## ch3 ## Source details **Canonical URL:** [ch3](https://www.imf.org/-/media/files/publications/esr/2020/english/ch3.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2020/english/ch3.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2020/english/ch3.pdf.json) --- ### Criteria for external position labels (Box 1.1) - Wording for current account and REER gaps: - “Higher” or “lower” used for positive or negative current account gaps when comparing cyclically adjusted CA to the CA norm. - REER gap reported as (–) percent “over” or “under” valued. - Definition of “broadly in line”: - Current account gaps in the range of ±1 percent of GDP. - REER gaps in the range reflecting country-specific exchange rate semi-elasticity (±5 percent based on an elasticity of –0.2). - Descriptive thresholds (CA Gap / REER Gap using elasticity of –0.2) — mapping: - CA Gap >4% / REER Gap <–20%: substantially stronger. - CA Gap [2%, 4%] / REER Gap [–20%, –10%]: stronger. - CA Gap [1%, 2%] / REER Gap [–10%, –5%]: moderately stronger. - CA Gap [–1%, 1%] / REER Gap [–5%, 5%]: broadly in line. - CA Gap [–2%, –1%] / REER Gap [5%, 10%]: moderately weaker. - CA Gap [–4%, –2%] / REER Gap [10%, 20%]: weaker. - CA Gap <–4% / REER Gap >20%: substantially weaker. ### Selection of economies covered - The 30 systemic economies were chosen based on: - global rank in purchasing power GDP (IMF’s WEO), - level of nominal gross trade, - degree of financial integration. - Economies covered include: 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. ### Two-country example: distinguishing domestic vs. foreign policy distortions - Stylized facts: - Country A: large CA deficit, large fiscal deficit, high public and external debt. - Country B: CA surplus (matching A’s deficit), large creditor position, no policy distortions. - Overall external assessment and policy gaps: - Country A: external imbalance reflecting its large fiscal deficit; exchange rate would look overvalued; needs domestic policy adjustment (rein in fiscal deficit; limit financial excesses). - Country B: equal and opposite surplus imbalance but no domestic policy gaps; adjustment by Country A would automatically eliminate Country B’s 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. ### Abbreviations (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 - 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 - QE = quantitative easing - REER = real effective exchange rate - Res. = residual ### Selected country assessments — key findings, projections, and policy recommendations - Australia - 2020 CA: 1.2 percent of GDP. - 2019 EBA cyclically adjusted CA: 0.3 percent of GDP; EBA CA Norm: –0.1 percent of GDP; EBA CA Gap: 0.5 percent of GDP. - IMF staff adjustments: - Adjust CA norm by –1.0 percent of GDP → adjusted CA norm –1.1 percent of GDP. - Adjust cyclically adjusted CA balance by –0.7 percent of GDP (iron ore price surge ~20 percent above medium-term WEO assumptions; iron ore exports ~3.3 percent of GDP). - Staff-adjusted CA gap: range 0.3 to 1.3 percent of GDP; midpoint 0.8 percent of GDP. - REER 2019: about 4.5 percent below 2018 average; May 2020 REER depreciated by about 1.9 percent relative to 2019 average. - REER gap for 2019: range –1.5 to –6.5 percent; midpoint –4 percent. - Financial account: 2019 net outflows; 2020 Q1 financial account deficit widened. - FX regime: free floating since 1983; no intervention since global financial crisis; reserves needs limited. - Belgium (selected figures) - 2019 NIIP: 37.6 percent of GDP. - Gross Assets: 425.0 percent of GDP; Gross Liab.: 387.4 percent of GDP. - 2019 CA balance: –1.2 percent of GDP. - EBA (2019): Cycl. Adj. CA –1.1 percent; EBA CA Norm 2.3 percent; EBA CA Gap –3.5 percent. - IMF staff CA gap (2019): between –4.5 and –2.5 percent of GDP; staff CA gap reported as –3.5 percent. - REER overvaluation (IMF staff): range 6 to 11 percent; midpoint 8.5 percent. - TARGET2 balances averaged –€27.4 billion (–5.8 percent of GDP) in 2019. - Brazil (selected figures) - 2019 NIIP: –39.8 percent of GDP. - 2019 CA deficit: –2.7 percent of GDP. - 2020 projection: CA deficit about –1.7 percent of GDP. - EBA (2019): Cycl. Adj. CA –3.7 percent; EBA CA Norm –2.5 percent; EBA CA Gap –1.2 percent; Staff CA Gap –1.2 percent. - REER: depreciated by 1.9 percent in 2019; as of May 2020, REER had depreciated by about 26.8 percent relative to 2019 average. - External buffers: gross reserves end-2019 US$357 billion (about 19 percent of GDP); net of FX swaps US$322 billion; reserves as of June 10, 2020: US$348 billion (gross) and US$289 billion (net). - Policy: retain strong external buffers; intervene only to address disorderly market conditions. - Canada (selected figures) - 2019 NIIP: 44.2 percent of GDP. - 2019 CA deficit: –2.0 percent of GDP. - 2020 projection: CA deficit expected to widen to 3.7 percent of GDP in 2020. - EBA (2019): CA norm 2.2 percent; Cycl. Adj. CA –1.9 percent; EBA CA Gap –4.1 percent. - IMF staff CA gap after adjustments: between –3.3 and –0.3 percent of GDP; staff CA gap reported as –1.8 percent. - REER: year average depreciated by about 1.0 percent in 2019; depreciated by 3.6 percent through May 2020 relative to 2019 average. - REER overvaluation (IMF staff): range 1.5 to 12.6 percent; midpoint 7 percent. - Policy recommendations: boost nonenergy exports via productivity, R&D, investment, promote FDI, develop services exports, diversify markets, and credible medium-term fiscal consolidation once recovery secured. - China - 2019 NIIP: 14.4 percent of GDP; Res. Assets US$3.2 trillion (21.9 percent of GDP). - 2019 Actual CA: 1.0 percent of GDP; Cycl. Adj. CA: 0.8; EBA CA Norm: –0.4; EBA CA Gap: 1.2; Staff CA Gap midpoint: 1.0 percent of GDP (range –0.5 to 2.5 percent). - 2019 REER: depreciated 0.8 percent from 2018 average; as of May 2020 REER appreciated about 1.8 percent from 2019 average. - Staff-assessed REER gap for 2019: range –12 to 8 percent; midpoint –2 percent. - Capital flows: capital outflows about US$160 billion in 2019; CFMs and CCAF in place; some CFMs eased in 2020. - Reserves: level at 82 percent of IMF composite metric at end-2019 (133 percent adjusted for capital controls); assessed adequate. - Policy priorities: gradual fiscal consolidation if needed; reforms to social safety net, SOE reform, attract FDI, market-based financial system, more flexible exchange rate and transparent monetary policy. - Euro Area (aggregate) - 2019 NIIP: –0.5 percent of GDP; Gross Assets: 243.3; Gross Liab.: 243.8. - 2019 Actual CA: 2.7 percent of GDP; Cycl. Adj. CA: 2.7; EBA CA Norm: 1.4; EBA CA Gap: 1.3; Staff CA Gap: 1.2 (range 0.4 to 2.0). - 2019 REER (CPI-based) depreciated by 3.1 percent; as of May 2020 REER appreciated by about 0.9 percent from 2019 average. - Staff-assessed REER gap range: –5.7 to 0, midpoint –2.8. - Policy: area-wide initiatives (banking and capital markets union, fiscal capacity) could reinvigorate investment and reduce aggregate CA surplus. - France - 2019 NIIP: –18.7 percent of GDP; Gross Assets: 299.2; Gross Liab.: 317.9. - 2019 Actual CA: –0.7 percent of GDP; Cycl. Adj. CA: –0.5; EBA CA Norm: 0.6; EBA CA Gap: –1.1; Staff CA Gap: –1.1. - 2019 REER assessment: IMF staff assesses REER gap 2.2 to 5.9 percent, midpoint 4.1 percent (overvaluation). - Vulnerabilities: large public external debt (58 percent of GDP) and banks’ refinancing needs. - Policy: near-term COVID-19 support; medium-term focus on competitiveness and fiscal space rebuilding. - Germany - 2019 NIIP: 70.7 percent of GDP; Gross Assets: 273.4; Gross Liab.: 202.7. - 2019 Actual CA: 7.1 percent of GDP; Cycl. Adj. CA: 7.3; EBA CA Norm: 2.5; EBA CA Gap: 4.7; Staff CA Gap: 4.3. - Staff-assessed REER gap for 2019: range 6 to 16 percent; midpoint 11 percent (undervaluation). - Policy: adopt growth-oriented fiscal policy with public investment to boost domestic demand and reduce external imbalances. - Hong Kong SAR - 2019 NIIP: 427.4 percent of GDP; Gross Assets: 1,536.6; Gross Liab.: 1,109.2. - 2019 Actual CA: 6.2 percent of GDP; Cycl. Adj. CA: 5.2; Staff CA Gap midpoint: 0.8 percent (range –0.7 to 2.3). - REER gap (staff): range –7½ to 2½ percent; midpoint –2½ percent (based on CA-REER elasticity ~0.4). - FX regime: linked exchange rate system; FX reserves 121 percent of GDP at end-2019. - Policy: near-term expansionary fiscal policy; maintain wage and price flexibility and robust financial supervision. - Indonesia - 2019 Actual CA: –2.7 percent of GDP; Cycl. Adj. CA: –2.7; EBA CA Norm: –0.8; EBA CA Gap: –1.9; Staff Adj.: 0.9; Staff CA Gap: –1.0. - Staff CA gap range for 2019: –2.5 to 0.5 percent of GDP; staff-assessed norm cited –1.6 percent of GDP. - 2019 REER: appreciated by 4.3 percent relative to 2018 average; May 2020 REER depreciated by 0.1 percent vs 2019 average. - Staff-assessed REER gap: –1.2 to 8.9 percent, midpoint 3.9 percent. - Reserves end-2019: US$129.2 billion (12 percent of GDP; about 119 percent of IMF reserve adequacy metric; about 9 months of prospective imports). - Policy: structural reforms (health, education, infrastructure, labor flexibility); continue exchange rate flexibility; FX intervention to prevent disorderly markets. - Italy - 2019 NIIP: –1.6 percent of GDP; Gross Assets: 163.4; Gross Liab.: 165.0. - 2019 Actual CA: 3.0 percent of GDP; Cycl. Adj. CA: 2.7; EBA CA Norm: 2.6; EBA CA Gap: 0.0; Staff CA Gap: 0.0 (staff range –1.0 to 1.0). - REER gap (staff): range 0 to 8 percent; midpoint about 4 percent. - Financial account: 2019 net outflows of 3 percent of GDP. - Policy: credible medium-term fiscal consolidation and structural reforms to boost competitiveness. - Japan - 2019 NIIP: 66.8 percent of GDP; gross assets valued at US$3.4 trillion end-2019. - 2019 Actual CA: 3.6 percent of GDP; Cycl. Adj. CA: 3.5; EBA CA Norm: 3.5; EBA CA Gap: 0.0; Staff CA Gap: 0.0 (range –1.2 to 1.2). - REER gap (staff): range –9 to 9 percent; midpoint 0 percent (semi-elasticity 0.14). - Policy: address pandemic emergency; gradual fiscal consolidation and structural reforms if preexisting distortions persist. - Korea - 2019 NIIP: 30.4 percent of GDP. - 2019 Actual CA: 3.6 percent of GDP; Cycl. Adj. CA: 3.3; EBA CA Norm: 3.3; EBA CA Gap: 0.0; Staff CA Gap: 0.0. - REER gap (staff): –3 to 3 percent; midpoint 0 percent (trade elasticity 0.36). - Reserves 2019: 25 percent of GDP; Bank of Korea sold net US$6.7 billion in 2019. - Policy: exchange rate market-determined; interventions limited to disorderly conditions. - Malaysia - 2019 NIIP: –1.5 percent of GDP; Gross Assets: 111.1; Gross Liab.: 112.6. - 2019 Actual CA: 3.4 percent of GDP; Cycl. Adj. CA: 3.5; EBA CA Norm: –0.2; EBA CA Gap: 3.7; Staff CA Gap: 3.3 (after Staff Adj. –0.4). - 2019 REER: depreciated by 1.4 percent vs 2018; May 2020 REER depreciated by 3.5 percent vs 2019 average. - Staff assesses REER gap in 2019 as –7.2 percent (about 2 percent). - Reserves end-2019: US$103.6 billion; reserves broadly adequate (gross and net about 116 percent and 101 percent of ARA metric). - Policy: continue exchange rate flexibility; phase out CFMs gradually; fiscal support and measures to bolster productivity. - Poland - 2019 NIIP: –50.3 percent of GDP; Gross Assets: 48.8; Gross Liab.: 99.2. - 2019 Actual CA: 0.5 percent of GDP; Cycl. Adj. CA: 0.6; EBA CA Norm: –2.1; EBA CA Gap: 2.7; Staff CA Gap: 2.7. - 2019 REER (staff): –6 percent (±2 percent). - Reserves end-2019: gross US$128 billion; net US$113 billion. - Policy: address structural rigidities; maintain adequate reserves; floating zloty and no direct FX intervention. - Singapore - 2019 NIIP: 240.8 percent of GDP; Gross Assets: 1,135.2; Gross Liab.: 894.4. - 2019 Actual CA: 17.0 percent of GDP; Cycl. Adj. CA: 16.8; Staff CA Gap: 4 percent (staff estimate). - REER gap (staff): undervalued 2 to 14 percent; midpoint 8 percent (semi-elasticity 0.5). - Official reserves MAS 2019: US$279 billion (75 percent of GDP); reserves US$302 billion April 2020. - Policy: monitor stimulus implementation; higher public investment if imbalance persists; structural reforms to boost productivity. - South Africa - 2019 NIIP: 8 percent of GDP; Gross Assets: 137; Gross Liab.: 129. - 2019 CA: –3.0 percent of GDP; Cycl. Adj. CA: –3.2; EBA CA Norm: 0.9; EBA CA Gap: –4.0; Staff Adj.: 2.5; Staff CA Gap: –1.5. - Staff REER assessment: overvalued 1.7 to 9.7 percent; midpoint 5.7 percent. - Reserves end-2019: about 16 percent of GDP; below IMF composite adequacy metric (76 percent without CFMs; 83 percent after). - Policy: near-term targeted fiscal support; medium-term fiscal consolidation and structural reforms; consider reserve accumulation when feasible. - Spain - 2019 NIIP: –73.5 percent of GDP; Gross Assets: 176.1; Gross Liab.: 249.6. - 2019 Actual CA: 2.0 percent of GDP; Cycl. Adj. CA: 2.2; EBA CA Norm: 1.1; EBA CA Gap: 1.1; Staff CA Gap: 0.2 (after Staff Adj. –0.9). - Staff places CA norm about 2 percent of GDP (range 1 to 3) to support raising NIIP toward –50 percent target. - REER gap (staff): range –4.9 to 3.1 percent; midpoint –0.9 percent. - Policy: structural reforms to boost competitiveness; manage public debt load carefully. - Sweden - 2019 NIIP: 21.0 percent of GDP; Gross Assets: 283.5; Gross Liab.: 262.5. - 2019 Actual CA: 4.2 percent of GDP; Cycl. Adj. CA: 4.5; EBA CA Norm: 1.2; EBA CA Gap: 3.2; Staff CA Gap: 3.2 (±1.5). - Staff assesses krona undervalued by 5 to 15 percent; midpoint 10 percent. - Foreign currency reserves December 2019: US$56 billion. - Policy: maintain adequate foreign reserves; monitor bank liquidity and funding pressures; utilize swap facility with Federal Reserve (US$60 billion). - Turkey (selected indicators) - Staff-assessed CA gap midpoint: 1.6 percent of GDP, range –0.2 to 3.4 percent of GDP contextually cited. - 2019 REER: average REER depreciated by 2.2 percent in 2019 and a further 7.8 percent through May 2020 (lira nominal depreciation). - Staff assesses REER undervalued by 7 to 23 percent in 2019, midpoint 15 percent. - Gross reserves coverage: 85 percent of IMF ARA metric at end-2019; dipped to 67 percent mid-May 2020. - External financing needs: annual gross external financing needs about 23 percent of GDP on average during 2020–21. - Policy: phase out CFMs as conditions improve; significant reserve accumulation needed over medium term. ### Country-specific methodological notes and measurement considerations (selected) - Hong Kong SAR: EBA not in sample; staff applied EBA coefficients and made adjustments (NIIP contribution 3–5 percentage points; Precious Metals Depository effect –4 to –4½ percentage points; mainland China onshoring –1 to –1½ percent of GDP). - Indonesia: demographic adjustor of 0.9 percentage point; ±1.5 percent for EBA regression uncertainty; semi-elasticity –0.18 used for REER mapping. - Italy: semi-elasticity of CA to REER estimated 0.26; one-off ECB deposit tiering effects noted. - Japan: staff semi-elasticity 0.14; staff CA norm range 2.3 to 4.7 percent of GDP. - Malaysia: semi-elasticity 0.46 used for REER gap; CFMs classification and reserve adequacy discussed. - Poland: identified policy gaps 1.7 percentage points (credit gap 0.7; fiscal trading partner gap 0.9); standard error of 2019 CA norm 0.6 percent of GDP. - Saudi Arabia: US$1 change in oil price → 0.5 percent of GDP first-round CA change at current oil exports; assumed oil export price US$36.20 in 2020 and US$66.50 in 2019; oil export volumes expected to decrease 6 percent in 2020. - Singapore and other EBA-excluded economies: staff applied alternative approaches and made fiscal and health spending adjustments where relevant. - Switzerland: stock-flow and retained earnings adjustments imply underlying CA reduction ~3.5 percent of GDP; staff CA gap 1.8 percent of GDP (±2). - Thailand: staff-estimated CA gap 6.1 percent of GDP; REER elasticity 0.62; EBA index and level REER gaps diverge (13.5 and –1.6 percent). - United Kingdom and United States: staff note measurement issues and derive REER midpoints from CA models with estimated semi-elasticities (UK market-value NIIP considerations and Brexit uncertainty; US semi-elasticity 0.11 used for REER midpoint derivation). *Source: ch3 - Box 1.1 and selected country assessments from CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS (IMF External Sector Report, 2020).* ### Box 1.1). The criteria for applying the labels to overall ### Box 1.1). The criteria for applying the labels to 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 IMF staff’s view of the REER gap is generally reported as (–) percent “over” or “under” valued. - Definition of “broadly in line”: - Current account gaps in the range of ±1 percent of GDP. - REER gaps in the range that reflects the country-specific exchange rate semi-elasticity (±5 percent based on an elasticity of –0.2). ### Table of descriptive thresholds (CA Gap / REER Gap using elasticity of –0.2) — description mapping - CA Gap >4% / REER Gap <–20%: . . . substantially stronger . . . - CA Gap [2%, 4%] / REER Gap [–20%, –10%]: . . . stronger . . . - CA Gap [1%, 2%] / REER Gap [–10%, –5%]: . . . 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%]: . . . moderately weaker . . . - CA Gap [–4%, –2%] / REER Gap [10%, 20%]: . . . weaker . . . - CA Gap <–4% / REER Gap >20%: . . . 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 reported in the IMF’s World Economic Outlook. - The level of nominal gross trade. - Degree of financial integration. - Economies covered (Table 3.B): - 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 ### Two-country example: distinguishing domestic vs. foreign policy distortions - Stylized facts: - 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. - Country B has an equal and opposite surplus imbalance. - Country A’s exchange rate would look overvalued and Country B’s undervalued. - Policy gaps: - Country A exhibits a domestic policy distortion that needs adjustment. - Country B has no domestic policy gaps; adjustment by Country A would automatically eliminate Country B’s imbalance. - Individual economy write-ups would differ despite equal and opposite estimated adjustments: - Country A: capital flows and foreign asset/liability sections would note vulnerabilities from international liabilities; potential policy response would focus on rein ing the fiscal deficit and limiting financial excesses. - Country B: write-up would find no fault with policies and note that adjustment among other economies would help reduce the imbalance. - Implication: - It is 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. ### Abbreviations (selected, as used in the box and assessments) - Adj. = adjusted - ARA = assessing reserve adequacy - BOP = balance of payments - CA = current account - CFM = capital flow management measure - CPI = consumer price index - Cycl. = cyclically - 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 - QE = quantitative easing - REER = real effective exchange rate - Res. = residual *Source: ch3 - Box 1.1). The criteria for applying the labels to overall external positions (chapter content).* ### 1.2 percent of GDP in 2020, reflecting resilient foreign demand for Australia’s commodity exports and a steep decline in ### ch3 - 1.2 percent of GDP in 2020, reflecting resilient foreign demand for Australia’s commodity exports and a steep decline in ### Current Account (Australia) - 2020 CA: 1.2 percent of GDP, reflecting resilient foreign demand for commodity exports and a steep decline in services imports (especially tourism) related to the border closure. - Medium-term outlook: CA expected to return to a deficit over the medium term, albeit at a level lower than the historical average. - Key risks: a deeper-than-expected slowdown in Australia’s major trading partners and further declines in commodity prices. ### Assessment and Staff Adjustments (Australia) - EBA model cyclically adjusted CA balance for 2019: 0.3 percent of GDP. - EBA CA norm: –0.1 percent of GDP. - EBA model–based CA gap: 0.5 percent of GDP. - IMF staff adjustments: - Adjust CA norm by –1.0 percent of GDP → adjusted CA norm of –1.1 percent of GDP (reflecting traditionally large investment needs). - Adjust cyclically adjusted CA balance by –0.7 percent of GDP due to temporary surge in iron ore prices (iron ore prices increased about 20 percent above medium-term WEO commodity price assumptions; iron ore exports amount to about 3.3 percent of GDP). - IMF staff–adjusted CA gap: range of 0.3 to 1.3 percent of GDP, with a midpoint of 0.8 percent of GDP. - 2019 (% GDP) summary line (as presented): - Actual CA: 0.6 - Cycl. Adj. CA: 0.3 - EBA CA Norm: –0.1 - EBA CA Gap: 0.5 - Staff Adj.: 0.3 - Staff CA Gap: 0.8 ### Real Exchange Rate (Australia) - Background: REER entered an overall depreciation path since the unwinding of the commodity boom in 2014. - 2019 REER: about 4.5 percent below the 2018 average. - As of May 2020: REER had depreciated by about 1.9 percent relative to the 2019 average. - Assessment: IMF staff–assessed REER gap for 2019 estimated in the range of –1.5 to –6.5 percent, with a midpoint of –4 percent, consistent with the staff CA gap. ### Capital and Financial Accounts (Australia) - 2019 financial account: recorded net outflows, reflecting the rise in the CA balance. - FDI: continued in 2019 but offset by portfolio investment outflows amid higher interest rates abroad. - 2020 Q1: financial account deficit widened, reflecting the CA surplus and sizable portfolio investment outflows and weaker FDI inflows due to the COVID-19 shock. - Assessment: Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate. ### FX Intervention and Reserves Level (Australia) - Background: Currency free floating since 1983; central bank has not intervened in the foreign exchange market since the global financial crisis. - Authorities strongly committed to a floating regime, reducing the need for reserve holdings. - Assessment: Although domestic banks’ external liabilities are sizable, they are either in local currency or hedged, so reserve needs for prudential reasons are limited. ### Belgium (selected external-sector findings) - 2019 NIIP: 37.6 percent of GDP (noted elsewhere as 38 percent of GDP at end-2019). - Gross Assets: 425.0 percent of GDP. - Debt Assets: 171.3 percent of GDP. - Gross Liab.: 387.4 percent of GDP. - Debt Liab.: 184.2 percent of GDP. - 2019 CA balance: –1.2 percent of GDP. - 2020 projection: CA deficit projected to narrow (imports expected to contract more than exports). - EBA model (2019): cyclically adjusted CA balance –1.1 percent of GDP; EBA CA norm 2.3 percent of GDP; EBA CA gap –3.5 percent of GDP. - IMF staff CA gap (2019): between –4.5 and –2.5 percent of GDP; staff CA gap reported as –3.5 percent of GDP. - REER assessment (Belgium): EBA indicates REER overvaluation between 9 and 17 percent; IMF staff assesses REER overvalued in the range of 6 to 11 percent, midpoint 8.5 percent. - Foreign assets and liabilities: TARGET2 balances averaged –€27.4 billion (–5.8 percent of GDP) in 2019. ### Brazil (selected external-sector findings) - 2019 NIIP: –39.8 percent of GDP. - Gross Assets: 48.6 percent of GDP. - Res. Assets: 19.4 percent of GDP. - Gross Liab.: 88.4 percent of GDP. - Debt Liab.: 23.1 percent of GDP. - 2019 CA deficit: –2.7 percent of GDP (up from –2.2 percent in 2018). - 2020 projection: IMF staff projects narrowing in the CA deficit to about –1.7 percent of GDP in 2020. - EBA (2019): cyclically adjusted CA deficit –3.7 percent of GDP; EBA CA norm –2.5 percent of GDP; EBA CA gap –1.2 percent of GDP; Staff CA gap –1.2 percent of GDP. - REER: depreciated by 1.9 percent in 2019; as of May 2020, REER had depreciated by about 26.8 percent relative to 2019 average. - External buffers: gross reserves end-2019 US$357 billion (about 19 percent of GDP); gross reserves net of FX swaps US$322 billion at end-2019; reserves as of June 10, 2020: US$348 billion (gross) and US$289 billion (net of FX swaps). - Policy note: Authorities should retain strong external buffers, with intervention limited to addressing disorderly market conditions. ### Canada (selected external-sector findings) - 2019 NIIP: 44.2 percent of GDP. - Gross Assets: 252.9 percent of GDP. - Debt Assets: 64.5 percent of GDP. - Gross Liab.: 208.7 percent of GDP. - Debt Liab.: 111.7 percent of GDP. - 2019 CA deficit: –2.0 percent of GDP (down from –2.5 percent in 2018). - 2020 projection: CA deficit expected to widen to 3.7 percent of GDP in 2020 due to COVID-19 and a sharp decline in oil prices. - EBA (2019): CA norm 2.2 percent of GDP; cyclically adjusted CA –1.9 percent of GDP; EBA CA gap –4.1 percent of GDP. - IMF staff adjustments lead to a Staff CA gap between –3.3 and –0.3 percent of GDP; staff CA gap reported as –1.8 percent of GDP after adjustments. - REER: year average REER depreciated by about 1.0 percent in 2019; REER depreciated by 3.6 percent through May 2020 relative to 2019 average. - Assessment: IMF staff assesses REER to be overvalued in the range of 1.5 to 12.6 percent, with a midpoint of 7 percent. - Policy recommendations: boost nonenergy exports via labor productivity improvements, R&D and physical capital investment, promote FDI, develop services exports, diversify export markets, and implement a credible medium-term fiscal consolidation plan once recovery is secured. *Source: IMF 2020 External Sector Report, Chapter 3 (individual economy assessments).* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### China: Economy Assessment #### Overall Assessment - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The CA surplus is expected to widen in 2020 amid the pandemic, and trend downward over the medium term in line with rebalancing. #### Potential Policy Responses - Policy reactions have appropriately prioritized support to the most affected households, workers, and firms, with increased focus on further supporting the demand recovery. - China has room to provide more policy support if needed, including on green investment and strengthening the public health system and social safety net. - If imbalances that existed prior to the COVID-19 outbreak persist in the medium term, policies to achieve a lasting balance in the external position should include: - a gradual fiscal consolidation; and - successful implementation of the authorities’ reform agenda addressing distortions and supporting rebalancing. - Reform priorities include: - improving the social safety net; - SOE reform and opening markets to more competition; - attracting more FDI; - creating a more market-based and robust financial system; and - moving to a more flexible exchange rate along with a more market-based and transparent monetary policy framework. #### Foreign Asset and Liability Position and Trajectory - Background: The NIIP declined to 14.4 percent of GDP in 2019 from 15.5 percent in 2018, after peaking at 30.4 percent in 2008. This decline reflects lower loans extended abroad and higher securities investment received amid robust GDP growth, despite a higher CA surplus. - Assessment: The NIIP-to-GDP ratio is expected to remain positive, with a modest decline over the medium term. The NIIP is not a major source of risk at this point, as assets remain high—reflecting large foreign reserves (US$3.2 trillion; 21.9 percent of GDP)—and liabilities are mostly FDI related. - 2019 (% GDP): - NIIP: 14.4 - Gross Assets: 52.4 - Res. Assets: 21.9 - Gross Liab.: 37.9 - Debt Liab.: 12.2 #### Current Account - Background: The CA surplus widened to 1 percent of GDP in 2019, reflecting the economic slowdown arising from continued financial regulatory strengthening and US-China trade tensions. Trade flows (especially those related to the inventory cycle) in 2018–19 shifted in response to expected and realized tariff hikes, contributing to a lower trade balance in 2018 and a higher balance in 2019. Imported foreign inputs for exports fell with signs of accelerated “onshoring” and adjustments in global value chains. Lower commodity and semiconductor import prices also boosted the trade balance, while outbound tourism spending declined (by ¼ percent of GDP). The CA surplus has been trending down from the peak of 10 percent of GDP in 2007. In Q1 2020, the CA turned to a deficit of 1 percent of GDP. For the year, the CA balance is expected to post a surplus of 1.3 percent, and the CA surplus is projected to converge to about 0.5 percent of GDP over the medium term. - Assessment: The EBA CA methodology estimates the CA gap to be 1.2 percent of GDP. Considering that timing shifts and accelerated onshoring raised the CA surplus by about ¼ percent of GDP, the IMF staff assesses the CA gap to range from –0.5 to 2.5 percent of GDP, with a midpoint of 1 percent. EBA identified policy gaps are close to nil on balance. The overall gap is accounted for by the residual, reflecting other factors, including distortions that encourage excessive saving. - 2019 (% GDP): - Actual CA: 1.0 - Cycl. Adj. CA: 0.8 - EBA CA Norm: –0.4 - EBA CA Gap: 1.2 - Staff Adj.: –0.2 - Staff CA Gap: 1.0 #### Real Exchange Rate - Background: In 2019, the REER depreciated by 0.8 percent from the 2018 average. The signaling effect from a stronger use of the countercyclical adjustment factor (CCAF) helped counter depreciation pressure, leading to a moderate NEER depreciation (1.8 percent). As of May, the REER had appreciated by about 1.8 percent from the 2019 average. - Assessment: The EBA REER index regression estimates the REER gap to be –1.1 percent and that resulting from the IMF staff CA gap (using an elasticity of 0.23) to be –4.4 percent. Overall, the staff assesses the REER gap to be in the range of –12 to 8 percent, with a midpoint of –2 percent, while noting that the RMB depreciation was driven largely by escalation of trade tensions. The assessment is subject to especially high uncertainty. #### Capital and Financial Accounts: Flows and Policy Measures - Background: Capital outflows increased to about US$160 billion in 2019, up from US$6 billion in 2018. This was significantly below the annual outflows of about US$650 billion in 2015–16. A 20 percent reserve requirement on FX forwards, a CFM, and the CCAF (both reintroduced in 2018) remain in place. Two CFMs were eased in 2020: the ceiling on cross-border financing under the macroprudential assessment framework was raised by 25 percent and restrictions on the investment quota of foreign institutional investors (QFII and RQFII) were removed. - Assessment: Substantial net outflow pressures may resurface if the private sector seeks to accumulate foreign assets faster than nonresidents accumulate Chinese assets. Over the medium term, further capital account opening consistent with exchange rate flexibility should carefully consider domestic financial stability. Priorities include: - shifting to an effective float while using FX intervention to counter disorderly market conditions; - strengthening domestic financial stability prior to substantial further opening; - encouraging inward FDI, supporting growth, and improving corporate governance. - Policy note: CFMs should not be used to actively manage the capital flow cycle or substitute for warranted macroeconomic adjustment and exchange rate flexibility. #### FX Intervention and Reserves Level - Background: FX reserves increased by US$35 billion in 2019, following a decline of US$67 billion in 2018, reflecting mainly valuation effects, interest income, and adjustments in net forward positions, with no sign of large FX intervention. FX reserves had declined by US$6 billion as of May. - Assessment: The level of reserves—at 82 percent of the IMF’s standard composite metric at end-2019 (89 percent in 2018) and 133 percent of the metric adjusted for capital controls (143 percent in 2018)—is assessed to be adequate. The decline in the ratios reflects higher broad money growth, external debt, and other liabilities that raised the metric. --- ### Euro Area: Economy Assessment #### Overall Assessment - The external position in 2019 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - The pandemic’s impact on the CA balance in 2020 is highly uncertain; the CA balance is projected to narrow 2.3 percent in 2020. - In the medium term, the CA surplus is projected to narrow slightly from 2019 levels, with high uncertainty. Pre-existing national-level imbalances could remain sizable. #### Potential Policy Responses - Short-term policies should focus on containing the COVID-19 outbreak, providing relief to households and firms, and reducing scarring from the crisis. - Recent EU-level COVID-crisis initiatives will support these efforts and potentially help reduce imbalances. - Monetary policy should remain accommodative until inflation durably converges to the ECB’s medium-term price stability objective. - If pre-COVID-19 policy gaps persist at the national level: - countries with excess CA surpluses should strengthen investment and potential growth; - countries with weak external positions should undertake reforms to raise productivity and enhance competitiveness. - Area-wide initiatives (for example, banking and capital markets union and fiscal capacity for macroeconomic stabilization) could reinvigorate investment and reduce the aggregate CA surplus. #### Foreign Asset and Liability Position and Trajectory - Background: The NIIP of the euro area had fallen to about –23 percent of GDP by end-2009, but reached about –51 percent by end-2019. The rise was driven by stronger CA balances and modest nominal GDP growth. The increase in 2019 reflects primarily transactions and exchange rate changes, especially the net increase in “other investment” assets. Gross foreign positions were about 243 percent of GDP for assets and 244 percent of GDP for liabilities in 2019. Net external assets are elevated in large creditor countries (for example, Germany and the Netherlands), whereas net external liabilities remained high in some countries, including Portugal and Spain. - Assessment: Projections of continued CA surpluses suggest NIIP-to-GDP will rise further and the euro area is expected to soon become a net external creditor. Overall NIIP financing vulnerabilities appear low, but large net external debtor countries bear greater risk of a sudden stop of gross inflows. - 2019 (% GDP): - NIIP: –0.5 - Gross Assets: 243.3 - Debt Assets: 95.4 - Gross Liab.: 243.8 - Debt Liab.: 94.7 #### Current Account - Background: The CA balance for the euro area stood at 2.7 percent in 2019, lower than in 2018. A stronger goods balance was more than offset by weaknesses in services and investment income balances. Some large creditor countries, such as Germany and the Netherlands, continued to have sizable surpluses. The CA surplus widened in Q1 2020 year over year, driven by the goods balance. - Assessment: The EBA model estimates a CA norm of 1.4 percent of GDP, against a cyclically adjusted CA of 2.7 percent of GDP, implying a gap of 1.3 percent of GDP. IMF staff analysis indicates a higher CA norm than EBA’s estimate, and, considering country-specific factors and measurement adjustments, the IMF staff assesses the CA gap to be 1.2 percent for 2019, with a range of 0.4 to 2.0 percent of GDP. - 2019 (% GDP): - Actual CA: 2.7 - Cycl. Adj. CA: 2.7 - EBA CA Norm: 1.4 - EBA CA Gap: 1.3 - Staff Adj.: –0.1 - Staff CA Gap: 1.2 #### Real Exchange Rate - Background: The CPI-based REER depreciated by 3.1 percent in 2019, reversing 2018 appreciation, reflecting a nominal depreciation of 1.5 percent and weaker euro area inflation relative to trading partners. The ULC-based REER depreciated by 2.3 percent. Other published REERs based on extra-euro-area trading partners depreciated by 1.6 percent on average. The REER continued to depreciate until February 2020, before reversing course in March. As of May, the REER appreciated by about 0.9 percent from the 2019 average. - Assessment: The EBA REER index model suggests an overvaluation of 4.2 percent, and the EBA REER-level model implies an undervaluation of 0.7 percent. The REER gap derived from the IMF staff’s CA gap assessment (using an estimated elasticity of 0.35) implies the real exchange rate was undervalued by 3.4 percent in 2019. The staff-assessed REER gap range is –5.7 to 0, with a midpoint of –2.8. There is large heterogeneity across member states (for example, undervaluation of 11 percent in Germany to overvaluations of 0 to 9 percent in several small to mid-sized member states). #### Capital and Financial Accounts: Flows and Policy Measures - Background: In 2019 the euro area experienced net capital outflows, driven largely by transactions in direct investment to the United Kingdom and the United States, and other investment outflows as banks reduced external liabilities; these were somewhat tempered by net portfolio debt inflows. In Q1 2020, the euro area experienced net capital outflows driven mainly by FDI and other investment flows. - Assessment: Gross external indebtedness of euro area residents decreased by 1.3 percent of GDP as higher external long-term sovereign debt was more than offset by lower other investment liabilities of banks and interoffice FDI debt. #### FX Intervention and Reserves Level - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating. *International Monetary Fund | 2020 — CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### France — Overall Assessment - The external position in 2019 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. ### France — Potential Policy Responses - In response to the COVID-19 pandemic, France deployed significant fiscal resources to bolster the health care system and provide targeted support to affected firms and individuals. - Near-term priorities: continue focusing on saving lives and supporting those most affected by the crisis. - Medium-term: if pre-COVID imbalances persist, refocus on improving competitiveness by reinvigorating structural reforms and rebuilding fiscal space once the recovery is secured. - These measures could help bring the CA more in line with medium-term fundamentals and desirable policies. ### France — Foreign Asset and Liability Position and Trajectory - Background: - NIIP stood at –19 percent of GDP at end-2019, slightly below the range observed during 2014–18 (between –15 and –18 percent of GDP). - NIIP fell by about 8 percent of GDP since end-2018, largely driven by an increase in banks’ and public sector gross debt (11 and 5 percent of GDP, respectively). - Gross asset position: 299 percent of GDP in 2019; banks’ non-FDI-related assets account for about 40 percent. - Gross liabilities: 318 percent of GDP in 2019; external debt about 218 percent of GDP (53 percent accounted for by banks and 27 percent by the public sector). - About three-fourths of France’s external debt liabilities are denominated in domestic currency. - The average TARGET2 balance in 2019 was only about €100 million. - Assessment: - The NIIP is negative, but its size and projected stable trajectory do not raise sustainability concerns. - Vulnerabilities stem from large public external debt (58 percent of GDP) and banks’ gross financing needs—stock of banks’ short-term debt securities was €83 billion at end-2019 (3.5 percent of GDP), and financial derivatives stood at about 35 percent of GDP. - 2019 (% GDP): - NIIP: –18.7 - Gross Assets: 299.2 - Debt Assets: 166.6 - Gross Liab.: 317.9 - Debt Liab.: 212.0 ### France — Current Account - Background: - CA deficit remained broadly stable in 2019, at 0.7 percent of GDP (compared with 0.6 percent in 2018). - Primary income surplus declined by 0.2 percent of GDP from 2018 to 2019; this was broadly offset by a small rise in the goods and services trade balance (by 0.1 percent of GDP). - CA deficit over the four quarters up to 2020:Q1 remained unchanged at 0.7 percent of GDP as a fall in the balance on non-oil goods and in the primary balance was offset by a rise in current transfers. - IMF staff projects the 2020 CA deficit will narrow slightly to about 0.5 percent of GDP, as contraction in exports and further fall in the primary income balance are expected to be more than offset by a rise in the oil balance (given lower oil prices) and a significant expected contraction in non-oil imports. - Assessment: - The 2019 cyclically adjusted CA deficit is estimated at 0.5 percent of GDP, compared with an EBA-estimated norm of a surplus of 0.6 percent. - IMF staff assesses the 2019 CA gap was between –1.6 and –0.6 percent of GDP. - 2019 (% GDP): - Actual CA: –0.7 - Cycl. Adj. CA: –0.5 - EBA CA Norm: 0.6 - EBA CA Gap: –1.1 - Staff Adj.: 0.0 - Staff CA Gap: –1.1 ### France — Real Exchange Rate - Background: - Cumulative appreciation of 3.0 and 3.7 percent during 2016–18; ULC-based and CPI-based REER depreciated by 3.3 and 1.7 percent, respectively, in 2019. - NEER depreciated by about 1 percent in 2019. - Through May 2020: ULC-based REER appreciated by 9.7 percent with respect to the 2019 average; CPI-based REER depreciated slightly, by 0.2 percent. - Since peak levels in 2008, both REER measures have depreciated by about 9 percent, but France has not regained the loss of about one-third of its export market share registered in the early 2000s (while the export market share of the euro area remained broadly stable between 2000 and 2018). - Assessment: - EBA REER-index model points to an REER gap of –2.7 percent; EBA REER-level model points to an REER gap of 3.2 percent. - Given an elasticity of 0.27, the staff CA gap points to an overvaluation of 2.2 to 5.9 percent. - IMF staff assesses the REER gap to be in the range of 2.2 to 5.9 percent, with a midpoint of 4.1 percent. ### France — Capital and Financial Accounts: Flows and Policy Measures - Background: - CA deficit in 2019 was financed mostly by net portfolio debt inflows (about 3.2 percent of GDP). - Outward direct investment flows declined from 4.5 to 2 percent of GDP between 2018 and 2019, falling below inward flows (about 2.5 percent of GDP) for the first time in six years. - Financial derivative flows have grown sizably on both asset and liability sides since 2008, especially in 2020:Q1, when asset- and liability-side flows increased to 12 and 18 percent of GDP, respectively, from about 5.5 percent in 2019. - The capital account is open. - Assessment: - France remains exposed to financial market risks owing to the large refinancing needs of the sovereign and banking sectors. ### France — FX Intervention and Reserves Level - Background: - The euro has the status of a global reserve currency. - Assessment: - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. --- ### Germany — Overall Assessment - The external position in 2019 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - IMF staff projects a temporary dip in the CA surplus below trend in the near term as the COVID-19 crisis disrupts world trade; over the medium term, the CA surplus is projected to recover and then resume modest gradual narrowing. - As part of the euro area, the nominal exchange rate does not flexibly adjust to Germany’s external position; stronger wage growth relative to euro area trading partners is expected to contribute to realignment, but additional policy actions will be necessary for external rebalancing. ### Germany — Potential Policy Responses - Near-term: continue mitigating the outbreak and support households and businesses to minimize economic scarring and facilitate a swift recovery. - Medium-term: if pre-COVID imbalances persist, adopt growth-oriented fiscal policy with greater public sector investment (digitalization, infrastructure, climate mitigation) to crowd in private investment, promote potential growth, and increase resilience. - Structural reforms: foster entrepreneurship (expand access to venture capital, stronger tax incentives for research and development) to stimulate investment and reduce external imbalances. - Additional policy options: tax relief for lower-income households to boost purchasing power and pension reforms prolonging working lives to reduce excessive saving and ameliorate external imbalances. ### Germany — Foreign Asset and Liability Position and Trajectory - Background: - Germany’s positive NIIP surpassed 70 percent of GDP in 2019, more than doubling over the past five years. - NIIP of financial corporations other than monetary financial institutions: 65 percent of GDP; NIIP of general government: –26 percent of GDP. - NIIP expected to exceed 80 percent of German GDP by 2022, as projected CA surplus remains large through the medium term but is expected to be partly offset by valuation changes. - Foreign assets are well diversified by instrument. - Germany’s TARGET2 claims on the Eurosystem stood at €895 billion at end-2019 (26 percent of GDP), down from a peak of over €976 billion in mid-2018. - Assessment: - With implementation of QE measures by the ECB, Germany’s exposure to the Eurosystem remains large. - 2019 (% GDP): - NIIP: 70.7 - Gross Assets: 273.4 - Debt Assets: 148.6 - Gross Liab.: 202.7 - Debt Liab.: 118.5 ### Germany — Current Account - Background: - CA surplus widened significantly since 2001, peaking at 8.6 percent of GDP in 2015 and falling gradually since then. - In 2019, CA surplus decreased slightly to 7.1 percent of GDP (from 7.4 percent in 2018) despite a rise in the oil and gas trade balance. - Bulk of CA surplus reflects large saving-investment surpluses of households and the government; nonfinancial corporations’ saving-investment balance, while still positive, has narrowed. - In 2020, the CA surplus is projected to temporarily decline to 5.6 percent of GDP. - Assessment: - Cyclically adjusted CA balance reached 7.3 percent of GDP in 2019, 0.4 percentage point below the 2018 level. - IMF staff assesses the CA norm at 2 to 4 percent of GDP, with a midpoint 0.4 percent of GDP above the 2.5 percent CA norm implied by the EBA model; this upward adjustment reflects uncertainty over the demographic outlook and the impact of recent large-scale immigration on national saving. - IMF staff assesses the 2019 CA gap to be in the range of 3.3 to 5.3 percent of GDP. - 2019 (% GDP): - Actual CA: 7.1 - Cycl. Adj. CA: 7.3 - EBA CA Norm: 2.5 - EBA CA Gap: 4.7 - Staff Adj.: –0.4 - Staff CA Gap: 4.3 ### Germany — Real Exchange Rate - Background: - Yearly average CPI-based REER depreciated by 1.7 percent in 2019; ULC-based REER appreciated by 3.0 percent in 2019, reflecting euro depreciation against key trading partners and pickup in relative unit labor costs. - Through May 2020, the REER appreciated by 1.0 percent relative to the 2019 average. - Assessment: - EBA REER-level model yields an undervaluation of 16 percent. - Undervaluation implied by the assessed CA gap is in the range of 9 to 14 percent (using an estimated elasticity of about 0.36). - Considering these estimates and the 2019 real appreciation in ULC-based terms, IMF staff assesses the 2019 REER to have been undervalued in the range of 6 to 16 percent, with a midpoint of 11 percent. ### Germany — Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2019, net portfolio outflows comprised almost half of the capital and financial accounts balance; direct investment was the second largest item (27 percent of total). - Over 60 percent of outflows went to other EU countries, about 23 percent went to the Americas (mostly the United States). - Inflows were primarily accounted for by direct investment and portfolio inflows originating in other EU countries; investment by emerging markets and North America declined. - FDI inflows and outflows declined sharply after rising in 2018, driven mainly by slowing flows between Germany and other EU countries. - Assessment: - Safe haven status and the strength of Germany’s current external position limit risks. ### Germany — FX Intervention and Reserves Level - Background: - The euro has the status of a global reserve currency. - Assessment: - Reserves held by euro area countries are typically low relative to standard metrics. The currency floats freely. *International Monetary Fund | 2020 — CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Overall Assessment (Hong Kong SAR) - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The CA surplus widened in 2019, mostly owing to the economic downturn resulting from the domestic social unrest and trade tensions between the United States and China. - From a longer-term perspective, the CA surplus remained lower than its pre-2010 level on account of structural factors, including the opening of mainland China’s capital account and changes in offshore merchandise trade activities. - As a result of Hong Kong SAR’s linked exchange rate system (LERS), short-term movements in the REER largely reflect US dollar developments. - The credibility of the currency board arrangement is assured by a transparent set of rules governing the arrangement, ample fiscal and FX reserves, strong financial regulation and supervision, a flexible economy, and a prudent fiscal framework. ### Potential Policy Responses (Hong Kong SAR) - In the near term, policies, including expansionary fiscal policy, are needed to cope with the cyclical downturn aggravated by the COVID-19 outbreak and support the recovery. - If imbalances that existed prior to the COVID-19 outbreak persist in the medium term, fiscal policy should remain expansionary and measures will be necessary to ensure fiscal sustainability given the rapidly aging population. - Maintaining policies that support wage and price flexibility is crucial to preserving competitiveness. - Robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and the LERS have worked well, and continuation of these policies will help keep the external position broadly in line with fundamentals. ### Foreign Asset and Liability Position and Trajectory (Hong Kong SAR) - Background: - The NIIP increased to 427 percent of GDP in 2019 from 354 percent in 2018. - Gross assets: 1,537 percent of GDP. - Gross liabilities: 1,109 percent of GDP. - Valuation changes have been sizable, as the increase in NIIP during 2015–19 (153 percent of 2019 GDP) far exceeded the cumulative financial account balances (21 percent of 2019 GDP). - Assessment: - Vulnerabilities are low given the positive and sizable NIIP and its favorable composition. - FX reserves are large and stable (121 percent of GDP). - Direct investment accounts for a large share of gross assets and liabilities (36 and 51 percent, respectively). - Only 14 percent of gross liabilities are portfolio liabilities. - Key 2019 figures (% GDP): - NIIP: 427.4 - Gross Assets: 1,536.6 - Debt Assets: 527.4 - Gross Liab.: 1,109.2 - Debt Liab.: 389.0 ### Current Account (Hong Kong SAR) - Background: - The economy fell into a technical recession in 2019, and the CA surplus widened to 6.2 percent of GDP from 3.7 percent in 2018, driven by a sharp narrowing of the trade deficit in goods. - Causes include weakness in domestic demand from the social unrest and lower oil prices, partially offset by weak exports resulting from the trade tensions between the United States and China and a lower services balance (by about 3 percentage points of GDP) from the sharp fall in tourism (–14 percent year over year). - From a longer-term perspective, the gradual decline in private saving, driven by robust consumption growth, a tight labor market, and wealth effects related to the strong housing market, accounted for most of the drop in the CA surplus from its peak of 15 percent of GDP in 2008. - The CA balance turned into a deficit of 1.4 percent of GDP in the first quarter of 2020, driven mainly by declines in the services and income balances amid the COVID-19 outbreak. - The CA surplus is projected to fall below 6.0 percent of GDP in 2020 driven by weak tourism flows, with significant uncertainties from US-China tensions and the cyclical positions of the domestic economy and key trading partners. - The CA balance is projected to be about 4.0 percent of GDP over the medium term. - Assessment: - The cyclically adjusted CA surplus increased to 5.2 percent of GDP in 2019, which is close to a midpoint of the IMF staff–assessed CA norm range of 2.9 to 5.9 percent of GDP. - The staff-assessed CA gap range is hence about –0.7 to 2.3 percent of GDP, with a midpoint of about 0.8 percent. - The staff-assessment CA gap reflects mainly the policy gaps related to fiscal policy. - Since Hong Kong SAR is not in the EBA sample, the CA norm was estimated by applying EBA-estimated coefficients to Hong Kong SAR and was adjusted for measurement issues related to the large valuation effects in the NIIP and the discrepancies between stocks and flows. - Key 2019 figures (% GDP): - Actual CA: 6.2 - Cycl. Adj. CA: 5.2 - EBA CA Norm: — - EBA CA Gap: — - Staff Adj.: — - Staff CA Gap: 0.8 ### Real Exchange Rate (Hong Kong SAR) - Background: - Under the currency board arrangement, REER dynamics are largely determined by US dollar developments and inflation differentials between the United States and Hong Kong SAR. - In line with the US dollar, after appreciating by about 16 percent during 2012–18, the REER appreciated by another 4 percent in 2019. - The REER continued to appreciate by about 3.6 percent in the first five months of 2020 compared with its 2019 average. - Assessment: - The IMF staff assesses the REER gap, based on a midpoint of the staff CA gap, to be in the range of –7½ to 2½ percent, with a midpoint of –2½ percent (based on CA-REER elasticity of about 0.4). ### Capital and Financial Accounts: Flows and Policy Measures (Hong Kong SAR) - Background: - As a global financial center, Hong Kong SAR has an open capital account. - Nonreserve financial outflows widened in 2019, largely driven by net portfolio outflows, but turned to inflows in the first quarter of 2020 on strong net portfolio inflows. - The financial account is typically very volatile, reflecting financial conditions in Hong Kong SAR and mainland China (transmitted through growing cross-border financial linkages), shifting expectations of US monetary policy, and related arbitrage in the FX and rates markets. - Assessment: - Large financial resources, proactive financial supervision and regulation, and deep and liquid markets should help limit the risks from potentially volatile capital flows. - The greater financial exposure to mainland China could also pose risks to the banking sector if growth on the mainland slows sharply or financial stress emerges amid increasing tension between the United States and China. - However, the credit risk appears manageable given the high origination and underwriting standards of Hong Kong SAR banks. ### FX Intervention and Reserves Level (Hong Kong SAR) - Background: - As the Hong Kong dollar depreciated to the weak side of convertibility undertaking, the HKMA conducted FX operations as part of the currency board operations, selling US$2.8 billion in March 2019. - As Hong Kong interbank offered rates have gradually caught up with London interbank offered rates since then, the spread has narrowed, and the Hong Kong dollar has traded within the convertibility undertaking range. - Total reserve assets increased to about 121 percent of GDP at end-2019 (or twice the monetary base), up from 117 percent in 2018. - The strong side of the convertibility undertaking was triggered in April and June 2020—driven mainly by increased carry-trade activities and equity-related demand for Hong Kong dollars—prompting the HKMA to sell HK$57.6 billion as part of the currency board arrangement. - Assessment: - FX reserves are currently 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 (about 40 percent of GDP) built through a track record of strong fiscal discipline. *International Monetary Fund | 2020* ### 2.7 percent of GDP and a staff-assessed norm of –1.6 percent of GDP. ### ch3 - 2.7 percent of GDP and a staff-assessed norm of –1.6 percent of GDP. ### Indonesia — Current Account and Policy Implications - 2019 (% GDP) - Actual CA: –2.7 - Cycl. Adj. CA: –2.7 - EBA CA Norm: –0.8 - EBA CA Gap: –1.9 - Staff Adj.: 0.9 - Staff CA Gap: –1.0 - Assessment and ranges - CA gap for 2019 is in the range of –2.5 percent to 0.5 percent of GDP, considering uncertainties in the estimation of the norm. - Staff-assessed norm cited: –1.6 percent of GDP (contextual reference in title). - Policy implications - Achieving external balance will require structural reforms to strengthen health, education, and infrastructure and increase labor market flexibility. - These reforms are consistent with the suggested room for higher fiscal spending identified by the policy gaps. ### Indonesia — Real Exchange Rate (REER) - Background - REER depreciated in 2018 by 6.3 percent relative to the average of 2017. - In 2019, the average REER appreciated by 4.3 percent relative to the 2018 average. - As of May 2020, the REER had depreciated by 0.1 percent compared with the 2019 average. - Assessment - EBA index and level REER models point to 2019 REER gaps of about 2.1 percent to –9.0 percent, respectively. - IMF staff CA gap estimate of –1.0 percent of GDP implies an REER gap of 5.6 percent with standard elasticities. - IMF staff assesses the REER gap in the –1.2 to 8.9 percent range, with a midpoint of 3.9 percent, considering all inputs and the 2019 appreciation. ### Indonesia — Capital and Financial Accounts; FX Intervention and Reserves - Capital and financial flows (2019) - Net capital and financial account inflows: 3.3 percent of GDP. - Net FDI inflows: 1.8 percent of GDP. - Net portfolio inflows: 1.9 percent of GDP. - Net other investment inflows: –0.5 percent of GDP. - 2020 events - March 2020: large capital outflows from sale of rupiah-denominated securities by nonresident investors; largely offset by inflows from subsequent issuance of foreign-currency-denominated government bonds. - In a context of COVID-19 market volatility, Bank of Indonesia intervened in non-spot and spot FX markets in February and March 2020 and introduced daily FX swap auctions. - Assessment of flows - Net and gross financial flows remain prone to volatility. - Contained CA deficit and strengthened policy frameworks, including exchange rate flexibility since mid-2013, have helped reduce capital flow volatility. - Continued strong policies to strengthen the fiscal position, keep inflation in check, advance financial deepening, and ease supply bottlenecks would help sustain capital inflows in the medium term. - Reserves and FX intervention (end-2019 and early-2020) - Reserves at end-2019: US$129.2 billion (equal to 12 percent of GDP, about 119 percent of the IMF’s reserve adequacy metric and about 9 months of prospective imports of goods and services). - Reserves at end-2018: US$120.7 billion. - Contingencies and swap lines amount to about US$95 billion. - International reserves recovered in April 2020, reaching US$127.9 billion. - Assessment of reserves and intervention - Current level of reserves (US$129.2 billion at end-2019) should provide a sufficient buffer against a wide range of possible external shocks, with predetermined drains also manageable. - FX intervention should continue to aim primarily at preventing disorderly market conditions while allowing the exchange rate to adjust to external shocks. ### Italy — Overall Assessment and Policy Responses - Overall Assessment - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The sustained CA surplus reflects structurally weak investment, while gross external liabilities remain high, with a large share of public debt. - Potential Policy Responses (post-health crisis) - Policies to improve competitiveness are necessary to support growth and reduce public debt over the medium term. - Credible medium-term fiscal consolidation and efforts to further strengthen bank balance sheets are necessary to reduce external vulnerabilities and maintain investor confidence. - Structural reforms to ensure wages are aligned with productivity at the firm level are important to boost potential growth and competitiveness and reduce vulnerabilities. - The package of policies would likely have offsetting effects on the CA balance, boosting export competitiveness but also raising investment. ### Italy — Foreign Asset/Liability Position and Current Account (2019) - Foreign position (2019, % GDP) - NIIP: –1.6 - Gross Assets: 163.4 - Debt Assets: 64.8 - Gross Liab.: 165.0 - Debt Liab.: 115.5 - Background and assessment - NIIP reached an estimated –1.6 percent of GDP at end-2019. - Gross assets and liabilities are estimated at about 163 and 165 percent of GDP. - TARGET2 liabilities declined to 25 percent of GDP in 2019; trend reversed in early 2020 due to nonresident outflows, Eurosystem asset purchases, and liquidity measures. - Debt securities represent about two-thirds of gross external liabilities, half of which are owed by the public sector. - Assessment: Further strengthening of balance sheets would reduce vulnerabilities related to high public debt and potential negative feedback loops. - Current Account (2019, % GDP) - Actual CA: 3.0 - Cycl. Adj. CA: 2.7 - EBA CA Norm: 2.6 - EBA CA Gap: 0.0 - Staff Adj.: 0.0 - Staff CA Gap: 0.0 - Assessment - Cyclically adjusted CA is estimated at 2.7 percent of GDP in 2019, close to the EBA-estimated CA norm of 2.6 percent of GDP. - IMF staff assesses a CA gap in the range of –1.0 to 1.0 percent of GDP. - Despite CA being in line with fundamentals, Italy’s structural rigidities hamper its ability to improve competitiveness. ### Italy — Real Exchange Rate and Financial Accounts - Real Exchange Rate (2019) - CPI-based and ULC-based REERs depreciated by about 2 percent from 2018 to 2019. - As of May 2020, the REER had appreciated by 0.3 percent compared to the 2019 average. - Level and index REER models suggest modest overvaluation in 2019 of 4.4 percent and 6.8 percent, respectively. - IMF staff assesses the REER gap in the range of 0 to 8 percent of GDP, implying a midpoint of about 4 percent. - Capital and financial accounts - Italy’s financial account posted net outflows of 3 percent of GDP in 2019, reflecting residents’ net purchases of foreign assets. - Portfolio investment shifted from outflows to inflows mid-2019 as foreign investors returned to Italian sovereign debt. - COVID-19 pandemic and market concerns triggered substantial sales of Italian government securities by foreign investors in early 2020. - Assessment: Italy remains vulnerable to market volatility due to large refinancing needs of the sovereign and banking sectors and remaining balance sheet weaknesses. - 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. ### Japan — Overall Assessment and Policy Priorities - Overall Assessment - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Strong NIIP generates sizable net returns supporting an income balance that is about as large as Japan’s CA surplus. - Potential Policy Responses - Policy priorities should focus on addressing the pandemic emergency to preserve lives and productive capacity. - Recent fiscal measures and Bank of Japan actions prioritized support to vulnerable households, workers, and firms while maintaining smooth financial market functioning. - If preexisting domestic policy distortions persist, a coordinated policy package will be needed: gradual fiscal consolidation accompanied by a credible medium-term fiscal framework and structural reforms to boost wages, increase labor productivity and labor supply, reduce barriers to entry, and accelerate agricultural and professional services deregulation. ### Japan — Foreign Position, Current Account, REER, and Flows (2019) - Foreign position (2019, % GDP) - NIIP: 66.8 - Gross Assets: 198.3 - Debt Assets: 91.7 - Gross Liab.: 131.5 - Debt Liab.: 81.8 - Japan’s net foreign assets valued at US$3.4 trillion at end-2019. - Current Account (2019, % GDP) - Actual CA: 3.6 - Cycl. Adj. CA: 3.5 - EBA CA Norm: 3.5 - EBA CA Gap: 0.0 - Staff Adj.: 0.0 - Staff CA Gap: 0.0 - Assessment - EBA model: cyclically adjusted CA is 3.5 percent of GDP and cyclically adjusted CA norm is 3.5 percent of GDP, with a standard error of 1.2 percent of GDP. - IMF staff estimates a 2019 CA norm range between 2.3 and 4.7 percent of GDP. - 2019 CA gap midpoint assessed to be 0.0 percent of GDP (range between –1.2 and 1.2). - Large unexplained portion of EBA CA gap suggests important investment and consumption bottlenecks. - Real Exchange Rate - REER depreciated by 5.7 percent between 2016 and 2018; appreciated in 2019 by 2.8 percent. - Estimates through May 2020 show REER appreciated by 4.1 percent relative to the 2019 average. - EBA REER level and index models deliver REER gaps of –12.5 and –18 percent, respectively, for the 2019 average REER, but these models are not used as they do not capture Japan-specific factors. - Using IMF staff 2019 CA gap and a staff-estimated semi-elasticity of 0.14 yields a staff range for the 2019 REER gap between –9 and 9 percent with a midpoint of 0 percent. - Capital and financial accounts - Net FDI and portfolio flows in 2019: 4.2 and 1.7 percent of GDP, respectively. - Other investments (net) recorded inflows of 2.1 percent of GDP. - Net short yen positions reemerged in late 2019. - FX Intervention and Reserves - Reserves are about 25 percent of GDP, on legacy accumulation. - There has been no FX intervention in recent years; exchange rate is free floating. - Interventions are isolated, last occurring in 2011, intended to reduce short-term volatility and disorderly movements. ### Korea — Overall Assessment and Policy Responses - Overall Assessment - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Change from 2018 (external position moderately stronger than fundamentals) reflects narrowing of the CA gap due to decline in policy gaps and deterioration in terms of trade following a fall in semiconductor prices. - Potential Policy Responses - Post-COVID-19: authorities deployed additional fiscal and monetary stimulus expected to be temporary. - Ensuring external position remains in line with fundamentals requires continued accommodative fiscal and monetary policies and structural policies to stimulate investment and rebalance toward services. - Desirable reforms: reduce barriers to firm entry and investment, deregulate the nonmanufacturing sector, strengthen social safety net to lessen precautionary saving. - Exchange rate should remain market-determined, with intervention limited to addressing disorderly market conditions. ### Korea — Foreign Position, Current Account, REER, and Reserves (2019) - Foreign position (2019, % GDP) - NIIP: 30.4 - Gross Assets: 103.2 - Debt Assets: 28.9 - Gross Liab.: 72.8 - Debt Liab.: 26.3 - Current Account (2019, % GDP) - Actual CA: 3.6 - Cycl. Adj. CA: 3.3 - EBA CA Norm: 3.3 - EBA CA Gap: 0.0 - Staff Adj.: 0.0 - Staff CA Gap: 0.0 - Assessment - EBA model estimates cyclically adjusted CA and CA norm at 3.3 percent of GDP, with a standard error of 0.9 percent of GDP. - 2019 CA gap midpoint assessed to be 0.0 percent of GDP. - Policy gaps narrowed compared with 2018, reflecting more expansionary fiscal policy; policy gap still positive in 2019 reflecting larger fiscal surplus than IMF staff’s recommended medium-term balance and low social spending. - Residual component grew, reflecting a larger drop in Korea’s terms of trade than picked up by the EBA model. - Real Exchange Rate - REER depreciated in 2019 by about 4.5 percent following appreciation during 2015–18. - As of May 2020, REER had depreciated by an additional 3.6 percent compared to the 2019 average. - EBA REER index model reports REER was 0.6 percent overvalued; REER level model reports an 8 percent undervaluation. - IMF staff uses CA gap and assumes a trade elasticity of 0.36, implying a REER gap of –3 percent to 3 percent with a midpoint of 0 percent. - Capital and financial accounts - Portfolio outflows were 5.8 percent of GDP in 2019. - Net FDI and portfolio flows in 2019: 2.2 and 3.6 percent of GDP, respectively. - Other investments (net) recorded inflows of 0.6 percent of GDP. - In Q1 2020, net FDI and portfolio outflows moderated, driven by portfolio debt inflows and a fall in outward FDI flows. - FX Intervention and Reserves - Korea has a floating exchange rate. - FX intervention appears two-sided since early 2015. - In 2019 reserves reached 25 percent of GDP. - Bank of Korea sold a net US$6.7 billion (0.4 percent of GDP) in 2019. - In Q1 2020, reserves declined modestly by US$7.6 billion. - As of end-April, Bank of Korea had drawn about US$20 billion from the US$60 billion swap line established by the Federal Reserve (US$60 billion). - Assessment: As of end-2019, FX reserves were about 110 percent of the IMF’s composite reserve adequacy metric; together with access to the Federal Reserve swap facility, this provides enough of a buffer against a wide range of possible external shocks. *Italic: Content extracted from the supplied IMF chapter content.* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Table 3.16. Malaysia: Economy Assessment ### Overall Assessment - The external position in 2019 was stronger than the level implied by medium-term fundamentals and desirable policies. - Over the past few years, Malaysia’s growth model has become increasingly driven by private domestic demand, and its CA surplus has narrowed significantly. - Further decline in the surplus is projected over the medium term on the back of policies supporting continued robust domestic private demand. ### Potential Policy Responses - In response to the ongoing COVID-19 shock, policies should: - continue to focus on providing relief to stressed firms and households and preserving the production capacity of the economy, while maintaining FX market stability. - keep the recent fiscal stimulus and monetary easing under review as the crisis unfolds. - If pre–COVID-19 distortions persist in the medium term, the planned fiscal consolidation should be accompanied by policies to: - strengthen the social safety net; - continue to encourage private investment and productivity growth, including measures to improve small and medium-sized enterprises’ access to credit, promote the quality of education, reduce skills mismatch, and encourage female labor participation. - Continued exchange rate flexibility is necessary to facilitate external adjustment, with intervention limited to addressing disorderly market conditions. ### Foreign Asset and Liability Position and Trajectory Background and recent developments: - Malaysia’s NIIP has averaged about 1 percent of GDP since 2010, with changes in recent years reflecting both CA surplus and valuation effects. - As of end-2019, the NIIP rose to –1.5 percent of GDP from –5.7 percent of GDP at end-2018, with higher net direct investment liabilities more than offset by the reduction in the net portfolio investment and other investment liabilities. - Direct investment abroad and official reserves contribute most to foreign assets; FDI and nonresidents’ portfolio investment in Malaysia contribute most to foreign liabilities. - Total external debt, measured in US dollars, was about 63.4 percent of GDP at end-2019 (end-2018: 62.3 percent), of which about two-thirds was in foreign currency and 41 percent in short-term debt, by original maturity. Assessment and outlook: - The NIIP should rise gradually over the medium term, reflecting projected moderate CA surpluses. - Malaysia’s balance sheet strength, along with exchange rate flexibility and increased domestic investor participation, would help support resilience to a variety of shocks, including outflows associated with external liabilities. Key statistics (2019, % GDP): - NIIP: –1.5 - Gross Assets: 111.1 - Res. Assets: 28.4 - Gross Liab.: 112.6 - Debt Liab.: 62.6 ### Current Account Background and recent developments: - Malaysia’s CA surplus declined by about 8 percentage points of GDP between 2010 and 2018, primarily driven by lower national saving and a modest rise in investment until 2017. - In 2019, the CA surplus increased to 3.4 percent of GDP, driven by a sharp decline in capital imports. - The goods balance remained in surplus, whereas the services account and income accounts registered lower deficits. - The CA registered a surplus of 2.6 percent of GDP in 2020:Q1. - With high uncertainty due to the COVID-19 shock, the CA surplus is projected to decline to 0.5 percent of GDP in 2020, driven by a sharp decline in tourism and external demand, which will outweigh the negative impact of the domestic demand shock on imports. - After the COVID-19 shock dissipates, the CA balance is expected to return to a modest surplus but decline over the medium term, driven by lower private sector saving and higher investment. Assessment (EBA and staff estimates): - The EBA CA regression estimates a cyclically adjusted CA of 3.5 percent of GDP and a CA norm at –0.2 percent of GDP for 2019. - After factoring in the effect of the postponement of large infrastructure projects on capital imports (0.4 percent of GDP), the preliminary estimate of the IMF staff CA gap is about 3.3 percent of GDP (about 1 percent of GDP). - Over half of the CA gap is attributed to policy distortions: - Low domestic public health care spending contributes 0.7 percentage point to the CA gap. - Looser fiscal policy in the rest of the world, relative to Malaysia, contributes 0.7 percentage point to the excess surplus. - Unidentified residuals potentially reflect structural impediments and country-specific factors not included in the model. Key statistics (2019, % GDP): - Actual CA: 3.4 - Cycl. Adj. CA: 3.5 - EBA CA Norm: –0.2 - EBA CA Gap: 3.7 - Staff Adj.: –0.4 - Staff CA Gap: 3.3 ### Real Exchange Rate Background and recent developments: - In 2019, the REER depreciated by 1.4 percent relative to the 2018 average. - The REER is about 12 percent lower than its 2013 peak, reflecting the impact on the NEER from capital outflows and terms-of-trade shocks, with the latter contributing to a decline in the CA surplus. - In May 2020, the REER had depreciated by 3.5 percent relative to the 2019 average. Assessment: - The EBA REER index and level models estimate Malaysia’s REER to be undervalued by about 25 and 38 percent, respectively. - However, the usual macroeconomic stresses associated with such undervaluation are absent (for example, high core inflation, sustained wage pressure, or significant FX reserve buildup). - Consistent with the IMF staff CA gap, the staff assesses the REER gap in 2019 to be –7.2 percent (about 2 percent). ### Capital and Financial Accounts: Flows and Policy Measures Background and recent developments: - Since the global financial crisis, Malaysia has experienced periods of significant capital flow volatility, largely driven by portfolio flows in and out of the local-currency-debt market, in response to both the change in global financial conditions and domestic factors. - Since late 2016, the Financial Markets Committee has implemented measures to develop the onshore FX market. - Portfolio capital flows had stabilized in April 2020, after substantial outflows in March. Assessment and policy guidance: - Continued exchange rate flexibility and macroeconomic policy adjustments are necessary to manage capital flow volatility. - CFMs should be gradually phased out, with due regard for market conditions. ### FX Intervention and Reserves Level Background and recent developments: - Malaysia’s official reserves fell by US$8.1 billion since May 2018 and had stabilized at US$101.4 billion as of end-2018. - The reserve level began to gradually pick up in the first half of 2019 and stood at US$103.6 billion as of end-2019. - The pre–COVID-19 reserve level was sustained throughout April 2020. Assessment: - Under the IMF’s composite reserve adequacy metric (ARA), reserves remain broadly adequate. - Gross and net official reserves were about 116 percent and 101 percent of the ARA metric, respectively, as of end-2019. - Given limited reserves and the increased hedging opportunities since 2017, FX interventions should be limited to preventing disorderly market conditions. - In case of an inflow surge, some reserve accumulation would be suitable to increase the reserve coverage ratio. *International Monetary Fund | 2020 — CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS, Table 3.16. Malaysia: Economy Assessment* ### 0.5 percent of GDP in 2019. While this evolution is consistent with a maturing FDI cycle, the CA surplus is excessive gi ### ch3 - 0.5 percent of GDP in 2019. While this evolution is consistent with a maturing FDI cycle, the CA surplus is excessive gi ### Potential Policy Responses - Short term: - Fiscal policy should bolster the health system, provide businesses with liquidity, and support incomes of vulnerable households, including through preserving employment. - Monetary and financial policies should prevent a tightening of financial conditions and enable the financial sector to support firms’ liquidity. - Medium term (if pre-COVID-19 imbalances persist): - Policies should aim to boost corporate investment and productivity. - Active labor market policies should facilitate access to skilled labor. - Structural reforms focused on raising potential growth. - The fiscal deficit should be reduced after the crisis has abated. - Better targeting of social benefits according to need to make room for priority fiscal spending, especially health care and self-financed public investment, as EU funds are gradually phased out. ### Foreign Asset and Liability Position and Trajectory - Background and stocks (2019): - NIIP stood at –50 percent of GDP in 2019, broadly stable since 2018. - Gross assets: 49 percent of GDP. - Gross liabilities: 99 percent of GDP. - Stock of net FDI (equity and debt) accounts for 36 percent of gross external liabilities and remains diversified across sectors and source countries. - Gross external debt: 62 percent of GDP. - 27 percent of the debt is liabilities to direct investors via intercompany loans. - 74 percent of the debt is of long-term maturity. - Short-term debt (excluding intercompany debt): 16 percent of GDP, mainly owed by banks (currency and deposits) and the nonfinancial private sector (trade credit). - Trajectory and dynamics: - Automatic debt dynamics are projected to continue to reduce the negative NIIP. - Assessment: - While sizable external debt is a vulnerability, rollover risk is mitigated by the large share of long-term debt and intercompany lending that tends to be automatically rolled over. - Adequate reserves reduce residual rollover risk from short-term debt (gross reserves at end-2019 were equivalent to 142 percent of short-term debt). - Key 2019 indicators (percent of GDP): - NIIP: –50.3 - Gross Assets: 48.8 - Res. Assets: 21.7 - Gross Liab.: 99.2 - Debt Liab.: 43.2 ### Current Account - Background and recent evolution: - The CA has moved toward surplus since the 2008 crisis, from large deficits to close-to-balance in recent years, reflecting a larger trade surplus (mainly services) despite sustained high primary income deficits from reinvested earnings and dividend payments to direct investors and net earnings of foreign workers in Poland. - Low investment and high saving by the corporate sector have been partially offset by net borrowing by households and the government. - Poland’s CA swung from a deficit of 1 percent of GDP in 2018 to a surplus of 0.5 percent of GDP in 2019 on a further rise in goods and services balances, assisted in part by lower oil prices. - 2020 developments and projections: - In 2020:Q1, the CA surplus increased significantly to US$6.2 billion (1.1 percent of annual GDP) driven mostly by a large decline in the primary income deficit. - For 2020, the CA surplus is expected to reach 1.5 percent of GDP as a projected reduction in the primary income deficit outweighs a decline in the balance of goods and services. - Over the medium term, the CA relative to GDP is expected to return to a small deficit as private net saving returns to a lower level as the economy recovers, outweighing an anticipated increase in government net saving. - Assessment: - For 2019, the EBA CA model estimates a norm of –2.1 percent of GDP against a cyclically adjusted CA of 0.6 percent of GDP. - The resulting EBA gap is 2.7 (±1) percent of GDP, attributable in part to identified policy gaps (1.7 percent of GDP) and an unexplained residual of 0.9 percent of GDP. - Key 2019 indicators (percent of GDP): - Actual CA: 0.5 - Cycl. Adj. CA: 0.6 - EBA CA Norm: –2.1 - EBA CA Gap: 2.7 - Staff Adj.: 0.0 - Staff CA Gap: 2.7 ### Real Exchange Rate - Background: - The REER has depreciated by 18 percent since 2008, including a 1.3 percent real depreciation in 2019. - In nominal terms, the zloty has tended to depreciate against the dollar but remain relatively stable against the euro. - Inflation in Poland has been only slightly higher than in its trading partners. - As of May 2020, the REER has depreciated by 2.2 percent relative to the 2019 average. - Assessment: - The REER index model suggests a gap of –2.7 percent. - The undervaluation implied by the IMF staff CA gap, along with the assumed CA-REER elasticity of 0.44, is in the range of –4 to –8 percent. - Overall, the IMF staff assesses the 2019 REER gap to be –6 percent (±2 percent), consistent with the staff CA gap. ### Capital and Financial Accounts: Flows and Policy Measures - Background and flows: - The capital account, dominated by inflows of EU funds for financing investment projects, has averaged about 2 percent of GDP over the past 10 years. - In 2019, financial account outflows amounted to 1.7 percent of GDP, mainly due to portfolio investment. - Net FDI inflows narrowed by 0.5 percentage point from 2018 to 2 percent of GDP, due to both expansion of Polish investment abroad and lower inflows into Poland. - In 2020, first quarter financial account outflows increased to US$8.2 billion (1.5 percent of annual GDP), concentrated in March. The outflows are projected to reach 2 percent of GDP for the year. - Assessment: - Foreign holdings of domestic government securities have declined sharply since 2016 (to 23 percent of the total; 6.9 percent of GDP) as domestic banks have increased their holdings in response to the bank asset tax, which exempts government bonds. - The overall stock remains sizable and could pose risks, although the diversified foreign investor base is a mitigating factor. ### FX Intervention and Reserves Level - Background and levels: - Gross international reserves were US$128 billion at end-2019. - Net reserves (excluding the central bank’s repo operations and government FX deposits) were US$113 billion at end-2019. - Net reserves increased from US$101 billion at end-2018, reflecting in part the central bank’s conversion of a portion of EU funds received by the government to zloty. - Through March 2020, net reserves increased approximately US$1 billion from end-2019 to US$114 billion, while gross reserves declined by about US$8 billion, to US$121, reflecting a decline in repo operations. - The zloty is free floating, and the central bank does not directly intervene in the FX market. - Assessment: - Net reserves were adequate at end-2019, standing at 127 percent of the IMF’s composite reserve adequacy (ARA) metric at end-2019. - Gross reserves were about 144 percent of the ARA metric. *International Monetary Fund | 2020* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Singapore - Overall Assessment: - The external position in 2019 was substantially stronger than with the level implied by medium-term fundamentals and desirable policies. - Singapore’s very open economy and its position as a global trading and financial center make the assessment more uncertain than usual. - Potential Policy Responses: - Amid COVID-19, both external and domestic demand significantly weakened. A sizable fiscal stimulus has been introduced drawing down accumulated government financial assets. - Authorities should continue monitoring the implementation of stimulus measures and stand ready to provide further stimulus if needed. - If pre–COVID-19 imbalances persist in the medium term, higher public investment (including health care, physical infrastructure, and human capital) would help moderate the CA imbalance by lowering net public saving. - Structural reforms are necessary to improve productivity, supporting a trend real exchange rate appreciation. - Foreign Asset and Liability Position and Trajectory: - Background: NIIP stood at 241 percent of GDP in 2019, up from 206 percent of GDP in 2018 and 187 percent in 2014. - Gross assets and liabilities are high (about 1,135 and 896 percent of GDP, respectively). - About half of foreign liabilities is in FDI, and about a third is in the form of currency and deposits. - CA surplus has been a main driver; valuation effects were material in some years. - CA and growth projections imply NIIP will rise over the medium term. - Large positive NIIP partly reflects accumulation of assets for old-age consumption, expected to be gradually unwound over the long term. - Assessment: Large gross non-FDI liabilities (438 percent of GDP in 2019) present some risks, mitigated by large gross asset positions, banks’ large short-term external assets, and authorities’ close monitoring of banks’ liquidity risk. Singapore has large official reserves and other official liquid assets. - 2019 (% GDP): - NIIP: 240.8 - Gross Assets: 1,135.2 - Debt Assets: 533.0 - Gross Liab.: 894.4 - Debt Liab.: 357.9 - Current Account: - Background: CA surplus was 17.0 percent of GDP in 2019, similar to 17.2 percent in 2018. - CA balance slightly lower than its average since 2014 and significantly lower than post-global-financial-crisis peak of 22.9 percent in 2010. - CA likely to decline in 2020 to about 13 percent of GDP due to COVID-19 movement restrictions and weak external demand; high uncertainty. - Large CA balance reflects strong goods balance and small surplus in services partly offset by deficit in income balance. Oil trade deficit narrowed in 2019. - Structural drivers: Singapore’s financial center status, consecutive fiscal surpluses, rapid aging, mandatory defined-contribution pension program (assets about 83.8 percent of GDP in 2019), and relatively high productivity. - CA surplus projected to narrow over the medium term on the back of increased infrastructure and social spending. - Assessment: Guided by the EBA framework, IMF staff assesses the 2019 CA gap to be in the range of 1 to 7 percent of GDP. This gap partly reflects a tighter-than-desired fiscal balance and, to a limited extent, relatively low government health spending. - 2019 (% GDP): - Actual CA: 17.0 - Cycl. Adj. CA: 16.8 - EBA CA Norm: — - EBA CA Gap: — - Staff Adj.: — - Staff CA Gap: 4 - Real Exchange Rate: - Background: REER appreciated by 0.1 percent year over year in 2019 reflecting NEER appreciation of 1.4 percent year over year. Between 2016 and 2018 cumulative REER depreciation was 1.8 percent and NEER appreciation was 1.1 percent. As of May 2020, REER had depreciated by 2.8 percent relative to 2019 average. - Assessment: IMF staff assesses REER is undervalued by 2 to 14 percent, with a midpoint of 8 percent, applying the semi-elasticity of 0.5 to the staff CA gap; assessment subject to wide uncertainty. - Capital and Financial Accounts: - Background: Open capital account. Financial account deficit widened to 19 percent of GDP in 2019 from 13 percent in 2018 due to higher net outflows of portfolio investment, offsetting increased net inflows of direct investment and decline in net outflows of other investment. - Assessment: Financial account likely to remain in deficit as long as trade surplus remains large. - FX Intervention and Reserves Level: - Background: NEER is the intermediate monetary policy target; intervention undertaken to achieve inflation and output objectives. Official reserves at MAS reached US$279 billion (75 percent of GDP) in 2019 after US$33 billion was transferred to the government in May 2019 for management by GIC. Reserves increased to US$302 billion in April 2020. MAS started publishing aggregate data on foreign exchange intervention in April 2020. On March 19, MAS announced establishment of a US$60 billion swap facility with the US Federal Reserve. - Assessment: In addition to MAS FX reserves, Singapore has access to other official foreign assets managed by Temasek and GIC. The current level of official external assets appears adequate, even after considering prudential motives; no clear case for further accumulation for precautionary purposes. ### South Africa - Overall Assessment: - External position in 2019 was moderately weaker than level implied by medium-term fundamentals and desirable policies, with CA gap unchanged from 2018. - Portfolio flows continued to finance most of the relatively high CA deficit. - Potential Policy Responses: - Near term: use temporary and targeted fiscal support to cushion COVID-19 impact and protect the vulnerable. - Medium term: reduce external gaps via bold structural reforms to improve competitiveness, and gradual but substantial fiscal consolidation while providing space for infrastructure and social spending (to improve educational attainment and skills and help reduce poverty and inequality). - Improve efficiency of key product markets (encourage private sector participation in power generation, transportation, telecommunications) and labor market functioning to attract durable capital inflows such as FDI. - Seize opportunities to accumulate international reserves, should they arise. - Foreign Asset and Liability Position and Trajectory: - Background: Large gross external assets and liabilities (respectively, 137 and 129 percent of GDP in 2019). NIIP rose from –8 percent of GDP in 2014 to 16 percent of GDP in 2015 mainly on valuation changes, but declined to 8 percent of GDP in 2019. NIIP expected to moderate over medium term as CA deficits projected to remain relatively high. - Gross external debt rose from 26 percent of GDP in 2008 to an estimated 50 percent of GDP in 2019 due mainly to public sector long-term debt. Short-term external debt (residual maturity basis) estimated at about 15.7 percent of GDP in 2019. - Assessment: Risks from large gross external liabilities mitigated by comfortable external asset position, bulk of liabilities in equities, and about half of external debt rand-denominated. - 2019 (% GDP): - NIIP: 8 - Gross Assets: 137 - Debt Assets: 13.9 - Gross Liabilities: 129 - Debt Liabilities: 43.2 - Current Account: - Background: CA deficit narrowed from 5.8 percent of GDP in 2013 to 2.5 percent in 2017 but widened to 3.5 percent in 2018. CA deficit for 2019 was 3 percent of GDP due to increases in trade and income balances. - With high COVID-19 uncertainty, 2020 CA projected to decline to 1.8 percent of GDP mainly due to import compression and lower oil prices. - CA deficit projected to widen to about 4 percent of GDP in the medium term owing to elevated income account deficit projected to remain at about 4 percent of GDP. - Assessment: IMF staff estimates a CA gap in the range of –0.5 to –2.7 percent of GDP in 2019, derived from a revised cyclically adjusted CA and an adjusted model-based norm. - Revised cyclically adjusted CA (–1.7 percent of GDP) obtained by subtracting 1.5 percentage points from cyclically adjusted CA (–3.2 percent of GDP) for statistical treatment of transfers and income accounts. - Adjusted CA norm (–0.1 percent of GDP) obtained by subtracting 1 percentage point from a surplus CA norm from the regression model (0.9 percent of GDP) to reflect lower life expectancy at prime age relative to other countries in regression sample. - The estimated CA gap largely explained by structural factors outside the model. - 2019 (% GDP): - CA: –3.0 - Cycl. Adj. CA: –3.2 - EBA CA Norm: 0.9 - EBA CA Gap: –4.0 - Staff Adj.: 2.5 - Staff CA Gap: –1.5 - Real Exchange Rate: - Background: CPI-REER depreciated during 2011–16 and recouped losses in 2017–18. In 2019, REER depreciated by about 3.5 percent relative to 2018. As of end-May 2020, REER further depreciated by 14.7 percent relative to 2019 average. - Assessment: IMF staff assesses REER to have been overvalued by 1.7 to 9.7 percent in 2019, with a midpoint of 5.7 percent, relying on the CA approach. Two REER-based regressions point to undervaluation in range of 3.3 percent (level approach) and 15.7 percent (index approach), but staff deems these less reliable. - Capital and Financial Accounts: - Background: Net FDI flows stayed positive in 2019 (0.4 percent of GDP). Net portfolio investment (2.6 percent of GDP) remained main source of financing the CA deficit. Gross external financing needs stood at 20 percent of GDP in 2019. - Assessment: In 2020, COVID-19–related portfolio outflows from emerging markets may continue. Moody’s end-March downgrade to sub-investment status increases capital outflow pressure. Risks from reliance on non-FDI inflows and nonresident holdings mitigated by flexible exchange rate, large local currency component in nonresident portfolio holdings, and large domestic institutional investor base. South African authorities have requested financing under IMF’s Rapid Financing Instrument. - FX Intervention and Reserves Level: - Background: Exchange rate regime classified as floating. Central bank FX intervention is rare. International reserves estimated about 16 percent of GDP, 80 percent of gross external financing needs, and nine months of imports at end-2019. Reserves stand below IMF’s composite adequacy metric (76 percent of the metric without considering existing CFMs and 83 percent after considering them). - Assessment: If conditions allow, reserve accumulation would be desirable to strengthen external liquidity buffer, subject to maintaining primacy of the inflation objective. ### Spain - Overall Assessment: - External position in 2019 was broadly in line with level implied by medium-term fundamentals and desirable policies. - CA remained in surplus for the eighth consecutive year in 2019. - Achieving a sufficiently strong NIIP will continue to require a relatively high CA surplus for a sustained period. - Potential Policy Responses: - Structural reforms after the global financial crisis (labor market reform and fiscal adjustment) helped reduce imbalances. - To mitigate COVID-19 impact, targeted and temporary income and liquidity support is warranted. - If pre–COVID-19 external vulnerabilities persist, policies should foster competitiveness and carefully manage public debt load. - Boosting competitiveness via productivity gains entails continued wage flexibility, reforms to address labor market duality, product and service market reforms, and actions to enhance education outcomes and innovation. - Foreign Asset and Liability Position and Trajectory: - Background: NIIP dropped significantly during 2000–09 driven mostly by high CA deficits and valuation effects. NIIP was –74 percent of GDP in 2019, but rose by 15 percentage points since 2015 partly due to sustained CA surpluses despite some negative valuation effects. - Gross liabilities stood at 250 percent of GDP in 2019, with about two-thirds as external debt. - Private sector deleveraging since 2008–12 crisis; NIIP accounted for by general government and central bank increased to more than four-fifths in 2019. TARGET2 liabilities reached 30 percent of GDP by end-2019. - Assessment: Large negative NIIP brings external vulnerabilities including large gross financing needs and potential adverse valuation effects. Mitigating factors include favorable maturity structure of sovereign debt (averaging almost eight years) and ECB measures such as QE that lower cost of debt. - 2019 (% GDP): - NIIP: –73.5 - Gross Assets: 176.1 - Debt Assets: 80.9 - Gross Liab.: 249.6 - Debt Liab.: 151.7 - Current Account: - Background: After a peak CA deficit in 2007, regained competitiveness from wage moderation and internationalization contributed to strong export growth leading to CA surpluses in 2012–19. - Historical data revisions, including upward changes in tourism receipts, show recent CA surpluses were higher than earlier reported—the annual average surplus during 2013–18 was revised from 1.5 to 2.3 percent of GDP. - CA surplus estimated at 2.0 percent of GDP in 2019. - 2020 CA projected at slightly below 2 percent of GDP with high uncertainty; imports projected to decline more strongly than exports partly because of low oil prices. Weaker-than-expected exports—particularly tourism receipts—are a key downside risk. - Moderate CA surpluses projected to continue in the medium term. - Assessment: EBA CA model suggests norm of 1.1 percent of GDP for 2019, below cyclically adjusted CA balance (2.2 percent of GDP). Given external risks from large negative NIIP, IMF staff places more weight on external sustainability and objective of raising NIIP to at least –50 percent over medium to long term. - NIIP projected to reach –57 percent of GDP over the medium term under current policies (zero valuation effects assumed). - Allowing for safety margin, IMF staff considers a CA norm of about 2 percent of GDP, with a range of 1 to 3 percent of GDP, yielding a CA gap of –0.8 to 1.2 percent of GDP. - 2019 (% GDP): - Actual CA: 2.0 - Cycl. Adj. CA: 2.2 - EBA CA Norm: 1.1 - EBA CA Gap: 1.1 - Staff Adj.: –0.9 - Staff CA Gap: 0.2 - Real Exchange Rate: - Background: In 2019, CPI-based REER and ULC-based REER depreciated from their average 2018 levels by 1.9 and 1.4 percent, respectively. ULC-based REER depreciated by 19 percent since 2008 peak. As of May 2020, CPI-based REER had depreciated by 0.3 percent and ULC-based REER by 1.6 percent relative to 2019 averages. - Assessment: EBA REER models estimate overvaluation of 4.9 to 5.2 percent for 2019, whereas IMF staff CA gap implies undervaluation of 0.9 percent. Balancing competitiveness needs and NIIP sustainability risks, IMF staff assesses 2019 REER gap to be in range of –4.9 to 3.1 percent, with midpoint of –0.9 percent. - Capital and Financial Accounts: - Background: Financing conditions continued to be favorable despite some increase in sovereign bond yields after COVID-19 crisis. By 2019:Q4 private sector continued deleveraging against rest of world. In 2019, financial account balance largely driven by net outflows of loans and other bank-related instruments. TARGET2 liabilities accumulation was negative for first time since 2015 (–3 percent of GDP in 2019). - Assessment: Investor sentiment had continued to improve in 2019. Amid the pandemic, large external financing needs leave Spain vulnerable to sustained market volatility, although ECB policies to maintain favorable liquidity conditions and monetary accommodation remain mitigating factors. - FX Intervention and Reserves Level: - Background/Assessment: Euro has status of a global reserve currency. Reserves held by euro area are typically low relative to standard metrics, but the currency is free floating. ### Sweden - Overall Assessment: - External position in 2019 was stronger than level implied by medium-term fundamentals and desirable policies. - Outlook for 2020 clouded by high uncertainty from COVID-19 crisis, likely pushing Sweden into a recession in 2020. Any assessment going forward is difficult and subject to revisions. - Potential Policy Responses: - Sweden had large fiscal buffers to provide timely, substantial support to companies and households via compensation programs, guarantees, and tax deferrals. - Riksbank providing ample liquidity and expanded quantitative easing; swap line with US Federal Reserve established to address dollar funding pressures. - Additional sizable targeted policies, complemented by broader stimulus packages, required to secure adequate resources for health care and limit propagation of health crisis to economic activity. - If pre–COVID-19 imbalances persist, implement reforms to raise potential output and reduce household uncertainties around sustainability of Sweden’s strong social model. - Foreign Asset and Liability Position and Trajectory: - Background: Swedish NIIP reached 21.0 percent of GDP in 2019, up 12.9 percentage points in the year. Expected to rise further in medium term reflecting continued CA surpluses. Increase in NIIP in 2019 above CA surplus due to large positive valuation effects; 2019 data preliminary and subject to considerable errors and omissions averaging –1.3 percent of GDP in past decade. - Assessment: Gross liabilities were 263 percent of GDP in 2019, with about half being gross external debt (138 percent of GDP). Other financial institutions (70 percent of GDP) hold bulk of net foreign assets as well as social security funds (21 percent of GDP) and government (16 percent of GDP). Nonfinancial corporations (48 percent of GDP) and monetary financial institutions (38 percent of GDP) are net external debtors. - Although rollovers of external debt (including banks’ covered bonds) pose vulnerability, risks moderated by banks’ ample liquidity and large capital buffers. - In response to COVID-19, authorities lowered countercyclical capital buffer from 2.5 percent to 0 and eased liquidity coverage ratio requirement. Measures, together with Sweden’s strong FX reserves, the swap line with the Federal Reserve, and low public debt, appear to have helped manage crisis-related pressures, though full impact on corporate and bank balance sheets remains uncertain. - 2019 (% GDP): - NIIP: 21.0 - Gross Assets: 283.5 - Debt Assets: 91.4 - Gross Liab.: 262.5 - Debt Liab.: 132.2 - Current Account: - Background: CA unexpectedly low at 1.9 percent of GDP in 2018, increased in 2019 to 4.2 percent of GDP, interrupting trend decline in surplus over past decade. Despite rising exports, imports were flat in 2019 owing to weak investment and durables consumption. Sweden is a net oil importer with a negative oil balance of 1.3 percent of GDP. - The CA in 2020 is expected to decline to *International Monetary Fund | 2020* ### 2.8 percent of GDP due to depressed external demand, but this projection is subject to high uncertainty. ### ch3 - 2.8 percent of GDP due to depressed external demand, but this projection is subject to high uncertainty. ### Current Account and Cyclically Adjusted Balance - Cyclically adjusted CA is estimated at 4.5 percent of GDP in 2019, which is 3.2 percentage points above the cyclically adjusted EBA norm of 1.2 percent of GDP. - The estimated EBA norm for Sweden has been below the actual CA balance for the past two decades, indicating factors not captured by the model (for example, Sweden’s mandatory contributions to fully funded pension plans and an older labor force) may be influencing saving-investment balances. - IMF staff assesses Sweden’s CA gap at 3.2 percent of GDP in 2019, within a range of ±1.5 percent of GDP. - Reported 2019 (% GDP) figures: - Actual CA: 4.2 - Cycl. Adj. CA: 4.5 - EBA CA Norm: 1.2 - EBA CA Gap: 3.2 - Staff Adj.: 0.0 - Staff CA Gap: 3.2 ### Real Exchange Rate (REER) - Background: - The Swedish krona depreciated by 4 percent in real effective terms (CPI based) in 2019 relative to its average level in 2018. - In May 2020 it was at the same level as its 2019 average. - The temporary weakness of the krona in March and April 2020 may partly have reflected financial outflows in response to the crisis, accommodative monetary policy, and demand for foreign currency funding. - EBA analysis and valuation: - EBA analysis suggests a gap of –19.4 percent and –19.0 percent using the REER index and level approaches, respectively, for 2019. - The ULC-based REER index is 10.8 percent below its 27-year average (since the krona was floated in 1993) in 2019. - Applying a 0.35 semi elasticity of CA to the REER to the CA gap of 3.2 percent ±1.5 percent of GDP gives a valuation range for the krona of –5.1 to –13.7 percent. - IMF staff assesses the krona to be undervalued by 5 to 15 percent, with a midpoint of 10 percent. - Note: This REER gap may decline once the situation, including monetary policy, normalizes. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Portfolio investment outflows of 2.1 percent of GDP provided two-thirds of the financial account balance in 2019. - Other investment outflows were 1.4 percent of GDP. - Direct investment outflows were 0.4 percent of GDP. - Assessment: - Given their size and funding model, Sweden’s large banks remain vulnerable to liquidity risks stemming from global wholesale markets, despite improvements in structural liquidity measures in recent years. - The authorities’ swift and strong policy response to the COVID-19 crisis appears to have eased liquidity and funding pressures for banks, but the full extent of the impact remains uncertain as it is still unfolding. ### FX Intervention and Reserves Level - Background: - The exchange rate is free floating. - Foreign currency reserves stood at US$56 billion in December 2019. - Reserves were equivalent to 19 percent of the short-term external debt of monetary and financial institutions (primarily banks) and about 11 percent of GDP. - Assessment and recent action: - In view of the high dependence of Swedish banks on wholesale funding in foreign currency, and disruptions in such funding at times of international financial distress, Sweden should maintain adequate foreign reserves. - A US$60 billion swap facility was agreed with the Federal Reserve to address risks to dollar funding related to the COVID-19 crisis. ### Overall Staff Assessment and Uncertainty - The IMF staff assesses Sweden’s external position in 2019 as having a CA gap of 3.2 percent of GDP (±1.5 percent), acknowledging model limitations and Sweden-specific factors not captured by the EBA framework. - Key uncertainties include: - Measurement limitations of the EBA norm relative to Sweden’s long-run CA balances. - Ongoing pandemic-related developments affecting exchange rates, capital flows, and bank funding. - Policy-relevant implications highlighted by the staff: - Maintain adequate foreign reserves given banks’ foreign-currency funding dependence. - Monitor liquidity and funding pressures on large banks; continue to assess the implications of policy responses to COVID-19 as impacts unfold. *Source: IMF staff assessment text as provided in the supplied content.* ### 1.6 percent of GDP, subject to considerable uncertainty (with a range between –0.2 and 3.4 percent of GDP). ### ch3 - 1.6 percent of GDP, subject to considerable uncertainty (with a range between –0.2 and 3.4 percent of GDP). ### Key statistics (2019, % GDP) - Actual CA: 1.2 - Cycl. Adj. CA: 0.8 - EBA CA Norm: –1.7 - EBA CA Gap: 2.5 - Staff Adj.: 0.9 - Staff CA Gap: 1.6 ### Real Exchange Rate - Background: After depreciating sharply in 2018, the average REER depreciated by 2.2 percent in 2019 and a further 7.8 percent through May 2020 driven by nominal depreciation of the lira. - Assessment: - EBA REER level and index approaches suggest the REER remained undervalued in 2019 by 21 to 23 percent, albeit with large uncertainties. - The IMF staff CA gap suggests the REER was undervalued by 7 percent (based on an elasticity of 0.22). - The staff assesses the REER to be undervalued by 7 to 23 percent in 2019 (with a midpoint of 15 percent). ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Net capital flows: US$0.5 billion in 2018 and US$5.6 billion in 2019 (0.7 percent of GDP and excluding reserves and E&O). - E&O: positive in 2018, switched to outflows in 2019. - Q1 2020: net capital outflows US$6 billion due to portfolio and other investment outflows. - Policy measures: limits on bank swaps and other derivatives with foreign counterparties and export surrender and repatriation requirements introduced in August 2018; partially unwound as volatility receded; limits on bank swaps and other derivatives reintroduced and tightened in December 2019 and February–April 2020. - Assessment: - The quality of financing remained weak in 2019. - Turkey remains vulnerable to adverse shifts in global and domestic investor sentiment, with annual gross external financing needs of about 23 percent of GDP on average during 2020–21. - CFMs should be phased out as macroeconomic and financial conditions improve. ### FX Intervention and Reserves Level - Background: - De jure exchange rate classified as floating. - Gross reserves had declined by US$22 billion as of mid-May 2020. - Net international reserves have dropped by US$15 billion to US$26 billion since the beginning of the year. - Assessment: - Gross reserves increased to 85 percent of the IMF’s ARA metric at end-2019, from 74 percent at end-2018, but dipped to 67 percent in mid-May 2020. - Reserve coverage of external financing requirements rose to 64 percent in 2019, from 46 percent the year prior, and then dropped to 49 percent in mid-May. - Significant accumulation of reserves over the medium term is needed given sizable external liabilities and dependence on short-term and portfolio funding. *Source: ch3 - 1.6 percent of GDP, subject to considerable uncertainty (with a range between –0.2 and 3.4 percent of GDP).* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Hong Kong SAR — assessment adjustments and drivers - Hong Kong SAR is not in the EBA sample as it is an outlier; one approach is to apply EBA-estimated coefficients to Hong Kong SAR. - Using that approach, the CA norm in 2019 is estimated at about 14 percent of GDP, implying a CA gap of about –8½ percent, largely explained by model residuals. - Three adjustments made to the EBA-implied CA gap: - Adjustment of 3 to 5 percentage points to the EBA’s implied contribution of the NIIP position, because the positive NIIP contribution in the EBA captures average income effects that are less relevant for Hong Kong SAR given a persistently higher share of debt instruments on the asset side than on the liability side. - Precious Metals Depository opening reduced the gold trade balance by 4 to 4½ percentage points, reflecting increased physical settlement of gold futures contracts rather than changes in wealth. - Mainland China onshoring reduced logistics and trading activities in Hong Kong SAR by 1 to 1½ percent of GDP in CA, viewed as temporary and expected to be replaced by higher-value-added services as the economy rebalances. - Financial linkages with the mainland: as of December 2019, banking system claims on mainland nonbank entities amounted to HK$6.1 trillion, or about 213 percent of GDP, up by about 14 percentage points since end-2018. ### REER/CA semi-elasticities and range constructions (selected economies) - India: REER range based on ±1 percent of uncertainty around the IMF staff-assessed current account gap and semi-elasticity of 0.18. - Indonesia: - Demographic adjustor of 0.9 percentage point applied to model-estimated CA norm due to outlier adult mortality. - ±1.5 percent added for EBA regression uncertainty (standard error of EBA norm is 1.3 percent). - Semi-elasticity of CA/GDP with respect to REER (trade adjustment) estimated at –0.18. - REER midpoint computed from average of EBA index model gap (2.1 percent) and REER gap implied by IMF staff CA gap (–1.0 percent of GDP) which is 5.6 percent; midpoint 3.9 percent; ±5 percent interval applied to midpoint yields range of –1.2 to 8.9. - Italy: - Under tiering, deposits at the ECB below a country-level cap of six times the minimum reserve requirement benefited from higher rates; Italy attracted liquid assets—identified as a one-off effect. - Semi-elasticity of CA balance (percent of GDP) to REER estimated to be 0.26. - Japan: staff range for the REER gap computed by applying staff-estimated semi-elasticity of 0.14 to the staff CA gap range. - Malaysia: - Ratios to GDP based on IMF staff estimates using US dollar values. - Close to one-third of external debt denominated in local currency; domestic holdings by nonresidents about 13 percent of GDP as of end-2019. - Point and range estimates of REER gap based on estimated semi-elasticity of CA to REER at 0.46. - On December 2, 2016, Financial Markets Committee announced measures including two classified as CFMs under IMF institutional view; strengthened enforcement of rules on resident banks’ noninvolvement in offshore ringgit transactions treated as enhanced enforcement of an existing CFM. - IMF composite reserve adequacy metric classifies Malaysia’s regime as “floating” since 2016. - Netherlands: REER gap range (–4.1 to –9.9 percent) obtained from CA gap range and estimated CA-to-REER semi-elasticity of 0.7. - Poland: - Identified policy gaps contribute 1.7 percentage points, mainly from credit gap (0.7 percentage point) and fiscal policy gap driven by too-loose trading partner fiscal policies (0.9 percentage point); small domestic policy gaps partially offset. - Standard error for the 2019 CA norm is 0.6 percent of GDP, with staff using a larger confidence band due to measurement error (remittances). - REER level model suggests undervaluation of 18.5 percent, but large residuals (–16.1 percent) indicate model may not capture equilibrium REER changes. - Spain: - EBA model suggests CA norm of 1.1 percent of GDP with standard error of 0.8 percent of GDP. - Empirical EBA norm does not fully account for very negative NIIP (about 30 percent of gross liabilities in equity); staff-assessed CA norm range 1 to 3 percent of GDP to raise NIIP by roughly 3 percent of GDP annually over next 10 years. - Valuation effects averaged –2.9 percent of GDP per annum over 2013–19; CA surpluses averaged about 2.2 percent of GDP over 2013–19. - REER gap midpoint obtained using CA gap and semi-elasticity of 0.22; REER gap range is ±4 percent derived from EBA CA norm standard error (0.8 percent). ### Country-specific measurement and model considerations (selected economies) - Russia: - Nominal GDP in US dollars grew by only 1.9 percent in 2019. - Favorable equity market performance historically created unfavorable valuation changes; “disguised” capital outflows (e.g., pre-payments on imports, repeated large transfers, inflated-price securities transactions) are included in financial account estimates but not in foreign asset position of reported NIIP, implying actual NIIP could be higher than reported. - No additional cyclical adjustment needed in 2019 due to lower oil price volatility. - REER estimate range is ±5 percent around the midpoint reflecting shocks (sanctions, oil market volatility). - Saudi Arabia: - At current oil exports, a US$1 change in the oil price results in a 0.5 percent of GDP first-round change in the CA balance. - Average oil export price assumed to be US$36.20 in 2020 and US$66.50 in 2019. - Oil export volumes expected to decrease by 6 percent in 2020. - EBA models exclude Saudi Arabia; staff used three EBA-Lite approaches (CA regression, Consumption Allocation Rules, Investment Needs Model) producing CA norms/estimates: CA regression cyclically adjusted CA norm 7.4 percent of GDP; Consumption Allocation Rules produced 8.1 percent and 10.8 percent of GDP under two allocation rules; Investment Needs Model produced a CA gap of –2.6 percent over the medium term. The 2019 CA gap (–3.0 percent of GDP) is the average of the three approaches. - Singapore: - Negative income balance despite large positive NIIP reflects lower rates of return on foreign assets versus foreign liabilities. - Not included in EBA sample; staff-estimated CA gap about 4 percent of GDP, with fiscal policy gap contributing about 1.4 percent of GDP and health spending gap about 0.2 percent of GDP. - Reserves-to-GDP ratio larger than most other financial centers; external assets managed by GIC and Temasek amount to at least 70 percent of GDP. - South Africa: - Final CA gap results from CA regression and IMF staff judgment with adjustments: - Demographic adjustor of –1 percent of GDP to model-based CA norm due to outlier adult mortality. - Net current transfers related to SACU assessed to have net negative impact on CA and warrant adjustment. - 2019 EBA CA norm higher than 2018 because a lower desirable fiscal deficit is required to stabilize future debt. - Applying estimated long-term elasticity of 0.26 suggests REER overvaluation of 2 to 10 percent. - Gauging appropriate REER challenging due to weakening of average REER levels pre-2000 vs post-2000. - Sweden and Switzerland: - Sweden: range used to reflect uncertainty around EBA estimated norm. - Switzerland: - Stock-flow adjustments include changes in statistical sources (quantitative importance unknown). - Appreciation (depreciation) of Swiss franc has negative (positive) effect on NIIP; symmetric percentage increase in share prices in Switzerland and abroad would reduce NIIP. - Underlying CA adjusted for retained earnings not recorded in the income balance and recording of nominal interest on fixed income securities; adjusting for both and lagged net foreign assets contribution implies underlying CA would need to be reduced by about 3.5 percent of GDP. - IMF staff CA gap for 2019 was 1.8 percent of GDP with range ±2 percentage points; estimated CA-REER semi-elasticity of 0.52 implies REER gap from –7.4 percent to +0.4 percent with midpoint –3.5 percent. - Thailand: - IMF staff removed country-specific adjustors previously used for temporary factors (political uncertainty and terms of trade) for 2019. - REER range based on CA approach using country-specific elasticity estimated at 0.62; CA gap estimated 6.1 percent of GDP with error band from standard error of norm 1.6 percent of GDP. - EBA index REER gap in 2019 estimated at 13.5 percent; EBA level REER gap estimated at –1.6 percent. - Turkey: - Despite persistent CA deficits, NIIP fluctuated with no clear trend during 2009–18 due to positive valuation effects and large net balance of payments E&O. - Net international reserves defined as gross international reserves minus central bank’s FX liabilities to banks, including Reserve Option Mechanism. - United Kingdom: - Official NIIP data may understate true position; Bank of England estimates suggest NIIP based on market values could have been close to 80 percent of GDP for mid-2017. - In 2017, about 90 percent of external assets denominated in foreign currency vs 60 percent for external liabilities (Juvenal and others 2019). - Shift from FDI assets to portfolio equity assets implies greater-than-historical underestimation of income balance. - Brexit could weaken equilibrium exchange rate if it significantly increases trade barriers. - Values presented reflect relative weights on different approaches with higher weight on CA gap methodology; wide ranges reflect large uncertainty about future UK-EU relationship. - United States: - REER midpoint obtained from CA model gap using estimated semi-elasticity of 0.11; range derived from largest absolute discrepancy between CA model and set of REER models. *Source: CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS (2020) — IMF External Sector Report chapter content as provided.* --- _Source: https://www.imf.org/-/media/files/publications/esr/2020/english/ch3.pdf_