## 2017-external-sector-report

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### Overview and purpose
- Documentation of the evolution of global external imbalances and updated assessment of external positions of 29 economies for 2016.
- Complements country assessments in the Individual Economy Assessments paper.
- Provides a detailed account of the process for assessing external positions, with special attention to persistent imbalances.
- Organization:
  - Section II: recent trends in external flow (current account) and stock imbalances (international investment positions) and exchange rates.
  - Section III: normative assessment of external positions (Box 1).
  - Section IV: outlook and policy recommendations.
  - Section V: large and persistent surpluses, historical evidence on persistence and reversals, and the role of corporations and households.

### Key concepts and assessment framework (Box 1)
- CA imbalance vs CA gap:
  - CA imbalance: any current account position different from zero (surplus or deficit) without judgement.
  - CA gap (excess imbalance): difference between the actual CA (stripped of cyclical and temporary factors) and the staff-assessed level consistent with fundamentals and desired medium-term policies (the “norm”).
  - Positive CA gap = excess surplus; negative CA gap = excess deficit.
- REER assessments:
  - REER gap normally consistent with assessed CA gap. Positive REER gap = overvalued exchange rate; negative REER gap = undervalued exchange rate.
- Multilateral consistency:
  - Positive CA gaps in some economies must be matched by negative gaps in others.
- Other indicators: financial account balances, international investment positions, competitiveness measures.

### 2016 developments — headline findings
- Global current account imbalances:
  - Broadly unchanged in 2016 at about 1.9 percent of world GDP.
  - Minor compositional shifts: some narrowing of China’s surplus and of deficits of selected EMDEs (Brazil, Indonesia, Mexico, South Africa); slightly higher surplus for Japan; higher deficit for the United States.
- Exchange rate movements in 2016:
  - Most currencies depreciated in nominal terms against the U.S. dollar, except the yen.
  - Real depreciations: United Kingdom (Brexit), China (capital outflow pressures), Mexico (trade-policy risks), South Africa (political developments).
  - Large real appreciations: Japan and some EMDEs (Brazil, Indonesia).
  - Euro and U.S. dollar: broadly unchanged in real terms during 2016.

### Reconfiguration of imbalances since 2013 — drivers and patterns
- Main patterns since 2013:
  - Marked shrinking of surpluses (into small deficits) in oil-exporting economies.
  - Narrowing of current account deficits in EMDEs.
  - Growing imbalances in advanced economies (AEs), with increased concentration of surpluses in some AEs (Germany, Japan, Korea, the Netherlands, Singapore, Switzerland, Sweden).
  - Higher or unchanged deficits in the United States and United Kingdom.
- Drivers:
  - Sharp drop in commodity prices, particularly oil, redistributing income away from commodity exporters toward importers.
  - Uneven demand recovery in systemic economies and related policy differences.
  - Policy responses and idiosyncratic factors alongside price and demand effects.
- Country-group mechanisms:
  - Oil exporters: pronounced terms-of-trade income shocks; net export volumes offset only a small portion of income losses; fiscal consolidation compressed domestic demand (example: Saudi Arabia).
  - Non-oil commodity exporters (Australia, Canada, New Zealand): expanding net export volumes, supported by weaker currencies, nearly fully offset price changes.
  - Brazil and Mexico: net exports more than offset exogenous price changes.
  - Commodity importers (United States, United Kingdom): terms-of-trade gains more than offset by trade volumes supported by stronger domestic demand and appreciating currencies.
  - China: large offset of terms-of-trade income gains reflecting policy stimulus.
  - Japan and euro area: limited spending of terms-of-trade gains; Japan’s expanding net exports added to gains.

### External adjustment in large deficit EMDEs (Box 2) — findings
- Countries studied: Brazil, India, Indonesia, Mexico, South Africa, Turkey.
- Drivers of sharp narrowing of current account deficits since 2012-13:
  - Rapid domestic demand slowdowns in most (except India), often driven by domestic idiosyncratic factors (e.g., political uncertainties in Brazil and South Africa during 2013-16).
  - General tightening of external financial conditions related to U.S. monetary policy normalization prospects.
  - Declines in terms of trade in some cases (Brazil, Mexico); improving terms of trade contributed in Indonesia, South Africa, Turkey, India.
- Policy contribution:
  - Weaker real exchange rates buffered negative external shocks.
  - Tighter fiscal policies contributed to adjustment in a few cases (particularly South Africa).

### Reserve accumulation and FX intervention — longer-term perspective (Box 3)
- Visual framework: net non-reserve capital inflows equal CA deficit along a diagonal; reserve purchases raise net private inflows, depreciate currency, and strengthen CA; reserve sales have opposite effects.
- Empirical patterns:
  - 2004-07 (pre-GFC): large CA surpluses (China, Japan, oil exporters, other EMs) associated with significant reserve accumulation.
  - 2010-13: CA imbalances narrowed for many surplus economies; reserve accumulation continued but at a slower pace; financial centers increased reserve accumulation.
  - 2014-16: CA surpluses concentrated in systemic AEs (euro area and Japan) without reserve accumulation; large reserve decumulation in oil exporters and China helped keep global imbalances in check; financial centers accumulated reserves at a slower pace.
- Main conclusion:
  - Over the longer term, reserve accumulation’s role as a driver of CA imbalances has diminished and recently reversed in some economies (notably China).
  - The current configuration points to factors other than currency intervention policy as main drivers.
- Link to stock imbalances and valuation effects:
  - Sustained CA imbalances since the GFC contributed to diverging stock positions.
  - Creditor-side accumulation of net foreign assets by euro area surplus countries and other AEs mirrored by widening of the U.S. net debtor position (also reflecting large valuation changes).
  - Valuation changes tended to play an NFA-stabilizing role since the GFC for many countries; the United States was an exception (CA deficits and valuation losses).

### Staff-assessed external gaps and classification (including the 0.4 percent of GDP statistic)
- Staff-assessed external gaps close to EBA gaps for most countries after adjustments.
- Uncertainty:
  - Staff assessments presented in ranges consistent with model standard errors.
  - Median standard deviation of EBA estimated CA norm: 1 percent of GDP.
- Global discrepancy statistic: 0.07 percent of global GDP (excess deficits exceeded excess surpluses by only 0.07 percent of global GDP).
- Highlighted figure appearing in document: 0.4 percent of GDP.
- 2016 excess CA imbalances — classification (selected):
  - Substantially stronger (excess surpluses above 4 percent of GDP): Germany, Singapore, Thailand.
  - Stronger (2-4 percent of GDP): Malaysia, Korea, Sweden, the Netherlands.
  - Moderately stronger (1-2 percent of GDP): China, Japan.
  - Substantially weaker (excess deficit of more than 4 percent of GDP): Saudi Arabia.
  - Weaker (2-4 percent of GDP): Turkey, the United Kingdom, Belgium, France, Spain.
  - Moderately weaker (1-2 percent of GDP): Australia, Canada, Italy, South Africa, United States.
  - Broadly in line with fundamentals and desirable policies: Brazil, Hong Kong SAR, India, Indonesia, Mexico, Poland, Switzerland.
  - Euro area as a whole: assessed as “broadly in line” (positive excess imbalances in some countries offset by negative excess imbalances elsewhere).
- Staff REER vs CA assessments:
  - REER assessments mostly map closely to CA assessments, with exceptions where REER movements are transitory or not yet reflected in the CA (examples: Japan, China, Mexico).

### Drivers of staff-assessed CA gaps (decomposition)
- Components:
  - “Identified policy gaps” (differences between actual and desired policies as included in EBA models).
  - “Other” distortions (not explicitly modeled).
- Foreign component of identified policies estimated at 0.9 percent of GDP in 2016.
- Fiscal stance examples:
  - Fiscal stances weaker than desirable contributed to excess deficits: Belgium, France, Spain, Russia, United Kingdom.
  - Higher-than-desirable health spending contributed in the United States.
  - Tighter-than-desirable fiscal stances boosted excess surpluses: Germany, Korea, Sweden, Thailand, Netherlands.
- Foreign exchange intervention in 2016: did not play a significant role overall.

### Shifts in excess imbalances since 2013 and totals
- Notable 2013→2016 shifts:
  - Narrowing of excess surpluses in China and Malaysia.
  - Narrowing of excess deficits in Brazil, India, Indonesia, Russia, South Africa, Turkey.
  - Increasing excess deficits in some large AEs: France, Italy, United Kingdom, United States.
  - Widening excess surpluses in Japan, Sweden, Netherlands, Thailand, Singapore.
  - Germany and Korea: excess surpluses remained large and broadly unchanged.
- Total excess global imbalances:
  - Total excess imbalances about 0.7 percent of global GDP in 2016.
  - Total excess imbalance of ESR countries ranged between 0.4 and 1.0 percent of global GDP (equivalent to ¼ to ½ of the actual global imbalance).
- Characteristic features:
  - Rotation increased concentration of excess imbalances in advanced economies.
  - Persistence of large excess surpluses remained a distinguishing feature.

### Reserve operations and policies, 2013–16
- Fiscal and credit policies:
  - Tighter fiscal and credit policies helped reduce excess deficits in some EMDEs (Indonesia, South Africa, Turkey).
  - Easing of policies contributed to narrowing excess surpluses in China.
  - Fiscal consolidation supported widening or persistence of excess surpluses in key AEs (Germany, Japan, Korea) but did little to reduce excess deficits in other AEs.
- Foreign exchange intervention:
  - Generally limited or consistent with rebalancing.
  - China and Malaysia sold significant reserves to support currencies while maintaining reserve adequacy.
  - Brazil and Indonesia purchased reserves to limit widening of excess deficits.
  - Russia and Turkey sold reserves despite weaker external positions (Turkey deteriorating reserve coverage).
  - Thailand accumulated reserves despite excess surpluses.
  - Financial centers: large reserve purchases in Hong Kong SAR and Switzerland; substantial reserve sales in Singapore.

### Developments since 2016, outlook and medium-term projections
- Currency movements through end-May 2017:
  - U.S. dollar and euro: broadly unchanged in real terms relative to 2016.
  - Sterling and yen: down about 4 percent (real terms) relative to 2016.
  - Renminbi: down 2¾ percent (real terms) relative to 2016.
  - Key EMDEs (Brazil, India, Russia, South Africa): significant real appreciations through end-May relative to 2016, which could exacerbate excess external imbalances.
  - Turkish lira: weakened by about 10 percent in real terms relative to 2016, accompanied by some widening of the CA deficit.
- Projected medium-term trajectory absent decisive policy action:
  - Flow imbalances: staff project broadly unchanged global imbalances, with moderately higher U.S. CA deficits offset by improvements in the United Kingdom and key oil exporters (latter supported by fiscal consolidation).
  - Key surplus economies (China, Germany, Japan, Korea, Netherlands): surpluses projected to persist, marginally narrowing because of structural reforms, reversal of temporary factors, and expected realignment of competitiveness.
  - Stock imbalances projected to widen:
    - U.S. net debtor position expected to deteriorate further, exceeding -50 percent of GDP by 2021.
    - Japan and Germany net creditor positions projected to continue increasing, reaching over 80 percent of GDP over the next five years.
    - China’s net creditor position projected to remain broadly unchanged over the medium term.
  - Narrowing excess CA imbalances would moderate projected widening of stock imbalances.
- Underlying causes limiting automatic adjustment: weak automatic adjustment mechanisms, in part due to rigid currency arrangements in both key surplus and deficit economies (including within the euro area).

### Trade protectionism — modeled scenario and impacts (Box 6, GIMF)
- Model setup: IMF Global Integrated Monetary and Fiscal (GIMF) multi-country model; three-region setup: deficit country, surplus country, rest of the world.
- Policy experiment:
  - Deficit country imposes a non-tariff barrier for 2 years on imports from the surplus country (roughly equivalent to a 10 percent tariff).
  - Surplus country retaliates one year after by imposing reciprocal trade restrictions for two years.
  - Restrictions lifted in the fourth year.
- Simulated impacts (deviations from baseline):
  - Deficit country:
    - Trade balance improves by 0.3 percent of GDP after 3 years.
    - Imports down 4 percent relative to baseline.
    - Real exchange appreciation averaging 1 percent over 3 years.
    - Transitory reduction in exports.
    - Output (GDP) declines on average by about 0.1 percent during the first three years.
  - Surplus country:
    - Trade balance declines by 0.25 percent of GDP over 3 years.
    - Exports decline by 1.25 percent over 3 years.
    - Average reduction of output of 0.3 percent during the first three years.
  - Global impact:
    - Global GDP experiences an average decline of 0.1 percent while protectionist policies are in place.
    - Trade restrictions can narrow global imbalances slightly but impact is small; real exchange rates partly offset trade barriers.
    - Imbalances in the rest of the world roughly unchanged.
- Additional findings:
  - Global GDP losses increase with duration of protectionist policies.
  - Protectionism likely increases global uncertainty and financial volatility beyond model channels.

### Global risks from the new configuration of imbalances and policy guidance
- Risks:
  - Rotation toward AEs reduces near-term deficit-financing risks but increases concentration in a few systemic economies, heightening risk of protectionist responses and disruptive corrections due to diverging stock positions.
  - More accommodative U.S. fiscal policy could lead to faster monetary normalization, sharper U.S. dollar appreciation, and disruptive effects in EMDEs with large external financing needs.
  - Insufficient reforms in surplus economies could promote wider imbalances (notably China).
- Policy prescriptions (summary of country/region actions):
  - General: recalibrate policy mix in excess deficit and surplus economies; focus on structural reforms complemented by supportive macro policies.
  - Excess surplus countries with fiscal space and negative output gaps (Korea, Thailand): use fiscal policy to support demand and reduce reliance on monetary policy.
  - China: fiscal and credit policies to support rebalancing from investment toward consumption and address financial vulnerabilities.
  - Japan: supportive fiscal policy conditional on credible medium-term consolidation plan.
  - Countries without independent monetary policy: internal appreciation needed.
  - Countries with fiscal space and healthy cyclical positions (Germany, Netherlands): use tax and spending to promote private and public investment, labor force participation, consumption.
  - Where output gaps are closed and fiscal and monetary policy available: tighter monetary and easier fiscal orientation desirable.
  - Adequate reserves (Thailand): limit reserve intervention to disorderly conditions and allow exchange rate flexibility.
  - Excess deficit countries with slack: generally avoid fiscal easing; rely on accommodative monetary policy.
  - Near-term fiscal easing envisaged (Canada): adopt timebound consolidation plan to reverse projected currency strengthening and CA widening.
  - Output near potential (United States): fiscal consolidation and gradual monetary normalization.
  - High inflation pass-through and above-target inflation (Turkey): tighten monetary policy while opportunistically building FX reserves; strengthen macroprudential measures.
  - Countries without independent monetary policy (France, Italy, Spain, Saudi Arabia): internal devaluation supported by fiscal consolidation and growth-friendly tax/spending policies plus labor market reforms.

### Structural reforms to address imbalances
- Aim: boost demand, reduce saving, facilitate relative price adjustments in excess surplus countries.
- Examples:
  - Reduce barriers to foreign competition and domestic investment in services and residential investment (China, Germany, Japan, Korea, Thailand, Sweden).
  - Facilitate private sector balance sheet repair (the Netherlands).
  - Expand social safety nets to discourage precautionary saving (China, Korea, Malaysia, Thailand).
  - Encourage labor force participation by the elderly and other groups with high consumption propensities (Germany, Japan, Singapore).
- In excess deficit countries:
  - Implement labor market reforms to moderate nominal wage increases and reduce unit labor costs (France, Italy, Spain).
  - Lower costs of doing business (Brazil, India, Italy, Russia).
  - Improve skill base and encourage innovation in export sector (Canada, France, United Kingdom, United States).
  - Reduce generosity of pension systems (Brazil, Italy, Turkey).

### Evidence on reforms and trade distortions
- Product Market Reforms (PMRs) and labor market reforms (LMRs):
  - PMRs can reduce CA imbalances in countries with large persistent surpluses: PMR reduces current account to GDP ratio by 2 percentage points over 5 years in response to a PMR.
  - LMRs have more ambiguous effects.
- Trade distortions:
  - Savings and investment levels largely determined by macro factors (cyclical position, fundamentals, policy settings).
  - Trade-related distortions generally not a key driver of overall savings and investment levels; removing distortions can boost productivity and global output.
  - Services sector reforms have strong potential given large share and high barriers.

### Large and persistent surpluses — occurrence, rotations, and reversals
- Historical counts:
  - Since 1960: about 40 large and persistent current account surplus episodes; 70 large and persistent deficit episodes.
  - Until mid-1980s, surplus episodes concentrated in oil exporters and financial centers; more recently distribution includes standard AEs and EMDEs.
- Surplus episodes:
  - Two thirds of large and persistent surplus episodes were in AEs (15 in AEs vs. 7 in EMDEs).
  - Surpluses in financial centers and oil exporters larger (8-13 percent of GDP) and longer (12-15 years).
- Ongoing vs completed episodes:
  - Ongoing episodes are larger and longer than completed episodes; many ongoing spells reflect excess surpluses.
  - EBA model: standard fundamentals (e.g., demographics) play only a partial role in accounting for large persistent surplus spells.
- Drivers and mechanisms for reversals:
  - Reversals require triggering forces (endogenous private demand expansion, corrective policies, external factors such as drop in foreign demand or terms-of-trade deterioration).
  - Significant and sustained reversals rare: fewer than half of completed surplus spells ended with such reversals (4 out of 15 for AEs; 6 out of 7 for EMDEs).
  - In reversal cases, surpluses averaged almost 9 percent of GDP in three years before reversal; narrowed on average by 9 percent of GDP during reversals.
  - EMDE reversals twice as fast (4 years) as for AEs (8 years).
  - Reversals often associated with real exchange rate appreciation, fiscal expansion, terms of trade deterioration, increase in private credit, reduction in saving.

### Sectoral decomposition and the “corporate veil”
- Stylized facts (panel of 23 AEs since mid-1990s):
  - Surplus countries save and invest more than deficit countries; saving differential larger than investment differential.
  - Higher corporate saving in surplus countries is a large and persistent contributor to current account differentials.
  - Household saving differs little between surplus and deficit countries; household saving fails to neutralize higher corporate saving in surplus countries.
- Corporate saving correlates with:
  - Share of intangibles in investment (intangibles difficult to collateralize → firms accumulate internal funds).
  - Large manufacturing sector and higher profitability.
  - Outliers: United States and France have low corporate saving despite high intangible intensity.
- Post-GFC shift:
  - Aggregate shift of AEs into surplus reflects large increase in private net lending not fully offset by public borrowing.
  - Corporate surge in net lending aligns with pre-GFC structural trends (trend increase in gross corporate saving).
  - Household sector diverged from pre-GFC model: household net lending increased post-GFC and remained persistent; pre-GFC models under-predict this household behavior (gap > 1 percent of GDP in 2015 for deficit countries).

### Corporate and household sector findings (paras 47–53)
- Corporate sector:
  - Predicted corporate investment and gross saving slightly higher than realized outcomes; predicted net lending close to actual levels.
  - High corporate saving is a distinguishing feature of surplus countries; surge in corporate saving post-GFC broadly in line with pre-existing trends.
- Household sector:
  - Pre-GFC models under-predict post-GFC household net lending; gap persistent and especially pronounced in deficit countries (still more than 1 percent of GDP in 2015).
  - Possible explanations: thickening of the corporate veil, household balance sheet repair, or reversal of pre-crisis exuberance.
- Dynamics of large and persistent surpluses:
  - Surpluses likely to revert only when very large; weak automatic adjustment mechanisms complicate correction.
- Policy implications:
  - About one-third of surplus AEs’ imbalances deemed excessive.
  - Decisive policy actions required to mitigate risks from continued excess imbalances.
  - Research priorities: drivers of corporate and overall saving behavior in AEs and role of distortions (corporate governance, capital markets).

### Selected economies: current account balances (2013–16) — headline statistics (selected entries)
- Top surplus economies in 2016 (USD, and percent of World GDP where shown):
  - Germany: 2013 = 251.8; 2014 = 289.7; 2015 = 288.5; 2016 = 289.0; percent of World GDP = 0.3, 0.4, 0.4, 0.4; additional columns 6.7, 7.5, 8.6, 8.3.
  - China: 2013 = 148.2; 2014 = 236.0; 2015 = 304.2; 2016 = 196.4; percent of World GDP = 0.2, 0.3, 0.4, 0.3; additional columns 1.5, 2.2, 2.7, 1.7.
  - Japan: 2013 = 45.9; 2014 = 36.8; 2015 = 134.1; 2016 = 188.1; percent of World GDP = 0.1, 0.0, 0.2, 0.3; additional columns 0.9, 0.8, 3.1, 3.8.
  - Korea: 2013 = 81.1; 2014 = 84.4; 2015 = 105.9; 2016 = 98.7.
  - Switzerland: 2013 = 79.0; 2014 = 61.8; 2015 = 77.3; 2016 = 70.4.
  - Singapore: 2013 = 51.2; 2014 = 60.8; 2015 = 53.8; 2016 = 56.5.
  - Netherlands: 2013 = 85.5; 2014 = 78.6; 2015 = 66.2; 2016 = 64.8.
  - Thailand: 2013 = -4.8; 2014 = 15.1; 2015 = 32.1; 2016 = 46.8.
- Top deficit economies in 2016 (USD, and percent of World GDP where shown):
  - United States: 2013 = -349.5; 2014 = -373.8; 2015 = -434.6; 2016 = -451.7; percent of World GDP = -0.5, -0.5, -0.6, -0.6; additional columns -2.1, -2.1, -2.4, -2.4.
  - United Kingdom: 2013 = -119.6; 2014 = -140.0; 2015 = -122.7; 2016 = -114.5.
  - Canada: 2013 = -59.4; 2014 = -43.6; 2015 = -52.8; 2016 = -50.5.
  - Australia: 2013 = -48.3; 2014 = -41.7; 2015 = -58.2; 2016 = -33.3.
  - Turkey: 2013 = -63.6; 2014 = -43.6; 2015 = -32.1; 2016 = -32.6.
  - Mexico: 2013 = -31.0; 2014 = -26.2; 2015 = -33.3; 2016 = -27.9.
  - France: 2013 = -24.6; 2014 = -36.2; 2015 = -10.7; 2016 = -24.5.
  - Saudi Arabia: 2013 = 135.4; 2014 = 73.8; 2015 = -56.7; 2016 = -24.9.
  - Brazil: 2013 = -74.8; 2014 = -104.2; 2015 = -59.4; 2016 = -23.5.
  - India: 2013 = -32.3; 2014 = -26.8; 2015 = -22.1; 2016 = -15.2.
- World aggregates:
  - Surpluses (world): 2013 = 1,517.4; 2014 = 1,563.4; 2015 = 1,506.4; 2016 = 1,506.4; percent of World GDP = 2.0, 1.9, 2.0, 1.8.
  - Deficits (world): 2013 = -1,118.3; 2014 = -1,149.9; 2015 = -1,281.6; 2016 = -1,124.3; percent of World GDP = -1.5, -1.4, -1.7, -1.5.

### Staff assessments, EBA gaps, and selected numbers (tables summary)
- Selected staff assessments (2016, selected rows):
  - Australia: Overall = Moderately Weaker; Actual CA = -2.6; Cycl Adj. = -2.0; Midpoint = -1.0; Low = -2.0; High = 0.0; NIIP = 128; CA/REER Elasticity = 0.19.
  - Belgium: Overall = Weaker; Actual CA = -0.4; Cycl Adj. = -0.5; Midpoint = -3.3; Low = -4.3; High = -2.3; NIIP = 464; CA/REER Elasticity = 0.71.
  - China: Overall = Moderately Stronger; Actual CA = 1.7; Cycl Adj. = 1.8; Midpoint = 1.5; Low = 0.5; High = 2.5; NIIP = 58; CA/REER Elasticity = 0.23.
  - Germany: Overall = Substantially Stronger; Actual CA = 8.3; Cycl Adj. = 8.5; Midpoint = 4.5; Low = 3.0; High = 6.0; NIIP = 251; CA/REER Elasticity = 0.38.
  - Japan: Overall = Moderately Stronger; Actual CA = 3.8; Cycl Adj. = 3.1; Midpoint = 1.0; Low = 0.0; High = 2.0; NIIP = 174; CA/REER Elasticity = 0.14.
  - Netherlands: Overall = Stronger; Actual CA = 8.4; Cycl Adj. = 8.5; Midpoint = 3.0; Low = 2.0; High = 4.0; NIIP = 1,098; CA/REER Elasticity = 0.33.
  - Saudi Arabia: Overall = Substantially Weaker; Actual CA = -3.9; Midpoint = -7.7; Low = -9.7; High = -5.7; NIIP = 144.
  - United States: Overall = Moderately Weaker; Actual CA = -2.4; Cycl Adj. = -2.3; Midpoint = -1.2; Low = -1.7; High = -0.7; NIIP = 129; CA/REER Elasticity = 0.12.

- EBA and staff-assessed CA gaps (selected entries, percent of GDP):
  - 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 [E] = -1.0; STD of EBA Gap = 0.66; NIIP = -58.7; CA NFA Stabilizing = -2.8.
  - China: [A] = 1.7; [B] = 1.8; [C] = 0.2; [D] = 1.5; [E] = 1.5; STD = 1.61; NIIP = 16.1; CA NFA Stabilizing = 1.6.
  - Germany: [A] = 8.3; [B] = 8.5; [C] = 4.5; [D] = 4.0; [E] = 4.5; STD = 1.17; NIIP = 51.8; CA NFA Stabilizing = 1.6.
  - Japan: [A] = 3.8; [B] = 3.1; [C] = 3.4; [D] = -0.3; [E] = 1.0; STD = 1.82; NIIP = 62.2; CA NFA Stabilizing = 2.8.
  - Netherlands: [A] = 8.4; [B] = 8.5; [C] = 5.3; [D] = 3.2; [E] = 3.0; STD = 1.61; NIIP = 72.3; CA NFA Stabilizing = 2.4.

### Regression decompositions and policy-gap contributions (selected country entries)
- Purpose: quantify total, identified, and residual contributions to CA gaps from policy variables (fiscal gap, public health expenditure gap, change in FX reserves + capital controls, other/private credit gap) and a domestic coefficient-based decomposition.
- Selected examples (Total / Identified / Residual — percent of GDP):
  - Australia: Total = -0.5; Identified = 0.3; Residual = -0.8.
  - China: Total = 1.5; Identified = -0.4; Residual = 1.9.
  - Germany: Total = 4.0; Identified = 1.4; Residual = 2.6.
  - India: Total = 3.1; Identified = 1.1; Residual = 2.0.
  - Korea: Total = 4.3; Identified = 2.5; Residual = 1.7.
- Notes: totals adjusted for multilateral consistency; values in percent of GDP.

### 2016 Individual Country Assessments — key policy recommendations (selected, verbatim)
- Australia — Overall: Moderately Weaker
  - Fiscal: Gradual Consolidation
  - Monetary: Further easing if growth weakens
- Belgium — Overall: Weaker
  - Fiscal: Steady consolidation with labor tax reduction
  - Structural: Product and labor market reforms (to address labor market fragmentation)
- Brazil — Overall: Broadly Consistent
  - Fiscal: Consolidation (social security reforms and new federal spending cap)
  - Monetary: ER flexibility. Intervention to smooth volatility; maintain reserve buffers.
  - Structural: Improve competitiveness by lowering costs of doing business
- China — Overall: Moderately Stronger
  - Monetary: Gradually move toward transparent, market-based MP framework and ER flexibility (when practical).
  - Structural: Improve social safety nets, enhance competition, market-based financial system; continue SOE reforms; attract more inward FDI by ensuring foreign investors receive same treatment as domestic investors.
- Germany — Overall: Substantially Stronger
  - Fiscal: More growth-oriented fiscal policy
  - Structural: Reforms to address aging costs by prolonging working life.
- India — Overall: Broadly Consistent
  - Fiscal: Continue fiscal consolidation (goods and service tax and subsidy reforms)
  - Structural: Ease domestic supply bottlenecks and enhance business climate (attract FDI, boost exports and investment).
- Japan — Overall: Moderately Stronger
  - Fiscal: Gradual fiscal consolidation
  - Structural: Measures to boost wages and labor supply, reduce labor market duality, enhance risk capital provision, accelerate agricultural and services sector deregulation.
- Korea — Overall: Stronger
  - Fiscal: Supportive fiscal policies
  - Monetary: ER flexibility with limited intervention.
  - Structural: Strengthening social safety net to lessen precautionary savings and addressing bottlenecks to investment.
- Saudi Arabia — Overall: Substantially Weaker
  - Fiscal: Fiscal consolidation necessary over short- and medium term.
  - Structural: Structural reforms to diversify economy and boost non-oil tradeable sector.
- Singapore — Overall: Substantially Stronger
  - Fiscal: More fiscal stimulus to boost domestic demand
  - Structural: Ongoing reforms and restrictions on foreign worker inflows to contribute to higher investment.
- South Africa — Overall: Moderately Weaker
  - Fiscal: Fiscal consolidation.
  - Monetary: Seize opportunities to build-up reserves to deal with FX liquidity shocks
  - Structural: Improve infrastructure; strengthen education/skills; greater financial inclusion; accelerate labor and product market reforms
- United States — Overall: Moderately Weaker
  - Fiscal: Gradual consolidation.
  - Structural: Tax reform, better schooling and training, measures to support working poor, policies to increase labor force.

### Technical appendices — methods and measurement
- Appendix I — Decomposing Current Account Variations:
  - Identity: Current account = trade balance + income account balance; nominal exports/imports expressed as price and volume components.
  - Change in CA/GDP broken into: volume effect, price effect (terms-of-trade income windfall), income account, reconciliation term.
- Appendix II — Calculating IIP valuation changes:
  - Residual method: change in NFA = current account + residual (valuation gains/losses and other changes).
  - Cumulative valuation changes obtained via recursive substitution; reported for 2010–16 in Figure 6.
  - Denomination choice affects relative importance of flow vs stock variables; robustness checks using local-currency-denominated variables show similar results.
  - Data and measurement issues: residual method subject to measurement error from flow/stock treatment differences, changes in IIP survey coverage, debt write-offs; financial centers experienced very large valuation changes during 2010–15, partly reflecting measurement error.

*International Monetary Fund — 2017 External Sector Report (Overview and selected sections as provided).*

### References _______________________________________________________________________________________ 39

### 2017-external-sector-report - References

### Overview
- The 2017 External Sector Report (ESR) provides:
  - Documentation of the evolution of global external imbalances.
  - An updated assessment of the external positions of 29 economies for 2016.
  - A global view complementing country assessments in the Individual Economy Assessments paper.
  - A more detailed account of the process for assessing external positions, with special attention to persistent imbalances.
- Organization of the report:
  - Section II: recent trends in external flow (current account) and stock imbalances (international investment positions) and exchange rates.
  - Section III: normative assessment of external positions (Box 1).
  - Section IV: outlook and policy recommendations.
  - Section V: large and persistent surpluses, historical evidence on persistence and reversals, and the role of corporations and households.

### Key concepts and assessment framework (Box 1)
- Distinction between CA imbalance and CA gap:
  - CA imbalance: any current account position different from zero (surplus or deficit) without judgement.
  - CA gap (excess imbalance): difference between the actual CA (stripped of cyclical and temporary factors) and the staff-assessed level consistent with fundamentals and desired medium-term policies (the “norm”).
  - A positive CA gap = a “stronger” CA than implied by fundamentals/desired policies (excess surplus); a negative CA gap = a “weaker” CA (excess deficit).
- REER assessments:
  - Assessments include a view on the real effective exchange rate (REER)—normally consistent with the assessed CA gap.
  - A positive REER gap implies an overvalued exchange rate; a negative REER gap implies an undervalued exchange rate.
- Multilateral consistency:
  - Assessments are multilaterally consistent: positive CA gaps in some economies must be matched by negative gaps in others.
- Other indicators considered: financial account balances, international investment positions, competitiveness measures.

### 2016 developments — summary findings
- Global current account imbalances:
  - Broadly unchanged in 2016 at about 1.9 percent of world GDP.
  - Minor compositional shifts: some narrowing of China’s surplus and of deficits of selected EMDEs (Brazil, Indonesia, Mexico, South Africa); slightly higher surplus for Japan; higher deficit for the United States.
- Exchange rate movements in 2016:
  - Most currencies depreciated in nominal terms against the U.S. dollar, with the notable exception of the yen.
  - Real depreciations implied for the United Kingdom (Brexit), China (capital outflow pressures), Mexico (trade-policy risks), and South Africa (political developments).
  - Large real appreciations for Japan and some EMDEs (Brazil, Indonesia).
  - The euro and the U.S. dollar were broadly unchanged in real terms during 2016.

### Reconfiguration of imbalances since 2013 — drivers and patterns
- Main patterns since 2013:
  - Marked shrinking of surpluses (into small deficits) in oil-exporting economies.
  - Narrowing of current account deficits in EMDEs.
  - Growing imbalances in advanced economies (AEs), with increased concentration of surpluses in some AEs (Germany, Japan, Korea, the Netherlands, Singapore, Switzerland, Sweden).
  - Higher or unchanged deficits in the United States and United Kingdom.
- Drivers of the reconfiguration:
  - Sharp drop in commodity prices, particularly oil, redistributing income away from commodity exporters toward importers.
  - Uneven demand recovery in systemic economies and related differences in policies.
  - Policy responses and idiosyncratic factors played a key role alongside price and demand effects.
- Specific mechanisms and country-group behavior:
  - Commodity exporters:
    - For oil exporters as a group, terms-of-trade income shocks were pronounced; net export volumes offset only a small portion of income losses, partly due to rigid exchange rate arrangements; fiscal consolidation supported some domestic demand compression (example: Saudi Arabia).
    - Other commodity exporters (Australia, Canada, New Zealand) saw expanding net export volumes, supported by weaker currencies, nearly fully offset price changes.
    - Brazil and Mexico saw net exports more than offset exogenous price changes.
  - Commodity importers:
    - United States and United Kingdom: terms-of-trade income gains were more than offset by trade volumes supported by stronger domestic demand and appreciating currencies.
    - China: large offset of terms-of-trade income gains reflecting policy stimulus.
    - Japan and the euro area: limited spending of terms-of-trade income gains; expanding net exports in Japan added to gains, euro area showed limited spending amid weaker currencies and slower domestic demand recovery.
  - Fiscal policy:
    - Excepting China, fiscal policy had a limited role in driving imbalances since 2013; consolidation was more gradual and evenly distributed.

### External adjustment in large deficit EMDEs (Box 2) — findings
- Countries studied: Brazil, India, Indonesia, Mexico, South Africa, Turkey.
- Drivers of sharp narrowing of current account deficits since 2012-13:
  - Rapid domestic demand slowdowns in most countries (except India), often driven by domestic idiosyncratic factors (notably political uncertainties and governance problems in Brazil and South Africa during 2013-16).
  - General tightening of external financial conditions related to prospects of U.S. monetary policy normalization; declines in terms of trade in some cases (Brazil, Mexico).
  - Improving terms of trade contributed to current account strengthening in Indonesia, South Africa, Turkey, and India.
- Policy contribution:
  - Weaker real exchange rates helped buffer negative external shocks.
  - Tighter fiscal policies contributed to adjustment in a few cases (especially South Africa).

### Patterns of private capital flows and foreign exchange intervention (2013-16)
- Net non-reserve flows to EMDEs:
  - Dominated by China’s abrupt reversal from net inflows to outflows, reflecting increased uncertainties about growth prospects and financial stability amid gradual capital account opening.
  - China’s foreign exchange intervention took the form of reserve sales, leading to cumulative reserve losses of about 7 percent of GDP during 2014-16 while preventing an even greater weakening of the renminbi.
  - Net non-reserve outflows also sizable for Russia and Saudi Arabia (stabilizing in 2016), partly reflecting weaker growth prospects from lower oil prices and geopolitical tensions (Russia).
  - Russia and Saudi Arabia sold sizable amounts of reserves to deal with terms-of-trade and confidence shocks and to prevent a more rapid slowdown in demand.
- Other EMDEs:
  - Net inflows slowed due to lower growth prospects, higher borrowing costs (especially for commodity exporters), and improved terms of trade for commodity importers (reducing demand for external financing).
  - Foreign exchange intervention was limited in most countries during 2013-16.
- Safe-haven flows and reserve accumulation in financial centers:
  - Financial turbulence (partly due to China) led to safe-haven flows into financial centers, which accumulated foreign exchange reserves to mitigate large flows.
  - Central bank balance sheets expanded markedly in Switzerland and Hong Kong SAR, with cumulative foreign exchange purchases reaching about 30 and 16 percent of GDP, respectively, during 2014-16.
- Reserve losses and reversals:
  - Reserve losses during 2014-16 reached 8 percent of GDP in Russia and exceeded 30 percent in Saudi Arabia (fully unwinding the accumulation of the previous three years), amid current account deficits since 2015.

### Figures, boxes, and appendices (selected items listed in the source)
- Boxes include: External Assessments Objective and Concepts; External Adjustment in Large Deficit EMDEs; Reserve Accumulation and Global Imbalances: A Longer-Term Perspective; Demographics and the EBA Current Account Norm; Country-Specific Adjustments to the EBA Model Current Account Gaps; Trade Protectionism, Global Imbalances, and Growth; Structural Reforms and External Adjustment; Trade Distortions and the Current Account.
- Figures document: evolution of global current account balances and exchange rates, evolution of external current accounts and REERs, contributions to change in current account balance, non-reserve capital flows and reserve accumulation in EMDEs, international investment positions, flow imbalances and valuation changes, estimated current account norms, staff-assessed vs. EBA estimated gaps, fiscal policy gap contributions, global excess imbalances, evolution of ESR external assessments, foreign exchange intervention and reserve adequacy, projected NIIP, external vs. internal imbalances, share and duration of large and persistent imbalances, and sectoral saving/lending patterns.
- Appendices: I. Decomposing Current Account Variations; II. Calculating IIP Valuation Changes.

*International Monetary Fund — 2017 External Sector Report (Overview and selected sections as provided).*

### Box 3. Reserve Accumulation and Global Imbalances: A Longer-Term Perspective

### Box 3. Reserve Accumulation and Global Imbalances: A Longer-Term Perspective

### Role of reserve accumulation and foreign exchange intervention (FXI)
- The debate centers on whether reserve accumulation and FXI in surplus countries drove global current account (CA) imbalances, though FXI may also reflect liquidity-buffer motives or mitigation of global capital flow cycles.
- Visual framework: along a diagonal where net non-reserve capital inflows equal the CA deficit, change in official reserves is nil. Increased reserve purchases raise net private capital inflows, depreciate the currency, and strengthen the CA (move up and right); reserve sales move down and left.
- Time periods analyzed: 2004-07 (pre-GFC), 2010-13 (post-GFC immediate years), 2014-16 (recent configuration).

### Empirical patterns by period
- Pre-GFC (2004-07)
  - Large external CA surpluses—primarily in China, Japan, oil exporting countries and other EM economies—were associated with significant reserve accumulation.
- 2010-13
  - CA imbalances of economies with previously large surpluses narrowed markedly (except financial centers), driven mainly by a sharp slowdown in external demand as key advanced economies deleveraged.
  - Reserve accumulation continued in many economies facing sustained capital inflows (partly due to accommodative monetary conditions in advanced economies), but at a significantly slower pace.
  - Reserve accumulation increased sharply in financial centers amid sustained CA surpluses and increased capital flows.
  - Some emerging economies gained reserves despite negative CAs because of sizable capital inflows.
- 2014-16
  - CA surpluses became more concentrated in systemic advanced economies (euro area and Japan) without reserve accumulation.
  - Large reserve decumulation in oil exporters (reflecting lower oil prices) and China helped keep global imbalances in check.
  - Financial centers continued accumulating reserves but at a significantly slower pace due to slowing capital inflows.

### Main conclusion on FXI as driver of CA imbalances
- Over the longer term, the role of reserve accumulation as a driver of CA imbalances has diminished significantly and recently reversed in some economies (notably China).
- It remains unclear whether this shift reflects changing exchange rate policies (policy reaction functions) or changes in the external environment.
- The current configuration of global imbalances points to factors other than currency intervention policy as the main drivers.

### Data and classification notes
- Charts and calculations cover non-reserve capital flows, current accounts and reserve changes for 2004-16 (percent of GDP).
- Sample includes EBA countries plus Hong Kong SAR, Saudi Arabia and Singapore.
- Green (red) circles indicate economies with significant accumulation (decumulation) of reserves; others are light blue. Circles are proportional to absolute value of CA balance as share of world GDP (contribution to global imbalances).
- Values for financial centers fall outside graph scales and are denoted in labels.

### Link to stock imbalances and valuation effects (contextual findings from related sections)
- Sustained CA imbalances since the GFC contributed to diverging stock positions; after slowing post-GFC, stock imbalances widened again in recent years.
- Creditor-side accumulation of net foreign assets mainly by euro area surplus countries (Germany, the Netherlands) and other AEs (Hong Kong SAR, Korea, Singapore, Sweden) was mirrored largely by a widening of the U.S. net debtor position (also reflecting large valuation changes).
- Flow imbalances drove global widening of stock positions: most net creditors in 2010 have run CA surpluses since then; net debtors have run deficits.
- Cumulative CA imbalances have been partly offset by valuation changes in many cases; valuation changes tended to play a NFA-stabilizing role since the GFC (opposite sign to CA balances).
  - Countries with large persistent CA surpluses (China, Germany, Japan) experienced valuation losses, containing NFA increases.
  - Countries with persistent CA deficits (Brazil, Canada, South Africa, United Kingdom) experienced valuation gains, mitigating NFA weakening.
  - United States was an exception: both CA deficits and valuation losses (mostly due to U.S. dollar appreciation).
  - Valuation changes were especially stabilizing in some financial centers, raising measurement questions for IIP and BOP in those economies.

### Methodological and institutional context for external assessments (relevant inputs)
- ESR assessments compare actual CA balances (stripped of temporary factors) with “current account norms” consistent with medium-term fundamentals and desired policies.
- Assessments cover 28 systemic economies plus the euro area that account for more than 85 percent of global GDP.
- The ESR combines numerical inputs from IMF External Balance Assessment (EBA) models with country-specific judgments from IMF country teams to ensure multilaterally consistent norms.
- EBA models estimate relationships using a panel of 49 countries over 28 years (1986-2013), including fundamentals (income level, medium-term growth potential, institutions, demographics, NFA, oil exporter/financial center/reserve currency status) and policy variables (fiscal stance, health spending, reserve accumulation, capital account openness index, credit as share of GDP). Models also estimate impact of terms of trade and the output gap to construct cyclically-adjusted CA measures.
- Policy variables are set to medium-term desired levels to compute norms; country teams identify desired policies and assess policy gaps relative to weighted sample averages.
- Estimated CA norms vary substantially across countries in 2016, with generally positive norms for higher-income, lower-growth countries with higher longevity and working-age shares (e.g., Switzerland, Netherlands, Germany, Japan, Italy) and negative norms for poorer, faster-growing countries (e.g., India, Brazil, Mexico). Reserve-currency status lowers the U.S. norm relative to peers.

### Adjustments and judgment in assessments
- Cyclically-adjusted CAs and EBA norms are adjusted for country-specific temporary factors and structural features beyond EBA coverage; adjustments apply to underlying CA positions and/or estimated norms when strongly justified.
- Examples of adjustments (2016): larger-than-estimated terms-of-trade impacts (Thailand, Malaysia, India); political transition delays (Thailand); temporarily high energy imports (Japan); temporarily low income flows (United Kingdom); mismeasurement from merchanting and financial-center activities (Korea, Sweden, Switzerland).
- Adjustments to norms address structural features not captured by EBA, including external financing risks (guided by external sustainability estimates for Brazil, India, Spain), demographic refinements (Sweden, Germany), projected structural changes (Japan), or sector productivity issues (Canada).
- Multilateral consistency requires evenhanded application of adjustments across countries; for the 2016 assessments, the median staff adjustment was roughly (text truncated in source).

*Prepared by Gustavo Adler; sources: WEO and IMF staff calculations; includes EBA sample and IMF staff assessments.*

### 0.4 percent of GDP

### 2017-external-sector-report - 0.4 percent of GDP

### Staff-assessed external gaps and overall discrepancy
- Staff-assessed external gaps, after introducing adjustments, were close to the EBA gaps for most countries.
- Staff assessments are presented in ranges to reflect uncertainties, which are generally consistent with the model’s standard errors.
- The median standard deviation of the EBA estimated CA norm: 1 percent of GDP.
- A summary discrepancy statistic reported: 0.07 percent of global GDP (excess deficits exceeded excess surpluses by only 0.07 percent of global GDP).
- A highlighted figure: 0.4 percent of GDP (appears as a content unit identifier in the document).

### 2016 excess current account imbalances — classification and magnitudes
- Substantially stronger (excess surpluses above 4 percent of GDP): Germany, Singapore, Thailand.
- Stronger (excess surpluses in the range of 2-4 percent of GDP): Malaysia, Korea, Sweden, the Netherlands.
- Moderately stronger (excess surpluses in the range of 1-2 percent of GDP): China, Japan.
- Substantially weaker (excess deficit of more than 4 percent of GDP): Saudi Arabia.
- Weaker (excess deficits in the range of 2-4 percent of GDP): Turkey, the United Kingdom, Belgium, France, Spain.
- Moderately weaker (excess deficits in the range of 1-2 percent of GDP): Australia, Canada, Italy, South Africa, United States.
- Broadly in line with fundamentals and desirable policies: Brazil, Hong Kong SAR, India, Indonesia, Mexico, Poland, Switzerland.
- The euro area as a whole: assessed as “broadly in line” (positive excess imbalances in some countries offset by negative excess imbalances elsewhere).

### REER assessments versus current account assessments
- Staff REER assessments mostly map closely to current account assessments, with exceptions when sharp REER movements are deemed transitory or not yet reflected in the current account.
- Examples in 2016:
  - Japan: current account moderately stronger; REER assessed broadly in line (yen’s sharp appreciation during 2016).
  - China: current account moderately stronger; REER broadly in line (projected further narrowing of the current account surplus).
  - Mexico: current account broadly in line; REER moderately undervalued (protectionist risks led to sharp depreciation in 2016).

### Drivers of staff-assessed current account gaps
- Decomposition: “identified policy gaps” (differences between actual and desired policies as included in EBA models) and “other” distortions (not explicitly modeled).
- Identified policy gaps include domestic policy gaps relative to the rest of the world; foreign component of identified policies was estimated at 0.9 percent of GDP in 2016.
- Examples where fiscal stance contributed to excess deficits:
  - Belgium, France, Spain, Russia, United Kingdom: fiscal stances weaker than desirable contributed to negative overall gap.
  - United States: higher-than-desirable health spending played a role.
  - In some excess-deficit countries (Australia, Canada, Italy, South Africa, Turkey), structural factors holding back saving and competitiveness were important where identified gaps were limited.
- Examples where fiscal stance contributed to excess surpluses:
  - Germany, Korea, Sweden, Thailand, Netherlands: tighter-than-desirable fiscal stances boosted current account positions.
  - China, Korea: insufficient health spending also contributed in some cases.
- Foreign exchange intervention in 2016: did not play a significant role in explaining excess imbalances overall.

### Shifts in excess imbalances since 2013
- Noteworthy changes 2013→2016:
  - Narrowing of excess current account surpluses in China and Malaysia.
  - Narrowing of excess deficits in Brazil, India, Indonesia, Russia, South Africa, Turkey.
  - Increasing excess deficits in some large AEs: France, Italy, United Kingdom, United States.
  - Widening excess surpluses in Japan, Sweden, Netherlands, Thailand, Singapore.
  - Germany and Korea: excess surpluses remained large and broadly unchanged since 2013.
- Total excess global imbalances:
  - Total excess imbalances amounted to about 0.7 percent of global GDP in 2016.
  - The total excess imbalance of ESR countries ranged between 0.4 and 1.0 percent of global GDP (equivalent to ¼ to ½ of the actual global imbalance).
- Characteristic features:
  - Rotation increased concentration of excess imbalances in advanced economies.
  - Persistence of large excess surpluses remained a distinguishing feature.

### Role of policies and reserve operations, 2013–16
- Fiscal and credit policies:
  - Tighter fiscal and credit policies helped reduce excess deficits in some EMDEs (Indonesia, South Africa, Turkey).
  - Easing of policies contributed to narrowing excess surpluses in China.
  - Fiscal consolidation supported widening or persistence of excess surpluses in key AEs (Germany, Japan, Korea) but did little to reduce excess deficits in other AEs (Australia, Canada, United Kingdom, United States).
- Foreign exchange intervention:
  - Generally limited or consistent with rebalancing.
  - China and Malaysia sold significant reserves to support currencies without unduly compromising reserve adequacy.
  - Brazil and Indonesia purchased reserves to limit widening of excess deficits.
  - Russia and Turkey were exceptions: despite weaker external positions, they sold reserves, further deteriorating reserve coverage (Turkey).
  - Thailand accumulated reserves despite having excess surpluses and comfortable reserve buffers.
  - Financial centers: large reserve purchases in Hong Kong SAR and Switzerland; substantial reserve sales in Singapore.

### Developments since 2016, outlook, and projections
- Currency movements through end-May 2017:
  - U.S. dollar and euro: broadly unchanged in real terms relative to 2016.
  - Sterling and yen: down about 4 percent (real terms) relative to 2016.
  - Renminbi: down 2¾ percent (real terms) relative to 2016.
  - Key EMDEs (Brazil, India, Russia, South Africa): significant real appreciations through end-May relative to 2016, linked to improved outlooks; these appreciations could exacerbate excess external imbalances.
  - Turkish lira: weakened by about 10 percent in real terms relative to 2016, accompanied by some widening of the current account deficit.
- Projected medium-term trajectory absent decisive policy action:
  - Flow imbalances: staff project broadly unchanged global imbalances, with moderately higher U.S. current account deficits offset by improvements in the United Kingdom and key oil exporters (the latter supported by fiscal consolidation).
  - Key surplus economies (China, Germany, Japan, Korea, Netherlands): surpluses projected to persist, marginally narrowing because of structural reforms, reversal of temporary factors, and expected realignment of competitiveness.
  - Stock imbalances: projected to widen further. Specific projections:
    - U.S. net debtor position expected to deteriorate further, exceeding -50 percent of GDP by 2021.
    - Japan and Germany net creditor positions projected to continue increasing, reaching over 80 percent of GDP over the next five years.
    - China’s net creditor position projected to remain broadly unchanged over the medium term.
  - If countries narrow their excess current account imbalances, the projected widening of stock imbalances would moderate somewhat.
- Underlying causes limiting automatic adjustment: weak automatic adjustment mechanisms, in part due to rigid currency arrangements in both key surplus and deficit economies (including within the euro area).

### Box 6 — Trade protectionism: modeled scenario, impacts and magnitudes
- Model: IMF’s Global Integrated Monetary and Fiscal (GIMF) multi-country model; three-region setup: deficit country, surplus country, rest of the world.
- Policy experiment:
  - Deficit country imposes a non-tariff barrier for 2 years on imports from the surplus country (roughly equivalent to a 10 percent tariff).
  - Surplus country retaliates one year after by imposing reciprocal trade restrictions for two years.
  - Restrictions lifted in the fourth year.
- Simulated impacts (deviations from baseline):
  - Deficit country:
    - Trade balance improves by 0.3 percent of GDP after 3 years.
    - Imports down 4 percent relative to baseline.
    - Real exchange appreciation averaging 1 percent over 3 years.
    - Transitory reduction in exports.
    - Output (GDP) declines on average by about 0.1 percent during the first three years.
  - Surplus country:
    - Trade balance declines by 0.25 percent of GDP over 3 years.
    - Exports decline by 1.25 percent over 3 years.
    - Average reduction of output of 0.3 percent during the first three years.
    - Reduction in exports only partially offset by reduction in imports from real depreciation.
  - Global impact:
    - Global GDP experiences an average decline of 0.1 percent while protectionist policies are in place.
    - Trade restrictions can narrow global imbalances slightly but the impact is small as real exchange rates partly offset trade barriers.
    - Imbalances in the rest of the world are roughly unchanged.
- Additional findings:
  - Global GDP losses increase with duration of protectionist policies.
  - Impact on global imbalances lessens as real exchange rates move to offset intended outcomes.
  - Protectionism likely increases global uncertainty and financial volatility beyond model channels.

*Source: 2017 EXTERNAL SECTOR REPORT, International Monetary Fund (excerpt).*

### 21. The new configuration of imbalances poses distinct global risks, particularly over the

### 21. The new configuration of imbalances poses distinct global risks, particularly over the medium term

### Global risks from the new configuration of imbalances
- Rotation of imbalances toward advanced economies entails lower deficit-financing risks in the near term, but an increased concentration of imbalances in a few systemic economies could:
  - heighten the risk of protectionist responses, which, if implemented, would reduce global output; and
  - raise the risk of disruptive corrections down the road, including due to diverging stock positions.
- Global flow and stock imbalances could widen further should U.S. fiscal policy prove to be more expansionary than under the baseline.
- A more accommodative U.S. fiscal policy could:
  - lead to a faster pace of monetary policy normalization and sharper appreciation of the U.S. dollar, with possibly disruptive effects in EMDEs, especially those with large external financing needs.
- Insufficient reforms in surplus economies could promote wider imbalances, including in China (where tighter fiscal and credit policies will be needed over the medium term).
- The rotation of excess imbalances towards AEs—with deficits increasingly concentrated in the United Kingdom and the United States—likely entails lower near-term deficit-financing risks but diverging stock positions could compromise the global recovery and raise the possibility of disruptive corrections if net debtor countries abruptly bring spending into closer balance with their intertemporal budget constraints.
- Protectionist policies should be avoided; supporting free trade through strong and well-enforced rules that promote competition and a level playing field is essential to strong and balanced global growth.

### Policies to address global excess imbalances (summary of recommended country/region actions)
- General insight:
  - Sustained global excess imbalances, amid smaller output gaps, point to the need for recalibrating the policy mix in excess deficit and surplus economies alike.
  - Reducing large and persistent excess global imbalances will require increased focus on structural reform policies tailored to country-specific circumstances and complemented by supportive macroeconomic policies.
- Excess surplus countries with fiscal space and negative output gaps (examples: Korea, Thailand):
  - Use fiscal policy to support demand while reducing reliance on monetary policy to narrow domestic and external imbalances.
- China:
  - Fiscal and credit policies should support domestic rebalancing (from investment toward consumption) and address financial sector vulnerabilities.
- Japan:
  - Where fiscal space is limited amid continued economic slack, supportive fiscal policy could play a role provided it is matched with a credible medium-term consolidation plan.
- Countries without independent monetary policy:
  - Internal appreciation is needed.
- Countries with fiscal space but relatively healthy cyclical positions (examples: Germany, the Netherlands):
  - Use tax and spending policies to promote private investment and boost public investment, labor force participation, and consumption without necessarily inducing long-lived overheating pressures.
- Where output gaps are closed and both fiscal and monetary policy are available:
  - A tighter monetary and easier fiscal orientation would be desirable.
- Countries with adequate foreign exchange reserve levels (example: Thailand):
  - Limit reserve intervention to deal with disorderly market conditions and allow the exchange rate to move flexibly so currencies align better with fundamentals.
- Excess deficit countries with slack:
  - Generally avoid easing fiscal policy; rely on accommodative monetary policy to address domestic and external imbalances.
- Countries where near-term fiscal easing is envisaged (example: Canada):
  - Adopt a timebound consolidation plan to reverse projected strengthening of the currency and widening of the current account deficit.
- Countries where output is near potential (example: United States):
  - Fiscal consolidation should proceed, along with gradual monetary policy normalization.
- Countries with high inflation pass-through and above-target inflation (example: Turkey):
  - May need to tighten monetary policy while opportunistically build foreign exchange reserves to reduce vulnerabilities to capital flow volatility, support saving, and reduce excess imbalances over the medium term.
- Countries without independent monetary policy (examples: France, Italy, Spain, Saudi Arabia):
  - Internal devaluation supported through fiscal consolidation and growth-friendly tax and spending policies (e.g., lower payroll taxes and job training programs) to complement productivity-enhancing labor market reforms.

### Structural reforms to address imbalances
- Reforms should aim at boosting demand, reducing saving, and facilitating relative price adjustments in excess surplus countries. Possible policy measures include:
  - reducing barriers to foreign competition and domestic investment in certain sectors, including services (China, Germany, Japan, Korea, Thailand) and residential investment (Sweden);
  - facilitating private sector balance sheet repair (the Netherlands);
  - expanding social safety nets to discourage precautionary saving (China, Korea, Malaysia, Thailand);
  - encouraging labor force participation by the elderly and by other groups with relatively high consumption propensities (Germany, Japan, Singapore).
- In excess deficit countries, policies should increase external competitiveness and overall saving by:
  - implementing labor market reforms aimed at moderating nominal wage increases and reducing unit labor costs (France, Italy, Spain);
  - lowering the costs of doing business (Brazil, India, Italy, Russia);
  - improving the skill base of workers and encouraging innovation in the export sector (Canada, France, the United Kingdom, the United States);
  - reducing the generosity of pension systems (Brazil, Italy, Turkey).

### Evidence on structural reforms (Box 7 highlights)
- Product Market Reforms (PMRs) and labor market reforms (LMRs) have differing impacts:
  - PMRs can help reduce current account imbalances in countries with large and persistent current account surpluses.
  - PMRs reduce surpluses immediately as well as through the medium-term—the current account to GDP ratio declines by 2 percentage points over 5 years in response to a PMR.
  - The decline in the current account appears largely driven by a corresponding decline in overall saving, suggesting consumption-smoothing; private investment also rises, while public investment responses offset.
  - LMRs have more ambiguous effects on the external position.
- Past empirical evidence is mixed:
  - Kennedy and Sløk (2005): PMRs tend to lower CA balances, LMRs have no significant effects.
  - OECD (2011): both reforms contribute to improving CA balances.
  - Culiuc and Kyobe (forthcoming): reforms have negligible impacts on external positions but facilitate productive reallocation and resilience.
- Results are robust across reform sectors and countries in the sample of advanced economies with large and persistent CA surpluses (more than 3 percent of GDP for at least 3 years).

### Trade distortions and current account (Box 8 highlights)
- Savings and investment levels and the gap between them are determined primarily by macroeconomic factors (cyclical position, fundamentals like demographics, and broader policy settings).
- Trade-related distortions have generally not been a key driver of overall savings and domestic investment levels in most countries; removing trade distortions and making markets more competitive goes beyond addressing imbalances and can boost global output by improving productivity and resource allocation.
- Services sector reforms have particularly strong potential given its large share in the global economy and high barriers to entry.
- Examples of country-specific trade/competition recommendations:
  - China: lower trade barriers in certain sectors (especially services), reform state-owned enterprises, ensure foreign investors receive the same treatment as domestic investors.
  - Germany and Japan: competition-enhancing reforms in the agricultural (Japan) and services sector to encourage investment and support productivity.

### Special feature: a focus on current account surpluses
- Over the past 20 years there was a large increase in countries with large and persistent current account surpluses:
  - In the run-up to the Global Financial Crisis (GFC), more than 40 percent of economies (in a sample of 47) registered a large and persistent surplus, compared to less than 10 percent a decade earlier.
  - The share has since declined to about one-quarter, but is still higher than at any point from 1965 to the early 2000s.
- Definition used in the study:
  - “Large and persistent” current account imbalances are episodes in which the current account exceeded 3 percent of GDP (in absolute value) every year for at least 3 years.
- Large and persistent current account surpluses can be appropriate (e.g., aging populations accumulating assets) but when excessive they can:
  - At the global level: imply an excessive supply of saving matched by excessive build-up of liabilities elsewhere, risking debt crises and financial turmoil; excess global saving also pushes down equilibrium interest rates, potentially triggering liquidity traps if interest rates approach effective lower bounds.
  - At the country level: reflect policy and structural distortions that can affect growth negatively and be associated with negative valuation effects on external assets through currency appreciation.
- The report analyzes actual rather than excess current account surpluses due to data limitations, but notes that almost all economies with ongoing large and persistent surplus spells are also deemed to have an excess current account surplus.

*Source: 2017 External Sector Report, International Monetary Fund*

### 31.      Large and persistent external surpluses have occurred less frequently than deficits, and

### 31.      Large and persistent external surpluses have occurred less frequently than deficits, and have rotated more recently towards AEs

### Occurrence and distribution of large and persistent current account imbalances
- Since 1960, there have been about 40 large and persistent current account surplus episodes.
- By contrast, the 70 large and persistent current account deficit episodes have occurred at a stable frequency and across a wide range of country types since the 1960s.
- Until the mid-1980s, all surplus episodes were concentrated in oil-exporting countries and financial centers; in recent years the distribution has become more balanced with a significant part playing out in “standard” advanced and emerging economies.
- A temporary spike in deficits occurred in the early 1980s, when a few oil exporting countries financed the external deficits of several AEs and EMDEs.

### Surplus episodes: advanced economies (AEs) versus EMDEs
- Two thirds of large and persistent surplus episodes were in AEs (15 vs. 7 in EMDEs).
- As a share of GDP, large and persistent surpluses were somewhat smaller in AEs but lasted longer.
- For financial centers and oil exporters, the large and persistent current account surpluses were both much larger (8-13 percent of GDP) and lasted longer (12-15 years) than for AEs and EMDEs.

### Ongoing versus completed surplus episodes and assessment of excess
- Ongoing large and persistent surplus episodes are larger and longer than completed surplus episodes.
- The ongoing spells comprise three of the four longest and four of the largest six surplus episodes identified since the 1960s.
- Of the seven countries with large and persistent surplus spells included in the ESR exercise, six are deemed to have current account surpluses that are stronger than warranted by fundamentals.
- EBA model estimates suggest that standard fundamentals—such as demographics—play only a partial role in accounting for large and persistent surplus spells.

### Drivers and mechanisms for surplus reversals
- Surplus reversals require triggering forces absent abrupt external financing constraints (which more naturally induce deficit reversals). Possible drivers include:
  - Endogenous private sector adjustment, as countries with large stocks of external wealth eventually expand demand.
  - Policies to correct distortions that raise saving or lower investment.
  - External factors: a drop in foreign demand, a deterioration in the terms of trade, or exogenous capital inflows.
- Disentangling drivers is difficult because multiple factors often operate simultaneously.

### Stylized facts on significant and sustained surplus reversals
- Significant and sustained reversals from large and persistent current account surpluses have been rare; fewer than half of completed surplus spells ended with such reversals (4 out 15 for AEs, 6 out of 7 for EMDEs).
- In cases with significant and sustained reversals, the current account surplus averaged almost 9 percent of GDP in the three years before the reversal.
- During reversals, surpluses narrowed on average by 9 percent of GDP.
- For EMDEs, reversals were twice as fast (4 years) as for AEs (8 years).
- On average, reversals were associated with:
  - real exchange rate appreciation,
  - fiscal expansion,
  - terms of trade deterioration,
  - increase in private credit,
  - a reduction in saving (rather than a rise in investment).
- By contrast, 80 percent of large and persistent deficit episodes ended in significant and sustained reversals.

### Case studies of surplus reversals (selected episodes)
- Six case studies analyzed: Belgium, China, Finland, Malaysia, Taiwan Province of China, and Thailand—chosen based on information availability and relevance since the 1980s.
- No single factor accounts for all reversal episodes; fiscal stimulus and real exchange rate appreciation were the most common mechanisms, featuring in 4 of the 6 episodes.

Brief highlights from the case studies:
- Taiwan Province of China (1988-95):
  - Structural reforms (trade and capital account liberalization, domestic financial market deregulation).
  - Abandoned quasi-peg to the U.S. dollar amid speculative inflows, resulting in a real currency appreciation of more than 20 percent over four years.
- Thailand (2001-06):
  - Post-Asian crisis adjustment following overborrowing and overinvestment.
  - Large current account surplus peaked at 12 percent of GDP in 1998; lasted 1998-2001 then began reversing in 2001 as balance sheet repair proceeded.
- China and Malaysia (post GFC stimulus and rebalancing):
  - Both triggered by a drop in external demand after the GFC and subsequent fiscal stimulus.
  - Excess surpluses narrowed but were not fully eliminated.
  - Malaysia: Economic Transformation Program (2009) included large investment projects with catalytic private investment effects.
  - China: stimulus included sharp increase in infrastructure investment, triggering higher commodity demand, decline in terms of trade, rising wages, real appreciation, and credit and fiscal stimulus—reversal accompanied by increasing private and public sector leverage.
- Belgium and Finland (post euro area accession):
  - Belgium: reversal associated with substantial increase in labor costs; real effective exchange rate based on unit labor costs appreciated by 16 percent over 9 years during the reversal.
  - Finland: reversal contributed to by terms of trade deterioration (price rise in petroleum products relative to wood products); domestic electronics industry boom-bust also important.

### Advanced economies’ role in global imbalances and sectoral contributions
- Since the mid-1980s, AEs’ contribution to the global imbalance has typically been about two-thirds—slightly less than their share in the global economy.
- In the run-up to the GFC, sizable current account deficits in several AEs (United States, United Kingdom, Spain, and Australia) drove global imbalances to record highs.
- After the GFC, most AEs with large current account deficits adjusted, while AEs with surpluses did not.
- The contribution to global imbalances of AEs with persistent surpluses (Japan, Germany, Korea, the Netherlands, Switzerland) increased to about 40 percent in 2016, about twice their contribution to global GDP.
- Estimates based on the 2016 external assessments suggest that about one-third of these countries’ aggregate surplus in AEs is excessive.
- Of the 15 AEs that had external surpluses in 2002, 12 also did in 2008, and 11 in 2016—composition fairly stable.
- Overall shift: deficit reduction in erstwhile deficit countries and persistent surpluses in surplus countries triggered a shift of AEs into aggregate surplus for the first time since the late 1990s.

### What distinguishes surplus from deficit countries: sectoral decomposition
- For a panel of 23 AEs since the mid-1990s, stylized facts include:
  - Surplus countries save and invest more than deficit countries, with the saving differential larger than the investment differential.
  - Higher corporate saving in surplus countries—that is not offset by lower household saving—plays an especially large and persistent role in accounting for current account differentials.
  - In the wake of the GFC, both household and corporate net lending moved sharply into surplus. For corporations, this move aligns with longer-term trends; for households, the GFC marks a trend break.
  - The private sector shift into surplus was initially offset by more public borrowing, but from 2010 fiscal consolidation advanced faster than private net lending normalized, triggering the aggregate shift of AEs into surplus.
- Decomposition by sector:
  - On average, gross corporate saving in surplus countries exceeded that of deficit countries by about 5 percent of GDP over the past 20 years.
  - Household saving differs little between surplus and deficit countries—so household saving fails to neutralize higher corporate saving in surplus countries.
- Structural correlates of corporate saving:
  - Corporate saving correlates well with the share of intangibles in investment.
  - Intangibles are difficult to collateralize and associated with uncertain returns; firms with high intangible shares need to accumulate internal funds.
  - Regression evidence (not shown) indicates a large manufacturing sector and higher profitability are also associated with higher corporate saving.
  - Important outliers: United States and France have low corporate saving despite high intangible intensity.

### Why AEs shifted into surplus after the Global Financial Crisis
- The aggregate shift reflects a large increase in private net lending that was not fully offset by public borrowing.
  - Prior to the GFC, cyclical fluctuations in private net lending were largely offset by parallel changes in net public borrowing.
  - The surge in private net lending after the GFC was twice as large as the increase during the dot-com recession of 2000-03.
  - Initially offset by fiscal stimulus; from 2010, fiscal positions consolidated faster than private lending normalized.
- Decomposition of private net lending:
  - Corporations: increase in net savings followed a longer-term upward trend overlaid by cyclical fluctuations; upward drift owes primarily to gross corporate saving.
  - Households: the GFC marks a trend break—household net lending increased and synchronized with corporate net lending after the GFC, reflecting simultaneous downturns in investment and simultaneous increases in gross saving.
  - The “corporate veil” thickened after the GFC: average correlation coefficient (GDP weighted) between gross household and corporate saving increased from -0.26 for 2002-08 to -0.07 for 2009-15.

### Empirical approach to understanding private saving and investment shifts
- Panel data models were fitted to each of the four components of private net lending (gross corporate and household saving, and corporate and household investment) for the pre-GFC period 1995-2008.
- Models include structural factors (e.g., share of intangibles in investment for corporate saving; demographic indicators for household saving/investment) and cyclical factors (output gap, interest rates, leverage, net worth).
- Corporate gross saving is included as a covariate in the household gross saving model.
- Model coefficients are used to predict post-GFC patterns out-of-sample and compared with actual outcomes to identify shifts in correlation patterns, acknowledging possible reverse causality and non-linearities.

*2017 EXTERNAL SECTOR REPORT — INTERNATIONAL MONETARY FUND*

### 47.      For corporations, the pre-crisis patterns broadly fit the post-crisis period. Predicted corporate

### 2017-external-sector-report - 47.      For corporations, the pre-crisis patterns broadly fit the post-crisis period. Predicted corporate

### Corporate sector: investment, saving, and net lending (paras 47, 51, 52)
- Predicted corporate investment and gross saving are both slightly higher than realized outcomes, leaving predicted net lending close to actual levels (Figure 24) (para 47).
- These results confirm Gruber and Kamin (2016) and IMF (2015) for corporate investment (para 47).
- High corporate saving is a key distinguishing feature between surplus and deficit countries (para 51).
- Elevated corporate saving rates in surplus countries partly reflect structural characteristics of corporate sectors (para 51).
- The surge in private net lending in AEs after the GFC for corporations appears broadly in line with cyclical patterns and structural trends already at work before the GFC—most notably a trend increase in gross corporate saving (para 52).

### Household sector: divergence from pre-GFC model (paras 48, 52)
- The pre-GFC model under-predicts post-GFC household net lending, with both household investment and gross saving contributing to the gap (para 48).
- The household net lending gap is especially pronounced in deficit countries and remained fairly persistent; it was still more than one percent of GDP in 2015 (para 48).
- Possible explanations:
  - Thickening of the corporate veil and constrained household behavior (for example, the need to repair household balance sheets) (para 48).
  - Alternatively, irrational exuberance boosted household borrowing before the crisis through channels not fully captured by the model, which then reversed post-GFC (para 48).
- For households, the post-GFC surge in private net lending does not appear to be explained by the same pre-GFC cyclical and structural trends that explain corporate behavior (para 52).

### Dynamics of large and persistent surpluses (paras 49–50, 53)
- Large and persistent current account surpluses in AEs and key EMDEs (excluding oil exporters and financial centers) are a relatively recent phenomenon, emerging for the first time only in the 1980s (para 49).
- Recent ongoing surplus episodes feature larger and longer-lived surpluses than completed episodes; most ongoing spells also reflect excess surpluses (para 49).
- Evidence from the limited number of large and sustained declines of surpluses suggests complex, multidimensional factors:
  - Associated factors include appreciating real exchange rates, expansionary fiscal and credit policies, and structural reforms (para 50).
  - Changes in the external environment, such as terms-of-trade shocks, have also been critical in some cases (para 50).
- A common trait is that external surpluses are likely to revert only when they have become very large, implying a possible role for multilateral cooperation (para 50).
- The large excess current account surpluses would continue to persist if not addressed; weak automatic adjustment mechanisms—such as nominal exchange rate adjustment—in key countries complicate correction (para 53).

### Policy implications and research priorities (paras 51, 53)
- Distortions that make households fail to see through the “corporate veil” may explain why elevated corporate saving rates are not sufficiently offset by household saving behavior; analysis of causes is beyond this note’s scope but relevant for policy design (para 51).
- The 2017 ESR assessment finds that about one-third of the surplus AEs’ imbalances is excessive (para 51).
- Decisive policy actions will be necessary to mitigate risks from continued excess imbalances (para 53).
- Understanding the drivers of corporate and overall saving behavior in AEs and the role of distortions (e.g. corporate governance and capital markets) is key for designing appropriate policy responses (para 53).

*Source: 2017 External Sector Report (selected excerpts, paragraphs 47–53).*

### Chapter 4.

### Chapter 4

### Selected Economies: Current Account Balances (2013–16) — headline statistics
- Top surplus economies in 2016 (in billions of USD and percent of World GDP where shown):
  - Germany: 2013 = 251.8; 2014 = 289.7; 2015 = 288.5; 2016 = 289.0; percent of World GDP columns include 0.3, 0.4, 0.4, 0.4; and additional columns 6.7, 7.5, 8.6, 8.3.
  - China: 2013 = 148.2; 2014 = 236.0; 2015 = 304.2; 2016 = 196.4; percent of World GDP columns 0.2, 0.3, 0.4, 0.3; and additional columns 1.5, 2.2, 2.7, 1.7.
  - Japan: 2013 = 45.9; 2014 = 36.8; 2015 = 134.1; 2016 = 188.1; percent of World GDP columns 0.1, 0.0, 0.2, 0.3; and additional columns 0.9, 0.8, 3.1, 3.8.
  - Korea: 2013 = 81.1; 2014 = 84.4; 2015 = 105.9; 2016 = 98.7.
  - Switzerland: 2013 = 79.0; 2014 = 61.8; 2015 = 77.3; 2016 = 70.4.
  - Taiwan Province of China: 2013 = 53.1; 2014 = 63.8; 2015 = 76.2; 2016 = 75.3.
  - Netherlands: 2013 = 85.5; 2014 = 78.6; 2015 = 66.2; 2016 = 64.8.
  - Singapore: 2013 = 51.2; 2014 = 60.8; 2015 = 53.8; 2016 = 56.5.
  - Italy: 2013 = 20.5; 2014 = 40.5; 2015 = 26.3; 2016 = 47.3.
  - Thailand: 2013 = -4.8; 2014 = 15.1; 2015 = 32.1; 2016 = 46.8.
  - Denmark: 2013 = 26.7; 2014 = 31.4; 2015 = 27.6; 2016 = 24.3.
  - Spain: 2013 = 20.7; 2014 = 14.9; 2015 = 16.3; 2016 = 24.1.
  - Sweden: 2013 = 30.5; 2014 = 26.6; 2015 = 23.3; 2016 = 23.1.
  - Iran: 2013 = 26.5; 2014 = 13.6; 2015 = 9.0; 2016 = 10.9.
  - Russia: 2013 = 33.4; 2014 = 57.5; 2015 = 68.9; 2016 = 25.0.
- Top deficit economies in 2016 (in billions of USD and percent of World GDP where shown):
  - United States: 2013 = -349.5; 2014 = -373.8; 2015 = -434.6; 2016 = -451.7; percent of World GDP columns -0.5, -0.5, -0.6, -0.6; and additional columns -2.1, -2.1, -2.4, -2.4.
  - United Kingdom: 2013 = -119.6; 2014 = -140.0; 2015 = -122.7; 2016 = -114.5.
  - Canada: 2013 = -59.4; 2014 = -43.6; 2015 = -52.8; 2016 = -50.5.
  - Australia: 2013 = -48.3; 2014 = -41.7; 2015 = -58.2; 2016 = -33.3.
  - Turkey: 2013 = -63.6; 2014 = -43.6; 2015 = -32.1; 2016 = -32.6.
  - Mexico: 2013 = -31.0; 2014 = -26.2; 2015 = -33.3; 2016 = -27.9.
  - France: 2013 = -24.6; 2014 = -36.2; 2015 = -10.7; 2016 = -24.5.
  - Algeria: 2013 = 0.8; 2014 = -9.4; 2015 = -27.3; 2016 = -26.3.
  - Saudi Arabia: 2013 = 135.4; 2014 = 73.8; 2015 = -56.7; 2016 = -24.9.
  - Brazil: 2013 = -74.8; 2014 = -104.2; 2015 = -59.4; 2016 = -23.5.
  - India: 2013 = -32.3; 2014 = -26.8; 2015 = -22.1; 2016 = -15.2.
  - Egypt: 2013 = -6.4; 2014 = -2.4; 2015 = -12.0; 2016 = -19.8.
  - Indonesia: 2013 = -29.1; 2014 = -27.5; 2015 = -17.5; 2016 = -16.9.
  - Argentina: 2013 = -12.1; 2014 = -8.0; 2015 = -16.8; 2016 = -14.2.
  - Libya: 2013 = 8.9; 2014 = -11.7; 2015 = -18.4; 2016 = -16.0.
- Memorandum item:
  - Euro Area: 2013 = 291.3; 2014 = 332.3; 2015 = 373.3; 2016 = 397.8; percent of World GDP columns 0.4, 0.4, 0.5, 0.5; and additional columns 2.2, 2.5, 3.2, 3.3.
- World aggregates:
  - Surpluses (world): 2013 = 1,517.4; 2014 = 1,563.4; 2015 = 1,506.4; 2016 = 1,506.4; percent of World GDP columns 2.0, 1.9, 2.0, 1.8.
  - Deficits (world): 2013 = -1,118.3; 2014 = -1,149.9; 2015 = -1,281.6; 2016 = -1,124.3; percent of World GDP columns -1.5, -1.4, -1.7, -1.5.
- Source data: World Economic Outlook and Fund Staff calculations. Note: Table sorted by size (in USD) of surplus and deficit in 2016. For India, data are presented on a fiscal year basis.

### Staff assessments of current account positions and REER gaps (selected highlights)
- Table 2: Summary of Staff-Assessed Current Account and REER Gaps, 2016 (selected rows):
  - Australia: Overall Assessment = Moderately Weaker; Actual CA = -2.6; Cycl Adj. = -2.0; Midpoint = -1.0; Low = -2.0; High = 0.0; Net Liabilities = -59; Assets = 187; NIIP = 128; CA/REER Elasticity = 0.19.
  - Belgium: Overall Assessment = Weaker; Actual CA = -0.4; Cycl Adj. = -0.5; Midpoint = -3.3; Low = -4.3; High = -2.3; Net Liabilities = 47; Assets = 416; NIIP = 464; CA/REER Elasticity = 0.71.
  - China: Overall Assessment = Moderately Stronger; Actual CA = 1.7; Cycl Adj. = 1.8; Midpoint = 1.5; Low = 0.5; High = 2.5; Net Liabilities = 16; Assets = 42; NIIP = 58; CA/REER Elasticity = 0.23.
  - Euro Area: Overall Assessment = Broadly Consistent; Actual CA = 3.3; Cycl Adj. = 2.9; Midpoint = 0.3; Low = -0.5; High = 1.0; Net Liabilities = -6; Assets = 231; NIIP = 226; CA/REER Elasticity = 0.17.
  - Germany: Overall Assessment = Substantially Stronger; Actual CA = 8.3; Cycl Adj. = 8.5; Midpoint = 4.5; Low = 3.0; High = 6.0; Net Liabilities = 52; Assets = 199; NIIP = 251; CA/REER Elasticity = 0.38.
  - Japan: Overall Assessment = Moderately Stronger; Actual CA = 3.8; Cycl Adj. = 3.1; Midpoint = 1.0; Low = 0.0; High = 2.0; Net Liabilities = 62; Assets = 112; NIIP = 174; CA/REER Elasticity = 0.14.
  - Korea: Overall Assessment = Stronger; Actual CA = 7.0; Cycl Adj. = 6.0; Midpoint = 3.6; Low = 1.6; High = 5.6; Net Liabilities = 20; Assets = 68; NIIP = 88; CA/REER Elasticity = 0.33.
  - Netherlands: Overall Assessment = Stronger; Actual CA = 8.4; Cycl Adj. = 8.5; Midpoint = 3.0; Low = 2.0; High = 4.0; Net Liabilities = 72; Assets = 1,026; NIIP = 1,098; CA/REER Elasticity = 0.33.
  - Singapore: Overall Assessment = Substantially Stronger; Actual CA = 19.0; Cycl Adj. = ...; Midpoint = 5.5; Low = 2.5; High = 8.5; Net Liabilities = 214; Assets = 822; NIIP = 1,036.
  - Saudi Arabia: Overall Assessment = Substantially Weaker; Actual CA = -3.9; Cycl Adj. = ...; Midpoint = -7.7; Low = -9.7; High = -5.7; Net Liabilities = 91; Assets = 53; NIIP = 144.
  - United States: Overall Assessment = Moderately Weaker; Actual CA = -2.4; Cycl Adj. = -2.3; Midpoint = -1.2; Low = -1.7; High = -0.7; Net Liabilities = -44; Assets = 172; NIIP = 129; CA/REER Elasticity = 0.12.
- Sources: IMF Staff Assessments and IMF International Financial Statistics (IFS).

### EBA and staff-assessed current account (CA) gaps, 2016 — key numbers
- Table 3: Summary of EBA and Staff-Assessed CA Gaps (in percent of GDP), selected entries:
  - 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 [E] = -1.0; Total Midpoint (Staff) = 0.5; STD of EBA Gap = 0.66; NIIP = -58.7; CA NFA Stabilizing = -2.8.
  - China: [A] = 1.7; [B] = 1.8; [C] = 0.2; [D] = 1.5; [E] = 1.5; STD = 1.61; NIIP = 16.1; CA NFA Stabilizing = 1.6.
  - Germany: [A] = 8.3; [B] = 8.5; [C] = 4.5; [D] = 4.0; [E] = 4.5; STD = 1.17; NIIP = 51.8; CA NFA Stabilizing = 1.6.
  - India: [A] = -0.7; [B] = -1.1; [C] = -4.2; [D] = 3.1; [E] = 0.8; STD = 0.89; NIIP = -16.4; CA NFA Stabilizing = -2.7.
  - Japan: [A] = 3.8; [B] = 3.1; [C] = 3.4; [D] = -0.3; [E] = 1.0; STD = 1.82; NIIP = 62.2; CA NFA Stabilizing = 2.8.
  - Netherlands: [A] = 8.4; [B] = 8.5; [C] = 5.3; [D] = 3.2; [E] = 3.0; STD = 1.61; NIIP = 72.3; CA NFA Stabilizing = 2.4.
  - Spain (note): For Spain, the CA level required to reduce NIIP by 5 percentage points of GDP annually — The NFA stabilizing CA is -1.6 percent of GDP.
- Footnotes and methodological notes are retained in source tables (e.g., ranges +/-1, +/-2, etc., and breakdowns between norm and other factors are approximate in some cases).
- Source: Fund staff estimates.

### Regression decompositions of CA policy-gap contributions (Table 4) — selected country contributions (in percent of GDP)
- Purpose: quantifies total, identified, and residual contributions to CA gaps from policy variables (fiscal gap, public health expenditure gap, change in FX reserves + capital controls, other/private credit gap) and a domestic coefficient-based decomposition.
- Examples (Total / Identified / Residual — selected numbers):
  - Australia: Total = -0.5; Identified = 0.3; Residual = -0.8; Fiscal Total = -0.1; Domestic Coeff = -1.0; P = 0.47; P* = -2.1; Total domestic contribution = -0.50; Dom2/Coeff P P* columns include 6.0, 6.8, 0.1, 0.0, 0.45, 0.6, 0.2, 0.1, 0.0 and -0.021; totals 51.2.
  - China: Total = 1.5; Identified = -0.4; Residual = 1.9; Fiscal Total = -0.5; Domestic Coeff = -1.4; P = 0.47; P* = -3.6; additional domestic items include 1.7, 3.8, -0.8, -0.9; totals 56.2 and 26.2.
  - Germany: Total = 4.0; Identified = 1.4; Residual = 2.6; Fiscal Total = 1.5; Domestic Coeff = 0.6; P = 0.47; P* = 0.7; totals include 8.7, 8.7, 0.1, 0.0; final total -5.4.
  - India: Total = 3.1; Identified = 1.1; Residual = 2.0; Fiscal Total = 0.2; Domestic Coeff = -0.7; P = 0.47; P* = -6.5; totals include 1.4, 1.5, 0.3, 0.2; final totals 17.6, 15.0.
  - Korea: Total = 4.3; Identified = 2.5; Residual = 1.7; Fiscal Total = 1.9; Domestic Coeff = 1.0; P = 0.47; P* = 2.1; totals include 4.1, 5.3, 0.2, 0.1; final totals 31.0.
- Table notes: 1/ Total contribution after adjusting for multilateral consistency. 2/ Total domestic contribution is equivalent to coefficient*(P-P*). Values reported in percent of GDP.

### 2016 Individual Country Assessments — key policy recommendations (Table 5)
- General formatting: each country row lists Overall 2016 Assessment, Fiscal recommendation, Monetary recommendation, Structural recommendation(s). Selected country recommendations (verbatim phrasing preserved):
  - Australia — Overall: Moderately Weaker
    - Fiscal: Gradual Consolidation
    - Monetary: Further easing if growth weakens
    - Structural: - (no additional structural line)
  - Belgium — Overall: Weaker
    - Fiscal: Steady consolidation with labor tax reduction
    - Monetary: -
    - Structural: Product and labor market reforms (to address labor market fragmentation).
  - Brazil — Overall: Broadly Consistent
    - Fiscal: Consolidation (social security reforms and new federal spending cap)
    - Monetary: ER flexibility. Intervention to smooth volatility; maintain reserve buffers.
    - Structural: Improve competitiveness by lowering costs of doing business
  - Canada — Overall: Moderately Weaker
    - Fiscal: Medium-term consolidation
    - Monetary: Maintaining tight macroprudential policies to ensure financial stability.
    - Structural: Measures geared at improving labor productivity; investing in R&D and physical capital; promoting FDI; developing services exports; and diversifying Canada’s export markets.
  - China — Overall: Moderately Stronger
    - Fiscal: -
    - Monetary: Gradually move toward transparent, market-based MP framework and ER flexibility (when practical).
    - Structural: Improve social safety nets, enhance competition, market-based financial system; continue SOE reforms, and taking steps to attract more inward FDI by ensuring that foreign investors receive the same treatment as domestic investors.
  - Euro Area — Overall: Broadly Consistent
    - Fiscal: Expand investment for countries with fiscal space, a more growth-friendly composition of national fiscal policies. Centralized investment schemes at regional level.
    - Monetary: Further easing
    - Structural: Enhance productivity, increase competitiveness; strengthen private sector balance sheet
  - France — Overall: Weaker
    - Fiscal: Gradual consolidation
    - Monetary: -
    - Structural: Enhance productivity; increase competitiveness; labor market reforms and wage moderation
  - Germany — Overall: Substantially Stronger
    - Fiscal: More growth-oriented fiscal policy
    - Monetary: -
    - Structural: Reforms to address aging costs by prolonging working life.
  - India — Overall: Broadly Consistent
    - Fiscal: Continue fiscal consolidation (goods and service tax and subsidy reforms)
    - Monetary: Mantain monetary framework with focus on low and stable inflation
    - Structural: Ease domestic supply bottlenescks and enhance business climate (attract FDI, boost exports and investment).
  - Japan — Overall: Moderately Stronger
    - Fiscal: Gradual fiscal consolidation
    - Monetary: -
    - Structural: Measures to boost wages and labor supply, reduce labor market duality, enhance risk capital provision, and accelerate agricultural and services sector deregulation.
  - Korea — Overall: Stronger
    - Fiscal: Supportive fiscal policies
    - Monetary: ER flexibility with limited intervention.
    - Structural: Strengthening the social safety net to lessen incentives for precautionary savings and addressing bottlenecks to investment.
  - Mexico — Overall: Broadly Consistent
    - Fiscal: Gradual consolidation
    - Monetary: Free-floating ER policy, and use foreign exchange intervention occasionally to prevent disorderly market conditions
    - Structural: Structural reforms to improve competitiveness and strengthen non-oil exports.
  - Netherlands — Overall: Stronger
    - Fiscal: Use fiscal space to to support the recovery and boost potential growth.
    - Monetary: -
    - Structural: Structural reforms to raise the productivity of small domestic firms, progress in repairing household balance sheets, and strengthening the banking system
  - Poland — Overall: Broadly Consistent
    - Fiscal: Gradual consolidation
    - Monetary: Accommodative monetary policy stance; flexible exchange rate
    - Structural: Structural reforms are crucial to boost potential growth.
  - Russia — Overall: Moderately Weaker
    - Fiscal: Gradual consolidation to reduce nonoil fiscal deficit; re-allocation from current to capital spending
    - Monetary: -
    - Structural: Structural reforms to invigorate the private sector
  - Saudi Arabia — Overall: Substantially Weaker
    - Fiscal: Fiscal consolidation is necessary over the short- and medium term.
    - Monetary: -
    - Structural: Structural reforms that help diversify the economy and boost the non-oil tradeable sector
  - Singapore — Overall: Substantially Stronger
    - Fiscal: More fiscal stimulus than envisaged would be useful to boost domestic demand
    - Monetary: -
    - Structural: Singapore’s ongoing structural reforms, along with the restrictions on foreign worker inflows should contribute to higher investment over the medium term.
  - South Africa — Overall: Moderately Weaker
    - Fiscal: Fiscal consolidation.
    - Monetary: Seize opportunities to build-up reserves to deal with FX liquidity shocks
    - Structural: Improve infrastructure; strengthen education/skills; greater financial inclusion; fostering entry into key product markets; and accelerating labor and product market reforms
  - Spain — Overall: Weaker
    - Fiscal: Further growth-friendly fiscal adjustment.
    - Monetary: Continued monetary accommodation at the euro area level to lift inflation
    - Structural: Moving forward with structural reforms of the labor market and faster implementation of product market reforms
  - Sweden — Overall: Stronger
    - Fiscal: Going forward it appears that a neutral fiscal stance will be sufficient to meet the medium-term surplus target.
    - Monetary: Continued monetary accommodation to bring inflation back to target
    - Structural: Efforts to facilitate migrant integration into the labor market; implement reforms to ensure the recent rise in residential investment is sustained.
  - Switzerland — Overall: Broadly Consistent
    - Fiscal: Allow some easing of the fiscal stance.
    - Monetary: Maintaining a sufficiently large negative interest rate differential against other major central banks, with intervention reserved for addressing inflow surges.
    - Structural: -
  - Thailand — Overall: Substantially Stronger
    - Fiscal: Boost to public infrastructure within available fiscal space
    - Monetary: Exchange rate flexibility with limited intervention
    - Structural: Addressing structural rigidities by reforming social safety nets, and reducing barriers to investment.
  - Turkey — Overall: Weaker
    - Fiscal: Medium-term fiscal consolidation.
    - Monetary: Monetary policy should aim to keep inflation within target, which would help support private savings. Increase net international reserves. Macroprudential measures should be strengthened to lower foreign currency risk in the economy.
    - Structural: -
  - United Kingdom — Overall: Weaker
    - Fiscal: Gradual consolidation.
    - Monetary: Maintain financial stability through macroprudential policies.
    - Structural: Broaden skill base; improve public infrastructure
  - United States — Overall: Moderately Weaker
    - Fiscal: Gradual consolidation.
    - Monetary: -
    - Structural: Tax reform, better schooling and training of workers, measures to support the working poor, and policies to increase growth in the labor force
- Source: 2016 Individual External Assessments. Note: This non-exhaustive list focuses on key recommendations for closing external imbalances.

### Technical Appendix I — decomposing current account variations (method summary)
- Current account decomposition identity (verbatim mathematical structure preserved in source):
  - Current account = trade balance + income account balance; nominal exports and nominal imports expressed as price and volume components.
  - Change in CA/GDP is broken into:
    - volume effect,
    - price effect (also called ‘terms-of-trade income windfall’),
    - income account,
    - a reconciliation term.
- Real trade-balance decomposition: contributions to change of (real) trade balance expressed as changes in real exports, real imports, and other real components (text preserves the mathematical expressions and notation).
- Prepared by Jaebin Ahn (as indicated in the source).

### Technical Appendix II — calculating IIP valuation changes (method and data issues)
- Calculation approach (residual method):
  - Define change in net foreign asset (NFA) position as change in NFA = current account + residual (where residual equals net valuation gains/losses from shifts in exchange rates and asset prices plus other changes due to errors and omissions).
  - Variables can be expressed as ratios to GDP; cumulative valuation changes between t-q and t obtained via recursive substitution (equations provided in source).
  - Valuation changes for 2010–16 are reported in Figure 6 of the main text (source).
- Denomination choice:
  - Selection of currency of denomination affects relative importance of flow vs stock variables. Using U.S. dollar may be inappropriate for economies where U.S. dollar is not the main reserve currency (example in text: Germany).
  - Robustness: Figure 6 is replicated using local-currency-denominated variables (Appendix Figure II.A); results are similar and the negative relationship between cumulative CA flows and valuation changes is maintained.
- Data and measurement issues:
  - Residual method has low data requirements but is subject to measurement error due to:
    - differences in flow/stock treatments (e.g., current account excludes net retained earnings of equity portfolios),
    - changes in IIP survey coverage (discovery of assets and liabilities not matched by corresponding flow transactions),
    - debt write-offs (restructuring/forgiveness).
  - For some countries, publicly-available reconciliation tables decompose valuation residual into exchange rate effect, asset price changes and other changes.
  - Empirical note: absolute level of valuation changes tends to be positively correlated with the size of countries’ gross external positions (Appendix Figure IIb). Financial centers experienced very large valuation changes during 2010–15; part of these may reflect measurement error.
- Prepared by Daniel Garcia-Macia (as indicated in the source).

*Italic: Source — 2017 EXTERNAL SECTOR REPORT, Chapter 4 (selected tables, assessments, and technical appendices) — International Monetary Fund.*

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_Source: https://www.imf.org/-/media/files/publications/pp/2017/2017-external-sector-report.pdf_