Chapter 3 2021 Individual Economy Assessments

International Monetary Fund. Research Dept.

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Keywords:: CA balance; IMF staff; CA deficit; staff CA; fiscal policy; External balance assessment (EBA); COVID-19; Global; Africa; CA norm

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Abstract

Global current account balances—the overall size of current account deficits and surpluses—continued to widen in 2021 to 3.5 percent of world GDP, and are expected to widen again this year. The IMF’s multilateral approach suggests that global excess balances narrowed to 0.9 percent of world GDP in 2021 compared with 1.2 percent of world GDP in 2020. The pandemic has continued to affect economies’ current account balances unevenly through the travel and transportation sectors as well as a shift from services to goods consumption. Commodity prices recovered from the COVID-19 shock and started rising in 2021 with opposite effects on the external position of exporters and importers, a trend that the war in Ukraine is exacerbating in 2022. The medium-term outlook for global current account balances is a gradual narrowing as the impact of the pandemic fades away, commodity prices normalize, and fiscal consolidation in current account deficit economies progresses. However, this outlook is highly uncertain and subject to several risks. Policies to promote external rebalancing differ with positions and needs of individual economies.

Methodology and Process

The individual economy assessments use a wide range of methods to form an integrated and multilaterally consistent view of economies’ external sector positions. These methods are grounded in the latest vintage of the External Balance Assessment (EBA), developed by the IMF’s Research Department to estimate desired current account balances and real exchange rates.¹ Model estimates and associated discussions on policy distortions (see Box 3.1 for an example) are accompanied by a holistic view of other external indicators, including capital and financial account flows and measures, foreign exchange intervention and reserves adequacy, and foreign asset or liability positions.² The policy discussion in the individual economy assessments highlights policies and reforms that contribute to supporting convergence toward (or maintenance of) external balance, in the context of a summary of the overall policy advice.

The EBA models provide numerical inputs for the identification of external imbalances but, in some cases, may not sufficiently capture all relevant economic characteristics and potential policy distortions. In such cases, the individual economy assessments may need to be complemented by analytically grounded judgment and economy-specific insights in the form of adjustors. IMF staff members estimate an economy’s current account gap by combining the EBA model’s current account gap estimate with adjustors. For the 2021 assessments, similar to the previous year, additional adjustors to account for the effects of the COVID-19 crisis on external positions were introduced (see Online Annex 1.2, Chapter 1). The IMF staff estimates the real effective exchange rate (REER) gap consistent with the staff current account gap by applying a country-specific elasticity, although in some cases additional information is used, such as the EBA REER regression models, unit-labor-cost-based measures, and metrics, to arrive at the staff REER gap estimate. To integrate country-specific judgment in an objective, rigorous, and evenhanded manner, a process was developed for multilaterally consistent external assessments for the 30 largest economies, representing about 90 percent of global GDP. These assessments are also discussed with the respective authorities as part of bilateral surveillance.

External assessments are presented in ranges, in recognition of inherent uncertainties, and in different categories generally reflecting deviations of the overall external position from fundamentals and desired policies. As reported in Annex Table 1.1.2 (Chapter 1), the ranges of uncertainty for IMF staff–assessed current account gaps are based on country-specific estimated measures. For the REER, the ranges of uncertainty vary by country, reflecting country-specific factors, including different exchange rate semielasticities applied to the staff-assessed current account gaps. Overall external positions are labeled as either “broadly in line,” “moderately weaker (stronger),” “weaker (stronger),” or “substantially weaker (stronger)” (See Table 3.A). The criteria for applying the labels to overall external positions are multidimensional.

^{Table 3.A.}

Description in External Sector Report Overall Assessment

^{Table 3.A.}

Description in External Sector Report Overall Assessment

CA Gap	REER Gap (Using Elasticity of –0.2)	Description in Overall Assessment
>4%	<-20%	… substantially stronger …
2%, 4%	-20%, -10%	… stronger …
1%, 2%	-10%, -5%	… moderately stronger …
-1%, 1%	-5%, 5%	The external position is broadly in line with fundamentals and desirable policies.
-2%, -1%	5%, 10%	… moderately weaker …
-4%, -2%	10%, 20%	… weaker …
<-4%	>20%	… substantially weaker …

^{Table 3.A.}

Description in External Sector Report Overall Assessment

CA Gap	REER Gap (Using Elasticity of –0.2)	Description in Overall Assessment
>4%	<-20%	… substantially stronger …
2%, 4%	-20%, -10%	… stronger …
1%, 2%	-10%, -5%	… moderately stronger …
-1%, 1%	-5%, 5%	The external position is broadly in line with fundamentals and desirable policies.
-2%, -1%	5%, 10%	… moderately weaker …
-4%, -2%	10%, 20%	… weaker …
<-4%	>20%	… substantially weaker …

Regarding the wording to describe the current account and REER gaps, (1) when comparing the cyclically adjusted current account with the current account norm, the wording “higher” or “lower” is used, corresponding to positive or negative current account gaps, respectively; (2) a quantitative estimate of the IMF staff’s view of the REER gap is generally reported as (_) percent “over” or “under” -valued. External positions that are labeled as being “broadly in line” are consistent with current account gaps in the range of ±1 percent of GDP as well as REER gaps in a range that reflects the country-specific exchange rate semielasticity (for example, ±5 percent based on an elasticity of –0.2).

Selection of Economies

The 30 systemic economies analyzed in detail in this report and included in the individual economy assessments are listed in Table 3.B. They were generally chosen on the basis of a set of criteria, including each economy’s global rank in terms of purchasing power GDP, as reported in the IMF’s World Economic Outlook, and in terms of the level of nominal gross trade and degree of financial integration.

^{Table 3.B.}

Economies Covered in the External Sector Report

^{Box 3.1.}

Assessing Imbalances: The Role of Policies—An Example

A two-country example: To clarify how to analyze policy distortions in a multilateral setting and how to distinguish between domestic policy distortions, which may require a country to take action to reduce its external imbalance, and foreign policy distortions, which require no action by the home country (but for which action by the other would help reduce the external imbalance), consider a stylized example of a two-country world.

Country A has a large current account deficit and a large fiscal deficit, as well as high public and external debt.
Country B has a current account surplus (matching the deficit in Country A) and a large creditor position but has no policy distortions.

Overall external assessment: The analysis would show that Country A has an external imbalance reflecting its large fiscal deficit. Country B would have an equal and opposite surplus imbalance. Country A’s exchange rate would look overvalued and Country B’s undervalued.

Policy gaps: The analysis of policy gaps would show that Country A has a domestic policy distortion that needs adjustment. The analysis would also show that there are no domestic policy gaps in Country B— instead, adjustment by Country A would automatically eliminate the imbalance in Country B.

Individual economy write-ups: While the estimates of the needed current account adjustment and associated real exchange rate change would be equal and opposite in both cases (given there are only two economies in the world), the individual economy assessments would identify the different issues and risks facing the two economies.

In the case of Country A, the capital flows and foreign asset and liability position sections would note the vulnerabilities arising from international liabilities, and the potential policy response section would focus on the need to rein in the fiscal deficit and limit financial excesses.
For Country B, however, as there were no domestic policy distortions, the write-up would find no fault with policies and would note that adjustment among other economies would help reduce the imbalance.

Implications: It remains critical to distinguish between domestic and foreign fiscal policy gaps. The elimination of the fiscal policy gap in a systemic deficit economy would help reduce excessive surpluses in other systemic economies. More generally, policy actions that contribute to addressing external imbalances relate to the determinants of current account balances, namely the private and public saving-investment balances. Structural or policy distortions can contribute to excessive or inadequate saving and investment, and the policy advice in the individual economy assessments highlights reforms and policy changes that can contribute to addressing these gaps. Policy advice also seeks to address vulnerabilities associated with external stock positions, including reserves, as well as foreign exchange intervention policies.

Abbreviations and Acronyms

Adj.	adjusted
ARA	assessing reserve adequacy
CA	current account
CFM	capital flow management
COVID-19	Coronavirus disease 2019
CPI	consumer price index
Cycl.	cyclically
EBA	External Balance Assessment
ECB	European Central Bank
EU	European Union
FDI	foreign direct investment
FX	foreign exchange
GDP	gross domestic product
IIP	international investment position
Liab.	liabilities
NEER	nominal effective exchange rate
NIIP	net international investment position
PIF	Public Investment Fund
QFII	Qualified Institutional Investor
REER	real effective exchange rate
Res.	residual
RQFII	Renminbi Qualified Institutional Investor
SDR	special drawing right
TARGET2	Trans-European Automated Real-Time Gross Settlement Express Transfer System
ULC	unit labor cost
VAT	value-added tax

^{Table 3.1.}

Argentina: Economy Assessment

^{Table 3.2.}

Australia: Economy Assessment

^{Table 3.3.}

Belgium: Economy Assessment

^{Table 3.4.}

Brazil: Economy Assessment

^{Table 3.5.}

Canada: Economy Assessment

^{Table 3.6.}

China: Economy Assessment

^{Table 3.7.}

Euro Area: Economy Assessment

^{Table 3.8.}

France: Economy Assessment

^{Table 3.9.}

Germany: Economy Assessment

^{Table 3.10.}

Hong Kong SAR: Economy Assessment

^{Table 3.11.}

India: Economy Assessment

^{Table 3.12.}

Indonesia: Economy Assessment

^{Table 3.13.}

Italy: Economy Assessment

^{Table 3.14.}

Japan: Economy Assessment

^{Table 3.15.}

Korea: Economy Assessment

^{Table 3.16.}

Malaysia: Economy Assessment

^{Table 3.17.}

Mexico: Economy Assessment

^{Table 3.18.}

The Netherlands: Economy Assessment

^{Table 3.19.}

Poland: Economy Assessment

^{Table 3.20.}

Russia: Economy Assessment

^{Table 3.21.}

Saudi Arabia: Economy Assessment

^{Table 3.22.}

Singapore: Economy Assessment

^{Table 3.23.}

South Africa: Economy Assessment

^{Table 3.24.}

Spain: Economy Assessment

^{Table 3.25.}

Sweden: Economy Assessment

^{Table 3.26.}

Switzerland: Economy Assessment

^{Table 3.27.}

Thailand: Economy Assessment

^{Table 3.28.}

Türkiye: Economy Assessment

^{Table 3.29.}

United Kingdom: Economy Assessment

^{Table 3.30.}

United States: Economy Assessment

Technical Endnotes by Economy

Argentina

¹ A band of ±1 percent of GDP (two standard errors of the CA norm) is applied to account for the elevated country-specific uncertainty in the context of external vulnerabilities.

² This includes the effect of the SDR allocation of US$4.3 billion in 2021.

³ Based on the program definition of net international reserves. See https://www.imf.org/en/Publications/CR/Issues/2022/03/25/Argentina-Staf-Report-for-2022-Article-IV-Consultation-and-request-for-an-Extended-515742.

⁴ To smooth the temporary effect of the sharp reductions in short-term debt and of a collapse in the valuation of debt portfolio investments in the wake of the sovereign debt restructuring, the adjusted measure uses a four-year average.

Belgium

¹ Methodological and source data changes led to major revisions of the 2015–20 CA, distorting comparison with previous assessments.

Brazil

¹ Under operation since the first decade of the 2000s, Repetro was a Brazilian special tax regime that generated exports of oil-related products, mainly oil platforms, in accounting terms only without equipment crossing borders. Since 2018, when the tax benefits were delinked from exports, the oil enterprises reimported platforms and other equipment, again in accounting terms only. The term of Repetro ended on December 31, 2020, as established by Normative Instruction RFB 176, generating a lagged temporary increase in imports in 2021.

Canada

¹ The estimates of the temporary impact of the COVID-19 crisis on travel, transport, household consumption composition, and trade in medical products are –0.4, 0.1, 0.2, and 0.2 percent of GDP, respectively, with a net impact of 0.1 percent of GDP.

² The statistical treatment of retained earnings on portfolio equity and inflation is estimated to generate a downward bias in the income balance of the current account of the order of 0.7 and 0.8 percent of GDP, respectively, totaling 1.5 percent of GDP.

³ The semielasticity of the CA with respect to the REER is set to 0.25.

China

¹ See “IMF 2021 Taxonomy of Capital Flow Management Measures” for a list of China’s existing CFMs and related policy advice.

Euro Area

¹ The export and import elasticities are taken as the average of estimates of export and import equations inspired by the Consultative Group on Exchange Rate Issues (CGER) using various types of REERs relevant for the euro area (with an autoregressive distributed lag (2,2,2) model on quarterly data 2000–19). The trade balance elasticity is calculated using the share of exports and imports for extra-euro-area trade in GDP.

France

¹ The adjustor is derived by estimating the loss for aeronautics net exports in value-added terms during 2021 (that is, the difference between domestic value added of exports and non-reexported imports using data on global value chains). The final adjustor reflects only the temporary component of the total loss and deducts the extent of loss that is expected to persist through the medium term.

Hong Kong SAR

¹ Hong Kong SAR is not in the EBA sample as it is an outlier along many dimensions of EBA analysis. Thus, one possibility— though with obvious drawbacks—is to use EBA-estimated coefficients and apply them to Hong Kong SAR. Following this approach, the CA norm in 2021 is estimated to be 20.6 percent of GDP, implying a CA gap of –9.4 percent of GDP, which is almost entirely explained by the model residuals. The EBA CA gap is overstated, as it does not properly reflect the measurement issues that are relevant for Hong Kong SAR, for which three adjustments are made. First, an adjustment of 4.7 to 6.7 percentage points, with a midpoint of 5.7 percentage points, is made to the EBA’s implied contribution of the NIIP position. This is because the positive NIIP contribution in the EBA captures average income effects that are less relevant for Hong Kong SAR, since the income balance relative to its NIIP is systematically lower than that of other peer economies due to a persistently higher share of debt instruments on the asset side than on the liability side. Second, the opening of the Precious Metals Depository has resulted in a decline of 4 to 4½ percentage points, with a midpoint of 4¼ percentage points, in the gold trade balance that does not reflect changes in wealth, but rather the increased physical settlement of gold futures contracts. Third, mainland China’s increased onshoring has led to a decline in logistics and trading activities in Hong Kong SAR (1 to 1½ percentage points, with a midpoint of 1¼ percentage points), which did not result in lower consumption because it is viewed as temporary and to be replaced with increased provision of high-value-added services as Hong Kong SAR’s own economy rebalances in response to mainland China’s demand. See “People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues” (IMF Country Report 17/12) for more details.

² The range is calculated by applying the average semielasticities of Hong Kong SAR and similar economies.

³ The financial linkages with mainland China have deepened in recent years with the increase in cross-border bank lending, capital market financing, and the internationalization of the renminbi. As of the end of 2021, banking system claims on mainland China nonbank entities amounted to HK$6.7 trillion, or about 234 percent of GDP, down by about 4 percentage points from the end of 2020.

Indonesia

¹ The 2021 assessment includes an adjustment for travel services (including tourism), transport, the global shift in the composition of household consumption from services toward consumer goods, and medical equipment. As Indonesia is among the few outlier countries regarding adult mortality rates, the demographic indicators are adjusted to account for the younger average prime age and workforce exit age (this results in an adjustor of –0.4 percentage point to the CA norm).

² A range of ±0.5 percent is added to reflect the fact that the EBA regression estimates are subject to uncertainty (the standard error of the EBA norm for Indonesia is 0.5 percent).

³ The semielasticity of the CA-to-GDP ratio with respect to the REER is estimated to be 0.14 for Indonesia.

Japan

¹ In line with IMF staff policy advice, Japan would require continued accommodative monetary and financial policies in order to achieve the 2 percent inflation target and facilitate productive investment. Consistent with this advice, the IMF staff recommends allowing the estimated credit-to-GDP gap to decline gradually over the medium term from its currently estimated level of 18.9 percent of GDP with a corresponding policy setting (P*) for the credit-to-GDP gap in five years of 9 percent of GDP. This decline in the credit gap over five years is similar to the reduction envisaged in the 2021 External Sector Report.

Malaysia

¹ On December 2, 2016, the Financial Markets Committee announced a package of measures aimed at facilitating onshore FX risk management and enhancing the depth and liquidity of onshore financial markets. Two of these measures were classified as CFM measures under the IMF’s institutional view on capital flows. In addition, the authorities’ strengthened enforcement of regulations on resident banks’ noninvolvement in offshore ringgit transactions was considered enhanced enforcement of an existing CFM measure. Over the course of 2017–19, additional measures were announced to help deepen the onshore financial market and facilitate currency risk management.

Saudi Arabia

¹ EBA models do not include Saudi Arabia. Staff considered three approaches in the EBA-Lite methodology, including two that incorporate the special intertemporal considerations that are dominant in economies in which exports of nonrenewable resources are a very high share of output and exports. Using the CA regression approach, the cyclically adjusted CA norm is estimated at 7.5 percent of GDP (slightly higher than the CA norm of 6.5 percent of GDP in 2020). The Consumption Allocation Rules assume that the sustainability of the CA trajectory requires that the net present value (NPV) of all future oil and financial/ investment income (wealth) be equal to the NPV of imports of goods and services net of non-oil exports. Estimated CA norms from the Consumption Allocation Rules were 1.0 percent of GDP and 5.3 percent of GDP for the constant real annuity and constant real per capita annuity allocation rules, respectively. The Investment Needs Model takes account of the possibility that it might be desirable to allocate part of the resource wealth to finance investment, which was not explicitly considered by the consumption-based model and produced a CA gap of 5.2 percent over the medium term. The reliance of the consumption and investment models on projected oil prices beyond the medium-term macro framework subjects the results to a high degree of uncertainty. The CA gap in 2021 of –1.0 percent of GDP represents the staff’s overall assessment which is anchored on the CA-regression based approach. The range for the gap is calculated using the estimates from Norway, a comparable oil-rich economy in the EBA sample.

² Total reserves include gold at national valuation.

Singapore

¹ Singapore has a negative income balance despite its large positive NIIP position, reflecting lower rates of return on its foreign assets relative to returns on its foreign liabilities, possibly due to the fact that the composition of Singapore’s assets is tilted toward safer assets with lower returns.

² Nonstandard factors make a quantitative assessment of Singapore’s external position difficult and subject to significant uncertainty. Singapore is not included in the EBA sample because it is an outlier along several dimensions. One possibility, though with drawbacks, is to use EBA estimated coefficients and apply them to Singapore. Following that approach, the CA norm is estimated to be about 14.8 percent of GDP in 2021 (including the multilateral consistency adjustor). However, using this approach understates the CA gap. In order to account for Singapore’s specificities, several adjustments are needed. First, a downward adjustment of 1.2 percentage points is made to the EBA’s implied contribution of public health expenditures to the norm to account for the fact that Singapore’s health expenditure is appropriate given its high efficiency, even though its desirable and current public health expenditure is significantly lower than in other EBA countries. Second, the EBA model does not include the impact of the COVID-19 shock on the CA, so a total –1.4 percent of GDP adjustment is applied to account for this transitory impact, including (1) a travel adjustor of –1.3 percent of GDP, (2) a transport adjustor of 0.7 percent of GDP, (3) a household consumption shift adjustor of –0.8 percent of GDP, and (4) a medical goods adjustor of 0 percent of GDP. Third, a downward adjustment of 3.7 percentage points to the norm is made to better account for the effect of net foreign assets (NFA) composition and component-specific return differentials on the CA. Fourth, notwithstanding possible partial double counting with the NFA components adjustor, a downward adjustment of –2.4 percentage points of GDP is applied to the underlying CA to account for measurement biases due to inflation and portfolio equity retained earnings (–4.9 and +2.5 percent of GDP, respectively). Adjusting for these factors, the CA gap estimated by the IMF staff is about 5.2 percent of GDP, to which the fiscal gap contributes about 0.6 percent of GDP, the credit gap about –0.5 percent of GDP, public health spending about –0.1 percent of GDP, and reserves about 0.0 percent of GDP.

³ We apply the maximum range of ±1.8 percent in the EBA sample for the CA gap, reflecting the uncertainty around Singapore’s assessment.

⁴ The reserves-to-GDP ratio is also larger than in most other financial centers, but this may reflect in part that most other financial centers are in reserve-currency countries or currency unions. External assets managed by the government’s investment corporation and wealth fund (Government of Singapore Investment Corporation and Temasek) amount to at least 100 percent of GDP.

South Africa

¹ The South Africa–specific COVID-19 adjustors for 2021 of –2.7 percent of GDP are composed of adjustments for travel services (including tourism exports) (0.9 percent of GDP), medical spending imports (–0.3 percent of GDP), transportation (0.2 percent of GDP), consumption shift to tradable goods (–0.2 percent of GDP), gold and other mineral exports (–2.8 percent of GDP), and an improved income balance (–0.5 percent of GDP). The gold and other mineral exports adjustor reflects the temporary surge in mineral export prices and volumes and the importance for South Africa of some mineral exports (for instance, rhodium and palladium), which are not included in the IMF EBA model (terms-of-trade adjustment).

² Net current transfers related to the Southern African Customs Union (SACU) in 2021 are assessed to have a net negative impact on the CA, are not accounted for in the regression model, and warrant an adjustment to the cyclically adjusted CA by 0.7 percent of GDP. In addition, measurement issues pertaining to the income balance are likely to contribute to an underestimation of the CA by 0.9 percent of GDP in 2021 overall.

³ Because South Africa is among the few countries with relatively high adult mortality rates, the demographic indicators are adjusted to account for the younger average prime age and exit age from the workforce. This results in an adjustor of –0.6 percent of GDP to the model-based CA norm for 2021.

Spain

¹ The EBA model suggests a cyclically adjusted CA norm of 0 percent of GDP, with a standard error of 0.7 percent of GDP. However, given external risks from a large and negative NIIP, the IMF staff’s assessment puts more weight on external sustain-ability and is guided by the objective of raising the NIIP to at least –50 percent over the medium term. Under current policies, the NIIP is projected to reach this target, though with high uncertainty as zero valuation effects are assumed. Allowing for a safety margin, the IMF staff therefore considers a CA norm of 1.7 percent of GDP, with a range of 1 to 2.4 percent of GDP.

¹ The REER gap midpoint is obtained from the IMF staff– assessed CA gap and an estimated semielasticity of the CA to the REER of 0.26. The range of the REER gap is ±2.7 percent, which is obtained from Spain’s estimated standard error of the EBA CA norm (0.7 percent of GDP) and the aforementioned CA-to-REER semielasticity.

Sweden

¹ The upper and lower range is derived by subtracting the standard deviation of the ULC-based REER index (which is 5 percent) from the average outcome, which is the midpoint.

Switzerland

¹ Due to large revisions to historical balance of payments (BOP) and international investment position (IIP) data, particular caution is needed when comparing external sector assessments for different periods. For example, in the December 2021 BOP release (after the publication of the 2021 External Sector Report), net incurrence of direct investment liabilities in 2020 was revised from CHF 129 billion in the March 2021 BOP release (prior to the publication of the 2021 External Sector Report) to CHF 245 billion, contributing to a large downward adjustment to the end-of-2020 direct investment foreign liabilities in the IIP. See also the 2021 External Sector Report for details on major BOP and IIP revisions in 2020.

² Other stock-fow adjustments include changes in statistical sources, such as changes in the number of entities surveyed and items covered, although their quantitative importance is not known.

³ As a result, an appreciation (depreciation) of the Swiss franc has a negative (positive) effect on the NIIP, whereas a symmetric percentage increase in share prices in Switzerland and abroad would reduce the NIIP.

⁴ At the time of the previous assessment, this average was 8.2 percent of GDP. The change was due to revisions to historical balance of payments data.

⁵ Part of the positive EBA CA gap may reflect institutional pension features in Switzerland, such as replacement and coverage rates, rather than other economic policy gaps.

⁶ The underlying CA is adjusted for Switzerland-specific factors in the income account: (1) retained earnings on portfolio equity investment that are not recorded in the income balance of the CA (or the portfolio equity retained earnings bias) under the sixth edition of the IMF Balance of Payments and International Investment Position Manual (BPM6) and (2) recording of nominal interest on fixed-income securities under the Balance of Payments Manual framework, which compensates for expected valuation losses (due to inflation and/or nominal exchange rate movements), even though this stream compensates for the (anticipated) erosion in the real value of debt assets and liabilities. The portfolio equity retained earnings bias was estimated using the “stock method” and “fow method,” as explained in “Te Measurement of External Accounts” (IMF Working Paper 19/132), and it is similar in size to estimates based on the Swiss National Bank’s pilot BPM7 data. In addition, the CA balance is adjusted for transitory impacts of the COVID-19 pandemic on trade in goods and services, including adjustors for (1) travel services (0 percentage point); (2) transport (–0.1 percentage point); (3) household consumption composition shift (–0.5 percentage point); and (4) medical products (0 percentage point). Adjusting for these COVID-19–related effects, the underlying CA would need to be reduced by about 0.6 percent of GDP.

⁷ Prices of energy products, especially gas prices, were a main driver underlying the producer price index (PPI) inflation differentials between Switzerland and other advanced economies, such as the euro area and the United States. If core PPIs excluding energy products were used, the depreciation of the PPI-based franc REER in 2021 and early 2022 would be smaller.

Thailand

¹ For Thailand, the change in the transport services balance between 2020 and 2021 was –2.8 percent of GDP. In the staff’s view, this change is too large relative to Thailand’s net imports of global transportation services. Using an average of percentage change in transport balances of comparable countries, the staff estimates the impact of high freight costs on Thailand’s transport service balance and current account to be a worsening of around 65 percent (1.93 percent of GDP). Therefore, staff proposes a transportation adjustor of 1.93 percent.

Türkiye

¹ Net international reserves are defined as gross international reserves minus the central bank’s FX liabilities to banks, including the Reserve Option Mechanism.

United Kingdom

¹ The official NIIP data may understate the true position— estimates of FDI stocks at market values imply a much higher NIIP. Market value estimates of FDI assets assume their valuations move in line with those of equity market indices in the United Kingdom and abroad. These estimates are highly uncertain, as actual FDI market values could evolve differently across different equity markets.

² Estimates in Bénétrix and others (2019) suggest that, in 2017, about 90 percent of external assets were denominated in foreign currency compared with 60 percent for external liabilities.

³ The post-Brexit adjustment (–0.1 percent of GDP) represents an offset of the 0.1 percent of GDP adjustment for the stockpiling that occurred before Brexit, which generated an adjustor applied in the 2020 external sector assessment.

⁴ The total COVID-19–related adjustment includes adjustors for travel services balance, transport balance, compositional change of consumption, and medical goods imports.

References

Bénétrix, Agustín S., Deepali Gautam, Luciana Juvenal, and Martin Schmitz. 2019. “Cross-Border Currency Exposures: New Evidence Based on an Enhanced and Updated Dataset.” IMF Working Paper 19/299, International Monetary Fund, Washington, DC.
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Cubeddu, Luis, Signe Krogstrup, Gustavo Adler, Pau Rabanal, Mai Chi Dao, Swarnali Ahmed Hannan, Luciana Juvenal, Nan Li, Carolina Osorio-Buitron, Cyril Rebillard, Daniel Garcia-Macia, Callum Jones, Jair Rodriguez, Kyun Suk Chang, Deepali Gautam, and Zijiao Wang. 2019. “The External Balance Assessment Methodology: 2018 Update.” IMF Working Paper 19/65, International Monetary Fund, Washington, DC.
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See Cubeddu and others (2019) for a complete description of the EBA methodology and for a description of the most recent refinements.

The individual economy assessments for 2021 are based on data and IMF staff projections as of June 30, 2022.

Overall Assessment: The external position in 2021 was weaker than the level implied by medium-term fundamentals and desirable policies, an assessment based holistically on elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. The recent sovereign FX debt restructuring agreements with private creditors have provided important short-term cash flow relief, but it remains critical to implement policies that rebuild international reserves and address external debt service obligations over the medium term. A CA surplus near 1 percent of GDP is projected over the medium to long term, supported by sustained fiscal consolidation. Potential Policy Responses: Policies should carefully balance the need to support the recovery and strengthen domestic and external stability. Growth-friendly fiscal consolidation, combined with prudent monetary policies, is essential to contain excessive domestic demand growth, maintain a strong trade surplus, rebuild international reserves, regain market access, and ensure debt sustainability, although this path will depend on the evolution of global conditions. In addition, structural reforms to boost Argentina’s export capacity and encourage FDI are required. As stability and confidence are reestablished, a gradual conditions-based easing of CFM measures will need to be considered.
Foreign Asset and Liability Position and Trajectory	Background. Argentina’s external gross liabilities stood at 60.9 percent of GDP at the end of 2021, well above the level of 34 percent of GDP at the end of 2015. That said, the NIIP remained positive, reaching 25 percent of GDP in the fourth quarter of 2021 (up 16 percentage points since the end of 2015), driven by continued private capital outflows and deleveraging by firms, despite tight CFM measures. Assessment. In 2020, Argentina restructured US$82 billion (21.4 percent of GDP) in domestic and foreign law sovereign FX debt held by the private sector, with cash flow relief of US$34 billion during 2020–30. Additional relief was achieved during 2021, as provincial governments restructured US$13 billion in foreign law FX debt obligations, with total cash flow savings estimated at about US$6.5 billion for 2021–27. Gross debt and debt service obligations remain substantial and meeting these obligations over the medium term will depend on implementation of a strong economic reform plan that restores market access.
2021:Q4 (% GDP)	NIIP: 25.2	Gross Assets: 86.0			Res. Assets: 8.2	Gross Liab.: 60.9	Debt Liab.: 45.8
Current Account	Background. The CA surplus rose to 1.4 percent of GDP in 2021, reflecting an improvement in the income balance (largely due to lower interest payments related to the debt restructuring operations), while the sharp rebound in imports broadly offset stronger exports, including from improved terms of trade. The CA balance is projected to narrow slightly in 2022, mainly on account of rising domestic demand, as spillovers from the war in Ukraine are expected to have limited net effects—with higher energy and fertilizer imports being broadly offset by higher grain exports. Assessment. The EBA CA cyclically adjusted balance reached a surplus of 0.5 percent of GDP in 2021, compared with an EBA CA norm equivalent to a surplus of 0.2 percent of GDP. The transitory impacts of the COVID-19 crisis in relation to the travel services (including tourism) and transport sectors cancel each other out. Furthermore, consistent with the need to bring down external debt service to more manageable levels and pave the way for market access, the IMF staff judges the near- to medium-term CA norm to be closer to 1 percent of GDP, implying an adjustment of 0.8 percent of GDP. As such, the IMF staff assesses the CA gap to be –0.5 ±1 percent of GDP.¹
2021 (% GDP)	CA: 1.4	Cycl. Adj. CA: 0.5	EBA Norm: 0.2	EBA Gap: 0.3	COVID-19 Adj.: 0	Other Adj.: 0.8	Staff Gap: –0.5
Real Exchange Rate	Background. After depreciating by nearly 30 percent between the end of 2017 and the end of 2019, the REER has been relatively stable, with some appreciation during the course of 2021 as the rate crawl lagged headline inflation. The average 2021 REER appreciated by 4.3 percent compared with the 2020 average, yet it is up over 20 percent when comparing end-of-period levels. The REER through May 2022 was up 18.3 percent relative to the 2021 average. Assessment. The IMF staff CA gap implies a REER gap of about 4 percent in 2021 (applying an estimated elasticity of 0.13). The EBA REER index model suggests a REER gap of 7.6 percent, while the EBA REER level model estimates a gap of –8.7 percent, albeit surrounded by significant uncertainty. Overall, the IMF staff assesses the 2021 REER gap to be in the range of –5 to 5 percent.
Capital and Financial Accounts: Flows and Policy Measures	Background. Various CFM measures were introduced in 2019, with subsequent adjustments. The country’s central bank (BCRA) and securities authority (CNV) introduced regulations to (1) restrict official FX market (MULC) access for financial account transactions; (2) restrict participation in securities markets (MEP/CCL); (3) subject FX purchases to two separate taxes of 30 and 35 percent; (4) apply tight repatriation and surrender requirements on export proceeds; (5) limit cash withdrawals and restrict selected capital-flow-related credit card transactions abroad; and (6) limit FX holdings of banks, mutual funds, and exchange bureaus. These are all considered to be CFM measures under the IMF’s institutional view on capital flows. The BCRA has stopped intervening in the FX securities market, and regulations issued to limit trading in this market have been eased. Assessment. The CFM measures have generally slowed capital outflows but have introduced distortions that tend to discourage trade and foreign investment. Importantly, the measures are not a substitute for macroeconomic policies to address underlying imbalances, and while they are needed in the near term, controls on trade flows should be avoided and a conditions-based easing will be necessary, especially to encourage FDI.
FX Intervention and Reserves Level	Background. Gross international reserves stood at US$39.7 billion at the end of 2021,² generally unchanged relative to 2020, yet US$5 billion below levels at the end of 2019. Meanwhile, net international reserves (NIR), after excluding swap lines with other central banks, reserve requirements on domestic US dollar deposits, and deposit insurance, fell to US$2.3 billion at the end of 2021. Despite current account surpluses, debt restructuring efforts and capital controls, reserve accumulation has been challenged by continued outflows, including from net private debt amortization payments. NIR had reached US$3.8 billion by the end of March 2022,³ reflecting in part net IMF program disbursements. Assessment. Gross international reserves are estimated at about 63 percent of the IMF’s composite metric as of the end of 2021 after smoothing of temporary effects, and about 68 percent without the adjustment.⁴ Tighter fiscal and monetary policies are necessary to secure the projected trade surpluses and improve reserve coverage, which in turn is essential to pave the way for market access and the easing of CFM measures over the medium term. Given reserve scarcity, FX sales (in the official or parallel market) should be consistent with reserve accumulation goals, while taking into account variability coming from seasonal factors and temporary bouts of excessive volatility.

Overall Assessment: The external position in 2021 was weaker than the level implied by medium-term fundamentals and desirable policies, an assessment based holistically on elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. The recent sovereign FX debt restructuring agreements with private creditors have provided important short-term cash flow relief, but it remains critical to implement policies that rebuild international reserves and address external debt service obligations over the medium term. A CA surplus near 1 percent of GDP is projected over the medium to long term, supported by sustained fiscal consolidation. Potential Policy Responses: Policies should carefully balance the need to support the recovery and strengthen domestic and external stability. Growth-friendly fiscal consolidation, combined with prudent monetary policies, is essential to contain excessive domestic demand growth, maintain a strong trade surplus, rebuild international reserves, regain market access, and ensure debt sustainability, although this path will depend on the evolution of global conditions. In addition, structural reforms to boost Argentina’s export capacity and encourage FDI are required. As stability and confidence are reestablished, a gradual conditions-based easing of CFM measures will need to be considered.
Foreign Asset and Liability Position and Trajectory	Background. Argentina’s external gross liabilities stood at 60.9 percent of GDP at the end of 2021, well above the level of 34 percent of GDP at the end of 2015. That said, the NIIP remained positive, reaching 25 percent of GDP in the fourth quarter of 2021 (up 16 percentage points since the end of 2015), driven by continued private capital outflows and deleveraging by firms, despite tight CFM measures. Assessment. In 2020, Argentina restructured US$82 billion (21.4 percent of GDP) in domestic and foreign law sovereign FX debt held by the private sector, with cash flow relief of US$34 billion during 2020–30. Additional relief was achieved during 2021, as provincial governments restructured US$13 billion in foreign law FX debt obligations, with total cash flow savings estimated at about US$6.5 billion for 2021–27. Gross debt and debt service obligations remain substantial and meeting these obligations over the medium term will depend on implementation of a strong economic reform plan that restores market access.
2021:Q4 (% GDP)	NIIP: 25.2	Gross Assets: 86.0			Res. Assets: 8.2	Gross Liab.: 60.9	Debt Liab.: 45.8
Current Account	Background. The CA surplus rose to 1.4 percent of GDP in 2021, reflecting an improvement in the income balance (largely due to lower interest payments related to the debt restructuring operations), while the sharp rebound in imports broadly offset stronger exports, including from improved terms of trade. The CA balance is projected to narrow slightly in 2022, mainly on account of rising domestic demand, as spillovers from the war in Ukraine are expected to have limited net effects—with higher energy and fertilizer imports being broadly offset by higher grain exports. Assessment. The EBA CA cyclically adjusted balance reached a surplus of 0.5 percent of GDP in 2021, compared with an EBA CA norm equivalent to a surplus of 0.2 percent of GDP. The transitory impacts of the COVID-19 crisis in relation to the travel services (including tourism) and transport sectors cancel each other out. Furthermore, consistent with the need to bring down external debt service to more manageable levels and pave the way for market access, the IMF staff judges the near- to medium-term CA norm to be closer to 1 percent of GDP, implying an adjustment of 0.8 percent of GDP. As such, the IMF staff assesses the CA gap to be –0.5 ±1 percent of GDP.¹
2021 (% GDP)	CA: 1.4	Cycl. Adj. CA: 0.5	EBA Norm: 0.2	EBA Gap: 0.3	COVID-19 Adj.: 0	Other Adj.: 0.8	Staff Gap: –0.5
Real Exchange Rate	Background. After depreciating by nearly 30 percent between the end of 2017 and the end of 2019, the REER has been relatively stable, with some appreciation during the course of 2021 as the rate crawl lagged headline inflation. The average 2021 REER appreciated by 4.3 percent compared with the 2020 average, yet it is up over 20 percent when comparing end-of-period levels. The REER through May 2022 was up 18.3 percent relative to the 2021 average. Assessment. The IMF staff CA gap implies a REER gap of about 4 percent in 2021 (applying an estimated elasticity of 0.13). The EBA REER index model suggests a REER gap of 7.6 percent, while the EBA REER level model estimates a gap of –8.7 percent, albeit surrounded by significant uncertainty. Overall, the IMF staff assesses the 2021 REER gap to be in the range of –5 to 5 percent.
Capital and Financial Accounts: Flows and Policy Measures	Background. Various CFM measures were introduced in 2019, with subsequent adjustments. The country’s central bank (BCRA) and securities authority (CNV) introduced regulations to (1) restrict official FX market (MULC) access for financial account transactions; (2) restrict participation in securities markets (MEP/CCL); (3) subject FX purchases to two separate taxes of 30 and 35 percent; (4) apply tight repatriation and surrender requirements on export proceeds; (5) limit cash withdrawals and restrict selected capital-flow-related credit card transactions abroad; and (6) limit FX holdings of banks, mutual funds, and exchange bureaus. These are all considered to be CFM measures under the IMF’s institutional view on capital flows. The BCRA has stopped intervening in the FX securities market, and regulations issued to limit trading in this market have been eased. Assessment. The CFM measures have generally slowed capital outflows but have introduced distortions that tend to discourage trade and foreign investment. Importantly, the measures are not a substitute for macroeconomic policies to address underlying imbalances, and while they are needed in the near term, controls on trade flows should be avoided and a conditions-based easing will be necessary, especially to encourage FDI.
FX Intervention and Reserves Level	Background. Gross international reserves stood at US$39.7 billion at the end of 2021,² generally unchanged relative to 2020, yet US$5 billion below levels at the end of 2019. Meanwhile, net international reserves (NIR), after excluding swap lines with other central banks, reserve requirements on domestic US dollar deposits, and deposit insurance, fell to US$2.3 billion at the end of 2021. Despite current account surpluses, debt restructuring efforts and capital controls, reserve accumulation has been challenged by continued outflows, including from net private debt amortization payments. NIR had reached US$3.8 billion by the end of March 2022,³ reflecting in part net IMF program disbursements. Assessment. Gross international reserves are estimated at about 63 percent of the IMF’s composite metric as of the end of 2021 after smoothing of temporary effects, and about 68 percent without the adjustment.⁴ Tighter fiscal and monetary policies are necessary to secure the projected trade surpluses and improve reserve coverage, which in turn is essential to pave the way for market access and the easing of CFM measures over the medium term. Given reserve scarcity, FX sales (in the official or parallel market) should be consistent with reserve accumulation goals, while taking into account variability coming from seasonal factors and temporary bouts of excessive volatility.

Overall Assessment: The external position in 2021 was stronger than the level implied by medium-term fundamentals and desirable policies. A significant improvement in Australia’s terms of trade and higher savings (partly due to COVID-19–related factors) contributed to the increase in the CA balance in 2021. The CA balance is expected to remain in surplus in 2022 due to elevated commodity prices in the wake of the war in Ukraine, but is projected to return to a slight deficit in the medium term as commodity prices decline, savings return to historical levels, and investment picks up. Potential Policy Responses: Withdrawing fiscal and monetary stimulus at an appropriate pace is warranted for Australia as it emerges from the pandemic. Private savings, which are at elevated levels in part due to the large pandemic-related fiscal stimulus, are expected to decline in the medium term. Furthermore, policies that boost investment can help reduce the CA gap. In particular, executing planned infrastructure investment, streamlining product market regulation, promoting R&D and innovation investment, and reducing the tax burden on companies can help boost investment. Australia’s commitment to a floating exchange rate should also help close the CA gap.
Foreign Asset and Liability Position and Trajectory	Background. Australia’s NIIP improved to –35.4 percent of GDP in 2021 from –55 percent of GDP in 2020 (and an average of –52 percent over the last five years), driven by the large CA surplus, significant valuation gains, and substantial growth of nominal GDP. Although about half of Australia’s gross liabilities are debt obligations, more than half of the debt liabilities are denominated in domestic currency, while assets are in foreign currency. Foreign liabilities are composed of about one-quarter FDI, one-half portfolio investment (principally banks’ borrowing abroad and foreign holdings of government bonds), and one-quarter other investments and derivatives. Assessment. The NIIP level and trajectory are sustainable. The structure of Australia’s external balance sheet reduces the vulnerability associated with its negative NIIP. With a positive net foreign currency asset position, a nominal depreciation tends to strengthen the external balance sheet, all else equal. The banking sector’s net foreign currency liability position is mostly hedged, and the maturity of banks’ external funding has lengthened since the global financial crisis. Despite the recent increase in debt, the government’s balance sheet remains strong and can provide credible support in a tail-risk event in which domestic banks suffer a major loss.
2021 (% GDP)	NIIP: –35.4	Gross Assets: 148.2			Debt Assets: 38.4	Gross Liab.: 183.7	Debt Liab.: 85.5
Current Account	Background. While Australia has historically run CA deficits, the CA balance switched to a surplus in 2019, and increased further from 2.6 percent of GDP in 2020 to 3.5 percent of GDP in 2021. The goods and services balance increased by 1.9 percent of GDP, driven by high prices for Australian commodity exports, most notably iron ore. The improvement in the trade balance was partly offset by a 1.2 percent of GDP deterioration in the primary income balance, as dividend payments on Australia’s equity liabilities (which had declined significantly in 2020 due to temporary pandemic-related factors) recovered. However, the income balance remained 0.8 percent of GDP stronger than pre–COVID-19 levels as the net compensation of employees (due to border closures) and net interest payments (due to low interest rates on debt liabilities) remained above historical averages. From a savings-investment perspective, the recent CA surpluses reflect a decline in investment rates, including mining investment, as well as a steep rise in private savings during the pandemic on account of pandemic-related uncertainty and generous fiscal support. While there is considerable uncertainty, the CA is expected to gradually return to a small deficit over the medium term. Assessment. The EBA model estimates a cyclically adjusted CA surplus of 1.7 percent of GDP compared with a CA norm of –0.9 percent of GDP, suggesting a model-based CA gap of 2.6 percent of GDP. However, in the IMF staff’s view, two adjustments are warranted to the cyclically adjusted CA balance: (1) a net adjustment of +0.2 percent of GDP to reflect temporary factors related to the COVID-19 shock, including changes in the travel services (–0.1) and transport services balances (+0.3) and higher imports of medical goods (+0.2); and (2) an adjustment of –0.2 percent of GDP to reflect a temporarily higher net compensation of employees. Taking these adjustments into consideration, the IMF staff–adjusted CA gap is in the range of 2.1 to 3.3 percent of GDP, with a midpoint of 2.7 percent of GDP. Part of the CA gap may reflect the pension system (which is not captured by the EBA model), for which mandated individual contributions to superannuation have increased in recent years, potentially contributing to higher savings.
2021 (% GDP)	CA: 3.5	Cycl. Adj. CA: 1.7	EBA Norm: –0.9	EBA Gap: 2.6	COVID-19 Adj.: 0.2	Other Adj.: 0	Staff Gap: 2.7
Real Exchange Rate	Background. Australia’s REER appreciated by 6 percent in 2021 compared with the 2020 average and was about 1.5 percent higher than its five-year average. After appreciating in the first half of 2021, the REER depreciated in the latter half of the year amid renewed lockdowns, a decline in Australian yields relative to other advanced economies, and lower iron ore prices. As of May 2022, the REER was 0.6 percent above the 2021 average. Assessment. The IMF staff CA gap implies a REER gap of –13.7 percent (applying an estimated elasticity of 0.2). The EBA REER level model points to an overvaluation of 24.6 percent, while the index model points to an undervaluation of 2.3 percent. Consistent with the CA gap, the IMF staff assesses the REER gap to be in the range of –16.7 to –10.7 percent, with a midpoint of –13.7 percent.
Capital and Financial Accounts: Flows and Policy Measures	Background. The financial account recorded net outflows in 2021, reflecting the sizable CA surplus. Net FDI inflows (1 percent of GDP in 2021) recovered from the COVID-19–induced low in 2020 (0.5 percent of GDP), though they remained lower than the pre-pandemic average (3.2 percent of percent of GDP over 2015–19). FDI inflows were offset by large net portfolio outflows (3.9 percent of GDP), mainly reflecting equity investments abroad by Australian residents, including by pension funds (superannuation). Net derivative outflows were small, with inflows and outflows of about 1.2 percent of GDP. Assessment. Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate.
FX Intervention and Reserves Level	Background. The currency has been free floating since 1983. The central bank has not intervened in the FX market since the global financial crisis. Reserve assets increased, mainly reflecting the IMF’s SDR allocation. Assessment. The authorities are strongly committed to a floating regime, which reduces the need for reserve holdings. Although domestic banks’ external liabilities remain sizable, they are either in local currency or hedged, so reserve needs for prudential reasons are also limited.

Overall Assessment: The external position in 2021 was stronger than the level implied by medium-term fundamentals and desirable policies. A significant improvement in Australia’s terms of trade and higher savings (partly due to COVID-19–related factors) contributed to the increase in the CA balance in 2021. The CA balance is expected to remain in surplus in 2022 due to elevated commodity prices in the wake of the war in Ukraine, but is projected to return to a slight deficit in the medium term as commodity prices decline, savings return to historical levels, and investment picks up. Potential Policy Responses: Withdrawing fiscal and monetary stimulus at an appropriate pace is warranted for Australia as it emerges from the pandemic. Private savings, which are at elevated levels in part due to the large pandemic-related fiscal stimulus, are expected to decline in the medium term. Furthermore, policies that boost investment can help reduce the CA gap. In particular, executing planned infrastructure investment, streamlining product market regulation, promoting R&D and innovation investment, and reducing the tax burden on companies can help boost investment. Australia’s commitment to a floating exchange rate should also help close the CA gap.
Foreign Asset and Liability Position and Trajectory	Background. Australia’s NIIP improved to –35.4 percent of GDP in 2021 from –55 percent of GDP in 2020 (and an average of –52 percent over the last five years), driven by the large CA surplus, significant valuation gains, and substantial growth of nominal GDP. Although about half of Australia’s gross liabilities are debt obligations, more than half of the debt liabilities are denominated in domestic currency, while assets are in foreign currency. Foreign liabilities are composed of about one-quarter FDI, one-half portfolio investment (principally banks’ borrowing abroad and foreign holdings of government bonds), and one-quarter other investments and derivatives. Assessment. The NIIP level and trajectory are sustainable. The structure of Australia’s external balance sheet reduces the vulnerability associated with its negative NIIP. With a positive net foreign currency asset position, a nominal depreciation tends to strengthen the external balance sheet, all else equal. The banking sector’s net foreign currency liability position is mostly hedged, and the maturity of banks’ external funding has lengthened since the global financial crisis. Despite the recent increase in debt, the government’s balance sheet remains strong and can provide credible support in a tail-risk event in which domestic banks suffer a major loss.
2021 (% GDP)	NIIP: –35.4	Gross Assets: 148.2			Debt Assets: 38.4	Gross Liab.: 183.7	Debt Liab.: 85.5
Current Account	Background. While Australia has historically run CA deficits, the CA balance switched to a surplus in 2019, and increased further from 2.6 percent of GDP in 2020 to 3.5 percent of GDP in 2021. The goods and services balance increased by 1.9 percent of GDP, driven by high prices for Australian commodity exports, most notably iron ore. The improvement in the trade balance was partly offset by a 1.2 percent of GDP deterioration in the primary income balance, as dividend payments on Australia’s equity liabilities (which had declined significantly in 2020 due to temporary pandemic-related factors) recovered. However, the income balance remained 0.8 percent of GDP stronger than pre–COVID-19 levels as the net compensation of employees (due to border closures) and net interest payments (due to low interest rates on debt liabilities) remained above historical averages. From a savings-investment perspective, the recent CA surpluses reflect a decline in investment rates, including mining investment, as well as a steep rise in private savings during the pandemic on account of pandemic-related uncertainty and generous fiscal support. While there is considerable uncertainty, the CA is expected to gradually return to a small deficit over the medium term. Assessment. The EBA model estimates a cyclically adjusted CA surplus of 1.7 percent of GDP compared with a CA norm of –0.9 percent of GDP, suggesting a model-based CA gap of 2.6 percent of GDP. However, in the IMF staff’s view, two adjustments are warranted to the cyclically adjusted CA balance: (1) a net adjustment of +0.2 percent of GDP to reflect temporary factors related to the COVID-19 shock, including changes in the travel services (–0.1) and transport services balances (+0.3) and higher imports of medical goods (+0.2); and (2) an adjustment of –0.2 percent of GDP to reflect a temporarily higher net compensation of employees. Taking these adjustments into consideration, the IMF staff–adjusted CA gap is in the range of 2.1 to 3.3 percent of GDP, with a midpoint of 2.7 percent of GDP. Part of the CA gap may reflect the pension system (which is not captured by the EBA model), for which mandated individual contributions to superannuation have increased in recent years, potentially contributing to higher savings.
2021 (% GDP)	CA: 3.5	Cycl. Adj. CA: 1.7	EBA Norm: –0.9	EBA Gap: 2.6	COVID-19 Adj.: 0.2	Other Adj.: 0	Staff Gap: 2.7
Real Exchange Rate	Background. Australia’s REER appreciated by 6 percent in 2021 compared with the 2020 average and was about 1.5 percent higher than its five-year average. After appreciating in the first half of 2021, the REER depreciated in the latter half of the year amid renewed lockdowns, a decline in Australian yields relative to other advanced economies, and lower iron ore prices. As of May 2022, the REER was 0.6 percent above the 2021 average. Assessment. The IMF staff CA gap implies a REER gap of –13.7 percent (applying an estimated elasticity of 0.2). The EBA REER level model points to an overvaluation of 24.6 percent, while the index model points to an undervaluation of 2.3 percent. Consistent with the CA gap, the IMF staff assesses the REER gap to be in the range of –16.7 to –10.7 percent, with a midpoint of –13.7 percent.
Capital and Financial Accounts: Flows and Policy Measures	Background. The financial account recorded net outflows in 2021, reflecting the sizable CA surplus. Net FDI inflows (1 percent of GDP in 2021) recovered from the COVID-19–induced low in 2020 (0.5 percent of GDP), though they remained lower than the pre-pandemic average (3.2 percent of percent of GDP over 2015–19). FDI inflows were offset by large net portfolio outflows (3.9 percent of GDP), mainly reflecting equity investments abroad by Australian residents, including by pension funds (superannuation). Net derivative outflows were small, with inflows and outflows of about 1.2 percent of GDP. Assessment. Vulnerabilities related to the financial account remain contained, supported by a credible commitment to a floating exchange rate.
FX Intervention and Reserves Level	Background. The currency has been free floating since 1983. The central bank has not intervened in the FX market since the global financial crisis. Reserve assets increased, mainly reflecting the IMF’s SDR allocation. Assessment. The authorities are strongly committed to a floating regime, which reduces the need for reserve holdings. Although domestic banks’ external liabilities remain sizable, they are either in local currency or hedged, so reserve needs for prudential reasons are also limited.

Overall Assessment: The external position in 2021 was weaker than the level implied by medium-term fundamentals and desirable policies. The CA balance turned into a deficit of 0.4 percent of GDP, largely due to a narrowing of the trade surplus, reflecting a swing to deficit in the goods balance. While the economy had been recovering well in 2021, and COVID-19 relief measures were unwound, the war in Ukraine has clouded the economic outlook. The CA balance is projected to deteriorate in the near term, mainly due to the effects of higher energy prices, before returning to a surplus in the medium term with the narrowing of fiscal imbalances. Potential Policy Responses: In the near term, outlays on energy bill support and expenses related to spillovers from the war in Ukraine (for example, refugee support) will delay much-needed fiscal adjustment, given elevated deficit/debt levels and aging-related spending pressures. Narrowing policy space requires fiscal support measures to be targeted and time-bound, balancing the protection of vulnerable households and viable firms with facilitating resource reallocation to mitigate scarring and with increasing energy efficiency. In light of imbalances that existed before the COVID-19 outbreak, policies in the medium term should focus on rebuilding fiscal buffers through a credible, expenditure-led consolidation that also creates space to support green and digital transformation through planned increases in investment. Policies should also focus on strengthening competitiveness by addressing structural challenges, including social benefit and labor and product market reforms and other actions to foster green, digital, and inclusive growth. These steps are expected to bring the external position closer in line with medium-term fundamentals and desirable policy settings.
Foreign Asset and Liability Position and Trajectory	Background. The NIIP increased to 57 percent of GDP at the end of 2021 from 44 percent at the end of 2020. This was mainly due to a decrease in gross liabilities by 9 percentage points of GDP, reflecting largely valuation changes. Gross foreign assets reached 460 percent of GDP in 2021 (up 11 percentage points of GDP from the pre–COVID-19 level in 2019), inflated by intragroup corporate treasury activities. Belgium’s large creditor position is also underpinned by sizable net household financial wealth. Following a decade of consolidation and deleveraging, gross foreign assets of the banking sector declined to 74 percent of GDP at the end of 2021, well below the pre-global-financial-crisis peak of more than 200 percent. External public debt—predominantly denominated in euros—decreased to 67 percent of GDP in 2021 from 74 percent of GDP in 2020. This represented a reversal, following a sharp increase in financing needs in 2020 due to fiscal response measures to address the pandemic (and a decline in nominal GDP). Assessment. Belgium’s large gross international asset and liability positions are elevated by the presence of corporate treasury units, which do not appear to create macro-relevant mismatches. Looking ahead, based on the projected CA and growth paths, the NIIP-to-GDP ratio is expected to decline. The large and positive NIIP and its trajectory do not raise sustainability concerns.
2021 (% GDP)	NIIP: 57	Gross Assets: 460			Debt Assets: 161	Gross Liab.: 403	Debt Liab.: 178
Current Account	Background. The CA averaged 0.5 percent of GDP over 2015–20 and has been on a downward but volatile path since its post-global-financial-crisis peak of 1.4 percent of GDP in 2015. Volatility in the trade and primary income balances is driven in part by sizable operations of multinationals and large revisions.¹ Preliminary data suggest that in 2021 the CA turned into a deficit of 0.4 percent of GDP from a surplus of 0.8 percent of GDP in 2020, driven by a deterioration of the trade balance (1.4 percent of GDP) and a modest decline in net income inflows (0.2 percent of GDP). Net current transfer outflows declined slightly (0.3 percent of GDP). The narrowing of the trade surplus reflected a swing to deficit in the goods balance (by 1.3 percent of GDP), as buoyant export growth (30 percent) was surpassed by an even stronger recovery of imports (34 percent). By major goods categories, there was an increase in net oil/fuel imports (1.3 percent of GDP) due to higher oil prices and net chemical imports (excluding pharmaceuticals) (2.6 percent of GDP); these offset a large increase in net exports of pharmaceutical products (1.9 percent of GDP). From a saving-investment perspective, the improvement in gross national saving that was led by a narrowing of public dissaving, was more than offset by a larger increase in gross capital formation that was largely driven by a pickup in private investment (increases in business investments in information technology and digitalization and a revival of residential property investment). Assessment. EBA model estimates yield a CA gap of –3.1 percent of GDP for 2021, based on a cyclically adjusted CA balance of 0 percent of GDP. Adjustment for transitory COVID-19 effects on the CA of –0.2 percent of GDP—driven by –0.3 percent of GDP for travel services (including tourism), 0.4 percent of GDP for transport, –0.1 percent of GDP for the shift in household consumption from services to consumer goods, and –0.2 percent of GDP for the impact on medical goods trade—brings the gap to –3.3 percent of GDP (relative to an estimated norm of 3.1 percent of GDP). This is within a range estimated by the IMF staff for the CA gap of between –3.6 and –3 percent of GDP, applying the standard error of the CA norm, estimated at ±0.3 percent of GDP.
2021 (% GDP)	CA: –0.4	Cycl. Adj. CA: 0	EBA Norm: 3.1	EBA Gap: –3.1	COVID-19 Adj.: –0.2	Other Adj.: —	Staff Gap: –3.3
Real Exchange Rate	Background. The ULC- and CPI-based REER appreciated in 2021 by 0.4 and 0.1 percent, respectively, relative to the 2020 average. This brings the cumulative appreciation of the ULC-based and CPI-based REER in recent years to 4 and 7 percent, respectively, thus broadly reversing the sharp depreciation in 2014–15 brought about by wage moderation. As of May 2022, the REER was 1.8 percent below the 2021 average. Assessment. The IMF staff assesses the REER gap, based on the staff-assessed CA gap range, to be overvalued in the range of 4.4 to 5.3 percent, with a midpoint of 4.9 percent (applying an estimated elasticity of the CA balance to the REER of 0.68). EBA model estimates point to a REER overvaluation of between 12 and 26.1 percent, based on the CPI-based REER index and level models.
Capital and Financial Accounts: Flows and Policy Measures	Background. Gross financial outflows and inflows were on an upward trend prior to the global financial crisis as banks expanded their cross-border operations. These flows have shrunk considerably and become more volatile as banks have deleveraged. Short-term external debt accounted for 27 percent of gross external debt in 2021. The capital account is open. Assessment. Belgium remains exposed to financial market risks, but the structure of financial flows does not point to specific vulnerabilities. The large and positive NIIP reduces the vulnerabilities associated with high external public debt.
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.

Abstract

Methodology and Process

Selection of Economies

Abbreviations and Acronyms

Technical Endnotes by Economy

Argentina

Belgium

Brazil

Canada

China

Euro Area

France

Hong Kong SAR

Indonesia

Japan

Malaysia

Saudi Arabia

Singapore

South Africa

Spain

Sweden

Switzerland

Thailand

Türkiye

United Kingdom

References

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Foresee

Overall Assessment: The external position in 2021 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. The decline in the trade balance, led by the increase in imports of goods, widened the CA deficit to 3.6 percent of GDP. Although uncertainty and terms-of-trade changes caused by the war in Ukraine may affect the near term, the CA deficit is projected to decline below 2 percent of GDP over the medium term based on an increase in public saving due to gradual fiscal consolidation, reflected in a lower trade deficit. Potential Policy Responses: Over the medium term, suggested fiscal consolidation aimed at a medium-term general government structural primary deficit of about 1 percent of GDP should broadly stabilize the debt-to-GDP ratio and address the CA gap. Structural policies to increase competitiveness include upgrading infrastructure; enhancing the schooling, training, and mobility of workers; supporting the working poor; and implementing policies to increase growth in the labor force (including skill-based immigration reform). Tariff barriers should be rolled back, and trade and investment disagreements with other countries should be resolved in a manner that supports an open, stable, and transparent global trading system.
Foreign Asset and Liability Position and Trajectory	Background. The NIIP, which averaged about –46 percent of GDP during 2016–19, strengthened slightly from –67.1 percent of GDP in 2020 to –79 percent of GDP in 2021. Under the IMF staff’s baseline scenario, the NIIP is projected to remain broadly unchanged through the medium term on the back of developments in portfolio assets and liabilities as the CA balance reverts to its pre–COVID-19 average. Assessment. Financial stability risks could surface in the form of an unexpected decline in foreign demand for US fixed-income securities, which is a main component of the country’s external liabilities. This risk, which could materialize, for example, as a result of a failure to reestablish fiscal sustainability, remains moderate given the dominant status of the US dollar as a reserve currency. About 60 percent of US assets are in the form of FDI and portfolio equity claims.
2021 (% GDP)	NIIP: –79	Gross Assets: 153			Debt Assets: 17.7	Gross Liab.: 232	Debt Liab.: 56.0
Current Account	Background. The US CA deficit increased from 2.9 percent of GDP in 2020 to 3.6 percent in 2021 (from 2.7 to 3.2 percent in cyclically adjusted terms), compared with a deficit of 2.1 percent of GDP in 2016. On the trade side, its evolution since 2016 is explained mostly by deterioration in the non-oil and income balances. In 2021, the trade balance declined moderately from 2020 (–3.2 versus –3.7 percent of GDP), mostly due to the changes in imports of goods, while the income account remained unchanged. Both national saving and investment increased as a percentage of GDP from 2016 to 2021 (with a massive increase in public dissaving due to the pandemic), resulting in the stated increase in the CA deficit. The CA deficit is expected to decline slightly below 2 percent of GDP over the medium term. Assessment. The EBA model estimates a cyclically adjusted CA balance of –3.2 percent of GDP and a cyclically adjusted CA norm of –1.3 percent of GDP. The EBA model CA gap is –1.9 percent of GDP for 2021, reflecting policy gaps (–1.1 percent of GDP, half of which, –0.7 percent, corresponds to fiscal policy) and an unidentified residual (about –0.8 percent of GDP) that may reflect structural factors not included in the model. On balance, the IMF staff assesses the 2021 cyclically adjusted CA to be 1.1 percent of GDP lower than the level implied by medium-term fundamentals and desirable policies, with a range between –1.7 and –0.5 percent of GDP. This assessment includes an IMF staff adjustor of 0.8 percent of GDP to account for the effects of COVID-19 on the travel (0.2 percent of GDP), transport (0.1 percent of GDP), and medical (0.1 percent of GDP) balances, as well as the shift in the composition of household consumption (0.4 percent of GDP). The estimated standard error of the CA norm is 0.6 percent of GDP.
2021 (% GDP)	CA: –3.6	Cycl. Adj. CA: –3.2	EBA Norm: –1.3	EBA Gap: –1.9	COVID-19 Adj.: 0.8	Other Adj.: 0.0	Staff Gap: –1.1
Real Exchange Rate	Background. After appreciating by 1.6 percent in 2020, the REER depreciated by 3.8 percent in 2021. The depreciation in 2021 brought the REER to the average level that prevailed in 2016. As of May 2022, the REER was 8.6 percent above the 2021 average. Assessment. Indirect estimates of the REER (based on the IMF staff’s current account assessment) imply that the exchange rate was overvalued by 8.7 percent in 2021 (applying the estimated elasticity of 0.12). The EBA REER index model suggests an overvaluation of 1.6 percent, and the EBA REER level model suggests an overvaluation of 8.9 percent. Considering all the estimates and their uncertainties, the IMF staff assesses the 2021 midpoint REER overvaluation to be 8.7 percent, with a range of 3.8 to 13.6 percent, where the range is obtained from the CA account standard error and the corresponding CA elasticity.
Capital and Financial Accounts: Flows and Policy Measures	Background. The financial account balance was about –3.1 percent of GDP in 2021, compared with –3.5 percent of GDP in 2020. This was due to a decrease in net direct investment from 0.5 to 0.2 percent GDP, with the changes in portfolio investment (–2.3 to –10 percent) and other investments (–1.3 to –2.5 percent) broadly canceling each other out. Assessment. The United States has an open capital account. Vulnerabilities are limited by the dollar’s status as a reserve currency, with foreign demand for US Treasury securities supported by the status of the dollar as a reserve currency and, possibly, by safe haven flows.
FX Intervention and Reserves Level	Assessment. The dollar has the status of a global reserve currency. Reserves held by the United States are typically low relative to standard metrics. The currency is free floating.

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