## ch3 ## Source details **Canonical URL:** [ch3](https://www.imf.org/-/media/files/publications/esr/2023/english/ch3.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2023/english/ch3.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2023/english/ch3.pdf.json) --- ### Box 3.1 — Assessing Imbalances: The Role of Policies — An Example (Argentina) - Overall assessment (2022): - External position weaker than level implied by medium-term fundamentals and desirable policies. - Elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. - Policy priority: continue prudent macroeconomic policies to strengthen the external CA and reserve coverage to secure external sustainability. - Potential policy responses: - Growth-friendly fiscal consolidation, tight monetary policy, and a streamlined FX regime to moderate domestic demand, strengthen the trade balance, rebuild international reserves, regain market access, and ensure fiscal and external debt sustainability. - Structural reforms to boost Argentina’s export capacity and encourage FDI. - Gradual conditions-based easing of CFM measures and elimination of MCP and exchange restrictions as stability and confidence are reestablished. - Foreign assets/liabilities and trajectory: - Gross liabilities: 49.0 percent of GDP (end-2022). - NIIP: 18.4 percent of GDP (end-2022). - 2020 sovereign FX debt restructuring: $82 billion (21.4 percent of GDP) with cash flow relief of $34 billion during 2020–30. - 2021 provincial restructurings: $13 billion foreign-law FX debt; estimated cash flow savings about $6.5 billion for 2021–27. - Key 2022 (% GDP) snapshot: - NIIP: 18.4 - Gross Assets: 67.5 - Res. Assets: 7.1 - Gross Liab.: 49.0 - Debt Liab.: 31.8 - Current account: - CA: –0.6 percent of GDP (2022); projected to reach surplus in 2023; medium-term CA expected 1 percent of GDP. - Cyclically adjusted CA: –0.8 percent of GDP (2022); EBA CA norm: 0.3 percent of GDP; IMF staff CA gap: –1.8 ± 1 percent of GDP. - IMF staff near- to medium-term CA norm judged closer to 1 percent of GDP, implying an adjustment to the norm of 0.7 percent of GDP. - COVID-19 transitory impacts: travel –0.2 percent of GDP; transport 0.2 percent of GDP; net 0.1 percent of GDP on cyclically adjusted CA. - Real exchange rate: - REER movements: depreciated >35 percent between 2017–2019; appreciated ~6 percent during 2020–21; estimated additional 20 percent appreciation in 2022; as of April 2023, REER 1.4 percent above 2022 average. - IMF staff CA gap implies REER gap ≈15 percent in 2022 (elasticity 0.12); EBA REER index model: 25 percent; EBA REER level model: 10.8 percent. - IMF staff assesses 2022 REER gap range: 15 to 20 percent. - Capital/financial accounts and policy measures: - Strict CFM and MCP measures intensified during 2022 (soy export liquidation incentives; tax measures on tourism inflows/outflows; import financing requirements). - CFMs helped contain capital outflows but introduced trade and FDI distortions; not a substitute for sound macro policies. - Near-term CFMs may be needed, but import controls and MCP measures should be eliminated and conditions-based easing pursued to encourage FDI. - FX intervention and reserves: - Gross international reserves: $44.6 billion in 2022 (about 69 percent of IMF composite metric). - Net international reserves: $8.8 billion (after exclusions). - Assessment: tighter fiscal and monetary policies necessary to secure projected trade surpluses and improve reserve coverage; FX sales should be consistent with reserve accumulation goals and account for seasonal and volatility factors. ### Selected country snapshots — key findings, projections, and policy recommendations H3: Brazil - Overall assessment (2022): external position broadly in line with fundamentals and desirable policies. - CA: –3.0 percent of GDP (2022); cyclically adjusted CA: –3.3; EBA Norm: –2.2; IMF staff CA gap midpoint: –0.8 percent of GDP; staff gap range: –1.3 to –0.3 percent of GDP. - NIIP and liabilities (end-2022): NIIP –40.4; Gross Assets 49.2; Res Assets 16.9; Gross Liab. 89.6; Debt Liab. 35.4 (% GDP). - REER: staff CA gap implies REER gap 6.0 percent (elasticity 0.13); staff REER gap range 2.1 to 9.9 percent. - Policy recommendations: raise national savings via medium-term fiscal consolidation; foster skilled labor force; structural reforms to reduce cost of doing business and strengthen competitiveness. - Reserves and FX: international reserves fell to US$325 billion end-2022; FX swap stock rose to US$98.5 billion in 2022. H3: China - Overall assessment (2022): external position broadly in line with fundamentals and policies. - CA: 2.2 percent of GDP (2022); cycl. adj. CA 2.2; EBA Norm 0.7; staff gap 0.8 percent of GDP; staff gap range 0.1 to 1.4 percent. - NIIP and reserves (2022): NIIP 14.0; FX reserves $3.3 trillion (end-2022; 18.3 percent of GDP). - Capital flows and measures (2022): net capital outflows $302 billion (1.7 percent of GDP); various CFMs adjusted (risk reserve requirement on FX forwards, cross-border financing parameter, FX deposit reserve reductions). - Policy guidance: sequence capital account opening to safeguard domestic financial stability; gradually phase out CFMs consistent with greater exchange rate flexibility and reforms. - Reserves adequacy: reserves level 68 percent of IMF composite metric at end-2022; 110 percent when adjusted for capital controls. H3: Euro area (aggregate) - Overall assessment (2022): external position broadly in line with fundamentals and policies; CA –1.0 percent of GDP (2022), down from 2.3 percent in 2021. - NIIP and gross positions (2022): NIIP 2.0; Gross Assets 250.7; Debt Assets 92.0; Gross Liab. 248.7; Debt Liab. 92.5 (% GDP). - REER (2022): CPI-based REER depreciated 3.0 percent vs 2021; as of April 2023, CPI-based REER 5 percent above 2022 average. - IMF staff CA gap (2022): –0.1 percent of GDP (range –0.7 to 0.6). - Policy recommendations: protect vulnerable households/firms via targeted policies; step up green transition; countries with excess CA should increase investment; weak external positions require productivity and fiscal reforms; euro area initiatives to deepen risk sharing. H3: India - Overall assessment (FY 2022/23): external position moderately stronger than fundamentals and desirable policies. - NIIP and external stocks (end-2022): NIIP –11.1; Gross Assets 25.9; Debt Assets 2.7; Gross Liab. 37.0; Debt Liab. 18.2 (% GDP). - Current account (FY 2022/23): CA –2.0; Cycl. Adj. CA –0.9; EBA Norm –2.3; Staff Gap 1.5; IMF staff CA gap range 0.8 to 2.1 percent of GDP. - REER (2022/fy): 2022 average REER appreciated ~1 percent vs 2021; as of April 2023 REER 2.8 percent below 2022 average; IMF staff REER gap range –11.4 to –4.2 percent, midpoint –7.8 percent (elasticity 0.19). - Reserves (end-2022): $562.7 billion; adequacy metrics: 198 percent of short-term debt (residual maturity), 159 percent of IMF composite metric, about seven months of import coverage. - Policy guidance: further structural reforms and liberalization to promote FDI; FX intervention limited to disorderly market conditions. H3: Japan - Overall assessment (2022): external position broadly in line with fundamentals and desirable policies. - NIIP and assets (end-2022): NIIP 75.2; Gross Assets 240.4; Debt Assets 80.7; Gross Liab. 165.2; Debt Liab. 102.3 (% GDP). - Current account (2022): CA 2.1 percent of GDP; cyc. adj. CA 3.2; CA norm 3.5 (range: 2.4 to 4.6); CA gap midpoint 0.0 (range –1.1 to 1.1). - REER: depreciated ~14 percent in 2022 (after 8.7 percent in 2021); as of April 2023 REER 1.3 percent below 2022 average; staff-assessed REER gap range –6.7 to 6.6 percent, midpoint 0.0 percent (elasticity 0.17). - Policy recommendations: more monetary policy flexibility; bold structural reforms; credible medium-term fiscal consolidation; labor market and fiscal reforms to support demand and investment. - FX and reserves: reserves declined to $1.2 trillion end-2022 after interventions; interventions in Sept–Oct 2022 (first since 1998), size equivalent to 5 percent of FX reserves at end-August. H3: Russia - Overall assessment (2022): external position stronger than fundamentals and desirable policies, but model uncertainty exceptionally large due to sanctions. - NIIP and stocks (end-2022): NIIP $762 billion or 34.4 percent of GDP; Gross Assets 72; Res. Assets 26.0; Gross Liab. 37.6; Debt Liab. 17 (% GDP). - Current account (2022): CA 10.4 percent of GDP ($233 billion); cycl. adj. CA 6.7; EBA Norm 4.0; Staff Gap 2.3 (range 1.2 to 3.4). - REER (2022): appreciated 31 percent (average) and 53 percent (end-period); IMF staff assesses REER undervalued in 2022 range 7.1 to 20.2 percent, midpoint 13.6 percent (elasticity 0.17); models and assessments affected by sanctions. - Capital flows and reserves: net private capital outflows $240 billion (10.6 percent of GDP) in 2022; reserves fell by $48.6 billion to $582.0 billion end-2022; published reserves 299.9 percent of IMF reserve adequacy metric, but a share frozen under sanctions complicates adequacy. H3: Saudi Arabia - Overall assessment (2022): external position substantially stronger than fundamentals and desirable policies. - NIIP and stocks (end-2022): NIIP 61.5; Gross Assets 119.3; Res. Assets 41.5; Gross Liab. 57.8; Debt Liab. 24.2 (% GDP). - Current account (2022): CA 13.6 percent of GDP; cycl. adj. CA 12.5; IMF staff CA gap 4.7 percent of GDP (range 2.2 to 7.2). - Policy recommendations: continue Vision 2030 reforms to diversify and boost non-oil tradable sector; medium-term fiscal reforms to delink spending from oil-price fluctuations and implement a medium-term fiscal framework. - Reserves and external assets: net foreign assets $440.5 billion (39.7 percent of GDP) end-2022; reserves adequate by IMF metrics; buffers from PIF and national oil company assets. H3: Singapore - Overall assessment (2022): external position substantially stronger than fundamentals and desirable policies; assessment subject to wide uncertainty. - NIIP and gross positions (2022): NIIP 176.1; Gross Assets 1,125.5; Res. Assets 62; Gross Liab. 949.4; Debt Liab. 332.2 (% GDP). - Current account (2022): CA 19.3 percent of GDP; cycl. adj. CA 21.8; staff-assessed CA gap midpoint 5.1 percent of GDP (range 3.3–6.9). - REER (April 2023): REER appreciated by 6.1 percent relative to 2022 average; IMF staff assesses REER undervaluation range 6.6 to 13.8 percent, midpoint 10.2 percent (elasticity 0.5). - Reserves and FX: official reserves $289.5 billion (62 percent of GDP) in 2022; assessment: official external assets appear adequate. H3: Switzerland - Overall assessment (2022): external position broadly in line with fundamentals and desirable policies; complex measurement issues. - NIIP and stocks (2022): NIIP 93.3; Gross Assets 680.8; Reserve Assets 110.6; Gross Liab. 587.5; Debt Liab. 198.5 (% GDP). - Current account (2022): CA 10.1 percent of GDP; cycl. adj. CA 10.6; EBA Norm 6.5; EBA Gap 4.1; Staff Gap 0.0 after adjustments. - REER (2022/Apr 2023): CPI-based REER 2.1 percent above 2022 average (April 2023); staff CA gap implies REER overvaluation 0.1 percent (elasticity 0.55); staff REER gap range –1.3 to 1.5 percent, midpoint 0.1 percent. - Capital flows and reserves: net financial outflows 4.5 percent of GDP in 2022; official reserve assets Sw F 852 billion ($924 billion, 111 percent of GDP) end-2022; SNB sold Sw F 22.3 billion of FX net in 2022. - Policy guidance: fiscal policy aligned with debt-brake framework; SNB should refrain from FX interventions to curb appreciation unless excess volatility requires action. H3: Türkiye - Overall assessment (2022): external position moderately weaker than fundamentals and desirable policies. - NIIP and external debt (end-2022): NIIP –30.8; Gross Assets 33.6; Debt Assets 13.7; Gross Liab. 64.5; Debt Liab. 44.2 (% GDP). - Current account (2022): CA –5.3 percent of GDP; cycl. adj. CA –2.5; EBA Norm –0.8; Staff Gap –1.9 (range –2.6 to –1.2). - REER: average REER depreciated 10 percent in 2022; staff assesses REER overvaluation range 4.0 to 9.0 percent, midpoint 6.5 percent (elasticity 0.29); EBA models give large undervaluations but with very large residuals. - Capital and financing needs: gross external financing needs projected ~23 percent of GDP annually over 2023–28; recommendation to phase out CFMs as conditions improve and to rebuild reserves once tightening occurs. - Reserves (end-2022): gross reserves about $129 billion; reserves at 95 percent of IMF ARA metric (end-2022). H3: United Kingdom - Overall assessment (2022): external position broadly in line with fundamentals and desirable policies. - NIIP and gross positions (2022): NIIP –11; Gross Assets 563; Debt Assets 283; Gross Liab. 574; Debt Liab. 293 (% GDP). - Current account (2022): CA –3.8; cycl. adj. CA –2.2; EBA Norm –1.0; Staff Gap –0.8 (range –1.8 to 0.2). - REER (2022/Apr 2023): REER appreciated 1.1 percent as of end-April 2023 vs 2022 average; staff CA gap implies REER gap ≈2.9 percent (elasticity 0.28). - Policy recommendations: gradual fiscal consolidation while preserving public services; structural reforms to boost competitiveness and skills. - FX and reserves: sterling share of global reserves about 4.6 percent; UK typically holds low reserves relative to standard metrics. H3: United States - Overall assessment (2022): external position moderately weaker than fundamentals and desirable policies. - NIIP and stocks (2022): NIIP –64.7; Gross Assets 112; Debt Assets 18.8; Gross Liab. 176; Debt Liab. 54.5 (% GDP). - Current account (2022): CA –3.7 percent of GDP; cycl. adj. CA –3.5; EBA Norm –2.2; EBA Gap –1.2; IMF staff assesses cyclically adjusted CA lower by 1.1 percent of GDP than implied level (range –1.7 to –0.4). - REER assessment: staff midpoint REER overvaluation 9.0 percent in 2022 (elasticity 0.12); range 3.5 to 14.6 percent; REER appreciated 8.3 percent in 2022 after 2021 depreciation. - Policy recommendations: medium-term fiscal consolidation to reach about 1 percent of GDP primary surplus to stabilize debt; structural policies on infrastructure, skills, labor force growth, and trade liberalization. - Capital account and reserves: financial account balance about –2.7 percent of GDP in 2022; dollar status limits vulnerabilities; reserves typically low relative to standard metrics. *Italic: Source: CHAPTER 3 and Box 3.1, 2023 EXTERNAL SECTOR REPORT — Chapter excerpts from ch3 (PDF).* ### Box 3.1. Assessing Imbalances: The Role of Policies—An Example ### Box 3.1. Assessing Imbalances: The Role of Policies—An Example ### Overall Assessment and Potential Policy Responses - Overall Assessment: The external position in 2022 was weaker than the level implied by medium-term fundamentals and desirable policies, an assessment based holistically on elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. It is critical to continue to implement prudent macroeconomic policies that strengthen the external CA and reserve coverage to secure external sustainability. - Potential Policy Responses: - Growth-friendly fiscal consolidation, combined with tight monetary policy and a streamlined FX regime, remains essential to moderate domestic demand growth, strengthen the trade balance, rebuild international reserves, regain market access, and ensure fiscal and external debt sustainability. - Structural reforms to boost Argentina’s export capacity and encourage FDI are required. - As stability and confidence are reestablished, a gradual conditions-based easing of CFM measures will need to be considered and multiple currencies practices (MCP) and exchange restrictions should be eliminated. ### Foreign Asset and Liability Position and Trajectory - Background: - Argentina’s external gross liabilities stood at 49.0 percent of GDP at the end of 2022, below the level of 50 percent of GDP at the end of 2017. - The NIIP remained positive, reaching 18.4 percent of GDP at end 2022 (up 16 percentage points since the end of 2017), driven by continued private capital outflows and deleveraging by firms, despite tight CFM measures. - Assessment: - In 2020, Argentina restructured $82 billion (21.4 percent of GDP) in domestic- and foreign-law sovereign FX debt held by the private sector, with cash flow relief of $34 billion during 2020–30. - Additional relief was secured during 2021, as provincial governments restructured $13 billion of foreign-law FX debt obligations, with total cash flow savings estimated at about $6.5 billion for 2021–27. - Gross debt and debt-service obligations remain substantial and meeting these obligations over the medium term will depend on implementation of a strong economic reform plan that restores market access. - Key statistics (2022 (% GDP)): - NIIP: 18.4 - Gross Assets: 67.5 - Res. Assets: 7.1 - Gross Liab.: 49.0 - Debt Liab.: 31.8 ### Current Account - Background: - The CA reached a deficit of 0.6 percent of GDP in 2022, down from a surplus of 1.4 percent in 2021, on account of a strong expansion of goods import volumes and a widening services deficit. - Terms of trade played a more minor role, as higher grain export prices largely offset higher import prices on energy and intermediate goods. - The CA balance is projected to reach a surplus in 2023, despite drought conditions affecting agricultural exports, mainly on account of moderating domestic demand and imports, improving commodity terms of trade, and higher interest income on private Argentine assets abroad. - In the medium term, the CA is expected to reach 1 percent of GDP, mainly on account of stronger energy and services trade balances. - Assessment: - The cyclically adjusted CA balance is estimated to have reached a deficit of 0.8 percent of GDP in 2022, compared with an EBA CA norm surplus of 0.3 percent of GDP. - The estimated transitory impact of the COVID-19 crisis is –0.2 percent of GDP for travel services (including tourism) and 0.2 percent of GDP for the transport sector, with a narrow net impact of 0.1 percent of GDP on the cyclically adjusted CA. - IMF staff judges the near- to medium-term CA norm to be closer to 1 percent of GDP, implying an adjustment to the norm of 0.7 percent of GDP. - IMF staff assesses the CA gap to be –1.8 ± 1 percent of GDP. - Key statistics (2022 (% GDP)): - CA: –0.6 - Cycl. Adj. CA: –0.8 - EBA Norm: 0.3 - EBA Gap: –1.2 - COVID-19 Adj.: 0.1 - Other Adj.: – 0.7 - Staff Gap: –1.8 ### Real Exchange Rate - Background: - The average REER, after depreciating by more than 35 percent between 2017 and 2019, appreciated by about 6 percent during 2020–21 and is estimated to have appreciated by additional 20 percent during 2022. - This appreciation largely reflects the fact that the rate crawl until recently has lagged headline inflation. - As of April 2023, the REER was 1.4 percent above the 2022 average. - Assessment: - The IMF staff CA gap implies a REER gap of about 15 percent in 2022 (with an estimated elasticity of 0.12 applied). - The EBA REER index model suggests a REER gap of 25 percent, while the EBA REER level model estimates a gap of 10.8 percent, with the estimate surrounded by significant uncertainty. - Overall, the IMF staff assesses the 2022 REER gap to be in the range of 15 to 20 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Strict CFM and MCP measures were introduced in late 2019 to contain capital outflows. - In the context of rising FX pressures (the gap between the parallel and official exchange rate remains around 90–100 percent) and challenges in accumulating reserves, these measures have been intensified during 2022, including through: 1. incentives to encourage the liquidation of soy exports, 2. tax measures on tourism inflows and outflows to reduce the services deficit, and 3. financing requirements in regard to imports to limit short-term FX demand. - Assessment: - CFM and MCP measures have generally helped to contain capital outflows yet have introduced distortions that discourage trade and foreign investment. - These measures are not a substitute for sound macroeconomic policies. - While CFMs are needed in the near term as imbalances are being addressed, import controls and MCP measures should be eliminated and a conditions-based easing is necessary, especially to encourage FDI. ### FX Intervention and Reserves Level - Background: - Gross international reserves reached $44.6 billion in 2022, $5 billion higher relative to 2021, yet close to the levels at the end of 2019. - Net international reserves, after excluding swap lines with other central banks, reserve requirements on domestic dollar deposits, and deposit insurance, reached $8.8 billion. - Despite CFM measures, reserve accumulation has been challenged by growing domestic demand and continued capital flight. - Assessment: - Gross international reserves are estimated to have stood at about 69 percent of the IMF’s composite metric in 2022. - Tighter fiscal and monetary policies are necessary to secure the projected trade surpluses and improve reserve coverage, which in turn is essential to pave the way for market access and the easing of CFM measures over the medium term and the elimination of MCP measures. - Given reserve scarcity, FX sales (in the official or parallel market) should be consistent with reserve accumulation goals, while taking into account variability arising from seasonal factors and temporary bouts of excessive volatility. *Source: Box 3.1. Assessing Imbalances: The Role of Policies—An Example, CHAPTER 3, 2023 EXTERNAL SECTOR REPORT, International Monetary Fund | 2023.* ### 0.9 percent in 2022, or by 7.7 percent in December 2022 from its trough in February 2020, reflecting higher wage increas ### ch3 - 0.9 percent in 2022, or by 7.7 percent in December 2022 from its trough in February 2020, reflecting higher wage increas ### Belgium — Real Exchange Rate and External Assessment - REER movements: - CPI-based REER was 0.8 percent above the 2022 average as of April 2023. - REER increased 0.9 percent in 2022, or by 7.7 percent in December 2022 from its trough in February 2020, reflecting higher wage increases in Belgium. - Assessment: - Based on the IMF staff–assessed CA gap range, Belgium’s REER is overvalued by 5.7 to 6.9 percent, with a midpoint of 6.3 percent (with an estimated elasticity of the CA balance to the REER of 0.72 applied). - EBA model estimates indicate REER overvaluation of 16.9 percent (CPI-based REER index) and 31.3 percent (REER level models). ### Belgium — Capital and Financial Accounts; FX Intervention and Reserves - Capital and financial flows in 2022: - Financial account strongly negative: flows of foreign liabilities exceeded flows of foreign assets by €19 billion. - Portfolio investment balance: almost zero. - Direct investment balance: €25 billion (positive). - Other investment: negative balance of €45 billion, stemming from a sharp rise in foreign debts of commercial banks to Russia. - Short-term external debt: increased marginally to 31 percent of gross external debt in 2022 (from an average of 27 percent in 2017–21). - Capital account: open. - Assessment: - Belgium remains exposed to financial market risks, but the structure of financial flows does not point to specific vulnerabilities. - The large positive NIIP reduces vulnerabilities associated with high external public debt. - FX Intervention and Reserves: - Background: the euro has the status of a global reserve currency. - Assessment: reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Brazil — Overall Assessment and Policy Responses - Overall Assessment: - The external position in 2022 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The CA deficit is expected to gradually narrow to about 2.3 percent of GDP in 2023 and remain broadly stable over the medium term. - Risks: uncertainties in global financial conditions and insufficient progress on domestic reforms. - Potential Policy Responses: - Raise national savings, including medium-term fiscal consolidation to increase net public savings. - Foster a skilled labor force. - Implement structural reforms to reduce the cost of doing business and strengthen competitiveness. ### Brazil — Foreign Asset and Liability Position - 2022 outcomes: - NIIP deteriorated to –40.4 percent of GDP at end-2022, from –36.7 percent of GDP in 2021. - External debt at end-2022: declined to 35.4 percent of GDP and 200 percent of exports (from 40.7 percent of GDP and 236 percent of exports in 2021). - Projection and assessment: - NIIP projected around –42 percent of GDP over the medium term, with FDI accounting for more than half of all liabilities. - Short-term gross external financing needs: moderate at 11 percent of GDP annually. - CA deficit required to stabilize NIIP at –41 percent is 2.1 percent of GDP. - 2022 (% GDP) snapshot: - NIIP: –40.4 - Gross Assets: 49.2 - Res Assets: 16.9 - Gross Liab.: 89.6 - Debt Liab.: 35.4 ### Brazil — Current Account and Real Exchange Rate - Current Account (2022): - CA: –3.0 percent of GDP. - Cyclically adjusted CA: –3.3 percent of GDP. - EBA Norm: –2.2 percent of GDP. - EBA Gap: –1.1 percent of GDP. - COVID-19 Adjustment: 0.3 percent of GDP (after travel and transport adjustments noted). - IMF staff estimate CA gap range: –1.3 to –0.3 percent of GDP with a midpoint of –0.8 percent of GDP. - REER: - Background: REER appreciated sharply (18.8 percent) in the first four months of 2022 before a gradual partial reversal; as of April 2023 REER appreciated by 2.3 percent relative to the 2022 average. - Assessment: IMF staff CA gap implies a REER gap of 6.0 percent in 2022 (applying an estimated elasticity of 0.13). - EBA index and level methodologies indicate a 29.1 percent and 14.4 percent undervaluation, respectively. - Staff assesses REER gap range: 2.1 to 9.9 percent, midpoint 6.0 percent. ### Brazil — Capital Flows and FX Reserves - Capital and financial accounts: - Net FDI flows averaged 2.9 percent of GDP during 2015–22; CA deficits averaged 2.6 percent over the same period. - Net FDI increased to 3.2 percent of GDP in 2022 (from 1.8 percent in 2021). - Portfolio investment: net outflows of 0.2 percent of GDP in 2022. - Policy measure: Law No. 14286 — BCB steps to simplify and modernize foreign exchange and capital regulation. - Assessment: - Composition of capital flows expected to have favorable risk profile: net FDI inflows (~2 percent of GDP) outweigh negative portfolio outflows (~0.1 percent of GDP). - Downside risks: tighter global financial conditions and insufficient reform progress. - FX Intervention and Reserves: - FX regime: floating exchange rate. - FX swap outstanding stock: rose from US$80 billion in 2021 to US$98.5 billion in 2022. - International reserves: fell to US$325 billion at end-2022 (from US$362 billion at end-2021), recovered to US$345 billion in May 2023. - Assessment: reserves adequate relative to various criteria, including the IMF’s reserve adequacy metric (136 percent as of end-2022); intervention should be limited to alleviating disorderly FX market conditions. ### Canada — Overall Assessment and Policy Responses - Overall Assessment: - External position in 2022 was moderately weaker than level implied by medium-term fundamentals and desirable policies. - CA balance remained marginally in deficit in 2022; CA deficit expected to widen to 1.4 percent of GDP in 2023 and remain in deficit over the medium term. - Potential Policy Responses: - Boost competitiveness in nonfuel goods and services exports through: - measures to improve labor productivity; - removing nontariff trade barriers; - investing in R&D and physical capital; - investing in the green transformation; - promoting FDI. - Implement medium-term fiscal consolidation to stabilize debt and support external rebalancing. ### Canada — Foreign Assets, Current Account, and REER - Foreign asset/liability position (2022): - NIIP dropped to 30.1 percent of GDP in 2022 (from 52.1 percent in 2021). - Gross external debt: 128.5 percent of GDP, of which about 51.1 percent of GDP is short-term debt. - 2022 (% GDP) snapshot: - NIIP: 30.1 - Gross Assets: 264.9 - Debt Assets: 87.3 - Gross Liab.: 234.7 - Debt Liab.: 128.5 - Current Account: - CA: –0.3 percent of GDP in 2022. - Cyclically Adjusted CA: –1.3 percent of GDP. - EBA Norm: 2.2 percent of GDP. - EBA Gap: –3.4 percent of GDP. - COVID-19 Adj.: 0.0 - Other Adj.: 1.6 - Staff Gap: –1.8 percent of GDP. - IMF staff assess CA gap range: –2.3 to –1.3 percent of GDP, midpoint –1.8 percent of GDP. - REER: - Average REER for 2022: broadly unchanged from 2021 average (0.1 percent stronger). - As of April 2023, REER was 4.3 percent below the 2022 average. - Assessment: EBA REER index model indicates overvaluation of 1.9 percent in 2022; REER level model suggests undervaluation of 10.5 percent. - IMF staff assesses REER to be overvalued by between 5.1 and 8.5 percent, with a midpoint of 6.8 percent. ### Canada — Capital Flows and FX Arrangements - Capital and financial accounts (2022): - FDI: net outflows of 1.3 percent of GDP in 2022. - Net portfolio inflows: 5.4 percent of GDP in 2022 (up from 2.1 percent in 2021). - Other investments: moved from net inflows ~0.6 percent of GDP in 2021 to net outflows of 3.4 percent of GDP in 2022. - Errors and omissions: 0.1 percent of GDP. - Assessment: - Canada has an open capital account. - Vulnerabilities limited by credible commitment to a floating exchange rate. - FX Intervention and Reserves: - Free-floating exchange rate; no intervention since September 1998 except participating in joint interventions. - Canada has limited reserves but standing swap arrangements with the US Federal Reserve and four other major central banks (Bank of Canada has not drawn on these swap lines). - Assessment: policies appropriate to Canada’s circumstances; commitment to floating regime and swap arrangements reduce need for reserves. ### China — Overall Assessment and Policy Responses - Overall Assessment: - External position in 2022 broadly in line with medium-term fundamentals and desirable policies. - CA surplus widened to 2.2 percent of GDP in 2022 from 2.0 percent in 2021. - CA surplus expected to narrow and return to downward trend as COVID-related factors unwind and rebalancing toward private consumption resumes. - Potential Policy Responses: - Accelerate market-based structural reforms, including: - further opening up domestic markets; - ensuring competitive neutrality between state-owned and private firms; - reducing wasteful and distorting industrial policy subsidies; - increasing reliance on market forces to improve resource allocation; - promoting green investment to boost potential growth. - Shift fiscal support toward strengthening social protection to reduce high household savings and rebalance toward private consumption. - Further increase exchange rate flexibility to help absorb external shocks. ### China — Foreign Assets, Current Account, and REER - Foreign asset/liability position (2022): - NIIP increased to 14.0 percent of GDP in 2022 (from 12.3 percent in 2021). - FX reserves: $3.3 trillion as of the end of 2022 (18.3 percent of GDP). - 2022 (% GDP) snapshot: - NIIP: 14.0 - Gross Assets: 51.1 - Debt Assets: 15.4 - Gross Liab.: 37.2 - Debt Liab.: 13.0 - Current Account (2022): - CA: 2.2 percent of GDP. - Cyclically Adjusted CA: 2.2 percent of GDP. - EBA Norm: 0.7 percent of GDP. - EBA Gap: 1.5 percent of GDP. - COVID-19 Adj.: –0.7 percent of GDP. - Staff Gap: 0.8 percent of GDP. - IMF staff estimate CA gap range: 0.1 to 1.4 percent of GDP, midpoint 0.8 percent. - REER: - REER depreciated in 2022 by 1.2 percent from the 2021 average; NEER appreciated 3.8 percent offset by relatively low inflation. - As of April 2023, REER had depreciated by 6.5 percent from the 2022 average. - Assessment: IMF staff CA gap implies REER gap of –5.7 percent (estimated elasticity 0.14). - EBA REER index regression: REER gap 16.1 percent in 2022. - EBA REER level regression: REER gap 12.7 percent in 2022. - IMF staff assesses REER gap range: –10.4 to –1.1 percent, midpoint –5.7 percent. ### China — Capital Flows, Policy Measures, and Reserves - Capital flows and policy measures (2022): - Net capital outflows increased to $302 billion (1.7 percent of GDP) in 2022 from $165 billion (0.9 percent of GDP) in 2021. - Authorities reimposed risk reserve requirement of 20 percent on FX forwards in September 2022 (outflow CFM). - Raised cross-border financing macroprudential adjustment parameter for financial institutions and enterprises from 1 to 1.25 in October 2022 (relaxation of an inflow CFM). - Reserve requirement ratio for FX deposits lowered twice by 1 and 2 percent in May and September 2022. - As of March 2023, Qualified Domestic Institutional Investor quota: $162.7 billion. - Assessment: - Net outflow pressures resurfaced amid divergence of China’s monetary policy from advanced economies. - Over the medium term, further capital account opening likely to create substantially larger two-way gross flows. - Recommendations: sequence of capital account opening should consider domestic financial stability; CFM should not be used to actively manage capital flow cycle or substitute for warranted macroeconomic adjustment and exchange rate flexibility; gradually phase out CFM measures consistent with greater exchange rate flexibility and supporting reforms. - FX Intervention and Reserves: - FX reserves declined by $122.5 billion to $3.1 trillion as of end-2022, mainly reflecting valuation effects and no sign of large FX intervention. - Assessment: reserves level is 68 percent of the IMF’s standard composite metric at end-2022 (68 percent in 2021) and 110 percent of the metric adjusted for capital controls (109 percent in 2021) — assessed to be adequate. ### Euro Area — Overview and Foreign Asset Position - Overall Assessment: - External position in 2022 broadly in line with medium-term fundamentals and desirable policies. - CA balance decreased to –1.0 percent of GDP in 2022 from 2.3 percent of GDP in 2021, falling into deficit largely due to a sharp increase in energy import prices and deterioration in the goods balance. - CA balance projected to recover gradually to positive territory over the medium term but remain below historical average; national external imbalances expected to remain sizable. - Potential Policy Responses: - Protect vulnerable households and firms with increasingly targeted policies given elevated energy prices. - Step up efforts to facilitate the green transition. - Avoid trade-distorting subsidy races and preserve integrity of the European single market. - Countries with excess CA surpluses should increase investment; countries with weak external positions should undertake reforms to raise productivity, reduce structural and youth unemployment, and commence growth-friendly fiscal consolidation. - Euro area–wide initiatives (e.g., completing banking and capital markets unions, establishing central fiscal capacity) would deepen risk sharing and support external stability. - Foreign Asset and Liability Position (2022): - NIIP rose to 2.0 percent of GDP by end-2022 (after falling to –20.5 percent of GDP in 2009). - NIIP increased by 1.7 percentage points of GDP in 2022, primarily reflecting valuation effects from the weaker euro. - Gross portfolio investment assets and liabilities declined sharply due to valuation effects from higher interest rates and financial market repricing; direct investment assets and liabilities declined more moderately; gross derivatives increased with higher financial market volatility. *Source: https://www.imf.org/-/media/files/publications/esr/2023/english/ch3.pdf* ### 250.7 percent of GDP, and liabilities 248.7 percent of GDP, as of the end of 2022. Net external assets (including those ### ch3 - 250.7 percent of GDP, and liabilities 248.7 percent of GDP, as of the end of 2022. Net external assets (including those ### Euro area — Foreign asset and liability position - 2022 (% GDP): NIIP: 2.0; Gross Assets: 250.7; Debt Assets: 92.0; Gross Liab.: 248.7; Debt Liab.: 92.5 - Net external assets remain elevated in external creditor countries such as Germany; net external liabilities remain high in countries such as Portugal and Spain. - Assessment: - Projections of continued CA surpluses over the medium term suggest the NIIP-to-GDP ratio will rise further at a moderate pace. - Overall NIIP financing vulnerabilities appear low in aggregate, but large net external debtor countries face elevated risk of a sudden stop of gross inflows. ### Euro area — Current Account - Background: - CA balance decreased to –1.0 percent of GDP in 2022 from 2.3 percent of GDP in 2021, driven largely by a sharp increase in energy import prices and deterioration in the goods balance. - Services and secondary incomes remained broadly stable; primary income balance declined owing to lower investment income. - Strongest compression in Q2 and Q3 2022; balance returned to surplus in Q4 2022 as energy prices and trade disruptions moderated. - Large creditor countries (Germany, The Netherlands) continued to have sizable surpluses reflecting high corporate and household saving and weak investment. - Assessment: - EBA model CA norm: –0.3 percent of GDP; cyclically adjusted CA: 0.1 percent of GDP; EBA gap: 0.5 percent of GDP. - IMF staff CA norm higher by 0.1 percent of GDP than EBA model, reflecting policy commitments to reduce large net external liability positions in Portugal and Spain. - Adjustments of –0.5 percent of GDP made for CA measurement issues in Ireland and The Netherlands. - Country-level COVID-19 transitory adjustments for transportation and travel services largely offset at euro area level. - IMF staff assesses the CA gap to be –0.1 percent of GDP in 2021, with a range of –0.7 to 0.6 percent of GDP. - 2022 (% GDP): CA: –1.0; Cycl. Adj. CA: 0.1; EBA Norm: –0.3; EBA Gap: 0.5; COVID-19 Adj.: 0.1; Other Adj.: –0.6; Staff Gap: –0.1 ### Euro area — Real Exchange Rate - Background: - CPI-based REER appreciated by 4.5 percent between 2015 and 2021 after nearly 20 percent post–global financial crisis depreciation. - 2022: CPI-based REER depreciated by 3.0 percent vs 2021 (nominal depreciation of 4.2 percent and somewhat stronger euro area inflation). - ULC-based REER depreciated by 5.3 percent in 2022. - As of April 2023, CPI-based REER was 5 percent above the 2022 average. - Assessment: - IMF staff assesses the euro area’s REER gap to be 0.2 percent in 2022, with a range of –1.6 to 2.0 percent (CA-REER elasticity 0.35). - Substantial heterogeneity across member states: REER gaps range from undervaluation of 8 percent in Germany to overvaluation of about 10 percent in Finland and Italy. - EBA REER index and level models suggest overvaluations of 7.6 percent and 8.0 percent, respectively. ### Euro area — Capital and Financial Accounts; FX reserves - Capital/financial flows 2022: - Capital account surplus: 1.0 percent of GDP. - Financial account surplus: 0.1 percent of GDP. - Assessment: - Gross external indebtedness of euro area residents decreased by 11 percentage points of GDP in 2022 as lower external debt of governments, the Eurosystem, and the nonfinancial sector offset higher debt of deposit-taking institutions. - FX intervention and reserves: - Background: the euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating. *Source: IMF — Chapter 3 (excerpt) — 2022 individual economy assessments and euro area overview* ### 10.6 percent). The IMF staff-assessed CA gap range is hence between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 ### ch3 - 10.6 percent). The IMF staff-assessed CA gap range is hence between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 ### Hong Kong Special Administrative Region — External Position and REER - Current account and adjustments (2022, % GDP): - CA: 10.5 - Cycl. Adj. CA: 10.3 - COVID-19 Adj.: 0.9 - Staff Gap: 0.6 - Background: - Under the currency board arrangement, REER dynamics are largely determined by U.S. dollar developments and inflation differentials between the United States and Hong Kong Special Administrative Region. - The REER depreciated by about 5 percent in 2021 and appreciated by 3.2 percent in 2022 compared with its 2021 average. - As of April 2023, the REER was 0.5 percent above the 2022 average. - Hong Kong Special Administrative Region is not in the EBA sample; the CA norm was estimated by applying EBA-estimated coefficients and adjusted for measurement issues related to large valuation effects in the NIIP and discrepancies between stocks and flows. - Assessment: - IMF staff-assessed CA gap range: –0.9 to 2.1 percent of GDP, midpoint 0.6 percent. - REER gap, based on the staff-assessed CA gap range and an average CA-REER elasticity of about 0.4: range of –5.3 to 2.4 percent, with a midpoint of –1.4 percent. - Capital and financial accounts: - Nonreserve financial flows: net outflow of $84 billion in 2022 (up from net outflows of $49 billion in 2021), driven by other investment and portfolio investment outflows. - Financial account volatility reflects Hong Kong Special Administrative Region and mainland China conditions, shifts in U.S. monetary policy expectations, and arbitraging in FX and rates markets. - Assessment: Large financial resources, proactive supervision/regulation, and deep liquid markets limit risks from volatile capital flows and the war in Ukraine; greater financial exposure to mainland China could pose risks via trade, tourism, banking credit exposures, and fundraising by Chinese firms. Banking system assessed as broadly resilient with high capital buffers and profitability. - FX intervention and reserves: - HKMA sold $30.8 billion as part of currency board FX operations in 2022 when HKD depreciated to the weak side of the Convertibility Undertaking. - Total reserve assets decreased to 117 percent of GDP at end-2022 (or 1.7 times the monetary base) from 135 percent of GDP at end-2021. - Fiscal reserves: about 27.4 percent of GDP at end-2022. - Assessment: FX reserves adequate for precautionary purposes and should evolve with currency board automatic adjustments. *Italic: Source — ch3 - 10.6 percent). The IMF staff-assessed CA gap range is hence between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 percent.* ### India — External Position, CA, REER, Reserves - Overall assessment summary: - External position in fiscal year 2022/23 (ending in March 2023): moderately stronger than level implied by fundamentals and desirable policies. - CA deficit projected to narrow in fiscal year 2023/24 before converging to estimated norm over the medium term. - Trade and capital account regimes remain relatively restricted despite progress on trade promotion and liberalization. - Foreign asset and liability position (end-2022, % GDP): - NIIP: –11.1 - Gross Assets: 25.9 - Debt Assets: 2.7 - Gross Liab.: 37.0 - Debt Liab.: 18.2 - Background and assessment: - NIIP improved marginally to –11.1 percent of GDP from –11.5 percent at end-2021. - Gross foreign assets: 25.9 percent of GDP (declined from 30.2 percent). - Gross foreign liabilities: 37.0 percent of GDP (from 41.7 percent). - Assessment: NIIP-to-GDP expected to remain broadly unchanged over medium term; external debt liabilities low compared with peers; moderate foreign liabilities reflect incremental capital account liberalization focused on FDI. - Current account (fiscal year 2022/23): - CA: –2.0 (% GDP) - Cycl. Adj. CA: –0.9 - EBA Norm: –2.3 - EBA Gap: 1.5 - COVID-19 Adj.: 0.0 - Other Adj.: 0.0 - Staff Gap: 1.5 - Background and projections: - CA deficit widened to 2.0 percent of GDP from 1.2 percent in prior year. - CA deficit projected to narrow to about 1.8 percent of GDP in fiscal year 2023/24. - EBA cyclically adjusted CA balance: –0.9 percent of GDP. - EBA CA regression norm: –2.3 percent of GDP, standard error 0.7 percent, implying CA gap 1.5 percent of GDP. - IMF staff judgment: CA deficit up to 2½ percent of GDP financeable in medium term via steady FDI, portfolio flows, and external borrowings. - IMF staff CA gap assessment: 1.5 percent of GDP, range 0.8 to 2.1 percent of GDP. - REER: - 2022 average REER appreciated by about 1 percent from 2021 average. - As of April 2023, REER was 2.8 percent below the 2022 average. - IMF staff CA gap implies REER gap of –7.8 percent (elasticity 0.19). - EBA REER index and level models suggest overvaluation of 12.5 percent and 10.6 percent, respectively. - IMF staff assesses REER gap range: –11.4 to –4.2 percent, midpoint –7.8 percent (fiscal year 2022/23). - Capital and financial accounts: - Net FDI inflows: about 1 percent of GDP (stable). - Portfolio investments: small net outflows ~0.2 percent of GDP. - Other investments: moderated to 1.0 percent of GDP from 2.2 percent in FY2021/22. - Assessment: FDI covered part of CA deficit; need further structural reforms and liberalization to promote FDI; expected inclusion in international bond indices could increase foreign participation and support portfolio inflows. - FX intervention and reserves: - Reserves stood at $562.7 billion at end-2022. - Reserves adequacy metrics (end-2022): about 198 percent of short-term debt (residual maturity), 159 percent of IMF composite metric, and about seven months of import coverage. - Assessment: reserves adequate; FX interventions should be limited to addressing disorderly market conditions. *Italic: Source — ch3 - 10.6 percent). The IMF staff-assessed CA gap range is hence between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 percent.* ### Indonesia — NIIP, CA, REER, Reserves - Foreign asset and liability position (end-2022, % GDP): - NIIP: –19.1 - Gross Assets: 34.1 - Res. Assets: 10.4 - Gross Liab.: 53.2 - Debt Liab.: 30.1 - Background and assessment: - NIIP improved to –19.1 percent of GDP from –23.4 percent in 2021. - Gross external liabilities reduced by 6.4 percentage points to 53.2 percent of GDP; gross external assets declined by 2.2 percentage points to 34.1 percent of GDP. - Gross external debt: 30.1 percent of GDP at end-2022 (declined from 34.9 percent). - 16.8 percent of external debt (or 5.1 percent of GDP) had remaining maturity less than one year. - Assessment: external position sustainable with limited rollover risk; vulnerability from reliance on foreign portfolio investment; NIIP projected to stabilize in medium term. - Current account (2022, % GDP): - CA: 1.0 - Cycl. Adj. CA: –1.5 - EBA Norm: –1.1 - EBA Gap: –0.4 - COVID-19 Adj.: 0.4 - Other Adj.: 0.4 - Staff Gap: 0.3 - Background and assessment: - CA surplus increased to 1.0 percent in 2022 from 0.3 percent in 2021, driven by non-oil and gas trade balance and supportive commodity prices (coal and palm oil). - CA gap estimate for 2022: 0.3 percent of GDP; range: –0.3 to 0.9 percent of GDP. - REER: - Average REER appreciated by 3.3 percent in 2022 compared with 2021 average (0.8 percent relative to 2016–19 pre-COVID-19 average), despite rupiah depreciation of 10.3 percent vs dollar. - As of April 2023, REER was 0.4 percent above the 2022 average. - IMF staff CA gap estimate of 0.3 percent implies REER gap of –2.0 percent (elasticity 0.16). - REER index and level models point to 2022 REER gaps of –2.7 percent and –16.3 percent, respectively. - Staff assesses REER gap range: –5.6 to 1.6 percent, midpoint –2.0 percent. - Capital and financial accounts: - 2022 experienced negative net financial inflows of –0.7 percent of GDP (first since GFC), after positive 1.1 percent in 2021, driven by local currency bond market outflows partly offset by net equity inflows. - Share of nonresident holdings of rupiah government bonds declined from 19 percent in 2021 to 14.4 percent in 2022 (peak 39 percent in 2019); holdings accounted for almost 4 percent of GDP in 2022. - Net FDI inflows: 1.1 percent of GDP in 2022 (from 1.5 percent in 2021). - Assessment: CA improvement helped offset portfolio outflows; continued policy focus on fiscal position, inflation, financial deepening, and easing investment obstacles recommended. - FX intervention and reserves: - Official foreign reserves: $137 billion in 2022 (from $145 billion in 2021). - Reserves metrics: 10.4 percent of GDP, 118 percent of IMF’s reserve adequacy metric, and 5.9 months of prospective imports. - Assessment: current reserves sufficient buffer; exchange rate flexibility should continue to absorb shocks, with FX interventions limited to disorderly market conditions. *Italic: Source — ch3 - 10.6 percent). The IMF staff-assessed CA gap range is hence between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 percent.* ### Italy — NIIP, CA, REER, Policy Recommendations - Foreign asset and liability position (end-2022, % GDP): - NIIP: 3.9 - Gross Assets: 174.3 - Debt Assets: 41.3 - Gross Liab.: 170.5 - Debt Liab.: 92.2 - Background and assessment: - NIIP declined to 3.9 percent of GDP at end-2022 due to net valuation losses (3.2 percent of GDP) and first CA deficit in a decade. - Gross foreign assets and liabilities retreated to 174.3 and 170.5 percent of GDP, respectively. - TARGET2 liabilities reached a record high of 36 percent of GDP. - About half of gross external liabilities correspond to general government and Bank of Italy. - Assessment: strengthening public balance sheets and structural reforms needed to lessen vulnerabilities from high public debt and reinvigorate growth. - Current account (2022, % GDP): - CA: –1.2 - Cycl. Adj. CA: 0.6 - EBA Norm: 3.4 - EBA Gap: –2.9 - COVID-19 Adj.: 0.4 - Other Adj.: 0.0 - Staff Gap: –2.5 - Background and assessment: - CA averaged 3.0 percent of GDP during 2016–21; CA dropped sharply in 2022 by 4.3 percentage points to –1.2 percent of GDP, mainly due to a 3.3 percent of GDP increase in the energy trade deficit; terms of trade worsened by 8.5 percent. - Cyclically adjusted CA estimated at 0.6 percent of GDP for 2022, 2.9 percentage points below the EBA norm of 3.4 percent. - Italy-specific COVID-19 adjustor of 0.4 percent of GDP applied (travel 0.1 percent; transport 0.3 percent). - IMF staff CA gap assessment: range –3.2 to –1.8 percent of GDP, midpoint –2.5 percent of GDP. - Fiscal policy gap: –1.5 percent of GDP, contributing substantially to total policy gap (–1.0 percent of GDP). - Policy recommendations: - Raise productivity and improve business climate through structural reforms to encourage higher private investment and normalize household saving rate. - Implement high-quality fiscal consolidation to return fiscal primary balance firmly to surplus. - Specific measures: upskill workforce, increase quality of infrastructure, improve judiciary and public administration effectiveness, improve budget efficiency, contain pension spending, undertake comprehensive and progressive tax reform, and fully implement the National Recovery and Resilience Plan. - REER: - During 2016–21, CPI-based REER depreciated by 0.4 percent; ULC-based REER depreciated by 1.8 percent. - During 2022, CPI-based REER further depreciated by 2 percent relative to 2021 average as weakening euro more than compensated for Italy’s relatively higher inflation. - As of April 2023, the CPI-based REER appreciated by [content truncated in source]. *Italic: Source — ch3 - 10.6 percent). The IMF staff-assessed CA gap range is hence between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 percent.* ### 2.8 percent relative to the 2022 average as the euro strengthened against a basket of currencies while energy inflation ### 2.8 percent relative to the 2022 average as the euro strengthened against a basket of currencies while energy inflation started to decline. ### Real Exchange Rate — Italy (IMF staff assessment) - IMF staff CA gap implies a REER gap of 9.3 percent in 2022 (with an estimated elasticity of 0.27 applied). - Level and index CPI-based REER models suggest an overvaluation in 2022 of 15.4 percent and 12.3 percent, respectively; simple average: 13.9 percent. - Staff-assessed REER gap range: 6.5 to 12.0 percent, midpoint: 9.3 percent. ### Capital and Financial Accounts — Italy - Capital account balance: 0.0 percent of GDP in 2022. - Financial account net inflows: 0.8 percent of GDP in 2022, reflecting residents’ net acquisition of foreign liabilities. - Large portfolio investment outflows were more than offset by inflows of other investment, including a nearly €60 billion increase in Italy’s TARGET2 liabilities. - Assessment: Monetary policy tightening pushed up sovereign yields. Large refinancing needs of sovereign and banking sector, elevated inflation, and exposures to geopolitical tensions and energy shocks imply vulnerability to market volatility. ### FX Intervention and Reserves Level — Italy / Euro area - Background: The euro has the status of a global reserve currency. - Italy’s reserves: remained largely unchanged in 2022. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is freely floating. --- ### Japan — Overall assessment and policy guidance - Overall Assessment: External position in 2022 was broadly in line with level implied by medium-term fundamentals and desirable policies. - CA surplus: declined to 2.1 percent of GDP in 2022 from 3.9 percent in 2021. - Drivers: Higher commodity import prices largely offset export improvements; larger primary income surplus supported CA. - Projection: CA surplus expected to continue over the medium term, mainly driven by primary income surplus from large positive NIIP and high rate of return on net foreign assets. - Potential Policy Responses: - More flexibility in monetary policy. - Bold structural reforms. - Credible and specific medium-term fiscal consolidation plan. - Priority: labor market and fiscal reforms to support private demand, raise potential growth, and promote digital and green investment. - Japan should prioritize global leadership to promote more open, stable, and transparent trade policies in regional/multilateral trade agreements. ### Japan — Foreign asset and liability position - NIIP: 75.2 percent of GDP at end-2022 (2021: 76.1 percent; pre-pandemic 2016–19 average: 61 percent). - Japan holds world’s largest stock of net foreign assets: $3.1 trillion at end-2022. - Composition (end-2022): gross foreign assets largely portfolio investment (~40 percent), FDI 21 percent. - Of portfolio investment: about 23 percent yen denominated, 56.5 percent dollar denominated. - NIIP generated net annual investment income return of 8.7 percent in 2022 (pre-pandemic 2016–19 average: 6.2 percent), owing to sharp depreciation of the yen. - Assessment: Holdings well diversified; valuation risk if yen appreciates against the dollar; liabilities vulnerabilities contained (equity and direct investment ~30 percent of gross foreign liabilities). Gradual decumulation of assets expected over long term to fund old-age consumption. ### Japan — Key 2022 statistics (percent of GDP) - NIIP: 75.2 - Gross Assets: 240.4 - Debt Assets: 80.7 - Gross Liab.: 165.2 - Debt Liab.: 102.3 ### Japan — Current Account - Background: Income balance reached 6.4 percent of GDP in 2022 (historic high) due to large net foreign asset position. - Merchandise trade balance: surplus 0.3 percent of GDP in 2021 → deficit 2.8 percent of GDP in 2022 due to higher commodity import prices. - Offset: 1.5 percent of GDP improvement in primary income balance. - Medium-term projection: CA balance projected to stabilize close to 3.8 percent of GDP. - Assessment (model results): - 2022 estimated cyclically adjusted CA: 3.2 percent of GDP. - Cyclically adjusted CA norm: 3.5 percent of GDP (range: 2.4 to 4.6 percent of GDP). - COVID-19 travel services transitory impact: 0.3 percent of GDP (transport adjustor 0 percent). - 2022 CA gap midpoint: 0.0 percent of GDP (range: –1.1 to 1.1 percent of GDP). - EBA-identified policy gaps reflect greater medium-term fiscal consolidation needs and a positive credit gap. ### Japan — Real Exchange Rate - REER depreciated ~14 percent in 2022, following 8.7 percent depreciation in 2021. - As of April 2023: REER was 1.3 percent below the 2022 average. - IMF staff CA gap implies REER gap of 0.0 percent in 2022 (elasticity 0.17 applied). - EBA REER level and index models deliver gaps of –31.4 and –31.7 percent, respectively (largely unexplained residuals). - Staff-assessed REER gap range: –6.7 to 6.6 percent, midpoint: 0.0 percent. ### Japan — Capital and Financial Accounts - Financial account recorded net outflows in 2022, declining to 1.9 percent of GDP in 2022 from 3.1 percent in 2021. - Net FDI outflows: 3.1 percent of GDP, primarily driven by outward FDI to Asia, Europe, North America. - Net portfolio inflows: 3.4 percent of GDP in 2022 (lower than 4 percent in 2021). - Assessment: Vulnerabilities limited; inward investment equity-based; strong home bias; outward spillovers to other economies contained so far. ### Japan — FX Intervention and Reserves - Background: Reserves $1.4 trillion (about 28 percent of GDP) at end-2021; declined to $1.2 trillion by end-2022 due to FX intervention and valuation effects. - Authorities intervened to support the yen in September and October 2022 for first time since 1998; size of intervention equivalent to 5 percent of FX reserves at end-August. - Policy recommendation: FX interventions should be isolated and limited to addressing disorderly market conditions. --- ### Korea — Overall assessment and policy guidance - Overall Assessment: External position in 2022 broadly in line with level implied by medium-term fundamentals and desirable policies. - CA surplus: 1.8 percent of GDP in 2022 (2021: 4.7 percent). - Drivers of 2022 narrowing: weak external demand, global semiconductor down cycle, high commodity prices. - Projection: CA surplus projected to strengthen in 2023 and increase further over the medium term (expected semiconductor cycle normalization, recovery in trading partners, lower commodity prices). - Potential Policy Responses: - Continued fiscal consolidation. - Monetary tightening since mid-2021 to contain domestic demand and import growth. - Over medium term: increase precautionary savings related to aging, orderly household deleveraging, and strong policies to mitigate geopolitical risks. - Exchange rate should remain market determined; intervention limited to preventing disorderly market conditions. ### Korea — Foreign asset and liability position - NIIP: 46.3 percent of GDP in 2022; gross liabilities: 83.9 percent of GDP (about 48 percent gross external debt). - 2022 NIIP increase ~8 percent of GDP vs 2021 due to residents’ outbound direct investment and decreased foreigners’ portfolio investment. - NIIP projected to rise to about 56 percent of GDP in medium term. - Foreign assets diversified; ~35 percent in equity or debt securities; ~60 percent of foreign assets denominated in dollars. - Liability structure limits vulnerabilities: direct investment and long-term loans = 55 percent of liabilities; 70 percent of liabilities denominated in Korean won. ### Korea — Key 2022 statistics (percent of GDP) - NIIP: 46.3 - Gross Assets: 130.2 - Debt Assets: 61.4 - Gross Liab.: 83.9 - Debt Liab.: 39.9 ### Korea — Current Account - CA: 1.8 percent of GDP in 2022 (2021: 4.7 percent). - CA projected: 2.2 percent of GDP in 2023; about 3.5 percent of GDP over the medium term. - Assessment (model results): - EBA cyclically adjusted CA: 4.2 percent of GDP. - CA norm: 4.8 percent of GDP (standard error: 0.9 percent of GDP). - COVID-19 transitory factors: transportation –0.3 percent of GDP; travel services –0.1 percent of GDP. - IMF staff 2022 CA gap midpoint: –1.0 percent of GDP (range: –1.9 to –0.1 percent of GDP). - Relative policy gap contribution: –0.6 percent of GDP (reflecting positive domestic credit gap partly offset by less expansionary fiscal stance). ### Korea — Real Exchange Rate - REER average depreciation in 2022: 5.4 percent from 2021. - As of April 2023: REER was 1.4 percent below the 2022 average. - IMF staff CA gap implies REER overvaluation of 2.9 percent (elasticity 0.34 applied). - EBA REER index model: 1.9 percent undervaluation. - EBA level model: 3.4 percent overvaluation. - Staff-assessed REER gap range: 0.2 to 5.6 percent, midpoint: 2.9 percent. ### Korea — Capital and Financial Accounts - Net capital outflows: increased to 4.0 percent of GDP in 2022 from 3.5 percent in 2021 (peak 6.2 percent in 2016). - Composition (2022): net FDI outflows 2.9 percent of GDP; portfolio outflows 1.5 percent of GDP; other investment net inflows 0.9 percent of GDP. - Net FDI outflows rose from 2.4 percent in 2021 to 2.9 percent in 2022 (rising outbound direct investment); inbound FDI moderated. - Assessment: Configuration of net and gross capital flows appears sustainable over medium term; Korea has absorbed short-term capital flow volatility in recent years. ### Korea — FX Intervention and Reserves - Korea has a floating exchange rate. - Bank of Korea FX intervention: net sales $45.9 billion (2.8 percent of GDP) in 2022, mostly in Q2–Q3 during heightened volatility. - Reserves at end-2022: $423 billion (25 percent of GDP). - Assessment: Intervention limited to preventing disorderly market conditions. - Reserves metrics (end-2022): about 25 percent of GDP; 2.5 times short-term debt; 6.2 months of imports; 14 percent of M2. --- ### Malaysia — Overall assessment and policy guidance - Overall Assessment: External position in 2022 stronger than level implied by medium-term fundamentals and desirable policies. - CA surplus: strengthened during pandemic-related exports, then narrowed to 3.1 percent of GDP in 2022 (2021: 3.8 percent of GDP). - Drivers of 2022 narrowing: rebound in domestic demand, inventory accumulation by firms, widening primary income deficit, import growth outpacing exports despite services balance improvement from removed travel restrictions. - Medium-term projection: CA surplus projected to widen as travel restrictions lift and imports moderate. - Potential Policy Responses: - Preserve exchange rate flexibility to facilitate fundamentals-driven external adjustments. - Medium-term: strengthen social safety nets and public health care via fiscal reorientation. - Structural policies to encourage private investment and productivity growth: reduce skills mismatch, improve quality of education, improve access to credit for SMEs. ### Malaysia — Foreign asset and liability position - NIIP: averaged ~1 percent of GDP over last decade; increased to 5.5 percent at end-2021; declined to 3.5 percent at end-2022 due to decline in reserve assets and portfolio investment outflows. - Total external debt: declined to 64 percent of GDP in 2022 (70 percent at end-2021). - One-third of external debt ringgit denominated; short-term external debt 42.1 percent of external debt, largely intragroup borrowing or trade credits. - Assessment: NIIP expected to increase over medium term supported by projected CA surpluses; balance sheet strength, exchange rate flexibility, and increased domestic investor participation support resilience. ### Malaysia — Key 2022 statistics (percent of GDP) - NIIP: 3.5 - Gross Assets: 124.5 - Debt Assets: 28.1 - Gross Liab.: 121.0 - Debt Liab.: 24.1 ### Malaysia — Current Account - Historical: CA surplus averaged ~12 percent of GDP early in century; narrowed in last decade due to strong domestic demand and decline in national savings. - 2021 CA: 3.8 percent of GDP (bolstered by goods surplus). - 2022 CA: 3.1 percent of GDP. - COVID-19-related staff adjustments: total 1.1 percent of GDP (lower travel receipts 1.0 percent; higher transport costs 0.3 percent; lower outflow of remittances –0.2 percent). - EBA CA model: cyclically adjusted CA 2.4 percent of GDP; norm –0.5 percent of GDP; model-assessed CA gap 2.9 percent. - Staff-assessed CA gap range: 3.5–4.5 percent, midpoint estimate: [text truncated in source]. *International Monetary Fund | ch3.pdf — Chapter content excerpt* ### 4.0 percent. Relative policy gaps partly explain the CA gap, with weaker social safety nets, proxied by health care expe ### ch3 - 4.0 percent. Relative policy gaps partly explain the CA gap, with weaker social safety nets, proxied by health care expe ### Current Account: Findings and Contributors - IMF staff-assessed CA gap (Staff Gap): 4.0 - 2022 (% GDP) indicators: - CA: 3.1 - Cycl. Adj. CA: 2.4 - EBA Norm: –0.5 - EBA Gap: 2.9 - COVID-19 Adj.: 1.1 - Other Adj.: 0.0 - Staff Gap: 4.0 - Relative policy gaps contributing to the excess surplus: - Weaker social safety nets, proxied by health care expenditure: 0.6 percent - Increase in reserve assets: 0.5 percent - Looser fiscal policies adopted by the rest of the world relative to Malaysia: 0.2 percent - Factor reducing the excess surplus: - Stronger credit growth: –0.8 percent - Medium-term outlook: - The CA surplus is expected to grow over the medium term as tourism recovers and improves the services balance. ### Real Exchange Rate (REER) - Background observations: - Ringgit movements: depreciated about 12 percent against the dollar between the start of the war in Ukraine and end-October 2022, strengthened since November, resulting in a depreciation of about 5 percent for the year. - REER change over the year: depreciated by 1.4 percent. - NEER change over the year: appreciated by 0.5 percent. - As of April 2023, the REER was 1.2 percent weaker than its 2022 average. - Assessment and valuation: - Semielasticity employed: 0.5 - IMF staff–assessed CA gap implies a REER undervaluation of 8.0 percent in 2022. - EBA REER model estimates: - REER index model undervaluation: 25.2 percent - REER level model undervaluation: 29.3 percent - Staff assessment range: REER undervalued in the range of 7.0–9.0 percent, with a midpoint estimate of 8.0 percent. - Policy implication: - Over the medium term, Malaysia’s REER needs to appreciate to narrow the CA gap. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Since the global financial crisis, Malaysia has experienced periods of significant capital flow volatility, largely driven by portfolio flows in and out of the local currency debt market in response to both changes in global financial conditions and domestic factors. - Assessment: - Continued exchange rate flexibility and macroeconomic policy adjustments, such as those prescribed by the IMF’s Integrated Policy Framework, are necessary to manage capital flow volatility. - CFM measures should be gradually phased out, with due regard for market conditions. ### FX Intervention and Reserves Level - Background: - Gross international reserves: - Increased to $116.9 billion by end-2021 - Declined to $114.7 billion by end-2022 - Reserves decreased significantly following the beginning of the war in Ukraine but recovered during the latter half of the year as external pressures eased. - Assessment and metrics: - Reserves declined to about 110 percent of the ARA metric at end-2022 (adequacy threshold: 100 percent). - Reserves at end-2021: 121 percent of the ARA metric. - Reserve coverage declined to five months of prospective imports, or about 85 percent of short-term debt. - An increase in short-term external debt partly drove the decline in reserves. - IMF staff assessment: Bank Negara Malaysia engaged in largely two-sided FX interventions over the course of the year. - Policy guidance: - There is a role for FX intervention as needed to address disorderly market conditions (DMC) and to respond to large and relevant shocks when well-identified and costly frictions are present, including when these dominate the economic benefits of letting the exchange rate remain as the sole shock absorber and may themselves give rise to DMC. *Italicized source: ch3 - 4.0 percent. Relative policy gaps partly explain the CA gap, with weaker social safety nets, proxied by health care expe* ### CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS ### CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS ### Russia — Table 3.20. Russia: Economy Assessment - Overall Assessment: - The external position in 2022 was stronger than the level implied by medium-term fundamentals and desirable policies. - Models do not account for Russia’s idiosyncratic situation: (1) because of sanctions, large CA surpluses may not translate easily into an accumulation of readily accessible foreign assets in reserve currencies; and (2) sanctions may lead to a permanent decline in the CA surplus relative to a nonsanctions scenario. - The range of uncertainty surrounding the estimates is exceptionally large. - Foreign Asset and Liability Position and Trajectory — Background: - NIIP stood at $762 billion or 34.4 percent of GDP at the end of 2022, slightly below its peak of 34.7 percent of GDP in 2020 and above 2018 level (23 percent of GDP). - In 2022, gross assets and gross liabilities fell sharply to 72 and 37.6 percent of GDP, respectively, from 90 and 64 percent of GDP in 2021. - External debt declined to 17 percent of GDP at end-2022, down from 27 percent of GDP at end-2021. - As of end-2022, about one-third of external debt was in domestic currency; no obvious maturity mismatches between gross assets and liabilities. - Nonresidents’ holdings of domestic government debt fell from 32.2 percent at end-2019 to 9.7 percent in February 2023. - Foreign Asset and Liability Position and Trajectory — Assessment: - Before the war, projected CA surpluses helped maintain positive NIIP and the sizable official external assets provided an important buffer. - An unknown share of international reserves is frozen due to sanctions; sanctions likely explain why the record CA surplus did not translate into higher reserves. - Key 2022 (% GDP) indicators: - NIIP: 34.4 - Gross Assets: 72 - Res. Assets: 26.0 - Gross Liab.: 37.6 - Debt Liab.: 17 - Current Account — Background: - 2022 CA surplus reached a record $233 billion (10.4 percent of GDP) versus $122 billion (6.9 percent of GDP) in 2021, reflecting favorable terms of trade, resilient oil export volumes, and lower imports due to sanctions and recession. - 2023 projection: surplus projected to decline sharply to $75.1 billion (3.6 percent of GDP) owing to lower effective oil prices and much lower gas prices, and a recovery of imports. - Range of uncertainty surrounding projections is exceptionally large. - Current Account — Assessment: - EBA CA model estimates a norm of 4.0 percent of GDP for 2022 and a cyclically adjusted CA surplus of 6.7 percent of GDP. - After a multilateral COVID-19 adjustment of –0.4 percent of GDP (tourism service imports –0.6 percent; transportation services 0.2 percent), the IMF staff assesses the CA gap at 2.3 percent of GDP, with a range from 1.2 to 3.4 percent of GDP. - Identified policies contributed –0.8 percent of GDP to the gap. - Models do not account for idiosyncratic effects of sanctions; range of uncertainty is exceptionally large. - Key 2022 (% GDP) CA-related figures: - CA: 10.4 - Cycl. Adj. CA: 6.7 - EBA Norm: 4.0 - EBA Gap: 2.7 - COVID-19 Adj.: –0.4 - Other Adj.: 0.0 - Staff Gap: 2.3 - Real Exchange Rate — Background: - Ruble volatile: initial ≈50 percent depreciation against the dollar, then sharp appreciation retracing losses and exceeding pre-war levels. - REER appreciated in 2022 by 31 percent (average) and 53 percent (end of period). - In 2023 the ruble reversed some gains; REER depreciated by about 20 percent between December 2022 and April 2023. As of April 2023, REER was 7.1 percent below the 2022 average. - Real Exchange Rate — Assessment: - IMF staff CA gap implies a REER undervaluation of 13.6 percent (midpoint) in 2022 (elasticity of 0.17 applied). - EBA REER index model indicates REER overvaluation of 5.7 percent; EBA REER level model indicates REER undervaluation of 4.7 percent. - Staff assesses REER as undervalued in 2022 in the range of 7.1 to 20.2 percent, midpoint 13.6 percent. - Models do not account for Russia’s idiosyncratic situation. - Capital and Financial Accounts: Flows and Policy Measures — Background: - In 2022, the Central Bank of Russia raised the interest rate to 20 percent and introduced broad capital flow measures (ban on selling securities by nonresidents, ban on FX lending to nonresidents, restrictions on nonresidents transferring money abroad); most measures later reversed. - Net private capital outflows reached $240 billion (10.6 percent of GDP) in 2022, above levels during crises in 1998, 2008, and 2014 (7.5–9 percent of GDP). - Outflows concentrated in first half of 2022 and declined in second half; meaningful part appears to be repayment of foreign liabilities by Russian firms. - Capital and Financial Accounts — Assessment: - Large FX reserves and floating exchange rate regime have provided buffers to absorb shocks. - Large capital outflows occurred despite capital flow measures; meaningful part appears to be repayment of FX liabilities to retain buffers under sanctions. - FX Intervention and Reserves Level — Background: - In 2022, reserves fell by $48.6 billion to $582.0 billion from end-2021 despite a very large CA surplus, likely reflecting constrained reserve accumulation under sanctions. - Fiscal rule abandoned and later replaced, reducing budget-related FX operations. - Decline in reserves reflects central bank sales of foreign currency to support the ruble ($10.6 billion in Q1, partly offset by FX purchases of $3 billion for rest of year) and valuation changes. - FX Intervention and Reserves Level — Assessment: - As of end-2022, international reserves stood at 299.9 percent of the IMF’s reserve adequacy metric. - Considering vulnerability to oil price shocks, an additional commodity buffer of $96 billion is appropriate, translating to reserves to buffer-augmented ARA metric ratio of 200.4 percent. - Published reserves are considerably above this level, but sanctions have frozen a share of reserves, complicating reserve adequacy assessment. *International Monetary Fund | 2023 — Table 3.20. Russia: Economy Assessment* --- ### Saudi Arabia — Table 3.21. Saudi Arabia: Economy Assessment - Overall Assessment: - The external position in 2022 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - External balance sheet remains strong; reserves adequate by standard IMF metrics. - Under current fiscal balance path, central government’s non-oil primary balance expected to be on improving trend. - Pegged exchange rate continues to provide a credible policy anchor. - Potential Policy Responses: - Projected normalization of oil exports expected to diminish the gap. - Vision 2030 structural reform agenda to diversify the economy, lift productivity, and boost non-oil tradable sector; accompanied by sizeable investment program, including by the Public Investment Fund (PIF). - Continued fiscal reforms needed to avoid procyclical fiscal policy amid high hydrocarbon windfalls, including delinking spending from oil price fluctuations and implementing a medium-term fiscal framework. - Maintain non-discriminatory approach to industrial policies to avoid distortions and retaliatory actions. - Foreign Asset and Liability Position and Trajectory — Background: - Net external assets estimated at 61.5 percent of GDP at end-2022, down from 71.2 percent in 2021. - Net external assets increased from US$618 billion to US$682 billion, while nominal GDP expanded more due to high oil prices. - Medium-term NIIP expected to stabilize at 63.8 percent of GDP. - Composition of external assets (broad categories): portfolio and other investments 53 percent, reserves 35 percent, FDI 13 percent of total external assets. - Foreign Asset and Liability Position and Trajectory — Assessment: - External balance sheet remains very strong; accumulated assets protect against oil price volatility and save exhaustible resource revenues for future generations. - Key 2022 (% GDP) indicators: - NIIP: 61.5 - Gross Assets: 119.3 - Res. Assets: 41.5 - Gross Liab.: 57.8 - Debt Liab.: 24.2 - Current Account — Background: - CA balance registered surplus of 13.6 percent of GDP in 2022 versus 5.1 percent in 2021. - Trade balance improved by 9.1 percent of GDP as oil export price and volume increased in 2022. - Terms of trade improved by 28.9 percent during the year. - Projections assume oil production follows OPEC+ agreement with a decline in 2023; CA expected to register a surplus in 2023 (around 6 percent of GDP) as oil export revenues decline and terms of trade projected to deteriorate by around 22 percent in 2023. - Current Account — Assessment: - IMF staff assesses CA gap of 4.7 percent of GDP using EBA-Lite CA model; overall assessment subject to significant model uncertainty due to Saudi Arabia’s idiosyncratic characteristics and oil reliance. - Cyclical adjustment component is 1.1 percent of GDP; COVID-19/transitory travel and transport impacts near 0. - Consumption Allocation Rules: CA gap 0.3 percent of GDP (constant real annuity) and –2.6 percent (constant real per capita annuity). - Investment Needs Model suggests CA gap of 14.4 percent of GDP. - Estimated CA gap of 4.7 percent has a range from 2.2 to 7.2 percent of GDP. - Key 2022 (% GDP) CA-related figures: - CA: 13.6 - Cycl. Adj. CA: 12.5 - EBA Norm: — - EBA Gap: — - COVID-19 Adj.: 0.0 - Other Adj.: — - Staff Gap: 4.7 - Real Exchange Rate — Background: - Riyal pegged to US dollar at 3.75 since 1986. - REER appreciated by 4.1 percent in 2022 and was 5 percent above its 10-year average; NEER appreciated by 8.7 percent in 2022. - As of April 2023, REER was 0.2 percent below 2022 average. - Real Exchange Rate — Assessment: - Exchange rate movements have limited short-term impact on competitiveness since exports are mostly dollar-denominated oil products. - EBA-Lite REER model suggests an overvaluation of 11.2 percent. - Consistent with IMF staff CA gap and elasticity of 0.2, staff assesses REER to be undervalued by 21.6 percent, with a range of –9.1 to –34.1 percent. - Capital and Financial Accounts — Background and Assessment: - Net financial outflows continued in 2022 as the PIF and other entities invested abroad. - Lack of detailed information on nature of financial flows complicates analysis; strong reserves and sizable PIF assets limit risks and vulnerabilities. - FX Intervention and Reserves Level — Background: - PIF investments abroad increasing, though most government foreign assets still held at central bank within international reserves. - Net foreign assets increased to $440.5 billion (39.7 percent of GDP, 19.4 months of imports, and 231 percent of the ARA metric) at end-2022, up from $438.2 billion at end-2021 (and from $730 billion in 2014). - Trend partly driven by financial outflows; reserves expected to stabilize at about 14 months of imports in the medium term. - FX Intervention and Reserves Level — Assessment: - Reserves adequate for precautionary purposes by IMF metrics; also serve as savings for future generations. - Buffers provided by external assets held by PIF and national oil company. - Fiscal prudence needed over medium term to strengthen CA and increase savings for future generations. *International Monetary Fund | 2023 — Table 3.21. Saudi Arabia: Economy Assessment* --- ### Singapore — Table 3.22. Singapore: Economy Assessment - Overall Assessment: - The external position in 2022 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Assessment subject to wide uncertainty due to Singapore’s very open economy and status as a global trading and financial center. - Over the medium term, CA surplus projected to narrow gradually as household consumption increases, capital-related imports recover, and public spending rises. - Potential Policy Responses: - Planned execution of major green infrastructure projects and assistance to vulnerable households should help reduce external imbalances in near term. - Over medium term, structural transformation (aging population, transition to green and digital economy) calls for higher public investment in health care, green and other physical infrastructure, and human capital to reduce external imbalances by lowering net public saving. - Foreign Asset and Liability Position and Trajectory — Background: - NIIP stood at 176.1 percent of GDP in 2022, down from 223 percent in 2021 and below average level of 237.1 percent in 2017–21. - Gross assets and liabilities are high; about half of foreign liabilities are FDI and about one-fifth are currency and deposits. - CA surplus has been main driver of NIIP since global financial crisis; valuation effects material in some years driven by appreciation in S$ NEER as Monetary Authority of Singapore tightened exchange-rate-based monetary policy. - CA and growth projections imply NIIP will rise over medium term. - Large positive NIIP partly reflects accumulation of assets for old-age consumption expected to be gradually unwound over long term. - Foreign Asset and Liability Position and Trajectory — Assessment: - Large gross non-FDI liabilities (442 percent of GDP in 2022) present some risks, mitigated by large gross asset positions, banks’ large short-term external assets, and authorities’ close monitoring of banks’ liquidity risk profiles. - Singapore has large official reserves and other official liquid assets. - Key 2022 (% GDP) indicators: - NIIP: 176.1 - Gross Assets: 1,125.5 - Res. Assets: 62 - Gross Liab.: 949.4 - Debt Liab.: 332.2 - Current Account — Background: - CA surplus was 19.3 percent of GDP in 2022, up from 18 percent in 2021; increase mainly reflects larger services surplus, particularly transport services due to freight rate hikes from COVID-19 supply disruptions. - 2022 CA balance higher than 2017 average of 17.3 percent and slightly lower than post–global financial crisis peak of 22.9 percent in 2010. - Structural factors driving CA: status as financial center, consecutive fiscal surpluses in most years, rapid aging, and mandatory defined-contribution pension program (assets about 84.7 percent of GDP in 2022). - CA surplus projected to narrow over medium term due to increased infrastructure and social spending. - In 2022, public saving increased as fiscal deficit narrowed; private saving decreased slightly. - Current Account — Assessment: - Guided by EBA framework, IMF staff assesses 2022 CA gap in range 3.3–6.9 percent of GDP, midpoint 5.1 percent. - Identified policy gaps remained close to zero in 2022, reflecting more contractionary fiscal policy in 2022 and low but efficient public health care expenditure. - Key 2022 (% GDP) CA-related figures: - CA: 19.3 - Cycl. Adj. CA: 21.8 - EBA Norm: — - EBA Gap: — - COVID-19 Adj.: –3.1 - Other Adj.: — - Staff Gap: 5.1 - Real Exchange Rate — Background: - REER appreciated by 6 percent in 2022, following NEER appreciation by 4.3 percent. - This followed cumulative REER depreciation of 3 percent and NEER depreciation of 1.8 percent between 2019 and 2021. *International Monetary Fund | 2023 — Table 3.22. Singapore: Economy Assessment* ### 2021. As of April 2023, the REER had appreciated by 6.1 percent relative to its 2022 average. ### ch3 - 2021. As of April 2023, the REER had appreciated by 6.1 percent relative to its 2022 average. ### Real Exchange Rate: Background and Assessment - As of April 2023, the REER had appreciated by 6.1 percent relative to its 2022 average. - Assessment: - Consistent with the staff CA gap, the IMF staff assesses the REER to be undervalued in a range from 6.6 to 13.8 percent, with a midpoint of 10.2 percent (with an estimated elasticity of 0.5 applied). ### Capital and Financial Accounts: Flows and Policy Measures (Background and Assessment) - Background: - Singapore has an open capital account. - As a trade and financial center in Asia, changes in market sentiment can affect Singapore significantly (e.g., increased regional risk aversion may lead to inflows to Singapore; global stress may lead to outflows). - The financial account balance reflects reinvestment abroad of income from official foreign assets, sizable net inward FDI, and smaller but more volatile net bank-related flows. - In 2022, the capital and financial account featured large outflows of 43.4 percent of GDP, up from 2 percent in 2021 (outflows ranged from 2 to 19.1 percent in 2017–21). - Assessment: - The financial account is likely to remain in deficit as long as the trade surplus remains large. ### FX Intervention and Reserves Level: Background and Assessment - Background: - With the NEER as the intermediate monetary policy target, intervention is undertaken to achieve inflation and output objectives. - As a financial center, prudential motives call for a larger NIIP buffer. - Official reserves held by the Monetary Authority of Singapore reached $289.5 billion (62 percent of GDP) in 2022. - Aggregate data on FX intervention operations have been published (with a six-month lag) since April 2020. - Assessment: - In addition to FX reserves held by the Monetary Authority of Singapore, Singapore also has access to other official foreign assets managed by Temasek and GIC. - The current level of official external assets appears adequate, even after considering prudential motives, and there is no clear case for further accumulation for precautionary purposes. *International Monetary Fund | 2023 — ch3 (excerpt)* ### 11.4 percent of GDP, and three months of imports. ### ch3 - 11.4 percent of GDP, and three months of imports. ### Overall assessment and potential policy responses (Switzerland) - Overall Assessment: The external position in 2022 was broadly in line with the level implied by medium-term fundamentals and desirable policies. Complex measurement issues and data lags complicate the assessment. - Potential Policy Responses: - Near term: fiscal policy should remain in line with the authorities’ debt-brake rule framework, while accommodating additional spending related to Russia’s war in Ukraine (e.g., support for refugees). - Medium term: as inflation pressures ease, small fiscal deficits would help expand spending space to support necessary expenditures. - Under current inflation and liquidity conditions: if facing depreciation pressures, the Swiss National Bank (SNB) could continue to reduce FX holdings; it should refrain from using FX interventions to curb franc appreciation, unless excess market volatility makes them necessary. - Macroprudential policies should continue to focus on safeguarding financial stability, taking into consideration the current cyclical position of the economy. - Medium-term policies should be geared to ensuring balanced domestic and external contributions to growth. ### Foreign asset and liability position and trajectory (Switzerland) - Background and dynamics: - Switzerland is a major financial center with a large positive NIIP and very large gross external positions. - 2022 (% GDP): NIIP: 93.3; Gross Assets: 680.8; Reserve Assets: 110.6; Gross Liab.: 587.5; Debt Liab.: 198.5. - Compared with 2021, the NIIP declined in 2022 by 14.7 percentage points of GDP, mainly driven by negative valuation effects due both to exchange rate movements and price changes. - Projections of the NIIP in 2023 and beyond are complicated by Switzerland’s large gross positions and compositional differences among its assets and liabilities. - Assessment: - Switzerland’s large gross liability position and the volatility of financial flows and investment returns present some risk. - Mitigating factors include its large gross asset position and the denomination of about two-thirds of its external liabilities in Swiss francs. ### Current account (Switzerland) - Background and dynamics: - Switzerland’s CA surpluses averaged 6.6 percent of GDP during 2012–21. - The CA surplus increased in 2022 to 10.1 percent of GDP, from 8.8 percent in 2021, driven by strong merchanting and a narrowed services trade deficit, more than offsetting a larger trade deficit in fuels and gas (by 0.8 percent of GDP) due to Russia’s war in Ukraine. - The CA surplus is expected to moderate to 7.8 percent of GDP in 2023 and remain near this level in the medium term. - Key figures (2022, % GDP): - CA: 10.1; Cycl. Adj. CA: 10.6; EBA Norm: 6.5; EBA Gap: 4.1; COVID-19 Adj.: –0.1; Other Adj.: –4.0; Staff Gap: 0.0. - Assessment and adjustments: - Based on a cyclically adjusted CA surplus of 10.6 percent and the norm, the overall EBA-estimated CA gap equaled 4.1 percent of GDP in 2022. - Domestic policy gaps account for –1.0 percentage point (excessive private sector credit: –1.2 percentage points; fiscal underspending: 0.3 percentage point). - Adjustments for valuation losses on fixed-income securities arising from inflation (–3.6 percentage points), retained earnings on portfolio equity investment (–0.4 percentage point), and transitory COVID-19 impacts (–0.1 percentage point) reduced the gap to 0.0 percent of GDP (±0.8 percentage point). ### Real exchange rate (Switzerland) - Background and movements: - Relative to its 2021 level, the average NEER appreciated by 4.4 percent in 2022, while the CPI- and PPI-based REERs depreciated by 0.9 and 11.2 percent, respectively. - In Q1 2023: NEER and CPI-based REER appreciated by 0.9 and 0.7 percent, respectively; PPI-based REER depreciated by 1.2 percent. - Long-term (since 2010): NEER appreciated by 44 percent; CPI-based REER appreciated by 5.3 percent; PPI-based REER depreciated by 12.9 percent. - As of April 2023, the CPI-based REER was 2.1 percent above the 2022 average. - Assessment: - Staff CA gap implies REER overvaluation of 0.1 percent in 2022 (elasticity of 0.55). - EBA REER index and level models suggest average REER in 2022 was overvalued by 11.9 and 17.6 percent, respectively. - Staff assesses the REER gap for 2022 to be in the range of –1.3 percent (undervalued) to 1.5 percent (overvalued), with a midpoint of 0.1 percent. ### Capital and financial accounts: flows and policy measures (Switzerland) - Background and dynamics: - Net financial outflows from Switzerland totaled 4.5 percent of GDP in 2022, including private outflows of 7.2 percent of GDP and a decrease in SNB reserve assets of 2.7 percent of GDP. - During 2009–21, net private inflows averaged 2.2 percent of GDP, while the average annual increase in SNB reserves was 10.3 percent of GDP. - Assessment: - Financial flows are large and volatile, reflecting Switzerland’s status as a financial center and safe haven. - In 2022, net private outflows increased from 4.6 percent of GDP in 2021 to 7.2 percent of GDP, partly driven by widened differentials between foreign and domestic interest rates. - The SNB reduced reserve assets on a net basis through transactions for the first time since 2005. ### FX intervention and reserves level (Switzerland) - Background and key figures: - Official reserve assets (including gold) amounted to Sw F 852 billion (or $924 billion, 111 percent of GDP) at the end of 2022, down Sw F 162 billion (or $186 billion) from the end of 2021, mostly driven by valuation changes due to investment losses (Sw F 131 billion) and exchange rate movements. - The SNB sold Sw F 22.3 billion of FX (net) through FX interventions in 2022, against net purchases of Sw F 110 billion and Sw F 21 billion in 2020 and 2021, respectively. - Assessment: - Reserves are large relative to GDP but more moderate in comparison with short-term foreign liabilities. - If the reserve currency status of the franc is taken into consideration, the adequacy of its FX reserves is not a pressing concern for Switzerland. - The large financial loss incurred by the SNB in 2022 and the volatility of its income indicate a high level of risk associated with its vast balance sheet. *Source: IMF 2023 — Chapter 3 (sections on Switzerland and related external sector assessments).* ### CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS ### CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS ### Türkiye — Overall assessment and policy responses - Overall Assessment: - The external position in 2022 is assessed to be moderately weaker than the level implied by medium-term fundamentals and desirable policies. - Assessment supported by low reserves, large external financing needs, and the size and composition of the NIIP. - CA deficit widened significantly in 2022 due to a sharp increase in imported energy prices. - Türkiye’s negative NIIP, while remaining large, narrowed significantly in 2021 due to a steep decline in equity liabilities from valuation effects. - Vulnerability to shocks remains high amid still-elevated gross external financing needs. - Over the medium term, CA deficit projected to narrow as commodity price pressures ease. - Potential Policy Responses: - Tighten monetary and fiscal policy stance and rebuild policy credibility to contain demand and reduce imports, thus improving the CA. - Support capital inflows and liraization to allow for a needed buildup of reserves over time. ### Türkiye — Foreign asset and liability position; trajectory - Background: - Türkiye’s NIIP averaged –40 percent of GDP over 2018–22. - End-2022 NIIP about –31 percent of GDP, constant year over year, with a slight increase during first three quarters driven by a marked decrease in equity liabilities in dollar terms. - External debt declined from 54 percent of GDP in 2021 to 52 percent of GDP in 2022. - Private sector holds almost 53 percent of Türkiye’s external debt; public sector (general government and central bank) holds the remaining 47 percent. - About one-third of external debt is short term (on a remaining-maturity basis). - Assessment: - Size and composition of gross external liabilities, coupled with low reserves, increase vulnerability to liquidity shocks and shifts in investor sentiment and to global upswing in interest rates. - FX exposure of nonfinancial corporations is high but improved; short-term net FX position is positive. - NIIP expected to stabilize and hover around –33 percent of GDP through 2028, but unwinding of recent valuation effects could worsen trajectory. - External debt is sustainable over the medium term but subject to risks, particularly from a large depreciation in the REER. - Key 2022 figures (% GDP): - NIIP: –30.8 - Gross Assets: 33.6 - Debt Assets: 13.7 - Gross Liab.: 64.5 - Debt Liab.: 44.2 ### Türkiye — Current account - Background: - CA deficit averaged 2.4 percent of GDP over 2018–22. - CA deficit widened from 0.9 percent of GDP in 2021 to 5.3 percent of GDP in 2022, significantly due to higher commodity prices from the war in Ukraine weakening the energy CA balance. - Non-oil CA surplus declined from 4.3 percent of GDP in 2021 to 3.5 percent of GDP in 2022. - Assessment: - EBA CA model norm: –0.8 percent of GDP; estimated standard error ±0.7 percent of GDP. - 2022 CA of 5.3 percent of GDP narrows to –2.5 percent of GDP after cyclical and terms-of-trade adjustments, yielding an EBA CA gap of –1.7 percent of GDP. - Adjusting for temporary pandemic-related shocks (transport: –0.2 percent) results in IMF staff–assessed CA gap in range –2.6 percent to –1.2 percent of GDP, midpoint –1.9 percent of GDP. - Key 2022 figures (% GDP): - CA: –5.3 - Cycl. Adj. CA: –2.5 - EBA Norm: –0.8 - EBA Gap: –1.7 - COVID-19 Adj.: –0.2 - Other Adj.: 0.0 - Staff Gap: –1.9 ### Türkiye — Real exchange rate - Background: - REER depreciated by an annual average of 9.5 percent over 2018–22; average REER depreciated by 10 percent in 2022. - Average PPI-based REER appreciated by about 9 percent in 2022 due to much higher PPI inflation than CPI inflation. - As of April 2023, CPI-based REER appreciated by 6.9 percent relative to the 2022 average. - Assessment: - IMF staff assesses the REER to be overvalued in a range of 4.0 percent to 9.0 percent, midpoint 6.5 percent (applying estimated REER elasticity of 0.29). - EBA REER index and level models suggest REER was undervalued in 2022 by 46.3 and 56.7 percent, respectively, though model residuals are very large for Türkiye. - Given higher PPI inflation, a PPI-based REER measure would likely yield lower undervaluation. ### Türkiye — Capital and financial accounts; policy measures - Background: - Net capital inflows rebounded in 2022, mainly due to one-off flows including large positive net errors and omissions of $25.1 billion. - Positive net inflows also driven by FDI; net portfolio inflows weakened further. - January 2022: exporters required to convert 25 percent of export earnings within 180 days; increased to 40 percent in April 2022. - Assessment: - Much of the 2022 rebound in net capital inflows was of unknown origin. - Annual gross external financing needs projected about 23 percent of GDP on average over 2023–28 (24 percent of GDP in 2022). - Türkiye remains vulnerable to adverse shifts in global investor sentiment. - Recommendation: CFMs should be phased out as conditions improve to increase market liquidity and support dedollarization. ### Türkiye — FX intervention and reserves level - Background: - De jure exchange rate classified as free floating. - Following sudden lira depreciation in Q4 2021, gross reserves decreased sharply to about $100 billion in Q2 2022. - Gross reserves recovered in H2 2022 to about $129 billion at end-December 2022. - Pressures on lira were relieved by large FX interventions and a scheme protecting lira term deposits against currency depreciation introduced in December 2021. - Assessment: - Gross reserves were at 95 percent of the IMF’s ARA metric as of end-December 2022, below the recommended 100–150 percent floor. - Quality of reserves remains an issue, with non–SDR basket currencies accounting for about 15 percent of central bank FX reserves. - Once monetary tightening is underway, significant nonborrowed accumulation of reserves is needed over time. - FX intervention to support the lira should be limited to extreme exchange rate volatility and undertaken only by the central bank (not state-owned banks). --- ### United Kingdom — Overall assessment and policy responses - Overall Assessment: - External position in 2022 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - CA deficit deteriorated in 2022 due to a sharp terms-of-trade shock from the war in Ukraine; CA deficit temporarily stays high in 2023–24 before gradually narrowing. - Uncertainty significant due to measurement issues, effects of the EU-UK Trade and Cooperation Agreement, and potential impacts on capital flows from any final agreement on financial services. - Potential Policy Responses: - Gradual fiscal consolidation while preserving quality of key public services and protecting the vulnerable to improve net public savings and offset decline in net private savings as private investment recovers. - Implement structural reforms to boost international competitiveness, including upgrading labor skills to support reallocation to fast-growing sectors. ### United Kingdom — Foreign asset and liability position; trajectory - Background: - NIIP improved to –11 percent of GDP in 2022 from –15 percent in 2021; improvement due to a positive valuation effect despite CA deficit. - About three-fifth of gross assets and liabilities accounted for by other investment (221 percent of GDP in assets and 207 percent in liabilities) and portfolio investment (128 percent of GDP in assets and 132 percent in liabilities). - Three-fourth of gross assets and liabilities are accounted for by the United States, other European countries, and Japan. - External liabilities have a larger share denominated in pounds than external assets. - IMF staff projects NIIP will moderately decrease over the medium term in line with projected small CA deficits, though large and volatile valuation effects make estimates uncertain. - Assessment: - Since 2016, negative CA flows have not explained positive changes in the NIIP, mainly due to valuation gains from pound depreciation and unrecorded income (retained earnings on portfolio equity and inflation compensation on debt interest). - Fluctuations in large gross stock positions (both gross assets and gross liabilities exceed 500 percent of GDP) could be a vulnerability; large short-term debt liability positions sensitive to market sentiment. - Exchange rate flexibility and net liability position in domestic currency offer some insurance against external crises. - Key 2022 figures (% GDP): - NIIP: –11 - Gross Assets: 563 - Debt Assets: 283 - Gross Liab.: 574 - Debt Liab.: 293 ### United Kingdom — Current account - Background: - CA deficit worsened from 1.5 percent of GDP in 2021 to 3.8 percent in 2022 due to widened trade deficit from surging energy prices. - Net private savings declined from 6.8 percent in 2021 to 2.5 percent in 2022. - Net public borrowing declined from 8.3 percent in 2021 to 6.2 percent in 2022. - Gross savings declined and investment increased. - IMF staff projects CA will moderately decrease to –3.5 percent of GDP over the medium term. - Assessment: - EBA CA model norm: –1.0 percent of GDP; EBA gap: –1.2 percent of GDP. - COVID-19 adjustments total –0.3 percent of GDP: travel services (–0.4 percent of GDP) and transport balances (0.1 percent of GDP). - Unrecorded income adjustments: retained earnings on portfolio equity (0.2 percent of GDP) and inflation compensation on debt interest (0.5 percent of GDP). - IMF staff assesses CA gap in range –1.8 to 0.2 percent of GDP, midpoint –0.8 percent of GDP. - Key 2022 figures (% GDP): - CA: –3.8 - Cycl. Adj. CA: –2.2 - EBA Norm: –1.0 - EBA Gap: –1.2 - COVID-19 Adj.: –0.3 - Other Adj.: 0.7 - Staff Gap: –0.8 ### United Kingdom — Real exchange rate - Background: - Pound depreciated in REER by 1.4 percent in 2022 relative to 2021 average; driven entirely by nominal depreciation due to surge in the dollar. - Pound has depreciated in real terms by about 3.4 percentage points since mid-2016. - As of end-April 2023, REER appreciated by 1.1 percent compared with 2022 average. - Assessment: - IMF staff CA gap implies a REER gap of about 2.9 percent in 2022 (estimated elasticity 0.28). - EBA REER level and index approaches suggest gaps of 2.3 and –8.4 percent, respectively, for 2022. - Staff assesses REER gap about 2.9 percent, in range –0.7 to 6.4 percent. ### United Kingdom — Capital and financial accounts; FX reserves - Background: - As an international financial center, portfolio investment and other investment are key components of the financial account. - In 2022, CA deficit of 3.8 percent of GDP financed by net portfolio investment of 3.5 percent of GDP, financial derivatives and other investment of 2.8 percent of GDP, net FDI of –3.8 percent of GDP, and errors and omissions of 1.3 percent of GDP. - Assessment: - Large fluctuations in capital flows are inherent and a potential source of vulnerability, though sound regulation and a healthy financial sector mitigate risks. - Additional risk: financial account flows may decelerate due to changes in UK-EU trade relationship and shift of some financial services to the EU. - FX intervention and reserves level: - Sterling’s share of global reserves stands at about 4.6 percent. - United Kingdom typically holds low reserves relative to standard metrics, but currency is free floating. --- ### United States — Overall assessment and policy recommendations - Overall Assessment: - External position in 2022 was moderately weaker than level implied by medium-term fundamentals and desirable policies. - CA deficit 3.7 percent of GDP in 2022 (versus 3.6 percent of GDP in 2021), marginal decline in trade balance led by small deterioration in services balance. - CA deficit projected to decline to about 2½ percent of GDP over the medium term based on increased public saving from gradual fiscal consolidation. - Potential Policy Responses: - Medium-term fiscal consolidation aimed at a general government primary surplus of about 1 percent of GDP to stabilize debt-to-GDP ratio and address CA gap. - Structural policies: upgrade infrastructure; enhance schooling, training, apprenticeship, mobility of workers; support the working poor; increase labor force growth (including skill-based immigration reform). - Roll back tariff barriers and other trade distortions; resolve trade and investment disagreements to support an open global trading system. ### United States — Foreign asset and liability position; trajectory - Background: - NIIP averaged about –46 percent of GDP during 2016–19; deteriorated to –74.4 percent of GDP in 2021 from –67.8 percent in 2020, then strengthened to –64.7 percent of GDP in 2022. - Declines in ratios of assets and liabilities to GDP in 2022 due to declines in value of assets and liabilities and increases in nominal GDP. - Under IMF staff baseline, NIIP projected to remain broadly unchanged through medium term as CA balance reverts to pre-COVID-19 average. - Assessment: - Financial stability risk: unexpected decline in foreign demand for US fixed-income securities could materialize (moderate risk given US dollar reserve status). - About 60 percent of US assets are in form of FDI and portfolio equity claims. - Key 2022 figures (% GDP): - NIIP: –64.7 - Gross Assets: 112 - Debt Assets: 18.8 - Gross Liab: 176 - Debt Liab.: 54.5 ### United States — Current account - Background: - CA deficit 3.7 percent of GDP in 2022, close to 2021 level of 3.6 percent of GDP (cyclically adjusted CA moved from 3.2 to 3.5 percent of GDP). - Pre-pandemic CA deficit about 2 percent of GDP. - Since 2016, deterioration driven mostly by non-oil goods and services balance. - Trade balance broadly stable in 2022 relative to 2021 (–3.7 versus –3.6 percent of GDP). - National savings and investment increased as percent of GDP from 2016 to 2021 due to pandemic-driven public dissaving; trend started to revert in 2022. - CA deficit expected to decline to about 2.5 percent of GDP over medium term with gradual fiscal consolidation and unwinding of extraordinary fiscal support. - Assessment: - EBA model estimates cyclically adjusted CA balance –3.5 percent of GDP and cyclically adjusted CA norm –2.2 percent of GDP; EBA CA gap –1.2 percent of GDP for 2022. - Model gap reflects policy gaps (–0.6 percent of GDP, mostly driven by private credit gap) and an unidentified residual (~ –0.6 percent of GDP). - IMF staff assesses the 2022 cyclically adjusted CA to be lower by 1.1 percent of GDP than level implied by fundamentals and desirable policies, with range between –1.7 and –0.4 percent of GDP. *International Monetary Fund | 2023 — CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS* ### 0.2 percent GDP to account for the temporary effects of COVID-19 on the travel and transport balances. The estimated sta ### Real Exchange Rate ### Background - After depreciating by 2.3 percent in 2021, the REER appreciated by 8.3 percent in 2022 (when yearly averages are compared). - As of April 2023, the REER was 0.5 percent below the 2022 average. ### Assessment - Indirect estimates of the REER gap (based on the IMF staff’s CA assessment) imply that the exchange rate was overvalued by 9.0 percent in 2022 (with an estimated elasticity of 0.12 applied). - The EBA REER index model suggests an overvaluation of 10.7 percent. - The EBA REER level model suggests an overvaluation of 22.8 percent. - Staff assessment: 2022 midpoint REER overvaluation of 9.0 percent, with a range of 3.5 to 14.6 percent, where the range is obtained from the CA standard error and the corresponding CA elasticity. ### Capital and Financial Accounts: Flows and Policy Measures ### Background - The financial account balance was about –2.7 percent of GDP in 2022, compared with –3.2 percent of GDP in 2021. - The change was mainly due to an increase in both net other investment and (to a lesser extent) net direct investment, partly offset by a reduction in net portfolio investment. ### Assessment - The US has an open capital account. - Vulnerabilities are limited by the dollar’s status as a reserve currency, with foreign demand for US Treasury securities supported by the status of the dollar as a reserve currency and possibly by safe haven flows. ### FX Intervention and Reserves Level ### Assessment - The dollar has the status of a global reserve currency. - Reserves held by the United States are typically low relative to standard metrics. - The currency is free floating. ### Key Country-Specific Notes and Adjustors (selected excerpts) - CA norm standard error: 0.7 percent of GDP. - Example country CA figures shown: 2022 (% GDP) CA: –3.7; Cycl. Adj. CA: –3.5; EBA Norm: –2.2; EBA Gap: –1.2; COVID-19 Adj.: 0.2; Other Adj.: 0.0; Staff Gap: –1.1. - Japan: recommended allowing the estimated credit-to-GDP gap to decline gradually from its currently estimated level of 25 percent (16 percent net of corporate savings), with a corresponding policy setting (P*) for the credit-to-GDP gap in five years of 9 percent of GDP. - Saudi Arabia: staff’s overall assessment CA gap in 2022 of 4.7 percent of GDP; EBA-Lite approaches yielded cyclically adjusted CA norm 7.7 percent of GDP (CA regression), Consumption Allocation Rules estimates 13.3 percent and 16.2 percent of GDP for alternate rules, and Investment Needs Model produced a CA gap of 14.4 percent over the medium term. - Singapore: using EBA coefficients would imply CA norm about 15.6 percent of GDP in 2022; after specified adjustments (downward adjustments of 1.1, –3.1, 3.8, and –2.9 percentage points and COVID-19 adjustors including travel adjustor of –0.8 percent of GDP and transport adjustor of –2.3 percent of GDP, plus other biases), adjusted staff–estimated CA gap is about 5.1 percent of GDP, to which the fiscal gap contributes about 0.3 percent of GDP, the credit gap about –0.6 percent of GDP, public health spending about –0.1 percent of GDP, and reserves about 0.0 percent of GDP. MAS’ outstanding holdings of RMGS as of end-2022: S$237.6 billion (36.9 percent of GDP). - South Africa: COVID-19 adjustors for 2022 of 0.2 percent of GDP composed of travel services (including tourism exports) (0.5 percent of GDP), transportation (0.5 percent of GDP), mineral exports (–0.6 percent of GDP), and an improved income balance (–0.2 percent of GDP). Net current transfers related to SACU warranted an adjustment to the cyclically adjusted CA by 0.7 percent of GDP. Measurement issues likely contributed to an underestimation of the CA by 0.8 percent of GDP in 2022 overall. Demographic indicator adjustment: –0.6 percent of GDP to the model-based CA norm for 2022. - Spain: EBA model suggests cyclically adjusted CA norm of –0.1 percent of GDP, with a standard error of 0.8 percent of GDP. Staff considers CA norm to be 1.0 percent of GDP, with a range of 0.2 to 1.8 percent of GDP. - Sweden: upper and lower bounds derived by adding/subtracting the standard deviation (5.7) from the average outcome (midpoint). - Switzerland: COVID-19 adjustors for tourism (0.0 percentage point) and transport (–0.1 percentage point); adjusted underlying CA would need to be reduced by about 0.1 percent of GDP. - Thailand: change in the transport services balance between 2019 and 2022 was –2.1 percent of GDP; staff estimates transport adjustor of 1.3 percent of GDP to account for high freight costs (about 60 percent of the change, 1.3 percent of GDP). - United Kingdom: official NIIP data may understate the true position; estimates of FDI stocks at market values imply a much higher NIIP, close to 100 percent of GDP. - United States: domestic fiscal policy gap estimated to amount to about –1.3 percent of GDP; fiscal policy gap estimated at –0.1 percent of GDP. *Source: IMF 2023 External Sector Report — Chapter 3 technical endnotes and country assessments.* --- _Source: https://www.imf.org/-/media/files/publications/esr/2023/english/ch3.pdf_