields to support external stability.

### Indonesia — Foreign Asset and Liability Position and Trajectory (partial)
- Background:
  - At end-2018, NIIP stood at –30 percent of GDP, compared with –33 percent of GDP at end-2017 and –39½ percent at end-2012.
  - Gross external assets reached 33.3 percent of GDP (of which close to 35 percent were reserve assets).
  - Gross external liabilities: (figure not provided in the supplied text).

_International Monetary Fund | July 2019_

### 63.8 percent of GDP. Indonesia’s gross external debt was moderate at 36.2 percent of GDP at end-2018, of which 19 percen

### ch3 - 63.8 percent of GDP. Indonesia’s gross external debt was moderate at 36.2 percent of GDP at end-2018, of which 19 percen

### Foreign asset and liability position and assessment
- NIIP: –30.5 percent of GDP (2018).
- Gross Assets: 33.3 percent of GDP (2018).
- Reserve Assets: 11.6 percent of GDP (2018).
- Gross Liabilities: 63.8 percent of GDP (2018).
- Debt Liabilities: 36.2 percent of GDP (2018).
- Composition: 19 percent of gross external debt was denominated in rupiah and 87 percent was maturing after one year.
- About one-third of the government’s external debt was denominated in rupiah.
- Nonresident holdings of rupiah-denominated government bonds were 34 percent of the total stock (or 6.4 percent of GDP) at end-2018.
- Assessment: The level and composition of the NIIP and gross external debt indicate that Indonesia’s external position is sustainable and subject to limited rollover risk, but nonresident holdings of rupiah-denominated government bonds combined with shallow domestic financial markets make Indonesia susceptible to global financial volatility, higher US interest rates, and a stronger US dollar.
- Staff projection: Staff projections for the current account suggest that the NIIP position as a percent of GDP will be stable over the medium term.

### Current account: background and assessment
- Actual CA: –3.0 percent of GDP (2018).
- Cyclically Adjusted CA: –3.3 percent of GDP (2018).
- EBA CA Norm: –0.9 percent of GDP (2018).
- EBA CA Gap: –2.4 percent of GDP (2018).
- Staff Adjustment: 0.9 percent of GDP.
- Staff CA Gap: –1.5 percent of GDP (2018).
- Background: CA deficit increased to 3 percent of GDP in 2018, from a 1.6 percent deficit in 2017, driven mainly by growing domestic demand and higher oil prices.
- Projection: CA deficit projected to narrow slightly to 2.9 percent in 2019 due to weaker import growth and lower oil prices.
- Medium-term outlook: A gradual increase in manufacturing exports, underpinned by improved competitiveness and stronger demand from trading partners, should help limit the CA deficit.
- Staff estimate: CA gap for 2018 is –1.5 percent, with a range of –3 percent to 0 percent of GDP when accounting for uncertainties in the norm estimation.
- Policy implication: Addressing excess imbalances will require reforms to improve labor markets and competitiveness; the lagged effects of the weaker rupiah should help improve the CA deficit in the near term.

### Real exchange rate (REER)
- 2018 average REER depreciated by 6.0 percent relative to the average of 2017.
- Nominal exchange rate depreciation: 7.1 percent (2018 vs 2017).
- Estimates through May 2019: REER appreciated by 5.0 percent relative to the 2018 average.
- Model results: EBA index and level REER models point to an REER gap of about –3.2 percent to –15.5 percent for 2018, driven by REER depreciation.
- CA-gap based implication: CA gap estimate of –1.5 percent of GDP with standard elasticities and uncertainty ranges (± 5 percent) would indicate REER overvaluation in the range of 3 to 13 percent.
- Staff assessment: Taking into account the 2018 depreciation, staff assesses the REER gap to be in the –9 to 1 percent range.
- Note: The staff assessed REER gap of –4 percent is within the (± 5 percent) interval generally described as broadly in line with fundamentals.

### Capital and financial accounts: flows and policy measures
- Net capital and financial account inflows in 2018: 2.5 percent of GDP.
- Composition (2018): net FDI inflows 1.4 percent of GDP; net portfolio inflows 0.9 percent of GDP; net other investment inflows 0.2 percent of GDP.
- Assessment: Net and gross financial flows have been relatively steady since the global financial crisis despite short periods of volatility.
- Policy implication: 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.
- Exchange rate framework: More flexible since mid-2013; floating regime has facilitated market adjustments.

### FX intervention and reserves
- Reserves at end-2018: US$120.6 billion (equal to 12 percent of GDP, about 118 percent of the IMF’s reserve adequacy metric and about 6.4 months of prospective imports of goods and services).
- Reserves at end-2017: US$130.2 billion.
- Loss in reserves mainly reflected FX intervention in response to disorderly market conditions in 2018.
- Contingencies and swap lines amounting to about US$92.5 billion are in place.
- Assessment: Current level of reserves (US$124.3 billion at end-April) should provide a sufficient buffer against a wide range of possible external shocks, with predetermined drains manageable.
- Policy implication: FX intervention should continue to aim primarily at preventing disorderly market conditions while allowing the exchange rate to adjust to external shocks.

*Source: https://www.imf.org/-/media/files/publications/esr/2019/english/ch3.pdf*

### 0.4 to 2.4 percent of GDP. Identified policy gaps from significantly tighter than desired fiscal policy and relatively l

### ch3 - 0.4 to 2.4 percent of GDP. Identified policy gaps from significantly tighter than desired fiscal policy and relatively l

### Current Account — Malaysia (selected excerpts)
- Background:
  - Malaysia’s CA surplus declined by about 7 percentage points of GDP between 2010 and 2017.
  - In 2018, the CA surplus was 2.1 percent of GDP (from 3 percent in 2017).
  - Goods balance: surplus; Services and income accounts: larger deficits.
- Assessment and model estimates:
  - EBA CA regression estimates:
    - EBA CA Norm: –0.2 percent of GDP (2018, after cyclical and multilateral consistency adjustments)
    - Cycl. Adj. CA: 2.3 percent of GDP (2018)
    - Actual CA: 2.1 percent of GDP (2018)
    - EBA CA Gap: 2.4 percent of GDP (2018) (about ±1 percent of GDP)
    - Staff Adj.: 0.0
    - Staff CA Gap: 2.4 percent of GDP
  - Unidentified residuals explain the entire CA gap, potentially reflecting structural distortions and country-specific factors not included in the model.
  - Identified domestic policy gaps have an offsetting effect: low public health care spending contributes to the excess surplus; FX intervention that helped to prevent further currency depreciation reduces the surplus.
  - Projection: CA balance expected to remain in surplus, albeit lower, over the medium term, driven by lower private sector net saving.

### Real Exchange Rate — Malaysia (selected excerpts)
- Background:
  - In 2018, the average REER appreciated by 4.2 percent.
  - REER had depreciated nearly 2.4 percent since April 2018.
  - REER is about 10 percent lower than its 2013 level.
  - Through May 2019, the REER has depreciated by 2.0 percent relative to the 2018 average.
- Assessment:
  - EBA REER Index and Level models estimate undervaluation of about 25 and 37 percent, respectively.
  - Staff assesses the REER gap in 2018 to be –5 percent (± about 2 percent), consistent with the assessed CA gap.

### Capital and Financial Accounts — Malaysia (selected excerpts)
- Background:
  - Since the global financial crisis, Malaysia experienced periods of significant capital flow volatility, largely driven by portfolio flows in and out of the local-currency debt market.
  - Following tightening of global financial conditions and general elections in spring 2018, portfolio outflows intensified, although they have recovered somewhat since late 2018.
  - Since late 2016, the Financial Markets Committee has implemented measures to develop the onshore FX market.
- Assessment:
  - Continued exchange rate flexibility and macroeconomic policy adjustments are necessary to manage capital flow volatility.
  - Capital flow management measures should be gradually phased out, with due regard for market conditions.

### FX Intervention and Reserves Level — Malaysia (selected excerpts)
- Background:
  - Malaysia faced significant reserve losses between 2014 and 2016 and witnessed an increase of nearly US$8 billion in 2017.
  - Reserves were generally unchanged in 2018, but intrayear volatility occurred: increased by US$7.1 billion through end-April 2018, then fell by US$8.1 billion during the remainder of the year.
  - Reserves as of end-2018: US$101.4 billion.
- Assessment:
  - Under the IMF’s composite reserve adequacy metric (ARA), gross official reserves are about 108 percent of the ARA metric as of end-2018.
  - Reserves adjusted for net forward positions are below 100 percent of the ARA metric.
  - Recommendation: FX interventions should be limited to preventing disorderly market conditions; in case of an inflow surge, some reserve accumulation would be appropriate to increase the reserve coverage ratio.

### Foreign Asset and Liability Position and Trajectory — Malaysia (selected excerpts)
- Background and 2018 snapshot:
  - Malaysia’s NIIP has averaged about 1 percent of GDP since 2010.
  - As of end-2018, NIIP: –5.2 percent of GDP (compared with –2 percent of GDP at end-2017).
  - Changes reflect higher net direct investment and other investment liabilities more than offsetting reduction in net portfolio capital liabilities.
  - Official reserves contribute most to net assets; net portfolio liabilities contribute most to net liabilities.
  - Total external debt (US dollars): about 62.4 percent of GDP at end-2018 (compared to 70 percent of GDP at end-2017).
    - About two-thirds of external debt was in foreign currency.
    - 44 percent in short-term debt, by original maturity.
  - 2018 (% GDP) snapshot:
    - NIIP: –5.2
    - Gross Assets: 113.6
    - Res. Assets: 28.3
    - Gross Liab.: 118.9
    - Debt Liab.: 51.0
- Assessment:
  - NIIP should rise gradually over the medium term reflecting projected moderate CA surpluses.
  - Malaysia’s balance sheet strength, exchange rate flexibility, and increased domestic investor participation support resilience to a variety of shocks, including outflows associated with external liabilities.

### Policy recommendations (Malaysia, consolidated from text)
- Planned medium-term fiscal consolidation should be accompanied by policies to strengthen the social safety net and continue to encourage private investment.
- Fiscal spending should be reoriented to accommodate further improvements in social protection and public health care.
- Continue efforts to improve quality of public infrastructure (supported by enhanced public finance management).
- Address structural impediments holding back private investment, including:
  - Improve the quality of education.
  - Reduce skills mismatch.
  - Encourage female labor participation to support private investment and productivity.
- Continued exchange rate flexibility is necessary to facilitate external adjustment, with intervention limited to addressing disorderly market conditions.
- Capital flow management measures should be gradually phased out, with due regard for market conditions.
- In case of inflow surges, some reserve accumulation would be appropriate to increase the reserve coverage ratio.

*Italic: Excerpts and assessments drawn from chapter content provided in the source PDF.*

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### Netherlands — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was substantially stronger than the level consistent with medium-term fundamentals and desirable policies. The Netherlands’ status as a trade and financial center and natural gas exporter makes an external assessment more uncertain than usual.
- Potential Policy Responses:
  - Implement envisaged expansionary fiscal policy and use additional fiscal space under the Medium-Term Objective over the medium term to support domestic demand and reduce excess external imbalances.
  - Pursue reforms to support household and small and medium-sized enterprise rebalancing to encourage investment.
  - Expand direct support to research and development, and public investment in digitalization and lifelong learning.

### Netherlands — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP at end-2018: 66.7 percent of GDP.
  - Gross assets and liabilities: 1,062 and 995 percent of GDP, respectively.
  - Largest component: net FDI stock ~€943 billion (122 percent of GDP) at end-2018.
  - Netherlands reported the largest inward and outward FDI positions in the world at end-2017.
  - Top three partner countries (gross bilateral stock positions close to): United States €2.2 trillion, Luxembourg €1.4 trillion, United Kingdom €1.4 trillion.
  - TARGET2 assets of the Eurosystem estimated at about €100 billion.
  - Medium-term NIIP projection: expected to continue growing to above 100 percent of GDP, in line with projected sizable CA surpluses.
- Assessment:
  - The Netherlands’ safe-haven status and sizable foreign assets limit risks from its large foreign liabilities.
- Key 2018 figures (percent of GDP):
  - NIIP: 66.7
  - Gross Assets: 1,061.9
  - Debt Assets: 205.7
  - Gross Liab.: 995.2
  - Debt Liab.: 275.8

### Netherlands — Current Account (2018)
- Background:
  - CA surplus history: in surplus since 1981.
  - CA surplus in 2018: 10.8 percent of GDP (11 percent cyclically adjusted).
  - Drivers: continued strong net exports; primary income balance low despite large NIIP due to dominant role of multinationals.
  - Main drivers since 2000: nonfinancial corporate net saving (gross saving minus domestic business investment).
  - Household net saving contributes only a small part of CA surpluses due to high mandatory second-pillar pension contributions and high real estate investment.
  - Structural contributors: trade and financial center status and natural gas exports.
- Assessment:
  - EBA CA model: CA norm 3.3 percent of GDP; CA gap 7.7 percent of GDP in 2018; unexplained residual 6.2 percent of GDP.
  - Staff assesses CA norm range: 1.3 to 5.3 percent of GDP; corresponding CA gap: 4.2 to 8.2 percent of GDP.
  - Medium-term outlook: CA gap expected to narrow moderately with continued strong domestic demand and expedited phasing-out of gas production.
- Key 2018 figures (percent of GDP):
  - Actual CA: 10.8
  - Cycl. Adj. CA: 11.0
  - EBA CA Norm: 3.3
  - EBA CA Gap: 7.7
  - Staff Adj.: –1.5
  - Staff CA Gap: 6.2

### Netherlands — Real Exchange Rate (2018)
- Background:
  - Annual average CPI-based REER appreciated about 2.0 percent in 2018.
  - Average ULC-based REER depreciated about 0.5 percent in 2018.
  - REER appreciation largely driven by the euro appreciation (about 1.8 percent); Dutch CPI and ULC grew more slowly than trading partners’.
  - As of May 2019, REER unchanged relative to 2018 average.
- Assessment:
  - EBA REER models indicate an overvaluation between 2.2 percent (level model) and 14.5 percent (index model) in 2018, largely attributable to unexplained residuals.
  - Staff-assessed CA gap implies REER undervaluation of about 8.6 percent (assuming a semielasticity of 0.72).
  - Staff assesses REER remained undervalued by about 5.8 to 11.4 percent.

### Netherlands — Capital and Financial Accounts; FX Intervention and Reserves
- Capital and Financial Accounts:
  - Background: Net FDI and portfolio outflows dominate the financial account; FDI outflows driven by investment of corporate profits abroad, largely by multinationals. On average, gross FDI outflows largely match corporate profits.
  - Assessment: Strong external position limits vulnerabilities from capital flows. Financial account likely to remain in deficit as long as corporate sector continues to invest substantially abroad.
- FX Intervention and Reserves:
  - 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.

---

### Poland — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was broadly in line with that suggested by medium-term fundamentals and desirable policies. Increased absorption of EU funds, continued buoyant private consumption, and weaker external demand returned the CA to a small deficit in 2018. Over the medium term, the CA deficit is expected to widen gradually, reflecting further declines in government and household net saving rather than an increase in private investment.
- Potential Policy Responses:
  - Boost private investment and productivity while restraining fiscal current spending.
  - Structural reforms to remove barriers to private investment, facilitate access to skilled labor, enhance policy predictability affecting firms, and provide a level playing field for all investors, including protecting minority shareholders and ensuring competition.
  - Front-loaded fiscal consolidation to support medium-term objectives, while making room for priority spending (health care and public investment) as EU funds are gradually reduced.

### Poland — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP in 2018: –59 percent of GDP (estimated –58.8 percent of GDP).
  - Gross assets and liabilities declined to 48 percent of GDP and 107 percent of GDP, respectively.
  - Inward FDI (equity and debt) accounts for about 46 percent of gross external liabilities.
  - Gross external debt: 62 percent of GDP at end-2018; more than a quarter corresponds to liabilities to direct investors.
  - Share of short-term debt (remaining maturity): 29 percent of total gross debt; non-FDI short-term debt: 17 percent of total gross external debt (11 percent of GDP).
  - Medium-term outlook: negative NIIP expected to narrow with ongoing income convergence.
- Assessment:
  - Sizable external debt, including short-term debt, presents vulnerability; rollover risk mitigated by large share of debt FDI which tends to be rolled over automatically.
  - Sizable reserves mitigate residual liquidity risk (gross reserves at end-2018 about 187 percent of non-FDI short-term debt at remaining maturity).
- Key 2018 figures (percent of GDP):
  - NIIP: –58.8
  - Gross Assets: 48.1
  - Res. Assets: 20.1
  - Gross Liab.: 106.9
  - Debt Liab.: 45.1

### Poland — Current Account (2018)
- Background:
  - CA improved significantly since the global financial crisis; close to balance during 2015–17.
  - Corporate sector net saving reached 5 percent of GDP in recent years.
  - 2018: CA returned to a small deficit of 0.7 percent of GDP due to slower external demand, increased absorption of EU funds, buoyant private consumption, higher oil prices, and larger remittance outflows.
  - Baseline: CA deficit expected to widen further on declining government and household saving.
- Assessment:
  - EBA model for 2018: cyclically adjusted CA deficit 0.6 percent of GDP; CA norm –2.3 percent of GDP; EBA gap 1.7 percent of GDP (includes identified policy gaps 1.0 percent of GDP).
  - Staff adjustment: applied a 0.8 percentage point adjustment to the norm to reflect need to reduce NIIP to 45 percent of GDP over five years.
  - Staff assessment: CA broadly in line with fundamentals and medium-term policies in 2018, with a CA gap of 0.9 (±1) percent of GDP.
- Key 2018 figures (percent of GDP):
  - Actual CA: –0.7
  - Cycl. Adj. CA: –0.6
  - EBA CA Norm: –2.3
  - EBA CA Gap: 1.7
  - Staff Adj.: –0.8
  - Staff CA Gap: 0.9

### Poland — Real Exchange Rate, Capital Accounts, and Reserves
- Real Exchange Rate:
  - Background: REER appreciated in 2017 by 3.4 percent and marginally in 2018 by 1.7 percent. Nominal zloty appreciated about 4½ percent against the dollar (annual average) and was stable against the euro in 2018. Between end-2018 and May 2019, zloty depreciated by 0.1 percent against the dollar and by 1 percent against the euro.
  - Assessment: REER index model suggests a gap of –2.7 percent. Staff assesses REER gap in 2018 in range –5 to 0 percent. (Staff assessed REER gap of –2.5 percent noted as within the ±5 percent interval described as broadly in line with fundamentals.)
- Capital and Financial Accounts:
  - Background: Capital account dominated by inflows of EU funds for investment projects. Net FDI inflows increased significantly in 2018. Net issuance of government debt declined as fiscal position improved.
  - Assessment: Sizable foreign holdings of government debt securities (~49 percent of total; 25 percent of GDP) suggest potential vulnerability; declining share since 2016 as domestic banks increased holdings in response to bank asset tax exemption on government bonds. Diversified foreign investor base mitigates risk.
- FX Intervention and Reserves:
  - Background: Gross international reserves stable in 2018; reached US$117 billion at year-end. Net reserves (excluding NBP repo operations) increased marginally to about US$98 billion at end-2018. Zloty is free-floating; NBP does not intervene.
  - Assessment: Net reserves at 97 percent of IMF’s composite reserve adequacy (ARA) metric in 2018; gross reserves about 115 percent of ARA metric. Net reserves remain adequate to insulate against external shocks and disorderly market conditions.

---

### Russia — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was moderately stronger than suggested by fundamentals and desirable policies. Favorable commodity prices boosted exports, whereas worsening geopolitical tensions weakened the exchange rate and contained imports. CA surplus reached a historical high. Uncertainty about sanctions has weighed on capital flows and complicates the external sector assessment.
- Potential Policy Responses:
  - Continue fiscal policy within parameters of the new fiscal rule to reduce impact of oil price volatility on the non-oil sector while rebalancing government expenditure toward health, education, and infrastructure in the medium term.
  - Emphasize structural reforms to improve business climate and boost private sector investment, especially in the non-oil sector.
  - Reorient fiscal expenditure and increase private sector investment to raise growth potential and bring external position into balance.

### Russia — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP at end-2018: US$370.9 billion (22 percent of GDP).
  - Gross assets: 81 percent of GDP; liabilities declined to 59 percent of GDP (from 68 percent in 2017).
  - Liabilities composition: 53 percent equity and 47 percent debt.
  - Debt liabilities to nonresidents declined from 32 percent of GDP in 2017 to 28 percent of GDP by end-2018; three-quarters of these are in foreign currencies.
  - Nonresidents cut holdings of ruble-denominated government debt to about 25 percent of total stock from peak of 34.5 percent in 2018:Q1 due to heightened geopolitical tensions.
  - No obvious maturity mismatches between gross asset and liability positions.
  - Historical NIIP growth hampered by unfavorable valuation changes and treatment of “disguised” capital outflows.
- Assessment:
  - Projected CA surpluses suggest gradual rise of positive NIIP, lowering risks to external stability.
  - Official external assets increasing rapidly since introduction of new fiscal rule, despite temporary suspension of associated FX purchases between August 2018 and January 2019.
  - Recent external deleveraging by private sector reduced risks.
- Key 2018 figures (percent of GDP):
  - NIIP: 22.4
  - Gross Assets: 80.9
  - Res. Assets: 28.3
  - Gross Liab.: 58.5
  - Debt Liab.: 18.9

### Russia — Current Account (2018)
- Background:
  - CA balance in 2018: 6.9 percent of GDP (highest level in more than a decade), driven by strong energy exports and moderate import growth.
  - Nonenergy CA in 2018: deficit of 8.6 percent of GDP, reflecting relatively weak competitiveness in the nonenergy sector.
  - Medium-term outlook: CA surplus expected to taper off to about 3 percent of GDP on moderating oil prices and a pickup in imports.
- Assessment:
  - EBA CA model yields a norm for 2018 of 3.1 percent of GDP, compared with a cyclically adjusted CA surplus (figure truncated in source).

*Source: CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS (excerpt).*

### 6.6 percent of GDP. This implies an EBA CA gap of 3.5 percent of GDP, for which identified policies contributed 2.8 perc

### ch3 - 6.6 percent of GDP. This implies an EBA CA gap of 3.5 percent of GDP, for which identified policies contributed 2.8 perc

### Russia — Current Account and Assessment
- Background and estimates:
  - Actual CA: 6.9
  - Cycl. Adj. CA: 6.6
  - EBA CA Norm: 3.1
  - EBA CA Gap: 3.5
  - Staff Adj.: –1.9
  - Staff CA Gap: 1.6
- Narrative findings:
  - Cycl. Adj. CA of 6.6 percent of GDP implies an EBA CA gap of 3.5 percent of GDP, for which identified policies contributed 2.8 percent of GDP, mainly reflecting lower-than-desirable health spending and the large fiscal surplus in 2018.
  - Staff assesses the CA gap to be about 1.6 percent of GDP in 2018, with a confidence interval between 0.6 and 2.6 percent of GDP, reflecting uncertainty from potential underestimation of cyclical effects related to the oil price increase in 2018 and difficulties estimating the impact and duration of sanctions (protracted sanctions could lead to higher precautionary savings, lower investment, and a higher CA norm).

### Russia — Real Exchange Rate
- Background:
  - The REER depreciated by 7.6 percent in 2018.
  - As of May 2019, the ruble has appreciated by 3.4 percent in real terms relative to the 2018 average.
- Assessment:
  - EBA Level and Index REER models indicate an undervaluation of 20 percent and 15 percent, respectively.
  - Both approaches generate large residuals (about –10 percent).
  - Using an elasticity parameter of 0.27, staff assesses that the 2018 REER was undervalued by between 2 and 10 percent.
  - Among model determinants, the most important contributor to undervaluation is health expenditure.

### Russia — Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Net private capital outflows continued in 2018: lower net liabilities generated an outflow of US$38 billion, and net acquisition of financial assets resulted in an outflow of US$39 billion.
  - In the banking sector, outflows mainly took the form of a reduction in foreign liabilities; the nonbanking private sector built up foreign assets during this period.
  - Sanctions and projected moderation of oil prices are expected to weigh on flows over the medium term.
- Assessment:
  - Russia is exposed to risks of continued outflows due to geopolitical uncertainties.
  - Large FX reserves and the floating exchange rate regime provide substantial buffers to help absorb external shocks.

### Russia — FX Intervention and Reserves Level
- Background:
  - Since the floating of the ruble in November 2014, FX interventions have been limited.
  - International reserves rose to US$469 billion (more than 16 months of imports) by end-2018.
- Assessment:
  - International reserves at end-2018 were equivalent to 275 percent of the IMF’s reserve adequacy metric, considerably above the adequacy range of 100 to 150 percent.
  - Taking into account Russia’s vulnerability to oil price shocks and sanctions, an additional commodity buffer of $65 billion is appropriate, translating into a ratio of reserves to the buffer-augmented metric to 204 percent.
  - The ratio remains above the adequacy level but is justifiable given the high degree of geopolitical uncertainty.
  - Recommendation: Large FX interventions should be limited to episodes of market distress.

### Saudi Arabia — Overall Assessment and Policy Responses
- Overall Assessment:
  - The external position in 2018 was moderately weaker than the level consistent with desirable medium-term fiscal policies.
  - The pegged exchange rate provides Saudi Arabia with a credible policy anchor.
  - The external balance sheet remains very strong.
- Potential Policy Responses:
  - Fiscal consolidation is needed to strengthen the CA and increase saving for future generations.
  - Fiscal adjustment should be based on further energy price reforms, non-oil revenue measures, expenditure restraint, and increased efficiency of spending, supported by reforms to strengthen the fiscal framework.
  - Structural reforms to diversify the economy and boost the non-oil tradables sector over the medium term can support a stronger external position over the long term.

### Saudi Arabia — Foreign Asset and Liability Position and Trajectory
- Background and projections:
  - Net external assets are estimated at 86 percent of GDP at end-2018, down from 91 percent of GDP in 2017 and 105 percent of GDP in 2015.
  - Projections suggest the NIIP-to-GDP ratio will increase slightly over the medium term (to about 91 percent of GDP by 2024) as the CA remains in surplus in the near term and moves to broad balance by 2024.
  - No details are available on the composition of external assets.
- Assessment:
  - The external balance sheet remains very strong; accumulated assets represent savings of exhaustible resource revenues for future generations and protection against oil price volatility.
- 2018 (% GDP) snapshot:
  - NIIP: 85.5
  - Res. Assets: 63.2
  - Debt Liab.: 28.3

### Saudi Arabia — Current Account and Assessment
- Background and projections:
  - The CA balance reached a surplus of 9.2 percent of GDP in 2018, up from 1.5 percent in 2017 and a deficit close to 9 percent in 2015.
  - Trade balance improved by 7.5 percent of GDP as a 36 percent increase in oil export revenues more than offset a 13 percent increase in imports of services.
  - Terms of trade improved by 23.5 percent in 2018.
  - The CA surplus is expected to decline to 6.9 percent of GDP in 2019 as oil revenues decline (terms of trade projected to decline by 4.4 percent) and import growth continues; over the medium term CA should move to broad balance.
- Assessment and CA gap estimates:
  - EBA-lite approach: CA gap in 2018 is –0.6 percent of GDP.
  - Consumption-based allocation model: CA gap of –0.2 percent of GDP and –3.4 percent of GDP for the constant real annuity and constant real per capita annuity allocation rules, respectively.
  - Investment-needs model: CA gap of 0.3 percent of GDP.
  - Staff assesses a CA gap of –1.7 percent of GDP with a range from 0 to –3.4 percent of GDP in 2018.
  - Policy implication: Fiscal adjustment needs to be implemented to strengthen the CA over the medium-term.
- 2018 indicators:
  - Actual CA: 9.2
  - Cycl. Adj. CA: 8.9
  - Staff CA Gap: –1.7

### Saudi Arabia — Real Exchange Rate
- Background:
  - Riyal pegged to the US dollar at 3.75 since 1986.
  - REER depreciated by 1 percent in 2018 (year over year) and was on average 7 percent above its 10-year average.
  - As of May 2019, the REER had depreciated by about 0.7 percent relative to the 2018 average.
- Assessment:
  - Staff estimates an average REER gap in 2018 in the range of 5 to 10 percent.
  - Fiscal consolidation will help narrow the REER gap as domestic absorption is restrained.

### Saudi Arabia — Capital and Financial Accounts; FX Intervention and Reserves
- Capital and Financial Accounts:
  - Background: Recorded net financial outflows increased in 2018 as public sector institutions continued to accumulate external assets.
  - E&O were about 0.6 percent of GDP in 2018 compared with 10.3 percent of GDP in 2016.
  - Reserves increased marginally; expected to decline over the medium term as CA moves to broad balance and investments overseas by public sector institutions continue.
  - Assessment: Analysis complicated by lack of detailed flow information and large E&O in some years; strong reserves position limits risks and vulnerabilities.
- FX Intervention and Reserves Level:
  - Background: Reserves increased slightly to $490 billion (63 percent of GDP, 26.7 months of imports, and 414 percent of the IMF’s reserve adequacy metric) at end-2018 but are down from $724 billion in 2014.
  - Reserve coverage expected to decline to 247 percent of the IMF’s ARA metric by 2024, above the IMF recommended range of 100 to 150 percent.
  - Assessment: Reserves serve both precautionary and intergenerational savings roles; reserves more than adequate for precautionary purposes per IMF metrics.
  - Recommendation: Continued fiscal adjustment is needed to strengthen the CA and increase savings for future generations.

### Singapore — Overall Assessment and Policy Responses
- Overall Assessment:
  - The external position in 2018 was substantially stronger than what is consistent with fundamentals and desirable policies.
  - Singapore’s very open economy and position as a global trading and financial center make the assessment more uncertain than usual.
- Potential Policy Responses:
  - Higher public investment addressing aging and digital transition (including health care, physical infrastructure, and human capital) would help moderate CA imbalances by lowering net public saving.
  - Structural reforms to improve productivity would support a trend real exchange rate appreciation.

### Singapore — Foreign Asset and Liability Position and Trajectory
- Background and 2018 snapshot:
  - NIIP: 223.0 percent of GDP in 2018, up from 197 percent in 2013.
  - Gross Assets: 1,053.4 percent of GDP.
  - Debt Assets: 504.0 percent of GDP.
  - Gross Liab.: 830.4 percent of GDP.
  - Debt Liab.: 354.2 percent of GDP.
  - Large gross non-FDI liabilities (427 percent of GDP in 2018) are mitigated by large gross asset positions and banks’ large short-term external assets.
- Assessment:
  - Singapore has large official reserves and other official liquid assets; current level of official external assets appears adequate, with no clear case for further accumulation for precautionary purposes.

### Singapore — Current Account and Assessment
- Background and dynamics:
  - CA surplus: 17.9 percent of GDP in 2018, up from 16.4 percent in 2017.
  - Large CA reflects a strong goods balance partly offset by deficits in services and income accounts.
  - Mandatory defined-contribution pension program assets were about 80 percent of GDP in 2018.
  - CA surplus projected to narrow on the back of increased infrastructure and social spending.
- Assessment:
  - Guided by the EBA framework, staff assesses the 2018 CA as higher than the level consistent with fundamentals and desirable policies, by 1.1–7.1 percent of GDP.
  - Actual CA: 17.9
  - Cycl. Adj. CA: 18.4
  - Staff CA Gap: 4.1

### Singapore — Real Exchange Rate, Capital Flows, and Reserves
- REER:
  - REER depreciated by 0.5 percent year over year in 2018; NEER appreciated by 1 percent year over year.
  - As of May 2019, the REER had appreciated by 0.6 percent relative to 2018 average.
  - Assessment: Staff assesses REER is undervalued by 2.2 to 14.2 percent (subject to wide uncertainty).
- Capital and Financial Accounts:
  - 2018 financial account deficit widened to 14 percent of GDP from 8 percent in 2017, reflecting resumed outflows in other investments driven by bank asset flows.
  - Assessment: Financial account likely to remain in deficit as long as trade surplus remains large.
- FX Intervention and Reserves:
  - Official reserves held by the MAS reached US$288 billion (79 percent of GDP) in 2018, of which S$45 billion was transferred to the government in May for management by sovereign wealth fund GIC.
  - Aggregated data on net FX purchases to be published beginning in 2020.
  - Assessment: Current level of official external assets appears adequate even after prudential considerations.

### South Africa — Overall Assessment and Policy Responses
- Overall Assessment:
  - The external position in 2018 was moderately weaker than implied by fundamentals and desirable policies.
  - In 2018, the CA gap remained broadly unchanged.
- Potential Policy Responses:
  - Reducing external gaps will require bold implementation of structural reforms to improve competitiveness and gradual fiscal consolidation while providing space for infrastructure and social spending.
  - Reforms to improve efficiency of key product markets and labor markets are needed to attract durable foreign inflows such as FDI.
  - Accumulating international reserves would strengthen ability to deal with FX liquidity shocks.

### South Africa — Foreign Asset and Liability Position and Trajectory
- Background and 2018 snapshot:
  - Gross external assets: 132.5 percent of GDP.
  - Gross external liabilities: 122.1 percent of GDP.
  - NIIP: 10.4 percent of GDP in 2018 (improved from –8 percent in 2014; 16 percent in 2015).
  - Gross external debt rose to 47 percent of GDP in 2018 from 26 percent of GDP in 2008; short-term external debt slightly below 15 percent of GDP in 2018.
- Assessment:
  - Risks from large gross external liabilities mitigated by comfortable external asset position, equities-dominated liabilities, and about half of external debt being rand-denominated.

### South Africa — Current Account and Assessment
- Background:
  - CA deficit widened to 3.5 percent of GDP in 2018 from 2.4 percent in 2017 (having narrowed from 5.8 percent in 2013).
  - CA deficit projected at 3.7 percent of GDP in the medium term due to an elevated income account deficit (projected to remain at about 3 percent of GDP).
- Assessment and CA gap calculations:
  - Staff estimates a CA gap in the range of –0.8 to –2.8 percent of GDP in 2018, derived from a revised cyclically adjusted CA and an adjusted model-based norm.
  - Revised cycl. adj. CA (–2.4 percent of GDP) is obtained by subtracting 1.5 percentage points from the cycl. adj. CA (–3.9 percent of GDP) for the statistical treatment of transfers and income accounts.
  - Adjusted CA norm (–0.6 percent of GDP) is obtained by subtracting 1.1 percentage points from a surplus CA norm from the regression model (0.5 percent of GDP) to reflect lower life expectancy at prime age relative to other countries in the regression sample.
  - The estimated CA gap is largely explained by structural factors outside the model.
- 2018 indicators:
  - Actual CA: –3.5
  - Cycl. Adj. CA: –3.9
  - EBA CA Norm: 0.5
  - EBA CA Gap: –4.4
  - Staff Adj.: 2.6
  - Staff CA Gap: 1.8

### South Africa — Real Exchange Rate, Capital Flows, and Reserves
- REER:
  - CPI-REER depreciated during 2011–15 and recouped some losses through early 2018; in 2018 the REER strengthened about 2 percent.
  - Two REER-based regressions point to undervaluation in a range of 1.8 percent (level approach) and 14 percent (index approach); staff deems these results less reliable.
  - Staff assesses the REER to be overvalued by 2 to 12 percent, relying on the CA approach where the implied REER gap is estimated from the CA gaps.
- Capital and Financial Accounts:
  - Net FDI flows turned positive in 2018 (0.8 percent of GDP).
  - Portfolio investment at 2.5 percent of GDP remained the main source of financing the CA deficit.
  - Gross external financing needs stood at 18 percent of GDP in 2018.
  - Assessment: Risks from reliance on non-FDI inflows and nonresident holdings are mitigated by a flexible exchange rate, large share of local currency component in nonresident portfolio holdings, and a large domestic institutional investor base.
- FX Intervention and Reserves:
  - Exchange rate regime classified as floating; central bank intervention is rare.
  - International reserves were about 14 percent of GDP, 77 percent of gross external financing needs, and 5½ months of imports in 2018.

*International Monetary Fund | July 2019 — Chapter 3 (selected country assessments as provided)*

### 2018. Reserves stand below the IMF’s composite adequacy metric (63 percent of the metric without considering existing ca

### ch3 - 2018. Reserves stand below the IMF’s composite adequacy metric (63 percent of the metric without considering existing ca

### Spain — Overall assessment and policy implications
- Overall Assessment: The external position in 2018 was moderately weaker than consistent with medium-term fundamentals and desirable policies.
- Key drivers and context:
  - The CA remained in surplus for the sixth consecutive year in 2018.
  - Achieving a sufficiently strong NIIP and further reductions in unemployment will continue to require a relatively high CA surplus and a moderately weaker REER for a sustained period.
- Potential Policy Responses:
  - Structural reforms that supported the reduction in imbalances included labor market reform, wage moderation, and fiscal adjustment.
  - To sustain progress and lower external vulnerability: restart structural fiscal consolidation and implement additional reforms to address labor market duality.
  - Boost productivity and competitiveness through faster implementation of product and service market reforms, and actions to enhance education outcomes, worker training, and firms’ innovation capacity.
- Reserve accumulation advice:
  - Assessment: If conditions allow, reserve accumulation would be desirable to strengthen the external liquidity buffer, subject to maintaining the primacy of the inflation objective.

### Spain — Foreign asset and liability position
- Background:
  - NIIP dropped from –35 percent of GDP in 2000 to –94 percent of GDP in 2009.
  - NIIP remained elevated at –74 percent of GDP in 2018:Q4, improved by 21 percentage points since 2014.
  - Gross liabilities stood at 231 percent of GDP in 2018:Q4, with more than two-thirds in the form of external debt.
  - NIIP accounted for by general government and central bank increased from about one-quarter in 2010 to over three-quarters in 2018:Q4.
  - TARGET2 liabilities reached 33 percent of GDP by end-2018.
- Assessment:
  - Large negative NIIP implies external vulnerabilities from large gross financing needs and potential adverse valuation effects.
  - Mitigating factors: favorable maturity structure of outstanding sovereign debt (averaging seven years) and ECB measures (such as QE) lowering the cost of debt.
- Key 2018 statistics (percent of GDP):
  - NIIP: –74.3
  - Gross Assets: 156.4
  - Res. Assets: 70.8
  - Gross Liab.: 230.7
  - Debt Liab.: 143.6

### Spain — Current account and REER
- Current Account background and outlook:
  - After a 2007 CA deficit peak of 9.6 percent of GDP, CA surpluses occurred in 2013–18.
  - CA surplus was estimated at 0.9 percent of GDP in 2018.
  - Trade surplus declined relative to 2017; moderate CA surpluses projected to continue in the medium term.
- Assessment and CA norms:
  - EBA CA model suggests a norm of 1.1 percent of GDP for 2018, roughly equal to the cyclically adjusted CA (0.9 percent of GDP).
  - Staff objective to strengthen NIIP to above –50 percent over the medium to long term implies a CA norm of about 2 percent of GDP, with a range of 1 to 3 percent of GDP, yielding a CA gap of –2.1 to –0.1 percent of GDP.
  - Uncertainty about the output gap could imply a larger desirable CA surplus if the output gap is still negative.
- CA figures (percent of GDP):
  - Actual CA: 0.9
  - Cycl. Adj. CA: 0.9
  - EBA CA Norm: 1.1
  - EBA CA Gap: –0.2
  - Staff Adj.: –0.9
  - Staff CA Gap: –1.1
- Real Exchange Rate background and assessment:
  - CPI-based REER appreciated by 2.1 percent from its average 2017 level in 2018; ULC-based REER was unchanged.
  - ULC-based REER depreciated by 18 percent since its 2008 peak.
  - As of May 2019, CPI-based REER and ULC-based REER had depreciated by 1.3 and 0.7 percent relative to 2018 averages, respectively.
  - EBA REER models estimate an overvaluation of 6.0 to 6.8 percent for 2018; CA model implies close-to-zero overvaluation.
  - Staff assesses a 2018 REER gap in the range of 1 to 9 percent, taking into account competitiveness and NIIP risks.

### Spain — Capital and financial accounts; FX intervention and reserves
- Capital and financial accounts:
  - Financing conditions favorable; sovereign bond yields near historical lows.
  - Private sector deleveraging continued against the rest of the world in 2018.
  - 2018 financial account balance largely driven by net outflows of loans and other bank-related instruments and portfolio equity.
  - TARGET2 liabilities accumulation moderated from close to 6 percent of GDP in 2015–2016 to less than 2 percent of GDP in 2018.
  - Assessment: ECB monetary accommodation, domestic reforms, and fiscal consolidation improved investor sentiment but large external financing needs leave Spain vulnerable to sudden market volatility.
- 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.

---

### Sweden — Overall assessment and policy implications
- Overall Assessment: The external position in 2018 was moderately stronger than the level consistent with medium-term fundamentals and desirable policies.
- Potential Policy Responses:
  - A mildly expansionary fiscal policy stance—consistent with converging to the lower medium term surplus target—should support demand.
  - Implement reforms to help restore residential investment following the recent slump.
  - Reforms to facilitate migrant integration into the labor market to raise potential output and reduce household uncertainties.
  - Expectation: over time, some appreciation of the krona as inflation returns to target.

### Sweden — Foreign asset and liability position
- Background:
  - NIIP reached 6.7 percent of GDP in 2018, up 2.5 percentage points in the year.
  - Expected to rise further in the medium term reflecting continued CA surpluses.
  - Over the last decade, average annual increase in NIIP about 1.5 percent of GDP vs. average CA surplus of 4.6 percent of GDP; persistence suggests potential measurement issues consistent with large E&O averaging –1.8 percent of GDP in the past decade.
- Assessment:
  - Gross liabilities reached 243 percent of GDP in 2018, with about two-thirds being external debt (168 percent of GDP).
  - Rollovers of external debt pose some vulnerability, but risks moderated by banks’ liquidity and capital buffers.
  - Sweden’s strong FX reserves and low public debt help ensure capacity to manage pressures.
- Key 2018 statistics (percent of GDP):
  - NIIP: 6.7
  - Gross Assets: 249.6
  - Debt Assets: 88.8
  - Gross Liab.: 243.0
  - Debt Liab.: 134.8

### Sweden — Current account and REER
- Current Account background and assessment:
  - CA balance estimated at 2 percent of GDP in 2018, down from 2.8 percent in 2017 and below the past decade average of 4.6 percent.
  - Cyclically adjusted CA estimated at 2.3 percent of GDP in 2018, 1.3 percentage points above the cyclically adjusted EBA norm of 1 percent of GDP.
  - EBA norm has been below actual CA for past two decades, implying model limitations.
  - Staff assesses Sweden’s CA gap at 1.3 percent of GDP in 2018, within a range of ± 1.5 percent of GDP.
- CA figures (percent of GDP):
  - Actual CA: 2.0
  - Cycl. Adj. CA: 2.3
  - EBA CA Norm: 1.0
  - EBA CA Gap: 1.3
  - Staff Adj.: 0.0
  - Staff CA Gap: 1.3
- Real Exchange Rate background and assessment:
  - The krona depreciated by 4.1 percent in real effective terms in 2018 relative to its average level in 2017; through May 2019, CPI-based REER depreciated by 5.2 percent.
  - EBA REER models suggest gaps of –16.7 and –17.7 percent using REER Index and Level approaches for 2018.
  - ULC-based REER index is only 6 percent below its 25-year average, within ± 12.5 percent historical fluctuation range.
  - Applying a 0.35 semielasticity of CA to REER to the CA gap of 1.3 percent ± 1.5 percent of GDP gives a valuation range for the krona of 1 to –8 percent.
  - Staff gives greater weight to EBA REER models and ULC-based REER and assesses the krona to be undervalued by 5 to 15 percent; this REER gap is expected to be temporary.

### Sweden — Capital and financial accounts; FX intervention and reserves
- Capital and financial accounts:
  - Sweden’s large banks remain vulnerable to liquidity risks from global wholesale markets despite improved structural liquidity measures.
  - Macroprudential policies (increased capital buffers, mortgage amortization regulations) help contain vulnerabilities.
  - Ongoing monitoring of an extended (three-month) liquidity coverage ratio in US dollars and euros recommended to ensure adequacy of banks’ FX liquidity buffers.
- FX intervention and reserves:
  - Background: exchange rate is free floating.
  - Foreign currency reserves stood at US$61 billion in December 2018, equivalent to 21 percent of the short-term external debt of monetary and financial institutions (primarily banks) and about 11 percent of GDP.
  - Assessment: Given high dependence of Swedish banks on wholesale funding in foreign currency and historical funding disruptions, Sweden should maintain adequate foreign reserves.

*International Monetary Fund | July 2019*

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### Switzerland — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was broadly in line with the level implied by medium-term fundamentals and desirable policies. This assessment is subject to especially high uncertainty: REER overvaluation following the exit from the floor in 2015 had been unwound by 2017. Were real depreciation to resume, future assessments could be affected.
- Potential Policy Responses:
  - Macroeconomic policies should be geared toward ensuring balanced contributions to GDP growth from domestic and external demand.
  - Move to—and maintain—a structurally neutral fiscal stance to ease the burden on monetary policy that faces operational limits during periods of economic weakness or safe-haven appreciation pressures.
  - Monetary policy should continue to be directed at maintaining inflation within the definition of price stability, with foreign currency intervention reserved for addressing large exchange market pressures.
  - Use macroprudential policies to address excessive private credit (related to mortgage lending) and reduce financial sector risks.
  - Reform the corporate income tax to encourage small and medium-sized enterprise investment and reduce corporate net saving.

### Switzerland — Foreign Asset and Liability Position and Trajectory
- Background:
  - Switzerland is a financial center with a positive NIIP of 128 percent of GDP and gross foreign asset and liability positions of 694 and 565 percent of GDP, respectively, as of end 2018.
  - The NIIP reflects both CA surpluses, which average nearly 10 percent of GDP, and large, bidirectional valuation changes, although valuation losses tend to dominate.
  - These valuation changes reflect fluctuations in exchange rates and prices of securities and precious metals that interact with mismatches between assets and liabilities in terms of currencies and financial instruments.
- Assessment:
  - Switzerland’s large gross liability position and the volatility of financial flows present some risk, but these are mitigated by the large gross asset position and the fact that about two-thirds of external liabilities are denominated in Swiss francs.
  - Given the large gross positions and compositional mismatch between assets and liabilities, relatively modest changes in exchange rates and asset prices can have a material effect on the NIIP.
- Key statistics (2018, % GDP):
  - NIIP: 128.2
  - Gross Assets: 693.6
  - Debt Assets: 217.3
  - Gross Liab.: 565.4
  - Debt Liab.: 192.1

### Switzerland — Current Account
- Background:
  - Switzerland has run large CA surpluses, averaging nearly 10 percent of GDP since 2006.
  - The CA balance is estimated at 10.2 percent of GDP for 2018, an increase from the downwardly revised surplus of 6.7 percent for 2017.
  - Ex post CA revisions are frequent, mainly due to changes in estimated investment income.
  - Surpluses on trade of goods and services (including merchanting) have been driving the overall positive CA balance.
- Assessment:
  - Based on a cyclically adjusted CA surplus of 10.4 percent of GDP and an EBA CA norm of 5.9 percent of GDP, the overall EBA estimated CA gap equaled 4.5 percent of GDP in 2018.
  - Domestic policy gaps account for –1.0 percentage points of the CA gap and consist of excessive private sector credit (1.3) and fiscal underspending (–0.4), while policy gaps in the rest of the world contribute 0.3 percentage point.
  - Switzerland-specific factors not appropriately treated in the income account lower the CA gap: (1) inclusion of estimated retained earnings on portfolio equity investment and (2) compensation for valuation losses on fixed income securities arising from inflation.
  - After accounting for these factors, staff estimates a CA gap of about 0.9 percent of GDP (with a range of ±2 percentage points).
- Key statistics:
  - Actual CA: 10.2
  - Cycl. Adj. CA: 10.4
  - EBA CA Norm: 5.9
  - EBA CA Gap: 4.5
  - Staff Adj.: –3.5
  - Staff CA Gap: 0.9

### Switzerland — Real Exchange Rate
- Background:
  - The CPI-based REER appreciated by 16 percent during 2008–18, including two episodes of rapid appreciation in response to safe-haven inflows.
  - The first spike occurred in July 2011 and led the Swiss National Bank (SNB) to establish a floor of 1.20 for the Swiss franc–euro exchange rate in September 2011.
  - After appreciating sharply following the exit from the floor in 2015, the REER moderated, initially on account of a partial unwinding of the overshooting of the nominal effective exchange rate and, subsequently, on lower inflation in Switzerland than in its trading partners.
  - The average REER for 2018 weakened by 2.8 percent relative to the 2017 average. As of May 2019, the REER had depreciated by 0.1 percent compared with the 2018 average.
- Assessment:
  - The EBA REER Index and Level models suggest that the average REER in 2018 was 11 to 17 percent overvalued, with policy gaps accounting for a modest amount of the total gap.
  - To a large extent, this finding reflects the “reversion to trend” property of the empirical model in the context of the prior rapid appreciation episodes.
  - Measurement issues may not fully capture the secular improvement in productivity, especially in knowledge-based sectors.
  - Based on the CA gap, staff assesses the REER gap to have been in the range of –6.5 to 1 percent in 2018.
  - Note: The staff assessed REER gap of –3.75 percent is within the (± 5 percent) interval generally described as broadly in line with fundamentals.

### Switzerland — Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - In recent years, Switzerland has experienced large inflows in the form of currency and deposits, in part due to its status as a safe haven.
  - Since 2007, these cumulative net inflows amounted to about 75 percent of GDP.
  - Since 2015, banks’ placements at the SNB (above a certain threshold) have been subject to a negative interest rate of 0.75 percent to reduce the attractiveness of these inflows.
  - These inflows stopped in mid-2017 and foreigners reduced holdings of currency and deposits in 2018.
  - There are no restrictions on financial flows.
- Assessment:
  - Financial flows are large and volatile, reflecting Switzerland’s status as a financial center and a safe haven, with inflows tending to accelerate during periods of heightened global and regional uncertainty.

### Switzerland — FX Intervention and Reserves Level
- Background:
  - Foreign exchange reserves amounted to US$788 billion (114 percent of GDP) at end-2018, down US$24 billion (including valuation changes) since end-2017.
  - About 75 percent of reserves were accumulated during 2009–15, including to defend the previous exchange rate floor.
  - Since exiting the floor, the SNB has intervened periodically, purchasing sizable volumes in response to large appreciation pressures from safe-haven surges, as well as more frequently but in smaller amounts.
  - Purchases dwindled since mid-2017, amounting to only Sw F 2.3 billion in 2018.
- Assessment:
  - Reserves are large relative to GDP but more moderate when compared with short-term foreign liabilities.
  - The high level of reserves reflects monetary policy operations aimed at avoiding persistent undershooting of inflation (which averaged –0.15 percent during 2012–18) as a result of inflow surges and given the limited scope for significant further easing via other monetary policy tools.
  - The supply of domestic assets available for purchase is very limited, and the marginal interest rate on banks’ deposits at the SNB is –0.75 percent, which is the lowest in the world.
  - Past interventions also helped to avoid potentially large exchange rate overvaluation.

### Thailand — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was substantially stronger than warranted by medium-term fundamentals and desirable policies. While the CA surplus has narrowed since peaking in 2016, it remains sizable, continuing to reflect the tepid recovery of domestic demand amid political uncertainty.
- Potential Policy Responses:
  - Mutually reinforcing macro policy stimulus, led by a fiscal expansion and structural reforms, should support domestic demand and lower the CA surplus over time.
  - Higher public infrastructure within available fiscal space should crowd in private investment.
  - Reform and expand social safety nets, notably the fragmented pension program, to reduce precautionary saving and widespread informality.
  - Reforms to reduce barriers to investment, especially in the services sector.
  - Exchange rate should move flexibly as the key shock absorber; intervention should be limited to avoiding disorderly market conditions.
  - With reserves exceeding all adequacy metrics, there is no need to build up reserves for precautionary purposes.

### Thailand — Foreign Asset and Liability Position and Trajectory
- Background:
  - Thailand’s NIIP continued to strengthen in 2018 to about –0.5 percent of GDP, compared with –9.1 percent of GDP in 2017 and –24 percent of GDP in 2014.
  - Gross assets declined to about 96 percent of GDP (41 percent being reserve assets), whereas gross liabilities declined 3 percentage points to 97 percent of GDP (dominated by direct about half and portfolio a third investment).
  - Net FDI continued to decline as outward investment (particularly by corporates) increased; portfolio (equities) and other investment also declined (by about 2 percentage points of GDP).
- Assessment:
  - External vulnerabilities have been reduced with the strengthening of the NIIP, which is projected to reach a small creditor position over the medium term.
  - With external debt steady at about 32 percent of GDP, of which short-term debt (on a remaining maturity basis) amounts to 16 percent of GDP, external debt sustainability and liquidity risk are limited.
- Key statistics (2018, % GDP):
  - NIIP: –0.5
  - Gross Assets: 96.4
  - Res. Assets: 43.2
  - Gross Liab.: 96.9
  - Debt Liab.: 29.5

### Thailand — Current Account
- Background:
  - Thailand’s CA surplus declined sharply to 7 percent of GDP in 2018, following the continued strengthening of the CA surplus since 2013, with an all-time high of 11.7 percent in 2016.
  - The reduction in the surplus in 2018 reflects a consumption-led strengthening of domestic demand and a decline in net exports.
  - Exports slowed due to US-China trade tensions and a moderation in global external demand; imports remained robust, but with the broader regional trade slowdown weighing on imports of intermediate goods toward the end of the year.
  - The services account contracted by about 0.1 percent of GDP relative to 2017, due to a temporary slowdown in tourism receipts.
- Assessment:
  - The EBA CA model estimates a cyclically adjusted CA of 7.0 percent of GDP and a CA norm of 0.1 percent of GDP for 2018.
  - The CA gap of 6.9 percent of GDP consists of an identified policy gap of 1.5 percent of GDP and an unexplained residual of 5.4 percent of GDP, which partly reflects Thailand-specific features and structural challenges not fully captured by the EBA model.
  - Political uncertainty continued to weigh on investment in 2018, although its effect has moderated somewhat (0 to 1.5 percent of GDP), including following the confirmation of the elections date.
  - Taking all of this into account, staff assesses the CA balance to be about 3.8 to 7.0 percent of GDP higher than warranted by fundamentals and desired policies. This CA gap is expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, private confidence recovers, and steps are taken to reform the safety net.
- Key statistics:
  - Actual CA: 7.0
  - Cycl. Adj. CA: 7.0
  - EBA CA Norm: 0.1
  - EBA CA Gap: 6.9
  - Staff Adj.: –1.5
  - Staff CA Gap: 5.4

### Thailand — Real Exchange Rate
- Background:
  - The baht has been on a gradual real appreciation trend since the mid-2000s, despite occasional bouts of volatility.
  - In 2018, despite some volatility through the year, with marked depreciations in 2018:Q2 and 2018:Q3, the REER appreciated overall by 3.0 percent relative to 2017.
  - As of May 2019, the baht had appreciated an additional 4 percent relative to the 2018 average.
- Assessment:
  - Using an elasticity of 0.64, the 2018 REER would be assessed as undervalued by about 6 to 11 percent.

### Thailand — Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - In 2018, the capital and financial account weakened to –4.5 percent of GDP from –2.8 percent in 2017.
  - This has been driven primarily by net portfolio flows, which strengthened to 1.1 percent of GDP.
  - Nonresident holdings of Thai bonds declined in 2018:S1 and reversed in 2018:S2 as nonresident flows rebounded.
  - Outward FDI remained robust at 4 percent of GDP owing to Thai firms’ overseas investment.
  - Net other investment outflows were about 1 percent of GDP.
  - The authorities continued with their gradual and prudent financial account liberalization, encouraging outward investment by residents.
  - The capital and financial account balance has been negative since 2013.
- Assessment:
  - Since 2013, Thailand has experienced episodes of volatility reflecting changes in external financial conditions, continued political uncertainty, and more recently concerns about the impact of US-China trade tensions.
  - Thailand has been able to weather such episodes well, given its strong external buffers and fundamentals, which have supported the ability of investors to distinguish Thailand from others in the emerging market asset class.

### Thailand — FX Intervention and Reserves Level
- Background:
  - The exchange rate regime is classified as (de jure and de facto) floating.
  - International reserves stood at 47.4 percent of GDP in 2018, standing at over three times short-term debt and 12 months of imports, and over 200 percent of the IMF’s standard reserve adequacy metric (unadjusted for capital controls).
- Assessment:
  - Interventions were two-sided over the course of 2018, as proxied by the increase and then decrease in reserves over the course of the year (official intervention data are not published).
  - Gross international reserves (including net forward position) remained stable during 2018.
  - Reserves are higher than the range of the IMF’s adequacy metrics, and there continues to be no need to build up reserves for precautionary purposes.
  - The exchange rate should move flexibly to act as a shock absorber, with FX intervention limited to avoiding disorderly market conditions.

*Source: CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS (PDF).*

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS

### Turkey — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was broadly in line with the level implied by fundamentals and desirable policies. This reflects the ongoing and lagged adjustment of external balances following the sharp REER depreciation in 2018, which is projected to gradually unwind. Large external financing needs and relatively low reserves make Turkey vulnerable to financial account reversals.
- Potential Policy Responses:
  - Monetary policy should aim to reanchor inflation expectations and strengthen central bank credibility, while rebuilding reserves.
  - Fiscal policy should allow automatic stabilizers to operate and reorient spending toward the most vulnerable.
  - Focused structural reforms to enhance productivity and ensure more stable domestic funding sources, including reducing labor market rigidities and improving the business climate through reforms of insolvency and corporate restructuring frameworks.

### Turkey — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP peaked at –54 percent of GDP at end-2017 and narrowed to –48 percent of GDP at end-2018, mostly reflecting valuation effects from the lira’s sharp depreciation in 2018.
  - Total foreign liabilities reached 78 percent of GDP in 2018, dominated by debt at 55 percent of GDP.
  - Short-term external debt: 22 percent of GDP; about 40 percent of long-term debt at variable rates.
- Assessment:
  - Size and composition of external liabilities, coupled with low reserves, expose Turkey to liquidity shocks, sudden shifts in investor sentiment, and increases in global interest rates.
  - FX exposure of nonfinancial corporates is high, with potential to worsen bank asset quality.
  - NIIP projected to gradually fall to about –40 percent of GDP by 2021, driven by a decline in liabilities, mainly loans, as the economy rebalances.
- Key statistics (2018 % GDP):
  - NIIP: –47.8
  - Gross Assets: 29.9
  - Res. Assets: 12.1
  - Gross Liab.: 77.7
  - Debt Liab.: 55.1

### Turkey — Current Account
- Background:
  - CA deficit averaged 4 percent during 2014–16, widened to 5.6 percent of GDP in 2017, narrowed to 3.5 percent in 2018.
  - CA expected to swing to a slight surplus of 0.5 percent in 2019.
- Assessment:
  - EBA CA norm: –1.6 percent of GDP (large standard error close to 2 percent).
  - Cyclically adjusted CA deficit in 2018: –2.5 percent of GDP; EBA CA gap: –0.9 percent of GDP.
  - After accounting for temporary large imports of gold (0.7 percent of GDP higher than normal), staff assesses 2018 CA to be broadly in line with fundamentals and desired policies, with a gap in the range of –1.2 to 0.8 percent of GDP.
- Key statistics:
  - Actual CA: –3.5
  - Cycl. Adj. CA: –2.5
  - EBA CA Norm: –1.6
  - EBA CA Gap: –0.9
  - Staff Adj.: 0.7
  - Staff CA Gap: –0.2

### Turkey — Real Exchange Rate
- Background:
  - Average REER depreciated by 14 percent in 2018 relative to 2017; REER some 37 percent below its 2010 peak.
  - As of May 2019, REER had depreciated by 10.3 percent relative to the 2018 average.
- Assessment:
  - EBA REER index and level approaches suggest undervaluation in 2018 by 21 to 23 percent (large uncertainties).
  - Staff-assessed CA gap suggests REER gap close to zero.
  - Giving more weight to EBA REER approaches, staff assesses REER to be undervalued in the range of 10 to 20 percent, with a midpoint around 15 percent.

### Turkey — Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Net capital flows: inflow of US$38.5 billion (4.5 percent of GDP) in 2017 to outflow of US$0.5 billion (0.1 percent of GDP) in 2018 (both excluding reserves and E&O).
  - Positive E&O increased from US$0.6 billion in 2017 to US$17.2 billion in 2018.
  - External rollovers of long-term bank debt fell as low as 42 percent in September 2018.
  - Net FDI flows around 1 percent of GDP in 2018.
  - High E&O netting US$17.2 billion (2.2 percent of GDP) in 2018.
  - August measure: limits to bank swaps and other derivative transactions with foreign counterparties (partially unwound later).
- Assessment:
  - Quality of financing worsened in 2018 with shorter maturity structure, lower rollover rates, and financing dominated by E&O and reserve drawdown.
  - Annual gross external financing needs about 22 percent of GDP, leaving Turkey vulnerable to adverse shifts in global investor sentiment.

### Turkey — FX Intervention and Reserves Level
- Background:
  - De facto and de jure exchange rate is floating.
  - Gross reserves declined to US$93 billion (12 percent of GDP) at end-2018, US$14.7 billion (1.9 percent of GDP) lower than end-2017.
  - Net international reserves at US$30 billion (3.9 percent of GDP) at end-2018, declining by US$0.8 billion (0.1 percent of GDP).
- Assessment:
  - Gross reserves amounted to 76 percent of the IMF’s ARA metric at end-2018, down from 80 percent at end-2017.
  - Reserve coverage of external financing requirements dropped to 45 percent in 2018, from 51 percent in 2017.
  - Accumulation of reserves over the medium term is needed given sizable external liabilities and dependence on short-term and portfolio funding.

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### United Kingdom — Overall Assessment and Policy Responses
- Overall Assessment: The external position in 2018 was weaker than implied by medium-term fundamentals and desirable policies. The CA deficit remained high in 2018, reflecting low public and private savings. Over the medium term, the deficit is set to narrow somewhat helped by ongoing fiscal consolidation. The uncertainty around this assessment is significant, reflecting both measurement issues and uncertainty about the future trade arrangement with the European Union and its possible effect on growth and trade flows.
- Potential Policy Responses:
  - Continue current fiscal consolidation within a medium-term framework to support external rebalancing.
  - Structural reforms to broaden the skill base and invest in public infrastructure (within the budget envelope) to boost productivity and competitiveness.
  - Maintain financial stability through macroprudential policies to support private sector saving.

### United Kingdom — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP strengthened to –6.7 percent of GDP in 2018 from –8.1 percent in 2017.
  - Over five years, NIIP strengthened by 11.3 percentage points, reflecting a negative CA contribution (–20.6 percentage points) more than offset by valuation and growth effects (28.9 percentage points and 3.0 percentage points).
  - Composition: assets roughly match liabilities; assets and liabilities concentrated in Europe, Japan, and the United States (~75 percent).
  - Liabilities have a larger share denominated in sterling than assets.
- Assessment:
  - NIIP sustainability not an immediate concern; valuation gains have offset about a third of CA flows since 2000.
  - Large gross stock positions (derivatives, gross assets, gross liabilities both exceed 500 percent of GDP) are potential sources of vulnerability.
- Key statistics (2018 % GDP):
  - NIIP: –6.7
  - Gross Assets: 521.6
  - Debt Assets: 256.2
  - Gross Liab.: 528.4
  - Debt Liab.: 272.0

### United Kingdom — Current Account
- Background:
  - CA deficit worsened to –3.9 percent of GDP in 2018 (from –3.3 percent in 2017); expected to worsen marginally to –4.2 percent of GDP in 2019.
  - Trade balance broadly stable at about –1.5 percent of GDP in 2018.
  - Reduction in gross national savings by 1 percent of GDP driven by reduction in corporate savings (from 9.8 to 8.2 percent of GDP), more than offsetting improvement in public savings.
- Assessment:
  - EBA CA model estimates a CA gap of –4.4 percent of GDP for 2018 (cyclically adjusted CA of –3.9 percent vs norm of 0.5 percent).
  - Cyclically adjusted CA assessed to be understated due to measurement biases from large NIIP valuation effects.
  - Staff assesses 2018 cyclically adjusted CA balance to be 1 to 4.8 percent of GDP lower than the CA norm, with a midpoint of 2.9 percent of GDP (range accounts for Brexit-related uncertainty and measurement issues).
- Key statistics:
  - Actual CA: –3.9
  - Cycl. Adj. CA: –3.9
  - EBA CA Norm: 0.5
  - EBA CA Gap: –4.4
  - Staff Adj.: 1.5
  - Staff CA Gap: –2.9

### United Kingdom — Real Exchange Rate
- Background:
  - Sterling appreciated by 1.8 percent in 2018 in real effective terms relative to 2017, but depreciated since mid-2016 by about 7 percent.
- Assessment:
  - EBA REER Level and Index approaches suggest gaps of –8.5 and –13.2 percent, respectively, for 2018.
  - Given uncertainties related to the UK’s new trading relationship with the EU, model estimates may be less appropriate.
  - Staff assesses the REER to be overvalued by between 0 and 15 percent (range anchored on CA assessment).

### United Kingdom — Capital and Financial Accounts
- Background:
  - As an international financial center, portfolio investment and other investments are key components of the financial account.
  - 2018 financing of the CA: recovery in net FDI inflows (outward FDI fell from 5.2 to 1.4 percent of GDP), repatriation of portfolio assets (–4.1 percent of GDP) combined with increase in portfolio liabilities of 6.8 percent of GDP, and other investments net 7.8 percent of GDP.
- Assessment:
  - Large fluctuations in capital flows are inherent and a potential source of vulnerability, mitigated by sound financial regulation and a strong financial sector.
  - Additional risk: FDI and portfolio investment inflows may decelerate due to concerns about future UK–EU trade relations.

### United Kingdom — FX Intervention and Reserves
- Background:
  - Pound has status of a global reserve currency; share of global reserves in sterling unchanged since 2015 at about 4.5 percent.
- Assessment:
  - Reserves typically low relative to standard metrics; currency is free floating.

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### United States — Overall Assessment and Policy Responses
- Overall Assessment: The external position was moderately weaker than implied by medium-term fundamentals and desirable policies in 2018. A strong economy and fiscal stimulus imply a sustained CA deficit in coming years, moving it further from the level justified by fundamentals and desirable policies. Actual and prospective changes in trade, taxation, and labor market policies add uncertainty to the assessment.
- Potential Policy Responses:
  - Fiscal consolidation aiming at a medium-term general government primary surplus of about 1.2 percent of GDP (a federal government primary surplus of about 1 percent of GDP) to put the debt-to-GDP ratio on a downward path and address external imbalances.
  - Structural policies to increase competitiveness while maintaining full employment: upgrade infrastructure; enhance schooling, training, and mobility of workers; encourage labor force participation.
  - Roll back recently imposed tariff barriers and resolve trade and investment disagreements without tariff and nontariff barriers.

### United States — Foreign Asset and Liability Position and Trajectory
- Background:
  - NIIP estimated to have decreased from –39.6 percent of GDP in 2017 to –47.4 percent of GDP in 2018 (before accounting for valuation effects of 2.9 percent of GDP through 2018:Q3).
  - Under staff baseline, negative NIIP projected to expand by 4 percent of GDP over next five years due to sustained CA deficits.
- Assessment:
  - Financial stability risks could arise from an unexpected decline in foreign demand for US fixed income securities.
  - Risk remains moderate given dominant status of the US dollar as a reserve currency.
  - About 64 percent of US assets are in the form of FDI and portfolio equity claims.
- Key statistics (2018 % GDP):
  - NIIP: –47.4
  - Gross Assets: 123.9
  - Debt Assets: 38.3
  - Gross Liab.: 171.3
  - Debt Liab.: 85.0

### United States — Current Account
- Background:
  - US CA deficit unchanged between 2017 and 2018 at 2.3 percent of GDP (compared with 2.1 percent in 2014).
  - Non-oil balance deficit reached 2.8 percent of GDP in 2018 vs 1.7 percent in 2014.
  - US CA deficit expected to rise to 2.6 percent of GDP by 2020 as US demand rises further above potential output, partly driven by projected fiscal easing.
- Assessment:
  - EBA model: cyclically adjusted CA of –2.1 percent of GDP; cyclically adjusted CA norm of –0.9 percent of GDP; cyclically adjusted CA gap of –1.2 percent of GDP for 2018.
  - Assessment attributes gap to policy gaps (–0.7 percent of GDP, of which –0.6 percent corresponds to fiscal policy) and an unidentified residual (about –0.5 percent of GDP).
  - External Sustainability Approach estimates a CA gap of –1.2 percent of GDP.
  - Staff assesses 2018 cyclically adjusted CA to be 0.9 to 1.9 percent of GDP lower than the level implied by fundamentals and desirable policies.
- Key statistics:
  - Actual CA: –2.3
  - Cycl. Adj. CA: –2.1
  - EBA CA Norm: –0.9
  - EBA CA Gap: –1.2
  - Staff Adj.: –0.2
  - Staff CA Gap: –1.4

### United States — Real Exchange Rate
- Background:
  - REER: depreciated about 7 percent in 2017 (eop), appreciated about 4 percent in 2018 (eop); as of end-2018 about 18 percent higher than the average for 2014.
  - Through May 2019, US dollar appreciated 3.4 percent in real terms relative to the 2018 average.
- Assessment:
  - Indirect estimates based on EBA CA assessment imply exchange rate was overvalued by 10 percent in 2018 (applying an estimated elasticity of 0.12).
  - EBA REER index model suggests overvaluation of 8.0 percent.
  - EBA REER level model suggests overvaluation of 11.9 percent.
  - External Sustainability Approach estimates a REER overvaluation of [text truncated in source].

*Source: CHAPTER 3 2018 INDIVIDUAL ECONOMY ASSESSMENTS (excerpt).*

### 10.3 percent. Considering all the estimates and their uncertainties, staff assesses the 2018 average REER to be somewhat

### ch3 - 10.3 percent. Considering all the estimates and their uncertainties, staff assesses the 2018 average REER to be somewhat

### REER valuation and assessment
- Staff assesses the 2018 average REER to be somewhat overvalued, in the 6 to 12 percent range.
- Specific model indications (selected excerpts):
  - For 2018, REER index and level models imply an overvaluation of 2 and 11 percent, respectively, while the CA gap is consistent with an overvaluation of 5 percent (Australia).
  - The EBA REER level model estimates a total REER gap of 12.6 percent for China (with identified policy gaps of –2.5 percent), though model fit is very poor for China.
  - The EBA REER level model indicates an overvaluation of 0.8 percent for the euro area, whereas the index model points to an overvaluation of 6.0 percent in 2018.
  - The EBA index REER gap in 2018 is estimated at 7.3 percent for Thailand; the EBA level REER gap is estimated at –6.1 percent.
  - Applying an estimated long-term elasticity of 0.27 would suggest a REER overvaluation of 2 to 12 percent for South Africa.
  - The REER Level model for Poland suggests an undervaluation of 18.9 percent, but the model’s large residuals (–16.9 percent) raise concerns about fit.

### Capital and financial accounts: flows and vulnerabilities
- Flows:
  - Net financial inflows were about 2.3 percent of GDP in 2018, compared with 1.6 percent of GDP in 2017.
  - Net portfolio investments and other investments decreased by 0.8 and 0.6 percent of GDP, respectively, in 2018, offset by stronger net direct investments.
- Assessment of vulnerabilities:
  - 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 that status and possibly by safe-haven flows.
  - Noted measurement and valuation issues in several economies (examples):
    - Canada: statistical treatment of retained earnings on portfolio equity and inflation estimated to generate a downward bias in the income balance of the CA of the order of 1.7 percent of GDP.
    - Hong Kong SAR: banking system claims on mainland nonbank entities amounted to HK$5.6 trillion, or about 198 percent of GDP, down by about 9 percentage points from a year earlier (as of end-2018).
    - Malaysia: about 13 percent of GDP of domestically issued debt held by nonresident investors as of 2018:Q3.
    - Saudi Arabia: at current oil production, a US$1 change in the oil price results in a 0.5 percent of GDP first-round change in the CA balance; oil price assumed to be US$65.5 in 2019, declining to US$57.4 in 2024 (US$67.9 in 2018).

### FX intervention and reserves level
- Background and 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.
- Country-specific reserve and intervention notes:
  - India: Reserves stand at about 187 percent of the ARA metric adjusted for capital controls.
  - Mexico: since February 2016 authorities moved to discretionary spot intervention and used it once in 2016 and once in 2017 (US$2 billion); in February 2017 a hedging program enabled the Bank of Mexico to offer up to US$20 billion in NDF settled in pesos with maturity up to 12 months; as of today US$5.5 billion in notional value outstanding has been continuously rolled over.
  - Turkey: net international reserves equal gross international reserves minus the central bank’s FX liabilities to banks, including the Reserve Option Mechanism.
  - Singapore: reserves-to-GDP ratio is larger than in most other financial centers; external assets managed by government investment entities amount to at least 70 percent of GDP.

### Notable technical endnotes and measurement issues by economy (selected)
- Australia: Lingering policy and structural distortions explain larger REER gap range relative to the CA gap range.
- Canada: commodity terms-of-trade and oil price measurement issues; WCS discount averaged US$26 a barrel in 2018 (from US$13 in 2017), estimated temporary effect on the CA about 0.9 percent of GDP.
- China: CA norm for 2018 (–0.4 percent) with a range of ± 1.5 percent of GDP.
- Euro Area: EBA analysis covers 11 members; when applying GDP-weighted aggregation the CA norm is adjusted by –0.6 percent of GDP.
- Germany: staff assesses the credit-to-GDP ratio to be currently lower than its long-term equilibrium.
- Hong Kong SAR: adjustments made to EBA implications include an adjustment of 5 to 7 percentage points to the NIIP contribution, a 4 to 4½ percentage point decline in the gold trade balance due to Precious Metals Depository opening, and a 1 to 1½ percent of GDP decline in logistics/trading activity from mainland onshoring.
- Indonesia: demographic adjustor of –0.9 percentage point applied to the model-estimated CA norm; a range of ± 1.5 percent added to reflect EBA regression uncertainty (standard error 1.4 percent).
- Malaysia: estimated 2018 EBA norm is 0.8 percentage point lower than the 2017 norm; REER semielasticity of CA to REER estimated at 0.46.
- Mexico: CA norm estimate has a standard error of 1.2 percent.
- Netherlands: larger external balance sheet and measurement issues add uncertainty; half of positions in assets and liabilities attributable to subsidiaries of foreign multinationals (Dutch Central Bank).
- Poland: standard error for the 2018 CA norm is 0.6 percent of GDP; REER level model shows large residuals.
- Russia: nominal GDP in US dollars grew by only 3.3 percent in 2018.
- Saudi Arabia: consumption-based model estimated CA norms of 12.6 percent of GDP and 9.4 percent of GDP under two annuity rules; EBA-lite cyclically adjusted CA norm estimated at 9.4 percent of GDP; investment-needs model produced a CA gap of 0.3 percent over the medium term.
- Singapore: staff-estimated CA gap about 4.1 percent of GDP (high uncertainty); external assets managed by GIC and Temasek amount to at least 70 percent of GDP.
- South Africa: demographic adjustor of –1.1 percent of GDP applied to model-based CA norm; measurement issues in the income balance and adjustments to cyclically adjusted CA noted.
- Spain: EBA model suggests CA norm of 1.1 percent of GDP with standard error 0.7 percent; staff-assessed CA norm range of 1 to 3 percent of GDP recommended to strengthen NIIP.
- Switzerland: underlying CA adjustments would need to reduce CA by about 3.6 percent of GDP after adjustments for retained earnings and nominal interest recording.
- Thailand: staff adjusts cyclically adjusted CA for measurement biases in EBA terms-of-trade estimates (about 0.5 to 1 percentage point of GDP).
- Turkey: additional cyclical contribution to the CA deficit due to gold imports in 2018 estimated at 0.7 percent of GDP (based on average annual 1999–2016 gold trade deficit of 0.4 percent of GDP vs 1.1 percent in 2018).
- United Kingdom: market-value based NIIP for mid-2017 could be close to 80 percent of GDP (Bank of England estimate); currency composition of FDI liabilities and assets differs (ONS survey).
- United States: small adjustor reflects correction to the terms-of-trade contribution, which does not include recent increases in oil production.

*International Monetary Fund | July 2019 — Chapter 3, Technical Endnotes by Economy*

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_Source: https://www.imf.org/-/media/files/publications/esr/2019/english/ch3.pdf_