## 2024 External Sector Report — Executive Summary and Chapter Highlights ## Source details **Canonical URL:** [2024 External Sector Report — Executive Summary and Chapter Highlights](https://www.imf.org/-/media/files/publications/esr/2024/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2024/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2024/english/text.pdf.json) --- ### Purpose and scope - Produced since 2012, the IMF’s annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions of the world’s largest economies representing more than 90 percent of global GDP. - Coverage includes current accounts, real exchange rates, external balance sheets, capital flows, and international reserves. - External sector data cutoff: May 20, 2024. IMF staff projections referenced from the April 2024 World Economic Outlook. - Report preparation: guided by Pierre-Olivier Gourinchas; led by Rudolfs Bems and Jiaqian Chen; editorial team led by Cheryl Toksoz. ### Key developments in 2023–early 2024 - Tight monetary policy conditions in key advanced economies were maintained in 2023, contributing to the continued strength of the US dollar in 2023 and early 2024. - Currency movements (real effective terms relative to 2022 average): - Chinese renminbi: −9.9 percent. - Japanese yen: −10.2 percent. - Euro: 0.3 percent. - Pound sterling: 4.9 percent. - Trade and flows: - Global imports and exports volume declined by 0.9 percent in 2023. - Net capital inflows to emerging market and developing economies recovered slightly from 2022 lows but remained negative in 2023. - Patterns in net flows masked a decline in both gross inflows and gross outflows in emerging market and developing economies. ### Global current account balance and recent changes - Global current account balance narrowed significantly in 2023, moderating toward pre-COVID levels after expansion during 2020–22. - Selected global current account figures (Billions of US Dollars / Percent of World GDP): - Global Current Account Balance: 3,448 (2021); 4,079 (2022); 3,192 (2023); 3,142 (2024 Projection). - Global Current Account Balance (Percent of World GDP): 3.6 (2021); 4.1 (2022); 3.1 (2023); 2.9 (2024 Projection). - Contribution magnitudes: - COVID-19 factors could have contributed 0.63 percent of global GDP to the post-COVID-19 increase in the global balance in 2021. - In 2023, withdrawal of COVID-19 factors estimated to have contributed 0.1 percent of global GDP to the narrowing relative to 2022. - Commodity exporters reduced current account surpluses by 0.55 percent of world GDP in 2023. - Net change: the global balance decreased by 1 percentage point of world GDP in 2023 following the 2020–22 expansion. ### Drivers of the narrowing - Main contributors: - Reversal of large current account surpluses in commodity exporting countries due to lower commodity prices. - Recovery from the COVID-19 pandemic (rebound in travel; rotation of consumption from durables back to services). - Declines in private saving in key surplus contributors (China, oil exporters) and increases in private saving in deficit contributors (United States); private saving changes were more important than public saving changes for key contributors. - Easing of supply concerns and slowdown in demand reduced prices for food, energy, and metals; gas prices in Europe fell dramatically from 2022 peaks. ### Medium-term outlook and risks - Baseline projection: global current account balance projected to continue narrowing over the medium term as deficit countries embark on fiscal consolidation and commodity prices moderate. - Baseline fiscal-consolidation assumption: deficit economies are projected to embark on a gradual fiscal consolidation of 2 percent of GDP over the medium term. - Quantitative baseline path for global current account balance (percent of world GDP) across 2023–28: 2.3 (2023), 2.8 (2024), 2.4 (2025), 2.5 (2026), 2.6 (2027), 2.7 (2028). - Key risks (tilted toward widening the global balance): - Divergence from projected medium-term fiscal consolidation plans. - Increasing geopolitical fragmentation. - Global spillovers from a prolonged real estate slowdown in China. - Renewed commodity price spikes amid regional conflicts. ### Policy recommendations for rebalancing - General principle: both excess surplus and deficit economies should pursue policies to promote external rebalancing. - For deficit economies with high public debt: focus on credible and growth-friendly fiscal consolidation in the near and medium term (baseline: 2 percent of GDP consolidation). - For economies with competitiveness challenges: implement structural reforms, including labor market measures. - For persistent surplus economies: prioritize policies to promote investment and diminish excess saving (including through public saving); expand social safety nets and reduce informality. - Monetary policy: careful calibration of monetary easing and clear communication to guard against unwarranted financial and capital market volatility. - Capital flow management and FX: adjust policy rates and allow exchange rate flexibility where markets are deep; use temporary FX interventions or capital flow measures where markets are shallow or FX mismatches prevalent; follow the Integrated Policy Framework and revised Institutional View on Capital Flows. - Macroprudential: pre-emptive measures to reduce financial vulnerabilities from foreign-currency debt exposure. - Multilateral cooperation: maintain stable and transparent trade policies; avoid discriminatory industrial policies; safeguard transportation of critical minerals; restore WTO dispute settlement capacity; coordinate on cross-border consequences of industrial policies and climate transition. - Global financial safety net: ensure adequacy with the IMF at its core; timely member consent to quota increases under the 16th General Review of Quotas is crucial to increase IMF liquidity. ### Role of coordination and IMF resources - Coordinated policy efforts and multilateral cooperation are important to preserve multilateralism and manage cross-border spillovers. - Ensuring an adequate global financial safety net remains critical; the IMF’s quota increases under the 16th General Review of Quotas are highlighted as important to increase liquidity and reinforce IMF’s central role. ### Exchange rates and exchange market pressure (EMP) - EMP index decomposition (2023): weighted and scaled sums of ER depreciation, adjusted changes in FX reserves, and policy rate changes; adjusted reserve changes constructed by Adler and others (2024, updated). - Exchange-market-pressure outcomes: - External pressure considerably weaker and less one-sided in 2023 vs 2022 as monetary policy divergence subsided. - Average depreciation pressure: 1.9 percent in 2023 (down from 12.8 percent in 2022). - In 2023, 12 out of 32 EBA currencies experienced depreciating pressure (down from 29 in 2022). - Adjusted reserves impact examples: - Adjusted change in reserves decreased appreciation pressure in Brazil, India, Poland, and Singapore. - Adjusted change in reserves absorbed depreciation pressure in Malaysia and Russia. ### Global financial flows and gross vs net patterns - Net capital inflows to emerging markets: recovered slightly in 2023 but remained negative overall. - China-specific dynamics: - China continued to account for a large share of negative net capital inflows in 2023. - Gross inflows in China have declined since 2021; gross FDI inflows sharply declined historically; gross other investment inflows stayed negative in 2022–23. - China’s gross FDI outflows remained broadly stable, producing large negative net inflows for FDI. - Other emerging markets (excluding China) in 2023: - Gross capital inflows and outflows declined, with outflows declining more and thus increasing net inflows. - Gross portfolio inflows and outflows increased in 2023; other gross outflows moderated relative to 2022. - High-frequency gross portfolio inflows (early 2024): inflows to emerging markets other than China continued into the first months of 2024; China saw a decline in inflows in early 2024. ### Global balance sheets, NIIP, and safety net - Global cross-border holdings of financial assets and liabilities: broadly constant in 2023 relative to 2022 in percent of global GDP, but increased in US dollar terms. - Financial centers: represent 36 percent of global assets and liabilities but only 7 percent of global GDP. - NIIP changes: - US net international investment position deteriorated from −61 percent of GDP in 2022 to −71 percent in 2023. - Global overall creditors (Billions of US Dollars): 20,170 (2020); 21,006 (2021); 20,095 (2022); 22,197 (2023). - Global overall debtors (Billions of US Dollars): −24,052 (2020); −27,932 (2021); −25,249 (2022); −29,007 (2023). - United States NIIP (Billions of US Dollars): −14,721 (2020); −18,783 (2021); −16,172 (2022); −19,768 (2023). - China NIIP (Billions of US Dollars): 2,287 (2020); 2,186 (2021); 2,427 (2022); 2,914 (2023). - Global financial safety net firepower as of end-2023: around $17.8 trillion. - People’s Bank of China swap lines: active bilateral swap agreements with 31 countries by 2023. ### Commodity prices and "Navigating the Tides of Commodity Prices" - Commodity price swings (1960–2023): - For 42 commodities, 362 upswings and 363 downswings identified. - Energy commodities show the largest swings: prices almost triple during a typical upswing and fall by as much during a downswing. - Empirical identification (oil): - Structural VAR for global crude oil market (January 1995–May 2023) identifies four shocks: global economic activity; oil consumption demand; oil inventory demand; oil supply. - Local projections normalized to a 10 percent on-impact real energy price increase used to estimate macro responses. - Key findings on shock sources: - Global activity–driven oil price increases: exporters and importers both see higher output and consumption; exporters’ current accounts improve, importers’ worsen. - Oil supply shocks (negative supply): exporters’ output increases; importers’ output and consumption fall; importers suffer larger adverse effects. - State-dependent mitigants for importers facing negative oil supply shocks: - Greater exchange rate flexibility. - Lower government debt and stronger external positions. - More anchored inflation expectations. - Lower energy import intensity. - Looser global financial conditions enable greater external borrowing and smoother consumption adjustment. - US dollar–oil price correlation: - After two decades of negative correlation, correlation turned positive since 2020. - Possible contributors: US shift to a modest oil exporter since early 2020; episodes of high global risk aversion; foreign investors’ increased holdings of US assets following oil price increases in post-2020 samples. - Policy implications if positive correlation persists: amplified terms-of-trade shocks for net oil importers with floating rates; increased financial stability risks where liabilities are dollar-denominated. - Clean energy transition implications (stylized simulation): - Permanent lower fossil fuel prices imply weaker GDP growth and initial current account improvement for fossil fuel exporters. - Permanent higher critical metals prices trigger initial investment booms in exporters, worsening current accounts initially and raising output. ### Fiscal policy changes and risk scenarios - Baseline: gradual fiscal consolidation of 2 percent of GDP in current account deficit countries over the medium term. - Risk scenario (postponement of consolidation to 2026): global current account balance expands relative to baseline until 2026 then shrinks faster thereafter (modeled with IMF’s Group of Twenty model). - Capital flows at risk (IMF staff estimates, Figure 1.23): - Three-quarter-ahead portfolio debt outflows across emerging markets (excluding China) at the fifth percentile = 2.3 percent of GDP; probability of outflows ≈ 27 percent. - Selected current account figures (Table 1.1): - United States current account (Billions of US Dollars): −831 (2021); −972 (2022); −819 (2023); −852 (2024 Projection). - China current account (Billions of US Dollars): 353 (2021); 402 (2022); 253 (2023); 236 (2024 Projection). - Euro Area (Billions of US Dollars): 417 (2021); −85 (2022); 260 (2023); 368 (2024 Projection). ### Geoeconomic fragmentation and trade interventions - Geoeconomic fragmentation concerns: US–China trade tensions and Russia’s war in Ukraine; extreme splintering could create geoeconomic blocs with profound trade and monetary system effects. - Model scenarios (Box 1.2 using GIMF): - Trade fragmentation (permanent 50 percent increase in symmetric NTBs): decreases global balance by 0.36 percentage point of global GDP; global medium-term real output declines by 3 percent; global trade volumes decline by about 9 percent. - Financial fragmentation (50 basis point decline in China bloc premium on US Treasuries): narrows global balance by 0.24 percent of global GDP; heterogeneous regional effects. - Empirical evidence: some fragmentation of trade and investment after Russia’s invasion of Ukraine, though relatively small to date. ### China real estate slowdown scenario (Box 1.3) - Illustrative calibration: - Depreciate economic value of existing buildings by 10 percent. - Increase equity premium in real estate sector by 4 percentage points for five years. - Households’ precautionary saving increases by 2 percent of GDP for five years. - Model horizon and reporting: medium-term responses captured at five-year horizon; responses reported as percentage point deviations from baseline. - Main impacts: - Near-term declines in China’s private investment, consumption, and GDP. - Persistent medium-term surge in saving in China, expanding China’s current account surplus and widening the global current account balance (chiefly via widening surplus in China and widening deficit in the United States). - Tariff simulation (10 percent tariffs by euro area and United States on China): very limited reduction in global balance (0.01 percent of world GDP) and significant reductions in global growth and trade. - Policy implications: domestic structural reforms in China to boost productivity and strengthen social safety nets to reduce precautionary saving; tariffs are ineffective in containing spillovers and harmful to global growth. ### Assessment methodology (EBA and staff judgment) - EBA models produce medium-term current account and REER benchmarks consistent with fundamentals and desirable policies. - Model outputs combined with other external indicators and analytically grounded adjustors; IMF staff judgment plays a critical role. - Adjustors include measurement issues, natural disasters, NIIP considerations, and lingering pandemic effects; adjustors’ size continued to shrink compared to 2022. - Assessments cover 30 economies representing 87.7 percent of global GDP in 2023. ### 2023 individual economy assessment highlights (selected country metrics and recommendations) - Aggregate ESR sample metrics: - Sum of absolute values of IMF staff–assessed current account gaps remained broadly unchanged relative to 2022—close to 1 percent of ESR economy GDP. - For ESR sample, sum of absolute current account balances decreased by about 0.6 percentage point to about 2.4 percent of ESR GDP in 2023 vs 2022. - Summed absolute value of current account norms stable at 1.6 percent of GDP in 2023. - Notable country assessments and key 2023 figures (select examples): - United States: - CA: −3.0 (2023, % GDP). - Cycl. Adj. CA: −2.6. - EBA Norm: −1.9. - EBA Gap: −0.7. - Staff Gap midpoint: −0.7. - NIIP: −70.7 (2023, % GDP). - Germany: - CA: 5.9 (2023, % GDP). - Cycl. Adj. CA: 5.9. - EBA Norm midpoint: 3.1. - Staff Gap midpoint: 2.7. - NIIP: 70 (2023, % GDP). - China: - CA (Billions of US Dollars): 353 (2021); 402 (2022); 253 (2023); 236 (2024 Projection). - CA (Percent of GDP): 2.0 (2021); 2.3 (2022); 1.4 (2023); 1.3 (2024 Projection). - 2023 assessment: Broadly in line. - India: - CA: −0.8 (fiscal year 2023/24, % GDP). - Cycl. Adj. CA: −0.5. - EBA Norm: −2.2. - Staff Gap: 1.7. - NIIP: −10.6 (end-2023, % GDP). - Reserves: $623.2 billion (end-2023) and $645.6 billion (end-March 2024). - Netherlands: - CA: 10.1 (2023, % GDP). - Cycl. Adj. CA: 10.3. - EBA Norm: 4.3. - Staff-adjusted CA gap: 4.3 (midpoint). - NIIP: 71.8 (2023, % GDP). - Saudi Arabia: - CA: 3.2 (2023, % GDP). - Cycl. Adj. CA: 3.3. - Staff Gap (EBA-Lite CA model): −2.6 percent of GDP (range −4.6 to −0.6). - Net foreign assets: $417.1 billion (end-2023). - Türkiye: - CA: −4.0 (2023, % GDP). - Cycl. Adj. CA: −3.0. - EBA Norm: −0.3. - Staff Gap midpoint: −2.6. - NIIP: −25.5 (2023, % GDP). - Korea: - CA: 2.1 (2023, % GDP). - Cycl. Adj. CA: 2.3. - EBA Norm: 4.4. - Staff Gap midpoint: −2.0. - NIIP: 45.5 (2023, % GDP); projected to rise to about 60 percent of GDP in 2029. - Brazil: - CA: −1.4 (2023, % GDP). - Cycl. Adj. CA: −1.7. - EBA Norm: −1.9. - Staff Gap midpoint: 0.2. - NIIP: −44.9 (2023, % GDP); Gross Assets: 46.5; Gross Liab.: 91.4; Debt Liab.: 33.7. - Country-specific policy recommendations follow classification: stronger-than-warranted, broadly in line, or weaker-than-warranted, with tailored fiscal, structural, exchange-rate, and macroprudential guidance (see individual country entries for details). ### Executive Board discussion highlights - Executive Directors broadly agreed with findings and policy recommendations. - Directors welcomed the narrowing of global current account balances in 2023 but noted excess global current account balances remained broadly unchanged relative to 2022. - Calls for transparency, consistency, and evenhandedness in external assessments and further improvements to EBA methodologies. - Requests for further analysis of clean energy transition challenges and the shifting oil price–US dollar correlation. *International Monetary Fund | 2024 — Executive summary and chapter highlights drawn from the 2024 External Sector Report* ### Preface ### Preface ### Purpose and scope - Produced since 2012, the IMF’s annual External Sector Report analyzes global external developments and provides multilaterally consistent assessments of external positions of the world’s largest economies representing more than 90 percent of global GDP. - Coverage includes current accounts, real exchange rates, external balance sheets, capital flows, and international reserves. - The report is part of a continuous effort, together with the World Economic Outlook and Article IV consultations, to assess and address the possible effects of spillovers from members’ policies on global stability and to monitor the stability of members’ external positions in a comprehensive manner. ### Chapter summaries and focal analysis - Chapter 1, “External Positions and Policies”: - Discusses the evolution of global external positions in 2023. - Identifies key risks to external sector stability. - Presents policy priorities for reducing excess imbalances over the medium term. - Chapter 2, “Navigating the Tides of Commodity Prices”: - Explores the external sector implications of energy price swings. - Finds that energy-importing countries bear the brunt of negative oil supply shocks and can mitigate the impact through policies including greater exchange rate flexibility and more anchored inflation expectations. - Chapter 3, “2022 Individual Economy Assessments”: - Provides details on the overall external assessments for 30 economies and associated policy recommendations. - This year’s external assessments are based on the latest version of the IMF’s External Balance Assessment methodology, external sector data as of May 20, 2024, and IMF staff projections in the April 2024 World Economic Outlook. ### Key findings and policy messages - The report provides multilaterally consistent assessments of external positions for the world’s largest economies (more than 90 percent of global GDP). - Energy-importing countries are particularly exposed to negative oil supply shocks; mitigation options highlighted include: - Greater exchange rate flexibility. - More anchored inflation expectations. - Chapter 1 emphasizes policy priorities aimed at promoting external rebalancing and reducing excess imbalances over the medium term. ### Data, methodology, and timing - External assessments use the latest version of the IMF’s External Balance Assessment methodology. - External sector data cutoff: May 20, 2024. - IMF staff projections referenced from the April 2024 World Economic Outlook. ### Report preparation, review, and contributors - Prepared under the overall guidance of Pierre-Olivier Gourinchas, IMF Economic Counsellor and Director of Research, and under the direction of the External Sector Coordinating Group. - External Sector Coordinating Group comprised staff from area departments (African, Asia and Pacific, European, Middle East and Central Asia, and Western Hemisphere) and functional departments (Fiscal Affairs; Statistics; Strategy, Policy, and Review; Monetary and Capital Markets; and Research). - Report led by Rudolfs Bems and Jiaqian Chen, with contributions from multiple IMF staff and external consultant Christiane Baumeister. - Important input provided by country teams and numerous individual staff members. - Editorial team led by Cheryl Toksoz from the Communications Department; production and editorial support provided by Absolute Services and the Grauel Group. - Analysis benefited from comments and suggestions by staff members from other IMF departments, and by the IMF’s Executive Directors following their discussion of the report on July 1, 2024. - Projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities. ### Publication, access, and corrections - Print copies can be ordered from the IMF Bookstore. - Multiple digital editions (ePub, enhanced PDF, Mobi, and HTML) are available on the IMF eLibrary. - A free PDF of the report and data sets for each chart are available from the IMF website. - The data and analysis are compiled by IMF staff at the time of publication; corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary. All substantive changes are listed in the online table of contents. *International Monetary Fund | 2024* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Key developments in 2023–early 2024 - Tight monetary policy conditions in key advanced economies were maintained in 2023, contributing to the continued strength of the US dollar in 2023 and early 2024. - Movements in other reserve currencies were mixed in real terms, with notable depreciations of the Chinese renminbi and the Japanese yen. - Emerging market and developing economies generally experienced less depreciation pressure in 2023 than in the previous year. - Net capital inflows to emerging market and developing economies recovered slightly from the lows experienced in 2022 but remained negative in 2023. - Patterns in net flows masked a decline in both gross inflows and gross outflows in emerging market and developing economies. ### Global current account balance and recent changes - The global current account balance—the cross-country sum of absolute values of current account—narrowed significantly in 2023, moderating toward pre-COVID levels after a sustained expansion during 2020–22. - Global trade in goods: the volume of imports and exports declined globally by 0.9 percent in 2023; global trade openness, measured as real goods trade-to-GDP ratio, fell sharply in 2023. - Commodity prices declined in 2023, reversing from 2022 peaks toward historical averages; as of the first quarter of 2024, real commodity prices remain elevated relative to prepandemic levels. - Contribution magnitudes linked to COVID-19 and commodity reversals: - COVID-19 factors could have contributed 0.63 percent of global GDP to the post-COVID-19 increase in the global balance in 2021. - In 2023, the withdrawal of COVID-19 factors is estimated to have contributed 0.1 percent of global GDP to the narrowing of the global balance relative to 2022. - Commodity exporters reduced current account surpluses by 0.55 percent of world GDP in 2023, as saving declined to buffer the impact of declining commodity prices. - Following a sustained expansion during 2020–22, the global balance in 2023 decreased by 1 percentage point of world GDP. ### Drivers of the narrowing - Reversal of large current account surpluses in commodity exporting countries due to lower commodity prices. - Continued recovery from the COVID-19 pandemic, including rebound in travel and rotation of consumption from durables back to services. - Decline in private saving in key surplus contributors (China, oil exporters) and increases in private saving in deficit contributors (United States), with changes in private saving more important than changes in public saving for key contributors. - Easing of supply concerns and slowdown in demand contributed to lower prices for food, energy, and metals; gas prices in Europe fell dramatically from 2022 peaks, reducing energy import bills for gas importers. ### Medium-term outlook and risks - Over the medium term, the global current account balance is projected to continue narrowing, as current account deficit countries embark on fiscal consolidation and commodity prices moderate. - Risks are sizable and tilted toward a widening global balance. Key risks include: - Divergence from projected medium-term fiscal consolidation plans. - Increasing geopolitical fragmentation. - Global spillovers from a prolonged real estate slowdown in China. - Renewed commodity price spikes amid regional conflicts. - These risks could hamper efficient resource flows and undermine external stability achieved postpandemic. ### Policy recommendations for rebalancing - Both excess surplus and deficit economies should pursue policies to promote external rebalancing. - For economies with excess current account deficits partly reflecting high public debt levels: focus on credible and growth-friendly fiscal consolidation in the near and medium term. - For economies with competitiveness challenges: implement structural reforms, including measures to address bottlenecks in the labor market. - For economies with persistent excess current account surpluses: prioritize policies to promote investment and diminish excess saving, including through public saving; expand social safety nets and reduce informality. - Careful calibration of monetary easing and clear communication are crucial to guard against unwarranted financial and capital market volatility and disruptive exchange market pressures. - Policy responses to potentially disruptive capital flow movements should be guided by the Integrated Policy Framework and the revised Institutional View on Capital Flows, depending on country circumstances. - Strong macroeconomic policies and fundamentals remain the first line of defense against excessive capital volatility. ### Role of coordination and IMF resources - Coordinated policy efforts and multilateral cooperation are important to deal with complex global challenges and preserve the benefits of multilateralism, including stable and transparent trade policies and responsible use of industrial policies and new technologies. - Ensuring an adequate global financial safety net, with the IMF at its core, remains critical; timely consent by members to their respective quota increases under the 16th General Review of Quotas is crucial. ### Executive Board discussion highlights - Executive Directors broadly agreed with the findings and policy recommendations of the 2024 External Sector Report. - Directors welcomed the narrowing of global current account balances in 2023 but noted excess global current account balances remained broadly unchanged relative to 2022. - Directors emphasized the need for transparency, consistency, and evenhandedness in external assessments and encouraged further improvements to EBA methodologies. - Directors called for further analysis of challenges from the clean energy transition and the potential shift in the correlation between oil prices and the US dollar. _International Monetary Fund | 2024 — EXECUTIVE SUMMARY_ ### Annex 1.1 of the 2021 External Sector Report for details on the adjustors. ### Annex 1.1 of the 2021 External Sector Report for details on the adjustors. ### Exchange Rates: recent dynamics and currency movements - Following a rapid US dollar appreciation in 2022, currency markets were more stable in 2023 and early 2024. - 2022 dollar appreciation was driven by rapid monetary tightening in the United States relative to other economies. - In 2023, tight monetary policy conditions prevailed globally but monetary policy divergence subsided; additional tightening in major advanced economies stayed limited. - The strong US dollar persisted in 2023, remaining close to its post-2000 peak. In Q4 2023 the US dollar depreciated slightly reflecting expectations of the beginning of the Federal Reserve cutting cycle; more recent expectations of higher-for-longer policy rates in the United States reversed this depreciation in early 2024. - Real effective exchange rate changes noted: - Chinese renminbi: –9.9 percent (real effective terms relative to 2022 average) - Japanese yen: –10.2 percent (real effective terms relative to 2022 average) - Euro: 0.3 percent (real effective terms relative to 2022 average) - Pound sterling: 4.9 percent (real effective terms relative to 2022 average) - Nominal effective exchange rate trends for other ESR countries in 2023 and early 2024 broadly mirrored their 2022 dynamics: - Some EMDEs such as Brazil and Mexico appreciated again in 2023 and early 2024. - Others such as Argentina and Türkiye experienced significant depreciations. - The Russian ruble depreciated in 2023, largely due to declining export earnings. - Country-specific drivers of persistent differences in currency movements across EMDEs during 2022–23 include interest rate differentials, speed of postpandemic economic recovery, preexisting vulnerabilities (such as lower perceived institutional quality), and success with disinflation efforts. ### Exchange Market Pressure (EMP) index and policy responses - The realized change in exchange rates is an imperfect measure of external pressures because interest rate changes and (active or passive) changes in FX reserves can cushion pressures. - The Exchange Market Pressure Index used for 2023: - Is based on Goldberg and Krogstrup (2023, updated). - Is defined as the weighted and scaled sums of ER depreciation, adjusted changes in FX reserves, and policy rate changes. - Combines pressures observed in exchange rate adjustments with model-based estimates of incipient pressures masked by changes in reserves and policy rate adjustments. - Positive values correspond to exchange market pressure that would depreciate the nominal exchange rate. - A country’s total exchange market pressure in 2023 is the sum of scaled and weighted observed adjusted changes in FX reserves, short-term interest rate changes, and nominal exchange rate movements. - Values of adjusted changes in FX reserves and interest rate changes are expressed in terms of counterfactual exchange rate adjustments that would have occurred if no changes in FX reserves or policy rates had occurred. - Changes in FX reserves are adjusted for valuation changes, income flows, and changes in other foreign currency balance sheet positions by Adler and others (2024, updated). - Using adjusted changes in FX reserves constructed by Adler and others (2024, updated), Goldberg and Krogstrup (2023) estimated the counterfactual adjustment in the exchange rate that would have occurred in the absence of the adjusted changes in FX reserves or policy rate changes. - External pressure was considerably weaker and less one-sided in 2023 compared to 2022 as monetary policy divergence subsided. - Twelve External Balance Assessment (EBA) economies (including Poland, Mexico and Brazil) faced appreciating pressure in 2023—a significant increase from 2022. - Average depreciation pressure was 1.9 percent, with 12 out of 32 EBA currencies experiencing depreciating pressure in 2023; in 2022 the average depreciation pressure was 12.8 percent, with 29 currencies having depreciating (positive) pressure. - Exchange rate changes were the main policy outlet for addressing exchange market pressures, especially where pressures were sizable. - Adjusted reserves movements in 2023 occurred in both directions: - Adjusted change in reserves decreased appreciation pressure in Brazil, India, Poland, and Singapore. - Adjusted change in reserves absorbed depreciation pressure in Malaysia and Russia. - With inflation abating in major emerging markets, some central banks commenced cutting interest rates in 2023. - During 2023 interest rate differentials vis-à-vis the United States declined for Brazil and Poland (among ESR countries), reflected in a negative interest rate component in the EMP decomposition. - As in 2022, change in inflation during 2023 was positively linked to the Exchange Market Pressure index, with lower pressure for depreciation in economies that have reduced inflation by more. ### Global financial flows: net and gross capital flow patterns - Net capital inflows to emerging markets recovered slightly from 2022 lows but remained negative in 2023. - Aggregate emerging market trend masks heterogeneity: - China continued to account for a large share of negative net capital inflows during 2023. - Inflows to other emerging markets as a group were positive and increased in 2023. - Subcomponents of financial account in 2023: - Net FDI inflows in 2023 declined relative to historical averages but remained positive across emerging market groups. China was an exception where net FDI inflows stayed negative and fell further in 2023. - Net portfolio inflows were less negative in 2023 in both China and other emerging markets. - Net other investment inflows were muted in 2023, with a turn to positive net inflows in other emerging markets and a decline in China relative to 2022. - Reserve accumulation (presented in negative values) declined in China and increased in other emerging markets. - Gross flows: - Patterns in net inflows mask a decline in both gross inflows (nonresident investment in EMDEs) and gross outflows (EMDE residents’ investment abroad). - In China, gross inflows have declined since 2021, with gross other investment inflows staying negative in 2022–23; a sharp decline in gross FDI inflows stands out historically. - China’s gross FDI outflows have remained broadly stable, producing large negative net inflows for this component. - In other emerging markets in 2023, gross capital inflows and outflows declined, with a more pronounced decline in outflows increasing net flows. - Gross portfolio inflows and outflows increased in 2023 in other emerging markets; other gross outflows moderated relative to 2022, contributing to recovery of net other capital inflows. - Significant heterogeneity exists across large emerging markets; some experienced sizable increases in gross inflow destinations relative to prepandemic trends. - Drivers of observed shifts in capital flows during 2023: - Global (push) factors: continued disinflation efforts and tight monetary policy in advanced economies constrained capital flows, evidenced by reduced gross inflows and outflows. - Local (pull) factors: interest differentials, less robust growth may have depressed inflows to some countries. - Geopolitical uncertainties may have reduced FDI. - High-frequency gross portfolio inflows (subset of financial account): - Show an inflow to emerging markets other than China in the first few months of 2024, continuing the 2023 trend. - China saw a decline in inflows in early 2024, partly reversing the recovery in Q4 2023. - These dynamics can be linked to fluctuations in US financial conditions; optimism in financial markets and limited US dollar depreciation in Q4 2023 helped rekindle capital inflows to emerging markets in Q4 2023 and Q1 2024. - There have been fairly limited global spillovers in capital flows from increased tensions in the Middle East; inflows to the region decreased in H2 2023 but have since recovered. ### Global balance sheets, net positions, and safety net observations - Global cross-border holdings of financial assets and liabilities are estimated to have remained broadly constant in 2023 relative to 2022 in percent of global GDP, while increasing in US dollar terms. - Financial centers continued to play an outsized role in global balance sheets: - Representing 36 percent of global assets and liabilities but only 7 percent of global GDP. - Net foreign creditor and debtor positions are estimated to have expanded in 2023 with broad-based increases across country groups. - The largest debtor economy remains the United States: - US net international investment position deteriorated from –61 percent of GDP in 2022 to –71 percent in 2023 (Table 1.2). - Other large debtor economies include Brazil, France, and India. - Largest creditor economies include China, Germany, Hong Kong Special Administrative Region, and Japan. - Gross assets and liabilities remain large from a historical perspective. *Annex 1.1 of the 2021 External Sector Report.* ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### Net International Investment Positions and Valuation Changes (2023) - Financial centers have a large net creditor position as a group, around 6 percent of global GDP. - Persistent current account surpluses and deficits across creditors and debtors continued to shape expanding net international investment positions during 2023. - Valuation changes contributed to increasing stock imbalances in 2023: - Creditor countries tended to have more positive valuation changes (with a notable exception of The Netherlands). - Larger debtors tended to experience valuation losses. - US equity prices led to a deterioration of US debtor position and increases in net positions of countries holding these assets. - Currency-induced valuation changes tended to partly offset asset-price-driven shifts; example: in the United States the valuation loss due to higher domestic equity prices was only partially offset by a valuation gain due to a US dollar depreciation over the first three quarters of 2023. ### Global Financial Safety Net - The global financial safety net provides insurance against shocks, financing to mitigate their impact, and incentives for sound macroeconomic policies. - It is composed of four layers: central banks’ foreign exchange reserves, central banks’ bilateral swap arrangements, regional financing arrangements, and the IMF. - As of the end of 2023, the global financial safety net represented a combined firepower of around $17.8 trillion. - The Federal Reserve’s temporary bilateral swap lines or repurchase agreement facility for foreign and international monetary authorities played a key role in stabilizing global financial markets and capital flows to emerging market economies. - There has been rapid growth in the People’s Bank of China swap lines over the last 1½ decades: - The People’s Bank of China expanded the number of countries with active bilateral swap line agreements to 31 by 2023. ### Assessment Methodology (EBA and IMF Staff Judgment) - The EBA models produce medium-term current account and real exchange rate benchmarks that are consistent with country fundamentals and desirable 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, a measure of excess external balances. - Model outputs are combined with other external indicators, analytically grounded adjustments, and country-specific insights to reach a holistic IMF staff assessment. - IMF staff judgment plays a critical role because models may not capture all relevant country characteristics and potential policy distortions. - Adjustors for country-specific factors included measurement issues, natural disasters, net international investment position considerations, and lingering but temporary effects of the pandemic. - The size of such adjustors continued to shrink when compared to 2022. ### Assessment Results for 2023 (30 economies; 87.7 percent of global GDP) - Category: Moderately stronger, stronger, or substantially stronger than medium-term fundamentals and desirable policies: - Germany, India, Malaysia, Mexico, Singapore, Sweden, Thailand, The Netherlands, Poland, Spain. - Category: Moderately weaker, weaker, or substantially weaker than medium-term fundamentals and desirable policies: - Argentina, Belgium, Canada, Italy, Türkiye, Korea, Saudi Arabia, Switzerland, United Kingdom. - Category: Broadly in line with medium-term fundamentals and desirable policies: - Australia, Brazil, China, the euro area, Hong Kong Special Administrative Region, Indonesia, Japan, France, Russia, South Africa, United States. - Changes from 2022 to 2023: - Assessments for 2023 changed for about half of the 30 ESR economies, largely driven by changes in headline current accounts. - About half of the economies that changed assessment moved farther away from the “broadly in line” category. - Notable moves into “broadly in line”: France, Russia, South Africa, United States. - Aggregate metrics: - The sum of the absolute values of IMF staff–assessed current account gaps remained broadly unchanged relative to 2022—close to 1 percent of ESR economy GDP. - For the ESR sample, the sum of the absolute values of current account balances decreased by about 0.6 percentage point to about 2.4 percent of ESR GDP in 2023 compared to 2022. - The summed absolute value of current account norms was stable at 1.6 percent of GDP in 2023. - Distribution of excess balance in 2023: - Most excess balance pertained to advanced economies. - Largest contributors among “weaker-than-warranted” categories (by share of ESR economy GDP): United Kingdom, Italy, Canada (in descending order). - Largest contributors among “stronger-than-warranted” categories (by share of ESR economy GDP): Germany, India, The Netherlands (in descending order). ### Outlook and Projections (Medium Term) - Global balance projected to narrow further over the medium term, with heterogeneity across countries. - Projected contributors to narrowing: - Declining current account surpluses in China and oil exporters as imports of services grow in China and energy prices moderate. - The United States’ current account deficit projected to contribute to narrowing as the trade deficit declines toward prepandemic levels. - Projected widening of deficits in several emerging market deficit countries dampens the decline in the global balance: Brazil, India, Indonesia, Mexico. - Macro factors supporting narrowing: - Moderating commodity prices. - Projected medium-term fiscal consolidation in current account deficit countries, including the United States. - These factors outweigh a projected gradual recovery in global trade volumes. - Change since prior report: - The medium-term global balance has decreased by 0.2 percent of world GDP relative to the path reported in the 2023 External Sector Report. - Creditor and debtor stock positions: - Projected to continue to expand moderately over the medium term. - Projections of exchange rates and asset prices are highly uncertain; global stock balances could deviate substantially from baseline projections. - Debtor position of European economies projected to improve over the medium term on the back of persistent current account surpluses and declining deficits. - External stress risks persist for economies where gross external liabilities are historically high. ### Risks Surrounding the Outlook - Key assumptions underpinning the baseline projection include: - Implementation of sizable medium-term fiscal consolidation in current account deficit countries. - No further escalation of geoeconomic tensions. - Moderating commodity prices. - Continued global financial stability. - Risks tilted toward widening the global balance: - Delays in fiscal consolidation in current account deficit countries. - External sector spillovers from continued real estate slowdown and rebalancing in China. - Rising commodity prices. - Risks that could narrow the global balance: - Intensifying geoeconomic fragmentation. - Tightening of global financial conditions. - Several risks (including delayed fiscal consolidation and intensifying geoeconomic fragmentation) could disrupt the relative stability in the external sector that has returned after the pandemic years. *Source: CHAPTER 1 ExtErnal PosItIons and PolIcIEs, 2024 External Sector Report* ### 1. Fiscal Policy Changes ### 1. Fiscal Policy Changes ### Fiscal consolidation baseline and risk scenario - Baseline projection: economies with current account deficits are projected to embark on a gradual fiscal consolidation of 2 percent of GDP over the medium-term horizon. - No systematic consolidation relative to 2023 is projected for current account surplus countries. - Political and electoral pressures (subsidies, tax reductions) could challenge implementation of consolidation. - Risk scenario (postponement): fiscal consolidation envisaged for 2024–25 is postponed until 2026 (as analyzed in Box 1.2 of the April 2024 World Economic Outlook). - Under this risk scenario, using the IMF’s Group of Twenty model: - Current account deficit countries run higher deficits in fiscal and current accounts initially and then engage in sharper fiscal consolidation after 2026 than under the baseline. - The global current account balance expands relative to the baseline until 2026 and thereafter shrinks faster and lower than the baseline. - Beyond this scenario, delayed consolidation could magnify fiscal vulnerabilities by increasing sovereign spreads and public debt, especially in current account deficit countries. - Heightened fiscal vulnerabilities increase the risk of external stress events, which have been shown to lead to larger output losses and sharper current account adjustments. ### Quantitative indicators and projections (figures and tables) - Figure indicators (from Figure 1.21 panels summarized in text): - Fiscal consolidation magnitude in baseline: 2 percent of GDP (medium-term). - Impact on global current account balance (percent of world GDP) shown across 2023–28 with values in figure: 2.3, 2.8, 2.4, 2.5, 2.6, 2.7 (for 2023, 2024, 2025, 2026, 2027, 2028 respectively). - Capital flows at risk (Figure 1.23): - IMF staff estimates: three-quarter-ahead portfolio debt outflows across emerging markets (excluding China) at the fifth percentile will be 2.3 percent of GDP, with a probability of outflows at about 27 percent. - Selected entries from Table 1.1 (Current Account Balance, 2021–24): - Global Current Account Balance (Billions of US Dollars): 3,448 (2021); 4,079 (2022); 3,192 (2023); 3,142 (2024 Projection). - Global Current Account Balance (Percent of World GDP): 3.6 (2021); 4.1 (2022); 3.1 (2023); 2.9 (2024 Projection). - United States current account (Billions of US Dollars): −831 (2021); −972 (2022); −819 (2023); −852 (2024 Projection). - United States (Percent of GDP): −3.5 (2021); −3.8 (2022); −3.0 (2023); −3.0 (2024 Projection). - China current account (Billions of US Dollars): 353 (2021); 402 (2022); 253 (2023); 236 (2024 Projection). - China (Percent of GDP): 2.0 (2021); 2.3 (2022); 1.4 (2023); 1.3 (2024 Projection). - Euro Area (Billions of US Dollars): 417 (2021); −85 (2022); 260 (2023); 368 (2024 Projection). - Overall Surpluses (Billions of US Dollars): 2,183 (2021); 2,260 (2022); 1,874 (2023); 1,852 (2024 Projection). - Overall Deficits (Billions of US Dollars): −1,265 (2021); −1,816 (2022); −1,324 (2023); −1,399 (2024 Projection). - Selected entries from Table 1.2 (Net International Investment Position, 2020–23): - Global overall creditors (Billions of US Dollars): 20,170 (2020); 21,006 (2021); 20,095 (2022); 22,197 (2023). - Global overall debtors (Billions of US Dollars): −24,052 (2020); −27,932 (2021); −25,249 (2022); −29,007 (2023). - United States NIIP (Billions of US Dollars): −14,721 (2020); −18,783 (2021); −16,172 (2022); −19,768 (2023). - China NIIP (Billions of US Dollars): 2,287 (2020); 2,186 (2021); 2,427 (2022); 2,914 (2023). ### Geoeconomic fragmentation and trade interventions - Geoeconomic fragmentation remains a major concern due to US–China trade tensions and Russia’s war in Ukraine; extreme splintering could create geoeconomic blocs with profound effects on trade and the international monetary system. - Policy measures restricting trade continue to accumulate in trade interventions and industrial policies targeting national security, economic resilience, de-risking of supply chains, and climate objectives. - Empirical evidence points to some fragmentation of trade and investment along geopolitical lines following Russia’s invasion of Ukraine, although to a relatively small extent. - Model-based scenarios suggest intensifying fragmentation could: - Reduce trade flows. - Narrow the global balance over the medium term. - Adversely impact effective productivity by distorting trade in intermediate goods (particularly for countries integrated in global value chains across un-friendly blocs). - Reduce output, investment, and trade openness also in systemically important non-aligned emerging and developing economies. - Figure 1.22 (number of net harmful trade restrictions by policy instrument, 2009–23) indicates accumulation of net harmful trade restrictions over 2009–23 (data based on Global Trade Alert, results as of May 16, 2024). ### Other risk scenarios with spillovers to external balances - Prolonged real estate slowdown in China: - Depreciation of China’s housing value could rebuild household wealth through increased saving, contribute to a saving glut, drive up China’s current account surpluses, and widen the global current account balance. - Increased production in goods sectors (via subsidies or productivity gains) could also widen the global balance. - Domestic rebalancing and broad-based structural reforms in China (boost productivity, strengthen social safety nets) are important to reduce precautionary saving. - Abrupt tightening of financial conditions: - Sudden repricing of risk amid low volatility could sharply tighten financial conditions, trigger capital outflows, exchange rate adjustments, and balance-of-payments crises for countries with weak buffers and high foreign currency debt. - Higher-for-longer US policy rates could reduce policy rate differentials in emerging markets, leading to disruptive exchange-market pressures, capital outflows, reduced trade flows, and a lower global balance. - IMF staff estimate (emerging markets excluding China): three-quarter-ahead portfolio debt outflows at the fifth percentile = 2.3 percent of GDP; probability ≈ 27 percent. - Rising commodity prices: - Energy price hikes from supply chain pressures, conflict, terrorism, or climate disasters could particularly harm EMDE energy importers with low buffers, causing capital outflows, exchange rate depreciations, fiscal pressures, and debt distress. - Historically, rising commodity prices have been linked to a widening global balance, though severe regional conflicts could also depress trade and financial flows. - Climate change and clean energy transition: - Natural disasters can deteriorate current accounts for disaster-prone economies. - Climate mitigation policies and the clean energy transition could significantly impact the global balance and reshape commodity prices and trade flows, with diverging current-account effects between exporters of fossil fuels and green metals. ### Policy priorities and recommendations for external rebalancing - Correcting excess current account balances can improve welfare, reduce risk of sudden stops/reversals, and preserve multilateralism. - Promoting external rebalancing requires collective action by both surplus and deficit economies. - Monetary policy: - Central banks should ensure the right timing of easing and verify that wage and price pressures are clearly dissipating before easing. - As central bank policies become less synchronous, diverging interest rates may spur volatile capital flows and FX volatility. - Fiscal policy: - Fiscal consolidation, where warranted, helps rebuild budgetary room and curb the rise of public debt. - Fiscal consolidation in several large economies with excessive fiscal and external deficits (such as Italy and the United Kingdom) would help external rebalancing. - Exchange rate and capital flow management: - For economies with deep FX markets, low FX mismatches, and well-anchored inflation expectations: adjust policy rates and allow exchange rate flexibility. - For economies with shallow FX markets, large FX mismatches, or risks of de-anchoring inflation: temporary FX interventions or loosening capital flow management measures on inflows may be appropriate to keep FX markets functioning while maintaining appropriate monetary and fiscal settings. - Macroprudential policies, including pre-emptive capital flow management measures/macroprudential measures where appropriate, should reduce financial vulnerabilities from foreign-currency debt exposure. - Temporary FX interventions and capital flow measures should not substitute for warranted macroeconomic adjustments or development of domestic macroprudential policies. - Multilateral cooperation: - Maintain stable and transparent trade policies, avoid discriminatory policies that induce trade and investment distortions. - Safeguard transportation of critical minerals, restore the World Trade Organization’s dispute settlement capacity, and ensure responsible use of potentially disruptive technologies (e.g., artificial intelligence). - Coordinate to identify unintended cross-border consequences of industrial policies, facilitate orderly resolution of debt problems in a complex creditor landscape, mitigate climate change impacts, and facilitate the green energy transition. - Global financial safety net: - Maintain liquidity in the global financial system to manage risks from less synchronous monetary policies and geoeconomic fragmentation. - Ensure economies at risk of external shocks can access the global financial safety net, including IMF precautionary financial arrangements. - The IMF Board of Governors’ conclusion of the 16th Review of Quotas is a welcome step; members’ consent to their respective quota increase is needed to implement the increase, which will: - Increase IMF liquidity. - Ensure the primary role of quotas in IMF resources. - Reinforce the IMF’s role at the center of the global financial safety net. *Source: 2024 External Sector Report (text - 1. Fiscal Policy Changes).* ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### Policies to promote external rebalancing - Economies with weaker-than-warranted external positions should: - Focus on policies that boost saving and competitiveness. - Where assessment reflects the need to reduce high public debt levels (as in Belgium and Italy), pursue credible fiscal consolidation in the near and medium terms to create space to support green and digital transformations. - Implement fiscal consolidation in a way that protects critical infrastructure investment and well-targeted social spending to help tackle poverty and inequality (for example, in Argentina). - Address structural bottlenecks through labor market and other structural reforms to promote green, digital, and inclusive growth while boosting productivity. - Economies with stronger-than-warranted external positions should: - Prioritize policies aimed at promoting investment and diminishing excess saving to support external rebalancing while also pursuing domestic objectives. - Example: Germany—higher fiscal deficits than currently planned are likely to be required over the medium term to ensure adequate public investment in the green transition, digitalization, and transport infrastructure, and to help reduce the current account balance toward its norm. - Example: Sweden—as inflation recedes, increase private and public investment in the green transition and the health sector to lower the external balance and meet climate and demographic challenges. - In some emerging markets (such as Malaysia, Mexico, and Thailand), reforms to tackle informality and expand social safety nets, including when appropriate through public health care, would encourage investment and—by supporting consumption—help reduce precautionary saving and support external rebalancing. - Economies with external positions broadly in line with fundamentals should: - Continue to address domestic imbalances to prevent excessive external imbalances. - Example: China—address policy distortions by accelerating market-based structural reforms, shift fiscal policy support toward strengthening social protection to reduce high household savings and rebalance toward private consumption, and gradually increase exchange rate flexibility to better absorb external shocks. - Example: United States—fiscal consolidation over the medium term would broadly stabilize the public debt-to-GDP ratio and maintain an external position consistent with medium-term fundamentals and desirable policies. - Economies with negative net international investment positions (such as Brazil) need efforts to raise national savings to keep current account balances in line with norms and provide room for a sustainable expansion in investment. - Reforms to boost productivity would improve competitiveness while facilitating green and digital transitions. *Box prepared by Cian Allen.* ### Box 1.1 — Cross-Country Variation in Gross Capital Inflows to Large Emerging Market and Developing Economies - Relative to a 2017–19 baseline, gross capital inflows in emerging markets declined during 2022–23 for aggregate capital flows as well as foreign direct investment (FDI). - Aggregate trends hide large cross-country variation: - Some larger emerging markets—China, India, and Russia—drive the aggregate decline. - Other emerging markets—Malaysia, Poland, and Türkiye—saw increases in gross capital inflows for both FDI and non-FDI flows relative to prepandemic trends. - Observed heterogeneity may reflect geoeconomic fragmentation trends: - Outward bilateral FDI flows from the euro area, Japan, and the United States show systematic differences in FDIs to rival geopolitical blocs. - For all three source countries, FDI to the Western bloc increased relative to a 2017–19 baseline, largely driven by FDI to Europe and the United States. - Flows to the Eastern bloc declined or stagnated, driven by FDI into China and Russia. - Nonaligned countries show mixed results: increases in Mexico as a destination for US investment, Türkiye for the euro area, and Malaysia and Vietnam for Japan. - For the United States and Japan, the nonaligned group outperformed the Eastern bloc. - Measurement caveat: - A significant share of FDI flows is directed to financial centers (FCs) and thus cannot be allocated to ultimate destination, complicating destination-based analysis and calling for improved measurement of capital flows. Key statistics and labels preserved from figures: - Figure 1.1.1 and Figure 1.1.2 display gross capital inflows and bilateral FDI inflows, with averages for 2022:Q1–23:Q4 and 2017:Q1–19:Q4; bubble size based on GDP in US dollars; data labels use ISO country codes. - Note: Last observation for Malaysia is 2023:Q3. *Box 1.1 continued.* ### Box 1.2 — Geoeconomic Fragmentation and the Global Balance - Purpose: Use the IMF’s Global Integrated Monetary and Fiscal (GIMF) model to analyze trade and financial fragmentation scenarios between hypothetical US and China blocs, focusing on implications for the global current account balance. - Trade fragmentation scenario: - Modeled as a permanent 50 percent increase in symmetric nontariff trade barriers (NTBs) between the US bloc and the China bloc over 10 years. - NTBs act as a negative productivity shock, reducing investment, trade volumes, and output globally, while increasing prices of imported goods (consumption, investment, intermediate goods). - Effects on current accounts: - Emerging Southeast Asia (the most open to both blocs and more specialized in GVC goods) experiences higher import and consumption prices, real exchange rate appreciation, temporary lowering of the real interest rate, and on balance a decrease in the current account. - Nonaligned countries face small declines in investment and income, but their tradable goods become relatively abundant leading to a short-to-medium-term real exchange rate depreciation, temporary increase in real interest rate, increased saving, and a temporary increase in the current account. - United States runs a current account surplus in the scenario because it is least exposed to the NTBs. - Aggregate impacts: - A 50 percent increase in NTBs decreases the global balance by 0.36 percentage point of global GDP over the medium term. - Global medium-term real output declines by 3 percent relative to the baseline. - Global trade volumes decline by about 9 percent relative to the baseline. - Financial fragmentation scenario: - Modeled as a decline in the premium paid by the China bloc on US Treasuries by 50 basis points (captured as a wedge λ). - Model simulation findings: - Financial fragmentation increases medium-term investment and decreases saving and the interest rate in the China bloc, leading to a decline in the current account. - In the US bloc, investment decreases and the interest rate and saving increase, leading to an increase in the current account. - Effects are present across regions within both blocs; medium-term impacts on nonaligned regions are relatively minor. - Aggregate impacts: - The overall medium-term impact on the global balance is a narrowing of 0.24 percent of global GDP, with the largest contributions from China and the United States. - Synthesis: - Fragmentation through trade and financial channels could narrow the global current account balance over the medium term. - The magnitude of the narrowing and which countries contribute depend on the nature of the fragmentation: trade restrictions compress trade flows and reduce dispersion of external balances globally, while financial fragmentation generates more heterogeneous external sector responses. *Box prepared by Rudolfs Bems, Benjamin Carton, and Racha Moussa.* *Italic: Source — CHAPTER 1 ExtErnal PosItIons and PolIcIEs, text - CHAPTER 1 ExtErnal PosItIons and PolIcIEs (2024 External Sector Report).* ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### China real estate slowdown: scenario design and transmission - Scenario modeled with the IMF Global Integrated Monetary and Fiscal Model to analyze a prolonged China real estate slowdown and its impact on the global current account balance. - Illustrative scenario components (calibration): - the economic value of existing buildings is depreciated by 10 percent; - the equity premium in the real estate sector increases by 4 percentage points for five years; - households’ precautionary saving increases by 2 percent of GDP for five years. - Immediate and medium-term transmission: - Near-term declines in private investment, private consumption, and GDP in China. - Persistent medium-term surge in saving in China, reducing domestic demand and import demand; trade balance increases. - Added saving decreases the real interest rate domestically and globally, which raises the investment rate in the medium term, but the investment increase is a fraction of the saving surge. - China’s current account surplus expands; the global current account balance widens chiefly because of the widening surplus in China and a widening deficit in the United States. - Relative price and spillover dynamics: - Medium-term real interest rate falls globally to accommodate China’s persistent surge in saving and current account surpluses. - China’s real effective exchange rate (REER) depreciates, reflecting income compression and facilitating external adjustment through expenditure switching at import and export margins. - Lower global interest rates increase investment and decrease saving in other regions, reducing their current accounts. - Distinction from sectoral production shocks: - The surge in saving and resulting global macroeconomic adjustment are distinct from a rise in goods’ production (for example, in electric vehicle or solar energy sectors) due to increased subsidies and/or rapid productivity gains. ### Results: magnitude and model horizon - Responses captured at a five-year horizon and reported as percentage point deviations from baseline. - The expanded scenario that includes tariffs (see next subsection) yields only a very limited reduction in the global balance, amounting to 0.01 percent of world GDP. - REER and other model responses are aggregated into three regions for reporting: (1) China, (2) the euro area and the United States as a region, and (3) the rest of the world. ### Tariff policy simulation: euro area and United States impose tariffs on China - Policy simulated: the euro area and the United States impose a 10 percent trade tariff on China to counter spillovers from China’s real estate slowdown. - Effects of imposing tariffs: - Tariffs have a limited impact on containing external sector spillovers: saving, investment, and current accounts remain broadly unchanged, mainly because tariffs induce further relative price adjustments in the model. - To accommodate the internal saving–investment imbalance, China’s REER depreciates even further, with offsetting appreciations for the euro area and the United States. - Very limited reduction in the global balance: 0.01 percent of world GDP. - Tariffs significantly reduce global growth and lower cross-border trade flows, as global production efficiency declines. ### Policy implications and alternatives - Domestic structural reforms in China could help address the saving–investment imbalance, including: - efforts to boost productivity growth; - strengthening social safety nets to reduce precautionary saving. - Geopolitical risks and financial fragmentation: - In the context of heightened geopolitical tensions between China and the United States, a rising current account surplus in China could coincide with a decline in demand for US assets, potentially leading to financial fragmentation. - Financial fragmentation could cause real interest rates in China and the United States to diverge toward their autarkic levels, which would attenuate global spillovers from a prolonged China housing slowdown (scenario examined in Box 1.2). ### Key model notes and reporting conventions - Model horizon: medium-term responses captured at the five-year horizon. - All responses reported as percentage point deviations from baseline. - Aggregation: responses aggregated into China; the euro area and the United States as a region; and the rest of the world. - REER interpretation: REER = real effective exchange rate, with a decrease representing a depreciation. *Source: IMF staff calculations and analysis, Box 1.3, CHAPTER 1 ExtErnal PosItIons and PolIcIEs, 2024 External Sector Report.* ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### External Balance Assessment — Policy Gap Contributions (Annex Table 1.1.5) - Table reports EBA Gap and decomposes current account regression policy gap contributions for 2023 (Percent of GDP) across selected economies. - Methodological and note highlights: - Coeff = coefficient; Dom = domestic; EBA = External Balance Assessment; FXI = foreign exchange intervention; KC = capital controls; P = actual level; P* = desired level. - Total contribution after adjusting for multilateral consistency. - Total foreign exchange intervention and capital controls contribution = Coeff * [(FXI × KC) − (desirable FXI × desirable KC)]. - Includes the contribution of domestic policy gaps to the identified gap. The total foreign policy gap contribution is constant and equal to 0.7 percent for all countries. - Foreign contributions are estimated as follows (in percent of GDP): fiscal = 1.2; public health = −0.1; private credit = −0.5; foreign exchange intervention = 0.0. - Total domestic contribution is equivalent to coefficient * (P − P*). - The euro area EBA current account gap and policy gap contributions are calculated as the GDP-weighted averages of EBA current account gaps and policy gap contributions for the 11 largest euro area economies. ### 2023 Individual Economy Assessments — Summary of Policy Recommendations (Annex Table 1.1.6) - Argentina — Overall 2023 Assessment: Weaker - Continue the implementation of the ambitious stabilization plan, centered on a strong fiscal anchor and relative price corrections. Implement structural reforms to boost Argentina’s competitiveness and export capacity. As stability and confidence are reestablished, a gradual conditions-based easing of CFM measures will be needed, while any remaining MCPs and exchange restrictions should be phased out as early as possible. - Australia — Overall 2023 Assessment: Broadly in line - Maintain fiscal and monetary restraint; implement structural policies that boost investment by rebalancing taxes from direct to indirect taxes, executing planned infrastructure investment, streamlining product market regulation, and promoting R&D and innovation investment. - Belgium — Overall 2023 Assessment: Weaker - Strengthen competitiveness through significant structural reforms, including of the wage indexation system, pension and social benefits, tax, and the labor and product markets. Rebuild fiscal buffers through a credible, expenditure-led consolidation, while preserving public investment. - Brazil — Overall 2023 Assessment: Broadly in line - Implement efforts to raise national savings, providing room for a sustainable expansion in investment. Fiscal consolidation should continue contributing to increase net public savings. Structural reforms that improve efficiency and reduce the cost of doing business would help strengthen competitiveness. - Canada — Overall 2023 Assessment: Moderately weaker - Tighter near-term fiscal policies as well as a medium-term fiscal consolidation plan would help in stabilizing debt and supporting external rebalancing; boost services exports and nonfuel goods exports through improved labor productivity, removal of nontariff trade barriers, promotion of FDI, and investment in R&D, physical capital, and green transformation. - China — Overall 2023 Assessment: Broadly in line - Accelerate market-based structural reforms—a further opening up of domestic markets, ensuring competitive neutrality between state-owned and private firms, scaling back wasteful and distorting industrial policies; shift fiscal policy support toward strengthening social protection to reduce high household savings and rebalance toward private consumption; gradually increase exchange rate flexibility to help the economy better absorb external shocks. - Euro Area — Overall 2023 Assessment: Broadly in line - Improve productivity through increased public investment, reskilling and upskilling of the labor force, and encouraging private investment and technology diffusion; strengthen the EU Single Market by harmonizing regulations, reducing administrative barriers, and streamlining trade procedures; avoid trade-distorting measures; see additional member country–specific recommendations on reducing internal and external imbalances. - France — Overall 2023 Assessment: Broadly in line - Maintaining the external position in line with medium-term fundamentals and desirable policies will require sustained fiscal consolidation efforts as well as structural reforms to support productivity and attract higher private investment to facilitate the green and digital transitions. - Germany — Overall 2023 Assessment: Stronger - Implement policies aimed at promoting investment and diminishing excess saving, including through higher fiscal deficits than currently planned in the medium term to ensure adequate public investment in the green transition, digitalization, and transport infrastructure. Implement structural reforms to foster innovation and enhance employability of older workers, which could also extend working lives and reduce the need for excess saving. - Hong Kong SAR — Overall 2023 Assessment: Broadly in line - Implement a gradual fiscal consolidation in the near term while taking measures to ensure fiscal sustainability over the medium to long term; maintain policies that support wage and price flexibility; continue to implement robust and proactive financial supervision and regulation. - India — Overall 2023 Assessment: Moderately stronger - Focus on raising investment by continuing to increase public investment and incentivize private investment. Reforms should include further liberalization of the investment regime; reductions in import tariffs, especially on intermediate goods; and implementation of measures to improve the business climate. - Indonesia — Overall 2023 Assessment: Broadly in line - Implement structural reforms to enhance productivity and facilitate post-COVID-19 sectoral adjustments, including higher infrastructure investment and higher social spending to foster human capital development and strengthen the social safety net, a reduction of restrictions on inward FDI and external trade, and promotion of greater labor market flexibility. Maintain flexibility of the exchange rate. - Italy — Overall 2023 Assessment: Weaker - Implement comprehensive structural reforms to encourage an increase in private investment; increase public sector saving, supported by a front-loaded fiscal adjustment program and improved budget efficiency, containing social benefit spending, undertaking comprehensive and progressive tax reform and fully implementing the National Recovery and Resilience Plan. - Japan — Overall 2023 Assessment: Broadly in line - Policies should focus on structural reforms and fiscal sustainability—a credible and specific medium-term fiscal consolidation plan. Priority should be given to labor market and fiscal reforms that support private demand, raise potential growth, and promote digital and green investment. - Korea — Overall 2023 Assessment: Moderately weaker - Implement restrictive monetary and fiscal policy stance in the short term. Over the medium term, implement policies to encourage an increase in aging-related precautionary savings and orderly deleveraging of private debt, and to mitigate risks arising from geopolitical tensions. Exchange rate flexibility, with intervention limited to preventing disorderly market conditions, would help the economy absorb external shocks. - Malaysia — Overall 2023 Assessment: Stronger - Implement medium-term policies to strengthen social safety nets and public health care; implement structural policies to encourage private investment and improve productivity growth; preserve exchange rate flexibility. - Mexico — Overall 2023 Assessment: Moderately stronger - Implement structural reforms to address investment obstacles, including by encouraging female labor force participation and promoting financial deepening. Maintain a prudent fiscal stance. The floating exchange rate should continue to serve as a shock absorber, with FX interventions employed only in exceptional circumstances. The IMF’s Flexible Credit Line with Mexico continues to provide an added buffer against global tail risks. - The Netherlands — Overall 2023 Assessment: Substantially stronger - Foster investment in physical and human capital, including by facilitating access to finance for small and medium-sized enterprises. Continue structural policies to safeguard energy security, allay housing market shortages, reinforce the education system, advance the climate transition, and further promote digitalization. - Poland — Overall 2023 Assessment: Stronger - Boost investment by easing regulatory hurdles to private investments in the energy sector. Strengthen the pension system in a financially sustainable manner to reduce pressures on precautionary savings for households. - Russia — Overall 2023 Assessment: Broadly in line - . . . - Saudi Arabia — Overall 2023 Assessment: Weaker - Implement additional fiscal consolidation over the medium term, including through enhanced revenue mobilization and energy price reforms. Implement a structural reform agenda to diversify the economy, lift productivity, and boost the non-oil tradable sector. - Singapore — Overall 2023 Assessment: Substantially stronger - Execute the planned major green infrastructure projects; strengthen social safety nets; implement higher public investment over the medium term, including spending on health care, green and other physical infrastructures, and human capital. - South Africa — Overall 2023 Assessment: Broadly in line - Implement bold structural reforms and ambitious fiscal consolidation. Structural reform should focus on addressing the energy and logistics crises; improving governance, product market efficiency, and the functioning of labor markets; and bolstering worker skills. Fiscal consolidation should be expenditure based, while providing space for critical infrastructure investment and well-targeted social spending. A flexible rand exchange rate should remain the main shock absorber. - Spain — Overall 2023 Assessment: Moderately stronger - Implement sustained fiscal consolidation to rebuild fiscal space and raise aggregate saving. Implement structural reforms and investment in strategic areas to boost growth and raise aggregate investment. Continue efforts to enhance education outcomes, encourage innovation, and reduce energy dependence from abroad, including through adequate implementation of the Recovery, Transformation and Resilience Plan. - Sweden — Overall 2023 Assessment: Substantially stronger - Once inflation recedes, increase private and public investment in the green transition and the health sector. - Switzerland — Overall 2023 Assessment: Weaker - Fiscal policy should balance the need to avoid creating headwinds to growth, while creating fiscal space to address accumulating spending pressures. A comprehensive medium-term plan will be needed to address mounting structural spending needs on aging, climate, and defense. Monetary policy should remain data-dependent and avoid the risk of inflation settling at very low rates. Commitment to free trade and cooperation, as shown by abolition of industrial tariffs in 2024 and efforts to expand trade relations, should continue in order to build resilience. - Thailand — Overall 2023 Assessment: Stronger - Implement policies aimed at promoting investment, diminishing precautionary savings, and supporting domestic demand. Focus public expenditures 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. Continue efforts to reform and expand social safety nets and address widespread informality. - Türkiye — Overall 2023 Assessment: Weaker - Tighten the monetary and fiscal policy stance; accelerate financial liberalization to reduce market distortions and improve monetary policy transmission. Enhance competition through open trade policies, including by removing discretionary credit allocation that favors exports. Collectively, these policies would improve confidence and help sustain capital inflows which would allow for a much-needed accumulation of international reserves. - United Kingdom — Overall 2023 Assessment: Weaker - Implement gradual fiscal consolidation while preserving key public services and protecting the vulnerable. Implement structural reforms to boost competitiveness, including by upgrading the labor skill base to support labor reallocation to fast-growing sectors. Continue to support an open trade environment, including by addressing remaining barriers to trade with the European Union. - United States — Overall 2023 Assessment: Broadly in line - Implement medium-term fiscal consolidation. Implement structural policies to increase competitiveness while maintaining full employment, including by upgrading infrastructure; enhancing the schooling, training, apprenticeship, and mobility of workers; supporting the working poor; and implementing policies to increase growth in the labor force. Roll back tariff barriers and resolve trade and investment disagreements supporting an open, stable, and transparent global trading system. *Source: IMF staff estimates; IMF, 2023 Individual External Balance Assessments.* ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### CHAPTER 1 ExtErnal PosItIons and PolIcIEs ### Introduction - Commodity prices are highly volatile; since 2000, real aggregate commodity prices have undergone three episodes of continuous rising by more than 30 percent. - Between April 2020 and August 2022, real commodity prices rose by about 150 percent, led by a fivefold increase in the average price of energy commodities (oil, natural gas, coal). - Energy commodities account for a significant share of global trade, are universally used and demanded, and have geographically concentrated production. - Energy price swings often exhibit a negative correlation with the US dollar, although this correlation has turned positive since 2020. - Two emerging challenges for commodity-trading countries and the global economy: - The clean energy transition, implying permanent changes in fossil fuel and critical metal prices and a reshaping of trade flows. - A possible persistent shift to a positive correlation between the oil price and the US dollar with substantial macroeconomic implications. ### Main findings (chapter summary) - Commodity price swings: - For 42 commodities, about 360 upswings and downswings identified since 1960. - Price swings have comparable durations across commodities. - Energy commodities exhibit the most pronounced swings: prices almost triple during a typical upswing and fall by as much during a downswing. - Effects of energy price swings depend on importer/exporter status and shock source: - Higher energy prices accompany current account improvements for energy exporters and deteriorations for energy importers, regardless of shock source. - When energy prices rise owing to stronger global economic activity or higher demand for oil consumption or inventories: - Output and consumption rise for both exporters and importers, despite the negative terms-of-trade effect for importers. - When energy prices rise owing to a negative oil supply shock: - Exporters’ output increases. - Importers’ output and consumption fall, although some risk sharing occurs via valuation gains in importers’ net foreign assets. - Heterogeneity among energy importers: - Adverse effects of negative oil supply shocks on energy importers are mitigated by: - Greater exchange rate flexibility. - Lower government debt. - More anchored inflation expectations. - Stronger external positions. - Lower intensity of energy imports. - Looser global financial conditions (allowing a smaller decline in consumption and larger external borrowing, i.e., decline in the current account). - Foreign investments in major oil-exporting economies represent another mitigating factor for importers. - US dollar–oil price correlation: - After two decades of negative correlations, the relationship turned positive since 2020. - This change coincided with the United States shifting from a net oil importer to a modest oil exporter in early 2020 and with periods of high global risk aversion. - Following an increase in the oil price, foreign investors tend to increase holdings of US assets in periods with a positive correlation. - If permanent, a positive correlation could imply: - Larger terms-of-trade shocks due to oil prices for net oil importers with a floating exchange rate. - Greater financial stability risks for importers with short (net) exposure to the US dollar. - Clean energy transition implications: - A permanently lower price for fossil fuel commodities implies weaker GDP growth and an initial improvement in the current account for fossil fuel exporters. - A permanently higher price for critical metals would trigger an initial investment boom in exporting countries that worsens their current accounts and gradually improves output. ### Features of commodity price swings - Data and methodology: - Analysis covers all commodities from the IMF Primary Commodity Price System and four commodity groups: energy, metals, food, agricultural. - Dating procedure follows business cycle and commodity price swing methods with three modifications: - No filtering of time series to avoid losing large but short-lived fluctuations. - No minimum duration imposed, capturing short sharp movements. - Larger window used to identify peaks and troughs (±24 months). - Commodity group prices calculated as weighted averages based on the average of global import share of 2014–16. - Empirical highlights: - 362 upswings and 363 downswings identified for 42 commodities over 1960–2023. - Strong co-movement among commodity prices documented. - Energy group displays the most pronounced swings (typical upswing: triple; typical downswing: fall by as much). - The magnitude of swings increases with the window size used to identify swings, but core findings are robust to different window sizes. ### Zooming in on energy price swings — empirical analysis: sources and impact - Focus and identification: - Focus on oil prices motivated by strong co-movement among energy commodities. - Structural VAR for the global crude oil market (Baumeister and Hamilton 2019) estimated with monthly data on global crude oil production, real oil prices, inventories, and global industrial production from January 1995 to May 2023. - Four structural drivers uncovered: global economic activity shock; oil consumption demand shock; oil inventory demand shock; oil supply shock. - Empirical strategy: - Local projections (LP) used to estimate normalized impulse responses, scaled to increase the energy price by 10 percent on impact. - Approach regresses macro variables at future horizons on current (and lagged) shocks and normalizes the unit effect of the structural shock. - Focused shocks: - Global activity shocks (highly correlated with the global factor affecting many commodity prices). - Oil supply shocks (pose adjustment challenges for energy importers—the majority of world economies). - Responses of global variables (summary of results): - Shocks have transitory, though persistent, effects on energy prices and other global variables. - Following a positive global activity shock that increases the real energy price by 10 percent on impact: - Global industrial production increases by about ¾ percent on impact. - (Further detailed impulse-response estimates and model-based simulations discussed in the chapter and online annexes.) ### Model simulations and transmission channels - The chapter complements empirical estimates with multiregion model simulations to illustrate transmission mechanisms behind key empirical findings. - The econometric approach uses a large panel of exporters and importers to strengthen estimation of average impacts and explores heterogeneity across importers’ structural characteristics and policy regimes. ### Concluding implications for policy and research - Policy-relevant implications: - Energy importers can mitigate adverse effects of negative oil supply shocks through: - Exchange rate flexibility. - Sound fiscal positions (lower government debt). - Anchored inflation expectations. - Strong external buffers. - Reducing energy import intensity. - Enhancing access to global financing during looser global financial conditions. - Monitoring shifts in the oil price–US dollar correlation is important for exchange rate policy and financial stability, especially for net oil importers with significant US dollar exposure. - Managing the transition risks for fossil fuel and critical metal exporters requires attention to investment dynamics, current account vulnerabilities, and longer-term output prospects. - Research gaps noted: - External implications of supply and demand shocks to nonenergy commodities are left for future research. *Source: CHAPTER 1 ExtErnal PosItIons and PolIcIEs, 2024 External Sector Report (text - CHAPTER 1 ExtErnal PosItIons and PolIcIEs).* ### Annex 2.5. ### Annex 2.5. ### Methodology and Data - Impulse responses estimated using instrumental variables local projections (LP-IV) for unit effect normalization; see Stock and Watson 2018 and Li, Plagborg‑Møller, and Wolf (2024) for methodological discussion. - Quarterly oil shock series computed as averages of the monthly shocks following Kilian, Rebucci, and Spatafora (2009). - Impulse responses present effects with 68 and 90 percent confidence intervals. - Country classification: a net energy exporter (importer) if median net energy export share over the sample period is above (below) zero; sample includes 11 net energy exporters and 33 net energy importers. - State-dependent local projection approach used to evaluate differential responses at different policy and country characteristics (sample splitting or interaction evaluated at 75th and 25th percentiles). ### Impulse Response Findings: Oil Supply versus Global Activity Shocks - Both shocks considered: one that increases real energy price by 10 percent on impact. - Global activity shock: - Real energy price: effect peaks three quarters after the shock and remains statistically significant for about eight quarters. - Oil production: picks up gradually and remains positive and statistically significant for about six quarters. - Global industrial production: implied positive response (figures show multi‑quarter dynamics). - Oil supply shock: - Real energy price: displays a tapering (hump‑shaped) response with the peak effect reached slightly earlier than for the global activity shock. - Oil production: falls somewhat more persistently, with effects remaining statistically significant for three years. - Global industrial production: declines by 1 percent after eight quarters, following some initial uptick. ### Impact on Exporters versus Importers - Global activity shock raising energy prices by 10 percent on impact: - Exporters’ current account balances (share of GDP) improve by 1 percentage point after four quarters. - Importers’ current account balances decline gradually to reach −1 percentage point in two years. - Exporters: temporary increase in saving offsets effects of gradually increasing investment on current accounts. - Importers: saving changes little while consumption and investment increase gradually. - Other macro variables (real output, consumption, investment, inflation, fiscal balances) increase for both groups, but importers experience more modest rises in consumption, investment, and output; importers’ interest rates rise less, leading to depreciation of their exchange rates relative to exporters. - Oil supply shock raising energy prices by 10 percent on impact: - Importers’ current account balance falls by about 0.5 percentage point two quarters after the shock. - Importers’ consumption, investment, and output fall by about 1.5, 2.5, and 0.8 percent, respectively, after two years. - Exporters’ consumption remains broadly unchanged for the first two years. - Exchange rate depreciations for importers improve nonenergy trade balance and bring about positive valuation effects on NIIP. - Capital flows: private sector portfolio debt inflows aid adjustment; public sector capital inflows decline despite higher fiscal deficit. ### Energy Importers under Oil Supply Shocks — State‑Dependent Findings - Financial conditions (BAA spread as indicator) and borrowing capacity: - Tighter global financial conditions weaken importers’ capacity to borrow, necessitating greater adjustments (sharper reductions in consumption and investment); current account deteriorates by less because domestic demand weakens. - Financial tightening associated with US monetary shocks leads to more gradual downward adjustment in consumption and investment than tightening associated with higher global risk aversion. - Foreign direct investment (FDI) in energy‑exporting countries: - Importers with higher FDI in energy‑exporting countries experience more positive valuation effects on net foreign assets, allowing smaller reductions in consumption and investment and a larger decline in the current account. - Government debt: - Importers with lower government debt can borrow more, facilitating smoother adjustment: smaller increase in borrowing costs, higher capital inflows to private and public sectors, credit to nonfinancial sector broadly unchanged, smaller declines in consumption and investment, accompanied by a larger decline in the current account. - Exchange rate flexibility: - More flexible exchange rate regimes allow larger depreciation, higher exports, and shallower declines in consumption and output; central banks raise interest rates by less, helping reduce decline in credit to the nonfinancial sector. - Inflation expectations: - Better‑anchored inflation expectations enable more accommodative policy stance, supporting investment and consumption and allowing greater exchange rate depreciation to absorb the shock. - External position and energy dependence: - Importers with stronger external positions (IMF staff current account gap ≥ −1 percent of GDP) experience larger capital inflows, shallower declines in consumption and investment, and larger deteriorations in current account balances. - Importers with lower dependence on energy imports experience smaller terms‑of‑trade effects, less deterioration in energy trade balance, and smaller declines in consumption, investment, and real output. ### Model Simulations (FSGM) — Setup and Key Results - Model: IMF’s Flexible System of Global Models (FSGM), using G20MOD module covering G20 economies plus five additional regions. - Relevant model features: - Commodity sector: three commodities—oil, food, and metals; commodity prices affect activity via (1) higher inflation reducing real household income and wealth, (2) higher production costs reducing hiring, and (3) second‑round effects prompting monetary tightening. Commodities priced in US dollars. - Monetary authorities and interest rates: inflation‑forecast‑based interest rate rules under flexible exchange rates; rules adjustable to replicate less flexible regimes; interest rates linked to policy rate plus risk premiums. - External sector: exports/imports determined by partner demand and exchange rates; investment, saving, and fiscal policy determine current account; exchange rates by interest rate parity short run and external sustainability long run. - Simulated shocks: - Temporary global private domestic demand shock applied equally to all countries. - Exogenous temporary reduction in oil supply applied equally to oil‑producing countries. - Both calibrated so real global oil prices increase by 10 percent on impact. - Simulation outcomes (flexible exchange rate regimes): - Global demand shock: increases output for both exporters and importers and raises oil prices; improves exporters’ current accounts and initially deteriorates importers’ current accounts; output and consumption increase for both groups. - Oil supply shock: illustrated complementarity with empirical results on transmission channels and differential effects for net oil exporters and importers; model used to assess how lower government debt and less flexible exchange rate regimes alter effects on importers. *Source: IMF staff calculations.* ### 1. Real Oil Prices ### 1. Real Oil Prices ### Impulse responses to oil supply and global activity shocks - Panels depict the impact of oil supply and global activity shocks on: - real oil prices, - world real output, - a representative oil exporter and importer. - Impact of oil supply shocks on importers with lower government debt and more fixed exchange rate regime (managed floating) are illustrated in panels 7 and 8. - Figure referenced: Impulse Responses to an Oil Supply and a Global Activity Shock in the Flexible System of Global Models (horizon labels include 2024, 2025, 2026, 2027, 2028, 2029). ### Differential macroeconomic effects: oil importers vs oil exporters - Oil supply shock (negative shock to oil supply): - Raises oil prices while lowering global output. - For oil importers: - Headline inflation rises and terms of trade weaken. - Household real income and consumption decline. - Investment falls and a negative output gap emerges. - Central bank eases in response to downturn, reflecting limited pass-through of oil prices to core inflation. - Currency depreciates; despite depreciation and weak growth supporting net exports, current account deteriorates due to higher energy import bill. - For oil exporters: - Higher oil prices increase consumption, investment, output, and the current account. ### Role of fiscal position and exchange rate regime for importers - Importer with lower government debt: - Faces tapered adverse effects after negative oil supply shocks. - Lower borrowing costs and lower risk premiums lead firms to reduce investment and employment to a lesser extent. - Results: higher real wages and household consumption relative to importers with higher government debt. - Stronger domestic demand leads to higher inflation, monetary tightening, currency appreciation. - Appreciation and stronger domestic demand dampen exports and strengthen imports, worsening net exports and expanding external borrowing. - Importers with less flexible exchange rate regimes (managed floating): - Experience larger adverse effects. - Following depreciation, central banks raise policy rates to stabilize the exchange rate. - Higher interest rates dampen consumption and output and reduce currency depreciation, lowering the medium-term improvement in the current account. ### Policy responses to mitigate adverse spillovers - Policies illustrated by econometric and model analyses: - More anchored inflation expectations and a more flexible exchange rate regime: - Enable central banks to implement more accommodative monetary policy. - Allow exchange rate to act as a shock absorber supporting the domestic economy. - Lower government debt and stronger external positions: - Help maintain investor confidence. - Enhance importers’ ability to borrow and mitigate adverse effects on consumption and investment. - Policies to reduce energy imports (for example, improvements to energy efficiency) limit importers’ exposure to energy price swings. - Greater financial integration and strengthening the global financial safety net: - Foster international risk sharing and reduce adverse effects on energy importers. ### Emerging changes that could alter adjustment challenges - Two emerging changes with uncertain but potentially large effects: 1. Reversal of the traditional negative correlation between the oil price and the US dollar (turned positive since 2020). 2. The clean energy transition affecting demand for fossil fuels and critical metals. - Oil price and the US dollar: - After two decades of stable negative correlation, correlation between the oil price and the US dollar has turned positive since 2020 (Figure 2.8). - Possible contributing developments: - Shift of the United States to a net exporter of oil since early 2020. - The BAA spread suggesting a role for global risk aversion. - Change in foreign investors’ purchases of US assets: since 2020, foreign investors tended to increase holdings of US assets—predominantly US treasuries—following an oil price increase. - If the positive correlation is permanent: - For dollar-pegging oil exporters, currency appreciation with oil price increases helps cool the economy and reduce inflation pressure, reducing need for fiscal tightening. - For countries with sovereign wealth funds long on the US dollar, valuation of external wealth would move with oil price, potentially increasing cost (in US dollar terms) of fiscal stimulus when oil price falls. - For net oil importers with floating exchange rates: - Positive correlation amplifies terms-of-trade shocks: rising oil prices and weaker local currency. - May require tighter monetary policy to head off higher inflation despite larger real income falls. - Export offset from depreciation is curtailed if exports are priced in the US dollar. - Import-reducing effect of depreciation larger if imports are priced in the US dollar. - For oil importers with short (net) exposure to the US dollar: - Depreciation vis-à-vis the dollar causes negative valuation effects, increasing cost of servicing foreign currency–denominated liabilities, raising financial stability risks. - For net oil importers with currency pegged to the US dollar: - Positive correlation hampers exchange rate’s ability to cushion the effects from oil price swings. - Empirical note: - Rolling correlation between oil price and the US dollar uses a 36-month window spanning from January 2000 to May 2023. - Clean energy transition: - Transition requires major transformation from fossil fuels to renewable energy to limit global temperature increases below 2 degrees Celsius by 2050. - Transition boosts demand for critical metals (copper, nickel, cobalt, lithium) used in renewable energy facilities and electric cars. - Stylized analysis (Box 2.4) models the transition as a permanent relative price change: lower relative price of fossil fuels and higher relative price of critical metals. - Likely macro effects: - Fossil fuel exporters (for example, oil) — initially stronger current account balances followed by gradually weakening economic performance. - Critical metal exporters (for example, copper) — opposite effect: initial gains then evolving dynamics depending on demand and prices. - Policy implications for exporters: - Fossil fuel exporters: - Need to reallocate resources across sectors. - Facilitate labor reallocation via active labor market policies: job search assistance and retraining for workers transitioning from fossil fuel industries. - Implement structural reforms to enable private sector response and growth in less-carbon-intensive and green sectors. - Critical mineral exporters: - Mitigate resource curse risks by improving fiscal capacity to prudently manage windfalls from higher commodity exports. - Reduce structural barriers to promote economic diversification. ### Historical extreme energy price swings (European case study highlights) - During Russia’s invasion of Ukraine, European wholesale prices at their peak in August 2022 rose relative to their 2019–21 average: - natural gas wholesale price: 1,100 percent, - coal: 600 percent, - electricity: 1,600 percent. - Pass-through and energy cost mechanics for manufacturing: - Correlation between wholesale and (pretax) retail natural gas prices in European sample: 0.81. - Taxes and levies materially affect retail prices (example: electricity taxes/charges in 2021 were 4 percent of retail prices in the United Kingdom and 48 percent in Germany). ### Key conclusions and policy takeaways - Energy commodities exhibit more pronounced price swings than other commodities; prices nearly triple during a typical upswing and fall by as much during a subsequent downswing. - Shocks to energy prices have appreciable effects on the global economy and external balance adjustments, with heterogenous effects depending on shock source and country characteristics. - Mitigating strategies for importers include: - greater exchange rate flexibility, - lower government debt, - stronger external buffers, - policies to reduce energy import dependence (energy efficiency). - Exporters facing the clean energy transition should: - facilitate resource and labor reallocation, - build fiscal capacity to manage windfalls (critical mineral exporters), - implement structural reforms to diversify economies. - Monitor evolving US dollar–oil price correlation and implications for exchange-rate regimes, fiscal policies, and financial stability. *Source: IMF staff calculations and analysis in Chapter 2, "Navigating the Tides of Commodity Prices," 2024 External Sector Report.* ### 1. Manufacturing (aggregate), 2000–22 ### 1. Manufacturing (aggregate), 2000–22 ### Impact of the Recent Energy Price Shock on the EU Manufacturing Sector - Energy cost in European countries increased by 3 percentage points on average in 2022 from 7 percent of the gross value added in 2021. - Natural gas and electricity prices were the main drivers of the increase, reflecting their high share in the manufacturing energy mix (together account for 70 and 80 percent of energy consumed by manufacturing sectors in France and Germany, respectively). - Government interventions: - Reductions in taxes and other mechanisms mitigated the impact on manufacturing firms. - Despite larger energy price increases in Europe, the average increase in manufacturing sector energy costs is broadly comparable with that of other non-EU countries because of these interventions. - Fiscal measures provided important short-term relief but—if sustained—would reduce firms’ incentives to improve their energy efficiency. ### Heterogeneity across Manufacturing Subsectors and Countries - Subsector differences: - Basic metals production, characterized by high energy intensity, incurs energy costs amounting to 60 to 70 percent of the gross value added. - Country differences: - The German manufacturing sector experienced the largest increase (pretax) in energy costs; the smallest increase was observed in France. - Data limitations: - Data for the “chemicals” and “paper” sectors in Japan are unavailable. ### Role of Taxes and Fees in Energy Costs - Historical contribution of taxes: - In 2021, the cost incurred as a result of taxes and fees ranged between 4 percent (United Kingdom) and 40 percent (Germany) of the total energy cost. - These values reduced to 3 to 10 percent in 2022–23 as governments reduced taxes and introduced other mechanisms to help manufacturing sectors cope with the increased energy prices. *Sources: International Energy Agency (2023a, 2023b, 2023c); and IMF staff calculations.* --- ### Box 2.2 — Co-Movements between Commodity Prices (PCA evidence) - Data and method: - Principal components analysis (PCA) of 39 monthly real commodity prices over the period from 1980 to 2023. - Exclusions: natural gas (not available before 1992); coal (not available before 1990); fish meals (not available after 2018). - Main PCA findings: - The first component explains 40 percent of the variance of commodity prices. - The first two components explain 60 percent of the variance of commodity prices. - These results hold across commodity subgroups (food versus other commodities) and over subperiods. - Correlation characterization of the first component: - First component correlation with commodity groups: - Energy prices: 0.79 on average. - Metals prices: 0.74 on average. - Food prices: 0.50. - Other components are much less correlated with commodity prices. - Mechanisms for co-movement (as enumerated in the box): - Energy is a crucial input for production and transportation of all commodities; oil, natural gas, and coal represent around 80 percent of total energy consumption at the global level. - Substitution effects between similar commodities and competition between uses (for example, land for food versus bio-fuel) transmit price changes. - Commodity prices share common drivers, notably global activities (for example, China’s demand). - Increased financialization and index investment into commodities has raised correlations for commodities included in the index. --- ### Box 2.3 — Evolving Correlation between the US Dollar and the Oil Price - Empirical pattern: - The (monthly) correlation between the US dollar and the oil price varied over five decades: alternating positive and negative signs from the 1970s to the 1990s; remained negative for two decades from the 2000s; shifted to positive since the early 2020s. - Method: - Estimated US dollar response to four structural oil shocks from Baumeister and Hamilton (2019) using monthly data from January 1975 to May 2023 on a rolling sample with a 36-month window. - Key empirical contrasts: - During periods of positive correlation between the US dollar and the oil price: - The US dollar appreciates in response to negative oil supply shocks that lead to an oil price increase. - The US dollar shows no significant response to oil consumption demand shocks, oil inventory demand shocks, and global economic activity shocks. - During periods of negative correlation: - The US dollar depreciates in response to any of the four structural shocks that increase the oil price. - Three potential contributing factors (nonexclusive): 1. US energy trade status: - The shift in early 2020 coincided with the United States transitioning from a net oil importer to a net oil exporter. - Rolling window regressions controlling for the US net oil import share find the dollar responds less to negative oil supply shocks, with the strongest effect estimated in the post-2020 samples. 2. Global risk aversion: - Periods with a positive US dollar–oil correlation (such as 1976, 1987, 1997, and post-2020) show the US dollar appreciating less in response to a negative oil supply shock after controlling for global risk aversion (measured by the residual from regressing BAA spreads on US monetary policy shocks). - Results are robust to alternative measures of global risk aversion, including short-term volatility indexes and the high-yield corporate bond spread. 3. Foreign investors’ purchases of US assets: - During positive correlation periods, foreign net purchase of US assets was estimated to be positive in response to a negative oil supply shock, exerting upward pressure on the US dollar. - During negative correlation periods (including most of the 2000s), foreign net purchase of US assets was negative in response to all four types of shocks that increase the oil price. - Note: - These factors are neither mutually exclusive nor exhaustive; other channels (for example, larger interest rate differentials due to relatively tight US monetary policy) may also contribute. Further investigation is warranted. --- ### Box 2.4 — Macroeconomic Impact of Energy Transition: The Case of Commodity Exporters - Scenario and model: - Energy transition simulated heuristically as policies that reduce demand for fossil fuels relative to critical metals. - Stylized simulation: permanent 20 percent decline in the real price of oil and a permanent 20 percent increase in the real price of copper. - Models used: IMF’s Flexible System of Global Models (FSGM), including G20MOD for oil exporters and an FSGM version for Latin America (Chile) for metals exporters. - Impact on exporters of fossil fuels (oil exporters, G20MOD): - Permanently lower oil prices reduce the return on capital, prompting firms to cut investment sharply and for an extended period until a lower desired capital stock is reached. - Firms cut demand for labor, reducing household income and consumption. - Central banks cut the interest rate to support the economy. - The real exchange rate depreciates to facilitate adjustment. - Real exports of noncommodities improve and real imports fall. - The large drop in investment implies an improvement in the current account balance, while output declines incrementally. - Impact on exporters of metals (copper exporter example: Chile): - Permanently higher copper prices trigger a large investment boom in the copper-producing industry. - Firms hire more workers, increasing consumption and raising real output in combination with the investment boom. - Central bank hikes interest rates and the real exchange rate appreciates. - Weaker real exports and a sharply negative current account result from the combination of higher investment and real exchange rate appreciation. *This box was prepared by Cyril Rebillard; Ting Lan; and Jiaqian Chen, Rafael Portillo, and Pedro Rodriguez. Sources: IMF staff calculations.* ### 2. Real Private Investment ### 2. Real Private Investment ### Impulse responses to a permanent decline in global real oil prices - The panels depict the impact of a permanent decline in real oil prices on a group of representative oil exporters using the Flexible System of Global Models (FSGM). - Key model-axis values shown in the figure panels: - Real Private Investment: scale from –30 to 5 (Percent difference from baseline). - Real Effective Exchange Rate (REER): scale from –14 to 2 (Percent difference from baseline, + = appreciation). - Current Account Balance to GDP: scale from 0.0 to 2.5 (Percentage points difference from baseline) with horizons labeled t, t+1, t+2, t+3, t+4, t+5, t+6, t+7. - Source and note: - Source: IMF staff calculations. - Note: The panels depict the impact of a permanent decline in real oil prices on a group of representative oil exporters. - Figure title preserved: Figure 2.4.1. Impulse Response to a Permanent Decline in Global Real Oil Prices in the Flexible System of Global Models. ### Observed and implied dynamics across variables (as presented) - Real Private Investment: - Shown in percent difference from baseline over the impulse response horizon with axis spanning –30 to 5. - Real Effective Exchange Rate: - Shown in percent difference from baseline with axis spanning –14 to 2; positive values correspond to appreciation. - Current Account Balance to GDP: - Shown in percentage points difference from baseline with axis values 0.0 and 2.5 and intermediate ticks 0.5, 1.0, 1.5, 2.0 across horizons t through t+7. ### Methodology and assessment approach (External Sector Report procedures) - The individual economy assessments use a wide range of methods grounded in the latest vintage of the External Balance Assessment (EBA) to estimate desired current account balances and real exchange rates. - Model estimates are combined with a holistic view of external indicators, including: - capital and financial account flows and measures, - foreign exchange intervention and reserves adequacy, - foreign asset or liability positions. - Where EBA models do not fully capture country characteristics or policy distortions, IMF staff apply analytically grounded judgment in the form of adjustors: - The staff estimate an economy’s current account gap by combining the EBA model’s current account gap estimate with adjustors. - The staff estimate the REER gap consistent with the staff current account gap by applying a country-specific elasticity, and in some cases using the EBA REER regression models and unit-labor-cost-based measures. - A multilaterally consistent process was developed for the 30 largest economies (representing about 90 percent of global GDP) to integrate country-specific judgment in an objective, rigorous, and evenhanded manner. - External assessments are presented in ranges to reflect inherent uncertainties; ranges of uncertainty for current account gaps and REER gaps vary by country and are based on country-specific estimated measures and exchange rate semi-elasticities. ### Labels and interpretation of overall external position (as applied in assessments) - Overall external positions are labeled across categories reflecting deviations from fundamentals and desired policies: - “broadly in line,” “moderately weaker (stronger),” “weaker (stronger),” or “substantially weaker (stronger).” - Wording conventions: - For the current account gap: “higher” or “lower” used when comparing the cyclically adjusted current account with the current account norm, corresponding to positive or negative current account gaps. - For the REER gap: a quantitative estimate is generally reported as ( ) percent “over” or “under” valued. - Example benchmark for what constitutes “broadly in line”: - Current account gaps in the range of ±1 percent of GDP and REER gaps in a range that reflects the country-specific exchange rate semi-elasticity (for example, ±5 percent based on an elasticity of –0.2). ### Selection of economies and illustrative two-country example (policy implications) - The 30 systemic economies analyzed were chosen based on criteria including global rank in purchasing power GDP, nominal gross trade, and degree of financial integration. - Two-country illustrative example (to distinguish domestic vs foreign policy distortions): - Country A: - Has a large current account deficit and a large fiscal deficit, as well as high public and external debt. - Assessment: Country A has an external imbalance reflecting its large fiscal deficit; its exchange rate would look overvalued. - Policy implication: Country A has a domestic policy distortion that needs adjustment; recommended actions focus on rein in the fiscal deficit and limit financial excesses. - Country B: - Has a current account surplus (matching Country A’s deficit) and a large creditor position but has no policy distortions. - Assessment: Country B would have an equal and opposite surplus imbalance; its exchange rate would look undervalued. - Policy implication: No domestic policy gaps in Country B; adjustment by Country A would automatically eliminate the imbalance in Country B. - General implication: - It is critical to distinguish between domestic and foreign fiscal policy gaps. - Elimination of a fiscal policy gap in a systemic deficit economy would help reduce excessive surpluses in other systemic economies. - Policy actions that address external imbalances relate to determinants of current account balances: private and public saving-investment balances. - Structural or policy distortions can contribute to excessive or inadequate saving and investment; policy advice highlights reforms and policy changes to address these gaps and vulnerabilities associated with external stock positions, including reserves and foreign exchange intervention policies. _Italic source: IMF staff calculations and text from "2. Real Private Investment" (Box 2.4 continued) and related Methodology and Process sections in the 2024 External Sector Report._ ### 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 Policy Responses - Overall Assessment: The external position in 2023 was weaker than the level implied by medium-term fundamentals and desirable policies, based holistically on elevated external debt vulnerabilities, depleted international reserves and no access to international capital markets. - Policy Responses: - Continued implementation of the ambitious stabilization plan, centered on a strong fiscal anchor, relative price corrections and structural reforms, is necessary to: - strengthen the trade balance, - support FDI and capital repatriation, - rebuild international reserves, - regain market access, and - safeguard external sustainability. - As stability is reestablished, a gradual conditions-based easing of CFM measures will be needed. - Multiple currencies practices (MCP) and exchange restrictions should be phased out as early as possible. ### Foreign Asset and Liability Position and Trajectory - Background: - Argentina’s NIIP doubled in USD terms during 2016-19 reflecting a large increase in private sector foreign assets, partly offset (and likely triggered) by an increase in the public sector’s external liability (over US$60 billion). - Since 2019, the external position has remained positive and relatively stable (at around US$110 billion), although gross assets and liabilities moved substantially. - Public sector: significant declines in reserve assets (US$22 billion) were balanced by a decline in privately held debt. - Private sector: increases in private deposits abroad (about US$60 billion) offset by increases in private liabilities in the form of trade credit. - Assessment: - Argentina has a large positive NIIP, mostly reflecting households’ holdings of external assets, while the government’s foreign position remains in deep negative territory (US$130 billion) with rising trade credit adding to vulnerabilities. - Key statistics (2023, % GDP): - NIIP: 17.0 - Gross Assets: 68.1 - Res. Assets: 3.6 - Gross Liab.: 51.2 - Ext. Debt.: 44.5 ### Current Account - Background: - CA reached a deficit of 3.4 percent of GDP in 2023, compared to a deficit of 0.7 percent in 2022, due to a sharp reduction in exports (drought) and insufficient compression in imports. - CA projected to reach a surplus of 0.6 percent in 2024, driven by a recovery in grain exports and significant demand compression. - Medium-term CA expected to reach a surplus of about 1.5 percent of GDP supported by a competitive exchange rate, and stronger energy balance. - Assessment: - Cyclically adjusted CA balance reached a deficit of 3.6 percent of GDP in 2023, before accounting for the transitory impact from the drought (about 2.4 percent of GDP). - Considering weak reserve coverage and heightened external liabilities, external sustainability considerations suggest a CA norm of 1.5 percent of GDP, consistent with bringing reserves near 100 percent of the ARA metric over the medium-term. - IMF staff assesses the CA gap to be −2.6 ±1 percent of GDP. - Key statistics (2023, % GDP): - CA: −3.4 - Cycl. Adj. CA: −3.6 - EBA Norm: 0.4 - EBA Gap: −3.9 - Staff Adj.: 1.3 - Staff Gap: −2.6 ### Real Exchange Rate - Background: - REER depreciated by more than 25 percent between end-2016 and end-2019, appreciated by over 30 percent through end-2022 and an additional 17 percent through end-November 2023. - In mid-December, a step devaluation (about 120 percent against the USD) was implemented to correct large exchange rate misalignment. - Since then, the REER appreciated by over 40 percent through end-March, bringing it broadly in line with IMF staff’s estimate of the equilibrium level. - Assessment: - Staff-assessed CA gap implies a REER gap of about 22 percent in 2023 (with an estimated elasticity of 0.12 applied). - Staff assesses the REER gap to have been in the range of 33 to 38 percent just before the December 2023 step devaluation, and in the range of 20 to 25 percent on average in 2023 (also consistent with the EBA REER index model). ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Exchange restrictions, CFM and MCP measures were introduced in late 2019 and intensified further in 2023, including: - incentives to encourage export liquidation, - taxes on FX access for imports, - financing requirements for imports, which led to an unprecedented rise in private commercial debt. - Since mid-December, the previous opaque system of administrative import controls has been replaced by a more transparent system, with a shorter delay in FX access (45 days on average), and a large share of excess commercial debt backlog has been reprofiled or resolved. - Assessment: - While CFMs are not a substitute for sound macroeconomic policies, they may be needed in the near term as imbalances are being addressed. - More distortive exchange restrictions and MCP measures should be phased out as early as possible. ### FX Intervention and Reserves Level - Background: - Gross international reserves fell sharply (by over US$20 billion) last year, reaching US$23 billion by end-2023, their lowest level since 2004. - NIR reached $−8.5 billion. - Since December 10, the BCRA has purchased over US$15 billion in FX assets through end-April. - Assessment: - Reserve coverage remains inadequate. - Gross international reserves are estimated to have fallen to only around 30 percent of the IMF’s composite metric by end-2023. *Source: Box 3.1. Assessing Imbalances: The Role of Policies—An Example (text).* ### 33.7 percent of GDP and 208 percent of exports, from around 35 percent of GDP and 200 percent of exports in 2022. ### 33.7 percent of GDP and 208 percent of exports, from around 35 percent of GDP and 200 percent of exports in 2022. ### Foreign Asset and Liability Position and Trajectory (NIIP) - Background: The NIIP has been negative since the series was first published in 2001. - Assessment: Over the medium term, gross external financing needs are moderate at below 10 percent of GDP annually, with capital flows and the exchange rate sensitive to global financing conditions. - 2023 (% GDP): - NIIP: −44.9 - Gross Assets: 46.5 - Res Assets: 16.3 - Gross Liab.: 91.4 - Debt Liab.: 33.7 ### Current Account - Background: - The CA deficit narrowed to 1.4 percent of GDP in 2023 from 2.5 percent in 2022, on the back of a sizable trade balance surplus of 3.7 percent of GDP (compared with 2.3 percent in 2022). - The record-high trade surplus reflected strong agriculture and oil exports and lackluster imports, partly offset by high deficits in transport services and primary income related to profits and dividends. - From a saving-investment perspective, the CA deficit reflects the saving-investment deficit of the public sector partially offset by the saving-investment surplus of the private sector. - The CA deficit is expected to remain at around 1.5 percent of GDP over the medium term, supported by higher oil exports and improved net public savings. - Assessment: - In 2023 the cyclically adjusted CA balance was −1.7 percent of GDP, and EBA estimates suggest a cyclically adjusted CA norm of −1.9 percent of GDP. - IMF staff estimate the CA gap to be in the range of −0.4 and 0.7 percent of GDP, with a midpoint of 0.2 percent of GDP. - EBA-identified policy gaps are estimated at −0.4 percent of GDP, reflecting positive credit growth and the more expansionary fiscal policy stances in Brazil relative to trading partners. - 2023 (% GDP): - CA: −1.4 - Cycl. Adj. CA: −1.7 - EBA Norm: −1.9 - EBA Gap: 0.2 - Staff Adj.: 0.0 - Staff Gap: 0.2 ### Real Exchange Rate (REER) - Background: - Continuing the appreciation trend in 2020–22 (by around 8 percent), the REER appreciated by 4.6 percent in 2023 compared to the 2022 average, below the NEER appreciation of 11.6 percent, reflecting relatively low inflation in Brazil compared with its major trading partners. - As of April 2024, the REER had depreciated by 0.5 percent relative to the 2023 average. - Assessment: - The IMF staff CA gap implies a REER gap of −1.7 percent in 2023 (applying an estimated elasticity of 0.12). - The REER index model suggests a REER gap of −25.1 percent, while the REER level model suggests a REER gap of −11.2 percent. - Consistent with the staff CA gap, staff assesses the REER gap to be in the range of −5.9 to 2.5 percent, with a midpoint of −1.7 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Brazil continues to attract sizable capital flows. - Net FDI flows continued to finance the CA deficit, averaging 2.6 percent of GDP during 2015–22 (when CA deficits averaged 2.8 percent) before dropping to 1.7 percent of GDP in 2023. - Portfolio investment registered net inflows of 0.3 percent of GDP. - Assessment: - The composition of capital flows is expected to have a favorable risk profile over the medium term, with positive net FDI inflows (above 1.5 percent of GDP) outweighing negative portfolio outflows (around 0.2 percent of GDP) and debt liabilities increasingly denominated by FDI liabilities. - Uncertainties related to tighter global financial conditions and insufficient progress on reforms pose downside risks to capital flows. ### FX Intervention and Reserves Level - Background: - Brazil has a floating exchange rate. - FX interventions in 2022 relied on spot, repo, and FX swap markets to ensure smooth market functioning; the authorities did not intervene in the FX markets in 2023 amid resilient FX performance. - The outstanding stock of the FX swap, a nondeliverable future settled in local currency, stayed around US$100 billion since 2022. - International reserves increased by US$30 billion and reached US$355 billion at the end of 2023, mostly owing to valuation effects. - Assessment: - The flexible exchange rate has been an important shock absorber. - Reserves remain adequate relative to various criteria, including the IMF’s reserve adequacy metric (130 percent as of the end of 2023) and serve as insurance against external shocks. - Intervention should be limited to alleviating disorderly FX market conditions. *Source: IMF 2024 External Sector Report chapter content provided in the source PDF.* ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMents ### France — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - Key 2023 outcome: CA deficit declined to 0.7 percent of GDP in 2023, driven by the unwinding of the terms-of-trade shock and strong non-oil goods export performance. - Medium-term outlook: The CA deficit is expected to continue to shrink as fiscal consolidation and structural reforms to improve competitiveness are implemented. - Potential Policy Responses: - Maintain sustained fiscal consolidation efforts. - Implement structural reforms to support productivity and attract higher private investment to facilitate the green and digital transitions. - Deploy industrial policies cautiously, targeted to specific objectives where externalities or market failures prevent effective market solutions. - Avoid favoring domestic producers over imports to minimize trade and investment distortions. ### France — Foreign Asset and Liability Position and Trajectory - Background: - NIIP stood at −29.2 percent of GDP in 2023, slightly above the range observed during 2014–19 (between −15 and −26 percent of GDP). - NIIP worsened by 5.5 percent of GDP since the end of 2022, largely driven by a decrease in direct and portfolio investment. - Gross assets: 334.9 percent of GDP in 2023; banks’ non-FDI-related assets accounted for about 46.2 percent. - Gross liabilities: 364.1 percent of GDP in 2023; external debt about 227.5 percent of GDP (58 percent by banks and 24 percent by the public sector). - About three-quarters of France’s external debt liabilities are denominated in domestic currency. - Average TARGET2 balance in 2023: about €120.5 billion. - Assessment: - NIIP is negative, but its size and projected stable trajectory do not raise sustainability concerns. - Vulnerabilities: large public external debt (53.7 percent of GDP in 2023) and banks’ gross financing needs—the stock of banks’ short-term debt securities was €149 billion in 2023 (5.3 percent of GDP), and financial derivatives stood at about 47.7 percent of GDP. - Key 2023 figures (% GDP): - NIIP: −29.2 - Gross Assets: 334.9 - Debt Assets: 190.7 - Gross Liab.: 364.1 - Debt Liab.: 227.5 ### France — Current Account - Background: - CA deficit declined to 0.7 percent of GDP in 2023 (from a deficit of 2 percent in 2022), driven by unwinding of the large terms-of-trade shock and strong export performance by aeronautics, naval, textile sectors and in capital goods, as well as lower energy imports from ongoing price corrections. - Gross national savings increased in 2023 by 0.4 percent of GDP, driven by private savings; domestic investment declined somewhat after peaking in 2022. - CA deficit expected to decrease slightly to about 0.6 percent of GDP in 2024, driven by recovery in aeronautics and automobile sectors. - Medium-term projection: CA deficit projected to shrink to a small deficit by 2029 as reforms to improve competitiveness take effect; fiscal consolidation will also help reduce the CA deficit. - Assessment: - 2023 cyclically adjusted CA balance estimated at −0.9 percent of GDP compared with an EBA-estimated norm of 0 percent. - IMF staff assesses the CA gap in 2023 is between −1.3 and −0.5 percent of GDP (compared with −2.5 and −1.6 percent of GDP in 2022), with a midpoint of −0.9 percent of GDP. - Main contributors to policy gaps: positive credit gap of 0.4 percent of GDP; health expenditure gap −0.3 percent; fiscal policy gap 0 percent despite a negative domestic gap of 1.2 percent. - Key 2023 figures (% GDP): - CA: −0.7 - Cycl. Adj. CA: −0.9 - EBA Norm: 0.0 - EBA Gap: −0.9 - Staff Adj.: 0.0 - Staff Gap: −0.9 ### France — Real Exchange Rate - Background: - ULC-based REER appreciated by 4.1 percent in 2023 versus 2022; CPI-based REER appreciated by 1.9 percent. - As of April 2024, ULC-based REER was 0.6 percent below the 2023 average; CPI-based measure about 0.5 below the 2023 average. - Longer-term: France has not regained the loss of about one-third of its export market share registered in the early 2000s (while euro area export market share remained broadly stable between 2000 and 2023). - Policy implication: advance reform agenda with emphasis on horizontal efforts to support competitiveness and efficient investment allocation. - Assessment: - CA gap implies a REER gap of 3.3 percent in 2023 (applying an estimated semi-elasticity of 0.27). - EBA REER index model points to a REER gap of −5.1 percent; EBA REER level model points to a REER gap of 2.9 percent. - IMF staff assesses the REER to be overvalued in the range of 1.7 to 5 percent, with a midpoint of 3.3 percent. ### France — Capital and Financial Accounts; FX Intervention and Reserves - Capital and Financial Accounts: - Background: Inward and outward FDI declined significantly in 2023 (from 3.8 to 0.7, and from 4.2 to 2.2 percent of GDP, respectively). - Financial account is open. - Public external debt and banks’ gross financing needs increased in 2023. - Assessment: France remains exposed to financial market risks owing to large refinancing needs of the sovereign and banking sectors. - FX Intervention and Reserves Level: - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. --- ### Germany — Overall Assessment and Policy Responses - Overall Assessment: The external position in 2023 was stronger than the level implied by medium-term fundamentals and desirable policies. - Key 2023 outcome: CA strengthened to 5.9 percent of GDP in 2023. - 2024 outlook: CA expected to strengthen slightly from improved terms of trade and as demand from Asia recovers. - Medium-term projection: CA projected to taper slightly as higher wage growth pushes up imports. - Potential Policy Responses: - Promote investment and diminish excess saving to support external rebalancing and reduce the CA balance toward its norm. - Over the medium term, higher fiscal deficits than currently planned likely needed to ensure adequate public investment in the green transition, digitalization, and transport infrastructure. - Structural reforms to foster innovation, strengthen venture capital financing for start-ups, and streamline administrative procedures to start a business. - Training to enhance employability of older workers with outdated skills to extend working lives and reduce excess saving. - Deploy industrial policies cautiously, targeted to specific objectives, and avoid favoring domestic producers over imports. ### Germany — Foreign Asset and Liability Position and Trajectory - Background: - NIIP largely unchanged at 70 percent of GDP in 2023 versus 2022 despite the year’s CA surplus because of valuation losses on external assets versus liabilities. - External assets include holdings of sovereign securities whose market prices fell in response to global policy rate tightening. - TARGET2 claims fell to €1.1 trillion at end-2023, down from €1.3 trillion at end-2022 as ECB initiated quantitative tightening from March 2023. - Between 2017 and 2023, NIIP increased by some 24 percent of GDP, lifting the primary income balance going forward. - Assessment: Germany’s exposure to the Eurosystem remains large. - Key 2023 figures (% GDP): - NIIP: 70 - Gross Assets: 302 - Debt Assets: 157 - Gross Liab.: 232 - Debt Liab.: 148 ### Germany — Current Account - Background: - CA surplus: 5.9 percent of GDP in 2023, compared with 4.2 percent in 2022 and 8.0 percent on average over 2017–19. - Strengthening in 2023 driven mainly by a significant increase in the goods balance as commodity import costs declined sharply; goods exports weakened slightly. - Increase in goods balance partially offset by a significant decrease in services balance due to normalization of travel, transport, and vaccine-related intellectual property exports. - Primary and secondary income accounts largely unchanged. - Increase in CA surplus driven by sharp increase in surplus with non–euro area countries; trade balance with Asia increased reflecting a reduced deficit with China as both exports and imports contracted, the latter more sharply. - Government savings-investment balance increased slightly, in line with tight fiscal stance; household and firm savings-investment surpluses also increased slightly. - Assessment: - EBA model estimates cyclically adjusted CA balance at 5.9 percent of GDP in 2023. - IMF staff assess CA norm between 2.6 and 3.6 percent of GDP, midpoint 3.1 percent of GDP. - CA gap for 2023 in range 2.2–3.2 percent of GDP, with midpoint 2.7 percent of GDP. - Key 2023 figures (% GDP): - CA: 5.9 - Cycl. Adj. CA: 5.9 - EBA Norm: 3.1 - EBA Gap: 2.7 - Staff Adj.: 0.0 - Staff Gap: 2.7 ### Germany — Real Exchange Rate - Background: - REER recovered to prepandemic levels after strong depreciation during the energy crisis (early 2021 to mid-2022). - CPI-based REER appreciated by 3.5 percent in 2023, driven by real appreciation against China and Japan. - As of April 2024, REER was 0.5 percent below the 2023 average. - Assessment: - IMF staff CA gap implies a REER gap of −7.5 percent in 2023 (with estimated elasticity of 0.36 applied). - EBA REER level and index models suggest an undervaluation of 9.3 percent and an overvaluation of 8.0 percent, respectively. - Consistent with the staff CA gap, staff assesses the REER to be undervalued, with a midpoint of 7.5 percent and a range of uncertainty of ±1.4 percent. ### Germany — Capital and Financial Accounts; FX Intervention and Reserves - Capital and Financial Accounts: - Background: - 2023 saw significant capital exports corresponding to the CA surplus, largely in “other investments” due to transactions via accounts of monetary and financial institutions. - FDI and portfolio investment were muted; derivatives transactions largely unchanged. - Foreign institutions reduced deposits with German banks, reflecting decline in excess liquidity in the euro area. - FDI (inward and outward) and portfolio investment declined versus previous year, in part due to global rate tightening, leading to reduced demand for equities and higher demand for highly rated sovereign securities. - Assessment: Risks are limited given Germany’s safe-haven status and the strength of its external position. - FX Intervention and Reserves Level: - Background: The euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics. The currency floats freely. *International Monetary Fund | CHAPTER 3 2023 IndIvIdual EconoMy assEssMents (tables on France and Germany, 2024 EXTERNAL SECTOR REPORT)* ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMents ### Hong Kong Special Administrative Region — Overall Assessment and Policy Responses - Overall Assessment: - The external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - The CA surplus (in percent of GDP) narrowed in 2023 as the goods balance deficit widened due to weaker external demand while the services balance registered a subdued recovery from COVID-era disruptions as slower growth in key markets impacted the performance of the tourism sector. - The CA surplus is expected to decline moderately over the medium term with the recovery in domestic demand broadly offsetting the impact of improved external conditions. - Under the Linked Exchange Rate System (LERS), short-term movements in the REER largely reflect US dollar developments. - Credibility of the currency board arrangement has been ensured by a transparent set of rules governing the arrangement, large fiscal and FX reserves, strong financial regulation and supervision, the flexible economy, and a prudent fiscal framework. - Potential Policy Responses: - A gradual pace of fiscal consolidation in the near term to secure a balanced recovery, while taking measures to ensure fiscal sustainability over the medium to long term given the rapidly aging population. - Maintain policies that support wage and price flexibility to preserve competitiveness under the currency board arrangement. - Continue robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and the LERS. ### Hong Kong Special Administrative Region — Foreign Asset and Liability Position and Trajectory - Background: - The NIIP decreased to 468 percent of GDP in 2023 from 492 percent in 2022. - Significant decreases in both gross assets (by 68 percentage points of GDP) and gross liabilities (44 percentage points of GDP). - Valuation effects in 2023 were sizable as the change in the NIIP (−24 percentage points of GDP) far exceeded the financial account balance (−9.2 percent of GDP). - Assessment: - Vulnerabilities are low given the positive and sizable NIIP and its favorable composition. - FX reserves remain large (111 percent of GDP at the end of 2023). - Direct investments account for a large share of gross assets and liabilities (36 and 53 percent, respectively). - Only 10.9 percent of gross liabilities are portfolio investments. - Key statistics (2023, % GDP): - NIIP: 468 - Gross Assets: 1,620 - Debt Assets1: 390 - Gross Liab.: 1,152 - Debt Liab.1: 211 ### Hong Kong Special Administrative Region — Current Account - Background: - The CA surplus narrowed to 9.2 percent of GDP in 2023 from 10.2 percent in 2022. - Goods deficit widened, driven by a decline in exports due to the economic slowdown in Mainland China. - Services recovery moderated; services surplus stable but well below pre-pandemic level. - Income balance rose strongly, driven by higher investment income flows, in part reflecting higher global interest rates. - The CA balance is projected to continue to gradually decline over the medium term with the recovery in domestic demand broadly offsetting the impact of improved external conditions. - Assessment: - After adjusting for cyclical and other temporary factors, the CA surplus is estimated to be 9.5 percent of GDP in 2023. - Mid-point of the staff assessed range for the norm: 10.4 percent of GDP (range 9.5 to 11.3 percent of GDP). - IMF staff-assessed CA gap range: −1.8 to 0 percent of GDP, with an estimated mid-point of −0.9 percent of GDP. - Since Hong Kong SAR is not in the EBA sample, the CA norm was estimated by applying EBA-estimated coefficients to Hong Kong SAR and adjusted for measurement issues related to large valuation effects in the NIIP and discrepancies between stocks and flows. - Key statistics (2023, % GDP): - CA: 9.2 - Cycl. Adj. CA: 8.8 - EBA Norm: — - EBA Gap: — - Staff Adj.: — - Staff Gap: −0.9 ### Hong Kong Special Administrative Region — Real Exchange Rate - Background: - Under the currency board arrangement, REER dynamics are largely determined by U.S. dollar developments and inflation differentials between the United States and Hong Kong SAR. - The REER appreciated by 2.6 percent in 2023, somewhat slower than the 3.7 percent appreciation in 2022. - As of April 2024, the REER had appreciated by 2.6 percent relative to the 2023 average. - Assessment: - The IMF staff assesses the REER gap, based on the staff-assessed CA gap range, to be around 2.3 percent (mid-point of the REER gap range of 0 to 4.5 percent and based on the average CA-REER elasticity of about 0.4). ### Hong Kong Special Administrative Region — Capital and Financial Accounts: Flows and Policy Measures - Background: - Open capital account as an international financial center. - Net outflow in non-reserve financial flows moderated to 11.9 percent of GDP in 2023, down from 22.9 percent in 2022, driven by net portfolio and other investment outflows. - The financial account is typically very volatile, reflecting financial conditions in Hong Kong SAR and Mainland China, shifting expectations of U.S. monetary policy, and related arbitraging in the FX and rates markets. - Assessment: - Large financial resources, proactive financial supervision and regulation, and deep and liquid markets should help limit risks from potentially volatile capital flows. - Greater financial exposure to Mainland China could pose risks to the financial sector through real sector linkages, particularly trade and tourism, credit exposures of the banking sector, and fundraising by Chinese firms in local financial markets. - Hong Kong SAR’s banking system, with its high capital buffers and profitability, is assessed to be broadly resilient to macro-financial shocks. ### Hong Kong Special Administrative Region — FX Intervention and Reserves Level - Background: - The Hong Kong dollar continued to trade in a smooth and orderly manner within the Convertibility Zone in 2023. - The HKMA conducted FX operations as part of the currency board operations, selling US$6.6 billion in 2023, substantially less than US$30.8 billion sold in 2022. - Total reserve assets decreased to 111 percent of GDP at the end of 2023 (or 1.8 times the monetary base) from 118 percent of GDP at the end of 2022. - Despite a large fiscal deficit in 2023, Hong Kong SAR still holds significant fiscal reserves (about 25 percent of GDP at the end of 2023). - Assessment: - FX reserves are currently adequate for precautionary purposes and should continue to evolve in line with the automatic adjustment inherent in the currency board system. --- ### India — Overall Assessment and Potential Policy Responses - Overall Assessment: - The external position in fiscal year 2023/24 (ending in March 2024) was moderately stronger than the level implied by medium-term fundamentals and desirable policies. - The CA deficit was somewhat smaller than implied by India’s level of per capita income, favorable growth prospects, demographic trends, and development needs. - External vulnerabilities stem from weakening demand in some partner countries and potentially volatile global financial conditions and commodity prices. - In part reflecting buoyant services exports and steady oil prices, the CA deficit is projected to remain smaller than its estimated norm in fiscal year 2024/25 but converge to it over the medium term. - India’s trade and capital account regimes remain relatively restricted, weighing on both exports and imports. - Potential Policy Responses: - In the near term, additional government infrastructure spending and strengthening of private consumption will contribute to raising the CA deficit, reducing the positive CA gap. - To facilitate external rebalancing over the medium term: develop export infrastructure, negotiate free trade agreements with main trading partners, further liberalize the investment regime, and reduce import tariffs, especially on intermediate goods. - Structural reforms to improve the business environment, induce private investment, deepen integration into global value chains, and attract FDI. - Pursue industrial policies cautiously, narrowly targeted, and aimed at minimizing trade and investment distortions. - Exchange rate flexibility should act as the main shock absorber, with intervention limited to addressing disorderly market conditions. ### India — Foreign Asset and Liability Position and Trajectory - Background: - As of the end of 2023, India’s NIIP had improved marginally to −10.6 percent of GDP, from −11.1 percent of GDP at the end of 2022. - Gross foreign assets increased to 27.9 percent of GDP (from 26.1 percent of GDP at the end of 2022). - Gross foreign liabilities rose to 38.5 percent of GDP, from 37.2 percent of GDP at the end of the previous year. - The bulk of assets were in the form of official reserves and FDI, whereas liabilities included mostly debt and FDI. - Assessment: - With the CA deficit projected to remain below its medium-term norm in 2024 and converge to it by 2029, the NIIP-to-GDP ratio is expected to remain broadly unchanged over the medium term. - India’s external debt liabilities are relatively low compared with peers, and short-term rollover risks are limited. - The moderate level of foreign liabilities reflects India’s incremental approach to capital account liberalization, including focus on attracting FDI. - Key statistics (2023, % GDP): - NIIP: −10.6 - Gross Assets: 27.9 - Debt Assets: 3.1 - Gross Liab.: 38.5 - Debt Liab.: 17.1 ### India — Current Account - Background: - The CA deficit is estimated to have narrowed to about 0.8 percent of GDP in fiscal year 2023/24, from 2.0 percent of GDP in the previous year. - Supported by improving terms of trade and fiscal consolidation. - Gross savings increased from 31 to 32.5 percent of GDP; gross domestic investment grew from 33 to 33.3 percent of GDP. - Buoyant services exports increasingly offset the contained merchandise trade deficit. - Trade restrictions—including food export restrictions and an information technology hardware import management system—are weighing on both exports and imports. - The CA deficit is projected to increase to about 1.4 percent of GDP in fiscal year 2024/25, largely reflecting rebounding domestic demand. - Over the medium term, the CA deficit is projected to converge to its norm of about 2.2 percent of GDP. - Assessment: - The EBA cyclically adjusted CA balance stood at −0.5 percent of GDP in fiscal year 2023/24. - The EBA CA regression estimates a norm of −2.2 percent of GDP, with a standard error of 0.6 percent, implying a CA gap of 1.7 percent of GDP. - IMF staff assesses the CA gap to be 1.7 percent of GDP, within a range of 1.1 to 2.3 percent of GDP. - IMF staff judgment: a CA deficit of up to 2½ percent of GDP is financeable in the medium term by a combination of steady FDI inflows, public and private external borrowing, and portfolio flows, though the latter may remain susceptible to changes in global risk appetite. - Key statistics (2023, % GDP): - CA: −0.8 - Cycl. Adj. CA: −0.5 - EBA Norm: −2.2 - EBA Gap: 1.7 - Staff Adj.: 0.0 - Staff Gap: 1.7 ### India — Real Exchange Rate - Background: - In early 2023, policy tightening in advanced economies and portfolio investment outflows resulted in depreciation pressures on the rupee. - Pressures abated and reversed when the CA deficit narrowed and global investor sentiment improved in the second half of 2023 and early 2024. - The average REER in 2023 depreciated by about 1.6 percent from its 2022 average. - As of April 2024, the REER was 1.8 percent above the 2023 average. - Assessment: - The IMF staff CA gap implies a REER gap of −9.4 percent (with an estimated elasticity of 0.18). - EBA REER index and level models suggest an overvaluation of 5.9 percent and 5.2 percent, respectively. - IMF staff assesses the REER gap to be in the range of −12.7 to −6.1 percent, with a midpoint of −9.4 percent, for fiscal year 2023/24. ### India — Capital and Financial Accounts: Flows and Policy Measures - Background: - In fiscal year 2023/24, net FDI inflows decreased to about 0.3 percent of GDP, mostly reflecting rising repatriations and disinvestment. - Net portfolio investment inflows strengthened to about 1.2 percent of GDP in anticipation of India’s inclusion in global bond indices. - Other investments, reflecting mostly debt-creating inflows, remained at about 1.1 percent of GDP. - The Indian authorities widened the scope of government bonds available for foreign investors. - Assessment: - While net FDI inflows covered most of the CA deficit in fiscal year 2023/24, the decline in FDI inflows as share of GDP warrants further structural reforms and improvement of the investment regime to promote FDI. - Volatile portfolio flows are sensitive to changes in global financial conditions and country risk premia. - Planned inclusion of India in international bond indices has significantly increased foreign participation in India’s bond market and supported net portfolio inflows that more than covered the CA deficit. ### India — FX Intervention and Reserves Level - Background: - Official FX reserves increased in 2023 and early 2024, reflecting a decreasing CA deficit, FDI and portfolio investment inflows, and valuation changes. - The Reserve Bank of India’s FX interventions aimed to smooth excessive market volatility and contributed to rupee exchange rate stability. - Reserves stood at $623.2 billion at the end of 2023 and $645.6 billion at end-March 2024. - Assessment: - Various criteria confirm that the official FX reserves are adequate for precautionary purposes. - As of the end of 2023, reserves represented about 219 percent of short-term debt (on residual maturity), 109 percent of the IMF’s composite metric (for a de facto stabilized exchange rate arrangement), and more than eight months of import coverage. - Integrated Policy Framework analysis indicates that FX interventions should be limited to addressing disorderly market conditions given India’s moderately strong external position, generally deep and liquid FX markets, limited FX mismatches, well-anchored inflation expectations, and adequate reserves level. *International Monetary Fund — CHAPTER 3 2023 IndIvIdual EconoMy assEssMents (text - CHAPTER 3 2023 IndIvIdual EconoMy assEssMents)* ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMEnts CHAPTER 3 2023 IndIvIdual EconoMy assEssMents ### Indonesia: Economy Assessment — Overall Assessment - The external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - In the medium term, exchange rate flexibility and structural policies are expected to contain the CA deficit. - External financing needs appear sustainable, but reliance on foreign portfolio investment exposes the economy to sharp swings in market sentiment and risk premiums, and to fluctuations in global financial conditions. ### Indonesia: Potential Policy Responses - The projected fiscal expansion in the coming years may support import growth and increase the CA deficit. - Maintaining external balance will require structural reforms to enhance productivity and facilitate post-COVID-19 sectoral adjustments, including: - Higher infrastructure investment and higher social spending to foster human capital development and strengthen the social safety net. - A reduction of restrictions on inward FDI and external trade, including by moving away from nontariff barriers. - Promotion of greater labor market flexibility. - Flexibility of the exchange rate should continue to support external stability with the ongoing structural transformation of the Indonesian economy. ### Foreign Asset and Liability Position and Trajectory - Background: - NIIP remained unchanged at −19.0 percent of GDP at the end of 2023. - Gross external assets increased by 1.1 percentage points to 35.3 percent of GDP. - Gross external liabilities increased by 1.1 percentage points to 54.3 percent of GDP. - Increase in gross external assets supported by higher FDI abroad, portfolio investment, and reserve assets. - Increase in gross external liabilities reflected fully the increase in FDI inflows. - Gross external debt was 29.8 percent of GDP at the end of 2023, declining marginally from 30.1 percent of GDP in 2022. - External rollover risks in the short term are contained due to the large share of long-term debt. - Assessment: - The level and composition of the NIIP and gross external debt indicate Indonesia’s external position is sustainable and subject to limited rollover risk. - Dependence on foreign portfolio investment (20.1 percent of GDP in 2023) makes Indonesia highly vulnerable to swings in global financial market sentiment. - The NIIP as a percent of GDP is projected to stabilize at current levels in the medium term as robust nominal GDP growth offsets projected small CA deficits. - Key 2023 figures (% GDP): - NIIP: −19.0 - Gross Assets: 35.3 - Res. Assets: 10.7 - Gross Liab.: 54.3 - Debt Liab.: 29.8 ### Current Account - Background: - CA balance posted a small deficit of 0.1 percent in 2023, after surpluses of 1.0 percent in 2022. - Deficit in 2023 primarily driven by the non-oil and gas trade balance due to weaker growth in major trading partners and a broad-based decline in commodity prices. - Resilient domestic demand led to a smaller decline in imports relative to exports. - On the savings-investment side, higher government revenue was broadly offset by lower private savings and higher private investment. - CA deficit expected to widen moderately in 2024 due to lower commodity prices, while robust domestic demand will support import growth. - CA deficit expected to remain close to the norm throughout the projection horizon. - Assessment: - Staff estimates a CA gap of 0.8 percent of GDP for 2023. - This is consistent with an estimated cyclically adjusted CA deficit of −0.3 percent of GDP, a staff assessed norm of −0.8 percent of GDP, and an adjustor of 0.3 percentage point for demographics. - Considering uncertainty, the CA gap for 2023 is in the range of 0.3 to 1.3 percent of GDP. - EBA-identified policy gaps are estimated at 1.7 percent of GDP, driven by a tighter fiscal stance than in other countries (1.3 percent) and underspending on health care (0.6 percent). - Key 2023 figures (% GDP): - CA: −0.1 - Cycl. Adj. CA: −0.3 - EBA Norm: −0.8 - EBA Gap: 0.5 - Staff Adj.: 0.3 - Staff Gap: 0.8 ### Real Exchange Rate - Background: - Average REER depreciated by 3.7 percent in 2023 compared to the average level in 2022 (or 3.2 percent relative to the pre-COVID-19 2016–19 average). - Depreciation occurred amid rapid tightening in global monetary policy and high volatility in global financial markets. - The rupiah recovered some losses toward the end of 2023 due to easier global financial conditions and Bank Indonesia’s policy responses (including a one-off interest rate hike). - As of the end of April 2024, the REER was 2.4 percent below its 2023 average. - Assessment: - The staff CA gap estimate of 0.8 percent of GDP implies a REER gap of −5.0 percent (applying an estimated elasticity of 0.16). - The REER index and level models point to REER gaps of 0.8 percent and −15.9 percent, respectively. - Staff assesses the REER gap in the range of −7.9 to −2.1 percent, with a midpoint of −5.0 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Net capital and financial flows returned to positive territory in 2023 (0.6 percent of GDP), after negative net flows of −0.7 percent of GDP in 2022. - Recovery in financial inflows driven by portfolio investment, particularly concentrated in the last quarter of 2023, reflecting the introduction of several open market instruments by Bank Indonesia to attract capital flows to support international reserves. - Net FDI inflows declined to 1.1 percent of GDP in 2023 (1.4 percent in 2022 and 1.5 percent in 2021). - Share of nonresident holdings of rupiah-denominated government bonds increased by 0.6 percentage point to 14.9 percent in 2023, but remains below the 39 percent share in 2019. - Assessment: - Recovery in portfolio investment flows in 2023 helped support the small negative CA deficit. - Continued strong policies focused on safeguarding the fiscal position, advancing financial deepening, and easing broad-based structural reforms to promote an enabling business environment should help sustain capital inflows in the medium term, particularly in periods of high market volatility. ### FX Intervention and Reserves Level - Background: - Since mid-2013, Indonesia has had a more flexible exchange rate policy framework. - Official foreign reserves increased to US$146 billion in 2023, from US$137 billion in 2022, reflecting the increase in deposits abroad and the withdrawal of government’s foreign loans during the year, which more than offset the decline in securities from FX intervention. - Assessment: - Current level of reserves is 10.7 percent of GDP, 123 percent of the IMF’s reserve adequacy metric, and 6.1 months of prospective imports. - These reserves should provide a sufficient buffer against external shocks. - Predetermined drains seem manageable, although they have increased related to short positions on financial derivatives. - In line with the Integrated Policy Framework, the use of FX interventions remains appropriate under certain shocks and circumstances, particularly when shocks trigger spikes in market premia given shallow FX markets, while remaining mindful of preserving reserve buffers. *International Monetary Fund | 2024* ### 45.5 percent. The NIIP is projected to rise further in the medium term, to about 60 percent of GDP in 2029, on the back ### Korea: Economy Assessment ### Foreign Asset and Liability Position and Trajectory - NIIP is 45.5 percent of GDP in 2023 and is projected to rise to about 60 percent of GDP in 2029 on the back of increasing CA surpluses. - Assessment: - The large and positive NIIP is a key factor supporting external sustainability. - Foreign asset holdings are diversified, with about 35 percent in equity or debt securities. - About 60 percent of foreign assets are denominated in dollars, implying that depreciation of the won can have large positive valuation effects in aggregate. - The structure of liabilities limits vulnerabilities: direct investment and long-term loans together account for 55 percent of liabilities and 70 percent of liabilities are denominated in Korean won. - 2023 (% GDP): - NIIP: 45.5 - Gross Assets: 133.5 - Debt Assets: 60.0 - Gross Liab.: 88.0 - Debt Liab.: 38.7 ### Current Account - Background: - CA surplus increased from 1.5 percent of GDP in 2022 to 2.1 percent of GDP in 2023, driven by lowered commodity imports and improvements in primary income more than offsetting the decline in semiconductor exports and service balances. - From a saving-investment perspective, a drop in the investment rate drove the increase in surplus in 2023 despite a decline in the saving rate from pandemic-era highs. - Semiconductor exports decreased sharply by about 2 percent of GDP in 2023 following a surge during 2021-22, but a strong recovery is ongoing, with semiconductor exports already up by about 50 percent (y/y) in the first quarter of 2024. Recovery is expected to continue in 2024. - Sustained growth in semiconductor exports over the medium term, coupled with expected stabilization of commodity import prices, is projected to increase the CA surplus to 4.5 percent of GDP in 2029. - In the first quarter of 2024, the CA surplus reached $16.8 billion, equivalent to about 1 percent of GDP. - Assessment: - The EBA CA model estimates a cyclically adjusted CA of 2.3 percent of GDP and a CA norm of 4.4 percent of GDP (with a standard error of 0.9 percent of GDP), implying a sizeable gap. - IMF staff estimates the 2023 CA gap midpoint at −2.0 percent of GDP, with a range of −2.9 to −1.2 percent of GDP. - A large unexplained residual potentially reflects country-specific factors not included in the model. - The net contribution of the relative policy gap is 0.6 percent of GDP, with contributions from lower health spending and tighter fiscal stance outweighing a more positive credit gap compared to the rest of the world. - 2023 (% GDP): - CA: 2.1 - Cycl. Adj. CA: 2.3 - EBA Norm: 4.4 - EBA Gap: −2.0 - Staff Adj.: 0 - Staff Gap: −2.0 ### Real Exchange Rate - Background: - REER appreciated by about 2.1 percent in 2023 on average relative to 2022, reversing the sustained depreciation (11.4 percent accumulated) during 2019-2022. - The 2023 REER appreciation was mainly driven by won appreciation against currencies of some major trading partners, notably the Japanese Yen and Chinese Yuan. - As of April 2024, the REER depreciated by about 2 percent relative to the 2023 average. - Assessment: - The EBA CA gap implies a REER overvaluation of 6.1 percent (with an estimated elasticity of 0.33 applied). - The EBA REER index model estimates an undervaluation of 4.1 percent, while the EBA level model estimates a 3.1 percent undervaluation. - Consistent with the staff CA gap, staff assesses the REER gap to be in the range of 3.4 to 8.7 percent, with a midpoint of 6.1 percent. - Given the wide range of estimates from different approaches, the estimated REER gap should be interpreted with caution. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Net capital outflows have been on a declining trend since 2016, further reduced to 2 percent of GDP in 2023 from 3.3 percent of GDP in 2022. - Both net FDI and portfolio outflows dropped by about 1.2 percent of GDP, reflecting a reduction of residents’ outbound direct investment and the resumption of foreigners’ net purchases of equity securities. - Assessment: - Korea has demonstrated resilience in weathering short-term capital flow volatility amid multiple global shocks. - The present configuration of capital flows appears sustainable over the medium term, mirroring the projected increase in the CA surplus and NIIP. ### FX Intervention and Reserves Level - Background: - Korea has a floating exchange rate. FX intervention since 2015 has been two-sided. - In 2023, FX intervention reduced from net sales of $45.9 billion (2.8 percent of GDP) in 2022 to $9.6 billion (0.6 percent of GDP), mostly conducted in the second and third quarters during periods of heightened exchange rate volatility. - As of end-2023, reserves stood at $420 billion, lower than $423 billion as of end-2022. - Assessment: - Exchange rate volatility generally does not pose significant economic challenges for Korea, given limited currency mismatches and manageable passthrough to consumer prices. - FX market depth ranks higher than in most emerging markets but still lags advanced economy peers; in periods of high global financial market uncertainty, herding amid temporarily shallow markets could lead to sharp FX movements and impaired market functioning. - Intervention should remain limited to preventing disorderly market conditions. - As of end-2023, FX reserves were about 25 percent of GDP, 2.2 times short-term debt, 6.6 months of imports, or 14 percent of M2. - Systemwide stress tests show that reserves provide sufficient FX liquidity buffers under a wide range of plausible shocks. *International Monetary Fund | 2024 External Sector Report (excerpt)* ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMEnts ### CHAPTER 3 2023 IndIvIdual EconoMy assEssMEnts ### The Netherlands — Overall assessment and policy priorities - Overall Assessment: The external position in 2023 was substantially stronger than the level implied by medium-term fundamentals and desirable policies. - Structural factors: Status as a base for multinational corporations and as a trading hub and financial center complicates the external assessment. - Projection: After a rebound in 2023, the external CA surplus is expected to contract over the medium term as population aging and a progressively higher fiscal deficit in the baseline forecast reduce domestic saving. - Potential Policy Responses: - Foster investment in physical and human capital, also by facilitating access to finance, particularly for small and medium enterprises. - Continue structural investment and reform plans to safeguard energy security, allay housing market shortages, reinforce the education system, advance the climate transition, and further promote the digitalization of the economy. ### The Netherlands — Foreign asset and liability position - Background: - NIIP reached 71.8 percent of GDP in 2023, compared with 75.2 percent in 2022. - Positive NIIP impacts from CA surpluses in 2023 were more than offset by denominator effects from strongly increasing nominal GDP and negative valuation effects that particularly affected the net stock of portfolio investment and financial derivatives. - FDI accounts for more than half of external assets and liabilities. - Debt liabilities composition: long-term debt securities (48 percent, of which 69 percent are denominated in euro and 22 percent are denominated in US dollars), currency and deposits (29 percent, of which 60 percent are denominated in euro), and long-term loans (7 percent). - Assessment: The Netherlands’ safe haven status and its sizable foreign assets limit risks from its large foreign liabilities. - Key 2023 figures (% GDP): - NIIP: 71.8 - Gross Assets: 931.2 - Debt Assets: 228.1 - Gross Liab.: 859.4 - Debt Liab.: 242.1 ### The Netherlands — Current account and CA gap - Background: - Revisions by Statistics Netherlands over 2020–22 shifted the CA surplus from 4.4 to 9.3 percent of GDP in 2022 (higher trade balance +1.5 percentage points; primary income +3.2 percentage points). - In 2023, the CA surplus is estimated at 10.1 percent of GDP (10.3 percent of GDP cyclically adjusted). - Support measures for energy price shock weighed on public net savings in 2023 but were counterbalanced by recovering private net savings from a strong labor market, accelerating wage growth, and weakening residential investment. - Multinational corporations’ profit recording at Dutch headquarters and FDI outward investment keep nonfinancial corporate saving high. - Measurement bias: portfolio equity–retained earnings bias may overstate net accumulation of wealth attributable to Dutch residents; foreign ownership of publicly listed firms has been above 80 percent in recent years. - 2024 projection: CA projected to decline to 9.1 percent of GDP. - Assessment and adjustments: - EBA CA norm: 4.3 percent of GDP. - 2023 cyclically adjusted CA: 10.3 percent of GDP. - EBA CA gap: 6.1 percent of GDP. - Staff adjustment for portfolio retained earnings bias: −1.8 percent of GDP. - Staff-assessed CA gap: 4.3 percent of GDP (range assessed as 3.7 to 4.8 percent of GDP, midpoint 4.3 percent). - The gap reflects a second-pillar retirement scheme with large coverage, robust replacement ratios, and strict prefunding requirements. - Key 2023 figures (% GDP): - CA: 10.1 - Cycl. Adj. CA: 10.3 - EBA Norm: 4.3 - EBA Gap: 6.1 - Staff Adj.: −1.8 - Staff Gap: 4.3 ### The Netherlands — Real exchange rate - Background: - CPI-based REER appreciated by 0.8 percent in 2023 versus 2022 average. - ULC-based REER appreciated by 0.7 percent in 2023. - As of April 2024, CPI-based REER was 0.6 percent above its 2023 average. - Assessment: - Assuming a semi-elasticity of 0.65, the IMF staff CA gap of 4.3 percent of GDP implies a REER undervaluation of about 6.6 percent. - EBA REER model estimates for 2023 range from an overvaluation of 2.8 percent (level model) to 18.9 percent (index model). - Staff REER assessment: undervalued by about 5.8 to 7.4 percent, with a midpoint of 6.6 percent. ### The Netherlands — Capital and financial accounts; FX and reserves - Background: - Large share of gross foreign assets and liabilities attributable to special purpose entities, contributing to capital flow volatility. - Capital outflows often represent channeling of corporate profits by multinationals abroad as FDI. - Assessment: - Strong external position limits vulnerabilities to capital outflows. - Financial account deficit is primarily the flip side of a CA recording sustained—and structural—surpluses. - FX intervention and reserves: - Background: the euro has the status of a global reserve currency. - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency floats freely. --- ### Poland — Overall assessment and policy priorities - Overall Assessment: The external position in 2023 was stronger than the level implied by medium-term fundamentals and desirable policies. - 2023 CA shift: From a deficit of 2.4 percent in 2022 to a surplus of 1.6 percent of GDP in 2023 due to improved terms-of-trade, subdued domestic demand, and a transitory sharp drawdown in import-intensive inventories. - Medium-term projection: CA balance projected to decline to −1 percent of GDP over the medium term as consumption and credit growth pick up, REER appreciation supports imports, and EU funds are released. - Potential Policy Responses: - Boost investment by easing regulatory hurdles to private investments in the energy sector to catalyze investment beyond NextGenerationEU grants. - Strengthen the pension system in a financially sustainable manner to reduce pressures on precautionary household savings from declining replacement ratios. ### Poland — Foreign asset and liability position - Background: - NIIP reached −33.5 percent of GDP in 2023 from −33.7 percent in 2022. - Gross external debt declined to 49 percent of GDP in 2023 from 54 percent in 2022. - Transition toward more stable FDI financing; reserve assets adequate. - Assessment: - External debt level declined substantially; rollover risk mitigated by large share of long-term debt (70 percent of total debt) and intercompany lending (30 percent of total debt). - Gross reserves (158 percent of short-term debt) are adequate. - Key 2023 figures (% GDP): - NIIP: −33.5 - Gross Assets: 59.6 - Reserve Assets: 24 - Gross Liab.: 93.1 - Gross External Debt: 49 ### Poland — Current account and CA gap - Background: - CA moved to a surplus of 1.6 percent of GDP in 2023 from a deficit of 2.4 percent in 2022 due mainly to decline in commodity imports, subdued domestic demand after cumulative interest rate hikes, and inventory drawdown from prior stockpiling. - Total national savings broadly stable in 2023; inventory destocking dampened investment. - Near-term expectation: CA balance to decline as growth picks up, EU fund-supported investment and real appreciation support imports, and inventories normalize. - Medium-term projection: CA projected to converge towards a deficit of 1 percent due to robust consumption growth, sustained EU fund inflows and increased military spending. - Assessment: - EBA CA norm: −2.2 percent of GDP. - 2023 cyclically adjusted CA: 1.4 percent of GDP. - EBA model CA gap: 3.6 percent of GDP. - Staff CA gap: 3.6 (±0.5) percent of GDP, including identified policy gaps of 1.8 percent of GDP and an unexplained residual of 1.8 percent of GDP. - Notes: Estimates may not fully capture one-off inventory drawdown effects; credit gap was largest contributor to the policy gap. - Key 2023 figures (% GDP): - CA: 1.6 - Cycl. Adj. CA: 1.4 - EBA Norm: −2.2 - EBA Gap: 3.6 - Staff Adj.: 0.0 - Staff Gap: 3.6 ### Poland — Real exchange rate - Background: - NEER appreciated by 6.3 percent in 2023; REER appreciated by 11.3 percent in 2023. - As of April 2024, CPI-based REER had further appreciated by 5.2 percent from its 2023 average. - Assessment: - EBA REER index and level models estimate a 2023 REER gap of 11.8 and −11.7 percent, respectively. - Consistent with the staff CA gap and an estimated elasticity of 0.43, staff’s overall assessment is a REER undervaluation within a range of −7.3 to −9.4 percent, with a midpoint of −8.4 percent. ### Poland — Capital and financial accounts; FX and reserves - Background: - Capital account surplus declined to 0.2 percent of GDP in 2023 from 0.5 percent in 2022; projected to stabilize around 0.5 percent of GDP supported by EU funds. - Financial account experienced a net inflow of 1.6 percent of GDP in 2023. - FDI inflows net: 2.3 percent of GDP in 2023 (from 3.7 percent in 2022). - Assessment: - Capital account projected to remain a strong source of support for investment. - Vulnerability to capital outflows contained as foreign holdings of domestic government securities have declined and investor base remains diversified. - Central bank has adequate tools to manage volatility. - FX reserves and interventions: - FX reserves increased to US$194 billion in 2023 from US$167 billion in 2022. - Net reserves: about US$167 billion in 2023 from US$146 billion in 2022. - No FX intervention in 2023; zloty considered free floating. - Assessment: Gross reserves about 164 percent of the IMF’s reserve adequacy metric; adequate to guard against external shocks. --- ### Russia — Overall assessment and constraints - Overall Assessment: Russia’s external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies, but models do not fully account for Russia’s idiosyncratic situation. - Key constraint: Due to sanctions, CA surpluses may not translate into an accumulation of readily accessible foreign assets in reserve currencies; projections subject to exceptionally large uncertainty. ### Russia — Foreign asset and liability position - Background: - NIIP stood at 42.4 percent of GDP at end-2023, an increase of 9.2 percentage points of GDP from 2022. - In 2023 gross assets increased by 7.6 percentage points of GDP while remaining below their 2020 peak of 105 percent of GDP—driven primarily by other investments and reserve assets. - Gross liabilities: 34.5 percent of GDP in 2023, down from 36.1 percent in 2022. - About one-third of external debt held in domestic currency; no obvious maturity mismatches between gross asset and liability positions. - Share of nonresident holdings of domestic government debt declined from 32.2 percent at end-2019 to 7.4 percent by end-2023. - Assessment: Recurring positive CA surpluses maintain positive NIIP trends and help accumulate external buffers; however, a share of international reserves is frozen due to sanctions. - Key 2023 figures (% GDP): - NIIP: 42.4 - Gross Assets: 76.9 - Reserve Assets: 29.6 - Gross Liab.: 34.5 - Debt Liab.: 15.6 ### Russia — Current account and CA gap - Background: - CA surplus narrowed from 10.5 percent of GDP in 2022 to 2.5 percent of GDP in 2023, driven by an export-led decline in the trade balance as energy exports declined. - CA projected to increase slightly to 2.7 percent of GDP in 2024, but projection is highly uncertain. - Assessment: - EBA CA norm: 2.3 percent of GDP for 2023. - Cyclically adjusted CA: 2.6 percent of GDP. - EBA Gap: 0.3 percent of GDP. - Identified policy gaps: 1.5 percentage points (half driven by fiscal balance gap). - Unexplained residual: −1.2 percentage points. - Staff Adj.: 0.0 - Staff Gap: 0.3 - Note: Range of uncertainty around CA gap estimates is exceptionally large due to sanctions affecting external balances. - Key 2023 figures (% GDP): - CA: 2.5 - Cycl. Adj. CA: 2.6 - EBA Norm: 2.3 - EBA Gap: 0.3 - Staff Adj.: 0.0 - Staff Gap: 0.3 ### Russia — Real exchange rate and policy responses - Background: - Between end-2022 and summer 2023, the ruble lost close to 40 percent of its value in part due to sharp CA surplus decline. - Bank of Russia raised policy rate by cumulative 850 basis points starting end-July, reaching 16 percent by end-2023, and intervened in FX market. - Repatriation and surrender requirements reintroduced; FX controls tightened. - REER depreciated by 24.6 percent in 2023, fully reversing 2022 gains. - As of April 2024, REER was 3.7 percent below the 2023 average. - Assessment: - IMF staff CA gap implies a REER undervaluation of 1.8 percent in 2023 (elasticity 0.17). - EBA REER index model suggests overvaluation of 3.3 percent; EBA level model points to undervaluation of 18.6 percent. - Staff assesses REER gap range: −6.7 percent to 3.1 percent, midpoint −1.8 percent (undervalued). - Caveat: Models do not fully account for Russia’s idiosyncratic situation. ### Russia — Capital flows, controls, and reserves - Capital and financial accounts: - Capital flow measures introduced in early 2022 were relaxed later, but restrictions on repatriation of foreign investment, cash FX withdrawals, and cash exports abroad remain. - Net private capital outflows declined from 9.5 percentage points of GDP in 2022 to 2.5 percentage points of GDP in 2023. - Assessment: Large FX reserves and floating exchange rate help absorb shocks; remaining capital controls curtailed outflows and preserved buffers despite sanctions. - FX intervention and reserves level: - Official reserves increased by $16.6 billion to $598.6 billion in 2023 due to revaluation effects. - Despite positive CA, reserves accumulation constrained by sanctions; a share of reserves is frozen. - Since January 2023, Bank of Russia resumed buying and selling FX only in Chinese RMB; transactions in traditional reserve currencies prohibited by sanctions. - 2023 fiscal rule: benchmark oil and gas revenues in rubles; when revenues exceeded benchmark (in rubles), authorities required to purchase FX. Ministry of Finance reverted to an earlier benchmark oil price–based fiscal rule from January 2024 onward. - Assessment: International reserves stood at 343.2 percent of the IMF’s reserve adequacy metric as of end-2023; adequacy assessment subject to high uncertainty given frozen reserves. --- ### Saudi Arabia — Overall assessment and policy priorities - Overall Assessment: The external position in 2023 was weaker than the level implied by medium-term fundamentals and desirable policies. - External balance sheet remains strong; reserves adequate by standard IMF metrics, but savings insufficient from an intergenerational equity perspective. - Lower oil exports and investment-driven imports expected to shift the CA surplus to a deficit. - External adjustment will be driven primarily by fiscal policy given the economy’s structure; pegged exchange rate provides a credible anchor. - Potential Policy Responses: - Additional fiscal consolidation over the medium term—including enhanced revenue mobilization and energy price reforms—to bring CA closer to norm. - Sustained implementation of ambitious structural reform agenda to diversify the economy, lift productivity, and boost the non-oil tradable sector. - Minimize risks associated with industrial policies and avoid discriminatory policies that could distort resource allocation or elicit retaliatory actions. ### Saudi Arabia — Foreign asset and liability position - Background: - Net external assets estimated at 73.5 percent of GDP at end-2023 (70.9 percent in 2022; 81.2 percent in 2021). - Medium-term NIIP expected to stabilize at 65 percent of GDP. - Composition of external assets (broad categories): portfolio and other investments 55 percent, reserves 31 percent, and FDI 14 percent of total external assets. - Assessment: External balance sheet remains very strong; accumulated assets provide protection against oil price volatility and represent saving of exhaustible resource revenues for future generations. - Key 2023 figures (% GDP): - NIIP: 73.5 - Gross Assets: 133.7 - Res. Assets: 40.9 - Gross Liab.: 60.1 - Debt Liab.: 26.2 ### Saudi Arabia — Current account (start of section) - Background (partial): The CA balance registered a surplus of 3.2 percent of GDP in 2023, down from a historical high of 13.7 percent surplus in *Italic: Source — text - CHAPTER 3 2023 IndIvIdual EconoMy assEssMents (canonical PDF content provided).* ### 2022. The trade balance decreased by 9.5 percent of GDP as the price and volume of oil exports decreased and imports pic ### text - 2022. The trade balance decreased by 9.5 percent of GDP as the price and volume of oil exports decreased and imports pic ### Current Account and Trade Balance - The trade balance decreased by 9.5 percent of GDP as the price and volume of oil exports decreased and imports picked up in 2023—primarily driven by domestic-driven policies of reducing oil production and promoting investment. - Higher consumption and reduced oil windfalls led to lower savings in 2023. - The terms of trade deteriorated by 15 percent in 2023. - Projections assumptions: - Oil production follows the OPEC+ agreement, with a further decline in 2024 and a recovery in 2025. - The current account (CA) surplus is expected to deteriorate to around 0.5 percent of GDP in 2024 before shifting to a deficit in 2025 and decline further to a 2.8 percent of GDP deficit by 2029, reflecting increases in investment-driven imports and decline in oil export revenues. ### CA Gap Assessments and Model Results - IMF staff assesses a CA gap of −2.6 percent of GDP using the EBA-Lite CA model (April 2024 World Economic Outlook). - Model uncertainty is significant due to idiosyncratic characteristics of the Saudi Arabian economy and wide swings of oil prices between 2020 and 2023. - EBA-lite commodity module and Consumption Allocation Rules results: - CA gap of −2 percent of GDP for constant real annuity rules. - CA gap of −5 percent of GDP for constant real per capita annuity allocation rules. - Investment Needs Model suggests a CA gap of 3.5 percent of GDP. - The estimated CA gap of −2.6 percent of GDP has an estimated range from −4.6 to −0.6 percent of GDP. - 2023 (% GDP) summary: - CA: 3.2 - Cycl. Adj. CA: 3.3 - EBA Norm: — - EBA Gap: — - Staff Adj.: — - Staff Gap: −2.6 ### Real Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) - Background: - The riyal has been pegged to the US dollar at a rate of 3.75 since 1986. - On average, the REER appreciated by 0.7 percent in 2023 and was 5.7 percent above its 10-year average (2013–22). - The NEER appreciated by 3.4 percent in 2023. - NEER appreciation was mainly driven by the appreciation of the US dollar versus third currencies. - With inflation less than in its trading partners, Saudi Arabia’s REER appreciation was less than that of its NEER. - As of April 2024, the REER was 0.7 percent above the 2023 average. - Assessment: - Exchange rate movements have a limited impact on Saudi Arabia’s competitiveness in the short term, as most exports are oil or oil-related products denominated in dollars. - Limited substitutability between imports and domestically produced products; domestic production has significant imported labor and intermediate-input content. - EBA-Lite REER model suggests an overvaluation of 13.2 percent. - Based on the IMF staff CA gap and a 0.2 elasticity of the CA to a change in REER, the staff assesses the REER to be overvalued by 12.1 percent, with a range of 2.9 to 21.2 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Net financial outflows in 2023 were $43 billion, returning to their historical average (2013–21) from a record high in 2022 ($123 billion), mainly due to the decline of CA balance associated with reduced oil exports and oil prices. - Net outflows continued as the Public Investment Fund (sovereign wealth fund) and other entities continued to invest abroad. - Reserves are expected to remain at a stable level over the medium term through reduced asset accumulation abroad. - Assessment: - A lack of detailed information on the nature of financial flows complicates analysis of the financial account. - The strong reserve position, including sizable assets of the Public Investment Fund, limits risks and vulnerabilities to capital flows. ### FX Intervention and Reserves Level - Background: - The Public Investment Fund’s investments abroad are increasing, although most government foreign assets are still held at the central bank within international reserves. - Net foreign assets decreased to $417.1 billion (39.1 percent of GDP, 15.7 months of imports, and 208 percent of the ARA metric) at the end of 2023, down from $440.5 billion at the end of 2022 (and from $724 billion in 2014). - This trend was, in part, driven by financial outflows. - Reserves are expected to stabilize at about 13 months of imports in the medium term. - Assessment: - Reserves play a dual role: they are saving for both precautionary motives and future generations. - Reserves are adequate for precautionary purposes (measured by the IMF’s metrics). - Significant buffers are also available through external assets held by the Public Investment Fund and the national oil company. - Fiscal consolidation is needed over the medium term to strengthen the CA and increase saving for future generations. *Source: IMF staff country assessment as provided in the supplied text.* ### 2008. As of April 2024, the CPI-based REER was 1.0 percent above the 2023 average. ### 2008. As of April 2024, the CPI-based REER was 1.0 percent above the 2023 average. ### Real Exchange Rate: Spain - As of April 2024, the CPI-based REER was 1.0 percent above the 2023 average. - IMF staff CA gap implies a REER gap of −6.4 percent in 2023 (with an estimated elasticity of 0.28 applied). - EBA REER index and level models suggest an overvaluation of 3.8 percent and 18.6 percent for 2023, respectively, driven mostly by large unexplained residuals. - Staff assessment: REER is moderately undervalued, with a midpoint of 6.4 percent and a range of uncertainty of ±2.8 percent. ### Capital and Financial Accounts: Spain — Flows and Policy Measures - Background: Capital account surplus high due to flows associated with NextGenerationEU funds. - Financial account balance improved to 4.1 percent of GDP in 2023 (from 1.9 percent of GDP in 2022). - Increase in the financial account surplus largely driven by changes in the Bank of Spain’s balance sheet, only partially offset by net outflows in other components. - Assessment: Large external financing needs leave Spain vulnerable to sustained market volatility and tighter global financial conditions. ### FX Intervention and Reserves Level: Spain / Euro area - Background: The euro has the status of a global reserve currency. - Assessment: Euro area economies typically hold low reserves relative to standard metrics, but the currency is free floating. ### Overall Assessment and Potential Policy Responses: Sweden - Overall assessment: External position in 2023 is substantially stronger than level implied by medium-term fundamentals and desirable policies, with an increase of the CA of 1.4 percentage points to 6.8 percent of GDP. - Projected medium-term recovery expected to bring external balance down before stabilizing at long-term average of about 4 percent. - Potential policy responses: As inflation recedes, scope to increase private and public investment in the green transition and the health sector to lower the external balance, help meet climate goals, and prepare for demographic challenges. ### Foreign Asset and Liability Position: Sweden (2023) - NIIP: 33.2 percent of GDP (increase of 2.2 percentage points). - Gross assets: 313.9 percent of GDP. - Debt assets: 140.9 percent of GDP. - Gross liabilities: 280.7 percent of GDP. - Debt liabilities: 137.4 percent of GDP. - Distribution of net foreign assets: Other financial institutions 75.4 percent of GDP; social security funds 20.2 percent of GDP; households 18.2 percent of GDP; Riksbank 6 percent of GDP. - Net external debtors: Nonfinancial corporations 44.5 percent of GDP; monetary financial institutions 37.4 percent of GDP; general government 2.9 percent of GDP. - A total of 50 percent of the NIIP is in foreign currency. - Assessment: NIIP expected to firm further; foreign currency assets almost three times foreign currency liabilities; estimates subject to uncertainty with errors and omissions averaging over 2 percent of GDP in the past decade; rollovers of external debt pose vulnerability but risks moderated by banks’ ample liquidity and large capital buffers; NIIP level and trajectory do not raise sustainability concerns. ### Current Account: Sweden (2023) - CA: 6.8 percent of GDP. - Cyclically adjusted CA: 6.6 percent of GDP. - EBA norm: 1.1 percent of GDP. - EBA gap: 5.5 percent of GDP. - Staff adjusted: 0.0 percent of GDP. - Staff gap: 5.5 percent of GDP. - Background: 2022 CA surplus revised up from 4.3 percent to 5.4 percent of GDP; 2023 CA surplus rose to 6.8 percent of GDP driven by higher net exports (increase by 1.8 percent of GDP). - Components: Primary income surplus 3.8 percent of GDP (down from 4.4 percent in 2022); secondary income deficit 1.6 percent of GDP; gross saving 33.5 percent of GDP (fell by 0.4 percentage point); gross investment 26.8 percent of GDP (decreased by 1.7 percentage points); Sweden net oil importer with oil deficit estimated at −0.9 percent of GDP. - Assessment: Cyclically adjusted CA estimated at 6.6 percent of GDP in 2023, 5.5 percentage points above cyclically adjusted EBA norm; model may understate factors such as mandatory contributions to fully funded pension schemes and older labor force; staff assesses CA gap at 5.5 percent of GDP in 2023 with model-estimated range of 5.1 to 6 percent; policy contributions explain 3 percentage points of gap (fiscal policy 1.1 percent; negative credit gap 2.0 percent); pension system could explain about 1 percentage point. ### Real Exchange Rate: Sweden - Background: In 2023, the krona depreciated by 6.4 percentage points in real effective terms (OECD-ULC based) relative to its average index in 2022. - As of April 2024, the CPI-based REER was 0.2 percent above its 2023 average. - Assessment: Staff CA gap implies a REER gap of −14.1 percent (applying elasticity of −0.39), range between −15.2 to −13.0 percent (using model standard error of ±0.4 percent of GDP). - REER index and level models suggest gaps of −20.9 percent and −23.9 percent for 2023. - ULC-based REER index depreciated by 20.3 percent since krona floated in 1993 and was about 17 percent below its 30-year average in 2023. - Overall IMF staff assesses krona as undervalued between −10.6 to −23.5 percent, with midpoint of −17 percent as guided by ULC-based REER index and its standard deviation. ### Capital and Financial Accounts: Sweden — Flows and Policy Measures - Financial account increased to 3.8 percent of GDP in 2023 (from 0.5 percent in 2022). - Change driven by increase in other investments of about 3 percent of GDP (three-fourths of the financial account) and increase in portfolio investments (equity and investment fund shares and long-term debt securities). - Direct investment increased from 2.6 to 3 percent of GDP. - Assessment: Large changes in capital flows common in countries with large financial sectors; risk mitigated by strong financial regulation, supervision, and sound financial sector; banking sector nearly three times GDP; banking system expected to be resilient to large liquidity shocks despite substantial share of wholesale funding. ### FX Intervention and Reserves Level: Sweden - Background: Exchange rate de facto floating. - Foreign currency reserves decreased by USD$4.8 billion to US$60.2 billion in 2023, equivalent to 21.1 percent of the short-term external debt of monetary and financial institutions, and slightly below three months of imports. - On September 25, 2023, the Riksbank launched a program to hedge FX risk in its balance sheet, following losses of about 1.4 percent of GDP in 2022. - Assessment: Despite floating regime, Sweden should maintain adequate foreign reserves given high dependence of commercial banks on wholesale funding in foreign currency and potential disruptions; Riksbank can quickly establish swap facilities when necessary. ### Overall Assessment and Potential Policy Responses: Switzerland - Overall assessment: Switzerland’s external position in 2023 was weaker than level implied by medium-term fundamentals and desirable policies. - External buffers remain strong given surplus on NIIP and sizable foreign reserves. - Potential policy responses: Fiscal policy should operate within debt-brake rule balancing growth and creating fiscal space to address spending pressures; amortize extraordinary expenditures and accumulated balance of amortization account until 2035 (option to extend to 2039); comprehensive medium-term plan needed for aging, climate, and defense; Swiss National Bank should remain data-dependent in monetary policy; macroprudential policies should safeguard financial stability; continue commitment to free trade and cooperation. ### Foreign Asset and Liability Position: Switzerland (2023) - NIIP: 95 percent of GDP. - Gross assets: 631.4 percent of GDP. - Reserve assets: 91 percent of GDP. - Gross liabilities: 536.7 percent of GDP. - Debt liabilities: 167 percent of GDP. - NIIP increased in 2023 by 2.4 percentage points of GDP, driven by positive net transactions that compensated negative valuation effects. - Assessment: Large gross liability position and volatility of financial flows present risk mitigated by large gross asset position and about two-thirds of external liabilities denominated in Swiss franc. ### Current Account: Switzerland (2023) - CA: 7.6 percent of GDP. - Cyclically adjusted CA: 7.7 percent of GDP. - EBA norm: 6.4 percent of GDP. - EBA gap: 1.3 percent of GDP. - Staff adjusted: −4.1 percent of GDP. - Staff gap: −2.8 percent of GDP. - Background: CA surplus in 2023 estimated at 7.6 percent of GDP, down from 9.4 percent in 2022; decline due to reductions in merchanting (10.6 to 9.5 percent of GDP) and services (−1.1 to −2.6 percent of GDP); introduction of new CA survey affected merchanting and services reporting; savings declined by 1.3 percent of GDP while investment increased by 0.5 percent of GDP. - Assessment: EBA CA norm 6.4 percent close to previous year; adjustments for valuation losses on fixed-income securities arising from inflation (−3.3 percentage points) and retained earnings on portfolio equity investment (−0.8 percentage point) lead to gap of −2.8 percent of GDP (±0.8 percentage point). ### Real Exchange Rate: Switzerland - Background: Relative to 2022, average NEER appreciated by 6.8 percent; CPI-based REER appreciated by 3.4 percent in 2023. - From long-term perspective, NEER appreciated by 31 percent since 2011 while CPI-based REER depreciated by 2 percent. - As of April 2024, REER depreciated by 1.1 percent compared to the 2023 average. - Assessment: Staff CA gap implies REER overvaluation of 5.2 percent in 2023 (elasticity 0.54). - EBA REER index and level models suggest average REER in 2023 overvalued by 12.8 and 17.7 percent, respectively. - Staff assesses REER gap in 2023 to be in range 3.8 percent to 6.6 percent with midpoint 5.2 percent (overvalued). ### Capital and Financial Accounts: Switzerland — Flows and Policy Measures - Net financial outflows totaled 6.8 percent of GDP in 2023, including private outflows of 21 percent of GDP (related to the collapse of Credit Suisse) and a decrease in Swiss National Bank reserve assets of 15 percent of GDP (due to interventions). - During 2010–22, net private inflows averaged 1.1 percent of GDP, while average annual increase in SNB reserves was 9.4 percent of GDP. - Assessment: Financial flows are large and volatile due to Switzerland’s status as financial center and safe haven; 2023 driven by Credit Suisse events and interest rate differentials led to increased net private outflows and SNB reduced reserve assets on net basis. ### FX Intervention and Reserves Level: Switzerland - Official reserve assets (including gold) amounted to CHF724 billion (or US$805 billion, 91 percent of GDP) at end of 2023, down CHF128 billion (or US$142 billion) from end of 2022. - Swiss National Bank sold CHF133 billion (17 percent of GDP) of FX (net) through FX interventions in 2023. - Assessment: Reserves large relative to GDP but more moderate compared with short-term foreign liabilities; considering reserve currency status of franc, adequacy of FX reserves not a pressing concern; financial losses incurred by SNB in 2022 and 2023 and volatility of its income indicate risks associated with large balance sheet; FX interventions can be considered in disorderly market conditions or to prevent de-anchoring of inflation expectations. ### Overall Assessment and Potential Policy Responses: Thailand - Overall assessment: External position in 2023 was stronger than level implied by medium-term fundamentals and desirable policies, although CA and REER gaps are narrowing. - CA balance improved to 1.4 percent of GDP in 2023 from −3.2 percent of GDP in 2022 and projected to return to surplus of around 3 percent of GDP in medium term. - Potential policy responses: Promote investment; diminish precautionary saving; liberalize services sector; minimize tax incentives and subsidies that distort competition; focus public expenditures on targeted social transfers and infrastructure for green recovery; reform and expand social safety nets, notably fragmented pension schemes; address informality to reduce precautionary saving and support consumption. ### Foreign Asset and Liability Position: Thailand (2023) - NIIP: 8.3 percent of GDP (strengthened from −3.4 percent in 2022). - Gross assets: 120.0 percent of GDP (from 117.5 percent). - Debt assets: 41.4 percent of GDP. - Gross liabilities: 111.7 percent of GDP (from 121 percent of GDP). - Debt liabilities: 37.5 percent of GDP. - Gross assets primarily consist of gross reserve assets (41.2 percent of GDP) and direct investment (40 percent of GDP). - Gross liabilities mainly comprise direct (about half) and portfolio (about one-fourth) investment. - Net direct and portfolio investment assets declined by 1.9 and 3.7 percentage points of GDP, respectively; net other investment assets increased by 1.6 percentage points of GDP. - Assessment: NIIP projected to remain small creditor position over medium term given CA surpluses; external debt declined to 37.5 percent of GDP in 2023 from 40.4 percent in 2022; short-term debt about 15.4 percent of GDP; external debt stability and liquidity risks limited. ### Current Account: Thailand (2023) - CA: 1.4 percent of GDP in 2023 (from deficit of −3.2 percent in 2022). - EBA cyclically adjusted CA: 1.3 percent of GDP. - EBA CA norm: 0.8 percent of GDP. - CA gap: 0.5 percent of GDP (identified policy gap 0.3 percent; unexplained residual 0.3 percent). - Adjustors applied for travel and transport shocks: 1.2 percent and 0.9 percent of GDP, respectively. - Background: Improvement due to partial recovery in tourist arrivals and improvement in transportation balance; services account improved by 3.3 percent of GDP; normalization of inventories and higher net public savings from delays in approving FY2024 budget contributed to CA surplus despite lower private savings. - Assessment: IMF staff assesses the CA gap to be in the (document ends mid-sentence in supplied content). *International Monetary Fund | 2024 EXTERNAL SECTOR REPORT* ### 1.9 to 3.3 percent of GDP range, with a midpoint of 2.6 percent of GDP for 2023. However, the results are subject to unc ### 1.9 to 3.3 percent of GDP range, with a midpoint of 2.6 percent of GDP for 2023. However, the results are subject to unc ### Thailand — Real Exchange Rate - Background: baht on gradual real appreciation trend since mid-2000s; 2023 REER appreciated by 1.1 percent relative to 2022, partly reflecting partial recovery of tourism receipts; as of April 2024, the REER was 5.0 percent below its 2023 average. - Assessment: using an elasticity of 0.49 and based on the IMF staff CA gap, IMF staff assesses the 2023 REER to be undervalued in the 3.9 to 6.7 percent range, with a midpoint of 5.3 percent. - EBA estimates: EBA index REER gap in 2023 is estimated at 7.4 percent, and the EBA level REER gap is estimated at −1.4 percent. ### Thailand — Capital and Financial Accounts: Flows and Policy Measures - Background: capital and financial account balance (excluding change in reserves) weakened to −2.4 percent of GDP in 2023 from 1.4 percent in 2022. - Portfolio investment: declined from 1.2 percent in 2022 to −2.6 percent of GDP in 2023. - Inward FDI: declined from 2.3 percent in 2022 to 0.6 percent of GDP in 2023. - Other net investments: increased from −0.6 to 0.9 percent of GDP. - Assessment and recommendations: - Thailand maintains strong external buffers and fundamentals. - IMF staff welcome authorities’ efforts to provide more flexibility and reduce the cost of non-residents’ foreign exchange transactions including by expanding the scope of the Non-resident Qualified Company scheme—to allow nonresidents providing cross-border payment services to participate. - Recommendation to phase out CFM measures on nonresident baht accounts. - Recommend a comprehensive package of macroeconomic, financial, and structural policies to address volatile capital flows, complemented with gradual and prudent financial account liberalization. ### Thailand — FX Intervention and Reserves Level - Background: exchange rate regime classified as (de jure and de facto) floating. - International reserves (including net forward position): declined to 49.4 percent of GDP from 49.6 percent of GDP in 2022. - Reserves adequacy metrics: around 2.5 times short-term debt, 11 months of imports, and 237 percent of the IMF’s standard ARA metric. - Assessment: - Reserves are higher than the range of the IMF’s reserve adequacy metrics; no need to build up reserves for precautionary purposes. - Exchange rate should move flexibly as a shock absorber; FX intervention could be used to address disorderly market conditions and mitigate policy trade-offs when FX market becomes dysfunctional and deviations in hedging and financing premia become excessive due to large non-fundamental shocks. ### Türkiye — Overall External Assessment and Vulnerabilities - Overall Assessment: external position in 2023 assessed weaker than level implied by medium-term fundamentals and desirable policies; assessment driven by sizable CA gap, low level of reserves, large external financing needs, and size and composition of NIIP with high debt component. - Potential Policy Responses: tighten monetary and fiscal policy stance; accelerate financial liberalization; open trade policies and remove discretionary credit allocation favoring exports; collectively improve confidence and allow accumulation of international reserves. ### Türkiye — Foreign Asset and Liability Position and Trajectory (2023) - NIIP averaged −36.8 percent of GDP over 2019–23. - NIIP: improved from −34.7 percent of GDP at end-2022 to −25.5 percent of GDP at end-2023. - Debt liabilities: around 70 percent of gross liabilities. - External debt: declined from 51 percent of GDP in 2022 to 45 percent of GDP in 2023. - Private sector holds almost 50 percent of Türkiye’s external debt; public sector holds remainder. - About 45 percent of external debt is short term (on a remaining-maturity basis). - Assessment: size and composition of gross external liabilities, coupled with low reserves, increase vulnerability to liquidity shocks, sudden shifts in investor sentiment, and any global upswing in interest rates. - NIIP projection: expected to stabilize and hover around −33 percent of GDP in 2029 (due to projected improvement in CA balance). - 2023 (% GDP) statistics: NIIP: −25.5; Gross Assets: 29.4; Debt Assets: 11.5; Gross Liab.: 54.9; Debt Liab.: 39.0. ### Türkiye — Current Account (2023) - Background: CA deficit averaged 2.4 percent of GDP over 2019–23. - 2023 CA deficit: 4.0 percent of GDP (versus 5.1 percent in 2022). - Nonenergy surplus: declined from 3.8 percent of GDP in 2022 to 0.7 percent of GDP in 2023, due to significant slowdown in exports amidst robust imports. - 2023:H2 CA deficit narrowed to around −1.4 percent of GDP. - Assessment: EBA CA model estimates cyclically adjusted CA balance of −3.0 percent of GDP and CA norm of −0.3 percent of GDP in 2023. - CA gap: assessed in the range of −3.3 to −2.0 percent of GDP, with a midpoint of −2.6 percent of GDP. - 2023 (% GDP) statistics: CA: −4.0; Cycl. Adj. CA: −3.0; EBA Norm: −0.3; EBA Gap: −2.6; Staff Adj.: 0.0; Staff Gap: −2.6. ### Türkiye — Real Exchange Rate - Background: CPI-based REER depreciated by an annual average of 8.3 percent over 2019–22; average REER appreciated by 2.4 percent in 2023; PPI-based REER appreciated by around 8 percent in 2023. - As of April 2024: CPI-based REER and PPI-based REER appreciated by 7 percent and 3 percent, respectively, relative to the 2023 average. - Assessment: staff assesses REER to be overvalued in the range of 7.3 to 11.9 percent with a midpoint of 9.6 percent (applying an estimated REER elasticity of 0.27). - EBA models: suggest REER was undervalued in 2023 by 45.7 and 55.7 percent (index and level models respectively), although models’ residuals are very large for Türkiye. ### Türkiye — Capital and Financial Accounts: Flows and Policy Measures (2023) - Net capital inflows: increased to 4.9 percent of GDP in 2023 from 3.9 percent of GDP in 2022, driven by increased borrowing in the banking sector. - Portfolio investments: recorded a net inflow of 0.8 percent of GDP in 2023 (turned positive after May 2023 election). - Direct investment: recorded a net inflow of 0.4 percent of GDP in 2023. - Assessment: annual gross external financing needs projected at around 24 percent of GDP on average over 2024–29; Türkiye remains vulnerable to adverse shifts in global investor sentiment. - Recommendation: policy normalization and further strengthening of policy credibility and accelerating financial liberalization; CFMs on capital outflows should be phased out as conditions improve. ### Türkiye — FX Intervention and Reserves Level - Background: de jure exchange rate free floating; de facto classification assessed as a crawl-like arrangement. - Gross international reserves: increased to $141 billion in 2023 from $129 billion in 2022. - Assessment: gross international reserves were at 97 percent of the IMF’s ARA metric as of end-December 2023 (close but below the recommended 100 to 150 percent range). - Concerns: international reserves net of off-balance-sheet swaps and other short-term liabilities remain deeply negative; non–SDR basket currencies account for about 15 percent of reserves. - Recommendation: interventions may be needed to avoid excessive exchange rate volatility while not preventing warranted macroeconomic adjustments; significant reserves buildup is needed but should be opportunistic. ### United Kingdom — Overall External Assessment (2023) - Overall Assessment: external position in 2023 weaker than level implied by medium-term fundamentals and desirable policies. - CA deficit: deteriorated marginally in 2023. - Potential Policy Responses: gradual fiscal consolidation while preserving key public services and protecting the vulnerable; structural reforms to boost international competitiveness (including upgrading labor skill base); continue to support open trade environment and address remaining barriers to trade with the European Union; industrial policies should be cautious and targeted. ### United Kingdom — Foreign Asset and Liability Position and Trajectory (2023) - NIIP deteriorated to −31 percent of GDP in 2023 from −14 percent of GDP in 2022. - Other investment: 196 percent of GDP in assets and 194 percent in liabilities. - Portfolio investment: 123 percent of GDP in assets and 130 percent in liabilities. - External assets and liabilities: about three-quarters percent attributed to Other European countries, Japan, and the United States. - Assessment: fluctuations in large gross stock positions could be potential source of vulnerability (gross assets and liabilities exceed 500 percent of GDP). - 2023 (% GDP) statistics: NIIP: −31; Gross Assets: 503; Debt Assets: 257; Gross Liab.: 534; Debt Liab.: 282. ### United Kingdom — Current Account (2023) - CA deficit: increased marginally from 3.1 percent of GDP in 2022 to 3.3 percent in 2023. - CA deficit higher than 2019–23 average of 2.5 percent. - Drivers: larger income deficit largely offset by improved trade balance due to lower energy prices and a negative public imbalance. - Assessment: EBA CA model estimates norm of −0.4 percent of GDP; with cyclically adjusted 2023 CA of −3.3 percent of GDP, CA gap is −2.9 percent of GDP. - Adjustments for valuation and retained earnings effects: IMF staff assesses CA gap at −2.4 percent of GDP within a range of −1.4 to −3.4 percent of GDP. - 2023 (% GDP) statistics: CA: −3.3; Cycl. Adj. CA: −3.3; EBA Norm: −0.4; EBA Gap: −2.9; Staff Adj.: 0.5; Staff Gap: −2.4. ### United Kingdom — Real Exchange Rate - Background: pound appreciated in real effective terms in 2023 by 2.5 percent relative to its 2022 average; overall pound has depreciated by about 3.7 percent since mid-2016. - As of April 2024: REER had further appreciated by 2.8 percent compared to 2023 average. - Assessment: EBA REER level and index approaches suggest a gap of 4 and −6 percent, respectively, for 2023. - Staff assessment: REER gap in range of 5.4 to 13 percent with a midpoint of 9.2 percent (applying an estimated elasticity of 0.26). ### United Kingdom — Capital and Financial Accounts and FX Intervention - Background: portfolio investment and other investment key components of financial account. - Financing of CA deficit in 2023: mainly by net other investment of 11.1 percent of GDP; net portfolio investment and FDI declined by 6.2 and 2.7 percent of GDP, respectively. - Assessment: large fluctuations in capital flows are inherent and a potential source of vulnerability, mitigated by robust financial stability framework. - FX Intervention and Reserves Level: pound has status of a global reserve currency; share of global reserves in sterling about 4.6 percent since 2015; reserves held by UK typically low relative to standard metrics; currency is free floating. ### United States — Overall External Assessment (2023) - Overall Assessment: external position in 2023 broadly in line with level implied by medium-term fundamentals and desirable policies. - CA deficit: 3.0 percent of GDP in 2023 (versus 3.8 percent of GDP in 2022). - Projection: CA deficit projected to decline to about 2¼ percent of GDP over the medium term based on fiscal consolidation and slow convergence of private saving. - Potential Policy Responses: medium-term fiscal consolidation aimed at a medium-term general government primary surplus of about 1 percent of GDP; structural policies to increase competitiveness while maintaining full employment; keep industrial policies narrowly targeted; roll back tariff barriers and trade distortions; resolve trade and investment disagreements to support open global trading system. ### United States — Foreign Asset and Liability Position (end-2023) - NIIP: −70.7 percent of GDP at end-2023 (weakened from −61.2 percent of GDP in 2022). - Drivers: about a quarter of NIIP decline attributed to net transactions; main driver valuation adjustments stemming from significant rise in US stock prices compared to foreign stocks. - Note: small depreciation of US dollar mentioned as part of context. *Source: text from the PDF chapter/section provided.* ### 1.7 percent) raised the value of foreign-currency-denominated US assets in dollar terms, thereby marginally offsetting ( ### United States — External Sector Assessment ### Net International Investment Position (NIIP) - Under the IMF staff’s baseline scenario, the NIIP is projected to remain broadly unchanged through the medium term on the back of improvements in net portfolio investment position as the CA balance reverts to its prepandemic average and valuation gains persist. - Assessment findings: - US external debt declined to around 87 percent of GDP in 2023 (down from its mid-2020 peak of nearly 110 percent of GDP and the 2016–19 average of 94 percent of GDP). - Investment income balance remained positive as the yield on assets has consistently surpassed that of its liabilities. - Substantial share of external assets denominated in foreign currencies increased to around 70 percent by 2020. - About 60 percent of US assets are in the form of FDI and portfolio equity claims. - Financial stability risk: an unexpected decline in foreign demand for US fixed-income securities could surface; risk remains moderate given the dominant status of the US dollar as a reserve currency and mitigating factors: strong institutions, a predictable policy framework, and attractive diverse investment opportunities. - 2023 (% GDP) statistics: - NIIP: −70.7 - Gross Assets: 123.6 - Debt Assets: 37.9 - Gross Liab.: 194.4 - Debt Liab.: 87 ### Current Account (CA) - Background: - CA deficit was 3.0 percent of GDP in 2023, down from 3.8 percent in 2022 (moving from 3½ to 2.6 percent of GDP in cyclically adjusted terms) and compared with the 2016–19 prepandemic deficit of around 2 percent of GDP. - Trade deficit contracted in 2023 relative to 2022 (−2.8 percent versus −3.7 percent of GDP), reversing the trend of deterioration observed since 2016 primarily due to a reduced deficit in goods. - Service surplus increased slightly; income accounts remained broadly stable. - From a savings-investment perspective, the CA deficit reflected the public sector’s savings-investment deficit, partly offset by private sector’s savings-investment surplus. - The CA deficit is expected to gradually decline to about 2¼ percent of GDP over the medium term. - Assessment: - EBA model estimates: - Cyclically adjusted CA balance: −2.6 percent of GDP - CA norm: −1.9 percent of GDP - Standard error: 0.7 percent of GDP - Model-based CA gap for 2023: −0.7 percent of GDP - Estimated contribution of identified policy gaps: −0.7 percent of GDP (primarily reflecting a fiscal policy gap contribution of -0.8 percent of GDP) - IMF staff assesses a CA gap in a range of −1.4 and 0 percent of GDP with a midpoint of −0.7 percent of GDP. - 2023 (% GDP) statistics: - CA: −3.0 - Cycl. Adj. CA: −2.6 - EBA Norm: −1.9 - EBA Gap: −0.7 - Staff Adj.: 0 - Staff Gap: −0.7 ### Real Exchange Rate (REER) - Background: - REER appreciated by 8.3 percent in 2022 and depreciated by 0.5 percent in 2023 (when yearly averages are compared). - As of April 2024, the REER was about 2.0 percent above the 2023 average. - Assessment: - IMF staff CA gap implies a REER overvaluation of 5.8 percent in 2022 (with an estimated elasticity of 0.12 applied). - EBA REER index model suggests an overvaluation of 8.3 percent. - EBA REER level model suggests an overvaluation of 16.7 percent. - IMF staff assesses the 2023 midpoint REER overvaluation to be 5.8 percent, with a range of 11.6 to 0 percent (range obtained from the CA standard error and the corresponding CA elasticity). ### Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2023, the financial account balance stood at approximately −3.0 percent of GDP, a slight improvement from the −3.1 percent of GDP recorded in 2022. - Shift primarily stemmed from an increase in net other investment and, to a lesser degree, an increase in net financial derivatives, partly offset by declines in net portfolio investment and net direct investment. - Assessment: - The United States has an open capital account. - Vulnerabilities are limited by the US 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 US 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. *International Monetary Fund | 2024 EXTERNAL SECTOR REPORT — Technical endnote excerpts for the United States* --- _Source: https://www.imf.org/-/media/files/publications/esr/2024/english/text.pdf_