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Overview: External SectorOverview: External SectorIn MyanmarIn Myanmaryy
Workshop for Staff of Ministry of National Planning and Economic DevelopmentMinistry of National Planning and Economic Development
Nay Pyi Taw, MyanmarJune 2 – 3, 2014
Jan Gottschalk
TAOLAMTAOLAM
IMF-TAOLAM training activities are supported by funding of the Government of Japan
OutlineOutline
I. External Sector Overview
II. Useful Concepts & Indicators
III. Balance of Payments Developments in Myanmar
IV. External Sector Considerations
2This training material is the property of the International Monetary Fund (IMF) and is intended for the use in IMF courses. Any reuse requires the permission of the IMF.
External Sector OverviewExternal Sector Overview
Basic structure of Balance of Payments
Ab
Basic structure of Balance of Payments
Current Account
Capital and Financial Account
bo
ve the liin
e
O ll B l
Errors and omissions
Financing
Belo
w th
Overall Balance
3
he lin
e
External Sector OverviewExternal Sector Overview
Basic Structure of current account balance ( l t ti )
Trade Balance (Goods) = Exports - Imports
(real transactions)
Trade Balance (Goods) = Exports - Imports
Trade Balance (Services) = Exports - Imports
Net Income (e.g., Interest, Profit Repatriation)
N t T f (Offi i l P i t )Net Transfers (Official, Private)
Current Account Balance
4
External Sector OverviewExternal Sector Overview
Basic Structure of capital and financial account balance (financial transactions)
Capital Account (e.g., Debt forgiveness)
(financial transactions)
Financial Account
Direct Investment
Portfolio Investment
Other Investment (e g net loans disbursements minus repayment;Other Investment (e.g., net loans—disbursements minus repayment; currency and deposits)
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Financial and Capital Account Balance
External Sector OverviewExternal Sector Overview
Flows StocksBasic structure: financing
-Overall Balance = Financing
Change in Net Financial Reserves Foreign Reserve Levels
Ch iChange in Arrears Stock of Arrears
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Exceptional Financing
External Sector OverviewExternal Sector Overview
CurrentAccount
•Trade•Services
OverallBalance
Surplus?Accumulate
reserves•Income•Transfers
BalanceWhat
happensto D fi i ?
Financing
to reserves?
Deficit?Run downreservesFinancing
•Cap & Fin Account
Putting it all together …
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Putting it all together …
OutlineOutline
I. External Sector Overview
II. Useful Concepts & Indicators
III. Balance of Payments Developments in Myanmar
IV. External Sector Considerations
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Useful Concepts & IndicatorsUseful Concepts & Indicators
The exchange rate
Kyat-US dollar exchange rate:exchange rate:
• Devaluation
• Appreciation• Appreciation
What determines the exchange
t ?rate?
For what does the exchange rate
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matter?
Useful Concepts & IndicatorsUseful Concepts & Indicators
What determines the exchange rate?
• Availability of foreign exchange
Depends on …
Balance ofBalance of Payments
Central bankCentral bank intervention
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Useful Concepts & IndicatorsUseful Concepts & Indicators
Fundamental exchange rate factor: price differentials
Similar good in two countries should cost about the same
exchange rate t f icorrects for price
differential
Called Called ‘Purchasing Power Parity’
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Useful Concepts & IndicatorsUseful Concepts & Indicators
Market and Effective Exchange Rates (EER) 1/
Real Exchange Rate
Comparing the price level in Myanmar with that of other countries all expressed in
0
200220240
Real EER
Market and Effective Exchange Rates (EER) 1/(Index, 2005=100)
countries, all expressed in kyat:
400
600
800
1000140160180200 Nominal EER
Kyat/USD (RHS, reverse)
1000
1200
1400
16006080
100120
160060
2005
2006
2007
2008
2009
2010
2011
2012
2013
1/ Auction rates (kyat/USD) are applied starting April 2012.
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Useful Concepts & IndicatorsUseful Concepts & Indicators
For what does the exchange rate matter? External competitiveness
Export volume = f ( PD/PD* ·ER); YR*; )
External competitiveness
Export volume f ( PD/PD ER); YR ; …)
Price Foreign income
where:
• ER = nominal exchange rate (in home currency per $)
Price effect (-)
Foreign incomeeffect (+)
ER nominal exchange rate (in home currency per $)
• PD = domestic price level (in home currency)
• PD* = foreign price level (in $)
• YR* = foreign income (proxied by real GDP)• YR = foreign income (proxied by real GDP)
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OutlineOutline
I. External Sector Overview
II. Useful Concepts & Indicators
III. Balance of Payment Developments in Myanmar
IV. External Sector Considerations
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Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
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Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
Current account balance (in % of GDP)
3%
Contributors to the Current Account Balance (in percent of GDP)
Current account d fi i
0%
1%
2% Net transfers
Net income
Ser icesdeficit has been rising 3%
-2%
-1%
Services balance
Trade balance
Currentrising …
-5%
-4%
-3% Current account
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-6%
2009/10 2010/11 2011/12 2012/13
Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
Trade balance (in % of GDP)
20%
25%
Contributors to the Trade Balance (in percent of GDP)
… mainly due to 5%
10%
15% Non-gas exports
Gas exportsdue to strong imports
10%
-5%
0% Imports
Trade b l
-20%
-15%
-10% balance
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-25%
2009/10 2010/11 2011/12 2012/13
Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
Financial account balance (in % of GDP)
7%
Contributors to the Financial Account Balance (in percent of GDP)
Oth fl
Financial account
4%
5%
6%Other flows
Direct investment, net
benefited from large FDI
2%
3%
4%
Other investment
Capital andlarge FDI inflows
0%
1%
Capital and financial account
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-1%
2009/10 2010/11 2011/12 2012/13
Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
Overall balance (in % of GDP)
Deficits and surpluses of
8%
Contributors to the Overall Balance(in percent of GDP)
surpluses of current account and financial 2%
4%
6%
account broadly offset each -2%
0%
2%
other-6%
-4%
2009/10 2010/11 2011/12 2012/13
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Current account Capital and financial account
Errors and omissions Overall balance
Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
Gross official reserves (in millions of US$)
Offi i l5000
Gross Official Reserves - Flows and Stocks (in millions of US$)
Official reserves, incl. those held by
3500
4000
4500
Change in Gross official reserves
those held by state banks, have increased,
1500
2000
2500
3000
Stock of Gross official reserves
but by enough?
0
500
1000
1500
20
0
2009/10 2010/11 2011/12 2012/13
Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
Reserve adequacy
I l ti t t d In relation to trade: import coverage Rule of thumb: reserves should cover 5-6 months of imports (IMF analysis)(IMF analysis)
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Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar
In relation to capital flows: vulnerability to sudden capital outflows?
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OutlineOutline
I. External Sector Overview
II. Useful Concepts & Indicators
III. Balance of Payment Developments in Myanmar
IV. External Sector Considerations
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External Sector ConsiderationsExternal Sector Considerations
Main considerations
From a macroeconomic viewpoint, analysis of external sector often focuses on:
• External sustainability
• Growth contribution• Growth contribution
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External Sector ConsiderationsExternal Sector Considerations
External sustainability
Key question: if country runs current account deficits, are they sustainable?
Contributors to the Current Account Balance
Thi i 1%
2%
3%(in percent of GDP)
Net transfersNetThis issue
matters for Myanmar! -2%
-1%
0%
1% Net incomeServices balanceTrade balance
y
-5%
-4%
-3%balanceCurrent account
25
-6%
2009/10 2010/11 2011/12 2012/13
External Sector ConsiderationsExternal Sector Considerations
Consider ThailandExternal sustainability
Th il dConsider Thailand crisis:
• Large deficits 40
50
10
15
Thailand
Large deficits prior to crisis
• Inability to 20
30
40
0
5
10
finance deficits was critical cause of crisis
0
10
-10
-5
1 1 1 1 1 1 1 1 1 1cause of crisis
• … and led to currency crisis
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90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
Thailand: Current Account Balance (in % of GDP)
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currency crisisBaht/US$ fx rate (right axis)
External Sector ConsiderationsExternal Sector Considerations
Consider Mongolia crisis:
External sustainabilityConsider Mongolia crisis:
• Mongolia has large natural
t
200010
Mongolia
resource exports
• Current account surplus prior to 1000
1500
-5
0
5
p pcrisis
• Sharp drop in international
0
500
-15
-10
5
2 2 2 2 2 2 2 2 2 2international commodity prices during GFC led to current account and
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Mongolia Current Account Balance (in % of GDP)
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current account and currency crisis
Togrog/US$ fx rate (right axis)
External Sector ConsiderationsExternal Sector Considerations
Important factor for sustainability of current account
External sustainabilityImportant factor for sustainability of current account deficits is how they are financed:
• Stable financing l k
Contributors to the Financial Account Balance (in percent of GDP)source lowers risk
of crisis
FDI is a fairly 5%
6%
7%(in percent of GDP)
Other flows
• FDI is a fairly stable financing source 3%
4%
5%
Direct investment, net
• This is good news for Myanmar!
0%
1%
2% Other investment
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Myanmar!-1%
2009/10 2010/11 2011/12 2012/13
External Sector ConsiderationsExternal Sector Considerations
Another important factor for sustainability of current
External sustainabilityAnother important factor for sustainability of current account deficits is levels of foreign exchange reserves:
• They serve as a b ff f
Does Myanmar
buffer in case of a crisis
• Does Myanmar have sufficient reserves?
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External Sector ConsiderationsExternal Sector Considerations
Large expansion of manufacturing sector was key driverGrowth contributionLarge expansion of manufacturing sector was key driver of growth in Asia!
• Export-driven growth strategy
• Manufacturing-l d FDIrelated FDI
inflows
External• External competitiveness is key for this
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strategy to work
External Sector ConsiderationsExternal Sector Considerations
R l h i i di t f t l
Growth contribution
Real exchange is common indicator for external competitiveness
R lMarket and Effective Exchange Rates (EER) 1/(Index, 2005=100)
• Real appreciation undermines
0
200
400180200220240
Real EERNominal EER
( , )
external competitiveness
600
800
1000
1200100120140160180 Kyat/USD (RHS, reverse)
• Is Myanmar’s real appreciation a problem?
1200
1400
16006080
10000
5
006
007
008
009
010
011
012
013
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a problem? 20 20 20 20 20 20 20 20 20
1/ Auction rates (kyat/USD) are applied starting April 2012.
OutlookOutlook
Next, we will explore in more detail …
• … the monetary sector, which helps with analyzing inflation and the exchange rateanalyzing inflation and the exchange rate.
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