9/20/2016

1

2016 External Sector Report

Global Imbalances and Policy Challenges

September, 2016

o Evolution of Global Current Accounts and Exchange Rates

Widening and reconfiguration of imbalances in 2015

Drivers: Asymmetric global recovery, commodity/K-flow shocks

o Assessment of External Positions

How Assessments Are Conducted (model vs. judgment)?

External Assessments for 2015

o Policy Challenges

9/20/2016

2

Evolution of Global Current Accounts and Exchange Rates

Global Current Account Imbalances, 2001-15

(percent of World GDP)

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Oil exporters Other Surplus Surplus AEs JPN DEU/NLD

CHN EA (other) Other Deficit AE Comm. Exp Deficit EMs

GBR USA Discrepancy

Sources: IMF, World Economic Outlook Database and Fund Staff calculations.

1/ Surplus AEs: Korea, Hong Kong SAR, Singapore, Sweden, Switzerland, Taiwan POC; AE Commodity Exporters: Australia, Canada, New Zealand;

Deficit EMs: Brazil, India, Indonesia, Mexico, South Africa, Turkey; Oil Exporters: WEO definition + Norway.

9/20/2016

3

Source: World Economic Outlook and Fund Staff calculations.1/ Red (green) bubbles indicate widening (narrowing) of imbalances. Bubble sizes are proportional to the change in current account, in percent of world GDP (i.e., contributions to reconfiguration of global imbalances).

Reconfiguration of Current Account Balances

(percent of GDP)

CHN

DEU

JPN KOR

CHE

RUS

ITA

THA

SWEESP

USA

AUS

CANMEX

GBR

AUT IRLHKG

HUN

CZE

COL

ARG

EGY

PER CHLNLD

MYS

BRA

TUR

IND

IDN

ZAF

FRA

POL

NOR

DNKPHL

FIN

SAU

NZL

MAR

GRC

-4

-3

-2

-1

0

1

2

3

4

5

-8 -5 -2 1 4 7 10 13

Ch

an

ge

in C

urr

en

t A

cco

un

t 20

14-1

5

2014 Current Account

(10, -18)

Narrowing

imbalances

Narrowing

imbalances

Widening

imbalances

Widening

imbalances

75

85

95

105

115

125

135

75

85

95

105

115

125

135

U.S. China Euro Area Japan U.K. Other

EMEs 1/Other

AMs 1/

2001

2015

Aug-2016 2/

2014

Sources: IMF International Financial Statistics; World Economic Outlook Database, Global Statistics Database.

1/ GDP-weighted average of ESR countries.

2/ Period average.

REER of Systemic Economies, 2001-16

(Index, average 2001-15=100)

9/20/2016

4

USA

ESP

BRA

AUS

ITA

IND

MEX

TUR

FRAPOL

IDN

CAN GBR

KOR

ZAF

SWE

THARUS

MYS

NLD

BEL

SAU

HKG

DEUCHE

CHNJPN

GRC

PRT

IRLHUN

NZL

CZE

COL

MAR

PHL

AUT

ARG

ISR

DNK

FIN

NOR

-10

-5

0

5

10

15

-120 -70 -20 30 80 130

Cu

rren

t A

cco

un

t B

ala

nce (

avera

ge 2

01

1-1

5)

Net Foreign Assets, 2010

Sources: World Economic Outlook, IMF International Financial Statistics, and IMF staff calculations.1/ Bubble size proportional to countries US$ GDP.

(290, 3)

NFA and Current Account Balance

(percent of GDP)

Expanding

creditor positions

Expanding debtor

positions

Drivers of the 2015 External Reconfiguration

9/20/2016

5

Systemic Currencies: Real Effective Exchange Rate, Jan-1980 to May-2016

(Index, Average 1980-2016=100)

90

95

100

105

110

2007 2009 2011 2013 2015

US

UK

Japan

Euro

area

-1.00

-0.50

0.00

0.50

1.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

US UK Japan Euro area

2-year

rate 1/

Monetary

policy rate

Real GDP, 2007-15

(Index, 2007=100)

Monetary policy and 2-year interest rate, 2010-15

(percent)

US UK Japan Euro area

Sources: World Economic Outlook, Haver Analytics, and IMF staff calculations.

1/ 2-year maturity treasure bond. For the euro area, Germany Treasury Bond is reported.

Sources: IMF International Financial Statistics, WEO, and IMF staff calculations.

1/ Methodological details are provided in Appendix I. Countries with small ToT income shocks (less than 0.01% of world GDP) are excluded.

2/ Classification into commodity exporter/importer based on the direction of the terms-of-trade movement in 2015.

-10%

-6%

-2%

2%

6%

10%

-0.20%

-0.10%

0.00%

0.10%

0.20%

SA

U

RU

S

BR

A

CA

N

AU

S

MEX

NO

R

CO

L

EG

Y

CH

L

AR

G

HK

G

BEL

PO

L

SG

P

ES

P

ISR

GB

R

TU

R

IRL

ITA

TH

A

FR

A

IND

KO

R

DEU

JPN

USA

CH

NIn percent of World GDP

In percent of own GDP (right scale)

Terms-of-trade Income Windfall. Largest Gains and Losses, 2015

(in percent of GDP)

SAU (-18)

Commodity

exporters

Commodity

importers

9/20/2016

6

Sources: IMF International Financial Statistics, WEO, and IMF staff calculations.

1/ Methodological details are provided in Appendix I. Countries with small ToT income shocks (less than 0.01% of world GDP) are excluded.

2/ Classification into commodity exporter/importer based on the direction of the terms-of-trade movement in 2015.

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5%

ToT Windfall Gains and Losses: Effect on Global Imbalances,

2015 2/ (in percent of World GDP)

2014 Current Account Balance

20

15

Term

s o

f T

rad

e I

nco

me W

ind

fall

Surplus Commodity Importers

(widening surpluses)

Surplus Commodity Exporters

(narrowing surpluses)

Deficit Commodity Importers

(narrowing deficits)

Deficit Commodity Exporters

(widening deficits)

(China, euro area, Japan Korea, …)

(Australia, Canada, Mexico, …)

(U.S., U.K., …)

(Saudi Arabia, Norway, …)

Selected EMs: Capital Inflows, Current Account and Cost of External Financing, 2014-15

(Excludes China, Russia and Saudi Arabia, in percent of GDP, 4-quarter moving average)

-100

-50

0

50

100

150

200

2014Q1 2014Q3 2015Q1 2015Q3

Commodity Importing EMEs 1/

Rising

reserves

0.0

1.0

2.0

3.0

4.0

5.0

2014Q1 2014Q3 2015Q1 2015Q3

Net Non-Reserve Capital Inflows

Current Account Deficit

EMBI Spread (RHS) 2/

Commodity Exporting EMEs 1/

Sources: Haver Analytics; Bloomberg; IMF, World Economic Outlook; IMF, Balance of Payment Statistics; and IMF staff calculations.

1/ Commodity exporters include Argentina, Brazil, Chile, Colombia, Egypt, Malaysia, Mexico, Morocco, Peru, South Africa, Sri Lanka. Commodity importers

include Costa Rica, Guatemala, Hungary, India, Indonesia, Pakistan, Philippines, Poland, Thailand, Turkey, Uruguay. GDP weighted averages are reported. Other

countries not reported due to data limitations. Russia is excluded as 2014-15 dynamics mostly reflect idiosyncratic geopolitical factors.

2/ EMBI sovereign spreads relative to January 2014 level.

9/20/2016

7

Illustration of capital flow supply and demand shifts

Commodity exporters Commodity importers

A

B

Demand

s

(spread)

SA

SB

KF

(Capital

Inflows)

KFA= KFB

Supply

C

A

KFC KFKFA

SupplyDemand

SB=SA

s

-1.0%

-0.5%

0.0%

0.5%

1.0%

Deficit Surplus Deficit Surplus

Export Volume

Import Volume 2/

Net Export Volume

Commodity

Exporters

Commodity

Importers

-1.0%

-0.5%

0.0%

0.5%

1.0%

Deficit Surplus Deficit Surplus

Income account change

reconciliation term

Net Export Volume

Terms-of-trade direct effect

CA/GDP Change

Commodity

Exporters

Commodity

Importers

Sources: IMF International Financial Statistics, and IMF staff estimates.

1/ Deficit and surplus countries are classified based on CA balance in 2014. AE exclude USA, GBR, JPN, EA countries; EMEs exclude CHN, SAU, RUS.

See Appendix I for technical details on the current account decomposition.

2/ A negative import contribution to the net trade volume implies an expansion of imports.

Current Account Components Trade Balance Components

Current Account Decomposition. All Countries

(in percent of World GDP)

9/20/2016

8

AUS

BEL

BRA

CAN

CHN

EAFRA

GRE

HKG

IND

IDN

ITA

JAP KOR

MYS

MEX

NET

POL

RUS

SGP

ZAF

SPA

SWE

CHE

THL

TUR

UK

US

SAU

-4

-2

0

2

4

6

8

10

-20 -15 -10 -5 0 5 10 15 20

REER

Real

Exp

ort

s

REER and Export Volumes, 2015

(annual percentage change)

Sources: WEO and IMF Staff calculations.

External Sector Assessments

9/20/2016

9

Country

teams

Country

authorities

ESR Group

EBA model

estimates

Art IV.

Consultation

Year-round

Discussionso Multilateral consistency and

evenhandedness

o Vetting of assessments

o Cross-cutting issues

o Role of policies

ESR Country

Page

ESR Overview

Paper

Other

external

sector

indicators

Refinements

Staff-Assessed Current Account Gaps, 2014-15

(percent of own GDP)

18

CHN

JPN

EA

GBR

USA

DEU

NLD

SPA

ITA

BEL

FRA

SGP

KOR

SWE

SWI

HKG

AUS

CAN

MYS

RUS

POL

IND

IDN

MEXTUR

BRA

ZAF

-2.0

-1.0

0.0

1.0

2.0

-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0

Staff Assessed CA GAP 2014

Ch

an

ge i

n S

taff

Ass

ess

ed

C

AG

AP

, 2

01

5-1

4

SAU

widening gaps

widening gaps

THA

Source: Mid-points of IMF Staff assessments.

1/ For Korea, the lower gap largely reflects additional adjustment on the income balance.

9/20/2016

10

2012 2013 2014 2015

Germany 1 1 1 1 Moderatly Substantially

Korea 2 1 1 1 Stronger 3 2 1

Singapore 2 1 1 1 Broadly in line 4 4 4

Malaysia 2 2 2 2 Weaker 5 6 7

Netherlands 2 2 2 2

Sweden 2 3 3 2

China 3 3 3 3

Thailand 4 4 4 2

Japan 3 4 4 3

Switzerland 3 4 4 5

Euro Area 4 4 4 4

Hong Kong SAR 4 4 4 4

India 4 4 4 4

Mexico 4 4 4 4

Poland 4 4 4 4

Italy 5 4 4 4

United States 5 4 4 5

Saudi Arabia 4 4 4 7

Indonesia 5 5 5 4

Russia 4 6 5 4

Canada 6 5 4 5

Belgium 5 6 4 5

Australia 6 5 5 5

Brazil 5 5 6 5

France 5 6 6 5

South Africa 6 6 6 5

Turkey 6 5 6 6

United Kingdom 5 6 6 6

Spain 7 7 7 7

Weaker

than

Im

pli

ed

by

Fu

nd

am

en

tals

1/

1/ Stronger (weaker) implies 'undervaluation'

('overvaluation'). Grouping is based on countries'

prevailing assessment during 2012-15.

Str

on

ger

than

Imp

lied

by

Fu

nd

am

en

tals

1/

Bro

ad

ly i

n L

ine w

ith

Fu

nd

am

en

tals

1/

2016 exchange rate developments may support some narrowing of excess imbalances but uncertainties remain

Sources: GDS and IMF Staff calculations.

1/ Pre-Brexit REER iis proxied as May average. Latest is REER average for August 2016.

ESR Countries: 2015 REER Gaps vs. REER Changes since 2015 1/

CHN

EA

JPN

GBR

USA

BRA

IND

IDN

MYS

MEX

RUS

POL ZAFTHA

TURAUS

CANKOR

SWE

CHE

HKG

SGP

BELFRA

DEU

ITLNLD

ESP

-20

-15

-10

-5

0

5

10

15

20

25

-20 -15 -10 -5 0 5 10 15 20

REER

Ch

an

ge r

ela

tive

to a

vg

. 2

01

5 (

perc

en

t)

2015 REER Gap (midpoint)

Possibly larger over-valuation

Post-U.K.

referendum

change

Possibly larger under-valuation

9/20/2016

11

Policy Challenges

In the near term, policies need to balance internal and external objectives, within the limits of policy space

ESR Economies: Current Account Gaps and Output Gap, 2015-16

(percent of GDP)

BEL

ITA

JPN

USA

AUS

CHN

IDN

KOR

MYS

MEX

POL

RUS

ZAF

SWE

CHE

THA

TUR

BRA

CAN

FRA

DEU

IND

NLD

ESP

GBR

-4%

-3%

-2%

-1%

0%

1%

-4% -2% 0% 2% 4%

Ou

tpu

t G

ap

, 2

01

5 (

% o

f p

ote

nti

al

GD

P)

CA Gap, 2015 (% of GDP)

Negative Output Gap

Excess External Deficit

Negative Output Gap

Excess External Surplus

Source: World Economic Outlook and Fund staff estimations.

1/ Area of bubble is proportional to the country's NFA level in percent of GDP. Orange (white) bubbles denote creditor (debtor) position.

9/20/2016

12

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2011 2012 2013 2014 2015 2016

US/UK/Euro Area Debtor

China

Other Surplus

Other Deficit

Total

?

Selected ESR Countries: Change in Cyclically Adjusted Primary Balance, 2011-16

(in percent of Total GDP of Selected Countries)

Source: IMF World Economic Outlook and Fund Staff estimates.

1/ Other deficit countries include Australia, Canada, India, Indonesia, Mexico, Poland, South Africa, and Turkey. Euro

area deficit includes Belgium, France, Italy, and Spain. Other surplus countries include Germany, Japan, Korea, Malaysia,

The Netherlands, Sweden, and Thailand. Weighted by the share of the country in the group.

Reforms tailored to country circumstances and carefully designed/sequenced to

avoid undermining near-term demand.

. strengthen social safety nets and reform

pensions to reduce precautionary savings

strengthen social safety nets and reform

pensions to raise the retirement age

. facilitate balance sheet repair and enterprise reform;

. streamline service and product sector

regulations;

. mobilize corporate investment

. strengthen financial intermediation;

. reduce generosity of pension systems;

. eliminate export barriers;

. facilitate diversification and growth of

the non-commodity sector;

. increase labor market flexibility;

. address infrastructure bottlenecks

Excess Surplus Countries

Excess Deficit Countries

9/20/2016

13

Widening and

reconfiguration of

global imbalances

in 2015

Widening of

excess imbalances

among systemic

economies

Persistent

imbalances

Recent

developments

More balanced

policy mix needed

to address

(domestic and

external)

imbalances

o Uneven AM recoveries

o Commodity Price Decline

o Tighter external financial conditions for EMEs

o Larger excess surpluses (Germany, Japan) and deficits (U.S., U.K.)

o Some narrowing of excess deficits in EMs and EA debtor countries

o Little progress in dealing with excess surpluses

Less demand-diverting: avoid overreliance on monetary policy

More demand-supporting (fiscal) and structural policies

Surplus countries with fiscal space to play a greater role

Global collective action, especially if global demand weakens further

o Some reversal of trends observed last year (Japan, U.K.), but

impact of U.K. referendum remains uncertain

o Projected expansion of stock imbalances

o Increased vigilance necessary (debtors and creditors)

2016 External Sector Report

Global Imbalances and Policy Challenges

September, 2016