## _062614a - 2000. The REER depreciated by 14 percent from April

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---

### Real Effective Exchange Rate (REER): movements and assessment
- REER movements:
  - The REER depreciated by 14 percent from April 2013 to August 2013, but between August 2013 and April 2014 it appreciated by some 9 percent.
  - As of April 2014, the REER had appreciated by about 1 percent compared to its 2013 average. 2/
- 2013 valuation estimates:
  - EBA CA approach: 4 percent overvalued.
  - EBA REER approach: 7 percent overvalued.
  - NIIP-stabilizing approach: 21 percent overvalued.
  - Staff assessment: some 5-15 percent above the level implied by fundamentals and desirable policies.
- Methodological note:
  - The estimated appreciation of the REER relative to both August 2013 and the 2013 average is calculated using revised CPI series of trading partners where applicable. (Technical Background Notes 2/)

### Capital and financial accounts: flows and policy measures (Brazil)
- Background facts:
  - Brazil continues to attract sizable capital inflows, including net FDI flows of about 3 percent of GDP per annum.
  - During 2013 strong portfolio inflows were largely offset by larger “other investment” outflows reflecting exporters’ receivables.
  - Interest differentials and the projected economic recovery will continue to attract net inflows over the medium term.
  - External debt remains low at 14 percent of GDP. 3/
  - CFMs introduced in previous years were rolled back in 2013 as global liquidity tightened.
  - Significant offshore issuances by non-resident subsidiaries (8 percent of GDP) are reflected in standard, residence-based external debt statistics when loaned back to the respective parent companies. (Technical Background Notes 3/)
- Assessment:
  - The composition of flows has a favorable risk profile, but this can change quickly. Managing flows is likely to remain a challenge.

### FX intervention and reserves level (Brazil)
- Background facts:
  - Brazil has a floating exchange rate.
  - Central bank intervention aimed at reducing volatility and managing capital inflows, causing large reserve increases during 2006 to mid-2011; since mid-2011 reserves have remained broadly stable.
  - Intervention in 2013 relied on foreign exchange non-deliverable forwards and foreign exchange repos, leveraging reserves without selling them in the spot market. 4/
  - Since August 2013, discretionary interventions were replaced by pre-announced daily auctions.
- Instruments (Technical Background Notes 4/):
  - Forex repo: the Central Bank sells dollars with the commitment to repurchase them at a pre-determined future date; the Central Bank retains a long dollar position following execution of the repo.
  - Non-deliverable forward: the Central Bank agrees to pay the onshore dollar rate on a given notional value plus exchange rate variation, and to receive the SELIC rate on the BRL equivalent; net value redeemed in local currency. Under this mechanism, the Central bank pays the holder if the BRL depreciates by more than the difference between the SELIC rate and the onshore dollar rate, and receives payment in the opposite case.
- Assessment:
  - The flexible exchange rate has been an important shock absorber.
  - Reserves are above adequate levels relative to various criteria including the IMF’s composite reserve adequacy metric.
  - Intervention is appropriate to avoid excessive FX volatility from large or sudden capital flow changes or hedging demand, but should not resist currency pressures reflecting fundamentals.

### Technical background and contextual notes (selected)
- Brazil’s domestic saving is low compared to other emerging economies. (Technical Background Notes 1/)
- See Technical Background Notes 2/, 3/, and 4/ for CPI revisions in REER calculations, offshore issuance treatment in external debt statistics, and mechanics of forex repos and non-deliverable forwards.

---

### Selected country highlights — key findings, projections, and policy recommendations
- China
  - Offshore renminbi deposits in Hong Kong SAR grew by 43 percent in 2013 to RMB 860 billion (12 percent of total Hong Kong SAR deposits, or 0.8 percent of onshore renminbi deposits).
  - Reserves are about 160 percent of the IMF’s composite metric; further accumulation is unnecessary from a reserve adequacy perspective.
  - Recommendation: Reduce intervention over time to support a move to a more flexible exchange rate regime.
- Euro Area (aggregate)
  - NIIP: deteriorated to -17 percent of GDP in 2008, rebounded to around -12 percent by end-2013; projected to about 0 percent over the medium-term.
  - 2013 CA balance: 2.3 percent of GDP; cyclically-adjusted CA surplus about 2.2 percent of GDP.
  - Assessment: external position broadly consistent with medium-term fundamentals; national-level imbalances persist.
  - Policy: surplus and deficit member states need further adjustment, product and labor market reforms, and surplus economies should boost domestic demand and investment.
- France
  - NIIP around -20 percent of GDP; gross asset position 307 percent of GDP in 2012; gross liability position almost 330 percent of GDP in 2012.
  - 2013 current account cyclically-adjusted deficit estimated at 1.4 percent of GDP; staff assesses CA 1 to 3 percent of GDP below norm.
  - REER: staff assesses 2013 REER to be 5 to 10 percent overvalued.
  - Policy: wage moderation, labor market reform, productivity-enhancing reforms, gradual fiscal deficit elimination.
- Germany
  - NIIP reached 48 percent of GDP at end-2013; current account surplus 7½ percent of GDP in 2013 (cyclically adjusted around 8¼ percent).
  - Assessment: external position substantially stronger than fundamentals; cyclically-adjusted CA 3–6 percentage points of GDP stronger than implied.
  - REER: assessed undervaluation of 5–15 percent.
  - Policy: boost public and private investment and service-sector reform to raise domestic demand.
- Hong Kong SAR
  - NIIP around 260 percent of GDP as of Q3-2013; CA about 3 percent of GDP in 2013; REER appreciated by about 3.5 percent in 2013.
  - Reserves equivalent to around US$311 (about 114 percent of GDP) at end-2013; currency board arrangement ensures non-discretionary reserve evolution.
  - Assessment: external position broadly consistent with fundamentals.
- India
  - NIIP deteriorated to -17 percent of GDP in FY2012/13; reserves at US$312 billion; external debt about 23 percent of GDP.
  - CA deficit narrowed to about 1.7 percent of GDP in FY2013/14; underlying CA in FY2013/14 estimated at -2.6 percent of GDP.
  - Staff projection: CA deficit expected to stabilize at about 2½ percent of GDP over the medium term.
  - REER: appreciated about 10 percent over the last decade; depreciated about 13 percent in June-August 2013, rebounded about 8 percent through May 2014; staff assesses REER gap in range -5 to +5 percent.
  - Policy: sustainable fiscal consolidation to reach fiscal deficit goal of 3 percent of GDP by FY2017/18, GST passage, subsidy reforms, ease supply bottlenecks, improve CA financing mix and FDI environment cautiously.
- Indonesia
  - End-2013 gross external debt-to-GDP ratio 30 percent; short-term debt 6 percent of GDP.
  - 2013 CA deficit 3.3 percent of GDP; projected 3.0 percent of GDP in 2014.
  - Financing requirement: 9.5 percent of GDP, with CA deficit 3.3 and amortization 6.3 percent; financing met by FDI 2.1 and new borrowing 7.5 percent of GDP.
  - Reserves as of May 2014: US$107 billion (equal to 150 percent of IMF’s reserve adequacy metric and 6 months of imports).
  - Policy: monetary focus on inflation, small structural fiscal deficit and subsidy phase-out, exchange rate flexibility, structural reforms to deepen markets.
- Italy
  - NIIP net liabilities 29 percent of GDP (September 2013); external debt 123 percent of GDP.
  - 2013 CA registered surplus of 1 percent of GDP; staff-assessed CA gap -1.5 to 0 percent of GDP.
  - REER: staff view that a REER depreciation of 0-5 percent would support adjustment.
  - Policy: structural reforms and medium-term fiscal consolidation.
- Japan
  - NIIP over 60 percent of GDP in 2013; 2013 CA surplus 0.7 percent of GDP; 2014 projected CA 1.2 percent of GDP.
  - REER depreciated close to 20 percent between 2012 and 2013, and another 5 percent by May 2014 relative to 2013 average.
  - Staff assesses REER midpoint of zero with range -15 percent to +15 percent for 2013 due to large uncertainty.
  - Policy: full implementation of fiscal and structural reform components of Abenomics.
- Korea
  - NIIP improved to -2.5 percent of GDP in 2013; CA surplus 6.1 percent of GDP in 2013 (7 percent cyclically adjusted).
  - Staff assessment: 2013 CA about 2¾ to 4¾ percent of GDP above value suggested by fundamentals; REER undervaluation around 6 percent as of May 2014.
  - Reserves around 130 percent of IMF’s metric; policy: market-determined exchange rate, limited intervention, targeted macroprudential measures.
- Malaysia
  - CA 3.8 percent of GDP in 2013; EBA CA regression implies cyclically-adjusted CA stronger by about 4.5 percent of GDP than fundamentals.
  - Staff assesses CA gap 1½ to 3½ percent of GDP in 2013.
  - REER: EBA suggests 22 percent below warranted level (mostly residual); staff assesses 2013 REER undervalued by about 5 to 10 percent.
  - Reserves at end-2013 about 117 percent of IMF composite metric.
- Mexico
  - NIIP about -40 percent of GDP; 2013 CA deficit 2.1 percent of GDP; EBA norm -1.9 percent implying small positive CA gap.
  - REER: EBA regression estimates small undervaluation about 6 percent in 2013; staff assesses REER broadly consistent (centered on -5 percent, range 0 to -10 percent).
  - Reserves adequate; central bank committed to floating exchange rate and rules-based intervention only.
- Netherlands
  - NIIP estimated 53 percent of GDP in 2013; CA 10.4 percent of GDP in 2013.
  - Staff assesses REER below consistent level by 0–10 percent; CA gap in range 0-4 percent of GDP.
  - Policies: structural reforms, repair household balance sheets, and slower fiscal consolidation to rebalance externally.
- Poland
  - NIIP 69 percent of GDP in 2013; CA deficit 1.3 percent of GDP in 2013.
  - Reserves broadly adequate (about 126 percent of IMF composite metric).
  - Policy: modest fiscal consolidation, vigilance on bank funding, allow exchange rate cushioning role.
- Russia
  - NIIP about 8 percent of GDP in 2012; total external debt 33 percent of GDP in 2013.
  - 2013 CA cyclically adjusted 1.9 percent of GDP; staff assesses 2013 CA gap -3 to -1 percent of GDP.
  - REER assessed overvalued by 5-15 percent on average during 2013; reserves at end-2013 at 155 percent of IMF’s composite metric.
  - Policy: tighten fiscal policy, save more oil revenues, structural reforms, increased exchange rate flexibility.
- Saudi Arabia
  - Current account declined to 17.9 percent of GDP from 22.4 percent in 2012; projected CA surplus 7 percent of GDP in 2019.
  - International reserves about 96 percent of GDP (35 months of imports) at end-2013.
  - Assessment: reserves more than adequate; no immediate vulnerabilities; policy focus on narrowing non-oil fiscal deficit and prudent investment in infrastructure and education.
- Singapore
  - NIIP 191 percent of GDP at end-2013; official reserves 92 percent of GDP in 2013; CA surplus 18.3 percent of GDP in 2013.
  - Staff assesses CA stronger than consistent by 2 to 8 percent of GDP; REER around 4-16 percent weaker than warranted.
  - Reserves and large gross liabilities monitored; no case for further precautionary reserve accumulation.
- South Africa
  - Gross external debt increased to 39 percent of GDP from near 25 percent in 2009; CA deficit widened to 5.8 percent of GDP in 2013 (5.3 percent cyclically adjusted).
  - Staff: external position weaker than desirable; REER assessed overvalued by 5-20 percent for 2013.
  - Policy: implement National Development Plan, fiscal consolidation, labor/product market reforms, reserve accumulation as conditions allow.
- Spain
  - 2013 CA surplus 0.8 percent of GDP (cyclically-adjusted -0.6 percent); large negative NIIP and high gross external debt persist.
  - REER: staff assesses gap around 5 to 15 percent (overvalued).
  - Policy: fiscal consolidation, labor and product market reforms, supportive monetary easing.
- Sweden
  - CA 6.5 percent of GDP in 2013 (cyclically-adjusted about 7 percent); staff assesses CA gap -½ to 3½ percent of GDP.
  - REER assessment range -10 to +2 percent; policy: rebalance flows toward longer maturities and macroprudential measures.
- Switzerland
  - NIIP about 150 percent of GDP; staff assesses CA gap -3 to +3 percent of GDP.
  - REER moderately overvalued (staff range 0 to +10 percent); SNB policy guided by price stability and past floor removal considerations.
- Thailand
  - CA close to balance in 2013 (cyclically-adjusted about 0.1 percent); REER broadly consistent with fundamentals within -5 to +5 percent.
  - Reserves about 43 percent of GDP and 229 percent of IMF composite metric.
- Turkey
  - NIIP about -48 percent of GDP; 2013 CA deficit 7.9 percent of GDP, expected 6.3 percent in 2014.
  - Staff assesses 2013 REER 10-20 percent stronger than fundamentals; reserves coverage and net international reserves warrant accumulation.
  - Policy: tighter fiscal policy, structural reforms, preserve positive real interest rates, accumulate net international reserves.
- United Kingdom
  - NIIP improved to -2 percent of GDP in 2013; EBA CA gap around -2.6 percent of GDP.
  - Staff assesses 2013 REER 5–10 percent above level consistent with fundamentals.
  - Policy: rebalance toward private-sector demand, fiscal consolidation, structural reforms and public infrastructure investment.
- United States
  - NIIP declined to -27 percent of GDP in 2013; 2013 current account 2.3 percent of GDP.
  - CA deficit projected to widen to about 2¾ percent of GDP by 2019.
  - REER assessed broadly in line with fundamentals with range -5 percent to +10 percent.
  - Policy: medium-term fiscal consolidation targeting a general government primary surplus of about 1¼ percent of GDP; structural policies to raise productivity and labor force growth.

*Source: _062614a — IMF staff assessments and technical background notes as presented in the supplied content.*

### 2000. The REER depreciated by 14 percent from April

### _062614a - 2000. The REER depreciated by 14 percent from April

### Real Effective Exchange Rate (REER): movements and assessment
- REER movements:
  - "The REER depreciated by 14 percent from April 2013 to August 2013, but between August 2013 and April 2014 it appreciated by some 9 percent."
  - "As of April 2014, the REER had appreciated by about 1 percent compared to its 2013 average. 2/"
- 2013 valuation estimates:
  - EBA CA approach: "4 percent" overvalued.
  - EBA REER approach: "7 percent" overvalued.
  - NIIP-stabilizing approach: "21 percent" overvalued.
  - Staff assessment: "some 5-15 percent above the level implied by fundamentals and desirable policies."
- Additional methodological note:
  - "The estimated appreciation of the REER relative to both August 2013 and the 2013 average is calculated using revised CPI series of trading partners where applicable." (Technical Background Notes 2/)

### Capital and financial accounts: flows and policy measures
- Background facts:
  - "Brazil continues to attract sizable capital inflows, including net FDI flows of about 3 percent of GDP per annum."
  - "During 2013 strong portfolio inflows were largely offset by larger “other investment” outflows reflecting exporters’ receivables."
  - "Interest differentials and the projected economic recovery will continue to attract net inflows over the medium term."
  - "External debt remains low at 14 percent of GDP. 3/"
  - "CFMs introduced in previous years to moderate inflows and influence their composition were rolled back in 2013 as global liquidity tightened."
  - Technical note on external debt statistics: "Significant offshore issuances by non-resident subsidiaries (8 percent of GDP) are reflected in standard, residence-based external debt statistics when loaned back to the respective parent companies." (Technical Background Notes 3/)
- Assessment:
  - "The composition of flows has a favorable risk profile, but this can change quickly. Managing flows is likely to remain a challenge."

### FX intervention and reserves level
- Background facts:
  - "Brazil has a floating exchange rate."
  - "Central bank intervention has been geared at reducing volatility and managing capital inflows, which resulted in a large increase of international reserves during 2006 to mid-2011."
  - "Since mid-2011, reserves have remained broadly stable."
  - "Intervention in 2013 relied on the use of foreign exchange non-deliverable forwards and foreign exchange repos; these strategies leveraged reserves without selling them in the spot market. 4/"
  - "Since August 2013, discretionary interventions were replaced by pre-announced daily auctions."
  - Description of instruments (Technical Background Notes 4/):
    - Forex repo: "the Central Bank sells dollars with the commitment to repurchase them at a pre-determined future date. That is, the Central Bank retains a long dollar position following execution of the repo."
    - Non-deliverable forward: "the Central Bank enters into a contract whereby it agrees to pay the onshore dollar rate on a given notional value plus the variation in the exchange rate, and to receive the SELIC rate on the BRL equivalent (at the moment of initiation) of the given notional value. The net value of these payments is redeemed in local currency."
    - Operational implication: "Under this mechanism, the Central bank pays the holder if the BRL depreciates by more than the difference between the SELIC rate and the onshore dollar rate, and receives payment from the holder in the opposite case. This instrument provides hedging to agents with prospective hard currency needs."
- Assessment:
  - "The flexible exchange rate has been an important shock absorber."
  - "Reserves are above adequate levels relative to various criteria including the IMF’s composite reserve adequacy metric."
  - "Intervention can be appropriate if aimed at avoiding excessive FX volatility stemming from large or sudden changes in capital flows and/or demand for hedging, but should not be used to resist currency pressures that reflect changes in fundamentals."

### Technical background and contextual notes
- Savings and reserves context:
  - "Brazil’s domestic saving is low compared to other emerging economies." (Technical Background Notes 1/)
- Instrument and statistical clarifications:
  - See Technical Background Notes 2/, 3/, and 4/ for CPI revisions used in REER calculations, offshore issuance treatment in external debt statistics, and detailed mechanics of forex repos and non-deliverable forwards as used by the Central Bank.

*Source: _062614a - 2000. The REER depreciated by 14 percent from April (PDF chapter/section).*

### 2012. Offshore renminbi markets have de

### _062614a - 2012. Offshore renminbi markets have de

### Offshore renminbi markets and liberalization
- Offshore renminbi markets have developed rapidly.
- In Hong Kong SAR, renminbi deposits grew by 43 percent in 2013 to a total of RMB 860 billion (equivalent to 12 percent of total Hong Kong SAR deposits, or 0.8 percent of onshore renminbi deposits).
- Assessment:
  - Over the medium term, a well-sequenced loosening of capital controls that supports domestic financial liberalization would be appropriate.
  - The net impact of full liberalization is uncertain.
  - The interest rate differential and expectation of RMB appreciation could attract net inflows in the short run, which, however, could be offset by outflow reflecting domestic savers’ desire for portfolio diversification.

### FX intervention and reserves level (China)
- Background:
  - China continues to manage closely its exchange rate and conducts intervention on a regular basis, which has been asymmetric, closely controlling and smoothing the pace of appreciation.
  - The pace of reserve accumulation slowed significantly in 2012 but picked-up again in 2013 against the backdrop of large capital inflows induced by interest rate differentials, the relatively high real return of capital in China and expectations of continued RMB appreciation.
- Assessment:
  - Reserves are about 160 percent of the IMF’s composite metric; further accumulation is unnecessary from a reserve adequacy perspective.
  - Intervention should be reduced over time to support the move to a more flexible exchange rate regime.
- Technical note:
  - Based on staff estimated CA gap of 1-3 percent and elasticity of 0.25.
  - Taking into account outward controls on capital flows in China, the level of M2/GDP in China may not be indicative of capital that is at risk of an outflow. A lower weight on M2/GDP in calculating the Fund’s composite metric would suggest that China’s reserves are more than 160% of the adequate level. M2/GDP weight will become more important over time as China liberalizes its capital account.

### Euro Area — overall external assessment
- Background:
  - NIIP deteriorated through the crisis to -17 percent of GDP in 2008, but rebo unded to around -12 percent by end-2013.
  - Projected to continue improving at a moderate pace, rising to about 0 percent over the medium-term.
- Assessment:
  - External position of the euro area is broadly consistent with the level implied by medium-term fundamentals and desirable policies.
  - Imbalances remain at the national level, with low inflation, high unemployment, and persistent financial fragmentation.
- Potential policy responses:
  - Surplus and deficit member states need further adjustment to boost demand and make the recovery more sustainable.
  - Product and labor market reforms and relative price adjustments to replace lost output and move towards full employment.
  - Surplus economies should boost domestic demand and investment.
  - More monetary easing may be warranted to raise prospects of achieving the ECB’s price stability objective and support demand.

### Euro Area — current account and REER
- Current account:
  - Background: CA balance improved in 2013 to 2.3 percent of GDP.
  - Cyclically-adjusted CA is estimated to be a surplus of about 2.2 percent of GDP.
  - Assessment: 2013 cyclically-adjusted CA is broadly consistent with fundamentals, with a CA gap ranging from -0.5 to 1 percent of GDP.
- Real exchange rate:
  - Background: On an annual average basis, the euro strengthened by 5 percent in 2013 from its average level in 2012; by May 2014, the euro had appreciated about 2 percent relative to its 2013 average.
  - Assessment: 2013 euro area REER gap lies between -5 to 0 percent.

### Euro Area — capital and financial flows; reserves
- Capital and financial accounts:
  - Background: Rising CA surplus in 2013 mirrored by net financial outflows; financial account deficit largely driven by FDI and other investment outflows, mitigated by resumed portfolio inflows.
  - Assessment: Future return of capital flows depends on growth prospects, external conditions, and institutional reform including completion of EMU architecture.
- FX intervention and reserves:
  - Background: The euro has the status of a global reserve currency.
  - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating.

### France — key external metrics and assessments
- Background:
  - NIIP deteriorated to around -20 percent of GDP.
  - Gross asset position stood at 307 percent of GDP in 2012; gross liability position almost 330 percent of GDP in 2012.
  - Public external debt accounts for about one third of the gross liability position.
  - Current account deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of 1.3 percent in 2013; cyclically-adjusted deficit estimated at 1.4 percent of GDP.
- Assessment:
  - Net external position is negative but does not raise sustainability concerns; vulnerabilities from large exposures to Italy and Spain and external public debt.
  - Overall external position weaker than level consistent with fundamentals and desirable policies.
  - Staff assesses the 2013 current account to be 1 to 3 percent of GDP below its cyclically-adjusted norm; EBA model estimates cyclically-adjusted CA 1.8 percent of GDP weaker than consistent value.
  - REER: staff assesses the real exchange rate in 2013 to be 5 to 10 percent overvalued (considering labor cost evidence and EBA estimates).
- Potential policy responses:
  - Wage moderation (especially of the minimum wage), continued labor market reform, and productivity-enhancing reforms (increasing competition in product markets and regulatory simplification).
  - Gradual elimination of the fiscal deficit over the medium term.

### Germany — key external metrics and assessments
- Background:
  - NIIP reached 48 percent of GDP at end-2013.
  - Gross assets over 240 percent of GDP; gross liabilities just under 200 percent of GDP.
  - German firms and households have NIIP of 49 percent of GDP; general government has negative position of 35 percent of GDP.
  - Bundesbank net claims on the Eurosystem currently stand at 19 percent of GDP.
  - Current account surplus was 7½ percent of GDP in 2013; estimated cyclically adjusted surplus around 8¼ percent of GDP.
- Assessment:
  - Germany’s external position is substantially stronger than implied by fundamentals and desirable policies.
  - The cyclically-adjusted current account balance is 3–6 percentage points of GDP stronger than implied by fundamentals and policies.
  - Staff assesses the norm at 2¼–5¼ percent of GDP, acknowledging structural factors (EMU, rapid population aging).
  - REER: staff’s assessment is of a REER undervaluation of 5–15 percent.
- Potential policy responses:
  - Boost growth potential via higher public and private investment and service sector reform to raise domestic demand and lower the current account surplus.

### Hong Kong SAR — external assessment and policy stance
- Background:
  - NIIP around 260 percent of GDP as of Q3-2013.
  - External financial assets 1300 percent of GDP; liabilities 1076 percent of GDP.
  - NIIP projected to decline gradually to about 250 percent of GDP over the medium term.
  - CA surplus fell to a low of 2¾ percent of GDP in 2012; estimated around 3 percent of GDP in 2013; projected to rise to 5 percent of GDP in the medium-term.
  - REER appreciated by about 3.5 percent in 2013 relative to its 2012 average.
- Assessment:
  - External position broadly consistent with medium-term fundamentals and desirable policy settings.
  - CA: staff assesses no clear CA gap, but uncertainty suggests a wide gap range from -3 to +3 percent of GDP.
  - REER: assessed to be from -10 to 10 percent different from level consistent with fundamentals and desirable policies.
  - Capital flows: gross inflows and outflows over 100 percent of GDP; 2013 experienced net private outflows mainly from portfolio outflows; fully open capital account.
- FX intervention and reserves level:
  - Background: Currency board arrangement with reserves built up non-discretionarily; stock of reserves equivalent to around US$311 (about 114 percent of GDP) at end-2013.
  - Assessment: Reserves are adequate for precautionary purposes and should continue to evolve with the currency board’s automatic adjustment; Hong Kong SAR also holds significant fiscal reserves.

### India — external position and policy implications
- Background:
  - NIIP deteriorated to -17 percent of GDP in FY2012/13, from -12 percent in FY2010/11.
  - Gross foreign assets and liabilities at 26 and 43 percent of GDP, respectively.
  - Reserves at US$312 billion; reserves dipped during exchange market turmoil in mid-2013 but are back above May 2013 levels.
  - External debt about 23 percent of GDP.
- Assessment:
  - With CA deficits under 3 percent of GDP projected for the medium term, NIIP-to-GDP ratio will be broadly stable.
  - Low per capita income, favorable growth prospects, and development needs justify running CA deficits, but heavy reliance on debt financing and portfolio inflows would create vulnerabilities.
- Potential policy responses:
  - Sustainable fiscal consolidation to reach authorities’ fiscal deficit goal of 3 percent of GDP by FY2017/18, including passage of a goods and services tax and comprehensive subsidy reforms.
  - Easing domestic supply bottlenecks to contain the CA deficit.
  - Current reserve levels are adequate.
  - Flexible exchange rate policy with occasional smoothing by the Reserve Bank of India is appropriate.
  - Improve CA financing mix by enhancing FDI environment; further relaxation of limits on ECB should be cautious given corporate balance sheet risks.

*Source: IMF staff assessments and technical background notes as presented in the supplied content.*

### 1.7 percent of GDP in FY2013/14 as exports improved, and import

### _062614a - 1.7 percent of GDP in FY2013/14 as exports improved, and import

### India — Current account and external balance
- Recent developments:
  - CA deficit narrowed to about 1.7 percent of GDP in FY2013/14 as exports improved, and importantly higher import duties and quantitative restrictions discouraged gold imports.
  - Non-oil, non-gold imports declined with weaker domestic demand (due in part to ongoing fiscal consolidation).
- Staff projection:
  - The CA deficit is expected to stabilize at about 2½ percent of GDP over the medium term as domestic mining constraints ease, external demand improves, and the effects of depreciation are fully realized.
- Assessment and norms:
  - The EBA CA regression estimates a norm of -3.9 percent of GDP.
  - Staff judgment: a smaller deficit of about 2½ percent is a more appropriate norm given risks from global financial market volatility.
  - Estimated underlying CA in FY2013/14: -2.6 percent of GDP.
  - Staff assesses the CA gap to be in a range of -1 to +1 percent of GDP.

### India — Real exchange rate (REER)
- Background:
  - REER appreciated by about 10 percent over the last decade, reflecting large inflation differentials between India and its trade partners.
  - REER depreciated by about 13 percent in June-August 2013, before rebounding by about 8 percent through May 2014.
- Assessment:
  - The EBA regression approach estimates a slight gap of about +2 percent for the 2013 average REER.
  - As of May 2014, the REER was near that same level.
  - Staff assesses the REER gap to be in a range of -5 to +5 percent.

### India — Capital and financial accounts: flows and policy measures
- Background:
  - Financial account dominated by portfolio equity and FDI flows.
  - Composition of CA financing shifted toward more debt flows and away from FDI recently.
  - Increased debt flows include non-resident Indian (NRI) deposits, external commercial borrowings (ECB) by Indian corporates, and trade credits.
  - Net portfolio flows have been very volatile.
  - Restrictions on foreign investment in government and corporate fixed income rupee assets have limited bond market development and skewed inflows toward equity and ECBs (mostly syndicated loans).
- Assessment and policy measures taken:
  - Portfolio debt flows have been volatile and the exchange rate sensitive to these flows and changes in global risk aversion.
  - Authorities have taken multiple steps to bolster available external finance, including:
    - Liberalizing caps on FDI inflows;
    - Relaxing restrictions on ECB;
    - Offering FX swaps to banks to attract more NRI deposits and increase banks’ ability to borrow;
    - Working with the IFC in its US$1 billion bond program directed at offshore investors.

### India — FX intervention and reserves
- Background:
  - Evolution of the rupee consistent with a floating arrangement; central bank intervention limited in recent years.
  - Authorities intervened during “taper turmoil” in mid-2013 but halted intervention later in the year.
  - Reserve coverage fell, notably import cover (down from 10⅓ months of prospective goods and service imports in 2007/08 to just above 6 months in 2013/14), but remains at comfortable levels.
- Assessment:
  - Reserve levels are adequate for precautionary purposes.
  - International reserves stand at around 6¼ months of import cover, representing 150 percent of short-term debt and above 150 percent of the IMF’s composite metric.

### India — Technical background notes (selected)
- India’s NFA at -25 percent of GDP in 2012 is lower than NIIP, mainly due to differing valuation of portfolio equities.
- The EBA ES approach would give a CA norm of about -1½ percent of GDP for India.
- The estimated underlying CA here incorporates the EBA-estimated cyclical adjustment and also takes account of the temporary impact of the recently-implemented restrictions on gold imports.
- Staff report referenced: IMF (2014), India: Staff Report for 2014 Article IV Consultation, IMF Country Report No. 14/57.

### Indonesia — Overall assessment and external position
- End-2012 external position:
  - NIIP stood at -41 percent of GDP.
  - Reserves, net FDI and equities, and net debt and other liabilities at +13, -34, and -20 percent of GDP, respectively.
- End-2013:
  - Gross external debt-to-GDP ratio: 30 percent.
  - Short-term debt: 6 percent of GDP.
  - External debt increased by 2 percentage points of GDP in 2013 mainly due to exchange rate depreciation.
- Assessment:
  - The EBA external sustainability approach suggests a CA deficit of 2.6 percent of GDP would stabilize the NIIP at its current level.
  - Non-resident holdings of rupiah debt amount to 3 percent of GDP.
  - Overall assessment: The external position is moderately weaker than implied by medium-term fundamentals and desirable policies, but external financing appears sustainable with vulnerability to global financial market volatility.

### Indonesia — Policy recommendations (summarized)
- Monetary policy:
  - Remain focused on bringing inflation back within the target band and further narrowing the CA deficit.
- Fiscal policy:
  - Support monetary policy to promote external adjustment and contain borrowing costs by aiming for a small structural deficit, while phasing out energy subsidies.
- Exchange rate and markets:
  - Continued flexibility on the exchange rate and treasury bond yields to help adjust to shocks.
- Structural reforms:
  - Ease trade and investment restrictions, expand public infrastructure and domestic energy production, deepen financial markets and access, and improve the labor market.

### Indonesia — Current account
- Developments:
  - CA deficit rose to 3.3 percent of GDP in 2013 from 2.8 percent of GDP in 2012 despite negative import growth.
  - Main causes: a 10 percent decline in average commodity prices (affecting 45 percent of goods exports) and a 0.5 percent of GDP increase in the net oil and gas trade deficit.
- Projection:
  - With a sizable rupiah depreciation since mid 2013, monetary tightening, and moderate slowdown in growth expected in 2014, staff projects the deficit will fall slightly to 3.0 percent of GDP in 2014.
- Assessment and norms:
  - The EBA CA regression estimates a gap of around -2 percent of GDP in 2013 (based on a cyclically adjusted CA balance of -2.4 percent of GDP and a norm of -0.2 percent of GDP).
  - Staff believes a norm of -1½ percent of GDP (± 1 percent of GDP) more accurately reflects Indonesia’s significant investment needs.
  - This suggests a CA gap of -2 to 0 percent of GDP.

### Indonesia — Real exchange rate (REER)
- Background:
  - Average REER was 5 percent weaker in 2013 than the previous year after a sizable nominal effective depreciation in the second half of 2013.
  - As of May 2014, the REER was about 6 percent below its 2013 average despite a nominal appreciation in the first four months of 2014.
- Assessment:
  - The EBA REER regression approach estimates a gap of about 2 percent.
  - Using a CA gap estimate of -2 to 0 percent of GDP and standard elasticities, staff’s assessment is that the REER would be overvalued by 0 to 10 percent for 2013.
  - The recent depreciation of the REER should help close the gap but may be partially offset by falling commodity prices over the medium term and export restrictions on certain mineral ores implemented in January 2014.
  - Staff recommends continued exchange rate flexibility and structural reforms to strengthen competitiveness.

*Source: IMF staff assessments and data as presented in the provided content unit.*

### 9.5 percent of GDP, with the CA

### _062614a - 9.5 percent of GDP, with the CA

### Indonesia — external flows, reserves, and policy assessment
- Key figures and composition:
  - Financing requirement: 9.5 percent of GDP, with the CA deficit and amortization comprising 3.3 and 6.3 percent, respectively.
  - Financing met by FDI and new borrowing—equal to 2.1, and 7.5 percent of GDP, respectively.
  - Reserves as of May 2014: US$107 billion (equal to 150 percent of IMF’s reserve adequacy metric—assuming a floating exchange rate—and 6 months of imports of goods and services).
  - Swap lines equivalent to around US$65 billion.
- Policy and institutional features:
  - Indonesia ranks as more restrictive on capital controls than other countries in the sample.
  - Since mid 2013, Indonesia has shifted towards a more flexible exchange rate policy framework, with a floating regime.
- Assessments and risks:
  - Net and gross financial flows appear sustainable, but could dissipate or reverse in the event of domestic or external shocks.
  - Continued external deficits or disruptions to capital flows could cause reserves to decline significantly.
  - The government’s frontloading of foreign exchange and rupiah debt issuance in 2014 should provide a cushion.
  - Intervention should aim primarily at smoothing volatility, while allowing the exchange rate to adjust to external shocks.
- Policy implications:
  - More predictable policies and a better business climate would help sustain capital inflows in the medium term.

### Italy — external position, current account, REER, and vulnerabilities
- Net asset/liability position and debt composition:
  - NIIP deteriorated by 16 percent of GDP since joining the Euro area, with net liabilities of 29 percent of GDP (September 2013) compared with 13 percent at end 2000.
  - At 123 percent of GDP, Italy’s external debt is in line with the Euro area as a whole.
  - Composition: 40 percent of external debt is owed by the government.
  - Total gross external liabilities are about 152 percent of GDP (2012), of which external debt represents about fourth-fifths.
  - Technical note: The NFA position is about -34 percent of GDP in 2012 vs. NIIP about -28 percent of GDP in that year.
- Current account developments:
  - CA averaged a deficit of 2 percent of GDP over the past decade; moved into balance starting in 2012.
  - 2013 current account registered a surplus of 1 percent of GDP.
  - Trade surplus grew to more than 2 percent in 2013.
  - Factors: higher exports, subdued imports; declining investment accounted for about three-fourths of the improvement; increased public saving more than offset lower private saving.
  - EBA cyclically-adjusted CA level: very near balance (0.3 percent of GDP) in 2013.
  - Staff-assessed CA gap: -1.5 to 0 percent of GDP.
- Real effective exchange rate (REER):
  - Price-based indices suggest misalignment on the order of 0 to 10 percent; labor-based indicators show a wider gap.
  - EBA REER gap estimates: +3 percent (overvaluation, REER regression) to -1 percent (undervaluation, CA regression).
  - Staff view: a REER depreciation of 0-5 percent would support adjustment and address imbalances.
- Capital and financial accounts:
  - Portfolio and other-investment inflows typically finance the CA deficit and a modest net FDI outflow.
  - 2011-12: banks had difficulties raising funds in international markets, increased reliance on euro system refinancing; TARGET2 liabilities declined from late-2012 as conditions stabilized.
  - Foreign investment in portfolio debt securities turned positive in 2013, led by investment in government securities.
- Assessments and vulnerabilities:
  - Overall external sustainability is not a concern given current account shift into small surplus, but stronger balance sheet desirable.
  - Italy is vulnerable to financial contagion given large stock of government debt and large share held by non-residents.
  - Italy’s external position is broadly consistent but likely still weaker than suggested by medium-term fundamentals and desirable policy settings, reflecting weak productivity and competitiveness.
- Policy recommendations:
  - Implementation of structural reforms to improve competitiveness and boost potential growth.
  - Continued progress in medium-term fiscal consolidation to help close competitiveness gap and maintain investor confidence.

### Japan — NIIP, current account, REER, and policy gaps
- NIIP and income:
  - NIIP rose to over 60 percent of GDP in 2013 (from 35 percent ten years ago).
  - Projected to stabilize around 70 percent of GDP in the medium term.
  - Investment income: average 3 percent of GDP over the past five years.
- Current account:
  - 2013 CA surplus narrowed to 0.7 percent of GDP (0.8 percent cyclically-adjusted).
  - 2014 projection: CA projected to rise to 1.2 percent of GDP as exports recover and fiscal deficit declines.
  - Factors: sluggish export recovery despite yen depreciation; imports elevated due to temporary high demand for fossil fuels and greater import penetration.
  - Staff view: underlying cyclically-adjusted CA about 1-1 ¼ percentage point higher than estimated by the EBA CA regression model.
  - Staff CA norm estimate: 2 percent of GDP (just under 1 percentage point lower than the EBA estimate).
  - Staff assessment: underlying CA in line with fundamentals and desirable policies; EBA estimated gap: 2 percent.
  - Uncertainty: wide range of +/-1½ percent of GDP around a midpoint of zero.
- REER and exchange rate developments:
  - REER depreciated close to 20 percent between 2012 and 2013, and another 5 percent by May 2014 relative to 2013 average.
  - EBA REER regression model assesses 2013 average REER to be 14 percent weaker compared to level consistent with fundamentals and desirable policies.
  - Staff assessment: midpoint of zero with indicative ranges of -15 percent undervaluation to +15 percent overvaluation for 2013.
  - Large uncertainty due to factors not captured by model (speculative positions, temporarily higher energy imports, widening sovereign spreads).
- Capital flows and interventions:
  - Yen appreciation and depreciation since the global financial crisis not associated with notable capital in- or outflows; exchange rate movements driven by derivative positions.
  - Reserves: about 20 percent of GDP on legacy accumulation.
  - Staff assesses isolated FX interventions as aimed at reducing short-term volatility, with ambiguous effects on the level of the exchange rate.
- Policy implications:
  - Full implementation of fiscal and structural reform components of Abenomics needed to close policy gaps.
  - Fiscal consolidation would raise national savings above baseline, offsetting decline in private saving from aging and raising the CA surplus.
  - Ambitious structural reforms, including liberalizing trade, could boost productivity and imports.

### Korea — NIIP, current account strength, REER, and policy stance
- NIIP and returns:
  - NIIP increased from -7.5 percent of GDP in 2012 to -2.5 percent in 2013.
  - Net return declined to -3¾ percent in 2013.
  - Net external debt position: -14.2 percent of GDP in 2013.
- Current account:
  - CA surplus rose from 4.3 to 6.1 percent of GDP in 2013 (7 percent cyclically adjusted, compared to 4½ in 2012).
  - Based on CA norm estimate of 2 percent of GDP, EBA estimates a CA gap of 4.9 percent of GDP.
  - Staff assessment: 2013 CA balance about 2¾ to 4¾ percent of GDP above value suggested by fundamentals and desirable policies.
  - Half of CA gap explained by Korea’s social spending gap (1¼ percent of GDP) and fiscal policy gaps of other countries (0.7 percent).
- REER:
  - EBA REER regression estimates 2013 average REER undervalued by 8 percent—of which 3 percent is accounted for by identified policy gaps (notably social spending).
  - Staff assessment of CA gap implies REER gap of 11 to 19 percent; as of May 2014, REER appreciated by about 7 percent relative to 2013 average.
  - Assessment centered on an undervaluation of around 6 percent for May 2014 REER level.
- Capital flows and reserves:
  - 2013 portfolio capital inflows: 1½ percent of GDP.
  - 2013 overall net capital flow deficit: 4¾ percent of GDP (3 percent in 2012), driven by banks’ short-term external assets (2½ percent of GDP) and residents’ overseas portfolio investment (2¼ percent of GDP).
  - Reserves: around 130 percent of the IMF’s composite reserve adequacy metric.
  - BOK forward position increased by US$12 billion during 2013.
  - Authorities continued actual and verbal intervention during bouts of high appreciating pressures to stem one-way bets.
- Assessments and policy recommendations:
  - External position substantially stronger than implied by medium-term fundamentals and desirable policies.
  - Exchange rate should remain market determined; intervention limited to smoothing excessive volatility in both directions.
  - Macroprudential measures should continue to be targeted at mitigating financial stability concerns.
  - No precautionary need to increase reserves relative to IMF metrics.

### Malaysia — NIIP, gross liabilities, external debt composition, and medium-term outlook
- External position and debt:
  - NIIP was -2 percent of GDP at end 2012.
  - Gross liabilities (ringgit- and foreign-currency-denominated) about 132 percent of GDP at end 2012.
  - Foreign currency denominated external debt estimated at about 29 percent of GDP in 2013, of which about 18 percent is medium- and long-term debt.
- Assessment and medium-term trajectory:
  - NIIP is not a major source of risk; projected to rise in the medium term reflecting projected current account surpluses.
  - Overall assessment: the external position is stronger than that consistent with medium-term fundamentals and desirable policy settings.
- Policy implications and structural issues:
  - External rebalancing is substantial; medium-term forecast of CA surplus of 3-4 percent of GDP.
  - Remaining CA and REER gaps viewed as reflecting inadequate social protection (beyond public health expenditure), need to improve risk sharing of pension system, investment bottlenecks, infrastructure gaps, labor force skill mismatches, and labor market rigidities.
  - Stronger social safety nets and efforts to remove bottlenecks to investment would help moderate the current account surplus.
- Current account trend (partial sentence preserved from source):
  - Malaysia’s current account (CA) surplus has declined by almost 8 percentage points since 2011 to

*Italic: IMF source content from the provided chapter excerpt.*

### 3.8 percent of GDP in 2013. From a saving

### _062614a - 3.8 percent of GDP in 2013. From a saving

### Malaysia — Current Account and Saving-Investment Dynamics
- The current account (CA) was 3.8 percent of GDP in 2013.
- From a saving-investment perspective, about two thirds of the CA adjustment was due to a strong surge in private investment and ETP-related investment projects.
- EBA CA regression approach: the cyclically-adjusted CA is stronger (by about 4.5 percent of GDP) than consistent with medium-term fundamentals and desirable policies.
  - That estimated gap comprises net policy gap contributions of 1.8 percent of GDP and a residual requiring interpretation.
- Staff assessment: taking model uncertainty and Malaysia-specific factors into account, the CA gap is assessed to be 1½ to 3½ percent of GDP in 2013.
- Factors affecting interpretation:
  - Insufficient social safety nets (not fully captured by public health spending) which drive up saving rates.
  - Bottlenecks to investment resulting in relatively low private investment.
  - Difficulty separating slow-moving structural factors from controllable policy variables.

### Malaysia — Real Exchange Rate (REER)
- Background: Over the past year, the REER fluctuated more widely than in 2010−2012; the ringgit depreciated during the capital outflow episode around mid-2013 but the nominal and real depreciation was short-lived; overall REER moved around a fairly horizontal trend.
- EBA REER regression: estimates REER to be 22 percent below levels warranted by fundamentals and desirable policies, though most of the gap is an unexplained residual.
- Staff preferred view:
  - Based on the CA gap and the semi-elasticity of the current account with respect to the REER (estimated at 0.29) and taking into account Malaysia’s trade openness and commodity exports, staff’s preferred estimation of the REER undervaluation is less than 10 percent.
  - Staff assesses the REER in 2013 to be undervalued by about 5 to 10 percent.

### Malaysia — Capital and Financial Accounts; FX Intervention and Reserves
- Capital flows in 2013:
  - Malaysia typically records net capital outflows.
  - In 2013, net outflows were about 1.5 percent of GDP:
    - portfolio outflows accounted for 1.1 percent of GDP,
    - other outflows accounted for 0.4 percent of GDP.
- Policy measures: authorities continued to liberalize FX administration, including greater flexibility for resident companies to undertake FDI abroad and obtain loans from related resident and nonresident companies.
- FX intervention and reserves:
  - Malaysia maintains a flexible exchange rate regime; BNM intervention seeks to limit excess volatility and generally has been two-sided.
  - At end-2013, official reserves were about 117 percent of the IMF’s composite reserve adequacy metric, and about 240 percent and 32 percent of short-term external debt and broad money, respectively.
  - Assessment: reserves are adequate and there is no need for additional accumulation for precautionary purposes.

### Malaysia — Technical Background Notes (selected figures)
- Gross assets are 130 percent of GDP, of which about one-third are direct investment assets.
- Ringgit-denominated debt held by nonresidents was about 23 percent of GDP at end 2013.
- The non-oil current account deficit widened from -0.6 percent in 2012 to -2.4 percent in 2013.
- Since 2000, movements in the REER have been driven almost entirely by the nominal exchange rate rather than inflation differentials.
- During the global financial crisis foreign reserves fell by about 28 percent between August 2008 and March 2009; in June 2013, reserves fell by in US$5 billion suggesting intervention.

---

### Mexico — Overall External Position and Medium-Term Outlook
- NIIP is about -40 percent of GDP (gross foreign assets and liabilities are roughly 40 percent and 80 percent of GDP, respectively).
- Foreign-held portfolio liabilities (particularly of peso government bonds) are about 38 percent of GDP.
- With projected current account deficits averaging less than 2 percent of GDP, the NIIP to GDP ratio is projected to remain broadly stable over the medium term.
- Assessment: while the NIIP is sustainable, gross foreign portfolio liabilities could be a channel of vulnerability to global financial volatility, especially through the domestic sovereign bond market.
- Overall staff assessment: Mexico’s external sector position is broadly consistent with medium-term fundamentals and desirable policy settings.
- Policy commitments noted:
  - Authorities committed to reducing the public sector borrowing requirement from 4.1 percent of GDP in 2014 to 2.5 percent of GDP in 2017, which will require expenditure restraint.
  - Central bank to set monetary policy to ensure inflation converges towards the 3 percent permanent target while maintaining a flexible exchange rate policy.

### Mexico — Current Account and REER
- Current account:
  - CA deficit widened to 2.1 percent of GDP in 2013 (-1.7 percent cyclically adjusted), amid larger net factor payments.
  - The deficit is projected to rise to about 2 percent of GDP, on the back of imports associated with increased FDI in the energy and telecom sectors.
  - Investment is projected to rise by almost 2 percentage points of GDP over the medium term, supported by an increase in public and private saving.
  - EBA model: cyclically-adjusted current account norm of -1.9 percent, implying a positive CA gap of +0.2 percent of GDP (including the upward influence on the CA of fiscal policies of other countries).
  - Staff assessment: similar, within a gap range centered on that estimate plus or minus 1 percent of GDP.
- REER:
  - EBA REER regression estimates a small undervaluation of about 6 percent in 2013.
  - Staff assesses Mexico’s REER to be broadly consistent with fundamentals and desirable policy settings (slightly undervalued with a gap centered on -5 percent, in a range of 0 to -10 percent).

### Mexico — Capital Flows, FX Intervention, and Reserves
- Capital flows:
  - Large gross capital inflows by non-residents post-global crisis were broadly offset by large purchases of assets abroad by residents.
  - Net capital inflows are expected to continue to be in excess of the external current account deficit; since 2010, a large share of these flows have been purchases of government paper and other portfolio investments by non-residents.
  - Structural reforms could raise overall inflows and FDI going forward.
- Assessment: local currency denomination and long duration of sovereign debt reduce exposure to depreciation, but the large presence of foreign investors leaves Mexico exposed to a reversal of capital flows and a sustained increase in risk premia.
- Policy stance: authorities have refrained from capital flow management measures to preserve an open capital account.
- FX intervention and reserves:
  - Central bank committed to a floating exchange rate, using rules-based intervention only to prevent disorderly conditions; no discretionary FX intervention in 2013.
  - Reserves are adequate for normal times according to a range of standard reserve coverage indicators, and fall in the lower end of the 100-150 percent range of the IMF’s composite adequacy metric.
  - Current policy of reserve accumulation is broadly consistent with the expected gradual rise in foreign-held portfolio liabilities.
  - The Fund FCL arrangement complements international reserves against global tail risks.

### Mexico — Technical Background Notes (selected figures)
- Following the tapering announcement by Ben Bernanke on May 21, 2013, Mexico’s currency experienced one of the sharpest depreciations across emerging markets, falling by nearly 8.4 percent by end-June 2013.
- By the end of April 2014 it had depreciated 6 percent with respect to May 21, 2013—significantly less than for other emerging market countries.

---

### The Netherlands — External Position Highlights
- NIIP turned positive in 2008 and is estimated to have reached 53 percent of GDP in 2013.
- Direct investment net assets are 48 percent of GDP; portfolio investments are a net liability of approximately 4 percent of GDP.
- Foreign assets amount to 495 percent of GDP, liabilities 442 percent of GDP.
- Current account has been in surplus since 1981, reaching 10.4 percent of GDP in 2013.
- Assessment: external position is stronger than levels consistent with medium-term fundamentals and desirable policy settings, but subject to large uncertainty because of the Netherlands’ role as a trade conduit and financial center.
- Potential policy responses:
  - Structural reforms to raise productivity of smaller domestic firms.
  - Repair household balance sheets and strengthen the banking system to support domestic demand.
  - A slower pace of fiscal consolidation and shift towards more productive investment to help rebalance externally.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_062614a.pdf*

### 2013. The current account

### 2013. The current account

### The Netherlands — Current account and external position
- Background
  - Surpluses are explained in large part by savings of the corporate sector and institutional pension held by households and reflect Netherland’s status as a trade and financial center and natural gas exporter.
  - Large corporate savings have been used to finance substantial FDI outflows by global firms in the Netherlands.
  - The rise in household savings since 2008 also reflects deleveraging in response to the sharp declines in housing prices.
- Assessment (current account)
  - The EBA model results: cyclically-adjusted current account surplus estimated at 9.3 percent of GDP; current account norm estimated at 5.1 percent of GDP.
  - Country-specific factors likely reduce the current account gap:
    - (i) fully funded pension system which has increased household saving rates;
    - (ii) household deleveraging following a real estate collapse has kept saving rates high;
    - (iii) statistical issues related to the income measurement of large FDI flows.
  - Staff assessment of the current account gap: in the range of 0-4 percent of GDP.
  - Technical note: The larger external balance sheet, presence of large international corporations, and issues related to the measurement of the current account add uncertainty to this assessment.
- Real exchange rate
  - Background: After depreciating during 2008–12, both the ULC and CPI based REERs appreciated somewhat in 2013 and are now slightly above their historical averages.
  - Assessment:
    - The EBA REER model estimates a gap of -1 percent.
    - Translation of the EBA CA regression estimate to REER terms yields a gap of -7 percent.
    - Considering the staff’s CA assessment and trade elasticities for monetary union members/high-trade economies, staff assesses the real exchange rate is below the level consistent with fundamentals and desirable policy settings by 0–10 percent.
- Capital and financial accounts
  - Background: Net FDI and portfolio outflows dominate the financial account. FDI outflows are driven by the investment of corporate profits abroad. On average, gross FDI outflows largely match corporate profits.
  - Assessment: The strong external position limits vulnerabilities from capital flows. The financial account is likely to remain in deficit as long as the corporate sector continues to invest substantially abroad.
- FX intervention and reserves level
  - Background: The euro has the status of a global reserve currency.
  - Assessment: Reserves held by the Euro area are typically low relative to standard metrics, but the currency is free floating.

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### Poland — External position, current account, and policy
- Foreign asset and liability position and trajectory
  - Background:
    - NIIP stood at 69 percent of GDP in 2013 (gross assets were 42 percent of GDP and gross liabilities were 111 percent of GDP).
    - Amid projections for a moderate widening of the CA deficit, financed largely by EU transfers, the NIIP is projected to decline to around 50 percent of GDP by 2019.
  - Assessment: Vulnerabilities exist, but sustainability concerns are mitigated by:
    - well-diversified FDI liabilities and associated intra-company lending (over 40 percent of foreign liabilities are FDI investments);
    - projected decline in the NIIP under the baseline;
    - broadly adequate reserves and the Flexible Credit Line (FCL) arrangement.
- Overall assessment
  - The external position is broadly consistent with medium-term fundamentals and desirable policies.
  - These policies include continued modest fiscal consolidation. Reserves are broadly adequate. The FCL arrangement provides an added buffer.
- Potential policy responses
  - Continue modest fiscal consolidation in Poland and in the rest of the world.
  - Vigilance with respect to bank funding (including foreign exchange swaps) and readiness to extend FX liquidity in the event of external shocks.
  - Modest additional reserve accumulation would be appropriate to further bolster buffers.
  - Allow the exchange rate to play its appropriate cushioning role.
- Current account
  - Background: CA deficit declined from around 5 percent of GDP in 2010-11 to 1.3 percent of GDP in 2013. The moderate CA deficit in 2013 largely reflects income repatriation by multinational companies’ domestic affiliates and a trade surplus of 1.9 percent of GDP.
  - Assessment:
    - EBA CA regression approach estimates a gap of around 0.4 percent of GDP.
    - The cyclically-adjusted CA and CA norm are both estimated at about -1 percent of GDP.
    - Staff assessment: CA gap range centered on 0 within a range of plus or minus 1 percent of GDP.
- Real exchange rate
  - Background: The average REER appreciated modestly in 2013 relative to its average level in 2012.
  - Assessment:
    - EBA approaches suggest a modest undervaluation of between 0 and 8 percent:
      - no estimated undervaluation using the current account norm;
      - estimated undervaluation using the ES estimate is 8 percent;
      - estimated undervaluation using the REER regression approach is 5 percent.
    - Staff assesses Poland’s REER in 2013 to be broadly consistent with fundamentals and desirable policy settings, with a REER gap range of -5 to +5.
- Capital and financial accounts
  - Background: In recent years, inflows centered on portfolio flows (notably government bonds), as net FDI inflows slowed and other investment outflows occurred (notably external deposits to the banking sector). Poland experienced portfolio outflows in 2013. The capital account is dominated by EU structural fund inflows. Portfolio inflows recovered in early 2014.
  - Assessment: Historically high foreign holdings of government bonds suggest potential vulnerability. Pension modifications that increase the share of foreign investors in the domestic government bond market may exacerbate vulnerabilities.
- FX intervention and reserves level
  - Background: Reserves increased from 93 billion in 2010 (77 percent of ST debt plus the current account deficit) to 106 billion in 2013 (90 percent of ST debt plus the current account deficit). The zloty has floated freely.
  - Assessment:
    - Reserves are broadly adequate, standing at about 126 percent of the IMF’s composite reserve adequacy metric and are at 100 percent of short-term debt at remaining maturities (and at 90 percent plus the current account).
    - Modest additional reserve accumulation would be appropriate to further bolster buffers.
    - The FCL arrangement with the Fund provides insurance against external risks.
  - Technical background note: Poland has a total current account gap of 0.4 percent. Domestic fiscal policy gap is -0.8, but its impact is offset by fiscal gaps in trading partners, resulting in a total contribution of -0.1 of fiscal policies on the current account gap.

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### Russia — External position, current account, and policy recommendations
- Foreign asset and liability position and trajectory
  - Background:
    - NIIP was modestly positive in 2012 at about 8 percent GDP; gross assets of 69 percent GDP and liabilities of 61 percent GDP.
    - NIIP has declined from about 15 percent GDP in 2008.
    - A significant proportion of gross liabilities consists of FDI and equities (57 percent in 2012).
    - Total external debt increased from 32 percent of GDP in 2012 to 33 percent in 2013.
  - Assessment: Projected modest CA surpluses suggest the positive NIIP position will not change greatly over the medium term. Intergenerational equity concerns and signs of Dutch disease suggest a higher portion of oil income should be saved to produce a stronger NIIP.
- Overall assessment
  - The external position in 2013 was weaker than the level consistent with medium-term fundamentals and desirable policy settings.
  - Lasting improvement in the current account would require sustained consolidation on the fiscal policy front and structural reforms.
- Potential policy responses
  - The nonoil fiscal deficit remains significantly higher than its long-term desirable level amid high oil prices and strong oil revenues.
  - Greater saving of oil revenues and/or re-allocation of government current expenditure into capital spending would help address the worsening in the current account and signs of Dutch disease.
  - Structural reforms to improve the business climate and increased flexibility of the exchange rate should help maintain appropriate external balances.
- Current account
  - Background:
    - From 2000 to 2013, the CA surplus fell from 18 to 1.6 percent of GDP despite increasing oil prices.
    - Non-oil exports declined by 12 percent of GDP as the non-oil fiscal balance worsened by 9 percent of GDP.
    - An increase in domestic investment drove about a third of the CA deterioration (evenly split between private and public).
  - Assessment:
    - EBA-estimated 2013 CA norm was 5.2 percent of GDP; cyclically adjusted CA was 1.9 percent.
    - Staff assessment: 2013 CA gap was -3 to -1 percent of GDP.
    - Change from previous ESR reflects a decline in the CA in 2013, in part driven by further deviation of the non-oil fiscal balance from the estimated sustainable level of 5 percent of GDP.
    - In the medium term, fiscal policy should be tightened to rebuild buffers, save more of the oil wealth for future generations, and counter Dutch disease.
    - The current account in 2014 is projected to improve on the back of recent real depreciation and projected contraction in domestic demand.
- Real exchange rate
  - Background: Sustained oil price boom and related expansion of domestic demand led to strong REER appreciation between 2000 and 2013. REER depreciated in the second half of 2013 and early 2014 due to global financial turbulence and geopolitical tensions.
  - Assessment:
    - EBA estimates: average REER in 2013 was 15 percent overvalued based on the CA regression approach and 5 percent undervalued based on the REER regression approach.
    - The REER regression approach is less reliable in countries with large structural changes and short data spans and is discarded from the staff assessment.
    - Staff assesses the REER was overvalued by 5-15 percent on average during 2013.
    - Considering subsequent REER depreciation in early 2014 (as of May, about 4 percent relative to the 2013 average), the REER gap has narrowed to a range of 1 to 11 percent.
- Capital and financial accounts
  - Background: Net private capital outflows continued in 2013 at about 3 percent of GDP (including net errors and omissions), driven by the non-bank sector. Outflows are expected to increase due to geopolitical tensions and the Fed tapering. Over the medium term, structural outflows are expected to decline if Russia improves its investment climate and oil prices moderate.
  - Assessment: Russia is exposed to risks of accelerated capital outflows and sudden stops of external funding, but the gradual move to a flexible exchange rate and large international reserves provide substantial buffers.
- FX intervention and reserves level
  - Background: The CBR has gradually widened and moved the intervention band since October 2013, increasing ruble flexibility. Following turmoil in Ukraine and ruble depreciation, the CBR temporarily reverted to discretion and increased FX interventions.
  - Assessment:
    - At end-2013, reserves stood at 155 percent of the IMF’s composite adequacy metric.
    - Reserve assets are adequate, but accumulation of fiscal savings in the oil funds should continue as long as oil prices are high.
    - Over time it would be appropriate to invest oil reserve fund assets in less liquid and higher-yielding instruments, limiting the costs of reserve holdings.
    - FX interventions should be limited to episodes of market distress. The move to increased ruble flexibility should continue.
  - Technical notes:
    - Unfavorable valuation changes arise because the Russian stock market has performed very well in the last 15 years as the oil price soared, boosting the valuation of foreign-owned assets.
    - “Disguised” capital outflows include pre-payments on import contracts where goods are not delivered, repeated large transfers abroad that deviate from standard remittances behavior, or securities transactions at inflated prices. The CBR includes estimates of “disguised” capital outflows in the financial account but not in the foreign asset position of the reported NIIP, which may explain part of the discrepancy between accumulated CA surpluses and the reported NIIP position.
    - The EBA estimated CA norm of 5.2 percent of GDP rests mostly on the need to save out of income from non-renewable oil exports. Staff acknowledges saving could take the form of productive investment spending, possibly justifying a somewhat lower CA surplus than the EBA-estimated norm.

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### Saudi Arabia — External position and policy guidance
- Foreign asset and liability position and trajectory
  - Background:
    - External assets are substantial at an estimated 130 percent of GDP at end-2012, with the public sector’s assets dominated by international reserves.
    - Total external liabilities amounted to 34 percent of GDP at end-2012 (portfolio and other investments were 7 percent of GDP).
    - All external debt is private. The NIIP stood between 90 and 100 percent of GDP during 2007-2012.
    - The average return on assets was about 3 percent compared to 6 percent on liabilities during the period.
    - Details on composition of external assets are not available; they are likely mostly invested in government securities.
    - Projections for the current account and GDP growth suggest the ratio of the NIIP to GDP will rise substantially over the medium term.
  - Assessment: There are no immediate vulnerabilities.
- Overall assessment
  - The external position is broadly consistent with medium-term fundamentals.
  - Alternative empirical models yield different conclusions but do not point to a systematic misalignment with medium-term fundamentals on balance.
  - The macroeconomic balance approach and equilibrium exchange rate assessment suggest CA and REER are broadly in line with fundamentals, while the external sustainability approach signals the current account surplus in the medium term may be too low.
  - Higher oil prices and volumes have pushed the current account surplus higher in recent years. In the absence of further negative supply shocks and with projected trend decline in oil prices, the current account is projected to decline over the medium term.
- Potential policy responses
  - The non-oil fiscal deficit remains significantly above the level implied by intergenerational equity models; narrowing the gap with the sustainable primary non-oil balance estimated from an intergenerational equity perspective is important.
  - Increased government investment in infrastructure and education is appropriate, but ensure composition of spending does not generate permanent increases in entitlements that would be difficult to reverse given heavy dependence on oil revenues.
  - (The source text ends mid-sentence on the current account in 2013 for Saudi Arabia.)

*Source: _062614a - 2013. The current account*

### 17.9 percent of GDP from 22.4 percent in 2012.

### _062614a - 17.9 percent of GDP from 22.4 percent in 2012.

### Saudi Arabia — Current Account and External Position
- Key recent change:
  - Current account share: "17.9 percent of GDP from 22.4 percent in 2012."
  - Drivers: lower oil revenue, weaker demand for petrochemical products, and increased remittance outflows.
- Non-oil exports:
  - Share of Saudi non-oil exports in global non-oil exports: "only around 1/3 of 1 percent."
- Medium-term outlook:
  - Oil prices anticipated to decline over the medium term.
  - Oil export volumes expected to fall slightly as output in other producers increases faster than global demand.
  - Projected CA surplus: "7 percent of GDP in 2019."
- Long-term determinants of the CA:
  - (i) Development strategy: balance between saving oil revenues overseas versus domestic investment (public and private).
  - (ii) Pace of oil extraction: Saudi Arabia’s role in balancing global oil supply and demand.
- Assessment of CA norms:
  - Estimated CA norms range: "3-13 percent of GDP."
  - With oil prices projected to decline, the surplus will fall further, "to within this range in the next few years."

### Saudi Arabia — Real Exchange Rate (REER)
- Background:
  - REER mainly influenced by oil price dynamics and the US nominal exchange rate vis-à-vis trade partners.
  - World oil prices have little direct impact on domestic fuel prices (adjusted very infrequently); oil prices affect domestic prices through government (and therefore consumer) spending.
- Assessment:
  - Models linking the REER to the real price of oil suggest the rate "is broadly in line with fundamentals."

### Saudi Arabia — Capital and Financial Accounts
- Background:
  - Inflows dominated by FDI; outflows largely trade credits and 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 under consideration: removing some barriers to portfolio inflows, particularly allowing increased foreign investment in the equity market.
- Assessment:
  - "There are no immediate risks or vulnerabilities associated with capital flows."

### Saudi Arabia — FX Intervention and Reserves
- Background:
  - Fixed exchange rate to the US dollar without realignment since 1986.
  - Saudi Arabia "does not have a Sovereign Wealth Fund." Government foreign assets are held at the central bank within international reserves.
  - International reserves increased to "about 96 percent of GDP (35 months of imports) at end-2013."
  - This reflects the dual role of reserves—for precautionary motives and as savings for future generations.
- Assessment:
  - Reserve assets are "more than adequate for precautionary purposes (measured by the Fund’s metrics)."
  - Current account surpluses and the resulting NIIP accumulation are "below what would be needed to ensure an equitable intergenerational transfer of oil revenues."

### Saudi Arabia — Technical Background Notes (selected)
- EBA methodology assessments are not available for Saudi Arabia; models used are tailored to large oil exporters.
- Preliminary data for 2013: improved coverage of other investment flows led to a sizable increase in estimated financial outflows; errors and omissions averaged "7.4 percent of GDP during 2005-12," reduced to "less than 1 percent of GDP."

*Source: _062614a - 17.9 percent of GDP from 22.4 percent in 2012.*

### Singapore — Overall External Assessment
- NIIP and reserves:
  - NIIP stood at "191 percent of GDP at end-2013," up "44 percentage points from 2008" but lower than the pre-GFC peak of "217 percent of GDP in 2006."
  - Official reserves: "92 percent of GDP in 2013."
  - Gross non-FDI liabilities: "468 percent of GDP in 2013."
- Assessment:
  - "The external balance is not a major source of risk."
  - Potential vulnerabilities from large and mainly short-term gross non-FDI liabilities are mitigated by banks’ large short-term external assets and authorities’ monitoring.
- Overall IMF assessment:
  - "The external position is substantially stronger than what is consistent with medium-term fundamentals and desirable policies."
  - Staff assesses the CA is stronger than consistent level "by 2 to 8 percent of GDP."

### Singapore — Current Account and REER
- Current account:
  - CA surplus: "18.3 percent of GDP in 2013."
  - Drivers: strong goods balance, remittance outflows, negative income balance, structural factors and policies boosting private and public saving rates, precautionary saving motives, rapid aging, greater income inequality, wealthier households’ higher propensity to save.
- REER:
  - "25½ percent appreciation of the real effective exchange rate (REER) since 2005—some 8 percentage points of which has occurred since end 2011."
  - Assessment: REER is "around 4-16 percent weaker than warranted by medium-term fundamentals and desirable policies." Estimate based on CA assessment and semi-elasticity of CA with respect to REER of about "0.5."

### Singapore — Capital Accounts and Reserves
- Background:
  - Fully open capital account.
  - Financial account deficit tends to co-move with the global financial cycle.
  - Financial flows include reinvestment abroad of income from foreign assets of the official sector, sizable net inward FDI, and volatile net bank-related flows.
- Assessment:
  - Financial account likely to remain in deficit as long as income from NFA is reinvested abroad.
  - At end-2013, official reserves covered "about 27 percent of short-term external debt."
  - Reserves are far in excess of thresholds for other adequacy metrics; current levels "appear adequate and there is no clear case for further reserve accumulation for precautionary purposes."

### Singapore — Technical Background Notes (selected)
- The EBA framework requires adjustments for Singapore due to non-standard factors (large NFA, per capita income, fiscal balance, aging speed).
- EBA-estimated CA gap: "about 3 percent of GDP (relative to a cyclically-adjusted level of the CA of about 20 percent of GDP in 2013)." Of that, "two percentage points of GDP is identified as policy gaps" and "the remaining 1 percentage point of GDP is the residual."

*Source: _062614a - 17.9 percent of GDP from 22.4 percent in 2012.*

### South Africa — Overall Assessment and External Position
- External debt and composition:
  - Gross external debt increased to "39 percent of GDP from near 25 percent in 2009."
  - Short-term external debt: "10 percent of GDP."
  - About "55 percent of external debt is denominated in rand."
- Vulnerabilities:
  - Net IIP position: "-8 percent of GDP in 2012" (not a major source of risk because it improves with depreciation).
  - Gross liabilities: "106 percent of GDP" and are large.
  - IIP position expected to deteriorate given projected large CA deficit.
  - A sudden stop of portfolio inflows remains an important source of vulnerability.
- Overall IMF assessment:
  - "The external position is weaker than implied by desirable policy settings and medium-term fundamentals."
  - CA deficit remains elevated and mainly financed by debt-creating flows.
  - Gross external financing requirements are relatively high and vulnerabilities are elevated.
  - A slowdown of capital inflows could complicate financing of the CA deficit and could induce a significant growth slowdown if severe.

### South Africa — Policy Responses and Current Account
- Potential policy responses:
  - Implementation of the authorities’ National Development Plan to help improve competitiveness over the medium term.
  - Additional labor and product market reforms to increase competition and align domestic costs with productivity growth.
  - Planned fiscal consolidation and monetary tightening expected to alleviate external vulnerabilities.
  - As financing conditions allow, building up reserves would strengthen ability to deal with FX liquidity shocks.
  - Increasing household saving requires faster household income growth through much faster employment growth, which in turn requires structural reforms.
- Current account:
  - CA deficit widened to "5.8 percent of GDP in 2013 (5.3 percent of GDP cyclically adjusted)."

*Source: _062614a - 17.9 percent of GDP from 22.4 percent in 2012.*

### 5.2 percent in 2012, on the back of resilient imports and softer terms of trade. Export and import volumes have started 

### _062614a - 5.2 percent in 2012, on the back of resilient imports and softer terms of trade. Export and import volumes have started

### South Africa — External position, REER, and reserves
- Current account (CA) dynamics and outlook:
  - CA norm (EBA) of -2.3 percent of GDP and a gap of -3.0 percent of GDP for 2013.
  - Staff assesses the CA to be 1½ to 3½ percentage points weaker than implied by medium-term fundamentals and desirable policy settings.
  - Low saving coupled with robust public infrastructure investment is expected to keep the CA deficit elevated over the medium term.
- Real exchange rate (REER) and competitiveness:
  - Since end-2010, the CPI-based REER has depreciated 26 percent, ending 2013 15 percent below its 10 year average.
  - By May 2014, the REER had further depreciated by 4 percent relative to its 2013 average level.
  - ULC-based measures are near 10-year averages.
  - Considering the CA gap, staff assesses the 2013 REER as overvalued by 5-20 percent.
  - Trade-flow sensitivity to exchange rate appears lower than implied by long-run elasticities; large structural changes since 1994 and high REER volatility make precise valuation difficult.
- Capital and financial accounts:
  - FDI is lower than in most peers; portfolio and other investment flows (foreign purchases of local currency government bonds) financed most of the CA deficit up to 2012.
  - In the last year reported, net portfolio flows declined to 0.1 percent of GDP while other investment and unrecorded transactions financed the bulk of the CA deficit.
  - Risks from reliance on non-FDI flows and nonresident holdings are significant but mitigated by: floating exchange rate, inflows into long-term local currency bonds, large share of index-tracking investors, and large domestic institutional investor base.
  - A sharp slowdown or sudden stop of capital inflows could prompt a disorderly adjustment.
- FX intervention and reserves:
  - Exchange rate regime among the most flexible in EMs; intervention is rare.
  - Reserves cover 5 months of imports (80 percent of gross external financing needs) and are expected to remain slightly below the lower bound of the IMF’s composite adequacy metric.
  - Gold reserves account for about 10 percent of reserves.
  - Assessment: As financing conditions allow, reserve accumulation is desirable.

### Spain — External position, policies, and REER
- External position and vulnerabilities:
  - NIIP liabilities dropped from -34 percent of GDP in 2000 to -97 percent of GDP in 2009.
  - High gross external debt stabilized around 165 percent of GDP since 2010.
  - Large negative NIIP and large gross financing needs from external debt are major sources of external vulnerability.
  - Overall: external position substantially weaker than consistent with fundamentals and desirable policy settings.
- Current account:
  - CA moved into a 0.8 percent of GDP surplus in 2013 (or -0.6 percent of GDP cyclically adjusted), after a 1.1 percent deficit in 2012 and a peak deficit in 2007 of 10 percent of GDP.
  - Staff gauges the 2013 cyclically-adjusted CA to have been 1-3 percent of GDP weaker than desirable.
  - Staff projects the CA surplus will rise by about this amount over the medium term and need to be maintained for many years to restore the NIIP.
- Real exchange rate:
  - By 2013, the CPI-based REER had declined by 3 percent from its 2008 peak.
  - ULC-based REER shows appreciation has been substantially reversed since euro entry due to labor shedding.
  - EBA REER regression estimates an overvaluation of 14 percent for 2013 (CPI-based); staff assesses a gap of around 5 to 15 percent.
  - Achieving significantly lower unemployment would likely imply a larger required REER adjustment.
- Policy responses:
  - Authorities’ reforms to deliver gradual fiscal consolidation, improve active labor market policies, and advance product market reforms are in line with reducing imbalances.
  - Further labor market reforms and accelerated product market reforms would speed adjustment.
  - More monetary easing at the euro area level would support Spain’s adjustment efforts.

### Sweden — Current account, REER, and macro-financial considerations
- NIIP and external structure:
  - Net IIP about -13 percent of GDP in 2013, roughly unchanged from recent years’ average.
  - Gross assets about 263 percent of GDP and gross liabilities about 276 percent of GDP in 2013; about one-third of liabilities are external debt liabilities (about 95 percent of GDP).
  - Overall: Sweden’s external position is moderately stronger than consistent with fundamentals and desirable policies.
- Current account:
  - CA estimated at 6.5 percent of GDP in 2013 (cyclically adjusted about 7 percent), down from peak over 9 percent in 2007.
  - Expected to moderately decline in the medium term.
  - Staff assesses Sweden’s adjusted CA norm around 2 to 6 percent of GDP, implying a CA gap in the range of -½ to 3½ percent of GDP.
- Real exchange rate:
  - Krona appreciated in REER by over 22 percent since early 2009 trough (around 20 percent vs euro).
  - EBA-estimates suggest a REER undervaluation of 6 percent; staff assesses REER gap in range -10 to +2 percent.
- Capital and financial accounts and policy:
  - Surplus in CA balanced by financial account deficit (mainly FDI and bank flows).
  - Large banks remain vulnerable to liquidity risk from global wholesale markets.
  - Desirable: further rebalancing of flows toward longer maturities and macroprudential policies (stricter capital requirements, raising funding stability standards).
- FX intervention and reserves:
  - Riksbank does not generally intervene, but boosted borrowed currency reserves to around USD 56 billion (10 percent of GDP) in early 2013.
  - Maintaining FX liquidity buffers appears broadly appropriate.

### Switzerland — CA, REER, and exchange-rate policy
- External position:
  - Positive NIIP of about 150 percent of GDP; gross foreign assets/liabilities about 610/467 percent of GDP.
  - Projected NIIP to rise to about 175 percent over the medium term.
  - Overall: underlying external position broadly consistent with fundamentals and desirable policies.
- Current account:
  - Preliminary authorities’ estimates indicate a CA surplus of 13 percent of GDP in 2013, up from 9½ percent in 2012; staff expects final reading around 9½ percent of GDP, similar to 2012.
  - Adoption of BPM6 in 2014 expected to lead to major changes to CA credits, debits and balance.
  - Staff assesses CA gap ranging from -3 to +3 percent of GDP; EBA CA regression estimates a CA gap of around 1.7 percent of GDP.
- Real exchange rate and policy:
  - REER (CPI basis) appreciated by 40 percent from mid-2007 to August 2011.
  - Since Sept 6, 2011, SNB enforced a floor of 1.20 for CHF/EUR exchange rate; franc traded in narrow band above that level.
  - Staff assesses REER as moderately overvalued with a REER gap range of 0 to +10 percent; EBA REER regression suggests franc overvalued by 7 percent.
  - Monetary and exchange rate policy should be guided by price stability; undoing past intervention could be considered if safe-haven inflows reverse; negative interest rates on bank excess reserves might reduce intervention needs.
- Capital flows and reserves:
  - Significant net outward FDI (mostly reinvested earnings); SNB absorbed safe-haven inflows through reserve accumulation.
  - SNB balance sheet stabilized at around 81 percent of GDP.
  - Introduction of the floor was appropriate to guard against contraction/deflation risks.

### Thailand — CA, REER, and reserves adequacy
- NIIP and external position:
  - NIIP improved from -81 percent of GDP post-Asian crisis to -3 percent in 2009, then deteriorated to -24 percent of GDP in 2012 due to valuation changes.
  - Overall: external position broadly consistent with fundamentals; reserves are more than adequate.
- Current account:
  - CA volatile over last decade, ranging from a 4¼ percent of GDP deficit to 8¼ percent of GDP surplus.
  - CA surplus came down from 8¼ percent of GDP in 2009 to -0.7 percent in 2013 (cyclically-adjusted CA about 0.1 percent) and expected to remain close to balance medium term.
  - Staff assesses 2013 CA close to level consistent with fundamentals within range -1 to +1 percent of GDP.
  - EBA CA model estimate of gap +0.2 percent of GDP (cyclically adjusted EBA norm -0.1 and 2013 CA +0.1 percent).
- Real exchange rate:
  - REER generally appreciating since 2005; after strong appreciation in late 2012/early 2013, REER weakened over remainder of 2013.
  - As of May 2014, REER about 4 percent weaker than its 2013 average level.
  - Staff assesses REER broadly consistent with fundamentals, likely within -5 percent to +5 percent.
- Capital flows and reserves:
  - Equity and bond flows declined and became negative in 2013.
  - Reserves about 43 percent of GDP, over three times short-term debt, and at 229 percent of IMF’s composite metric.
  - Net forward FX position declined to six percent of GDP in 2013.
  - Assessment: gross reserves more than adequate; no need to build up reserves for precautionary purposes. Intervention smooths volatility but sterilization is costly.

### Turkey — CA, REER, and reserves
- NIIP and vulnerabilities:
  - NIIP about -48 percent of GDP; short-term debt liabilities account for 16 percent of GDP.
  - Composition of foreign liabilities worsened; short-term debt predominates financing.
  - Overall: external position substantially weaker than consistent with fundamentals and desirable policy settings.
- Current account:
  - CA deficit increased to 7.9 percent of GDP in 2013, partly due to temporary gold restocking; expected to decrease to 6.3 percent of GDP in 2014.
  - EBA estimates a 2013 CA gap of -5.7 percent of GDP.
  - Staff assesses underlying 2013 CA was some 2½ to 5 percent of GDP weaker than level implied by fundamentals and desirable policies.
  - Substantial currency depreciation in late 2013/early 2014, tighter monetary policy, and macro-prudential measures expected to reduce domestic demand and lower the CA deficit.
- Real exchange rate:
  - REER fluctuated considerably; appreciated by 15-20 percent through early 2013 after a 2011 fall; then depreciated through end-2013 to near 2011 low; in 2014 appreciated again.
  - EBA regression estimates a 19 percent overvaluation for 2013; staff assesses REER was 10-20 percent stronger on average in 2013 than consistent with fundamentals and desirable policies.
- Capital flows and reserves:
  - Net inflows in 2013 (including errors and omissions) amounted to some 9 percent of GDP; reserve accumulation about 1.2 percent of GDP.
  - Cumulative FX sales interventions: US$ 17.6 billion in 2013; US$ 20.2 billion at end-January 2014.
  - Gross reserves equaled 116 percent of IMF composite adequacy metric at end-2013 versus 114 percent at end-2012; adjusting for ROM-related reserve holdings reduced it to 95 percent at end-2013.
  - Reserve cover of short-term debt declined from 83 percent in 2012 to 78 percent at end-2013; accounting for the CA to be financed, reserve cover drops to 53 percent.
  - Assessment: Given low net international reserves, reserve accumulation is warranted.
- Policy recommendations:
  - Significantly tighter fiscal policy over the medium term and structural reforms to increase private sector savings.
  - Monetary policy to keep real interest rates solidly positive.
  - CBRT should accumulate net international reserves when possible and limit FX intervention to smoothing excessive volatility.

### United Kingdom — External position, CA gap, and REER
- NIIP and gross positions:
  - NIIP improved from -15 percent of GDP in 2012 to -2 percent in 2013 due to valuation effects and portfolio changes.
  - Gross positions about 600 percent of GDP; staff projects NIIP to decline to about -8 percent by 2019.
  - Overall: external position moderately weaker than implied by fundamentals and desirable policies.
- Current account:
  - Pre-crisis persistent CA deficits driven by public and private consumption; post-crisis deterioration largely due to decline in income balance.
  - Trade balance deficit stable around 2 percent of GDP despite 16 percent real exchange rate depreciation between 2007 and 2013.
  - EBA CA regression estimates a CA gap of around -2.6 percent of GDP.
  - Staff assessment finds a cyclically-adjusted CA balance 1-2 percent weaker than the current account norm.
- Real exchange rate:
  - REER appreciated 16 percent pre-crisis (1997-2007) and depreciated 16 percent since 2007.
  - Sterling appreciated in real effective terms since July 2013; by May 2014 REER was 6 percent stronger than its 2013 average.
  - EBA REER regression suggests 2013 average REER undervaluation of 5 percent (discarded as implausible); staff assesses 2013 REER as 5–10 percent above level consistent with fundamentals and desirable policy settings.
- Policy responses:
  - Rebalancing toward private-sector led demand, continued fiscal consolidation within a medium-term framework, accommodative monetary policy, structural reforms to broaden skill base and invest in public infrastructure to boost productivity and competitiveness.

### United States — NIIP trajectory and medium-term policy guidance
- NIIP and external liabilities:
  - NIIP declined from -15 percent of GDP in 2010 to -27 percent of GDP in 2013.
  - Gross assets and liabilities about 130 and 160 percent of GDP, respectively.
  - Under staff baseline, U.S. NIIP would deteriorate by about 5 percentage points of GDP over the next five years.
  - Overall: external position broadly consistent with medium-term fundamentals and desirable policies.
- Risks and structural factors:
  - Risks to external stability could arise from decline in foreign demand for U.S. debt securities, e.g., from failure to restore long-run fiscal sustainability.
  - Dollar’s reserve currency status limits current vulnerabilities.
  - Most U.S. foreign assets denominated in foreign currency; over 50 percent in FDI and portfolio equity claims.
- Policy recommendations:
  - Over the medium term, fiscal consolidation should aim for a general government primary surplus of about 1¼ percent of GDP (corresponding to a federal government primary surplus of about 2 percent).
  - Structural policies to raise productivity and labor force growth and to exploit gains from unconventional energy production to support external stability and full employment.

*Source: IMF — Individual Economy Assessments (excerpts reproduced from the supplied content).*

### 2.3 percent in 2013, reflecting a sharp reduction in the fiscal deficit (which also helped to lower the global fiscal ga

### United States (continued)

### Current account
- Current account position was 2.3 percent in 2013, reflecting a sharp reduction in the fiscal deficit, higher private saving, lower investment in the aftermath of the financial crisis, and a stronger energy trade balance (due to the rapid increase of unconventional energy production).
- Going forward, the current account deficit is projected to widen to about 2¾ percent of GDP by 2019, as stronger private demand leads to a closure of the output gap but with the effect tempered by a further improvement in the energy balance.
- Assessment:
  - The EBA model estimates a CA gap of -1 percent of GDP for 2013.
  - The staff view assesses the cyclically-adjusted current account to be between 0 and 1.5 percent of GDP weaker than the level implied by medium-term fundamentals and desirable policies.

### Real exchange rate (REER)
- Background:
  - The REER appreciated by about 2 percent during 2013, but remains around 10 percent below its average value over the past two decades.
- Assessment:
  - Indirect estimates of the REER (drawing on the EBA current account estimate and the staff’s current account assessment range) suggest some overvaluation (within the 0 to 10 percent range).
  - Direct analyses of the REER in the EBA would suggest an undervaluation of around 8 percent in 2013.
  - Taking into account both methodologies, and acknowledging some uncertainty associated with the boom in unconventional energy production on the US external position, staff assesses the REER to be broadly in line with medium-term fundamentals and desirable policies (with a range of -5 percent to +10 percent).

### Capital and financial accounts: flows and policy measures
- Background:
  - Inflows and outflows picked up in 2013 but are substantially lower than pre-Lehman levels.
  - Portfolio inflows halved in 2013 relative to 2012 but were more than offset by stronger bank inflows (which were negative in 2012).
  - On the outflow side, there was a large increase in U.S. portfolio investment overseas.
  - The U.S. dollar reserve currency status and safe haven motives boost foreign demand for U.S. Treasury securities during periods of market turbulence.
  - The outlook for U.S. capital flows will depend on global financial stability and the pace of the global recovery, as well as on the outlook for the U.S. 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.

### FX intervention and reserves level
- 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.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_062614a.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_062614a.pdf_