## 2020 External Sector Report — Preface and Executive Summary (excerpt) ## Source details **Canonical URL:** [2020 External Sector Report — Preface and Executive Summary (excerpt)](https://www.imf.org/-/media/files/publications/esr/2020/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2020/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2020/english/text.pdf.json) --- ### Purpose and scope - Annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions (current accounts, real exchange rates, external balance sheets, capital flows, international reserves) for the world’s largest economies representing over 90 percent of global GDP. - Assessments based on the latest vintage of the External Balance Assessment (EBA) methodology and on data and IMF staff projections as of July 6, 2020. - Chapter coverage includes: - Chapter 1: evolution of global external positions in 2019, external developments during the COVID-19 crisis, and policy priorities. - Chapter 2: link between structure of external assets/liabilities and risk of external stress events. - Chapter 3: 2019 individual economy assessments for 30 economies. ### Key findings on 2019 external positions - Current accounts and configuration: - Current account surpluses and deficits narrowed modestly in 2019. - Global current account balance (absolute sum of all surpluses and deficits) declined by 0.2 percentage point of world GDP, to 2.9 percent of world GDP. - IMF multilateral approach suggests about 40 percent of overall current account surpluses and deficits were excessive in 2019. - Larger-than-warranted surpluses concentrated in the euro area (driven by Germany and the Netherlands); lower-than-warranted balances mainly in Canada, the United Kingdom, and the United States. - China’s assessed external position remained broadly in line with fundamentals and desirable policies. - Stocks and valuation: - Stocks of external assets and liabilities reached historic highs; stocks as share of GDP more than tripled from early 1990s to pre-COVID years. - United States has largest net debtor position as a share of world GDP; largest net creditor economies in percent of world GDP include China, Germany, and Japan. - Currency movements in 2019: - US dollar and Japanese yen appreciated about 3 percent in real effective terms. - Euro depreciated by 3 percent in real effective terms. - Renminbi depreciated by 0.8 percent in real effective terms. - Argentina peso nominal depreciation: almost 42 percent vis-à-vis US dollar; real effective depreciation limited to 11 percent. - Brazil, South Africa, Turkey currencies depreciated vis-à-vis US dollar by 8 percent to 14 percent. ### External Sector indicators and selected 2019 statistics (examples) - Global excess imbalances (absolute excess surpluses and deficits): 1.2 percent of world GDP in 2019. - Selected country 2019 CA and staff CA gap midpoint: - Germany: Current Account 7.1; Staff CA Gap midpoint 4.3; NIIP (Percent of GDP) 32.1 - United States: Current Account –2.3; Staff CA Gap midpoint –1.3; NIIP (Percent of GDP) –0.8 - China: Current Account 1.0; Staff CA Gap midpoint 1.1; NIIP (Percent of GDP) 21.1 - Japan: Current Account 3.6; Staff CA Gap midpoint 0.0; NIIP (Percent of GDP) 83.6 - Netherlands: Current Account 10.2; Staff CA Gap midpoint 4.9; NIIP (Percent of GDP) 2.5 - Singapore: Current Account 17.0; Staff CA Gap midpoint 4.0; NIIP (assets) 1,135 ### Foreign reserves and FX positions (selected aggregates and country levels) - Aggregate Gross Official Reserves (Billions of USD): - 2017: 10,703 - 2018: 10,674 - 2019: 11,216 - Percent of world GDP: 13.3; 12.5; 12.8 - Selected country reserves (Billions of USD; ARA metric where reported): - China: 3,236; 3,168; 3,223 (ARA: 133) - Japan: 1,264; 1,270; 1,322 - Russia: 433; 469; 555 (ARA: 310) - Saudi Arabia: 509; 509; 500 (ARA: 375) - India: 413; 399; 492 (ARA: 163) - Argentina: 55; 66; 45 (ARA: 45) --- ### COVID-19 crisis impacts, 2020 outlook, and scenarios ### Short-run impacts and 2020 baseline - Main effects: - Sharp decline in global trade (goods trade volume in first five months of 2020 about 20 percent lower than in 2019). - Lower commodity prices (crude oil price expected 41 percent lower in 2020 than in 2019; global oil demand about 8 percent lower in 2020 than in 2019). - Tighter external financing conditions and sudden capital flow reversals in late February–March 2020. - Services trade (notably tourism) especially affected; international tourism arrivals during first four months of 2020 about 50 percent lower than same period in 2019; UNWTO scenario implies tourism receipts 73 percent below 2019 levels under gradual lifting starting September 2020. - IMF staff forecasts and global CA impact: - Staff forecasts for 2020 imply a modest narrowing in current account surpluses and deficits by some 0.3 percent of world GDP, subject to high uncertainty. - Drivers: large fiscal expansions, offset by expected increases in private saving and lower investment. - For severely affected economies (oil, tourism, remittances), impacts on external current account balances expected to exceed 2 percent of GDP, likely requiring significant adjustment. ### Capital flows, currencies, and reserves during COVID-19 - Capital flows: - Outflows in late Feb–March 2020 exceeded those during early stages of the global financial crisis in US dollar terms; relative to initial stock positions, outflows were comparable. - Following significant policy easing, portfolio flows stabilized in April–May 2020; some EM economies regained sovereign debt market access. - Currency developments: - Global reserve currencies appreciated as safe havens early in crisis; partial unwind since late March. - EMDE currencies depreciated on average 5 percent mid-February to late March 2020; some depreciated more than 20 percent; many partially recovered since March. - Role of buffers and swap lines: - High reserves and access to Federal Reserve swap lines mitigated outflows; economies with access to swap lines experienced about 30 percent lower cumulative outflows in EPFR-based analysis. ### Scenario analysis (IMF G20 Model) — two illustrative cases relative to June 2020 WEO baseline - Scenario 1 — A Second Outbreak (early 2021): - Assumptions include second major outbreak in early 2021, partial tightening in sovereign and corporate spreads, endogenous conventional monetary easing where room exists, additional discretionary fiscal measures. - Results: Global trade declines by an additional 6 percent in 2021 vs baseline; global GDP declines by about 5 percent vs baseline in 2021; oil prices higher by about 12 percent; heterogeneous CA effects across country groups (net oil exporters lose vs gain; EM non-oil exporters move toward surplus due to borrowing costs and subdued demand). - Scenario 2 — A Faster Recovery: - Assumptions include effective containment, greater confidence, looser financial conditions, maintained discretionary fiscal measures. - Results: Global trade rises by an additional 4 percent in 2021 vs baseline; oil prices higher by 8 percent; easing raises domestic demand and loosens CA balances for many economies. ### Risks and amplification channels - Key vulnerabilities that amplify external stress risk: - Large current account deficits, high share of foreign-currency-denominated external debt, limited international reserves. - Empirical magnitudes from stress-probability analysis: - Increase in FX debt liabilities from 40 percent of GDP to 60 percent of GDP raises predicted external stress probability by 5 percentage points for EMDEs (0.2 percentage points in full sample). - Decline in reserves from 20 percent to 10 percent of GDP increases predicted external stress probability by 6.5 percentage points for EMDEs; further decline from 10 percent to 0 percent raises probability by additional 12.6 percentage points for EMDEs. - A decline in current account from surplus of 5 percent of GDP to deficit of 5 percent of GDP increases predicted stress probability by 5.3 percentage points for EMDEs (1.1 percentage points full sample). - When global risk aversion reaches peak values seen in global financial crisis or Great Lockdown, predicted external stress probability for an EMDE with average preexisting vulnerabilities rises to about 40 percent. --- ### Policy priorities and recommendations ### Near-term priorities (health and stabilization) - Prioritize the health emergency and provide emergency lifelines to households and firms. - Ensure adequate liquidity: - Central banks: substantial liquidity provision, including asset purchase programs; monetary base expansions larger than during global financial crisis in many advanced economies. - IMF: expand precautionary and lending facilities (Short-Term Liquidity Line, Rapid Credit Facility, Rapid Financing Instrument). - Encourage broader bilateral and multilateral swap lines to strengthen global financial safety net. - Fiscal measures: - Temporary, targeted policies: cash transfers, wage subsidies, tax relief, extension/postponement of debt repayments. - Support affected sectors (tourism, travel, oil exporters) with targeted fiscal and financial measures. - Exchange rate and capital flow guidance: - Countries with flexible exchange rates should allow exchange rates to adjust where feasible. - Exchange rate intervention, where needed and reserves adequate, can mitigate disorderly conditions. - Capital flow management measures on outflows may be appropriate in imminent crisis circumstances guided by the Institutional View; measures should be broad based, temporary, transparent, and not substitute for macroeconomic adjustment. ### Medium-term priorities (address preexisting distortions) - Reduce persistent external imbalances and policy distortions that predated crisis: - Excess deficit economies: growth-enhancing fiscal consolidation that preserves public investment and social safety nets; structural policies to boost export competitiveness. - Excess surplus economies: reforms to encourage private investment, discourage excessive precautionary saving, and, where fiscal space exists, increase productive public investment. - Commodity exporters: pursue diversification (example: Saudi Arabia). - Strengthen reserve buffers and reduce foreign-currency debt share where vulnerabilities exist. - Structural measures: - Infrastructure investment, active labor market policies, schooling and training, worker mobility, immigration reform where appropriate. - Improve business climate and FDI openness to attract stable financing. - Trade policy: - Avoid tariff and nontariff barriers, especially on medical equipment and supplies; roll back recent new restrictions. - Oppose adoption of currency-based countervailing duties (C-CVDs) as counterproductive and likely to provoke retaliation and complicate surveillance. - Modernize multilateral rules (e-commerce, services, subsidies, technology transfer) and ensure enforceability of WTO commitments. ### Surveillance and methodology - Continue improving EBA methodologies and transparency; present assessments as ranges reflecting uncertainty (CA gap ranges generally about ±1 percent of GDP). - Factor in external balance sheet vulnerabilities and reserve adequacy in country assessments. - Use country-specific judgment to complement model outputs where EBA models do not capture all relevant features. --- ### External stress, NIIP, and balance-sheet implications ### Trends and vulnerabilities (1990–2019) - Net creditor and debtor positions increased about threefold since 1990. - Emerging market and developing economies (EMDEs): - Foreign exchange reserves ~40 percent of external assets. - Foreign-currency-denominated debt ~79 percent of total external debt. - Selected NIIP (Billions of USD; Percent of world GDP; Percent of GDP) examples for 2016–2019: - Germany NIIP (Billions USD): 1,697; 2,162; 2,381; 2,718 (Percent of world GDP: 2.2; 2.7; 2.8; 3.1) (Percent of GDP: 48.9; 59.0; 60.3; 70.7) - Japan NIIP (Billions USD): 2,902; 2,915; 3,033; 3,393 (Percent of world GDP: 3.8; 3.6; 3.5; 3.9) (Percent of GDP: 58.9; 59.9; 61.2; 66.8) - United States NIIP (Billions USD): –8,192; –7,743; –9,555; –10,991 (Percent of world GDP: –10.8; –9.6; –11.2; –12.6) (Percent of GDP: –43.8; –39.7; –46.4; –51.3) - China NIIP (Billions USD): 1,950; 2,101; 2,146; 2,124 (Percent of world GDP: 2.6; 2.6; 2.5; 2.4) (Percent of GDP: 17.4; 17.1; 15.5; 14.4) - Saudi Arabia NIIP (Billions USD): 597; 624; 632; 683 (Percent of world GDP: 0.8; 0.8; 0.7; 0.8) (Percent of GDP: 92.6; 90.6; 80.3; 86.1) - Overall Creditors: 14,085; 15,817; 16,432; 18,316 (Percent of world GDP: 18.6; 19.6; 19.2; 20.9) - Overall Debtors: –15,818; –16,729; –18,453; –20,295 (Percent of world GDP: –20.9; –20.8; –21.6; –23.2) - Memorandum: Euro Area NIIP: –984; –1,044; –607; –70 (Percent of world GDP: –1.3; –1.3; –0.7; –0.1) (Percent of GDP: –8.2; –8.3; –4.4; –0.5) ### External stress prediction and economic significance (probit and scenario results) - Probit estimation (1991–2018) key coefficients (exact as presented): - NIIP/GDP: –0.27* (Full Sample) | –0.58** (EMDE Sample) - Debt Liabilities: Foreign Currency/GDP: 0.44*** | 1.78*** - FX Reserves/GDP: –5.22*** | –5.47*** - Current Account/GDP: –5.45*** | –6.89*** (Full Sample columns as presented) - Global Risk Aversion (VXO): 0.02** | 0.02** - Predicted-probability examples (exactly as presented): - Increase in foreign-currency-denominated debt liabilities from 40 percent of GDP to 60 percent of GDP → predicted probability of external stress increases by 5 percentage points for EMDEs; 0.2 percentage points in full sample. - Decline in current account from surplus of 5 percent of GDP to deficit of 5 percent of GDP → predicted probability increases by 5.3 percentage points for EMDEs; 1.1 percentage points in full sample. - Decline in foreign exchange reserves from 20 percent to 10 percent of GDP → predicted stress probability increases by 6.5 percentage points for EMDEs; further decline from 10 percent to 0 percent increases probability by additional 12.6 percentage points for EMDEs. ### Macro consequences of external stress episodes (local projections) - For vulnerable EMDEs (high FX debt, low reserves, large CA deficits) during external stress episodes: - Output loss within first two years: 4.1 percent versus 1 percent for less vulnerable economies. - REER depreciates by about 10 percent within first year for vulnerable economies. - Current account rises by more than 2.5 percent of GDP within first year for vulnerable economies. - Policy implication: - Reduce FX debt share, strengthen reserve buffers, limit currency mismatches, deepen domestic financial markets, and improve data on currency composition of external assets/liabilities. --- ### Country assessment methodology and illustrative policy recommendations (selected country highlights) ### External assessment framework - EBA models produce multilaterally consistent estimates for current account and REER norms based on fundamentals and desirable policies. - Assessments combine model outputs with external indicators, balance-sheet considerations, and country-specific judgment; results presented as ranges to reflect uncertainty (CA gap ranges generally about ±1 percent of GDP). - Mapping of CA Gap and REER Gap to overall assessment (examples): - CA Gap >4% and REER Gap <–20%: “substantially stronger” - CA Gap [–1%, 1%] and REER Gap [–5%, 5%]: “broadly in line” - CA Gap <–4% and REER Gap >20%: “substantially weaker” ### Representative country recommendations and key 2019 figures (selection) - Germany: - 2019 Actual CA: 7.1 percent of GDP; Staff CA Gap: 4.3 percent of GDP; NIIP (Percent of GDP): 70.7 - Policy: use fiscal space for investment (green/digital), structural reforms to boost domestic demand and reduce excessive saving. - United States: - 2019 Actual CA: –2.3 percent of GDP; Staff CA Gap: –1.3 percent of GDP; NIIP (Percent of GDP): –51.3 - Policy: near-term fiscal support; medium-term fiscal consolidation and structural policies to raise competitiveness; roll back tariff barriers. - China: - 2019 Actual CA: 1.0 percent of GDP; Staff CA Gap midpoint: 1.0 percent of GDP; NIIP (Percent of GDP): 21.1 - Policy: support demand recovery, fiscal consolidation if needed, SOE reform, encourage FDI, move to more flexible exchange rate. - Saudi Arabia: - 2019 Actual CA: 5.9 percent of GDP; Staff CA Gap: –3.0 percent of GDP; NIIP (Percent of GDP): 86.1 - Policy: near-term fiscal support to health and hard-hit sectors; medium-term fiscal consolidation and diversification. - Singapore: - 2019 Actual CA: 17.0 percent of GDP; Staff CA Gap: 4 percent of GDP; NIIP: 240.8 percent of GDP - Policy: monitor stimulus implementation; medium-term increase public investment and structural reforms to improve productivity. - India: - 2019 Actual CA: –0.9 percent of GDP; Staff CA Gap: 1.0 percent of GDP; NIIP: –15.0 percent of GDP - Policy: preserve capacity with fiscal/monetary/financial measures; rein in fiscal deficits medium term; improve business climate and attract FDI. - Indonesia: - 2019 Actual CA: –2.7 percent of GDP; Staff CA Gap: –1.0 percent of GDP; NIIP: –31.2 percent of GDP - Policy: structural reforms to boost competitiveness, continued exchange rate flexibility, strengthen fiscal position and financial deepening. - Poland: - 2019 Actual CA: 0.5 percent of GDP; Staff CA Gap: 2.7 percent of GDP; NIIP: –50.3 percent of GDP - Policy: short-term fiscal support; medium-term fiscal consolidation and policies to boost investment and productivity. - Turkey: - 2019 Actual CA: 1.2 percent of GDP; Staff CA Gap: 1.6 percent of GDP (range –0.2 to 3.4); REER undervaluation staff midpoint 15 percent - Policy: cushion COVID impact; medium-term rebuild reserves, rein in rapid credit growth, phase out CFMs as conditions allow. - United Kingdom: - 2019 Actual CA: –3.8 percent of GDP; Staff CA Gap: –2.9 percent of GDP; NIIP: –25.2 percent of GDP - Policy: support near-term recovery; medium-term structural reforms to boost competitiveness; manage measurement uncertainties and future UK–EU relationship impacts. --- *Source: Preface and selected chapters, 2020 External Sector Report, International Monetary Fund | 2020.* ### Preface ### Preface ### Purpose and scope - Produced since 2012, the IMF’s annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions, including current accounts, real exchange rates, external balance sheets, capital flows, and international reserves, of the world’s largest economies, representing over 90 percent of global GDP. - This edition’s assessments are based on the latest vintage of the External Balance Assessment (EBA) methodology and on data and IMF staff projections as of July 6, 2020. - Chapter coverage: - Chapter 1: evolution of global external positions in 2019, external developments during the COVID-19 crisis, and policy priorities. - Chapter 2: relationship between the structure of external assets and liabilities and the risk of external stress events; amplification by heightened global risk aversion. - Chapter 3: “2019 Individual Economy Assessments” for 30 economies. ### Key findings on 2019 external positions - Current account surpluses and deficits narrowed modestly in 2019. - The global current account balance (the absolute sum of all surpluses and deficits) declined by 0.2 percentage point of world GDP, to 2.9 percent of world GDP. - The IMF’s multilateral approach suggests that about 40 percent of overall current account surpluses and deficits were excessive in 2019, only slightly less than in 2018. - Larger-than-warranted current account balances were mostly in the euro area (driven by Germany and the Netherlands); lower-than-warranted balances mainly existed among Canada, the United Kingdom, and the United States. - China’s assessed external position remained, as in 2018, broadly in line with fundamentals and desirable policies, due to offsetting policy gaps and structural distortions. - Stocks of external assets and liabilities have reached historic highs, with attendant risks to both debtor and creditor countries. - Currency movements in 2019 were generally modest, with exceptions among emerging market and developing economies with preexisting vulnerabilities. ### COVID-19 crisis impacts and 2020 outlook - The COVID-19 pandemic caused a sharp decline in global trade, lower commodity prices, and tighter external financing conditions. - Implications for current account balances and currencies vary widely across countries. - IMF staff forecasts for 2020 imply a modest narrowing in current account surpluses and deficits by some 0.3 percent of world GDP, although subject to high uncertainty. - The limited expected net impact reflects large fiscal expansions with offsetting expected increases in private saving and lower investment. - For economies dependent on severely affected sectors—such as oil and tourism—or reliant on remittances, the impact of the crisis has been especially acute, with negative effects on external current account balances expected to exceed 2 percent of GDP and likely requiring significant economic adjustment. - Early in the crisis, deterioration in financial market sentiment triggered a sudden capital flow reversal and currency depreciations across numerous emerging market and developing economies; global reserve currencies appreciated as safe havens. - Subsequent improvement in risk sentiment—reflecting exceptional monetary and fiscal policy support—stabilized capital flows and led to some unwind of initial currency shifts. ### Risks, scenarios, and vulnerabilities - The outlook for external positions remains highly uncertain, with significant risks. - Chapter 2 analysis suggests that a further worsening in risk sentiment could—for economies with preexisting vulnerabilities (large current account deficits, high share of foreign currency debt, limited international reserves)—increase risks of an external crisis. - A second wave of the crisis, with renewed tightening in global financial conditions, could: - Narrow the scope for emerging market and developing economies to run current account deficits. - Further reduce current account balances of commodity exporters. - Deepen the decline in global trade. ### Policy priorities and recommendations - Near-term: focus on providing relief and promoting economic recovery. - To adjust to external shocks (fall in commodity prices or tourism), countries with flexible exchange rates should allow them to adjust as needed, where feasible. - For economies experiencing disruptive balance of payments pressures and without access to private external financing, official financing would help ensure that health care spending is not compromised. - Avoid tariff and nontariff barriers to trade—especially on medical equipment and supplies—and roll back recent new restrictions on trade. - Medium-term: address persistent economic and policy distortions that predated the crisis. - Where excess current account deficits in 2019 partly reflected larger-than-desirable fiscal deficits and where such imbalances persist beyond the crisis, fiscal consolidation over the medium term would promote debt sustainability. ### Report preparation and review - The report was prepared under the guidance of Gita Gopinath and under the direction of the External Sector Coordinating Group, with leadership in preparation by Gustavo Adler and Pau Rabanal. - The analysis benefited from contributions from numerous IMF staff and country teams and from comments and suggestions by staff members from other IMF departments and by Executive Directors following their discussion of the report on July 24, 2020. - Projections and policy considerations are those of IMF staff and should not be attributed to Executive Directors or to their national authorities. *Source: Preface, 2020 External Sector Report.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overview and Director Conclusions - Executive Directors generally agreed with the findings and policy recommendations of the 2020 External Sector Report. - Directors noted that current account imbalances had narrowed modestly in 2019, but configuration of external positions on the eve of the COVID-19 pandemic implied persistent vulnerabilities and challenges in addressing underlying structural distortions. - Stock imbalances have reached historic highs, raising risks to both debtor and creditor countries. - Directors expected current account imbalances to narrow modestly in the near term but emphasized that this outlook is subject to high uncertainty and cross-country variation. - Directors cautioned that a worsening of risk sentiment could re-trigger capital flow reversals and currency pressures, increasing risks of an external crisis for economies with preexisting vulnerabilities (large current account deficits, high share of foreign currency debt, and limited international reserves). - Directors underscored the importance of maintaining strong policy frameworks, adequate reserve buffers, and close monitoring of external flows and currency mismatches. - Directors noted the role of bilateral swap lines and official financing in easing global financial conditions and supporting vulnerable countries’ health spending and crisis response. - Directors highlighted the need to avoid policies that distort trade, including tariffs, nontariff barriers, and subsidies; several Directors called attention to the detrimental effects of currency-based countervailing duties. ### Global External Positions and 2019 Benchmarks - Global current account balances (absolute sum of all surpluses and deficits) declined by 0.2 percentage point of world GDP, to 2.9 percent of world GDP in 2019. - Oil-exporting economies saw current account surpluses decline on average, reflecting lower oil prices. - Euro area surplus declined by 0.4 percentage point of GDP, to 2.7 percent of GDP. - China’s current account surplus rose by 0.8 percentage point of GDP, to 1.0 percent of GDP. - US current account deficit decreased by 0.1 percentage point of GDP, to 2.3 percent of GDP. - Japan’s surplus remained at 3.6 percent of GDP. - Stocks of external assets and liabilities as a share of GDP more than tripled from the early 1990s to the years preceding the COVID-19 crisis, raising sustainability and macroeconomic vulnerability questions. - The United States has the largest net debtor position as a share of world GDP; the largest net creditor economies in percent of world GDP are China, Germany, and Japan. ### Currency and Trade Developments in 2019 - Currency movements were generally modest for major economies: - US dollar and Japanese yen appreciated about 3 percent in 2019 in real effective terms. - Euro depreciated by 3 percent in real effective terms. - Renminbi depreciated by 0.8 percent in real effective terms. - Some emerging market and developing economies (India, Indonesia, Mexico, Thailand) saw currencies appreciate by 3 percent to 6 percent in real effective terms. - Several economies with preexisting vulnerabilities experienced large nominal depreciations: - Argentina peso depreciated almost 42 percent vis-à-vis the US dollar; real effective depreciation limited to 11 percent. - Currencies of Brazil, South Africa, and Turkey depreciated vis-à-vis the US dollar by 8 percent to 14 percent, with smaller real effective depreciations. - Trade tensions influenced markets: - Average US tariff on Chinese imports increased from 12.0 percent to 21.0 percent. - China’s average tariff on US imports rose from 16.5 percent to 21.1 percent. - In early 2020 the United States and China agreed to a “Phase One” economic and trade agreement with a partial rollback of previously implemented tariffs. - United States-Mexico-Canada Agreement went into effect on July 1, 2020. ### Normative External Assessments for 2019 (EBA-based) - IMF staff external sector assessments for 2019 provide a benchmark for pre-COVID-19 external positions using the latest vintage of the External Balance Assessment (EBA) methodology plus external indicators and country-specific judgment. - The EBA methodology produces multilaterally consistent estimates for current account and real exchange rate norms that depend on country fundamentals and desired policies. - For most of the 30 economies assessed, overall external position assessments for 2019 remained broadly similar to 2018; about one-third changed categories in 2019. - General pattern: economies with excess current account surpluses typically had undervalued REERs; economies with excess current account deficits typically had overvalued REERs (as estimated by IMF staff). - Configuration of overall external positions in 2019: - Stronger than level consistent with medium-term fundamentals and desirable policies (10 economies): euro area, Germany, Malaysia, Netherlands, Singapore, Thailand, Poland, Sweden, Switzerland, Turkey (Turkey entered this category in 2019). - Weaker than level consistent with medium-term fundamentals and desirable policies (9 economies): Belgium, Canada, United Kingdom, United States, Argentina, South Africa, and certain commodity exporters. ### External Developments during the COVID-19 Crisis and Risks - COVID-19 caused a sharp contraction in global trade, especially in services, and tighter external financing conditions in the crisis’s early stage; effects on external positions varied widely across countries. - Economies dependent on commodities, tourism, and remittances could face severe adverse effects on their economies and external positions, likely requiring significant economic adjustment and financing. - A second wave of COVID-19 could deepen the decline in global trade and supply chains, reduce investment demand, and limit financing of current account deficits for emerging market and developing economies. - Capital flow reversals and currency pressures could reemerge if risk sentiment worsens, posing external crisis risks for vulnerable economies with large current account deficits, high foreign currency debt shares, and limited reserves. - Precautionary arrangements reflect the IMF’s endorsement of strong policy frameworks and prudent responses to potential balance of payments needs. ### Policy Priorities and Recommendations - Near-term policy focus: - Provide emergency lifelines. - Ensure adequate liquidity. - Promote economic recovery while building strong social safety nets. - Exchange rate and capital flow guidance: - Countries with flexible exchange rates should allow them to adjust in response to external shocks; the extent and effectiveness vary by country characteristics. - Exchange rate intervention, where needed and reserves are adequate, could alleviate disorderly market conditions. - Capital flow management measures on outflows may be needed in imminent crisis circumstances, guided by the Institutional View; their use during the pandemic was limited. - Fiscal and structural policy guidance: - Excess deficit economies: growth-enhancing fiscal consolidation and structural policies to enhance export competitiveness; commodity exporters should pursue economic diversification. - Excess surplus economies: prioritize reforms that encourage private investment, discourage excessive precautionary savings, and where fiscal space remains, increase productive public investment. - In some cases, reforms to expand social safety nets to discourage excessive precautionary saving may be warranted. - Directors encouraged continued improvements to External Balance Assessment methodologies, ensuring transparency, consistency, and evenhandedness of external assessments across countries. - As more data become available, comprehensive and multilaterally consistent analysis of crisis effects and policy responses should be pursued to promote shared understanding of distortions and reforms needed to rebalance the global economy. *Source: EXECUTIVE SUMMARY, 2020 EXTERNAL SECTOR REPORT, International Monetary Fund | 2020* ### 3. Foreign Currency Exposure by Group, 1990–2017 ### 3. Foreign Currency Exposure by Group, 1990–2017 ### External assets, liabilities, and NIIP trends (1990–2019) - Net creditor and debtor positions have increased three times since 1990. - Emerging market and developing economies: - Foreign exchange reserves are about 40 percent of external assets. - Foreign-currency-denominated debt is about 79 percent of total external debt. - Emerging markets’ foreign exchange positions turned long in the mid-2000s and have continued to increase since the global financial crisis. - Selected NIIP figures (Billions of USD; Percent of world GDP; Percent of GDP) for 2016–2019 include: - Germany: 1,697; 2,162; 2,381; 2,718 (Percent of world GDP: 2.2; 2.7; 2.8; 3.1) (Percent of GDP: 48.9; 59.0; 60.3; 70.7) - Japan: 2,902; 2,915; 3,033; 3,393 (Percent of world GDP: 3.8; 3.6; 3.5; 3.9) (Percent of GDP: 58.9; 59.9; 61.2; 66.8) - United States: –8,192; –7,743; –9,555; –10,991 (Percent of world GDP: –10.8; –9.6; –11.2; –12.6) (Percent of GDP: –43.8; –39.7; –46.4; –51.3) - China: 1,950; 2,101; 2,146; 2,124 (Percent of world GDP: 2.6; 2.6; 2.5; 2.4) (Percent of GDP: 17.4; 17.1; 15.5; 14.4) - Saudi Arabia: 597; 624; 632; 683 (Percent of world GDP: 0.8; 0.8; 0.7; 0.8) (Percent of GDP: 92.6; 90.6; 80.3; 86.1) - Overall Creditors: 14,085; 15,817; 16,432; 18,316 (Percent of world GDP: 18.6; 19.6; 19.2; 20.9) - Overall Debtors: –15,818; –16,729; –18,453; –20,295 (Percent of world GDP: –20.9; –20.8; –21.6; –23.2) - Memorandum: Euro Area NIIP: –984; –1,044; –607; –70 (Percent of world GDP: –1.3; –1.3; –0.7; –0.1) (Percent of GDP: –8.2; –8.3; –4.4; –0.5) ### Foreign reserves and FX positions (2017–2019) - Aggregate Gross Official Reserves for External Sector Report economies: - 2017: 10,703 (Billions of USD) - 2018: 10,674 (Billions of USD) - 2019: 11,216 (Billions of USD) - Percent of world GDP: 13.3; 12.5; 12.8 - Advanced economies aggregate reserves: - AEs: 4,801; 4,821; 5,117 (Billions of USD) - Percent of world GDP: 6.0; 5.6; 5.8 - EMDEs aggregate reserves: - EMDEs: 5,902; 5,852; 6,099 (Billions of USD) - Percent of world GDP: 7.3; 6.8; 7.0 - Selected country reserve levels (Billions of USD; Percent of world GDP; Percent of GDP; Gross Official Reserves in Percent of ARA metric (2019)): - China: 3,236; 3,168; 3,223 (Percent of world GDP: 26.4; 22.9; 21.9) (Percent of GDP: 1.1; 0.1; 0.1) (ARA: 133) - Japan: 1,264; 1,270; 1,322 (Percent of world GDP: 26.0; 25.7; 26.0) (Percent of GDP: 0.3; 0.5; 0.3) - Russia: 433; 469; 555 (Percent of world GDP: 27.5; 28.1; 32.6) (Percent of GDP: 1.7; 2.0; 3.9) (ARA: 310) - Saudi Arabia: 509; 509; 500 (Percent of world GDP: 74.0; 64.8; 63.0) (Percent of GDP: –5.8; 0.1; 0.5) (ARA: 375) - India: 413; 399; 492 (Percent of world GDP: 15.6; 14.7; 16.2) (Percent of GDP: 2.6; –1.3; 2.3) (ARA: 163) - Argentina: 55; 66; 45 (Percent of world GDP: 8.6; 12.7; 10.0) (Percent of GDP: 2.3; –3.3; –8.4) (ARA: 45) - Notes: - Total reserves include gold valued at market prices. - The ARA metric is estimated for selected EMDEs and Korea and includes adjustments for capital controls for China. ### IMF External Assessment indicators and current account (CA) gaps, 2019 - Global excess imbalances (sum of absolute excess surpluses and deficits) represented about 1.2 percent of world GDP in 2019. - The absolute sum of excess surpluses and deficits: 1.2 (Percent of world GDP). - IMF staff-assessed movements 2018–19: - CA gaps moved down (smaller excess surpluses or larger deficits) for commodity exporters such as Brazil, Russia, and Saudi Arabia, and for some euro area economies such as the Netherlands. - CA gaps increased for some emerging market and developing economies, such as Argentina and Turkey, and to a lesser extent EMDEs in Asia. - Relationship between CA gaps and REER gaps: - Countries with estimated excess CA surpluses (deficits) generally had an undervalued (overvalued) REER, according to IMF staff estimates. - Selected country 2019 assessments and CA/REER indicators (percent of GDP where applicable): - Germany: Current Account 7.1; Staff CA Gap midpoint 4.3; NIIP (Percent of GDP) 32.1 - United States: Current Account –2.3; Staff CA Gap midpoint –1.3; NIIP (Percent of GDP) –0.8 (Net liabilities/assets shown: 5118/137) - China: Current Account 1.0; Staff CA Gap midpoint 1.1; NIIP (Percent of GDP) 21.1 - Japan: Current Account 3.6; Staff CA Gap midpoint 0.0; NIIP (Percent of GDP) 83.6 - Netherlands: Current Account 10.2; Staff CA Gap midpoint 4.9; NIIP (Percent of GDP) 2.5 - Singapore: Current Account 17.0; Staff CA Gap midpoint 4.0; NIIP (Percent of GDP) 1,135 (assets) - Categories of overall assessment (examples of economies in each): - Broadly in line: Australia, China, Hong Kong SAR, India, Italy, Japan, Mexico, Indonesia, Korea, Russia, Spain. - Weaker: Argentina, France, United Kingdom, Saudi Arabia, Saudi Arabia listed among weaker for CA assessment. - Substantially stronger: Germany, Netherlands, Singapore, Thailand. - Staff adjustments and country-specific factors cited include: - NIIP/financing risks considerations (Argentina, India, Spain). - Terms of trade and large investment needs (Australia). - Measurement biases (Netherlands, Switzerland, United Kingdom). - Demographics and immigration uncertainty (Germany, India). ### External developments during the COVID-19 crisis (2020 early assessment) - The crisis produced: - A sharp decline in global trade. - Lower commodity prices. - Tighter external financing conditions. - Wide variation in implications for current account balances and currencies. - Trade contraction: - The global volume of goods trade in the first five months of 2020 was about 20 percent lower than in 2019. - The June 2020 WEO Update forecast for goods and services trade volume for 2020 as a whole is a contraction of about 12 percent. - For services trade, the expected contraction in 2020 is more severe than could be expected based on the fall in aggregate demand alone, reflecting special factors such as travel restrictions. - Financial conditions: - Financial market sentiment deteriorated sharply in mid- to late February and in March 2020. - Equity markets sold off sharply, and expected equity price volatility, as measured by the Chicago Board Options Exchange Volatility Index, reached elevated levels (exact index values not provided in the excerpt). - Uncertainty and data limitations: - With limited balance of payments data for 2020, only a partial assessment is feasible and significant uncertainty surrounds the outlook. - Changes in macroeconomic fundamentals relative to 2019 may affect observed current account balances, REERs, and their equilibrium values (e.g., worse commodity terms of trade may come with a depreciated equilibrium exchange rate). - The path of excess imbalances in 2020 cannot be inferred from recent developments; more data are needed for a holistic assessment. *Source: Excerpt from IMF 2020 External Sector Report chapter and tables.* ### 2. Staff-Assessed REER Gaps ### 2. Staff-Assessed REER Gaps ### Overview - Staff-assessed CA gaps narrowed for some economies in 2019, but the global sum of excess imbalances in percent of world GDP was broadly unchanged. - Staff-assessed REER gaps generally moved consistently with the CA gaps. - Referenced figure: Figure 1.5. Evolution of IMF Staff-Assessed Current Account and Real Effective Exchange Rate Gaps, 2018–19. ### Capital Flows and Currency Movements - Emerging market and developing economies experienced sudden capital flow reversals in late February and March, followed by a stabilization in flows in most cases and modest inflows in selected economies (June 2020 GFSR Update). - Available high-frequency data on portfolio flows indicate outflows that exceed those during the early stages of the global financial crisis in US dollar terms; expressed in percent of initial stock positions the outflow is more comparable across the two crisis episodes. - Following significant policy easing by central banks, portfolio flows stabilized in April and May, with some emerging market economies able to fully regain access to sovereign debt markets. - Exchange rates experienced large swings as global financial conditions tightened through late March and eased thereafter. - As investor sentiment worsened, global reserve currencies appreciated, reflecting their safe haven role; since late March these initial currency shifts have partly unwound. - Emerging market and developing economy currencies generally saw sharp depreciations as investor sentiment worsened, with substantial cross-country variation. Commodity exporters with flexible exchange rates fell especially sharply, reflecting the fall in oil prices. - Country-specific characteristics shaped outflows and currency movements, including dependence on commodity exports, strength of reserve buffers, initial current account balances, and access to US Federal Reserve swap lines. - In some cases (for example, Egypt and Turkey) significant declines in foreign exchange reserves point to strong underlying depreciation pressures; in other cases (for example, Colombia, Indonesia, Mexico, South Africa, and Russia) sharp initial depreciations occurred with a more limited change in foreign currency reserves. ### Commodity and Trade Impacts - The price of crude oil is expected to be 41 percent lower in 2020 than in 2019. - Global oil demand is expected to be about 8 percent lower in 2020 than in 2019. - The estimated direct impact on oil trade balances ranges from –7 percent to 3 percent of GDP across economies. - Estimated trade balance losses are concentrated among economies with significant net oil exports, including Norway, Russia, and Saudi Arabia, where losses are expected to exceed 3 percent of GDP. - Positive effects on trade balances are spread across net oil importers; effects are expected to exceed 2 percent of GDP for Thailand and Turkey. - High-frequency indicators and projections for 2020 suggest a sharp decline in global trade; weakness in economic activity is the main driver. - Monthly trade data suggest trade balances are closer to zero in the first four months of 2020, with lower surpluses for oil exporters and narrower trade deficits for a number of emerging market and developing economies. ### Tourism - International tourism arrivals during the first four months of 2020 were about 50 percent lower than over the same period in 2019. - UN World Tourism Organization (2020) scenario involving gradual lifting of travel restrictions starting in September 2020 implies tourism receipts 73 percent below their 2019 levels. - Under that scenario, the direct impact on tourism trade balances ranges from –6 percent of GDP to 2 percent of GDP. - Losses in tourism proceeds exceeding 2 percent of GDP are expected to be concentrated among large net tourism exporters, such as Costa Rica, Egypt, Greece, Morocco, New Zealand, Portugal, Spain, Sri Lanka, Thailand, and Turkey. - A UNWTO survey reports 40 percent of respondents expect international tourism demand to start recovering only in 2021. ### Remittances - Migrant workers are highly exposed to unemployment and wage losses during recessions; remittance inflows are therefore highly vulnerable to the COVID-19 crisis. - World Bank 2020 forecasts an average 20 percent fall in remittance flows in 2020. - For economies where remittance inflows represented more than 5 percent of GDP (for example, Egypt, Guatemala, Pakistan, the Philippines, and Sri Lanka), a 20 percent decline implies significant hardship for many households and small businesses. - Remittances declined sharply in April 2020 before partially rebounding in May 2020. - The World Bank projects remittances to rebound only partially (by 5 percent) in 2021. ### Current Account Forecasts and Cross-Country Effects - The latest IMF staff forecasts underpinning the June 2020 WEO Update imply a narrowing of global current account deficits and surpluses in 2020 both in percent of world GDP and on average in percent of domestic GDP, although with high uncertainty. - Changes in current account balances vary widely across economies. - Among the five largest economies, the expected changes in current account balances in 2020 compared with 2019 are modest—below ½ percent of GDP. - In the United States, the fiscal expansion in the wake of the COVID-19 crisis is expected to be offset by higher private sector saving; higher net exports due to import compression are projected to offset a weaker income account, with the current account deficit narrowing by 0.3 percentage point of GDP to about 2.0 percent of GDP. - Monthly trade and remittance developments, lower commodity prices, contraction in tourism, and tightening in global financial conditions are central channels affecting the evolution of current account balances in 2020; uncertainty remains high. *Source: 2020 External Sector Report, Chapter 1: External Positions and Policies.* ### 0.3 percentage point of GDP to 1.3 percent of GDP, ### 0.3 percentage point of GDP to 1.3 percent of GDP ### Changes in Current Account Balances and Key Country Outcomes - Global current account balances (sum of absolute surpluses and deficits) are projected to modestly narrow by some ⅓ percent of world GDP. - This narrowing is smaller than the 1.4 percent of global GDP decline observed in 2009. - Specific country and region projections: - Euro area: current account surplus projected to narrow by 0.4 percentage point of GDP to a surplus of 2.3 percent of GDP. - United Kingdom: current account deficit projected to narrow by 0.3 percentage point of GDP to 3.5 percent of GDP. - Japan: current account surplus projected to narrow by 0.4 percentage point of GDP to 3.2 percent of GDP. - Saudi Arabia: largest expected change in absolute terms, with a decline of more than 10 percent of GDP to a deficit of 4.9 percent of GDP. - Drivers of these changes include: - Disruptions caused by the pandemic (including on tourism, with lower service imports reflecting international travel disruptions). - Weaker global demand (partly mitigated by increased demand for personal protective and medical equipment). - Lower commodity prices. - A higher income deficit. ### Comparative Lessons with the 2009 Global Financial Crisis - Initial global current account surpluses and deficits were significantly smaller in 2019 (2.9 percent of world GDP in absolute value) than before the global financial crisis (5.8 percent of world GDP in 2006). - In 2009, lower investment by a large current account deficit economy—the United States—played a central role in narrowing global imbalances. - In 2020: - Larger reductions in public saving are expected than in 2009, reflecting exceptional levels of fiscal support. - These reductions are concentrated among current account deficit economies. - They are expected to be offset to a greater extent than in 2009 by increases in private saving, including precautionary saving, implying little net effect on global current account deficits and surpluses. - The broadly synchronized global downturn and sharper decline in global GDP mean the fall in the ratio of investment to world GDP is smaller and less concentrated among current account deficit economies. ### Significant Uncertainty Surrounding the External Outlook - Near-term uncertainties: - If the fall in economic activity, global trade, and commodity prices is more persistent than assumed, effects on current account balances (through tourism, commodity balances, remittances) could be larger. - A more persistent tightening in global financial conditions would strengthen global reserve currencies and hinder recovery in capital inflows for emerging market and developing economies, constraining financing of current account deficits. - Medium-term uncertainties: - A lasting decline in global trade and global supply chain integration could weaken growth prospects for emerging market and developing economies, reducing investment demand and raising their current account balances toward surplus. - A rise in precautionary private saving could raise current account balances and decrease global equilibrium interest rates. - Large fiscal expansions, especially in advanced economies, if not withdrawn appropriately, could contribute to persistently higher debt and weaker current account balances in these economies. ### External Implications of a Second Wave and Scenario Findings - A second wave of the pandemic could: - Narrow the scope for running current account deficits for emerging market and developing economies. - Further reduce current account balances of commodity exporters. - Deepen the decline in global trade. - Rising global financial stress could increase the risk of debt default, debt restructuring, or the need for more IMF financial support in economies with preexisting vulnerabilities. - Rising default risks from nonfinancial corporations could further contribute to supply chain disruptions. - Box 1.6 (referenced) reports simulations based on the IMF’s G20 Model that combine these aspects. ### Risks to Cross-Border Trade Integration - Global trade as a share of world GDP peaked in 2008 and has plateaued since then. - Integration of global supply chains has declined since 2008. - As of May 2020, countries had imposed 120 new export restrictions in 2020 on a net basis, with more than one-fifth imposed on pharmaceutical and medical products. - The sectors most affected by these measures comprise about 10 percent of global trade, implying risks to trade growth. - Potential consequences of retreat from trade integration: - Greater trade barriers and moves toward reshoring production. - Possible reductions in the efficiency gains of international supply chain management. - Reduced foreign direct investment in emerging market and developing economies. - Escalating US–China trade tensions could further risk retreat from trade globalization and hinder efforts toward an open, stable, and transparent rules-based international trade system. - Evidence and studies: - Renationalization of supply chains would not necessarily increase resilience of GDP to pandemics because domestic inputs are also vulnerable to lockdowns. ### Policy Priorities and Recommendations - Near-term focus: prioritize the health emergency and ease the burden of containment measures on households and firms. - Continue temporary and targeted policies: cash transfers, wage subsidies, tax relief, extension or postponement of debt repayments. - Support affected sectors, notably tourism and travel, with substantial targeted fiscal and financial measures for households and businesses. - Support for migrants and remittance channels: - Support access to social services for migrants and their families. - Offer incentives (such as subsidies) to remittance service providers to reduce the cost of remittance services. - Extend cash transfer programs to support international migrants, especially those who have lost their jobs. - Fiscal policy as economies reopen: - Countries with fiscal space should adopt a front-loaded package that increases investment, including in infrastructure where appropriate, and supports household consumption. - Monetary and foreign exchange policy: - Countries with flexible exchange rates should allow them to adjust to external shocks where feasible. - For economies with adequate reserves, exchange rate intervention can be appropriate to alleviate disorderly market conditions and limit financial stress, particularly where large balance sheet mismatches exist. - Foreign exchange funding facilities can help alleviate foreign currency funding pressures. - In imminent crisis circumstances, countries with limited reserves and facing reversals of external financing could use capital flow management measures on outflows as part of a broad package, provided they do not substitute for warranted macroeconomic and structural policies; such measures should be broad based, tightly enforced, transparent, temporary, and lifted once crisis conditions abate. - Addressing risks of external crisis for vulnerable emerging market and developing economies: - Official financing is essential for economies experiencing disruptive balance of payments pressures and without access to private external financing, including to ensure health care spending is not compromised. - Strong multilateral cooperation is required to help countries facing twin health and external financing shocks. - The IMF is supporting vulnerable countries through lending facilities, including the Rapid Credit Facility and the Rapid Financing Instrument, and has expanded its available financial support amid risks of a protracted global shock and tight financial conditions. *Source: 2020 EXTERNAL SECTOR REPORT, CHAPTER 1 EXTERNAL POSITIONS AND POLICIES* ### 1. COVID-19 Crisis ### 1. COVID-19 Crisis ### Monetary policy and liquidity provision - Central banks have provided a significant expansion in liquidity, including through asset purchase programs, especially in advanced economies where the expansion has been stronger than during the global financial crisis. - Figure 1.17. Selected Economies: Monetary Base Expansion (Change in first three months of the episode, in percent of previous year’s GDP) is referenced to illustrate the scale of monetary base expansions. ### IMF actions and global financial safety net - The IMF created the Short-Term Liquidity Line to provide precautionary credit lines for countries with strong fundamentals. - The IMF managing director and the World Bank Group president called on official bilateral creditors to suspend debt service payments from the poorest countries; this call was heeded by the Group of Twenty in April. - IMF and World Bank staff are providing technical support in the implementation of the debt-service suspension initiative. - A broader net of bilateral and multilateral swap lines is recommended to further strengthen the global financial safety net and reduce financing risks across emerging market and developing economies. ### Foreign-currency liquidity risks and recommended prudential steps - For economies highly likely to face foreign currency liquidity shocks, prudent steps include: 1. monitoring and containing further buildup of foreign-currency-denominated debt through targeted macroprudential policies; 2. encouraging a shift from foreign-currency-debt liabilities toward equity liabilities, including by ensuring equal treatment of domestic and foreign investors and encouraging more inward direct investment; 3. seizing opportunities to strengthen international reserve buffers, where needed, when they arise; 4. deepening domestic financial markets. ### Trade policy, supply chains, and exchange rate measures - International supply chain trade plays an important role in supporting production of essential medical equipment and development of vaccines and medical tests; policies that encourage repatriation of supply chains could provoke retaliation and slow economic recovery. - Tariff and nontariff barriers to trade in medical equipment and supplies should be avoided, and recent new restrictions on trade should be rolled back. - Treating undervalued currencies as a countervailable subsidy (the adoption of currency-based countervailing duties, C-CVDs) represents a significant risk to the multilateral trade and international monetary systems: - C-CVDs would be counterproductive for the adopting country because, other things equal, they would further appreciate its currency. - C-CVDs could lead to retaliation and proliferation of trade restrictions, increasing trade tensions. - Threat of trade penalties could impinge on monetary policy decisions and discourage beneficial exchange rate flexibility. - C-CVDs could complicate effective dialogue and economic surveillance over macro-structural distortions affecting external positions. - More generally, policies that distort trade should be avoided: - Countries should refrain from using tariffs to target bilateral trade balances; tariffs are costly for trade, investment, and growth and are generally not effective for reducing excess external imbalances. - Tariff barriers should be rolled back. - Trade and investment disagreements should be resolved in a manner that supports an open, stable, and transparent global trading system. - Efforts should focus on modernizing the multilateral rules-based trading system to capture the increasing importance of e-commerce and trade in services, strengthen rules on subsidies and technology transfer, and ensure enforceability of World Trade Organization (WTO) commitments through a well-functioning WTO dispute settlement system. - To foster support for trade-reform initiatives, social safety net policies and policies to promote flexibility in adjustment can play a role: - There is limited evidence that trade integration itself drives economic inequality, but trade can cause job dislocations. - A robust social safety net is important for facilitating regional adjustment and protecting particular regions and segments of the labor force. - Place-based policies targeted at lagging regions may help but must be carefully calibrated. ### Avoiding excess external imbalances over the medium term - Distortions that affected external positions before the COVID-19 crisis may persist after the crisis, implying the need for policy reforms (see Tables 1.6 and 1.8 in the source). - Economies with weaker-than-warranted external positions: - Where excess current account deficits in 2019 partly reflected larger-than-desirable fiscal deficits (as in the United States), and such imbalances persist beyond the crisis, fiscal consolidation over the medium term that safeguards growth-enhancing items and social safety nets and prioritizes entitlement reform would both promote debt sustainability and reduce the current account gap. - In several emerging market and developing economies with larger-than-warranted current account deficits in 2019 (such as Argentina), fiscal consolidation would also support raising international reserves to adequate levels, enhancing resilience to global foreign currency liquidity shocks. - Structural policies to increase export competitiveness—and, for commodity exporters (such as Saudi Arabia), diversification—would further support rebalancing. - Infrastructure investment and active labor market policies may be widely needed to address the scars of the crisis. - Countries with lingering competitiveness challenges would benefit from upgrading infrastructure; labor market policies such as enhancing schooling, training, and worker mobility; supporting the working poor; and encouraging growth in the labor force (including through skill-based immigration reform). - Economies with stronger-than-warranted external positions: - (Discussion continues in the source; see related assessments and country-specific recommendations in Tables 1.7 and 1.8.) ### Country assessments and policy recommendations (summary pointers) - The source provides detailed empirical assessments and policy recommendations, including: - Table 1.6: EBA Current Account Regression Policy Gap Contributions, 2019 (Percent of GDP) for selected economies, with country-level decompositions of EBA gaps and policy contributions. - Table 1.7: Summary of IMF staff–assessed Real Effective Exchange Rate and External Balance Assessment Model gaps, 2019. - Table 1.8: 2019 Individual Economy Assessments: Summary of Policy Recommendations, providing short-term and medium-term policy guidance for economies including Argentina, Australia, Belgium, Brazil, Canada, China, Euro Area, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, and others. *Source: IMF staff (2020), “1. COVID-19 Crisis,” 2020 External Sector Report.* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Country Assessments and Policy Recommendations (selected entries) - Malaysia — Overall 2019 Assessment: Stronger - Short Term: Focus on efforts to provide relief to stressed firms and households and preserve the production capacity of the economy, while maintaining FX market stability. - Medium Term: Implement fiscal consolidation accompanied by policies to strengthen the social safety net and encourage investment; allow continued exchange rate flexibility. - Mexico — Overall 2019 Assessment: Broadly in line - Short Term: Provide sufficient policy support in response to COVID-19 pandemic; maintain floating ER as the main shock absorber, with FX interventions to prevent disorderly market conditions. - Medium Term: Implement pro-growth and inclusive fiscal reforms and structural reforms; improve competitiveness and business climate. - Netherlands — Overall 2019 Assessment: Substantially stronger - Short Term: Use fiscal space and the escape clause to provide crucial support to the health sector and to help households and businesses to face the COVID-19 pandemic care. - Medium Term: Promote the recovery and support investment in physical and human capital to foster robust potential growth. - Poland — Overall 2019 Assessment: Stronger - Short Term: Use fiscal policy to bolster the health system, provide businesses with liquidity, and support incomes of vulnerable households. Prevent a tightening of financial conditions using monetary and financial policies. - Medium Term: After the crisis has abated, reduce fiscal deficit and prioritize spending for health care and public investment; boost corporate investment and productivity; implement active labor market policies. - Russia — Overall 2019 Assessment: Broadly in line - Short Term: Focus fiscal policy on managing the public health emergency and compensating those most affected by it. - Medium Term: Mitigate impact of oil price volatility on non-oil sector; rebalance government expenditure toward health, education, and infrastructure. - Saudi Arabia — Overall 2019 Assessment: Weaker - Short Term: Provide fiscal support to the health care sector and sectors hard hit by the pandemic. - Medium Term: Implement further consolidation to ensure savings for future generations; diversify the economy and boost the non-oil tradeable sector. - Singapore — Overall 2019 Assessment: Substantially stronger - Short Term: Continue monitoring the implementation of fiscal stimulus measures; stand ready to provide further stimulus if needed. - Medium Term: Increase public investment, including on health care, physical infrastructure and human capital; introduce structural reforms to improve productivity. - South Africa — Overall 2019 Assessment: Moderately weaker - Short Term: Cushion the negative impact of the COVID-19 crisis and protect the vulnerable through temporary and targeted fiscal support. - Medium Term: Introduce structural reforms to improve competitiveness; implement gradual fiscal consolidation while providing space for infrastructure and social spending; seize opportunities to build up reserves. - Spain — Overall 2019 Assessment: Broadly in line - Short Term: Mitigate the impact of the Great Lockdown by using targeted and temporary income and liquidity support. - Medium Term: Foster competitiveness, including through continued wage flexibility and reforms addressing labor market duality; carefully manage public debt load. - Sweden — Overall 2019 Assessment: Stronger - Short Term: Adopt sizable targeted policies complemented by broader stimulus packages; minimize persistent scarring, and ensure conditions for a quick economic recovery. - Medium Term: Raise potential output and reduce household uncertainties around the sustainability of Sweden’s strong social model. - Switzerland — Overall 2019 Assessment: Moderately stronger - Short Term: Use fiscal policy to respond to the pandemic; and FX intervention to partially mitigate safe-haven appreciation pressures if needed while not precluding secular real appreciation. - Medium Term: Use fiscal policy to address structural challenges (competitiveness, aging, climate change); implement macroprudential policies to reduce financial sector risks; consider more frequent and timely publication of FXI data. - Thailand — Overall 2019 Assessment: Substantially stronger - Short Term: Deploy fiscal expansion toward targeted social transfers and relief measures; allow ER flexibility with limited intervention to avoid disorderly market conditions. - Medium Term: Boost domestic demand and public infrastructure; pursue efforts to reform and expand social safety nets; reduce barriers to investment, especially in the services sector. - Turkey — Overall 2019 Assessment: Moderately stronger - Short Term: Cushion the impact of the COVID-19 crisis and protect the most vulnerable through temporary and targeted fiscal support. - Medium Term: Rein in rapid credit growth; rebuild reserves; strengthen the broader public sector balance sheet; bolster the business climate. - United Kingdom — Overall 2019 Assessment: Weaker - Short Term: Support the economy, address the impact of the coronavirus, and facilitate the recovery, in particular by maintaining the accommodative monetary policy stance and fiscal policies to support vulnerable households and businesses. - Medium Term: Implement structural reforms, including broadening the skill base, to boost productivity and international competitiveness, once the pandemic is over. - United States — Overall 2019 Assessment: Moderately weaker - Short Term: Direct fiscal efforts to ease the burden of the shutdown on households and firms; increase investment in infrastructure; facilitate the transition to a lower carbon economy; offer consumption subsidies to kick-start demand. - Medium Term: Implement fiscal consolidation and structural policies to increase competitiveness and growth in the labor force. Roll back tariff barriers, and resolve trade and investment disagreements supporting an open, stable, and transparent global trading system. ### Cross-country policy commentary and fiscal support examples - Where pre-crisis imbalances persist, prioritize reforms that encourage investment and discourage excessive private saving. - In economies with remaining fiscal space, a growth-oriented fiscal policy with greater public sector investment in digitalization, infrastructure, and climate change mitigation would: - Support private investment - Promote potential growth - Make the economy more resilient - Narrow excess current account surplus - Country-specific fiscal packages cited: - Germany announced a new package: €130 billion, or 4 percent of GDP, over 2020–21, to support the recovery with measures to boost green and digital economies. - The European Union has proposed an additional €750 billion (6 percent of its GDP) in support over 2021–27, including a grant-based recovery fund. - Structural reforms highlighted: - Boost corporate investment, competition, and productivity. - Active labor market policies to facilitate access to skilled labor (example: Poland). - Expand social safety nets to discourage excessive precautionary saving (examples: Malaysia and Thailand). - For economies broadly in line with fundamentals: - Former excess surplus countries: gradually narrow larger-than-desirable fiscal deficits; reform state-owned enterprises; open markets to more competition; relax restrictions on FDI; strengthen social safety net (example: China). - Former excess deficit countries: carefully manage public debt load; enhance competitiveness through productivity gains and wage flexibility; reform education and innovation (examples: Indonesia and Spain). ### External Assessments: Objectives and Concepts (Box 1.1) - Current account deficits and surpluses can be desirable for absorbing shocks and allocating capital efficiently. - IMF staff assesses whether current account balances are excessive by comparing: - The actual current account (stripped of cyclical and temporary factors) - The level consistent with fundamentals and desirable policies (staff-assessed norm) - Definitions: - Positive current account gap: actual current account higher than implied by fundamentals and desirable policies. - Negative current account gap: actual current account lower than implied by fundamentals and desirable policies. - REER gap: positive implies overvalued exchange rate; negative implies undervalued exchange rate. - Assessment considers additional indicators: financial account balances, international investment position, reserve adequacy, unit-labor-cost–based REER. - Eliminating current account gaps is desirable over the medium term, though temporary gaps and gradual adjustment may be warranted. - Reference: External Balance Assessment models and complementary tools (Cubeddu and others (2019)) used in the external assessment process. ### US–China Trade Tensions and Asset Price Movements (Box 1.2) - Analysis based on 43 trade policy announcements cited in news reports for 2018–19, classified by importance. - Main empirical findings: - News of a rise in US–China trade tensions causes China’s currency to depreciate significantly in trade-weighted terms and the US dollar to appreciate by about half as much. - News of tightening in US trade policy regarding China in 2018–19 explains much of the 10 percent depreciation in the value of the renminbi vis-à-vis the US dollar over this period. - The impact on the currency corresponds to about two-thirds of the rise in the average US tariff on imports of goods from China. - The renminbi fixing rate responded significantly less to announcements regarding US trade policy on impact, suggesting a role in smoothing currency movements. - News of a rise in US–China trade tensions depressed stock prices in both China and the United States, with US stock prices falling by about half as much as China’s. - Impact on US firms with high sales to China is almost three times the US average. - Persistent negative effects on stock prices observed in other major economies; relatively small estimated stock market reaction in economies that potentially benefited from trade and FDI diversion effects (example: Mexico). - Methodology notes: - News shocks were grouped by direction (easing or tightening) and severity, with tightening announcements assigned 1 (minor), 2 (moderate), or 3 (major), and easing announcements assigned –1 to –3 accordingly. - Local projections estimated using ordinary least squares with Newey-West standard errors and 90 percent confidence bands derived from Jordà (2005). - NEER = nominal effective exchange rate; RMB = Chinese renminbi; USD = US dollar. ### Trade Collapse in 2020 and Empirical Model of Imports - Forecasts and main findings: - Recent data and IMF staff forecasts suggest global trade will decline by about 12 percent in 2020, comparable to what was observed during the global financial crisis. - The historical relationship between trade and aggregate demand fully explains the expected global decline in goods trade in 2020. - For services, the expected contraction is more severe than explained by the expected fall in aggregate demand, indicating a strong role for other factors (for example, travel restrictions). - Empirical approach: - Uses an import-intensity-adjusted (IAD) measure of aggregate demand following Bussière and others (2013): a weighted average of aggregate demand components where weights are the import content of each component. - Estimation for 33 economies during 1998–2019, equation: - ∆lnM_{c,t} = δ_c + β_D ∆lnD_{c,t} + β_P ∆lnP_{c,t} + ε_{c,t} - ∆ denotes first difference; δ_c denotes country dummies; D_{c,t} is aggregate demand; P_{c,t} is relative price of imports. - Separate estimation for goods and services imports. - Empirical results (Table 1.3.1): - IAD specification — Total sample: Aggregate Demand coefficient = 1.56***; Relative Import Price = –0.17**; Observations = 693; R-squared = 0.78. - IAD specification — Expansion periods: Aggregate Demand = 1.55***; Relative Import Price = –0.13; Observations = 577; R-squared = 0.61. - IAD specification — Recession periods: Aggregate Demand = 1.63***; Relative Import Price = –0.15***; Observations = 116; R-squared = 0.86. - GDP specification — Total sample: Aggregate Demand = 2.59***; Relative Import Price = –0.28**; Observations = 693; R-squared = 0.56. - GDP specification — Expansion periods: Aggregate Demand = 2.09***; Relative Import Price = –0.21; Observations = 577; R-squared = 0.27. - GDP specification — Recession periods: Aggregate Demand = 3.86***; Relative Import Price = –0.24***; Observations = 116; R-squared = 0.70. - Note: ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Recessions defined as years with real GDP growth below the country-specific 10th percentile. Country-fixed effects included. *Source: 2019 Individual External Assessments; IMF staff estimates and calculations as presented in the chapter.* ### Box 1.3. Trade and Economic Activity in the COVID-19 Crisis ### Box 1.3. Trade and Economic Activity in the COVID-19 Crisis ### Overview - The COVID-19 crisis caused unprecedented travel restrictions that reduced services trade, including tourism, especially severely. - Risks to future trade growth include a possible rise in trade barriers and a retreat from cross-border integration, building on a period after the global financial crisis when trade in both goods and services was weaker than would be expected based on aggregate demand. ### Data and forecast for 2020 - Trade growth is based on growth in volume of imports. Trade growth is predicted by the historical relationship with the measure of import-intensity-adjusted aggregate demand. - Annual aggregate import growth is calculated as the weighted average of country-specific real import growth rates. - (Figure references and staff calculations are used to compare actual trade growth and the June 2020 World Economic Outlook Update forecast for 2020 against predictions based on import-intensity-adjusted aggregate demand.) ### Investor pullout from emerging market and developing economies: magnitude and drivers - Data source: debt and equity flows to emerging market and developing economy mutual funds from Emerging Portfolio Fund Research (EPFR) at weekly frequency (percent of the asset position at the end of 2019). - Key drivers analyzed: (1) global financial conditions measured by the Chicago Board Options Exchange Volatility Index (VIX) and interactions with country-specific factors; (2) macroeconomic fundamentals including precrisis external vulnerabilities (reserve adequacy and current account balance) and commodity terms-of-trade changes; and (3) COVID-19–related country features (dependence on tourism revenues and speed of virus spread). Findings: - Heightened global risk aversion was the dominant driver of outflows: - The VIX alone explains 45 percent of the variance of EPFR flows during the sample period. - Examples of country-specific amplifiers/mitigants (estimates reported as percent differences in cumulative outflows relative to comparison cases): - Economies whose commodity terms of trade fell by 20 percent experienced cumulative outflows up to 50 percent larger than economies whose commodity terms of trade improved by a similar magnitude. - Economies with a current account deficit of 3 percent of GDP or more experienced cumulative outflows about 20 percent larger than an economy with a current account surplus of 3 percent of GDP or more. - Outflows were nearly 30 percent lower for economies with high rather than low reserves-to-imports ratios. - Capital outflows were 30 percent lower for economies whose central banks obtained access to the US Federal Reserve’s swap lines during the episode relative to other economies. - COVID-19–specific amplifiers: - Capital outflows were 20 percent larger in economies with 20 percent of exports concentrated in tourism, relative to those with no tourism proceeds. - The weekly change in confirmed COVID-19 cases contributed to differentiation in outflows, with a 20 percent difference in the magnitude of outflows between extreme (10th and 90th percentiles) cases. Notes and caveats: - The analysis focuses on mutual fund portfolio flows (EPFR), which may be more sensitive to the VIX than balance of payments flows. Other flow types (cross-border banking flows, foreign direct investment) may behave differently; the role of these flows in this episode remains less known. Policy implication: - Preventing another tightening of global financial conditions and maintaining healthy liquidity buffers in emerging market and developing economies—including through cross-country financial arrangements—will be essential to support healthy capital flows. ### Currency movements in emerging market and developing economies - From mid-February to late March 2020, emerging market and developing economy currencies depreciated by an average of 5 percent; some depreciated more than 20 percent. Many have partially recovered since March. - The range of currency movements was broadly comparable to the global financial crisis and significantly larger than during the 2013 taper tantrum. Drivers (panel regression of 30-day percent change in the nominal effective exchange rate, NEER): - Global factors: - A rise in equity market volatility (VIX) is significantly associated with currency depreciations. - A fall in the price of oil (simple average of Dated Brent, Dubai Fateh, and West Texas Intermediate) is strongly associated with currency depreciations. - The first principal component of the VIX, US equity prices, and oil prices is strongly correlated with the variance in currency movements. - Preexisting country characteristics that amplified or mitigated impacts: - Oil-exporting economies depreciated more when oil prices declined. - Economies with stronger perceived institutional quality or stronger economic and financial fundamentals (measured by International Country Risk Guide, ICRG, scores) experienced smaller currency depreciations when the VIX was high. Example: an economy at the 75th percentile of the ICRG score experienced, on average, a 2½ percent smaller NEER depreciation than an economy at the 25th percentile when the VIX increased to peak levels in March 2020. - Subcomponents of ICRG scores for debt service, international liquidity (availability of international reserves), and current account deficit affected differences among economies. - Economies with more flexible exchange rates (managed floating or free floating regimes per Ilzetzki, Reinhart, and Rogoff [2019]) experienced larger currency depreciations. - Implication: Easing global financial conditions and stronger perceived country fundamentals reduce downward pressure on currencies. Selected regression results (Table 1.5.1 highlights): - Δ Oil Price coefficients reported as 0.03*, 0.03**, 0.03**, 0.03* across specifications. - VIX coefficients reported as –0.51***, –0.28**, –0.33***, –0.33*** across specifications. - “Floater” coefficient reported as –3.22***, –3.24***, –3.46***, –3.05*** across specifications. - Oil Exporter × Δ Oil Price reported as 0.08**, 0.07**, 0.08**, 0.08**. - Composite Score and interaction terms with VIX show statistical significance in some specifications (e.g., Composite Score × VIX 0.01***). - Sample: February–May 2020 for 25 emerging market and developing economies. Observations: 1,848; 1,838; 1,823; 1,843 (across specifications). R-squared: 0.316, 0.290, 0.319, 0.324. ### Scenario analysis for global trade and current account balances (IMF G20 Model) Scenarios modeled relative to the June 2020 World Economic Outlook (WEO) Update baseline: Scenario 1 — A Second Outbreak (early 2021) - Assumptions: - Second major global outbreak in early 2021 with domestic disruptions in each country about half the size of what is already in the baseline for 2020. - Additional tightening about one-half of the increase in sovereign and corporate spreads seen since the beginning of the pandemic; advanced economies face relatively limited tightening, emerging market economies face larger increases in spreads on both sovereign and corporate debt. - Conventional monetary policy reacts endogenously where room exists to lower policy rates; unconventional policies not explicitly modeled but implicitly reflected in limited tightening in advanced economies. - Governments implement additional discretionary fiscal measures depending on available fiscal space; overall spending response assumed about twice as strong as under typical business cycle fluctuations in advanced economies. - Results: - Global trade declines by an additional 6 percent in 2021 compared with the baseline. - Global GDP declines by about 5 percent compared with the baseline in 2021. - Oil prices are higher by about 12 percent. - For emerging market economies (non-oil exporters): higher borrowing costs, lower oil prices, and subdued domestic demand raise current account balances toward surplus. - For net oil exporters: lower oil prices reduce current account balances. - For advanced economies: limited tightening in external financing conditions and greater fiscal policy space results in less import compression and lower current account balances. - Net effect: uphill flow of capital from emerging market economies to advanced economies; little narrowing in overall global current account surpluses and deficits. Scenario 2 — A Faster Recovery - Assumptions: - Greater confidence in effective post-lockdown measures (social distancing and more effective testing, tracing, and isolation) leads to effective containment and less precautionary behavior once lockdowns are lifted. - Financial conditions loosen more than in the baseline. - Discretionary fiscal measures included in the baseline are maintained; automatic stabilizers imply less fiscal support due to faster dissipation of excess supply. - Results: - Global trade rises by an additional 4 percent in 2021 compared with the baseline. - Oil prices are higher by 8 percent. - For emerging market economies: additional easing in global financial conditions and... (Results for emerging market economies under the faster recovery scenario are reported as part of the scenario narrative in the source.) *Source: Box 1.3, “Trade and Economic Activity in the COVID-19 Crisis,” 2020 External Sector Report, International Monetary Fund.* ### Box 1.6. A Second Outbreak: Implications for Trade and Current Account Balances ### Box 1.6. A Second Outbreak: Implications for Trade and Current Account Balances ### Scenario analysis and projected impacts - Two alternative scenarios are considered relative to the baseline: a faster recovery starting in the second half of 2020, and a second outbreak in 2021 (Figure 1.6.1, "Alternative Scenarios" — deviations from baseline). - Under the scenario where investor sentiment improves and borrowing costs decline: - Improved investor sentiment lowers borrowing costs, which, combined with higher oil prices and rising domestic demand, reduces current account balances toward deficit. - For net oil exporters, higher oil prices raise current account balances. - In advanced economies (AE), on average greater automatic fiscal stabilizers imply a larger rise in government saving, compared to baseline, and current account balances rise modestly. - The analysis reports scenario outcomes in terms of deviations from baseline for: - World trade and oil price (Percent). - AE current account (CA)/GDP (Percentage points). - EM (emerging market economies not including oil exporters) CA/GDP (Percentage points). - Oil exporters CA/GDP (Percentage points). - Figure labeling includes time points 2020, 2021, 2022, 2023, 2024, and shows 2020 CA/GDP in baseline (percent). (Figure annotations in source indicate ranges such as –14 to 10 and –4 to 4 for different panels; scenario decomposition distinguishes Oil exporters, Deficit EMs, Deficit AEs, Surplus EMs, Surplus AEs, Oil price, and World trade.) ### Key findings on trade and current accounts - Improved investor sentiment and higher oil prices can have offsetting effects across country groups: - Net oil exporters benefit via higher current account balances from higher oil prices. - Many other economies see current account balances move toward deficit when borrowing costs fall and domestic demand rises. - Advanced economies’ stronger automatic fiscal stabilizers lead to relatively larger increases in government saving under the improved-sentiment scenario, producing modest rises in current account balances for AEs. - Global trade outcomes in the scenarios are summarized by deviations in the volume of exports (global trade is based on sum of volume of exports). ### Uncertainty, caveats, and limitations - The simulation results are subject to considerable uncertainty. - Important uncertainties highlighted: - Potential amplification of overall macroeconomic effects from financial pressures during a second outbreak, especially in emerging market economies. - Sustained negative effects on trade from further disruptions to global value chains are not fully captured by the analysis. - The note clarifies AE = advanced economies; CA = current account; EM = emerging market economies not including oil exporters. *Source: IMF, G20 Model simulations. Box text from "Box 1.6. A Second Outbreak: Implications for Trade and Current Account Balances" (2020 EXTERNAL SECTOR REPORT).* ### 1. Net International Investment ### 1. Net International Investment Position ### Dynamics of IIP and Its Components around External Stress Episodes - External stress episodes are usually preceded by a deterioration of the net international investment position and a large buildup of foreign-currency-denominated debt liabilities. - Domestic-currency-denominated debt liabilities also increase ahead of the stress episode, but by a smaller magnitude. - Equity assets and liabilities decline gradually ahead of stress episodes. - Foreign-currency-denominated external debt assets increase ahead of stress episodes; private foreign-currency-denominated external debt assets increase ahead of stress episodes, likely reflecting a combination of private capital flight and currency valuation effects. - Official foreign exchange reserves decline sharply just ahead of the stress episode. - After the onset of an external stress episode: - The net IIP typically rises, driven primarily by a significant drop in foreign-currency-denominated external debt liabilities associated with deleveraging and restructuring. - Other IIP components exhibit smaller fluctuations or remain broadly unchanged, except official foreign exchange reserves, which typically decline in the aftermath and bounce back afterwards. - For large external crises (IMF financial assistance exceeding 200 percent of quota): - The drop in net IIP ahead of large external crises is far more pronounced, driven even more importantly by a large rise in foreign-currency-denominated debt liabilities. - Declines in gross equity and official reserve assets are much sharper; while they rebound, they end well below precrisis peaks. ### Estimating External Stress Probabilities - Methodology: - A pooled probit model is estimated (dependent variable: occurrence of external stress = 1 for stress episode in a given country and year; 0 otherwise). - Explanatory variables include IIP components and macroeconomic variables: current account balance, global risk aversion (VXO), real effective exchange rate gap, income per capita relative to the United States, the credit gap, and the degree of financial development. - Financial development index includes measures of market depth, access, and efficiency. - Sample: 73 advanced and emerging market and developing economies, estimation period 1991–2018 (sample limitations noted). - Definitions: - External stress episodes are defined as sovereign debt defaults and restructurings, and/or access to IMF arrangements. ### Estimation Results (Probit Estimates; Estimation period: 1991–2018) - Main empirical findings: - A lower NIIP (a larger net debtor position) is associated with higher external stress. - Both higher foreign and domestic currency external debt liabilities increase the probability of external stress events. - Gross positions (assets and liabilities) provide useful information; estimated coefficients for assets and liabilities differ. - Higher levels of foreign exchange reserves lower the occurrence of stress episodes. - Private external debt assets do not appear to play a mitigating role (possible reflection of capital flight). - Equity assets are not statistically significant in the full sample. - Larger current account deficits are associated with higher external stress. - The likelihood of external stress events increases with global risk aversion (VXO). - Differences between full sample and EMDE (emerging market and developing economies) sample: - Foreign-currency-denominated debt liabilities have a statistically significant relationship with external stress risk for EMDEs, whereas domestic-currency-denominated debt liabilities do not. - Private external debt assets denominated in foreign currency reduce the probability of a stress episode in EMDEs. - Equity assets and liabilities and external debt assets denominated in domestic currency are not statistically significant for EMDEs. - As before, current account deficits and global risk aversion increase likelihood; higher foreign exchange reserves play a mitigating role. - Table 2.1. Probit Estimates (coefficients presented exactly as in source) - Dependent variable: probability of external stress event. Country-specific variables are lagged by one year. The current account/GDP is included as a two-year moving average. Additional controls include the credit gap, the real effective exchange rate gap, income per capita relative to the United States, and a financial development index. EMDE = emerging market and developing economies; FX = foreign exchange; NIIP = net international investment position; VXO = Chicago Board Options Exchange Volatility Index. Significance levels: *** p < 0.01, ** p < 0.05, * p < 0.1. - Full Sample | EMDE Sample - NIIP/GDP: –0.27* | –0.58** - Debt Assets: Foreign Currency/GDP: 0.40 | –0.13 - Debt Assets: Domestic Currency/GDP: –0.27 | . . . - Debt Liabilities: Foreign Currency/GDP: 0.44*** | 1.78*** - Debt Liabilities: Domestic Currency/GDP: 0.75** | 1.32 - Equity Assets/GDP: 0.34 | –0.52 - Equity Liabilities/GDP: –0.66*** | –0.56 - FX Reserves/GDP: –5.22*** | –5.47*** - Current Account/GDP: –5.45*** | –6.89*** (Full Sample) ; –4.61*** | –5.10*** (EMDE columns as presented) - Global Risk Aversion (VXO): 0.02** | 0.02** ; 0.02*** | 0.02*** - Constant: –0.11 | –0.67** ; –0.61** | –1.24*** - Number of Observations: 1,838 | 1,828 ; 1,014 | 1,004 - Source: IMF staff estimates. - Robustness and additional notes: - Main results are robust to incorporating additional control variables, including global variables (interest rates and real GDP growth in the United States) and country-specific variables (the fiscal balance). - The fiscal balance has significant explanatory power when other indicators that incorporate fiscal information (current account balance and external debt) are excluded. - The relationship between short-term debt and external stress is not robust, depending on data sources and inclusion of other controls; breakdown of currency composition of short-term external debt is not broadly available. ### Predicted Probabilities and Economic Significance - Predicted probabilities computed by holding variables at sample means and changing variable of interest in specified increments; nonlinear effects examined. - Key predicted-probability results (effects expressed exactly as in source): - An increase in foreign-currency-denominated debt liabilities from 40 percent of GDP to 60 percent of GDP is associated with an increase in the predicted probability of external stress by 5 percentage points for EMDEs; in the full sample, the rise results in an increase of 0.2 percentage points. - A decline in the current account balance from a surplus of 5 percent of GDP to a deficit of 5 percent of GDP is associated with an increase in the predicted probability of external stress by 5.3 percentage points for EMDEs; for the full sample, the probability rises by 1.1 percentage points. - Nonlinear relationship for official foreign exchange reserves: - Predicted external stress probability is near zero when reserves are above 40 percent of GDP. - A decline in foreign exchange reserves from 20 percent to 10 percent of GDP is associated with an increase in predicted external stress probability by 6.5 percentage points for EMDEs. - A further decline from 10 percent to 0 percent of GDP increases predicted external stress probability by an additional 12.6 percentage points for EMDEs. - Corresponding values for the entire sample are 0.7 percent and 2.1 percent, respectively. - Combination of vulnerabilities: - The same level of foreign-currency-denominated debt liabilities can imply very different predicted probabilities depending on reserves and current account. - When foreign currency debt is 40 percent of GDP, predicted probability ranges from 2–12 percent depending on whether reserves and current account are at high (75th percentile) or low (25th percentile) sample levels. - Impact of global risk aversion shocks (context of COVID-19): - When global risk aversion reaches peak values seen during the global financial crisis or the Great Lockdown, the predicted external stress episode probability for an EMDE with an average level of preexisting vulnerabilities rises to about 40 percent—more than double the estimated probability for less vulnerable EMDEs. ### External Stress Drivers over Time (EMDEs on the eve of major crises) - Configuration of vulnerabilities for EMDEs before major crises: - Before the Asian financial crisis (1998): external risks mostly associated with low foreign exchange reserves and, to a lesser extent, large current account deficits. - At onset of the global financial crisis (2008): external risks reflected mainly current account deficits and, to a lesser extent, foreign-currency-denominated debt liabilities; low reserves had become less of a vulnerability for most EMDEs. - On the eve of the Great Lockdown (2020): elevated foreign-currency-denominated debt liabilities became a central vulnerability for EMDEs; this vulnerability was often mitigated by relatively small current account deficits and relatively high foreign exchange reserves. - The combination of external vulnerabilities in multiple dimensions can amplify external financing risks. ### Consequences and Implications - External debt is a strong predictor of external stress episodes across various crisis definitions (including sudden stops with high growth impact and exchange market pressure events). - Stock vulnerabilities, such as external debt measures, are reliable predictors of crises, though ranking and interactions vary across crisis types and country groups. - The current account balance and the level of foreign exchange reserves are relevant indicators for assessing crisis risks in both advanced economies and EMDEs. - Preexisting vulnerabilities markedly amplify the impact of global “push” factors (global risk aversion), underscoring the importance of pre-crisis balance-sheet strength for EMDEs. *Source: IMF staff calculations and analysis in “1. Net International Investment” from the publication text.* ### CHAPTER 2 EXTERNAL STRESS AND THE INTERNATIONAL INVESTMENT POSITION ### CHAPTER 2 EXTERNAL STRESS AND THE INTERNATIONAL INVESTMENT POSITION ### Consequences for Debtor Economies - Methodology: - Analysis uses local projections following Jordà (2005) with controls for country and time fixed effects and two-year lags of output growth, exchange rates, and the current account. - Countries classified as higher or lower vulnerabilities based on preexisting levels of foreign-currency-denominated debt liabilities, current account deficits, and foreign exchange reserves (vulnerability = 1 if foreign-currency-denominated debt above the EMDE median, and current account balance and foreign exchange reserves below the EMDE median). - Key dynamic responses for emerging market and developing economies (EMDEs) with greater preexisting vulnerabilities: - Output: - Output loss within the first two years: 4.1 percent for vulnerable economies versus 1 percent for “less vulnerable” economies. - Output loss five years after the external stress episode: about 2.6 percent for vulnerable economies; less vulnerable economies experience a recovery in GDP levels within five years. - Real effective exchange rate (REER): - REER depreciates by about 10 percent within the first year for countries with high preexisting vulnerabilities. - Current account: - Current account balance rises by more than 2.5 percent of GDP within the first year for countries with high preexisting vulnerabilities. - Interpretation: - Economies with relatively high foreign-currency external debt, large current account deficits, and relatively low international official reserves face several times greater risk of an external stress episode during spikes in global risk aversion. - When external stress episodes occur, macroeconomic consequences (lost real GDP, sharp current account and REER adjustment) are significantly greater for economies with greater preexisting vulnerabilities. - Recent trends—rising debt ratios and falling foreign exchange reserves in a number of EMDEs—increase near-term likelihood of external stress episodes. - The COVID-19 crisis adds unique additional risk factors, including the evolution of the pandemic; sharp terms-of-trade movements; disruptions to economic activity, trade, travel, and remittances; and implications for net exporters of commodities and tourism. ### Rotating Sources of External Vulnerabilities (1990–2018) - Cross-period observation: - Before the Asian financial crisis (1996): countries at risk had low foreign exchange reserves and large current account deficits. - By recent years (2018): vulnerabilities have been building through high levels of foreign-currency-denominated debt but mitigated in many countries by smaller current account deficits and higher levels of foreign exchange reserves. - Vulnerability percentile definitions used in Venn diagrams: - Low level of foreign exchange reserves and current account balances = below the 25th percentile. - High level of foreign exchange debt = above the 75th percentile. - Sample proportions (labels from figure): - Not in vulnerable zone: 32 (1996), 52 (2007), 50 (2018). - FX Debt share: 5 (1996), 5 (2007), 24 (2018). - Reserves share: 42 (1996), 5 (2007), 5 (2018). - CA share: 8 (1996), 24 (2007), 7 (2018). - (Note: these numeric labels reflect the figure’s reported percentages of the sample in overlapping vulnerability sets.) ### Consequences for Creditor Economies - Mechanisms of creditor losses: - When debtor economies suffer external stress or crises, creditors experience losses via adverse exchange rate movements, lower asset and bond prices, valuation changes, debt restructuring, and write-offs. - Examples: creditor advanced economies such as Belgium, Denmark, Germany, Sweden, and Switzerland suffered banking crises in 2008 in part due to exposures to distressed assets in debtor economies. - Aggregate valuation effects: - Valuation effects estimated by the “residual” approach: difference between the annual change in the net IIP and the financial account flows included in the balance of payments statistics. - Analysis studies accumulated valuation effects before and after the global financial crisis. - Empirical finding (post-global-financial-crisis period): - Relationship between average current account balances and accumulated valuation effects is negative and statistically significant. - Estimated slope coefficient: –0.5. Interpretation: a sustained current account surplus of 2 percent of GDP led, on average, to a valuation loss of 1 percent of GDP a year. - Implication: in countries with sustained current account surpluses, the net IIP increases by less than would be expected from cumulative current account balances in the post-crisis period. - Pre-global-financial-crisis contrast: - In the precrisis period, there was no systematic pattern; the coefficient is near zero and not statistically significant. - Drivers of valuation effects: - Valuation gains can reflect adverse macroeconomic and financial factors in debtor economies (examples: Italy, Spain, Greece, Portugal experienced valuation gains following the global financial crisis). - Valuation losses can result from relatively strong underlying fundamentals in creditor economies (example: United States experienced valuation losses since 2008 driven by US dollar appreciation and better equity performance of US liabilities relative to assets). - Estimation shows valuation effects are not systematically related to exchange rate fluctuations over the two subperiods; instead, bond and asset price differentials, debt restructuring, and debt write-offs are driving valuation effects. ### Implications for Policy and Outlook - For debtor economies: - Increased probability of experiencing external stress with debt default, debt restructuring, or need for IMF support due to ongoing global financial stress. - Highest risk concentrated in EMDEs with preexisting vulnerabilities: high foreign-currency external debt, large current account deficits, low international official reserves. - Policy priority: address preexisting vulnerabilities (external debt composition, current account adjustment, reserve buffers) to reduce probability and macroeconomic costs of external stress episodes. - For creditor economies: - Running large and persistent current account surpluses carries the risk of IIP valuation losses in the aftermath of large systemic crises. - Even if creditor economies face negligible direct risk of an external crisis, they may suffer valuation losses from exposures to distressed assets or markets, as observed during the global financial crisis. *Source: CHAPTER 2 EXTERNAL STRESS AND THE INTERNATIONAL INVESTMENT POSITION, 2020 EXTERNAL SECTOR REPORT, International Monetary Fund* ### CHAPTER 2 EXTERNAL STRESS AND THE INTERNATIONAL INVESTMENT POSITION ### CHAPTER 2 EXTERNAL STRESS AND THE INTERNATIONAL INVESTMENT POSITION ### Policy implications for limiting external vulnerabilities - Limiting a buildup of external vulnerabilities requires monitoring various components of external flows and the IIP. - For countries where financing priority investment through external public and private sector debt is warranted: - Limit the foreign-currency-denominated component and currency mismatches. - Maintain adequate buffers in the form of official and private sector reserves, even when the accumulation of foreign assets may carry the risk of valuation losses. - Increased foreign ownership of domestic currency debt can help reduce borrowing costs but may increase price volatility where domestic markets lack depth. - Monitoring currency mismatches appropriately requires timely data on the currency composition of external assets and liabilities. - Further efforts are needed to compile official data on currency composition to improve and stimulate future analysis. - IMF staff already factor in excessive IIP and financing risk considerations when assessing external positions in the External Sector Report, particularly for large debtor economies. - The chapter’s results can be used to further inform the external sector assessment process. - The potential risks and costs associated with both large creditor and debtor positions provide a reason to take steps to avoid excessive and persistent current account imbalances over the medium term. ### Box 2.1 — Robustness checks, alternative crisis definitions, and methodology - Complementary external stress episodes analyzed: - Sudden stops with growth impact (SSGIs): occur when the net private capital inflow as a percentage of GDP is at least 2 percentage points lower than in the two previous years with large multilateral support. - Exchange market pressure events (EMPEs): defined as episodes where the weighted average of the annual percentage depreciation in the nominal exchange rate and the annual decline in reserves as a percentage of the previous year’s GDP is below the 15th percentile of the worldwide pooled sample, with large multilateral support. - Analytical approach: - Benchmark: signal extraction methods to predict external crises, calculating a threshold for each variable separately to reduce impact of outliers and missing data. - Alternative: tree-based machine-learning models (including random forest and RUSBoost) to capture nonlinearities and complex interactions among variables. - About 80 predictive indicators covering multiple crisis generations are explored. - Data and sample details: - Models estimated with data from 1990 onward. - Results presented for the model that performs best with out-of-sample testing between 2008–17. - Missing variables are imputed using the machine-learning-based surrogate technique. - Variable importance rankings are subject to caveats including random seed effects, sensitivity to variable subsets, and potential differences between in-sample and out-of-sample rankings. ### Key predictive-variable findings by crisis type and country grouping - General finding: - Stock vulnerabilities are generally reliable predictors of external crises; however, the ranking of indicators and importance of interactions vary across crisis categories and country groupings. - SSGIs in emerging market economies (EMs): - Well predicted by signal extraction methods. - Most important predictors: debt liabilities and the asset price and credit bubbles they finance. - Predictors include global factors (including the TED spread), the incidence of financial crisis in advanced economies, interbank liabilities to banks in advanced economies, medium-term bubbles (stock prices, house prices, REER), and external debt measures (scheduled amortization, cross-border interbank debt). - EMPEs in emerging market economies: - Better predicted by machine learning techniques, indicating interactions between variables are important. - Best predictors draw from several crisis-generation models: reserve adequacy metrics, measures of equity outflows, fiscal vulnerabilities (EMBI sovereign spread, change in public debt), and competitiveness indicators (cumulative inflation). - EMPEs in advanced economies (AEs): - Well predicted by signal extraction techniques. - Most important predictors: indicators of external debt (private external debt, amortization, and the foreign currency and external shares of public debt). - EMPEs in low-income countries (LICs): - Sometimes better predicted by signal extraction and sometimes by machine learning, depending on inclusion of foreign currency share data. - If foreign currency share data are included: net open foreign currency share measures are important; other predictors include cumulative inflation, fiscal vulnerabilities, banking system health (share of non-investment-grade debt, capital-to-assets ratio), and stock market overvaluation (price-to-earnings ratio) where available. - If foreign currency share data are not available: machine-learning methods deliver superior performance and identify global factors (TED spread, US term premium) as important in addition to the above variables. ### Predictive-variable coverage (themes represented) - Policy regimes: exchange rate regime, capital account openness, dummies for hard peg and float, dummy for parallel market. - Imbalances and mismatches: current account balance/GDP, amortization/exports, FX share of public debt, debt service/exports, FX share of external debt, net open FX position/GDP. - Liability stocks: external debt/GDP, private external debt/GDP, cross-border interbank liabilities/GDP, external equity liabilities/GDP. - Buffers and vulnerabilities: Reserves/M2, Reserves/GDP, EMBI spread (level and change), primary gap/GDP, banks’ capital-asset ratio, nonperforming loans. - Asset-price booms and busts: real housing price growth, real stock price growth, REER growth, five-year changes and accelerations in price series. - Global shocks and contagion: VIX, US NEER change, US term premium, TED spread, federal funds rate (level and change), interbank liabilities/GDP to banks in AEs in financial crisis. - Political shocks and current account shocks: political violence, successful coup, change in export partner growth relative to five-year trend, reserves/imports, absolute oil balance/GDP. ### Methodology and process for individual economy assessments - Methods grounded in the latest vintage of the External Balance Assessment (EBA) developed by the IMF’s Research Department to estimate desired current account balances and real exchange rates. - Model estimates and discussions on policy distortions are accompanied by a holistic view of other external indicators: capital and financial account flows and measures, foreign exchange intervention and reserves adequacy, and foreign asset or liability positions. - Individual economy assessments may be complemented by country-specific knowledge where EBA models do not capture all relevant characteristics. - A process was developed for multilaterally consistent external assessments for the 30 largest economies, representing about 90 percent of global GDP; these assessments are discussed with authorities as part of bilateral surveillance. - External assessments are presented in ranges, reflecting uncertainties: - Ranges of uncertainty for IMF staff–assessed current account gaps are generally about ±1 percent of GDP. - For REER, ranges vary by country according to country-specific factors and different exchange rate semi-elasticities applied to staff-assessed current account gaps. - Timing of data used in the 2019 individual economy assessments: - Based on data and IMF staff projections as of July 6, 2020, except for cyclical and medium-term variables, which are based on data as of January 31, 2020, preceding the COVID-19 pandemic. *Source: text - CHAPTER 2 EXTERNAL STRESS AND THE INTERNATIONAL INVESTMENT POSITION (2020 External Sector Report).* ### 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”: - Consistent with current account gaps in the range of ±1 percent of GDP. - Consistent with REER gaps in the range that reflects the country-specific exchange rate semi-elasticity (±5 percent based on an elasticity of –0.2). ### Mapping of CA Gap and REER Gap to overall assessment (Table 3.A) - CA Gap >4% and REER Gap <–20%: “substantially stronger” - CA Gap [2%, 4%] and REER Gap [–20%, –10%]: “stronger” - CA Gap [1%, 2%] and REER Gap [–10%, –5%]: “moderately stronger” - CA Gap [–1%, 1%] and REER Gap [–5%, 5%]: “The external position is broadly in line with fundamentals and desirable policy settings.” - CA Gap [–2%, –1%] and REER Gap [5%, 10%]: “moderately weaker” - CA Gap [–4%, –2%] and REER Gap [10%, 20%]: “weaker” - CA Gap <–4% and REER Gap >20%: “substantially weaker” ### Selection of economies (Table 3.B) - The 30 systemic economies analyzed were generally chosen based on criteria including each economy’s global rank in terms of purchasing power GDP (as reported in the IMF’s World Economic Outlook), and in terms of the level of nominal gross trade and degree of financial integration. - Economies covered: 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 illustrative example: distinguishing domestic vs. foreign policy distortions - Setup: - Country A: large current account deficit, large fiscal deficit, high public and external debt. - Country B: current account surplus matching Country A’s deficit, large creditor position, no policy distortions. - Overall external assessment: - Country A has an external imbalance reflecting its large fiscal deficit; 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: domestic policy distortion that needs adjustment. - Country B: no domestic policy gaps; adjustment by Country A would automatically eliminate Country B’s imbalance. - Individual economy write-ups: - Country A: capital flows and foreign asset and liability position sections note vulnerabilities from international liabilities; potential policy response focuses on rein in fiscal deficit and limit financial excesses. - Country B: write-up finds no fault with policies and notes that adjustment among other economies would help reduce the imbalance. - Implication: - Critical to distinguish between domestic and foreign fiscal policy gaps. Eliminating the fiscal policy gap in a systemic deficit economy would help reduce excess surpluses in other systemic economies. ### Argentina: Key findings and recommended policies (Table 3.1 and accompanying text) - Overall assessment: - “The external position in 2019 was weaker than the level implied by medium-term fundamentals and desirable policies.” - Bringing gross external debt and debt service down requires a successful debt operation and policies to ensure a sufficiently high CA surplus over the near and medium term while keeping the real exchange rate near 2019 levels. - Potential policy responses: - Near term: balance need to support the economy during the pandemic while ensuring domestic and external stability with very limited access to financing. - Over time: gradual and growth-friendly fiscal consolidation, combined with prudent monetary policies, to maintain a trade surplus, rebuild international reserves, and ensure debt sustainability. - Structural reforms to boost export capacity and measures to encourage FDI in sectors with export potential. - As stability is established, gradual unwinding of CFMs and export taxes will be necessary, provided fiscal consolidation is on track. - Foreign asset and liability position: - Background: external gross liabilities rose from 34 percent of GDP at end-2015 to 63 percent at end-2019; 22 percent of GDP came due in 2019. - NIIP rose from 2.3 percent in 2017 to about 26 percent of GDP in 2019. - Assessment: public and external debt is unsustainable; restructuring with private creditors is ongoing; CFMs introduced in 2019 will remain necessary in the near term. - Key 2019 metrics (percent of GDP): - NIIP: 26.2 - Gross Assets: 89.1 - Res. Assets: 10.0 - Gross Liab.: 62.8 - Debt Liab.: 45.6 - Current account: - Background: CA deficit narrowed to 0.8 percent of GDP in 2019. - Projected trade surplus: 4.2 percent of GDP in 2020 (2.9 percent in 2019); trade surplus—1.2 percent of GDP through April for goods. - Assessment and EBA results: - EBA CA norm: about –1.2 percent of GDP, with an upward adjustment of 1.5 percent necessary for debt reduction. - 2019 cyclically adjusted CA balance: –1.7 percent of GDP. - 2019 (% GDP) statistics: - Actual CA: –0.8 - Cycl. Adj. CA: –1.7 - EBA CA Norm: –1.2 - EBA CA Gap: –0.5 - Staff Adj.: –1.5 - Staff CA Gap: –2.0 - Real exchange rate: - Background: official REER depreciated by 11 percent on average in 2019 relative to 2018. - Through May 2020, official REER estimated to have appreciated 18.2 percent relative to the 2019 average. - Assessment: CA assessment implies a moderate REER overvaluation (15 percent assuming an elasticity of 0.14); REER-index model suggests an undervaluation closer to 6.4 percent. IMF staff assesses the 2019 REER gap in the range of –6.5 to +3.5 percent, with a midpoint of –1.5 percent. - Capital and financial accounts; CFMs: - Background: CFMs introduced in September 2019 and tightened thereafter; current CFMs include (1) surrender requirement for FX export proceeds, (2) central bank authorization for payment of dividends and profits, and (3) limits on FX purchases by firms and individuals. - Parallel market premium in May 2020: 65–80 percent over the official rate. - Assessment: CFMs stabilized the peso and contained reserve loss in 2019 and slowed COVID-triggered outflows in 2020; CFMs remain necessary in the near term but could be gradually unwound as conditions allow. - FX intervention and reserves: - Background: gross international reserves fell to US$44 billion by end-2019, US$21 billion below end-2018; gross reserves fell by US$1.7 billion through mid-June 2020, including US$0.7 billion in FX sales. - Assessment: reserve coverage at end-2019 fell to 45 percent of the ARA metric; net reserves insufficient to cover FX debt service obligations. Projected trade surpluses and a successful restructuring are necessary to allow gradual rebuilding of reserve coverage (about ¾ percent of GDP a year initially) and relaxation of CFMs. ### Australia: Key findings (Table 3.2 and accompanying text) - Overall assessment: - “The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies.” - CA recorded a surplus of about 0.6 percent of GDP in 2019 and is expected to remain in surplus in 2020. - Potential policy responses: - Recent substantial monetary policy easing and fiscal stimulus are appropriate to support the economy amid COVID-19; authorities should stand ready to provide additional stimulus if necessary. - Foreign asset and liability position: - Background: NIIP estimated at about –45.6 percent of GDP in 2019. - NIIP rose by about 7.9 percent of GDP in 2019, partially due to valuation effects from the Australian dollar depreciation. - Assessment: NIIP level and trajectory are sustainable; staff analysis suggests NIIP will be stable at about current levels over the medium term with a CA deficit at about 2.3 percent of GDP. The structure of the external balance sheet reduces vulnerability; banking sector’s net foreign currency liability position is mostly hedged. - Key 2019 metrics (percent of GDP): - NIIP: –45.6 - Gross Assets: 151.1 - Debt Assets: 44.4 - Gross Liab.: 196.7 - Debt Liab.: 94.8 *International Monetary Fund | 2020* ### 1.2 percent of GDP in 2020, reflecting resilient foreign demand for Australia’s commodity exports and a steep decline in ### 1.2 percent of GDP in 2020, reflecting resilient foreign demand for Australia’s commodity exports and a steep decline in ### Current Account - CA recorded a surplus of 1.2 percent of GDP in 2020, reflecting resilient foreign demand for Australia’s commodity exports and a steep decline in services imports (especially tourism) related to the border closure. - While there is significant uncertainty, the CA is 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. - 2019 (% GDP): - 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 ### Assessment of CA gap and staff adjustments - EBA model estimates a cyclically adjusted CA balance of 0.3 percent of GDP for 2019, compared with the EBA CA norm of –0.1 percent of GDP, implying a model-based CA gap of 0.5 percent of GDP. - IMF staff adjustments warranted: - Adjust CA norm for Australia by –1.0 percent of GDP, implying an adjusted CA norm of –1.1 percent of GDP, reflecting Australia’s traditionally large investment needs due to its size, low population density, and initial conditions. - Adjust cyclically adjusted CA balance by –0.7 percent of GDP because the EBA model may be underestimating cyclical effects related to the temporary surge in iron ore prices. - Rationale: iron ore prices increased about 20 percent above medium-term World Economic Outlook commodity price assumptions, and iron ore exports amount to about 3.3 percent of GDP. - Taking adjustments into consideration, the IMF staff–adjusted CA gap would be in the range of 0.3 to 1.3 percent of GDP (with a midpoint of 0.8 percent of GDP). ### Real Exchange Rate - Background: - Australia’s REER has entered an overall depreciation path since the unwinding of the commodity boom in 2014. - The 2019 REER was about 4.5 percent below the 2018 average, partly reflecting uncertainties related to US-China trade tensions, volatile commodity prices, and a narrowing interest rate gap between Australian bonds and US Treasury bills. - As of May 2020, the REER had depreciated by about 1.9 percent relative to the 2019 average amid significant financial market volatility and weaker demand and prices for Australia’s key commodity and service exports due to the COVID-19 outbreak. - Assessment: - For 2019, the IMF staff–assessed REER gap is estimated to be 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: Flows and Policy Measures - Background: - The financial account recorded net outflows in 2019, reflecting the rise in the CA balance. - FDI continued in 2019 but was offset by portfolio investment outflows, against a backdrop of higher interest rates abroad. - The financial account deficit widened in the first quarter of 2020, reflecting the CA surplus amid 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 - Background: - The currency has been free floating since 1983. - The central bank has not intervened in the foreign exchange market since the global financial crisis. - The authorities are strongly committed to a floating regime, which reduces 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 also limited. *International Monetary Fund | 2020 — 2020 EXTERNAL SECTOR REPORT (excerpt)* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### China — 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. - Projection: 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: - Prioritize 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 pre-COVID-19 imbalances persist in the medium term, policies to achieve a lasting balance in the external position should include: - Gradual fiscal consolidation. - Successful implementation of the authorities’ reform agenda to address distortions and support 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. - Moving to a more flexible exchange rate along with a more market-based and transparent monetary policy framework. ### China — Foreign asset and liability position and trajectory - Background: - NIIP declined to 14.4 percent of GDP in 2019 from 15.5 percent in 2018, after peaking at 30.4 percent in 2008. - Decline reflects lower loans extended abroad and higher securities investment received amid robust GDP growth, despite a higher CA surplus. - Assessment: - NIIP-to-GDP ratio is expected to remain positive, with a modest decline over the medium term. - NIIP is not a major source of risk currently: assets remain high—reflecting large foreign reserves (US$3.2 trillion; 21.9 percent of GDP)—and liabilities are mostly FDI related. - 2019 (% GDP) key statistics: - NIIP: 14.4 - Gross Assets: 52.4 - Res. Assets: 21.9 - Gross Liab.: 37.9 - Debt Liab.: 12.2 ### China — Current account - Background: - CA surplus widened to 1 percent of GDP in 2019, reflecting the economic slowdown from continued financial regulatory strengthening and US-China trade tensions. - Trade flows shifted in 2018–19 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 boosted the trade balance. - Outbound tourism spending declined (by ¼ percent of GDP). - Long-term trend: CA surplus has been trending down from the peak of 10 percent of GDP in 2007. - Q1 2020: CA turned to a deficit of 1 percent of GDP as exports declined sharply due to production disruptions. - 2020 projection: CA balance expected to post a surplus of 1.3 percent, reflecting weaker demand, lower commodity prices, international travel disruptions, and a higher income deficit. - Medium-term projection: CA surplus projected to converge to about 0.5 percent of GDP. - Assessment: - EBA CA methodology estimates the CA gap to be 1.2 percent of GDP. - Considering timing shifts and accelerated onshoring raised the CA surplus by about ¼ percent of GDP, 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. - Overall gap is accounted for by the residual, reflecting other factors, including distortions that encourage excessive saving. - 2019 (% GDP) key statistics: - 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 ### China — Real exchange rate - Background: - In 2019, the REER depreciated by 0.8 percent from the 2018 average. - NEER depreciated by 1.8 percent. - As of May (2020), the REER had appreciated by about 1.8 percent from the 2019 average. - Assessment: - EBA REER index regression estimates the REER gap to be –1.1 percent. - REER gap from IMF staff CA gap (using an elasticity of 0.23) is –4.4 percent. - Staff assesses the REER gap to be in the range of –12 to 8 percent, with a midpoint of –2 percent. - Notation: RMB depreciation was driven largely by the escalation of trade tensions; assessment is subject to especially high uncertainty. ### China — 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. - Annual outflows in 2019 were significantly below about US$650 billion in 2015–16. - Measures in place: 20 percent reserve requirement on FX forwards, a CFM, and the CCAF (both reintroduced in 2018). - Two CFMs were eased in 2020: 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 and guidance: - Substantial net outflow pressures may resurface if private sector accumulates foreign assets faster than nonresidents accumulate Chinese assets. - Further capital account opening consistent with exchange rate flexibility should carefully consider domestic financial stability. - Further opening will likely create substantially larger two-way gross flows; prior actions should include shifting to an effective float and strengthening domestic financial stability. - Encourage inward FDI, support growth, and improve corporate governance. - CFMs should not be used to actively manage the capital flow cycle or substitute for warranted macroeconomic adjustment and exchange rate flexibility. ### China — FX intervention and reserves level - Background: - FX reserves increased by US$35 billion in 2019, following a decline of US$67 billion in 2018. - FX reserves had declined by US$6 billion as of May (2020). - Assessment: - Level of reserves is 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). - Reserves are assessed to be adequate. - Decline in the ratios reflects higher broad money growth, external debt, and other liabilities that raised the metric. --- ### Euro Area — Overall assessment and policy priorities - Overall Assessment: The external position in 2019 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - Projection and uncertainty: - Impact of the pandemic on the CA balance in 2020 is highly uncertain; CA balance projected to narrow 2.3 percent in 2020. - In the medium term, CA surplus is projected to narrow slightly from 2019 levels; range of uncertainty is very high. - Imbalances that existed prior to COVID-19 could remain sizable at the national level. - Potential Policy Responses: - Short-term: contain the COVID-19 outbreak, provide relief to households and firms to reduce scarring. - EU-level COVID-crisis initiatives will support these efforts and potentially help reduce imbalances. - Monetary policy: remain accommodative until inflation has durably converged 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 as the acute phase of the pandemic recedes. - Area-wide initiatives to make the currency union more resilient (for example, banking and capital markets union and fiscal capacity for macroeconomic stabilization) could reinvigorate investment and reduce aggregate CA surplus. ### Euro Area — Foreign asset and liability position and trajectory - Background: - NIIP had fallen to about –23 percent of GDP by end-2009, but recovered to about –51 percent by end-2019. - Rise driven by stronger CA balances and modest nominal GDP growth. - Increase in NIIP during 2019 reflects transactions and exchange rate changes, especially net increase in “other investment” assets. - Gross foreign positions about 243 percent of GDP for assets and 244 percent of GDP for liabilities in 2019. - Net external assets elevated in large net external creditors (for example, Germany and the Netherlands); net external liabilities remained high in some countries (including Portugal and Spain). - Assessment: - Continued CA surpluses suggest NIIP-to-GDP ratio will rise further moderately; euro area expected to soon become a net external creditor. - Overall NIIP financing vulnerabilities appear low. - Large net external debtor countries still bear greater risk of a sudden stop of gross inflows. - 2019 (% GDP) key statistics: - NIIP: –0.5 - Gross Assets: 243.3 - Debt Assets: 95.4 - Gross Liab.: 243.8 - Debt Liab.: 94.7 ### Euro Area — Current account - Background: - CA balance stood at 2.7 percent in 2019, lower than in 2018, after increasing from close to zero in 2011. - Stronger goods balance was more than offset by weaknesses in services and investment income balances. - Large creditor countries (Germany and the Netherlands) continued to have sizable surpluses. - CA surplus widened in Q1 2020, year over year, driven by the goods balance. - Assessment: - EBA model estimates a CA norm of 1.4 percent of GDP; cyclically adjusted CA is 2.7 percent of GDP, implying an EBA gap of 1.3 percent of GDP. - IMF staff analysis indicates a higher CA norm than EBA, considering policy commitments to reduce large net external liability positions and uncertainties about demographics and immigration impacts. - Adjustments for measurement issues were undertaken in Ireland and the Netherlands. - 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) key statistics: - 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 ### Euro Area — Real exchange rate - Background: - CPI-based REER depreciated by 3.1 percent in 2019; nominal depreciation of 1.5 percent in 2019. - ULC-based REER depreciated by 2.3 percent. - Other published REERs depreciated by 1.6 percent on average. - REER continued to depreciate until February 2020, before reversing in March. - As of May (2020), REER appreciated by about 0.9 percent from the 2019 average. - Assessment: - EBA REER index model suggests an overvaluation of 4.2 percent; EBA REER-level model implies an undervaluation of 0.7 percent. - REER gap from IMF staff’s CA gap (elasticity 0.35) implies real exchange rate was undervalued by 3.4 percent in 2019. - Staff-assessed REER gap range is –5.7 to 0, with a midpoint of –2.8. - Significant heterogeneity across member states: REER gaps range from an undervaluation of 11 percent in Germany to overvaluations of 0 to 9 percent in several small to mid-sized member states. - Policy implication: net external debtor countries need to improve external competitiveness; net external creditor countries should boost domestic demand. ### Euro Area — Capital and financial accounts: flows and policy measures - Background: - Mirroring the 2019 CA surplus, 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. - Net portfolio debt inflows somewhat tempered outflows. - Q1 2020: 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. ### Euro Area — 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. *CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS, International Monetary Fund | 2020* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### France — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2019 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - 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 focus: saving lives and supporting those most affected by the crisis. - Medium-term uncertainty is unusually large. If pre-COVID-19 imbalances persist, policies should: - Refocus on improving competitiveness by reinvigorating structural reforms. - Rebuild fiscal space once the recovery is secured. - These measures could also help bring the current account (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). - The NIIP had fallen 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 ≈ 40 percent of gross assets. - Gross liabilities: 318 percent of GDP in 2019; external debt ≈ 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 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). - Financial derivatives stood at about 35 percent of GDP. - Key 2019 (% GDP) statistics: - 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 in 2019: 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; goods and services trade balance rose by 0.1 percent of GDP. - CA deficit over the four quarters up to 2020:Q1 remained at 0.7 percent of GDP. - IMF staff projection for 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: - 2019 cyclically adjusted CA deficit: 0.5 percent of GDP. - EBA-estimated norm: surplus of 0.6 percent. - IMF staff assesses the CA gap in 2019 was between –1.6 and –0.6 percent of GDP. - Key 2019 (% GDP) statistics: - 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 only 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 by 0.2 percent. - Since peak levels in 2008 both REER measures have depreciated by about 9 percent; France has not regained the loss of about one-third of its export market share registered in the early 2000s. - Assessment: - EBA REER-index model: REER gap of –2.7 percent. - EBA REER-level model: 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 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; inward flows were about 2.5 percent of GDP. - Financial derivative flows have grown sizably both on the asset and liability side 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. - 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 and Policy Responses - 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 due to COVID-19 disruptions to 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; stronger wage growth relative to euro area trading partners is expected to contribute to realigning price competitiveness within the monetary union, but projected adjustment is partial and additional policy actions will be necessary for external rebalancing. - Potential Policy Responses: - The sizable fiscal stimulus in response to the COVID crisis is a welcome use of Germany’s ample fiscal space. - Near-term: continue mitigating the outbreak while supporting households and businesses to minimize economic scarring and facilitate a swift recovery. - If pre-COVID-19 imbalances persist in the medium term, recommended measures include: - Growth-oriented fiscal policy with greater public sector investment in digitalization, infrastructure, and climate mitigation to crowd in private investment and promote potential growth. - Structural reforms to foster entrepreneurship (expand access to venture capital, stronger tax incentives for research and development). - Additional tax relief for lower-income households to boost purchasing power. - Pension reforms prolonging working lives to reduce excessive saving and ameliorate external imbalances. ### Germany — Foreign Asset and Liability Position and Trajectory - Background: - 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 but partially offset by valuation changes. - Foreign assets are well diversified by instrument. - TARGET2 claims: €895 billion at end-2019 (26 percent of GDP), down from over €976 billion in mid-2018. - Assessment: - With implementation of QE measures by the ECB, Germany’s exposure to the Eurosystem remains large. - Key 2019 (% GDP) statistics: - 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 has widened significantly since 2001, peaking at 8.6 percent of GDP in 2015 and falling gradually since then. - 2019 CA surplus: 7.1 percent of GDP (from 7.4 percent of GDP in 2018); rise in the oil and gas trade balance partly due to falling energy prices. - Bulk of CA surplus reflects large saving-investment surpluses of households and government; saving-investment balance of nonfinancial corporations narrowed. - 2020 projection: CA surplus temporarily declines to 5.6 percent of GDP. - Assessment: - Cyclically adjusted CA balance in 2019: 7.3 percent of GDP. - 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. - Taking demographic outlook and large-scale immigration into account, IMF staff assesses the 2019 CA gap to be in the range of 3.3 to 5.3 percent of GDP. - Key 2019 (% GDP) statistics: - 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 due to euro depreciation versus key trading partners and pickup in relative unit labor costs. - Through May 2020, 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 to the Americas (mostly the United States). - Inflows primarily from 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 ### Hong Kong SAR - 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 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 due to structural factors, including the opening of mainland China’s capital account and changes in offshore merchandise trade activities. - The credibility of the currency board arrangement (LERS) is assured by a transparent set of rules, ample fiscal and FX reserves, strong financial regulation and supervision, a flexible economy, and a prudent fiscal framework. - Potential Policy Responses: - Near term: expansionary fiscal policy to cope with the cyclical downturn aggravated by the COVID-19 outbreak and support recovery. - Medium term: if pre-COVID-19 imbalances persist, fiscal policy should remain expansionary and measures will be necessary to ensure fiscal sustainability given the rapidly aging population. - Maintain policies supporting wage and price flexibility to preserve competitiveness. - Continue robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and the LERS. - Foreign Asset and Liability Position and Trajectory: - Background: 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 were sizable; the increase in NIIP during 2015–19 (153 percent of 2019 GDP) far exceeded 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 36 percent of gross assets and 51 percent of gross liabilities; only 14 percent of gross liabilities are portfolio liabilities. - 2019 (% GDP): NIIP: 427.4; Gross Assets: 1,536.6; Debt Assets: 527.4; Gross Liab.: 1,109.2; Debt Liab.: 389.0 - Current Account: - Background: Economy fell into a technical recession in 2019; 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. - Contributing factors: weakness in domestic demand from social unrest, lower oil prices, weak exports due to US-China trade tensions, and a lower services balance (about 3 percentage points of GDP) from a sharp fall in tourism (–14 percent year over year). - Longer-term drivers: gradual decline in private saving due to robust consumption growth, tight labor market, and wealth effects from strong housing market; CA peaked at 15 percent of GDP in 2008. - Q1 2020: CA balance turned into a deficit of 1.4 percent of GDP driven mainly by declines in the services and income balances amid COVID-19. - Projections: CA surplus projected to fall below 6.0 percent of GDP in 2020; CA balance projected to be about 4.0 percent of GDP over the medium term. - Assessment: Cyclically adjusted CA surplus increased to 5.2 percent of GDP in 2019, close to midpoint of IMF staff–assessed CA norm range of 2.9 to 5.9 percent of GDP. Staff-assessed CA gap range: –0.7 to 2.3 percent of GDP, midpoint about 0.8 percent. - 2019 (% GDP): Actual CA: 6.2; Cycl. Adj. CA: 5.2; Staff CA Gap: 0.8 - Real Exchange Rate: - Background: Under the currency board arrangement, REER dynamics largely reflect US dollar developments and inflation differentials with the United States. REER appreciated about 16 percent during 2012–18 and by another 4 percent in 2019; it appreciated about 3.6 percent in the first five months of 2020 compared with its 2019 average. - Assessment: IMF staff assesses the REER gap to be in the range of –7½ to 2½ percent, midpoint –2½ percent (based on CA-REER elasticity of about 0.4). - Capital and Financial Accounts: Flows and Policy Measures: - Background: Open capital account; nonreserve financial outflows widened in 2019 largely driven by net portfolio outflows, but turned to inflows in Q1 2020 on strong net portfolio inflows. - The financial account is very volatile, reflecting conditions in Hong Kong SAR and mainland China, shifting expectations of US monetary policy, and related arbitrage in FX and rates markets. - Assessment: Large financial resources, proactive supervision, and deep liquid markets should limit risks from volatile capital flows. Greater financial exposure to mainland China could pose risks if mainland growth slows sharply or financial stress emerges. Credit risk appears manageable given high origination and underwriting standards of Hong Kong SAR banks. - FX Intervention and Reserves Level: - Background: HKMA sold US$2.8 billion in March 2019 as part of currency board operations when the Hong Kong dollar depreciated to the weak side of convertibility undertaking. - Total reserve assets increased to about 121 percent of GDP at end-2019 (or twice the monetary base), up from 117 percent in 2018. - Strong side of convertibility undertaking triggered in April and June 2020, prompting HKMA to sell HK$57.6 billion. - Assessment: FX reserves adequate for precautionary purposes and should continue to evolve with the currency board automatic adjustment. Fiscal reserves about 40 percent of GDP. --- ### India - Overall Assessment: - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Low per capita income, favorable growth prospects, demographic trends, and development needs justify running CA deficits. - External vulnerabilities stem from volatility in global financial conditions and an oil price surge, as well as a retreat from cross-border integration. - Progress on FDI liberalization; portfolio flows remain controlled. Trade barriers remain significant. - Potential Policy Responses: - Address pandemic emergency to preserve lives and productive capacity through fiscal, monetary, and financial sector policies protecting vulnerable households and firms, including informal sector. - If pre-COVID-19 imbalances persist, rein in fiscal deficits while enhancing credit provision via faster cleanup of bank, nonbank financial, and corporate balance sheets, and strengthen governance of public banks. - Improve business climate, ease domestic supply bottlenecks, liberalize trade and investment to attract FDI and contain external vulnerabilities. - Consider gradual liberalization of portfolio flows while monitoring reversal risks. - Exchange rate flexibility should remain the main shock absorber; intervention limited to disorderly market conditions. - Foreign Asset and Liability Position and Trajectory: - Background: End-2019 NIIP –15.0 percent of GDP (from –15.9 percent at end-2018). Gross foreign assets 24.6 percent of GDP; gross foreign liabilities 39.6 percent of GDP. - Asset composition: official reserves and FDI dominate assets; liabilities include mostly other investments and FDI. - External debt about 20 percent of GDP; 52 percent denominated in US dollars and 34.5 percent in Indian rupees. Short-term external debt (residual maturity basis) 42.3 percent of total external debt and 51.8 percent of FX reserves. - Assessment: With projected CA deficits, NIIP-to-GDP expected to fall marginally. External debt moderate but rollover risks elevated short term. Moderate foreign liabilities reflect gradual capital account liberalization focused on attracting FDI. - 2019 (% GDP): NIIP: –15.0; Gross Assets: 24.6; Res. Assets: 16.2; Gross Liab.: 39.6; Debt Liab.: 19.9 - Current Account: - Background: CA deficit estimated to have narrowed to 0.9 percent of GDP in fiscal year 2019/20 from 2.1 percent of GDP in previous year due to sharply weaker domestic demand. Exports decelerated, but contraction in investment goods imports and relatively low oil prices narrowed the trade balance. - Projection: CA deficit projected to narrow to 0.3 percent of GDP in 2020/21 driven by lower oil prices and import compression from weak domestic demand; medium-term CA deficit expected to widen to about 2½ percent of GDP with strengthening domestic demand. - Assessment: EBA cyclically adjusted CA deficit stood at 1.4 percent of GDP in fiscal year 2019/20. EBA CA norm estimated at –3.0 percent of GDP with standard error 1.3 percent, implying an EBA gap of 1.6 percent. IMF staff judges a CA deficit of about 2½ percent of GDP is financeable over time. With staff-assessed CA norm, CA gap would range from 0 to 2 percent of GDP. Positive policy contributions to CA gap from a negative credit gap, an increase in FX reserves, and a relatively closed capital account; offset by larger-than-desirable domestic fiscal deficit. - 2019 (% GDP): Actual CA: –0.9; Cycl. Adj. CA: –1.4; EBA CA Norm: –3.0; EBA CA Gap: 1.6; Staff Adj.: –0.6; Staff CA Gap: 1.0 - Real Exchange Rate: - Background: Average REER in 2019 appreciated by about 5.8 percent from 2018 average. As of May 2020, rupee depreciated by about 0.4 percent in real terms compared with 2019 average. - Assessment: EBA REER index and REER level models estimate REER gap of 13.4 and 10.2 percent, respectively, for 2019. Based on IMF staff CA gap and semi-elasticity of 0.18, REER gap assessed in range –11.1 to –0.1 percent for fiscal year 2019/20, midpoint –5.6 percent. - Capital and Financial Accounts: Flows and Policy Measures: - Background: Sum of FDI, portfolio, and financial derivatives flows (net) estimated at 2.3 percent of GDP in 2019, up from 0.8 percent in 2018. Net FDI inflows 1.4 percent of GDP in 2019. Net portfolio flows rebounded to 0.9 percent of GDP in 2019 after outflows in 2018. - 2020: India faced a drastic reversal of portfolio flows US$15 billion in 2020:Q1 amid COVID-19; FDI inflows US$10.6 billion continued. Authorities allowed exchange rate depreciation, limited FX intervention, and relaxed measures on debt inflows. - Assessment: Yearly capital inflows relatively small; portfolio and other investments critical to finance CA. Portfolio debt flows volatile; exchange rate sensitive to these flows and changes in global risk aversion. Need to attract more stable financing. - FX Intervention and Reserves Level: - Background: Foreign reserves reached a record high US$459.8 billion in 2019. Spot foreign exchange purchases were US$40 billion (1.5 percent of GDP); net forward sales decreased by US$550 million in 2019. Reserves at US$477.8 billion at end-March 2020. - Reserve coverage: about 16.4 percent of GDP and about 13 months of prospective imports of goods and services. - Assessment: Reserve levels adequate for precautionary purposes. International reserves about 173 percent of short-term debt and 163 percent of IMF’s composite metric by end-2019. --- ### Indonesia - Overall Assessment: - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Exchange rate flexibility and structural policies should help contain the CA deficit over the medium term. - External financing appears sustainable but sizable and, with a large share of foreign portfolio investment, exposes the economy to fluctuations in global financial conditions. - Potential Policy Responses: - Structural reforms to boost competitiveness, including higher infrastructure and social spending aimed at fostering human capital development while maintaining fiscal sustainability through revenue mobilization. - Reduce restrictions on FDI and external trade (nontariff trade barriers) and increase labor market flexibility (e.g., streamline stringent job protection, improve job placement services). - Continue exchange rate flexibility to support external stability amid increased market volatility associated with the COVID-19 pandemic. - Foreign Asset and Liability Position and Trajectory: - Background: End-2019 NIIP –31 percent of GDP, broadly unchanged since end-2018. Gross external assets 33 percent of GDP (35 percent of which were reserve assets); gross external liabilities 64 percent of GDP. - Gross external debt moderate at 36 percent of GDP at end-2019; 19 percent denominated in rupiah; 84 percent maturing after one year. - Assessment: NIIP and gross external debt indicate external position is sustainable with limited rollover risk, but nonresident holdings of rupiah-denominated government bonds at 39 percent of total stock (or 6.8 percent of GDP) and shallow domestic financial markets make Indonesia vulnerable to global financial volatility, higher US interest rates, and a stronger US dollar. Since 2015, IIP has had positive net foreign currency exposure. IMF staff projects NIIP as percentage of GDP will continue to rise over the medium term. - 2019 (% GDP): NIIP: –31.2; Gross Assets: 32.7; Res. Assets: 11.5; Gross Liab.: 64.0; Debt Liab.: 32.3 - Current Account: - Background: CA deficit narrowed to 2.7 percent of GDP in 2019 from 2.9 percent in 2018, driven mainly by weak import growth reflecting lower prices for imported commodities and weaker import volume growth from policy actions and softening domestic demand. - Projection: CA deficit projected to narrow to 1.6 percent in 2020, driven by contraction in domestic demand and imports, partially offset by negative impact on tourism from COVID-19. Structural policies expected to help limit CA deficit in medium term. - Assessment: IMF staff estimates a CA gap of –1.0 percent for 2019, consistent with an estimated cyclically adjusted CA deficit of [text truncated in source]. *CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS, International Monetary Fund | 2020* ### 2.7 percent of GDP and a staff-assessed norm of –1.6 percent of GDP. ### text - 2.7 percent of GDP and a staff-assessed norm of –1.6 percent of GDP. ### Indonesia — Current Account and Policy Implications - 2019 Actual CA: –2.7 percent of GDP. - 2019 Cycl. Adj. CA: –2.7 percent of GDP. - EBA CA Norm: –0.8 percent of GDP. - EBA CA Gap: –1.9 percent of GDP. - Staff Adj.: 0.9 percent of GDP. - Staff CA Gap: –1.0 percent of GDP. - Considering uncertainties in the estimation of the norm, the CA gap for 2019 is in the range of –2.5 percent to 0.5 percent of GDP. - Policy implication: Achieving external balance will require structural reforms to strengthen health, education, and infrastructure and increase labor market flexibility; this is consistent with 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 average REER appreciated by 4.3 percent relative to the 2018 average. As of May 2020, REER had depreciated by 0.1 percent compared with the 2019 average. - Model estimates and staff assessment: - EBA index and level REER models point to 2019 REER gaps of about 2.1 percent to –9.0 percent. - 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. - Assessment: EBA index and CA models are most relevant for Indonesia; consideration of all inputs and 2019 REER appreciation yields the staff range above. ### Indonesia — Capital and Financial Accounts; FX Intervention and Reserves - Capital and financial flows in 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. - March 2020: large capital outflows from sale of rupiah-denominated securities by nonresident investors; outflows largely offset by subsequent issuance of foreign-currency-denominated government bonds. - Assessment: Net and gross financial flows remain prone to volatility; exchange rate flexibility since mid-2013 and strengthened policy frameworks have helped reduce capital flow volatility. Continued strong policies to strengthen fiscal position, keep inflation in check, advance financial deepening, and ease supply bottlenecks would help sustain capital inflows. - Reserves and FX intervention: - At end-2019, reserves were 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), compared with US$120.7 billion at end-2018. - Contingencies and swap lines amounting to about US$95 billion are in place. - International reserves recovered in April 2020, reaching US$127.9 billion. - Assessment: 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 manageable. FX intervention should 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; gross external liabilities remain high, with a large share of public debt. - Potential policy responses: Once the health crisis has passed, 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. ### Italy — Foreign Assets and Liabilities - 2019 NIIP: –1.6 percent of GDP. - 2019 Gross Assets: 163.4 percent of GDP. - 2019 Debt Assets: 64.8 percent of GDP. - 2019 Gross Liab.: 165.0 percent of GDP. - 2019 Debt Liab.: 115.5 percent of GDP. - Background and assessment: TARGET2 liabilities declined to 25 percent of GDP in 2019; trend reversed in early 2020. Debt securities represent about two-thirds of gross external liabilities, half owed by the public sector. High public debt is a key vulnerability; strengthening balance sheets would reduce vulnerabilities related to high public debt and potential negative feedback loops. ### Italy — Current Account and REER - 2019 Actual CA: 3.0 percent of GDP. - 2019 Cycl. Adj. CA: 2.7 percent of GDP. - 2019 EBA CA Norm: 2.6 percent of GDP. - 2019 EBA CA Gap: 0.0 percent of GDP. - 2019 Staff Adj.: 0.0 percent of GDP. - 2019 Staff CA Gap: 0.0 percent of GDP. - Background: CA balance averaged –1¼ percent of GDP in decade after euro adoption; CA surplus reached 3 percent of GDP in 2019 and is projected to rise to 3.6 percent in 2020. - REER: - From 2018 to 2019, CPI-based and ULC-based REERs depreciated by about 2 percent. - As of May 2020, REER had appreciated by 0.3 percent compared to 2019 average. - Level and index REER models suggest modest overvaluation in 2019 of 4.4 percent and 6.8 percent, respectively. - Staff assesses the REER gap in the range of 0 to 8 percent of GDP, implying a midpoint of about 4 percent. ### Italy — Capital Flows and FX - Financial account in 2019: net outflows of 3 percent of GDP, reflecting residents’ net purchases of foreign assets; portfolio investment shifted mid-year from outflows to inflows. - Assessment: Italy remains vulnerable to market volatility owing to large sovereign and banking sector refinancing needs and balance sheet weaknesses. - FX Intervention and Reserves: The euro is a global reserve currency; reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Japan — Overall Assessment and Policy Recommendations - Overall assessment: 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 the income balance. - Potential policy responses: Priorities include addressing the pandemic emergency to preserve lives and productive capacity. Fiscal consolidation should proceed gradually and be 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 Assets, Liabilities, and NIIP - 2019 NIIP: 66.8 percent of GDP. - 2019 Gross Assets: 198.3 percent of GDP. - 2019 Debt Assets: 91.7 percent of GDP. - 2019 Gross Liab.: 131.5 percent of GDP. - 2019 Debt Liab.: 81.8 percent of GDP. - Background: NIIP reached 67 percent of GDP in 2019; Japan holds the world’s largest stock of net foreign assets, valued at US$3.4 trillion at end-2019. - Assessment: Foreign asset holdings are diversified; portfolio investment accounts for 46 percent of total foreign assets, with about 20 percent yen-denominated and about half of portfolio investment denominated in US dollars. NIIP generated net annual investment income of 3.8 percent of GDP in 2019. ### Japan — Current Account and REER - 2019 Actual CA: 3.6 percent of GDP. - 2019 Cycl. Adj. CA: 3.5 percent of GDP. - 2019 EBA CA Norm: 3.5 percent of GDP. - 2019 EBA CA Gap: 0.0 percent of GDP. - 2019 Staff Adj.: 0.0 percent of GDP. - 2019 Staff CA Gap: 0.0 percent of GDP. - Background: CA surplus averaged 3.7 percent of GDP since 2015; 2019 CA was 3.6 percent of GDP. 2020 CA balance projected at 3.2 percent of GDP with unusually high uncertainty. - REER: - After depreciating by 5.7 percent between 2016 and 2018, average REER appreciated in 2019 by 2.8 percent. - Estimates through May 2020 show REER appreciated by 4.1 percent relative to 2019 average. - EBA REER level and index models deliver REER gaps of –12.5 and –18 percent, respectively, for the 2019 average REER; these models are not used for the assessment. - 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. ### Japan — Capital Flows and FX - 2019 financial flows: - Net FDI and portfolio flows: 4.2 and 1.7 percent of GDP, respectively. - Other investments (net) inflows: 2.1 percent of GDP. - Assessment: Vulnerabilities are limited; liabilities’ vulnerabilities are limited with equity and direct investment accounting for 33 percent of total liabilities. - FX Intervention and Reserves: Reserves are about 25 percent of GDP on legacy accumulation; no recent FX intervention. Exchange rate is free floating; interventions are isolated (last occurring in 2011). ### Korea — Overall Assessment and Policy Responses - Overall assessment: External position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. Change from 2018 reflects narrowing of the CA gap due to decline in policy gaps and deterioration in terms of trade. - Potential policy responses: Following COVID-19 outbreak, additional fiscal and monetary stimulus deployed. Ensuring external position remains in line with fundamentals will require 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 nonmanufacturing sector, strengthen social safety net. Exchange rate should remain market-determined with intervention limited to disorderly conditions. ### Korea — NIIP, Current Account, REER, and Reserves - 2019 NIIP: 30.4 percent of GDP. - 2019 Gross Assets: 103.2 percent of GDP. - 2019 Debt Assets: 28.9 percent of GDP. - 2019 Gross Liab.: 72.8 percent of GDP. - 2019 Debt Liab.: 26.3 percent of GDP. - 2019 Actual CA: 3.6 percent of GDP. - 2019 Cycl. Adj. CA: 3.3 percent of GDP. - 2019 EBA CA Norm: 3.3 percent of GDP. - 2019 EBA CA Gap: 0.0 percent of GDP. - 2019 Staff Adj.: 0.0 percent of GDP. - 2019 Staff CA Gap: 0.0 percent of GDP. - Background and projections: CA surplus narrowed to 3.6 percent of GDP in 2019 from 4.5 percent in 2018; projected to narrow to 3.4 percent in 2020 and widen to about 4.3 percent over the medium term. - REER: - REER depreciated in 2019 by about 4.5 percent; as of May 2020, REER had depreciated an additional 3.6 percent compared to 2019 average. - EBA REER index model reports REER 0.6 percent overvalued; REER level model reports 8 percent undervaluation. - IMF staff uses CA gap with trade elasticity of 0.36, implying a REER gap of –3 percent to 3 percent with a midpoint of 0 percent. - Reserves and FX intervention: - 2019 reserves reached 25 percent of GDP. - Bank of Korea sold a net US$6.7 billion (0.4 percent of GDP) in 2019 to help the won adjust orderly. - In the first quarter of 2020, reserves declined 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. *2020 EXTERNAL SECTOR REPORT — International Monetary Fund | 2020* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Malaysia — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2019 was stronger than the level implied by medium-term fundamentals and desirable policies. - Recent dynamics: Growth model increasingly driven by private domestic demand; 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. - Recent fiscal stimulus and monetary easing were appropriate, and need to be kept under review as the crisis unfolds. - If preexisting 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. ### Malaysia — Foreign Asset and Liability Position and Trajectory - Background: - NIIP has averaged about 1 percent of GDP since 2010. - As of end-2019, NIIP: –1.5 percent of GDP (rose from –5.7 percent of GDP at end-2018). - Changes reflect CA surplus and valuation effects; higher net direct investment liabilities more than offset reduction in 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 (US$ terms) 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: 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. - 2019 (% GDP): - NIIP: –1.5 - Gross Assets: 111.1 - Res. Assets: 28.4 - Gross Liab.: 112.6 - Debt Liab.: 62.6 ### Malaysia — Current Account - Background: - CA surplus declined by about 8 percentage points of GDP between 2010 and 2018, driven primarily by lower national saving and a modest rise in investment until 2017. - In 2019, CA surplus increased to 3.4 percent of GDP, driven by a sharp decline in capital imports. - Goods balance remained in surplus; services and income accounts registered lower deficits. - CA registered a surplus of 2.6 percent of GDP in 2020:Q1. - With high uncertainty due to COVID-19, CA surplus projected to decline to 0.5 percent of GDP in 2020, driven by a sharp decline in tourism and external demand, outweighing negative impact of domestic demand shock on imports. - After COVID-19 shock dissipates, CA expected to return to a modest surplus but decline over the medium term, driven by lower private sector saving and higher investment. - Assessment: - 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 postponement of large infrastructure projects affecting capital imports (0.4 percent of GDP), preliminary 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. - 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 ### Malaysia — Real Exchange Rate - Background: - In 2019, REER depreciated by 1.4 percent relative to the 2018 average. - REER about 12 percent lower than its 2013 peak, reflecting NEER impact from capital outflows and terms-of-trade shocks, with the latter contributing to a decline in the CA surplus. - In May 2020, REER had depreciated by 3.5 percent relative to the 2019 average. - Assessment: - EBA REER index and level models estimate Malaysia’s REER to be undervalued by about 25 and 38 percent, respectively. - Usual macroeconomic stresses associated with such undervaluation are absent (for example, high core inflation, sustained wage pressure, or significant FX reserve buildup). - Consistent with IMF staff CA gap, staff assesses the REER gap in 2019 to be –7.2 percent (about 2 percent). ### Malaysia — Capital and Financial Accounts: Flows and Policy Measures - Background: - Since the global financial crisis, Malaysia experienced periods of significant capital flow volatility, largely driven by portfolio flows in and out of the local-currency-debt market. - Since late 2016, the Financial Markets Committee implemented measures to develop the onshore FX market. - Portfolio capital flows had stabilized in April 2020 after substantial outflows in March. - Assessment: - 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. ### Malaysia — FX Intervention and Reserves Level - Background: - Official reserves fell by US$8.1 billion since May 2018 and stabilized at US$101.4 billion as of end-2018. - Reserve level began to pick up in first half of 2019 and stood at US$103.6 billion as of end-2019. - Pre–COVID-19 reserve level sustained throughout April 2020. - Assessment: - Under 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 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. --- ### Mexico — 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. - Recent dynamics: CA deficit narrowed significantly in 2019, driven by temporary sharp decline in investments and imports, strong exports and remittances. - Potential Policy Responses: - Focus on providing sufficient policy support in the near term in response to COVID-19. - Commit to implement pro-growth and inclusive fiscal reforms and reinvigorate structural reforms over the medium term, conditional on post–COVID-19 environment, to improve competitiveness and the investment climate. - Floating exchange rate should continue to serve as the main shock absorber, with FX interventions used to prevent disorderly market conditions. - A dollar swap line with the US Federal Reserve and the IMF Flexible Credit Line provide added buffers against global tail risks. ### Mexico — Foreign Asset and Liability Position and Trajectory - Background: - NIIP projected to remain broadly stable at about –50 percent of GDP over the medium term. - Foreign assets: direct investment (18 percent of GDP) and reserves (14.5 percent of GDP). - Foreign liabilities: FDI (50 percent of GDP) and portfolio investment (41 percent of GDP). - Gross public external debt was 25 percent of GDP, of which about one-third was holdings of local currency government bonds. - Assessment: - NIIP sustainable; local currency denomination of large share of foreign public liabilities reduces FX risks. - Large gross foreign portfolio liabilities could be a source of vulnerability in case of global financial volatility. - Exchange rate vulnerabilities moderate as most Mexican firms with FX debt have natural hedges and actively manage FX exposures. - 2019 (% GDP): - NIIP: –52.1 - Gross Assets: 48.3 - Res. Assets: 14.5 - Gross Liab.: 100.4 - Debt Liab.: 38.6 ### Mexico — Current Account - Background: - In 2019, CA deficit narrowed sharply to –0.3 percent of GDP from –2.1 percent in 2018, driven by unexpected sharp contraction in investments and imports, strong exports, and workers’ remittances. - Exports and imports of goods fell by 10.7 and 11.3 percent year over year, respectively, in the first four months of 2020. - Remittances increased by 18.4 percent in the first quarter of 2020. - 2020 CA is expected to record a moderate deficit of 0.2 percent of GDP, subject to high uncertainty from collapse of oil prices and COVID-19. - Over the medium term, CA deficit projected to widen toward the CA norm as a rising oil balance is offset by some decline in the non-hydrocarbon CA. - Assessment: - EBA model estimates a cyclically adjusted CA norm of –2.2 percent of GDP in 2019, implying a CA gap of 1.5 percent of GDP (range of 0.4 to 2.6 percent of GDP). - Policy gap contribution estimated at 1 percent of GDP, mainly from loose fiscal policy in the rest of the world and lower-than-desired spending on health. - IMF staff adjustment of 0.6 percent of GDP to account for unexpectedly sharp rise in CA (expected to unwind) yields IMF staff assessment of CA gap at 0.9 percent of GDP (range of –0.2 to 2.0 percent of GDP). - 2019 (% GDP): - Actual CA: –0.3 - Cycl. Adj. CA: –0.7 - EBA CA Norm: –2.2 - EBA CA Gap: 1.5 - Staff Adj.: 0.6 - Staff CA Gap: 0.9 ### Mexico — Real Exchange Rate - Background: - For most of 2019, peso fluctuated within range of 19 to 19.5 vis-à-vis US dollar. - Average REER in 2019 about 3 percent stronger than 2018 average, mostly driven by nominal appreciation. - In May 2020, REER was 15.0 percent weaker than 2019 average, driven by almost 17 percent depreciation in nominal effective terms. - Assessment: - EBA REER level and index models estimate undervaluation of 3.5 and 15.4 percent, respectively, in 2019. - IMF staff’s overall assessment, based on staff CA gap (applying elasticity of 0.13), estimates Mexico’s REER gap to be in range of –15 to 1 percent, with midpoint of –7 percent. ### Mexico — Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2019, net FDI and portfolio debt flows decelerated but remained positive; net equity flows were negative. - In first four months of 2020, sovereign issued around US$12 billion in FX bonds, exceeding FX debt financing needs, while decline of almost US$14 billion in nonresident holdings of peso debt by mid-May. - Net FDI flows declined sharply (by 20 percent) and net equity flows were negative in the first quarter of 2020. - Going forward, portfolio inflows unlikely to return to previous high growth rates. - Assessment: - Long maturity of sovereign debt and high share of local currency financing reduce exposure of government finances to depreciation risks. - Banking sector appears well capitalized, liquid, and resilient. - Nonfinancial corporate debt is low; FX risks generally covered by natural and financial hedges. - Strong presence of foreign investors leaves Mexico exposed to capital flow reversals and risk premium increases. - Authorities have refrained from capital flow management measures. - Capital flow risks mitigated by prudent macro policies. ### Mexico — FX Intervention and Reserves Level - Background: - Central bank committed to free-floating exchange rate; discretionary intervention used solely to prevent disorderly market conditions. - End-2019 FX reserves: US$183 billion (14.5 percent of GDP), up from US$176 billion at end-2018. - By mid-June 2020, FX reserves increased to US$197 billion, mostly owing to federal government’s debt management operations and valuation changes. - In 2018 and 2019, no discretionary interventions occurred. In 2020, two nondeliverable forwards auctions conducted alongside further US dollar liquidity provision measures. - Assessment: - End-2019 reserves at 117 percent of assessing reserve adequacy metric and 234 percent of short-term debt (at remaining maturity); level remains adequate. - IMF staff recommends authorities continue to maintain reserves at an adequate level over the medium term. - US$60 billion swap line with the Federal Reserve (established March 2020) and IMF Flexible Credit Line arrangement provide additional buffers. --- ### Netherlands — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2019 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Uncertainty: Netherlands’ status as a trade and financial center and natural gas exporter makes external assessment particularly uncertain. - Potential Policy Responses: - Use of fiscal space and escape clause to provide support to health sector and help households and businesses during COVID-19 is appropriate. - Once pandemic is over, policies should aim at promoting recovery and supporting investment in physical and human capital to foster robust potential growth. ### Netherlands — Foreign Asset and Liability Position and Trajectory - Background: - NIIP reached 89 percent of GDP at end-2019 (gross assets and liabilities totaling 1,126 and 1,037 percent of GDP, respectively), rising from almost balanced NIIP at end-2009. - Largest NIIP component from net FDI stock, about €1,007 billion (124 percent of GDP) at end-2019. - Netherlands reported largest inward and outward FDI positions in world at end-2018. - Top partner countries: United Kingdom, United States, Luxembourg, with gross bilateral stock positions close to US$1.6, US$1.2, and US$0.9 trillion, respectively. - TARGET2 assets of Eurosystem estimated about €62 billion. - NIIP expected to increase as ratio to GDP in 2020, possibly exceeding 100 percent in absence of large revaluation effects. - Assessment: Netherlands’ safe haven status and sizable foreign assets limit risks from large foreign liabilities. - 2019 (% GDP): - NIIP: 89 - Gross Assets: 1,126 - Res. Assets: 262.1 - Gross Liab.: 1,037 - Debt Liab.: 306.6 ### Netherlands — Current Account - Background: - In 2019, CA surplus decreased slightly to 10.2 percent of GDP (10.5 percent cyclically adjusted). - CA in surplus since 1981, reflecting positive goods and services balance largely vis-à-vis EU trading partners. - Primary income balance relatively low despite large NIIP. - Nonfinancial corporate net saving has been main driver of surpluses since 2000, with large corporate saving financing substantial FDI outflows. - Household net saving accounts for small part of CA surpluses due to offsetting high mandatory second-pillar pension contributions and high real estate investment. - Status as trade and financial center and natural gas exporter also contribute to strong structural position. - In 2020, CA surplus projected to decline to 8.0 percent of GDP. - Assessment: - EBA CA model estimates CA norm of 3.3 percent of GDP and CA gap of 7.2 percent of GDP in 2019, with unexplained residual of 4.6 percent of GDP. - Large unexplained residual primarily reflects high gross saving of Netherlands-based multinationals, possibly reflecting measurement errors or biases in official statistics that may overstate net accumulation of wealth attributed to Dutch residents. - Foreign ownership of publicly listed Dutch corporations above 85 percent over past 10 years. - IMF staff adjustment of –2.3 percent of GDP based on data from Dutch central bank. - Taking these into account, IMF staff assesses norm in range of 1.3 to 5.3 percent of GDP, and corresponding CA gap of 2.9 to 6.9 percent of GDP. - 2019 (% GDP): - Actual CA: 10.2 - Cycl. Adj. CA: 10.5 - EBA CA Norm: 3.3 - EBA CA Gap: 7.2 - Staff Adj.: –2.3 - Staff CA Gap: 4.9 ### Netherlands — Real Exchange Rate - Background: - Annual average CPI-based REER remained flat in 2019; average ULC-based REER depreciated by about 4 percent in 2019. - Euro depreciation together with higher inflation in Netherlands (temporary indirect tax increases) led to unchanged REER; Dutch ULC grew more slowly than trading partners’. - As of May 2020, REER appreciated by 1.1 percent relative to 2019 average. - Assessment: - EBA REER models indicate overvaluation between 4.2 percent (level model) and 16.1 percent (index model) in 2019, largely attributable to unexplained residuals. - IMF staff CA gap of 4.9 percent of GDP implies REER undervaluation of about 7 percent (assuming semi-elasticity of 0.7). - Considering estimates and uncertainty, IMF staff assesses REER remained undervalued by about 4.1 to 9.9 percent, with midpoint of 7 percent. ### Netherlands — Capital and Financial Accounts: Flows and Policy Measures - Background: - Net FDI and portfolio outflows dominate the financial account. - FDI outflows driven by investment of corporate profits abroad, largely by multinationals. - More than half of gross FDI assets and liabilities attributable to subsidiaries of multinationals. - Assessment: Strong external position limits vulnerabilities from capital flows. Financial account likely to remain in deficit as long as corporate sector continues to invest substantially abroad. ### Netherlands — FX Intervention and Reserves Level - Background: Euro is a global reserve currency. - Assessment: - Reserves held by euro area typically low relative to standard metrics, but the currency is free floating. *International Monetary Fund | 2020 — CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS (selected country assessments: Malaysia, Mexico, Netherlands).* ### 0.5 percent of GDP in 2019. While this evolution is consistent with a maturing FDI cycle, the CA surplus is excessive gi ### 0.5 percent of GDP in 2019. While this evolution is consistent with a maturing FDI cycle, the CA surplus is excessive gi ### Poland — External Position and Outlook - Background and short-term outlook: - CA surplus moved to 0.5 percent of GDP in 2019 from a deficit of 1 percent of GDP in 2018, driven by a further rise in goods and services balances and assisted in part by lower oil prices. - In 2020:Q1, the CA surplus increased 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 is expected to return to a small deficit as private net saving returns to a lower level, more than offsetting an anticipated rise in government net saving. - Uncertainty is higher over the medium term due to the COVID-19 pandemic. - Assessment: - EBA CA model (2019): norm of –2.1 percent of GDP; cyclically adjusted CA of 0.6 percent of GDP; EBA CA gap of 2.7 (±1) percent of GDP. - Identified policy gaps account for 1.7 percent of GDP; unexplained residual of 0.9 percent of GDP. - Staff-adjusted CA gap: 2.7 percent of GDP. - Foreign asset and liability position (2019): - NIIP: –50 percent of GDP (NIIP stood at –50 percent of GDP in 2019). - Gross assets: 49 percent of GDP. - Gross liabilities: 99 percent of GDP. - Net FDI accounts for 36 percent of gross external liabilities. - Gross external debt: 62 percent of GDP; 27 percent of that 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). - Gross reserves at end-2019 were equivalent to 142 percent of short-term debt. - 2019 (% GDP) snapshot: NIIP: –50.3; Gross Assets: 48.8; Res. Assets: 21.7; Gross Liab.: 99.2; Debt Liab.: 43.2. - Real exchange rate: - REER depreciated by 18 percent since 2008, including a 1.3 percent real depreciation in 2019. - As of May 2020, the REER had depreciated by 2.2 percent relative to the 2019 average. - REER index model suggests a gap of –2.7 percent. - IMF staff assesses the 2019 REER gap to be –6 percent (±2 percent), consistent with the staff CA gap; implied undervaluation range of –4 to –8 percent given a CA-REER elasticity of 0.44. - Capital and financial accounts: - Capital account dominated by inflows of EU funds, averaging about 2 percent of GDP over past 10 years. - In 2019, financial account outflows amounted to 1.7 percent of GDP, mainly due to portfolio investment. - Net FDI inflows in 2019: 2 percent of GDP (narrowed by 0.5 percentage point from 2018). - In 2020:Q1, financial account outflows increased to US$8.2 billion (1.5 percent of annual GDP), concentrated in March; projected outflows for 2020: 2 percent of GDP. - Foreign holdings of domestic government securities declined to 23 percent of the total; 6.9 percent of GDP. - FX intervention and reserves level: - Gross international reserves: US$128 billion at end-2019. - Net reserves: US$113 billion at end-2019 (excluding central bank repo operations and government FX deposits). - Net reserves increased from US$101 billion at end-2018 to US$113 billion at end-2019. - Through March 2020: net reserves increased approximately US$1 billion from end-2019 to US$114 billion; gross reserves declined by about US$8 billion to US$121 billion, reflecting a decline in repo operations. - The zloty is free floating; the central bank does not directly intervene in the FX market. - Net reserves at end-2019 were 127 percent of the IMF’s composite reserve adequacy (ARA) metric; gross reserves about 144 percent of the ARA metric. - Potential policy responses (Poland): - 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 imbalances persist): - Policies to boost corporate investment and productivity. - Active labor market policies to facilitate access to skilled labor. - Structural reforms focused on raising potential growth. - Fiscal deficit should be reduced after the crisis abates. - Better target 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. ### Russia — External Position and Outlook - Overall assessment: - External position in 2019 broadly in line with medium-term fundamentals and desirable policies. - CA surplus narrowed to 3.8 percent of GDP in 2019 (from 6.8 percent in 2018) reflecting moderating oil prices. - Capital outflows caused by uncertainties surrounding sanctions declined dramatically. - Potential policy responses: - Short term: fiscal policy to manage the COVID-19 public health emergency and compensate those most affected, including self-employed and informal workers and SMEs. - Medium term: reduce impact of oil price volatility on the non-oil sector, rebalance government expenditure toward health, education, and infrastructure, and pursue structural reforms to improve the business climate and boost private investment. - Foreign asset and liability position (2019): - NIIP: 21.0 percent of GDP (NIIP had declined slightly to US$356.5 billion by end-2019, which at 21 percent of GDP). - Gross assets: 88.8 percent of GDP. - Res. assets: 32.6 percent of GDP. - Gross liabilities: 67.8 percent of GDP. - Debt liabilities: 20.6 percent of GDP. - Nonresidents’ holdings of ruble-denominated government debt rose marginally to 32 percent of total external debt from 24 percent at end-2018. - Current account: - CA balance: 3.8 percent of GDP in 2019. - Nonenergy CA deficit widened by 1 percentage point to 9.7 percent of GDP. - CA surplus of US$22 billion in 2020:Q1, driven by a trade surplus of US$32 billion. - CA balance expected to decline to near zero in 2020 on contracting exports caused by oil price plunge and weak global demand, but expected to recover to above 3 percent of GDP over the medium term. - Assessment: - EBA CA model (2019): norm of 3.7 percent of GDP; cyclically adjusted CA surplus of 3.8 percent of GDP; EBA CA gap of 0.1 percent of GDP. - Identified policies contributed 2.6 percent of GDP to the gap (sound fiscal and monetary policy, lower-than-desirable health spending, and increased reserves). - IMF staff assesses the CA gap at 0.1 percent of GDP in 2019 with a range between –0.9 and 1.1 percent of GDP. - Real exchange rate: - REER appreciated by 2.5 percent in 2019. - By end-May 2020, REER had depreciated by 5.0 percent from the 2019 average. - EBA level and index REER models indicate undervaluation of 14.5 percent and 9.3 percent, respectively. - Using elasticity parameter of 0.27 and staff-assessed CA gap, staff assesses the 2019 REER gap in range –5.4 to 4.6 percent, midpoint –0.4 percent. - Capital and financial accounts: - Net private capital outflows declined significantly in 2019; majority of net outflows occurred in Q1. - Banking sector reduced foreign liabilities by US$20.2 billion; nonbanking private sector increased both foreign assets (US$25.3 billion) and foreign liabilities (US$25.7 billion). - Moderate private sector outflows in 2020:Q1. - Risks from volatility in oil prices, global demand, and geopolitical uncertainty. - FX intervention and reserves: - Since ruble float in November 2014, FX interventions limited. - In 2020:Q1, FX sales were moderate despite sharp fall in oil revenue. - International reserves rose to US$554 billion (more than 19 months of imports) by end-2019 and edged up marginally in 2020:Q1. - Reserves reflected FX purchases by the National Wealth Fund under the fiscal rule. - International reserves at end-2019 equivalent to 310 percent of IMF reserve adequacy metric (above adequacy range of 100 to 150 percent). - An additional commodity buffer of US$77 billion is appropriate, translating to a reserves-to-buffer-augmented metric ratio of 217 percent. - 2019 (% GDP) snapshot: NIIP: 21.0; Gross Assets: 88.8; Res. Assets: 32.6; Gross Liab.: 67.8; Debt Liab.: 20.6. - Current account 2019 (% GDP) snapshot: Actual CA: 3.8; Cycl. Adj. CA: 3.8; EBA CA Norm: 3.7; EBA CA Gap: 0.1; Staff Adj.: 0; Staff CA Gap: 0.1. ### Saudi Arabia — External Position and Outlook - Overall assessment: - External position in 2019 was weaker than level implied by medium-term fundamentals and desirable policies. - Pegged exchange rate provides credible policy anchor; external adjustment driven primarily by fiscal policy. - External balance sheet remains very strong; reserves comfortable against standard IMF metrics though external savings may be insufficient from an intergenerational equity perspective. - Potential policy responses: - Immediate priority: fiscal support to health sector and sectors hit by coronavirus, implying larger-than-budgeted fiscal deficit in 2020 given expected decline in oil revenues. - Medium term: fiscal consolidation to raise the CA and increase saving for future generations, via energy price reforms, non-oil revenue measures, expenditure restraint, and more efficient spending, supported by fiscal framework reforms. - Structural reforms to diversify the economy and boost non-oil tradable sector. - Foreign asset and liability position (2019): - NIIP: 86.1 percent of GDP at end-2019 (up from 80 percent in 2018; down from 105 percent in 2015). - Gross assets: 146.0 percent of GDP. - Res. assets: 63.0 percent of GDP. - Gross liabilities: 59.9 percent of GDP. - Debt liabilities: 23.6 percent of GDP. - Composition: Portfolio and other investments 46 percent of total external assets; reserves 43 percent; FDI 11 percent. - Current account: - CA surplus of 5.9 percent of GDP in 2019, down from 9.2 percent in 2018. - Trade balance decreased by 5 percent of GDP due to lower oil price and volume and higher imports. - Terms of trade deteriorated by 4.6 percent. - CA expected to register a deficit of 4.9 percent of GDP in 2020 as oil revenues decline further (terms of trade projected to worsen by 42 percent). - Assessment: - EBA-Lite and other approaches produce varied CA gap estimates. - CA gap estimates for 2019: –2.1 percent of GDP (CA-regression); –2.3 and –5.0 percent of GDP (consumption allocation rules: constant real annuity and constant real per capita annuity); Investment Needs Model: –2.6 percent of GDP. - IMF staff assesses a CA gap of –3.0 percent of GDP with range –1.8 to –4.2 percent of GDP in 2019. - 2019 (% GDP) snapshot: Actual CA: 5.9; Cycl. Adj. CA: 5.2; EBA CA Norm: —; EBA CA Gap: —; Staff Adj.: —; Staff CA Gap: –3.0. - Real exchange rate: - Riyal pegged to US dollar at 3.75 since 1986. - REER depreciated by 0.4 percent in 2019 but was 5.4 percent above its 10-year average. - As of end-May 2020, REER had appreciated by about 2.9 percent relative to 2019 average. - IMF staff assesses the 2019 REER gap to be about 13 percent with a range of 10 to 16 percent. - Capital and financial accounts: - Net financial outflows continued in 2019 as public sector institutions accumulated external assets. - FX reserves increased marginally in 2019; reserves expected to decline in 2020 as the CA slips into a deficit and public sector overseas investments continue. - Equity markets saw large outflows in March 2020 and some rebound more recently. - Analysis complicated by lack of detailed information on nature of financial flows. - FX intervention and reserves level: - Net FX reserves increased slightly to US$494 billion at end-2019 (62 percent of GDP, 30.6 months of imports, and 375 percent of IMF’s reserve adequacy metric) but down from US$724 billion in 2014. - Reserves have fallen by US$50 billion since end-2019, mainly due to transfers of foreign assets to the sovereign wealth fund. - Reserves more than adequate for precautionary purposes by IMF metrics; reserves also function as intergenerational savings. - Fiscal adjustment needed over the medium term to raise the CA and increase savings for future generations. - 2019 (% GDP) snapshot: NIIP: 86.1; Gross Assets: 146.0; Res. Assets: 63.0; Gross Liab.: 59.9; Debt Liab.: 23.6. *Source: https://www.imf.org/-/media/files/publications/esr/2020/english/text.pdf* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Singapore: Overall Assessment - The external position in 2019 was substantially stronger than 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. ### Singapore: 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 imbalances that existed prior to the COVID-19 outbreak persist in the medium term: - Higher public investment, including on 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, which would support a trend real exchange rate appreciation. ### Singapore: 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 that the NIIP will rise over the medium term. - The large positive NIIP in part reflects the accumulation of assets for old-age consumption, which is expected to be gradually unwound over the long term. - Assessment: - Large gross non-FDI liabilities (438 percent of GDP in 2019)—predominantly cross-border deposit taking by foreign bank branches—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 ### Singapore: Current Account - Background: - CA surplus was 17.0 percent of GDP in 2019, similar to 17.2 percent in 2018. - CA balance is slightly lower than its average since 2014 and significantly lower than the post-global-financial-crisis peak of 22.9 percent in 2010. - CA balance likely to decline in 2020—to about 13 percent of GDP—due to COVID-19 movement restrictions and weak external demand, with high uncertainty. - Large CA balance reflects a strong goods balance and small surplus in services partly offset by income balance deficit. - Oil trade deficit narrowed in 2019. - Structural factors and policies that boost saving include status as a financial center, consecutive fiscal surpluses, rapid pace of aging, mandatory defined-contribution pension program (assets about 83.8 percent of GDP in 2019), and relatively high productivity. - CA surplus over the medium term projected to narrow 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 in part 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 ### Singapore: Real Exchange Rate - Background: - REER appreciated by 0.1 percent year over year in 2019 reflecting NEER appreciation by 1.4 percent year over year. - This followed a REER depreciation by 1.8 percent and NEER appreciation by 1.1 percent, both cumulative, between 2016 and 2018. - As of May 2020, the REER had depreciated by 2.8 percent relative to 2019 average. - Assessment: - IMF staff assesses the 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 about CA assessment and the semi-elasticity of the CA with respect to the REER. ### Singapore: Capital and Financial Accounts - Background: - Singapore has an open capital account. - As a trade and financial center, changes in market sentiment can affect Singapore significantly (risk aversion may lead to inflows as a regional safe haven; global stress may lead to outflows). - Financial account deficit reflects reinvestment abroad of income from official foreign assets, sizable net inward FDI, and smaller but more volatile net bank-related flows. - In 2019, deficit on the capital and financial account widened to 19 percent of GDP from 13 percent in 2018, reflecting higher net outflows of portfolio investment, more than offsetting increase in net inflows of direct investment and decline in net outflows of other investment. - Assessment: - Financial account likely to remain in deficit as long as the trade surplus remains large. ### Singapore: FX Intervention and Reserves Level - Background: - NEER is the intermediate monetary policy target; intervention is 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 sovereign wealth fund 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 FX reserves held by MAS, Singapore has access to other official foreign assets managed by Temasek and GIC. - 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 - The external position in 2019 was moderately weaker than the level implied by medium-term fundamentals and desirable policies, with the CA gap staying at the same level as in 2018. - Portfolio flows continued to finance most of the relatively high CA deficit. ### South Africa: Potential Policy Responses - Near term: policies need to cushion the negative impact of the COVID-19 crisis and protect the vulnerable through temporary and targeted fiscal support. - If pre-COVID imbalances persist in the medium term: - Reducing external gaps will require bold implementation of 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 functioning of labor markets to attract durable capital inflows such as FDI. - Seize opportunities to accumulate international reserves, should they arise, to strengthen ability to deal with FX liquidity shocks. ### South Africa: Foreign Asset and Liability Position and Trajectory - Background: - Large gross external assets and liabilities (137 and 129 percent of GDP in 2019). - NIIP rose from –8 percent of GDP in 2014 to 16 percent in 2015, mainly on valuation changes, but declined to 8 percent in 2019. - NIIP expected to continue moderating over the medium term as CA deficits projected to remain relatively high. - Gross external debt rose from 26 percent of GDP in 2008 to 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 mitigated by comfortable external asset position, bulk of liabilities in equities, and about half of all external debt being rand-denominated. - 2019 (% GDP): - NIIP: 8 - Gross Assets: 137 - Debt Assets: 13.9 - Gross Liabilities: 129 - Debt Liabilities: 43.2 ### South Africa: 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 COVID-19 uncertainty, 2020 CA deficit projected to decline to 1.8 percent of GDP 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 an elevated deficit in the income account—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. - Revised cyclically adjusted CA (–1.7 percent of GDP) is 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 regression model (0.9 percent of GDP) to reflect lower life expectancy at prime age relative to sample. - 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 ### South Africa: Real Exchange Rate - Background: - CPI-REER depreciated during 2011–16 and recouped some 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 CA approach. - Two REER-based regressions point to undervaluation in a range of 3.3 percent (level approach) and 15.7 percent (index approach), but staff deems these less reliable. ### South Africa: Capital and Financial Accounts - Background: - Net FDI flows 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 large portfolio outflows from emerging markets may continue. - Moody’s end-March downgrade to sub-investment status increased 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 the IMF’s Rapid Financing Instrument. ### South Africa: FX Intervention and Reserves Level - Background: - Exchange rate regime classified as floating; central bank 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 metric without considering existing CFMs and 83 percent after considering them). - Assessment: - If conditions allow, reserve accumulation would be desirable to strengthen the external liquidity buffer, subject to maintaining the primacy of the inflation objective. --- ### Spain: Overall Assessment - The external position in 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - In 2019, the CA remained in surplus for the eighth consecutive year. - Achieving a sufficiently strong NIIP will continue to require a relatively high CA surplus for a sustained period. ### Spain: Potential Policy Responses - Structural reforms in response to the global financial crisis—particularly labor market reform with resulting wage moderation, and fiscal adjustment—helped reduce imbalances. - To mitigate COVID-19 impact, targeted and temporary income and liquidity support is warranted. - If pre-COVID external vulnerabilities persist in the medium term: - Policies should foster competitiveness and carefully manage public debt load. - Boosting competitiveness through productivity gains would entail continued wage flexibility, reforms to address labor market duality, product and service market reforms, and actions to enhance education outcomes and innovation. ### Spain: Foreign Asset and Liability Position and Trajectory - Background: - NIIP dropped significantly during 2000–09; NIIP was –74 percent of GDP in 2019, but has risen by 15 percentage points since 2015, partly due to sustained CA surpluses. - Gross liabilities stood at 250 percent of GDP in 2019, with about two-thirds in the form of 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 had 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: favorable maturity structure of outstanding sovereign debt (averaging almost eight years) and ECB measures (QE) lowering cost of debt. - 2019 (% GDP): - NIIP: –73.5 - Gross Assets: 176.1 - Debt Assets: 80.9 - Gross Liab.: 249.6 - Debt Liab.: 151.7 ### Spain: Current Account - Background: - After a peak CA deficit in 2007, regained competitiveness from wage moderation and greater internationalization contributed to strong export growth and CA surpluses in 2012–19. - Historical data revisions (including upward changes in tourism receipts) increased recent CA surplus estimates; annual average surplus during 2013–18 revised from 1.5 to 2.3 percent of GDP. - CA surplus estimated at 2.0 percent of GDP in 2019. - With high uncertainty, 2020 CA projected at slightly below 2 percent of GDP, with imports declining 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 a norm of 1.1 percent of GDP for 2019, below the cyclically adjusted CA balance (2.2 percent of GDP). - Given external risks from large negative NIIP, IMF staff puts more weight on external sustainability and is guided by objective of raising NIIP to at least –50 percent over medium to long term. - NIIP projected to reach –57 percent of GDP over medium term under current policies (zero valuation effects assumed). - Allowing for a 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 ### Spain: 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. - CPI-based REER still moderately lower than its 2009 peak; ULC-based REER shows appreciation between 1999 and 2008 substantially reversed, with 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 had depreciated by 1.6 percent relative to 2019 averages. - Assessment: - EBA REER models estimate an overvaluation of 4.9 to 5.2 percent for 2019, whereas IMF staff CA gap implies an undervaluation of 0.9 percent. - Taking into account need for preserving competitiveness and NIIP sustainability risks, IMF staff assesses 2019 REER gap to be in the range of –4.9 to 3.1 percent, with a midpoint of –0.9 percent. ### Spain: Capital and Financial Accounts - Background: - Financing conditions continued to be favorable despite some increase in sovereign bond yields in wake of COVID-19 crisis. - By 2019:Q4 private sector had continued deleveraging against the rest of the world. - In 2019, financial account balance largely driven by net outflows of loans and other bank-related instruments (especially from sectors other than the central bank). - Accumulation of TARGET2 liabilities was negative for first time since 2015 (–3 percent of GDP in 2019). - Assessment: - Investor sentiment improved in 2019. - Amid pandemic, large external financing needs leave Spain vulnerable to sustained market volatility, although ECB’s policies to maintain favorable liquidity conditions and monetary accommodation remain a mitigating factor. ### Spain: 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. --- ### Sweden: Overall Assessment - The external position in 2019 was stronger than the level implied by medium-term fundamentals and desirable policies. - Outlook for 2020 clouded by high uncertainty caused by the COVID-19 crisis, likely pushing Sweden into a recession in 2020. ### Sweden: Potential Policy Responses - Given large fiscal buffers, Sweden was in a good position to provide timely, substantial support to companies and households through compensation programs, guarantees, and tax deferrals. - The Riksbank is providing ample liquidity and has expanded its quantitative easing program; a swap line with the US Federal Reserve was established to address dollar funding pressures. - Additional sizable targeted policies, complemented by broader stimulus packages, will be required to secure resources for health care and limit propagation of the health crisis to economic activity. - If pre-COVID imbalances and policy distortions persist in the medium term, reforms should be implemented to raise potential output and reduce household uncertainties around sustainability of Sweden’s strong social model. ### Sweden: 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. - NIIP expected to rise further in the medium term, reflecting outlook for continued CA surpluses. - Increase in NIIP above CA surplus in 2019 due to large positive valuation effects; 2019 data preliminary and subject to considerable errors and omissions (average –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 for individual and total currencies. - Measures, together with strong FX reserves, Federal Reserve swap line, and low public debt, appear to have helped manage crisis-related pressures, but 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 ### Sweden: Current Account - Background: - After being unexpectedly low at 1.9 percent of GDP in 2018, the CA increased in 2019 to 4.2 percent of GDP, interrupting a trend decline in the surplus in the 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 *Italic: Source: CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS, International Monetary Fund | 2020* ### 2.8 percent of GDP due to depressed external demand, but this projection is subject to high uncertainty. ### text - 2.8 percent of GDP due to depressed external demand, but this projection is subject to high uncertainty. ### Current Account and Assessment - Projection: 2.8 percent of GDP due to depressed external demand, but this projection is subject to high uncertainty. - Cyclically adjusted CA: estimated at 4.5 percent of GDP in 2019. - EBA norm: cyclically adjusted EBA norm of 1.2 percent of GDP. - Historical note: the estimated EBA norm for Sweden has been below the actual CA balance for the past two decades, suggesting factors not captured by the model (for example, Sweden’s mandatory contributions to fully funded pension plans and an older labor force) may be driving Sweden’s saving-investment balances. - IMF staff assessment: Sweden’s CA gap at 3.2 percent of GDP in 2019, within a range of ±1.5 percent of GDP, reflecting uncertainty around the EBA-estimated norm. - 2019 (% GDP) key 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 - 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. Temporary weakness 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 (2019): - REER index gap: –19.4 percent - REER level gap: –19.0 percent - ULC-based REER index: 10.8 percent below its 27-year average (since the krona was floated in 1993) in 2019. - Valuation range using a 0.35 semi elasticity of CA to the REER applied to the CA gap of 3.2 percent ±1.5 percent of GDP: –5.1 to –13.7 percent. - IMF staff assessment: the krona is 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 (2019): - Portfolio investment outflows: 2.1 percent (provided two-thirds of the financial account balance). - Other investment outflows: 1.4 percent. - Direct investment outflows: 0.4 percent. - Assessment: - Sweden’s large banks remain vulnerable to liquidity risks stemming from global wholesale markets given their size and funding model, 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: - Exchange rate: free floating. - Foreign currency reserves: US$56 billion in December 2019. - Reserves equivalence: 19 percent of the short-term external debt of monetary and financial institutions (primarily banks) and about 11 percent of GDP. - Assessment and policy note: - Given high dependence of Swedish banks on wholesale funding in foreign currency, and disruptions in such funding during 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. *International Monetary Fund | 2020* ### 1.6 percent of GDP, subject to considerable uncertainty (with a range between –0.2 and 3.4 percent of GDP). ### text - 1.6 percent of GDP, subject to considerable uncertainty (with a range between –0.2 and 3.4 percent of GDP). ### Turkey — Key external sector findings - 2019 (% GDP) Current Account (CA) and gaps: - 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 - Staff CA gap estimate: 1.6 percent of GDP, subject to considerable uncertainty (with a range between –0.2 and 3.4 percent of GDP). - Real Exchange Rate (REER): - REER depreciated by 2.2 percent in 2019 and a further 7.8 percent through May 2020. - EBA REER level and index approaches suggest the REER remained undervalued in 2019 by 21 to 23 percent (with large uncertainties). - IMF staff CA gap suggests the REER was undervalued by 7 percent (based on an elasticity of 0.22). - Staff overall assessment: REER undervalued by 7 to 23 percent in 2019 (with a midpoint of 15 percent). - Capital and Financial Accounts: flows and policy measures: - Net capital flows: inflows of 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 of US$6 billion due to portfolio and other investment outflows. - Policy measures: limits on bank swaps and other derivatives with foreign counterparties; export surrender and repatriation requirements introduced August 2018, partially unwound, then limits reintroduced and tightened in December 2019 and February–April 2020. - Assessment: quality of financing remained weak in 2019; annual gross external financing needs of about 23 percent of GDP on average during 2020–21; CFMs should be phased out as conditions improve. - FX intervention and reserves level: - Gross reserves declined by US$22 billion as of mid-May 2020. - Net international reserves dropped by US$15 billion to US$26 billion since the beginning of the year. - Gross reserves: increased to 85 percent of the IMF’s ARA metric at end-2019 (from 74 percent at end-2018), dipped to 67 percent in mid-May 2020. - Reserve coverage of external financing requirements: rose to 64 percent in 2019 (from 46 percent in 2018), then dropped to 49 percent in mid-May 2020. - Assessment: significant accumulation of reserves over the medium term is needed given sizable external liabilities and dependence on short-term and portfolio funding. *Italic: Source — 2020 EXTERNAL SECTOR REPORT, International Monetary Fund | 2020 (excerpt).* ### United Kingdom — Key external sector findings - Overall assessment: - External position in 2019 was weaker than level implied by medium-term fundamentals and desirable policies. - CA deficit remained high in 2019; uncertainty significant due to measurement issues and uncertainty about future trade arrangement with the European Union. - Foreign asset and liability position and trajectory: - NIIP declined to –25.2 percent of GDP in 2019 from –12.8 percent of GDP in 2018. - NIIP declined by 2.5 percentage points over past five years, reflecting a negative CA contribution (–19.7 percentage points) largely offset by valuation and growth effects (13.7 percentage points and 3.6 percentage points, respectively). - Composition highlights: assets roughly match liabilities; FDI about 86 percent of GDP, equity instruments about 70 percent of GDP, derivatives about 98 percent of GDP (about ¾ linked to interest rates and ¼ to exchange rates), other investment about 183 percent of GDP. - Portfolio investment liabilities: 167 percent of GDP; portfolio investment assets: 126 percent of GDP. - Geographic concentration: United States, other European countries, and Japan account for about 75 percent of total UK external assets and liabilities. - 2019 (% GDP) balance-sheet snapshot: - NIIP: –25.2 - Gross Assets: 508.6 - Debt Assets: 250.7 - Gross Liab.: 533.8 - Debt Liab.: 288.0 - Assessment: sustainability of NIIP not an immediate concern; gross stock positions (assets and liabilities) both exceed 500 percent of GDP and present potential vulnerability. - Current Account: - CA deficit narrowed marginally to –3.8 percent of GDP in 2019 (from –3.9 percent in 2018). - Projected CA to decline to 3.5 percent of GDP in 2020 due to a narrower trade deficit and slight rise in primary income balance. - Measurement biases: retained earnings on portfolio equity assets estimated at about 0.8 percent of GDP (not recorded on accrual basis); unrecorded impact of expected inflation differentials estimated about 0.5 percent of GDP. - IMF staff assesses CA gap in range of –0.9 to –4.9 percent of GDP, taking into account uncertainty related to UK-EU negotiations and measurement issues. - 2019 (% GDP) CA figures: - Actual CA: –3.8 - Cycl. Adj. CA: –3.8 - EBA CA Norm: 0.4 - EBA CA Gap: –4.2 - Staff Adj.: 1.3 - Staff CA Gap: –2.9 - Real Exchange Rate: - Pound unchanged in real effective terms in 2019 relative to 2018 average; depreciated since mid-2016 by about 6 percent. - As of May 2020, REER had depreciated by 0.4 percent compared with 2019 average. - EBA REER model gaps for 2019: –5.6 and –12.6 percent. - IMF staff CA gap implies an REER gap of 12 percent. - Staff overall assessment: REER overvalued between 0 and 15 percent, with a midpoint of 7.5 percent. - Capital and financial accounts: - 2019 financing composition: net FDI inflows 1 percent of GDP; net other investments 5.7 percent of GDP; net portfolio investments declined by 2 percent of GDP. - Nonresidents’ net purchases of UK debt (portfolio and direct) represented 2 percent of GDP. - Assessment: volatility in capital flows inherent given UK’s international financial center role; mitigants include sound regulation and a strong financial sector; risk that FDI and portfolio inflows may decelerate due to future trade relations with EU. - FX intervention and reserves: - Pound has status of global reserve currency; share of global reserves in sterling unchanged since 2015 at about 4.5 percent. - Reserves held by the United Kingdom are typically low relative to standard metrics; currency is free floating. *Italic: Source — 2020 EXTERNAL SECTOR REPORT, International Monetary Fund | 2020 (excerpt).* ### United States — Key external sector findings - Overall assessment and policy recommendations: - External position in 2019 was moderately weaker than level implied by medium-term fundamentals and desirable policies. - Recommendation: expand fiscal efforts to ease coronavirus impact; once health crisis subsides, use fiscal space for front-loaded package increasing infrastructure investment, facilitating transition to a lower-carbon economy, and offering consumption subsidies; medium-term fiscal consolidation to aim at a general government primary surplus of about ¾ percent of GDP. - Structural policies: upgrade infrastructure, enhance schooling/training/mobility, support working poor, policies to increase labor force growth (including skill-based immigration reform); roll back tariff barriers and resolve trade and investment disagreements to support open global trading system. - Foreign asset and liability position and trajectory: - NIIP decreased from –46.4 percent of GDP in 2018 to –51.3 percent of GDP in 2019, including valuation effects of –4.9 percent of GDP. - IMF staff baseline: NIIP projected to decline by about 2 percent of GDP through the medium term due to sustained CA deficits. - Assessment: financial stability risks if foreign demand for US fixed income securities unexpectedly declines; risk moderated by US dollar’s reserve currency status. - 2019 (% GDP) balance-sheet snapshot: - NIIP: –51.3 - Gross Assets: 136.8 - Debt Assets: 40.4 - Gross Liab.: 188.1 - Debt Liab.: 87.2 - Current Account: - CA deficit decreased from 2.4 percent of GDP in 2018 to 2.3 percent in 2019 (2.4 to 2.0 in cyclically adjusted terms). - CA expected at about 2 percent of GDP in 2020, with fiscal expansion offset by higher private saving and higher net exports due to compressed imports. - EBA model estimates for 2019: - Actual CA: –2.3 - Cycl. Adj. CA: –2.0 - EBA CA Norm: –0.7 - EBA CA Gap: –1.3 - Staff Adj.: 0.0 - Staff CA Gap: –1.3 - IMF staff assesses 2019 cyclically adjusted CA to be –0.8 to –1.8 percent of GDP lower than implied by fundamentals and desirable policies. - Real Exchange Rate: - REER appreciated by 2.8 percent in 2019 (after depreciating by 1 percent in 2018). - As of end-2019 REER about 17 percent higher than average for 2014. - Through May 2020, US dollar appreciated 4.9 percent in real terms relative to 2019 average. - REER overvaluation estimates for 2019: - Indirect estimate (based on EBA CA assessment, elasticity 0.11): 11.4 percent overvaluation. - EBA REER index model: 8.1 percent overvaluation. - EBA REER level model: 10.9 percent overvaluation. - Staff assessment: 2019 average REER overvalued in the 8 to 14 percent range, with a midpoint of 11 percent. - Capital and financial accounts: - Net financial inflows about 1.8 percent of GDP in 2019 (compared with 2.2 percent in 2018). - Composition: stronger net portfolio investment flows offset by weaker direct and other investment flows. - Assessment: open capital account; vulnerabilities limited by dollar’s reserve status and foreign demand for US Treasury securities. - FX intervention and reserves: - Dollar has status of global reserve currency; reserves held by United States typically low relative to standard metrics; currency is free floating. *Italic: Source — 2020 EXTERNAL SECTOR REPORT, International Monetary Fund | 2020 (excerpt).* ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS ### Hong Kong SAR - Not in the EBA sample as an outlier; one approach is to apply EBA-estimated coefficients. - EBA-implied CA norm in 2019: about 14 percent of GDP; implied CA gap: about –8½ percent. - Three adjustments reducing the EBA CA gap: - Adjustment of 3 to 5 percentage points to the NIIP contribution due to systematically lower income balance relative to NIIP (higher share of debt instruments on the asset side than liabilities). - Precious Metals Depository opening led to a decline of 4 to 4½ percentage points in the gold trade balance that does not reflect wealth changes. - 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. - Financial linkages with the mainland: as of December 2019, banking system claims on mainland nonbank entities = HK$6.1 trillion, about 213 percent of GDP, up about 14 percentage points since end-2018. - A range is calculated by applying exchange rate semi-elasticities of Hong Kong SAR and similar economies to the IMF staff CA gap range. ### 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: 0.9 percentage point applied to model-estimated CA norm due to younger average prime age and exit age from workforce. - EBA regression uncertainty: range of ±1.5 percent added (standard error of EBA norm is 1.3 percent). - Semi-elasticity of CA/GDP with respect to REER (trade adjustment): –0.18. - REER midpoint calculation: average of EBA index model gap (2.1 percent) and REER gap implied by IMF staff CA gap estimate of –1.0 percent of GDP (5.6 percent); midpoint 3.9 percent. Width: standard ±5 percent interval applied to midpoint 3.9 percent, leading to range of –1.2 to 8.9. ### Italy - Tiering at the ECB: deposits below a country-level cap of six times the minimum reserve requirement benefit from higher rates; Italy was only country below that threshold and attracted liquid assets from other euro area banks (one-off effect). - Debt assets and liabilities data reference year: 2018. - Semi-elasticity of the CA balance (percent of GDP) to REER: 0.26. ### Japan - Staff range for the REER gap computed by applying staff-estimated semi-elasticity of 0.14 to staff CA gap range. ### Malaysia - Ratios to GDP based on IMF staff estimates using US dollar values. - About one-third of external debt denominated in local currency and largely medium-term maturity; domestically issued debt holdings by nonresidents about 13 percent of GDP as of end-2019. - Short-term FX-denominated debt largely belongs to banking system; portion matched by short-term foreign currency assets and supervised by Bank Negara Malaysia. - IMF staff stress tests indicate resilience to large capital flow reversal due to depth of domestic financial markets and role of institutional investors. - 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 facilitating onshore FX risk management; two measures classified as CFMs; enforcement of resident banks’ noninvolvement in offshore ringgit transactions considered enhanced enforcement of existing CFM. Additional measures announced over 2017–19. - 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 semi-elasticity of CA balance to REER of 0.7. ### Poland - Identified policy gaps contribution to CA: 1.7 percentage points (mainly credit gap 0.7 percentage point; fiscal policy gap: domestic too-loose –0.1 percentage point offset by trading partners too-loose 0.9 percentage point). - No adjustor to CA norm despite negative NIIP declining and projected to decline further. - Standard error for 2019 CA norm: 0.6 percent of GDP; IMF staff uses larger confidence band due to potential measurement error related to remittances. - REER level model suggests undervaluation of 18.5 percent; model residuals large (–16.1 percent), indicating potential poor capture of equilibrium REER changes. ### Russia - Nominal GDP in US dollars grew by only 1.9 percent in 2019, reflecting moderate growth. - Unfavorable valuation changes due to strong performance of Russian stock market over past 15 years as oil price soared, boosting valuation of foreign-owned assets. - “Disguised” capital outflows (pre-payments on undelivered imports, repeated large transfers abroad deviating from standard remittance behavior, securities transactions at inflated prices) are included in financial account but not in reported NIIP foreign asset position; actual NIIP could be higher than reported. - No additional cyclical adjustment needed in 2019 due to lower oil price volatility. - Range of REER estimate: ±5 percent around the midpoint, reflecting uncertainties including shocks and oil market volatility. ### Saudi Arabia - At current oil exports, a US$1 change in oil price results in a 0.5 percent of GDP first-round change in the CA balance. - Assumed average oil export price: US$36.20 in 2020 and US$66.50 in 2019. - Oil export volumes expected to decrease by 6 percent in 2020. - EBA models do not include Saudi Arabia; IMF staff used three EBA-Lite approaches: - CA regression approach: cyclically adjusted CA norm estimated at 7.4 percent of GDP. - Consumption Allocation Rules (two variants): estimated CA norms 8.1 percent of GDP (constant real annuity) and 10.8 percent of GDP (constant real per capita annuity). - Investment Needs Model: produced a CA gap of –2.6 percent over the medium term. - 2019 CA gap (–3.0 percent of GDP) is the average of estimates from the three approaches. ### Singapore - Negative income balance despite large positive NIIP, reflecting lower rates of return on foreign assets relative to returns on foreign liabilities (asset composition tilted toward safer assets with lower returns). - Singapore not included in EBA sample; staff estimates CA norm using various approaches. - Staff-estimated CA gap: about 4 percent of GDP; fiscal policy gap contributes about 1.4 percent of GDP; 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. - Demographic adjustor: –1 percent of GDP to model-based CA norm due to younger average prime age and exit age from workforce. - Net current transfers related to SACU assessed to have net negative impact on CA and warrant adjustment to cyclically adjusted CA. - Measurement issues in income balance likely contribute to underestimation of CA. - 2019 EBA CA norm higher than in 2018 because a lower desirable fiscal deficit is required to stabilize future debt. - Applying an estimated long-term elasticity of 0.26 suggests a REER overvaluation of 2 to 10 percent. - Gauging appropriate REER is challenging due to weakening average REER levels from pre-2000 to post-2000 and model attribution issues. ### Spain - Based on data through 2019:Q4. - EBA model suggests CA norm of 1.1 percent of GDP with standard error of 0.8 percent of GDP; does not fully account for very negative NIIP (about 30 percent of gross liabilities in equity). - For external stability and to raise NIIP by at least roughly 3 percent of GDP annually over next 10 years, a CA norm in the range of 1 to 3 percent of GDP is necessary. - Over 2013–19, valuation effects averaged –2.9 percent of GDP per annum; CA surpluses averaged about 2.2 percent of GDP per annum. - REER gap midpoint from IMF staff-assessed CA gap and semi-elasticity of CA to REER of 0.22; REER gap range ±4 percent obtained from standard error of EBA CA norm (0.8 percent of GDP) and CA-to-REER semi-elasticity. ### Sweden - Range used to reflect uncertainty around the EBA estimated norm. ### Switzerland - Other stock-flow adjustments include changes in statistical sources (number of entities surveyed and items covered); quantitative importance unknown. - Swiss franc appreciation (depreciation) has negative (positive) effect on NIIP; symmetric percentage increase in share prices in Switzerland and abroad would reduce NIIP. - Underlying CA adjustments: - Retained earnings on portfolio equity investment not recorded in income balance under sixth edition BPM. - Recording of nominal interest on fixed income securities compensates for expected valuation losses. - Adjusting for both effects and lagged net foreign assets contribution, underlying CA would need to be reduced by about 3.5 percent of GDP. - CA gap range reflects assessment uncertainty. - IMF staff CA gap for 2019: 1.8 percent of GDP, with range of ±2 percentage points. - With estimated CA-REER semi-elasticity of 0.52, IMF staff CA gap implies REER gap from –7.4 percent to +0.4 percent, midpoint –3.5 percent. ### Thailand - Country-specific adjustors for temporary factors removed (political uncertainty adjustor removed after March 2019 elections; terms-of-trade adjustor removed due to no notable divergence). - REER range based on CA range using elasticity of 0.62 (country-specific for Thailand). Current account range computed as estimated CA gap 6.1 percent of GDP with error band using standard error of norm for Thailand 1.6 percent of GDP. - EBA index REER gap in 2019: 13.5 percent; EBA level REER gap in 2019: –1.6 percent. ### Turkey - Despite persistent CA deficits, NIIP fluctuated with no clear trend during 2009–18 due to mix of 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 the Reserve Option Mechanism. ### United Kingdom - Official NIIP data may understate true position; Bank of England estimates market-value NIIP could have been close to 80 percent of GDP for mid-2017 (November 2017 inflation report). - Estimates in Juvenal and others (2019): in 2017 about 90 percent of external assets denominated in foreign currency compared with 60 percent for external liabilities. - Shift from FDI assets to portfolio equity assets implies greater-than-historical underestimation of income balance. - Should Brexit lead to significant increase in trade barriers, equilibrium exchange rate could be weaker than suggested. - Values reflect relative weights on different approaches with higher weight on CA gap methodology; wide range reflects large uncertainty about future UK–EU relationship. ### United States - REER midpoint obtained from CA model gap applying estimated semi-elasticity of 0.11. - REER range stems from largest absolute discrepancy between CA model and set of REER models. *Source: CHAPTER 3 2019 INDIVIDUAL ECONOMY ASSESSMENTS, 2020 External Sector Report* --- _Source: https://www.imf.org/-/media/files/publications/esr/2020/english/text.pdf_