## 2023 External Sector Report — Preface, Executive Summary, and Chapter 1 excerpts ## Source details **Canonical URL:** [2023 External Sector Report — Preface, Executive Summary, and Chapter 1 excerpts](https://www.imf.org/-/media/files/publications/esr/2023/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2023/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2023/english/text.pdf.json) --- ### Overview - The IMF’s External Sector Report (ESR) analyzes global external developments and provides multilaterally consistent assessments of external positions for the world’s largest economies representing more than 90 percent of global GDP. - This edition uses the latest External Balance Assessment (EBA) methodology, external sector data as of May 31, 2023, and IMF staff projections in the April 2023 World Economic Outlook. ### Key findings and trends (2022–23) - Global balances and stocks - Global current account balances increased for the third consecutive year in 2022 and are projected to narrow in 2023. - Stocks of foreign assets and liabilities remained at historically high levels in 2022; creditor and debtor positions remained historically high. - Excess global current account balances remained unchanged since 2021 after a multi-year declining trend. - Drivers of widening balances - Unequal impact of COVID-19 in 2020–21. - Increase in commodity prices from 2021 recovery and supply concerns following Russia’s invasion of Ukraine in 2022. - Absence of widespread sudden stops during the pandemic enabled deficit economies to avoid abrupt contraction of current account deficits. - Currency and capital flow patterns - US dollar: appreciated by about 8 percent in real effective terms in 2022; by April 2023 about 7 percent stronger compared with its 2021 average; by October 2022 appreciated by about 14 percent relative to its 2021 average and subsequently depreciated by about 6 percent on a real trade-weighted basis. - Selected REER moves as of April 2023: - Japanese yen: depreciated by 15.3 percent relative to its 2021 average. - Renminbi: depreciated by 7.6 percent relative to its 2021 average. - Euro and pound sterling: “have either remained broadly unchanged.” - Capital flows: net capital flows from emerging market and developing economies (EMDEs) to advanced economies reemerged in 2022, mostly driven by China and commodity-exporting economies; reserve accumulation played limited role in these net outflows. - Net creditor/debtor positions: Overall Creditors, 2022: 20,004 (Billions of US Dollars); Overall Debtors, 2022: –25,200 (Billions of US Dollars); Percent of World GDP: Overall Creditors 2022: 20.0; Overall Debtors 2022: –25.2. ### Risks and outlook - Medium-term expectation: global current account balances expected to narrow as pandemic and war in Ukraine effects recede. - Key risks: - Renewed increase in commodity prices. - Slower-than-expected recovery in China. - Slower fiscal consolidation in deficit economies. - Geoeconomic fragmentation—uncertain effect on global balances but would unambiguously reduce global welfare. - Severe tightening of global financial conditions could trigger broad-based capital outflows from vulnerable EMDEs. ### Policy priorities and recommendations (high level) - Both excess surplus and deficit economies need policy efforts to promote external rebalancing. - Deficit countries where excess current account deficits partly reflected fiscal deficits: pursue fiscal consolidation to stabilize debt-to-GDP ratios and close current account gaps. - Surplus countries: higher targeted fiscal spending to meet climate, digital, and energy security goals while reducing excess surpluses. - Address structural bottlenecks in economies with competitiveness challenges. - Multilateral cooperation priorities: - Counter geoeconomic fragmentation and strengthen the rule-based trading system. - Facilitate the green transition. - Complete the 16th General Review of Quotas to ensure adequate IMF resourcing and preserve the IMF’s central role in the global financial safety net. ### Report structure (selected) - Chapter 1: “External Positions and Policies” — global external positions in 2022, pandemic and war developments, policy priorities to reduce excess imbalances. - Chapter 2: “External Sector Implications of the Global Dollar Cycle” — quantifies cross-border spillovers from US dollar appreciations; finds large negative spillovers on emerging markets and increased current account balances; flexible exchange rates and anchored inflation expectations mitigate spillovers. - Chapter 3: “2022 Individual Economy Assessments” — detailed assessments and policy recommendations for 30 economies. ### Selected headline statistics and table excerpts (preserve exact figures) - Global Current Account Balance (Billions of US Dollars; Percent of World GDP) - 2020: 2,594; 3.1 percent of World GDP - 2021: 3,435; 3.6 percent of World GDP - 2022: 3,941; 3.9 percent of World GDP - 2023 Projection: 3,188; 3.0 percent of World GDP - Country current accounts (Percent of GDP, Table 1.1) - United States: 2020: –2.9; 2021: –3.6; 2022: –3.7; 2023 Projection: –2.7 - China: 2020: 1.7; 2021: 2.0; 2022: 2.2; 2023 Projection: 1.4 - Saudi Arabia: 2020: –3.1; 2021: 5.1; 2022: 13.6; 2023 Projection: 6.2 - Net International Investment Position highlights (Percent of GDP, Table 1.2) - United States NIP, 2022: –64.7 - Japan NIP, 2022: 75.2 - Germany NIP, 2022: 71.0 - China NIP, 2022: 14.0 - Euro Area NIP, 2022: 2.0 - Aggregate reserves (Annex Table 1.1.1, Billions of US Dollars) - Aggregate Gross Official Reserves (ESR sample): 2019: 11,204; 2020: 12,272; 2021: 12,857; 2022: 11,737 - Advanced economies reserves: 2019: 5,116; 2020: 5,857; 2021: 6,234; 2022: 5,587 - EMDE reserves: 2019: 6,088; 2020: 6,416; 2021: 6,623; 2022: 6,150 - Aggregate CA gaps and balances (ESR economies) - Sum of absolute IMF staff–assessed current account gaps: unchanged at 0.9 percent of ESR economy GDP in 2022 relative to 2021. - Sum of the absolute values of headline current account balances increased by 0.2 percentage point to about 3 percent of ESR GDP in 2022. - Current account norms (summed absolute values) widened to 1.6 percent of GDP in 2022, from 1.4 percent in 2021. ### EBA methodology, assessment coverage, and results for 2022 - Methodology - EBA produces medium-term current account and REER benchmarks conditional on fundamentals and desirable policies; cyclical adjustments and country-specific adjustments (COVID-19, measurement, demographics, NIIP considerations) are applied. - IMF staff judgment supplements model outputs; positive and negative gaps offset to maintain multilaterally consistent results. - For 2022, EBA estimates were adjusted to strip lingering COVID-19 effects (travel restrictions, transport costs). - Coverage and classifications (30 economies, 87.5 percent of global GDP) - “Stronger” categories (9 economies): Germany, Malaysia, Russia, Singapore, Sweden, Thailand, India, Mexico, Saudi Arabia (India, Mexico, Saudi Arabia entered in 2022). - “Weaker” categories (8 economies): Argentina, Belgium, Canada, South Africa, United States, France, Italy, Türkiye (France, Italy, Türkiye entered in 2022). - “Broadly in line” (13 economies): Brazil, China, Hong Kong SAR, Indonesia, Japan, Korea, Spain, Switzerland, United Kingdom, Australia, The Netherlands, Poland, euro area (Australia, The Netherlands, Poland, euro area moved into this category in 2022 from stronger in 2021). - Aggregate contributors to 2022 gaps (as share of ESR GDP) - Largest contributors to lower-than-warranted current account balances: United States, France, Italy (descending). - Largest contributors to larger-than-warranted current account balances: Germany, Russia, Saudi Arabia (descending). - Annex table metrics (selected) - Annex Table 1.1.2 provides country-level Current Account (Percent of GDP), IMF Staff CA Gap (Percent of GDP), IMF Staff REER Gap (Percent), and International Investment Position (Percent of GDP). - Annex Table 1.1.3 lists IMF staff adjustments (COVID-19 and other) to EBA gaps, with examples: - Argentina: Actual CA [A]: –0.6; Cycl. Adj. [B]: –0.8; EBA Norm [C]: 0.3; EBA Gap [D]: –1.2; IMF Staff-Assessed CA Gap [E]: –1.8; Staff Adjustments Other Total [F]: –0.6. - Russia: [A]: 10.4; [B]: 6.7; [C]: 4.0; [D]: 2.7; IMF Staff-Assessed CA Gap [E]: 2.3; Adjustments [F]: –0.4. ### Global dollar cycle — empirical and model findings (Chapter 2 highlights) - Construction and correlation - Global dollar cycle estimated as residual after controlling for policy rates, policy rate differentials, US financial conditions, global activity factor, and lagged dollar changes. - Estimated correlation between the unexplained residual “global dollar cycle” and the US dollar index is 84 percent. - Established factors explain about one-fifth of US dollar fluctuations. - Quantitative spillovers (panel local projections; exact reported estimates) - A 10 percent US dollar appreciation: - Decreases output in emerging markets by 1.9 percent after one year (negative effect dissipates only after 10 quarters). - Decreases output in smaller advanced economies by 0.6 percent (peak after one quarter). - Increases current account balances, peaking at 1 percent of GDP for a 10 percent appreciation and more persistent for emerging markets. - Decreases global current account balances by 0.4 percent of GDP after one year. - Transmission and heterogeneity - Emerging markets: main channel is depressed investment (income compression) and “fear of floating” that limits immediate REER depreciation; capital inflows decline; valuation effects can offset current account improvements. - Advanced economies: REER depreciates persistently on impact, facilitating expenditure switching; investment recovers faster. - Commodity exposure matters: - Commodity exporters face larger negative spillovers because US dollar appreciations historically coincide with falling commodity prices; commodity importers often benefit. - Policy mitigants: more flexible exchange rates and more anchored inflation expectations reduce negative spillovers to emerging markets. - Model simulations (FSGM) - A 1 percentage point global sovereign premium shock (UIP deviation) produces a US dollar appreciation and generates larger output declines in emerging markets, a more-than-proportional fall in commodity prices (1 percent US dollar appreciation → 2.3 percent commodity price decline at one year for the simulated shock), and differential current account responses: commodity importers’ current accounts increase; commodity exporters’ current accounts may be unchanged as falling commodity prices reduce export values. ### Risks and downside scenarios (Chapter 1 and Annex) - Capital flows at risk and severe scenario metrics - IMF staff estimates capital flows at risk at the 5 percent level to be 2.7 percent of GDP and probability of outflows about 31 percent in May (2023). - April 2023 WEO severe downside simulation implies narrowing of global balances and a 10 percent depreciation of EMDE currencies on impact. - Geoeconomic fragmentation - Higher trade barriers across blocs likely reduce global balances but lower welfare; lower trade costs within blocs could increase global balances. - Extreme fragmentation could increase self-insurance incentives and raise global balances if surplus countries increase savings more than deficit countries. ### Policy guidance by external position (selected, verbatim-style recommendations preserved) - Economies with weaker-than-warranted external positions - Pursue policies that boost saving and competitiveness; where deficits reflect excessive fiscal deficits (examples: Italy and the United States), pursue medium-term fiscal consolidation while preserving space for critical infrastructure and social spending. - Address structural bottlenecks—labor, product market, and other reforms—to promote green, digital, inclusive growth and boost productivity. - Economies with stronger-than-warranted external positions - Promote investment and diminish excess saving while pursuing domestic objectives. - Examples: - Germany: “higher fiscal deficits than currently planned are likely required over the medium term to achieve domestic climate, digital, and energy security goals.” - Sweden: “higher investment in the green transition and the health sector would lower the external balance.” - Malaysia and Thailand: reform and expand social safety nets and address informality to reduce precautionary saving. - Economies broadly in line with fundamentals - Continue addressing domestic imbalances to prevent excessive external imbalances. - China: “accelerate market-based structural reforms...reduce high household saving (by strengthening the social safety net)...further increase ER flexibility.” - Exchange rate and capital flow guidance - In global financial distress, EMDEs should let currencies adjust; temporary FX intervention may be appropriate when shocks are large and markets shallow. - Capital flow management measures on outflows may be used in imminent crisis circumstances but should not substitute for macroeconomic adjustment. ### Financial side of global imbalances (Box 1.1 key findings) - Recycling of surpluses has shifted: - Reserve accumulation played a much smaller role post-GFC. - Net portfolio investment and net other investment (bank loans, currency and deposits) became more important channels (notably in China and Saudi Arabia). - United States current account deficit financing: mainly via portfolio debt flows and increasingly via other investment (currency and deposits, bank loans); financing mediated by financial centers. - Holders and currency shares - Share of official holdings of US Treasury securities decreased from peak 76 percent in mid-2009 to about 50 percent at end-2022. - US dollar still accounts for about 60 percent of allocated global reserves. ### Selected country exemplars (selected exact figures preserved) - United States - 2022 CA: –3.7 percent of GDP; Staff-assessed REER gap: 9.0; NIIP, 2022: –64.7 percent of GDP. - China - 2022 CA: 2.2 percent of GDP; Staff-assessed REER gap midpoint: –5.7; NIIP, 2022: 14.0 percent of GDP; FX reserves: $3.3 trillion (end-2022). - Saudi Arabia - 2022 CA: 13.6 percent of GDP; Staff-assessed CA gap: 4.7 percent of GDP (range 2.2 to 7.2 percent); NIIP, 2022: 61.5 percent of GDP. - Japan - NIIP, 2022: 75.2 percent of GDP; CA, 2022: 2.1 percent of GDP; REER depreciated close to 14 percent in 2022. - Russia - CA, 2022: 10.4 percent of GDP; Staff-assessed CA gap: 2.3 percent of GDP; NIIP, end-2022: 34.4 percent of GDP; gross assets and liabilities, 2022: 72 and 37.6 percent of GDP, respectively. - EMDE vulnerability indicators - Example: Brazil NIIP end-2022: –40.4 percent of GDP; CA, 2022: –3.0 percent of GDP; staff gap midpoint: –0.8 percent of GDP. - Example: Türkiye CA, 2022: –5.3 percent of GDP; staff gap midpoint: –1.9 percent of GDP; NIIP end-2022: –30.8 percent of GDP. ### Selected policy implications and recommended instruments - For emerging markets: - Strengthen monetary policy credibility to allow accommodative responses to US dollar appreciations. - Increase exchange rate flexibility where feasible; where not feasible due to financial frictions, use macroprudential measures and targeted CFMs temporarily. - Deepen financial markets and hedging options to improve shock absorption. - For global policymakers: - Preserve and strengthen the Global Financial Safety Net; IMF’s universal coverage role underpinned by successful completion of the 16th General Review of Quotas. - Avoid policies that exacerbate geoeconomic fragmentation; support multilateral trade rules and WTO dispute settlement restoration. - For surplus economies: - Use fiscal policy to increase investment (climate, digital, health) and reduce excess saving; avoid procyclical responses to hydrocarbon windfalls. _Italic: Source — 2023 External Sector Report, International Monetary Fund (selected Preface, Executive Summary, Chapter 1 excerpts, Chapter 2 highlights, and Annex tables as presented in the supplied text)._ ### Preface ### Preface ### Overview - The IMF’s annual External Sector Report has been produced since 2012 and analyzes global external developments and provides multilaterally consistent assessments of external positions of the world’s largest economies representing more than 90 percent of global GDP. - The report covers current accounts, real exchange rates, external balance sheets, capital flows, and international reserves, and is part of a continuous effort—together with the World Economic Outlook and Article IV consultations—to assess spillovers from members’ policies on global stability and to monitor external positions comprehensively. - This edition uses the latest version of the IMF’s External Balance Assessment methodology, external sector data as of May 31, 2023, and IMF staff projections in the April 2023 World Economic Outlook. ### Key findings and trends (2022–23) - Global current account balances (defined as the sum of absolute values of current account deficits and surpluses) increased for the third consecutive year in 2022 and are projected to narrow in 2023. - Drivers of the widening over the three years include: - The unequal impact of the COVID-19 crisis in 2020–21. - The increase in commodity prices fueled by the 2021 recovery and by supply concerns following Russia’s invasion of Ukraine in 2022. - The absence of widespread sudden stops during the pandemic enabled deficit economies to avoid an abrupt contraction of their current account deficits. - Currency markets in 2022: - The US dollar appreciated by about 8 percent in real effective terms, reaching its strongest level since 2002. - Emerging market and developing economies with preexisting vulnerabilities (such as high inflation and misaligned external positions) experienced greater depreciation pressures. - Commodity-exporting economies benefited from the increase in commodity prices. - Capital flow patterns: - Net capital flows from emerging market and developing economies to advanced economies reemerged in 2022, mostly driven by China and commodity-exporting economies. - Accumulation of official foreign exchange reserves played a limited role in net capital outflows from emerging market and developing economies in this episode. - Net creditor and debtor positions remained at historically high levels. - Excess global current account balances (sum of absolute values of current account surpluses and deficits in excess of their norms) remained unchanged since 2021 after a multi-year declining trend. ### Risks and outlook - Over the medium term, global current account balances are expected to narrow as the impacts of the pandemic and Russia’s war in Ukraine recede. - Key risks to the outlook include: - A renewed increase in commodity prices. - A slower-than-expected recovery in China. - A slower fiscal consolidation in economies with current account deficits. - Geoeconomic fragmentation: while its impact on global current account balances is unclear, it would unambiguously reduce global welfare. ### Policy priorities and recommendations - Both excess surplus and deficit economies need policy efforts to promote external rebalancing: - In economies where excess current account deficits in 2022 partly reflected larger-than-desired fiscal deficits, fiscal consolidation will help stabilize debt-to-GDP ratios and close current account gaps. - In economies with excess current account surpluses, higher fiscal spending in targeted areas will help meet climate, digital, and energy security goals while reducing excess surpluses. - Economies with lingering competitiveness challenges need to address structural bottlenecks. - Multilateral cooperation priorities: - Counter risks of geoeconomic fragmentation, including efforts to strengthen the current rule-based trading system. - Facilitate the green transition. - Successfully completing the 16th General Review of Quota would ensure that the IMF is adequately resourced to serve as an anchor of the global financial safety net. ### Report structure and production - Chapter 1, “External Positions and Policies,” discusses global external positions in 2022, external developments through the COVID-19 pandemic and Russia’s invasion of Ukraine, and policy priorities for reducing excess imbalances over the medium term. - Chapter 2, “External Sector Implications of the Global Dollar Cycle,” analyzes cross-border spillovers from US dollar appreciations and finds large negative spillovers on emerging markets accompanied by increased current account balances; more flexible exchange rates and better anchored inflation expectations can mitigate the negative spillovers. - Chapter 3, “2022 Individual Economy Assessments,” provides detailed overall external assessments and associated policy recommendations for 30 economies. - The report was prepared under the overall guidance of Pierre-Olivier Gourinchas and under the direction of the External Sector Coordinating Group, with named contributors and editorial support; the analysis reflects IMF staff projections and policy considerations as of publication, and the IMF Executive Board discussed the report on July 13, 2023. *Preface, 2023 External Sector Report, International Monetary Fund.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overview and Key Findings - Executive Directors broadly agreed with the findings of the 2023 External Sector Report (ESR) and its policy recommendations. - Global current account balances widened for the third consecutive year in 2022. - Stocks of foreign assets and liabilities remained at historically high levels in 2022. - The trend decline in excess current account balances had stalled in 2022. - Currency markets exhibited significant fluctuations driven by changes in the terms of trade and monetary tightening. - The US dollar appreciated substantially, reflecting a rapid tightening of monetary policy and more favorable terms of trade. - Emerging market and developing economies with preexisting vulnerabilities experienced greater depreciation pressures, while commodity exporting economies benefited from higher commodity prices. ### Drivers of Widening Global Balances (2022) - Elevated commodity prices amid supply concerns following Russia’s invasion of Ukraine significantly contributed to the widening of global balances in 2022. - The pandemic continued to unevenly affect current account balances, though to a lesser extent than in prior years; travel services remained subdued and high transportation costs persisted in some economies. - Cyclical factors (including temporary elevated commodity prices and differing output gaps across economies) played an important role in the widening of global balances in 2022. - Policy actions: On average, economies with current account deficits consolidated fiscal policies in 2022 relative to 2021, while economies with current account surpluses loosened their stances. - Fiscal support deployed to help households and firms weather the energy crisis was about 1.3 percent of GDP in the case of the European Union. - Government and household saving in advanced economies moved in opposite directions in 2022; corporate saving remained above pre-pandemic levels since mid-2020. - China’s reopening led to a temporary rebound in exports in the first quarter of 2023, contributing to a widening of global trade balances. - Banking sector turmoil (unexpected failures of two large regional banks in the United States and a systemically important global bank in Europe) had limited impact on cross-border capital flows and currency volatility so far, owing to forceful policy actions; tighter credit conditions have led market participants to expect a shallower US monetary policy path, providing some support to EMDE currencies. ### Currencies, Capital Flows, and Balance Sheets - Capital moved from emerging market and developing economies to advanced economies in 2022, in the context of increased risk aversion triggered by the war in Ukraine and tighter monetary policy in advanced economies. - Net flows of capital from emerging market and developing economies, mostly driven by China and commodity-exporting economies, have funded large current account deficits in some advanced economies. - The recent strong dollar episode was accompanied by surging commodity prices, in contrast to historical trends; US dollar appreciations have increased current account balances and have had large negative cross-border spillovers, disproportionally affecting emerging markets. - Directors highlighted that more flexible exchange rates and more anchored inflation expectations can mitigate negative spillovers to emerging market economies. - Directors called for greater analysis of vulnerabilities associated with large external stock positions. ### Outlook and Risks - Global current account balances are expected to narrow over the medium term as the impact of the pandemic and Russia’s war in Ukraine recede. - There is a high degree of uncertainty surrounding this outlook. Risks include: - tightening global financial conditions, - renewed increase in commodity prices, - slower-than-expected pace of China’s recovery, - slower-than-expected fiscal consolidation in economies with current account deficits, - a severe tightening of global financial conditions triggering broad-based capital outflows from vulnerable EMDEs, - further geoeconomic fragmentation leading to large welfare losses through trade barriers and reduced foreign direct investment. - The widening of global current account balances is expected to reverse in 2023, but gradually and over the medium term. ### Policy Recommendations and Governance Priorities - Both excess surplus and deficit economies should take steps to promote external rebalancing to reduce the risk of trade tensions, protectionist measures, and disruptive currency and capital flow movements. - Policies to promote external rebalancing differ by country circumstances: - In economies where excess current account deficits reflect excessive fiscal deficits, fiscal consolidation that preserves space for critical infrastructure and well-targeted social spending is critical. - Economies with lingering competitiveness challenges should address structural challenges to promote green, digital, and inclusive growth while boosting productivity. - Economies with persistent excess current account surpluses should prioritize reforms that encourage investment and discourage excessive private saving, while pursuing domestic objectives. - Directors underscored the importance of cooperation to address global challenges and preserve benefits of global integration and multilateralism; geoeconomic fragmentation would unambiguously reduce global welfare. - Industrial policy can be pursued to address well-established market failures but should not introduce distortions and should be consistent with international agreements and WTO rules. - Ensuring an adequate global financial safety net, with the Fund at its core, remains critical amid heightened vulnerabilities in emerging markets with high external liabilities; Directors underscored the importance of successfully completing the 16th General Review of Quotas. - Directors reiterated the need for transparency, consistency, and evenhandedness of external assessments across countries, urged continued caution in interpreting and communicating assessment results, and encouraged improvements to EBA methodologies given model limitations. *From: EXECUTIVE SUMMARY, 2023 External Sector Report (IMF).* ### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES ### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES ### Currency movements and real effective exchange rates - By April 2023, the US dollar was about 7 percent stronger compared with its 2021 average. - By October 2022, in real effective terms, the US dollar had appreciated by about 14 percent relative to its 2021 average; it has since depreciated by about 6 percent on a real trade-weighted basis. - Despite the depreciation, the dollar “remains stronger than it has been since 2000.” - As of April 2023: - The Japanese yen depreciated by 15.3 percent in real effective terms compared with its 2021 average. - The renminbi depreciated by 7.6 percent in real effective terms compared with its 2021 average. - The euro and the pound sterling “have either remained broadly unchanged.” - EMDE currency movements were heterogeneous: - Some economies (for example, Brazil and Mexico) appreciated in nominal effective terms in 2022 and early 2023. - Others (for example, Argentina, South Africa, and Türkiye) depreciated significantly. - The Russian ruble appreciated significantly in Q2 2022 under import and capital outflow restrictions, but has since depreciated against the US dollar, “largely owing to weaker terms of trade and a sharp increase in parallel imports.” - Drivers of these movements included: rapid tightening of US monetary policy, interest rate differentials, high energy prices, different speeds of economic recovery, earlier monetary tightening in some EMDEs, preexisting vulnerabilities (such as lower perceived institutional quality), and commodity exposure. ### Exchange Market Pressure and policy responses in 2022 - The Exchange Market Pressure Index (based on Goldberg and Krogstrup (2023)) combines exchange rate depreciation, foreign exchange intervention (FXIs), and policy rate changes; positive values correspond to pressure that would depreciate the nominal exchange rate. - In 2022 many economies let currencies adjust fully (examples: Australia, Sweden), while many others undertook foreign exchange intervention (examples: Czech Republic, Singapore) or raised policy rates (examples: Colombia, Romania), which dampened depreciation pressures. - Compared with 2021, external pressures in 2022 were “much larger,” with many economies hiking interest rates and offsetting depreciation pressures. - In 2022, countries with larger increases in inflation tended to experience more external pressure (correlation: when policy rate changes are excluded from the Exchange Market Pressure Index, the correlation goes from 0.6 to 0.5). - The March 2023 banking sector turmoil had only limited impact on currency volatility due to forceful policy responses; international dollar funding conditions eased after a brief tightening as the cross-currency basis narrowed back to pre-March levels. ### Global financial flows and capital flow patterns - In 2022 uphill capital flows from EMDEs to advanced economies reemerged, resembling the pre-global financial crisis pattern. - In 2022 net capital outflows from EMDEs (particularly from China) occurred not via accumulation of official reserves but via other types of flows; private holdings of US assets increased. - The net flow of capital from EMDEs as a whole is expected to diminish in 2023. - Subcomponents of the financial account in 2022: - Net portfolio flows accounted for a large share of net outflows from EMDEs and declined substantially in 2022. - Other investment inflows, including global cross-border bank flows to EMDEs, declined since 2021; the bulk of the decline was inflows into China. - Net foreign direct investment (FDI) inflows, relatively stable in 2020 and 2021, fell in 2022. - Reserve accumulation slowed from large accumulation in 2021 and turned into a net sale of reserves in Q2 2022. - Incidence of extreme capital flow movements increased since the onset of the pandemic, with a notable rebound in gross flows from both foreign (surges) and domestic (flights) investors during the 2021 recovery. - Episodes are defined when year-over-year changes in four-quarter flows are more than two standard deviations away from the historical average (based on 20 quarters). - After a year of net outflows in 2022, short-run net capital inflows to EMDEs resumed in early 2023, supported by: - Easing financial conditions (April 2023 Global Financial Stability Report). - Reopening of China. - A shallower expected monetary policy rate path in the United States. - The rebound in early 2023 featured a strong return of nonresident—and mostly debt—flows to EMDEs. - The March 2023 banking turmoil, while having limited short-term impact on flows, raises the risk of a potential risk-off episode with decreasing inflows to EMDEs. ### International balance sheets, valuation effects, and the global financial safety net - Creditor and debtor stock positions remained elevated in 2022, reflecting offsetting effects of widening current account balances, the dollar’s strength (valuation gains for countries with long dollar positions), and declining asset prices. - The largest debtor economy remains the United States; its net international investment position improved from –18.1 percent of world GDP in 2021 to –16.4 percent in 2022. - Other large debtor economies include the euro area (excluding Germany and The Netherlands). - The largest creditor economies, in descending order, are Japan, Germany, and China. - Financial centers represent 36 percent of global holdings but only 7 percent of global GDP. - Stock positions are “even more elevated in gross terms.” - Valuation changes in 2022 were more muted compared with 2021 for all ESR economies: - Creditor economies tended to have more valuation losses in 2022. - Debtor economies tended to experience more valuation gains in 2022, dampening global stock imbalances. - In the United States, declining domestic asset prices led to (positive) valuation gains in its external balance sheet that more than offset deterioration due to its current account deficit. - The global financial safety net (GFSN) comprises four main layers: gross international reserves, central banks’ bilateral swap lines (BSLs, limited and unlimited), Regional Financing Arrangements (RFAs), and the IMF (borrowed and quota resources). - As of end-2021, the GFSN represented a combined firepower of about 19 percent of global ... [text provided ends here]. *Source: CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES, 2023 EXTERNAL SECTOR REPORT (text - CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES).* ### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES ### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES ### Primer on Methodology - Primary numerical inputs come from the External Balance Assessment (EBA) methodology models, which produce medium-term current account and real exchange rate benchmarks consistent with country fundamentals and desired policies. - Norms are compared with realized current account and real exchange rate levels (after adjusting for cyclical and other short-term factors) to derive gaps measuring excess external balances. - Positive and negative gaps offset one another to ensure multilaterally consistent results. - Model outputs are combined with other external indicators (net international investment positions, capital flows, foreign exchange reserves, competitiveness indicators), analytically grounded adjustments, and country-specific insights to reach holistic IMF staff assessments. - IMF staff judgment is critical because models may not capture all country-specific characteristics and policy distortions. - For 2022, EBA model estimates were adjusted to strip out lingering but temporary COVID-19 effects on current accounts (including remaining travel restrictions and transportation cost shocks). - Adjustments for country-specific factors such as measurement issues, demographics, and net international investment position considerations were included. - Annex Table 1.1.3 reports IMF staff adjustments reflecting COVID-19-related and other country-specific factors. ### Assessment Results for 2022 - Coverage: Individual assessments for 30 of the world’s largest economies representing 87.5 percent of global GDP. - Overall classification of economies in 2022: - Moderately stronger, stronger, or substantially stronger than consistent with medium-term fundamentals and desirable policies (9 economies): - Germany, Malaysia, Russia, Singapore, Sweden, Thailand, India, Mexico, Saudi Arabia (India, Mexico, and Saudi Arabia entered the category in 2022). - Moderately weaker, weaker, or substantially weaker than consistent with medium-term fundamentals and desirable policies (8 economies): - Argentina, Belgium, Canada, South Africa, United States, France, Italy, Türkiye (France, Italy, and Türkiye entered the category in 2022). - Broadly in line with the level consistent with medium-term fundamentals and desirable policies (13 economies): - Brazil, China, Hong Kong SAR, Indonesia, Japan, Korea, Spain, Switzerland, United Kingdom, Australia, The Netherlands, Poland, euro area (Australia, The Netherlands, Poland, and the euro area entered this category in 2022 after being assessed as on the stronger side in 2021). - Changes versus 2021: - Assessments changed for nearly half of the 30 ESR economies. - Nearly a third of ESR economies moved farther away from “broadly in line.” - Majority of changes driven by lower current account balances in 2022 (e.g., Australia and the euro area). - Notable exception: large increase in Saudi Arabia’s current account balance moved its assessment to substantially stronger. - Some economies saw current account gaps widen (China, Korea, United Kingdom) or narrow (Germany, Japan, Switzerland) without changing category. - Aggregate metrics: - Sum of the absolute values of IMF staff–assessed current account gaps remained unchanged at 0.9 percent of ESR economy GDP in 2022 relative to 2021. - Sum of the absolute values of headline current account balances increased by 0.2 percentage point to about 3 percent of ESR GDP in 2022. - Current account norms (summed absolute values) widened to 1.6 percent of GDP in 2022, from 1.4 percent in 2021. - Major contributors to gaps in 2022 (as a share of ESR economy GDP): - Largest contributors to lower-than-warranted current account balances (negative gaps): United States, France, Italy (in descending order). - Largest contributors to larger-than-warranted current account balances: Germany, Russia, Saudi Arabia (in descending order). - Consistency: - IMF staff–assessed real effective exchange rate (REER) gaps and current account gaps for 2022 were generally consistent: economies with excess current account surpluses (deficits) were assessed to have had an undervalued (overvalued) REER. ### Outlook for Current Account Balances and Net Positions - Short-term projection for 2023: - Global current account balances projected to narrow in 2023. - China, the United States, and commodity-exporting countries (notably Norway and Saudi Arabia) are expected to contribute to narrowing global balances by about 0.5 percentage point of world GDP (more than half of the projected narrowing), reflecting: - Increase in public saving in the United States. - Robust recovery in domestic demand and overseas travel in China. - Falling commodity prices. - Germany and Japan (along with Korea) expected to contribute to widening global balances by about 0.1 percentage point: Germany driven by lower liquefied natural gas prices and stronger demand from Asia; Japan by lower commodity prices and inbound tourism. - Medium-term outlook: - Narrowing of global current account balances expected to continue as COVID-19 effects dissipate and output gaps close. - Commodity prices expected to fall as demand and supply adjust and the global economy slows, reducing terms-of-trade gaps. - Some surplus economies (Japan, Korea) expected to see widening current accounts over the medium term due to fundamentals (demographics in Korea; high rate of return on Japan’s net foreign assets). - Creditor and debtor stock positions: - Reached historically high levels in 2022 (Table 1.2). - Expected to moderate slightly over the medium term as current account balances gradually narrow. - Some debtor countries (for example, Spain) expected to improve net foreign asset positions driven by sustained projected trade surpluses and positive returns on net foreign assets. - Nonetheless, in some economies gross external liabilities remain large from a historical perspective, posing risks of external stress materializing. ### Risks Surrounding the Outlook - Key uncertainties include: - Falling commodity prices. - No further escalation of geopolitical tensions. - Contained financial sector turmoil. - Specific risk: Severe tightening of global financial conditions - Continued tightening of monetary policies in major economies poses challenges to the global financial system (referenced to Chapter 1 of the April 2023 Global Financial Stability Report). - In a severe global financial stress scenario, broad-based capital (text truncated in source). ### Key Table Excerpts (selected figures preserved exactly) - Global Current Account Balance (from Table 1.1): - 2020: 2,594 (Billions of US Dollars) - 2021: 3,435 - 2022: 3,941 - 2023 Projection: 3,188 - Percent of World GDP: 2020: 3.1; 2021: 3.6; 2022: 3.9; 2023 Projection: 3.0 - United States current account, Percent of GDP (Table 1.1): - 2020: –2.9 - 2021: –3.6 - 2022: –3.7 - 2023 Projection: –2.7 - China current account, Percent of GDP (Table 1.1): - 2020: 1.7 - 2021: 2.0 - 2022: 2.2 - 2023 Projection: 1.4 - Saudi Arabia current account, Percent of GDP (Table 1.1): - 2020: –3.1 - 2021: 5.1 - 2022: 13.6 - 2023 Projection: 6.2 - Net International Investment Position highlights (Table 1.2, Percent of GDP): - United States NIP, 2022: –64.7 - Japan NIP, 2022: 75.2 - Germany NIP, 2022: 71.0 - China NIP, 2022: 14.0 - Euro Area NIP, 2022: 2.0 - Overall creditors and debtors (Table 1.2): - Overall Creditors, 2022: 20,004 (Billions of US Dollars) - Overall Debtors, 2022: –25,200 (Billions of US Dollars) - Percent of World GDP: Overall Creditors 2022: 20.0; Overall Debtors 2022: –25.2 *Source: CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES, 2023 External Sector Report (text - CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES).* ### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES ### CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES ### Risks to Global Balances and External Positions - Capital flow reversal risk: - IMF staff estimates capital flows at risk at the 5 percent level to be 2.7 percent of GDP and the probability of outflows to be about 31 percent in May. - In the severe downside scenario in the April 2023 World Economic Outlook, simulation implies a narrowing of global balances and a 10 percent depreciation of EMDE currencies on impact. - Outflows from EMDEs could cause currency depreciation, sharp swings in risk premiums, exacerbate vulnerabilities of countries with high levels of dollar-denominated external debt, and dampen global trade. - Adjustments to Japan’s yield curve control policy: - Departure from yield curve control could cause portfolio rebalancing by Japanese investors that would put downward pressure on foreign asset prices. - Larger effects likely in countries with greater presence of Japanese investors, such as Australia, Ireland, and The Netherlands. - Some emerging markets such as Indonesia and Malaysia could face material capital outflows and exchange rate adjustments. - EMDE currency depreciations with falling risk appetite would likely contribute to narrowing global balances. - Rising commodity prices: - Renewed supply disruptions (for example, escalation of the war in Ukraine, extreme climate events such as El Niño), or stronger-than-expected demand could trigger another surge in commodity prices. - A surge could widen global current account balances in 2023 beyond the baseline projection and delay adjustment in subsequent years. - Prolonged elevation in oil and gas prices would increase vulnerabilities in commodity-importing EMDEs, potentially causing significant capital outflows, sizable exchange rate fluctuations, greater borrowing costs, and increased fiscal pressures. - The implication of these side effects for global balances is ambiguous. - Faltering growth in China: - A weaker-than-expected recovery in China would affect trading partners in Asia and the Pacific and commodities for which China accounts for a large share of global demand. - Lower growth in China would likely expand global balances by reducing its imports. - Fiscal policy path: - Additional fiscal spending financed by borrowing in economies with current account deficits, or higher-than-expected fiscal consolidation in surplus economies, could slow the expected narrowing of global balances. - Failure to implement credible fiscal consolidation in high-debt economies with elevated risk premiums could add pressures on financing current account deficits, resulting in narrowing global balances. - Climate change: - Worsening climate change and lack of progress on mitigation could increase natural disasters and potentially affect large countries long term, with possible effects on global balances. - Unbalanced implementation of climate mitigation policies could widen global balances. - Geoeconomic fragmentation: - Risk aggravated by US–China trade tensions and the war in Ukraine, with rising trade barriers. - Fragmentation could affect currency composition of foreign exchange reserves, reduce capital flows, complicate global safety net provision, and lead to reorganization of the international monetary system. - Impact on global current account balances depends on scenario: increased trade costs across blocs would likely reduce global balances; lower trade costs within blocs could increase global balances. - Extreme fragmentation could increase self-insurance incentives and potentially increase global balances if surplus countries increase savings more than deficit countries. - Further fragmentation would unambiguously lower welfare via effects on FDIs, technology diffusion, and flows of labor, goods, and capital, and weaken international policy coordination on global public goods such as climate mitigation and pandemic resilience. ### Policy Priorities for Promoting External Rebalancing - Overarching rationale: - Excess current account balances should be reduced as they reflect inefficient allocation of resources, frictions in domestic economies, and welfare losses. - Economies with excessively large current account deficits and negative net international investment positions are associated with larger real effective exchange rate gaps and greater exchange market pressures and risks of sudden stops. - Correcting excess balances can improve welfare and reduce risk of disruptive capital flow reversals. - Collective action: - Promoting external rebalancing requires both excess surplus and deficit economies to act collectively. - April 2023 World Economic Outlook priorities—restoring financial sector stability, normalizing fiscal policy, avoiding recession, durably reducing inflation, and achieving sustainable and inclusive growth—also facilitate trade and rebalance external positions. - Exchange rate and capital flow guidance: - In global financial distress, EMDEs should let currencies adjust to absorb external shocks. - Temporary foreign exchange interventions may be appropriate where shocks are large and countries face vulnerabilities from shallow FX markets, sizable balance sheet mismatches, or poorly anchored inflation expectations. - Capital flow management measures on outflows may be used if disruptive outflows lead to (imminent) crisis circumstances, but should not substitute for needed macroeconomic policy adjustment. - Preserve global integration and multilateralism: - Strengthen the current rule-based trading system and advance multilateral trade rules, focusing on reforms with broadly aligned country preferences. - Fully restoring the WTO dispute settlement system and implementing new WTO-based agreements would strengthen the rule-based system. - Policies to preserve global economic integration would mitigate risks related to fragmentation of FDI and other capital flows along geoeconomic fault lines. - Supporting availability of climate financing is important because green infrastructure investment in developing economies could mitigate external sector impacts of climate mitigation and adaptation. - Industrial policy guidance: - Industrial policy can address market failures but should not introduce distortions; should be consistent with international agreements and WTO rules; minimize adverse spillovers; avoid creating barriers to technology transfer; be well-structured, cost-effective, transparent, accountable, and not undermine competition. - Global Financial Safety Net (GFSN) and IMF role: - Maintaining liquidity in the global financial system via the GFSN is essential to manage tightening global financial conditions and fragmentation risks. - Coverage of GFSN layers is uneven and global liquidity provision is limited. - The IMF is the only layer providing universal coverage; its lending programs provide a safety net for balance-of-payments shocks. - IMF representativeness and adequate resourcing are crucial, depending on successful completion of the 16th General Review of Quotas. ### Tailored Policy Recommendations by External Position - Economies with weaker-than-warranted external positions: - Focus on policies that boost saving and competitiveness. - Where current account deficits partly reflect fiscal deficits above desirable levels (examples: Italy and the United States), pursue medium-term fiscal consolidation to stabilize debt-to-GDP ratios and close current account gaps. - Implement fiscal consolidation in a growth-friendly way while providing space for critical infrastructure investment and well-targeted social spending to reduce poverty and inequality (examples: Argentina and South Africa). - Address structural bottlenecks—labor, product market, and other structural reforms—to promote green, digital, inclusive growth and boost productivity. - Economies with stronger-than-warranted external positions: - Prioritize policies to promote investment and diminish excess saving to support external rebalancing while pursuing domestic objectives. - Examples: - Germany: higher fiscal deficits than currently planned are likely required over the medium term to achieve domestic climate, digital, and energy security goals. - Sweden: higher investment in the green transition and the health sector would lower the external balance. - Emerging markets such as Malaysia and Thailand: reform and expand social safety nets and address informality to reduce precautionary saving and support consumption. - Economies broadly in line with fundamentals: - Continue addressing domestic imbalances to prevent excessive external imbalances. - China: accelerate market-based structural reforms—including state-owned enterprise reform—to promote growth and shift fiscal policy support toward strengthening social protection to reduce high household saving and stimulate private consumption. - Countries with negative net international investment positions (examples: Brazil and Spain): keep current account balances in line with norms via fiscal consolidation and higher private saving to provide room for investment in education and reforms to encourage innovation and competitiveness. - Reforms to boost productivity create space for investment needed to advance green transition and reduce dependence on foreign energy. ### Financial Side of Global Imbalances (Box 1.1) — Key Findings - Changes since the global financial crisis in recycling of large surpluses: - Accumulation of foreign exchange reserves has played a much smaller role than before the GFC. - Net portfolio investment (debt in China, equity in Saudi Arabia) and net other investment (bank loans in China, currency and deposits in China and Saudi Arabia) have become more important channels of recycling recent surpluses. - In China, net errors and omissions account for part of the recycling of the surplus. - Russia: - Net other investment is the main channel for financial outflows from Russia, with a notable portion headed toward the euro area, Belgium being a prime destination. - Switzerland has been a substantial recipient of Russia’s investment since 2008. - United States current account deficit financing: - Mainly financed via portfolio debt flows, but increasingly financed by net flows of other investment (mainly currency and deposits, and bank loans). - Since early 2021, net external purchase of US portfolio debt securities shifted to US Treasury securities and away from corporate bonds, partly reflecting large financing needs related to pandemic stimulus measures. - Financing of the US current account deficit has become increasingly mediated by financial centers in recent years, contrasting with the pre-GFC period when reserve accumulation from surplus countries played a larger role. *2023 EXTERNAL SECTOR REPORT — CHAPTER 1 EXTERNAL POSITIONS ANd POLICIES* ### Box 1.1 (continued) ### Box 1.1 (continued) ### Net foreign purchases of US securities and reserve composition - China - 2015–16 sale of US Treasuries coincided with exchange rate depreciation. - 2018–20 sale occurred with modest net purchases of US government agency bonds. - Since late-2021, purchases of agency bonds have increased, broadly offsetting the decline in purchases of Treasury securities. - Russia - Has been divesting away from US Treasury bonds, especially since 2014. - Divestment appears to have peaked about 2018, with no significant transactions since mid-2019. - Share of gold in reserves increased since 2007, reaching 21 percent at the end of 2022. - United Kingdom and Cayman Islands - United Kingdom increased holdings by a total of about US$600 billion, comparable to the pre-GFC peak, with composition now more tilted toward US Treasuries and away from corporate bonds. - Cayman Islands increased holdings by a total of about US$500 billion, also tilted toward US Treasuries. - Given the United Kingdom’s current account deficit and the Cayman Islands’ small size, both are likely intermediaries providing financial and banking sector services. - Trends in holders and currency shares - Share of official holdings (among total holdings) of US Treasury securities decreased from a peak of 76 percent in mid-2009 to about 50 percent at the end of 2022. - Share of private holdings exceeded 40 percent at the end of 2022. - Currency composition of official foreign exchange reserves remained largely stable in recent years, with the US dollar still accounting for about 60 percent of the total of (allocated) global reserves. ### Role of financial centers and portfolio investment flows - Financial centers have increased their role in financing the US current account deficit and in China’s overseas portfolio investment. - Figures document net foreign purchases of US securities by country/center (Federal Reserve data and IMF staff calculations); “Corporate” includes bonds and stocks. - Custodial bias can distort patterns where a foreign holder uses a custodian in a different country (noted examples: Belgium, the Caribbean banking centers, Luxembourg, Switzerland, and the United Kingdom). ### Currency exposures of external balance sheets (Box 1.2) - Aggregate foreign currency exposures (net foreign assets in foreign currency as a percentage of total assets and liabilities) have improved significantly since 1990, particularly in EMDEs. - EMDEs shifted from negative aggregate net foreign currency positions in 1990 to positive positions by 2020; transition occurred mainly before the global financial crisis and is largely attributable to the currency composition of other investments (mainly bank related) and greater reliance on portfolio equity financing. - Currency-induced valuation effects (10 percent depreciation in domestic currency, all else equal): - EMDEs: 1990 median valuation loss of 1.6 percent of GDP; by 2020 the median effect had become positive, equivalent to 2.4 percent of GDP. - Advanced economies: 1990 median valuation gain of 0.5 percent of GDP; 2020 valuation gain of 9.2 percent of GDP. - Proportions and vulnerabilities - Proportion of EMDEs with net long positions in foreign currency increased from 17 percent in 1990 to 75 percent in 2020. - 92 percent of EMDEs were short on foreign currency in portfolio debt in 2020, resulting in a median valuation loss of 1 percent of GDP in portfolio debt when there is a 10 percent depreciation in domestic currency. - Aggregate positions may mask significant currency mismatches at the sectoral, institutional, or asset-class level; debt and equity valuation effects can offset each other, but short positions in foreign-currency debt keep EMDEs vulnerable to depreciation. ### Trade costs, geoeconomic fragmentation (GEF), and current account imbalances (Box 1.3) - Historical association - Trade openness and the size of global current account balances have tended to move together since 1870 (figure shows averages for 18 economies). - Model-based findings (dynamic quantitative trade model based on Cuñat and Zymek (2023)) - Trade barriers dampen the effect of shocks on trade balances and international risk sharing by magnifying the response of prices and the real interest rate to shocks. - Illustrative simulation: a one-time negative labor productivity shock in one country produces a need to run a current account deficit through international borrowing; higher trade barriers strengthen price and real rate responses and reduce current account imbalances. - Quantitative impacts of a baseline GEF scenario (calibrated to diminished trade openness per Bolhuis, Chen, and Kett (2023)) - Average absolute value of the trade balance is 10 percent lower after GEF. - Average absolute value of the current account balance is 8 percent lower after GEF. - Standard deviation of real aggregate consumption is 20 percent larger after GEF. - Scenario calibration notes: countries divide into a western and an eastern bloc with higher barriers between blocs, leading to a 3–4 percent real income loss for EMDEs on average. - Trade-offs - Higher trade costs reduce global imbalances but diminish capacity to smooth shocks, exposing EMDEs to greater consumption volatility even if shock size/frequency are unchanged. ### Selected reserves aggregates (Annex Table 1.1.1 highlight) - Aggregate Gross Official Reserves for the sample of External Sector Report economies: - 2019: 11,204 - 2020: 12,272 - 2021: 12,857 - 2022: 11,737 - Advanced economies (aggregate Gross Official Reserves): - 2019: 5,116 - 2020: 5,857 - 2021: 6,234 - 2022: 5,587 - Emerging market and developing economies (aggregate Gross Official Reserves): - 2019: 6,088 - 2020: 6,416 - 2021: 6,623 - 2022: 6,150 *Source: Box 1.1 (continued), CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2023 EXTERNAL SECTOR REPORT, International Monetary Fund | 2023.* ### Annex Table 1.1.2. External Sector Report Economies: Summary of External Assessment Indicators, 2022 ### Annex Table 1.1.2. External Sector Report Economies: Summary of External Assessment Indicators, 2022 ### Overall external position assessments and headline indicators - The table reports for each economy: Current Account (Percent of GDP), IMF Staff CA Gap (Percent of GDP) (midpoint and range), IMF Staff REER Gap (Percent), International Investment Position (Percent of GDP) (Net Liabilities / Assets), CA NFA Stabilizing (Percent of GDP), and SE of CA Norm (Percent). - Overall assessment categories used: Substantially stronger, Stronger, Moderately stronger, Broadly in line, Moderately weaker, Weaker, Substantially weaker. - Representative country-level headlines (selected exact values as reported): - Argentina — Overall Assessment: Weaker; Current Account: –0.6; Cycl. Adj.: –0.8; IMF Staff CA Gap Midpoint: –1.8 ±1; IMF Staff REER Gap Midpoint: 17.5 ±2.5; International Investment Position: NetLiabilities 1849 Assets 671.0.5 - Australia — Overall Assessment: Broadly in line; Current Account: 1.2; Cycl. Adj.: –2.1; IMF Staff CA Gap Midpoint: –0.5 ±0.8; IMF Staff REER Gap Midpoint: 2.6 ±4; International Investment Position: NetLiabilities –3418 Assets 3149 –1.9 0.8 - China — Overall Assessment: Broadly in line; Current Account: 2.2; Cycl. Adj.: 2.2; IMF Staff CA Gap Midpoint: 0.8 ±0.6; IMF Staff REER Gap Midpoint: –5.7 ±4.7; International Investment Position: NetLiabilities 1437 Assets 510.8 0.6 - Germany — Overall Assessment: Stronger; Current Account: 4.2; Cycl. Adj.: 5.3; IMF Staff CA Gap Midpoint: 2.8 ±0.5; IMF Staff REER Gap Midpoint: –7.8 ±1.4; International Investment Position: NetLiabilities 7123 Assets 93104.3 0.5 - United States — Overall Assessment: Moderately weaker; Current Account: –3.7; Cycl. Adj.: –3.5; IMF Staff CA Gap Midpoint: –1.1 ±0.7; IMF Staff REER Gap Midpoint: 9.0 ±5.6; International Investment Position: NetLiabilities –6517 Assets 6112 –3.5 0.7 - Note: full country-level numeric detail is provided in the table for all economies included; the above are selected exact entries to illustrate the reported indicators and assessments. ### IMF staff–assessed current account gaps and adjustments (Annex Table 1.1.3) - The table presents for each economy: Actual CA Balance [A]; Cycl. Adj. CA Balance [B]; EBA CA Norm [C]; EBA CA Gap [D = B–C]; IMF Staff-Assessed CA Gap [E = D + F]; IMF Staff Adjustments (COVID-19 [G], CA [H], Norm [I], Other/Total [F = G + H - I]) and Comments on non–COVID-19-related adjustments. - Selected exact entries and comments: - Argentina — Actual CA Balance [A]: –0.6; Cycl. Adj. CA Balance [B]: –0.8; EBA CA Norm [C]: 0.3; EBA CA Gap [D]: –1.2; IMF Staff-Assessed CA Gap [E]: –1.8; IMF Staff Adjustments Other Total [F]: –0.6 (COVID-19 0.1, CA 0.0, Norm 0.0); Comments: "NIIP/financing risk considerations" - Canada — [A]: –0.3; [B]: –1.3; [C]: 2.2; [D]: –3.4; IMF Staff-Assessed CA Gap [E]: –1.8; IMF Staff Adjustments Other Total [F]: 1.6 (COVID-19 0.0, CA 1.6, Norm 0.0); Comments: "Measurement biases" - Russia — [A]: 10.4; [B]: 6.7; [C]: 4.0; [D]: 2.7; IMF Staff-Assessed CA Gap [E]: 2.3; IMF Staff Adjustments Other Total [F]: –0.4; Comments: (none) - United Kingdom — [A]: –3.8; [B]: –2.2; [C]: –1.0; [D]: –1.2; IMF Staff-Assessed CA Gap [E]: –0.8; IMF Staff Adjustments Other Total [F]: 0.4 (COVID-19 0.4, CA –0.3, Norm 0.7); Comments: "Measurement biases" - Aggregate metrics shown: - Absolute sum of excess surpluses and deficits reported as 1.2 (percent of aggregate GDP). - Discrepancy reported as –0.0. ### IMF staff–assessed REER gaps and EBA REER gaps (Annex Table 1.1.4) - The table reports: IMF Staff-Assessed REER Gap (midpoint), REER Gap Implied by IMF Staff-Assessed CA Gap, EBA REER-Level Gap, EBA REER-Index Gap, CA/REER Elasticity, and REER percent change (Average 2022/Average 2021 and April 2023/Average 2022). - Selected exact entries: - Argentina — IMF Staff-Assessed REER Gap: 17.5; REER Gap Implied by CA Gap: 15.2; EBA REER-Level Gap: 10.8; EBA REER-Index Gap: 25.0; CA/REER Elasticity: 0.12; REER (Average 2022/Average 2021): 21.0; REER (April 2023/Average 2022): 1.4 - China — IMF Staff-Assessed REER Gap: –5.7; REER Gap Implied by CA Gap: –5.7; EBA REER-Level Gap: 12.7; EBA REER-Index Gap: 16.1; CA/REER Elasticity: 0.14; REER (Average 2022/Average 2021): –1.2; REER (April 2023/Average 2022): –6.5 - Russia — IMF Staff-Assessed REER Gap: –13.6; REER Gap Implied by CA Gap: –13.6; EBA REER-Level Gap: –4.7; EBA REER-Index Gap: 5.7; CA/REER Elasticity: 0.17; REER (Average 2022/Average 2021): 36.8; REER (April 2023/Average 2022): –7.1 - United States — IMF Staff-Assessed REER Gap: 9.0; REER Gap Implied by CA Gap: 9.0; EBA REER-Level Gap: 22.8; EBA REER-Index Gap: 10.7; CA/REER Elasticity: 0.12; REER (Average 2022/Average 2021): 9.5; REER (April 2023/Average 2022): –0.5 - Discrepancy (GDP-weighted average sum of IMF staff–assessed REER gaps) reported as 0.9. ### Policy gap contributions from regression decomposition (Annex Table 1.1.5) - The regression-based decomposition attributes EBA CA gaps to policy gaps: fiscal, public health expenditure, private credit, foreign exchange intervention and capital controls, plus domestic identified and residual contributions. - Key methodological notes: - Total foreign exchange intervention and capital controls contribution = Coeff * [(FXI x KC) - (desirable FXI x desirable KC)]. - Foreign contributions set (in percent of GDP): fiscal = 1.1; public health = 0.0; private credit = –0.4; foreign exchange intervention = 0.0. - Total domestic contribution = coefficient * (P − P*). - Representative numeric examples (exact reported values): - Argentina — EBA Gap: –1.2; Fiscal Total: –0.1 (Dom –0.9); Public Health Total: –1.0 (Dom 0.4); Private Credit Total identified: –0.7 (Dom 0.3); FXI and KC Total: –3.9 (Dom –1.5); FXI P: 0.0; KC P: 0.0; Residual and other coefficients and P/P* entries reported in table. - China — EBA Gap: 1.5; Fiscal Total: 1.0 (Dom 0.2); Public Health Total: 0.5 (Dom –0.4); Private Credit Total identified: –1.5 (Dom 0.3); FXI and KC Total: –6.8 (Dom –1.8); FXI P: 0.2; KC P: 0.2. - Germany — EBA Gap: 2.5; Fiscal Total: –0.6 (Dom –1.4); Public Health Total: 3.1 (Dom 0.7); Private Credit Total identified: –0.5 (Dom 0.3); FXI and KC Total: –2.8 (Dom –1.3). - The table provides country-level coefficient, P and P* values and the identified versus residual decompositions for all economies included. ### 2022 Individual economy assessments: Summary of policy recommendations (Annex Table 1.1.6) - The table lists for each economy the Overall 2022 Assessment and concrete policy recommendations (verbatim). - Country-by-country exact recommendations (selected full entries preserved): - Argentina — Overall 2022 Assessment: Weaker - Policy Recommendations: "Implement growth-friendly fiscal consolidation, combined with tight monetary policy and a streamlined FX regime to strengthen the trade balance, rebuild international reserves, regain market access, and ensure debt sustainability; introduce reforms to boost export capacity and encourage FDI." - Australia — Broadly in line - "Withdraw fiscal and monetary stimulus at an appropriate pace. Boost investment by executing planned infrastructure spending, streamlining product market regulation, and promoting R&D and innovation." - Belgium — Substantially weaker - "Strengthen competitiveness by addressing structural challenges, including labor and product market reforms, to foster green, digital, and inclusive growth. Rebuild fiscal buffers through expenditure-led consolidation." - Brazil — Broadly in line - "Raise national saving including by implementing medium-term fiscal consolidation. Reduce the cost of doing business by fostering a skilled labor force and implementing structural reforms to increase competitiveness." - Canada — Moderately weaker - "Develop a medium-term fiscal consolidation plan; boost nonfuel exports through improved labor productivity, removal of nontariff trade barriers, promotion of FDI, and investment in R&D, physical capital, and green transformation." - China — Broadly in line - "Accelerate structural reforms (by further opening domestic markets, ensuring competitive neutrality between SOEs and private firms), reduce wasteful and distorting industrial policy subsidies, reduce high household savings (by strengthening the social safety net), and promote green investment. Further increase ER flexibility to help the economy adjust to absorb shocks." - Euro Area — Broadly in line - "Step up efforts to facilitate the green transition; ensure that policies to protect the vulnerable from elevated energy prices are well targeted; avoid a trade-distorting subsidy race; preserve the integrity of the European single market; see additional member country–specific recommendations on reducing internal and external imbalances." - France — Moderately weaker - "Enhance productivity through structural reforms and sustain higher private investment to facilitate the green transition and digitalization, while rebuilding fiscal space once shock dissipates." - Germany — Stronger - "Promote investment and diminish excess saving, including through an investment push to achieve climate, digital, and energy security goals. Structural reforms to foster innovation, including development of the venture capital market and reducing the administrative steps needed to start a business, would also stimulate investment." - Hong Kong SAR — Broadly in line - "Ensure medium-term fiscal sustainability, given the rapidly aging population, and maintain policies that support wage and price flexibility to preserve competitiveness." - India — Moderately stronger - "Raise infrastructure spending to reduce CA gap. Over the medium term, implement gradual fiscal consolidation, develop export infrastructure, negotiate free trade agreements, and liberalize investment regime. Structural reforms could deepen integration in global value chains and attract FDI. ER flexibility should act as the main shock absorber, with intervention limited to addressing disorderly market conditions" - Indonesia — Broadly in line - "Enhance productivity and facilitate post-COVID-19 sectoral adjustment by increasing infrastructure and social spending and strengthening the social safety net, reducing restrictions on inward FDI and trade, and improving labor market flexibility. Flexibility of the ER should continue to support external stability." - Italy — Weaker - "Raise productivity and improve the business climate through structural reforms, including by upskilling the workforce and increasing the quality of infrastructure and the effectiveness of the judiciary and public administration. Reduce vulnerabilities associated with rollover of public debt by improving budget efficiency, containing pension spending, undertaking comprehensive and progressive tax reform, and fully implementing the National Recovery and Resilience Plan." - Japan — Broadly in line - "Implement a more flexible monetary policy, bold structural reforms, and a credible and specific medium-term fiscal consolidation plan. Focus on reforms that support private demand, raise potential growth, and promote digital and green investment." - Korea — Broadly in line - "Continue fiscal consolidation and monetary policy tightening to contain domestic demand and import growth in the near term. Over the medium term, reducing household debt and implementing policies to mitigate risks from geopolitical tensions would help maintain a sound external position. ER should remain market determined, with intervention limited to preventing disorderly market conditions." - Malaysia — Stronger - "Strengthen the social safety net, including through a reorientation of fiscal spending that should target a gradual and growth friendly consolidation; implement structural policies to encourage private investment and boost productivity growth." - Mexico — Moderately stronger - "Implement structural reforms to address investment obstacles, including tackling economic informality and governance gaps. Continue using floating ER as the main shock absorber, with FXI used only to prevent disorderly market conditions." - The Netherlands — Broadly in line - "Support investment in physical and human capital to foster robust potential growth, including through structural investment and reform plans to safeguard energy security, allay housing market shortages, facilitate access to finance for SMEs, reinforce the education system, and advance the climate transition and digitalization." - Poland — Broadly in line - "Reduce fiscal deficit while boosting public investment by deploying Next Generation EU grants to tackle infrastructure gaps, digitalization, and climate change; use structural policies to encourage corporate investment and productivity and incentivize credit allocation to the private sector." - Russia — Stronger - Policy recommendation entry in table: ". . ." - Saudi Arabia — Substantially stronger - "Implement structural reforms with an accompanying investment program to help diversify the economy, lift productivity and align the external position in the medium term; avoid procyclical fiscal policy amid high hydrocarbon windfalls; minimize risks associated with industrial policies." - Singapore — Substantially stronger - "Increase public investment, including spending on health care, green and other physical infrastructures, and human capital, to help reduce external imbalances over the medium term by lowering net public saving." - South Africa — Moderately weaker - "Implement structural reforms and stronger fiscal consolidation under a credible medium-term framework, while providing space for critical infrastructure and social spending; improve governance, efficiency of key product markets (to promote private sector participation), and functioning of labor markets; seize opportunities to build up reserves." - Spain — Broadly in line - "Implement fiscal consolidation. Improve productivity to increase private saving by enhancing education outcomes, encouraging innovation, and improve energy efficiency. Spain’s recovery plan foresees investments and reforms in these areas." - Sweden — Stronger - "Once inflation recedes, increase private and public investment in the green transition and the health sector." - Switzerland — Broadly in line - "Fiscal policy should remain in line with debt-brake rule framework in the near term. As inflation pressures ease, small deficits should support necessary expenditures; consider targeted FXI to mitigate disruptive volatility." - Thailand — Stronger - "Focus public spending on targeted social transfers as well as infrastructure investment to support a green recovery and reorientation of affected sectors. Continue the effort to reform and expand social safety nets; implement measures to address widespread informality." - Türkiye — Moderately weaker - "Strengthen the policy framework to help underpin external sustainability. Implement a tighter monetary and fiscal policy stance, and rebuild policy credibility." - United Kingdom — Broadly in line - "Implement gradual fiscal consolidation, while preserving the quality of key public services and protecting the vulnerable. Implement structural reforms to boost competitiveness, including via upgrading the labor skill base to support labor reallocation to fast-growing sectors, bolstering national savings to help finance investment, including in support of the climate transition." - United States — Moderately weaker - "Implement fiscal consolidation over the medium term. Implement structural policies to increase competitiveness, including upgrading infrastructure; enhancing schooling, training, and mobility of workers; supporting the working poor; and policies to increase growth in the labor force (including skill-based immigration reform). Roll back tariff barriers and resolve trade and investment disagreements supporting an open, stable, and transparent global trading system." - Note: country-specific recommendations are verbatim from the 2022 Individual External Balance Assessments table. *Source: IMF staff estimates and 2022 Individual External Balance Assessments as presented in the Annex tables.* ### References ### References ### Selected cited works - Adler, Gustavo, and Daniel Garcia-Macia. 2018. “The Stabilizing Role of Net Foreign Asset Returns.” IMF Working Paper 18/79, International Monetary Fund, Washington, DC. - Adler, Gustavo, Kyun Suk Chang, Rui Mano, and Yuting Shao. 2021. “Foreign Exchange Intervention: A Dataset of Public Data and Proxies.” IMF Working Paper 2021/047, International Monetary Fund, Washington, DC. - Aiyar, Shekhar, Jiaqian Chen, Christian Ebeke, Roberto Garcia-Saltos, Tryggvi Gudmundsson, Anna Ilyina, Alvar Kangur, and others. 2023. “Geoeconomic Fragmentation and the Future of Multilateralism.” IMF Staff Discussion Note 2023/001, International Monetary Fund, Washington, DC. - Allen, Cian, Camila Casas, Giovanni Ganelli, Luciana Juvenal, Daniel Leigh, Pau Rabanal, Cyril Rebillard, Jair Rodriguez, and João Tovar Jalles. 2023. “2022 Update of the External Balance Assessment Methodology.” IMF Working Paper 23/47, International Monetary Fund, Washington, DC. - Allen, Cian, Deepali Gautam, and Luciana Juvenal. 2023. “Currencies of External Balance Sheets.” Unpublished, International Monetary Fund, Washington, DC. - Antolín-Díaz, Juan, Ivan Petrella, and Juan F. Rubio-Ramírez. 2021. “Structural Scenario Analysis with SVARs.” Journal of Monetary Economics 117: 798–815. - Bank for International Settlements (BIS). 2023. “Statistical Release: BIS International Banking Statistics and Global Liquidity Indicators at End-December 2022.” Bank for International Settlements, Basel, Switzerland. - Bertaut, Carol, and Ruth A. Judson. 2014. “Estimating U.S. Cross-Border Securities Positions: New Data and New Methods.” International Finance Discussion Papers 1113, Board of Governors of the Federal Reserve System, Washington, DC. - Blanchard, Olivier J., and Mitali Das. 2017. “A New Index of Debt Sustainability.” NBER Working Paper 24068, National Bureau of Economic Research, Cambridge, MA. - Bolhuis, Marijn A., Jiaqian Chen, and Benjamin Kett. 2023. “Fragmentation in Global Trade: Accounting for Commodities.” IMF Working Paper 23/73, International Monetary Fund, Washington, DC. - Boz, Emine, Luis Cubeddu, and Maurice Obstfeld. 2017. “Revisiting the Paradox of Capital.” Vox: CEPR Policy Portal, March 9. - Boz, Emine, Nan Li, and Hongrui Zhang. 2019. “Effective Trade Costs and the Current Account: An Empirical Analysis.” IMF Working Paper 19/08, International Monetary Fund, Washington, DC. - Cherif Reda, Fuad Hasanov, and Nikola Spatafora and comprising Rahul Giri, Dimitre Milkov, Saad Quayyum, Gonzalo Salinas, and Andrew Warner. 2022. “Industrial Policy for Growth and Diversification: A Conceptual Framework.” IMF Departmental Paper DP/2022/017, International Monetary Fund, Washington, DC. - Cuñat, Alejandro, and Robert Zymek. 2023. “Trade Costs and Imbalances in a Small Open Economy.” Unpublished, International Monetary Fund, Washington, DC. - David, Antonio C., and Carlos Eduardo Gonçalves. 2021. “In Search of Lost Time: Examining the Duration of Sudden Stops in Capital Flows.” Journal of International Money and Finance 117 (C). - Denbee, Edd, Carsten Jung, and Francesco Paternò. 2016. “Stitching Together the Global Financial Safety Net.” Financial Stability Paper 36, Bank of England, London. - Eaton, Jonathan, Samuel Kortum, and Brent Neiman. 2016. “Obstfeld and Rogoff’s International Macro Puzzles: A Quantitative Assessment.” Journal of Economic Dynamics and Control 72: 5–23. - Forbes, Kristin J., and Francis E. Warnock. 2012. “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment.” Journal of International Economics 88 (2): 235–51. - Forbes, Kristin J., and Francis E. Warnock. 2021. “Capital Flow Waves—or Ripples? Extreme Capital Flow Movements since the Crisis.” Journal of International Money and Finance 116: 102394. - Goldberg, Linda S., and Signe Krogstrup. 2023. “International Capital Flow Pressures and Global Factors.” NBER Working Paper 30887, National Bureau of Economic Research, Cambridge, MA. - Gourinchas, Pierre-Olivier, and Olivier Jeanne. 2013. “Capital Flows to Developing Countries: The Allocation Puzzle.” The Review of Economic Studies 80 (4): 1484–1515. - International Monetary Fund (IMF). 2015. “Assessing Reserve Adequacy–Specific Proposals.” IMF Policy Paper, Washington, DC. - International Monetary Fund (IMF). 2016. “Adequacy of the Global Financial Safety Net.” IMF Policy Paper, Washington, DC. - Joy, Mark, Noëmie Lisack, Simon Lloyd, Dennis Reinhardt, Rana Sajedi, and Simon Whitaker. 2018. “Mind the (Current Account) Gap.” Financial Stability Paper 43, Bank of England, London. - Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2017. “Macrofinancial History and the New Business Cycle Facts.” NBER Macroeconomics Annual 31: 213–63. - Lane, Philip R., and Gian Maria Milesi-Ferretti. 2018. “The External Wealth of Nations Revisited: International Financial Integration in the Aftermath of the Global Financial Crisis.” IMF Economic Review 66 (1): 189–222. - Lane, Philip R., and Jay C. Shambaugh. 2010. “The Long or Short of It: Determinants of Foreign Currency Exposure in External Balance Sheets.” Journal of International Economics 80 (1): 33–44. - Lucas, Robert. 1990. “Why Doesn’t Capital Flow from Rich to Poor Countries?” American Economic Review 80 (May): 92–96. - Obstfeld, Maurice. 2017. “Assessing Global Imbalances: The Nuts and Bolts.” IMF Blog, June 26, 2017. - Obstfeld, Maurice, and Kenneth Rogoff. 2000. “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?” NBER Macroeconomics Annual 15: 339–90. - Perks, Michael, Yudong Rao, Jongsoon Shin, and Kiichi Tokuoka. 2021. “Evolution of Bilateral Swap Lines.” IMF Working Paper 21/210, International Monetary Fund, Washington, DC. - Prasad, Eswar, Raghuram G. Rajan and Arvind Subramanian. 2007. “The Paradox of Capital.” Finance & Development 44 (1): 16. - Reyes-Heroles, Ricardo. 2017. “The Role of Trade Costs in the Rise of Trade Imbalances.” Working Paper. 2017 Meeting Papers 212, Society for Economic Dynamics. - Tabova M. Alexandra, and Francis E. Warnock. 2021. “Foreign Investors and US Treasuries.” NBER Working Paper 29313, National Bureau of Economic Research, Cambridge, MA. ### Chapter 2 — External sector implications of the global dollar cycle: key findings and diagnostics - Research focus: - Examines implications of the “global dollar cycle” for the current account balance and other external sector indicators, building on Obstfeld and Zhou (2023). - Compares emerging markets with smaller advanced economies for heterogeneous effects. - Methodology: - State-dependent local projections (LP) methodology, following Obstfeld and Zhou (2023). - Controls for monetary policy developments, broader US financial conditions, and economic activity trends in the rest of the world. - Leverages model-based simulations analyzing global risk premium shocks in the Flexible System of Global Models (FSGM; Andrle and others 2015). - Quantitative impacts (exact reported estimates): - A 10 percent US dollar appreciation decreases output in emerging markets by 1.9 percent after one year, with the negative effect dissipating only after 10 quarters. - Negative effects in smaller advanced economies peak at 0.6 percent after one quarter. - Current account balances, as a share of GDP, increase in both country groups; the effect peaks at 1 percent of GDP for a 10 percent appreciation in the US dollar and is more persistent for emerging markets. - A 10 percent appreciation in the US dollar is associated with a decline in global current account balances by 0.4 percent of GDP after one year. - The estimated correlation between the unexplained residual labeled “global dollar cycle” and the US dollar index is 84 percent. - Established factors explain about one-fifth of US dollar fluctuations. - Transmission channels and heterogeneity: - Negative real sector spillovers from US dollar appreciations fall disproportionately on emerging markets. - The depressed investment rate accompanying negative spillovers is the main contributor to the current account increase. - Commodity exposure is a key structural contributor: - Commodity exporters exhibit larger negative spillovers owing to a pronounced deterioration in their terms of trade, driven by a strong negative link between commodity prices and the US dollar. - Commodity importers exhibit the opposite pattern, often generating sizable surpluses. - Policy relevance and mitigation: - More flexible exchange rates and more anchored inflation expectations can mitigate negative spillovers to emerging markets. - Monetary policy credibility facilitates accommodative policy responses to a US dollar appreciation, including reduced policy rates and real effective exchange rate (REER) depreciations, leading to a shallower initial negative spillover. - “Fear of floating” and less accommodation in emerging markets limit the shock-absorbing contribution of exchange rates, allowing income compression to dominate. - Diagnostics on the global dollar cycle construction: - The chapter focuses on a trade-weighted nominal US dollar index against currencies of major advanced economies. - Established explanatory variables for the US dollar include: (1) policy rates, including shadow rates; (2) differences between US policy rates and those of major advanced economies; (3) an index for US financial conditions; (4) a common component of economic activity in the rest of the world; and (5) the lagged change in the US dollar index. - Despite controls, a significant unexplained residual remains and is labeled the “global dollar cycle”; this residual accounts for the bulk of US dollar fluctuations over the last two decades. - Limitations noted: - The global dollar cycle is estimated as a residual and may contain many endogenous factors not further disentangled in the chapter. - The analysis focuses on the unexplained residual portion of US dollar fluctuations and uses model simulations to illustrate possible contributing mechanisms such as global financial market shocks. *Italic: Source — text - References, https://www.imf.org/-/media/files/publications/esr/2023/english/text.pdf* ### 2022. Extensive robustness tests, results of which are ### 2022. Extensive robustness tests, results of which are ### Global dollar cycle: definition, measurement, and correlates - The global dollar cycle is constructed as cumulated residuals after established factors are controlled for: (1) monetary policy, (2) policy rate differences with major advanced economies, (3) US financial conditions, and (4) an economic activity factor. - Shadow rates used: Wu-Xia shadow federal funds rate (Wu and Xia 2016) for the United States; the LJK Limited shadow rates for Australia, Canada, euro area, Japan, Switzerland, and the United Kingdom (Krippner 2015); and the shadow rate from De Rezende and Ristiniemi (2023) for Sweden. - Robustness tests (reported in Online Annex 2.4) show the estimated role of the global dollar cycle is broadly unchanged under a wide variety of alternative specifications of explanatory variables, including alternative series for monetary policy shocks, alternative horizons for interest rates, and the addition of commodity market developments. - Commodity market developments are not directly included as explanatory variables because the global dollar cycle (as proxied by risk premium shocks) can be an important driver of commodity prices and hence the terms of trade. Robustness tests instead consider global commodity supply shocks proxied with oil supply shocks (Baumeister and Hamilton 2019); results in Online Annex 2.4 show this variable has only a marginal explanatory power in historical data. ### Statistical correlations and interpretive lens - The chapter interprets underlying global dollar cycle shocks through the prism of UIP deviations, which exhibit the strongest correlation with the global dollar cycle. - Correlations of the global dollar cycle with other global financial indicators (quarterly correlations over 2000:Q1–22:Q4 depending on data availability): - Uncovered interest parity deviations from major advanced economy currencies: 0.69* - Global financial cycle: −0.53* - Chicago Board Options Exchange Volatility Index (VIX): 0.04 - Global uncertainty index: 0.09 - Note: “*” indicates the correlation is significant at the 1 percent level. - Interpretation of UIP linkage: - UIP deviations (λit) are decomposed as λit = iit − itUS − (ln(E(St+kLC/$)) − ln(StLC/$)), where iit is the interest rate in country i, StLC/$ the nominal exchange rate expressed in local currency per US dollar, and E(St+kLC/$) the expectation k periods out. - A strongly positive correlation between UIP deviations and the global dollar cycle suggests episodes when the US dollar appreciates are associated with excess returns on non-US currencies driven primarily by expected exchange rate depreciation rather than contemporaneous cross-border interest rate differentials. - Relationship with global financial cycle: - The global dollar cycle shows a strong negative correlation with the global financial cycle (tightening of financial conditions, as captured by a downswing in the global financial cycle, accompanies an upswing in the global dollar cycle). - VIX and global uncertainty: - The VIX does not correlate significantly with the global dollar cycle over the full sample period (though stronger correlations appear in some subperiods). - The global uncertainty index shows only a weak positive correlation with the global dollar cycle. ### Empirical framework for spillover analysis - The empirical analysis uses a local projections (LP) framework (Jordà 2005) following Obstfeld and Zhou (2023) to examine the impact of US dollar fluctuations on real, external sector, and financial variables for a sample of countries included in the IMF’s External Balance Assessment, subject to availability of quarterly data. - Main regressor: the first difference of a trade-weighted US dollar index against currencies of major advanced economies. - Sample exclusions: countries with a weight in the US dollar index greater than 4 percent are excluded to limit feedback from sample economies to the US dollar. - Controls included: - Global controls: US policy rates and differences with other advanced economies, US financial conditions, and an economic activity factor. - Country-specific lagged controls: GDP growth, the policy rate, bilateral exchange rate against the US dollar, and lags of global controls, change in the US dollar index, and the dependent variable. - State-dependent LP framework (Ramey and Zubairy 2018) is estimated to allow differential responses across country sets split by policy and structural characteristics. ### Empirical findings: spillovers to advanced vs emerging market economies - Aggregate output responses to a US dollar appreciation: - A 10 percentage points appreciation in the US dollar index is associated with a decline in real output by 1.9 percent in emerging markets and 0.5 percent in advanced economies 2 quarters after the initial appreciation. - Output in advanced economies recovers 3 quarters after the appreciation, while emerging market output remains depressed 10 quarters out. - Investment and trade: - An outsized decline in real investment in emerging markets drives the differential impact on output. - Trade volumes decline disproportionately more than economic activity for both country groups, with the magnitude of the decline in imports roughly double the decline in exports. - Current account and saving-investment dynamics: - A 10 percent appreciation in the US dollar increases the current account after five quarters by about 1 percent of GDP in emerging markets and 0.7 percent of GDP in advanced economies. - The current account increase is driven mainly by a decline in investment (measured in percent of GDP) around one year out in both country groups. - Saving does not reveal a clear systematic response or differences between the two country groups, except for a contemporaneous significant but short-lived drop in emerging markets. - Exchange rate behavior and expenditure switching: - Advanced economies: the real effective exchange rate (REER) depreciates persistently on impact, facilitating expenditure switching and contributing to external sector adjustment; services exports contribute substantially to the current account increase. - Emerging markets: the REER does not respond to a US dollar appreciation on impact (consistent with “fear of floating”), depreciating only gradually over subsequent quarters; the current account increase is driven mainly by a fall in imports of goods (income compression channel). - Financial channels and valuation effects: - Contemporaneous with the US dollar appreciation, capital inflows to emerging markets, both private and public, decline (private and public inflows are normalized by lagged foreign liabilities). - There is evidence of systematic negative valuation effects impacting the net international investment position (NIIP) over the examined horizon, as NIIP does not increase despite current account improvements for emerging markets. - Additional notes: - The chapter’s estimated large negative real spillovers for emerging markets confirm findings in Obstfeld and Zhou (2023) and align with several other recent studies. - The expenditure switching channel is further hindered in emerging markets by prevalence of US dollar invoicing in trade. - Fear of floating is applied broadly to non-floating exchange rate regimes in the analysis; the emerging market REER response is not driven by a limited number of pegged observations. ### Analytical implications and channels of transmission - Financial-market-driven shocks (risk premium shocks) are a plausible candidate source of the global dollar cycle; these shocks are not directly observable and are identified via the residual not explained by established exchange rate determinants. - Two concrete applications leveraging the UIP–global dollar cycle link: - Simulated risk premium shocks in a general equilibrium model to understand channels through which spillovers to emerging markets operate. - Constructed UIP deviations as an alternative source of global financial market shocks whose spillovers to emerging markets can be estimated. - Key transmission channels highlighted: - Exchange rate flexibility: depreciation of the REER in advanced economies helps absorb shocks and supports external adjustment; lack of immediate REER adjustment in emerging markets amplifies income compression and import declines. - Financial conditions and capital flows: tightening global financial conditions and reduced capital inflows to emerging markets magnify adverse spillovers; valuation effects on NIIP can offset current account gains. - Trade invoicing currency: US dollar invoicing dampens the expenditure switching channel in emerging markets. *Source: IMF staff calculations and chapter text (2023 External Sector Report).* ### 1. Saving ### 1. Saving ### Effects of a US dollar appreciation on external and financial variables - A 10 percent appreciation in the nominal US dollar index is the shock analyzed; impulse responses are shown with 90 percent confidence intervals. - When the US dollar appreciates, the current account increases in both emerging market and advanced economies, but through distinct channels: - Emerging markets: investment is persistently depressed; income compression drives the fall in imports and the external adjustment because of “fear of floating.” - Advanced economies: investment recovers quickly; depreciation in the real effective exchange rate (REER) and expenditure switching facilitate the adjustment. - Advanced economies experience: - Increases in NIIP driven by both current account surpluses and an initial positive valuation effect stemming from the US dollar appreciation. - Increases in public capital inflows that smooth the impact of the global dollar cycle. - Systematic association of US dollar appreciations with accommodative monetary policy, mitigating negative spillovers; the decline in domestic credit is shallow and short lived. - Emerging markets experience: - No systematic policy rate response and even procyclical responses on impact. - Persistent declines in domestic credit extending beyond the 12-quarter horizon. - Larger declines in stock prices than in advanced economies. - Figure and panel references (as presented in the source): - Figure 2.5 panels illustrate private inflows, public inflows, NIIP, policy rate, domestic credit, and stock price index responses to the 10 percent US dollar appreciation. ### Role of policy regimes and structural characteristics - Analysis approach: - State-dependent responses estimated by sample splits into subgroups for each factor; factors include exchange rate regime, monetary policy credibility, US dollar liability exposure, US dollar export invoicing, trade openness, and commodity exporter/importer status (Table 2.2). - Commodity exporter/importer status is used as a key exogenous structural feature to avoid endogeneity and collinearity issues. - Where overlap with the advanced/emerging market split is severe, estimation is limited to the emerging market sample. - Country categorization thresholds from Table 2.2 (preserved exactly as in the source): - Exchange rate regime: The coarse classification from Ilzetzki, Reinhart, and Rogoff (2019). Freely floating: 4; other regime: 1, 2, or 3. - Monetary policy credibility: The country average of the measure in Bems and others (2021). Median. - US dollar liability exposure: The share of foreign liabilities in US dollars from Bénétrix and others (2019). 75th percentile. - US dollar export invoicing: The country average of the share of exports invoiced in US dollars from Boz and others (2022). 75 percent of exports. - Trade openness: (Exports + Imports)/GDP from the IMF’s Balance of Payments Statistics. Median. - Commodity exporter/importer: The country median trade balance in all commodities from UN Comtrade. 5 percent of GDP. - Identification challenges highlighted: - Many characteristics are closely correlated with the split between emerging market and advanced economies (notably US dollar liability exposure and monetary policy anchoring). - Characteristics are often collinear with each other (example: exchange rate regime correlated with US dollar invoicing of exports). - Commodity-exporting status is more evenly distributed across country groups and treated as slow moving and exogenous for the analysis. - Monetary policy anchoring: - Emerging markets with more anchored inflation expectations exhibit a shallower initial decline in output; the difference is statistically significant. - When inflation expectations are anchored: - The REER depreciates (an increase in the REER is a depreciation as noted in the source). - The policy rate becomes more accommodative. - Investment remains more stable, contributing to a shallower decline in output. - Emerging markets with less anchored monetary policy see policy rates increase (marginal statistical significance) and the REER appreciates on impact, contributing to larger negative spillovers. - Exchange rate flexibility: - Emerging markets with freely floating exchange rate regimes exhibit systematically faster recoveries in output than emerging markets with less flexible exchange rates (after accounting for commodity trade). - Less flexible exchange rate regimes show larger current account increases via both saving increases and investment falls. - For emerging markets with severe financial frictions and balance sheet vulnerabilities, complementary policy tools (macroprudential measures and capital flow management measures) are recommended when exchange rate flexibility is limited. ### Commodity exporters versus commodity importers - Commodity exporters: - Exhibit larger negative spillovers owing to concurrent deterioration in their terms of trade. - A 10 percent US dollar appreciation decreases the terms of trade by 10 percent after five quarters. - Smooth the temporary drop in income by reducing saving and decreasing trade balances. - For commodity exporters, the current account does not increase in response to the US dollar appreciation. - No evidence that the REER depreciates disproportionately for commodity exporters to compensate for the fall in commodity export prices, consistent with “fear of floating.” - No evidence for accommodative monetary policy among commodity exporters (per the source). - Commodity importers: - Terms of trade improve, partially offsetting negative spillovers. - The decline in output is shallower. - REER movements and monetary policy further buffer the impact of the shock. - The current account increase is magnified: the initial fall in investment is accompanied by a significant increase in saving from the fifth quarter onward, leading to a gradual improvement in the NIIP. - Notable episode: - The 2021–22 strong US dollar episode was accompanied by a commodity price surge (driven by pandemic recovery dynamics and commodity supply disruptions from Russia’s war in Ukraine), which significantly muted or even reversed negative spillovers for commodity-exporting countries (event study summarized in Box 2.1). ### Policy implications and recommendations - For emerging markets: - Monetary policy credibility (anchoring of inflation expectations) mitigates negative spillovers by enabling accommodative policy responses and limiting imported inflation. - Flexible exchange rate regimes provide shock-absorbing properties and faster output recoveries, but may not be immediately feasible for economies with severe financial frictions and balance sheet vulnerabilities. - Complementary tools for vulnerable emerging markets include macroprudential measures and capital flow management measures. - For commodity-exporting advanced economies: - Accommodative policy responses (more anchored inflation expectations and allowing REER depreciation) can mitigate negative spillovers; analysis of this subsample shows more muted negative spillovers in output than in emerging market commodity exporters. ### Implications for global balances - US dollar appreciations are associated with a compression of global balances. - A time-series local projection (LP) exercise, similar to the panel approach used for country-level spillovers, is applied to estimate the impact on global balances (details are presented in the chapter). *Source: IMF staff calculations.* ### 5. Net International Investment ### 5. Net International Investment Position ### Empirical findings on US dollar appreciations and global balances - A 10 percent appreciation of the US dollar is associated with a decrease in global balances of about 0.4 percentage points after one year. - Average global balances in the period examined stand at 3.5 percent of GDP, with a standard deviation of 0.7 percent of GDP. - The decline in global balances is persistent, with a significant negative effect lasting for up to four years, but reversing thereafter. - One possible channel: falling commodity prices compress chronic current account surpluses of commodity exporters and deficits of importers simultaneously. - The compression of global balances is consistent with links between a stronger US dollar and lower trade flows under dominant currency pricing. - US dollar appreciations can tighten collateral constraints for importers that borrow in US dollars, amplifying effects on trade and balances. _Impulse response note preserved from source: Impulse responses show a 10 percent appreciation in the nominal US dollar index with 90 percent confidence intervals. An increase in the real effective exchange rate is a depreciation._ ### Model framework used: Flexible System of Global Models (FSGM) - FSGM is a semistructural multiregion general equilibrium model; analysis uses the G20MOD module including every G20 economy. - Key model features: - Monetary authorities and interest rates: An inflation-forecast-based reaction function under flexible exchange rates, with a higher weight on exchange rate deviations for emerging markets (consistent with fear of floating). Long-term (10-year) interest rate based on expectations theory plus a term premium. Interest rates on consumption, investment, government debt, and net foreign assets are weighted averages of the 1- and 10-year interest rates. - UIP: Deviations from UIP in the model are based on risk premiums. The UIP condition holds in the short term for the sovereign only if sovereign risk premium is set to zero; the calibrated model has a nonzero exogenous sovereign risk premium and a term premium on long-term bonds. The model includes an endogenous corporate risk premium depending on the business cycle and commodity prices. - Commodity exposure: The FSGM incorporates three types of commodities—oil, food, and metals—with commodities priced in the dominant currency: the US dollar. Calibration uses countries’ commodities production, consumption, and trade. - External sector: Exports and imports are determined by foreign and domestic activity and the exchange rate, with producer pricing assumed. Investment, household saving, and fiscal policy determine the current account and net-foreign-asset positions. ### Simulation setup: UIP deviations as sovereign spread shocks - UIP deviations are introduced as a global (excluding the United States) disturbance to sovereign spreads: a global persistent 1 percentage point shock to the sovereign premium. - The shock primarily increases financing costs for firms and households and generates cross-border spillovers and a US dollar appreciation. - For comparison with empirical findings, results distinguish aggregated advanced economies (excluding the United States) and aggregated emerging markets, with emerging markets further split into commodity exporters and commodity importers. ### Model simulation results (responses to a 1 percentage point sovereign premium shock) - Exchange rate and demand: - The shock increases demand for US dollars by reducing risk-free returns on foreign bonds, creating an incentive to invest in US bonds absent policy rate changes. - Central banks in advanced economies react by easing policy rates, contributing further to US dollar appreciation. - Real activity: - Increase in financing costs reduces domestic consumption via intertemporal substitution and lowers investment, producing a fall in output in the rest of the world. - The fall in output is larger in emerging markets, primarily because of their more limited exchange rate flexibility. - Commodity prices and trade: - The simulated shock generates a strong negative link between the US dollar and commodity prices through the demand channel: as global demand declines, demand for commodities falls and the real price of commodities falls. - For the simulated shock, a 1 percent appreciation in the US dollar is associated with a 2.3 percent decline in commodity prices at a one-year horizon. - The more-than-proportional fall in commodity prices is magnified by higher commodity intensity in the rest of the world and commodity pricing in the appreciating US dollar. - The US dollar pricing channel accounts for about 10 percent of the overall fall in the commodity price after one year. - As investment declines, there is a large worldwide drop in imports (high import propensity of investment goods), lowering global trade openness. - Current account dynamics: - Commodity importers: Improved terms of trade (lower import values) raise real income and households increase saving; however, substitution effects can offset this. In model calibration, the fall in investment is the main driver of the current account increase. The current account increases in commodity-importing countries, more so in emerging market commodity importers because of the larger fall in investment. - Commodity exporters: Two opposing effects—higher cost of capital and lower investment increase the current account; falling commodity prices reduce export values and lower saving, decreasing the current account. In the simulation, investment and saving responses broadly offset, leaving the current account unchanged for commodity exporters. - Overall: - The modeled global risk premium shock reproduces empirically observed negative real spillovers: US dollar appreciations are linked with falling foreign economic activity, falling commodity prices, reduced trade openness, and current account increases in commodity-importing countries. ### Caveats and omitted mechanisms - The model omits potentially important factors that could magnify negative spillovers: - Additional financial vulnerabilities from balance sheet mismatches. - A more nuanced modeling of the degree of central bank credibility. - Financial spillovers from advanced economies to emerging markets are represented as an exogenous shock to financial conditions rather than modeled directly (a shortcut). ### Policy implications and recommendations - Key empirical and model-based conclusions: - Negative spillovers from US dollar appreciations are more pronounced in emerging market economies, with larger and longer-lived declines in output compared with advanced economies. - The current account as a share of GDP increases in both emerging market and advanced economies, driven by weak investment; investment rebounds in advanced economies but remains persistently negative in emerging markets. - Depreciation in the REER facilitates adjustment in advanced economies; in emerging markets, REER does not adjust on impact and depreciates only gradually (consistent with fear of floating). - Financial channels contribute to adverse spillovers in emerging markets via reduced capital inflows (public and private) and a decline in domestic credit. - Commodity exporter status magnifies spillovers because US dollar appreciations are historically associated with falling commodity prices and deteriorating terms of trade for exporters; absent real exchange rate depreciation, emerging market commodity exporters smooth temporary income drops through reduced saving and decreased current account balances. Commodity importers benefit from improved terms of trade that partly offset negative spillovers. - Policies that can mitigate negative spillovers to emerging markets: - More anchored inflation expectations, which mitigate negative effects on real output by allowing accommodative policy responses (real exchange rate depreciation and policy rate decreases). - More flexible exchange rate regimes to speed economic recovery; flexibility should be supported by domestic financial market development to deepen foreign exchange markets and expand hedging options. - Strengthening fiscal and monetary frameworks: a well-balanced mix of fiscal and monetary policies, consolidation and enhancement of central bank independence, and improved transparency and effectiveness of communications. - Precautionary policy tools: global safety nets and Integrated Policy Framework-linked policy tools to address global financial market cycles and their spillovers. - In emerging markets with severe financial frictions and balance sheet vulnerabilities, macroprudential and capital flow management measures could help mitigate negative cross-border spillovers. - Broader research and policy agenda: - A deeper understanding of UIP deviations is needed to inform multilateral policy that could affect the global dollar cycle. - Research avenues include understanding spillover effects of national and global regulation of financial intermediaries and sources of intrinsic fluctuations in market-wide risk appetite. *Source: IMF staff calculations and Flexible System of Global Models (FSGM) analysis as presented in the chapter.* ### CHAPTER 2 EXTERNAL SECTOR IMPLICATIONS OF ThE GLObAL DOLLAR CyCLE ### CHAPTER 2 EXTERNAL SECTOR IMPLICATIONS OF ThE GLObAL DOLLAR CyCLE ### Event study: 2014–15 versus 2021–22 US dollar appreciation episodes - 2014–15 episode: - US dollar index appreciated by 16 percent. - Commodity prices fell by 32 percent. - Pattern is in line with the historical negative comovement between the US dollar index and commodity prices. - 2021–22 episode: - US dollar index appreciated by 10 percent. - Commodity prices increased by 34 percent. - A comparable simultaneous large and persistent positive comovement in the two variables has not been observed in recent decades. - Historical statistics and estimates: - Correlation between the US dollar index and commodity prices for the sample period is −0.38. - Obstfeld (2022) reports a coefficient of −2.45 (standard error of 0.42, R2 = 0.15) for a simple ordinary least squares regression of the oil-price change on dollar appreciation. - Figure trend lines reported in the analysis: - 2015 linear trend line: y = –0.16x + 0.17 (trend line excludes Brazil; coefficient is statistically significant at the 5 percent level). - 2022 linear trend line: y = 0.05x + 0.54 (trend line excludes Russia). ### Measurement of cross-border real output spillovers - Proxy for output spillovers: - Real GDP forecast errors constructed for each episode as: - For 2015: actual GDP for 2015 minus the IMF World Economic Outlook data for April 2014. - For 2022: IMF World Economic Outlook data for April 2023 minus that for January 2022. - Commodity trade balance measure: - Defined as the ratio of commodity exports to GDP minus the ratio of commodity imports to GDP. - Data sources: - IMF, World Economic Outlook database; IMF staff calculations. ### Key empirical findings on spillovers by economy type - 2015 (US dollar appreciation with falling commodity prices): - US dollar appreciation associated with systematic negative revisions to output for commodity exporters. - Negative spillovers were driven entirely by emerging market commodity exporters. - No systematic negative GDP forecast errors for advanced commodity-exporting economies. - Larger negative revisions for exporters with larger commodity trade surpluses. - 2022 (US dollar appreciation with rising commodity prices): - Real GDP of emerging market commodity exporters was systematically revised upward following the US dollar appreciation, with the notable exception of Russia. - Small downward revisions observed for advanced commodity-exporting economies. - Negative spillovers in 2022 fell disproportionately on emerging market commodity importers. - Role of exchange rate regimes and exposure: - Emerging market commodity exporters experienced mitigated impacts in 2022 partly because many had less flexible exchange rate regimes and larger commodity exposure. - Commodity importers’ vulnerabilities were muted by: - Their more limited exposure to commodities (see commodity trade balance ranges in the analysis). - Their more flexible exchange rate regimes. ### Interpretation and implications - The 2021–22 episode is unusual because the surge in commodity prices—linked to recovery from the COVID-19 pandemic and to Russia’s war in Ukraine—ran counter to the historical negative comovement with the US dollar. - Conclusions from the event study: - Emerging market vulnerabilities from the most recent US dollar appreciation episode require a nuanced interpretation. - The surge in commodity prices mitigated the impact of the US dollar appreciation on the more vulnerable commodity-exporting emerging markets during 2022. - The negative spillovers instead fell more on emerging market commodity importers, although limited by their lower commodity exposure and more flexible exchange rate regimes. - A return to the historically observed relationship between the US dollar and commodity prices could reverse the mitigating role that commodity prices played in 2022. - Notable country-specific exception: - Russia did not follow the general upward revision pattern for emerging market commodity exporters in 2022. ### Methodological notes relevant for interpretation - The event-study construction of forecast errors uses IMF World Economic Outlook vintages to isolate revisions around the dollar appreciation episodes. - Trend lines and statistical exclusions: - 2015 trend excludes Brazil; coefficient statistically significant at the 5 percent level. - 2022 trend excludes Russia. - The analysis highlights heterogeneity across advanced and emerging market economies and across exporters and importers of commodities. *Source: Box 2.1, CHAPTER 2 EXTERNAL SECTOR IMPLICATIONS OF ThE GLObAL DOLLAR CyCLE, 2023 External Sector Report (IMF).* ### 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, based holistically on elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. - Policy guidance: - Continue implementing prudent macroeconomic policies to strengthen the external CA and reserve coverage to secure external sustainability. - Growth-friendly fiscal consolidation, combined with tight monetary policy and a streamlined FX regime, 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. - As stability and confidence are reestablished, consider a gradual conditions-based easing of CFM measures and eliminate multiple currencies practices (MCP) and exchange restrictions. ### Foreign Asset and Liability Position and Trajectory - Background: - External gross liabilities: 49.0 percent of GDP at the end of 2022 (below 50 percent of GDP at the end of 2017). - NIIP: 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: - 2020 sovereign FX debt restructuring: $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. - 2021 provincial restructurings: 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; meeting obligations over the medium term depends on implementing a strong economic reform plan to restore market access. - Key 2022 balance-sheet figures (% GDP): - NIIP: 18.4 - Gross Assets: 67.5 - Res. Assets: 7.1 - Gross Liab.: 49.0 - Debt Liab.: 31.8 ### Current Account - Background: - CA reached a deficit of 0.6 percent of GDP in 2022, down from a surplus of 1.4 percent in 2021, due to a strong expansion of goods import volumes and a widening services deficit. - Terms of trade: higher grain export prices largely offset higher import prices on energy and intermediate goods. - Projection: CA balance projected to reach a surplus in 2023 (despite drought conditions affecting agricultural exports), mainly on moderating domestic demand and imports, improving commodity terms of trade, and higher interest income on private Argentine assets abroad. - Medium-term CA expected to reach 1 percent of GDP, mainly on account of stronger energy and services trade balances. - Assessment: - Cyclically adjusted CA balance estimated at a deficit of 0.8 percent of GDP in 2022, compared with an EBA CA norm surplus of 0.3 percent of GDP. - Estimated transitory COVID-19 impact: –0.2 percent of GDP for travel services and 0.2 percent of GDP for the transport sector; net impact of 0.1 percent of GDP on the cyclically adjusted CA. - IMF staff judges 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 2022 CA figures (% 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: - Average REER depreciated 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. - Appreciation largely reflects the rate crawl lagging headline inflation. - As of April 2023, the REER was 1.4 percent above the 2022 average. - Assessment: - IMF staff CA gap implies a REER gap of about 15 percent in 2022 (with an estimated elasticity of 0.12 applied). - EBA REER index model suggests a REER gap of 25 percent. - EBA REER level model estimates a gap of 10.8 percent (surrounded by significant uncertainty). - 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 introduced in late 2019 to contain capital outflows. - In 2022, measures were intensified amid rising FX pressures (gap between the parallel and official exchange rate remains around 90–100 percent) and challenges in accumulating reserves, including: 1. Incentives to encourage the liquidation of soy exports. 2. Tax measures on tourism inflows and outflows to reduce the services deficit. 3. Financing requirements for imports to limit short-term FX demand. - Assessment: - CFM and MCP measures have generally helped contain capital outflows but introduced distortions that discourage trade and foreign investment. - CFMs are not a substitute for sound macroeconomic policies; while needed in the near term, 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 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. - Reserve accumulation challenged by growing domestic demand and continued capital flight despite CFM measures. - Assessment: - Gross international reserves estimated at about 69 percent of the IMF’s composite metric in 2022. - Tighter fiscal and monetary policies necessary to secure projected trade surpluses and improve reserve coverage to pave the way for market access and easing of CFM measures over the medium term and elimination of MCP measures. - Given reserve scarcity, FX sales (in the official or parallel market) should be consistent with reserve accumulation goals, taking into account variability from seasonal factors and temporary bouts of excessive volatility. *Source: Box 3.1. Assessing Imbalances: The Role of Policies—An Example (text).* ### 0.9 percent in 2022, or by 7.7 percent in December 2022 from its trough in February 2020, reflecting higher wage increas ### text - 0.9 percent in 2022, or by 7.7 percent in December 2022 from its trough in February 2020, reflecting higher wage increas ### Belgium — External Position and REER - REER developments: - CPI-based REER: 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. - As of April 2023, the CPI-based REER was 0.8 percent above the 2022 average. - Assessment (IMF staff CA gap range): - REER 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: REER overvaluation of 16.9 percent (CPI-based REER index) and 31.3 percent (REER level models). ### Belgium — Capital, Financial Accounts, and Reserves - Financial account (2022): - Balance-of-payments 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. - Other investment: negative €45 billion, stemming from a sharp rise in foreign debts of commercial banks to Russia. - Short-term external debt: 31 percent of gross external debt in 2022 (from an average of 27 percent in 2017–21). - Assessment: - Belgium remains exposed to financial market risks, but the structure of financial flows does not point to specific vulnerabilities. - Large positive NIIP reduces vulnerabilities associated with high external public debt. - FX 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: - External position in 2022 broadly in line with level implied by medium-term fundamentals and desirable policies. - CA deficit expected to gradually narrow to about 2.3 percent of GDP in 2023 and remain broadly stable over the medium term as growth converges to its potential rate and net public savings improve. - Risks: uncertainties to global financial conditions and insufficient progress on domestic reforms. - Potential Policy Responses: - Raise national savings to provide room for sustainable expansion in investment, 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 to strengthen competitiveness. ### Brazil — External Positions and Key Statistics (2022) - Foreign asset and liability position: - NIIP: –40.4 percent of GDP at end-2022 (from –36.7 percent in 2021). - Projected NIIP: around –42 percent of GDP over the medium term. - At end-2022, estimated external debt: 35.4 percent of GDP and 200 percent of exports (compared with 40.7 percent of GDP and 236 percent of exports in 2021). - FDI accounts for more than half of all liabilities. - Assessment: - NIIP negative since 2001. - Short-term gross external financing needs: 11 percent of GDP annually. - CA deficit required to stabilize NIIP at –41 percent: 2.1 percent of GDP. - 2022 (% GDP) summary: - NIIP: –40.4 - Gross Assets: 49.2 - Res Assets: 16.9 - Gross Liab.: 89.6 - Debt Liab.: 35.4 ### Brazil — Current Account and REER (2022) - Current Account: - Background: trade surplus in goods of 2.3 percent of GDP; CA deficit reached 3 percent of GDP in 2022 (compared with 2.8 percent in 2021). - Drivers: higher deficits in transport services and primary income related to profits and dividends; exports and imports at record levels driven by high commodity prices. - Expected path: CA deficit gradually narrow to about 2.3 percent of GDP in 2023 and remain broadly stable over the medium term. - Assessment (2022 numbers and gaps): - CA: –3.0 percent of GDP - Cycl. Adj. CA: –3.3 percent of GDP - EBA Norm: –2.2 percent of GDP - EBA Gap: –1.1 percent of GDP - COVID-19 Adj.: 0.3 percent of GDP - Other Adj.: 0.0 percent of GDP - Staff Gap: –0.8 percent of GDP - IMF staff estimate CA gap in the range of –1.3 and –0.3 percent of GDP with a midpoint of –0.8 percent of GDP (after COVID-19 travel and transport adjustments). - Real Exchange Rate: - Background: REER appreciated sharply 18.8 percent in the first four months of 2022 before partial reversal; as of April 2023, REER appreciated by 2.3 percent relative to 2022 average. - Assessment: IMF staff CA gap implies a REER gap of 6.0 percent in 2022 (elasticity 0.13). - EBA models: REER index and level methodologies indicate 29.1 percent and 14.4 percent undervaluation, respectively. - Staff 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. - 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: Central Bank of Brazil (BCB) under Law No. 14286 has begun simplifying and modernizing foreign exchange and capital regulation. - Assessment: favorable risk profile over medium term with positive net FDI inflows (~2 percent of GDP) outweighing negative portfolio outflows (~0.1 percent of GDP); downside risks from tighter global financial conditions and insufficient reforms. - FX intervention and reserves: - Background: floating exchange rate. - FX swap outstanding stock: rose from US$80 billion in 2021 to US$98.5 billion in 2022. - International reserves: US$325 billion at end-2022 (from US$362 billion at end-2021); recovered to US$345 billion in May 2023. - Assessment: reserves adequate (IMF reserve adequacy metric 136 percent as of end-2022); interventions should be limited to alleviating disorderly FX market conditions. ### Canada — Overall Assessment and Policy Recommendations - Overall Assessment: - External position in 2022 moderately weaker than level implied by medium-term fundamentals and desirable policies. - CA 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 as export prices decline and domestic demand recovers. - Potential Policy Responses: - Boost competitiveness in nonfuel goods and services exports via: - (1) measures to improve labor productivity, - (2) removing nontariff trade barriers, - (3) investing in R&D and physical capital, - (4) investing in the green transformation, - (5) promoting FDI. - Medium-term fiscal consolidation to stabilize debt and support external rebalancing. ### Canada — Positions, Gaps, and REER (2022) - Foreign asset and liability position: - NIIP: 30.1 percent of GDP in 2022 (down from 52.1 percent in 2021). - Gross external debt decreased to 128.5 percent of GDP; about 51.1 percent of GDP is short-term debt. - 2022 (% GDP) summary: - NIIP: 30.1 - Gross Assets: 264.9 - Debt Assets: 87.3 - Gross Liab.: 234.7 - Debt Liab.: 128.5 - Current Account and CA gap (2022): - CA: –0.3 percent of GDP - Cycl. Adj. 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 percent of GDP - Other Adj.: 1.6 percent of GDP - Staff Gap: –1.8 percent of GDP - IMF staff assesses CA gap range: between –2.3 and –1.3 percent of GDP, midpoint –1.8 percent of GDP. - Real Exchange Rate: - Background: average REER for 2022 broadly unchanged from 2021 (0.1 percent stronger); as of April 2023, REER was 4.3 percent below 2022 average. - Assessment: EBA REER index model points to overvaluation of 1.9 percent in 2022; REER level model suggests undervaluation of 10.5 percent. - Staff assessment: REER overvalued between 5.1 and 8.5 percent, midpoint 6.8 percent. ### Canada — Capital Flows and FX Regime - Capital and financial accounts (2022): - FDI net outflows: 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 of about 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: - Open capital account; vulnerabilities limited by credible commitment to a floating exchange rate. - FX intervention and reserves: - Background: free-floating exchange rate; no intervention since September 1998 (except joint interventions); limited reserves but standing swap arrangements with US Federal Reserve and four other major central banks. - Assessment: policies appropriate; swap arrangements reduce need for reserve holdings. ### China — Overall Assessment and Policy Recommendations - Overall Assessment: - External position in 2022 broadly in line with level implied by medium-term fundamentals and desirable policies. - CA surplus widened to 2.2 percent of GDP in 2022 (from 2.0 percent in 2021) reflecting sluggish imports and COVID-19-related transitory factors. - CA surplus expected to narrow and return to downward trend as COVID-related factors unwind and rebalancing toward private consumption resumes. - Potential Policy Responses: - (1) Accelerate market-based structural reforms: further opening of domestic markets, ensure competitive neutrality between state-owned and private firms, reduce wasteful and distorting industrial policy subsidies, increase reliance on market forces, and promote green investment—to boost potential growth. - (2) Shift fiscal policy support toward strengthening social protection to reduce high household savings and rebalance toward private consumption. - (3) Further increase exchange rate flexibility to help absorb external shocks. ### China — External Positions and Key Statistics (2022) - NIIP and reserves: - 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) summary: - 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 - Cycl. Adj. 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 - Other Adj.: 0.0 percent of GDP - Staff Gap: 0.8 percent of GDP - EBA CA model estimates CA gap 1.5 percent of GDP; accounting for pandemic-related temporary factors (+0.7 percent of GDP), staff estimate CA gap range 0.1 to 1.4 percent of GDP, midpoint 0.8 percent. - Real Exchange Rate: - Background: REER depreciated in 2022 by 1.2 percent from 2021 average; NEER appreciated 3.8 percent; as of April 2023, REER had depreciated by 6.5 percent from 2022 average. - Assessment: IMF staff CA gap implies REER gap of –5.7 percent (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, CFMs, and Reserves - Capital and financial accounts: - Net capital outflows increased to $302 billion (1.7 percent of GDP) in 2022 from $165 billion (0.9 percent of GDP) in 2021. - Policy measures in 2022: - Reimposed risk reserve requirement of 20 percent on FX forwards (outflow CFM) in September 2022. - Raised cross-border financing macroprudential adjustment parameter from 1 to 1.25 (relaxation of an inflow CFM) in October 2022. - Reserve requirement ratio for FX deposits lowered twice, by 1 and 2 percent, in May and September 2022. - Qualified Domestic Institutional Investor quota stood at $162.7 billion as of March 2023. - Assessment: substantial net outflow pressures resurfaced; medium-term opening likely to create larger two-way gross flows; CFM should not be used to actively manage capital flow cycle or substitute for macroeconomic adjustment and exchange rate flexibility; gradual phase-out of CFM consistent with exchange rate flexibility and supporting reforms recommended. - FX intervention and reserves level: - FX reserves declined by $122.5 billion and reached $3.1 trillion as of end-2022, with decline mainly reflecting valuation effects and no sign of large FX intervention. - Reserves level: 68 percent of IMF’s standard composite metric at end-2022 (68 percent in 2021) and 110 percent of metric adjusted for capital controls (109 percent in 2021); assessed to be adequate. ### Euro Area — Overall Assessment and Policy Responses - Overall Assessment: - External position in 2022 broadly in line with level implied by 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 for first time in more than a decade, largely due to sharp increase in energy import prices and deterioration in the goods balance. - Over the medium term, euro area CA projected to recover gradually to positive territory but remain below historical average as energy prices remain elevated. - National external imbalances expected to remain sizable. - Potential Policy Responses: - With elevated energy prices, target protection for vulnerable households and firms and 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 (completing banking and capital markets unions, establishing central fiscal capacity) would deepen risk sharing and support external stability. ### Euro Area — NIIP and Financial Position (2022) - NIIP trajectory: - NIIP rose to 2.0 percent of GDP by end-2022 (from –20.5 percent of GDP in 2009). - Relative to 2021, NIIP increased in 2022 by 1.7 percentage points of GDP, primarily reflecting valuation effects from the weaker euro. - Gross portfolio investment assets and liabilities declined sharply reflecting valuation effects from higher interest rates; direct investment assets and liabilities declined more moderately. - Gross values of derivative positions increased with higher financial market volatility. *Italic: Source — International Monetary Fund, 2023.* ### 250.7 percent of GDP, and liabilities 248.7 percent of GDP, as of the end of 2022. Net external assets (including those ### text - 250.7 percent of GDP, and liabilities 248.7 percent of GDP, as of the end of 2022. Net external assets (including those ### Foreign asset and liability positions and trajectory (euro area aggregate) - NIIP: 2.0 percent of GDP (2022) - Gross Assets: 250.7 percent of GDP (2022) - Debt Assets: 92.0 percent of GDP (2022) - Gross Liabilities: 248.7 percent of GDP (2022) - Debt Liabilities: 92.5 percent of GDP (2022) - 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. Aggregate NIIP financing vulnerabilities appear low, but large net external debtor countries bear an elevated risk of a sudden stop of gross inflows. ### Current account (euro area aggregate) - CA (2022): –1.0 percent of GDP - Cyclically Adjusted CA (2022): 0.1 percent of GDP - EBA Norm: –0.3 percent of GDP - EBA Gap: 0.5 percent of GDP - COVID-19 Adjustment: 0.1 percent of GDP - Other Adjustments: –0.6 percent of GDP - Staff Gap: –0.1 percent of GDP - Background: CA balance decreased from 2.3 percent of GDP in 2021 to –1.0 percent of GDP in 2022, driven largely by a sharp increase in energy import prices and deterioration in the goods balance; services and secondary incomes broadly stable; primary income declined owing to lower investment income. CA compression strongest in Q2 and Q3 2022; returned to surplus in Q4 2022 as energy prices and trade disruptions moderated. - Assessment: EBA model CA norm –0.3 percent of GDP vs cyclically adjusted CA 0.1 percent of GDP implies a 0.5 percent of GDP gap. IMF staff indicates a CA norm higher by 0.1 percent of GDP than EBA model because of policy commitments to reduce large net external liabilities in Portugal and Spain. IMF staff assesses CA gap to be –0.1 percent of GDP in 2021, with range –0.7 to 0.6 percent of GDP. ### Real exchange rate (euro area aggregate) - CPI-based REER appreciation 2015–2021: 4.5 percent - CPI-based REER change 2022 vs 2021: –3.0 percent - Nominal depreciation 2022 vs 2021: –4.2 percent - ULC-based REER depreciation 2022 vs 2021: –5.3 percent - As of April 2023: CPI-based REER was 5 percent above the 2022 average - Assessment: IMF staff assesses REER gap = 0.2 percent in 2022, range –1.6 to 2.0 percent, based on CA-REER elasticity of 0.35. Large heterogeneity across member states: Germany undervaluation of 8 percent; Finland and Italy overvaluation about 10 percent. EBA REER index and level models suggest overvaluations of 7.6 percent and 8.0 percent, respectively. ### Capital and financial accounts; flows and policy measures (euro area aggregate) - Capital account surplus (2022): 1.0 percent of GDP - Financial account surplus (2022): 0.1 percent of GDP - Assessment: Gross external indebtedness of euro area residents decreased by 11 percentage points of GDP in 2022 due to lower external debt of governments, the Eurosystem, and the nonfinancial sector offsetting higher debt of deposit-taking institutions. ### FX intervention and reserves level (euro area aggregate) - 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. ### France: foreign asset/liability, CA, REER, and vulnerabilities (selected figures) - NIIP (Q4 2022): –23.6 percent of GDP - Gross Assets (Q4 2022): 302.2 percent of GDP - Debt Assets: 173.2 percent of GDP - Gross Liabilities (Q4 2022): 325.8 percent of GDP - Debt Liabilities: 202.7 percent of GDP - Public external debt: 46 percent of GDP (Q4 2022) - Banks’ short-term debt securities stock: €96 billion (Q2 2022) = 3.5 percent of GDP - Financial derivatives: about 40.5 percent of GDP - Average TARGET2 balance (2022): €75.9 billion - CA (2022): –2.1 percent of GDP - Cyclically Adjusted CA (2022): –1.5 percent of GDP - EBA Norm: –0.3 percent of GDP - EBA Gap: –1.1 percent of GDP - COVID-19 Adj.: –0.9 percent of GDP - Other Adj.: 0.0 percent of GDP - Staff Gap (midpoint): –2.0 percent of GDP (range –2.5 to –1.6 percent) - REER: ULC-based REER depreciation 2022 vs 2021: –3 percent; CPI-based REER depreciation 2022 vs 2021: –4.6 percent; As of April 2023 CPI-based REER 2.3 percent above 2022 average - IMF staff CA gap implies REER gap of 7.1 percent in 2022 (elasticity 0.28). EBA REER models: –4.8 percent (index) and 5.3 percent (level). IMF staff assesses REER overvalued in range 5.5 to 8.7 percent (midpoint 7.1 percent). - Assessment: NIIP negative but size and projected stable trajectory do not raise sustainability concerns; vulnerabilities from large public external debt and banks’ gross financing needs. CA deficit expected to shrink to about 1.2 percent of GDP in 2023; medium-term shrinkage projected as war effects fade and reforms improve competitiveness; fiscal consolidation would help reduce CA deficit. ### Germany: foreign asset/liability, CA, REER, and vulnerabilities (selected figures) - NIIP (2022): 71 percent of GDP - Gross Assets: 310 percent of GDP - Debt Assets: 162 percent of GDP - Gross Liabilities: 239 percent of GDP - Debt Liabilities: 156 percent of GDP - TARGET2 claims at end-2022: €1.3 trillion - CA (2022): 4.2 percent of GDP - Cyclically Adjusted CA (2022): 5.3 percent of GDP - EBA Norm (midpoint): 2.8 percent of GDP - EBA Gap: 2.5 percent of GDP - COVID-19 Adj.: 0.4 percent of GDP - Staff Gap (midpoint): 2.8 percent of GDP (range 2.3 to 3.3 percent) - REER (CPI-based) appreciation in 2022: 0.4 percent; 12-month depreciation to August 2022: –3.9 percent; As of April 2023 CPI-based REER 3.2 percent above 2022 average - IMF staff CA gap implies REER gap of –7.8 percent in 2022 (elasticity 0.37). EBA REER models suggest undervaluation 9.5 percent (level) and overvaluation 6.7 percent (index). Staff assesses REER undervalued with midpoint 7.8 percent and uncertainty ±1.4 percent. - Assessment: External position stronger than implied by fundamentals. 2022 CA weakening driven by surge in energy import costs and recovery in travel imports. Risks limited given safe-haven status and external position strength. ### Hong Kong SAR: foreign asset/liability, CA, and reserves (selected figures) - NIIP (2022): 486 percent of GDP (down from 572 percent in 2021) - Gross Assets: 1,678 percent of GDP (2022) - Debt Assets: 596 percent of GDP (2022) - Gross Liabilities: 1,192 percent of GDP (2022) - Debt Liabilities: 420 percent of GDP (2022) - FX reserves (end-2022): 117 percent of GDP - CA surplus (2022): 10.5 percent of GDP (down from 11.8 percent in 2021) - Adjustment for travel services (COVID-19): 0.9 percent of GDP (transport adjustor 0 percent) - Adjusted CA surplus estimate (2022): 11.2 percent of GDP (within IMF staff–assessed CA norm 9.1–12.1 percent of GDP) - Assessment: Vulnerabilities low given positive and sizable NIIP and favorable composition. Large gross asset and liability levels reflect status as international financial center; direct investment shares: assets 36 percent, liabilities 51 percent; portfolio investments only 12 percent of gross liabilities. *Source: https://www.imf.org/-/media/files/publications/esr/2023/english/text.pdf* ### 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 ### Selected Economy Assessments (excerpt): Hong Kong Special Administrative Region; India; Indonesia; Italy — 2022 ### Hong Kong Special Administrative Region — External Position and REER - IMF staff-assessed CA gap range: between –0.9 and 2.1 percent of GDP, with a midpoint of 0.6 percent. - CA estimates for 2022 (% GDP): - CA: 10.5 - Cycl. Adj. CA: 10.3 - EBA Norm: — - EBA Gap: — - COVID-19 Adj.: 0.9 - Other Adj.: — - Staff Gap: 0.6 - Real Exchange Rate (REER) background: - REER depreciated by about 5 percent in 2021; 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. - REER assessment: - IMF staff assesses the REER gap to be in the range of –5.3 to 2.4 percent, with a midpoint of –1.4 percent (based on average CA-REER elasticity of about 0.4). - Capital and financial accounts — flows and policy measures: - 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 characteristics: very volatile, reflecting Hong Kong SAR and mainland China financial conditions, shifting expectations of U.S. monetary policy, and related arbitraging in FX and rates markets. - Assessment: large financial resources, proactive supervision/regulation, and deep/liquid markets should help limit risks from volatile capital flows and the war in Ukraine; greater exposure to mainland China could pose risks through trade, tourism, banking credit exposures, and fundraising by Chinese firms; banking system assessed broadly resilient due to high capital buffers and profitability. - FX intervention and reserves level: - 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 several times. - 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; should evolve with automatic adjustment under currency board. *Source: IMF 2023 — chapter excerpt* ### India — Overall External Position, CA, REER, Reserves - Overall assessment (fiscal year 2022/23 ending March 2023): - External position moderately stronger than level implied by medium-term fundamentals and desirable policies. - CA deficit somewhat smaller than implied by per capita income, growth prospects, demographics, development needs. - External vulnerabilities: weakening demand in some partner countries, volatile global financial conditions and commodity prices. - CA deficit projected to narrow in fiscal year 2023/24 before converging to estimated norm over medium term. - Potential policy responses: - Near term: additional government infrastructure spending will raise CA deficit (reducing positive CA gap). - Medium term: fiscal consolidation, development of export infrastructure, negotiation of free trade agreements, further investment regime liberalization, reduction in tariffs (especially intermediate goods), structural reforms to deepen integration into global value chains and attract FDI. - Exchange rate flexibility should be main shock absorber; intervention limited to addressing disorderly market conditions. - Foreign asset and liability position (end-2022): - NIIP: –11.1 percent of GDP (improved from –11.5 at end-2021). - Gross foreign assets: 25.9 percent of GDP (declined from 30.2 at end-2021). - Gross foreign liabilities: 37.0 percent of GDP (shrunk from 41.7 at end-2021). - Debt assets: 2.7 percent of GDP; Debt liabilities: 18.2 percent of GDP. - Assessment: NIIP-to-GDP ratio expected to remain broadly unchanged over medium term; external debt liabilities low compared with peers; short-term rollover risks limited. - Current Account (fiscal year 2022/23): - CA widened to 2.0 percent of GDP (from 1.2 percent prior year) in context of high fiscal deficit. - CA projected to narrow to about 1.8 percent of GDP in fiscal year 2023/24; medium-term convergence to norm of about 2.4 percent of GDP. - EBA cyclically adjusted CA: –0.9 percent of GDP in FY2022/23. - EBA CA regression norm: –2.3 percent of GDP, standard error of 0.7 percent ⇒ EBA gap: 1.5 percent of GDP. - IMF staff judgment: CA deficit up to 2½ percent of GDP is financeable in medium term via steady FDI, portfolio flows, and external borrowings. - COVID-19 cyclical considerations assessed near 0. - IMF staff CA gap: 1.5 percent of GDP, range 0.8 to 2.1 percent of GDP. - 2022 (% GDP) summary: - CA: –2.0 - 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 - Policy contributions: positive from domestic credit gap; negative from changes in FX reserves and capital controls. - Real Exchange Rate: - Background: first half of 2022 depreciation pressures; average REER in 2022 appreciated by about 1 percent from 2021 average. As of April 2023, REER was 2.8 percent below the 2022 average. - Assessment: - IMF staff CA gap implies REER gap of –7.8 percent (elasticity 0.19 applied). - 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 for FY2022/23. - Capital and financial accounts: - Net FDI inflows stable at about 1 percent of GDP. - Portfolio investments: small net outflows about 0.2 percent of GDP (compared with net outflows of about 0.5 percent prior year). - Other investments moderated to 1.0 percent of GDP from about 2.2 percent in FY2021/22. - Authorities increased limits on external borrowing and widened government bonds available for foreign investors. - Assessment: FDI covered part of CA deficit; further structural reforms and investment regime improvements needed; inclusion in international bond indices could increase foreign participation. - FX intervention and reserves level: - Official FX reserves: $562.7 billion at end-2022. - Reserves represented about 198 percent of short-term debt (residual maturity), 159 percent of IMF’s composite metric, and about seven months of import coverage. - Assessment: reserves adequate for precautionary purposes; interventions should be limited to addressing disorderly market conditions. *Source: IMF 2023 — chapter excerpt* ### Indonesia — NIIP, CA, REER, Reserves - Overall assessment (2022): - External position broadly in line with level implied by medium-term fundamentals and desirable policies. - Exchange rate flexibility and structural policies expected to contain CA deficit in medium term. - Strong reliance on foreign portfolio investment exposes economy to global financial condition fluctuations. - Potential policy responses: - Structural reforms: (1) higher infrastructure investment, (2) higher social spending, (3) reduction in restrictions on inward FDI and external trade (consider phasing out export restrictions and not extending restrictions), (4) promote greater labor market flexibility. - Maintain exchange rate flexibility. - Foreign asset and liability position (end-2022): - NIIP: –19.1 percent of GDP (improved from –23.4 in 2021). - Gross assets: 34.1 percent of GDP. - Reserve assets: 10.4 percent of GDP. - Gross liabilities: 53.2 percent of GDP. - Debt liabilities: 30.1 percent of GDP. - At end-2022, 16.8 percent of external debt (or 5.1 percent of GDP) had remaining maturity < 1 year. - Assessment: NIIP and gross external debt indicate sustainability and limited rollover risk; dependence on foreign portfolio investment remains vulnerability. - Current Account (2022): - CA surplus: 1.0 percent of GDP in 2022 (from 0.3 percent in 2021). - Drivers: non-oil and gas trade balance supported by commodity prices (coal, palm oil); imports growth and higher oil prices mitigated increase. - Projected: expected downward correction in commodity prices in 2023 will lead to small CA deficit from 2023 onward, with structural policies helping maintain CA near norm. - IMF staff estimates CA gap: 0.3 percent of GDP for 2022. - Components: cyclically adjusted CA deficit of –1.5 percent of GDP; staff-assessed norm –1.1 percent of GDP; COVID-19 adjustor 0.4 percent of GDP (travel); other adjustor 0.4 percent. - Considering uncertainty, CA gap range: –0.3 to 0.9 percent of GDP. - 2022 (% GDP) summary: - 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 - Real Exchange Rate: - Background: average REER appreciated by 3.3 percent in 2022 vs 2021 average (0.8 percent relative to 2016–19 pre-COVID average), despite rupiah depreciation vs dollar of 10.3 percent. As of April 2023, REER was 0.4 percent above 2022 average. - Assessment: - 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 net financial inflows: –0.7 percent of GDP (first negative since GFC), after +1.1 percent in 2021. - Drivers: 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 declined to 1.1 percent of GDP in 2022 (from 1.5 percent in 2021). - Assessment: CA improvement helped offset portfolio outflows; continued strong policies needed to sustain capital inflows. - FX intervention and reserves level: - Official foreign reserves: $137 billion in 2022 (from $145 billion in 2021), reflecting FX intervention and negative valuation effects. - Reserves: 10.4 percent of GDP, 118 percent of IMF’s reserve adequacy metric, and 5.9 months of prospective imports. - Assessment: reserves provide sufficient buffer; exchange rate flexibility should continue, with interventions limited to addressing disorderly conditions or inflation de-anchoring risks. *Source: IMF 2023 — chapter excerpt* ### Italy — External Position, Current Account, REER - Overall assessment (2022): - External position weaker than level implied by medium-term fundamentals and desirable policies. - Uncertainty heightened by lack of clarity on persistence of large negative energy terms of trade shock. - CA balance declined due to temporary increase in gas import bill; private sector saving net of investment declined while government saving net of investment broadly unchanged. - Investment increased moderately in 2022; chronic weak productivity, rapid population aging, and uncertain medium-term growth could damp investment once temporary fiscal programs end. - Potential policy responses: - Raise productivity and improve business climate via structural reforms to encourage private investment and normalize household saving rate. - Implement high-quality fiscal consolidation to return fiscal primary balance to surplus. - Specific measures: upskilling workforce, improving infrastructure quality, enhancing judiciary and public administration effectiveness, improving budget efficiency, containing pension spending, comprehensive and progressive tax reform, and fully implementing National Recovery and Resilience Plan. - Foreign asset and liability position (end-2022): - NIIP: 3.9 percent of GDP (declined on account of net valuation losses of 3.2 percent of GDP and first CA deficit in a decade). - Gross assets: 174.3 percent of GDP. - Debt assets: 41.3 percent of GDP. - Gross liabilities: 170.5 percent of GDP. - Debt liabilities: 92.2 percent of GDP. - TARGET2 liabilities reached a record high of 36 percent of GDP. - Assessment: strengthening public balance sheets and structural reforms would lessen vulnerabilities associated with high public debt. - Current Account (2022): - CA dropped sharply 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 as terms of trade worsened by 8.5 percent. - Cyclically adjusted CA estimated at 0.6 percent of GDP for 2022. - EBA-estimated CA norm: 3.4 percent of GDP ⇒ EBA gap: –2.9 percent of GDP. - Italy-specific COVID-19 adjustor: 0.4 percent of GDP (travel 0.1; transport 0.3). - IMF staff assessment: CA gap in range –3.2 to –1.8 percent of GDP, midpoint –2.5 percent of GDP. - Fiscal policy gap: –1.5 percent of GDP; contributed substantially to total policy gap (–1.0 percent of GDP). - 2022 (% GDP) summary: - 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 - Real Exchange Rate: - Background: 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 a weakening euro more than compensated for Italy’s relatively higher inflation than trading partners. - (Text ends mid-sentence on REER appreciation as of April 2023.) *Source: IMF 2023 — chapter excerpt* ### 2.8 percent relative to the 2022 average as the euro strengthened against a basket of currencies while energy inflation ### text - 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) - Background: REER was 2.8 percent relative to the 2022 average as the euro strengthened against a basket of currencies while energy inflation started to decline. - 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. - Average of the two CPI-based REER model estimates: 13.9 percent. - Staff-assessed REER gap range: 6.5 to 12.0 percent, with a midpoint of 9.3 percent. ### Capital and Financial Accounts (Italy) - Background: - Capital account balance: 0.0 percent of GDP in 2022. - Financial account: net inflows of 0.8 percent of GDP in 2022. - Notable flow: nearly €60 billion increase in Italy’s TARGET2 liabilities. - Assessment: - Central banks’ monetary policy tightening pushed up sovereign yields. - Large refinancing needs of the sovereign and the banking sector, elevated inflation, and exposures to geopolitical tensions and energy shocks suggest Italy remains vulnerable 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 External Position and Policy Recommendations - Overall Assessment: - External position in 2022 was broadly in line with the 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 improvement and a larger primary income surplus. - Japan’s CA surplus expected to continue over the medium term, mainly driven by its primary income surplus from a large positive NIIP and a high rate of return on net foreign assets. - Potential Policy Responses: - More flexibility in monetary policy, accompanied by bold structural reforms and a credible and specific medium-term fiscal consolidation plan. - Priority: labor market and fiscal reforms that support private demand, raise potential growth, and promote digital and green investment. - Fiscal consolidation will push the CA surplus higher but may be offset by higher investment and decreased private savings. ### Japan: Foreign Asset and Liability Position - Background: - NIIP: 75.2 percent of GDP at end-2022 (76.1 percent in 2021; pre-pandemic average 61 percent). - Japan holds the world’s largest stock of net foreign assets, valued at $3.1 trillion at the end of 2022. - Assessment: - Gross foreign assets composition at end-2022: portfolio investment about 40 percent, FDI 21 percent. - Of portfolio investment: about 23 percent yen denominated and 56.5 percent dollar denominated. - NIIP generated a net annual investment income return of 8.7 percent in 2022 (pre-pandemic average 6.2 percent), owing to a sharp depreciation of the yen. - Long-term expectation: gradual decumulation of assets accumulated for old-age consumption. - Key 2022 aggregates (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 historic high at 6.4 percent of GDP in 2022. - CA surplus declined to 2.1 percent of GDP in 2022 from 3.9 percent in 2021. - Merchandise trade balance shifted from surplus 0.3 percent of GDP in 2021 to deficit 2.8 percent in 2022. - Medium-term CA balance projected to stabilize close to 3.8 percent of GDP. - Assessment: - 2022 estimated cyclically adjusted CA: 3.2 percent of GDP. - Cyclically adjusted CA norm: 3.5 percent of GDP (range between 2.4 and 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 between –1.1 and 1.1 percent of GDP). - Key 2022 aggregates (percent of GDP): - CA: 2.1 - Cycl. Adj. CA: 3.2 - EBA Norm: 3.5 - EBA Gap: –0.3 - COVID-19 Adj.: 0.3 - Other Adj.: 0.0 - Staff Gap: 0.0 ### Japan: Real Exchange Rate - Background: - REER depreciated sharply in 2022 by close to 14 percent, after an 8.7 percent depreciation in 2021. - As of April 2023, REER was 1.3 percent below the 2022 average. - Assessment: - IMF staff CA gap implies a 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. - Staff-assessed REER gap range: –6.7 to 6.6 percent, with a midpoint of 0.0 percent. ### Japan: Capital and Financial Accounts - Background: - Financial account net outflows in 2022; declined to 1.9 percent of GDP in 2022 from 3.1 percent in 2021. - Net FDI outflows: 3.1 percent of GDP in 2022. - 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 of Japanese investors. - Outward spillovers to other economies have been 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. - Assessment: - Exchange rate is free floating. - Authorities intervened to support the yen in September and October for the first time since 1998. - Size of intervention equivalent to 5 percent of FX reserves at end of August. - Recommendation: FX interventions should be isolated and limited to addressing disorderly market conditions. ### Korea: Overall Assessment and Policy Responses - Overall Assessment: - External position in 2022 broadly in line with medium-term fundamentals and desirable policies. - CA surplus narrowed to 1.8 percent of GDP in 2022 from 4.7 percent in 2021. - Drivers: weak external demand, global semiconductor down cycle, high commodity prices. - Surplus projected to strengthen in 2023 and increase over the medium term. - Potential Policy Responses: - Continued fiscal consolidation and monetary tightening to contain domestic demand and import growth. - Over medium term: increase precautionary savings for aging, orderly household deleveraging, mitigate geopolitical risks. - Exchange rate should remain market determined; intervention limited to preventing disorderly market conditions. ### Korea: Foreign Asset and Liability Position - Background: - NIIP: 46.3 percent of GDP in 2022. - Gross liabilities: 83.9 percent of GDP; about 48 percent gross external debt. - NIIP increased by about 8 percent of GDP compared with 2021. - NIIP projected to rise to about 56 percent of GDP in the medium term. - Assessment: - Foreign asset holdings diversified; about 35 percent in equity or debt securities. - About 60 percent of foreign assets denominated in dollars. - Structure of liabilities limits vulnerabilities: direct investment and long-term loans account for 55 percent of liabilities and 70 percent denominated in Korean won. - Key 2022 aggregates (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 - Background: - CA was 1.8 percent of GDP in 2022 (4.7 percent in 2021). - CA projected to increase to 2.2 percent of GDP in 2023 and about 3.5 percent of GDP over the medium term. - Assessment: - EBA model 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. - 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. - Key 2022 aggregates (percent of GDP): - CA: 1.8 - Cycl. Adj. CA: 4.2 - EBA Norm: 4.8 - EBA Gap: –0.6 - COVID-19 Adj.: –0.4 - Other Adj.: 0.0 - Staff Gap: –1.0 ### Korea: Real Exchange Rate - Background: - REER depreciated on average 5.4 percent from 2021 in 2022; as of April 2023, REER was 1.4 percent below the 2022 average. - Assessment: - IMF staff CA gap implies a 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 - Background: - Net capital outflows increased to 4.0 percent of GDP in 2022 from 3.5 percent in 2021. - Net FDI outflows: 2.9 percent of GDP in 2022 (2.4 percent in 2021). - Net portfolio outflows: 1.5 percent of GDP in 2022 (1.1 percent in 2021). - Other investment net inflows: 0.9 percent of GDP. - Assessment: - Current configuration of net and gross capital flows appears sustainable over the medium term. - Korea has ample capacity to absorb short-term capital flow volatility. ### Korea: FX Intervention and Reserves - Background: - Floating exchange rate. - Bank of Korea net sales in 2022: $45.9 billion (2.8 percent of GDP). - Reserves at end-2022: $423 billion (25 percent of GDP). - Assessment: - Intervention limited to preventing disorderly market conditions. - As of end-2022, FX reserves: about 25 percent of GDP, 2.5 times short-term debt, 6.2 months of imports, or 14 percent of M2. ### Malaysia: Overall Assessment and Policy Responses - Overall Assessment: - External position in 2022 stronger than level implied by medium-term fundamentals and desirable policies. - CA surplus narrowed to 3.1 percent of GDP in 2022 (3.8 percent in 2021). - Drivers of narrowing: rebound in domestic demand, inventory accumulation, widening primary income deficit. - Over medium term, CA surplus projected to widen as travel recovers and imports moderate. - Potential Policy Responses: - Preserve exchange rate flexibility in near term. - Medium-term: strengthen social safety nets and public health care through fiscal reorientation. - Implement structural policies to encourage private investment and improve productivity (reduce skills mismatch, improve education quality, improve SME access to credit). ### Malaysia: Foreign Asset and Liability Position - Background: - NIIP averaged about 1 percent of GDP over last decade; increased to 5.5 percent at end-2021; declined to 3.5 percent of GDP at end-2022. - Total external debt declined to 64 percent of GDP in 2022 from 70 percent at end-2021. - One-third of external debt is ringgit denominated. - Short-term external debt accounts for 42.1 percent of external debt. - Assessment: - NIIP expected to increase over the medium term, supported by projected CA surpluses. - Balance sheet strength, exchange rate flexibility, and increased domestic investor participation support resilience. - Key 2022 aggregates (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 - Background: - CA surplus averaged about 12 percent of GDP in the early 2000s; narrowed over the last decade. - CA surplus: 3.8 percent of GDP in 2021; 3.1 percent of GDP in 2022. - Drivers in 2022: import growth exceeded export growth; improved services balance from removal of travel restrictions; higher investment income deficit and outward remittances. - Assessment: - EBA CA model estimates cyclically adjusted CA balance: 2.4 percent of GDP; norm: –0.5 percent. - Model-assessed CA gap: 2.9 percent. - IMF staff adjust for temporary COVID-19-related factors totaling 1.1 percent of GDP (lower travel receipts 1.0 percent, higher transport costs 0.3 percent, lower outflow of remittances –0.2 percent). - Staff-assessed CA gap range: 3.5–4.5 percent, with a midpoint estimate of (text truncated in source). *International Monetary Fund | 2023* ### 4.0 percent. Relative policy gaps partly explain the CA gap, with weaker social safety nets, proxied by health care expe ### 4.0 percent. Relative policy gaps partly explain the CA gap, with weaker social safety nets, proxied by health care expe ### Current Account: assessment and drivers - IMF staff–assessed CA gap: 4.0 percent. - 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. - Other contributors: - Stronger credit growth contributing negatively: –0.8 percent. - 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 and staff assessment - Background movements: - Ringgit depreciation 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. - Over the year, the REER depreciated by 1.4 percent. - NEER appreciated by 0.5 percent. - As of April 2023, the REER was 1.2 percent weaker than its 2022 average. - Staff assessment and model estimates: - With a semielasticity of 0.5 employed, the IMF staff–assessed CA gap implies a REER undervaluation of 8.0 percent in 2022. - The REER index model estimates Malaysia’s REER to be undervalued by 25.2 percent in 2022. - The REER level model estimates Malaysia’s REER to be undervalued by 29.3 percent in 2022. - Staff assigns an REER undervaluation 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 and policy guidance: - 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: developments and adequacy - Background on reserves: - Gross international reserves increased to $116.9 billion by end-2021 and 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. - Adequacy metrics and composition: - Based on the IMF’s composite ARA metric, reserves declined to about 110 percent of the ARA metric at end-2022, above the adequacy threshold of 100 percent but significantly lower than 121 percent of the ARA metric at the end of the previous year. - Reserve coverage declined to five months of prospective imports, or about 85 percent of short-term debt. - An increase in the short-term external debt partly drove the decline in reserves. - Assessment of FX intervention: - IMF staff assesses that Bank Negara Malaysia engaged in largely two-sided FX interventions over the course of the year. - Role for FX intervention: - To address disorderly market conditions (DMC). - To respond to large and relevant shocks when well-identified and costly frictions are present, including when these frictions dominate the economic benefits of letting the exchange rate remain as the sole shock absorber and may themselves give rise to DMC. *International Monetary Fund | 2023* ### CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS ### CHAPTER 3 2022 INdIvIduAL ECONOMy ASSESSMENTS ### Russia — Economy Assessment: External Position and Policies - 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) on a forward-looking basis, the 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 its 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 2021 levels (90 and 64 percent of GDP, respectively). - 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 asset and liability positions. - Share of nonresidents’ holdings of domestic government debt fell from 32.2 percent at end-2019 to 9.7 percent in February 2023. - Assessment: - Before the war in Ukraine, projected CA surpluses and sizable official external assets under the new fiscal rule provided buffers and helped maintain positive NIIP. - Unknown share of international reserves currently frozen due to sanctions; sanctions likely explain why the record CA surplus did not translate into higher reserves. - Key statistics (2022, % GDP): - NIIP: 34.4 - Gross Assets: 72 - Res. Assets: 26.0 - Gross Liab.: 37.6 - Debt Liab.: 17 - Current Account: - Background: - CA surplus reached a record $233 billion (10.4 percent of GDP) in 2022 versus $122 billion (6.9 percent of GDP) in 2021, driven by favorable terms of trade, resilient oil export volumes, and lower imports because of sanctions and recession. - Projected 2023 CA surplus declines sharply to $75.1 billion (3.6 percent of GDP) due to lower effective oil prices, much lower gas prices, and recovery of imports. - Range of uncertainty surrounding projections is exceptionally large. - Assessment: - EBA CA model norm for 2022: 4.0 percent of GDP; cyclically adjusted CA surplus: 6.7 percent of GDP. - After multilateral COVID-19 adjustment of –0.4 percent of GDP, IMF staff assesses CA gap at 2.3 percent of GDP, 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 sanctions-related factors (see overall assessment). - Key statistics (2022, % GDP): - 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 volatility: initial ~50 percent depreciation vs. dollar after invasion, then sharp appreciation retracing losses and exceeding pre-war value. - REER appreciated in 2022 by 31 percent (average) and 53 percent (end of period). - In 2023, ruble reversed some gains; REER depreciated about 20 percent between December 2022 and April 2023. - As of April 2023, REER was 7.1 percent below the 2022 average. - Assessment: - IMF staff CA gap implies REER undervaluation of 13.6 percent (midpoint) in 2022 (elasticity 0.17 applied). - EBA REER index model: REER overvaluation of 5.7 percent. - EBA REER level model: REER undervaluation of 4.7 percent. - Staff assesses REER 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: - Central Bank of Russia increased 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 nonresident transfers 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, 2014 (7.5–9 percent of GDP). - Outflows concentrated in first half of 2022, declining in second half; meaningful part appears to have gone toward repayment of foreign liabilities by Russian firms. - Assessment: - Large FX reserves and floating exchange rate provided buffers to absorb shocks. - Large capital outflows occurred despite capital flow measures; meaningful part likely repayment of FX liabilities to retain buffers amid sanctions. - FX Intervention and Reserves Level: - Background: - Reserves fell by $48.6 billion to $582.0 billion in 2022 despite large CA surplus, likely reflecting constrained 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 ruble ($10.6 billion in Q1, partly offset by FX purchases of $3 billion for rest of year) and valuation changes. - Assessment: - As of end-2022, international reserves 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 into reserves to buffer-augmented ARA ratio of 200.4 percent. - Published reserves considerably above this level, but sanctions mean a share of reserves frozen, complicating reserve adequacy assessment. --- ### Saudi Arabia — Economy Assessment: External Position and Policies - Overall Assessment: - External position in 2022 was substantially stronger than implied by medium-term fundamentals and desirable policies. - External balance sheet remains strong; reserves adequate by standard IMF metrics. - Under current fiscal path, central government’s non-oil primary balance expected to be on an improving trend. - Pegged exchange rate continues to provide a credible policy anchor given economy’s structure. - Potential Policy Responses: - Projected normalization of oil exports expected to reduce the gap. - Ambitious structural reform agenda (Vision 2030) and sizeable investment program, including Public Investment Fund (PIF), will reduce current gap and help align external position in medium term. - Continued fiscal reforms needed to avoid procyclical policy amid high hydrocarbon windfalls: delink spending decisions from international oil price fluctuations; implement medium-term fiscal framework. - Non-oil revenue mobilization, improvement of public financial management, and energy price reform are important; minimize risks associated with industrial policies and avoid discriminatory policies. - 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 of GDP 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. - Assessment: - External balance sheet remains very strong; accumulated assets protect against oil price volatility and save exhaustible resource revenues for future generations. - Key statistics (2022, % GDP): - NIIP: 61.5 - Gross Assets: 119.3 - Res. Assets: 41.5 - Gross Liab.: 57.8 - Debt Liab.: 24.2 - Current Account: - Background: - CA surplus registered 13.6 percent of GDP in 2022, compared with 5.1 percent in 2021. - Trade balance improved by 9.1 percent of GDP as price and volume of oil exports increased. - Terms of trade improved by 28.9 percent during 2022. - 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. - Assessment: - IMF staff assesses CA gap of 4.7 percent of GDP using EBA-Lite CA model; assessment subject to significant model uncertainty due to idiosyncratic characteristics. - Cyclical adjustment component: 1.1 percent of GDP. - COVID-19 travel/transport transitory impacts near 0. - Consumption Allocation Rules: CA gap of 0.3 percent (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 range from 2.2 to 7.2 percent of GDP. - Key statistics (2022, % GDP): - 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 rate of 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 the 2022 average. - Assessment: - Exchange rate movements have limited short-term impact on competitiveness as most exports are oil or oil-related denominated in dollars; limited substitutability between imports and domestically produced products. - EBA-Lite REER model suggests overvaluation of 11.2 percent. - Consistent with IMF staff CA gap and elasticity 0.2, staff assesses REER to be undervalued by 21.6 percent, with range of –9.1 to –34.1 percent. - Capital and Financial Accounts: - Background: - Net financial outflows continued in 2022 as the PIF and other entities invested abroad. - Assessment: - Lack of detailed information on nature of flows complicates analysis. - Strong reserves position and sizable assets of PIF limit risks and vulnerabilities to capital flows. - FX Intervention and Reserves Level: - Background: - PIF investments abroad increasing; 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, down from $438.2 billion at end-2021 (and from $730 billion in 2014). - Trend partly driven by financial outflows. - Reserves expected to stabilize at about 14 months of imports in medium term. - Assessment: - Reserves serve as savings for precautionary motives and future generations. - Reserves adequate for precautionary purposes (IMF metrics). - Buffers also provided by external assets held by PIF and national oil company. - Fiscal prudence needed over medium term to strengthen CA and increase savings for future generations. --- ### Singapore — Economy Assessment: External Position and Policies - Overall Assessment: - External position in 2022 was substantially stronger than level implied by medium-term fundamentals and desirable policies. - Assessment subject to wide range of uncertainty due to Singapore’s very open economy and status as a global trading and financial center. - Over medium term, CA surplus projected to narrow gradually as household consumption rises, capital-related imports recover, and public spending increases. - Potential Policy Responses: - Planned execution of major green infrastructure projects and assistance to vulnerable households should help reduce external imbalances near term. - Over medium term, structural transformation (rapid aging, transition to green and digital economy) requires higher public investment in health care, green and other physical infrastructures, and human capital to reduce external imbalances by lowering net public saving. - Foreign Asset and Liability Position and Trajectory: - Background: - NIIP stood at 176.1 percent of GDP in 2022, down from 223 percent of GDP in 2021 and below the 2017–21 average of 237.1 percent of GDP. - Gross assets and liabilities are high reflecting financial center status. - About half of foreign liabilities are FDI; about one-fifth are currency and deposits. - CA surplus main driver of NIIP since global financial crisis; valuation effects material some years due to S$ NEER appreciation as MAS tightened exchange rate 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 long term. - Assessment: - Large gross non-FDI liabilities (442 percent of GDP in 2022)—predominantly cross-border deposit taking by foreign bank branches—present 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 statistics (2022, % GDP): - NIIP: 176.1 - Gross Assets: 1,125.5 - Res. Assets: 62 - Gross Liab.: 949.4 - Debt Liab.: 332.2 - Current Account: - Background: - CA surplus 19.3 percent of GDP in 2022, up from 18 percent in 2021. - Increase mainly reflects larger surplus in services balance, particularly transport services, owing to significant hikes in freight rates from COVID-19 supply chain 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 and policies boosting savings: 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. - 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 statistics (2022, % GDP): - 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, reflecting NEER appreciation by 4.3 percent. - This followed a cumulative depreciation of REER by 3 percent and NEER by 1.8 percent between 2019 and 2021 (text truncated thereafter). *International Monetary Fund | 2023* ### 2021. As of April 2023, the REER had appreciated by 6.1 percent relative to its 2022 average. ### text - 2021. As of April 2023, the REER had appreciated by 6.1 percent relative to its 2022 average. ### Real Exchange Rate (REER) — Key Finding - As of April 2023, the REER had appreciated by 6.1 percent relative to its 2022 average. - For Singapore: earlier context indicates the NEER is the intermediate monetary policy target; CPI-REER movements in 2022 included appreciation and depreciation episodes (e.g., appreciated by 3.4 percent overall during 2022, depreciated about 5.3 percent during the second half of 2022). - For other economies in the chapter, REER positions and movements in 2022 and as of April 2023 are reported, including: - South Africa: As of April 2023, the REER was 9.1 percent below the 2022 average. - Spain: As of April 2023, the CPI-based REER was 0.2 percent above the 2022 average. - Sweden: As of April 2023, the CPI-based REER was 0.8 percent below its 2022 average. ### Assessment of REER Valuation - Singapore: 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). - South Africa: Based on the CA approach, staff assesses the REER to be overvalued by 5.0 percent, with a range of 2.1 to 7.9 percent (elasticity of 0.25 applied). Other REER models point to overvaluation of 12.8 percent (level) and a marginal undervaluation of 3.5 percent (index). - Spain: Using an elasticity of 0.31 and the IMF staff CA gap range, the staff assesses the REER gap range to be –4.7 to 0.4 percent, with a midpoint of –2.2 percent. EBA REER models estimate overvaluation of 10.6 percent (index) to 29.2 percent (level) for 2022. - Sweden: The staff assesses the krona to be undervalued by between –4.0 to –15.4 percent, with a midpoint of –9.7 percent. The staff CA gap implies a REER gap of –10.3 percent (elasticity 0.37); REER index and level models suggest gaps of –15.9 percent and –17.0 percent, respectively. ### Capital and Financial Accounts — Flows and Risks - Singapore: - Background: Open capital account; financial account balance reflects reinvestment abroad of official foreign asset income, sizable net inward FDI, and smaller but volatile net bank-related flows. - 2022 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. - South Africa: - 2022 net FDI inflows decreased from 9.8 percent of GDP in 2021 to 1.6 percent in 2022; net portfolio investment recorded outflows of –1.0 percent of GDP in 2022 (compared with –13 percent in 2021). - Gross external financing needs: 12.5 percent of GDP in 2022, up from 10.3 percent in 2021. - Assessment: Capital outflows and a 6.4 percent depreciation of the rand against the US dollar in 2022; risks mitigated by small currency mismatches, large equity liability composition of the NIIP, and a large domestic institutional investor base. - Spain: - Capital account surplus supported by NextGenerationEU flows; financial account balance 1.8 percent of GDP in 2022 (1.9 percent in 2021). - Assessment: Large external financing needs leave Spain vulnerable to sustained market volatility. - Sweden: - Financial account fell by 5.0 percentage points in 2022 to 3.1 percent of GDP; portfolio investments fell from 10.3 to –1.7 percent of GDP; direct investment improved from 1.1 to 2.5 percent of GDP. - Assessment: Large changes in capital flows are common given a financial sector nearly three times GDP; strong regulation and supervision mitigate risk. ### FX Intervention and Reserves — Levels and Assessments - Singapore: - 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 published (with a six-month lag) since April 2020. - Assessment: In addition to MAS FX reserves, Singapore has access to other official foreign assets managed by Temasek and GIC. Current level of official external assets appears adequate; no clear case for further accumulation for precautionary purposes. - South Africa: - International reserves at end-2022: about 14.9 percent of GDP, 117.3 percent of gross external financing needs, and 4.9 months of imports. - Reserves stand below the IMF composite adequacy metric: 89.5 percent of the metric without existing CFM measures considered, and 99.5 percent with those measures considered. - Assessment: Reserve accumulation would be desirable over the medium term if conditions allow, subject to maintaining the primacy of the inflation objective. - Spain: - Background/assessment: Euro has status of a global reserve currency; euro area economies typically hold low reserves relative to standard metrics, but the currency is free floating. - Sweden: - Foreign currency reserves increased slightly to $67.5 billion in 2022. - Reserves amount to approximately 15 percent of the short-term external debt of monetary and financial institutions. ### Selected Key Statistics (reported in source) - Singapore: Official reserves (Monetary Authority of Singapore) in 2022: $289.5 billion (62 percent of GDP). - Singapore: 2022 capital and financial account outflows: 43.4 percent of GDP; 2021: 2 percent. - South Africa (2022, % GDP): NIIP: 17.2; Gross Assets: 131.4; Debt Assets: 16.4; Gross Liab.: 114.2; Debt Liab.: 40.6. - South Africa (2022, % GDP): CA: –0.5; Cycl. Adj. CA: –1.4; EBA Norm: 2.2; EBA Gap: –3.6; COVID-19 Adj.: 0.2; Other Adj.: 2.1; Staff Gap: –1.3. - South Africa (reserves and external debt): International reserves about 14.9 percent of GDP; gross external debt 40.6 percent of GDP in 2022; short-term external debt ~12.2 percent of GDP in 2022. - Spain (2022, % GDP): NIIP: –60.5; Gross Assets: 198.9; Debt Assets: 95.2; Gross Liab.: 259.3; Debt Liab.: 157.3. - Spain (2022, % GDP): CA: 0.6; Cycl. Adj. CA: 1.4; EBA Norm: –0.1; EBA Gap: 1.5; COVID-19 Adj.: 0.2; Other Adj.: –1.1; Staff Gap: 0.7. - Sweden (2022, % GDP): NIIP: 39.8; Gross Assets: 324.6; Debt Assets: 86.8; Gross Liab.: 284.8; Debt Liab.: 134.6. - Sweden (2022, % GDP): CA: 4.3; Cycl. Adj. CA: 5.0; EBA Norm: 0.8; EBA Gap: 4.2; COVID-19 Adj.: –0.3; Staff Gap: 3.8. - Sweden: Foreign currency reserves in 2022: $67.5 billion. *International Monetary Fund | 2023 — 2023 EXTERNAL SECTOR REPORT (text segment).* ### 11.4 percent of GDP, and three months of imports. ### 11.4 percent of GDP, and three months of imports. ### Switzerland — 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. However, complex measurement issues and data lags complicate the assessment. - Potential Policy Responses: - Fiscal policy should remain in line with the authorities’ debt-brake rule framework in the near term, while accommodating additional spending related to Russia’s war in Ukraine (e.g., support for refugees). - In the medium term, as inflation pressures ease, small fiscal deficits would help expand spending space to support necessary expenditures. - Under the 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. - Assessment note: Despite having a floating exchange rate regime, it is important to maintain adequate foreign reserves in view of the high dependence of its commercial banks on wholesale funding in foreign currency and disruptions in such funding during global financial distress. As seen during the pandemic, the Riksbank can quickly establish swap facilities when necessary. ### Switzerland — Foreign Asset and Liability Position and Trajectory - Background: - Switzerland is a major financial center with a large positive NIIP of 93.3 percent of GDP and large gross foreign asset and liability positions of 680.8 and 587.5 percent of GDP, respectively, at the end of 2022. - The NIIP reflects both a history of large CA surpluses and valuation changes. - 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, but its large gross asset position and the denomination of about two-thirds of its external liabilities in Swiss francs mitigate this risk. - Key statistics (2022, % GDP): - NIIP: 93.3 - Gross Assets: 680.8 - Reserve Assets: 110.6 - Gross Liab.: 587.5 - Debt Liab.: 198.5 ### Switzerland — Current Account - Background: - 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. - Drivers: strong merchanting and a narrowed services trade deficit, more than offsetting a larger (by 0.8 percent of GDP) trade deficit in fuels and gas 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 as lower inflation and strength in key sectors (e.g., pharmaceutical, commodity trading) preserve competitiveness. - Assessment: - The EBA CA norm of 6.5 percent of GDP is close to last year’s norm. - 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 and include excessive private sector credit (–1.2 percentage points) and fiscal underspending (0.3 percentage point); policy gaps in the rest of the world also contribute (0.8 percentage point). - Adjustments for (1) valuation losses on fixed-income securities arising from inflation (–3.6 percentage points) and retained earnings on portfolio equity investment (–0.4 percentage point) and (2) transitory impacts of the COVID-19 pandemic (–0.1 percentage point) reduced the gap to 0.0 percent of GDP (±0.8 percentage point). - Key statistics (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 ### Switzerland — Real Exchange Rate - Background: - 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 the first quarter of 2023, the NEER and CPI-based REER appreciated by 0.9 and 0.7 percent, respectively, while the PPI-based REER depreciated by 1.2 percent. - Long-term perspective: the NEER has appreciated by 44 percent since 2010, while the CPI- and PPI-based REERs have appreciated by 5.3 percent and depreciated by 12.9 percent, respectively. - As of April 2023, the CPI-based REER was 2.1 percent above the 2022 average. - Assessment: - The staff CA gap implies REER overvaluation of 0.1 percent in 2022 (with an elasticity of 0.55 applied). - The EBA REER index and level models suggest that the average REER in 2022 was overvalued by 11.9 and 17.6 percent, respectively, with policy gaps accounting for a small amount of the total gap. - Because of measurement issues, the results may not fully capture a secular improvement in productivity. - Consistent with the staff CA gap, the 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. ### Switzerland — Capital and Financial Accounts: Flows and Policy Measures - Background: - 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. - From a long-term perspective, sizable net private financial outflows prior to the global financial crisis declined and, on average, turned into net capital inflows between 2009 and 2020, adding to appreciation pressures. - In 2022, partly driven by widened differentials between foreign and domestic interest rates, net private outflows increased from 4.6 percent of GDP in 2021 to 7.2 percent, while the SNB reduced reserve assets on a net basis through transactions for the first time since 2005. ### Switzerland — FX Intervention and Reserves Level - Background: - 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 both 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. --- ### Thailand — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2022 was stronger than the level implied by medium-term fundamentals and desirable policies. The goods trade balance worsened on account of both an increase in import bill with the surge in oil prices and a slowdown in goods exports as external demand weakened in the second half of the year. Whereas the services balance improved with a partial recovery of tourism and a decline in shipping costs, the overall CA balance deteriorated. - Potential Policy Responses: - Policies aimed at promoting investment, diminishing precautionary savings, and supporting domestic demand would bring the CA balance more in line with medium-term fundamentals and desirable policies. - Public expenditures should be focused on targeted social transfers to continue to support the most vulnerable, as well as infrastructure investment to support a green recovery and reorientation of affected sectors. - Efforts to reform and expand social safety nets, notably the fragmented pension schemes, should continue, and measures to address widespread informality should help reduce precautionary savings and support consumption. ### Thailand — Foreign Asset and Liability Position and Trajectory - Background: - Thailand’s NIIP weakened in 2022 to –3.0 percent of GDP (from 6.6 percent in 2021). - Its gross assets declined from 120 to 118 percent of GDP (with 44 percent of GDP being reserve assets), while its gross liabilities increased from 114 to 121 percent of GDP, dominated by direct (about half) and portfolio (about one-third) investment. - Net direct and portfolio investment assets declined by 2 and 3 percentage points of GDP, respectively, while net other investment assets increased by 1 percentage point of GDP. - Assessment: - The NIIP is projected to remain in a small creditor position over the medium term given CA surpluses. - External debt rose slightly to 40 percent of GDP, of which short-term debt (on a remaining-maturity basis) amounted to 16 percent of GDP. - External debt stability and liquidity risks are limited. - Key statistics (2022, % GDP): - NIIP: –3.0 - Gross Assets: 117.6 - Debt Assets: 25.5 - Gross Liab.: 120.6 - Debt Liab.: 40.3 ### Thailand — Current Account - Background: - Thailand’s CA balance declined from –2.1 percent of GDP in 2021 to –3.2 percent of GDP in 2022, reflecting the impact of an increase in food and oil prices due to the war in Ukraine and slowdown in external demand in the second half of the year. - A surge in import costs weakened the trade balance by 4.2 percent of GDP. - A decline in shipping costs and post-pandemic tourism recovery, albeit still partial, improved the services account by 1.9 percent of GDP. - From a savings-investment perspective, the recent CA deficits reflect a decline in private savings due to the COVID-19 shock and war in Ukraine as well as increased public dissaving from the generous fiscal support in response to the shock. - The CA balance in 2023 is projected to improve to 1.2 percent of GDP as tourism strengthens further. - Assessment: - The EBA CA model estimates a cyclically adjusted CA of –2.3 percent of GDP and a CA norm of 0.9 percent of GDP for 2022. - The CA gap of –3.2 percent of GDP consists of an identified policy gap of –1.4 percent of GDP and an unexplained residual of –1.8 percent of GDP, which partly reflects structural factors the EBA model does not capture. - As the standard EBA cyclical adjustment does not account for the large COVID-19-related shocks to the travel and transport sectors, adjustors of 4.8 percent and 1.3 percent of GDP, respectively, are applied. - Overall, the IMF staff assesses the CA gap to be in the range of 2.2 to 3.6 percent of GDP, with a midpoint of 2.9 percent of GDP. This CA gap is expected to narrow over the medium term as domestic demand recovers and steps are taken to reform the social protection system. - Key statistics (2022, % GDP): - CA: –3.2 - Cycl. Adj. CA: –2.3 - EBA Norm: 0.9 - EBA Gap: –3.2 - COVID-19 Adj.: 6.1 - Other Adj.: 0.0 - Staff Gap: 2.9 ### Thailand — Real Exchange Rate - Background: - The baht has been on a gradual real appreciation trend since the mid-2000s, despite occasional bouts of volatility. - The REER depreciated by 7.6 percent in 2021 on account of tightened global financial conditions alongside weak recovery in Thailand. - The REER appreciated until June 2022, relative to the end of December 2021, supported by a strong recovery in Thailand, before depreciating over July–October as a result of high global volatility amid advanced economies’ monetary policy normalization. - The REER then resumed its appreciation in November, ending the year about 1 percent higher than the 2021 average. - As of April 2023, the REER was 1.6 percent above the 2022 average. - Assessment: - Using an elasticity of 0.47 and based on the staff CA gap, the IMF staff assesses the REER to be undervalued in the 4.7 to 7.8 percent range, with a midpoint of –6.2 percent. - The EBA index REER gap in 2022 is estimated at 6.7 percent, and the EBA level REER gap is estimated at –2.6 percent. ### Thailand — Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2022, the capital and financial account balance (excluding change in reserves) strengthened to 0.5 percent of GDP from –1.2 percent in 2021, driven by a recovery in portfolio investment (from –2.4 percent in 2021 to 1.2 percent of GDP in 2022) and a decline in outward FDI (from 3.8 percent in 2021 to 1.7 percent of GDP in 2022). - Other net investments declined from 2.3 to –1.1 percent of GDP. - FX reserves declined by 2.1 percent of GDP. - Assessment: - Since 2013, Thailand has experienced episodes of volatility reflecting external financial conditions, political uncertainty, and most recently, shocks related to COVID-19 and the war in Ukraine. - Thailand has been able to weather such episodes well, given strong external buffers and fundamentals. - The IMF staff welcomes the Bank of Thailand’s removal of limits on nonresident baht accounts for qualifying nonresident firms to facilitate baht liquidity management and recommends additional phasing out of remaining CFM measures on nonresident baht accounts. - A comprehensive package of macroeconomic, financial, and structural policies should be pursued to address volatile capital flows, complemented with gradual and prudent financial account liberalization. ### Thailand — FX Intervention and Reserves Level - Background: - The exchange rate regime is classified as (de jure and de facto) floating. - International reserves (including the net forward position) declined from 55.2 percent in 2021 to 49.6 percent of GDP in 2022, which is about 2.5 times the short-term debt, 11 months of imports, and 203 percent of the IMF’s standard ARA metric. - The exchange rate has been allowed to adjust, with some FX interventions in periods of large volatility. - Assessment: - While official intervention data are not published, estimates suggest two-sided intervention for the year. - Reserves are higher than the range of the IMF’s reserve adequacy metrics, and there continues to be no need to build up reserves for precautionary purposes. - The exchange rate should move flexibly to act as a shock absorber, with FX intervention limited to avoiding disorderly market conditions or addressing risks of de-anchoring inflation expectations and FX market dysfunction, especially during periods of elevated global volatility. *Source: Chapter excerpts from the 2023 External Sector Report (text).* ### 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 level of reserves, large external financing needs, and the size and composition of the NIIP. - CA deficit widened significantly in 2022, reflecting the 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, the CA deficit is 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, improving the CA. - Support capital inflows and liraization and allow for a needed buildup of reserves over time. ### Türkiye — Foreign Asset and Liability Position and Trajectory - Background and Assessment: - NIIP averaged –40 percent of GDP over 2018–22. - At the end of 2022, NIIP remained about –31 percent of GDP (constant year over year). - 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 holds the remaining 47 percent. - About one-third of external debt is short term (on a remaining-maturity basis). - 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, with risks from unwinding valuation effects. - External debt sustainable over the medium term but subject to risks, particularly from a large depreciation in the REER. - Key 2022 statistics (% GDP): - NIIP: –30.8 - Gross Assets: 33.6 - Debt Assets: 13.7 - Gross Liab.: 64.5 - Debt Liab.: 44.2 ### Türkiye — Current Account - Background and Assessment: - 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 due to higher commodity prices. - Non-oil CA surplus declined from 4.3 percent of GDP in 2021 to 3.5 percent of GDP in 2022. - EBA CA model norm estimated at –0.8 percent of GDP, with standard error ±0.7 percent of GDP. - 2022 CA deficit 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. - After COVID-19 transport adjustment (–0.2 percent) IMF staff–assessed CA gap range is –2.6 percent to –1.2 percent of GDP, midpoint –1.9 percent of GDP. - Key 2022 statistics (% 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 and Assessment: - REER depreciated by an annual average of 9.5 percent over 2018–22; average REER depreciated by 10 percent in 2022. - PPI-based REER appreciated by about 9 percent in 2022. - As of April 2023, CPI-based REER had appreciated by 6.9 percent relative to the 2022 average. - IMF staff assesses the REER to be overvalued with a range of 4.0 percent to 9.0 percent and a midpoint of 6.5 percent (applying estimated REER elasticity of 0.29). - EBA REER index and level models suggest the REER was undervalued in 2022 by 46.3 and 56.7 percent, respectively, though model residuals are very large for Türkiye. ### Türkiye — Capital and Financial Accounts: Flows and Policy Measures - Background and Assessment: - Net capital inflows rebounded in 2022 mainly due to one-off flows, including net errors and omissions of $25.1 billion. - Positive net inflows driven by FDI; net portfolio inflows weakened. - Exporters required to convert 25 percent of export earnings within 180 days from January 2022, increased to 40 percent in April 2022. - Annual gross external financing needs projected at about 23 percent of GDP on average over 2023–28 (they amounted to 24 percent of GDP in 2022). - Recommendation: CFMs should be phased out as conditions improve to increase market liquidity and support dedollarization. ### Türkiye — FX Intervention and Reserves Level - Background and Assessment: - De jure exchange rate classified as free floating. - Gross reserves fell to about $100 billion in Q2 2022, recovered to about $129 billion at end-December 2022. - Pressures relieved by large FX interventions and a scheme protecting lira term deposits against currency depreciation introduced in December 2021. - Gross reserves at 95 percent of IMF’s ARA metric as of end-December 2022, below recommended 100–150 percent range. - Quality of reserves issue: non–SDR basket currencies account for about 15 percent of central bank’s FX reserves. - Recommendation: Once monetary policy tightening is firmly underway, significant nonborrowed accumulation of reserves is needed; FX intervention should be limited to most extreme exchange rate volatility and be 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 expected to temporarily stay high in 2023–24, then gradually narrow as the trade balance improves. - Significant uncertainty 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 public services and protecting the vulnerable to improve net public savings. - Implement structural reforms to boost international competitiveness, including upgrading labor skills, to bolster national savings and finance increased investment needs including climate transition. ### United Kingdom — Foreign Asset and Liability Position and Trajectory - Background and Assessment: - NIIP improved to –11 percent of GDP in 2022 from –15 percent of GDP in 2021 due to positive valuation effect. - 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 with the United States, other European countries, and Japan. - External liabilities have a larger share denominated in pounds than external assets. - IMF staff projects NIIP to moderately decrease over the medium term in line with projected small CA deficits; large and volatile valuation effects add uncertainty. - Since 2016, valuation gains and unrecorded income flows explain changes in NIIP despite negative CA flows. - Large gross stock positions (both gross assets and liabilities exceed 500 percent of GDP) and large short-term debt liabilities pose vulnerabilities, mitigated by exchange rate flexibility and net liability position in domestic currency. - Key 2022 statistics (% GDP): - NIIP: –11 - Gross Assets: 563 - Debt Assets: 283 - Gross Liab.: 574 - Debt Liab.: 293 ### United Kingdom — Current Account - Background and Assessment: - CA deficit worsened from 1.5 percent of GDP in 2021 to 3.8 percent in 2022 due to trade deficit widening from energy price shock. - 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. - IMF staff projects CA to moderately decrease to –3.5 percent of GDP over the medium term. - EBA CA model norm: –1.0 percent of GDP; EBA CA gap: –1.2 percent of GDP. - COVID-19 adjustments total –0.3 percent of GDP (travel services –0.4; transport 0.1). - Unrecorded income (retained earnings on portfolio equity 0.2; inflation compensation on debt interest 0.5) contributes to underestimation of underlying CA. - IMF staff assesses CA gap in range –1.8 to 0.2 percent of GDP, midpoint –0.8 percent of GDP. - Key 2022 statistics (% 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 and Assessment: - Pound depreciated in REER by 1.4 percent in 2022 relative to 2021 average, driven by nominal depreciation from dollar surge. - Pound has depreciated in real terms by about 3.4 percentage points since mid-2016. - As of end-April 2023, REER had appreciated by 1.1 percent compared with 2022 average. - IMF staff CA gap implies REER gap of about 2.9 percent in 2022 (elasticity 0.28). - EBA REER level and index approaches suggest a gap of 2.3 and –8.4 percent, respectively. - Staff assesses REER gap ~2.9 percent, range –0.7 to 6.4 percent. ### United Kingdom — Capital and Financial Accounts - Background and Assessment: - Portfolio investment and other investment are key financial account components. - 2022 CA deficit of 3.8 percent of GDP financed by net portfolio investment 3.5 percent, financial derivatives and other investment 2.8 percent, net FDI –3.8 percent, and errors and omissions 1.3 percent. - Large fluctuations in capital flows are inherent and a potential vulnerability, mitigated by sound financial regulation and a healthy financial sector. - Additional risk: financial account flows may decelerate due to changes in trade relationship with EU and shift of some financial services to the EU. ### United Kingdom — FX Intervention and Reserves Level - Background and Assessment: - Pound has status of global reserve currency; sterling’s share of global reserves about 4.6 percent (unchanged materially since 2015). - UK typically holds low reserves relative to standard metrics, but currency is free floating. --- ### United States — 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 deficit of 3.7 percent of GDP in 2022 (versus 3.6 percent of GDP in 2021), driven by marginal decline in trade balance and small deterioration in services balance. - CA deficit projected to decline to about 2½ percent of GDP over the medium term given gradual fiscal consolidation and increased public saving. - Potential Policy Responses: - Fiscal consolidation aimed at a medium-term general government primary surplus of about 1 percent of GDP to stabilize debt-to-GDP 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 open, stable, transparent global trading system. ### United States — Foreign Asset and Liability Position and Trajectory - Background and Assessment: - NIIP averaged about –46 percent of GDP during 2016–19. - NIIP deteriorated from –67.8 percent of GDP in 2020 to –74.4 percent of GDP in 2021, 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 reverts to pre-COVID-19 average. - Financial stability risk: unexpected decline in foreign demand for US fixed-income securities; risk moderate given US dollar’s dominant reserve status. - About 60 percent of US assets are in the form of FDI and portfolio equity claims. - Key 2022 statistics (% GDP): - NIIP: –64.7 - Gross Assets: 112 - Debt Assets: 18.8 - Gross Liab: 176 - Debt Liab.: 54.5 ### United States — Current Account - Background and Assessment: - CA deficit 3.7 percent of GDP in 2022 (close to 3.6 percent in 2021). - Cyclically adjusted CA moved from 3.2 to 3.5 percent of GDP. - Pre-pandemic deficit about 2 percent of GDP. - Trade side evolution since 2016 largely explained by deterioration in non-oil goods and services balance. - National savings and investment increased as percent of GDP from 2016 to 2021 (massive increase in public dissaving due to pandemic), then started to revert in 2022. - CA deficit expected to decline to about 2.5 percent of GDP over medium term based on increased public saving from gradual fiscal consolidation and unwinding of extraordinary fiscal support. - 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. - EBA gap reflects policy gaps (–0.6 percent of GDP, mostly driven by private credit gap) and unidentified residual (~–0.6 percent of GDP). - IMF staff assesses 2022 cyclically adjusted CA to be lower by 1.1 percent of GDP than level implied by fundamentals and desirable policies, range between –1.7 and –0.4 percent of GDP. - Key 2022 statistics (% GDP): - CA: 3.7 percent of GDP (noted above in context) *Source: CHAPTER 3 2022 INdIvIduAL ECONOMY ASSESSMENTS, International Monetary Fund | 2023* ### 0.2 percent GDP to account for the temporary effects of COVID-19 on the travel and transport balances. The estimated sta ### 0.2 percent GDP to account for the temporary effects of COVID-19 on the travel and transport balances. The estimated sta ### Current Account (CA) and Adjustments - 2022 (% GDP)CA: –3.7Cycl. Adj. CA: –3.5 EBA Norm: –2.2EBA Gap: –1.2 COVID-19 Adj.: 0.2Other Adj.: 0.0Staff Gap: –1.1 - The estimated standard error of the CA norm is 0.7 percent of GDP. ### Real Exchange Rate (REER) - 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 assesses the 2022 midpoint REER overvaluation to be 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. - Change driven mainly by an increase in 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. ### Selected Technical Endnotes and Country Adjustors (highlights) - A band of ±1 percent of GDP (two standard errors of the CA norm) is applied to account for elevated country-specific uncertainty in the context of external vulnerabilities. (Argentina) - Canada: Statistical treatments estimated to have generated a downward bias in the income balance of 0.6 and 1 percent of GDP, respectively, totaling 1.6 percent of GDP. Semielasticity of the CA with respect to the REER is set to 0.27. - Hong Kong SAR: EBA-implied CA norm adjustments reduce the CA norm by 11.2 percentage points of GDP to 10.6 percent (midpoint of the IMF staff–assessed norm range) through three adjustments: NIIP deduction of 5.7 percentage points of GDP, gold trade balance deduction of 4¼ percentage points of GDP, and onshoring deduction of 1¼ percentage points of GDP. - India: Cyclical adjustment and COVID-19 adjustors computed based on the fiscal year to account for quarterly dynamics between Q2 2022 and Q1 2023. - Indonesia: The standard error of the EBA norm is 0.6 percent of GDP. - Japan: IMF staff recommends 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: Using EBA-Lite methods, cyclically adjusted CA norm estimated at 7.7 percent of GDP; consumption allocation rules produced CA norms of 13.3 percent of GDP and 16.2 percent of GDP for alternative annuity rules; Investment Needs Model produced a CA gap of 14.4 percent over the medium term. The CA gap in 2022 of 4.7 percent of GDP represents the staff’s overall assessment. - Singapore: Adjustments to the EBA-implied CA norm include a total COVID-19 adjustment of –3.1 percent of GDP (travel adjustor –0.8 percent of GDP; transport adjustor –2.3 percent of GDP) and other downward adjustments (1.1, 3.8, and –2.9 percentage points), yielding an adjusted staff–estimated CA gap of about 5.1 percent of GDP. - South Africa: COVID-19 adjustors for 2022 of 0.2 percent of GDP composed of travel services (0.5 percent of GDP), transportation (0.5 percent of GDP), mineral exports (–0.6 percent of GDP), and improved income balance (–0.2 percent of GDP). Net current transfers related to SACU warrant an adjustment to the cyclically adjusted CA by 0.7 percent of GDP. Measurement issues likely contributed to underestimation of the CA by 0.8 percent of GDP in 2022. Demographic indicator adjustments result in an adjustor of –0.6 percent of GDP to the model-based CA norm for 2022. - Spain: EBA suggests cyclically adjusted CA norm of –0.1 percent of GDP with 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 to account for external sustainability and NIIP objectives. Range of REER gap is ±2.6 percent based on semielasticity of 0.31. - Sweden: Upper and lower bounds derived by adding/subtracting the standard deviation (5.7) from the average outcome (midpoint). - Switzerland: Financial account net balance for 2021 was revised upward from Sw F 27.5 billion to Sw F 79.2 billion (a revision of 7.1 percent of 2021 GDP). COVID-19 related CA adjustors: 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 transport services balance between 2019 and 2022 was –2.1 percent of GDP; staff proposes a transportation adjustor of 1.3 percent. - United Kingdom: Official NIIP data may understate true position; estimates of FDI stocks at market values imply a much higher NIIP, close to 100 percent of GDP. - United States: Fiscal policy gap estimated at –0.1 percent of GDP; domestic fiscal policy gap estimated to amount to about –1.3 percent of GDP. *Source: https://www.imf.org/-/media/files/publications/esr/2023/english/text.pdf* --- _Source: https://www.imf.org/-/media/files/publications/esr/2023/english/text.pdf_