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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 we Arrive at Assessments (model/judgment/multilateral consistency)
2015 External Assessments
Implications of 2016 Developments
o Policy Challenges
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.
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
SWE ESP
USA
AUS
CAN MEX
GBR
AUT IRL HKG
HUN
CZE
COL
ARG
EGY
PER CHL NLD
MYS
BRA
TUR
IND
IDN
ZAF
FRA
POL
NOR
DNK PHL
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)
[CELLREF]
ESP
BRA
AUS
ITA
IND
MEX
TUR
FRA POL
IDN
CAN GBR
KOR
ZAF
SWE
THA RUS
MYS
NLD
BEL
SAU
HKG
DEU CHE
CHN JPN
GRC
PRT
IRL HUN
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
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
US
A
CH
N
In 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
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.
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 KF KFA
Supply Demand
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)
AUS
BEL
BRA
CAN
CHN
EA FRA
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
Ex
po
rts
REER and Export Volumes, 2015
(annual percentage change)
Sources: WEO and IMF Staff calculations.
External Sector Assessments
Country
teams
Country
authorities
ESR Group
EBA model
estimates
Art IV.
Consultation
Year-round
Discussions o 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
MEX TUR
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
A
GA
P, 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.
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/
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
CH
N
DEU
JPN
KO
R
SG
P
NLD
IND
TH
A
SW
E
MY
S
MEX
PO
L
IDN
RU
S
ZA
F
AU
S
TU
R
CA
N
BR
A
SA
U
Oth
er E
A 1
/
GB
R
US
Source: IMF Staff Assessments.
1/ Other EA includes Belgium, France, Italy and Spain.
ESR Economies: CA Gaps (midpoint), 2015
(in percent of World GDP)
Stock imbalances will continue widening, and rapidly if flow (current account) gaps remain open
-100
-60
-20
20
60
100
ESR Economies
United States
United Kingdom
Euro Area
China
Japan
Other ESR Ec.
Closing CA gaps 2/
Based on projected CA
-100
-60
-20
20
60
100
Euro Area Economies
Other debtors
Italy
France
Other creditors
Germany
Selected Economies. Actual and Projected Net Foreign Asset Position, 2010-20 1/
(percent of GDP)
Sources: Lane and Milesi-Ferretti dataset; WEO and IMF staff estimations.
1/ Based on WEO current account and GDP projections (excludes valuation effects).
2/ Assumes shift in CA balance during projection period equal to the 2015 gap (staff-assessed for ESR countries, and EBA gap for the rest).
Valuation effects related to the closing of REER gaps would add a level shift without altering the direction of NFA positions over the medium term.
Exchange rate movements since 2015 may support a narrowing of excess imbalances in some key cases
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 ZAF THA
TUR AUS
CAN KOR
SWE
CHE
HKG
SGP
BEL FRA
DEU
ITL NLD
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 t
o 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
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 G
DP
)
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.
-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
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
-8
-4
0
4
8
12
16
-8
-4
0
4
8
12
16
EA
JPN
CH
N
GB
R
US
A
NLD
DEU
ITA
ES
P
BEL
FR
A
CH
E
SW
E
KO
R
CA
N
AU
S
RU
S
TH
A
MY
S
BR
A
PO
L
TU
R
IND
IDN
ZA
F
MEX
Cyclically-adjusted CA 1/ESR Staff-assessed Norm
Source: IMF Staff estimates.
1/ Adjusted for both the relative output gap and terms of trade gap. Sorted by mid-point of the CA norm.
Systemic 5 Euro Area Other AEs Other EMEs
ESR Economies: Actual CA vs. Staff-Assessed Norm (cyclically adjusted) (in percent of own GDP)
ESR Economies: Staff Assessed vs. EBA Estimated Current Account Gaps
(in percent of GDP)
-12
-9
-6
-3
0
3
6
9
12
-12
-9
-6
-3
0
3
6
9
12
CH
N
JPN EA
US
A
GB
R
DEU
NLD
ES
P
ITA
BEL
FR
A
SG
P
KO
R
SW
E
HK
G
CH
E
AU
S
CA
N
TH
A
MY
S
PO
L
IND
IDN
MEX
RU
S
BR
A
ZA
F
TU
R
SA
U
EBA CA GapESR CA Gap
Source: IMF Staff assessments.
1/ Sorted by the mid-point of the Staff Assessed gap. Saudi Arabia, Hong Kong and Singapore and not included in EBA. For Saudi
Arabia, the current account gap is a reflection of a fiscal policy gap related to the desirability of saving of oil export income.
Systemic 5 Euro Area Other AEs Other EMEs
ESR Economies: Breakdown of EBA CA Norms, 2015
(in percent of GDP)
-6%
-4%
-2%
0%
2%
4%
6%
8%
CH
E
RU
S
NLD
DEU
JPN
BEL
ITL
KO
R
TH
A
FR
A
CA
N
ES
P
CH
N
MY
S
TU
R
GB
R
PO
L
AU
S
US
A
ZA
F
IDN
SW
E
MEX
BR
A
IND
Desired policies Demographics
GDPPC/ Institutions/Pot Growth NFA
Reserve
Currency
Fin.Center
Oil Norm (Cyclically Adjusted)
Source: Fund Staff estimates.
ESR Economies: Policy Contributions to ESR CA Gaps, 2015
(in percent of GDP)
-4
-3
-2
-1
0
1
2
3
4
5
6
GB
R
TU
R
ZA
F
BR
A
US
A
CA
N
BEL
FR
A
AU
S
CH
E
ITA
ES
P
RU
S
EA
MEX
IDN
IND
PO
L
JPN
SW
E
CH
N
NLD
TH
A
MY
S
KO
R
DEU
Fiscal
Social Protection
Cap Controls/Reserves/Credit
Other (unidentified)
Total Gap
Source: IMF Staff Assessments.