## 2017-external-sector-report-individual-economy-assessments ## Source details **Canonical URL:** [2017-external-sector-report-individual-economy-assessments](https://www.imf.org/-/media/files/publications/pp/2017/2017-external-sector-report-individual-economy-assessments.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2017/2017-external-sector-report-individual-economy-assessments.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2017/2017-external-sector-report-individual-economy-assessments.pdf.json) --- ### Methodology and scope - External sector assessments use a wide range of methods, including the External Balance Assessment (EBA) developed by the IMF’s Research Department. - Overall assessments are based on IMF staff judgment drawing on model estimates and other analysis; because estimates are subject to uncertainty, overall assessments are presented in ranges. - Assessments are based on data and IMF staff projections as of June 15th, 2017. - External indicators considered include: the current account (CA), the real effective exchange rate (REER), capital and financial account flows, FX intervention and reserves, and the foreign asset or liability position (NIIP). - The Report analyzes 29 systemic economies chosen by equal weighting of global ranking in purchasing power GDP and nominal gross trade. ### Summary table: Selected country CA and REER gaps, 2016 (selected excerpts) - Table structure (columns): Actual CA [A], Cyclically Adjusted CA [B], EBA Norm [C], EBA Gap [D=B-C], Staff Adjustments [F=D-E], Staff CA Gap (Total Norm Other Staff CA Gap Mid-point and Range), Staff REER Gap and Staff REER Gap Range. - Select country figures (preserved exactly as in source): - Australia - Actual CA [A]: -2.6 - Cycl. Adj. CA [B]: -2.0 - EBA Norm [C]: -1.5 - EBA Gap [D=B-C]: -0.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.0 0.5 ... 0.5 +/-1 - Staff REER Gap: 5.0 +/-5 - Belgium - Actual CA [A]: -0.4 - Cycl. Adj. CA [B]: -0.5 - EBA Norm [C]: 2.6 - EBA Gap [D=B-C]: -3.2 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -3.3 0.1 ... 0.1 +/-1 - Staff REER Gap: 7.5 +/-2.5 - Brazil - Actual CA [A]: -1.3 - Cycl. Adj. CA [B]: -2.1 - EBA Norm [C]: -2.5 - EBA Gap [D=B-C]: 0.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -0.5 1.0 1.0 ... +/-1 - Staff REER Gap: 5.0 +/-10 - Canada - Actual CA [A]: -3.3 - Cycl. Adj. CA [B]: -2.5 - EBA Norm [C]: 0.6 - EBA Gap [D=B-C]: -3.1 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.6 -1.5 -1.5 ... +/-1 - Staff REER Gap: 6.0 +/-4 - China - Actual CA [A]: 1.7 - Cycl. Adj. CA [B]: 1.8 - EBA Norm [C]: 0.2 - EBA Gap [D=B-C]: 1.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 1.5 0.0 ... 0.0 +/-1 - Staff REER Gap: 0.0 +/-10 - Euro Area - Actual CA [A]: 3.3 - Cycl. Adj. CA [B]: 2.9 - EBA Norm [C]: 3.1 - EBA Gap [D=B-C]: -0.2 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.3 -0.4 -0.4 ... +/-0.75 - Staff REER Gap: -1.0 +/-4 - Germany - Actual CA [A]: 8.3 - Cycl. Adj. CA [B]: 8.5 - EBA Norm [C]: 4.5 - EBA Gap [D=B-C]: 4.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 4.5 -0.5 -0.5 ... +/-1.5 - Staff REER Gap: -15.0 +/-5 - India - Actual CA [A]: -0.7 - Cycl. Adj. CA [B]: -1.1 - EBA Norm [C]: -4.2 - EBA Gap [D=B-C]: 3.1 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.8 2.3 1.7 0.6 +/-1 - Staff REER Gap: 2.5 +/-7.5 - Japan - Actual CA [A]: 3.8 - Cycl. Adj. CA [B]: 3.1 - EBA Norm [C]: 3.4 - EBA Gap [D=B-C]: -0.3 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 1.0 -1.3 -1.1 -0.2 +/-1 - Staff REER Gap: -7.0 +/-7 - Korea - Actual CA [A]: 7.0 - Cycl. Adj. CA [B]: 6.0 - EBA Norm [C]: 1.7 - EBA Gap [D=B-C]: 4.3 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 3.6 0.7 ... 0.7 +/-2 - Staff REER Gap: -10.0 +/-5 - Mexico - Actual CA [A]: -2.7 - Cycl. Adj. CA [B]: -2.0 - EBA Norm [C]: -1.9 - EBA Gap [D=B-C]: -0.1 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.0 -0.1 ... -0.1 +/-1 - Staff REER Gap: -10.0 +/-5 - Netherlands - Actual CA [A]: 8.4 - Cycl. Adj. CA [B]: 8.5 - EBA Norm [C]: 5.3 - EBA Gap [D=B-C]: 3.2 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 3.0 0.2 ... 0.2 +/-1 - Staff REER Gap: -9.0 +/-3 - Russia - Actual CA [A]: 1.9 - Cycl. Adj. CA [B]: 4.2 - EBA Norm [C]: 6.3 - EBA Gap [D=B-C]: -2.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.0 -1.0 -1.0 ... +/-1 - Staff REER Gap: 5.0 +/-5 - Spain - Actual CA [A]: 2.0 - Cycl. Adj. CA [B]: 1.1 - EBA Norm [C]: 1.8 - EBA Gap [D=B-C]: -0.7 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -2.0 1.3 1.3 ... +/-1 - Staff REER Gap: 7.5 +/-2.5 - Technical note: NFA stabilizing CA is -1.6 percent of GDP. - Sweden - Actual CA [A]: 4.5 - Cycl. Adj. CA [B]: 5.0 - EBA Norm [C]: -1.4 - EBA Gap [D=B-C]: 6.4 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 2.0 4.4 1.0 3.4 +/-1 - Staff REER Gap: -7.5 +/-2.5 - Switzerland - Actual CA [A]: 10.7 - Cycl. Adj. CA [B]: 10.5 - EBA Norm [C]: 7.5 - EBA Gap [D=B-C]: 3.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.8 2.3 ... 2.3 +/-2 - Staff REER Gap: -1.5 +/-4 - Thailand - Actual CA [A]: 11.5 - Cycl. Adj. CA [B]: 11.2 - EBA Norm [C]: 1.2 - EBA Gap [D=B-C]: 10.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 5.0 5.0 ... 5.0 +/-2 - Staff REER Gap: -8.0 +/-3 - Turkey - Actual CA [A]: -3.8 - Cycl. Adj. CA [B]: -3.7 - EBA Norm [C]: -0.6 - EBA Gap [D=B-C]: -3.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -2.5 -0.5 -0.5 ... -0.5 +/-1 - Staff REER Gap: 11.3 +/-3.75 - United Kingdom - Actual CA [A]: -4.4 - Cycl. Adj. CA [B]: -4.1 - EBA Norm [C]: 0.0 - EBA Gap [D=B-C]: -4.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -2.5 -1.5 ... -1.5 +/-1.5 - Staff REER Gap: 7.5 +/-7.5 - United States - Actual CA [A]: -2.4 - Cycl. Adj. CA [B]: -2.3 - EBA Norm [C]: -1.3 - EBA Gap [D=B-C]: -1.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.2 0.2 ... 0.2 +/-0.5 - Staff REER Gap: 15.0 +/-5 - Hong Kong SAR - Actual CA [A]: 4.6 - Cycl. Adj. CA [B]: 2.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.0 ... +/-1.5 - Staff REER Gap: 0.0 +/-5 - Singapore - Actual CA [A]: 19.0 - Cycl. Adj. CA [B]: 18.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 5.5 ... +/-3 - Staff REER Gap: -11.0 +/-6 - Saudi Arabia - Actual CA [A]: -3.9 - Cycl. Adj. CA [B]: -3.7 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -7.7 ... +/-2 - Staff REER Gap: 20.0 +/-5 - Discrepancy (weighted average sum of staff-assessed CA gaps): -0.07 ### Selected individual economy assessments — key findings and policy recommendations (excerpts) - Australia - NIIP: high negative NIIP reaching -60 percent of GDP in 2016; NIIP deteriorated in 2016 by 1¾ percent of GDP relative to 2015. - CA 2016: -2.6 percent of GDP (cyclically-adjusted -2.0); EBA CA norm -1.5 → CA gap mid-point -0.5; staff CA gap range: -2 to 0 percent of GDP. - REER: depreciated by 17 percent between 2012 and 2015; staff assesses REER 0 to 10 percent above level implied by fundamentals and desirable policies. - Policy responses: further monetary accommodation if growth weak or commodity prices fall; gradual fiscal consolidation to boost national savings. - Banking and reserves: banking sector net FX liability position fully hedged; weighted average maturity of government bonds 6.6 years; credible floating rate limits vulnerabilities. - Brazil - NIIP and external debt: NIIP hovered around -30 percent of GDP in 2011-15; external debt about 37 percent of GDP. - CA 2016: -1.3 percent of GDP (cyclically-adjusted -2.1); staff CA norm range -0.5 to -2.6 → 2016 CA gap ranged between -1.5 and 0.5 percent of GDP. - REER: appreciated on average by 7 percent during 2016; staff REER gap in [-5, 15] percent range. - Reserves: gross reserves at $365 billion in 2016 (20 percent of GDP); net forward position 1.4 percent of GDP at end-2016. - Policy responses: raise national savings via fiscal consolidation (spending cap, social security reform); structural reforms to attract FDI; FX intervention to alleviate disorderly markets. - China - NIIP: positive but deteriorated to 16 percent of GDP at end-2016; reserves US$3.0 trillion end-2016. - CA 2016: actual 1.7 percent (cyclically-adjusted 1.8); EBA Gap 1.5; staff assesses CA ½ to 2½ percent of GDP stronger than implied by fundamentals and desirable policies. - REER: 2016 average REER depreciated by about 5.1 percent relative to 2015; staff assesses REER broadly consistent with fundamentals with gap in range of -10 to +10 percent. - Policy responses: improve social safety net, SOE reform, market-based financial system, attract more inward FDI, flexible market-based exchange rate with measured use of reserves to smooth volatility. - Euro Area (aggregate and country heterogeneity) - CA 2016: 3.3 percent of GDP (cyclically adjusted 2.9); staff CA gap range -0.5 to 1.0 percent of GDP. - NIIP: improved to around -6 percent of GDP in 2016. - Policy responses: continued monetary accommodation, country-level structural reforms, country-specific fiscal policies (use fiscal space where available), expand centralized investment schemes. - REER: CPI-based REER appreciated ~1.1 percent 2015–16; staff assesses 2016 average REER broadly aligned between -5 and +3 percent. - Germany - CA 2016: 8.3 percent of GDP (cyclically-adjusted 8.5); staff assesses CA 3–6 percentage points of GDP stronger than fundamentals and desirable policies. - NIIP: 52 percent of GDP end-2016; projected to reach 85 percent by 2021 under continued CA surpluses. - REER: staff assesses 2016 REER undervaluation of 10–20 percent. - Policy responses: more growth-oriented fiscal policy to boost domestic demand; pension reforms to reduce saving and external surplus. - India - NIIP: -17.0 percent of GDP end-2016; CA FY2016/17: -0.7 percent of GDP. - EBA CA regression norm: -4.2 percent of GDP; staff judgment norm about -2½ percent of GDP; CA gap range -0.2 to +1.8 percent of GDP. - REER: 2016 average appreciated ~3 percent; staff REER gap range -5 to +10 percent. - Policy priorities: increase FDI, improve business climate, proceed with fiscal consolidation, implement GST and subsidy reforms, safeguard financial stability. - Japan - NIIP: assets 164 percent, liabilities 103 percent of GDP in 2016; NIIP rose to 61 percent of GDP. - CA 2016: 3.8 percent of GDP (cyclically-adjusted 3.1); EBA norm 3.4 → EBA gap -0.3; staff underlying CA gap midpoint 1.0. - REER: appreciated 13.3 percent between 2015 and 2016; staff assesses REER broadly in line with fundamentals with indicative gap range -14 to 0 percent (midpoint 7 percent noted). - Policy responses: accommodative BoJ stance alongside bold structural reforms and gradual fiscal consolidation. - Korea - CA 2016: 7.0 percent of GDP (cyclically-adjusted 6.0); EBA norm 1.7 → EBA gap 4.3; staff CA gap midpoint 3.6 with range 1½–5½ percent of GDP. - NIIP: positive 20 percent of GDP end-2016. - REER: staff assesses REER 5 to 15 percent below level consistent with fundamentals and desired policies. - Policy implication: significantly more expansionary fiscal policy to boost domestic demand; structural reforms to rebalance. - Mexico - NIIP 2016: -46.1 percent of GDP; CA 2016: -2.7 percent of GDP (cyclically-adjusted -2.0); EBA norm -1.9 → CA gap -0.1. - REER: 2016 average 13 percent weaker than 2015; staff assesses REER undervaluation 5 to 15 percent under baseline. - Policy recommendations: further structural reforms to boost non-oil exports, maintain inflation targeting, preserve flexible exchange rate with occasional intervention; reserves end-2016 US$178 billion. - Netherlands - CA 2016: 8.4 percent of GDP (cyclically-adjusted 8.5); EBA norm 5.3 → CA gap 3.2; staff assesses REER undervalued around 9 percent (range 6–12 percent). - NIIP: 76 percent of GDP end-2016. - Policy recommendations: use fiscal space to support recovery and boost domestic productive investment; structural reforms for small firms. - Russia - CA 2016: 1.9 percent of GDP (cyclically-adjusted 4.2); EBA norm 6.3 → CA gap -2.0; staff assesses 2016 CA gap between -2 to 0 percent of GDP. - NIIP end-September 2016: 18 percent of GDP; reserves USD378 billion 2016. - Policy responses: fiscal tightening to rebuild buffers and save more oil wealth; structural reforms and diversification. - Saudi Arabia - CA 2016: -3.9 percent of GDP (cyclically-adjusted -3.7); staff CA gap -7.7 percent of GDP (range -5.7 to -9.7). - NIIP net external assets 93 percent of GDP end-2016; reserves $529 billion end-2016. - Policy responses: fiscal consolidation (Fiscal Balance Program), energy price reforms, new non-oil revenue measures; structural reforms to diversify economy. - Singapore - CA 2016: 19 percent of GDP (cyclically-adjusted 18.5); staff assesses CA stronger than fundamentals by 2½ to 8½ percent of GDP. - NIIP 2016: about 214 percent of GDP. - REER: average REER depreciated by 1 percent in 2016; staff assesses REER around 5 to 17 percent weaker than warranted. - Policy recommendations: consider time-bound unemployment insurance, potentially more fiscal stimulus (public healthcare, infrastructure), expand targeted transfers, support credit-constrained businesses. - Spain - CA 2016: 2.0 percent of GDP (cyclically-adjusted 1.1); staff CA norm ~3 percent of GDP (range 2–4) aiming to strengthen NIIP; staff assesses 2016 REER 5 to 10 percent overvalued. - Policy responses: continue structural reforms, fiscal consolidation consistent with growth, and benefit from euro-area monetary accommodation. - Sweden - CA 2016: 4.5 percent of GDP (cyclically-adjusted 5.0); EBA norm -1.4 → EBA CA gap 6.4; staff adjusted CA gap about 2 percent of GDP (±1). - REER: staff assesses krona undervalued by 5 to 10 percent. - Policy recommendations: reforms to bolster residential investment, migrant integration; macroprudential measures to contain bank funding vulnerabilities. - Switzerland - CA 2016: 10.7 percent of GDP (cyclically-adjusted 10.5); EBA norm 7.5 → EBA CA gap 3.0; staff residual gap about 0.75 percent of GDP (±2). - NIIP 2016: 131 percent of GDP; reserves USD707 billion end-2016. - Policy recommendations: shift toward domestic demand, maintain negative interest rate differential, reserve use limited to inflow surges. - Thailand - CA 2016: 11.5 percent of GDP (cyclically-adjusted 11.2); EBA norm 1.2 → CA gap 10.1 percent of GDP (staff assesses CA gap within 3 to 7 percent of GDP). - NIIP improved to around -10 percent of GDP in 2015-16. - Policy responses: mutually reinforcing monetary and fiscal stimulus, public infrastructure within fiscal space, reform social safety nets, reduce investment barriers, allow flexible exchange rate with limited intervention. - Turkey - CA 2016: -3.8 percent of GDP (cyclically-adjusted -3.7); staff assesses 2016 CA gap range -1.5 to -3.5 percent of GDP. - NIIP end-2016: -42 percent of GDP. - Vulnerabilities: large share of short-term and FX-denominated private debt; gross external financing needs over 20 percent of GDP. - Policy responses: credible fiscal consolidation, tighter macroprudential measures, increase net international reserves, restrict FX sales to disorderly conditions. - United Kingdom - CA 2016: -4.4 percent of GDP (cyclically-adjusted -4.1); EBA norm 0.0 → EBA CA gap -4.0; staff mid-point CA gap 2½ percent of GDP weaker than norm. - NIIP 2016: 24 percent of GDP after sterling depreciation. - Policy responses: continue fiscal consolidation in medium term, structural reforms to boost productivity and competitiveness, maintain macroprudential policies. - United States - NIIP 2016: -43.7 percent of GDP. - CA 2016: -2.4 percent of GDP (cyclically-adjusted -2.3); EBA gap -1.0 → staff cyclically-adjusted CA between -0.7 and -1.7 percent weaker than fundamentals. - REER: 2016 average REER moderately overvalued within range of 10 to 20 percent. - Policy recommendations: fiscal consolidation over time (general government primary surplus about ¾ percent of GDP), structural policies to raise productivity (infrastructure, tax reform, education, labor force growth). ### Technical notes and recurring themes - 2017 REERs estimated using data available as of June 15, 2017. - Staff adjustments reflect judgment to account for temporary factors, measurement issues, and country-specific features (tourism booms, terms-of-trade shocks, financial center effects). - EBA models sometimes fit poorly for commodity exporters or financial centers; staff places more weight on external sustainability and country-specific analysis where appropriate. - Discrepancy reported in table denotes weighted average sum of staff-assessed CA gaps: -0.07. *Source: Fund staff estimates, 2017 External Sector Report — Individual Economy Assessments (selected extracts).* ### 1. Summary of EBA and Staff-Assessed CA Gaps, 2016 ___________________________________ 5 ### 1. Summary of EBA and Staff-Assessed CA Gaps, 2016 ### A. The External Sector Assessments - The external sector assessments use a wide range of methods, including the External Balance Assessment (EBA) developed by the IMF’s Research Department to estimate desired current account balances and real exchange rates (see IMF Working Paper WP/13/272 for a complete description of the EBA methodology and Annex I of the 2015 External Sector Report for a discussion of more recent refinements). - Overall assessments are based on IMF staff judgment drawing on model estimates and other analysis. - Since estimates are subject to uncertainty, overall assessments are presented in ranges. - The external sector assessments are based on data and IMF staff projections as of June 15th, 2017. - External assessments discuss a broad range of external indicators: the current account, the real effective exchange rate, capital and financial accounts flows and measures, FX intervention and reserves and the foreign asset or liability position. - Individual economy assessments are discussed with respective authorities as part of bilateral surveillance. ### B. Selection of Economies Included in the Report - The Report analyzes 29 systemic economies in detail. They were chosen on the basis of an equal weighting of each economy’s global ranking in terms of purchasing power GDP (as used in the Fund’s World Economic Outlook) and in terms of the level of nominal gross trade. - Listed economies include: Australia, Belgium, Brazil, Canada, China, Euro area, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, Poland, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, United Kingdom, United States. ### C. Domestic and Foreign Policies and Imbalance Calculations: An Example - Thought experiment: two-country world (Country A and Country B). - Country A: large current account deficit, large fiscal deficit and high debt. - Country B: current account surplus but no policy distortions. - External imbalances: - Country A shows an external imbalance reflecting its fiscal deficit; Country B has an equal and opposite surplus imbalance. - Country A’s exchange rate would look overvalued and Country B’s undervalued. - Policy gaps: - Country A: domestic policy distortion requiring adjustment. - Country B: no domestic policy gaps; adjustment by Country A would eliminate the imbalance in Country B. - Individual economy write-ups: - Country A: issues include vulnerabilities from international liabilities; policy response should focus on rein in fiscal deficit and limit asset price excesses. - Country B: no fault with domestic policies; adjustment by others would help reduce its surplus. - Implications: - Fiscal policy is currently the area where distinguishing domestic vs. foreign policy gaps is most important. - An elimination of the fiscal policy gap in deficit advanced economies could help reduce surplus imbalances in other economies by around 3/4 percent of GDP. ### Table 1: Summary of EBA and Staff-Assessed CA Gaps, 2016 — Selected excerpts and key statistics - Table columns shown include: Actual CA [A], Cyclically Adjusted CA [B], EBA Norm [C], EBA Gap [D=B-C], Staff Adjustments [F=D-E] (in percent of GDP), Total Staff CA Gap (Norm / Other / Staff CA Gap Midpoint and Range), Staff REER Gap and Staff REER Gap Range. - Selected country figures (all numbers preserved exactly as in source): - Australia - Actual CA [A]: -2.6 - Cycl. Adj. CA [B]: -2.0 - EBA Norm [C]: -1.5 - EBA Gap [D=B-C]: -0.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.0 0.5 ... 0.5 +/-1 - Staff REER Gap: 5.0 +/-5 - Belgium - Actual CA [A]: -0.4 - Cycl. Adj. CA [B]: -0.5 - EBA Norm [C]: 2.6 - EBA Gap [D=B-C]: -3.2 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -3.3 0.1 ... 0.1 +/-1 - Staff REER Gap: 7.5 +/-2.5 - Brazil - Actual CA [A]: -1.3 - Cycl. Adj. CA [B]: -2.1 - EBA Norm [C]: -2.5 - EBA Gap [D=B-C]: 0.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -0.5 1.0 1.0 ... +/-1 - Staff REER Gap: 5.0 +/-10 - Canada - Actual CA [A]: -3.3 - Cycl. Adj. CA [B]: -2.5 - EBA Norm [C]: 0.6 - EBA Gap [D=B-C]: -3.1 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.6 -1.5 -1.5 ... +/-1 - Staff REER Gap: 6.0 +/-4 - China - Actual CA [A]: 1.7 - Cycl. Adj. CA [B]: 1.8 - EBA Norm [C]: 0.2 - EBA Gap [D=B-C]: 1.5 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 1.5 0.0 ... 0.0 +/-1 - Staff REER Gap: 0.0 +/-10 - Euro Area - Actual CA [A]: 3.3 - Cycl. Adj. CA [B]: 2.9 - EBA Norm [C]: 3.1 - EBA Gap [D=B-C]: -0.2 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.3 -0.4 -0.4 ... +/-0.75 - Staff REER Gap: -1.0 +/-4 - Germany - Actual CA [A]: 8.3 - Cycl. Adj. CA [B]: 8.5 - EBA Norm [C]: 4.5 - EBA Gap [D=B-C]: 4.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 4.5 -0.5 -0.5 ... +/-1.5 - Staff REER Gap: -15.0 +/-5 - India - Actual CA [A]: -0.7 - Cycl. Adj. CA [B]: -1.1 - EBA Norm [C]: -4.2 - EBA Gap [D=B-C]: 3.1 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.8 2.3 1.7 0.6 +/-1 - Staff REER Gap: 2.5 +/-7.5 - Japan - Actual CA [A]: 3.8 - Cycl. Adj. CA [B]: 3.1 - EBA Norm [C]: 3.4 - EBA Gap [D=B-C]: -0.3 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 1.0 -1.3 -1.1 -0.2 +/-1 - Staff REER Gap: -7.0 +/-7 - Korea - Actual CA [A]: 7.0 - Cycl. Adj. CA [B]: 6.0 - EBA Norm [C]: 1.7 - EBA Gap [D=B-C]: 4.3 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 3.6 0.7 ... 0.7 +/-2 - Staff REER Gap: -10.0 +/-5 - Mexico - Actual CA [A]: -2.7 - Cycl. Adj. CA [B]: -2.0 - EBA Norm [C]: -1.9 - EBA Gap [D=B-C]: -0.1 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.0 -0.1 ... -0.1 +/-1 - Staff REER Gap: -10.0 +/-5 - Netherlands - Actual CA [A]: 8.4 - Cycl. Adj. CA [B]: 8.5 - EBA Norm [C]: 5.3 - EBA Gap [D=B-C]: 3.2 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 3.0 0.2 ... 0.2 +/-1 - Staff REER Gap: -9.0 +/-3 - Russia - Actual CA [A]: 1.9 - Cycl. Adj. CA [B]: 4.2 - EBA Norm [C]: 6.3 - EBA Gap [D=B-C]: -2.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.0 -1.0 -1.0 ... +/-1 - Staff REER Gap: 5.0 +/-5 - Spain (note) - Actual CA [A]: 2.0 - Cycl. Adj. CA [B]: 1.1 - EBA Norm [C]: 1.8 - EBA Gap [D=B-C]: -0.7 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -2.0 1.3 1.3 ... +/-1 - Staff REER Gap: 7.5 +/-2.5 - Technical note: For Spain, the CA level required to reduce NIIP by 5 percentage points of GDP annually is reported. The NFA stabilizing CA is -1.6 percent of GDP. - Sweden - Actual CA [A]: 4.5 - Cycl. Adj. CA [B]: 5.0 - EBA Norm [C]: -1.4 - EBA Gap [D=B-C]: 6.4 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 2.0 4.4 1.0 3.4 +/-1 - Staff REER Gap: -7.5 +/-2.5 - Switzerland - Actual CA [A]: 10.7 - Cycl. Adj. CA [B]: 10.5 - EBA Norm [C]: 7.5 - EBA Gap [D=B-C]: 3.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.8 2.3 ... 2.3 +/-2 - Staff REER Gap: -1.5 +/-4 - Thailand - Actual CA [A]: 11.5 - Cycl. Adj. CA [B]: 11.2 - EBA Norm [C]: 1.2 - EBA Gap [D=B-C]: 10.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 5.0 5.0 ... 5.0 +/-2 - Staff REER Gap: -8.0 +/-3 - Turkey - Actual CA [A]: -3.8 - Cycl. Adj. CA [B]: -3.7 - EBA Norm [C]: -0.6 - EBA Gap [D=B-C]: -3.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -2.5 -0.5 -0.5 ... -0.5 +/-1 - Staff REER Gap: 11.3 +/-3.75 - United Kingdom - Actual CA [A]: -4.4 - Cycl. Adj. CA [B]: -4.1 - EBA Norm [C]: 0.0 - EBA Gap [D=B-C]: -4.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -2.5 -1.5 ... -1.5 +/-1.5 - Staff REER Gap: 7.5 +/-7.5 - United States - Actual CA [A]: -2.4 - Cycl. Adj. CA [B]: -2.3 - EBA Norm [C]: -1.3 - EBA Gap [D=B-C]: -1.0 - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -1.2 0.2 ... 0.2 +/-0.5 - Staff REER Gap: 15.0 +/-5 - Hong Kong SAR - Actual CA [A]: 4.6 - Cycl. Adj. CA [B]: 2.5 - EBA Norm [C]: ... - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 0.0 ... +/-1.5 - Staff REER Gap: 0.0 +/-5 - Singapore - Actual CA [A]: 19.0 - Cycl. Adj. CA [B]: 18.5 - EBA Norm [C]: ... - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): 5.5 ... +/-3 - Staff REER Gap: -11.0 +/-6 - Saudi Arabia - Actual CA [A]: -3.9 - Cycl. Adj. CA [B]: -3.7 - EBA Norm [C]: ... - Staff CA Gap (Total Norm Other Staff CA Gap Mid-point): -7.7 ... +/-2 - Staff REER Gap: 20.0 +/-5 - Discrepancy (weighted average sum of staff-assessed CA gaps): -0.07 (table shows “-0.07” under Discrepancy). ### D. Individual Economy Assessments — Selected country highlights (excerpted text) - Australia — Foreign asset and liability position and trajectory - NIIP: high negative NIIP, reaching -60 percent of GDP in 2016; varied between -40 and -60 percent of GDP since 1988. - Liabilities largely denominated in Australian dollars while assets are in foreign currency. - Foreign liabilities composition: around one quarter FDI, one half portfolio investment (principally banks borrowing abroad and foreign holdings of government bonds), and one quarter other investment and derivatives. - NIIP deteriorated in 2016 (by 1¾ percent of GDP relative to 2015), driven mainly by valuation effects, as CA deficit narrowed to -2.6 percent of GDP in 2016. - NIIP to GDP ratio expected to remain around -60 percent of GDP over the medium term. - Assessment: NIIP level and trajectory are sustainable. ES approach suggests NIIP stabilized near present levels with CA deficit between 2½-3 percent, close to the cyclically-adjusted CA deficit recorded in 2016. - Structure of external balance sheet reduces vulnerability: liabilities mainly in AUD and there is a net foreign currency asset position; nominal depreciation tends to strengthen external balance sheet; banking sector net foreign currency liability position is fully hedged. - Banking sector funding maturity improved; government strong balance sheet allows credible support in tail risk events. - Australia — Overall external position and potential policy responses - External position in 2016 assessed as moderately weaker than level consistent with fundamentals and desirable policies. - CA deficit narrowed in 2016 from prior year; narrowing reflects strong service exports, currency-commodity adjustment, increased resource exports from new capacities. - Australian dollar depreciated over 2014-15 and partly reversed since September 2015; remains some 15 percent below peaks observed in 2011-2013. - Potential policy responses: - If growth remains weak or commodity prices fall further, further monetary accommodation would be warranted. - Government’s planned gradual fiscal consolidation over the longer term should help improve current account by boosting national savings. - Australia — Current account details and assessment - Historical CA deficits average around 4 percent of GDP since early 1980s. - CA narrowed to -2.6 percent of GDP in 2016 due to currency depreciation effects, new resource export capacity, and improvement in terms of trade. - Medium-term deficit expected to widen slightly to around 3 percent of GDP as non-mining investment recovery progresses. - Assessment: EBA CA regression estimates CA norm of -1.5 percent of GDP with standard deviation of 0.7. Cyclically adjusted CA for 2016 estimated -2.0 percent of GDP → CA gap mid-point -0.5 percent of GDP. - Staff assessment CA gap range: -2 to 0 percent of GDP (accounting for temporary factors and expected reversal in non-mining business investment ratio). - Key risk: sharper slowdown in China affecting commodity prices. - Australia — Real exchange rate - REER depreciated by 17 percent between 2012 and 2015, appreciated by 1 percent in 2016 relative to 2015 average. - Compared to thirty-year average, REER some 14 percent higher. - Through May 2017, currency up 1.1 percent in real effective terms relative to 2016 average. - Assessment: staff assesses REER to be 0 to 10 percent above level implied by fundamentals and desirable policies. - Technical note: EBA estimated CA-to-REER elasticity 0.19; -1 percent of GDP mid-point CA gap under CA regression consistent with exchange rate overvaluation of around 5.4 percent in 2016. ES approach implies medium-term CA gap around ½ percent of GDP relative to NIIP stabilizing level of around -2.8 percent, translating into exchange rate overvaluation around 3.1 percent. EBA REER index regression and level regression provide gap estimates ranging from 4.1 to 16 percent in 2016. - Australia — Capital and financial accounts, FX intervention and reserves - Mining investment boom funded predominantly offshore; net FDI inflows partly offset reduced banking sector borrowing abroad. - Large inflows into bond markets given sound fiscal position and relatively high interest rate differentials. - Weighted average maturity of government bonds is 6.6 years; 90 percent of issue maturing by 2027. - Assessment: credible commitment to floating exchange rate and strong fiscal position limit vulnerabilities. - FX intervention and reserves: free-floater since 1983; brief but large intervention in 2007–08. Authorities strongly committed to floating regime; reserve needs for prudential reasons limited given hedged external liabilities. - Belgium — Foreign asset and liability position and trajectory - NIIP remains strong at 50 percent in 2016. - Gross foreign assets averaging 487 percent of GDP; banks’ gross foreign assets at 97 percent of GDP. - External public sector debt around 67 percent of GDP, predominantly denominated in euro. - Short-term debt accounted for 28 percent of total external debt in 2016. - Assessment: large gross positions bloated by corporate treasury units without creating macro-relevant mismatches; remaining risk exposures mainly financial sector claims and external public debt. - Projected NIIP to GDP ratio expected to increase gradually; strongly positive NIIP not raising sustainability concerns. - Belgium — Overall assessment and policy recommendations - External position in 2016 was weaker than implied by fundamentals and desirable policies. - Recovery in euro area and measures to improve competitiveness point to some strengthening in 2017, conditional on euro depreciation and policies not being reversed. - Strong NIIP mitigates vulnerabilities from high external public debt. - Potential policy responses: - Planned steady fiscal consolidation, reductions in labor taxes, and continued wage moderation. - Productivity-enhancing structural reforms in product and labor markets to address severe labor market fragmentation. - Belgium — Current account and REER - CA registered a small deficit in 2016 (0.4 percent of GDP), after a small surplus in 2015. - EBA model estimates cyclically adjusted CA of -0.5 percent of GDP and CA norm of 2.6 percent of GDP → CA gap of -3.2 percent of GDP for 2016. - Policy gaps contribution of -0.7 percent mainly from fiscal policy gap. - Staff assessment CA gap range: -4¼ to –2¼ percent of GDP. - REER: ULC-based REER depreciated by almost 3 percent between 2013 and 2016; CPI-based REER depreciated by 2.9 percent since end-2013. - Staff assessment REER gap for 2016: 5 to 10 percent overvaluation. - Belgium — Capital and financial accounts, FX intervention and reserves - Short-term debt about 39 percent of external liabilities; capital account open. - Assessment: exposed to financial market risks, but strong NIIP reduces vulnerabilities. - Reserves: euro area reserves typically low relative to standard metrics; currency is free floating. Technical notes and table footnotes (selected) - 2017 REERs estimated based on data available as of June 15, 2017. - Staff adjustments column: Refers to the mid-point of the CA Gap. - Breakdown between norm and other factors (temporary or measurement errors) is approximate in some cases. - For Spain, the CA level reported is required to reduce NIIP by 5 percentage points of GDP annually; NFA stabilizing CA is -1.6 percent of GDP. - Discrepancy denotes weighted average sum of staff-assessed CA gaps. *Source: Fund staff estimates.* ### part valuation effects (on ### 2017-external-sector-report-individual-economy-assessments - part valuation effects (on ### Foreign asset and liability position and NIIP - NIIP hovered around -30 percent of GDP throughout 2011-15. - The NIIP is projected to gradually strengthen over the medium term to around -30 percent of GDP reflecting stable CA deficits (around 1-2 percent). - FDI accounts for about half of all liabilities. - External debt rose since the global financial crisis to about 37 percent of GDP and 300 percent of exports, presenting a source of risk. - While Brazil’s NIIP is comparable to that of its peers, the shift in composition of liabilities toward FX external debt over the last several years is a concern. - Short-term gross external financing needs are moderate at 8 percent of GDP annually over the medium-term. ### Overall Assessment (Brazil) - Brazil’s external position in 2016 was, on average, broadly consistent with medium-term fundamentals and desirable policies. - The REER appreciation during 2016 reflects both improved ToT and the positive market response to the new government’s reform agenda. - The current account deficit will likely gradually widen starting in 2017 as demand recovers after the end of a deep recession during 2015-16. ### Potential Policy Responses - Efforts to raise national savings are needed to provide room for a sustainable expansion in investment. - Fiscal consolidation, including from the new federal spending cap and social security reform, should contribute to boosting net public savings. - Structural reforms to reduce the cost of doing business would help strengthen competitiveness and attract more FDI rather than debt financing. - Foreign exchange intervention, including through the use of derivatives, can be appropriate to alleviate disorderly market conditions in the foreign exchange market. ### Current account — Background and assessment - The CA deficit narrowed further in 2016 owing in part to the continued drop in domestic demand, especially investment, and some improvement in ToT. - The CA deficit is down from 4.2 percent of GDP in 2014 to 1.3 percent in 2016 despite a neutral cyclically-adjusted fiscal stance. - The CA deficit is expected to increase slightly in 2017, and gradually widen to about 2 percent of GDP in the medium term as demand recovers. - Downside risks: declines in ToT and a sharp slowdown in trading partner growth. - Staff assesses the CA norm consistent with fundamentals and desirable policies in 2016 to range from -0.5 to -2.6 percent of GDP, primarily based on the external sustainability approach and considering structural breaks in the supply side of the economy. - With a cyclically-adjusted CA balance of -2.1 percent, the 2016 CA gap ranged between -1.5 and 0.5 percent of GDP. ### Real exchange rate (REER) — Background and assessment - The REER (INS) on average appreciated by 7 percent during 2016, after weakening by 16 percent during 2015. - The annual average ULC-based REER appreciated by some 5 percent during the first three quarters in 2016 relative to 2015. - As of May 2017, the REER has appreciated an additional 16 percent relative to the average for 2016, although the currency remains volatile due to lingering political uncertainties. - Staff’s assessment: the real was on average broadly consistent with the level implied by fundamentals and desirable policy settings in 2016, with a REER gap in the [-5, 15] percent range. ### Capital and financial accounts — flows and policy measures - Brazil continues to attract sizable capital flows, but their composition changed recently. - Equity liability flows remained strong while debt liabilities showed outflows. - Net DI fully financed the CA deficit (DI liabilities totaled 4 percent of GDP), partly supported by intercompany loans counted in DI liabilities. - Net portfolio debt liabilities, having exceeded 1 percent of GDP in previous years, turned to net outflows despite shrinking sovereign spreads and the positive reaction of markets to the new government’s reform agenda; nonresident holdings of sovereign debt have been gradually declining. - Interest differentials, still large despite recent monetary easing, should help to attract inflows. - Assessment: The composition of flows has a favorable risk profile; outflows on the liability side may pose some concerns, but this is tempered by a more stable outlook for credit risk. ### FX intervention and reserves — Background and assessment - Brazil has a floating exchange rate. - Since mid-2011, reserves have remained broadly stable. - The preannounced intervention program the central bank initiated in 2013 ended in March 2015. - Intervention in 2015 continued to rely on the use of FX swaps and repos, but was symmetric over the course of the year and generally more limited compared to previous years. - In 2016, as the currency strengthened, the BCB reduced the rollover rate of maturing FX swaps and started auctioning reverse FX swaps, significantly reducing its net forward position to 1.4 percent of GDP at end-2016 from over 5 percent of GDP at end-2015. - Brazil’s gross reserves remained broadly constant in 2016, at $365 billion, some 20 percent of GDP and 260 percent of short term debt at remaining maturity. - Assessment: The flexible exchange rate has been an important shock absorber. Reserves are adequate relative to various criteria including the IMF’s composite reserve adequacy metric (about 166 percent). - Recommendation: Authorities should aim to retain strong buffers and a net creditor FX position, with intervention limited to alleviating disorderly market conditions. ### Technical background notes (selected) - The real appreciated by about 20 percent vis-à-vis the US dollar from end 2015 to end 2016. - Import volumes fell by 8 percent in 2016 adding to a 14 percent decline in 2015. - Export volumes rose by 4 percent in 2016, after increasing by 8 percent in 2015. - Brazil currently runs a small oil deficit; in the short run, falling oil prices thus strengthen the CA, other things equal, while they depress the outlook for oil production in the medium term. The development of Brazil’s off-shore oil potential is no longer projected to contribute significantly to export growth in the medium term, as exploration and development plans to expand production over the medium term have been drastically cut back. - A significant slowdown in China, which remains Brazil’s most important export destination (19 percent), is a key external risk. - Estimates suggest a CA norm between -2.5 percent (EBA CA approach) and -1.2 percent (NIIP-stabilizing approach). Staff’s assessment of the CA norm ranges from -0.5 to -2.5 percent (from where a REER gap can be derived using an elasticity of 0.1). - The strong decline in proceeds from overseas borrowing by foreign incorporated subsidiaries of Brazilian parent companies—chiefly Petrobras—illustrates that the risk profile of these flows is more similar to that of portfolio debt flows than to other types of DI liabilities. *International Monetary Fund — 2017 External Sector Report: Individual Economy Assessments (Brazil, selected sections)* ### 0.6 percent of GDP. Staff adjusted the CA norm to take into ### 2017-external-sector-report-individual-economy-assessments - 0.6 percent of GDP. Staff adjusted the CA norm to take into ### Canada — Real exchange rate - Background: - The real effective exchange rate (REER) depreciated by 2 percent on an annual average basis between 2015 and 2016. - As of May 2017, the REER has depreciated further by 2.3 percent compared to the average for 2016. - Assessment: - Both the EBA REER index and level approaches point to the currency being undervalued, by 9.5 and 19.9 percent respectively in 2016. - Staff view: The REER approaches overstate the extent of undervaluation because they do not fully capture structural factors behind Canada’s export underperformance and the need to restore external competitiveness in non-resource sectors. - Consistent with the assessed CA gap, staff estimates that the real effective exchange rate is overvalued by about 2 to 10 percent relative to medium-term fundamentals and desirable policies. - Technical note: - The semi-elasticity of the CA with respect to the REER is estimated at 0.27. (footnoted in Technical Background Notes) ### Canada — Capital and financial accounts; FX intervention and reserves - Capital and financial accounts — Background: - The CA deficit in 2016 has been financed by net portfolio inflows (7.3 percent of GDP). - Non-resident investors mostly purchased corporate debt securities (44 percent of portfolio net inflows). - Foreign acquisition of Canadian equities and government debt securities stood at 51 and 5 percent, respectively. - In 2016 foreign direct investment recorded a higher net outflow of 2.1 percent of GDP (1.6 percent of GDP in 2015). - Assessment: - Canada has a fully open capital account. - Vulnerabilities are limited by a credible commitment to a floating exchange rate. - The government is running fiscal deficits in the order of 1 percent of GDP in the near term, with a strong and credible commitment to fiscal consolidation over the medium term. - FX intervention and reserves — Background: - Canada has a free-floating exchange rate regime, and has not intervened in the foreign exchange market since September 1998 (with the exception of participating in internationally concerted interventions). - Canada has limited reserves but its central bank has standing swap arrangements with the U.S. Federal Reserve and four other major central banks (it has not drawn on these swap lines). - Assessment: - Policies in this area are appropriate to the circumstances of Canada. - The authorities are strongly committed to a floating regime which, together with the swap arrangement, reduces the need for reserve holding. ### Canada — Technical Background Notes (selected) - Adjustment rationale for CA norm: - Adjustment is consistent with staff’s estimate of the CA in the medium-term macroeconomic framework and reflects key factors including: - The structural loss in trade competitiveness: a long period of low labor productivity growth and the appreciation of the Canadian dollar during the oil boom worsened external competitiveness, depressed business investment outside the energy sector, and led to a decline in productive capacity in the non-resource sector. - The EBA does not capture the increasing attractiveness of Canadian assets to overseas investors as a “safe haven”. - Note on REER explanatory variables: - The approach includes commodity terms of trade rather than oil prices as an explanatory variable, while Canada’s REER has mirrored movements in oil prices much more closely than its commodity terms of trade. ### China — Overall assessment and external position - Foreign asset and liability position — Background: - The net international investment position (NIIP) is positive but deteriorated to 16 percent of GDP at end-2016 after peaking at 33 percent of GDP in 2007. - Gross foreign assets were 58 percent of GDP by end-September 2016 and are dominated by foreign reserves. - Gross liabilities were 42 percent of GDP and mainly represent inward FDI. - Reserve assets fell to US$3.0 trillion by end-2016 (about 27 percent of 2016 GDP), from US$3.3 trillion at end-2015 (about 29 percent of 2015 GDP), due to net sales of reserve assets and valuation changes. - Assessment: - The NIIP-to-GDP ratio is expected to remain around current levels over the medium term, consistent with projected CA surpluses. - NIIP is not a major source of risk given large foreign reserves and FDI-dominated liabilities. - Capital outflow pressure may persist and reserves may fall further as the private sector seeks to accumulate foreign assets faster than non-residents seek to accumulate domestic assets. - Overall external position: - The external position in 2016 was moderately stronger compared with the level consistent with medium-term fundamentals and desirable policies. - The renminbi remained broadly in line with fundamentals and desirable policies. - Staff assesses the CA remains ½ to 2½ percent of GDP stronger than implied by medium-term fundamentals and desirable policies. ### China — Potential policy responses - To achieve a lasting balance in the external position the following priorities are highlighted: - Improve the social safety net. - SOE reform and opening markets to more competition. - Create a more market-based and robust financial system. - Attract more inward FDI, including by ensuring that foreign investors receive the same treatment as domestic investors. - Achieve a flexible, market-based exchange rate with a better communication strategy. - Continue moving toward a more market-based and transparent monetary policy framework; this may require use of foreign exchange reserves to smooth excessive volatility. ### China — Current account and REER - Current account — Background: - The CA surplus declined to 1.7 percent of GDP in 2016 (1.8 percent of GDP cyclically adjusted), about 1.0 percent of GDP lower than in 2015. - From a longer perspective the CA surplus has fallen substantially from about 10 percent of GDP in 2007. - Current account — Assessment: - The EBA-estimated CA gap narrowed to about 1.5 percent of GDP in 2016 from 2.4 percent in 2015. - Overall staff assesses the CA remains ½ to 2½ percent of GDP stronger than implied by medium-term fundamentals and desirable policies. - REER — Background: - In 2016, the average REER depreciated by about 5.1 percent relative to 2015, driven by the depreciation in the NEER (6.5 percent). - As of May 2017, the REER is 2.8 percent weaker relative to the average 2016 level. - REER — Assessment: - The EBA REER index regression estimates China’s REER to be 2.7 percent weaker than levels warranted by fundamentals and desirable policies in 2016, compared to 3.9 percent stronger in 2015. - Overall, staff assesses the REER to be broadly consistent with fundamentals and desirable policies, with the gap being in the range of -10 to +10 percent. - Technical notes: - The EBA REER Level model estimates a total REER gap of 6.3 percent, with identified policy gaps of 3.4 percent; however, the model fit is very poor for China. - Changing expectations about monetary and exchange rate policy, re-evaluation of the government’s reform agenda, or a desire by residents to diversify into foreign assets can trigger large changes in capital flows and exchange rate pressures. ### China — Capital and financial accounts; FX intervention and reserves - Capital and financial accounts — Background: - Financial account recorded net outflows of US$647.4 billion in 2015 and US$639.7 billion in 2016. - Substantially negative errors and omissions (2.0 percent of GDP) are included as capital outflows. - China’s capital account remains relatively closed de jure and authorities materially increased enforcement of existing measures to help reduce outflow pressure. - Assessment: - Over the medium term, capital control loosening consistent with exchange rate flexibility should carefully take into account domestic financial stability. - Further opening of the capital account is likely to lead to sizable gross flows in both directions; prioritizing the move to an effective float (while using foreign reserves to a limited degree to smooth excessive volatility) and strengthening domestic financial stability is recommended over substantial further liberalization. - Efforts should be stepped up to encourage inward FDI to generate positive growth spillovers from import of foreign technology and improving corporate governance standards. - FX intervention and reserves — Background: - After a long period of reserve accumulation, FX reserves declined in 2015 and 2016 by US$513 billion and US$320 billion, respectively, of which intervention accounted for about US$342 billion and US$448 billion. - FX intervention and reserves — Assessment: - Reserves stood at 105 percent of the IMF’s composite metric unadjusted for capital controls at end-2016 (down from 118 in 2015). - Relative to the metric adjusted for capital controls, reserves stood at 171 percent (down from 190 in 2015). - Given partial reversal of capital account liberalization, the capital account is considered partially open and reserves are assessed to be adequate. ### Euro Area — Overall assessment and NIIP - Foreign asset and liability position — Background: - The NIIP of the euro area fell to about -18 percent of GDP by end-2008, then improved to around -6 percent in 2016. - Gross positions in 2016: assets about 237 percent of GDP and liabilities about 243 percent of GDP. - Assessment: - Projections of continued current account surpluses suggest the NIIP-to-GDP ratio will continue to improve; the euro area is expected to become a net external creditor within the next few years, absent large valuation differences. - The region’s overall NIIP financing vulnerabilities appear low, though large net external debtor countries still bear greater risk of a sudden stop of gross inflows. ### Euro Area — External position, imbalances, and policy responses - Overall external position: - The external position of the euro area in 2016 was broadly in line with the level implied by medium-term fundamentals and desirable policies. - In 2017, the current account surplus is projected to shrink very slightly as the region’s economic recovery continues. - Imbalances at the national level remain sizeable and progress in reducing them is slow. - Potential policy responses: - Continued monetary accommodation to increase demand and lift inflation closer to the ECB’s medium-term price stability objective. - Country-level policies to address imbalances: strengthen private sector balance sheets, structural reforms to enhance productivity and competitiveness, and a more growth-friendly composition of national fiscal policies. - Countries with fiscal space should expand investment and promote structural reforms to raise potential and reduce their current accounts. - Countries without fiscal space should continue consolidating to reduce debt and increase buffers while undertaking desirable structural reforms. - At the regional level, expanding centralized investment schemes would support rebalancing. - A more balanced policy mix with priority institutional and structural reforms at the country level would better boost domestic demand and rebuild policy buffers, helping to reduce external imbalances. ### Euro Area — Current account - Background: - The current account balance for the euro area was 3.3 percent of GDP (cyclically adjusted 2.9 percent) in 2016. - Nearly all euro area countries are running current account surpluses (apart from Belgium, Cyprus, Finland, France, Greece, and Lithuania). - Drivers of improvements differ across countries; lower commodity prices provided a broad-based boost to euro area current accounts. - Assessment: - The EBA model estimates a CA gap of -0.2 percent of GDP for 2016, with a cyclically adjusted CA norm of (text ends). *International Monetary Fund — Individual Economy Assessments (excerpts from provided content)* ### 3.1 percent of GDP. The elevated norm reflects in partic ### Individual Economy Assessments — Euro Area, France, Germany, Hong Kong SAR ### Euro Area: Current account and CA gap - Elevated CA norm cited at 3.1 percent of GDP; the elevated norm reflects in particular demographics (population aging) and its impact on desirable saving. - Heterogeneity across countries: positive estimated gaps in some countries (e.g., Germany, the Netherlands) roughly equaling total of the negative estimated gaps for other countries (e.g., France, Italy). - Staff assesses the euro area CA gap to be in the range of -0.5 to 1.0 percent of GDP for 2016, leaving the underlying CA broadly consistent with the level implied by medium-term fundamentals and desirable policies. - Technical note: IMF EBA analysis covers 11 euro area members: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain. - When applying GDP-weighted aggregation for the euro area, the CA is corrected for reporting discrepancies in intra-area transactions; the CA of the entire euro area is about ½ percent of GDP less than the sum of the individual 11 countries' CA balances. ### Euro Area: Real exchange rate (REER) - Background: CPI-based REER appreciated by about 1.1 percent from 2015 to 2016; nominal appreciation about 3.3 percent. As of May 2017, the REER is down by about 1 percent relative to its 2016 average level. - EBA index REER model points to an overvaluation of about 2.4 percent in 2016; the level REER model suggests an undervaluation of about 4.5 percent. - Staff assessment: 2016 average REER broadly aligned, between an undervaluation of 5 percent and an overvaluation of 3 percent. - Large heterogeneity across member states: REER gaps ranging from an undervaluation of 10-20 percent in Germany to overvaluations of 5-20 percent in a number of small to mid-sized euro area member states. - Policy implication: need for net debtor countries to improve external competitiveness and for net creditor countries to boost domestic demand. ### Euro Area: Capital and financial accounts; FX intervention and reserves - Background: Mirroring the 2016 CA surplus, the euro area experienced net capital outflows, largely driven by portfolio debt and FDI outflows; tempered by inflows into portfolio equity and loans and other bank-related instruments. - Assessment: Capital outflows in portfolio debt and inflows into portfolio equity over the past couple years likely arose in large part from the ECB’s asset purchase program, which lowered yields on debt and spurred interest in equity. - FX intervention and reserves: The euro has the status of a global reserve currency. Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating. ### France: Overall assessment; foreign asset and liability position - NIIP deteriorated to around -16 percent of GDP by 2016Q4, mainly driven by increases in public sector liabilities (rising public debt held by foreigners). - TARGET2 liabilities small at €14 billion (0.6 percent of GDP) by end-2016. - Gross asset position over 300 percent of GDP in 2016; more than three-quarters of French bank exposures are to advanced economies; major emerging market exposures reach 4 percent of total foreign claims. - Public external debt and bank liabilities account for about respectively 19 and 40 percent of the gross liability position. - Assessment: NIIP negative but size and trajectory do not raise sustainability concerns; vulnerabilities due to external public debt and bank funding on the liability side. ### France: Current account (CA) and policy recommendations - Background: CA deteriorated from a surplus of almost 4 percent of GDP in the late 1990s to an estimated deficit of 1.0 percent in 2016; cyclically-adjusted deficit estimated at 1.7 percent of GDP. - Drivers: weakening goods balance, growing net secondary income deficits, declines in private net savings, increase in government deficits; 2016 exports particularly weak due partly to temporary factors (drop in tourism revenues, lower exports of grains and wine). - Projection: CA projected to deteriorate in 2017 to -1.3 percent of GDP, reflecting adverse effect of higher oil prices; medium-term projection is gradual move into balance as exports grow and fiscal deficit narrows. - Assessment: Staff assesses the 2016 cyclically-adjusted CA to be 1.8 to 3.8 percent of GDP below its norm. EBA model estimate that the cyclically-adjusted CA is about 2.8 percent of GDP weaker than the value consistent with fundamentals and desirable policy settings. - Potential policy responses: continued wage moderation (especially of the minimum wage), additional labor market reforms, productivity-enhancing measures (increasing competition in product markets and regulatory simplification), and gradual elimination of the fiscal deficit over the medium term. ### France: Real exchange rate - Background: REER (ULC and CPI bases) appreciated modestly in 2016, by about ½ percent compared to 2015. - EBA Level REER regression model estimates a 6.8 percent overvaluation; staff’s assessment of the CA gap implies REER overvaluation of about 8 to 14 percent using standard trade elasticities. EBA Index REER model estimates an undervaluation of -2.4 percent. - Staff assessment: REER is 8–14 percent overvalued, taking into account CA model fit, ULC evidence, and Level regression model. ### France: Capital and financial accounts; FX intervention and reserves - Background: Current account deficit has been financed mostly by debt inflows (portfolio and other investment); outward direct investment generally higher than inward investment. Flows in financial derivatives have grown sizably on both asset and liability sides since 2008. Capital account is open. - Assessment: France exposed to financial market risks but the structure of financial flows does not point to specific vulnerabilities. - FX intervention and reserves: The euro has the status of a global reserve currency. Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Germany: Foreign asset and liability position and trajectory - NIIP reached 52 percent of GDP in end-2016, about twice the 2011 level. - NIIP of financial corporations other than MFIs is large and positive (50 percent of GDP); general government NIIP large and negative (34 percent of GDP). - NIIP expected to reach 85 percent of Germany GDP and 3.5 percent of world GDP by 2021 as projected CA surplus remains sizable through the medium term. - Germany’s net (Target2) claims on the Eurosystem reached almost €857 billion in May 2017 (27 percent of GDP). - Assessment: With ECB quantitative easing, Germany’s exposure to the Eurosystem has widened again. ### Germany: Current account and policy recommendations - Background: CA surplus averaged 7.5 percent of GDP over the last five years and reached 8.3 percent of GDP in 2016 (0.3 p.p. decline relative to 2015). - Drivers: bulk of CA surplus reflects large saving-investment surpluses of non-financial corporations and households; rising net savings of non-financial corporations and fiscal consolidation account for upward trend. - Assessment: Cyclically-adjusted CA balance reached 8.5 percent of GDP in 2016; staff assesses it as 3–6 percentage points of GDP stronger than the value implied by fundamentals and desirable policies. - Staff assesses the CA norm at 2½–5½ percent of GDP, with a midpoint slightly lower than the EBA model’s implied 4½ percent. - Potential policy responses: more growth-oriented fiscal policy using fiscal space to stimulate potential growth, and pension reforms prolonging working lives to reduce savings, stimulate investment, and reduce external imbalances. ### Germany: Real exchange rate - Background: Yearly average CPI-based REER broadly unchanged relative to 2015; through May 2017 REER shows a very minor depreciation relative to the 2016 average. - Assessment: Staff’s assessment for 2016 is a REER undervaluation of 10–20 percent. - EBA REER Level model yields an undervaluation of about 18 percent; CA regression model using standard trade elasticities implies an undervaluation of 11–16 percent. - Technical note: Rapid aging contributes 3 percentage points to the estimated EBA CA norm of 4½ percent of GDP. ### Germany: Capital and financial accounts; FX intervention and reserves - Background: In 2016, net portfolio and other investment flows constituted about ½ and ⅓ of the capital and financial account balance, respectively. - On a regional basis, about 2/3 of the net outflows were toward European countries and 1/3 toward the Americas (mostly the U.S.), with small net inflows from emerging countries and offshore centers. - Assessment: Safe haven status and strength of Germany’s external position limit risks. - FX intervention and reserves: The euro has the status of global reserve currency. Reserves held by Euro area countries are typically low relative to standard metrics. The currency is freely floating. ### Hong Kong SAR: Overall assessment and NIIP - NIIP reached around 368 percent of GDP as of end-2016, up from 291 percent in 2010. - External financial assets about 1,425 percent of GDP and liabilities about 1,057 percent of GDP. - Projection: GDP share of the NIIP is projected to decline moderately, chiefly driven by the interest-growth differential, as nominal GDP expected to grow faster than effective returns on the NIIP. - Assessment: Vulnerabilities are low given size of NIIP and favorable composition, with large stock of reserve assets and more than half of total liabilities in the form of direct investment. - Overall assessment: External position in 2016 broadly consistent with medium-term fundamentals and desirable policy settings; developments through June 2017 do not suggest a change. - Policy prescription: Maintain wage and price flexibility, robust and proactive financial supervision and regulation, prudent fiscal management, flexible markets, and continuation of the Linked Exchange Rate System. *International Monetary Fund — Individual Economy Assessments (excerpt).* ### 4.6 percent of GDP in 2016 (2.5 percent of GDP after ### 2017-external-sector-report-individual-economy-assessments ### Hong Kong SAR — Current Account and External Position - CA surplus: 4.6 percent of GDP in 2016 (2.5 percent of GDP after cyclical adjustment). - Pre-GFC average CA: around 10 percent in 2000-08. - Private saving decline: from 34.4 percent of GDP in 2006 to 24.6 percent of GDP in 2014 and 2015. - 2016 CA drivers: - Favorable terms of trade shock from lower commodity prices: 1 percent of GDP. - Temporary surge in the primary income balance: contributing 1 percent of GDP to the cyclical adjustment. - CA projection: 3.0 percent of GDP in 2017. - Staff assessment: - Cyclically-adjusted CA is roughly in the mid-point of the CA norm range of 1 to 4 percent of GDP. - CA gap range: -1½ to 1½ percent of GDP. - Large decline in CA surplus (relative to pre-2010) driven by structural changes: weaker growth and rebalancing in mainland China and opening of the Mainland capital account; such changes not fully reflected in the EBA implied norm. ### Hong Kong SAR — Real Exchange Rate (REER) - REER appreciated by about 5 percent in 2016, relative to the average REER in 2015. - As of May 2017, the REER was about 4.2 percent stronger than its 2016 average. - Historical note: decade-long REER depreciation from 1998 to 2011; current REER broadly same as 2004-2005 (when CA surplus was above 10 percent of GDP). - Staff assessment: - Real exchange rate broadly consistent with medium-term fundamentals and desirable policies. - Exchange rate assessed to be from -5 to +5 percent different from the level consistent with medium-term fundamentals and desirable policies. ### Hong Kong SAR — Capital and Financial Accounts - Capital account: fully open without capital controls. - Financial flow dynamics: - Movements from sizeable inflows in 2015 to net outflows up to 2016: Q3. - Portfolio investment: large inflows in first half of 2016 to large outflows in Q3 2016. - Direct investment: inflows intensifying through Q3 2016. - Drivers: financial volatility in the Mainland transmitted through growing cross-border financial linkages and shifting expectations of a U.S. policy rate hike. - Staff assessment: - Large financial resources and proactive supervision limit risks from volatile capital flows. - Greater financial exposure to mainland China could pose risks if mainland growth slows sharply and financial stress emerges in key Mainland sectors (export-oriented manufacturing or real estate). - Credit risk appears manageable given high origination and underwriting standards. - Ongoing U.S. dollar appreciation will affect capital flow outlook in 2017 given linked exchange rate system. ### Hong Kong SAR — FX Intervention and Reserves - Currency arrangement: currency board arrangement (Linked Exchange Rate System). - Stock of reserves end-2016: equivalent to around 120 percent of 2016 GDP or just above US$386 billion. - Staff assessment: reserves adequate for precautionary purposes and should evolve with automatic adjustment of the currency board system. - Additional note: Hong Kong SAR holds significant fiscal reserves built through strong fiscal discipline. ### Hong Kong SAR — Technical Background Notes (selected) - Using EBA estimated coefficients applied to Hong Kong SAR yields a cyclically-adjusted CA about 10 percent of GDP weaker than that consistent with fundamentals and desirable policies; CA gap mainly driven by EBA regression residual (about 12 percent of GDP) with policy gap around 2 percent of GDP. - Structural factors accounting for differences: - Structural decline in transport services balance tied to reduced re-exporting to/from China. - Structural reversal of Hong Kong SAR’s gold trade balance tied to opening of Precious Metals Depository. - Adjustments and considerations lead staff to estimate the CA gap close to zero, corresponding to a norm in the range of 1 to 4 percent of GDP. - Financial linkages with Mainland as of 2016: Q2 — banking system claims on mainland banks and nonbank entities amounted to HK$ 6.1 trillion, or about 250 percent of 2015 GDP (part of exposure accounted by foreign banks). *Source: 2017External Sector Report — Individual Economy Assessments (selected extracts)* ### India — Overall Assessment and External Position - NIIP evolution: from -18.5 percent of GDP at end FY2013/14 to -17.0 percent of GDP at end-2016. - Gross foreign assets and liabilities: 25 and 42 percent of GDP, respectively. - External debt: about 21 percent of GDP. - Share of long-term external debt: about 82 percent. - Short-term external debt to FX reserves: ratio is low (exact numeric ratio not provided in text). - Staff assessment: - With CA deficits under 2¼ percent of GDP projected for the medium term and rising GDP growth, NIIP-to-GDP ratio expected to remain broadly stable. - External debt moderate; maturity profile favorable. ### India — Overall External Sector Assessment and Risks - Assessment: external sector position in 2016/17 broadly consistent with medium-term fundamentals and desirable policy settings. - Justification for CA deficits: low per capita income, favorable growth prospects, development needs. - Risks: intensified global financial volatility, faster-than-anticipated monetary normalization in advanced economies, longer-than-expected cash normalization following the currency exchange initiative, slower global growth. - Policy priorities: - Increase non-debt creating capital flows through FDI to improve CA financing mix. - Revamp business climate and ease domestic supply bottlenecks to attract FDI and boost exports. - Proceed cautiously with further liberalization of ECBs and carefully monitor corporate vulnerabilities. - Continue fiscal consolidation, implement goods and services tax and subsidy reforms. - Safeguard financial stability and enhance financial sector’s ability to contribute to growth. ### India — Current Account - CA deficit: 0.7 percent of GDP in FY2016/17 (slightly lower than FY2015/16). - Exports: after a decline of 15.9 percent in FY2015/16, exports of goods have recently rebounded. - Medium-term CA expectation: expected to widen to under 2¼ percent of GDP. - EBA CA regression norm: -4.2 percent of GDP for India in FY2016/17 (subject to uncertainty). - Staff judgment on appropriate norm given volatility risks: about 2½ percent of GDP. - EBA-estimated cyclically adjusted CA deficit: 1.1 percent of GDP. - Temporary part of terms of trade gain: about ½ of one percent of GDP (Technical note 3/). - Underlying CA deficit in FY2016/17: 1.4 percent of GDP. - CA gap range: -0.2 to +1.8 percent of GDP. ### India — Real Exchange Rate (REER) - REER movements: - Average REER in 2016 appreciated by about 3 percent over 2015 average. - As of May 2017, REER appreciated a further 7.2 percent relative to its 2016 average. - EBA estimates: - EBA Index REER gap: about +7.2 percent for 2016 average REER. - Level REER regression gap: about +12.6 percent for 2016 average REER. - Staff assessment: - Gap assessed to be smaller due to positive terms of trade shocks not fully captured by model. - CA gap implies a REER gap of -4.4 percent for FY2016/17. - Overall staff REER gap range: -5 to +10 percent. ### India — Capital and Financial Accounts - Sum of FDI, portfolio, and financial derivatives flows (net): about 2.3 percent of GDP in FY2016/17. - Net FDI flows: increased to 1.6 percent of GDP in FY2016/17 from 1.2 percent in FY2013/14. - Portfolio investment and financial derivatives largely offset other investment flows on net basis. - Debt flows / ECBs: stabilized after increasing in recent years. - 2016 RBI policy: allowed infrastructure companies and infrastructure-related finance and investment companies to raise ECB with minimum average maturity period of 5 years, subject to 100 percent hedging. - Staff assessment: - Need to attract more stable sources of financing. - Further initiatives to improve business environment (labor market and power sector reforms) necessary to attract greater FDI. ### India — FX Intervention and Reserves - International reserves: increased by $32 billion since January 2016 to reach $381 billion as of early-June 2017. - Reserve coverage: currently about 16.6 percent of GDP, and about 8.0 months of prospective goods and services imports. - Reserves represent 176 percent of short-term debt and 156 percent of the IMF’s composite metric. - Staff assessment: reserve levels adequate for precautionary purposes. - Technical note: Reserves stand at 191 percent of the metric adjusted for capital controls (discussion of appropriateness in technical notes). *Source: 2017External Sector Report — Individual Economy Assessments (selected extracts)* ### Indonesia — Overall Assessment and External Position - NIIP at end-2016: -34½ percent of GDP, compared to -43¾ percent of GDP at end-2015 and -39¼ percent at end-2012. - Drivers of improvement: disclosure of external financial assets held by residents under tax amnesty program. - Gross external assets at end-2016: 31¾ percent of GDP (close to 40 percent being reserve assets). - Gross external liabilities at end-2016: 66¼ percent of GDP. - Gross external debt at end-2016: 34 percent of GDP, with 17½ percent of external debt denominated in rupiah. - Government external debt: about 17 percent of GDP at end-2016, about one-third denominated in rupiah. - Nonresident holdings of rupiah-denominated government bonds: 39 percent share of total stock (or 6 percent of GDP) at end-May 2017. - Staff assessment: NIIP and gross external debt indicate sustainable external position, but vulnerability exists from large share of foreign portfolio holdings. ### Indonesia — Overall External Sector Assessment and Policy Responses - 2016 external position assessed as broadly consistent with medium-term fundamentals and desirable policies. - Low commodity prices and weak trading partner demand offset by import compression. - Recovery of commodity prices and relatively low projected world oil prices should help contain CA deficit. - Policy recommendations: - Continued exchange rate flexibility and market-determined interest rates. - Monetary policy focused on containing inflation within Bank Indonesia’s target band. - Fiscal policy: fiscally-neutral reform emphasizing social and health spending while keeping overall deficit within statutory limit over medium term. - Ease trade and investment restrictions, bolster infrastructure, and deepen financial markets to strengthen resilience. ### Indonesia — Current Account - CA deficit: 1.8 percent of GDP in 2016 (improved from peak of 3.2 percent in 2013). - Drivers: - Decline in commodity exports largely offset by lower imports due to low oil prices and cyclical weakness in investment. - Exports and imports started to pick up in Q4:2016 as commodity prices bottomed out. - Medium-term outlook: moderate increase in CA deficit expected from rise in capital goods and raw material imports tied to infrastructure investment and pickup in domestic demand; manufacturing export increase and stronger trading partner demand should help limit deficit. - EBA CA model: - Estimated cyclically-adjusted CA balance: -0.9 percent of GDP. - Norm: -0.9 percent of GDP. - Staff believes a norm of -1.9 percent to 0.1 percent of GDP is appropriate. - Implied CA gap range: about -1 percent to 1 percent of GDP for 2016. ### Indonesia — Real Exchange Rate (REER) - REER movement: compared to 2015 average, average REER appreciated by 4.1 percent in 2016. - Drivers of appreciation: slight NEER appreciation (by 1 percent) and relatively higher inflation rate than trading partners. - As of May 2017: REER had appreciated by about (text truncated in source). *Source: 2017External Sector Report — Individual Economy Assessments (selected extracts)* ### 2.4 percent relative to 2016. ### 2017-external-sector-report-individual-economy-assessments - 2.4 percent relative to 2016. ### Indonesia — Assessment and External Accounts - REER gap estimates for 2016: - EBA index and level REER results point to an REER gap of about -1.1 percent to 3.7 percent for 2016. - Staff’s REER gap assessment: range of -5 percent to 5 percent (based on the CA assessment and estimated elasticities). - Capital and financial accounts (2016): - Net capital and financial account inflows: 3.0 percent of GDP. - Net FDI inflows: 1.7 percent of GDP. - Net portfolio inflows: 2.0 percent of GDP. - Net other investment inflows: -0.7 percent of GDP (private sector deleveraging). - Assessment of flows and policies: - Net and gross financial flows have been steady since the global financial crisis with some short periods of volatility. - Narrower current account deficit and strengthened policy framework, including exchange rate flexibility since mid-2013, have helped reduce capital flow volatility. - Continued strong policies focused on strengthening the fiscal position, keeping inflation in check, and easing supply bottlenecks would help sustain capital inflows in the medium term. - FX intervention and reserves (end-2016 and mid-2017): - End-2016 reserves: US$116.4 billion (equal to 12.5 percent of GDP, about 130 percent of IMF’s reserve adequacy metric, and about 8 months of prospective imports of goods and services). - End-2015 reserves: US$105.9 billion. - Contingencies and swap lines: amounting to about US$81½ billion are in place. - Assessment: volatile capital flows could cause reserves to decline significantly; current level of reserves (US$125 billion at end-May) should be sufficient to absorb most shocks, with predetermined drains manageable. - Policy guidance: intervention should aim primarily at preventing disorderly market conditions, while allowing the exchange rate to adjust to external shocks. ### Italy — Overall Assessment, Current Account, REER, and Policy Responses - Foreign asset and liability trajectory: - NIIP evolution: -6 percent of GDP at end-2000 → about -25 percent of GDP in 2013 → around -15 percent of GDP in end-2016. - Gross assets: 149 percent of GDP in end-2016. - Gross liabilities: 164 percent of GDP in end-2016. - Changes since 2000: assets and liabilities up by 51 and 59 percentage points respectively. - TARGET2 liabilities: rose from 15 to 25 percent of GDP between end-2015 and May 2017. - External debt: represents about ¾ of gross external liabilities; half is owed by the public sector. - Overall assessment: - 2016 external position: in the upper range of moderately weaker than suggested by medium-term fundamentals and desirable policy settings. - Staff assessment: REER weakening would be required to support stronger growth and reduce unemployment and public debt while strengthening the external balance sheet. - Potential policy responses: - Strong implementation of structural reforms, including improving wage bargaining to align wages with productivity at the firm level. - Strengthen bank balance sheets. - Progress in fiscal consolidation to help narrow the external gap and maintain investor confidence. - Current account (CA) background and assessment: - CA averaged a deficit of 1¼ percent of GDP in the decade after euro adoption; moved into balance starting 2013. - 2016 CA: surplus of 2.6 percent of GDP (compared to 1.4 percent of GDP in 2015). - Trade surplus: 3.6 percent of GDP in 2016. - Drivers of improvement since 2010: declining investment accounted for ⅔ of improvement; higher public saving contributed most of the rest. - EBA cyclically-adjusted CA: 1.5 percent of GDP in 2016, about 2.5 percent of GDP below the EBA norm implied by fundamentals and desirable policy settings. - Staff CA gap assessment: about -3 to -1 percent of GDP for 2016. - Real exchange rate (REER): - CPI-based REER appreciated about 1 percent from 2015 to 2016; ULC-based REER appreciated about 0.4 percent. - Longer-term REER appreciation since joining the Euro area: about 0 to 10 percent using price-based REER indices. - As of May 2017, REER unchanged relative to 2016 average. - EBA REER regression estimates for 2016: - EBA Level REER model: -3.1 percent gap. - EBA Index REER model: -0.2 percent gap. - CA regression method implies an overvaluation of about 10 percent. - ULC-based indicators point to sizable wage-productivity differentials; staff assesses an REER gap of 6–12 percent. - Capital and financial accounts: - Financial account posted net outflows of about 3 percent of GDP in 2016, largely reflecting residents’ net purchases of foreign assets. - Assessment: vulnerability to market volatility due to large refinancing needs of sovereign and banking sectors and high stock of NPLs. - FX intervention and reserves: - Background: the euro is a global reserve currency. - Assessment: reserves held by the euro area are typically low relative to standard metrics; the currency is free floating. ### Japan — NIIP, Current Account, REER, and Policy Measures - NIIP and trajectory: - NIIP increased from 55 to 61 percent of GDP between 2011 and 2016. - Assets: 164 percent of GDP in 2016. - Liabilities: 103 percent of GDP in 2016. - Medium-term projection: NIIP projected to rise to about 85 percent of GDP with CA surpluses before gradually stabilizing due to population aging. - NIIP generated net annual investment income of 3.4 percent of GDP in 2016. - Overall assessment: - 2016 external position: moderately stronger than the level consistent with medium-term fundamentals and desirable policies. - Policy recommendation: continued accommodative BoJ stance to reflation needs to be accompanied by bold structural reforms and a credible medium-term fiscal consolidation plan. - Potential policy responses: - Measures to boost wages and labor supply, reduce labor market duality, enhance risk capital provision, and accelerate agricultural and services deregulation. - Fiscal consolidation should proceed gradually and be anchored by a concrete medium-term target, tuned to economic conditions. - Current account: - CA was about 2 percent of GDP in 2011, about 1 percent in 2012-14. - 2016 CA: 3.8 percent of GDP (from 3.1 percent in 2015); improvement driven by goods trade balance (~1.2 percent of GDP). - Exports of goods as share of GDP decreased in 2016 to 12.9 percent; imports of goods decreased to 11.8 percent of GDP. - Income balance accounted for 89 percent of the current account surplus in 2016. - EBA-based adjustments and staff assessment: - EBA cyclically-adjusted CA for 2016: 3.1 percent of GDP, adjusted to compute underlying cyclically-adjusted CA of 3.3 percent of GDP. - EBA 2016 CA norm: 3.4 percent of GDP (standard deviation of estimated CA norm is 1.8 percent). - Staff adjusts norm to 1.3-3.3 percent of GDP to reflect structural reforms and other factors. - Underlying CA gap in 2016 assessed at 0.0-2.0 percent of GDP, midpoint estimate 1.0. - 2017 surplus expected to rise to about 3.9 percent of GDP under current policy mix. - Real exchange rate (REER): - REER appreciated 13.3 percent between 2015 and 2016. - As of May 2017, REER depreciated 3.9 percent relative to its 2016 average. - EBA REER Level model estimates 2016 average REER to be 11.3 percent weaker; EBA Index REER model: 20.9 percent weaker than level consistent with fundamentals and desirable policies. - Due to model omissions, the EBA REER model is not used in Japan’s assessment. - Using staff-assessed CA gap range and a semi-elasticity of 0.14 yields an indicative REER gap range of -14 to 0 percent (midpoint of 7 percent). - Overall assessment: REER broadly in line with medium-term fundamentals and desirable policies. - Capital and financial accounts: - Portfolio outflows continued during most of 2016; institutional investors continued to diversify overseas and FDI outflows continued. - Net long yen positions prevailed during most of 2016 but turned net short in December; positions have eased recently. - Assessment: vulnerabilities limited; inward investment tends to be equity-based; no large spillovers from YCC to other economies observed. - FX intervention and reserves: - Reserves about 24 percent of GDP (legacy accumulation). - No FX intervention in recent years; interventions are isolated (last in 2011) to reduce short-term volatility and disorderly movements. - Assessment: exchange rate is free floating. ### Korea — NIIP, Current Account, and Policy Recommendations - NIIP and external position: - NIIP turned positive in 2014 and continued to rise; end-2016 NIIP: 20 percent of GDP. - Gross liabilities: 68 percent of GDP; 27 percent was gross external debt. - Assessment: positive NIIP strengthens external sustainability and should increase further as CA remains in surplus. - Currency mismatch risks reduced: short-term external liabilities of banks declined back below pre-crisis levels; bulk of short-term external debt in non-financial sector held by exporters who typically hedge. - Overall assessment: - 2016 external position: in the upper portion of stronger than warranted by medium-term fundamentals and desirable policies, reflecting excessive saving (including precautionary) and relatively weak private investment. - Developments as of May 2017: point to a further decline in the CA surplus in 2017 though it is expected to remain large without strong fiscal support and well-targeted structural measures. - Potential policy responses: - Significantly more expansionary fiscal policy to boost domestic demand in the short and longer run, given available fiscal space. - Structural policies to facilitate rebalancing toward services and boost domestic demand, including strengthening the social safety net to lessen precautionary savings incentives and addressing investment bottlenecks. - Exchange rate should remain market determined, with intervention limited to addressing disorderly market conditions. - Current account (2016): - CA surplus: 7.0 percent of GDP in 2016. - Surplus remained significantly above its 5-year average as savings increased and share of investment in GDP declined. - CA surplus fell 0.7 percentage point in 2016, reflecting temporary and structural factors and policies; shipping services exports lost competitiveness and fell. *International Monetary Fund — 2017 External Sector Report: Individual Economy Assessments (excerpts).* ### 0.5 percentage point of GDP in 2016. An ### 2017-external-sector-report-individual-economy-assessments - 0.5 percentage point of GDP in 2016. An ### Korea — Overall assessment and external position - 2016 cyclically adjusted CA surplus (EBA model): 6 percent of GDP. - 2016 cyclically adjusted EBA CA norm: 1.7 percent of GDP. - Adjustment for net retained earnings on equity investments reduces CA gap by about ¾ percent of GDP. - Staff estimate of CA gap midpoint (including adjustment): 3.6 percent of GDP with a range of 1½–5½ percent of GDP (based on EBA standard deviation). - Assessment places the CA gap in the upper portion of the stronger-than-warranted range of 2 to 4 percent. - Key identified policy gap contributor: tighter-than-desired fiscal policy and relatively low social spending → smaller social safety net → higher precautionary savings and larger CA surplus. - Policy implication: To durably reduce the CA surplus, a significantly more expansionary fiscal policy is needed using Korea’s ample fiscal space. ### Korea — Real exchange rate (REER) - Background: REER appreciated gradually since 2013 until 2016, when REER depreciated by 2.3 percent relative to its 2015 average on a trade-weighted basis. - REER appreciated by 3 percent in 2017 (first quarter average vs. 2016 average). - EBA REER regression estimates: gaps of –16.6 percent (EBA Level REER model) and -1.5 percent (EBA Index REER model). - CA regression direct approach implies a REER gap of 10 percent (used as mid-point). - Staff assessment for 2016: REER is 5 to 15 percent below the level consistent with fundamentals and desired policies (range reflects high uncertainty). ### Korea — Capital and financial accounts; FX intervention and reserves - Net capital outflows: 2016 = 7 percent of GDP (2015 = 8 percent of GDP). - 2016 pattern: larger outward FDI and portfolio outflows by residents balanced by renewed portfolio and other investment inflows by non-residents. - Assessment: Present configuration of net and gross capital flows appears sustainable over the medium term; Korea has absorbed short-term capital-flow volatility of magnitudes observed over recent years. - FX reserves: In 2016, reserves increased by $3 billion and stood at 26.3 percent of GDP; forward position declined by $12 billion (0.84 percent of GDP). - Intervention: Two-sided since early 2015; intervention appears limited to smoothing excessive volatility since 2015. - Reserves adequacy: Foreign exchange reserves were around 120 percent of the IMF’s composite reserve adequacy metric at end 2016. --- ### Malaysia — Overall assessment and external position - NIIP averaged around 1¾ percent of GDP since 2010; in 2016 NIIP was about 5¼ percent of GDP (2015: 8¾ percent of GDP). - Total external debt: 67½ percent of GDP in 2017:Q1 (2016: 69 percent of GDP); about 70 percent in foreign currency and 45 percent in short-term debt. - NIIP expected to rise gradually over the medium term reflecting projected moderate CA surpluses. - Assessment: Balance sheet strength and exchange rate flexibility support resilience to shocks; staff assesses FX reserves to be adequate. ### Malaysia — Current account - CA surplus decline since 2010: about 7½ percentage points to 2.4 percent of GDP in 2016 (2015: 3 percent of GDP). - Drivers: decline mainly from lower goods account surplus; national saving declined while investment rose. - 2017 projection: CA surplus projected at 1¾ percent of GDP. - EBA estimates: 2016 CA norm at 1.1 percent of GDP; 2016 cyclically-adjusted CA about 3.6 percent of GDP → EBA CA gap about 2½ percent of GDP. - Staff assessment (country-specific adjustments): 2016 CA gap at slightly above 2¼ percent of GDP (±1 percent of GDP). - Identified policy gaps account for one-half of the CA gap; EBA cyclical adjustments for commodity terms of trade do not fully capture decline in commodity export weights. - Policy recommendation: Macroeconomic policy adjustments, including exchange rate flexibility, and structural policies; planned fiscal consolidation should be accompanied by further improvements in social protection (including introduction of an unemployment insurance system) and higher public healthcare spending; address structural bottlenecks (labor market frictions, low female participation, weak education quality) and improve physical infrastructure to support private investment and productivity. ### Malaysia — Real exchange rate (REER) - Background: REER depreciated by 4 percent in 2016 relative to 2015; as of May 2017, REER had depreciated by about 3.0 percent relative to its 2016 average. - EBA REER models estimate REER to be 26.4–34.6 percent below warranted level by fundamentals and desirable policies. - Staff assessment: Consistent with assessed CA gap, REER gap for 2016 was about –8 percent (± 3½ percent). - Note: Usual macro stresses associated with undervaluation (high inflation, wage pressure, FX reserve build up) are absent. ### Malaysia — Capital and financial accounts; FX reserves - Financial account: 2016 small deficit of about 0.1 percent of GDP (2015: nearly 5 percent deficit; 2014: 7¼ percent deficit). - Net direct investment turned positive for the first time in a decade in 2016. - Policy actions: Since late 2016, Bank Negara Malaysia announced measures to develop the onshore FX market; net portfolio inflows returned in April 2017. - Assessment: Macroeconomic policy adjustments should remain central to responding to capital flow volatility; authorities should keep FX market measures under review. - Foreign reserves: 2016 reserves = US$94.6 billion (2015: US$95.3 billion); reserves at US$98 billion in May 2017. - Reserve adequacy: Under IMF composite metric (classified as “other managed”), end-2016 adequacy was about 80 percent of the metric; under “floating” metric, reserves would be 115 percent of the metric. Staff assesses FX reserves to be adequate but notes reserves could be deployed in disorderly market conditions and could be accumulated when opportunities present while considering needed real exchange rate adjustments. --- ### Mexico — Overall assessment and external position - NIIP in 2016: -46.1 percent of GDP (gross foreign assets 55.6 percent and liabilities 101.7 percent of GDP); NIIP was -41.0 percent in 2010. - Portfolio liabilities: 42.5 percent of GDP (around one fourth holdings of local-currency government bonds). - Estimated outstanding federal government FX liabilities in 2016: 8 percent of GDP (77 percent in US-dollars, 15 percent in euro, 6 percent in yen). - NIIP to GDP projected path: 2017 = -44.9 percent of GDP; 2022 ≈ -40 percent of GDP. - Assessment: NIIP sustainable but large gross foreign portfolio liabilities could be a vulnerability to global financial volatility; significant peso weakening could complicate policy via balance sheet exposures. ### Mexico — Overall external assessment and policy implications - 2016 external sector position: broadly consistent with medium-term fundamentals and desirable policies. - 2016 REER: average REER was 13 percent weaker than 2015 average. - Staff notes limited benefits to external position from peso depreciation given risks of rising protectionism in key trading partners. - Policy recommendations: Further structural reforms to improve competitiveness and strengthen non-oil exports; authorities committed to reducing public sector borrowing requirement from 4.6 percent of GDP in 2014 to 2.5 percent of GDP in 2018 (2015 and 2016 targets met); central bank targets inflation near 3-percent target; free-floating exchange rate with occasional FX intervention; FCL provides added buffer. ### Mexico — Current account - 2016 CA deficit: 2.7 percent of GDP (2015: 2.9 percent of GDP). - Drivers: deterioration in hydrocarbons balance offset by stronger non-hydrocarbon goods and services balances and increased remittances. - Cyclically-adjusted CA deficit: estimated at 2.0 percent of GDP. - EBA: cyclically-adjusted CA norm of -1.9 percent in 2016 → CA gap of -0.1 percent of GDP in 2016. - Staff assessment: CA gap between -1 and 1 percent of GDP. ### Mexico — Real exchange rate (REER) - 2016 average REER 13 percent weaker than 2015 average. - As of May 2017, REER appreciated by 0.6 percent relative to 2016 average. - EBA level REER regression: undervaluation of 16.9 percent in 2016. - EBA index approach: undervaluation of 30.7 percent. - External sustainability approach: marginal overvaluation by 1 percent. - Staff assessment: REER undervalued in the range of 5 to 15 percent (under baseline where protectionism risk do not fully materialize); undervaluation would reverse if protectionism risks dissipate. ### Mexico — Capital and financial accounts; FX intervention and reserves - 2010–14: large share of inflows went into locally-issued government paper and other portfolio investments. - 2015–16: gross portfolio inflows slowed and there were net outflows from local currency government paper in early 2016, reversed later in 2016. - Outlook: structural reforms expected to lead to higher FDI; portfolio inflows unlikely to return to previous high growth rates. - Assessment: Long duration of sovereign debt and high share of local currency financing reduce depreciation exposure; banking sector well capitalized and liquid; non-financial corporate debt levels low and FX risks well covered. Presence of foreign investors leaves exposure to capital flow reversals. - Authorities refrain from capital flow management measures. - FX reserves: end-2016 FX reserves = US$178 billion (17.0 percent of GDP) — unchanged from end-2015. - February 2017: Foreign Exchange Commission announced FX hedging program enabling up to US$20 billion of non-deliverable forwards (maturity up to 12 months, settled in pesos); first auction US$1 billion in early March 2017. - Reserve adequacy: reserves at 118 percent of the ARA metric and 270 percent of short-term debt (at remaining maturity); assessed as adequate for normal times. - FCL arrangement: effective complement to reserves, providing protection against global tail risks. --- ### Netherlands — Overall assessment and current account - NIIP reached 76 percent of GDP at end 2016. - Increase chiefly reflects net FDI position which rose from 566 billion in 2010:Q1 to 741 billion at end 2016. - Claims on the Eurosystem (Target 2 balances) increased since 2014 to reach €87bn by 2016 (12.5 percent of GDP), still below the 2011-2012 peak. - Assessment: External position in 2016 was stronger than level consistent with medium-term fundamentals and desirable policies; Netherlands’ safe haven status and sizeable foreign assets limit risks from large foreign liabilities. - Policy recommendations to support domestic demand and reduce external imbalances: - Use available fiscal space to support the recovery and boost potential growth. - Adopt structural reforms to raise productivity of small domestic firms. - Progress in repairing household balance sheets and strengthening the banking system. - Shift towards more domestic productive investment as Dutch and global economies recover. ### Netherlands — Current account background (selected) - Current account estimated to have stabilized at 8.4 percent of GDP in 2016 (8.5 percent cyclically adjusted). - Rebound in net primary income (investment income) offset a decline in the trade balance by 0.7 percentage points. *Source: https://www.imf.org/-/media/files/publications/pp/2017/2017-external-sector-report-individual-economy-assessments.pdf* ### 11.3 percent of GDP. Beyond 2016, the CA su ### 11.3 percent of GDP. Beyond 2016, the CA su ### Current account developments and drivers - The current account (CA) surplus was 11.3 percent of GDP. - Beyond 2016, the CA surplus is projected to decline in line with the trade balance, as: - a lackluster foreign environment and lower gas production due to earthquakes in extraction areas dampen exports, and - robust domestic demand tends to boost imports. - The current account has been in surplus since 1981—a reflection of a positive goods and services balance—and until 2000 was mainly driven by household savings. - Since 2001, non-financial corporate net savings have progressively taken over as the main driver of current account surpluses, with large and global corporate savings financing substantial FDI outflows. - Household savings have nonetheless also increased as a result of deleveraging following the sharp declines in housing prices starting in mid-2008 as well as an increase in mandatory contributions to the second-pillar pension funds. - Netherland’s status as a trade and financial center and natural gas exporter also likely plays a role to account for the strong structural position. ### Assessment of the current account gap - As the current account surplus essentially reflects the high corporate savings and liquidity of Netherlands-based multinationals, partly due to some favorable tax treatment for corporate income, as well as more recent but possibly long lasting increases in household saving rates following the sharp decline in real estate prices and financial difficulties of the pension funds, the assessment of the EBA estimated current account gap is particularly uncertain. - Taking these factors into account, staff assesses: - the norm in a range of 5–7 percent of GDP, and - a corresponding CA gap of 2–4 percent of GDP. - In the medium to long term, the CA surplus is likely to decline, supported by: - a recovery in domestic demand, - progress in household deleveraging, - declining gas exports, and - demographic trends, including divestment by pension funds. ### Real exchange rate — Background - Following a year and a half long depreciation trend (that primarily followed the euro depreciation) the CPI-based REER started to appreciate again from May 2015 on. - In April 2017 the REER was 1.2 percent above its April 2015 trough. ### Real exchange rate — Assessment - The 2016 EBA REER gaps range from -3.0 percent (index) to -13.2 percent (level), exclusively attributable to unexplained residuals. - The REER elasticity approach to the current account would imply an undervaluation of 6 to 12 percent (relying on an elasticity of *Source: 2017 external sector report — individual economy assessments (excerpt).* ### 0.33 and a current account gap of 2 to 4 pe ### 2017-external-sector-report-individual-economy-assessments - 0.33 and a current account gap of 2 to 4 pe ### The Netherlands - Real effective exchange rate (REER) - Staff assesses that the REER remained undervalued by around 9 percent within a range of 6–12 percent. - Current account (CA) - EBA-estimated CA gap in 2016 widened by 0.8 percentage point to 3.2 percent of GDP (unexplained residual plus contribution of identified policy gaps). - Cyclically adjusted CA surplus rose from 8.3 to 8.5 percent of GDP; CA norm fell slightly from 5.9 to 5.3 percent of GDP. - Capital and financial accounts - Net FDI and portfolio outflows dominate the financial account. - FDI outflows driven by investment of corporate profits abroad; on average, gross FDI outflows largely match corporate profits. - The strong external position limits vulnerabilities from capital flows; financial account likely to remain in deficit as corporate sector invests abroad. - FX intervention and reserves - Background: the euro is a global reserve currency. - Assessment: reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. - Uncertainty notes - Larger external balance sheet, presence of large international corporations, and measurement issues add uncertainty. According to DNB, half of positions in assets and liabilities are attributable to subsidiaries of foreign multinationals. ### Poland - Foreign asset and liability position and trajectory - NIIP broadly stable around 60 percent of GDP over last five years. - Assets and liabilities in 2016: assets 52 percent of GDP, liabilities 111 percent of GDP. - NIIP projected to improve towards -49 percent of GDP over the medium term. - Short-term debt about 23 percent of the total. - Overall assessment and outlook - External position in 2016 broadly consistent with medium-term fundamentals and desirable policies. - Improvements in CA balance in 2016 driven by stronger demand in the euro area, weaker currency, and marginally better terms of trade. - CA deficit expected to widen in 2017 due to stronger domestic demand, investment, and rebound in oil prices. - Reserves are adequate; FCL arrangement provides added buffer. - Policy responses - Current policy settings (accommodative monetary policy and gradual fiscal consolidation) broadly appropriate under baseline. - Close domestic policy gaps via fiscal consolidation and supportive credit growth. - In event of external shocks: flexible exchange rate as first line of defense; monetary tightening if inflation overshoots target. - Vigilance on bank funding (including FX swaps); ready to extend FX liquidity. - Manage risks of fiscal slippages and overly loose monetary policy; implement macro-prudential and bank resolution frameworks; pursue structural reforms to boost potential growth. - Current account - CA deficit broadly unchanged at 0.3 percent of GDP in 2016. - Trade balance improved by 0.6 percent of GDP; higher trade surplus due to improved terms of trade, stronger export performance, and subdued non-oil import growth. - 2017 CA deficit projected to widen. - ES model gives CA gap of 1 percent. - CA approach estimates gap between cyclically-adjusted CA (-0.1 percent of GDP) and CA norm (-0.7 percent of GDP) of around 0.6 percent of GDP. - Staff assessment: CA gap range for 2016 centered on 0.9 (plus or minus 1) percent of GDP. - Real exchange rate (REER) - Annual average REER depreciated 7¾ percent cumulatively over 2014-16 (weakening by around 4 percent in 2016 relative to 2015 average). - REER depreciation explained by nominal depreciation vis-à-vis USD and CHF, NBP policy rate cuts, and domestic policy uncertainties. - REER appreciated slightly in 2017:Q1; as of May 2017, REER up by 2.5 percent relative to 2016 average. - EBA models suggest undervaluation between 1 and 10 percent for 2016. - Specific model gaps: CA EBA model -1 percent; ES EBA -2.6 percent; REER index model -9.6 percent. - Staff assesses REER in 2016 close to consistent with fundamentals with REER gap range of -10 to 0. - Capital and financial accounts - Capital account dominated by EU structural fund inflows; temporary slowdown in EU funds absorption in 2016. - Financial account inflows volatile, centered on portfolio and FDI flows; net capital inflows weak in 2016. - Largest net inflows driven by NBP repo transactions as part of reserve management. - High foreign holdings (~40 percent) of government bonds indicate potential vulnerabilities; ratio has declined as domestic banks increase holdings in response to new bank asset tax. - FX intervention and reserves - Gross reserves increased from USD 95 billion at end-2015 to USD 114 billion at end-2016 (partly due to increase in NBP’s repo transactions). - Net reserves increased from USD 87 billion at end-2015 to about 92 billion at end-2016. - Zloty floated freely. - Gross reserves ~128 percent of IMF’s composite reserve adequacy (ARA) metric in 2016; net reserves stood at 103 percent of IMF’s ARA metric. - Recently approved FCL arrangement of SDR 6.5 billion provides insurance against external tail risks. - Technical notes - Poland’s EBA CA gap (including residual) 0.6 percent of GDP; contribution of identified policy gaps 0.9 percent. - Domestic fiscal policy gap -0.7 percent offset by fiscal gaps in trading partners yielding 0.2 percent net contribution. - Credit gaps contribute 0.2 percent to total CA gap; health spending, domestic capital controls and reserves contribute positively. - Staff assesses mid-point CA norm slightly lower by 0.2 percent of GDP but within EBA CA model 90 percent confidence interval of [-2.3, 0.9] percent of GDP. - Level REER model suggests undervaluation of 18.2 percent with large residuals of 14.0 percent. ### Russia - Foreign asset and liability position and trajectory - NIIP at end-September 2016 was 18 percent of GDP (up from 10 percent in 2013). - Gross assets 96 percent of GDP; liabilities 78 percent of GDP. - Total external debt 41.6 percent of GDP at end-2016. - No obvious maturity mismatches between gross asset and liability positions. - Historical issues: NIIP has not kept pace with CA surpluses due to unfavorable valuation changes and treatment of “disguised” capital outflows. - Overall assessment and outlook - Projected CA surpluses suggest Russia will continue to maintain a positive IIP, minimizing risks to external stability. - Reserve assets expected to increase as accumulation of fiscal savings in oil funds resumes. - External deleveraging by private sector since 2014 reduces risks further. - External position in 2016 moderately weaker than suggested by medium-term fundamentals and desirable policy settings. - Since 2016 the REER appreciated sharply as oil prices bottomed out and appetite for Russian assets resumed. - Structural implications of sanctions create exceptional uncertainty; on balance they would suggest equilibrium REER should be lower. - Potential policy responses - Greater diversification called for. - Non-oil fiscal deficit remains significantly higher than long-term desirable level and needs to adjust to rebalance from public to private activity and re-allocate government expenditure from current to capital spending. - Emphasize structural reforms to invigorate private sector to increase net savings while allowing somewhat higher investment over medium term. - Current account - From 2000 to 2013 CA surplus fell from 16 to 1.5 percent of GDP. - 2015 CA rose to 5 percent of GDP; in 2016 CA surplus shrunk to 1.9 percent of GDP. - Non-oil current account deficit remained stable in 2016. - Medium-term projection: increase in oil prices and fiscal consolidation should support gradual improvement in CA. - EBA CA model norm for 2016: 6.3 percent of GDP; cyclically adjusted CA surplus 4.2 percent of GDP; CA gap -2 percent of GDP. - Staff assesses 2016 CA gap between -2 to 0 percent of GDP, somewhat less than EBA estimate. - Identified fiscal gap accounts for almost all of CA gap; fiscal policy should be tightened to rebuild buffers and save more oil wealth. - Real exchange rate (REER) - REER appreciated strongly 2000-2013; depreciated over 35 percent between mid-2014 and February 2016 after shocks and ruble float. - In 2016 average REER largely unchanged vs 2015; from Q4 2016 REER sustained significant appreciation. - As of May 2017 REER was 26.2 percent above 2016 average largely due to oil price increases. - Staff assesses 2016 REER between 0 to 10 percent above equilibrium and therefore moderately overvalued. - Capital and financial accounts - Net private capital outflows continued in 2016 though pace significantly slowed relative to 2014 and 2015. - Private sector external deleveraging continued due to limited access to international capital markets. - Over medium term structural outflows expected to decline if investment climate improves. - Floating exchange rate regime and large international reserves provide substantial buffers against accelerated capital outflows. - FX intervention and reserves - Since November 2014 free float, FX interventions limited. - International reserves rose to USD378 billion in 2016, up from USD368 billion in 2015, largely due to valuation effects. - International reserves at end-2016 equivalent to 235 percent of Fund’s basic reserve adequacy metric (above adequacy range 100-150 percent). - Adjusted adequacy metric (accounting for commodity vulnerability) falls to 206 percent of metric, still above adequacy level. - Small regular purchases to replenish reserves could be justified; large FX interventions should be limited to episodes of market distress. - Technical notes - Unfavorable valuation changes reflect strong Russian stock market performance during oil price boom; “disguised” capital outflows include pre-payments, repeated large transfers, or securities transactions at inflated prices. - CBR includes estimates of “disguised” outflows in financial account but not in foreign asset position of reported NIIP; actual NIIP could be higher than reported. - EBA Level REER model suggests undervaluation of 18.1 percent and EBA Index REER regression model an undervaluation of 23.6 percent, but REER models fit poorly for commodity exporters; staff gives more weight to CA model. ### Saudi Arabia - Foreign asset and liability position and trajectory - Net external assets 93 percent of GDP at end-2016. - External assets declined by 7.3 percent of GDP during 2016 and by 12.5 percent since peak in 2014:Q4, largely due to decline in central bank FX reserves. - External liabilities rose by 6.3 percent of GDP in 2016 mainly because of new borrowing. - NIIP-to-GDP ratio projected to decline to around 54 percent of GDP in 2022. - No details available on composition of external assets. - Overall assessment - External balance sheet remains very strong; accumulated assets represent savings of exhaustible resource revenues and protection against oil price volatility. - External position in 2016 remained substantially weaker than level consistent with desirable medium-term fiscal policy settings. - Planned fiscal adjustment needs successful implementation over medium term to reduce CA deficit and support the peg. - Pegged exchange rate provides credible policy anchor; with U.S. dollar strengthening, REER has appreciated at time of lower oil prices. - Despite drawdown since 2015, reserves remain very comfortable against standard Fund metrics, though external savings insufficient from intergenerational equity perspective. - Under government’s planned fiscal adjustment, reserve loss will slow over medium term. - Potential policy responses - Fiscal consolidation necessary short- and medium-term to strengthen CA and support exchange rate peg. - Fiscal Balance Program (FBP) planned adjustment based on energy price reforms, new non-oil revenue measures, and continued expenditure compression. - Non-oil primary fiscal deficit expected to narrow substantially over medium-term and reduce external gap. - Structural reforms to diversify economy and boost non-oil tradeable sector will support stronger external position over time. - Current account - CA deficit narrowed to 3.9 percent of GDP in 2016 from 8.7 percent of GDP in 2015. - Imports of goods fell by 22 percent as government cut spending; exports declined by 10 percent largely due to lower oil prices. - Import volumes fell by 18 percent while export volumes increased by 2 percent, leading to improvement in goods and services balance of 5 percent of GDP. - CA projected to move into small surplus in 2017 and be in surplus of 1.2 percent of GDP in 2022. - Assessment: reliance on oil causes wide CA swings and considerable uncertainty in external assessment. - CA gap estimates: macro-balance approach -8 percent of GDP; external sustainability approach between -4.3 and -10.2 percent of GDP. - Staff assesses CA gap of -7.7 percent of GDP, with range of -5.7 to -9.7 percent of GDP. - Real exchange rate (REER) - Riyal pegged to USD at rate of 3.75 since 1986. - REER strengthened by 4 percent in 2016 and by 20 percent since mid-2014 as U.S. dollar appreciated. - As of May 2017, REER unchanged relative to 2016 average. - Terms of trade fell by 44 percent in 2015 and by 12 percent in 2016, projected to improve by 15 percent in (text truncated). *Italicized source: 2017-external-sector-report-individual-economy-assessments - 0.33 and a current account gap of 2 to 4 pe (PDF).* ### 2017. The REER in 2016 was 20 percent ### 2017-external-sector-report-individual-economy-assessments - 2017. The REER in 2016 was 20 percent above its 10-year average. ### REER and competitiveness - The REER in 2016 was 20 percent above its 10-year average. - Assessment findings: - The REER has appreciated at a time of a sharp decline in the terms of trade. - Most exports are oil or oil-related products, and exchange rate movements have a limited impact on competitiveness. - Limited substitutability between imports and domestically-produced products, which in turn have significant imported labor and intermediate input content, means exchange rate movements have only a small impact on import demand through the substitution channel. - Staff estimates a REER gap in the range of 15-25 percent. - As fiscal consolidation proceeds, it would be expected that the REER gap would narrow. ### Capital and financial accounts: flows and policy measures - Background: - Net financial outflows slowed in 2016. - Financial inflows picked-up, dominated by the issuance of government debt. - Errors and omissions remained large (6.2 percent of GDP). - FX reserves continued to fall. - Assessment: - Analysis of the financial account is complicated by the very large errors and omissions in the balance of payments. - The strong reserves position limits immediate risks and vulnerabilities. ### FX intervention and reserves level - Background: - The government is developing a SWF by broadening the mandate of the Public Investment Fund (PIF). - Most of the government’s foreign assets are held at the central bank within international reserves. - Reserves fell to $529 billion (82 percent of GDP, 32 months of imports, and 566 percent of the IMF’s reserve metric) at end-2016, down from $724 billion in 2014. - Assessment: - Reserves play a dual role—savings for both precautionary motives and for future generations. - Reserves are more than adequate for precautionary purposes (measured by the Fund’s metrics). - A substantial fiscal adjustment is needed over the medium-term to help moderate the decline in reserves, support the exchange rate peg, and achieve intergenerational equity. - A CA surplus and the resulting NIIP accumulation will be needed over the medium-term to ensure an equitable intergenerational saving of oil revenues. ### Technical background notes and quantitative specifics - Note 1: - The NIIP is likely underestimated given large errors and omissions in the balance of payments (6.3 percent of GDP in 2016) and inconsistencies between the BoP and IIP data. - If the errors and omissions reflect financial outflows, the NIIP will be under-recorded. - The cumulative CA balance between 1987 and 2016 was $1 trillion, while the net asset position in the IIP is $0.6 trillion. - Note 2: - The decline in the NIIP over the forecast period is due to the assumption of continued large errors and omissions rather than recorded CA flows. - Note 3: - At current oil production levels, a $1 change in the oil price results in a 0.4 percent of GDP first-round change in the CA balance. - The oil price is assumed to be $50.3 in 2017, rising to $52.0 in 2022 ($41.5 in 2016). - Note 4 (CA norm estimates and methodology): - EBA methodology assessments are not available for Saudi Arabia. - Staff considered two methodologies, including one that incorporates the special intertemporal considerations that are dominant in economies in which exports of non-renewable resources are a very high share of output and exports. - Estimates suggest CA norms under the external sustainability (ES) approach were 6.3 percent of GDP and 0.4 percent of GDP under the constant real per capita annuity and constant real annuity allocation rules, respectively. - Using the macro-balance approach, the norm is estimated at 4.4 percent of GDP under the EBA-lite approach. - An alternative specification estimated on a sample of oil-exporting countries and a narrower set of control variables suggests a CA norm of 4.1 percent of GDP. - Additional data point: - The CA deficit in 2016 was *Source: 2017-external-sector-report-individual-economy-assessments - 2017. The REER in 2016 was 20 percent above its 10-year average.* ### 3.9 percent of GDP. The corresponding CA gaps are esti ### Singapore ### Overall Assessment - The external position in 2016 was substantially stronger than what is consistent with fundamentals and desirable policies. - The current account balance rose in 2016, driven mainly by improvements in the income balance, and strength of goods and services balance. - The assessment for 2016 and the size of the imbalance are subject to a wide range of uncertainty reflecting Singapore’s very open economy and position as a global trading and financial center. - The external balance sheet is not a major source of risk. Potential vulnerabilities posed by the large gross non-FDI liabilities (453 percent of GDP at the end of 2016)—predominantly cross-border deposit taking by foreign bank branches—are mitigated by banks’ large short-term external assets and the authorities’ close monitoring of banks’ liquidity risk profiles. - Singapore also has large official reserves and other official liquid assets. - The net international investment position (NIIP) stood at about 214 percent of GDP in 2016, 26 percentage points higher than at end-2015, driven mainly by the current account (CA) surplus. - Despite large and persistent CA surpluses, the NIIP to GDP ratio stands slightly below its 2010 level, and is significantly lower than the pre-Global Financial Crisis (GFC) peak of 265 percent of GDP in 2006. - Projections on the CA balance and growth imply that the NIIP is likely to rise beyond the pre-GFC peak over the medium term. ### Potential Policy Responses - While fiscal policy is providing welcome support to activity, more fiscal stimulus than envisaged, including on public healthcare, would be useful to: - boost domestic demand, - close the output gap, and - provide insurance against downside risks to growth. - Consideration should be given to a time-bound unemployment insurance. - Attuning the fiscal rule to the business cycle rather than the political cycle and including all the government's investment income in the budget’s revenue stream would help address medium-term fiscal needs. - Infrastructure spending could be accelerated. - Means-tested, categorical income transfers to families could be further expanded. - More could be done to help dynamic, innovative businesses, especially credit constrained ones. - Singapore’s ongoing structural reforms, along with the restrictions on foreign worker inflows (which puts upward pressure on firms’ wage/rental ratios) should contribute to higher investment over the medium term. ### Current Account - Background: - The large CA surplus of 19 percent of GDP in 2016, up by about 1 percent of GDP from 2015, reflects a strong goods balance that is somewhat offset by deficits in the services and income account balances. - The recent oil price decline caused the oil trade deficit to narrow to near balance from an average deficit of 5 percent of GDP over 2010–14. - The gains from lower oil price have been largely offset by weakness in marine engineering exports (oil rigs) and deterioration in the services and income accounts. - Structural factors and policies that boost savings such as the financial center status, a limited social safety net, high income inequality and the rapid pace of aging combined with a mandatory defined-contribution pension scheme (whose assets were about 70 percent of GDP in 2015) are the main drivers of Singapore’s high saving rate and strong external position. - Fiscal policy in recent years has been associated with increased social and infrastructure spending, the continuation of which should support a lower CA surplus over the medium term. - Assessment: - Singapore is a small, very open economy, with a large positive NIIP and very high per capita income, that is aging rapidly. - Such non-standard factors make a quantitative assessment of its CA balance subject to a wide range of uncertainty. - Guided by the EBA framework, staff assesses the 2016 CA balance as substantially stronger than the level consistent with fundamentals and desirable policies, by 2½ to 8½ percent of GDP. ### Real Exchange Rate - Background: - The average real effective exchange rate (REER) depreciated by 1 percent in 2016 with respect to 2015. - This modest depreciation followed a secular, 29 percent appreciation in the REER between 2004 and 2013. - As of May 2017, the REER weakened by 2.2 percent relative to its 2016 average. - The nominal effective exchange rate (NEER) did not fluctuate much in 2016 (depreciating by about 0.9 percent relative to 2015) and has fluctuated in a narrow range since end 2016. - Assessment: - Notwithstanding the nonstandard factors that make a quantitative assessment difficult, staff assesses that the REER is around 5 to 17 percent weaker than warranted by fundamentals and desirable policies. - This estimate is drawn from the CA assessment and a semi-elasticity of –½ of the CA balance with respect to the REER, consistent with Singapore’s high level of openness. - This assessment is subject to a wide range of uncertainty with regard to both the underlying CA assessment and the semi-elasticity of the CA balance with respect to the REER. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Singapore has a fully open capital account. - The financial account deficit tends to rise during periods of lower uncertainty in global financial markets. - It reflects in part reinvestment abroad of income from the foreign assets of the official sector. - Financial flows also encompass sizable net inward FDI and smaller but more volatile net bank-related flows. - In 2016, the deficit on the capital and financial account widened by about 2½ percentage points to 20 percent of GDP, the largest deficit in two decades, led by rising “other investment outflows”. - These were partially offset by a significant slowdown in portfolio investment outflows and largely stable direct investment inflows, with the latter increasing in the last two years. - As a trade and financial center in Asia, negative sentiment in emerging and low-income countries in the region can affect Singapore significantly. - Assessment: - The financial account is likely to remain in deficit as long as the trade surplus remains large. ### FX Intervention and Reserves Level - Background: - With the NEER as the intermediate monetary policy target, intervention is undertaken to achieve inflation and output targets. - Official reserves held by the Monetary Authority of Singapore (MAS) declined marginally in 2016, to US$ 246.6 billion (83 percent of GDP). - Reserves peaked in 2013 and declined in 2014 and 2015, reflecting also valuation changes. - As a financial center, prudential motives call for a large NIIP buffer, also in the form of reserves. - Reserves were at US$264.5 billion in May 2017. - Assessment: - In addition to FX reserves held by the MAS, Singapore also has access to other official foreign assets managed by Temasek and the GIC. - The current level of official external assets appear adequate, even taking into account prudential motives, and there is no clear case for further accumulation for precautionary purposes. ### Technical Background Notes - Staff estimates in U.S. dollar terms. Valuation changes have been an important negative drag on the NIIP, suggesting CA measurement complexities typical of financial centers. - Singapore’s official reserves held by the Monetary Authority of Singapore (MAS) amounted to about 83 percent of GDP in 2016. - Singapore has a negative income balance despite its large and positive NIIP position. This reflects the lower rate of return earned on its foreign assets relative to the return paid on its foreign liabilities. The lower return on foreign assets may reflect the fact that the composition of Singapore’s assets is tilted toward safer assets which yield lower returns. - Singapore is a net oil importer, with a net oil trade deficit of about ¼ percent of GDP in 2016. The oil trade deficit would be smaller if one takes into account the high imported petroleum product content in Singapore’s exports of petrochemicals and other oil intensive products and services like water transportation. In addition, Singapore has some sectors that are closely linked to investment in the oil sectors such as production of oil rigs. The decline in investment in the oil sector is expected to reduce Singapore’s exports of these products, in particular if the oil price decline is sustained. - Monetary policy has been eased in three steps since January 2015. The last monetary policy easing decision, announced in April 2016, involved lowering the trend appreciation of the NEER band from about 1 percent to zero percent per annum, and was motivated by the deceleration of core inflation. This easing appears to have had a limited positive effect on the CA balance. - Nonstandard factors make quantitative assessment of Singapore’s external position difficult and subject to significant uncertainty. Singapore is not included in the sample used to estimate the EBA models because it is an outlier along several dimensions (e.g., large external asset and liability positions, highly positive NFA position). Estimates from regression models that are guided by the EBA CA framework suggest that Singapore’s CA surplus is mainly explained by the high level of productivity, fiscal surplus, status as a financial center, and its large NFA position. The model estimated CA gap is about 5½ percent of GDP (relative to a cyclically-adjusted level of the CA of about 18½ percent of GDP in 2016 and a norm of about 13percent of GDP). Identified policy gaps under the regression models are driven largely by the need for more fiscal spending to strengthen the social safety net. However, the estimated CA surplus norm could be overstated, in particular if the high NFA level is interpreted as a byproduct of past excessive surpluses. - The reserves-to-GDP ratio is also larger than in most other financial centers, but this may reflect in part that most other financial centers are located in reserve-currency countries or currency unions. External assets managed by the government’s investment corporation and wealth fund (GIC and Temasek) amount to at least 70 percent of GDP. *International Monetary Fund* ### 2016. The share of ### 2016. The share of ### Spain — Overall assessment and policy implications - Large negative NIIP with external vulnerabilities from large gross financing needs and valuation changes. - Mitigating factors: - Favorable maturity structure of Spain’s outstanding sovereign debt (averaging 6½ years). - Current ECB measures such as QE. - Overall assessment: external position in 2016 is estimated to be weaker than consistent with medium-term fundamentals and desirable policy settings. - Recent improvements: - CA continued to improve in 2016, helped by lower oil import price, low interest rates, regained competitiveness from wage moderation, and larger firms’ internationalization efforts. - Spain recorded its fourth consecutive annual CA surplus. - Policy recommendations and required actions: - Recent structural reforms (labor market reform yielding wage moderation; Market Unity Law) and fiscal deficit reductions are in line with reducing imbalances. - Medium term: further growth-friendly fiscal adjustment; move forward with structural reforms of the labor market; faster implementation of product market reforms to accelerate adjustment. - Continued monetary accommodation at the euro area level to lift inflation closer to the ECB’s medium-term price stability objective to increase external demand and support adjustment. ### Spain — Current account (CA) - Background: - Peak CA deficit in 2007 of 9.6 percent of GDP. - CA surplus estimated at 2 percent of GDP in 2016 (or 1.1 percent of GDP cyclically adjusted). - Projected to moderate somewhat in 2017 as domestic demand recovers. - ECB measures reduced interest rates on external debt; sharply lower oil price reduced import costs. - Assessment: - EBA CA model suggests a norm of 1.8 percent of GDP for 2016 (somewhat higher than observed cyclically-adjusted CA of 1.1 percent of GDP). - Staff places more weight on external sustainability and targets strengthening NIIP to above -50 percent over the medium term. - This yields a CA norm of about 3 percent of GDP, with a range of 2-4 percent of GDP. - Implication: the cyclically-adjusted CA was about 1 to 3 percent of GDP weaker than desirable. - Uncertainty about the output gap could imply a larger gap if the output gap is bigger. - Reducing the sizable structural fiscal deficit is a key policy requirement. ### Spain — Real exchange rate (REER) - Background: - 2016 CPI-based REER: 0.1 percent higher than average 2015 level; still about 8 percent lower than 2009 peak. - ULC-based REER depreciated by 18 percent after peaking in 2008. - As of May 2017, CPI-based REER was down 0.1 percent relative to the 2016 average. - Assessment: - Two EBA REER regression approaches estimate an overvaluation of 6.5 and -0.4 percent for 2016 (reference: CPI-based REER). - Considering historical REERs and NIIP sustainability, staff assesses a 2016 gap of around 5 to 10 percent above the level consistent with medium-term fundamentals and desirable policies. ### Spain — Capital and financial accounts; TARGET2 and flows - Background: - Financing conditions favorable; sovereign bond yields near historical lows. - Private sector continued deleveraging versus the rest of the world. - TARGET2 liabilities reached €333 billion (30 percent of GDP) by end-2016. - TARGET2 liabilities, accumulated over 2011-12, increased during 2015-16 by an annual average of 6 percent of GDP, reflecting liquidity creation by the Bank of Spain within the Eurosystem’s asset purchase program. - Recent capital outflows partly explained by a net FDI outflow. - Assessment: - ECB actions, domestic reforms, and fiscal consolidation improved investor sentiment. - Large external financing needs in both public and private sectors leave Spain vulnerable to sudden market sentiment shifts and spillovers from Europe. ### Spain — FX intervention and reserves - Background and assessment: - The euro has the status of a global reserve currency. - Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. ### Spain — Technical Background Notes (selected) - Based on data available through 2016:Q4. - The EBA CA regression-based approach estimate would suggest a CA surplus of 1.8 percent of GDP. - The empirically-based EBA norm does not fully account for the very negative NIIP, with around a quarter of liabilities in the form of equity. - Given external stability considerations, a CA norm in the range of 2-4 percent of GDP is necessary to strengthen the NIIP by about 5 percent of GDP annually over the next 5-10 years. --- ### Sweden — Overview and assessments - Foreign asset and liability position: - Net IIP rose to 15.8 percent of GDP, up 12.5 percentage points in the year. - Gross liabilities were 267 percent of GDP in 2016, with over a third being external debt (94 percent of GDP). - Overall assessment: Sweden’s external position in 2016 was stronger than the level consistent with medium-term fundamentals and desirable policies. - Policy responses and considerations: - Expansionary monetary policy supports strong domestic demand; krona likely to appreciate when inflation returns to target. - Fiscal policy accommodated increased migrant-related spending in 2015-16; neutral fiscal stance appears sufficient to meet medium-term surplus target. - Need to implement reforms to bolster residential investment and continue migrant integration efforts. ### Sweden — Current account and REER - Current account: - CA balance was 4.5 percent of GDP in 2016. - Cyclically-adjusted CA was 5.0 percent of GDP in 2016. - Cyclically-adjusted EBA norm was -1.4 percent of GDP; cyclically-adjusted CA was 6.4 percentage points above that norm. - Adjustments: mandatory contributions to fully-funded pension schemes of 5 percent of GDP; household savings rate 18.5 percent for 2016. - After country-specific adjustments, staff assesses Sweden’s adjusted CA gap at about 2 percent of GDP in 2016, with a range of +/- 1 percent of GDP. - REER: - Krona mostly unchanged in 2016 relative to 2015 average; as of May 2017 REER weakened by 1.9 percent relative to 2016 average. - EBA REER index and level approaches suggest gaps of -20 and -18 percent for 2016. - Staff assesses the krona to be undervalued by 5 to 10 percent; expected to be temporary. ### Sweden — Capital, financial accounts, and reserves - Background and risks: - Large banks vulnerable to liquidity risks from global wholesale markets despite improved structural liquidity. - Foreign currency reserves stood at USD 59.8 bn in December 2016 (equivalent to 25 percent of the short-term external debt of monetary and financial institutions and about 12 percent of GDP). - Policy assessments: - Further decline in banks’ short-term funding in favor of longer maturities is desirable. - Macroprudential policies (planned increases in capital buffers, raising funding stability standards, mortgage amortization regulations) can help contain vulnerabilities. - Given high dependence on wholesale funding in foreign currency, it would not be appropriate to reduce Sweden’s existing reserves; evaluate further tightening of FX liquidity requirements on banks. --- ### Switzerland — Overview and assessments - Foreign asset and liability position: - NIIP of 131 percent of GDP; gross foreign asset and liability positions of 689 and 558 percent of GDP, respectively, at end-2016. - NIIP about unchanged from peak of 134 percent in 2011; recovered by 35 percentage points in 2016 partly from valuation gains. - Overall assessment: external position in 2016 broadly consistent with medium-term fundamentals and desirable policies, though subject to especially high uncertainty. - Policy recommendations: - Gear macroeconomic policies toward greater reliance on domestic demand while exiting deflation and moving toward SNB's inflation target. - Maintain a sufficiently large negative interest rate differential against other major central banks, with intervention reserved for addressing inflow surges. - Allow some easing of fiscal stance. ### Switzerland — Current account and REER - Current account: - CA surplus decreased to 10.7 percent of GDP in 2016 from 11.5 percent in 2015. - Cyclically-adjusted CA surplus of 10.5 percent of GDP and an EBA CA regression-estimated norm of 7.5 percent of GDP. - EBA CA gap around 3.0 percent of GDP in 2016; including additional factors, staff estimates a residual CA gap of about 0.75 percent of GDP (with a range of ±2 percentage points). - REER: - CPI-based REER appreciated cumulatively 26 percent during 2007–16; average REER for 2016 weakened by 2½ percent relative to 2015 average; as of May 2017 it had weakened another 0.9 percent. - EBA REER index and level regression-based estimates suggest the average REER in 2016 was 12.6–15.5 percent overvalued. - REER gap implied by the CA gap is estimated at -5.5 to +2.5 percent. ### Switzerland — Capital, financial accounts, and reserves - Background: - Large inflows of currency and deposits since 2007; cumulative net inflows amounted to about 75 percent of GDP since 2007. - Since January 15, 2015 banks’ placements at the SNB (above a certain threshold) subject to a negative interest rate of 0.75 percent. - Reserves: - Foreign exchange reserves amounted to USD 707 bn (107 percent of GDP) at end 2016, up USD 90 bn since end 2015; about 80 percent accumulated during 2009–15. - Assessment: - Financial flows are large and volatile due to Switzerland’s role as a financial center and safe haven. - Reserves large relative to GDP but more moderate relative to foreign liabilities. - High level of reserves reflects monetary policy operations aimed at avoiding persistent undershooting of inflation. *International Monetary Fund — Individual Economy Assessments (excerpts from the 2017 External Sector Report, content based on material through 2016).* ### 0.5 percent during 2012–16) as a result of ### Individual Economy Assessments — Switzerland (continued) and Thailand ### Switzerland — Technical Background Notes - Other stock-flow adjustments include changes in statistical sources, such as changes in the number of entities surveyed and items covered, although their quantitative importance is not known. - An appreciation (depreciation) of the Swiss franc has a negative (positive) effect on the NIIP. - A symmetric percentage increase in share prices in Switzerland and abroad would reduce the NIIP. - In the BPM framework, retained earnings on FDI are recorded as an outflow in the income account of the current account (with an offsetting inflow in the financial account). No similar current account payment imputation is made for retained earnings on portfolio investment, which instead leads to revaluation of portfolio investment securities in the IIP. - Adopting a similar treatment for net retained earnings on portfolio equity investment in publicly-listed firms as for FDI would reduce the Swiss current account by about 1.2 percent of GDP. - Income from merchanting (which accrues from trading goods that do not enter the country, mostly by foreign-owned firms) amounted to 4 percent of GDP in 2016, partly reflecting mismeasurement of income attributable to non-Swiss nationals. Adjusting for the latter is estimated to further reduce the current account by about 1.2 percent of GDP. - The CA gap range reflects the uncertainty inherent in the assessment. - The supply of domestic assets available for purchase is very limited, and the interest rate on banks’ deposits at the SNB is -0.75 percent, which is the lowest in the world. - Interventions have also helped to avert further exchange rate overvaluation. *Source: INTERNATIONAL MONETARY FUND — Individual Economy Assessments (Switzerland technical notes excerpt)* ### Thailand — Background on Foreign Asset and Liability Position and Trajectory - The net international investment position (NIIP) improved steadily from -48 percent of GDP in 2000 to -2 percent of GDP in 2009. - Subsequently, the NIIP declined to -24 percent of GDP in 2014, despite CA surpluses averaging 1.6 percent of GDP, largely due to valuation changes and other stock-flow adjustments. 1/ - The NIIP halved to around -10 percent of GDP in 2015-16, accompanied by a rising CA surplus and subdued FDI, amid steadily rising outward investment by residents. ### Thailand — Assessment of External Position (2016) - In 2016, gross liabilities were 101.8 percent of GDP and external debt stood at 32.5 percent of GDP (short term debt stood at 13 percent of GDP). - External debt is projected to continue declining over the medium term and net foreign liabilities (as a percent of GDP) are expected to stabilize. - Overall: The external position in 2016 was substantially stronger than warranted by medium-term fundamentals and desirable policy settings. - The size of the 2016 CA and REER gap are subject to a wide margin of error reflecting Thailand-specific transitory factors not fully captured in the EBA model, such as the sharp improvement in ToT, the boom in tourism, and political uncertainty. - The fast demographic transition may increase savings going forward. ### Thailand — Potential Policy Responses - Mutually reinforcing monetary and fiscal stimulus, coupled with structural reforms, should support domestic demand and help lower the current account gap over time. - The boost to public infrastructure within available fiscal space should crowd-in private investment. - The authorities should continue addressing structural rigidities by: - Reforming social safety nets, notably the fragmented pension schemes compounded by widespread informality. - Reducing barriers to investment, especially in the services sector. - The exchange rate should move flexibly as the key shock absorber. Intervention should be limited to avoiding disorderly market conditions. - Reserves exceed all adequacy metrics, thus there is no need to build up reserves for precautionary purposes. ### Thailand — Current Account: Background and Assessment - Background: - Thailand’s current account (CA) has been volatile over the last decade, ranging from a deficit of 4 percent of GDP in 2005 to a surplus of 7¼ percent of GDP in 2009. - The CA then dropped to a deficit of 1¼ percent of GDP by 2013 and rose back to a record surplus of 11.5 percent of GDP in 2016. - The 12.6 percent of GDP turnaround in the CA between 2013-16 can be largely accounted for by a 5.8 percent of GDP decline in net oil imports and a 3 percent of GDP rise in the services balance (mainly tourism). - Net oil imports and tourism also account for the bulk (two-thirds) of the increase in the CA in 2016. Import volume declined, while goods exports were stagnant. - Assessment: - The EBA CA model estimated a small (0.3 percent of GDP) terms-of-trade (ToT) cyclical adjustment in 2016, with a cyclically-adjusted 2016 CA of 11.2 percent of GDP and a CA norm of 1.2 percent of GDP. - The CA gap of 10.1 percent of GDP consists of an identified policy gap of *Source: INTERNATIONAL MONETARY FUND — Individual Economy Assessments (Thailand assessment excerpt)* ### 2.3 percent of GDP (1.5 percent of GDP from domestic policy ### 2017-external-sector-report-individual-economy-assessments - 2.3 percent of GDP (1.5 percent of GDP from domestic policy ### Thailand — Current account, REER, capital flows, reserves, and policy assessment - Current account (CA) gap assessment: - Staff assesses the CA gap within 3 percent to 7 percent of GDP of the level consistent with medium-term fundamentals and desirable policies. - CA gap components cited: 2.3 percent of GDP (1.5 percent of GDP from domestic policy gaps), and an unexplained residual of 7.7 percent of GDP. - The large unexplained residual partly reflects Thailand-specific features not fully captured by the EBA model (positive ToT shock, boom in tourism, political uncertainty). - The CA gap is expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, private confidence recovers, and steps are taken to reform the safety net. - Real exchange rate (REER): - The baht has been on a broadly stable REER appreciation trend since the mid-2000s, with exceptions: Fed tapering talk in mid-2013 and domestic monetary easing in 2015: Q1. - REER resumed gradual real appreciation in 2016:Q1; by May 2017 REER had appreciated by 1.7 percent relative to 2016. - Correlation between REER and CA has been weak over the last decade. - EBA estimates for 2016: - EBA index REER gap: -6.3 percent. - EBA level REER gap: -16.5 percent, but with a large unexplained residual. - Using an elasticity of 0.6, staff assesses the 2016 REER to be 5 percent to 11 percent below levels consistent with medium-term fundamentals and desirable policies. - Capital and financial accounts: - Capital and financial account balance has been negative since 2013. - In 2016, the negative balance increased to $25.7 billion due to Thai firms’ overseas investment, subdued FDI inflows, and other investment outflows despite portfolio inflows. - Authorities continued financial account liberalization, encouraging outward investment by residents. - Assessment: capital outflows are manageable given resilient external sector and baht flexibility, partially offsetting the current account surplus. - FX intervention and reserves: - Exchange rate regime: floating (de jure and de facto). - International reserves declined from 52 percent of GDP in 2012 to 49 percent of GDP in 2016. - Reserves stand at: - over three times short-term debt, - 211 percent of the IMF’s reserve metric unadjusted for capital controls, - 250 percent of the metric adjusted for capital controls. - Staff considers the unadjusted adequacy metric to be more appropriate. - Intervention proxies (reserves and net forward position) show two-sided interventions throughout 2016 (positive for 7 months and negative for 5 months); gross reserves increased by US$29.4 billion (7.2 percent of GDP) during 2016. - Assessment: reserves are higher than IMF adequacy metrics; there is no need to build up reserves for precautionary purposes. Exchange rate should move flexibly; intervention should be limited to avoiding disorderly market conditions. - Technical/background notes (staff adjustments and measurement issues): - Persistent negative valuation effects during 2010-14 driven mainly by capital inflows contributing to asset price growth and baht appreciation. - EBA model has a large and rising unexplained residual for Thailand, likely due to imperfect measurement of ToT shock, tourism boom, and political uncertainty. - Staff adjustments: updated weights in EBA terms of trade index; estimate of cyclical component in tourism boom; estimate of transitory impact of ongoing political transition; public health expenditure variable does not fully reflect underdeveloped social safety nets, contributing to high precautionary savings. *Italic: Source — 2017-external-sector-report-individual-economy-assessments - 2.3 percent of GDP (1.5 percent of GDP from domestic policy* ### Turkey — External position, CA, REER, financing risks, and policy recommendations - NIIP and external liabilities: - NIIP improved slightly from -44 percent of GDP in 2015 to -42 percent of GDP at end-2016. - Total foreign liabilities: 67 percent of GDP. - Short-term debt and portfolio investment in debt securities amount to around 24 percent of GDP. - 42 percent of long-term debt has adjustable interest rates. - A large portion of private domestic debt is denominated in FX. - Assessment: composition of foreign liabilities exposes Turkey to liquidity shocks, investor sentiment shifts, and rising global interest rates. - NIIP projection: projected to deteriorate further by about 15 percentage points of GDP over the medium term due to sustained current account deficits. - Overall assessment: - In 2016, Turkey’s external position was weaker than the level consistent with medium-term fundamentals and desirable policies. - Net international reserves are low; Turkey vulnerable to capital flow reversals given large financing needs and high share of short-term capital inflows. - Policy responses recommended: - Reduce the CA deficit to diminish vulnerabilities. - Credible medium-term fiscal consolidation plan to shore up public saving. - Monetary policy should aim to keep inflation within target to support private savings. - Strengthen macroprudential measures to lower foreign currency risk. - Central Bank of the Republic of Turkey (CBRT) should increase net international reserves and limit foreign exchange sales to periods of excessive Lira volatility. - Current account: - CA deficit widened slightly to 3.8 percent of GDP in 2016 (-3.7 percent on a cyclically adjusted basis). - Weak tourism, Russian trade sanctions, and strong non-oil import growth outweighed lower energy costs. - Output gap was broadly closed in 2016; it was negative in early 2017. - EBA model (2016): cyclically-adjusted CA was some 3 percent of GDP weaker than level implied by fundamentals and desirable policies. - External sustainability (ES) approach: CA deficit about 1.1 percent of GDP higher than level consistent with stabilizing NIIP at current level. - Staff assesses 2016 CA gap to be in the range of -1.5 to -3.5 percent of GDP; CA norm in range of -0.4 to -2.4 percent of GDP. - Real exchange rate: - 2016 average REER depreciated by 2 percent from year before; standing 16 percent below its 2010 peak. - Based on ES approach, about 6 percent REER adjustment required to stabilize current NIIP. - As of May 2017, REER depreciated by 9.7 percent relative to 2016 average. - Assessment: REER models have large errors for Turkey; staff prefers CA models, which assess REER was overvalued by about 7.5–15 percent on average in 2016. - Capital and financial accounts: - Significant external financing needs met due to ample global liquidity and attractive yields. - Net portfolio inflows turned positive in 2016 as a whole; last quarter of 2016 saw portfolio and other investment outflows. - Turkey has not used capital controls on inflows or outflows. - Assessment: large share of short-term debt exposes Turkey to rollover risks; one third of 2015-16 CA deficits covered by unaccounted inflows (BOP errors and omissions). - Gross external financing needs over 20 percent of GDP. - FX intervention and reserves: - Exchange rate: floating. - Since April 2016, CBRT stopped selling FX to commercial banks through regular auctions and reduced direct FX sales to energy-importing SOEs; net international reserves (NIR) replenished to US$35.4 billion at end-2016. - Gross international reserves (GIR) declined by 3.8 billion in 2016 and were just below 90 percent of the ARA metric; coverage of short-term debt about 65 percent. - Net international reserves make up only a third of GIR. - Assessment: given low net international reserves, further reserve accumulation is warranted. FX sales should be restricted to periods of disorderly market conditions. - Technical/background notes: - NIIP fluctuated in 2009-16 due to valuation effects and large BOP errors and omissions. - December 2016 TurkStat national accounts revision: 2015 nominal GDP revised up by 20 percent; 2015 CA deficit and NIIP are now 0.7 and 9 percentage points of GDP lower than before, respectively. - Staff’s midpoint estimate of CA norm range is around 0.5 percent of GDP lower than EBA CA norm. *Italic: Source — 2017-external-sector-report-individual-economy-assessments - 2.3 percent of GDP (1.5 percent of GDP from domestic policy* ### United Kingdom — NIIP, current account, REER, vulnerabilities, and policy recommendations - NIIP and external position: - NIIP strengthened by about 29 percentage points in 2016 to 24 percent of GDP, largely due to sterling depreciation. - Gross assets and liabilities amount to over 500 percent of GDP. - Staff projects NIIP to weaken moderately over the medium term; valuation effects create significant uncertainty. - Assessment: NIIP sustainability not a concern, but fluctuations in gross positions are potential vulnerabilities. - Overall assessment: - External position in 2016 was weaker than implied by medium-term fundamentals and desirable policy settings. - Current account deficit remained high in 2016, reflecting low public and private savings. - Over medium term, deficit expected to narrow helped by sterling depreciation and ongoing fiscal consolidation, but uncertainty is significant due to unknown future trade arrangements with the EU. - Policy responses recommended: - Continue current fiscal consolidation within a medium-term framework to support external rebalancing. - Structural reforms to broaden skill base and invest in public infrastructure to boost productivity and competitiveness. - Maintain financial stability through macroprudential policies to support private-sector saving. - Current account: - CA balance remained broadly unchanged in 2016 at -4.4 percent of GDP. - Trade balance stable at around -2 percent of GDP; wider deficits since global financial crisis largely from income balance losses. - General government deficit: 3.1 percent of GDP in 2016. - EBA CA regression approach estimates: - CA gap of -4.0 percent of GDP for 2016 (2016 cyclically adjusted CA -4.1 percent of GDP vs CA norm of 0.0 percent of GDP). - Staff assesses the 2016 cyclically-adjusted CA balance to be 1 to 4 percent of GDP weaker than the current account norm, with a mid-point of 2½ percent of GDP. - Sterling depreciation accounted for 1 percent of GDP in valuation effects observed at end-2016 and expected to improve NIIP and CA in 2017. - Real exchange rate: - Sterling depreciated by 10 percent in 2016 in real effective terms relative to 2015. - As of May 2017 REER depreciated by additional 4.2 percent relative to its 2016 average. - EBA REER level and index approaches suggest gaps of 2.8 and 3.2 percent, respectively, for 2016. - Overall staff assessment: REER between 0 and 15 percent above level consistent with fundamentals and desirable policies (range reflects CA assessment and uncertainty about future UK-EU trade relationship). - Capital and financial accounts: - Given UK’s role as international financial center, portfolio and other investment key components of financial account. - Large capital flow fluctuations inherent and potentially a source of vulnerability, mitigated by sound financial regulation and strong financial sector. - Risk: FDI and portfolio inflows may decelerate due to concerns about future trade relations with the EU. - FX intervention and reserves: - Pound has status of a global reserve currency. - Reserves held by the UK typically low relative to standard metrics; currency is free floating. - Technical/background notes: - Official NIIP data might understate true position; market-value estimates of FDI assets suggest higher NIIP but are uncertain. *Italic: Source — 2017-external-sector-report-individual-economy-assessments - 2.3 percent of GDP (1.5 percent of GDP from domestic policy* ### United States — NIIP, CA gap, REER, financial flows, risks, and policy recommendations - NIIP and trajectory: - NIIP declined from -16.8 percent of GDP in 2010 to -43.7 percent of GDP in 2016. - Under staff baseline, U.S. NIIP would deteriorate by about 6 percentage points of GDP over the next five years due to persistent current account deficits. - Assessment: financial stability risks could surface if foreign demand for U.S. debt securities unexpectedly declines; risks remain moderate due to U.S. dollar’s dominant reserve status (accounting for 60 percent of global reserves). - Most U.S. foreign assets are denominated in foreign currency; over 50 percent are in FDI and portfolio equity claims. - Overall assessment and policy recommendations: - U.S. external position was moderately weaker than implied by fundamentals and desirable policies in 2016. - Fiscal consolidation over time necessary to lower debt-GDP ratio; aim for a general government primary surplus of about ¾ percent of GDP (a federal government primary surplus of about 1 percent of GDP). - Structural policies to raise productivity within a declining fiscal deficit envelope: infrastructure investment, tax reform, better schooling and training, measures to support the working poor, policies to increase labor force growth. - On net, such policies should raise efficiency, lift productivity, and reduce CA deficit over time. - Current account: - CA deficit narrowed to 2.4 percent of GDP in 2016 from a pre-crisis maximum of 6 percent of GDP. - Drivers: reduction in fiscal deficit, higher private saving, lower investment post-crisis, stronger energy trade balance. - CA deficit expected to increase from 2016 through medium term due to stronger U.S. economy, U.S. dollar appreciation, and an assumed fiscal expansion. - EBA model estimates: cyclically-adjusted CA gap of -1.0 percent of GDP for 2016, partly reflecting policy gaps and an unidentified policy residual of -0.6 percent of GDP. - Staff view: 2016 cyclically-adjusted CA is between -0.7 and -1.7 percent weaker than level implied by fundamentals and desirable policies. - Real exchange rate: - REER appreciated in 2016 by about 3.1 percent compared to 2015. - As of May 2017, REER appreciated about 0.7 percent relative to 2016 average. - Indirect estimates imply exchange rate overvalued by between 10 to 20 percent in 2016. - EBA REER index analysis suggests an overvaluation of 15.8 percent. - Staff assessment: 2016 average REER moderately overvalued within range of 10 to 20 percent compared to level implied by fundamentals and desirable policies. - Capital and financial accounts: - Net financial inflows about 3 percent of GDP in 2016, below pre-crisis levels (~5 percent of GDP). - Portfolio inflows increased by about 1 percent of GDP year over year in 2016, offset by weaker direct investment and other inflows. - Foreign demand for U.S. Treasury securities likely supported by stronger U.S. outlook, dollar reserve status, and safe-haven motives. - Assessment: fully open capital account; vulnerabilities limited by dollar’s reserve currency status and U.S. safe-haven role. - FX intervention and reserves: - Dollar has status of global reserve currency. - Reserves held by the U.S. typically low relative to standard metrics; currency is free floating. - Technical/background notes: - U.S. has positive net equity position and negative debt position vis-à-vis rest of world. - Oil and gas portion of CA had a deficit of 0.4 percent of GDP in 2016, compared to 0.6 percent of GDP in 2015. - Example: at an oil price of $60 per barrel, implied wealth gains from shale discovery estimated to lower CA norm by about 0.25 percentage points of GDP. *Italic: Source — 2017-external-sector-report-individual-economy-assessments - 2.3 percent of GDP (1.5 percent of GDP from domestic policy* --- _Source: https://www.imf.org/-/media/files/publications/pp/2017/2017-external-sector-report-individual-economy-assessments.pdf_