CONFIDENTIALGROUP OF TWENTYGLOBAL IMBALANCES

Prepared by Staff of the
I N T E R N A T I O N A L M O N E T A R Y F U N D*
*Does not necessarily reflect the views of the IMF Executive Board.

CONTENTS
EXECUTIVE SUMMARY ______________________________________________________________________________ 3
EVOLUTION OF GLOBAL FLOW AND STOCK IMBALANCES _______________________________________ 4
DISTINGUISHING HELPFUL FROM EXCESSIVE GLOBAL IMBALANCES____________________________ 9
RISKS FROM PERSISTENT IMBALANCES _________________________________________________________ 10
POLICIES TO REDUCE EXTERNAL IMBALANCES__________________________________________________ 12

FIGURES1. Global Current Account Imbalances, 1990-2018 ___________________________________________________ 4
2. Selected Economies: Changes in Current Account Imbalances, 2005-18 ___________________________ 4
3. Selected Economies: Fiscal Balances and Private Credit, 2005-18 __________________________________ 5
4. Selected Economies: Current Account and Import Volume Growth vs. REER Changes, 2007-18 ___ 6
5. Selected Economies: Net Corporate Saving Balance vs. Current Account Balance, 1997-2016 _____ 6
6. Selected EMDEs: Net Capital Inflows, 2007-18 _____________________________________________________ 7
7. World Net International Investment Positions, 1990-2018 _________________________________________ 8
8. Selected Economies: Current Account and Valuation Changes, 2010-17 ___________________________ 8
9. World Gross External Liabilities, 1990-2017 ________________________________________________________ 8
10. Selected Economies: CA Gaps vs. Fiscal Policy Gaps, 2017 ________________________________________ 9
11. Selected Economies: 2017 Staff-Assessed CA Gap vs. Change in Actual CA 2017-18 ____________10
12. Model-Predicted Probability Margins ____________________________________________________________10
13. G20 Economies: 2018 NIIP vs. Current Account Balances, 2018-23 ______________________________11
14. Selected Creditor Economies: Net International Investment Position, 1985-2030 ________________11
15. G20 Economies: Output Gaps and Current Account Gaps, 2017-18 ______________________________12

BOXES
1. Corporate Saving in Advanced Economies ________________________________________________________15
2. Bilateral Trade Balances and the Role of Tariffs ___________________________________________________16
3. The Income Balance and the Current Account ____________________________________________________18
4. IIP Structure and External Financing Risks _________________________________________________________19

REFERENCES_________________________________________________________________________________________20

2

INTERNATIONAL MONETARY FUNDEXECUTIVE SUMMARY1
Aggregate current account surpluses and deficits narrowed in the aftermath of the global financial
crisis but have remained relatively stable in recent years. At the same time, these imbalances are
increasingly concentrated in advanced economies (AEs), as key emerging markets and developing
economies (EMDEs) have either experienced a narrowing in their surpluses or their deficits. Thesedevelopments reflected a combination of domestic policies and cyclical factors, with exchange rates
generally playing a supporting role.
Meanwhile, external creditor and debtor positions have continued to increase. At 40 percent of worldGDP, the sum of net creditor and net debtor positions is now at a historical peak and four times larger thanin the early 1990s. The continued increase of net asset and liability positions took place against the
backdrop of persistent (even if narrowing) current account imbalances, with valuation effects in the formof exchange rate and asset price movements playing a mitigating role in most cases, with the United States
being an important exception.
Risks from the current configuration of global imbalances are generally contained, but continued
vigilance and policy action are required. While the increased concentration of deficits in reserve currency
AEs lowers near-term financing risks, a re-escalation of trade tensions will negatively impact global growth
and trade, with knock-on effects on global risk aversion. This could affect the external debt service capacityof some EMDEs, especially those reliant on foreign demand and financing. Over the medium term, in theabsence of corrective actions trade tensions could persist and the resulting divergence in external stock
positions could trigger disruptive adjustments in large debtor economies that could spill over to creditor
economies.
Reducing excess external imbalances in a growth-friendly manner requires a collective effort byboth excess deficit and surplus economies. With output near potential in most systemic countries, a wellcalibrated macroeconomic policy mix is necessary to support rebalancing. Deficit countries can help byadopting growth-friendly fiscal consolidation, while surplus economies should seek to reduce imbalancesby deploying available fiscal space and avoiding overreliance on accommodative monetary policies. While,
in general, removing structural policy distortions is a desirable policy goal, careful sequencing and tailoringis needed to achieve global rebalancing. Many surplus countries have scope for reforms that encourage
investment and discourage precautionary saving, including by further liberalizing the service sector andwidening the coverage of social safety nets, where appropriate. Mitigating risks for deficit countries calls
for reforms that increase labor market flexibility and improve competitiveness, including by strengthening
the skill base of workers. Protectionists policies should be avoided as they are harmful for both domestic
and global growth.
The Fund will continue to strengthen its analysis and understanding of the underlying drivers ofglobal imbalances, including how exchange rates impact the current account and its components, the roleof structural factors, including those related to corporate behavior, in explaining the evolution andpersistence of imbalances, and the measurement challenges posed by multinational activities. Ongoingwork in a few of these areas will be showcased in the forthcoming 2019 External Sector Report.
1

Prepared by Pau Rabanal, Swarnali Ahmed Hannan, Cyril Rebillard and Margaux MacDonald, under the guidance ofLuis Cubeddu, and inputs from Helge Berger, Varapat Chensavasdijai, Lone Christiansen, and Martin Kaufman. Kyun
Suk Chang, Jair Rodriguez, and Zijiao Wang provided research assistance.

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EVOLUTION OF GLOBAL FLOW AND STOCK IMBALANCES
1.
After narrowing in the aftermath of the global financial crisis (GFC), global current
account surpluses and deficits have remained broadly unchanged in recent years although they
have
becomeincreasingly
Figure 1. Global Current Account Imbalances, 1990-2018
concentrated in advanced economies(in percent of World GDP)
(AEs). Aggregate current accountsurpluses and deficits have hoveredaround 3½-4 percent of global GDP in
recent years, and while they are well
below the pre-crisis peak of 6 percent,they remain high from a historicalperspective (Figure 1). The recent stabilityof aggregate current account balances
masks a rotation of aggregate surpluses
and deficits towards AEs.


4Surpluses in China and oil exporting
countries have narrowed significantly
since 2005-07, while current accountbalances of euro area countries andsome advanced Asian economies
have either expanded or remained
persistently high (Figure 2). The
increase in the euro area’s current
account balance reflects both neededadjustments in debtor countries andlarger surpluses in creditor countries(Germany, the Netherlands).

Sources: World Economic Outlook (WEO) and IMF staff calculations.

Figure 2. Selected Economies: Changes in Current AccountImbalances, 2005-18 1/

Meanwhile, although overall deficits
are down since the GFC, they are now
increasingly concentrated in the
United Kingdom and the UnitedStates. Taken as a whole, deficits of
key G20 emerging and developing
Sources: WEO and IMF staff calculations.
economies(EMDEs,namely Note: The size of the bubble depends on the current account balance in USD
Argentina, Brazil, India, Indonesia, in absolute terms, taking the 2016-2018 average.
1/ Chart includes G20 economies, Spain as a permanent invitee, and the euro
Mexico, South Africa and Turkey, area.
have been generally unchanged since2007, although behavior has varied notably during the post-crisis period.

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2.
The narrowing and rotation of global surpluses and deficits reflects a combination ofmacroeconomic policies and cyclical factors. Fiscal policy and the credit cycle have been key driversof current account dynamics since the crisis (Figure 3). In the aftermath of the GFC, the coordinatedfiscal policy impulse helped to offset private deleveraging, which was especially sharp in deficit
economies. However, since 2013, divergent fiscal policy stances and credit cycles in key economies
contributed to the rotation of imbalances towards AEs. Specifically, sharply lower surpluses in China
reflected a sizable easing of fiscal and credit policies, while the rise in the euro area surplus reflected
a combination of tight fiscal policy in most member countries and continued private sector
deleveraging in peripheral debtor economies. Meanwhile, renewed fiscal easing in the United States
and tighter fiscal and credit policies in EMDEs following the Taper Tantrum episode contributed to
the recent concentration of deficits in AES. Finally, the sharp reduction in world energy prices since2013 helped to underpin the reduction in current surpluses of oil exporting EMDEs.
Figure 3. Selected Economies: Fiscal Balances and Private Credit, 2005-18 1/
Credit-to-GDP Ratio, 2005-18(percent of Group GDP)

Structural Fiscal Balance, 2005-18(percent of World GDP)
200%

0.2%

Creditor AEs

CHN
‐0.2%

Debtor AEs

CHN

180%
160%
140%

‐0.6%
120%

US
Creditor
AEs
ESP/ITL

100%

‐1.0%

EMDEs
‐1.4%

80%

EMDEs

60%

US

40%
‐1.8%
2005

2007

2009

2011

2013

2015

2017

20%
2005

2007

2009

2011

2013

2015

2017

Sources: BIS, WEO and staff calculations.
EDMEs include Argentina, Brazil, India, Indonesia, Mexico, South Africa, and Turkey. Creditor AEs includes Germany, Japan and Korea. Debtor AEs
includes France, Italy, and Spain (from euro area) as well as Australia, Canada, and United Kingdom. Italy and Spain are only shown in credit trends
to emphasize role of private sector deleveraging in these economies.

3.
Real exchange rate movements have generally supported these current account trends,
with foreign exchange intervention playing a much more muted role since the crisis (see IMF,2018). For example, the large reduction in China’s current account surplus, from above 10 percent of
GDP in 2007 to 0.4 percent in 2018, was accompanied by a cumulative 35 percent real appreciation of
the renminbi over this period. Similarly, the increase in the overall euro area current account balance,from close to zero percent of GDP in 2007 to a surplus of 3 percent of GDP in 2018, was accompanied
by a cumulative 10 percent real depreciation of the euro during this period. That said, while cumulative
real exchange rate changes since 2007 have been generally associated with changes in current accountbalances, which were especially driven by changes in import volumes, the relationship exhibits a great

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Figure 4. Selected Economies: Current Account and Import Volume Growth vs. REER Changes, 2007-18 1/

Sources: IMF, INS and WEO databases and IMF staff calculations.
1/ Includes all G20 economies (except Argentina), plus Spain (permanent invitee) and the overall euro area.

deal of heterogeneity in part reflecting country-specific factors (Figure 4). Ongoing analysis suggeststhat the role of exchange rates in facilitating current account adjustment depends on various factors,
including the extent of integration into global value chains and invoicing in foreign dominantcurrencies (see paragraph 17).
4.
Corporate savings and investment trends contributed to the rise and persistence of
surpluses in some AEs. While the saving-investment balance of the corporate sector has improved
across AEs since the mid-1990s (Gruber and Kamin, 2016), this trend has been especially strong among
key surplus economies, including Germany,
Figure 5. Selected Economies: Net Corporate Saving
Japan, and Korea (Figure 5). Moreover, theBalance vs. Current Account Balance, 1997-2016
rise in corporate saving has supported the(in percent of GDP) 1/
improvement in overall current accountbalances, especially during the post-crisis
period, at a time when public sector savinginvestment balances also improved. The risein net corporate saving of AEs reflect aseries of factors, including lower wage
compensation, dividends payments, anddomestic investment, although further
research is needed to ascertain the extent towhich these trends reflect policy distortions(see Box 1 on Corporate Saving). In
particular, there is a need to better
understand whether the concentration of
wealth and firm ownership increases the Sources: IMF WEO, OECD National Accounts and IMF staff calculations.
1/ Based on sample of 30 advanced and emerging economies for which
degreeofco-movement
between sectoral data are available.
aggregate and corporate saving.

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5.
Recent trade policy actions do not appear to have materially affected overall
imbalances, although they have come at a cost to global growth and trade. The trade dispute
between China and the United States has led to higher tariffs on about 40 percent of U.S. imports
from China (US$250 billion), and a similar share of Chinese imports from the United States (US$110
billion). Recent analysis (IMF 2019a) suggests that while tariffs on Chinese goods may have reduced
the U.S.’s bilateral trade deficit with China, the overall U.S. current account deficit remained largely
unchanged in part due to trade diversion effects. Meanwhile, higher tariffs and uncertainty related to
trade tensions are likely to have detrimental effects on productivity and employment if they were to
persist (see Box 2 on Bilateral Trade). Specifically, simulations suggest that an across-the-board tariffincrease to 25 percent between the U.S. and China would lead to GDP losses of ¼ percent of GDP in
the U.S. and 1¼ percent of GDP in China, although these effects could be larger if accompanied bymarket sentiment and confidence effects (see IMF 2018c, Scenario Box 1).
6.
Current account deficits of key
Figure 6. Selected EMDEs: Net Capital Inflows
EMDEs have fluctuated in the post crisisand REER, 2007-18(inpercent of GDP) 1/
period, on account of volatile financing
6%120
conditions, which were largely driven by
115
growth differentials with AEs and4%110associated U.S. dollar movements (IMF,
105
2016). Following the post-GFC Quantitative
2%
100
Easing programs in key AEs, capital inflows
0%95
accelerated, currencies appreciated, and90
current account deficits widened, in key G20‐2%85
FDI Net Flows
EMDEs (Figure 6). However, these trends
Non FDI Net Flows
80
started to reverse following the 2013 “Taper
Change GIR (‐, accum)‐4%
CA Deficit
75
Tantrum” episode as AE-EMDE growth
REER (+, appr, RHS)
70
‐6%
differentials narrowed and the prospects of AE
2000
2003
2006
2009
2012
2015
2018
monetary normalization gathered strength. Sources: WEO and IMF staff calculations.
Current account deficits have narrowed since, 1/ Includes Argentina, Brazil, India, Indonesia, Mexico, South Africa, andTurkey. Weighted average (share of GDP and REER Index).
especially in the more vulnerable economies(Argentina, Turkey) which have also observed much weaker currencies. It is worth noting, that net (andgross) Foreign Direct Investment (FDI) flows have been far more stable than portfolio and otherinvestment flows, as the latter are more sensitive to global financial conditions and U.S. dollar
movements (see also Avdjiev et al., 2018).
7.
Meanwhile, net stock imbalances have continued to widen as current account surpluses
and deficits remain concentrated in creditor and debtor countries, respectively. At 40 percent ofworld GDP, the world’s Net International Investment Position (NIIIP), the sum of net creditor and net
debtor positions, is now at a historical peak and four times larger than in the early 1990s (Figure 7).
The widening of stock positions has been partly mitigated by valuation effects in most cases, both in
the form of exchange rate and asset price movements (Figure 8). An important exception to thispattern has been the United States, with current account deficits and valuation losses over the same
period primarily linked to the cumulative U.S. dollar appreciation and higher U.S. equity prices (see

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Adler and Garcia-Macia, 2018). The widening of stock positions has led to an increase in primary
income credits and debits in some cases, although historically low global interest rates may havedampened this effect (see Box 3 on Income Balance).
Figure 7. World Net International Investment
Positions, 1990-2018(in percent of World GDP)

Sources: WEO, Lane and Milesi-Ferretti dataset, and IMF staff
calculations.

Figure 8. Selected Economies: Current Account andValuation Changes, 2010-17(in percent of World GDP)

Sources: WEO, Lane and Milesi-Ferretti dataset, and IMF staff
calculations.
1/ For methodology see Adler and Garcia-Macia (2018).

8.
Similarly, gross stock positions have continued to grow, despite some volatility after the
GFC. While the crisis slowed the rapid pace of financial integration of previous years, total externalliabilities reached about 200 percent of world
Figure 9. World Gross External Liabilities, 1990-2017
GDP in 2018, double the amount observed in(in percent of World GDP)
15%
1998 (Figure 9).
8Among AEs, cross-border FDI positions
have continued to increase, unlike
portfolio
and
otherinvestments,
reflecting mainly an expansion of
positions vis vis-à-vis financial centersconsistent with the increased complexityof activities of large multinational
corporations (Lane and Milesi-Ferretti,2017), while cross-banking activity has
slowed.

200%

FDI
Portfolio
Other

AE
EMDE
150%

10%

EMDE Reserve
Assets (RHS)
100%
5%
50%

0%

0%

Financial integration in EMDEs has
1990
1995
2000
2005
2010
2015
continued to increase further (up 10 Sources: IMF’s Financial Flows Analytics (FFA) database and IMF staff
percentage points of world GDP since calculations.
Note: shaded area denotes the Global Financial Crisis.
2018), driven by an increase in crossborder FDI and non-FDI positions, withtotal liabilities reaching about 30 percent of world GDP. Corporate leverage and overall external
debt in EMDEs are at historical peaks, including foreign currency credit (BIS, 2018). On the asset
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side, EMDE reserve assets, after rising sharply through 2013, have declined slightly in recent years(both as a share of world GDP total and non-FDI liabilities), mainly driven by China and consistent
with the reduced importance of foreign exchange intervention in global current account dynamics.

DISTINGUISHING HELPFUL FROM EXCESSIVE GLOBALIMBALANCES
9.
Global current account surpluses and deficits can be economically warranted. Often,
current account surpluses and deficits are
Figure 10. Selected Economies: CA Gaps
appropriate, or even necessary. For example,
vs. Fiscal Policy Gaps, 2017(in percent of GDP) 1/
countries with rapidly aging populations mayneed to accumulate external savings that they
can draw from when their workers retire (see
IMF, 2019b), while young and rapidly growing
economies
with
ample
investment
opportunities but scarce domestic capital
benefit from foreign funding.
10.
However, there are times when
global imbalances reflect macroeconomic
distortions and financial vulnerabilities. This
will generally be the case when a country’s
current account surplus or deficit is excessive
relative to the level implied by its fundamentals
and desirable policies. To derive benchmark Source: IMF External Sector Report (2018).
Note: Countries in bold denote G20 members plus Spain (permanentlevels (or norms) that can help determine what invitee).
constitutes an excessive current account and 1/ The fiscal gap is measured as the domestic component of the policy
gap. The dot size is proportional to the absolute value of estimated excess
real exchange rate level for each country, the current account balances (in percent of World GDP) Green (red) dots
IMF uses a multilaterally-consistent model- correspond to positive (negative) gaps. Broadly-in-line current accounts
are depicted in blue.
based framework (see Cubeddu and others,
2019 for the latest vintage of the IMF’s External Balance Assessment methodology). Model-based
estimates are combined with analytically-grounded judgment to arrive at multilaterally-consistentexternal assessments, which are presented in the forthcoming External Sector Report (ESR), with theaim of identifying policies that both deficit and surplus countries can adopt to reduce excess global
imbalances.
11.
About 40 percent of global current account balances in 2017 were excessive and traced
to undesirable policy settings (IMF, 2018). Regarding the role of fiscal policies in explaining excess
surpluses and deficits (Figure 10), some countries with tighter-than-desirable fiscal stances observed
higher-than-warranted current account balances (e.g. Germany, Korea), while others where fiscal
consolidation is necessary over the medium term observed lower-than-warranted current accountbalances (e.g. Argentina, France, Spain, United Kingdom, the United States). Other macroeconomic
policies, such as insufficient public health spending played a role in explaining excess surpluses in

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some cases (China, Korea), while easy credit was in part responsible for excess deficits in others(Canada, Turkey). Moreover, structural policies can help explain the persistence of external imbalances,with product market distortions generally constraining innovation and investment and labor market
distortions holding back competitiveness. That said, policies have a role to play even in countries withexternal positions that are deemed to be in line with fundamentals, as macro-structural policy
distortions can often have offsetting effects on a country’s external position (e.g. a weaker-thandesired fiscal balance combined with high barriers to entry that constrain business investment).

Change in CA, 2017‐18

Developments in 2018 were
12.
Figure 11. Selected Economies: 2017 Staff-Assessed CA
consistent with a minor narrowing of
Gap vs. Change in Actual CA 2017-18(in percent of GDP)
excess surpluses and deficits as well as
their further concentration in advanced
3.0
RUS
SAU
economies. Current accounts have generally
2.0
moved in the direction of closing external
TUR
imbalances between 2017 and 2018, with the
1.0
large reduction in China’s surplus generally
AUS
matched by lower deficits in some advanced
CAN
MEX EA
0.0
USA ITA
KOR
and emerging economies as well as higher
DEU
ARG
FRA
JPN
BRA
GBR
balances in oil exporting countries (Figure 11).
IND
ZAF
‐1.0
CHN
In the United States, despite a very
IDN
expansionary fiscal policy and output rising‐2.0‐4.0 ‐3.0 ‐2.0 ‐1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
above potential, the current account deficit
2017 Staff‐Assessed CA Gap
was generally unchanged, largely reflecting
increases in domestic oil production. A full Sources: WEO, INS, 2018 External Sector Report, and IMF staff calculations.
Note: G20 members plus Spain (permanent invitee) are highlighted.
assessment will be included in theforthcoming 2019 ESR, which will take into account the extent to which the observed narrowing of
imbalances reflected cyclical factors (e.g. energy prices rose in 2018) and domestic policies.

RISKS FROM PERSISTENT IMBALANCES
13.
While the concentration of global
deficits in AEs reduces near-term financing
risks, vulnerabilities persist in some EMDEs.
With deficits concentrated in reserve currencyissuing AEs, global imbalances do not present
an imminent threat. That said, a re-escalation intrade tensions (or a disorderly Brexit outcome)with knock-on effects on commodity prices andglobal risk aversion could affect the external
debt service capacity of some EDMEs,
especially those highly reliant on foreign
demand and financing. Fund analysis suggeststhat the size of the current account balance and

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Figure 12. Model-Predicted Probability Margins 1/

Source: IMF staff estimates.
1/ Y-axis shows external crisis probability conditional on foreign currency
debt liabilities and current account levels, with other covariates constant.

composition of the IIP impact the likelihood of external crises. Specifically, preliminary estimatessuggest that an increase in foreign-currency denominated debt liabilities from 50 to 100 percent of
GDP (all else equal) would increase the probability of a large and costly external crisis by 3 percentage
points (Figure 12), while large current account deficits are also associated with a higher probability ofan external crisis. Similarly, higher exposure to foreign currency debt increase the likelihood of an
external crisis or sudden stop, although reserve assets can act as a
mitigating factor (for more see Box 4 on NIIP Risks).
14.
In the absence of corrective actions, trade tensions could become entrenched and stock
imbalances could widen further, making the global economy more vulnerable down the road.
The continued persistence of surplus and deficits could lead to a further increase in credit and debtor
positions (Figure 13), and raise the likelihood of a disruptive adjustment in large debtor economies
with global spillovers, as was the case following the GFC. How stock imbalances will evolve depend
on a series of factors and is especially sensitive to the policy assumptions underpinning the current
account projections.


To illustrate three scenarios are considered (Figure 14). Under baseline policies consistent with theApril 2019 World Economic Outlook (WEO), stock imbalances are projected to remain generally
unchanged over the medium term, despite a modest rise in the U.S. current account deficit.
However, under a passive policy scenario, which assumes unchanged current account balances asa share of GDP over the projection period, creditor and debtor positions would expand by anadditional 5 percentage points of World GDP by 2030.2 It is only under an active policy scenario,
where countries’ current account balances are set to their staff-assessed norms, that creditor
and debtor positions would close (by about 2 percentage points of World GDP by 2030).
Figure 13. G20 Economies: 2018 NIIP vs. Current
Account Balances, 2018-23,(in percent of GDP) 1/

Source: WEO and IMF staff calculations.
1/ Dot sizes proportional to GDP in USD.
Note: Chart includes G20 economies and Spain as a permanent invitee.

Figure 14. Selected Creditor Economies: Net
International Investment Position, 1985-2030(in percent of GDP)

Source: WEO and IMF staff calculations.

2 In the baseline policies simulation, the current account is projected to stay constant at its 2023 value through 2030.
It is worth noting that simulations do not assume valuation effects, and as such may understate the actual impact on(continued)
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11That said, there are other scenarios where creditor and debtor positions could expand evenfurther. For instance, a sharp slowdown in China, absent of an orderly deleveraging process, could
also lead to a rapid widening of global imbalances, possibly triggering further trade actions. In
EMDEs, a prolonged period of benign financing conditions could lead to a surge in capital inflows,
and additional borrowing by governments and/or corporates, that would sow the seeds of future
distress when monetary policy conditions normalize in AEs (see Box 4, and Bruno and Shin, 2018).

POLICIES TO REDUCE EXTERNAL IMBALANCES
15.
G20 surplus and deficit countries
need to adopt carefully calibrated
macroeconomic policies to reduce excess
imbalances. In recent years, output gaps
have closed for most G20 countries, while
external gaps have not (Figure 15). In
general, deficit countries should movewithgrowth-friendly
forwardfiscalconsolidation, while surplus economies
should deploy available fiscal space andavoid overreliance on accommodative
monetary policies. In deficit countries where
growthremains
creditstrong,macroprudential policies may need to betightened to help slow down domestic
demand growth and reduce imbalances.

Figure 15. G20 Economies: Output Gaps
and Current Account Gaps, 2017-18(in percent of GDP) 1/

Source: WEO, 2018 ESR and IMF staff calculations.
1/ Bubble area is proportional to the country’s NFA level in percent of GDP.
Blue (white) bubbles denote creditor (debtor) positions. Chart includes G20
members and Spain as a permanent invitee.

16.
Structural reforms also have an
important role to play to boost potential growth and address external imbalances. Boosting
potential growth will require policies that incentivize higher private investment, particularly in thosecountries where demographics are weighing on potential growth and reducing incentives fordomestic investment. While, in general, removing structural policy distortions is a desirable policy goal(see Banerji and others, 2017), careful sequencing is needed to achieve global rebalancing (see IMF,
2018b; and Cubeddu and others, 2019). Surplus countries could prioritize reforms that encourage
investment and discourage excessive savings by curtailing subsidies to SOEs (China), expanding thesocial safety net (China and Korea), incentivizing R&D spending and ensuring financing for investment
in innovative activities and deregulating the service sector (China, Germany, and Japan). Higher wage
growth in euro area surplus countries maybe be needed to facilitate rebalancing. Meanwhile, deficit
countries could focus on reforms that reduce labor costs and improve competitiveness, including bystrengthening the skill base of workers (Canada, France, United Kingdom and United States). In thestock imbalances (e.g. under active policies, exchange rate movements would likely support a narrowing of stock
positions). Simulations only cover ESR creditor economies.

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euro area, efforts to make the currency union more resilient (e.g., banking and capital markets union,
fiscal capacity for macro stabilization) remain of essence to avoid a reemergence of disorderly intraeuro area imbalances.
17.
Exchange rate flexibility should continue to support external adjustment,
notwithstanding varying effects across countries. Ongoing analysis suggests that key features ofinternational trade, especially greater integration into global value chains and invoicing in foreign,
dominant currencies, may have a bearing on the responsiveness of gross flows to exchange rates, withweaker export responses and greater external adjustment through imports, especially in the short run.
This work will be featured in the forthcoming 2019 ESR. Sluggish export responses point to the needof supporting exchange rate flexibility with other macro-structural policies in the short-run, including
measures to lessen capacity constraints, such as improving infrastructure to facilitate exports (i.e.
roads, ports, logistical support). Easier access to credit and lower regulatory barriers for SMEs should
also facilitate export responses to exchange rate movements. In some cases, excessive exchange rate
volatility and/or disorderly movements in exchange rates can have adverse implications for economic
and financial stability.
18.
Vulnerabilities associated with external stock imbalances require careful monitoring.
Given the rapid rise on corporate indebtedness in many EMDEs, currency and maturity mismatches
need to be monitored carefully (BIS, 2018 Annual Report, IMF 2019 April GFSR), while efforts to reduce
vulnerabilities continue. Special attention should be given to: (i) reducing foreign currencydenominated debt through targeted macroprudential policies; (ii) encouraging more inward FDI by
ensuring equal treatment between domestic and foreign investors; and (iii) deepening financial
markets, including aiding the development of FX hedging instruments. In some EMDEs, measures toreduce fiscal debt and external vulnerabilities should be supplemented by efforts to build bank capitaland liquidity buffers. More generally, an integrated approach in response to external shocks is needed,
where the complementarities and tradeoffs between monetary policy, foreign exchange intervention,
macroprudential policies, and capital flow management measures are appropriately considered (seeIMF Managing Director’s April 2019 GPA).
19.
Protectionist and trade policies that target bilateral trade balances are likely to beineffective and impose substantial efficiency costs. Countries should avoid using tariffs to target
bilateral trade balances as these are unlikely to affect aggregate imbalances and are costly in termsof domestic growth and employment, with negative global spillovers. Instead, focus should also begiven to reviving liberalization efforts and strengthening the multilateral rules-based trading system,
including promoting trade in services, where gains from trade are substantial but barriers remain high.
20.
Data collection efforts should be strengthened to account for the growing complexityof multinational cross-border activities. With greater integration in finance and trade—reflecting,in part, the growing role of multinational corporations—measurement of external positions has
become more challenging as the boundaries between residents and non-residents, and thecorresponding attribution of income across countries, have become blurred. These issues are
particularly relevant for financial centers (countries with large gross assets and liabilities) and tax
havens (whose statistics are disproportionally impacted by profit shifting practices). To ensure the
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proper measurement and assessment of external positions, national statistics agencies need tostrengthen their data collection and collaboration efforts (see 2019 European Commission which finds
large bilateral statistical discrepancies on income and service balances). The Fund is spearheading
efforts, together with other international organizations, to ensure Global Value Chains and Special
Purpose Entities are properly reflected in the measurement of external positions.
The IMF’s surveillance of external imbalances will remain key for monitoring global risks
and coordinating appropriate policy actions. Despite narrowing imbalances since the global
financial crisis, risks from lingering imbalances in some countries and growing stock positions remain.
Rigorous and evenhanded analysis of external positions are of essence to promote growth-friendly
policy actions by both excess surplus and deficit countries to rebalance the global economy. The Fundremains committed to continue strengthening the analysis of external imbalances and its drivers,
including to ensure the EBA methodology evolves by drawing on the latest advances in the literatureand lessons learned in the implementation process. Moreover, further efforts are necessary to address
data gaps to monitor more accurately the evolution of external positions.
21.

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Box 1. Corporate Saving in Advanced Economies
From a sectoral perspective, differences in net saving(saving minus investment, S-I) behavior of the corporate
sector can explain over half of the divergence in overall
current account balances between surplus and deficit AEs(Figure 1). While net corporate saving has risen across all AEs(red bar), it has been more pronounced in surplus economies.
Surplus AEs have also observed higher public net saving (bluebar) and a smaller offsetting role by households (grey bar),the latter suggesting there may be impediments forhouseholds to “pierce the corporate veil”, possibly linked to
wealth inequality and firm ownership structures.

Figure 1: AEs: Change in current account by sector, 1995‐2017 1/(percentage points of GDP)
6.0

Government S‐I
Households S‐I
Corporate S‐I
Total Economy S‐I

5.0
4.0
3.0
2.0
1.0
0.0
‐1.0
‐2.0

‐3.0
These differences in net corporate saving largely reflect
Surplus AEs
Deficit AEs
differences in labor compensation, dividend payments,
Source: IMF WEO, AMECO database, OECD National Accouncts dataset andFund staff calculations.
and investment (Figure 2). Meanwhile, interest payments
1/ Surplus (deficit) AEs are those that ran surpluses (deficits) in 2008.
and taxation appear to have played a more limited directrole in explaining the differences in corporate saving between surplus and deficit AEs (see also Dao and Maggi,2018), even though taxation may also affect incentives (see below).

Labor compensation. While labor shares (blue bar) have fallen across most AEs, these declines have been strongest
in AEs with faster rising corporate saving (see also Chen, Karabarbounis and Neiman, 2017). The shift in income fromworkers (with high marginal propensities to consume) to shareholders (with low marginal propensities to consume)
can depress aggregate consumption, imports, and raise the current account (Behringer and van Treeck, 2018).
However, the extent to which the decline in labor shares reflect technological progress (see Dao and others, 2017)or labor market institutions is an open question. On this point, Ciminelli, Duval, and Furceri (2018) find that theerosion in job protection legislation may have partly contributed to a decline in labor shares (15 percent on average),while IMF (ESR, 2018) finds that an easing of employment protection can improve the current account; the latter isFigure 2: AEs: Change in corporate saving‐investment balance,in line with Redeker (2019), who finds reduced union density
1995‐2017 (percentage points of corporate value‐added)
and workers’ bargaining power increase net corporate
8.0
saving.
Investment
Transfers
Dividends. The rise in corporate saving has been strongest in
countries with more pronounced shifts away from dividend
payouts (gray bar) and towards retained earnings and sharebuybacks (Gutierrez and Philippon, 2016), due to changes in
tax incentives in some cases. These trends may havecontributed to current account dynamics, as risk-averse
agents tend to choose to consume more out of actual
income (dividends) than out of latent income in the form of
retained earnings (see Baker, Nagel and Wurgler, 2006).
Investment. Declines in investment (green bars) have beenstrongest among surplus AEs, although it is unclear whether
these reflect weaker future growth prospects (Gruber andKamin, 2016) or more binding investment barriers (IMF, ESR
2018).

Interests 2/
Taxes & Subsidies
Corporate S‐I

6.0

Dividends 2/
Wages

4.0
2.0
0.0
‐2.0
‐4.0
Surplus AEs

Deficit AEs

Source: IMF WEO, AMECO database, Chen et al (2017) online database, OECD
National Accouncts dataset and Fund staff calculations.
2/ Dividends (net) include retained earnings on FDI, interests (net) include
income from insurance policies and rents.

The extent to which the rise in corporate saving reflects policy distortions remains work in progress and will
require tailored analysis at the country level. In fact, other aspects related to the distribution of wealth and firmownership could also be important in understanding the link between corporate saving and the current account.
Specifically, if the rise in corporate profits are concentrated among wealthy households with low propensities to
consume, aggregate private saving may co-move stronger with corporate saving.

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Box 2. Bilateral Trade Balances and the Role of Tariffs
Large and rising bilateral trade balances have come under
scrutiny lately, as some policymakers are concerned they may
reflect asymmetric obstacles to trade. Recent analysis has
shown, however, that their evolution is the result ofmacroeconomic forces and that resorting to bilateral tariffs totarget a specific bilateral balance is likely to be both ineffective
and disruptive to global trade and growth (see IMF 2019a). Tariffinduced changes in a bilateral trade balance tend to lead tooffsetting changes in balances with other partners through trade
diversion, with little or no impact on a country’s aggregate tradebalance. At the same time, tariffs have important negative effects
on output, employment, and productivity for the countries
directly involved and also for other countries linked throughglobal value chains.

Figure 1. Contributions to Changes in
Bilateral Trade Balances, 1995-2015 1/(Billions of US dollars)
Residual 3/
Macroeconomic factors
Sectoral composition
Tariffs and other trade costs 2/
Total
60

300

40

200

20

100

0

0

-20

-100

-40

-200

-60

-300

-80

-400

-100

-500

-120
CHN-KORDEU-USA-600

CHN-USA(right scale)
Sources: Organisation for Economic Co-operation
and Development, Trade in Value Added database;and IMF staff calculations.
Note: Data labels use International Organization forStandardization (ISO) country codes.
1/ Average value 2010-2015 minus average value
1995-1999.
2/ This includes tariffs and free or preferential trade
agreements.
3/ The residual is the sum of the model residuals
plus the approximation error.

Macroeconomic forces, not tariffs, drove bilateral tradebalances. A decomposition exercise using a standard trade modelshows that over the past two decades, most of the changes inbilateral trade balances were explained by changes inmacroeconomic factors of both trading partners (Figure 1). These
factors include fiscal policies and credit cycles, and in some cases
also foreign exchange intervention and supply-side policies (e.g.,
subsidies to exports or production that affect similarly trade with all partners). In contrast, bilateral tariffs
played only a small direct role, reflecting their already low levels in most countries in the mid-1990s and thefact that reciprocal tariff reductions had offsetting effects on bilateral trade balances.
Analysis of episodes of overall trade balance reversals suggests that targeting a particular bilateral
trade balance is of little consequence. Adjustments in specific bilateral trade balances do not necessarily
lead to adjustments in the overall trade balances, but changes in the overall trade balance tend to be matchedby proportional changes across trading partners. This suggests that, absent changes in macroeconomic
conditions, changes in a country’s bilateral balances simply result in compensating adjustments in otherbilateral balances.
But tariffs are costly for macroeconomic outcomes. While the impact of tariffs on trade balances wasmodest over the period of analysis, large and permanent changes in tariffs shaped the internationalorganization of production. And indeed, since the mid-1990s the significant decline in both tariffs and othertrade costs (for example, transportation costs) has gone together with an increase in the extent and complexityof global value chains. This increased integration of production has not only led to specialization andproductivity improvements, but also to greater risk of international spillovers from trade policy.

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Box 2. Bilateral Trade Balances and the Role of Tariffs (Concluded)
Specifically, an increase in tariffs would have ripple effects
far beyond any bilateral pair of countries, with detrimental
effect on output, jobs, and productivity for both thecountries directly affected and for others up and down the
global value chain. Simulations (which do not account for
any feedback effects) suggest that the negative effect of ageneralized 1 percentage point increase in manufacturing
tariffs is larger today than it would have been in the mid1990s (Figure 2). In countries like Germany and Korea, who
are particularly highly integrated into manufacturing
supply chains, the difference is especially large.
Any further escalation of trade tensions would also be
costly at the country and global level. Different
simulations using general equilibrium models andinvolving an illustrative scenario with a 25-percentage
point increase in bilateral tariffs on all goods traded
between US and China show output losses in bothcountries, but also at the global level (Figure 3). The effects
would be larger the impact of trade tensions on
confidence and financial markets were considered.
Moreover, sectoral reallocations from the repositioning of
global value chains would imply sizeable job losses in
specific sectors in both countries. The change in theaggregate trade balance of both countries would, however,be negligible: following the increase in bilateral tariffs, eachcountry’s demand is diverted to other trading partners,
benefitting countries such as Mexico, Canada and to alesser extent east Asia.
These findings suggest two main policy conclusions.
First, discussion of external balances is rightly focused on
macroeconomic determinants of trade and current accountbalances. Second, broad-based multilateral reductions intariff and non-tariff barriers will benefit trade and, over the
longer term, improve macroeconomic outcomes.

Figure 2. Illustration of the Effect of a 1
Percentage Point Generalized Tariff
Increase on Real Value Added 1/(Percent of GDP)
0.1
0.0
‐0.1
‐0.2
‐0.3
‐0.4
‐0.5
‐0.6
‐0.7
‐0.8

Upstream tariff
Domestic protection
Total

Downstream tariff
Diversion tariff

CAN CHN DEU FRA GBR ITA JPN KOR USA
Source: IMF staff estimates.
Note: Data labels use International Organisation forStandardization (ISO) country codes.
1/ Effects are partial equilibrium estimates based ona country-sector level analysis. The figure shows thechange in the simulated tariff spillovers between
1995 and 2011, the last year for which such an
exercise is possible given data constraints. 2011 is agood approximation of current global value chain
links because most of the growth in global value
chain integration took place before 2011.

Figure 3. Macro Effects from a 25 Percent
Increase in Tariffs Affecting all US–China
Trade: Real GDP 1/(Percentage point change from baseline)
1.0

GIMF Year 1

GIMF LR

GTAP

CFRT

0.5
0.0
-0.5
-1.0
-1.5
World

China

USA

Asia

NAFTA

Euro
area

Rest oftheworld

Source: IMF calculation.
Note: CFRT = Caliendo and others (2017) model; EA =euro area; GIMF = Global Integrated Monetary and
Fiscal model; GTAP = Global Trade Analysis Project; LR= long run; NAFTA = North American Free Trade
Agreement. In the figure, NAFTA is NAFTA countries
excluding US and Asia is Asian countries excluding
China.
1/ Effects are simulated from three generalequilibrium models: GIMF, GTAP, and CFRT.

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Box 3. The Income Balance and the Current AccountIncome balance

The current account summarizes a country’s intertemporal saving and investment decisions. As such, it
is mainly driven by a range of fundamentals and policies affecting production, consumption and investment,along with shifting external conditions. The main
Figure 1: Trade Balances vs. Income Balances, Average 2012-16(in percent of GDP)
components of the current account are the trade balance
12
and the net factor income balance, although their10
relative importance also varies depending of
8fundamentals and policies (past and present). For
y = ‐0.6727x ‐ 1.1835
6
R² = 0.6569
example, the primary income balance tends to be more
42
positive in richer, faster aging economies that have0
accumulated net external assets to provide for‐2
consumption at old age. The opposite is true for younger‐4‐6
and faster growing economies who must pay returns on‐8
their stock of foreign borrowing. Of course, other factors‐10affect the net income balance, including the composition
‐12
‐15
‐10
‐5
0
5
10
15
and risk profile of assets and liabilities and safe-haven
Trade balance
status of currencies. Similarly, countries with a large
population living abroad (due to conflicts or lack of domestic employment opportunities) will tend to havepositive secondary income balances from migrants’ remittances. Often, there is a negative relationshipbetween the trade and income balance (Figure 1), as countries may need to run trade surpluses to meetexternal debt service obligations, while others run trade deficits as they start dissaving and put to use theincome on assets held abroad.
Trade still holds a predominant role at the country and global level, although the income balance hasrisen alongside financial and labor integration. Gross
Figure 2: Total Trade and Income, 1980-2017(in percent of World GDP)
trade flows (defined as the sum of exports and imports)
30
continue to exceed gross income flows (primary and
Trade
Incomesecondary income credits and debits). The widening of
25
stock positions since the 1990s have led to an increase in20
total income as percent of world GDP, although the relative
importance of trade and income has been generally
15
unchanged, as trade openness has also risen, and interest
10
rates have fallen to historic lows (see Figure 2). That said,
the distinction between trade and income is becoming less5
relevant with the growing complexity of multinational0
operations as location decisions are often driven by
1980
1985
1990
1995
2000
2005
2010
2015
taxation and associated profit shifting motives.
Although trade and income balances are mere components of the current account, certain features of
the income balance deserve consideration. The “recorded” income balance may at times not fully reflect
net wealth changes, and adjustments for these measurement biases could be required (see Cubeddu andothers, 2019). This issue is particularly relevant for financial centers and tax havens, including because ofchallenges in properly attributing income to the ultimate owner. Overcoming these issues require improved
data collection efforts and increased collaboration among national statistical agencies. Finally, the income
balance may affect how exchange rates facilitate the adjustment process. For example, a (permanent)
depreciation may lead to larger trade adjustments in countries with larger debt service obligations in foreign
currency, with the opposite potentially holding true in creditor countries. Further research is needed to better
understand how balance sheets and associated income (or debt service) affects how exchange rates impact
external adjustment (see Hofmann and others, 2019).

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Box 4. IIP Structure and External Financing Risks
Figure 1: Size of EMDE External Balance Sheets
External Assets+Liabilities (%GDP), Change from1996 to 2017

Financial integration in EMDEs has risen substantiallyover the last two decades, posing new challenges.
External balance sheets (sum of assets and liabilities) haveincreased by an average of 85 percentage points of GDP
since 1996, yet this trend has varied substantially acrosscountries and has tended to be the strongest in emerging
European and Latin American economies. Although
integration can in principle improve risk sharing and theability to absorb shocks, it can also pose risks depending on
the size and composition of liabilities, currency mismatches,
as well as the depth of domestic financial markets.

300%

HUN (120%, 503%)

250%

ZAF
CZE

200%

CHL

150%

URY

COL

POL

100%
BRA
50%

IND

0%
0%

20%

40%

RUS

TUR
CHN

CRI
MEX
MAR

GTM IDN
PAK
LKA
60%

MYS

THA

80%

TUN
PHL

PER
EGY

ARG
100%

120%

140%

160%

External Assets+Liabilities (%GDP),1996

FX weights on foreign liabilities

Current Account (% of GDP), 2yr ma.

Financial integration has
Figure 2: Selected EMDEs, Sensitivity of Private Flows to Global Risk Aversion vs. Flow and Stock Imbalances,
2009-17made EMDEs more prone(a) CA Balance(b) FX Debt Exposure
15
1
toshiftsinglobal10
sentiment, although the
0.8
impact varies depending
5
on external fundamentals.
00.6
Specifically, private capital-5
net inflows to EMDES are
0.4-10
more sensitive to spikes inHigher Exposure
to Global Risks
global risk aversion (x-axis) in
0.2
-15
-1
-0.8 -0.6 -0.4 -0.2
0
0.2
0.4
0.6
0.8
1
countries with higher current
Correlation (VIX, Net Non-official Inflows as % of GDP)
Correlation (VIX, Net Non-official Inflows as % of GDP)account deficits (Figure 2a),
Sources: BIS, FFA, Haver Analytics, and IMF staff calculations.
higher FX debt exposure(Figure 2b) and net external debt (not shown). The sensitivity of capital flows to the VIX appears to have grownwith financial integration.
-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

Guarding against a sudden stop or external crisis requires carefully monitoring different aspects offlow and stock imbalances. Findings based on a probit model (estimated using data for 70 countries,
between 1991-2016) to study the relationship between external balance sheets and episodes of sudden stops
with large output declines and external crises1 suggest that: (i) IIP currency composition matters, with higher
foreign currency shares in gross external debt increasing the likelihood of sudden stops and external crises;(ii) foreign reserves assets can decrease the likelihood of external crises, although with diminishing returns;(iii) higher current account deficits increase the likelihood of external crises, while overvalued REERs increase
the likelihood of sudden stops. Finally, financial deepening reduces the likelihood of both sudden stops andexternal crises.
1/ Sudden stops are episodes where net private capital inflows are either: (i) 1.5 standard deviation below their mean andthe annual decline is 0.75 standard deviations from the previous year, or (ii) have declined by at least 3 pps of GDP relative
to the previous year and 2 pps from two years before. A large output decline is an episode where real GDP growth, relative
to its past 5-year historical average, is in the bottom 5th percentile of the distribution (across time and across countries).
An external crisis is an episode of private or public external debt default/restructuring or an IMF-supported program.
Regression also includes standard controls used in the literature (see Catao and Milesi-Ferretti, 2014).

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