## _062013a ## Source details **Canonical URL:** [_062013a](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_062013a.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_062013a.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_062013a.pdf.json) --- ### Country assessments — key findings, indicators, and policy recommendations - Canada - Current account: 3.7 percent of GDP in 2012; cyclically-adjusted current account deficit estimated by staff around 2½ percent of GDP in 2012. - External position: cyclically-adjusted current account some 1-3 percentage points of GDP weaker than implied by fundamentals; net external liabilities around -15 percent of GDP at end-2012; gross external debt 77 percent of GDP. - Real exchange rate: REER appreciated 32 percent between 2002 and 2012; assessed overvaluation of 5–15 percent. - Policies: improve labor productivity, foster research and innovation, higher investments in infrastructure to transport/export natural resources. - China - Current account: surplus fell from over 10 percent of GDP in 2007 to 2¼ percent of GDP in 2012 (around 2½ percent of GDP cyclically adjusted). - External position: cyclically-adjusted current balance some 1-3 percent of GDP stronger than implied by fundamentals; desired current account 0 to 2 percent of GDP. - REER: appreciated ~5 percent from end-2011 through April 2013 and some 35 percent since mid-2005 reform; staff assesses REER moderately undervalued by some 5-10 percent. - Capital controls & reserves: broad capital controls remain; inward FDI equal to US$220 billion or 3 percent of GDP in 2011; net capital outflows around US$100 billion in 2012; reserves 161 percent at end-2012; further accumulation undesirable. - Policies: comprehensive reforms—financial sector, fiscal, exchange rate, structural reforms; move to market-based exchange rate; improve financial intermediation and household income. - Euro Area (aggregate) - Current account: 1.2 percent of GDP in 2012; cyclically-adjusted surplus 1.3 percent of GDP. - External position: broadly in line with medium-term fundamentals and desirable policies; cross-country needs differ—deficit economies need internal rebalancing; surplus countries need non-tradable productivity. - REER: declined 10-15 percent since end-2009; 2012 average close to equilibrium; REER rose about 2½ percent by early April 2013 from 2012 average. - Policies: improve public/private debt positions; structural reforms (labor/product markets); targeted Services Directive implementation. - France - Current account: deficit about 2½ percent of GDP in 2012 (cyclically-adjusted just over 2½ percent of GDP). - External position: cyclically-adjusted CA some 1-3 percent of GDP weaker than implied by fundamentals; estimated REER overvaluation between 0 and 5 percent. - Policies: wage moderation (especially minimum wage), labor market reform, productivity-enhancing reforms, increase competition and regulatory simplification. - Germany - Current account: 7 percent of GDP in 2012 (around 8 percent cyclically adjusted); surplus since 2002. - External position: cyclically-adjusted CA 5–6 percentage points of GDP stronger than implied by fundamentals; external position substantially stronger than implied by fundamentals. - REER: at end-2012 REER on average about 8 percent below historical average; methods indicate undervaluation of about 2–10 percent. - Policies: boost domestic demand, raise potential growth, make tax structure more growth-friendly, financial sector reform. - Italy - Current account: cyclically-adjusted CAD just less than 1 percent of GDP in 2012. - External position: REER approaches suggest a real effective depreciation of 0-10 percent appropriate; net IIP liabilities 24½ percent of GDP in 2012. - Policies: fiscal consolidation and structural reforms to improve competitiveness. - Spain - Current account: 1 percent of GDP in 2012 (1.8 percent cyclically-adjusted); model and net IIP considerations suggest 2012 CA 3–5 percentage points of GDP weaker than implied by fundamentals. - REER: model-based REER about 8-12 percent above level consistent with fundamentals. - External position: net IIP around 90 percent of GDP; gross external debt close to 170 percent of GDP. - Policies: fiscal consolidation, product and labor market reforms, bank restructuring. - Japan - Current account: 1 percent of GDP in 2012 (around 1¼ percent cyclically adjusted); investment income account surplus nearly 3 percent of GDP in 2012. - External position: prior cyclically-adjusted CA about 2¼ percent of GDP weaker than fundamentals (pre-new macro policies); current assessment ranges from 1 percent of GDP weaker to 2 percent stronger than fundamentals. - REER: since May 2012 by June 2013 REER depreciated about 18-19 percent; assessment subject to unusual uncertainty; estimates range from 20 percent undervaluation to 10 percent overvaluation. - Policies: fiscal consolidation, ambitious structural reforms (e.g., TPP liberalization). - Korea - Current account: CA surplus widened to 3.8 percent of GDP in 2012 (4½ percent cyclically-adjusted). - External position: cyclically-adjusted CA some 1-4 percent of GDP above value suggested by fundamentals; REER moderately undervalued (around 2-8 percent below consistent level). - Reserves: in line with IMF composite metric; reserve growth by 1 percent of GDP (US$21 billion) in 2012; reserves adequate at 180 percent of short-term external debt and 130 percent of IMF metric. - Policies: market-determined exchange rate, limited intervention to smooth volatility, macroprudential measures for flow surges. - India - Current account: finding that a CAD of 3 to 3½ percent of GDP would be broadly consistent with high growth and low capital-to-worker ratio; recent deterioration increased medium-term vulnerabilities. - REER: REER some 3 percent above 20-year average; appreciated by 9 percent up to March 2013 after prior depreciation. - Reserves: import cover under 6 months in March 2013; reserves at 166 percent of IMF composite metric and 170 percent of short-term debt. - Policies: ease supply bottlenecks; gradual capital account liberalization; fiscal measures needed to meet authorities’ deficit goals. - Indonesia - Current account: deficit 2.7 percent of GDP in 2012 (2.3 percent cyclically adjusted); modest deficit of ½-2½ percent of GDP in line with fundamentals. - REER: 2012 REER depreciated modest 2 percent; in line with fundamentals. - Reserves: projected adequate at around 125 percent of IMF composite metric at end-2013. - Policies: eliminate energy subsidies, tighten monetary policy, allow exchange rate flexibility, reform trade and investment climate. - Malaysia - Current account: surplus declined to 6.1 percent of GDP in 2012 from 11 percent in 2011. - External position: EBA model suggests cyclically-adjusted CA stronger by about 7 percentage points of GDP; taking structural factors, CA gap assessed 2-5 percentage points of GDP. - REER: EBA estimates undervaluation about 17 percent; taking structural factors REER undervalued about 5-15 percent. - Reserves: about 128 percent of IMF composite metric; reserves cover 280 percent of short-term external debt and 32 percent of broad money. - Policies: strengthen social protection, improve investment climate, two-way exchange rate flexibility with limited intervention. - Singapore - Current account: around 18½ percent in 2012 (declined by 6 percentage points). - External position: structural decline of 3-5 percent of GDP appropriate; net IIP positive 223 percent of GDP in 2012. - REER: 27 percent appreciation since 2005; REER appears around 0−10 percent weaker than warranted by fundamentals. - Reserves and liabilities: official reserves covered 26 percent of short-term external debt at end-2012; short-term non-FDI liabilities 436 percent of 2012 GDP; official liquid foreign assets 92 percent of 2012 GDP. - Policies: increased public spending, slower foreign worker inflows, reinvestment strategies to moderate CA. - Hong Kong SAR - Current account: surplus 2.3 percent of GDP in 2012; cyclically-adjusted CA broadly consistent with fundamentals though a CA around 7 percent of GDP consistent with status as international financial center. - Capital flows: gross inflows and outflows over 100 percent of GDP; fully open capital account. - Reserves and assets: external financial assets 1330 percent of GDP and liabilities 1052 percent of GDP; official reserves 117 percent of GDP. - REER: empirical under/overvaluation range -15 to +7 percent. - Assessment/policy: currency board arrangement appropriate; reserves adequate and future accumulation should be limited to automatic adjustments. - Thailand - Current account: 0.7 percent surplus in 2012 (2 percent cyclically adjusted); cyclically-adjusted CA about 0-2 percentage points stronger than norm. - Reserves: gross reserves about 50 percent of GDP and 297 percent of IMF composite metric; net forward FX position 7 percent of GDP in 2012. - Policies: medium-term infrastructure investment, allow NEER to follow fundamentals, consider macroprudential policies for capital inflows. - Turkey - Current account: adjusted to 6.1 percent of GDP in 2012 (4.7 percent cyclically adjusted). - External position: cyclically-adjusted CAD 1.5-3 percent of GDP weaker than implied by fundamentals; net IIP about -53.2 percent of GDP. - Reserves: gross reserves $119 billion at end-2012 (115 percent of IMF composite metric); reserves cover of short-term debt 87 percent in 2012. - Vulnerabilities: gross external financing needs estimated at 28 percent of GDP in 2013. - Policies: tighter fiscal policy over medium term, structural reforms to increase private savings. - South Africa - Current account: deficit 6.3 percent of GDP in 2012 (5.8 percent cyclically adjusted). - External position: cyclically-adjusted CA 2-4 percentage points of GDP weaker than implied by fundamentals; gross external debt 36 percent of GDP; reserves cover 5 months of imports and about 80 percent of gross external financing requirement. - Policies: implement National Development Plan, structural reforms, tighten macroprudential measures, build reserves. - Spain (see above) — large negative IIP, high gross external debt, need for significant REER adjustment. - Sweden - Current account: 7.1 percent of GDP in 2012 (cyclically adjusted also 7.1 percent). - External position: cyclically-adjusted CA 2–4 percent of GDP stronger than fundamentals; net IIP slightly negative (-14.4 percent of GDP at 2012 Q4). - REER: model estimates suggest undervaluation of some 3.5-8.5 percent. - Policies: boost FX liquidity buffers; Riksbank boosting currency reserves to around USD 55 billion (10 percent of GDP). - Switzerland - Current account: 13½ percent of GDP in 2012 (about 14 percent cyclically adjusted). - REER: REER overvalued by 5-10 percent relative to fundamentals; franc floor of 1.20 CHF/EUR introduced Sept 2011; REER depreciated 7 percent between Sept 2011 and May 2013. - Reserves: massive accumulation during 2009–12; interventions increased reserves by 175 billion (29 percent of GDP). - External position: positive IIP 150 percent of GDP; large gross positions but healthy asset position mitigates risks. - Policies: SNB interventions appropriate; potential use of negative interest rates on excess reserves; return to floating once growth/inflation normalize. - Russia - Current account: cyclically-adjusted surplus around 3½ percent of GDP in 2012. - Reserves: around 172 percent of IMF composite metric at end-2012; total external debt fell to 27 percent of GDP in 2012. - Policies: increase exchange rate flexibility; invest oil reserve fund assets in less liquid/higher-yielding instruments over time. - Saudi Arabia - Current account: increased surpluses in 2011-12; exports boosted export revenues by 19 percent of GDP between 2010 and 2012. - Reserves: international reserves increased to approximately 90 percent of GDP or 34 months of import coverage. - Assessment: structural CA norms vary between 6 and 15 percent of GDP depending on methodology; external position broadly in line with fundamentals. - Policies: increase government investment in infrastructure/education but avoid permanent entitlement increases; consider steps to remove barriers to portfolio inflows. - Mexico - Current account: deficit less than 1 percent of GDP in 2012 (less than 0.5 percent cyclically adjusted). - External position: cyclically-adjusted CA close to fundamentals. - Reserves: adequate at middle of IMF composite metric; recommendation for gradual reserve increase aligned with rising foreign-held liabilities. - Vulnerabilities: gross foreign portfolio liabilities nearly 30 percent of GDP. - Netherlands - Current account: 8.3 percent of GDP in 2012; cyclically-adjusted surplus estimated at 8 percent of GDP. - External position: cyclically-adjusted CA 1–3 percent of GDP stronger than implied by fundamentals; net foreign assets 50 percent of GDP; gross liabilities close to 470 percent of GDP. - REER: moderate undervaluation of 0–5 percent. - Poland - Current account: improved to about 3.5 percent of GDP (around 3 percent cyclically adjusted). - Reserves: about 140 percent of IMF composite metric; net IIP liabilities stabilized at 66 percent of GDP. - Policies: continue fiscal consolidation; monitor foreign bank subsidiary funding practices. - United Kingdom - Current account: cyclically adjusted -3.8 percent of GDP in 2012. - External position: cyclically-adjusted CA 1–2 percent of GDP weaker than implied by fundamentals. - REER: various methodologies suggest decline of 5–10 percent may be appropriate. - External liabilities: gross liabilities exceed 500 percent of GDP. - Policies: fiscal consolidation, infrastructure spending within medium-term framework, structural reforms to boost competitiveness. - United States - Current account: deficit narrowed to around 3 percent of GDP during 2009–12 (cyclically adjusted -3.8 percent of GDP). - External position: cyclically-adjusted CA deficit ½–1½ percentage points of GDP weaker than implied by fundamentals. - REER: over 10 percent below average over past 2-4 decades; staff assesses a further depreciation of 0–10 percent consistent with fundamentals. - Net IIP: declined to an estimated -28 percent of GDP in 2012 from -17 percent in 2010. - Policies: medium-term fiscal consolidation to reach general government primary surplus of about 1 percent of GDP recommended. *International Monetary Fund — Individual Economy Assessments extracted from the provided content unit.* ### 3.7 percent of GDP (the cyclically-adjusted current account deficit is estimated by staff to be around 2½ percent ### _062013a - 3.7 percent of GDP (the cyclically-adjusted current account deficit is estimated by staff to be around 2½ percent ### Canada — Current account and external position - Background: cyclically-adjusted current account deficit is estimated by staff to be around 2½ percent of GDP in 2012, reflecting the large negative output gap in the United States. - Recent developments: current account at 3.7 percent of GDP; deterioration reflects Canada’s stronger economic rebound relative to main trade partners, significant real appreciation of the Canadian dollar, and weak productivity growth. - Energy sector: rapidly rising supply combined with limited refining capacity and lack of transportation infrastructure led to large pricing differentials between Canadian and global energy markets, limiting the positive impact on the current account from the boom in unconventional energy production. - Assessment: - The cyclically-adjusted current account is some 1-3, percentage points of GDP weaker than the value implied by medium-term fundamentals and desirable policies. - The external position appears weaker than implied by medium-term fundamentals. - Export performance has been disappointing and net external liabilities have increased. - Potential policy responses: - Continued efforts to improve labor productivity (budget programs to improve labor skills and foster research and innovation). - Higher investments in infrastructure to transport and export natural resources — would help to gradually bring Canada’s current account close to the level implied by fundamentals and desirable policy settings. ### Canada — Real exchange rate - Background: Canada’s real effective exchange rate appreciated by 32 percent between 2002 and 2012, and is some 15 percent above its 1995–2012 average. Over the last decade, Canada’s exchange rate has become increasingly correlated with oil prices, as petroleum exports surged. - Assessment: Models suggest a real effective exchange rate overvaluation of 5–15 percent relative to medium-term fundamentals and desirable policy settings. ### Canada — Capital and financial accounts; FX intervention; external positions - Capital flows background: the large current account deficit of recent years has been financed primarily by net portfolio inflows. Average net portfolio outflows from 2000–07 turned into inflows of some 4½ percent of GDP as strong growth prospects, and relatively strong fiscal position and high interest rates made Canada a safe haven, putting upward pressure on the exchange rate. - Assessment: Canada has a fully open capital account. Vulnerabilities are limited by a credible commitment to a floating exchange rate and a strong fiscal position. - FX intervention and reserves assessment: A free floater with minimal reserves who has not unilaterally intervened since September 1998. - Foreign asset and liability position background: - Canada’s net external liabilities are modest (around -15 percent of GDP at end-2012), and would deteriorate moderately under current conditions. - Canada has a positive net equity position and a negative net debt position vis-à-vis the rest of the world, reflecting sizable FDI and portfolio equity investment overseas. - Assessment: - Gross external debt, at 77 percent of GDP, is low relative to other advanced economies, and is a modest vulnerability. - Canadian foreign assets are primarily in the form of FDI and portfolio equity claims whose value tend to decline during periods of global growth and stock market weakness, as well as when the Canadian dollar appreciates. ### China — Overall assessment and current account - Background: - Current account surplus has fallen from over 10 percent of GDP in 2007 to 2¼ percent of GDP in 2012 (around 2½ percent of GDP cyclically adjusted). - Exchange rate appreciation accompanied by very high investment, driven by high productivity in China, cheap cost of capital and other factors, cyclical weakness in major advanced economies, and high oil and other commodity prices. - Less evidence, as yet, of a decisive shift toward consumption and lower national savings (as a percent of GDP). - Assessment: - China’s cyclically-adjusted current balance is some 1-3 percent of GDP stronger than implied by medium-term fundamentals and desirable policies. - The desired current account balance is estimated to range from 0 to 2 percent of GDP. - The external position appears moderately stronger and the currency moderately undervalued compared with the level consistent with medium-term fundamentals and desirable policy settings. - Post-financial crisis narrowing of the external imbalance accompanied by a rise in domestic imbalances, with investment approaching 50 percent of GDP. - Potential policy responses: - Implement a comprehensive package of reforms: financial sector, fiscal, exchange rate, and structural measures. - Priorities: improve financial intermediation to better allocate investment and boost household income; move to a more market-based exchange rate; strengthen the fiscal framework to rationalize infrastructure spending and shift the tax burden away from regressive social contributions; improve resource pricing; open markets to more competition. - Note: China has made progress on widening the exchange band, liberalizing interest rates, gradually opening the capital account, and strengthening the social security system, but more progress is needed. ### China — Real exchange rate - Background: currency appreciated by around 5 percent from end 2011 through April 2013 and some 35 percent since the mid-2005 exchange rate reform. Prior to the 2005 reform, the REER had been depreciating, so it is only 14 percent above the level reached a decade ago. - Assessment: Staff assesses the real exchange rate to be moderately undervalued by some 5-10 percent compared to medium-term fundamentals and desirable policies. ### China — Capital and financial accounts; FX intervention; reserves; external position - Capital flows background: - China maintains a broad range of capital controls on both inflows and outflows covering the bulk of non-FDI portfolio flows and external borrowing, despite steps to open the capital account. - Inflows are dominated by inward foreign direct investment (equal to US$220 billion or 3 percent of GDP in 2011), limiting vulnerabilities; around one-half has gone into building manufacturing capacity. - In 2012, China experienced net capital outflows of around US$100 billion, a large turnaround from net capital inflows of previous years. - Assessment: Over the medium term a carefully planned and sequenced loosening of capital controls that supports domestic financial liberalization would be appropriate; recent staff research suggests liberalization could result in significant net capital outflows. - Foreign exchange intervention and reserves: - Background: China closely manages its exchange rate and conducts intervention which has the effect, in most cases, of controlling the pace of appreciation. Pace of reserve accumulation slowed significantly in 2012 due to temporary factors, and picked-up again in the first part of 2013. - Assessment: Reserves are somewhat above the IMF’s composite metric (161 percent at end 2012), and further accumulation would be undesirable. - Foreign asset and liability position: - Net foreign assets amount to 30 percent of GDP and NFA has grown rapidly over the past several years. - Asset composition dominated by international reserves (at end-2012 approximately 40 percent of GDP). - Assessment: With large foreign exchange reserves and liabilities largely composed of FDI, vulnerabilities are low. ### Euro Area — Overall assessment and current account - Background: - Current account balance improved moderately in 2012 to 1.2 percent of GDP. - The cyclically-adjusted current account (after adjusting for the output gap and terms of trade shocks) is estimated to be a surplus of 1.3 percent of GDP. - Assessment: - 2012 cyclically-adjusted current account is broadly in line with the estimated value from medium-term fundamentals and desirable policy settings. - The euro area external position is now broadly in line with its equilibrium level implied by medium-term fundamentals and desirable policies. - Although only modest adjustment is needed for the euro area as a whole, more substantial adjustment is desirable for individual euro area economies on internal rebalancing and improving competitiveness. - Potential policy responses: - Improve public and private debt positions. - For deficit economies: lower costs and shift resources to tradable sectors. - For surplus countries: increase productivity in the non-tradable sector to improve disposable incomes and external demand. - Strengthen implementation of ongoing structural reforms (labor and product market reforms in deficit economies; product market reforms in surplus ones). - Targeted implementation of the Services Directive to reduce barriers to entry in protected professions and improve productivity and living standards. ### Euro Area — Real exchange rate - Background: euro REER has declined by 10-15 percent from its peak since end-2009 and is currently close to the long-run average (from the inception of euro). - Assessment: the real exchange rate (in 2012 average) is close to equilibrium as suggested by medium-term fundamentals and desirable policy settings. - Cross-country differences: real exchange rates seem moderately undervalued in surplus economies, while overvalued in most deficit economies. By early April 2013 the REER is estimated to have risen by about 2½ percent from its 2012 average. ### Euro Area — Capital flows; FX intervention; external positions - Capital and financial accounts background: the 2012 current account surplus was matched by financial outflows; financial account deficit largely driven by FDI and other-investment outflows, mitigated by resumed portfolio inflows. - Assessment: the path for financial flows depends crucially on resolution of the euro area crisis and completion of EMU architecture; failure to deliver agreed policy commitments will undermine market confidence and likely prevent “real money” flows from readily returning. - FX intervention and reserves assessment: the euro has the status of a global reserve currency. Reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. - Foreign asset and liability position background: - Net international investment position deteriorated to nearly -17 percent of GDP in 2008, but recovered to -7½ percent in 2012. - Cyclically-adjusted current account suggests NFA position likely to improve modestly going forward. - Assessment: External vulnerabilities largely come from market perception of some deficit countries’ ability to service debts. ### France — Current account and external position - Background: current account deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2½ percent in 2012 (cyclically-adjusted deficit estimated at just over 2½ percent of GDP). - Assessment: - Model estimates suggest the cyclically-adjusted current account is some 1- 3 percent of GDP weaker than the value implied by medium-term fundamentals and desirable policy settings. - The external position appears moderately weak compared to medium-term fundamentals and desirable policies. - Domestic policy settings contribute only to a small degree to the econometric findings. - Policy measures taken: labor tax wedge reduced by the equivalent of 3 percent of total labor costs (with full effect in 2014); a broad labor market reform increased flexibility to renegotiate labor contracts and mitigated judicial uncertainty in the event of dismissals. - Potential policy responses: - Wage moderation (especially minimum wage), continued labor market reform, and productivity-enhancing reforms (increase competition in product markets and regulatory simplification) to restore profit margins and promote investment into higher value added production. ### France — Real exchange rate; capital account; external position - Real exchange rate background: trend deterioration in external position and unit labor costs point to a loss of competitiveness; firms appear to have squeezed profit margins to retain price competitiveness. - Assessment: structural rigidities and rising unit labor costs relative to France’s main trading partners in the euro area have contributed to loss of competitiveness and an estimated overvaluation of between 0 and 5 percent. - Capital and financial accounts background: capital account movements since early 2000s have been volatile without a discernible pattern contributing to imbalances. The capital account is open. - Assessment: France’s net international investment position has deteriorated since the start of the financial crisis in 2008, mainly due to retrenchment in portfolio investment (including adverse valuation effects). - FX intervention and reserves assessment: the euro has the status of a global reserve currency; reserves held by the euro area typically low relative to standard metrics, but currency is free floating. - Foreign asset and liability position background: - External debt to GDP ratio has risen due to rising public and private debt. - Cyclically-adjusted current account points to a deteriorating net international investment position. - Assessment: net international investment position close to balance (-16 percent of GDP in 2010). Gross assets stand at around 300 percent of GDP with exposure to the euro area periphery as the main vulnerability. ### Germany — Current account and overall assessment - Background: - Current account at 7 percent of GDP in 2012 (around 8 percent of GDP cyclically adjusted); surplus since 2002, peaking at 7½ percent of GDP in 2007. - Sizeable surpluses also common prior to 1990 reunification. - Assessment: - Model analysis points to a cyclically-adjusted current account balance that is 5–6 percentage points of GDP stronger than the value implied by fundamentals and desirable policies, or 4–5 percentage points of GDP stronger than the actual current account observed in 2012. - This would be consistent with a medium-term reduction in the current account balance by 2-3 percent of GDP over and above the natural rebalancing process. - Germany’s external position is substantially stronger than implied by medium-term fundamentals and desirable global policy settings. - Potential policy responses: - Staff projects some rebalancing due to relatively stronger wage growth, somewhat higher inflation and higher domestic demand. - Medium-term sustainable approach: raise potential growth, reinvigorate domestic demand and allow relative price adjustment with other euro area members. - Preliminary analysis suggests policy levers such as making the tax structure more growth-friendly within the fiscal envelope and reforming the financial sector could be beneficial. ### Germany — Real exchange rate; capital flows; external position - Real exchange rate background: at end of 2012, REER on average about 8 percent below its historical average. - Assessment: methodologies indicate a range from an undervaluation of about 2 percent to 10 percent, suggesting REER is moderately undervalued relative to medium-term fundamentals and appropriate policies. - Capital and financial accounts background: - Germany exported private capital matching its surpluses prior to the crisis, with bank-driven financial investments; FDI comprised only a small portion. - Since the crisis private capital flows reversed (retrenchment from cross-border interbank markets, unwinding of investment positions, safe haven flows). - Outflows associated with TARGET2 payment system increased significantly, but declined noticeably from the peak in August 2012, resulting in accumulation of liquidity in German financial system. - Assessment: exposure to the European Monetary System reflects failure to resolve stresses in the euro area, which is a threat to global stability. - FX intervention and reserves assessment: the euro has the status of a global reserve currency; reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. - Foreign asset and liability position background: - IIP recovered by the mid-2000s and increased in the past five years (to about 40 percent of GDP at end 2011, of which over one half are net claims on the Eurosystem (Target 2 balance)). - Projected to continue to improve, suggesting a strong external position. - German firms and individuals hold a large positive net international investment position (46 percent of GDP); monetary and financial institutions hold a small net surplus (4 percent of GDP) but large gross positions. - Bundesbank accumulated large net claims on the Eurosystem (almost 25 percent of GDP) and holds some reserves (7 percent of GDP). These are offset by large negative IIP of general government (40 percent of GDP). - Assessment: safe haven status limits risks from gross liabilities of over 224 percent of GDP. *International Monetary Fund — Individual Economy Assessments extracted from the provided content.* ### 2.3 percent of GDP in 2012. ### _062013a - 2.3 percent of GDP in 2012. ### Current account - Current account surplus was 2.3 percent of GDP in 2012. - At current levels of the real exchange rate, the current account surplus will remain below 3 percent of GDP in 2013–15 before rising again over the medium term to around 5 percent of GDP (as global growth recovers and integration with the Mainland deepens). - The cyclically-adjusted current account position is broadly consistent with medium-term fundamentals and desirable policies. - A cyclically-adjusted current account surplus of around 7 percent of GDP is consistent with Hong Kong’s status as an international financial center, characterized by structurally high savings and low levels of investment in physical capital. ### Assessment of external position - The external position appears broadly consistent with medium-term fundamentals and desirable policy settings. - The currency regime is well supported by robust and proactive financial regulation and supervision, a strong fiscal position, and significant external resources. - The currency board has broad-based support among the public and remains the most appropriate exchange rate arrangement for Hong Kong SAR. ### Real exchange rate - Background: The Hong Kong system has repeatedly shown itself to possess very strong self-equilibrating tendencies (due to very flexible goods, factor, and asset markets which adjust through both inflation and deflation) making it unlikely that misalignment will be large or persistent. - Assessment: The real exchange rate is broadly consistent with medium-term fundamentals and desirable policies. - Empirical analysis points to a range of under/overvaluation of -15 to +7 percent. ### Capital and financial accounts: flows and measures - Background: - Gross inflows and outflows are over 100 percent of GDP, largely comprising banking flows as well as portfolio assets. - Over the past year, Hong Kong has experienced sizable net private outflows, mainly the result of portfolio outflows. - Notable also was significant loan flows to Mainland China, largely a result of tightening financial conditions on the Mainland. - Hong Kong SAR has a fully open capital account and no capital controls. - Assessment: Large financial resources limit the risks from volatile banking capital flows. ### FX intervention and reserves - Background: Hong Kong SAR has a currency board arrangement. International reserves have been built up in a non-discretionary way as a result of a long-standing commitment to the peg. - Assessment: - Currently reserves are adequate for precautionary purposes, and future accumulation should be limited to that required by the automatic adjustment of the currency board system. - Hong Kong SAR holds significant fiscal reserves, held offshore and built up through a track record of strong fiscal discipline. ### Foreign asset and liability position - Background: - Both external financial assets and liabilities are very high, at 1330 percent and 1052 percent of GDP, respectively, reflecting Hong Kong’s status as a major international financial center with considerable cross-territory investment. - The NFA position is expected to rise gradually over time given the persistent current account surplus, suggesting if anything a strong external position. - Assessment: - Very large gross financial assets and liabilities could pose some vulnerability, but this is mitigated by large official reserve holdings (117 percent of GDP). *Source: _062013a - 2.3 percent of GDP in 2012.* ### 3.8 percent of GDP cyclically-adjusted). While a current account deficit of 3 to 3½ percent of GDP would be broadly ### _062013a - 3.8 percent of GDP cyclically-adjusted). While a current account deficit of 3 to 3½ percent of GDP would be broadly ### India — Current account and overall assessment - Finding: A current account deficit (CAD) of 3 to 3½ percent of GDP would be broadly consistent with India’s high growth and low capital-to-worker ratio. - Recent development: Recent deterioration of the current account has increased India's medium-term vulnerabilities to foreign interest rate and liquidity shocks, as well as to sudden stops in capital inflows. - Projection: The CAD is expected to narrow slightly in the near term as supply-side bottlenecks ease and exports recover with global growth. - Assessment: The cyclically-adjusted CAD is broadly consistent with medium-term fundamentals and desirable policies, although the near term rise in the deficit has increased external stability risks. - Policy implication: Recent measures to ease supply bottlenecks include expediting project approvals through the Cabinet Committee on Investment; liberalizing diesel prices; and relaxing FDI norms. Additional measures are envisaged. ### India — Potential policy responses - Fiscal: - Under current policies, India’s general government budget deficit is expected to decline by less than 1 percent of GDP by 2017/18. - To reach the authorities’ goal (3.5 percent of GDP deficit reduction) would require additional measures. - Structural: - Easing domestic supply bottlenecks would be key to help lower the current account deficit. - Reserves and exchange rate: - Reserve adequacy indicators have deteriorated but reserve levels are broadly adequate. - The flexible exchange rate policy followed by the RBI is welcome; the current policy of smoothing exchange rate volatility is appropriate. - Capital account liberalization: - Capital controls should be gradually liberalized with further liberalization of FDI inflows and portfolio debt flows. - Liberalization should be accompanied by policies to develop financial markets. ### India — Real exchange rate - Background: - The real effective exchange rate (REER) has been broadly stable over the last two decades, but volatile recently. - After a 21 percent appreciation in 2009 and 2010, the REER depreciated rapidly in late 2011 and in April–June 2012. - Since then it has appreciated by 9 percent (in the period up to March 2013). - Assessment: - The REER is some 3 percent above the average of the last 20 years. - Despite nominal depreciation since July 2011, the REER has appreciated somewhat due to India’s large inflation differential with its trading partners. - The REER is broadly consistent with medium-term fundamentals and desirable policies. ### India — Capital and financial accounts: flows and measures - Background: - India’s financial account is dominated by portfolio equity and FDI flows. - Shift in financing mix of the CAD: more debt flows and less FDI flows. - FDI inflows finance only a quarter of the CAD in 2012; before 2007/08 they generally exceeded the CAD. - Debt flows, particularly short-term and in the form of non-resident Indian (NRI) deposits, have increased. - External commercial borrowings by Indian corporates increased by more than 60 percent since 2008. - Assessment: - Portfolio equity flows have been volatile; the exchange rate has been sensitive to these flows and changes in global risk aversion. - Restrictions on external commercial borrowing have affected composition of debt flows but have not impeded arbitrage of domestic and foreign interest rates. - Widening of the CAD when growth and investment are weak, along with increased reliance on debt financing, have increased concerns about external vulnerabilities. ### India — FX intervention and reserves - Background: - The rupee is consistent with a floating arrangement; authorities have recently intervened only to prevent abrupt movements. - Magnitude of intervention has remained small relative to the size of the FX market. - Reserve coverage has fallen: import cover dropped from 11 months of projected imports in 2007/08 to under 6 months in March 2013. - Assessment: - Reserves stand at 166 percent of the IMF’s composite metric and 170 percent of short-term debt covering about 6 months of imports. - Reserve levels are broadly adequate for precautionary purposes. ### India — Foreign asset and liability position - Background: - Gross assets and liabilities have grown steadily; the net International Investment Position (IIP) has deteriorated because liabilities increased rapidly since 2007/08. - Bulk of external assets are FDI and official reserves. - Gross liabilities include portfolio equity and FDI, and increasingly short-term liabilities (trade credits and other loans). - Reserves are broadly unchanged in U.S. dollars compared with November 2010, but have declined by US$30 billion since the recent peak of August 2011. - Assessment: - Growth of near term gross liabilities (particularly debt) is a key external vulnerability. --- ### Indonesia — Current account and overall assessment - Background: - The current account balance declined by 3 percent of GDP in 2012 to a deficit of 2.7 percent of GDP (a deficit of 2.3 percent of GDP, cyclically adjusted). - Main factors: weaknesses in major export commodity prices and a trend decline in net oil and gas exports (Indonesia became a net importer in 2011). - Projected: Declines in commodity prices, continued solid domestic demand, and further deterioration in the oil and gas balance expected to widen the current account deficit in 2013. - Assessment: - A modest current account deficit in the range ½-2½ percent of GDP is in line with medium-term fundamentals and desired policies. - The cyclically-adjusted current account is in the range 0-2 percent percentage points of GDP weaker than the estimated norm, compared with a point estimate of 2 percentage points of GDP stronger in the Pilot ESR. - The external position appears moderately weaker than implied by medium-term fundamentals and desirable policies. - Policy implication: - Maintain reserves near current levels given ongoing reliance on foreign financing and still-volatile capital flows. ### Indonesia — Potential policy responses - Measures to address widening CAD: - Maintain the current small structural fiscal deficit while eliminating energy subsidies. - Tighten monetary policy. - Allow exchange rate flexibility so rates can adjust with commodity prices and the current account. - Reform trade regime and improve investment climate to complement policies. ### Indonesia — Real exchange rate - 2012: REER depreciated by a modest 2 percent. - Assessment: REER is in line with medium-term fundamentals and desirable policies. - Recommendation: Greater exchange rate flexibility would help absorb external shocks, supported by macro-financial policies and growth-oriented structural reforms. ### Indonesia — Capital and financial accounts - Background: - In 2012, FDI hit a new high; net debt issuance rebounded somewhat from 2011. - FDI expected to remain about 2½ percent of GDP; net debt issuance about 1½ percent of GDP. - About one-third of rupiah government debt is held by nonresidents. - Assessment: FDI and debt inflows appear sustainable but susceptible to shocks; improve investment climate and refrain from unexpected policy changes. ### Indonesia — FX intervention and reserves - Assessment: - At end-2013, reserves are projected to be adequate at around 125 percent of the IMF’s composite metric. - With sustained CAD projected, this reserve cover could help reduce risks. - Given volatile capital flows, some FX intervention may be warranted to smooth currency fluctuations. ### Indonesia — Foreign asset and liability position - Background: - NFA position at end-2011: -36 percent of GDP (reserves 13 percent of GDP; net FDI and equities about -30 percent of GDP; net debt and other liabilities -18 percent of GDP). - Gross external debt-to-GDP ratio about 25 percent of GDP; short-term debt 6 percent of GDP. - Assessment: Net external position appears sustainable; main vulnerability is nonresident holdings of government rupiah debt. --- ### Italy — Current account and overall assessment - Background: - Italy typically runs moderate current account deficits (1–3 percent of GDP). - In 2012, trade balance improved sharply owing to subdued imports; cyclically-adjusted CAD estimated at just less than 1 percent of GDP. - Assessment: - Cyclically-adjusted current account is still around [0-2 percentage points of GDP weaker than value implied by medium-term fundamentals and desirable policy settings. - Italy’s weak productivity and competitiveness point to an external position moderately weaker than suggested by fundamentals. - Policy responses: - Continued progress in medium-term fiscal consolidation. - Implementation of structural reforms to improve competitiveness and ensure rebound in growth. ### Italy — Real exchange rate - Background: - Structural rigidities and increasing unit labor costs have resulted in a gradual REER appreciation. - Since joining the euro area, ULC in Italy has increased by around 10 percent relative to the euro area average. - Assessment: Various approaches suggest a real effective depreciation of 0-10 percent would be appropriate. ### Italy — Capital and financial accounts; FX and reserves; foreign position - Capital and financial accounts: - Portfolio and other-investment inflows have typically financed the CAD and a modest net FDI outflow. - Over 2011-12 banks had difficulties raising funds internationally, increasing euro system refinancing and TARGET2 liabilities which have stabilized. - Assessment: Italy is vulnerable to a downturn in investor sentiment due to large refinancing needs of sovereign and banking sectors. - FX intervention and reserves: - Assessment: The euro is a global reserve currency; reserves held by the euro area are typically low relative to standard metrics; currency free floating. - Foreign asset and liability position: - Net international investment position: net liabilities reached 24½ percent of GDP in 2012. - Assessment: Italy is vulnerable given relatively large stock of government debt and large share held by non-residents. --- ### Japan — Current account and overall assessment - Background: - Current account surplus declined to 1 percent of GDP in 2012 (around 1¼ percent of GDP cyclically adjusted). - Factors: sluggish external demand, increased energy imports after the Great East Japan Earthquake, and a strong yen through most of the second half of 2012. - Investment income account surplus nearly 3 percent of GDP in 2012. - Assessment: - Before recent depreciation, cyclically-adjusted CA was about 2¼ percent of GDP weaker than value implied by fundamentals and desirable policies (pre-dates new macroeconomic policies). - Taking into account higher energy imports and lagged impact of depreciation since mid 2012, estimated current account gap ranges from 1 percent of GDP weaker to 2 percent of GDP stronger than implied by fundamentals. - External position appears moderately stronger than implied by fundamentals (exchange rate moderately undervalued) due to monetary easing aimed at exiting deflation. - Uncertainty: Assessment subject to unusual degree of uncertainty because of major shift in macroeconomic framework since 2012. ### Japan — Potential policy responses - Fiscal consolidation to close the policy gap would raise national savings above baseline, offsetting decline in private saving from aging, and raise the current account surplus. - Ambitious structural reforms, including liberalizing trade through the TPP, could boost productivity, domestic income, and imports. ### Japan — Real exchange rate - Background: - Yen strong through most of 2012, then depreciated steadily from November 2012. - Factors: new monetary framework, reversal of safe haven effects (potentially contributing 5-10 percent to depreciation since fall 2012), and structural weakening of trade balance from higher energy imports. - Since May 2012, by June 2013 REER depreciated by about 18-19 percent in real effective terms. - Assessment: - Relative to fundamentals, sharp depreciation since 2012 implies moderate undervaluation, with estimates ranging from a 20 percent undervaluation to a 10 percent overvaluation (assessment subject to greater than usual uncertainty). - Exchange rate expected to move in line with fundamentals over medium-term assuming comprehensive and credible fiscal and structural reforms. ### Japan — Capital and financial accounts; FX; foreign position - Capital and financial accounts: - Yen carry trade and its unwinding were important in the 2000s. - Recent exchange rate movements driven largely by derivative positions reflecting hedging and speculative positions. - Scale of new monetary easing could result in spillovers, notably larger capital flows to the region. - Assessment: Safe haven flows imply limited vulnerabilities to global financial instability. - FX intervention and reserves: - Reserves are higher than other reserve asset issuers (about 20 percent of GDP) on legacy accumulation. - Isolated FX interventions during safe haven periods reduced short-term volatility with ambiguous effects on level. - Foreign asset and liability position: - Net foreign asset position rose from about 35 percent of GDP ten years ago to over 50 percent of GDP in 2012. - Most assets and liabilities are portfolio equity and debt securities. - Assessment: Vulnerabilities are limited as positive net position generates sizable investment income that averaged about 3 percent of GDP over the past five years. --- ### Korea — Current account and overall assessment - Background: - CA surplus widened to 3.8 percent of GDP in 2012 (from 2.3 percent in 2011), but remained at 4½ percent in cyclically-adjusted terms. - Projected to narrow as domestic demand strengthens over the medium term. - Assessment: - Cyclically-adjusted CA balance is assessed to be some 1-4 percent of GDP above value suggested by fundamentals and desirable policies. - External sector position appears stronger than implied by medium-term fundamentals and desirable policies. - Real exchange rate assessed to be moderately undervalued. - Policy responses: - CA gap would narrow with fiscal rebalancing in advanced economies and higher public spending in Korea (including social spending). - Exchange rate should remain market determined with intervention limited to smoothing volatility. - In event of capital flow surge, existing macroprudential measures can be further tightened; macroprudential measures should target financial stability and volatility rather than level of exchange rate. - Reserves are in line with IMF’s composite metric; slow increase in line with rising liabilities would be reasonable. ### Korea — Real exchange rate - Background: - REER was assessed moderately undervalued (around 0-10 percent) in 2012. - Then appreciated by 7 percent in 2012, followed by depreciation of around 1½ percent between end-2012 and April 2013. - Assessment: - REER assessed to be around 2-8 percent below the level consistent with medium-term fundamentals and desirable policies. ### Korea — Capital and financial accounts; FX intervention and reserves; foreign position - Capital and financial accounts: - Capital flows remained volatile in 2012, particularly equity and other flows with no significant net capital inflows overall. - Policy responses after global financial crisis included macroprudential measures to contain banks’ FX funding risks and reinstitution of withholding tax on bond investments; some measures tightened in 2012. - Assessment: Korea faces risk of volatile capital flows but financial system more robust; remain open to capital flows and allow exchange rates to move freely. - FX intervention and reserves: - Reserves grew by 1 percent of GDP (US$ 21 billion) in 2012. - Reserves adequate at 180 percent of short-term external debt and 130 percent of the IMF’s composite metric, within the 100–150 percent recommended range. - Including forward positions, reserve coverage looks more comfortable; no need for further precautionary reserve accumulation. - Foreign asset and liability position: - Net international investment position at -9 percent of GDP. - Net debt 16 percent of GDP; reserves 28 percent of GDP. - Short-term external debt largely held by banks with prudent net open position limits. - About 16 percent of listed government bonds outstanding held by foreign investors. - Assessment: Few risks to external debt sustainability. --- ### Malaysia — Current account and overall assessment - Background: - Current account surplus declined to 6.1 percent of GDP in 2012 from 11 percent in 2011 and 17 percent in 2008, reflecting increasingly domestic demand-driven growth. - Goods trade balance dominated the decline; income and service balances also turned increasingly negative. - Assessment: - EBA model suggests cyclically-adjusted CA is stronger (by about 7 percentage points of GDP) than level consistent with medium-term fundamentals and desirable policies. - Structural factors (insufficient social safety nets and bottlenecks to investment) are not well captured by EBA. - Taking structural factors and model uncertainty into account, CA gap assessed to be of the order of 2-5 percentage points of GDP. - External position appears stronger than consistent with estimated medium-term fundamentals and desirable policies; CA and REER gaps likely reflect structural factors. ### Malaysia — Potential policy responses - Structural reforms: - Strengthen social protection and improve investment climate. - Population aging and reforms would contribute to reduce savings-investment gap. - Recent pension reforms welcomed but risk-sharing characteristics could be further enhanced. - Introduction of employment insurance would strengthen safety net and reduce precautionary savings. - Exchange rate: - Continued two-way exchange rate flexibility with intervention limited to dampening excessive volatility; allow currency to appreciate in real terms over medium term. ### Malaysia — Real exchange rate and capital flows - Real exchange rate: - After appreciation in September 2009–April 2010, REER has fluctuated around a fairly horizontal trend. - EBA estimates suggest exchange rate undervalued by about 17 percent, but taking structural factors into account, REER assessed undervalued by about 5-15 percent. - Capital and financial accounts: - Malaysia has typically recorded net capital outflows driven by net FDI and non-portfolio investment. - In 2012, net outflows were about 2.4 percent of GDP, with portfolio inflows (about ...) *Italic: International Monetary Fund — extracted content from the provided chapter/section.* ### 6.3 percent of GDP) largely offset by non-portfolio outflows. ### _062013a - 6.3 percent of GDP) largely offset by non-portfolio outflows. ### Malaysia - Assessment: Malaysia has experienced volatile capital flows reflecting push and pull factors, including shifting global risk aversion, low policy rates in advanced economies and Malaysia’s strong fundamentals. A healthy financial sector has limited the impact on the overall economy. - Policy actions: Authorities continued to liberalize FX administration, including via greater flexibility for resident companies to undertake foreign direct investment abroad and obtain loans from related resident and non-resident companies. - FX intervention and reserves: - Official reserves are about 128 percent of the IMF’s composite reserve adequacy metric. - Reserves cover about 280 percent and 32 percent of short-term external debt and broad money, respectively. - Conclusion: Current reserve levels are adequate and there is no need for additional accumulation for precautionary purposes. - BNM intervention seeks to limit excess exchange rate volatility and has generally been two-sided. Foreign reserves fell by about 33 percent between August 2008 and March 2009; a decline was again recorded in August–September 2011. - Foreign asset and liability position: - Gross liabilities are substantial (118 percent of GDP at end-2011), consisting primarily of FDI and portfolio equity. - External debt is relatively low at about 27 percent of GDP in 2012, of which about 63 percent is medium and long-term debt. - Short-term external debt is well-covered by foreign reserves. - Assessment: The international investment position is not a major source of risk with a moderate surplus (4.3 percent of GDP at end-2011) and is projected to rise, suggesting a strong external position. ### Mexico - Overall assessment: Current account deficit was less than 1 percent of GDP in 2012 (and less than 0.5 percent of GDP cyclically adjusted); it will increase slightly over time due to a weaker oil balance over the medium term. - Assessment: Models suggest Mexico’s cyclically-adjusted current account balance seems close to the value implied by medium-term fundamentals and desirable policies. - Real exchange rate: - Background: Flexible exchange rate has been a key shock absorber. Since the reference period, Mexico’s real exchange rate is estimated to have appreciated about 10 percent, displaying substantial volatility. - Assessment: Current level broadly in line with medium-term fundamentals and desirable policy settings. - Capital and financial accounts: - Background: Annual net capital inflows have been in the order of 4 percent of GDP over the 2010-2012 period. - Most inflows have been purchases of domestic currency government paper by non-residents; inclusion in the WGBI played an important role. - Assessment: Foreign investors hold a large share of Mexican financial assets, entailing potential vulnerabilities from contagion. - FX intervention and reserves: - Central bank remains committed to a flexible exchange rate and to gradually build reserve buffers through rules-based intervention. - Assessment: Current foreign reserves are adequate at the middle of the range of the IMF’s composite adequacy metric. - Recommendation: There is a case for a gradual increase in reserves consistent with the expected gradual rise in foreign-held liabilities. The Fund FCL arrangement has been an effective complement to international reserves against global tail risks. - Foreign asset and liability position: - Background: NFA position about -40 percent of GDP is comfortable and projected to remain broadly stable. - Assessment: Gross foreign portfolio liabilities—at nearly 30 percent of GDP—represent a material risk and could be a channel of contagion. ### The Netherlands - Overall assessment: Current account at 8.3 percent of GDP in 2012; surplus since 1981, peaking at 10.1 percent of GDP in 2011. Persistent surpluses have not led to a commensurate accumulation of net foreign assets. - Assessment: Cyclically-adjusted surplus estimated at 8 percent of GDP, pointing to a cyclically-adjusted current account 1–3 percent of GDP stronger than the value implied by medium-term fundamentals and desirable global policy settings. - Conclusion: The external position is stronger than the level consistent with medium-term fundamentals and desirable global policy settings. - Policy response: Domestic policy settings are broadly appropriate and no policy measures are needed. - Real exchange rate: - Background: REER has depreciated somewhat in recent years and is slightly lower than historical averages. - Assessment: Range of approaches suggest a moderate undervaluation of 0–5 percent. - Capital and financial accounts: - Background: Net FDI outflows dominate, stimulated by investment of corporate profits abroad; on average gross FDI outflows largely match corporate profits. - Assessment: Strong external position limits vulnerabilities from capital flows; financial account likely to remain in deficit as corporate sector invests abroad. - FX intervention and reserves: - Assessment: Euro is a global reserve currency; reserves held by the euro area are typically low relative to standard metrics but the currency is free floating. - Foreign asset and liability position: - Background: Both assets and liabilities increased rapidly since 2008, with assets growing faster. Net international investment position turned positive in 2008 and is projected to continue to increase. - Direct investment net assets are considerable at 50 percent of GDP, while portfolio investments are in net liability of approximately 10 percent of GDP. - Assessment: Net foreign assets of 50 percent of GDP and a safe haven status limit risks from liabilities close to 470 percent of GDP, including significant gross debt. ### Poland - Overall assessment: Moderate current account deficit largely reflects income repatriation by multinationals and a structural fiscal deficit; improved to about 3.5 percent of GDP (around 3 percent of GDP cyclically adjusted), after peaking at 6 percent of GDP in 2007–08. - Assessment: Cyclically-adjusted current account position broadly consistent with medium-term fundamentals and desirable policies. - Conclusion: External position appears broadly consistent with medium-term fundamentals and desirable policies, including fiscal consolidation. Reserves broadly adequate; FCL arrangement provides an added buffer. - Potential policy responses: - Continue fiscal consolidation over the medium term in line with authorities’ goal. - Continued vigilance with respect to funding activities (including foreign exchange swaps) of foreign bank subsidiaries, including preparedness to extend fx liquidity in face of external shocks. - Real exchange rate: - Background: REER appreciated modestly in 2012 as global risk aversion receded. - Assessment: Exchange rate broadly consistent with medium-term fundamentals and desirable policy settings. - Capital and financial accounts: - Background: EU regulations do not allow use of capital controls. - Assessment: Capital inflows increasingly centered on portfolio (notably government bonds); net FDI inflows slowed and other investment outflows occurred in 2012. Historically high foreign holdings of government bonds suggest potential vulnerabilities. - FX intervention and reserves: - Assessment: Reserves broadly adequate, standing at about 140 percent of the IMF’s composite reserve adequacy metric, but are less than 100 percent of short-term debt at remaining maturities plus the current account deficit. The Fund FCL arrangement helps as a buffer. - The zloty has floated freely. - Foreign asset and liability position: - Background: Substantial net IIP liabilities stabilized at 66 percent of GDP. - Assessment: Vulnerabilities exist but are mitigated as much represents well-diversified FDI liabilities and inter-company lending. Planned fiscal consolidation would help improve net IIP position; broad reserves and FCL help mitigate risks. ### Russia - Overall assessment: Current account surplus declined in 2012 (estimated at around 3½ percent of GDP in cyclically adjusted terms) amid strong import demand and real appreciation of the ruble; surplus expected to decline gradually over the medium term. - Assessment: Cyclically-adjusted current account was in line with value implied by medium-term fundamentals and desirable policy settings. - Potential policy responses: - Non-oil fiscal deficit remains significantly higher than long-term sustainable level (estimated at 4.7 percent of GDP); newly-adopted oil price-based fiscal rule envisages considerable medium-term adjustments. - Increased exchange rate flexibility should help maintain appropriate external balances. - Real exchange rate: - Background: REER appreciated considerably during 2011–12 due mostly to higher inflation in Russia than in trading partners. - Assessment: Model-based approach points to a real exchange rate undervaluation of 0–10 percent; alternative indicators suggest ruble broadly in line with fundamentals. - Capital and financial accounts: - Background: Capital outflows continued in 2012 (US$54 billion), albeit at a slower pace, which with limited FX interventions broadly mirrored current account developments. - Assessment: Capital outflows expected to decline this year. Russia exposed to risks of accelerated capital outflows and sudden stops, but flexible exchange rate and large international reserves would help handle such shocks. - FX intervention and reserves: - Assessment: Reserves, including National Wealth Fund savings, were around 172 percent of the IMF’s composite adequacy metric at end-2012. - Reserve assets are adequate; no need for further reserve accumulation for precautionary purposes. - Recommendation: Over time appropriate to invest oil reserve fund assets in less liquid and higher-yielding instruments to limit costs of reserve holdings. - Exchange rate has shown greater flexibility; interventions limited since early 2011. - Foreign asset and liability position: - Background: Net international investment position is in surplus (US$138 billion at end-2011); improvement will slow gradually. - Assessment: Significant proportion of gross liabilities consist of FDI and equities. Total external debt fell from about 40 percent of GDP in 2009 to 27 percent in 2012, but vulnerabilities remain in face of unanticipated events. ### Saudi Arabia - Overall assessment: Increased current account surpluses in 2011-12 driven by higher oil prices and increased oil production; exports boosted export revenues by 19 percent of GDP between 2010 and 2012. - Background and assessment: - Share of Saudi non-oil exports in global non-oil exports increased but remains less than 1/3 of 1 percent. - Errors and omissions are large and consistently negative (average of 7.5 percent of GDP in 2011–12). - Long-term current account will be determined by the development strategy chosen (saving oil revenues overseas vs investment in Saudi Arabia). - Using methodologies reflecting large oil exporters, estimated current account norms vary between 6 and 15 percent of GDP. On current policies, structural current account balance is within the range of model estimates. - Conclusion: External position is in line with medium-term fundamentals and desirable policies, although uncertainty around specific estimates should be acknowledged. - Projection: With reversal of temporary supply shocks and forecast trend decline in oil prices, current account projected to converge to a level broadly consistent with long-term fundamentals. - Potential policy responses: - Fiscal spending increased sharply in 2011 and 2012 and is currently above level implied by intergenerational equity models. - Increased government investment in infrastructure and education is appropriate, but composition of spending should avoid permanent increases in entitlements given heavy dependence on oil revenues. - Real exchange rate: - Background: Fixed exchange rate against the US dollar without realignment since 1986. REER influenced by oil price dynamics and movements in the US nominal exchange rate. - Assessment: Empirical models linking REER to real price of oil suggest rate broadly in line with fundamentals. - Capital and financial accounts: - Background: Inflows dominated by FDI; outflows largely portfolio investment. Capital account restrictions and underdeveloped domestic capital markets limit portfolio and investment inflows; higher oil export revenues boost portfolio and investment outflows. Steps to remove barriers to portfolio inflows under consideration. - Assessment: No immediate risks or vulnerabilities associated with capital flows. - FX intervention and reserves: - Background: Saudi Arabia does not have a Sovereign Wealth Fund; government’s foreign assets are held at the central bank within international reserves. - International reserves increased to approximately 90 percent of GDP or 34 months of import coverage. - Assessment: Reserve assets are more than adequate for precautionary purposes (measured by traditional metrics); foreign assets accumulation is consistent with intergenerational transfer of oil revenues. - Foreign asset and liability position: - Background: Assets of both public and private sectors are substantial, with public sector assets dominated by central bank’s international reserves. - Total external liabilities (portfolio and other investments) amounted to [text ends here]. *From: _062013a - 6.3 percent of GDP) largely offset by non-portfolio outflows.* ### 7.2 percent of GDP in 2011. All external debt is private. ### 7.2 percent of GDP in 2011. All external debt is private. ### Singapore — Overall assessment & current account - Background: The current account surplus declined by 6 percentage points to around 18½ percent in 2012 (with a similar decline in the structural balance), as an appreciated real exchange rate and weak external demand dragged on goods exports. - Drivers: Large goods surplus partially offset by modest remittance outflows and a small negative income balance (income payments on the large stock of inward FDI exceeding income receipts, including from official-sector assets held abroad). - Assessment: - A range of estimates suggest a current account surplus that is stronger than the level consistent with medium-term fundamentals and desirable policies. - Non-standard factors make a quantitative assessment difficult; a sizable structural decline (on the order of 3-5 percent of GDP) is appropriate. - The structural balance is expected to moderate further over the medium term on increased aging-related and other social spending and slower absorption of foreign workers. - The external position appears to be stronger than what is consistent with medium-term fundamentals and desirable policies. - Potential policy responses: - From a multilateral perspective, and consistent with the authorities’ current policies, increased public spending, a more-even distribution of consumption across generations, and recourse to slower foreign worker inflows would help to further moderate the current account and slow accumulation of foreign assets. ### Singapore — Real exchange rate - Background: The 27 percent appreciation of the real effective exchange rate (REER) since 2005—9 percentage points of which occurred since end 2011—has increased the REER above its previous peak in the late 1990s. - Assessment: While non-standard factors make quantitative assessment difficult, the real exchange rate appears around 0−10 percent weaker than warranted by medium-term fundamentals (including rapid population aging) and desirable policies. ### Singapore — Capital and financial accounts; FX intervention and reserves; foreign asset/liability position - Capital and financial accounts — Background: - Financial account deficit co-moves with the global financial cycle. - Reinvestment abroad of income from foreign assets of the official sector is a large contributor to net financial flows. - Sizable net inward FDI and smaller but more volatile net bank-related flows; nonbank corporate sector generally associated with net outflows. - Large reserves, a high sovereign investment rating and strong banks support Singapore’s status as a safe haven. - Capital and financial accounts — Assessment: - The financial account is likely to remain in deficit as long as income from NFA (recorded in the current account) is reinvested abroad. - FX intervention and reserves — Assessment: - With the nominal effective exchange rate as the intermediate target, intervention is undertaken as required to achieve monetary policy’s inflation and output goals. - At end-2012, official reserves covered 26 percent of short-term external debt, but are much higher than thresholds for other traditional adequacy metrics. - Reserves are a larger share of GDP than in most other financial centers; while non-standard factors warrant generous reserve buffers, current levels appear adequate and there is no clear case for further reserve accumulation for precautionary purposes. - Foreign asset and liability position — Background: - As of 2012, net IIP stood at a positive 223 percent of GDP, rising 76 percentage points of GDP since 2008. - Foreign asset and liability position — Assessment: - The international investment position is not a major source of risk. - Very large short-term gross non-FDI liabilities of 436 percent of 2012 GDP, predominantly deposit taking by banks’ Asian Currency Units, could nonetheless pose some vulnerability, mitigated by large official reserve holdings (92 percent of 2012 GDP) and other official liquid foreign assets. --- ### South Africa — Overall assessment & current account - Background: - The current account deficit widened sharply to 6.3 percent of GDP in 2012 (5.8 percent of GDP cyclically adjusted), reflecting flat export volumes, a pick-up in imports and softer terms of trade. - Export stagnation partly reflected disruptions from labor unrest as well as South Africa’s competitiveness problems. - Structurally, low saving coupled with robust public infrastructure investment is expected to keep the current account deficit elevated over the medium term despite the planned fiscal consolidation. - Assessment: - Model-based estimates suggest the cyclically-adjusted current account is 2-4 percentage points of GDP weaker than implied by medium-term fundamentals and desirable policy settings. - The current account deficit has widened sharply, financed to a large degree by portfolio debt flows. The external position appears weaker than consistent with medium-term fundamentals and desirable policy settings. - Although external debt is still moderate and about half denominated in local currency, external vulnerabilities have risen. - Potential policy responses: - Implementation of the authorities’ National Development Plan to improve competitiveness over the medium term; additional labor and product market reforms to increase competition and bring domestic costs in line with productivity growth are essential. - Planned fiscal consolidation can help improve sustainability of the current account. - Some tightening of macro-prudential measures to reign in rapid growth of personal loans to households could help encourage household savings. - Substantial increase in household saving will require faster growth in household incomes through much faster employment growth, which requires structural reforms. - Building reserves would strengthen the country’s ability to deal with FX liquidity shocks. ### South Africa — Real exchange rate - Background: After appreciating in 2009–10, the REER depreciated in 2011 and 2012; by April 2013, the REER was 9 percent below its 10 year average. ULC-based measures suggested the REER was stronger than its 10-year average. Since April, the rand has depreciated amidst high volatility. - Assessment: - Direct approaches are complicated by structural changes since 1994 and high REER volatility. - Model-based estimates suggest the CPI-based REER was slightly undervalued as of 2013 Q1; ULC-based and other indicators point to the opposite. - Applying mechanically trade elasticities suggested an overvaluation of 10-15 percent by Q1 2013. The rand depreciation since then should help reduce the current account gap, but structural factors likely keep the external position weaker than justified. ### South Africa — Capital and financial accounts; FX intervention and reserves; foreign asset/liability position - Capital and financial accounts — Background: - Portfolio inflows, particularly foreign purchases of local currency government bonds, have accounted for a large and increasing share of CAD financing. - South Africa benefits from its relatively large share in major EM indices and its 2012 inclusion in the WGBI. - Capital and financial accounts — Assessment: - Risks from portfolio flows and large nonresident financial holdings are mitigated by the free-floating exchange rate, inflows into long-term local currency bonds, large share of index-tracking investors, and large domestic institutional investors’ base. - Nevertheless, a slowdown or sudden stop of capital inflows would complicate financing of the twin deficits, possibly prompting disorderly adjustments. - FX intervention and reserves — Background/Assessment: - Exchange rate regime is one of the most flexible among EM; SARB intervention is rare. - Reserves cover 5 months of imports and about 80 percent of the gross external financing requirement, but are expected to be slightly below the lower bound of the IMF’s composite adequacy metric. - Gold reserves account for about 12 percent of reserves. - Some reserve accumulation is desirable. - Foreign asset and liability position — Background/Assessment: - Gross external debt is modest (at 36 percent of GDP), but expected to rise gradually over the medium term; short-term external debt is also relatively low; more than half of external debt is denominated in rand. - Net IIP (-6 percent of GDP in 2011) is not seen as a major source of risk, but gross positions are large and the IIP position is expected to continue to deteriorate given the projected large CAD. - A sudden stop of portfolio inflows is an important vulnerability. --- ### Spain — Overall assessment & current account - Background: - The current account deficit stood at 1 percent of GDP in 2012, or 1.8 percent of GDP cyclically-adjusted, falling from its peak in 2007 at 10 percent of GDP. - Assessment: - Model-based norms do not suggest a significant gap, but the need to sharply improve the net IIP suggests a significant improvement in cyclically-adjusted current account balances would be appropriate. - Taking this into account, the 2012 current account appears to be 3–5 percentage points of GDP weaker than the value implied by medium-term fundamentals and desirable policy settings. - Despite recent improvement, the external position appears substantially weaker than that consistent with medium-term fundamentals and desirable policy settings. - Net IIP remains highly negative and indicators point to substantial REER overvaluation. - Potential policy responses: - Because the current account improvement partly reflects domestic demand compression and a sizeable output gap, attaining strong and sustainable growth and full employment would require a significantly weaker real effective exchange rate. - Authorities’ plans for fiscal consolidation, product market reforms, and continued bank restructuring are in line with reducing imbalances. - Further labor market reforms and accelerated product market reform implementation would be required to bring down labor costs and reduce mark ups. ### Spain — Real exchange rate; capital and financial accounts; FX intervention and reserves; foreign asset/liability position - Real exchange rate — Background/Assessment: - In 2012, the CPI-based REER had declined by 4 percent from its 2008 peak; ULC-based REER shows a nearly full reversal of pre-crisis appreciation. - Model-based REER analysis suggests the REER is about 8-12 percent above the level consistent with medium-term fundamentals and desirable policies; achieving domestic equilibrium, especially full employment, would likely imply an even greater gap. - Capital and financial accounts — Background/Assessment: - Large portfolio debt outflows by non-residents in 2010–12 added external financing needs; a private financial account deficit opened up in 2011 and 2012, compensated by increased ECB refinancing of Spanish banks (reflected in TARGET2 imbalances). - Since the ECB’s OMT announcement, financing conditions eased, non-resident portfolio outflows abated, and ECB borrowing fell. - Large external financing needs in public and private sectors leave Spain vulnerable to changes in market sentiment; ECB’s OMT program has greatly helped improve sentiment and reduce liquidity-crisis risk. - FX intervention and reserves — Assessment: - The euro has the status of a global reserve currency; reserves held by the euro area are typically low relative to standard metrics, but the currency is free floating. - Foreign asset and liability position — Background/Assessment: - Large net IIP liabilities have stabilized around 90 percent of GDP since 2009; a further large improvement in the current account would be needed to reduce net liabilities. - High gross external debt has stabilized close to 170 percent of GDP since 2010. - The negative IIP and large gross financing needs from external debt are major sources of external vulnerability. --- ### Sweden — Overall assessment & current account - Background: - The current account surplus remained almost unchanged at 7.1 percent of GDP in 2012 (cyclically adjusted also around 7.1 percent of GDP), up slightly from 7 percent of GDP the previous year. - Continued strong exports despite cooling in the euro area. - Assessment: - Various approaches point to a cyclically-adjusted current account that is 2–4 percent of GDP stronger than the value implied by medium-term fundamentals and desirable policies. - The external position appears stronger than the one consistent with medium-term fundamentals; Sweden has benefited from strong fundamentals relative to the euro area, including wage moderation. - Potential policy responses: - The undervaluation likely reflects structural factors such as higher savings rates following the phased-in pension reform; current policies in place are appropriate. ### Sweden — Real exchange rate; capital and financial accounts; FX intervention and reserves; foreign asset/liability position - Real exchange rate — Background/Assessment: - Safe-haven flows and Sweden’s strong fiscal and growth position have put upward pressures on the krona, which appreciated in real effective terms by over 5 percent since early 2009 (and by around 25.percent against the euro), reaching a ten-year high in August 2012. - Model estimates suggest a real exchange rate undervaluation of some 3.5-8.5 percent relative to its long-run equilibrium. - Capital and financial accounts — Background/Assessment: - Current account surplus is balanced by a financial account deficit (mainly FDI and bank flows). - Banks’ liquidity risk vis-à-vis a renewed EU banking crisis is a vulnerability despite improved structural liquidity measures in 2011 and 2012. - A rebalancing of flows, with a drop in short-term flows in favor of longer ones, is desirable. - FX intervention and reserves — Background/Assessment: - The krona floats freely; the Riksbank decided to gradually boost currency reserves by about one-third to around USD 55 billion (10 percent of GDP) to pre-empt possible financial sector liquidity shortages. - The entire amount will be borrowed using bonds and short-term securities in foreign currencies with maturities of up to five years. - Given large gross external liabilities of banks, maintaining FX liquidity buffers—in the form of reserves and swap lines—is advisable. - Foreign asset and liability position — Assessment: - Net IIP is slightly negative (-14.4 percent of GDP at 2012 Q4) and expected to weaken slightly before turning positive in the medium term, suggesting a strong external position. - Gross liabilities (268 percent of GDP in 2012) create vulnerabilities, notably large external debt liabilities including liquid banking-sector liabilities. --- ### Switzerland — Overall assessment & current account - Background: - Switzerland has a large current account surplus (13½ percent of GDP in 2012 according to preliminary estimates or about 14 percent in cyclically-adjusted terms) dominated by service exports and net investment income. - Net investment income is very volatile; preliminary current account estimates are subject to large revisions. - Correcting for foreign ownership of FDI retained earnings and domestic ownership of retained earnings of foreign multinationals could reduce the balance by 2-5 percentage points (SNB estimates for 2009-11); accounting for cross-border shopping would further increase imports. - Assessment: - The cyclically-adjusted current account surplus in 2012 is some 0-5 percent of GDP above the level implied by medium-term fundamentals and desirable policy settings, mostly reflecting a large preliminary estimate of net investment income, particularly FDI income. - Given preliminary data and other factors, there are considerable uncertainties around this assessment. - The underlying external position is moderately stronger than the level consistent with medium-term fundamentals and desirable policy settings, but this assessment is complicated by measurement and other issues and is subject to unusual uncertainty. - The real exchange rate is moderately overvalued because of safe-haven capital inflows, but the overvaluation is eroding over time given negative inflation differentials with trading partners. - As a rapid real appreciation threatened to destabilize the economy with deflationary pressures, Switzerland successfully imposed a floor on the franc-euro rate, curbing further appreciation. *Source: IMF country assessments excerpted from the supplied content unit.* ### introduction of the floor was appropriate ### _062013a - introduction of the floor was appropriate ### Switzerland — Real exchange rate - Background: The Swiss franc appreciated by more than 30 percent in real effective terms from mid-2007 to August 2011. Since Sept 2011, the central bank has enforced a floor of 1.20 for the CHF/EUR rate and the Swiss franc has traded above that level. The REER has depreciated by 7 percent between September 2011 and May 2013 as a result of nominal depreciation and negative inflation differentials. - Assessment: Model-based estimates suggest that the real effective exchange rate is overvalued by 5-10 percent relative to its medium-term fundamentals and desirable policy settings. ### Switzerland — Capital and financial accounts: flows and measures - Background: The large current account surpluses have led to accumulation of foreign exchange reserves and increases in the net foreign direct investment position (in large part via reinvestment of retained earnings). - Assessment: Switzerland continues to face the risk of safe-haven capital inflows and/or reduced outflows if a tail event occurs in the euro area or problems in the euro periphery persist. ### Switzerland — FX intervention and reserves - Background: The SNB has accumulated massive foreign exchange reserves during 2009–12 following several rounds of intervention. As a result of interventions in the spring and summer of 2012 reserves increased by 175 billion (29 percent of GDP). - Assessment: - The introduction of the floor was appropriate in light of the risk of economic contraction and deflation. - The credible exchange rate arrangement mitigated the need for reserve accumulation initially, but reserves are on the rise again with a large scale intervention from the SNB as a result of the intensification of the European crisis and, to a lesser extent, a continued increase in global liquidity. - The central bank has access to dollar swap lines with the US Federal Reserve. - Potential policy responses: - Introducing negative interest rates on bank excess reserves at the SNB might discourage inflows if exchange rate pressures return. - Once growth recovers and inflation returns to comfortable levels, the credibility of the ceiling may be called into question and the central bank should return to floating the currency to avoid stoking inflation. ### Switzerland — Foreign asset and liability position - Background: Switzerland is a financial center and has a positive IIP position of 150 percent of GDP, and large gross foreign asset/liability positions. Valuation changes due to exchange rate movements have also had a significant effect on the IIP position. - Assessment: A healthy asset position, policy credibility and large reserves, mitigate the risks from large and liquid gross liabilities. ### Thailand — Overall assessment - Current account Background: Thailand’s current account has been quite volatile over the last decade, ranging from a 4¼ percent deficit to 8¼ percent surplus, against the backdrop of a relatively stable trend real appreciation, and volatile economic fundamentals. The current account surplus came down sharply from its peak in 2009 at 8¼ percent of GDP to 0.7 percent in 2012 (2 percent cyclically adjusted) and is expected to remain close to balance over the medium term, as large investment projects raise imports and the baht continues to appreciate in real terms. - Assessment: Thailand’s cyclically adjusted current account is close to its norm; model-based and other estimates suggest a cyclically adjusted current account that is about 0-2 percentage points, of GDP stronger than the value consistent with medium-term fundamentals and desirable policies. - Conclusion: The external position is consistent with medium-term fundamentals and desirable policy settings. Thailand’s current account is likely to remain close to its norm and the exchange rate is assessed to be fairly valued. To the extent that higher infrastructure investment adds to the productive capacity of the economy its equilibrium real effective exchange rate is likely to appreciate. - Potential policy responses: - A medium-term infrastructure investment policy is key to unlocking growth by boosting private investment, which would reduce existing current account surpluses. - The authorities should allow the nominal effective exchange rate to follow fundamentals. The more-than-adequate reserves can support two-way flexibility of the baht while still providing some scope for intervention to prevent exchange rate overshooting and smoothing excessive volatility. - To deal with the impact of strong capital inflows, macroprudential policies should also be considered. ### Thailand — Real exchange rate - Background: Barring the global financial crisis, the Thai baht has been appreciating in real effective terms since 2005. - Assessment: A number of methodologies suggest that the Thai baht is consistent with medium-term fundamentals and appropriate policies. ### Thailand — Capital and financial accounts: flows and measures - Background: While equity flows were mostly flat over 2012, bond inflows have been very large and volatile, reaching historic peaks at times, and reversing during periods of heightened domestic or external uncertainty. - Assessment: - While capital flows to banks reflect mostly hedging activities of the trade sector and therefore follow the trade balance, portfolio flows are driven by global push factors as well as the relatively better fundamentals of the Thai economy compared to advanced economies. - Portfolio inflows are expected to continue, although they will increasingly be offset by outward investment as the authorities push forward with their financial account liberalization plans. ### Thailand — FX intervention and reserves - Background: Foreign currency reserves are about 50 percent of GDP, over four times short-term debt, and at 297 percent of the IMF’s composite metric. Thailand’s net forward FX position (7 percent of GDP in 2012), has been increasing since mid-2012. - Assessment: Thailand’s gross reserves are more than adequate and there is no need to build up reserves for precautionary purposes. Intervention has smoothed volatility but sterilization costs have increased and there is room for more two-way exchange rate flexibility. ### Thailand — Foreign asset and liability position - Background: Net foreign assets had been rising steadily as a percentage of GDP from the large deficit they hit following the Asian crisis until 2011, when large inflows of direct and portfolio investment raised foreign liabilities and lowered the net investment position to -9 percent of GDP. - Assessment: Net foreign assets are currently rising but would be expected to remain broadly stable, although further liberalization of outflows could raise both foreign assets and liabilities. There are limited risks to external debt sustainability because Thailand’s external debt is projected to remain low and net foreign assets (as a percent of GDP) are expected to stabilize. ### Turkey — Overall assessment - Current account Background: The current account deficit adjusted to 6.1 percent of GDP in 2012 (4.7 percent of GDP on a cyclically adjusted basis), down from 9.7 percent in the previous year. - Assessment: A substantial adjustment took place in 2012, driven by both cyclical and structural factors. However, model results suggest a cyclically-adjusted current account deficit that is 1.5-3 percent of GDP weaker than the level implied by medium-term fundamentals and desirable policy settings. - Conclusion: The external balance has improved vis-à-vis 2011, as have external buffers. However, the external position continues to be weaker than the level consistent with medium-term fundamentals and desirable policy settings. Turkey remains vulnerable to a large capital flows reversal. - Potential policy responses: Given the country’s external imbalances, a tighter fiscal policy over the medium term and continued structural reforms to increase private savings (such as last year’s changes to private sector contributions) are desirable. ### Turkey — Real exchange rate - Background: The Real exchange rate appreciated by 4 percent in 2012 largely due to higher inflation than in trading partners. - Assessment: Model results point to a real effective exchange rate that is 10-20 percent stronger than the level that can be explained by medium-term fundamentals and policy deviations from desirable settings. ### Turkey — Capital and financial accounts: flows and measures - Background: Turkey has received substantial capital inflows in recent years. In 2012 net inflows, including errors and omissions, amounted to some 10 percent of GDP, thereby over-financing the current account deficit and resulting in reserve accumulation. Despite improvements in the maturity composition of capital inflows, short-term debt remains the predominant financing instrument. Turkey has not resorted to capital controls on either inflows or outflows. Rather, it has used the reserve requirement ratio (RRR) and reserve option mechanism (ROM) as tools to manage liquidity. - Assessment: Despite improvements in the current account deficit, short-term debt inflows expose Turkey’s private sector to significant rollover risks. Gross external financing needs are estimated at a large 28 percent of GDP in 2013. In an environment of ample global liquidity, these risks have not thus far materialized, but continue to pose a major vulnerability. ### Turkey — FX intervention and reserves - Background: The Central Bank has not intervened in the exchange rate since January 2012. The ROM has been the instrument of choice to accumulate reserves in the face of capital inflows, helping to alleviate pressure on the lira. - Assessment: Turkey’s gross reserves of $119 billion at end-2012 increased from $88 billion the year before. The 2012 reserves account for 115 percent of the IMF composite adequacy metric versus 99 percent in 2011. Reserves cover of short-term debt rose to 87 percent in 2012 compared with 71 percent in 2011. Reserve coverage is also adequate when using other traditional metrics. However, reserves accumulation is warranted for precautionary reasons given uncertainty in global liquidity flows. ### Turkey — Foreign asset and liability position - Background: Turkey’s net international investment position is about -53.2 percent of GDP, and it is comparable to peers. However, the NFA position has worsened by 8.4 percentage points of GDP since 2009 and the deterioration is projected to continue. The composition of NFA has also deteriorated in recent years, with short-term debt liabilities accounting for a growing fraction of total liabilities. - Assessment: The current NFA level does not point to a solvency problem at this stage, but Turkey remains exposed to liquidity vulnerabilities. ### United Kingdom — Overall assessment - Current account Background: Prior to the crisis, the United Kingdom had a substantial current account deficit due to strong domestic demand. In the aftermath of the crisis the trade and current account balances had a transitory improvement, but have reverted back to the levels observed in 2007. The cyclically adjusted current account was -3.8 percent of GDP in 2012. - Assessment: Model estimates suggest that the cyclically-adjusted current account balance (after adjusting for the output gap and terms of trade) is some 1–2 percent of GDP weaker than the value implied by medium-term fundamentals and desirable policies. - Conclusion: The external position is moderately weaker than implied by medium-term fundamentals and desirable policy settings. From an accounting perspective, this reflects the position of public and private saving rates. More fundamentally, the external position is influenced by the lack of trade competitiveness. - Potential policy responses: - Sustaining a strong and durable recovery in the UK requires a rebalancing away from public support toward private-sector led demand, along with a greater reliance on external demand. - The authorities are pursuing fiscal consolidation, which, per se, would normally be expected to improve national savings. However, given that households banks and (to a lesser extent) firms are also attempting to save more than usual, the overall effect would weaken growth. Bringing forward infrastructure spending and other growth enhancing measures, within a medium-term fiscal framework, could help bridge to a more sustained pick-up in private demand, notably investment. - The authorities have implemented some growth-friendly fiscal measures. More structural reforms (in improving infrastructure, skills, and banking competition) would help to improve competitiveness. ### United Kingdom — Real exchange rate - Background: The necessary fiscal consolidation and deleveraging of the private sector imply that the relative demand for non-tradables will be low over the medium term. - Assessment: Various methodologies suggest a decline in the real effective exchange rate of the order of 5–10 percent may be appropriate given medium-term fundamentals and desirable policy settings, although, there is uncertainty regarding the precise magnitude of exchange rate misalignment. For instance, the recent depreciation of the real exchange rate has not propelled an improvement of net exports suggested by standard trade elasticities. ### United Kingdom — Capital and financial accounts: flows and measures - Background: Given the UK’s role as an international financial center, portfolio and bank flows are the key components of the financial account. - Assessment: With safe haven inflows offset by debt outflows, and while the depth of the sterling market provide it with some cushion against idiosyncratic moves, the fickle nature of some flows into the UK is a potential vulnerability for sterling. ### United Kingdom — FX intervention and reserves - Assessment: Reserves held by the UK are typically low relative to standard metrics, but the currency is free floating. ### United Kingdom — Foreign asset and liability position - Background: The UK’s net international investment position improved substantially during the crisis as the exchange rate depreciation yielded positive valuation effects. Current account deficits are worsening the net international investment position suggesting a weak external position, although net liabilities remain relatively low at about 35 percent of GDP at end-2012. - Assessment: Gross liabilities exceed 500 percent of GDP, including a high proportion of short-term debt. These are offset by large holdings of equities. Large and highly liquid gross liabilities create vulnerabilities for the UK’s large financial sector, despite continuing efforts to strengthen regulation and supervision. ### United States — Overall assessment - Current account Background: The US current account deficit narrowed from 6 percent of GDP prior to the crisis to around 3 percent of GDP during 2009–12 due to higher private saving and lower private investment (and was -3.8 percent of GDP cyclically adjusted). It is projected to worsen modestly as the output gap closes. - Assessment: Model estimates suggest that the cyclically-adjusted current account deficit is½–1½ percentage points of GDP weaker than the value implied by medium-term fundamentals and desirable policies. - Conclusion: The US external position is moderately weaker than implied by medium-term fundamentals and desirable policies. - Potential policy responses: - Over the medium term, fiscal consolidation should aim for a general government primary surplus of about 1 percent of GDP (corresponding to a federal government primary surplus of 1¾ percent, higher than the 1 percent surplus envisaged in the President’s budget and staff’s projection of a very small deficit). This, together with some depreciation of the dollar would be consistent with maintaining external stability and full employment. ### United States — Real exchange rate - Background: The dollar appreciated in real effective terms by some 2½ percent over the summer of 2012, with an increase in global risk aversion, and subsequently depreciated by a similar amount as market confidence returned. It is currently over 10 percent below its average value over the past 2-4 decades. - Assessment: Estimates relying on current account assessments suggest a mild overvaluation given underlying fundamentals and desirable policies. The range of direct estimates of equilibrium real exchange rates is instead centered around zero, reflecting primarily the dollar’s current weakness relative to a long-run average. On balance, staff assesses that a further depreciation of the dollar in the range of 0–10 percent would be associated with a level of the dollar and a current account balance broadly consistent with medium-term fundamentals and desirable policies. ### United States — Capital and financial accounts: flows and measures - Background: Both inflows and outflows are substantially lower than the levels observed prior to the Lehman crisis (including US portfolio investment overseas, despite record-low US interest rates). The US dollar reserve currency status and safe haven motives boost foreign demand for US Treasury securities during periods of market turbulence even as US overseas investments fall. Hence the outlook for capital flows in the United States will depend on global financial stability and the pace of the global recovery, as well as on the outlook for the US economy and its public finances. - Assessment: The United States has a fully open capital account. Vulnerabilities are limited by the dollar’s status as a reserve currency and the United States’ role as a safe haven. ### United States — FX intervention and reserves - Assessment: The dollar has the status of a global reserve currency. Reserves held by the U.S. are typically low relative to standard metrics, but the currency is free floating. ### United States — Foreign asset and liability position - Background: The net IIP declined from -17 percent of GDP in 2010 to an estimated -28 percent of GDP in 2012, and would deteriorate further under staff’s baseline scenario, suggesting some overvaluation. Still, given the large external imbalances of the last decade, the decline in the international investment position has been modest as the falling dollar and rising overseas equity prices raised the value of US assets overseas. - Assessment: Risks to external stability could come from a decline in foreign demand for US debt securities (the bulk of US external liabilities), driven for example by a protracted failure to restore long-run fiscal sustainability. Still, given the dollar’s reserve currency status, current vulnerabilities are limited. Most US foreign assets are denominated in foreign currency; over 50 percent are in the form of FDI and portfolio equity claims and hence tend to decline in value in periods of global growth and stock market weakness, as well as US dollar appreciation. *Source: _062013a - introduction of the floor was appropriate* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_062013a.pdf_