## Preface ## Source details **Canonical URL:** [Preface](https://www.imf.org/-/media/files/publications/esr/2022/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2022/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2022/english/text.pdf.json) --- ### Scope and purpose - 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 more than 90 percent of global GDP. - Complements the World Economic Outlook and Article IV consultations. - 2022 assessments based on the latest version of the IMF’s External Balance Assessment (EBA) methodology and on data and IMF staff projections as of June 30, 2022. ### Structure of the report (high level) - Chapter 1: “External Positions and Policies” — reviews evolution of global external positions in 2021, pandemic and war in Ukraine effects, and policy priorities to reduce excess imbalances over the medium term. - Chapter 2: “Climate Policies and External Adjustment” — analyzes economic effects of climate mitigation policies on external positions; emphasizes dependence on country characteristics, degree of international coordination, and credibility. - Chapter 3: “2021 Individual Economy Assessments” — detailed external assessments and policy recommendations for 30 economies. ### Key findings and projections - Global current account balances: - Increased in 2020 and 2021 and are projected to widen further in 2022. - Widening in 2021 largely driven by pandemic’s continued impact and increase in commodity prices accompanying recovery. - Fallouts from the war in Ukraine and the lingering pandemic projected to widen global current account balances further in 2022. - Over the medium term, balances expected to resume pre-pandemic downward trend as COVID-19 economic implications fade, commodity prices normalize, and deficit economies implement fiscal consolidation faster than surplus economies; outlook subject to unusually high uncertainties. - Multilateral assessment of excess imbalances: - Global excess current account balances (sum of absolute deviations from norms) narrowed to 0.9 percent of world GDP in 2021 compared with 1.2 percent of world GDP in 2020. - Largest contributors to lower-than-warranted current account balances, in descending order: the United States, Canada, and Belgium. - Largest contributors to larger-than-warranted current account balances, in descending order: Germany, Australia, Russia, and Sweden. - External positions and stocks: - Creditor and debtor stock positions remained elevated at end-2021, though moderated from 2020 peaks. - Global financial safety net remained close to 20 percent of world GDP. ### Pandemic and war channels affecting external accounts - Continued fall in travel services, increased demand for medical products, and household consumption shift toward goods rather than services. - Transportation costs important in 2021 due to high demand for tradable goods and pandemic-related supply bottlenecks. - Energy and commodity prices recovered in 2021 and began rising; war in Ukraine exacerbated price increases in 2022, with opposite effects on exporters and importers. ### Financial and currency dynamics - Currency movements during 2021 relatively limited despite considerable depreciation in several emerging market currencies vis-à-vis broad set of trading partners. - Monetary policy tightening driving currency movements in 2022; revised expectations on the pace of US monetary tightening contributed to sizable currency realignment in early 2022, contributing to projected widening of global current account balances. ### Risks to the outlook (enumerated) - Possible pandemic resurgence. - Slower-than-expected recovery in public savings, especially in current account deficit economies. - The war’s impact on commodity prices. - Possible escalation of geopolitical conflicts and tensions. - China’s growth slowdown and zero-COVID-19 policy. - The global pace of financial tightening. - Trade and economic fragmentation. ### Policy implications and recommendations - Multilateral cooperation: - Key to addressing pandemic and war challenges, including humanitarian responses. - Coordinated efforts needed to counter risks of global economic fragmentation and eschew new barriers to trade. - Maintaining liquidity in the global financial system, including via the global safety net, to help economies manage risks related to tightening global financial conditions and financial system fragmentation. - Multilateral cooperation could greatly facilitate the green transition; coordinated implementation of climate mitigation policies can reduce global current account balances and help bring forward net zero emissions. - Policies to promote external rebalancing vary by economy: - Excess current account deficits driven by fiscal deficits above desirable medium-term levels: implement growth-friendly fiscal consolidation to support external rebalancing and move current account balances closer to norms. - Lingering competitiveness challenges: pursue structural reforms (labor, product market, and other reforms) to promote green, digital, and inclusive growth while boosting productivity. - Persistent excess current account surpluses: intensify reforms that encourage public and private investment and discourage excessive private saving, including expanding social safety nets in some emerging markets. ### Process, contributors, and review - Report prepared under overall guidance of Pierre-Olivier Gourinchas; directed by External Sector Coordinating Group (IMF area departments, Fiscal Affairs, Statistics, SPR, Monetary and Capital Markets, Research). - Lead preparers: Rudolfs Bems and Pau Rabanal. - Analysis benefited from comments across IMF departments and from IMF’s Executive Directors following discussion on July 22, 2022; projections and policy considerations are those of IMF staff. --- ### Executive Board summary and policy guidance ### Main messages - Coordinated implementation of climate mitigation policies is critical to address climate change while supporting external rebalancing, with due consideration of disproportionate economic costs on developing economies. - Excess current account imbalances remain concentrated in advanced economies; reduction requires continued joint efforts by both excess surplus and excess deficit economies. - Policy prescriptions differ by country: - Excess current account deficits reflecting excessive fiscal deficits: fiscal consolidation preserving space for infrastructure and social spending and preventing long-term scarring from the pandemic. - Competitiveness challenges: structural reforms to promote green, digital, and inclusive growth while boosting productivity. - Persistent excess surpluses: reforms to encourage public and private investment and discourage excessive private saving, including expanding social safety nets in some emerging markets. - Directors welcomed analysis of historical persistence of current account gaps and asked for refinements in policy recommendations. - Directors appreciated consideration of temporary pandemic-induced factors in external sector assessments and called for further analysis of potentially more permanent effects. - Directors welcomed refinements to EBA methodologies and reiterated need for transparency, consistency, and evenhandedness of external assessments; called for greater analysis of vulnerabilities from large external stock positions. - Executive Board discussion concluded July 22, 2022. *Key date: Executive Board discussion: July 22, 2022.* --- ### War and lingering pandemic: macro effects and risks ### Evolution and drivers - Global current account balances started widening in 2020 after several years on a narrowing trend. - Drivers of widening in 2020–21: - Asymmetric impact of COVID-19 shock and related policy responses (travel and medical shocks, shifts in consumption, larger fiscal support in advanced economies). - Rising transportation costs and commodity prices as recovery took hold. - War in Ukraine: - Humanitarian crisis and setback to global recovery. - Exacerbated widening global balances in 2022 by adding to commodity price pressures. - US monetary tightening and dollar appreciation expected to contribute to widening global balances in 2022. - Medium-term outlook: balances expected to return to narrowing trend as pandemic and war shocks recede, but subject to unusually large uncertainties. --- ### Recent developments in current account balances and trade patterns ### Commodity and trade impacts (selected figures and examples) - Shipping costs surged in 2021. - Oil price dynamics: - Sharp oil price increase in 2021 contributed to shifting current account positions; oil exporters’ balances recovered in 2021 while oil importers experienced the opposite. - War in Ukraine expected to increase current accounts of oil and other commodity exporters in 2022; projected impact on advanced economies smaller. - COVID-19 continued to affect current accounts via: - Travel shock: lowered Spain’s CA by 1.6 percent of GDP and Thailand’s by 4.4 percent of GDP in 2021. - Medical goods and PPE: increased Malaysia’s CA by 1.3 percent of GDP. - Household consumption shift toward goods: estimated 2021 impacts increased the US CA deficit by 0.4 percent of GDP and increased China’s surplus by 0.3 percent of GDP. - Transportation balance: increased sea transport service export prices significantly increased CA balances of some economies (for example, France and Korea). - Trade in goods recovered sharply and surpassed pre-COVID-19 levels in 2021; trade in services remained below pre-pandemic levels and not projected to approach pre-pandemic levels until 2023. --- ### Aggregate saving, investment, and global current account balances ### Advanced economy dynamics during the pandemic - Public and private saving moved in opposite directions, limiting effects on CA balances. - Private sector began winding down pandemic-related saving as public sector withdrew fiscal support. - Household saving declining as pandemic-related subsidies and transfers withdrawn but remains above pre-pandemic levels. - Corporate saving broadly unchanged during pandemic. - Government saving moving toward pre-pandemic levels as fiscal support withdrawn. ### Global balances and projections - Global CA balances: - Had been on a declining trend before widening because of pandemic in 2020; increased further in 2021. - Expected to widen further in 2022 due to higher commodity prices (including because of the war) and pandemic’s asymmetric impact, before narrowing over medium term. - After netting out COVID-19 factors, global balances still increased in 2021 and hovered about their 2019 level. - Forecast for global CA balances for 2022 revised up since January 2022 WEO Update, incorporating the war’s impact. - Short-term widening opens scope for surplus economies to redirect global savings to help finance low income countries and emerging markets. --- ### Currencies, financial flows, and balance sheets ### 2021 observations and 2022 developments - Currency movements in 2021: - Relatively limited in most advanced economies; Japan and Korea experienced depreciations; the United States experienced appreciation. - Several emerging market currencies depreciated in 2021 due to tightening global financial conditions and weak domestic prospects (for example, Thailand) or sharply easing domestic monetary conditions (for example, Türkiye). - China’s currency experienced considerable appreciation. - Reserves and capital flows: - Most emerging markets accumulated reserves. - Capital inflows by nonresidents to emerging markets were stable in 2021. - FDI flows peaked at start of 2021 then declined; portfolio flows ended year in net outflows. - Monetary policy tightening in 2022: - Many central banks accelerated withdrawal of stimulus; several emerging markets started tightening cycles in 2021. - In first half of 2022, US dollar appreciated by about 5 percent in nominal effective terms. - Some emerging economies’ currencies appreciated in first half of 2022 after depreciating in 2021 owing to earlier and more aggressive tightening (for example, Brazil and Mexico). - Russian ruble depreciated sharply at outbreak of war and associated sanctions but appreciated to exceed pre-war level by May due to strong terms of trade and CA surplus. --- ### Global financial safety net and reserves (2021 — selected figures) - Global financial safety net stood at 19 percent of global GDP ($18.4 trillion) in 2021, down from 22 percent of global GDP in 2020 ($18.6 trillion). - Composition in 2021: - $14.8 trillion in reserves (including August 2021 SDR allocation of $650 billion) - $1.4 trillion in bilateral swap lines - $1.2 trillion in regional financing arrangements - $1 trillion in IMF funds - About 40 percent of bilateral swap lines in place in 2021 were permanent swap lines among major advanced economies. --- ### External assessment framework and EBA methodology (high level) - Framework combines: - Numerical inputs from refined 2022 EBA methodology - Estimated effects of COVID-19 - Analytically grounded judgment and country-specific insights - EBA applies estimated coefficients from cross-country panel regression to macroeconomic, structural, and desired policy variables to produce multilaterally consistent estimates for CA and REER norms. - Special adjustments to strip out pandemic-associated factors (travel and medical trade shocks, consumption shift, transportation costs). - Oil balance adjustor dropped because oil demand and world prices moved closer to pre-pandemic levels. ### Changes in external assessments in 2021 (summary) - Assessments changed categories in 12 of 30 economies in 2021 vs 2020. - Economies assessed as moderately stronger, stronger, or substantially stronger (ten): Germany, Malaysia, The Netherlands, Poland, Russia, Singapore, Sweden, Thailand, Australia, and the euro area (entered category in 2021). - Economies assessed as moderately weaker or weaker (five): Argentina, Belgium, Canada, South Africa, and the United States. - Economies broadly in line (15): Brazil, China, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Spain, Switzerland, France, Mexico, Saudi Arabia, Türkiye, and the United Kingdom (entered this category in 2021). - IMF staff–assessed REER gaps generally consistent with assessed CA gaps. --- ### Adjustment dynamics of external imbalances (Box findings and regression evidence) ### Speed and asymmetry of adjustment - All gaps adjust toward zero but adjustment is slow and asymmetric across countries. - IMF staff current account gaps take 6.9 years to close by half (half-life). - EBA gaps half-life: 4.7 years (whole period) or 5.7 years (2012–19). - Cross-country heterogeneity: - Adjustment fastest in deficit emerging economies: half-life 1.5 years. - Adjustment slowest in advanced surplus economies: half-life 6.4 years. - Policy gaps close faster than overall EBA CA gaps: policy gaps half-life 2.7 years; EBA CA gaps half-life 4.7 years. - Crisis episodes: adjustment faster (2.1 years) vs normal times (5.5 years). - Wage-bargaining structure affects speed: - Decentralized wage bargaining: faster adjustment (3.7 years). - Centralized wage bargaining: slower adjustment (10.8 years). - Closing fiscal gaps reduces overall EBA gap by $150 billion; closing credit gap increases overall EBA gap by $125 billion (quantitative results from regressions). ### Policy implication from adjustment evidence - Policy gaps close mainly for domestic reasons, regardless of impact on external rebalancing; additional policy measures aimed at external rebalancing may be required. - Residuals and other factors remain key for external rebalancing given modest quantitative contribution of policy gaps to overall adjustment. --- ### Chapter 2 — Climate policies and external adjustment (key findings) ### Model, scenario, and policy package - Model: G-Cubed intertemporal general equilibrium model with 10 countries/regions and 20 sectors; detailed energy and power-generation sectors. - Baseline projection: global carbon emissions projected to continue rising at 1.7 percent annual pace, reaching 57.5 gigatons by 2050. - Mitigation policy package analyzed: - Carbon tax with compensatory transfer to households (initial tax with annual increase of 7 percent). - Revenue recycling: 25 percent to households; 75 percent to reduce government debt. - Carbon tax calibrated to achieve 80 percent reduction in emissions by 2050 relative to 2018 (accounting for other measures). - Green subsidy to renewables: output of solar and wind subsidized by 80 percent; subsidy financed by government debt. - Low-carbon infrastructure investment: initial green public infrastructure investment of 1 percent of GDP gradually declines to zero over 10 years; productivity assumption: every 10 percent increase in infrastructure capital raises private sector productivity by 0.8 percent; sustaining new infrastructure requires additional 0.2 percent of GDP to offset depreciation. ### Mechanisms and aggregate impacts (first decade averages) - Carbon tax effects: - Decreases current account balances in greener advanced economies; increases current account balances in fossil-fuel-dependent regions. - Permanently reduces return on carbon-intensive investment, leading to global fall in investment; larger decline in fossil-fuel-dependent economies. - Global decline in investment reduces global interest rate; decreases saving across countries relatively uniformly. - Current account movements primarily driven by investment response and country characteristics (carbon intensity, net fossil fuel exports). - Green subsidy and infrastructure: - Green subsidy and infrastructure investment boost investment and saving and increase global interest rate; have more muted external sector impact than carbon tax. - When green infrastructure boost imposed identically across countries, current accounts broadly unchanged. - Quantitative outcomes: - Coordinated climate mitigation package would reduce global current account balances by 25 percent by 2027. - Aggregate investment and saving decline by 2 percent of global GDP over the first decade in one scenario; alternative coordinated scenario reports 0.2 percent of GDP drop in investment (and saving) globally and global interest rate change of 0.02 percentage point over first decade (source contains both magnitudes in different boxes; review scenario-specific context carefully). - Carbon taxes account for majority of external-sector impacts: e.g., carbon tax accounts for 91 percent of total current account response for median region in model; carbon tax accounts for 46 percent of overall RER adjustment. ### Partial and unilateral implementation - Partial implementation can reverse or magnify external sector effects relative to full coordination. - Example: unilateral carbon tax in Europe would reverse Europe’s current account response (negatively impacting competitiveness) and increase global balances. - Burden sharing and targeted support: - Increased burden sharing (international coordinated carbon price floor) could reduce climate-policy-induced external adjustment between advanced and developing economies by a third. - Accelerating renewables investment in developing economies could moderate external-sector impacts. - Fiscal recycling sensitivity: - Baseline recycling: 25 percent of carbon tax revenues transferred to households; 75 percent reduced public debt. - Carbon tax revenue size during first decade: 0.6 percent of GDP for the average country. - Sensitivity: extreme fiscal scenarios (all revenues to debt reduction vs fully transferred to households) change average absolute CA response by less than 0.25 percent of GDP across 10 countries/regions. ### Real exchange rate role - RER acts as shock absorber; cross-country correlation between current account and RER responses: –0.86. - Absolute 10-year average CA response to coordinated carbon tax ranges from 0.3 to 3 percent of GDP. - Absolute RER adjustments range from 0 to 4.8 percent relative to baseline, with outsized initial-year responses. ### Policy implications and recommendations (from Chapter 2) - Coordinate mitigation policies across regions to avoid large adverse external-sector adjustments and to ensure global emission reductions. - Consider burden-sharing arrangements (e.g., income-differentiated carbon price floors or sectoral carbon pricing) to moderate heterogeneous investment and CA impacts. - For unilateral carbon taxes, adopt complementary measures (for example, border carbon adjustments, focus on energy-intensive and trade-exposed sectors) to reduce negative competitiveness effects. - Expand renewables and targeted green investment in countries where renewables sector is smallest to accelerate constrained investment and moderate cross-country external disparities. - Given carbon tax revenue small in first decade (0.6 percent of GDP), recycling design has limited effect on external-sector heterogeneity. --- *Source: Preface, Executive Board summary, Chapter 1, Chapter 2, Box 1.2, and selected country assessments from the 2022 External Sector Report, International Monetary Fund.* ### Preface ### Preface ### Scope and purpose - 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 more than 90 percent of global GDP. - The report complements the World Economic Outlook and Article IV consultations as part of a continuous effort to assess and address spillovers from members’ policies on global stability and to monitor members’ external positions comprehensively. - This year’s assessments are based on the latest version of the IMF’s External Balance Assessment (EBA) methodology and on data and IMF staff projections as of June 30, 2022. ### Structure of the report (high level) - Chapter 1, “External Positions and Policies,” reviews the evolution of global external positions in 2021, the lingering pandemic and the war in Ukraine, and policy priorities to reduce excess imbalances over the medium term. - Chapter 2, “Climate Policies and External Adjustment,” analyzes economic effects of climate mitigation policies on external positions and emphasizes dependence on country characteristics, degree of international coordination, and credibility. - Chapter 3, “2021 Individual Economy Assessments,” provides detailed external assessments and associated policy recommendations for 30 economies. ### Key findings and projections - Global current account balances: - Increased in 2020 and 2021 and are projected to widen further in 2022. - Widening in 2021 was largely driven by the pandemic’s continued impact and the increase in commodity prices accompanying the economic recovery. - Fallouts from the war in Ukraine and the lingering pandemic are projected to widen global current account balances further in 2022. - Over the medium term, global current account balances are expected to resume their pre-pandemic downward trend as the COVID-19 pandemic’s economic implications fade, commodity prices normalize, and current account deficit economies implement fiscal consolidation faster than surplus economies—but this outlook is subject to unusually high uncertainties. - Multilateral assessment of excess imbalances: - Global excess current account balances (sum of absolute deviations from norms) narrowed to 0.9 percent of world GDP in 2021 compared with 1.2 percent of world GDP in 2020. - Largest contributors to lower-than-warranted current account balances, in descending order: the United States, Canada, and Belgium. - Largest contributors to larger-than-warranted current account balances, in descending order: Germany, Australia, Russia, and Sweden. - External positions and stocks: - Creditor and debtor stock positions remained elevated at the end of 2021, though moderated from their 2020 peaks. - The global financial safety net remained close to 20 percent of world GDP. - Pandemic and war channels affecting external accounts: - Continued fall in travel services, increased demand for medical products, and a household consumption shift toward goods rather than services. - Transportation costs became important in 2021 due to high demand for tradable goods and pandemic-related supply bottlenecks. - Energy and commodity prices recovered in 2021 and began rising; the war in Ukraine exacerbated price increases in 2022, with opposite effects on exporters and importers. - Financial and currency dynamics: - Currency movements during 2021 were relatively limited despite considerable depreciation in several emerging market currencies vis-à-vis a broad set of trading partners. - Monetary policy tightening is driving currency movements in 2022; revised expectations on the pace of US monetary tightening contributed to sizable currency realignment in early 2022, contributing to projected widening of global current account balances. ### Risks to the outlook (enumerated) - Possible pandemic resurgence. - Slower-than-expected recovery in public savings, especially in current account deficit economies. - The war’s impact on commodity prices. - Possible escalation of geopolitical conflicts and tensions. - China’s growth slowdown and zero-COVID-19 policy. - The global pace of financial tightening. - Trade and economic fragmentation. ### Policy implications and recommendations - Multilateral cooperation: - Multilateral cooperation is key to addressing policy challenges from the pandemic and the war in Ukraine, including humanitarian responses. - Coordinated policy efforts are needed to counter risks of global economic fragmentation, including eschewing new barriers to trade. - Maintaining liquidity in the global financial system, including via the global safety net, will help economies manage risks related to tightening global financial conditions and financial system fragmentation. - Multilateral cooperation could greatly facilitate the green transition; Chapter 2 finds coordinated implementation of climate mitigation policies can reduce global current account balances and help bring forward net zero emissions. - Policies to promote external rebalancing vary by economy: - For economies with excess current account deficits driven by fiscal deficits above desirable medium-term levels: implement growth-friendly fiscal consolidation to support external rebalancing and move current account balances closer to norms. - For economies with lingering competitiveness challenges: pursue structural reforms (labor, product market, and other reforms) to promote green, digital, and inclusive growth while boosting productivity. - For economies with persistent excess current account surpluses: intensify reforms that encourage public and private investment and discourage excessive private saving, including expanding social safety nets in some emerging markets. ### Process, contributors, and review - The report was prepared under the overall guidance of Pierre-Olivier Gourinchas, IMF Economic Counsellor and Director of Research, and under the direction of the External Sector Coordinating Group (staff from IMF area departments, Fiscal Affairs Department, Statistics Department, Strategy, Policy, and Review Department, Monetary and Capital Markets Department, and Research Department). - Lead preparers: Rudolfs Bems and Pau Rabanal. - Contributors and important inputs include named IMF staff and external consultants, as well as country teams and numerous editorial and production staff. - The analysis benefited from comments and suggestions by staff across IMF departments and from the IMF’s Executive Directors following their discussion of the report on July 22, 2022; projections and policy considerations are those of IMF staff and should not be attributed to Executive Directors or national authorities. *Source: Preface, 2022 External Sector Report, International Monetary Fund.* ### conclusion that climate policies could lead to large ### conclusion that climate policies could lead to large ### Executive Board summary and policy guidance - Coordinated implementation of climate mitigation policies is critical to address climate change while supporting external rebalancing, with due consideration of the disproportionate economic costs on developing economies. - Excess current account imbalances remain concentrated in advanced economies; their reduction requires continued joint efforts by both excess surplus and excess deficit economies. - Policy prescriptions differ by country: - For economies where excess current account deficits reflect excessive fiscal deficits: fiscal consolidation that preserves space for infrastructure and social spending and prevents long-term scarring from the pandemic is critical to support external rebalancing. - For economies with lingering competitiveness challenges: address structural challenges to promote green, digital, and inclusive growth while boosting productivity. - For economies with persistent excess current account surpluses: intensify reforms that encourage public and private investment and discourage excessive private saving, including by expanding social safety nets in some emerging markets. - Directors welcomed staff analysis of historical persistence of current account gaps and asked for refinements in policy recommendations to better support external rebalancing. - Directors appreciated consideration of temporary pandemic-induced factors in external sector assessments and called for further analysis of potentially more permanent effects. - Directors welcomed refinements to the EBA methodologies and reiterated the need for transparency, consistency, and evenhandedness of external assessments across countries; they stressed continued caution in interpreting and communicating assessment results and called for greater analysis of vulnerabilities associated with large external stock positions. - The Acting Chair concluded the Executive Board’s discussion of the External Sector Report on July 22, 2022. *Key dates and references in the discussion* - Executive Board discussion: July 22, 2022. - Publication context: 2022 EXTERNAL SECTOR REPORT; chapter authors and contributors listed. ### War and lingering pandemic: macro effects and risks - Global current account balances started widening in 2020 at the pandemic’s outset after several years on a narrowing trend. - Drivers of widening in 2020–21: - Asymmetric impact of COVID-19 shock and related policy responses, including travel and medical shocks, shifts in consumption, and larger fiscal support in advanced economies. - Rising transportation costs and commodity prices as the recovery took hold. - The war in Ukraine: - Created a humanitarian crisis and set back the global recovery. - Exacerbated widening global balances in 2022 by adding to commodity price pressures, with opposite effects on commodity exporters and importers. - US monetary tightening and dollar appreciation expected to contribute to widening global balances in 2022. - Medium-term outlook: global balances expected to return to a narrowing trend as the pandemic and war shock recede, but outlook subject to unusually large uncertainties that could see balances widen. - Risks to the outlook include: - Possible pandemic resurgence. - Slower-than-expected recovery in public savings (especially in current account deficit economies). - Stronger-than-expected impact of the war in Ukraine on commodity prices. - Further inflation surprises and faster monetary tightening. - Possible escalation of geopolitical conflicts and tensions. - Impact of China’s growth slowdown and zero-COVID-19 policy. - Risk of trade and economic fragmentation. ### Recent developments in current account balances and trade patterns - Commodity and energy prices and supply bottlenecks (pandemic and war) affected external positions asymmetrically; shipping costs surged in 2021. - Oil price dynamics: - Sharp oil price increase in 2021 contributed to shifting current account positions; oil exporters’ oil balances and current accounts recovered in 2021 while oil importers experienced the opposite. - The war in Ukraine expected to increase current accounts of oil and other commodity exporters in 2022; projected impact on advanced economies is smaller. - COVID-19 continued to affect current account balances via: - Travel and medical trade: travel declines significantly lowered travel services and current account balances of many tourism-exporting countries; demand for medical products and personal protective equipment bolstered current account positions of exporters of those goods. - Example estimates: travel shock lowered Spain’s current account by 1.6 percent of GDP and Thailand’s by 4.4 percent of GDP in 2021; trade in medical goods and personal protective equipment increased Malaysia’s current account by 1.3 percent of GDP. - Shift in household consumption composition away from services toward goods (equipment for teleworking and virtual learning); in advanced economies goods consumption declined through 2021 but remained above pre-pandemic levels at year-end, while services consumption remained below pre-pandemic levels; in emerging markets services consumption declined during 2021 while goods consumption rose. - Transportation balance: high demand for tradable goods in advanced economies plus supply bottlenecks increased shipping costs noticeably in 2021, significantly increasing current account balances of some economies (for example, France and Korea) through higher sea transport service export prices. - Trade in goods recovered sharply and surpassed pre-COVID-19 levels in 2021, returning to pre-COVID-19 trend; trade in services remained below pre-pandemic levels and was not projected to approach pre-pandemic levels until 2023. ### Aggregate saving, investment, and global current account balances - In advanced economies during the pandemic: - Public and private saving moved in opposite directions, limiting effects on current account balances. - Private sector began winding down pandemic-related saving as public sector withdrew fiscal support. - Household saving is declining as pandemic-related subsidies and transfers are withdrawn but remains above pre-pandemic levels. - Corporate saving remained broadly unchanged during the pandemic. - Government saving is moving toward pre-pandemic levels as pandemic-related fiscal support is withdrawn. - The pandemic-induced consumption shift toward goods contributed to widening global balances by increasing current account deficits in advanced economies and surpluses in some emerging markets: - Estimated 2021 impacts: increased the US current account deficit by 0.4 percent of GDP and increased China’s surplus by 0.3 percent of GDP. - Global current account balances: - Had been on a declining trend before widening because of the pandemic in 2020; they increased further in 2021. - Expected to widen further in 2022 due to higher commodity prices (including because of the war) and the pandemic’s continued asymmetric impact on external positions, before narrowing over the medium term. - After netting out COVID-19 factors, global balances still increased in 2021 (likely reflecting the increase in oil prices) and hovered about their 2019 level. - Forecast for global current account balances for 2022 was revised up since the January 2022 WEO Update, incorporating the war’s impact. - The projected short-term widening of global balances opens scope for current account surplus economies to redirect global savings to help finance low income countries and emerging markets. ### Currencies, financial flows, and balance sheets - Currency movements in 2021: - Relatively limited in most advanced economies; Japan and Korea experienced depreciations; the United States experienced appreciation. - Several emerging market currencies depreciated in 2021 due to tightening global financial conditions and weak domestic prospects (for example, Thailand) or sharply easing domestic monetary conditions (for example, Türkiye). - China’s currency experienced considerable appreciation. - Reserves and capital flows: - Most emerging markets accumulated reserves. - Capital inflows by nonresidents to emerging markets were stable in 2021. - Foreign direct investment flows peaked at the start of 2021 but declined for the rest of the year; portfolio flows ended the year in net outflows. - Monetary policy tightening in 2022: - With rising inflation, many central banks accelerated withdrawal of monetary stimulus; several emerging markets started tightening cycles in 2021. - In the first half of 2022, the US dollar appreciated by about 5 percent in nominal effective terms. - Some emerging economies’ currencies appreciated in the first half of 2022 after depreciating in 2021 owing to earlier and more aggressive tightening (for example, Brazil and Mexico). - The Russian ruble depreciated sharply at the outbreak of the war and associated sanctions but appreciated to exceed the pre-war level by May due to strong terms of trade and current account surplus. *Source: IMF External Sector Report chapter text (2022).* ### 1. Merchandise Trade Balances, Monthly, 2018–22 ### 1. Merchandise Trade Balances, Monthly, 2018–22 ### Major findings on global current account balances and drivers - Strength in the first half of 2022 could deepen the US current account deficit and contribute to widening global current account balances. - The global current account balance (as presented) by year: 2,452 2,592 3,333 3928 - Statistical Discrepancy (as presented) by year: 322364747581 - Overall surpluses (as presented) by year: 1,3871,4762,0302251 - Overall deficits (as presented) by year: –1,065–1,112–1,283–1670 - The United States remains the largest debtor economy; its net international investment position declined from −67 percent of GDP in 2020 to −79 percent of GDP in 2021. - Creditor and debtor stock positions remained elevated in 2021, though moderated from 2020 peaks; narrowing of NIIP dispersion in 2021 reflects valuation changes that more than offset widening of current account balances. ### Global financial safety net and reserves (2021) - Global financial safety net stood at 19 percent of global GDP ($18.4 trillion) in 2021, down from 22 percent of global GDP in 2020 ($18.6 trillion). - Composition of the global financial safety net in 2021: - $14.8 trillion in reserves (including the August 2021 SDR allocation of $650 billion) - $1.4 trillion in bilateral swap lines - $1.2 trillion in regional financing arrangements - $1 trillion in IMF funds - About 40 percent of bilateral swap lines in place in 2021 were permanent swap lines among major advanced economies. ### Selected current account balances, 2019–22 (from Table 1.1, Billions of US Dollars) - Advanced Economies (examples): - Australia: 8 3 5 5 7 1 5 0.0 10.0 40.0 6 (note: table rows present numeric and percent columns; preserved as in source) - Germany: 294 272 314 251 - Hong Kong SAR: 21 24 42 38 - Japan: 176 147 142 84 - United Kingdom: –77 –69 –82 –174 - United States: –472 –616 –822 –944 - Emerging Market and Developing Economies (examples): - China: 103 249 317 279 - India (fiscal year basis): –25 24 –38 –108 - Russia: 66 36 12 2265 - Saudi Arabia: 38 –22 44 177 - Türkiye: 5 –36 –14 –44 - Memorandum item: - Euro Area: 307 250 345 228 (Note: table preserves numeric strings and formatting as presented in the source.) ### Net international investment positions, 2018–21 (selected entries from Table 1.2, Billions of US Dollars; Percent of world GDP; Percent of GDP) - Advanced Economies (selected): - Australia: –746 –658 –747 –579 –0.9 –0.8 –0.9 –0.6 –52.6 –47.5 –55.0 –35.4 - Germany: 2,102 2,327 2,597 2,759 2.4 2.7 3.1 2.9 52.8 59.8 67.6 65.3 - Hong Kong SAR: 1,283 1,579 2,122 2,134 1.5 1.8 2.5 2.2 354.6 435.0 615.2 578.0 - Japan: 3,033 3,271 3,417 3,748 3.5 3.7 4.0 3.9 60.2 63.8 67.8 75.9 - United Kingdom: –381 –733 –622 –1,020 –0.4 –0.8 –0.7 –1.1 –13.1 –25.5 –22.5 –32.0 - United States: –9,685 –11,231 –14,011 –18,101 –11.3 –12.9 –16.5 –18.7 –47.2 –52.6 –67.1 –78.7 - Emerging Market and Developing Economies (selected): - China: 2,108 2,300 2,287 1,983 2.5 2.6 2.7 2.1 15.2 16.0 15.4 11.2 - India: –437 –375 –355 –354 –0.5 –0.4 –0.4 –0.4 –16.2 –13.3 –13.3 –11.1 - Russia: 374 360 517 483 0.4 0.4 0.6 0.5 22.6 21.2 34.8 27.2 - Türkiye: –336 –310 –385 –253 –0.4 –0.4 –0.5 –0.3 –43.1 –40.8 –53.4 –31.4 - Memorandum: - Overall Creditors (as presented): 15,859 17,616 19,836 21,034 18.5 20.2 23.3 21.8 - Overall Debtors (as presented): –18,808 –20,897 –23,580 –27,595 –21.9 –23.9 –27.7 –28.6 ### Capital flows, reserves, and market signals - Capital flow patterns and volatility: - Figures in the chapter document VIX, portfolio flows, net FDI inflows, net other investment inflows, and reserve accumulation across 2018–2022 quarters; positive numbers represent net inflow of capital in panels 2–4. - Change in foreign exchange reserves and NEER (March 2021–December 2021): - Charts indicate cross-country variation in change in foreign exchange reserves (percent of GDP) and NEER percent change; data labels use ISO country codes. ### External sector assessments and methodology - The IMF’s external assessment framework combines: - Numerical inputs from models of the refined 2022 External Balance Assessment (EBA) methodology - Estimated effects of the COVID-19 crisis - Analytically grounded judgment and country-specific insights - The EBA applies estimated coefficients from a cross-country panel regression to country-specific macroeconomic, structural, and desired policy variables to produce multilaterally consistent estimates for current account and real exchange rate norms. - Special adjustments to EBA model estimates were made to strip out pandemic-associated factors—the travel and medical trade shocks, the shift in consumption, and transportation costs. - The oil balance adjustor was dropped because oil demand and world prices moved closer to pre-pandemic levels. ### Changes in external assessments in 2021 - Assessments changed categories in 12 of the 30 economies in 2021 compared with 2020. - Economies assessed as moderately stronger, stronger, or substantially stronger than levels consistent with fundamentals and desirable policies (ten economies): - Germany, Malaysia, The Netherlands, Poland, Russia, Singapore, Sweden, Thailand, Australia, and the euro area (entered the category in 2021). - Economies assessed as moderately weaker or weaker than levels consistent with fundamentals and desirable policies (five economies): - Argentina, Belgium, Canada, South Africa, and the United States. - Economies assessed as broadly in line with levels consistent with fundamentals and desirable policies (15 economies): - Brazil, China, Hong Kong Special Administrative Region, India, Indonesia, Italy, Japan, Korea, Spain, Switzerland, France, Mexico, Saudi Arabia, Türkiye, and the United Kingdom (entered this category in 2021). - IMF staff–assessed real effective exchange rate gaps were generally consistent with assessed current account gaps; excess current account surpluses (deficits) generally associated with undervalued (overvalued) REER. *Source: 2022 EXTERNAL SECTOR REPORT, International Monetary Fund | 2022* ### 1. Current Account Norms, 2021 ### 1. Current Account Norms, 2021 ### Key findings on norms, gaps, and model refinements - The EBA current account norm is multilaterally consistent and cyclically adjusted. - The current account norm is corrected for reporting discrepancies in intra-area transactions, since the current account of the entire euro area is about 1.41 percent of GDP less than the sum of the individual 11 countries’ balances (for which no such correction is available). - Other fundamentals used in norms include output per worker, expected GDP growth, and ICRG. - Model refinements and improved cyclical adjustment (through the new terms-of-trade gap variable) brought estimated norms closer to actual current account balances on average. - The application of the refined model was a major driver of the narrowing in global excess current account balances in 2021; under the previous model, imbalances would have declined less, to 1.1 percent of world GDP (instead of the observed 0.9 percent). ### Changes in 2020–21: magnitudes and country-level movements - Global excess current account balances (the sum of absolute IMF staff–assessed current account gaps) narrowed to 0.9 percent of world GDP in 2021 compared with 1.2 percent of world GDP in 2020. - Global current account balances widened by ½ percentage point of world GDP to 3.5 percent of world GDP in 2021. - The absolute sum of current account norms widened to 1.4 percent of GDP in 2021, from 1.1 percent of GDP in 2020. - IMF staff–assessed current account gaps narrowed for several economies, particularly China, Malaysia, Mexico, Poland, the United Kingdom, and the United States. - IMF staff–assessed current account gaps widened for some countries, such as Australia, Belgium, and Singapore. - Most of the excess balances in 2021 pertained to advanced economies, higher than the 70 percent share in 2020. - Largest contributors to lower-than-warranted (at least 1 percent of GDP below their norm) current account balances, in descending order: United States, Canada, Belgium. - Largest contributors to larger-than-warranted (at least 1 percent of GDP above their norm) current account balances, in descending order: Germany, Australia, Russia, Sweden. - Current account gaps tend to narrow over time, with adjustments occurring faster in excess deficit economies than in excess surplus economies. ### IMF staff vs EBA model results (2021) - Figure comparisons indicate differences between IMF staff–assessed current account gaps and EBA model–based current account gap estimates, reflecting use of country-specific adjustors and COVID-19 shock adjustors (for example, Thailand includes large COVID-19 adjustors to account for the travel shock and transportation costs; Switzerland includes country-specific adjustors to account for measurement biases). - There are no EBA estimates for Hong Kong SAR, Saudi Arabia, and Singapore because they are not included in the EBA regression model. ### Medium-term forecasts and projected 2022 movements - Global current account balances are projected to widen further in 2022, driven by an expansion in oil exporters’ surplus and the US deficit, as monetary tightening by the Federal Reserve contributes to the dollar’s appreciation. - Balances will narrow gradually over 2023–27 as these factors moderate. - As pandemic support is withdrawn, governments will increase their saving over the medium term (notably in the United States and to a lesser extent in some surplus advanced economies), offsetting projected decline in private saving that peaked during the pandemic. - Investment is set to increase globally in the medium term, driven largely by China. - Advanced economies: the current account surplus in surplus advanced economies is projected to narrow in percent of GDP in 2022 across the board. - Germany: projected decline in the surplus by 1.3 percentage points of GDP, driven by an increase in the cost of energy imports and a collapse in exports to Russia stemming from sanctions related to the war in Ukraine. - Japan: projected narrowing of the current account surplus by 1 percentage point, driven by higher energy costs. - United States: the current account deficit is projected to remain elevated at 3.7 percent of GDP, with the decrease in public dissaving countered by a decline in private saving and an increase in investment. - Emerging market economies: projected changes vary widely. - China: current account surplus is projected to decline by 0.4 percentage point of GDP to 1.4 percent of GDP in 2022, driven by an increase in investment. - Saudi Arabia: current account balances projected to increase by 12.1 percentage points of GDP in 2022. - Indonesia: current account balances projected to increase by 1.9 percentage points of GDP in 2022. - India: current account deficit projected to increase by 1.9 percentage points of GDP in 2022. - Russia: current account surplus projected to increase by 5 percentage points of GDP in 2022, driven by import compression, positive terms of trade, and resilient export volumes so far in the face of sanctions. ### Risks to the outlook (principal channels and consequences) - Commodity prices: A prolonged war in Ukraine could lead to higher commodity prices for longer, widening global current account balances in 2022 beyond the baseline and delaying adjustment in subsequent years. Higher oil and gas prices would increase vulnerabilities in importing countries, potentially causing higher capital outflows, larger borrowing costs, and greater fiscal pressures. In food-importing countries, higher prices could increase import costs and fiscal pressures. Escalating international sanctions and countersanctions could exacerbate these risks. - Trade tensions and fragmentation: A wider deterioration in the geopolitical environment could exacerbate trade tensions and supply disruptions and could lead to trade fragmentation (for example, “friendshoring”), disruption of global value chains, and reorganization of the international monetary system; these developments would erode welfare gains from globalization and reduce technology transfers and export-led growth potential in low-income countries. - A worsening slowdown in China: A prolonged slowdown in China would impact trading partners (often in Asia and the Pacific) and global commodity demand; effects on global balances depend on net effects across commodity importers and exporters. Risks to growth are amplified by potential reemergence of COVID-19 and zero-COVID policies that could cause lockdowns and supply-chain disruptions. - Financial tightening: Continued monetary tightening in the United States and other major economies implies tighter global financial conditions, raising risks of disruptive capital outflows from emerging markets, currency depreciations, and higher default probabilities. The stock of external liabilities at end-2021 exceeded reserves for most emerging and developing economies. IMF staff estimates capital flows at risk at the 5 percent level to be 2.3 percent of GDP and the probability of outflows to be about 30 percent (April 2022 Global Financial Stability Report). - Fiscal policy path: Deviations from the baseline fiscal path (for example, additional fiscal expansions in current account deficit economies or faster consolidation in surplus economies) could materially affect the projected narrowing of global balances. Resurgence of COVID-19 or additional transfers to offset higher food and fuel prices could alter fiscal paths. - Climate change: Natural disasters can have large effects on current accounts of disaster-prone countries; worsening climate change or unbalanced implementation of climate mitigation policies could widen global balances over time. ### Policy priorities to promote external rebalancing - Multilateral cooperation: essential for addressing pandemic and war-related challenges, tackling humanitarian crises, facilitating the green transition, and countering risks of global economic fragmentation. Coordinated climate policy implementation can reduce global current account balances and help bring forward net zero emissions. Coordinated efforts are also needed for global food security, including supporting vulnerable groups, promoting open trade of food and agricultural inputs, and investing in climate-resilient agriculture. - Maintain liquidity in the global financial system: the global financial safety net and IMF lending programs are important to help economies manage balance-of-payments shocks and risks from tightening global financial conditions and system fragmentation. - Manage capital flow volatility: The IMF’s review of the Institutional View provides guidance; exchange rate flexibility generally helps absorb shocks, but in economies with shallow FX markets foreign exchange intervention may be needed. Temporary capital flow management measures may be warranted in imminent crisis circumstances or during capital inflow surges. Preemptive capital flow management measures that are also macroprudential can mitigate systemic risks from large stocks of unhedged external debt, but should not be used in a manner that leads to excessive... *Source: IMF, External Sector Assessment estimates and IMF staff assessments.* ### 1. Reserves and Short-Term External Financing Needs, 20212. Change in Reserves and Short-Term External Financing Needs, ### 1. Reserves and Short-Term External Financing Needs, 20212. Change in Reserves and Short-Term External Financing Needs, 2020–21 ### External rebalancing: policy guidance by external position - Economies with weaker-than-warranted external positions: - Fiscal consolidation will be critical where excess current account deficits in 2021 partially reflected fiscal deficits above desirable medium-term levels (example: the United States). - Fiscal consolidation should be implemented to prevent long-term scarring, including by protecting spending for infrastructure, health care, and education. - Policies should help the most vulnerable households cope with rising oil and food prices. - In several emerging market economies with weaker-than-warranted external positions in 2021 (such as Argentina and South Africa), gradual but substantial growth-friendly fiscal consolidation while providing space for infrastructure and social spending would help current account rebalancing and accumulate international reserves to more adequate levels. - Countries with lingering competitiveness challenges need structural reforms (labor, product market, and other reforms) to promote green, digital, and inclusive growth and boost productivity. - Economies with stronger-than-warranted external positions: - Intensify reforms that encourage investment and discourage excessive private saving. - Fiscal policies can help where there is fiscal space and inflation expectations are well-anchored (examples: Germany and the Netherlands—additional fiscal spending can foster investment in physical and human capital and deal with repercussions from the war in Ukraine). - Policies to encourage public and corporate investment, including those facilitating a greener structural transformation, would help reduce external imbalances (examples: Poland and Sweden). - In some emerging markets, reforms to discourage excessive precautionary saving and support consumption by expanding social safety nets (example: Malaysia, Thailand) and tackling widespread informality (example: Thailand) would help reduce excess current account surpluses. - Economies with external positions broadly in line with fundamentals: - Continue addressing domestic imbalances to prevent excessive external imbalances. - Relevant policies include accelerating structural reforms—including state-owned enterprise reforms—to boost potential growth and strengthening social protection to reduce high household precautionary savings (example: China). - In countries with large external liabilities (example: Spain), keeping the current account balance in line with its norm will require a combination of fiscal consolidation efforts and higher private savings, to be achieved through productivity gains requiring continued wage flexibility, addressing labor market duality, and actions to enhance education outcomes and encourage innovation. ### Saving and wealth dynamics in the aftermath of COVID-19 - Aggregate and sectoral saving dynamics: - The pandemic led to very large and opposite changes in saving by households, firms, and the public sector, yielding small net changes in national saving and current account balances. - The fall in consumption from lockdowns explains a significant part of the household saving increase; public support aimed at maintaining incomes also contributed. - Corporate saving was broadly unchanged as falls in production were offset by lower employee compensation and higher public support. - Public saving fell sharply due to fiscal support and lower economic activity. - As the recovery takes hold, household and public saving have progressively returned to close to their pre-pandemic levels, but there has been little drawdown of the stock of excess household savings so far. - Cumulative changes and international comparisons: - The cumulative change in household saving relative to the first quarter of 2020 (excess saving) is strongly associated with large government dissaving across countries. - Figure-based findings reported in the text: - The magnitude of excessive public and private saving is much larger in the United States in percent of GDP compared with Europe. - In the United States, large increases in fiscal deficits more than offset the increase in private saving, leading to larger current account deficits. - In Europe, higher private saving combined with lower investment more than offset fiscal deficits, leading to increases in the cumulative current account balance. - Financial wealth and valuation effects: - The increase in household sector aggregate net financial wealth was much larger in the United States than in Europe. - In the United States, most of the increase in financial wealth was driven by valuation changes (asset price changes). - In Europe, the relative contributions of net financial saving and changes in asset prices to wealth were more balanced. - Since the beginning of 2021, most increases in net wealth are due to changes in valuations in both the United States and Europe, as net financial saving flows have reverted to pre-pandemic levels. - Recent data for the United States show a drawdown in accumulated saving in early 2022, possibly related to the inflation surge and large valuation losses. ### Distributional aspects of accumulated saving and wealth - Unequal distribution of saving and wealth gains: - The pandemic’s increase in net wealth was distributed unevenly, with much accruing to individuals at the top of the distribution: the equity price boom mostly benefited the rich, while lockdowns reduced spending on services that comprise a larger share of wealthier households’ consumption. - The distribution of wealth across groups did not change much, as increases in net wealth were relatively in line with the pre-pandemic shares in the wealth distribution. - Europe versus United States patterns: - In Europe, the increase in saving is relatively broad based, which can be explained by relatively muted changes to measured income inequality between 2019 and 2020. - Median values for 24 European countries indicate the increase in saving by income percentile is less concentrated than in the United States. ### EBA framework and adjustment dynamics of external imbalances - Purpose and method: - The External Balance Assessment (EBA) framework produces multilaterally consistent assessments of current account balances and real effective exchange rates. - This box evaluates how and how fast excess external imbalances adjust by relating initial EBA assessments and policy gaps to subsequent adjustments using regression analysis on samples that include 48 economies (Ireland excluded) and two sub-periods: (i) 2012–19 with actual assessments and available optimal policies P*, and (ii) 1987–2019 with refined EBA specification assuming constant P* at 2019 levels. - Panel regressions estimated: X_{i,t} − X_{i,t−1} = α.Gap_{i,t−1} + ε_{i,t}, where X represents various gap measures. When X = Gap and α < 0, the gap follows an exponential process converging toward zero. - Key findings on adjustment: - All gaps adjust toward zero, but adjustment is slow and asymmetric across countries: regression coefficients α are negative and statistically significant in nearly all cases. - Based on 2012–19 and the External Sector Report sample, IMF staff current account gaps take 6.9 years to close by half. - Adjustment is somewhat faster for EBA gaps over the whole period (half-life of 4.7 years) or 2012–19 (5.7 years). - Significant cross-country heterogeneity: - Adjustment fastest in deficit emerging economies: half-life 1.5 years. - Adjustment slowest in advanced surplus economies: half-life 6.4 years. - Adjustment is mainly driven by changes in actual current account balances; changes in current account norms (“norm creep”) play only a modest role. - Closing policy gaps contributes to external adjustment only when policy gaps and overall current account gaps are aligned. - Methodological notes: - Half-lives HL(Gap) are defined as the number of years it takes for the gap to close by half, with HL(Gap) = − ln(2)/ln(1 + α). - Regressions exclude constants and country fixed effects, reflecting the normative EBA notion that gaps should close to zero over time. - Robustness exercises including country fixed effects and a constant show results largely unchanged; half-lives between 4.7 and 6.7 years correspond to α coefficients between −0.098 and −0.138 (both significant at the 1 percent level). - Results are consistent with related literature (for example, Coutinho, Turrini, and Zeugner 2022). *2022 EXTERNAL SECTOR REPORT, International Monetary Fund | 2022* ### Box 1.2. Current Account Rebalancing: At What Speed? Assessment of Current Account Gaps ### Box 1.2. Current Account Rebalancing: At What Speed? Assessment of Current Account Gaps ### Historical persistence and determinants of adjustment speed - Crisis episodes: adjustment is faster during crisis episodes (2.1 years) compared with normal times (5.5 years). - Wage-bargaining structure: - Decentralized wage bargaining: faster adjustment (3.7 years). - Centralized wage bargaining: slower adjustment (10.8 years). - Other country features: - Economies that are more financially closed and have less flexible exchange rate regimes tend to adjust faster. - Norm creeping: - EBA gaps adjustment is mainly driven by changes in actual current account or cyclically adjusted current account balances, with norm creeping playing only a modest role. - Norm creeping is mainly related to the net foreign assets variable as persistent external imbalances lead to building large external positions over time; other fundamentals also matter for surplus economies, generating asymmetry between surplus and deficit countries. ### Quantitative estimates of gap adjustment and half-lives - Policy gaps vs EBA CA gaps: - Policy gaps tend to adjust faster than overall EBA current account gaps: policy gaps half-life is 2.7 years; EBA current account gaps half-life is 4.7 years. - Asymmetries in policy-gap adjustment: - Fiscal gaps: adjustment slower when fiscal stance is tighter than warranted. - Credit gaps: adjustment slower after a credit crunch; credit gaps contribute differently depending on sign. - Health gaps: adjust very slowly. - Foreign exchange reserve (FX reserve) gaps: adjust extremely rapidly. - Residuals: - Residuals adjust relatively slowly, with asymmetry between surplus and deficit countries: half-lives of 4.5 and 2.2 years, respectively. - Alignment of policy gaps with overall external gaps: - Policy gaps are aligned with overall external gaps in about two-thirds of cases. - Quantitatively, closing policy gaps in 2019 changes absolute EBA gaps in percent of GDP by an average of 0.1 percent of country GDP (they are reduced in US dollar terms). - Closing fiscal gaps reduces overall EBA gap by $150 billion. - Closing the credit gap increases overall EBA gap by $125 billion. ### Regression evidence on drivers of EBA CA gap changes (summary of Table 1.2.1) - Lagged EBA CA gap coefficient: −0.1358*** (column 1). - Change in actual CA and cyclically adjusted CA also significant contributors to change in EBA CA gap (columns 2 and 3). - Change in EBA CA norm contributes modestly (column 4). - Change in EBA CA norm decomposition: - Change in NFA contribution and change in norm excluding NFA presented separately for surplus and deficit countries (columns 6–10). - Regression sample and statistics: - Observations: 1,331 for main regressions; number of ifs_code up to 48 depending on specification. - R-squared values reported (for example, 0.070 in column 1). - p-values shown in parentheses; significance indicated (*** p < 0.01; * p < 0.1). ### Regression evidence on policy gaps and residuals (summary of Table 1.2.2) - Lagged EBA CA gap coefficient: −0.1251*** (column 1). - Change in EBA residual and change in policy gaps analyzed separately for aligned and nonaligned policy gaps. - Observations: 1,331 for main regressions; subgroups have 849 and 482 observations. - R-squared values reported (for example, 0.064 in column 1). ### Implications for policy - Policy gaps close mainly for domestic reasons, regardless of their impact on external rebalancing; this can call for additional policy measures aimed at external rebalancing. - Because policy gaps adjust faster than overall EBA CA gaps but are only modest contributors to overall external adjustment, residuals and other factors remain key for external rebalancing. *Sources: IMF, External Balance Assessment estimates; Laeven and Valencia 2020; The OECD/AIAS database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts; and IMF staff calculations.* ### 1. Effect of an Increase in NTBs on Exports, ### 1. Effect of an Increase in NTBs on Exports, Imports, Trade Balance, and CAB Five Years after the Reform ### Effects on trade and macroeconomic variables (box continuation) - The heading indicates analysis of the "Effect of an Increase in NTBs on Exports, Imports, Trade Balance, and CAB Five Years after the Reform" and a parallel analysis on "Effect of an Increase in NTBs on GDP, Investment, and Productivity Five Years after the Reform." (No numeric results shown in the supplied excerpt for these effects.) ### Annex Table 1.1.1 — Selected Economies: Foreign Reserves, 2018–21 (high-level highlights) - Aggregate (sample of ESR economies) gross official reserves (Billions of US Dollars): 10,669; 11,198; 12,265; 12,851 (2018, 2019, 2020, 2021). - Aggregate percent of GDP: 12.4; 12.8; 14.4; 13.3 (2018, 2019, 2020, 2021). - Advanced economies aggregate gross reserves (Billions of US Dollars): 4,816; 5,110; 5,849; 6,227 (2018–2021). - Emerging Market and Developing Economies aggregate gross reserves (Billions of US Dollars): 5,852; 6,088; 6,416; 6,624 (2018–2021). - Selected country examples (Gross Official Reserves in Billions of US Dollars, 2018–2021; percent of GDP shown where available): - China: 3,168; 3,223; 3,357; 3,428 and percent of GDP: 22.9; 22.5; 22.6; 19.3. - United States: 450; 517; 628; 716 and percent of GDP: 2.2; 2.4; 3.0; 3.1. - Japan: 1,270; 1,322; 1,391; 1,406 and percent of GDP: 25.2; 25.8; 27.6; 28.5. - Russia: 469; 555; 597; 632 and percent of GDP: 28.4; 32.7; 40.2; 40.2 (table shows 35.5 for 2021 in a later column context). - Notes from the table: - Total reserves from International Financial Statistics; includes gold reserves valued at market prices. - The ARA metric is reported for selected EMDEs and Korea and used to assess adequacy of FX reserves against potential FX liquidity drains. ### Annex Table 1.1.2 — External Sector Report Economies: Summary of External Assessment Indicators, 2021 (key assessments and exact figures) - Current account and IMF staff assessments (examples): - Argentina — Overall Assessment: Weaker; Current Account (Percent of GDP) Actual: 1.4; Cycl. Adj.: 0.5; IMF Staff CA Gap midpoint: –0.5 ±1. - Germany — Overall Assessment: Stronger; Current Account (Percent of GDP) Actual: 7.4; Cycl. Adj.: 7.6; IMF Staff CA Gap midpoint: 3.7 ±0.5. - China — Overall Assessment: Broadly in line; Current Account (Percent of GDP) Actual: 1.8; Cycl. Adj.: 2.2; IMF Staff CA Gap midpoint: –0.3 ±0.6. - Singapore — Overall Assessment: Substantially stronger; Current Account (Percent of GDP) Actual: 18.1; Cycl. Adj.: 18.8; IMF Staff CA Gap midpoint: 5.2 ±1.8. - United States — Overall Assessment: Moderately weaker; Current Account (Percent of GDP) Actual: –3.6; Cycl. Adj.: –3.2; IMF Staff CA Gap midpoint: –1.1 ±0.6. - International Investment Position and CA NFA stabilizing values are reported in the table for each economy (values retained in original table; selected examples above reproduce the table entries exactly where shown). ### Annex Table 1.1.3 — IMF Staff–Assessed Current Account Gaps and Staff Adjustments, 2021 - Table structure preserved: columns include Actual CA Balance [A], Cycl. Adj. CA Balance [B], EBA CA Norm [C], EBA CA Gap [D=B–C], IMF Staff-Assessed CA Gap [E=D+F], and IMF Staff Adjustments broken down into COVID-19 [G], CA [H], Norm [I], Other, Total [F=G+H–I], with comments on non–COVID-19-related adjustments. - Selected country entries (exact numbers as in table): - Argentina — Actual CA Balance [A]: 1.4; Cycl. Adj. CA Balance [B]: 0.5; EBA CA Norm [C]: 0.2; EBA CA Gap [D=B–C]: 0.3; IMF Staff-Assessed CA Gap [E]: –0.5; IMF Staff Adjustments total [F]: –0.8; Comments: NIIP/financing risk considerations. - Australia — Actual CA Balance [A]: 3.5; Cycl. Adj. CA Balance [B]: 1.7; EBA CA Norm [C]: –0.9; EBA CA Gap [D=B–C]: 2.6; IMF Staff-Assessed CA Gap [E]: 2.7; IMF Staff Adjustments total [F]: 0.2. - Brazil — Actual CA Balance [A]: –1.7; Cycl. Adj. CA Balance [B]: –2.8; EBA CA Norm [C]: –1.6; EBA CA Gap [D=B–C]: –1.2; IMF Staff-Assessed CA Gap [E]: –0.4; IMF Staff Adjustments total [F]: 0.8; Comments: Severe drought + end of Repetro. - Euro Area — Actual CA Balance [A]: 2.4; Cycl. Adj. CA Balance [B]: 2.3; EBA CA Norm [C]: 0.6; EBA CA Gap [D=B–C]: 1.7; IMF Staff-Assessed CA Gap [E]: 1.2; IMF Staff Adjustments total [F]: –0.5; Comments: Country-specific adjustments. - Table notes: Figures may not add up due to rounding effects; total IMF staff adjustments include rounding in some cases. ### Annex Table 1.1.4 — IMF Staff–Assessed Real Effective Exchange Rate (REER) and EBA Gaps, 2021 (selected entries) - Columns include IMF Staff-Assessed REER Gap (midpoint), REER Gap Implied from IMF Staff-Assessed CA Gap, EBA REER-Level Gap, EBA REER-Index Gap, CA/REER Elasticity, and REER percent change indicators. - Selected exact entries: - Argentina — IMF Staff-Assessed REER Gap: 0.0; REER Gap Implied from IMF Staff-Assessed CA Gap: 4.0; EBA REER-Level Gap: –8.7; EBA REER-Index Gap: 7.6; CA/REER Elasticity: 0.13; REER Average 2021/Average 2020: 4.4; May 2022/Average 2021: 18.3. - Germany — IMF Staff-Assessed REER Gap: –10.8; REER Gap Implied: –10.8; EBA REER-Level Gap: –7.9; EBA REER-Index Gap: 7.7; CA/REER Elasticity: 0.34; REER Average 2021/Average 2020: 0.9; May 2022/Average 2021: –3.0. - United States — IMF Staff-Assessed REER Gap: 8.7; REER Gap Implied: 8.7; EBA REER-Level Gap: 8.9; EBA REER-Index Gap: 1.6; CA/REER Elasticity: 0.12; REER Average 2021/Average 2020: –2.1; May 2022/Average 2021: 8.6. - Discrepancy (GDP-weighted average sum of IMF staff-assessed REER gaps): 1.6. ### Annex Table 1.1.5 — Selected Economies: EBA Current Account Regression Policy Gap Contributions, 2021 (percent of GDP) - Table reports contributions to EBA CA gaps from policy gaps such as Fiscal Gap, Public Health Expenditure Gap, Private Credit Gap, Foreign Exchange Intervention and Capital Controls Gap, with domestic/identified/residual breakdowns and coefficients. - Key structural note from table footnotes: - Total foreign exchange intervention and capital controls contribution = Coeff * [(FXI x KC) − (desirable FXI × desirable KC)]. - Foreign contributions used for all countries are: fiscal = 1.3 percent of GDP; public health = 0.0 percent of GDP; private credit = −0.1 percent of GDP; foreign exchange intervention = −0.2 percent of GDP. - Representative country entries (exact numbers reproduced where shown): - Argentina — EBA Gap: 0.3; Fiscal Total: 0.7; Fiscal Domestic: –0.3; Public Health Total: –0.4; Private Credit Total: 0.8; Foreign Exchange Intervention and Capital Controls Total: –0.5; Coeff and other subcomponents appear in table. - Germany — EBA Gap: 4.3; Fiscal Total: –0.8; Fiscal Domestic: –1.8; Public Health Total: 5.1; Private Credit Total: 0.5; Foreign Exchange Intervention and Capital Controls Total: –0.7; EBA regression shows a large identified domestic public health coefficient and other components documented in the table. - Japan — EBA Gap: –0.9; Fiscal Total: –1.8; Public Health Total: –2.8; Private Credit Total: 0.9; Foreign Exchange Intervention and Capital Controls Total: –0.6; table includes precise coefficient and P/P* entries. ### Annex Table 1.1.6 — 2021 Individual Economy Assessments: Summary of Policy Recommendations (selected country recommendations verbatim) - Argentina (Overall 2021 Assessment: Weaker) - "Implement growth-friendly fiscal consolidation and prudent monetary policies to maintain strong trade surplus, rebuild international reserves, regain market access, and ensure fiscal sustainability; introduce reforms to boost export capacity and encourage FDI." - Australia (Overall 2021 Assessment: Stronger) - "Boost investment by executing planned infrastructure spending, streamlining product market regulation, promoting R&D and innovation, and reducing the tax burden on companies." - Belgium (Weaker) - "Strengthen competitiveness by addressing structural challenges, including labor and product market reforms, to foster green, digital, and inclusive growth. Rebuild fiscal space through expenditure led consolidation." - Brazil (Broadly in line) - "Implement medium-term fiscal consolidation and structural reforms to raise potential growth and investment. FX intervention, including that using derivatives, may be appropriate to alleviate disorderly market conditions in the FX market." - Canada (Moderately weaker) - "Develop credible medium-term fiscal consolidation plan; boost nonfuel exports through improved labor productivity, investment in R&D and public infrastructure; implement policies to encourage green transformation and boost FDI." - China (Broadly in line) - "Accelerate structural reforms (by further opening domestic markets, reforming SOEs, and ensuring competitive neutrality with private firms), reduce high household savings (by strengthening the social safety net), and promote green investment. Further increase exchange rate flexibility to help the economy adjust to the changing external environment." - Euro Area (Moderately stronger) - "Implement area-wide initiatives (banking and capital markets union and fiscal capacity for macro-stabilization) to reinvigorate investment, thus reducing the aggregate CA surplus; see member country–specific recommendations to reduce internal and external imbalances." - India (Broadly in line) - "Gradually withdraw fiscal and monetary policy stimulus, negotiate free trade agreements with main trading partners to boost exports, further liberalize the investment regime, and reduce tariffs. Structural reforms could deepen integration in global value chains and attract FDI, hence mitigating external vulnerabilities. Exchange rate flexibility should act as the main shock absorber, with intervention limited to addressing disorderly market conditions" - Indonesia (Broadly in line) - "Pursue planned fiscal consolidation while boosting productivity and allowing for higher infrastructure and social spending to foster human capital development; facilitate sectoral adjustment, ease nontariff trade barriers and FDI restrictions; improve labor market flexibility. Flexibility of the exchange rate should continue to support external stability with the ongoing structural transformation of the Indonesian economy." - Italy (Broadly in line) - "Raise productivity and improve the business climate through higher investment and structural reforms, including by upskilling the workforce and increasing the quality of infrastructure and the effectiveness of the public administration. Reduce vulnerabilities associated with rollover of public debt by improving budget efficiency and fully implementing the National Recovery and Resilience Plan." - Japan (Broadly in line) - "Implement gradual fiscal consolidation within a well-specified medium-term fiscal framework, accommodative monetary policy, and structural reforms that support domestic demand. Focus on reforms to increase labor supply, boost productivity and wages, and encourage firms to deploy their accumulated savings." - Korea (Broadly in line) - "In a context of expected normalization of fiscal and monetary policies, implement structural policies to stimulate investment and facilitate rebalancing of the economy toward services and other new growth drivers, by reducing barriers to entry and deregulating the nonmanufacturing sector and strengthening the social safety net to reduce the need for precautionary saving. ER should remain market determined, with intervention limited to preventing disorderly market conditions." - (Table continues with country-specific, verbatim policy recommendations in the same structure for other economies.) *Source: 2022 EXTERNAL SECTOR REPORT, International Monetary Fund | 2022* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Chapter authors and contributors - Authors: Rudolfs Bems and Luciana Juvenal. - Modeling consultants: Warwick McKibbin and Weifeng Liu. - Research support: Xiaohan Shao. - Editorial assistance: Jane Haizel. - Chapter benefited from comments by Fernanda Nechio, internal seminar participants, and reviewers. ### Focus and scope - Examines the external sector effects of climate mitigation policies using a model-based approach. - Builds on the net-zero emissions by 2050 scenario analyzed in the October 2020 WEO, based on the G-Cubed global macroeconomic model. - Considers medium-term outcomes over the next decade for the largest economies and key regions to capture global general equilibrium effects. - Limits analysis to a specific mitigation scenario; findings are conditional on scenario assumptions, including economy responses to carbon pricing and technological progress. - Global current account balances are used descriptively (defined as the sum of absolute current account balances across all countries), not as policy prescriptions. ### Mitigation policy package analyzed - Carbon tax with a compensatory transfer to households to ensure inclusion. - Green subsidy to the renewables sector. - Green infrastructure investment. ### Questions addressed - Consequences of mitigation policies on countries’ external sectors. - Dependence of external outcomes on countries’ structural characteristics (e.g., carbon intensity, net fossil fuel exports). - Impact of international coordination of mitigation policies on external outcomes. - Effects of burden sharing of emission reductions between advanced and developing economies. - Implications for global current account balances, capital flows, and global interest rates. ### Key findings — sectoral and external adjustments - A credible and globally coordinated carbon tax: - Decreases current account balances in greener advanced economies. - Increases current account balances in more fossil-fuel-dependent regions. - Permanently reduces the return on carbon-intensive investment, leading to a global fall in investment, with a larger decline in fossil-fuel-dependent economies. - Global decline in investment reduces the global interest rate, which decreases saving across countries in a relatively uniform manner. - As a result, current account movements are primarily driven by the investment response and determined by country characteristics such as initial carbon intensity and net fossil fuel exports. - Globally coordinated supply-side policies (green subsidy and infrastructure investment): - Boost investment and saving and increase the global interest rate. - Have a more muted external sector impact than the carbon tax because of either the constrained pace of renewables expansion or the symmetry of the infrastructure boost across countries. - Leave current accounts broadly unchanged when the green infrastructure boost is imposed identically across countries. - For the global economy: - A coordinated climate mitigation policy package would reduce global current account balances by 25 percent by 2027. - Capital flows would shift toward greener advanced economies. - The global interest rate would initially rise due to green infrastructure, then fall over time as the persistently increasing carbon tax reduces investment globally and shifts activity toward more labor-intensive sectors. - Partial or unilateral implementation: - Partial implementation of mitigation policies can reverse or magnify external sector effects relative to full coordination. - A unilateral carbon tax in Europe would reverse that region’s current account response (negatively impacting competitiveness) and increase global balances. - Policy design and burden sharing: - Burden sharing of emission reductions between advanced and developing economies and accelerating renewables investment in developing economies could moderate external sector impacts. ### Supporting empirical note - In support of the model scenario, the April 2022 WEO estimates that, in part as a result of anticipated and implemented climate policies, investment in gas and oil sectors declined globally by 40 percent between 2014 and 2019. ### Caveats and interpretation - Findings pertain to the specific mitigation scenario used; economic consequences vary with assumptions on input substitutability, factor mobility, policy credibility, and the path of technological change. - The chapter focuses on medium-term external sector impacts (next decade); longer-term outcomes are highly uncertain. *Source: CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2022 EXTERNAL SECTOR REPORT* ### CHAPTER 2 CLIMATE POLICIES ANd EXTERNAL AdjuSTMENT ### CHAPTER 2 CLIMATE POLICIES ANd EXTERNAL AdjuSTMENT ### The G-Cubed Model and Baseline - Model: G-Cubed global macroeconomic model (intertemporal general equilibrium) partitioning world into 10 countries/regions and 20 sectors, including detailed energy and power-generation sectors (three fossil fuel sectors: oil, gas, coal; multiple renewables generation sectors). - Regions (selected features): - Europe (EUW) accounts for 62 percent of global renewable energy (solar, wind, other renewables). - Renewables account for about 20 percent of energy generation in Europe and the OEC; less than 5 percent in all fossil fuel exporters. - Carbon intensity is higher in fast-growing emerging market economies such as China and India. - Baseline projections: - Global carbon emissions projected to continue rising at an average annual pace of 1.7 percent, reaching 57.5 gigatons by 2050. - Model features relevant for external sector analysis: - Intertemporal optimization, limits on pace of investment, cross-border capital and trade flows, heterogeneous agents, monetary and fiscal rules, flexible exchange rates and open capital accounts. - External sector: gap between aggregate saving and investment determines current account; real interest rate affects saving, investment, and human wealth through discounting. ### Climate Change Mitigation Scenario — Policy Package - Objective: bring net carbon emissions to zero by 2050 via a policy package composed of: - Carbon tax: calibrated to achieve an 80 percent reduction in emissions in each region by 2050 relative to 2018 (after accounting for emission reductions from infrastructure investment and green subsidy). Carbon tax consists of an initial tax rate followed by an annual increase of 7 percent. - Revenue recycling: 25 percent of carbon tax revenue transferred back to households; 75 percent recycled to reduce government debt. - The scenario assumes that the remaining 20 percent of emission reductions come from factors not captured by the model (natural emission sinks, carbon removal technologies). - Exception: OPC region emissions are kept at the initial level. - Green subsidy: output of renewables—solar and wind electricity generation sectors—subsidized by 80 percent. Subsidy financed by government debt. - Low-carbon infrastructure investment: initial green public infrastructure investment of 1 percent of GDP gradually declines to zero over 10 years. - Productivity assumption: for every 10 percent increase in aggregate stock of infrastructure capital, productivity in private sector output rises by 0.8 percent. - Sustaining new infrastructure: additional 0.2 percent of GDP spending to offset depreciation, locking in productivity gains. - Roles: - Carbon tax by 2050 accounts for 80 percent of emission reductions but negatively impacts economic growth. - Green supply-side policies provide limited direct emission reductions but make the green transition growth neutral. - Scenario is designed to be employment-neutral and public-debt-neutral for the global economy (with specific recycling and financing assumptions). ### Mechanisms of Impact - Primary channels: - Price channel: carbon tax raises relative price of fossil-fuel energy, encouraging energy efficiency and discouraging energy usage; main channel for emission reductions. - Composition and investment channel: as energy usage falls, activity shifts from capital-intensive high-carbon sectors to more labor-intensive low-carbon sectors; decarbonization is more negative for investment than for output and employment. - Supply push: carbon tax and green supply policies increase relative price competitiveness of renewables, supporting growth and investment in renewables. - Transition characteristics: - Gradual and orderly transformation with persistently increasing fossil fuel prices; no abrupt fossil-fuel price shocks assumed. - No technological breakthroughs assumed beyond spillovers from green infrastructure investment. - Credibility and anticipation of policies over three decades are crucial for generating the scenario outcomes. - Additional modeling notes: - Limits on pace of sectoral expansion constrain speed of shift to renewables. - Precautionary saving motive absent from the model. - Results abstract from long-term climate damages; a model extension suggests very limited economic and external sector impact over the next decade. ### External Sector Impact — Carbon Tax and Aggregate Effects - Aggregate global impacts (first decade averages): - Aggregate investment and saving decline by 2 percent of global GDP over the first decade (reflecting high capital intensity of fossil-fuel-dependent activity and investment response in renewables expansion). - Global real interest rate declines by 0.25 percentage point. - Public sector surpluses from carbon tax revenues are more than offset by private dissaving, resulting in decreased aggregate saving. - Cross-country heterogeneity: - Investment contraction is largest in fossil-fuel-producing countries/regions (Russia, OEC, ROW, OPC). - Greener advanced economies and regions (Japan, EUW) are least affected. - China and India are more negatively affected than advanced economies because of carbon-intensive manufacturing. - Saving declines more evenly across countries, dominated by the decline in the global interest rate. - Current account responses: - Current account decreases where investment contracts the least and increases where the carbon tax decreases investment the most, as capital relocates toward greener economies. - Cross-country correlations: - Correlation between investment and current account responses: –0.94. - Correlation between current account and aggregate saving: 0.01. - Interpretation: - Carbon tax acts like a negative productivity shock varying by sector and country; fossil-fuel extraction activities are permanently reduced. - Economic impact is back-loaded as tax levels rise gradually to 2050. - Limits to pace of sectoral expansion imply slow shifts in energy composition and potential role for targeted policies to accelerate renewables growth. ### Alternative Scenarios and Policy Design Notes - Partial implementation and burden-sharing: - Partial implementation can change external-sector outcomes and may magnify or reverse current account responses depending on policy type and implementing country (example: unilateral carbon tax in Europe increases the region’s current account; unilateral green subsidy magnifies current account reduction). - Increased burden sharing in emission reductions, consistent with an internationally coordinated carbon price floor, could reduce the size of climate-policy-induced external sector adjustment between advanced and developing economies by a third. - Policies that accelerate investment in developing economies with less developed renewables sectors could further moderate external sector responses. - Green supply-side policies: - Provide growth neutrality to the transition but contribute less directly to emission reductions than the carbon tax. - Subsidy financed by debt and public infrastructure investment can lock in productivity gains and support renewables expansion. *Source: IMF staff calculations, October 2020 World Economic Outlook scenario as summarized in CHAPTER 2 CLIMATE POLICIES ANd EXTERNAL AdjuSTMENT.* ### 4. Real Exchange Rate ### 4. Real Exchange Rate ### Role of the real exchange rate (RER) in adjustment - The RER acts as a shock absorber for countries most affected by a carbon tax, facilitating external sector adjustment through the expenditure switching channel (domestic demand shifts from imports to domestic goods and services; exports are boosted). - Cross-country correlation between current account and RER responses: –0.86. - Absolute value of the 10-year average current account response to a coordinated carbon tax ranges from 0.3 to 3 percent of GDP. - Absolute value of RER adjustments, relative to baseline, ranges from 0 to 4.8 percent, with an outsized response in initial years. - The model does not capture intergenerational equity considerations from the exhaustible nature of fossil fuels, which could decrease the current account of fossil-fuel-exporting countries in response to a globally coordinated carbon tax. ### Impact of a coordinated carbon tax on the external sector - Investment falls globally following a carbon tax; heterogeneity in the decline in investment determines external sector responses: - Countries where investment contracts least: current account decreases relative to baseline. - Countries with largest decline in investment: current account increases relative to baseline. - In many fossil-fuel-dependent economies, current accounts increase due to permanent nature of the carbon tax and the resulting structural adjustment as aggregate investment declines. - Collected carbon tax revenues exhibit a strong positive correlation with change in the current account: - Regions with highest tax revenues (and projected emissions) see the largest current account increases. - Regions with relatively low carbon tax revenues exhibit current account decreases. - Net fossil-fuel-exporter status is an important determinant: - Net fossil-fuel-exporting countries face reduced foreign demand for fossil fuels, further depress investment and increase current accounts—even if they do not impose a carbon tax. - Cross-border demand spillovers can differ across resource-exporting countries; demand for metals critical to green transition could surge, but the G-Cubed model lacks sufficient mineral-resource detail to explore this. ### Green subsidy (output-based subsidy to renewables) - The green subsidy functions like a positive sector-specific productivity shock, complementing the carbon tax by shifting energy generation to renewables. - Global macro impacts (first decade, averages reported as deviations from baseline): - Investment (and saving) increase globally by 0.1 percent of GDP. - Interest rate rises by 0.11 percentage point. - Reasons for muted global response: - Small initial size of renewables sector: 0.1 percent of global output. - Limits on the pace of investment (quadratic investment adjustment costs in the model). - Cross-country heterogeneity: - Europe has the strongest investment boom due to abundant renewable generation and existing capital for renewables. - Fossil-fuel-producing countries and regions with small renewables sectors (RUS, OPC) see decreased investment in fossil-fuel sectors. - Saving increases in all regions alongside the rise in the global interest rate. - Current account responses: - Heterogeneity in investment responses drives current account changes. - Europe experiences an outsized decrease in the current account; fossil-fuel-dependent countries see the largest increases. - Cross-country correlation between investment and current account responses: –0.91. - RER response: largest appreciation in Europe and depreciations for fossil fuel exporters. - Size of subsidies and distribution: - In countries with the smallest initial renewables sectors (RUS, OPC), the average size of the output-based green subsidy over the first decade remains below 0.04 percent of GDP, and the current account increases the most. - Europe provides the largest subsidy—0.3 percent of its GDP and 57 percent of the global green subsidy—exhibiting the largest decrease in the current account. - Policy implications to moderate heterogeneous impacts: - Accelerate adoption of green energy in countries with less developed renewables sectors to moderate external sector responses to the green subsidy. - Potential financing sources: targeted recycling of the carbon tax, international financing, and technology transfers to enable technology leapfrogging. ### Infrastructure investment component - Green public infrastructure is a sizable and front-loaded fiscal expansion intended to counter negative growth effects of the carbon tax and to generate private sector productivity spillovers. - Aggregate size of the infrastructure investment components (temporary fiscal expansion and productivity spillover) is assumed identical across countries. - Symmetric, coordinated infrastructure investment limits external sector impact: - Identical policy-induced investment shifts across countries broadly offset via increased interest rates, leaving current accounts largely unchanged. - Cautions on interpretation: - Results depend on assumed symmetry of infrastructure investment across countries. - External sector outcomes could be sensitive to symmetry in productivity spillovers and their sectoral distribution. ### Mitigation policy package (carbon tax + green subsidy + infrastructure) - The mitigation policy package is designed to be growth and public debt neutral by 2050. - External sector impact equals the sum of impacts of the three policies. - Key takeaways: - Despite positive global output growth during the initial decade, aggregate investment falls in all but the least carbon-intensive economies. - The public infrastructure boost offsets approximately half of the carbon-tax-induced decline in investment globally; remaining negative impact reflects decline of investment-intensive carbon-based sectors as economies transition. - The external sector impact is dominated by the carbon tax; other policies have much smaller effects: - For the model’s median region, the carbon tax accounts for 91 percent of the total current account response to the mitigation package. - The carbon tax accounts for 46 percent of the overall RER adjustment. - In greener advanced regions (JPN, EUW), investment increases while saving remains broadly unchanged, generating a Dutch-disease-type effect (export activity shrinking as a share of GDP). - Significant country-specific components remain in responses due to variation in openness, bilateral exposures, sectoral structures, labor force trends, and the size of policy shocks. ### Alternative scenarios: role of policy synchronization - Partial or asynchronous implementation of mitigation policies introduces policy asymmetry that can change external sector outcomes. - Example scenario: only Europe implements the carbon tax and green subsidy. - Global intertemporal adjustment (fall in investment and saving, reduction in global interest rate) still occurs but the size of adjustment is significantly smaller than under coordinated implementation. *Source: IMF staff calculations.* ### 0.2 percent of GDP drop in investment (and saving) ### 0.2 percent of GDP drop in investment (and saving) ### Aggregate effects on investment, saving, and interest rates - Global outcome under the net-zero by 2050 scenario: 0.2 percent of GDP drop in investment (and saving) globally. - Associated change in the global interest rate over the first decade: a 0.02 percentage point decrease. - Carbon tax accounts for more than two-thirds of the decline in global current account balances by 2027 in the coordinated mitigation package. ### Heterogeneous country and regional responses (coordinated vs partial implementation) - Europe implementing the carbon tax alone: - Investment in Europe falls more than under coordinated implementation. - The current account response in Europe is reversed from a decline to an increase (Europe becomes a source of capital outflows). - Upstream energy supplies and investment in Europe’s fossil-fuel-supplying countries—Russia and OPC—are depressed. - Regions not imposing the carbon tax: - Investment increases marginally while saving declines. - Capital flows out of Europe and its fossil-fuel suppliers and into regions without the tax, producing current account surpluses in Europe and fossil-fuel-producing regions and deficits elsewhere. - Europe implementing a green subsidy alone: - Economic activity in Europe is further boosted. - The global interest rate rises by less than under coordinated implementation, so investment in Europe is boosted further and its current account decreases. - Partial implementation can magnify competitive disadvantages or the economic boost from mitigation policies, but fails to deliver the necessary global carbon emission reductions. ### Differentiated mitigation efforts (advanced economies vs developing economies) - Alternative scenario for 2030 targets: - Advanced regions/countries: carbon tax increased to double emission reductions from an average of 20 percent to 40 percent by 2030 (relative to the baseline). - Developing regions: 2030 emission targets reduced from an average of 32 percent to 20 percent. - By 2030 advanced economies reduce emissions by approximately twice as much as developing economies. - Impacts: - Higher 2030 emission cuts in advanced economies increase their current accounts relative to the baseline net-zero by 2050 scenario. - More gradual 2030 cuts in developing economies reduce their current accounts relative to the same benchmark. - The size of the shift in capital flows toward the five higher-income regions and countries is reduced by a third. - Assumptions noted: - Reported results assume (1) 2030 burden sharing is followed by country-specific emission reduction targets of 80 percent met by 2050 (except OPC); and (2) all carbon tax revenues are applied toward public debt repayment. Main findings are broadly unchanged if revenues are transferred to households. ### Fiscal revenue recycling and sensitivity - Baseline recycling: 25 percent of carbon tax revenues are transferred to households; 75 percent is recycled to reduce government debt. - Carbon tax revenue size during the first decade: 0.6 percent of GDP for the average country. - Sensitivity analysis: - Two extreme fiscal scenarios examined: all revenues used to reduce public debt vs fully transferred to households. - Average difference in the absolute current account response across the 10 countries and regions between these two scenarios is smaller than 0.25 percent of GDP. - Conclusion: external sector findings are not driven by the specific revenue-recycling assumption. ### Global balances, capital flows, and interest rate dynamics - Global balances: - Coordinated mitigation package reduces global balances by 0.3 percent of global GDP by 2027 (current account balances deviation from baseline). - A coordinated net-zero by 2050 mitigation policy package would reduce global balances one-quarter by 2027; carbon taxes would account for three-fourths of this reduction. - Partial implementation can strengthen or reverse this effect (example: Europe-only carbon tax increases global balances). - Increased burden sharing would moderate the decline in global balances by 15 percent by 2027. - Cross-border capital flows: - Mitigation policies shift global capital flows toward advanced economies: inflows into Europe, Japan, and the United States; outflows from lower-income oil-exporting developing economies, India, and ROW. - Carbon tax is the primary driver of these cross-border flows, decreasing current accounts in greener economies and increasing them in more carbon-intensive regions. - Global interest rate prospects: - Carbon taxes reduce investment and gradually decrease the global interest rate over the mitigation period. - Front-loaded green infrastructure investment raises the global interest rate in the short term; the effect is transitory. - Net effect of the mitigation package: an initial rise in the global interest rate followed by a gradual decline as carbon tax levels increase. - Specific decade averages reported in simulations: 2023–33 average and 2043–53 average deviations shown in model figures (percentage point deviations from baseline). ### Key quantitative findings and scenario magnitudes - Investment and saving: 0.2 percent of GDP drop globally (first decade). - Global interest rate: 0.02 percentage point decrease over the first decade. - Carbon tax revenue (first decade, average country): 0.6 percent of GDP. - Global current account balances deviation by 2027: 0.3 percent of global GDP reduction (coordinated). - Burden-sharing moderation: reduces decline in global balances by 15 percent by 2027. - Shift in capital flows toward advanced regions reduced by a third under differentiated mitigation (advanced economies cut emissions more by 2030). - Emission reduction targets in differentiated scenario by 2030: advanced economies from 20 percent to 40 percent; developing economies from 32 percent to 20 percent. - Long-run emission target assumption: 80 percent reduction by 2050 (country-specific, except OPC). ### Policy implications and recommendations - Coordinate mitigation policies across regions to avoid large adverse external sector adjustments and to ensure global emission reductions are achieved. - Consider burden-sharing arrangements (for example, income-differentiated carbon price floors or sectoral carbon pricing) to moderate heterogeneous investment and current account impacts across countries. - For unilateral carbon taxes, complementary measures (such as border carbon adjustments, focusing on energy-intensive and trade-exposed sectors) could reduce negative competitiveness effects. - Expand renewables and targeted green investment in countries where the renewables sector is smallest to accelerate constrained investment and moderate cross-country external sector disparities. - Evaluate fiscal recycling choices recognizing that, given carbon tax revenue is small in the first decade (0.6 percent of GDP), recycling design has limited effect on external sector heterogeneity. *Source: IMF staff calculations.* ### 1. Norway ### 1. Norway ### Climate policy effects on external accounts (Metzler-diagram intuition) - Setup: - Current account identity: CA = S – I. - Saving depends positively on interest rates; investment depends negatively on interest rates. - Coordinated carbon tax (two-region example; Region 1 = low carbon intensity, Region 2 = high carbon intensity): - Global interest rate falls (r* → r* ́) until the global current account adding-up constraint holds (CA1 + CA2 = 0). - In the new equilibrium, saving falls in both regions by an equal amount (movement along identical S(r) curve). - Investment falls in both regions, but by less in the greener region (Region 1). - The current account falls in the greener economy (CA1 < 0), with an offsetting increase in the more carbon-intensive economy (CA2 > 0). The current account response is driven by heterogeneity in the investment response. - Additional notes: - If carbon intensities are identical in the two regions, then the declines in investment and saving coincide, and the current account would stay at zero (CA1 = CA2 = 0). - In a richer setting the saving curve can differ across countries (for example, owing to differences in labor force projections), generating some variation in the saving response between the regions. The saving curve could also shift to varying degrees across countries in response to the tax, for example, reflecting intertemporal smoothing. Nevertheless, the carbon-tax-induced shift in the investment curve remains the main driver of the current account response. - Partial implementation (greener region acts alone): - Interest rate falls (r* → r* ́) and saving is reduced by the same amount in both regions, though partial implementation reduces the magnitude of adjustment for both variables. - Investment falls by more in Region 1, while increasing in Region 2 (which takes advantage of the reduced interest rate). - As a result, the current account impact is reversed under partial implementation: it decreases in Region 1 (CA1 < 0) and increases in Region 2 (CA2 > 0). - Footnote: In a richer modeling environment, the magnitude of the adjustment for the interest rate and saving will depend on the relative size of the region that implements the carbon tax. If Region 1 is small enough not to affect the global interest rate, then only investment in Region 1 would decrease in response to the tax shock. (Author of Box 2.1: Rudolfs Bems.) ### The green energy transition and implications for metal producers - Main findings: - Not all commodity exporters will face a demand contraction from the green transition; demand for metals critical to green energy transitions is projected to rise substantially. - Under the IEA net-zero emissions by 2050 scenario, the value of annual copper production could more than double in main exporting countries over the next two decades. Projected increases for nickel, cobalt, and lithium are described as even more dramatic. - The geographic concentration of production and reserves for copper, nickel, cobalt, and lithium is even higher than that for fossil fuels. As metals replace fossil fuels, the role of cross-border trade in satisfying global demand for commodities could increase, strengthening the impact of global commodity cycles on global current account balances. - Illustrative elements from figures: - Figure 2.3.1: Projected increase in revenue for metal producers (Billion of US dollars) — shows large increases across copper, nickel, cobalt, lithium for main exporters. - Figure 2.3.2: Comparison of geographic concentration (Top three countries) — indicates production and reserves concentration for Cobalt, Lithium, Nickel, Copper versus Crude oil (global share, percent). - Data notes: - Scenario value of production is based on reserves data and the IEA net-zero emissions scenario. - Cobalt and lithium production data are for 2019. All other data are for 2020. - Country abbreviations noted: AR = Argentinia; AU = Australia; BR = Brazil; CA = Canada; CD = Democratic Republic of Congo; CL = Chile; CN = China; CU = Cuba; ID = Indonesia; PE = Peru; PH = Philippines; RU = Russia; SA = Saudi Arabia; US = United States; VE = Venezuela. - (Authors of Box 2.3: Rudolfs Bems and Martin Stuermer.) - Sources cited in the box: Boer, Pescatori, and Stuermer (2021); International Energy Agency (IEA); US Geological Survey; IMF staff calculations. ### Methodology for individual economy external assessments - Framework: - Individual economy assessments draw on a range of methods integrated into a multilaterally consistent view, grounded in the External Balance Assessment (EBA) to estimate desired current account balances and real exchange rates. - Model estimates and policy-distortion discussions are accompanied by a holistic view of capital and financial account flows, foreign exchange intervention and reserves adequacy, and foreign asset or liability positions. - EBA models provide numerical inputs for identifying external imbalances; where models do not capture all relevant characteristics, economy-specific adjustors are applied. - Estimation details: - IMF staff estimate an economy’s current account gap by combining the EBA model’s current account gap estimate with adjustors. For the 2021 assessments, additional adjustors to account for COVID-19 effects were introduced. - The staff estimates the real effective exchange rate (REER) gap consistent with the staff current account gap by applying a country-specific elasticity; additional information (EBA REER regression models, unit-labor-cost-based measures, and metrics) may be used to arrive at the staff REER gap estimate. - To integrate country-specific judgment in an objective manner, a multilaterally consistent process was developed for the 30 largest economies (representing about 90 percent of global GDP); assessments are discussed with authorities as part of bilateral surveillance. - Presentation and labels: - External assessments are presented in ranges to reflect uncertainty and are labeled as “broadly in line,” “moderately weaker (stronger),” “weaker (stronger),” or “substantially weaker (stronger).” - Wording conventions: - When comparing the cyclically adjusted current account with the current account norm, “higher” or “lower” corresponds 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. - “Broadly in line” corresponds to current account gaps in the range of ±1 percent of GDP and REER gaps reflecting the country-specific exchange rate semielasticity (for example, ±5 percent based on an elasticity of –0.2). - Table of REER/CA gap descriptions (as presented in Table 3.A): - CA Gap >4% ; REER Gap <–20% : . . . substantially stronger . . . - CA Gap 2%, 4%–20%, –10% : . . . stronger . . . - CA Gap 1%, 2%–10%, –5% : . . . moderately stronger . . . - CA Gap –1%, 1%–5%, 5% : The external position is broadly in line with fundamentals and desirable policies. - CA Gap –2%, –1%5%, 10% : . . . moderately weaker . . . - CA Gap –4%, –2%10%, 20% : . . . weaker . . . - CA Gap <–4% ; REER Gap >20% : . . . substantially weaker . . . - Selection of economies (Table 3.B — economies covered in the External Sector Report): - Argentina, Australia, Belgium, Brazil, Canada, China, Euro area, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, The Netherlands, Poland, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, Türkiye, United Kingdom, United States. - Process for assessing policy distortions and policy advice: - Distinguish between domestic policy distortions (requiring domestic adjustment) and foreign policy distortions (requiring action by other countries). - The individual economy write-ups identify vulnerabilities related to capital flows and foreign asset/liability positions and recommend policy actions addressing current account determinants (private and public saving–investment balances), structural reforms, fiscal adjustments, and measures addressing external stock vulnerabilities (reserves and foreign exchange intervention policies). - Illustrative two-country example (policy-distortion interpretation): - Country A: large current account deficit, large fiscal deficit, high public and external debt → domestic policy distortion requiring adjustment (e.g., rein in fiscal deficit). - Country B: current account surplus, large creditor position, no policy distortions → no domestic policy gap; adjustment by Country A would automatically eliminate B’s imbalance. - Individual assessments would reflect different policy advice and vulnerability notes for Country A and Country B despite equal and opposite CA adjustments. *Source: 2022 External Sector Report (text - 1. Norway).* ### CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS ### Argentina — Overall Assessment and Policy Guidance - Overall Assessment: - External position in 2021 was weaker than the level implied by medium-term fundamentals and desirable policies. - Assessment based holistically on elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. - Recent sovereign FX debt restructuring agreements with private creditors provided short-term cash flow relief but rebuilding international reserves and addressing external debt service obligations over the medium term remain critical. - A CA surplus near 1 percent of GDP is projected over the medium to long term, supported by sustained fiscal consolidation. - Potential Policy Responses: - Balance support for the recovery with strengthening domestic and external stability. - Implement growth-friendly fiscal consolidation combined with prudent monetary policies to: - Contain excessive domestic demand growth; - Maintain a strong trade surplus; - Rebuild international reserves; - Regain market access; and - Ensure debt sustainability (outcome depends on evolution of global conditions). - Undertake structural reforms to boost export capacity and encourage FDI. - As stability and confidence are reestablished, consider a gradual conditions-based easing of CFM measures. ### Argentina — Foreign Asset and Liability Position and Trajectory - Background: - External gross liabilities: 60.9 percent of GDP at end-2021 (vs. 34 percent of GDP at end-2015). - NIIP remained positive, reaching 25 percent of GDP in 2021:Q4 (up 16 percentage points since end-2015), driven by private capital outflows and corporate deleveraging despite tight CFM measures. - Assessment: - 2020 sovereign FX debt restructuring: US$82 billion (21.4 percent of GDP) restructured; cash flow relief of US$34 billion during 2020–30. - 2021 provincial restructurings: US$13 billion in foreign law FX debt restructured; total cash flow savings estimated about US$6.5 billion for 2021–27. - Gross debt and debt service obligations remain substantial; meeting obligations over the medium term depends on implementing a strong economic reform plan. - Key statistics (2021:Q4 % GDP): - NIIP: 25.2 - Gross Assets: 86.0 - Res. Assets: 8.2 - Gross Liab.: 60.9 - Debt Liab.: 45.8 ### Argentina — Current Account - Background: - CA surplus rose to 1.4 percent of GDP in 2021, reflecting improved income balance (largely lower interest payments due to debt restructuring). - Sharp rebound in imports broadly offset stronger exports, including improved terms of trade. - CA projected to narrow slightly in 2022 mainly due to rising domestic demand; spillovers from the war in Ukraine expected to have limited net effects (higher energy and fertilizer imports broadly offset by higher grain exports). - Assessment: - EBA cyclically adjusted CA: surplus of 0.5 percent of GDP in 2021 vs. EBA CA norm of 0.2 percent of GDP. - IMF staff judges near- to medium-term CA norm closer to 1 percent of GDP implying an adjustment of 0.8 percent of GDP. - IMF staff assesses the CA gap to be –0.5 ±1 percent of GDP. - Key statistics (2021 % GDP): - CA: 1.4 - Cycl. Adj. CA: 0.5 - EBA Norm: 0.2 - EBA Gap: 0.3 - COVID-19 Adj.: 0 - Other Adj.: 0.8 - Staff Gap: –0.5 ### Argentina — Real Exchange Rate - Background: - REER depreciated nearly 30 percent between end-2017 and end-2019; relatively stable with some appreciation during 2021 as rate crawl lagged headline inflation. - Average 2021 REER appreciated by 4.3 percent compared with 2020 average; up over 20 percent comparing end-of-period levels. - REER through May 2022 was up 18.3 percent relative to 2021 average. - Assessment: - IMF staff CA gap implies a REER gap of about 4 percent in 2021 (applying an estimated elasticity of 0.13). - EBA REER index model suggests a REER gap of 7.6 percent. - EBA REER level model estimates a gap of –8.7 percent, with significant uncertainty. - IMF staff assesses the 2021 REER gap to be in the range of –5 to 5 percent. ### Argentina — Capital and Financial Accounts: Flows and Policy Measures - Background: - Various CFM measures introduced in 2019 and adjusted subsequently, including: - Restrictions on official FX market (MULC) access for financial transactions; - Restrictions on participation in securities markets (MEP/CCL); - Taxes on FX purchases of 30 and 35 percent; - Tight repatriation and surrender requirements on export proceeds; - Limits on cash withdrawals and selected capital-flow-related credit card transactions abroad; - Limits on FX holdings of banks, mutual funds, and exchange bureaus. - BCRA stopped intervening in the FX securities market and eased some regulations limiting trading in that market. - Assessment: - CFM measures have generally slowed capital outflows but introduced distortions discouraging trade and foreign investment. - Measures are not a substitute for macroeconomic policies; controls on trade flows should be avoided. - Conditions-based easing will be necessary over time, especially to encourage FDI. ### Argentina — FX Intervention and Reserves Level - Background: - Gross international reserves: US$39.7 billion at end-2021 (generally unchanged relative to 2020; US$5 billion below end-2019). - Net international reserves (NIR), excluding swap lines, reserve requirements on domestic US dollar deposits, and deposit insurance, fell to US$2.3 billion at end-2021. - NIR reached US$3.8 billion by end-March 2022, reflecting in part net IMF program disbursements. - Assessment: - Gross international reserves estimated at about 63 percent of the IMF’s composite metric as of end-2021 after smoothing temporary effects, and about 68 percent without the adjustment. - Tighter fiscal and monetary policies necessary to secure projected trade surpluses and improve reserve coverage to pave the way for market access and easing of CFM measures. - FX sales (official or parallel market) should be consistent with reserve accumulation goals while accounting for seasonal variability and temporary bouts of excessive volatility. --- ### Australia — Overall Assessment and Policy Guidance - Overall Assessment: - External position in 2021 was stronger than the level implied by medium-term fundamentals and desirable policies. - Significant improvement in terms of trade and higher savings (partly COVID-19–related) contributed to the CA balance increase in 2021. - CA expected to remain in surplus in 2022 due to elevated commodity prices following the war in Ukraine; projected to return to a slight deficit in the medium term as commodity prices decline, savings return to historical levels, and investment picks up. - Potential Policy Responses: - Withdraw fiscal and monetary stimulus at an appropriate pace as Australia emerges from the pandemic. - Policies to boost investment can help reduce the CA gap, including: - Executing planned infrastructure investment; - Streamlining product market regulation; - Promoting R&D and innovation investment; - Reducing the tax burden on companies. - Commitment to a floating exchange rate should help close the CA gap. ### Australia — Foreign Asset and Liability Position and Trajectory - Background: - NIIP improved to –35.4 percent of GDP in 2021 from –55 percent of GDP in 2020 (and an average of –52 percent over the last five years), driven by a large CA surplus, valuation gains, and substantial nominal GDP growth. - About half of gross liabilities are debt obligations; more than half of debt liabilities are denominated in domestic currency; assets are in foreign currency. - Foreign liabilities composition: about one-quarter FDI, one-half portfolio investment (principally banks’ borrowing abroad and foreign holdings of government bonds), and one-quarter other investments and derivatives. - Assessment: - NIIP level and trajectory are sustainable. - Structure of external balance sheet reduces vulnerability associated with negative NIIP; positive net foreign currency asset position means nominal depreciation tends to strengthen balance sheet. - Banking sector’s net foreign currency liability position is mostly hedged; maturity of banks’ external funding has lengthened since the global financial crisis. - Despite recent increase in debt, government balance sheet remains strong and can provide credible support in a tail-risk event affecting domestic banks. - Key statistics (2021 % GDP): - NIIP: –35.4 - Gross Assets: 148.2 - Debt Assets: 38.4 - Gross Liab.: 183.7 - Debt Liab.: 85.5 ### Australia — Current Account - Background: - CA switched to a surplus in 2019 and increased from 2.6 percent of GDP in 2020 to 3.5 percent of GDP in 2021. - Goods and services balance increased by 1.9 percent of GDP driven by high commodity export prices, notably iron ore. - Income balance deteriorated by 1.2 percent of GDP as dividend payments recovered; income balance remained 0.8 percent of GDP stronger than pre–COVID-19 levels due to net compensation of employees and net interest payments dynamics. - Recent CA surpluses reflect a decline in investment rates (including mining) and a rise in private savings during the pandemic. - CA expected to gradually return to a small deficit over the medium term. - Assessment and adjustments: - EBA cyclically adjusted CA: 1.7 percent of GDP vs. EBA CA norm of –0.9 percent of GDP → model-based CA gap of 2.6 percent of GDP. - IMF staff adjustments: - +0.2 percent of GDP for temporary COVID-19-related factors (travel services –0.1; transport services +0.3; higher imports of medical goods +0.2). - –0.2 percent of GDP to reflect temporarily higher net compensation of employees. - IMF staff–adjusted CA gap range: 2.1 to 3.3 percent of GDP, midpoint 2.7 percent of GDP. - Part of CA gap may reflect increased mandated individual contributions to superannuation (pension system) not captured by EBA model. - Key statistics (2021 % GDP): - CA: 3.5 - Cycl. Adj. CA: 1.7 - EBA Norm: –0.9 - EBA Gap: 2.6 - COVID-19 Adj.: 0.2 - Other Adj.: 0 - Staff Gap: 2.7 ### Australia — Real Exchange Rate - Background: - REER appreciated by 6 percent in 2021 compared with 2020 average; about 1.5 percent higher than five-year average. - REER depreciated in latter half of 2021 after first-half appreciation; as of May 2022 REER was 0.6 percent above the 2021 average. - Assessment: - IMF staff CA gap implies a REER gap of –13.7 percent (applying estimated elasticity of 0.2). - EBA REER level model points to overvaluation of 24.6 percent; EBA index model points to undervaluation of 2.3 percent. - IMF staff assesses REER gap range: –16.7 to –10.7 percent; midpoint –13.7 percent. ### Australia — Capital and Financial Accounts and Reserves - Financial account in 2021 recorded net outflows reflecting sizable CA surplus. - Net FDI inflows: 1 percent of GDP in 2021 (recovered from 0.5 percent of GDP in 2020; below pre-pandemic average 3.2 percent of GDP over 2015–19). - Net portfolio outflows: 3.9 percent of GDP, mainly equity investments abroad by Australian residents including pension funds. - Net derivative outflows were small with inflows and outflows about 1.2 percent of GDP. - Assessment: Vulnerabilities related to the financial account remain contained, supported by credible commitment to a floating exchange rate. - FX Intervention and Reserves Level: - Currency has been free floating since 1983; central bank has not intervened in FX market since the global financial crisis. - Reserve assets increased mainly reflecting the IMF’s SDR allocation. - Authorities’ commitment to a floating regime reduces need for reserve holdings. - Domestic banks’ external liabilities are sizable but either in local currency or hedged; reserve needs for prudential reasons limited. --- ### Belgium — Overall Assessment and External Position (partial) - Overall Assessment: - External position in 2021 was weaker than the level implied by medium-term fundamentals and desirable policies. - CA turned into a deficit of 0.4 percent of GDP in 2021, largely due to a narrowing of the trade surplus and a swing to deficit in the goods balance. - Economy recovering in 2021 and COVID-19 relief measures unwound; war in Ukraine clouds outlook. - CA projected to deteriorate in near term mainly due to higher energy prices, before returning to a surplus in the medium term with narrowing fiscal imbalances. - Potential Policy Responses: - Near term: target and time-limit outlays on energy bill support and expenses related to spillovers from the war in Ukraine to avoid delaying fiscal adjustment amid elevated deficit/debt and aging-related spending pressures. - Balance protection of vulnerable households and viable firms with facilitating resource reallocation and increasing energy efficiency. - Medium term: rebuild fiscal buffers through credible, expenditure-led consolidation that creates space for green and digital transformation via planned increases in investment. - Strengthen competitiveness via social benefit, labor and product market reforms and other actions to foster green, digital, and inclusive growth. - Foreign Asset and Liability Position and Trajectory: - NIIP increased to 57 percent of GDP at end-2021 from 44 percent at end-2020, mainly due to a 9 percentage point of GDP decrease in gross liabilities reflecting valuation changes. - Gross foreign assets reached 460 percent of GDP in 2021 (up 11 percentage points of GDP from pre–COVID-19 level in 2019), inflated by intragroup corporate treasury activities. - Banking sector gross foreign assets declined to 74 percent of GDP at end-2021 (well below pre-global-financial-crisis peak >200 percent). - External public debt decreased to 67 percent of GDP in 2021 from 74 percent in 2020; predominantly denominated in euros. - Assessment: Large gross positions elevated by corporate treasury units that do not appear to create macro-relevant mismatches; NIIP-to-GDP ratio expected to decline based on projected CA and growth paths; large positive NIIP and trajectory do not raise sustainability concerns. - Key statistics (2021 % GDP): - NIIP: 57 - Gross Assets: 460 - Debt Assets: 161 - Gross Liab.: 403 - Debt Liab.: 178 - Current Account (background note): - CA averaged 0.5 percent of GDP over 2015–20 and has been on a downward but volatile path since its post-global-financial-crisis peak of 1.4 percent of GDP in 2015. - Volatility in trade and primary income balances driven in part by sizable multinational operations and large revisions. - Preliminary data suggest CA turned into a deficit of 0.4 percent of GDP in 2021. *International Monetary Fund | 2022 — CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS* ### 0.8 percent of GDP in 2020, driven by a deterioration of the trade balance (1.4 percent of GDP) and a modest decline in ### text - 0.8 percent of GDP in 2020, driven by a deterioration of the trade balance (1.4 percent of GDP) and a modest decline in ### Belgium — Current Account and Assessment - CA change in 2020: 0.8 percent of GDP, driven by: - deterioration of the trade balance: 1.4 percent of GDP - modest decline in net income inflows: 0.2 percent of GDP - net current transfer outflows declined slightly: 0.3 percent of GDP - Trade dynamics in 2021: - swing to deficit in the goods balance by 1.3 percent of GDP - export growth: 30 percent - import recovery: 34 percent - increases by major goods categories: - net oil/fuel imports: 1.3 percent of GDP (due to higher oil prices) - net chemical imports (excluding pharmaceuticals): 2.6 percent of GDP - net exports of pharmaceutical products: 1.9 percent of GDP (large increase) - Saving-investment perspective: - improvement in gross national saving led by narrowing of public dissaving - offset by larger increase in gross capital formation largely driven by pickup in private investment (business investments in information technology and digitalization and revival of residential property investment) - EBA model and staff CA gap estimates for 2021: - CA: –0.4 percent of GDP - Cycl. Adj. CA: 0 percent of GDP - EBA Norm: 3.1 percent of GDP - EBA Gap: –3.1 percent of GDP - COVID-19 Adj.: –0.2 percent of GDP (components: –0.3 percent of GDP travel services including tourism; 0.4 percent of GDP transport; –0.1 percent of GDP shift in household consumption from services to consumer goods; –0.2 percent of GDP impact on medical goods trade) - Other Adj.: — - Staff Gap: –3.3 percent of GDP - IMF staff CA gap range (applying standard error of CA norm ±0.3 percent of GDP): between –3.6 and –3.0 percent of GDP ### Belgium — Real Exchange Rate (REER) - Background: - ULC-based REER appreciated in 2021 by 0.4 percent (relative to 2020 average) - CPI-based REER appreciated in 2021 by 0.1 percent (relative to 2020 average) - cumulative appreciation in recent years: ULC-based 4 percent; CPI-based 7 percent (broadly reversing 2014–15 depreciation) - As of May 2022, REER was 1.8 percent below the 2021 average - Assessment: - IMF staff assesses REER gap (based on staff-assessed CA gap range) to be overvalued in range of 4.4 to 5.3 percent, midpoint 4.9 percent (applying estimated elasticity of CA balance to REER of 0.68) - EBA model estimates point to REER overvaluation between 12 and 26.1 percent (based on CPI-based REER index and level models) ### Belgium — Capital and Financial Accounts; FX Intervention and Reserves - Background: - Gross financial outflows and inflows were on upward trend prior to global financial crisis; shrunk and become more volatile as banks deleveraged - Short-term external debt: 27 percent of gross external debt in 2021 - Capital account: open - Assessment: - Belgium remains exposed to financial market risks, but structure of financial flows does not point to specific vulnerabilities - Large and positive NIIP reduces vulnerabilities associated with high external public debt - FX Intervention and Reserves: - Background: euro has status of a global reserve currency - Assessment: reserves held by euro area typically low relative to standard metrics, but currency is free floating --- ### Brazil — Foreign Asset and Liability Position and Trajectory - Background and levels at end-2021: - NIIP: –30 percent of GDP (end of 2021), modestly stronger than 2016–20 average (–35 percent of GDP) - Drivers: higher GDP growth and valuation effects associated with currency depreciation (assets predominantly denominated in FX; liabilities more concentrated in local currency) - Medium-term NIIP projection: about –33 percent of GDP - FDI accounts for half of all liabilities - Estimated external debt end-2021: 41 percent of GDP and 234 percent of exports (improved from 44 percent of GDP and 303 percent of exports in 2020) - Assessment: - NIIP negative since series first published in 2001 - Over medium term, gross external financing needs moderate at 10 percent of GDP annually - CA deficit required to stabilize NIIP at –30 percent: 1.5 percent of GDP - 2021 (% GDP) snapshot: - NIIP: –30 - Gross Assets: 59.8 - Res Assets: 22.5 - Gross Liab.: 89.6 - Debt Liab.: 41.4 ### Brazil — Current Account and Assessment - Background: - CA deficit: 1.7 percent of GDP in 2021 (broadly unchanged from 2020) - Exports and imports rebounded strongly in 2021; trade surplus unchanged - Terms of trade: rose in first half of 2021 then fell in second half - Accounting increase in imports in 2020–21: approximately 0.9 percent of GDP related to transactions under the Repetro program - 2022 outlook: exports expected to benefit from higher global commodity prices related to war in Ukraine, narrowing CA deficit to 1.3 percent of GDP - Medium-term: CA deficit expected to gradually widen to about 2 percent of GDP as growth recovers - Assessment and adjustments: - 2021 cyclically adjusted CA balance: –2.8 percent of GDP - EBA CA norm in 2021: –1.6 percent of GDP - Implied EBA CA gap: –1.2 percent of GDP - Estimated contribution of identified policy gaps: 0.3 percent of GDP (reflects positive total fiscal policy gap from more expansionary fiscal stances in trading partners relative to Brazil, partly countered by strong credit growth) - Adjustments made for: 1. Transitory COVID-19 impacts on travel and transport: –0.3 percent of GDP; medical goods sectors: 0.1 percent of GDP 2. Higher liquefied natural gas imports due to drought effect on hydropower generation: 0.1 percent of GDP 3. Lagged temporary increase in export and import data owing to Repetro program that ended December 2020: 0.9 percent of GDP - With adjustments, IMF staff estimates CA gap in range of –0.9 to 0.1 percent of GDP with midpoint –0.4 percent of GDP - 2021 (% GDP) snapshot: - CA: –1.7 - Cycl. Adj. CA: –2.8 - EBA Norm: –1.6 - EBA Gap: –1.2 - COVID-19 Adj.: –0.2 - Other Adj.: 1 - Staff Gap: –0.4 ### Brazil — Real Exchange Rate (REER) - Background: - Sharp depreciation in 2020: –20.6 percent - REER remained broadly stable in 2021: –3.2 percent - Mild appreciation in first half of 2021 followed by depreciation in second half consistent with terms of trade movement - As of end-May 2022, REER had appreciated by 17.8 percent relative to 2021 average - Assessment: - IMF staff CA gap implies REER gap of 3.1 percent in 2021 (applying estimated elasticity of 0.12) - REER index and level methodologies indicate 36.4 percent and 19.6 percent undervaluation, respectively, for 2021 - Staff assesses REER gap to be in range of –1.1 to 7.3 percent, with midpoint 3.1 percent ### Brazil — Capital and Financial Accounts; FX Intervention and Reserves - Background: - Brazil continues to attract sizable capital flows - Net FDI: 1.7 percent of GDP in 2021 (down from 2.8 percent of GDP in 2020); has fully financed CA deficit since 2015 (averaging 2.9 percent of GDP during 2015–21 while CA deficits averaged 2.2 percent) - Net portfolio flows: positive 0.4 percent in 2021 (first time since 2015), attracted by wider interest rate gap - Government decree to gradually reduce IOF on FX operations to zero by 2029 as part of Brazil’s entry into OECD - Assessment: - Composition of capital flows expected to have favorable risk profile medium term, with positive net FDI inflows outweighing negative portfolio outflows - Downside risks: war in Ukraine, COVID-19 pandemic, tighter global financial conditions, insufficient progress on reforms, political uncertainty - FX Intervention and Reserves: - Background: - Floating exchange rate - In 2021, central bank sold FX in spot, repo, and FX swap markets to dampen excess exchange rate volatility - Reserves: US$362 billion at end-2021 - Assessment: - Flexible exchange rate important shock absorber - Reserves adequate relative to various criteria, including IMF’s reserve adequacy metric (162 percent as of end-2021) - Intervention should be limited to alleviating disorderly FX market conditions --- ### Canada — Foreign Asset and Liability Position and Trajectory - Background and 2021 levels: - NIIP improved since 2011, reaching 68.8 percent of GDP in 2021 (up from 53.3 percent in 2020, 20.2 percent in 2016, and –17.1 percent in 2011) - Reflects valuation gains on external portfolio assets - Gross external debt decreased to 133.8 percent of GDP at end-2021, of which around 51 percent of GDP is short-term debt - Assessment: - Canada’s foreign assets have higher foreign currency component than liabilities, providing hedge against currency depreciation - NIIP level and trajectory are sustainable - 2021 (% GDP) snapshot: - NIIP: 68.8 - Gross Assets: 311.3 - Debt Assets: 77.3 - Gross Liab.: 242.5 - Debt Liab.: 133.8 ### Canada — Current Account and Assessment - Background: - Estimated CA balance: 0 percent of GDP in 2021 (up from –1.8 percent of GDP in 2020), reflecting recovery of global demand and improvement in terms of trade - Assessment: - EBA estimates CA norm: 2.6 percent of GDP and cyclically adjusted CA gap: –3.0 percent of GDP for 2021 - IMF staff considers temporary impacts of COVID-19 (travel, transport, household consumption composition, medical products) and biases in measuring inflation and retained earnings - Taking factors into account, IMF staff assesses CA gap range between –1.9 and –1.1 percent of GDP, with midpoint –1.5 percent of GDP - 2021 (% GDP) snapshot: - CA: 0.0 - Cycl. Adj. CA: –0.4 - EBA Norm: 2.6 - EBA Gap: –3.0 - COVID-19 Adj.: 0.1 - Other Adj.: 1.5 - Staff Gap: –1.5 ### Canada — Real Exchange Rate, Capital Flows, and FX Policy - Real Exchange Rate: - Background: REER appreciated by 4.9 percent on average in 2021 relative to 2020 average - As of May 2022, REER was 0.3 percent below the 2021 average - Assessment: - EBA REER index model points to overvaluation of 6.7 percent in 2021 - REER level model points to undervaluation of 7.4 percent - IMF staff assesses REER overvalued in range of 4.2 to 7.4 percent, midpoint 5.8 percent - Capital and Financial Accounts: - Background: - FDI net outflows: 1.9 percent of GDP in 2021 (comparable with 2020 and 2019) - Portfolio investments net inflows: 2.1 percent of GDP in 2021 (down from 4.1 percent in 2020) - Other investments: inflows of 0.6 percent of GDP in 2021 vs net outflows around 0.8 percent of GDP in 2020 - Errors and omissions: net inflow of 0.2 percent of GDP - Assessment: open capital account; vulnerabilities limited by credible commitment to floating exchange rate - FX Intervention and Reserves: - Background: - Canada has free-floating exchange rate regime and has not intervened in FX market since September 1998 (except participating in internationally concerted interventions) - Canada has limited reserves but central bank has standing swap arrangements with US Federal Reserve and four other major central banks (has not drawn on these swap lines) - Assessment: policies appropriate; commitment to floating regime plus swap arrangements reduces need for reserve holdings --- ### China — Foreign Asset and Liability Position and Trajectory - Background and 2021 levels: - NIIP declined to 11.2 percent of GDP in 2021 (down from peak 30.4 percent in 2008) - Decline despite CA surplus and continued external lending, reflecting continuing inward direct investment and securities investment received - Foreign reserves: US$3.4 trillion, 19.3 percent of GDP - Liabilities mostly FDI-related - Assessment: - NIIP-to-GDP ratio expected to remain positive with modest decline over medium term - NIIP not a major source of risk; assets remain high - 2021 (% GDP) snapshot: - NIIP: 11.2 - Gross Assets: 52.5 - Debt Assets: 14.9 - Gross Liab.: 41.4 - Debt Liab.: 13.4 ### China — Current Account and Assessment - Background: - CA surplus: 1.8 percent of GDP in 2021 (compared with 1.7 percent of GDP in 2020) - Pandemic-related factors elevated CA surplus in 2021: medical trade, shifting household consumption abroad toward goods, subdued outbound tourism, increases in transportation costs - Trade balance narrowed by 0.2 percentage point of GDP due to stronger imports on higher commodity prices; partly offset by wider income balance deficit (0.1 percent of GDP) - Higher energy and commodity prices related to war in Ukraine will increase import costs in 2022 - Medium-term projection: CA surplus converging to about 0.5 percent of GDP assuming continued rebalancing toward higher-quality, more consumption-driven growth - Assessment: - EBA CA methodology estimates CA gap in 2021: 1.4 percent of GDP - Pandemic-related temporary factors raised CA surplus by 1.6 percent of GDP, contributed by: - travel services balance: 0.7 percentage point - shift in global household consumption from services to consumer goods: 0.3 percentage point - impact on medical goods trade: 0.4 percentage point - impact on transportation services balance: 0.2 percentage point - IMF staff assesses CA gap to range from –0.9 to 0.3 percent of GDP, with midpoint –0.3 percent - EBA-identified policy gaps estimated about 1.3 percent of GDP, driven by relatively low credit growth, continued reserve accumulation with relatively closed capital account (de jure), larger fiscal contraction in 2021 than in other countries, and inadequate social safety nets - 2021 (% GDP) snapshot: - CA: 1.8 - Cycl. Adj. CA: 2.2 - EBA Norm: 0.8 - EBA Gap: 1.4 - COVID-19 Adj.: –1.6 - Other Adj.: 0 - Staff Gap: –0.3 ### China — Real Exchange Rate - Background: - REER appreciated by 3 percent in 2021 from 2020 average, largely driven by NEER appreciation of 5.4 percent - Continued REER appreciation in 2020 by 2.1 percent after a depreciation of 7 percent during 2015–19 - As of May 2022, REER was [text ends] *International Monetary Fund | 2022* ### 1.3 percent below the 2021 average. ### 1.3 percent below the 2021 average. ### Assessment — IMF staff REER and CA gaps - IMF staff CA gap implies a REER gap of 1.9 percent in 2021 (applying an estimated elasticity of 0.14). - EBA REER index regression estimates the REER gap in 2021 to be 10.5 percent. - EBA REER level regression estimates the REER gap in 2021 to be 10.5 percent. - Consistent with the staff CA gap, the IMF staff assesses the REER gap to be in the range of –2.3 to 6.2 percent, with a midpoint of 1.9 percent. ### Capital and Financial Accounts: Flows and Policy Measures (China) - Background: - Net capital outflows (including errors and omissions) declined to US$129 billion (0.7 percent of GDP) in 2021, down from $220 billion (1.5 percent of GDP) in 2020. - Decline largely due to the decline in gross capital outflows (including outward direct investment, equity outflows, and overseas bank loans). - Since December 2020, CFM measures include: 1. The ceiling on cross-border financing under the macroprudential assessment framework was lowered to the original level in December 2020 for financial institutions and in January 2021 for enterprises. 2. QFII investors were allowed to trade commodity futures, commodity options, and stock index options starting in November 2021. - As of December 2021, the total Qualified Domestic Institutional Investor quota stood at US$157.5 billion. - Assessment: - Substantial net outflow pressures may resurface as the private sector seeks to accumulate foreign assets faster than nonresidents accumulate Chinese assets. - Over the medium term, further capital account opening consistent with exchange rate flexibility should carefully consider domestic financial stability. - Further capital account opening is likely to create substantially larger two-way gross flows, requiring: - Prioritizing the shift to an effective float (while using FX intervention to counter disorderly market conditions). - Strengthening domestic financial stability prior to substantial further opening. ### FX Intervention and Reserves Level (China) - Background: - FX reserves increased by US$34 billion in 2021 and reached US$3.3 trillion in 2021, mainly reflecting valuation effects, return on reserves, and adjustments in net forward positions, with no sign of large FX intervention. - Assessment: - The level of reserves is 68 percent of the IMF’s standard composite metric at the end of 2021 (75 percent in 2020) and 109 percent of the metric adjusted for capital controls (120 percent in 2020). - Reserves level is assessed to be adequate. - Decline in the ratios reflects higher exports, broad money, external debt, and other liabilities, all of which raised the metric. ### Euro Area — Overall Assessment and Key Findings (Table 3.7) - Overall Assessment: - External position in 2021 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - CA surplus increased to 2.4 percent of GDP in 2021 from 1.9 percent of GDP in 2020. - Increase driven by stronger external demand, especially for services. - Projected reversal in 2022 due to weaker external demand, high energy prices, persistent supply disruptions, amplified by Russia’s invasion of Ukraine. - Over the medium term, the euro area’s CA surplus is projected to increase compared to the 2021 level, with exceptionally high uncertainty. - Potential Policy Responses: - Short-term: reduce scarring from COVID-19 and mitigate fallout from Russia’s invasion of Ukraine by supporting vulnerable households and firms facing high energy prices to increase investment and consumption, thereby raising imports and reducing the CA surplus. - Fiscal policy: remain supportive in the near term (allow automatic stabilizers), medium-term fiscal consolidation to reduce vulnerabilities in high-debt countries. - Structural: countries with excess CA surpluses should increase investment and potential growth; countries with weak external positions should implement reforms to raise productivity, reduce structural and youth unemployment, and enhance competitiveness. - Euro-area-wide initiatives (for example, banking and capital markets union and central fiscal capacity for macroeconomic stabilization) could reinvigorate investment and reduce the CA surplus. ### Euro Area — Foreign Asset and Liability Position - Background: - NIIP rose to –1.5 percent of GDP by end-2021, up from –20.5 percent of GDP at end-2009. - NIIP increased by 3.4 percentage points of GDP relative to 2020. - Gross foreign positions: assets 274.6 percent of GDP; liabilities 276.0 percent of GDP as of end-2021. - Net external assets elevated in large net external creditors (Germany, The Netherlands); net external liabilities high in Portugal and Spain. - Assessment: - Continued CA surpluses project NIIP-to-GDP ratio to rise further at a moderate pace. - Aggregate NIIP financing vulnerabilities appear low, but large net external debtor countries bear elevated risk of a sudden stop of gross inflows. - Key 2021 statistics: - NIIP: –1.5 - Gross Assets: 274.6 - Debt Assets: 105.0 - Gross Liab.: 276.0 - Debt Liab.: 104.4 ### Euro Area — Current Account and REER - Current Account: - 2021 CA: 2.4 percent of GDP (from 1.9 percent in 2020). - Cyclically adjusted CA: 2.3 percent of GDP. - EBA Norm: 0.6 percent of GDP; EBA Gap: 1.7 percent of GDP. - IMF staff CA norm estimated 0.2 percent of GDP higher than EBA model. - Adjustments totaling –0.4 percent to reflect CA measurement issues in Ireland and The Netherlands. - COVID-19 transitory adjustments estimated at 0.1 percent of GDP. - IMF staff assesses CA gap at 1.2 percent of GDP in 2021, with a range of 0.6 to 1.8 percent of GDP. - 2021 (% GDP) summary: - CA: 2.4 - Cycl. Adj. CA: 2.3 - EBA Norm: 0.6 - EBA Gap: 1.7 - COVID-19 Adj.: 0.1 - Other Adj.: –0.6 - Staff Gap: 1.2 - Real Exchange Rate: - CPI-based REER cumulative appreciation of 7.1 percent between 2015 and 2021; CPI-based REER appreciated by 0.5 percent in 2021 vs 2020. - ULC-based REER remained broadly unchanged; ULC-based REER depreciated by 1.7 percent in 2021. - As of May 2022, the REER was 5.4 percent below its 2021 average. - IMF staff assesses the REER gap to be –3.4 percent in 2021, with a range of –1.7 to –5.1 percent, based on estimated CA-REER elasticity of –0.35. - Significant heterogeneity across member states: REER gaps range from an undervaluation of 10.8 percent in Germany to an overvaluation of 4.9 percent in Belgium. - EBA REER index and level models suggest overvaluations of 6.8 percent and 7.1 percent, respectively. ### France — Key Findings (Table 3.8) - Overall Assessment: - External position in 2021 broadly in line with medium-term fundamentals and desirable policies. - CA balance expected to decline in 2022 driven by large terms-of-trade shock and lower external demand from trading partners affected by the war in Ukraine, and supply-chain effects. - Over the medium term, CA balance expected to move to a deficit of less than 0.5 percent of GDP as pandemic and war effects fade and structural reforms are implemented. - Potential Policy Responses: - Continue structural reforms to enhance productivity, sustain higher private investment for the green transition and digitalization, and rebuild fiscal space after the shock dissipates. - Foreign Asset and Liability Position: - NIIP: –34.3 percent of GDP in Q4 2021. - NIIP fell by about four percent of GDP since end-2020, driven by a fall in direct and other investment. - Gross assets: 341 percent of GDP in Q4 2021; banks’ non-FDI-related assets ~39 percent of gross assets. - Gross liabilities: 375 percent of GDP; external debt ~237 percent of GDP (54 percent by banks, 25 percent by public sector). - About three-quarters of France’s external debt liabilities are denominated in domestic currency. - Average TARGET2 balance in 2021: about €6.4 billion. - Assessment: NIIP negative but projected stable trajectory does not raise sustainability concerns; vulnerabilities from large public external debt (59.2 percent of GDP in Q4 2021) and banks’ gross financing needs (stock of banks’ short-term debt securities €116 billion in Q4 2021, 4.6 percent of GDP; financial derivatives ~39.3 percent of GDP). - 2021 (% GDP) summary: - NIIP: –34.3 - Gross Assets: 341 - Debt Assets: 194.3 - Gross Liab.: 375.2 - Debt Liab.: 237.2 - Current Account: - 2021 CA: 0.4 percent of GDP (from a deficit of 1.8 percent in 2020), driven by an uptick in services exports. - CA expected to move to a deficit of 1.4 percent of GDP in 2022. - IMF staff projects CA to move to a deficit of less than 0.5 percent of GDP by 2026. - Cyclically adjusted CA: 0.2 percent of GDP; EBA-estimated norm: 0.3 percent surplus. - IMF staff CA net adjustments related to COVID-19: 0.0 percent of GDP (components: travel-services-related transitory factors 0.2; transport –0.7; exports of aeronautics 0.4; exports of medical goods 0.3; shift to durable goods –0.2). - IMF staff assesses CA gap in 2021 between –0.5 and 0.3 percent of GDP, midpoint –0.1 percent of GDP. - 2021 (% GDP) summary: - CA: 0.4 - Cycl. Adj. CA: 0.2 - EBA Norm: 0.3 - EBA CA Gap: –0.1 - COVID-19 Adj.: 0.0 - Other Adj.: 0.0 - Staff CA Gap: –0.1 - Real Exchange Rate: - ULC-based REER depreciated by 2.9 percent in 2021 vs 2020 average; CPI-based REER depreciated by 0.6 percent in 2021 vs 2020 average. - As of May 2022, the REER was 4.7 percent below the 2021 average. - IMF staff CA gap implies a REER gap of 0.2 percent in 2021 (applying an estimated elasticity of 0.26). - EBA REER index model points to a REER gap of –2.1 percent; EBA REER level model points to a REER gap of 8.2 percent. - IMF staff assesses the REER to be overvalued in the range of –1.3 to 1.7 percent, with a midpoint of 0.2 percent. - Capital and Financial Accounts: - Inward FDI normalized in 2021 after decreasing significantly between 2019 and 2020 by 2.3 percent of GDP. - Capital account is open. - Assessment: France remains exposed to financial market risks owing to large refinancing needs of the sovereign and banking sectors. - FX Intervention and Reserves Level: - Background: euro has 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 — Key Findings (Table 3.9) - Overall Assessment: - External position in 2021 was stronger than level implied by medium-term fundamentals and desirable policies. - Russia’s invasion of Ukraine in February 2022 and associated sanctions expected to weaken Germany’s current account significantly in 2022. - CA surplus projected to increase in 2023 and 2024 as energy prices and supply bottlenecks ease, before declining over the medium term due to reduced competitiveness and revived domestic demand. - Potential Policy Responses: - Promote investment and diminish excess saving to reduce current account balance towards its norm. - Priorities include investment push for climate, digital, and energy security goals; structural reforms to foster innovation and develop venture capital market; reduce administrative barriers to start businesses; additional tax relief for lower-income households to reduce excess saving. - Foreign Asset and Liability Position: - NIIP reached 65 percent of GDP in 2021 (from 67 percent in 2020). - TARGET2 claims increased to €1.3 trillion by end-2021 (from €1.1 trillion end-2020). - NIIP revised up by 3.4 percent of GDP in 2021 for 2017–2021 due to new data on safe custody accounts abroad. - Between 2017 and 2021, NIIP increased by some 23 percent of GDP. - Assessment: Germany’s exposure to the Eurosystem remains large, given continued ECB quantitative easing. - 2021 (% GDP) summary: - NIIP: 65 - Gross Assets: 302 - Debt Assets: 170 - Gross Liabilities: 237 - Debt Liabilities: 163 - Current Account: - 2021 CA: 7.4 percent of GDP (compared with 7.1 percent in 2020 and 7.8 percent average over 2017–19). - Strengthening driven by recovery of earnings on foreign direct investment within primary income. - Assessment: - EBA model cyclically adjusted CA balance: 7.6 percent of GDP. - Staff cyclically adjusted CA balance: 7 percent of GDP (0.6 percent lower than model after adjustments for temporary pandemic factors). - Staff CA norm between 2.8 and 3.8 percent of GDP, midpoint 3.3 percent of GDP. - CA gap in 2021 in range 3.2 to 4.2 percent of GDP, midpoint 3.7 percent of GDP. - Note: demographic adjuster phased out this year. - 2021 (% GDP) summary: - CA: 7.4 - Cycl. Adj. CA: 7.6 - EBA Norm: 3.3 - EBA Gap: 4.3 - COVID-19 Adj.: –0.6 - Other Adj.: 0 - Staff Gap: 3.7 - Real Exchange Rate: - REER based on consumer prices depreciated by 2 percent in 2021. - Between December 2021 and February 2022, consumer-price REER depreciated a further 0.3 percent. - As of May 2022, the REER was 3 percent below the 2021 average. - Staff CA gap implies a REER gap of 10.8 percent in 2021 (applying an estimated elasticity of 0.34). - EBA REER level and index models suggest an undervaluation of 7.9 percent and an overvaluation of 7.7 percent, respectively. - Consistent with the staff CA gap, staff assess the REER to be undervalued with a midpoint of 10.8 percent and a range of uncertainty of ±1.5 percent. - Capital and Financial Accounts: - 2021 saw reversal of 2020 safe-haven inflows, resulting in large portfolio outflows. - Net foreign direct investment outflows resumed in 2021. - Portfolio and direct investment outflows partially mirrored by “other” inflows reflecting declining net foreign assets of the Bundesbank and banks’ transfer of some securities business from the United Kingdom to Germany. - Assessment: Risks limited given Germany’s safe haven status and strength of its external position. - FX Intervention and Reserves Level: - Background: euro has 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 | 2022 — 2022 EXTERNAL SECTOR REPORT (selected sections).* ### CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS ### Hong Kong SAR — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2021 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA dynamics and outlook: - CA surplus widened in 2021, reflecting a recovery of reexports vis-à-vis mainland China and a stronger income balance. - CA is expected to gradually decline over the medium term with the recovery in domestic demand. - Exchange rate regime and credibility: - Under the Linked Exchange Rate System (LERS), short-term movements in the REER largely reflect US dollar developments. - Credibility of the currency board arrangement supported by transparent rules, large fiscal and FX reserves, strong financial regulation and supervision, flexible economy, and a prudent fiscal framework. - Potential Policy Responses: - Expansionary fiscal policy in the near term to mitigate shocks and support recovery, while taking measures to ensure fiscal sustainability over the medium to long term given the rapidly aging population. - Maintain policies that support wage and price flexibility to preserve competitiveness under the currency board arrangement. - Continue robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and the LERS. ### Hong Kong SAR — Foreign Assets, CA, REER, Capital Flows, and Reserves - Foreign asset and liability position (2021 % GDP): - NIIP: 578 - Gross Assets: 1,747 - Debt Assets: 591 - Gross Liab.: 1,169 - Debt Liab.: 433 - Background and assessment: - NIIP decreased to 578 percent of GDP in 2021 from 615 percent in 2020 due mainly to a decrease in gross assets by 76 percentage points of GDP after a large increase of 279 percentage points in 2020. - Both gross assets and liabilities are high; valuation changes sizable; NIIP increase during 2016–21 was 218 percent of GDP vs. cumulative financial account balances of 39 percent of GDP. - Vulnerabilities are low given positive and sizable NIIP and favorable composition. - FX reserves: 135 percent of GDP at the end of 2021. - Direct investments share: 35 percent of gross assets and 50 percent of gross liabilities; portfolio investments constitute 12 percent of gross liabilities. - Current Account (2021 % GDP and adjustments): - CA: 11.3 - Cycl. Adj. CA: 10.7 - COVID-19 Adj.: –0.5 - Staff Gap: 1.0 - CA background and assessment: - CA surplus widened to 11.3 percent of GDP in 2021 from 7 percent in 2020 amid a large increase in public savings from fiscal tightening. - Goods balance moved into surplus driven by recovery of reexports via mainland China; income balance improved driven by portfolio investment income. - After cyclical and COVID-19 sectoral adjustments (travel services, medical, transport: 0.8, –0.8, –0.5 percent of GDP respectively), CA surplus estimated at 10.4 percent of GDP in 2021, within IMF staff–assessed CA norm range of 7.9 to 10.9 percent of GDP. - IMF staff–assessed CA gap range: –0.5 to 2.5 percent of GDP, midpoint 1 percent. - Real Exchange Rate: - REER movements largely determined by US dollar developments and inflation differentials with the United States. - REER appreciated about 20 percent over 2012–20, then depreciated about 5 percent in 2021 compared with 2020 average. - As of May 2022, REER was 2.3 percent above the 2021 average. - IMF staff REER gap based on CA gap range: –6.4 to 1.2 percent, midpoint –2.6 percent (average CA-REER elasticity ~0.4). - Capital and Financial Accounts: - Nonreserve financial flows: net outflow of US$49 billion in 2021 (from net inflow of US$3 billion in 2020), largely driven by portfolio investment outflows. - Financial account volatility reflects Hong Kong SAR and mainland China financial conditions, US monetary policy expectations, and FX/rates market arbitraging. - Assessment: Large financial resources, proactive supervision/regulation, and deep markets should limit risks from volatile capital flows and the war in Ukraine; greater exposure to mainland China could pose risks through trade, tourism, bank credit exposures, and Chinese firms’ fundraising. - Hong Kong SAR banking system assessed to be broadly resilient with high capital buffers and profitability. - FX Intervention and Reserves Level: - Total reserve assets decreased to 135 percent of GDP at end-2021 (or 1.8 times the monetary base) from 143 percent of GDP at end-2020. - FX reserves adequate for precautionary purposes and should evolve with automatic adjustments inherent in the currency board system. - Fiscal reserves about 34 percent of GDP at end-2021 despite large fiscal deficits in 2020 and 2021. ### India — Overall Assessment and Policy Responses - Overall Assessment: The external position in fiscal year 2021/22 (ending in March 2022) was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA context and outlook: - Running CA deficits consistent with India’s per capita income, growth prospects, demographics, and development needs. - CA deficit projected to widen in fiscal year 2022/23 (partly reflecting war in Ukraine impact on oil prices) then stabilize over the medium term. - Potential Policy Responses: - Gradual withdrawal of fiscal and monetary stimulus. - Development of export infrastructure and negotiation of free trade agreements with main trading partners. - Further investment regime liberalization and reduction in tariffs, especially on intermediate goods. - Structural reforms to deepen integration in global value chains and attract FDI. - Exchange rate flexibility as main shock absorber; intervention limited to disorderly market conditions. ### India — Foreign Assets, CA, REER, Capital Flows, and Reserves - Foreign asset and liability position (2021 % GDP): - NIIP: –11.1 - Gross Assets: 30.5 - Debt Assets: 2.6 - Gross Liab.: 41.7 - Debt Liab.: 20.1 - Background and assessment: - NIIP improved to –11.1 percent of GDP at end-2021 from –13.5 percent at end-2020 due to relatively low CA deficit and reserve accumulation. - Gross foreign assets 30.5 percent of GDP; gross liabilities 41.7 percent of GDP. - Assets mainly official reserves and FDI; liabilities mostly FDI and other investments. - NIIP-to-GDP ratio expected to strengthen marginally over medium term given CA projections. - External debt liabilities moderate; short-term rollover risks limited. - Current Account (2021 % GDP and adjustments): - CA: –1.2 - Cycl. Adj. CA: –1.6 - EBA Norm: –1.9 - EBA Gap: 0.3 - COVID-19 Adj.: 0.7 - Staff Gap: 1.0 - CA background and assessment: - CA returned to a small deficit of 1.2 percent of GDP in fiscal year 2021/22 from a surplus of 0.9 percent in prior year. - Imports rebounded faster than exports as pandemic eased; CA deficit projected to widen to about 3 percent of GDP in fiscal year 2022/23 and converge to about 2.6 percent of GDP over the medium term. - EBA cyclically adjusted CA: –1.6 percent of GDP in FY2021/22; EBA CA norm –1.9 percent with standard error 0.7 percent implying CA gap 0.3 percent of GDP. - IMF staff judgment: CA deficit up to 2½ percent of GDP financeable over time. - COVID-19 transitory impacts total 0.7 percent of GDP (travel 0.4; transportation 0.6; household consumption –0.1; medical goods –0.1). - IMF staff assesses CA gap 1 percent of GDP, range 0.3 to 1.7 percent of GDP. - Real Exchange Rate: - REER in 2021 depreciated about 1.1 percent from 2020 average. - As of May 2022, REER was 2.4 percent above the 2021 average. - IMF staff CA gap implies REER gap of –6 percent (elasticity 0.16). - EBA REER index and level models suggest overvaluation of 10.1 percent and 8.5 percent, respectively. - IMF staff assesses REER gap range –10.3 to –1.7 percent, midpoint –6 percent for FY2021/22. - Capital and Financial Accounts: - Financial account balance about –1.2 percent of GDP in FY2021/22 (net inflows), compared with outflows of 0.8 percent in 2020/21. - FDI inflows decreased to 1.2 percent of GDP (from 1.6 percent). - Portfolio investments shifted to outflows of about 0.5 percent of GDP. - Other investments (mostly debt-creating) increased to about 2.2 percent of GDP. - Authorities increased limits on FDI and portfolio investments, particularly for oil, gas, and life insurance sectors. - Assessment: FDI inflows covered the CA deficit in FY2021/22; further structural reforms to promote FDI and deepen investment regime needed; expected inclusion in international bond indices should increase portfolio inflows. - FX Intervention and Reserves Level: - Official FX reserves reached about US$638.5 billion at end-2021 (record high). - Reserves decreased in subsequent months but remained around eight months of import coverage. - Reserves represented about 223 percent of short-term debt (on residual maturity) and 195 percent of the IMF’s composite metric at end-2021. - Assessment: Official FX reserves adequate; additional accumulation less warranted; FX interventions should be limited to disorderly market conditions. ### Indonesia — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2021 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Outlook and vulnerabilities: - Exchange rate flexibility and structural policies should contain the CA deficit and keep it near its norm of near-balance in the medium term. - External financing needs are sustainable but sizable; substantial share of foreign portfolio investment exposes the economy to global financial condition fluctuations. - Potential Policy Responses: - Structural reforms to enhance productivity and facilitate post–COVID-19 sectoral adjustments. - Higher infrastructure and social spending to foster human capital and strengthen social safety net, while maintaining fiscal sustainability via revenue mobilization. - Reduce restrictions on FDI and external trade (nontariff trade barriers) and promote labor market flexibility (streamline job protection rules; improve job placement services). - Continue exchange rate flexibility to support external stability. ### Indonesia — Foreign Assets, CA, REER, Capital Flows, and Reserves - Foreign asset and liability position (2021 % GDP): - NIIP: –23.5 - Gross Assets: 36.4 - Res. Assets: 12.2 - Gross Liab.: 59.9 - Debt Liab.: 35 - Background and assessment: - NIIP improved to –23.5 percent of GDP at end-2021 from –26.4 percent at end-2020, mainly due to a decrease of 5 percentage points in gross external liabilities to 59.9 percent of GDP and a rebound in nominal GDP. - Gross external assets fell slightly to 36.4 percent of GDP from 38 percent at end-2020. - One-third of gross external assets were reserve assets. - Gross external debt moderate at 35 percent of GDP at end-2021 (down from 39.4 percent at end-2020); 14 percent of external debt (5 percent of GDP) had remaining maturity less than one year. - Assessment: NIIP level and composition and gross external debt indicate sustainable external position and limited rollover risk. - Share of nonresident holdings of rupiah government bonds declined from 25 percent of the total stock at end-2020 to 19 percent (or 5.3 percent of GDP) at end-2021. - NIIP projected to strengthen in medium term given projected small CA deficits and strong nominal GDP growth. - Current Account (2021 % GDP and adjustments): - CA: 0.3 - Cycl. Adj. CA: –1.5 - EBA Norm: –0.8 - EBA Gap: –0.7 - COVID-19 Adj.: 0.6 - Other Adj.: 0.4 - Staff Gap: 0.2 - CA background and assessment: - CA surplus of 0.3 percent of GDP in 2021 vs. deficit of 0.4 percent in 2020. - Exports grew faster than imports due to higher commodity prices and volumes. - Higher commodity terms of trade and related higher government revenue raised national savings offsetting lower private savings and investment. - 2022 commodity price increases from the war in Ukraine expected to yield sizable CA surplus; dissipates in 2023–24. - IMF staff CA gap estimate for 2021: 0.2 percent of GDP with range –0.3 to 0.7 percent and midpoint 0.2 percent. - Components used: cyclically adjusted CA deficit –1.5 percent; COVID-19 adjustor 0.6 percent (0.4 travel; 0.1 transport; –0.2 household consumption; 0.3 medical); CA norm –0.8 percent adjusted by –0.4 percent for demographics → –1.2 percent. - Real Exchange Rate: - Average REER in 2021 depreciated by 1.4 percent relative to 2020 average, or by 2 percent relative to the 2016–20 REER average. - As of May 2022, REER was 2.7 percent above the 2021 average. - IMF staff CA gap of 0.2 percent implies REER gap of –1.7 percent (elasticity 0.14). - REER index and level models point to 2021 REER gaps of about 1.9 percent and –18.1 percent, respectively. - IMF staff assesses REER gap range –5.3 to 1.9 percent, midpoint –1.7 percent. - Capital and Financial Accounts: - Net financial inflows stabilized at 1 percent of GDP in 2021 after decline to 0.7 percent in 2020 (from 3.3 percent in 2019). - Net portfolio inflows 0.4 percent of GDP (from 0.3 percent end-2020); positive net equity inflows for first time since 2016. - Share of nonresident holdings of rupiah government bonds declined to 19 percent of GDP at end-2021 from 25 percent at end-2020. - Net FDI inflows rose to 1.4 percent of GDP from 1.3 percent. - Assessment: Net and gross financial flows prone to volatility; contained CA and strengthened policy frameworks, including exchange rate flexibility since mid-2013, helped reduce capital flow volatility; continued policy focus on fiscal position, inflation control, financial deepening, and easing investment obstacles recommended. - FX Intervention and Reserves Level: - Reserves at end-2021: US$145 billion vs. US$136 billion at end-2020. - Two-thirds of reserve increase reflects the IMF’s 2021 SDR allocation, which authorities intend to keep as reserves. - Current reserves equal to 12.2 percent of GDP and 110.7 percent of the IMF’s reserve adequacy metric. *International Monetary Fund | 2022* ### 6.6 months of prospective imports of goods and services—should provide a sufficient buffer against external shocks, with ### 6.6 months of prospective imports of goods and services—should provide a sufficient buffer against external shocks, with ### Overall Assessment - The external position in 2021 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The combined current and capital account surplus declined as private sector saving net of investment declined by more than the increase in government saving net of investment as pandemic-related income support was wound down. - Generous tax credits and other fiscal programs under the National Recovery and Resilience Plan, mainly funded by the European Union, lifted private and public investment in 2021. - Chronic weak productivity and uncertain medium-term growth prospects could dampen private investment once these programs expire. - Under the baseline scenario, the CA surplus is expected to moderate over the next few years due to the adverse commodity terms-of-trade shock and higher imports of capital goods to support the green transition and digitalization, after which the CA balance would gradually improve. ### Potential Policy Responses - Raising productivity and improving the business climate through structural reforms would sustain the higher private investment while the fiscal primary balance returns to surplus and household saving moderates. - Upskilling the workforce and increasing the quality of infrastructure and the effectiveness of the judiciary and public administration would boost productivity, reduce high unemployment, and raise output and domestic absorption. - Improving budget efficiency and fully implementing the National Recovery and Resilience Plan would reduce vulnerabilities associated with rollover of public debt. ### Foreign Asset and Liability Position and Trajectory - Background: - Italy’s NIIP further increased to 7.4 percent of GDP at the end of 2021. - Gross foreign assets and liabilities increased during 2021 to 188 and 181 percent of GDP, respectively. - This includes an increase in TARGET2 liabilities to a record high of 33 percent of GDP. - About half of gross external liabilities is attributed to the general government and the Bank of Italy. - A steady accumulation of direct and portfolio investments in foreign equities and a net long US dollar external position contributed to the net valuation gains on Italy’s NIIP over the past decade. - Assessment: - Further strengthening public balance sheets and undertaking structural reforms would reduce vulnerabilities associated with the high public debt, reinvigorate economic growth, and reduce the potential for negative feedback loops between the debt stock and debt servicing costs. - Key statistics (2021, % GDP): - NIIP: 7.4 - Gross Assets: 188.1 - Debt Assets: 45.4 - Gross Liab.: 180.6 - Debt Liab.: 103.0 ### Current Account - Background: - Italy’s CA averaged 2.9 percent of GDP during 2016–20. - The increase was underpinned by rising private sector gross national saving and lower public and private sector gross domestic investment. - More than half of the increase in the CA balance is due to the trade surplus; the rest reflects strong dividend and interest income on rising foreign asset holdings of the nonfinancial private sector and declining interest payments on external liabilities owing to the ECB’s accommodative monetary stance. - The CA balance reached 3.7 percent of GDP in 2020 due to the pandemic; in 2021 the CA moderated to 2.4 percent of GDP, mainly due to a 1.1 percent of GDP increase in the energy trade deficit on much higher energy import prices in the latter part of the year. - Italy’s trade and financial linkages with Russia and Ukraine are limited (3 percent of imports and 2 percent of exports); Italy is heavily reliant on energy imports from Russia (including 40 percent of Italy’s natural gas consumption). - The war in Ukraine pushed up international commodity prices, widening Italy’s energy trade deficit, and reduced export demand from regional trade partners, with the impact on the current account felt mostly beginning in 2022. - Assessment: - The cyclically adjusted CA is estimated at 2.2 percent of GDP in 2021, 1.2 percentage points below the EBA-estimated CA norm of 3.4 percent of GDP. - An Italy-specific COVID-19 adjustor of 0.3 percent of GDP is applied to account for temporary declines and shifts (travel 0.4 percent, transport 0.1 percent, medical trade 0.1 percent, household shift –0.2 percent). - Taking into account uncertainty, the IMF staff assesses the CA gap to be in the range of –1.6 to –0.2 percent of GDP. - Key statistics (2021, % GDP): - CA: 2.4 - Cycl. Adj. CA: 2.2 - EBA Norm: 3.4 - EBA Gap: –1.2 - COVID-19 Adj.: 0.3 - Other Adj.: 0 - Staff Gap: –0.9 ### Real Exchange Rate - Background: - During 2016–20, the CPI-based REER appreciated by 2.2 percent while the ULC-based REER was unchanged. - During 2021, the CPI-based REER was broadly stable, with a 0.3 percent depreciation relative to the 2020 average, mainly on account of a weakening euro. - As of May 2022, the REER was 4.1 percent below the 2021 average. - Assessment: - The IMF staff CA gap implies a REER gap of 3.3 percent in 2021 (applying an estimated elasticity of 0.26). - The level and index CPI-based REER models suggest an overvaluation in 2021 of 10.8 percent and 8.6 percent, respectively, with an average of 9.7 percent. - Taking into account the staff CA gap, the IMF staff assesses a REER gap range of 0.7 to 6 percent, with a midpoint of 3.3 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - The capital account balance remained unchanged at –0.1 percent of GDP in 2021. - The financial account posted net outflows of 1.5 percent of GDP in 2021, reflecting residents’ net purchases of foreign assets. - Large portfolio investment outflows were mostly offset by inflows of other investment, including a €74 billion increase in Italy’s TARGET2 liabilities. - Assessment: - The low global interest rate environment has been conducive to the smooth functioning of the sovereign debt market. - Rising inflation and geopolitical tensions, large refinancing needs of the sovereign and the banking sector, and exposures to the current geopolitical situation and energy shocks suggest Italy remains vulnerable to market volatility. ### FX Intervention and Reserves Level - Background: - The euro has the status of a global reserve currency. - Italy’s reserves increased by €21 billion in 2021 mostly on account of the IMF’s SDR allocation. - Assessment: - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. *International Monetary Fund | 2022 — 2022 EXTERNAL SECTOR REPORT* ### 4.8 percent. The average REER for 2021 remained stable compared with the 2020 average. As of May 2022, the REER was 4.7 ### 4.8 percent. ### Real Exchange Rate — Background and Key Figures - The average REER for 2021 remained stable compared with the 2020 average. - As of May 2022, the REER was 4.7 percent below the 2021 average. - For another country excerpt: In 2021, the REER depreciated by 0.5 percent relative to the 2020 average and was about 6 percent lower than in 2015. As of May 2022, the REER was 2.5 percent below the 2021 average. - For Malaysia (separate excerpt): In 2021, the REER depreciated by 0.5 percent relative to the 2020 average and was about 6 percent lower than in 2015. As of May 2022, the REER was 2.5 percent below the 2021 average. - For Mexico (separate excerpt): The average REER in 2021 appreciated by about 6 percent compared with the 2020 average. As of May 2022, the REER had appreciated by 4 percent compared with its 2021 average. - For The Netherlands (separate excerpt): The annual average CPI-based REER appreciated by 0.2 percent in 2021. As of May 2022, the CPI-based REER was 1.7 percent below its 2021 average. ### Real Exchange Rate — Assessment and Model Estimates - IMF staff CA gap implies a REER overvaluation of 1 percent (applying an estimated elasticity of 0.31). - EBA REER index model estimates a 0.8 percent REER undervaluation. - REER level model estimates a 4.2 percent overvaluation. - IMF staff preference: uses the estimated CA gap for its assessment, given the better fit of the EBA CA model. - IMF staff assesses the REER gap to be in a range of –1.6 to 3.7 percent, with a midpoint of 1 percent. - For Malaysia: IMF staff CA gap implies a REER undervaluation of 4 percent in 2021 (applying an estimated elasticity of 0.46). - EBA REER index and level models estimate Malaysia’s REER to be undervalued by 22.4 percent and 29.1 percent, respectively. - IMF staff assesses the REER to be undervalued in the range of 2.9 to 5.1 percent, with a midpoint of 4 percent, consistent with the IMF staff CA gap. - For Mexico: IMF staff CA gap implies a REER gap of 0.5 percent (applying a semielasticity of 0.33). - EBA REER level and index models estimate an overvaluation of 7.7 percent and an undervaluation of 9.1 percent, respectively, in 2021. - IMF staff overall assessment: REER gap in the range of –2.6 to 3.5 percent, with a midpoint of 0.5 percent. - For The Netherlands: Assuming a semielasticity of 0.6, the IMF staff CA gap of 2.0 percent of GDP implies a REER undervaluation of about [text cut off in source]. ### Capital and Financial Accounts — Background and Assessment - Net FDI and portfolio outflows have declined since 2017, when outflows reached 4.6 percent of GDP. - Net portfolio outflows were 1.1 percent of GDP in 2021; largely offset by nonresident debt inflow. - Net FDI and portfolio outflows made up the bulk of the 2021 financial account (2.4 and 1.1 percent of GDP, respectively); other investments (net) recorded inflows (0.1 percent of GDP). - Assessment: Present configuration of net and gross capital flows appears sustainable over the medium term. - Korea (context): In recent years, including the COVID-19 shock, Korea has demonstrated ample capacity to absorb short-term capital flow volatility. - Malaysia: Since the global financial crisis, periods of significant capital flow volatility driven by portfolio flows; net portfolio flows reached US$7.4 billion by December 2021, primarily driven by sustained net debt inflows (US$8.2 billion). - Assessment: Continued exchange rate flexibility and macroeconomic policy adjustments are necessary to manage capital flow volatility. CFM measures should be gradually phased out, with due regard for market conditions. - Mexico: In 2021, Mexico recorded a small amount of net financial account inflows. Net portfolio outflows increased compared with the previous year, offset by a turnaround in other investment flows and continued strong net FDI inflows. - Assessment: Long maturity of sovereign debt and high share of local-currency-denominated debt reduce FX exposure. However, strong presence of foreign investors leaves Mexico exposed to capital flow reversals and risk premium increases. ### FX Intervention and Reserves Level — Background and Assessment - Korea: - Reserves at end-2021: 25.6 percent of GDP. - Bank of Korea net US$14 billion sales (0.8 percent of GDP) in second half of 2021 to limit excess exchange rate volatility. - With increased investment returns, gross reserves rose by US$20 billion (1.1 percent of GDP) year to date. - Assessment: Intervention limited to preventing disorderly market conditions. As of end-2021, preliminary data indicate FX reserves were about 99 percent of the IMF’s composite reserve adequacy metric. - The US$60 billion swap line with the US Federal Reserve expired at the end of 2021. - Malaysia: - Reserve levels stood at US$116.9 billion as of December 2021 (compared with US$107.6 billion at end-December 2020). - Assessment: Gross official reserves were about 122 percent of the ARA metric at end-December 2021. FX interventions should be limited to preventing disorderly market conditions; exchange rate should continue to adjust as first line of defense. - Mexico: - Gross international reserves at end-2021: US$208 billion (16 percent of GDP), up from US$199 billion at end-2020. - In 2021, no FX intervention was conducted. - Assessment: Reserves at 131 percent of the ARA metric and 254 percent of short-term debt (at remaining maturity) at end-2021; level remains adequate. Continue to maintain adequate reserves over the medium term. The Flexible Credit Line provides an additional buffer. ### Selected Country-Level Key Statistics (from source excerpts) - Korea: FX intervention net sales US$14 billion (0.8 percent of GDP); gross reserves rose by US$20 billion (1.1 percent of GDP); reserves at end-2021: 25.6 percent of GDP; swap line US$60 billion (expired end-2021). - Malaysia (2021, % GDP): - NIIP: 5.5 - Gross Assets: 136.9 - Debt Assets: 31.5 - Gross Liab.: 131.4 - Debt Liab.: 29.7 - CA: 3.8 - Cycl. Adj. CA: 2.6 - EBA Norm: –0.1 - EBA Gap: 2.7 - Staff Gap: 1.8 - Malaysia reserves: US$116.9 billion (Dec 2021); US$107.6 billion (Dec 2020). - Mexico (2021, % GDP): - NIIP: –41 - Gross Assets: 58 - Debt Assets: 19 - Gross Liab.: 99 - Debt Liab.: 38 - CA: –0.4 - Cycl. Adj. CA: –1.5 - EBA Norm: –1.2 - EBA Gap: –0.2 - Staff Gap: –0.2 - Mexico reserves: US$208 billion (end-2021); US$199 billion (end-2020). - The Netherlands (2021, % GDP): - NIIP: 93.8 - Gross Assets: 1,119.9 - Debt Assets: 254.1 - Gross Liab.: 1,026.1 - Debt Liab.: 285.7 - CA: 9.0 - Cycl. Adj. CA: 9.2 - EBA Norm: 5.1 - EBA Gap: 4.1 - COVID-19 Adj.: –0.4 - Other Adj.: –1.7 - Staff Gap: 2.0 ### Policy Implications and Recommended Approaches (from source excerpts) - Use the exchange rate as the first line of defense; limit FX interventions to preventing disorderly market conditions. - Maintain adequate reserve levels over the medium term; leverage available buffers such as swap lines or the Flexible Credit Line where applicable. - Continue exchange rate flexibility and macroeconomic policy adjustments to manage capital flow volatility. - Phase out capital flow management (CFM) measures gradually, with due regard for market conditions. - For countries with sectoral or pandemic-driven CA effects, consider targeted adjustments to fiscal and public health spending and policies that promote domestically led growth to support external rebalancing. *International Monetary Fund | 2022* ### 3.3 percent. EBA REER model estimates for 2021 range from an overvaluation of 6 percent (level model) to 21.9 percent (i ### 3.3 percent. EBA REER model estimates for 2021 range from an overvaluation of 6 percent (level model) to 21.9 percent (index model) ### Real Exchange Rate and Current Account (Poland) - EBA REER index and level models estimate a REER gap of –1 and –20.2 percent, respectively. - IMF staff assesses the REER as undervalued in 2021 in the range of –4.4 to –2.5 percent, with a midpoint of –3.5 percent (using an estimated elasticity of 0.41). - CA outcomes and adjustments: - 2021 CA: –0.6 percent of GDP - Cyclically Adjusted CA: –0.3 percent of GDP - EBA Norm: –2.4 percent of GDP - EBA Gap: 2.1 percent of GDP - COVID-19 Adjustment: –0.6 percent of GDP (composed of +0.3, +0.2, and –1.1 percentage point components described in the source) - IMF staff CA gap (resulting): 1.4 (±0.4) percent of GDP, which includes identified policy gaps of 2.7 percent of GDP and an unexplained residual of –0.6 percent of GDP. - Drivers of the 2021 external balance: - Lower exports due to global supply-chain disruptions. - Higher import growth due to higher energy prices and recovering domestic demand. - Normalization of the primary income deficit. - Medium-term projection: CA deficit expected to reach 2 percent of GDP in the medium term (context: domestic-demand-led expansion, Next Generation EU grants, projected increase in defense-related government expenditures). ### Foreign Asset and Liability Position (Poland) - 2021 headline stocks (percent of GDP): - NIIP: –38 - Gross Assets: 55.5 - Reserve Assets: 25 - Gross Liabilities: 93.4 - Gross External Debt: 54 - Background and structure: - Gross assets and liabilities reached about 55.5 and 93.4 percent of GDP, respectively. - Stock of net FDI (equity and debt) equivalent to 38 percent of gross external liabilities. - Short-term debt (excluding intercompany debt) in 2021 amounted to 17 percent of total debt (9 percent of GDP) and consisted mostly of liabilities issued by banks (currency and deposits) and the nonfinancial private sector (trade credit). - 30 percent of external debt was intercompany lending; 72 percent of the debt was of long maturity. - Assessment: - NIIP strengthened to –38 percent of GDP in 2021 from –46 percent in 2020. - Rollover risk mitigated by large share of long-term debt and intercompany lending. - Gross reserves stood at about 162 percent of short-term debt in 2021. - Automatic debt dynamics and GDP growth, helped by Next Generation EU grants, projected to reduce negative NIIP in the medium term. ### Capital and Financial Accounts; Policy Measures (Poland) - Background: - Capital account dominated by inflows of EU funds; averaged about 2 percent of GDP over past 10 years. - Capital account surplus declined to 1.6 percent of GDP in 2021 from 2.3 percent in 2020; projected to gradually decline to 1 percent of GDP over medium term. - Financial account inflows in 2021 amounted to 2.1 percent of GDP. - Foreign holdings of domestic government securities declined significantly since 2016 and by end-2021 represented 15.2 percent of the total (4.8 percent of GDP cited as foreign holdings of government debt). - Assessment: - Capital account projected to remain a strong source of support for investment, reflecting EU cooperation frameworks. - Foreign holdings of government debt at 4.8 percent of GDP could pose some volatility risk, but diversified investor base and central bank tools mitigate risks. ### FX Intervention and Reserves Level (Poland) - Background: - FX reserves increased by about US$12 billion, to US$166 billion by the end of 2021. - IMF’s SDR allocation in August 2021 contributed US$5.6 billion in reserve assets. - Net reserves stood at about US$151 billion by the end of 2021. - Central bank converted a portion of EU funds received by the government to zloty as part of reserve strategy. - The zloty is free floating. - Assessment: - Gross reserves about 141.4 percent of the IMF’s reserve adequacy metric; assessed as adequate to guard against external shocks and disorderly market conditions. --- ### Real Exchange Rate and Current Account (Russia) - REER and CA indicators: - 2021 CA: 6.9 percent of GDP (US$122 billion) - Cyclically Adjusted CA: 7.1 percent of GDP - EBA Norm: 4.4 percent of GDP - EBA Gap: 2.6 percent of GDP - COVID-19 Adjustment: –0.6 percent of GDP - IMF staff CA gap: 2.1 percent of GDP (range 1.2 to 3 percent of GDP); identified policies contributed 1.8 percent of GDP to the gap. - REER assessments: - Average REER depreciated by 1.1 percent in 2021 and by 13.2 percent over 2017–21. - IMF staff CA gap implies a REER undervaluation of 10.6 percent in 2021 (applying an estimated elasticity of 0.19). - EBA REER index and level model estimates point to a REER undervaluation of 11.2 and 33.8 percent, respectively. - IMF staff assesses the REER as undervalued in 2021 in the range of 6 to 15.2 percent, with a midpoint of 10.6 percent. - 2021 (% GDP) snapshot: - NIIP: 27.2 - Gross Assets: 93 - Reserve Assets: 35.5 - Gross Liabilities: 65 - Debt Liabilities: 27 ### Capital and Financial Accounts; Policy Measures (Russia) - Background: - 2020–21 experienced volatility with moderate outflows amid the pandemic; volatility abated through 2021 though moderate capital outflows continued. - Since the beginning of the war in Ukraine, the central bank first raised the policy rate to 20 percent and later lowered it to 9.5 percent; broad capital flow measures were introduced. - Assessment: - Large FX reserves and a floating exchange rate provided buffers prior to sanctions. - Post-sanctions measures included bans and limits on nonresident transactions and restrictions on residents’ FX placements and sales to nonresidents. ### FX Intervention and Reserves Level (Russia) - Background and changes: - In 2021, central bank FX purchases under the fiscal rule amounted to US$63.5 billion. - International reserves rose to US$632.2 billion by end-2021 from US$596.8 billion at end-2020. - Reserves fell by US$24.2 billion from end-2021 to US$606.4 billion by end-March 2022 due to central bank FX sales to support the ruble. - Assessment: - International reserves in 2021 were equivalent to 339 percent of the IMF’s reserve adequacy metric. - An additional commodity buffer of US$77 billion is appropriate, translating into a ratio of reserves to the buffer-augmented ARA metric of 239 percent. - Note: As a result of sanctions, a significant share of international reserves has been frozen, complicating reserve adequacy assessment. --- ### Overall Observations and Policy Implications (from the provided assessments) - REER model outputs can vary widely by specification (index vs. level models); staff assessments reconcile model outputs with CA gaps and estimated elasticities to produce REER undervaluation/overvaluation ranges and midpoints. - Capital account compositions (EU funds for Poland; foreign investor composition for others) and the share of intercompany lending and long-term debt materially affect rollover and volatility risks. - Reserves adequacy is evaluated relative to IMF metrics and buffer adjustments; policy contexts (floating vs. pegged/free-floating currencies) and recent operations (FX purchases/sales, SDR allocations) influence assessments. - Policy recommendations and responses highlighted: - For Poland: targeted short-term fiscal support for energy-price shocks and refugees; medium-term policies to boost investment via Next Generation EU grants, clean energy availability, skilled labor supply, and redesigning bank asset tax to reduce disincentives for private credit allocation. - For Russia: capital flow measures and large reserves provided buffers; sanctions and frozen reserves materially affect policy options and reserve usefulness. - For countries with strong external positions (e.g., Saudi Arabia, discussed later in the source), continued fiscal consolidation and structural reforms are recommended to align CA with norms and diversify the tradable sector. *Italicized source attribution: Excerpted text from the IMF 2022 External Sector Report chapter content supplied by the user.* ### 0.1 percent of GDP for constant real per capita annuity allocation rules. The Investment Needs Model suggests a CA gap o ### 0.1 percent of GDP for constant real per capita annuity allocation rules. The Investment Needs Model suggests a CA gap o ### Saudi Arabia — External Position and Exchange Rate - CA gap and balances: - The Investment Needs Model suggests a CA gap of 5.2 percent of GDP. - IMF staff assess a CA gap of –1.0 percent of GDP, with a range from –2.8 to 0.8 percent of GDP in 2021. - 2021 (% GDP): CA: 5.3; Cycl. Adj. CA: 5.4; COVID-19 Adj.: 1.1; Staff Gap: –1.0. - Real Exchange Rate (REER): - Background: The riyal has been pegged to the US dollar at a rate of 3.75 since 1986. - The REER depreciated by 1.9 percent in 2021 and was 4 percent above its 10-year average. - As of May 2022, the REER was 4.1 percent above the 2021 average. - Assessment: Based on an elasticity of 0.2 and consistent with the IMF staff CA gap, the IMF staff assesses the REER to be overvalued by 4.1 percent, with a range of –4.9 and 13.1 percent. - Capital and Financial Accounts: - Background: Net financial outflows continued in 2021 as the PIF and other entities invested abroad; equity market saw inflows as oil prices recovered. - Assessment: Analysis is complicated by lack of detailed information on flows; strong reserves position limits risks and vulnerabilities to capital flows. - FX Intervention and Reserves: - Background: Total reserve assets declined to US$453.7 billion at the end of 2020, down from US$499.6 billion by the end of 2019, and from US$732.4 billion in 2014. - Reserves increased during 2021, reaching US$455.4 billion, while net foreign assets declined from US$449.2 billion to US$438.2 billion (52.6 percent of GDP, 22 months of imports, and 254 percent of the ARA metric), largely due to an increase in foreign liabilities. - Going forward, reserves are expected to increase significantly in the wake of rising oil export revenues. - Assessment: Reserves are adequate for precautionary purposes (measured by the IMF’s metrics); fiscal prudence is needed over the medium term to strengthen the CA and increase savings for future generations. *Italic: Source: Excerpt from IMF 2022 External Sector Report (text provided).* ### Singapore — Overall Assessment and Policy Implications - Overall Assessment: - The external position in 2021 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Near-term: the war in Ukraine is expected to narrow the CA surplus due to a related negative terms-of-trade shock. - Medium-term: CA surplus projected to narrow gradually alongside an increase in household consumption, recovery of capital-related imports, and increased public spending. - Potential Policy Responses: - Planned implementation of major green infrastructure projects should help reduce external imbalances in the near term. - Over the medium term, higher public investment addressing aging, green and digital transition, health care, physical infrastructure, and human capital would help reduce external imbalances by lowering net public saving. - Foreign Asset and Liability Position: - Background: NIIP stood at 256.4 percent of GDP in 2021, down from 280.8 percent in 2020; average over 2016–20 was 231.1 percent of GDP. - About half of foreign liabilities are in FDI, about a third are currency and deposits. - 2021 (% GDP): NIIP: 256.4; Gross Assets: 1,240; Res. Assets: 105.3; Gross Liab.: 983.6; Debt Liab.: 383.9. - Assessment: Large gross non-FDI liabilities (477.9 percent of GDP in 2021) present some risks, mitigated by large gross asset positions, banks’ large short-term external assets, and close monitoring of banks’ liquidity risk profiles. - Current Account: - Background: CA surplus was 18.1 percent of GDP in 2021, up from 16.8 percent in 2020. - Drivers: strong goods balance, small services surplus partly offset by income account deficit; structural factors boosting savings include status as financial center, consecutive fiscal surpluses, rapid aging, mandatory defined-contribution pension assets amounting to about 94.8 percent of GDP in 2021. - Projection: CA surplus projected to narrow over the medium term due to increased infrastructure and social spending. - Assessment: Guided by the EBA framework, IMF staff assesses the 2021 CA gap to be in the range of 3.4 to 7 percent of GDP, with a midpoint of 5.2 percent. - 2021 (% GDP): CA: 18.1; Cycl. Adj. CA: 18.8; COVID-19 Adj.: –1.4; Staff Gap: 5.2. - Real Exchange Rate: - Background: REER depreciated by 0.3 percent in 2021; as of May 2022, REER had appreciated by 4.1 percent relative to the 2021 average. - Assessment: IMF staff assesses the REER as undervalued in the range of 6.8 to 14 percent, with a midpoint of 10.4 percent in 2021 (applying an estimated elasticity of 0.5). - Capital and Financial Accounts: - Background: Open capital account; in 2021, capital and financial account switched to outflows of 2.1 percent of GDP from temporary inflows of 4.6 percent in 2020. - Assessment: Financial account likely to remain in deficit as long as trade surplus remains large. - FX Intervention and Reserves: - Background: NEER is intermediate monetary policy target; official reserves held by MAS reached US$417.9 billion (105.3 percent of GDP) in 2021. - Assessment: Current level of official external assets appears adequate, even after prudential motives; no clear case for further accumulation for precautionary purposes. *Italic: Source: Excerpt from IMF 2022 External Sector Report (text provided).* ### South Africa — External Dynamics and Policy Recommendations - Overall Assessment: - The external position in 2021 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - The exceptional CA surplus in 2021 (3.7 percent of GDP) is explained by sharp increase in commodity prices and pandemic-related factors, and is expected to be temporary. - If the war in Ukraine subsides and commodity prices normalize, the CA is expected to return to its structural deficit. - Potential Policy Responses: - Tackle external imbalances via bold implementation of structural reforms and gradual but substantial fiscal consolidation while providing space for infrastructure and social spending to reduce poverty and inequality. - Reform priorities: improving governance, efficiency of key product markets, functioning of labor markets to attract less volatile and longer-term capital inflows such as FDI and boost exports. - Seizing opportunities to accumulate international reserves, should they arise, would strengthen shock resilience. - Foreign Asset and Liability Position: - Background: Large gross external assets and liabilities (132 and 107 percent of GDP, respectively, Q4 2021). - NIIP improved from 7.8 percent of GDP in 2019 to 25 percent of GDP in Q4 2021. - 2021 (% GDP): NIIP: 25.0; Gross Assets: 132; Debt Assets: 18.0; Gross Liab.: 107; Debt Liab.: 38.3. - Assessment: Risks from large gross external liabilities are mitigated by large external asset position and liability composition (mostly equities; external debt mostly in rand). - Current Account: - Background: CA turned into a surplus for first time in nearly two decades in 2020 (2 percent of GDP) and increased to 3.7 percent of GDP in 2021. - Projection: CA projected to remain positive in 2022 at 1.5 percent of GDP; expected to gradually widen to about 2 percent of GDP deficit over the medium term. - Adjustments and gaps: IMF staff estimates a CA gap in the range of –2.4 to –1 percent of GDP in 2021. - 2021 (% GDP): CA: 3.6; Cycl. Adj. CA: 1.3; EBA Norm: 2.6; EBA Gap: –1.3; COVID-19 Adj.: –2.7; Other Adj.: 2.2; Staff Gap: –1.7. - Real Exchange Rate: - Background: CPI-based REER depreciated by 4.5 percent in 2021; as of May 2022, REER was 1.5 percent below the 2021 average. - Assessment: IMF staff CA gap implies an overvalued REER with a midpoint of 7.3 percent for 2021 (applying an estimated elasticity of 0.23); REER-based regressions point to overvaluation in a range of 1.2 percent to 15.9 percent. - Based on CA approach, IMF staff assesses the REER to be overvalued by 7.3 percent, with a range between 4.3 and 10.3 percent. - Capital and Financial Accounts: - Background: Net FDI increased from 1.5 percent of GDP in 2020 to 9.7 percent in 2021; net portfolio investment recorded outflows of –13 percent of GDP in 2021. - Gross external financing needs stood at 6.4 percent of GDP in 2021. - Assessment: Risks from reliance on non-FDI inflows mitigated by flexible exchange rate, relatively small currency mismatches, large equity liability composition of the NIIP, and a large domestic institutional investor base. - The South African authorities obtained US$4.3 billion (100 percent of quota) under the IMF’s Rapid Financing Instrument in July 2020. - FX Intervention and Reserves: - Background: Exchange rate regime classified as floating; central bank intervention is rare. - In 2021, international reserves were about 13.8 percent of GDP, 214.7 percent of gross external financing needs, and 5.6 months of imports. - Reserves stand below the IMF’s composite adequacy metric (80.8 percent of the metric without considering existing CFM measures and 89.3 percent of the metric after considering them). - Assessment: If conditions allow, reserve accumulation would be desirable over the medium term to strengthen the external liquidity buffer, subject to maintaining the primacy of the inflation objective. - South Africa received US$4.2 billion as part of the IMF’s SDR allocation in August 2021. *Italic: Source: Excerpt from IMF 2022 External Sector Report (text provided).* ### Spain — External Position, NIIP, and Policy Options - Overall Assessment: - The external position in 2021 is broadly in line with the level implied by medium-term fundamentals and desirable policies. - IMF staff assesses Spain’s CA norm to be relatively high due to external sustainability risks from a large negative NIIP. - Baseline: CA expected to recover and reach 1.5 percent of GDP in the medium term, supported by resumption of foreign tourism and resolution of global supply bottlenecks; downside risks from war in Ukraine. - Potential Policy Responses: - Keeping the CA balance in line with its norm will require fiscal consolidation efforts and higher private saving achieved via productivity gains, wage flexibility, addressing labor market duality, enhancing education, and encouraging innovation. - Recovery plan foresees investments and reforms and measures to diversify and improve quality of tourism services. - Foreign Asset and Liability Position: - Background: NIIP improved to –70.4 percent of GDP at end-2021, reversing 2020 decline; gross liabilities declined to 283.1 percent of GDP. - Negative NIIP largely attributed to general government and central bank, with TARGET2 liabilities amounting to 42.6 percent of GDP at end-2021. - 2021 (% GDP): NIIP: –70.4; Gross Assets: 212.8; Debt Assets: 96.3; Gross Liab.: 283.1; Debt Liab.: 173.2. - Assessment: Large negative NIIP implies external vulnerabilities including large gross financing needs and potential adverse valuation effects; mitigating factors include favorable sovereign debt maturity structure (almost eight years), limited share of debt in foreign currency (9.5 percent of total external debt), and current ECB measures keeping cost of debt low. - Current Account: - Background: CA surplus increased slightly in 2021 (from 0.8 to 0.9 percent of GDP), supported by improvement in services surplus (tourism) partially offset by widening goods deficit. - Higher public savings offset rise in public investment and drawdown of excess private savings generated during the pandemic. - Impact of war in Ukraine: higher energy prices, reduced trading partner growth, and erosion of confidence; Q1 2022 trade balance deteriorated due to sharp increase in imports associated with high energy prices. - Projection: CA projected to gradually recover in the medium term with full resumption of foreign tourism flows and resolution of supply bottlenecks. - Assessment: 2021 cyclically adjusted CA balance is –0.1 percent of GDP; this mainly reflects pandemic’s transitory impact due to shocks not captured by the EBA model, which amount to 1.6 percent for travel services (including tourism) and 0.2 percent for transport. *Italic: Source: Excerpt from IMF 2022 External Sector Report (text provided).* ### 0.3 percent for medical goods, and –0.4 percent for the global shift of household consumption from services to consumer ### text - 0.3 percent for medical goods, and –0.4 percent for the global shift of household consumption from services to consumer ### Current Account: cyclically adjusted balances, norms, and gaps - COVID-19 and other adjustments: - 0.3 percent for medical goods - –0.4 percent for the global shift of household consumption from services to consumer goods - Adjusted outcome: - 2021 cyclically adjusted CA balance: 1.6 percent of GDP (after adjusting for above effects) - EBA and staff assessments: - IMF staff CA norm: 1.7 percent of GDP, with a range of 1 to 2.4 percent of GDP (reflecting external sustainability considerations, including potentially adverse NIIP valuation effects) - Resulting CA gap range: –0.8 to 0.6 percent of GDP - CA gap midpoint: –0.1 percent of GDP - Reported 2021 summary table (percent of GDP): - CA: 0.9 - Cycl. Adj. CA: –0.1 - EBA Norm: 0.0 - EBA Gap: –0.1 - COVID-19 Adj.: 1.7 - Other Adj.: –1.7 - Staff Gap: –0.1 ### Real Exchange Rate (REER) — background and IMF staff assessment - Background: - In 2021, the CPI-based REER appreciated by 0.9 percent and the ULC-based REER depreciated by 1.7 percent relative to 2020. - Both indicators show at least a partial reversal of the significant appreciation from euro entry in 1999–2008. - As of May 2022, the REER was 1.5 percent below the 2021 average. - EBA model and staff REER gap calculation for 2021: - EBA REER models estimate an overvaluation of 8.8 percent (index) to 26.4 percent (level) for 2021. - Using the IMF staff CA gap range and an elasticity of 0.26, the IMF staff assesses the REER gap range to be –2.3 to 3 percent, with a midpoint of 0.4 percent. ### Capital and Financial Accounts: flows and policy measures (first country block) - Background (aggregate 2021): - Financial account balance increased from 1.6 to 2.4 percent of GDP in 2021. - Outflows by the Bank of Spain partially offset net inflows by other resident sectors, particularly in portfolio investment. - Capital account surplus increased due to flows associated with Next Generation EU funds. - Assessment: - Large external financing needs leave Spain vulnerable to sustained market volatility. - ECB policies to maintain favorable liquidity conditions and monetary accommodation remain a mitigating factor. ### FX Intervention and Reserves Level (euro area context) - 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: Economy assessment (selected 2021 findings) - Overall: - External position in 2021 remains stronger than level implied by medium-term fundamentals and desirable policies, despite a decrease in the CA by 0.6 percentage point to 5.5 percent of GDP. - Sweden has limited direct exposure to Russia, but second-round effects from main trading partners (notably Germany) could weigh on activity and the current account in 2022. - Over the medium term, CA surplus expected to decline further to long-term average as policies normalize and structural reforms are undertaken. - Potential policy responses: - Scope for greener and growth-enhancing private and public investments to facilitate structural transformation. - Once recovery is well underway, address past imbalances and policy distortions via reforms that raise productive investment and potential output. - Policies to lower household debt to safeguard against severe consumption shocks. - Foreign asset and liability position (2021, percent of GDP): - NIIP: 16.8 - Gross Assets: 296.3 - Debt Assets: 84.9 - Gross Liab.: 279.5 - Debt Liab.: 173 - Background on NIIP: - NIIP estimated to have increased by 1.3 percentage points to reach 16.8 percent of GDP in 2021. - Increase is lower than CA balance due to valuation effects. - IIP data include large errors and omissions averaging –2.2 percent of GDP over the past 10 years. - Assessment on assets/liabilities: - Gross liabilities increased to 279.5 percent of GDP in 2021; gross external debt 173 percent of GDP. - Other financial institutions (mostly pension funds) hold bulk of net foreign assets (82 percent of GDP), followed by social security funds (24 percent of GDP), households (20 percent of GDP), and the central bank (7 percent of GDP). - Nonfinancial corporations (70 percent of GDP), monetary financial institutions (39 percent of GDP), and the government (6 percent of GDP) are net external debtors. - Rollovers of external debt (including banks’ covered bonds) pose vulnerability, but risks moderated by banks’ ample liquidity and large capital buffers. - Current account (2021 and adjustments): - CA surplus decreased to 5.5 percent of GDP in 2021 (from 6.1 percent in 2020), driven by decline in primary income and stronger import growth. - Tourism service imports picked up in 2021 but remain below pre-pandemic levels; lower tourism imports estimated to have kept CA surplus higher by about 0.3 percentage point (COVID-19 adjustor). - Sweden’s direct exposure to Russia: exports and imports are less than 0.4 percent of GDP each. - Medium-term CA projected to return to long-term average of 3.5 percent of GDP. - Assessment and CA gap (2021): - Cyclically adjusted CA: 5.3 percent of GDP in 2021. - Cyclically adjusted EBA norm: 1.2 percent of GDP. - EBA gap: 4.1 percentage points. - Temporary COVID-19 adjustments: travel (–0.4 percent of GDP), transport (–0.1 percent of GDP), medical imports (+0.1 percent of GDP), household consumption (0 percent of GDP). - IMF staff CA gap: 3.6 percent of GDP in 2021, with estimated range of 3.2 to 4 percent of GDP. - Policies explaining gap: 0.2 percentage point (fiscal policy contributed 1 percent and partially offset by gaps in health (–0.1 percent), reserves (–0.1 percent), and credit (–0.6 percent)). - Complementary EBA tools suggest labor market regulation (more flexible than average) and pension system could explain about 1.5 percentage points of the gap. - Reported 2021 summary table (percent of GDP) for Sweden: - CA: 5.5 - Cycl. Adj. CA: 5.3 - EBA Norm: 1.2 - EBA Gap: 4.1 - COVID-19 Adj.: –0.5 - Other Adj.: — - Staff Gap: 3.6 ### Sweden: Real Exchange Rate and capital/financial accounts (selected) - REER background (krona): - Krona appreciated by 3.6 percentage points in real effective terms (ULC-based) in 2021 relative to 2020 average. - Real GDP growth: –2.8 percent in 2020 to 4.8 percent in 2021. - As of May 2022, REER was 6.3 percent below the 2021 average. - REER assessment: - IMF staff CA gap implies a REER gap of –10.7 percent in 2021 (applying elasticity of 0.34), with range between –9.5 and –11.8 percent (using model’s standard error of ±0.4 percent of GDP). - REER index and level models suggest gaps of –11.1 percent and –14.8 percent, respectively, for 2021. - ULC-based REER index using OECD data in 2021: 4.4 percent below its 29-year average (since krona floated in 1993). - IMF staff assesses the krona to be valued between +0.6 and –9.4 percent, with a midpoint of –4.4 percent (guided by ULC-based REER index and its standard deviation). - Note: This REER gap may continue to decline further once situation, including monetary policy, normalizes. - Capital and financial accounts (2021 flows and assessment): - Financial account declined by almost half in 2021 to 2.2 percent of GDP (from 3.7 percent in 2020). - Reversals: other investments from 2.2 to –3.9 percent of GDP; FDI decreased from 0.9 to –1.1 percent of GDP. - Portfolio investments more than tripled from 2.2 to 7.5 percent of GDP. - Assessment: Sweden’s large banks vulnerable to liquidity risks from global wholesale markets due to size, interconnectedness, and funding model; banks have improved structural liquidity positions and authorities strengthened regulation by introducing liquidity coverage ratio requirements in foreign and domestic currency in addition to overall LCR. - FX intervention and reserves (Sweden): - Exchange rate is free floating. - Foreign currency reserves increased by US$4.5 billion to US$62 billion in December 2021. - Reserves equivalent metrics: - 21 percent of short-term external debt of monetary and financial institutions - about 10 percent of GDP - 2.8 months of imports - Increase in reserves reflects general SDR allocation effective August 2021. - There were no FX interventions in 2021. - Assessment: Sweden should maintain adequate foreign reserves given high dependence of banks on wholesale funding in foreign currency and past disruptions. - A US$60 billion swap facility was agreed with the US Federal Reserve to address dollar funding risks related to COVID-19; the swap facility was extended three times before expiring by end-2021 and was not used. --- ### Switzerland: Economy assessment (selected 2021 findings) - Overall assessment: - Switzerland’s external position in 2021 was assessed as broadly in line with the level implied by medium-term fundamentals and desirable policies. - Complex measurement issues and data lags complicate the assessment. - The current account is expected to remain in a large, surplus position (about 7 percent of GDP) in the medium term, with relatively limited exposure to oil and gas from Russia. - Potential policy responses: - Fiscal policy should remain broadly balanced in structural terms, in line with authorities’ debt-brake rule framework, while accommodating additional spending related to the war in Ukraine (for example, accommodation of refugees) and continuing COVID-19 support to vulnerable households/firms where needed. - Required offset of extraordinary COVID-19–related spending via future fiscal surpluses should be extended to avoid excessive headwinds to recovery. - SNB should closely monitor inflation developments and stand ready to adjust FX market operations and policy interest rates if needed. - If significant downside risks materialize (for example, large safe haven inflows or a deep and/or sustained downturn), authorities should consider targeted FX interventions to mitigate disruptive volatility and allow full operation of structural-balance fiscal rule and/or temporary discretionary fiscal stimulus. - Macroprudential policies should focus on containing real estate imbalances and reducing financial sector risks. - Medium-term policies should ensure balanced domestic and external contributions to growth and improve public-private mix in financial outflows to ease pressures on the franc. - Continue efforts to promote green transition and energy security. - Foreign asset and liability position (end-2021, percent of GDP): - NIIP: 89.8 - Gross Assets: 753.1 - Reserve Assets: 136.5 - Gross Liab.: 663.3 - Debt Liab.: 205.6 - Background and valuation effects: - Switzerland is a major financial center with large NIIP and gross positions. - Compared with 2020, NIIP declined in 2021 by 18.5 percentage points of GDP, mainly driven by negative valuation effects due to price changes. - Projections of NIIP in 2022 and beyond are complicated by heightened uncertainty: large gross positions and compositional differences mean modest changes in exchange rates, asset prices, and returns may have material effects. - Assessment: - Large gross liability position and volatility of financial flows and investment returns present some risk, mitigated by large gross asset position and CHF denomination of about two-thirds of external liabilities. - Current account (2021 and outlook): - CA surpluses averaged 7.2 percent of GDP during 2011–20. - CA surplus increased from 2.8 percent in 2020 to 9.3 percent of GDP in 2021, reflecting reversal of some COVID-19–linked shocks (for example, watch exports, precious metals trade), strong pharmaceutical sector performance, and a surge in merchanting trade likely related to sharp rise of commodity prices. - In 2022, CA surplus expected to moderate to 6.7 percent of GDP, slightly below medium-term average. - Assessment (EBA norm): - EBA CA norm of 6.8 percent of GDP for 2021 is higher than previous year’s norm. - Based on a cyclically adjusted CA surplus of [content cut off in source here]... *Italic: Source: https://www.imf.org/-/media/files/publications/esr/2022/english/text.pdf* ### 9.9 percent and the norm, the overall EBA-estimated CA gap equaled +3.1 percent of GDP in 2021. ### 9.9 percent and the norm, the overall EBA-estimated CA gap equaled +3.1 percent of GDP in 2021. ### Current account and CA gap (Switzerland) - 2021 (% GDP): CA: 9.3; Cycl. Adj. CA: 9.9; EBA Norm: 6.8; EBA Gap: 3.1; COVID-19 Adj.: –0.6; Other Adj.: –3.4; Staff Gap: –0.9 - Overall EBA-estimated CA gap equaled +3.1 percent of GDP in 2021. - Domestic policy gaps accounted for –0.9 percentage points and included: - excessive private sector credit: –1.8 percentage points - fiscal underspending: 0.2 percentage point - Policy gaps in the rest of the world contributed +0.9 percentage points. - CA gap was reduced to –0.9 percent of GDP (±0.8 percentage points) due to adjustments related to: - valuation losses on fixed-income securities arising from inflation: –3.3 - retained earnings on portfolio equity investment: –0.1 - transitory impacts of the COVID-19 pandemic: –0.6 ### Real Exchange Rate (Switzerland) - Background: - Relative to 2020, the average NEER stayed virtually unchanged. - CPI-based REER depreciated by 2.4 percent in 2021. - PPI-based REER depreciated by 8.9 percent in 2021. - In Q1 2022, average NEER appreciated by 2.7 percent; PPI-based REER depreciated by 9.6 percent. - As of May 2022, the CPI-based REER was 2.7 percent below the 2021 average. - Since 2010: NEER has appreciated by 38 percent; CPI-based REER has appreciated by 6 percent; PPI-based REER has depreciated by 9 percent. - Assessment: - IMF staff CA gap implies REER overvaluation of 1.9 percent in 2021 (applying an elasticity of 0.47). - EBA REER index and level models suggest average REER in 2021 was overvalued by 10.5 and 16.8 percent, respectively. - IMF staff assesses the REER gap in 2021 to be in the range of +0.2 to +3.6 percent (overvalued), with a midpoint of +1.9 percent. - Note on measurement: results may not fully capture a secular improvement in productivity, especially in knowledge-based sectors. ### Capital and financial accounts: flows and policy measures (Switzerland) - Background: - Net financial outflows totaled 3.7 percent of GDP in 2021. - Private inflows: 2.3 percent of GDP in 2021. - Increase in SNB reserve assets: 6 percent of GDP in 2021. - During 2009–20, net private inflows averaged 2.9 percent of GDP. - Average annual increase in SNB reserves during 2009–20: 10.5 percent of GDP. - Assessment: - Financial flows are large and volatile, reflecting Switzerland’s status as a financial center and safe haven. - Sizable net private financial outflows prior to the global financial crisis have declined and, on average, turned into net capital inflows, adding to appreciation pressures. ### FX intervention and reserves level (Switzerland) - Background: - Official reserve assets (including gold) amounted to US$1.11 trillion (136.5 percent of GDP) at the end of 2021, up US$26 billion from the end of 2020 (including valuation changes). - SNB purchased CHF 21 billion of FX (net) through FX interventions in 2021, down from CHF 110 billion in 2020. - Assessment: - Reserves are large relative to GDP, but more moderate in comparison with short-term foreign liabilities. - High reserves reflect monetary operations aimed at avoiding persistent undershooting of inflation as a result of FX inflow surges and limited scope for significant easing via other monetary policy tools. - Supply of domestic assets for purchase is limited; marginal interest rate on bank deposits at the SNB is –0.75 percent. - SNB’s initiation of quarterly publication of (net) FX intervention information in 2020 was an important step to enhance transparency. ### Overall assessment and potential policy responses (Thailand) - Overall Assessment: - The external position in 2021 was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - CA balance turned negative due to collapse in tourism-driven services balance and a surge in shipping costs due to the COVID-19 shock. - CA balance is expected to narrow to –0.8 percent of GDP in 2022 as tourism receipts recover and return to a surplus of around 3 percent of GDP in the medium term. - Potential Policy Responses: - More gradual consolidation of pandemic era policy stimulus alongside structural reforms to support domestic demand and align the CA balance with medium-term fundamentals and desirable policies. - Public expenditures should focus on targeted social transfers and infrastructure investment to support a green recovery and reorientation of affected sectors. - Undertake revenue mobilization reform to keep deficit and debt sustainable. - Continue efforts to reform and expand social safety nets, notably the fragmented pension schemes. - Measures to address widespread informality to help reduce precautionary savings and support consumption. ### Foreign asset and liability position and trajectory (Thailand) - Background: - NIIP weakened in 2021 to 9.5 percent of GDP (from 11.5 percent in 2020). - Gross assets declined from 122 to 120 percent of GDP (48 percent of GDP being reserve assets). - Gross liabilities remained stable at around 110 percent of GDP, dominated by direct (about half) and portfolio (a quarter) investment. - Net direct investment assets increased by 3 percentage points of GDP. - Portfolio and net other investment assets declined by 1 and 2 percentage points of GDP, respectively. - Assessment: - NIIP is projected to remain in a small creditor position over the medium term given current account surpluses. - External debt remained stable at 39 percent of GDP, of which short-term debt (on a remaining maturity basis) amounts to 14 percent of GDP. - External debt stability and liquidity risks are limited. - 2021 (% GDP): NIIP: 9.5; Gross Assets: 120.1; Debt Assets: 23.3; Gross Liab.: 110.6; Debt Liab.: 39.0 ### Current account (Thailand) - Background: - CA balance declined from 4.2 percent of GDP in 2020 to –2.2 percent of GDP in 2021. - Services account collapsed as international tourist arrivals fell to around 1 percent of their pre-pandemic level. - Shipping costs surged due to supply-chain disruptions. - Goods exports bounced back; goods imports (particularly raw material and intermediate goods) increased. - Fuel imports increased markedly with rapid rise in oil prices; overall trade balance weakened by 0.3 percent of GDP. - CA balance in 2022 projected to improve to –0.8 percent of GDP as tourism strengthens. - Assessment: - EBA CA model estimates: - cyclically adjusted CA of –2.8 percent of GDP for 2021 - CA norm of 1.4 percent of GDP for 2021 - CA gap of –4.2 percent of GDP, consisting of an identified policy gap of –1.2 percent of GDP and an unexplained residual of –3 percent of GDP - Adjustors applied: - to account for large shocks to travel and transport sectors: 4.4 percent and 1.9 percent of GDP, respectively - reflect global shift in private spending composition from services towards consumer goods and increase in consumer goods exports from Thailand: –0.9 percent of GDP - net exports of medical supplies triggered by the pandemic: 0.1 percent of GDP - Overall IMF staff assessment: CA gap in the 0.7 to 2.1 percent of GDP range, with a midpoint of 1.4 percent of GDP. - CA gap expected to narrow over the medium term as domestic demand recovers and social protection reforms are taken. - 2021 (% GDP): CA: –2.2; Cycl. Adj. CA: –2.8; EBA Norm: 1.4; EBA Gap: –4.2; COVID-19 Adj.: 5.6; Other Adj.: 0; Staff Gap: 1.4 ### Real Exchange Rate (Thailand) - Background: - Baht has been on a gradual real appreciation trend since mid-2000s. - In 2021, REER depreciated by 7.6 percent by end of year relative to its 2020 average. - As of May 2022, the REER was 0.6 percent above the 2021 average. - Assessment: - Using an elasticity of 0.44 and based on the IMF staff CA gap, IMF staff assess the REER to be undervalued in the 1.6 to 4.8 percent range, with a midpoint of 3.2 percent. - EBA index REER gap in 2021 estimated at 6 percent. - EBA level REER gap estimated at –2.8 percent. ### Capital and financial accounts: flows and policy measures (Thailand) - Background: - Capital and financial account balance strengthened to –0.4 percent of GDP in 2021 from –2.4 percent in 2020. - Recovery in inward direct investment: from –1 percent in 2020 to 2.2 percent of GDP in 2021. - Other net investments declined from 4.9 to 3.2 percent of GDP. - Assessment: - Since 2013, Thailand experienced episodes of volatility reflecting external financial conditions, political uncertainty, and the COVID-19 shock. - Thailand has weathered episodes well given strong external buffers and fundamentals. - IMF staff welcome Bank of Thailand’s removal of limits on nonresident baht accounts for qualifying nonresident firms to facilitate baht liquidity management and recommend additional phasing out of remaining CFMs on nonresident baht accounts. - Recommend a comprehensive package of macroeconomic, financial, and structural policies to address volatile capital flows, complemented with gradual and prudent financial account liberalization. ### FX intervention and reserves level (Thailand) - Background: - Exchange rate regime classified as floating (de jure and de facto). - International reserves (including the net forward position) declined from 57.3 percent in 2020 to 55.2 percent of GDP in 2021. - Reserves are more than three times short-term debt and 12 months of imports, and over 200 percent of the IMF’s standard reserve adequacy metric. - Exchange rate allowed to adjust in response to COVID-19 shock, with some FX sales in outflow episodes. - Assessment: - Official intervention data are not published; estimates suggest two-sided intervention for the year. - Reserves are higher than IMF’s reserve adequacy metrics; no need to build up reserves for precautionary purposes. - Exchange rate should move flexibly to act as a shock absorber, with FX intervention limited to tackling disorderly market conditions. *International Monetary Fund | 2022 — 2022 EXTERNAL SECTOR REPORT* ### CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS ### CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS ### Türkiye: Economy Assessment - Overall Assessment: - The external position in 2021 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA deficit narrowed as exports (including tourism revenues) rebounded; imports were contained by official restrictions on gold imports. - NIIP remained negative but narrowed significantly due to a steep decline in the value of FDI liabilities. - REER is estimated to have remained undervalued, although significant uncertainties remain surrounding the scale of that undervaluation. - Monetary conditions sharply eased, leading to a sharp depreciation of the lira—reversing some reserve gains—and rising inflation. - Vulnerability to shocks remains high amid still-elevated gross external financing needs. - Over the medium term, the CA deficit is projected to narrow as the REER undervaluation feeds through and as commodity price pressures ease. - Potential Policy Responses: - Tighter monetary policy to lower inflation, anchor inflation expectations, and strengthen policy credibility. - Monitor credit growth carefully. - Maintain a broadly neutral fiscal stance with targeted measures to protect the most vulnerable and accompany this with a credible medium-term fiscal plan. - Overall tightening and rebuilding of credibility to contain demand and reduce imports, improving the CA, sustaining capital inflows, supporting de-dollarization, and allowing reserve buildup—paving the way for relaxation of gold import restrictions and CFM measures. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP averaged –44 percent of GDP over 2017–21, declining to –53 percent in 2020. - NIIP increased to –31 percent of GDP in 2021, driven largely by a marked decrease in FDI equity liabilities (overall liabilities fell from 89 to 65 percent of GDP). - External debt decreased from 60 to 56 percent of GDP. - Almost 70 percent of external debt is held by the private sector; less than a third is short term (on a remaining maturity basis). - Debt is expected to remain sustainable over the medium term. - Assessment: - Size and composition of gross external liabilities, coupled with low reserves, increase vulnerability to liquidity shocks, sudden shifts in investor sentiment, and global upswing in interest rates. - FX exposure of nonfinancial corporations is high but has improved; short-term net FX position is positive. - NIIP is projected to remain at about –30 percent of GDP through 2027. - Key 2021 (% GDP): - NIIP: –31.4 - Gross Assets: 35.7 - Debt Assets: 16.4 - Gross Liab.: 67.1 - Debt Liab.: 48.9 - Current Account: - Background: - CA deficit narrowed from 4.9 percent of GDP in 2020 to 1.7 percent of GDP in 2021. - Improvement driven by increase in goods exports (+4.5 percent of GDP) and net services (+1.5 percent of GDP) due to tourism. - Overall increase in goods imports (+2.8 percent of GDP) driven by oil imports (+2.3 percent of GDP) and contained by decline in gold imports (–2.8 percent of GDP) following new regulations. - Higher commodity prices from the war in Ukraine expected to widen the CA deficit in 2022. - Assessment: - EBA CA model norm for Türkiye is estimated at –0.8 percent of GDP, with a standard error of ±0.6 percent of GDP. - Actual CA deficit of 1.7 percent of GDP in 2021 narrows to 0.6 percent of GDP after cyclical and terms-of-trade adjustment. - Adjusting for temporary pandemic-related shocks (travel, 0.8 percent of GDP; transport, –0.5 percent; household consumption shift, –0.4 percent; medical, –0.1 percent) results in a 0 percent of GDP gap. - IMF staff assesses a CA gap in the range of –0.6 to 0.6 percent of GDP, with a midpoint of 0. - Key 2021 (% GDP): - CA: –1.7 - Cycl. Adj. CA: –0.6 - EBA Norm: –0.8 - EBA Gap: 0.2 - COVID-19 Adj.: –0.2 - Other Adj.: 0.0 - Staff Gap: 0.0 - Real Exchange Rate: - Background: - REER remained undervalued in 2021, depreciated by an annual average of 9.4 percent over 2017–21. - Average REER depreciated by 9 percent in 2021; average nominal depreciation against the US dollar of 27 percent. - As of May 2022, the REER was 1.4 percent below the 2021 average. - Assessment: - IMF staff estimate of the CA gap implies a REER gap of 0 percent in 2021 (applying an estimated elasticity of 0.26). - EBA REER index and level approaches suggest REER was undervalued in 2021 by 41.1 and 50.5 percent, respectively. - IMF staff assesses the lira to be undervalued by about 20 to 25 percent in 2021, with large uncertainties. - Capital and Financial Accounts: Flows and Policy Measures: - Background: - Net capital inflows rebounded in 2021 from US$8 billion to US$28 billion. - Drivers included one-off flows: US$6.4 billion from Türkiye’s SDR allocation, large positive errors and omissions of US$10 billion, and increases in bilateral swap line agreements. - Positive net inflows driven by FDI; net portfolio inflows weakened. - Two CFM measures remain with modifications: (1) limits to bank swaps and other derivative transactions with foreign counterparties (introduced August 2018) and (2) export surrender/repatriation requirements (introduced 2018). - Early 2022: new requirement for exporters to convert 25 percent of export earnings within 180 days, later increased to 40 percent. - Assessment: - Much of the 2021 net capital inflows were one-off or of unknown origin. - Annual gross external financing needs projected at about 25 percent of GDP on average over 2022–27 (22 percent of GDP in 2021). - Türkiye remains vulnerable to adverse shifts in global investor sentiment. - CFM measures should be phased out as conditions improve to increase market liquidity and support de-dollarization. - FX Intervention and Reserves Level: - Background: - De jure exchange rate classified as free floating. - Gross reserves increased from US$93.5 billion at end-2020 to US$109.5 billion by end-2021, partly due to US$6.4 billion SDR allocation. - Central bank FX intervention increased toward end-2021; net international reserves dropped to US$10.8 billion by end-2021. - Assessment: - Gross reserves increased from 77 to 91.2 percent of the IMF’s ARA metric during 2021, still below recommended 100 to 150 percent range and covering 89 percent of short-term external debt (at remaining maturity). - Reserve quality issue: non-SDR-basket currencies account for a large share of FX reserves. - Steady reserve accumulation over the medium term is needed given large external liabilities, dependence on short-term and portfolio funding, and large domestic FX deposits. *Italic: Source: Table 3.28. Türkiye: Economy Assessment, CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS* --- ### United Kingdom: Economy Assessment - Overall Assessment: - External position in 2021 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA deficit stable in 2021, reflecting continued high public borrowing offset by private saving. - War in Ukraine and global supply disruptions could increase inflation, weaken exports, and worsen the CA in the near term. - Over the medium term, CA deficit projected to narrow as exports gradually recover. - Significant uncertainty due to pandemic-related factors, measurement issues, impact of the EU-UK Trade and Cooperation Agreement, and outstanding issues on financial services. - Potential Policy Responses: - Gradual fiscal consolidation while maintaining targeted fiscal support to lower-income quintiles to cushion cost-of-living impacts. - Implement structural reforms to boost productivity in the tradables sector and international competitiveness, including upgrading labor skills to support reallocation to fast-growing sectors. - Support rising public investment in the climate transition. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP declined to –32 percent of GDP in 2021 from –22.5 percent in 2020; negative valuation effect contributed. - Other investment: 212 percent of GDP in assets and 200 percent in liabilities. - Portfolio investment: 134 percent of GDP in assets and 171 percent in liabilities. - United States, other European countries, and Japan account for about 75 percent of total UK external assets and liabilities. - External liabilities have a larger share denominated in pounds than external assets. - IMF staff projects NIIP broadly stable over the medium term; large and volatile valuation effects increase uncertainty. - Assessment: - Since 2000, valuation gains have offset more than half the effect of CA flows on NIIP (driven by unrecorded impacts of inflation differentials and retained earnings bias). - Fluctuations in large gross stock positions (including derivatives—both gross assets and gross liabilities exceed 500 percent of GDP) could be a vulnerability. - Net liability position in domestic currency and exchange rate flexibility provide some insurance. - Key 2021 (% GDP): - NIIP: –32 - Gross Assets: 533 - Debt Assets: 278 - Gross Liab.: 565 - Debt Liab.: 317 - Current Account: - Background: - CA deficit remained about 2.6 percent of GDP in 2021. - Lower trade balance due to strong domestic demand was offset by higher income balance. - Gross saving and investment both increased marginally; private saving declined, offsetting lower public borrowing. - Assessment: - EBA CA model estimates norm of –0.7 percent of GDP and CA gap of –1.3 percent of GDP. - COVID-19 related adjustments totaling 0.3 percent of GDP: travel (–0.4), transport (0.3), household consumption composition (0.2), medical goods (0.1). - Post-Brexit adjustment (–0.1 percent of GDP) affected the CA temporarily. - Unrecorded impact of inflation differentials (0.6 percent of GDP) and retained earnings bias on portfolio equity assets (0.3 percent of GDP) contribute to underestimation of underlying CA. - IMF staff assesses CA gap in range of –1.1 to 0.9 percent of GDP, midpoint –0.1 percent of GDP. - Key 2021 (% GDP): - CA: –2.6 - Cycl. Adj. CA: –2 - EBA Norm: –0.7 - EBA Gap: –1.3 - COVID-19 Adj.: 0.3 - Other Adj.: 0.9 - Staff Gap: –0.1 - Real Exchange Rate: - Background: - Pound appreciated in REER by 3.8 percent in 2021 relative to 2020 average, driven by nominal appreciation. - Overall pound has depreciated since mid-2016 by about 3.4 percent. - As of end-May 2022, REER had depreciated by 1.4 percent compared to 2021 average. - Assessment: - IMF staff CA gap implies REER gap of 0.5 percent in 2021 (estimated elasticity 0.24). - EBA REER level and index approaches suggest gaps of 5.6 and –7.5 percent, respectively, for 2021. - IMF staff assesses REER gap to be 0.5 percent, in a range of –3.6 to 4.6 percent. - Capital and Financial Accounts: Flows and Policy Measures: - Background: - UK as an international financial center: portfolio and other investment key components. - In net terms, CA financed in 2021 by net portfolio investment of 5.4 percent of GDP; other investment and net FDI declined by 0.8 and 1 percent of GDP, respectively. - Access to finance remained favorable during COVID-19, aided by Bank of England support. - Assessment: - Large capital flow fluctuations are inherent and a potential vulnerability, mitigated by sound regulation and strong financial sector. - Additional risk: deceleration of FDI and portfolio inflows due to changes in trade relationship with EU and shift of some financial services to EU. - FX Intervention and Reserves Level: - Background: - Pound has status of a global reserve currency. - Share of global reserves in sterling about 4.5 percent since 2015. - Assessment: - Reserves held by the United Kingdom are typically low relative to standard metrics; currency is free floating. *Italic: Source: Table 3.29. United Kingdom: Economy Assessment, CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS* --- ### United States: Economy Assessment - Overall Assessment: - External position in 2021 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - Decline in trade balance, led by increase in imports of goods, widened CA deficit to 3.6 percent of GDP. - CA deficit projected to decline below 2 percent of GDP over the medium term based on increase in public saving due to gradual fiscal consolidation. - Potential Policy Responses: - Suggested fiscal consolidation over medium term aimed at a medium-term general government structural primary deficit of about 1 percent of GDP to stabilize debt-to-GDP and address CA gap. - Structural policies to increase competitiveness: upgrade infrastructure; enhance schooling, training, and worker mobility; support the working poor; increase labor force growth (including skill-based immigration reform). - Roll back tariff barriers and resolve trade and investment disagreements in a manner supporting an open, stable, and transparent global trading system. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP averaged about –46 percent of GDP during 2016–19; strengthened slightly from –67.1 percent of GDP in 2020 to –79 percent of GDP in 2021. - Under IMF staff baseline, NIIP projected to remain broadly unchanged through medium term as CA reverts to pre–COVID-19 average. - Assessment: - Financial stability risks could surface from unexpected decline in foreign demand for US fixed-income securities. - Risk remains moderate given dominant status of US dollar as reserve currency. - About 60 percent of US assets are in the form of FDI and portfolio equity claims. - Key 2021 (% GDP): - NIIP: –79 - Gross Assets: 153 - Debt Assets: 17.7 - Gross Liab.: 232 - Debt Liab.: 56.0 - Current Account: - Background: - US CA deficit increased from 2.9 percent of GDP in 2020 to 3.6 percent in 2021 (from 2.7 to 3.2 percent in cyclically adjusted terms), compared with 2.1 percent of GDP in 2016. - Trade-side evolution since 2016 explained mostly by deterioration in non-oil and income balances. - In 2021 trade balance declined moderately from 2020 (–3.2 versus –3.7 percent of GDP), mostly due to changes in imports of goods; income account remained unchanged. - Both national saving and investment increased as percentage of GDP from 2016 to 2021 (with massive increase in public dissaving due to pandemic), resulting in CA deficit increase. - CA deficit expected to decline slightly below 2 percent of GDP over medium term. - Assessment: - EBA model estimates cyclically adjusted CA balance of –3.2 percent of GDP and cyclically adjusted CA norm of –1.3 percent of GDP. - EBA model CA gap is –1.9 percent of GDP for 2021, reflecting policy gaps (–1.1 percent of GDP; half, –0.7 percent, corresponds to fiscal policy) and an unidentified residual (~–0.8 percent of GDP). - IMF staff assesses 2021 cyclically adjusted CA to be 1.1 percent of GDP lower than level implied by medium-term fundamentals and desirable policies, range between –1.7 and –0.5 percent of GDP. - Assessment includes IMF staff adjustor of 0.8 percent of GDP to account for COVID-19 effects: travel (0.2), transport (0.1), medical (0.1), shift in household consumption (0.4). - Estimated standard error of the CA norm is 0.6 percent of GDP. - Key 2021 (% GDP): - CA: –3.6 - Cycl. Adj. CA: –3.2 - EBA Norm: –1.3 - EBA Gap: –1.9 - COVID-19 Adj.: 0.8 - Other Adj.: 0.0 - Staff Gap: –1.1 - Real Exchange Rate: - Background: - REER appreciated by 1.6 percent in 2020, then depreciated by 3.8 percent in 2021, bringing REER to average level of 2016. - As of May 2022, REER was 8.6 percent above the 2021 average. - Assessment: - Indirect estimates of the REER (based on IMF staff’s current account assessment) imply exchange rate was overvalued by 8.7 percent in 2021 (applying estimated elasticity of 0.12). *Italic: Source: Table 3.30. United States: Economy Assessment, CHAPTER 3 2021 INDIVIDUAL ECONOMY ASSESSMENTS* ### 1.6 percent, and the EBA REER level model suggests an overvaluation of 8.9 percent. Considering all the estimates and th ### 1.6 percent, and the EBA REER level model suggests an overvaluation of 8.9 percent. Considering all the estimates and th ### External position: REER and current account assessment - IMF staff assesses the 2021 midpoint REER overvaluation to be 8.7 percent, with a range of 3.8 to 13.6 percent (range obtained from the CA account standard error and the corresponding CA elasticity). - An EBA REER level model suggests an overvaluation of 8.9 percent. - A band of ±1 percent of GDP (two standard errors of the CA norm) is applied in some country cases to account for elevated country-specific uncertainty in the context of external vulnerabilities. ### Capital and financial accounts — flows and composition (2021) - Financial account balance: about –3.1 percent of GDP in 2021 (compared with –3.5 percent of GDP in 2020). - Net direct investment: decreased from 0.5 to 0.2 percent of GDP. - Portfolio investment: changed from –2.3 to –10 percent of GDP. - Other investments: changed from –1.3 to –2.5 percent of GDP. - Assessment note: The United States has an open capital account. Vulnerabilities are limited by the dollar’s status as a reserve currency, with foreign demand for US Treasury securities supported by that status and possibly by safe haven flows. ### FX intervention and reserves - Assessment: The dollar has the status of a global reserve currency. - Reserves held by the United States are typically low relative to standard metrics. - Currency regime: free floating. ### Selected technical endnotes and methodological parameters (illustrative country-specific figures preserved as in source) - Canada: semielasticity of the CA with respect to the REER is set to 0.25. - Canada: estimates of temporary COVID-19 impacts on travel, transport, household consumption composition, and trade in medical products are –0.4, 0.1, 0.2, and 0.2 percent of GDP, respectively, with a net impact of 0.1 percent of GDP. - Canada: statistical treatment biases estimated to generate a downward bias in the income balance of the CA of the order of 0.7 and 0.8 percent of GDP, respectively, totaling 1.5 percent of GDP. - Indonesia: semielasticity of the CA-to-GDP ratio with respect to the REER is estimated to be 0.14. - Indonesia: a range of ±0.5 percent is added to reflect EBA regression uncertainty (standard error of the EBA norm for Indonesia is 0.5 percent). - Japan: recommended gradual decline of the estimated credit-to-GDP gap from its currently estimated level of 18.9 percent of GDP with a corresponding policy setting (P*) for the credit-to-GDP gap in five years of 9 percent of GDP. - Spain: IMF staff considers a CA norm of 1.7 percent of GDP with a range of 1 to 2.4 percent of GDP; REER gap midpoint is obtained using an estimated semielasticity of the CA to the REER of 0.26 and a REER gap range of ±2.7 percent. - Singapore: IMF staff estimates a CA gap about 5.2 percent of GDP after several country-specific adjustments; fiscal gap contributes about 0.6 percent of GDP, credit gap about –0.5 percent of GDP, public health spending about –0.1 percent of GDP, and reserves about 0.0 percent of GDP. A maximum range of ±1.8 percent in the EBA sample is applied for the CA gap. - Hong Kong SAR: CA norm in 2021 estimated at 20.6 percent of GDP using EBA coefficients (implying a CA gap of –9.4 percent of GDP) before three specified adjustments; adjustments include midpoints of 5.7 percentage points, 4.25 percentage points, and 1.25 percentage points for NIIP contribution, gold trade balance, and logistics/trading activity, respectively. - South Africa: COVID-19–specific adjustors for 2021 total –2.7 percent of GDP (components listed in source), plus SACU transfers adjustor of 0.7 percent of GDP and an income-balance measurement-related underestimation of 0.9 percent of GDP; demographic adjustor of –0.6 percent of GDP applied to the model-based CA norm for 2021. - Switzerland: underlying CA adjusted for portfolio equity retained earnings bias and COVID-19–related effects (travel 0 percentage point; transport –0.1 percentage point; household consumption composition shift –0.5 percentage point; medical products 0 percentage point). Adjusting for these COVID-19–related effects, the underlying CA would need to be reduced by about 0.6 percent of GDP. - Thailand: staff estimates transport services impact and proposes a transportation adjustor of 1.93 percent (representing a worsening of around 65 percent, or 1.93 percent of GDP). - Türkiye: net international reserves defined as gross international reserves minus the central bank’s FX liabilities to banks, including the Reserve Option Mechanism. - United Kingdom: post-Brexit adjustment of –0.1 percent of GDP represents an offset of a 0.1 percent of GDP adjustor for stock-piling before Brexit. *Italicized material and country technical endnotes as presented in the source PDF.* --- _Source: https://www.imf.org/-/media/files/publications/esr/2022/english/text.pdf_