2017 External Sector Report—Individual Economy Assessments

2017 External Sector Report Individual Economy Assessments


2017 External Sector Report Individual Economy Assessments

Individual Economy Assessments

A. The External Sector Assessments

The external sector assessments use a wide range of methods, including the External Balance Assessment (EBA) developed by the IMF’s Research Department to estimate desired current account balances and real exchange rates (see IMF Working Paper WP/13/272 for a complete description of the EBA methodology and Annex I of the 2015 External Sector Report for a discussion of more recent refinements). In all cases, the overall assessment is based on the judgment of IMF staff drawing on the inputs provided by these model estimates and other analysis. Since estimates are subject to uncertainty, overall assessments are presented in ranges. The external sector assessments are based on data and IMF staff projections as of June 15th, 2017.

The external assessments discuss a broad range of external indicators: the current account, the real effective exchange rate, capital and financial accounts flows and measures, FX intervention and reserves and the foreign asset or liability position.1 The individual economy assessments are discussed with the respective authorities as a part of bilateral surveillance.

B. Selection of Economies Included in the Report

The 29 systemic economies analyzed in detail in this Report and included in the individual economy assessments are listed below. They were chosen on the basis of an equal weighting of each economy’s global ranking in terms of purchasing power GDP, as used in the Fund’s World Economic Outlook, and in terms of the level of nominal gross trade.

  • Australia

  • Belgium

  • Brazil

  • Canada

  • China

  • Euro area

  • France

  • Germany

  • Hong Kong SAR

  • India

  • Indonesia

  • Italy

  • Japan

  • Korea

  • Malaysia

  • Mexico

  • The Netherlands

  • Poland

  • Russia

  • Saudi Arabia

  • Singapore

  • South Africa

  • Spain

  • Sweden

  • Switzerland

  • Thailand

  • Turkey

  • United Kingdom

  • United States

C. Domestic and Foreign Policies and Imbalance Calculations: An Example

The thought experiment. A simplified example could help to clarify how policy distortions are analyzed in a multilateral setting and how the analysis can distinguish between domestic policy distortions where a country might need to take action to reduce its external imbalance and those that are generated abroad and where no action by the home country is needed (but where action by others would help reduce the external imbalance).

Take a stylized example of a two country world.

Country A has a large current account deficit, a large fiscal deficit and high debt.

Country B has a current account surplus (matching the deficit in Country A), but it has no policy distortions.

External imbalances. 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 there is a domestic policy distortion in Country A that needs adjustment. However, the analysis for Country B would show that there were no domestic policy gaps—instead adjustment by Country A would automatically eliminate the imbalance in Country B.

Individual economy write-ups. While the estimates of the overall external sector position, needed current account adjustment, and associated real exchange rate over/undervaluation would be equal and opposite given there are only two economies in the world, the individual economy assessments would clearly identify the quite 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 of the overall assessment would focus on the need to rein in the fiscal deficit and limit asset price excesses. For Country B, however, if 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 to reduce the imbalance.

Implications. At the current time, fiscal policy is the area where it is most important to distinguish between domestic and foreign policy gaps (as the contribution of foreign policy is most marked). As discussed later an elimination of the fiscal policy gap in deficit advanced economies could help reduce surplus imbalances in other economies by around 3/4 percent of GDP.

Table 1.

Summary of EBA and Staff-Assessed CA Gaps, 2016

(in percent of GDP)

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Source: Fund staff estimates.

Refers to the mid-point of the CA Gap.

Breakdown between norm and other factors (namely temporary or measurement errors) is approximate in some cases.

For Spain, we report the CA level required to reduce NIIP by 5 percentage points of GDP annually. The NFA stabilizing CA is -1.6 percent of GDP.

Weighted average sum of staff-assesed CA gaps.

D. Individual Economy Assessments—by Economy