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.