Report to Congress on International

Economic and Exchange Rate Policies

U.S. Department of the Treasury

Office of International Affairs

October 15, 2009

This report reviews developments in international economic and exchange rate policies, focusing on the

first half of 2009, and is required under the Omnibus Trade and Competitiveness Act of 1988, 22 U.S.C. §

5305 (the “Act”).1

   

 

1 The Treasury Department has consulted with the Board of Governors of the Federal Reserve System and IMF

management and staff in preparing this report.
Table of Contents

Key Findings .................................................................................................................................. 2

Introduction ................................................................................................................................... 2

U.S. Macroeconomic Trends ........................................................................................................ 5

Global Economy ............................................................................................................................ 8

U.S. International Accounts ......................................................................................................... 9

The Dollar in Foreign Exchange Markets ................................................................................ 11

Analysis of Individual Economies.............................................................................................. 12

Asia ........................................................................................................................................... 12

China .................................................................................................................................... 12

India ...................................................................................................................................... 15

Japan .................................................................................................................................... 16

Malaysia ............................................................................................................................... 18

Singapore .............................................................................................................................. 19

South Korea .......................................................................................................................... 21

Taiwan .................................................................................................................................. 22

Europe ...................................................................................................................................... 23

Euro Area ............................................................................................................................. 23

Norway .................................................................................................................................. 24

Russia ................................................................................................................................... 25

Switzerland ........................................................................................................................... 26

United Kingdom ................................................................................................................... 28

Middle East .............................................................................................................................. 29

Gulf Cooperation Council ................................................................................................... 29

Saudi Arabia ......................................................................................................................... 29

Western Hemisphere .............................................................................................................. 30

Brazil..................................................................................................................................... 30

Canada .................................................................................................................................. 32

Mexico .................................................................................................................................. 33

Venezuela ............................................................................................................................. 34

Appendix 1: An Historical Perspective on the Reserve Currency Status of the U.S. Dollar

....................................................................................................................................................... 36

Appendix 2: Report to Congress on IMF Bilateral and Multilateral Surveillance over 

Members’ Policies ....................................................................................................................... 38

1
Key Findings 

The Omnibus Trade and Competitiveness Act of 1988 (the “Act”) requires the Secretary of the 

Treasury to provide biannual reports on the international economic and exchange rate policies of 

the major trading partners of the United States. Under Section 3004 of the Act, the report must 

consider whether any foreign economy manipulates its rate of exchange against the U.S. dollar to 

prevent effective balance of payments adjustments or to gain unfair competitive advantage in 

international trade. For the period covered in this Report, January 1, 2009 to June 30, 2009, 

Treasury has concluded that no major trading partner of the United States met the standards 

identified in Section 3004 of the Act. 

The Report further finds that the financial crisis that began in the summer of 2007, and 

intensified in the fall of 2008, was especially severe in the last quarter of 2008 and the first 

quarter of 2009. The International Monetary Fund (IMF) has estimated that global real GDP 

declined at an average annual rate of 6.5 percent during the first quarter of 2009 and international 

trade fell sharply, contracting at an annual rate of 54 percent. Industrial production is estimated 

to have declined by 18 percent. By early March 2009, global equity prices were down by 60 

percent from their peak in October 2007. On a nominal effective basis, the dollar strengthened 

5.9 percent in the fourth quarter of 2008 and a further 3.7 percent during the first quarter of 2009 

as risk appetite fell sharply. There was widespread agreement that the crisis represented the 

greatest economic challenge in more than a generation, and there was growing concern that the 

world economy could be on the edge of a new depression 

On April 2, 2009, Leaders of the G-20 met in London and pledged to do “whatever is necessary” 

to restore confidence, growth, and jobs; repair the financial system and restore lending; and 

maintain the global flow of capital. Pledges were made to deliver extraordinary fiscal and 

monetary stimulus and financial sector support – the largest and most comprehensive global 

stimulus program in modern times. In addition, G-20 Leaders pledged to make available an 

additional $850 billion to international financial institutions to support emerging markets and 

they committed to a substantial strengthening of financial market regulation and supervision. 

The U.S. Administration, together with the U.S. Congress, had already begun taking exceptional 

action to arrest the economic decline with emergency demand support measures under the 

February 2009 $787 billion American Recovery and Reinvestment Act (ARRA). This was 

buttressed by the Administration’s Financial Stability Plan (FSP) to strengthen credit, housing, 

and financial markets, and by the joint Treasury/Federal Reserve bank stress tests conducted 

under the Supervisory Capital Assessment Program (SCAP). Virtually every G-20 member 

country and all the economies listed in this Report have put in place exceptional monetary and 

fiscal measures to bolster demand and support a rejuvenation of growth. 

These forceful interventions on a coordinated global scale worked. In the few months following 

the April Leaders’ meeting, global economic growth turned positive, industrial production 

bottomed and began increasing, international trade increased 10.2 percent, financial markets 

improved sharply as interest rate spreads declined and access to credit broadened, and consumer 

and business confidence improved. Globally, capital began flowing once again as risk aversion 

began to dissipate. As moderation in downside risks prompted global investors to once again 

shift their portfolios toward more risky assets, the dollar retraced some of its previous rise. 

2
Despite the recent improvements in financial markets and economic growth, the global economic 

recovery remains incomplete. Private-sector demand remains weak and unemployment in many 

countries remains unacceptably high. To help guide the recovery and to reduce the risk and 

incidence of future crises, G-20 Leaders agreed at the Pittsburgh Summit on September 24-25 to 

launch a new Framework for Strong, Sustainable, and Balanced Growth. The goal of the 

Framework is to help to ensure a better balanced global economy that is less prone to crisis and 

to secure the ability to quickly mobilize early intervention in the event of prospective instability. 

As part of the Framework, G-20 members with sustained, significant external deficits pledged to 

undertake policies to support private savings and fiscal consolidation while maintaining open 

markets and strengthening export sectors. G-20 members with sustained, significant external 

surpluses pledged to strengthen domestic sources of growth. The G-20 will establish a process 

of mutual assessment to help evaluate the sustainability of policies and develop corrective 

actions where necessary. 

As noted, no major trading partner of the United States met the standards identified in Section 

3004 of the Act during the most recent reporting period. All of the countries described in this 

Report have put in place policies to boost their economies and expand domestic demand. Global 

imbalances have fallen sharply during the crisis from a peak of 5.9 percent of world GDP to an 

IMF-estimated 3.6 percent in 2009. The U.S. current account deficit has fallen from a peak of 

6.5 percent of GDP in the fourth quarter of 2005 to 2.9 percent of GDP in the second quarter of 

2009. Most U.S. bilateral trade deficits have fallen as well. Some of the correction in global 

imbalances is the result of cyclical factors and may be reversed as the global economy recovers. 

However, some is also structural – as with the rise in private sector saving in the United States. 

Of the 17 currencies examined in this Report, two (the Saudi Arabia riyal and the Venezuelan 

bolivar) are fixed against the U.S. dollar. Among the remaining 15 currencies, all except the 

Norwegian kroner depreciated against the dollar in the first quarter of 2009, as capital flows to 

emerging markets declined and investors continued to shift their portfolios into dollar assets. 

During the second quarter of 2009, 14 of these currencies appreciated against the dollar, as 

improvements in financial market conditions and the global outlook led to a return to more 

diverse portfolios. Only the Chinese renminbi remained unchanged against the dollar in the 

second quarter. This lack of movement of the renminbi has contributed to upward pressure on 

more flexible currencies in the region. Several emerging markets in the region have intervened 

in the foreign exchange market to slow the pace of appreciation. 

Although China’s overall policies played an important role in anchoring the global economy in 

2009 and promoting a reduction in its current account surplus, the recent lack of flexibility of the 

renminbi exchange rate and China’s renewed accumulation of foreign exchange reserves risk 

unwinding some of the progress made in reducing imbalances as stimulus policies are eventually 

withdrawn and demand by China’s trading partners recovers. 

On an effective basis, the renminbi has depreciated 6.9 percent since February 2009. From the 

end of February through June, China’s reserves increased both as a result of valuation changes 

and additional purchases associated with intervention. Both the rigidity of the renminbi and the 

reacceleration of reserve accumulation are serious concerns which should be corrected to help 

ensure a stronger, more balanced global economy consistent with the G-20 Framework. 

Treasury remains of the view that the renminbi is undervalued. The United States will continue 

to work with China both in the G-20 and the bilateral Strategic and Economic Dialogue to pursue 

3
policies that permit greater flexibility of the exchange rate and lead to more sustainable and 

balanced trade and growth. 

Appendix 1 of the Report provides data on the currency composition of reserves over the past 30 

years. Despite repeated predictions of the demise of the dollar as the major reserve currency, the 

data show no significant diversification of global currency reserves away from the dollar. 

Appendix 2 of the Report, required by the Supplemental Appropriations Act, 2009, Public Law 

No. 111-32 (June 24, 2009) focuses on how to improve the effectiveness of IMF surveillance. 

Rigorous bilateral and multilateral surveillance by the IMF will help shed light on trends that 

could lead to the next unsustainable boom and allow preventative or corrective measures to be 

put in place. Under the G-20 Framework for Strong, Sustained, and Balanced Growth, the IMF 

will provide forward-looking analysis of whether the world's major countries are implementing 

economic policies, including exchange rate policies, which are collectively consistent with G-20 

objectives. 

4
Introduction 

This report focuses on international economic and foreign exchange developments in the first 

half of 2009. Where pertinent and when available more recent data and developments are 

included. 

Exports and imports of goods to and from the areas whose economies and currencies are 

discussed in this report accounted for more than 80 percent of U.S. merchandise trade in the first 

half of 2009. 

U.S. Macroeconomic Trends 

The U.S. economy remained deep in recession at the start of 2009 but, as the first half of the year 

drew to a close, signs of recovery began to emerge. The pace of economic contraction slowed 

sharply in the second quarter as some sectors appeared to be stabilizing. Conditions in financial 

and credit markets improved notably, and housing activity started to pickup during the spring 

after a 3-year slump. Labor markets remained very weak but job losses began to moderate 

midyear. Several new fiscal policy measures were put in place in early 2009 to stabilize 

financial markets and put the economy back on the path towards long-term sustainable growth. 

These initiatives, along with the injection of fiscal stimulus delivered by the American Recovery 

and Reinvestment Act (the Recovery Act), enacted in mid February, are having the desired 

impact. Financial market volatility decreased notably in the first half of the year, measures of 

financial risk declined substantially, with some returning to pre-crisis levels, and credit flows 

picked up considerably. Early indicators about the third quarter suggest that some sectors of the 

economy are starting to recover. Most private forecasters expect moderate economic growth to 

resume in the second half of 2009. The IMF projects US real GDP to decline by 2.7 percent in 

2009 and rise by 1.5 percent in 2010.2

The U.S. Economy Continued to Contract in the First Half of 2009 

U.S. real GDP fell at an annual rate of 6.4 percent in the first quarter and at a 1.0 percent pace in 

the second quarter. The second-quarter drop was the smallest in a year, partly due to a pickup in 

government spending which boosted real GDP by 1.3 percentage points. The rate of decline in 

private spending also slowed in the second quarter as the pullback in business investment 

moderated and the downturn in residential investment slowed. Private inventories continued to 

shrink but the drawdown was a smaller drag on growth in the second quarter, subtracting 1.4 

percentage points from real GDP growth after reducing growth by 2.4 percentage points in the 

first quarter. Consumer outlays fell by 0.9 percent following a modest 0.6 percent increase in the 

first quarter. Exports and imports both declined but the drop in imports was larger. As a result, 

net exports rose, boosting real GDP by 1.6 percentage points in the second quarter. Since the 

previous business cycle peak in the fourth quarter of 2007, real GDP has fallen by an annual rate 

of 2.5 percent – the largest six-quarter decline on record in the post-war period. 

 

2

The IMF annually reviews U.S. economic performance and policies through the IMF Article IV surveillance 

process. The last Article IV surveillance concluded in July 2009. The Article IV Staff Report and the results of the 

IMF Executive Board’s discussion of the U.S. Article IV review can be found at 

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23144.0 In addition, the IMF discusses U.S. economic 

policies and performance in the context of its twice yearly World Economic Outlook reports. These can be found at 

http://www.imf.org/external/pubs/ft/weo/2009/02/index.htm. 

5
Labor Market Conditions Worsened 

Labor market conditions continued to deteriorate in early 2009 as job losses accelerated and the 

unemployment rate surged. During the first half of the year, 3.4 million jobs were cut from 

nonfarm payrolls on top of the 3.1 million lost over the course of 2008. The unemployment rate 

jumped by 2.3 percentage points between December 2008 and June 2009 to 9.5 percent and in 

September stood at a 26-year high of 9.8 percent. Since the recession began in December 2007, 

the jobless rate has risen by 4.9 percentage points. 

While the labor market remained very weak heading into the second half of 2009, there were 

signs that the rate of deterioration was slowing. The monthly pace of job losses moderated in the 

third quarter of 2009 to 256,000, on average, from about 430,000 in the second quarter and 

nearly 700,000 in the first quarter. Weekly initial claims data through September continued to 

signal further job losses, but they also pointed to a slower pace of decline. 

The Housing Sector Showed Tentative Signs of Stabilization 

The housing market downturn entered its fourth year in 2009, but by spring housing activity 

appeared to be stabilizing. Single-family housing starts appear to have hit bottom at the start of 

the year and by August had risen by one-third from early 2009 lows. Permit issuance for future 

construction also picked up in the first half of 2009 after falling steadily for more than three 

years. Sales of both new and existing single-family homes have also moved off of the low levels 

recorded in early 2009, and in August the combined total was near its highest level since late 

2007. The inventory of unsold homes on the market retreated from a historically high level. In 

August, the stock of new homes for sale was at its lowest level since 1992 and, relative to sales, 

was approaching historical norms. Major house price measures started to stabilize at the end of 

the second quarter, though they remained sharply lower than a year earlier. 

Inflation Slowed Sharply 

Consumer prices fell by 1.4 percent during the twelve months ending in June and were down by 

1.5 percent over the year ending in August. A year earlier, headline consumer inflation was 

around 5-1/2 percent. The dramatic reversal was due in large part to a steep drop in energy 

prices. Food price inflation also moderated notably. Core inflation (excluding food and energy) 

has also retreated, slowing from 2.5 percent in mid 2008 to 1.7 percent in June 2009, and 1.4 

percent in August.

Conditions in Financial and Credit Markets Improved 

Equity markets posted steep losses in 2008, triggered by weakness in the U.S. economy and 

concerns about the performance and viability of a wide range of assets and the financial 

institutions holding or guaranteeing those assets. Financial markets remained volatile at the start 

of 2009 and equity markets continued to post losses well into the first quarter. In early March, 

however, equities began to recover. From March 9 through the end of June, the S&P 500 

jumped nearly 36 percent. This index has continued to post gains since mid year and through 

October 1 had risen an additional 12 percent, bringing the increase so far in 2009 to 14 percent. 

6
Credit market conditions improved in the first six months of 2009. The 3-month U.S. dollar 

LIBOR-OIS spread – a measure of what banks perceive as the credit risk in lending to one 

another – fell to 39 basis points at the end of June from 126 basis points in late December and an 

all-time high of 365 basis points in early October 2008. This spread narrowed to around 14 basis 

points by early October, close to the pre-crisis historical average of 9 basis points. Corporate 

bond spreads also narrowed, pointing to a rising tolerance for risk. The spread between Baarated corporate bonds and the 10-year Treasury note fell to 364 basis points in late June and 

continued to ease through early October to 283 basis points. Though still elevated, this measure 

is far below its December 2008 peak of 616 basis points. Mortgage rates dipped to new lows 

early in the second quarter and, despite some upward movement, since then they remain at 

historically low levels. 

Additional Policy Measures Were Implemented to Stimulate the Economy 

A number of monetary and fiscal policy measures were put in place in the latter half of 2008 to 

stabilize financial and credit markets. With the economy weakening rapidly at the start of 2009 

and markets still severely impaired, it became necessary to take additional action. 

In February, Treasury introduced the Financial Stability Program, a set of initiatives to 

strengthen financial institutions and jumpstart the flow of credit to households and businesses. 

The first of these, the Supervisory Capital Assessment Program, subjected major banks to a 

rigorous evaluation of their medium-term prospects. Following this highly transparent exercise, 

major banks were able to raise a substantial amount of new capital. The Financial Stability 

Program also expanded the scale and the scope of the Term Asset-Backed Securities Lending 

Facility (TALF) in order to rehabilitate key channels of credit to households and businesses. The 

announcement of the TALF’s launch in March helped narrow spreads, and the issuance of 

consumer-related asset-backed securities has recovered substantially. Finally, the Financial 

Stability Program created the Public-Private Investment Program to remove legacy assets from 

bank balance sheets and re-liquefy key markets for financial assets. While this initiative has not 

been implemented on the scale and scope originally anticipated, the government’s willingness to 

commit resources to this effort likely contributed to the recovery of these markets. 

Treasury also continued to play an active role in efforts to stabilize the housing market during the 

first half of 2009. Treasury purchases of mortgage-backed securities and support to the 

government-sponsored enterprises (GSEs), along with complementary policies implemented by 

the Federal Reserve, helped hold down mortgage rates. The Making Home Affordable Program, 

under which Treasury subsidizes mortgage modifications in order to reduce the incidence of 

foreclosures. In early October, nearly one month ahead of the November 1 benchmark 

established in July, more than 500,000 mortgages of distressed borrowers had entered a trial 

modification period 

To more directly stimulate domestic demand, Congress passed and President Obama signed the 

American Recovery and Reinvestment Act (Recovery Act) in mid February. This $787 billion 

stimulus package was designed to support income, saving, and consumption through tax cuts and 

transfers to households, including the Making Work Pay tax credit, payments for unemployment 

insurance, and one-time payments to Social Security and other eligible beneficiaries. Treasury 

estimates indicate that nearly $63 billion in tax relief will have been made available by the end of 

August 2009. Economic stimulus will also support necessary state programs and provide funds 

7
for infrastructure investment. The spending from these programs will provide an important boost 

to economic activity throughout 2009 and in 2010—by the end of September nearly $95 billion 

in Recovery Act funds had been paid out by the government. 

These measures are working. As noted above, financial markets have stabilized and conditions 

in credit markets have improved dramatically since late last year. Measures of systemic risk 

have declined substantially, with some returning to their pre-crisis levels, and there are clear 

signs that the economy is stabilizing. 

Temporary Stimulus Measures Contributed to Rising Federal Budget Deficit 

The temporary measures to shore up the financial system and spur economic growth and job 

creation along with lower revenues as a consequence of the recession have boosted the Federal 

budget deficit. In FY2009, the deficit is projected to reach $1.6 trillion (11.2 percent of GDP). 

Federal expenditures are expected to grow by 22 percent in FY2009, partly reflecting TARP 

outlays and spending associated with the Recovery Act. Receipts are projected to fall by 18 

percent, due in part to falling employment and income and declining asset values. The deficit is 

expected to narrow once the temporary spending provisions of the Recovery Act expire and the 

economy begins to improve, with the deficit averaging slightly more than 4 percent of GDP from 

FY2012 to FY2019. 

Global Economy 

Global economic conditions continued to worsen in early 2009 and financial markets remained 

under severe stress. Global trade plummeted and capital flows to emerging markets declined, 

pushing down output, or sharply lowering growth rates in countries that had avoided the direct 

effects of the financial crisis. 

Real GDP in the G-7 economies fell at an annual rate of 8.6 percent in the first quarter of 2009, 

the fourth consecutive quarterly decline, and the largest quarterly contraction in the post-World 

War II era. Real GDP fell in all of the economies discussed in this report in the first quarter, 

with the exception of China, India, and Korea.3

 China and India are the only two economies 

discussed in this report that have not experienced a contraction in output during the crisis. 

Nevertheless, growth has fallen sharply in both countries. 

The severity of the crisis prompted an unprecedented coordinated response from monetary and 

fiscal policymakers, particularly among the G-20 economies. By the time of the April 2009 G20 Leaders Summit, stimulus packages had been adopted by all G-20 fiscal authorities. In 

addition, central banks had slashed interest rates and many had adopted non-conventional 

measures to increase liquidity and support domestic demand. At the April Summit, Leaders 

pledged to take whatever actions necessary to restore economic growth, lending, and 

employment. 

By late spring there were signs that these policy measures were stabilizing financial markets and 

attenuating the decline in real GDP. In the G-7 countries, real GDP contracted at an annual rate 

of 0.4 percent in the second quarter, the smallest decline in a year, and the economies of France, 

 

3

 Real GDP data for Saudi Arabia are not available on a quarterly basis. 

8
Germany, and Japan expanded slightly. Similarly, in the emerging markets, output either 

expanded or declines moderated. Declines in international trade also began to moderate in the 

second quarter, with some recovery by the end of the quarter. 

The success of global policy efforts can be seen 

in the upward revisions in growth forecasts. 

The contraction in the global economy in 2009 

is now expected to be less severe than the 

International Monetary Fund (IMF) forecast 

earlier in the year, and a stronger bounce back 

is expected in 2010, according to the latest IMF 

projections. Nevertheless, growth in both the 

advanced and emerging market economies is expected to remain below pre-crisis norms, with 

large output gaps. Given the continuing economic weakness and risks to a sustained recovery, 

G-20 leaders agreed at the Pittsburgh Summit in September 2009 that it was too early to remove 

the policy stimulus. At the same time, they agreed that developing a transparent and credible 

exit strategy was necessary, recognizing that the timing of the exits would differ across countries 

and policy measures. 

Global Output

(percent change)

World

Advanced 

Economies

Emerging & 

Developing 

Economies

forecast 2009 -1.1 -3.4 1.7

forecast 2010 3.1 1.3 5.1

Average 2002-07 4.4 2.5 7.0

Source: IMF, World Economic Outlook, October 2009

Looking forward, Leaders of the G-20 established a new framework for more balanced and 

sustainable growth. Under this framework, G-20 countries will work together to ensure that their 

individual policies are collectively consistent with more sustainable and balanced trajectories of 

demand, debt, reserve, and credit growth. To reduce the likelihood of future crises, the G-20 will 

establish a process of mutual assessment to help evaluate the sustainability of policies and 

develop corrective actions where necessary. 

Shifts in global demand are already 

underway. Global imbalances declined from 

5.9 percent of world GDP in 2006 to an 

estimated 3.6 percent in 2009. The global 

crisis and associated drop in international 

trade is at least partly responsible for the 

decline in imbalances but some structural 

changes appear to be underway. For 

example, in some countries, notably the 

United States, the crisis may have resulted in 

a structural rise in private saving. As the economic recovery becomes established, fiscal 

stimulus will need to be unwound and public saving should be increased. As was acknowledged 

by Leaders at the Pittsburgh Summit, to sustain a strong recovery, this necessary rise in public 

saving will need to be accompanied by an offsetting rise in domestic demand in other countries. 

Otherwise, global growth will remain unacceptably low and the adjustment of current account 

imbalances could stall. 

0

1

2

3

4

5

6

198019821984198619881990199219941996199820002002200420062008

Source: IMF, WEO Database October 2009

Global Imbalances

(absolute sum of current account balances, as a percent of global GDP)

U.S. International Accounts 

The U.S. current account deficit narrowed sharply to $203.3 billion in the first half of 2009 from 

$339.1 billion in the second half of 2008, a decrease of 40 percent. In the second quarter of 

2009, the current account deficit narrowed to $98.8 billion (2.8 percent of GDP). This is the 

9
smallest deficit since the fourth quarter of 2001 in dollar terms and the smallest deficit as a share 

of GDP in a decade. U.S. merchandise exports decreased 21 percent in the first half of 2009 

from the second half of 2008 and service exports fell 11 percent. However, imports fell more 

sharply—merchandise imports declined 26 percent, and service imports fell 12 percent. 

U.S. Balance of Payments and Trade 

($ billions, seasonally adjusted unless otherwise indicated) 

2006 2007 2008 2008 2008 2009 2009

 Q3 Q4 Q1 Q2

Current Account:

 Balance on Goods -847.3 -831.0 -840.3 -221.1 -178.8 -124.0 -115.5

 Balance on Services 86.9 129.6 144.3 35.1 34.3 31.6 32.5

 Balance on Income 1/ 48.1 90.8 118.2 34.1 21.1 18.3 16.4

 Net Unilateral Current Transfers -91.3 -116.0 -128.4 -32.4 -31.5 -30.3 -32.2

Balance on Current Account -803.5 -726.6 -706.1 -184.2 -154.9 -104.5 -98.8

Balance on Current Account as % of GDP -6.1 -5.3 -4.9 -5.1 -4.3 -3.0 -2.8

Major Capital Flow Components (financial inflow +)

 Net Bank Flows -40.1 -134.8 106.8 22.8 258.7 -253.2 -178.8

 Net Direct Investment Flows -1.8 -122.8 -12.3 8.6 12.3 -16.4 -18.7

 Net Securities Sales 724.9 661.8 791.7 166.7 242.8 93.4 20.7

 Net Liabilities to Unaffiliated Foreigners by Non-banking Concerns 63.5 161.2 327.1 163.8 -36.1 9.2 43.4

Memoranda:

 Statistical Discrepancy -1.7 64.9 200.1 38.1 67.2 69.8 41.2

 Change in Foreign Official Assets in the United States 487.9 480.9 487.0 115.6 -16.0 70.9 125.0

Trade in Goods 

Balance -828.0 -808.8 -816.2 -214.9 -174.0 -120.2 -111.8

Total Exports 1026.0 1148.2 1287.4 340.7 293.3 252.0 248.9

 of Which:

 Agricultural Products 66.0 84.3 108.3 28.9 23.3 21.6 23.7

 Capital Goods Ex Autos 404.0 433.0 457.7 118.1 109.0 98.4 93.3

 Automotive Products 107.3 121.3 121.5 31.9 27.3 17.5 16.7

 Consumer Goods Ex Autos and Food 129.1 146.0 161.3 41.9 39.0 36.5 36.0

 Industrial Supplies and Materials 2/ 276.0 316.4 388.0 107.2 82.2 66.8 68.7

Total Imports 1853.9 1957.0 2103.6 555.5 467.3 372.2 360.7

 of Which

 Petroleum and Products 602.0 634.7 779.5 130.8 85.4 52.2 56.9

 Capital Goods ex Autos 418.3 444.5 453.7 115.2 106.7 91.6 86.4

 Automotive Products 256.6 259.2 233.8 58.1 49.9 32.3 31.7

 Consumer Goods Ex Autos and Food 442.6 474.6 481.6 123.0 114.1 105.9 104.8

1/ Including compensation of employees

2/ Including petroleum and petroleum products

Source: BEA, Bureau of Census

Net International Investment Position 

U.S. net international indebtedness, as measured by the 

Net International Investment Position (NIIP), widened to 

$3.47 trillion at the end of 2008 from $2.14 trillion at the 

end of 2007, when valuing direct investment at the current 

cost of tangible assets. The value of U.S. assets held 

abroad rose to $19.9 trillion in 2008 while the value of 

foreign held assets in the U.S. increased to $23.4 trillion. 

As a share of GDP, net indebtedness rose to 24.3 percent 

in 2008, from 15.5 in 2007. If direct investment is valued 

at the market value of owner’s equity, net indebtedness 

widened to $4.0 trillion (28.1 percent of GDP) from $1

trillion (10.9 percen

U.S. Net International Investment Position

($ trillions)

2007 2008

U.S.‐owned assets abroad 18.28 19.89

Official assets 0.37 0.92

Private assets 15.35 12.35

   Direct Investment 3.45 3.70

   Foreign Securities 6.84 4.24

Foreign‐owned assets in the U.S. 20.42 23.36

Official assets 3.40 3.87

   U.S. government securities 2.54 3.23

     U.S. Treasury securities 1.74 2.33

Other assets 14.53 13.02

   U.S. Treasury assets 0.64 0.88

Net international position ‐2.14 ‐3.47

percent of GDP ‐15.50 ‐24.30

.5 

t of GDP). 

10
Net financial flows and price and exchange rate adjustments each contributed to the widening of 

the NIIP.4

 Net financial flows increased net indebtedness by $0.5 trillion, as net foreign 

acquisitions of U.S. financial assets exceeded net U.S. acquisitions of overseas assets. Most of 

the increase in net indebtedness resulted from price and exchange rate adjustments. Price 

declines of U.S.-held foreign assets outpaced declines of foreign-held U.S. assets by $0.7 trillion, 

and the appreciation of the dollar in 2008 lowered the dollar value of U.S. assets abroad by $0.6 

trillion. 

The Dollar in Foreign Exchange Markets 

For much of the first half of 2009 and into the third quarter, the near-term direction of the dollar 

tended to be inversely correlated with market perceptions of financial and economic risk. The 

dollar appreciated when risk aversion increased and depreciated when risk appetite increased. 

Recently, however, this inverse correlation between the dollar and risk has become less clear, as 

market participants have focused more on relative returns on U.S. and foreign assets. 

On a real effective basis, the dollar 

rose by 3.5 percent in the first two 

months of the year, against a broad 

group of currencies, but has since 

declined and at the end of September 

had depreciated by 4.0 percent since 

the end of 2008. Against the “major 

currencies” the dollar has 

depreciated by 6.3 percent in 2009 

and by 1.7 percent against the 

currencies of “other important 

trading partners” (OITP). 

60

70

80

90

100

110

Feb-02

Aug-02

Feb-03

Aug-03

Feb-04

Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Source: Federal Reserve Board

Real Effective Exchange Rate of the U.S. Dollar

February 2002 = 100

OITP

Broad

Major

Early in 2009, there was strong 

demand for dollars amid the 

extreme risk aversion resulting 

from the breakdown of money and 

credit markets and the spike in 

asset and currency market volatility 

in late 2008. This included “safe 

haven” buying of Treasuries by 

global investors and repatriation 

flows by U.S. investors. These 

flows have slowed as money and 

credit market conditions have 

settled and volatilities have moved 

closer to historically normal levels. 

Options Implied Volatilities: Euro/Dollar, Dollar/Yen, U.S. Stocks

0

10

20

30

40

50

60

70

80

90

Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08Oct-08Nov-08Dec-08Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09

Percent

EURUSD USDJPY VIX

 

4

 The NIIP is a measure of the stock of U.S. holdings of foreign assets minus the stock of foreign holdings of U.S. 

assets (U.S. liabilities to foreigners). For this reason, changes in the valuation of these asset stocks can cause large 

year to year fluctuations, particularly when valued at current market prices. 

11
In March, policy changes by major central banks and governments – including non-conventional 

monetary policy measures – alleviated market concerns about downside risks to the global 

financial system and world economy. The moderation in downside risks prompted global 

investors to re-allocate out of dollar assets amid a sustained recovery in asset markets. Major 

global asset market indicators have now returned to levels not seen since Lehman declared 

bankruptcy in September 2008. 

Confidence was reinforced in the second quarter on a number of fronts. The April G-20 Leaders 

Summit alleviated concerns about emerging markets, especially in Eastern Europe, and global 

trade. Global investors increasingly sought exposure to growth, trade, and commodities as 

economic data in both the advanced and emerging markets showed improvement. China’s fiscal 

stimulus initiatives were seen as critical to the outlook for global growth and commodities 

demand. U.S. financial sector earnings reports for the first quarter came in better than expected. 

U.S. bank “stress tests” were a key marker of progress in the financial market recovery process 

and were followed by increased capital raising by banks, issuance of non-guaranteed debt, and 

repayment of TARP loans by some recipients. 

Analysis of Individual Economies 

Asia

China 

The fall in global demand brought China's growth to a halt in the fourth quarter of 2008, but a 

timely and aggressive fiscal and monetary policy stimulus has resulted in a strong domestic 

economic recovery and a decline in its current account surplus, and as a result contributed 

significantly to the recovery in global demand. Real GDP rose by 7.1 percent on a year-overyear basis in the first half of 2009, as fixed investment and consumption contributed 6.2 

percentage points and 3.8 percentage points to growth, respectively. Reflecting the decline in 

China’s trade surplus, net exports in the first half of 2009 subtracted 2.9 percentage points from 

growth. China does not publish quarterly output data, but private analysts estimate that output 

rose between an annual rate of 4 and 6 percent in the first quarter, and between 15 and 19 percent 

in the second quarter. In October, the IMF forecast that real GDP would increase by 8.5 percent 

in 2009, up from its April forecast of 6.5 percent growth. The IMF is forecasting that in 2010 

China’s economy will grow 9.0 percent and account for 28 percent of the anticipated 3.1 percent 

pace of total global growth. 

As global demand dried up in the fourth quarter of 2008, China’s exports plummeted. Exports 

fell by 31 percent between the third quarter of 2008 and the first quarter of 2009, while imports 

fell 30 percent. In the second quarter of 2009, imports recovered strongly on the back of China’s 

economic stimulus; however, exports increased only slightly. As a result, China's trade surplus 

narrowed to a three-year low of $35 billion (3.2 percent of GDP) in the second quarter. China's 

current account surplus, though still large, narrowed to 6.7 percent of GDP in the first half of 

2009, from an 11 percent high in 2007. China’s trade surplus with the United States fell to $103 

billion in the first half of 2009, down from 13 percent from the first half of 2008. 

New details on China’s fiscal stimulus program, originally announced in November 2008, were 

provided by Chinese authorities in the first half of 2009. The draft 2009 budget, issued at 

China’s National People’s Congress (NPC) annual meeting in March, indicates that new central 

12
government spending will be $172 billion (3.9 percent of annual GDP) spread over two years. 

This is less than one third of the two-year $590 billion fixed investment component of China’s 

stimulus, which means that most of the funding for public fixed investment is being provided by 

financial sector lending and local governments. Private analysts expect China’s budget deficit to 

rise to 4 percent of GDP in 2009 compared to a 0.5 percent deficit in 2008. 

In response to the slowdown in growth and the decline in inflationary pressures, Chinese 

authorities loosened monetary policy significantly. At the end of 2008, the People's Bank of 

China (PBOC) lowered the 1-year bank lending rate by 216 basis points to 5.3 percent lowered 

reserve requirements for large banks by 200 basis points to 15.5 percent, reduced the amount of 

outstanding central bank bonds, and lowered the interest paid on excess reserves.. Interest rates 

and reserve requirements have remained at these levels through September 2009. Most 

importantly, in conjunction with these efforts to increase liquidity in the banking system, the 

PBOC lifted quantitative caps on bank lending towards the end of 2008, resulting in 

extraordinary growth in new bank loans.5 In the first half of 2009, banks issued $1.1 trillion in 

new loans, equaling 35 percent of first half GDP, and more than triple the amount of new loans 

in the first half of 2008. A significant proportion of these loans are believed to have gone to the 

infrastructure projects promoted by China’s stimulus plan. 

More recently, China’s banking regulators have become concerned that rapid loan growth was 

resulting in a deterioration of lending standards and have taken steps to increase banks’ 

provisions for bad loans. In July and August, new loans fell to $355 and $410 billion 

respectively, much lower than monthly average of $1.2 trillion in the first half of 2009. The 

PBOC has also taken steps to dampen liquidity growth in the inter-bank market by raising rates 

on its PBOC bills and repurchase agreements. Nevertheless, its stated goal remains to adhere to 

a “moderately loose monetary policy.” 

Officially, China operates a “managed floating exchange rate regime based on market supply and 

demand with reference to a basket of currencies.” In the summer of 2008, however, China 

returned to a policy of maintaining a largely-stable renminbi-dollar exchange rate. Because the 

renminbi has remained stable against the U.S. dollar in 2009, it has followed the movement of 

the dollar against other currencies. According to the index of the Bank for International 

Settlements (BIS), China’s real effective exchange rate appreciated 13.3 percent between June 

2008 and February 2009, but it has depreciated on a real effective basis by 6.9 percent between 

February and August 2009. Since the end of the dollar peg in July 2005, the renminbi has 

appreciated a cumulative 21.2 percent against the dollar and 15.7 percent on a real effective 

basis, based on the BIS measure. 

In its 2008 annual report issued in August 2009, the PBOC reiterated its commitment to 

exchange rate reform, noting that it “will closely watch the movement in the exchange rates of 

the major currencies in the international market, and, following the principle of ‘self-initiated, 

controllable, and gradual’ to improve the formation mechanism of the RMB exchange rate, make 

the exchange rate more flexible, and keep it basically stable at an adaptive and equilibrium 

level.” In the report, the PBOC also reiterated its two long-term goals of developing the foreign 

exchange market and creating new exchange rate risk management instruments. 

 

5

 Credit quotas remain one of China’s most effective tools for curbing lending growth and monetary expansion. 

Periods in which credit quotas are imposed usually result in a backlog of projects seeking financing. 

13
China’s leadership has also shown a greater commitment to interest rate liberalization and at the 

first U.S.-China Strategic and Economic Dialogue agreed to promote this in the future. The 

PBOC annual report notes it “will accelerate the establishment of the benchmark interest rate 

system in the money market, improve the central bank interest rate system, enhance the pricing 

capabilities and expertise of financial institutions, and give greater play to the market in 

determining interest rate levels.” Interest rate liberalization will improve resource allocation, 

enhance the effectiveness of monetary policy as a market-oriented means of managing economic 

activity, and increase the growth of household incomes.

China has taken several steps in the reporting period towards greater capital account 

liberalization. First, the PBOC has implemented two pilot programs that allow corporations to 

settle their foreign trade in renminbi.6

 Second, the PBOC has signed six bilateral currency swap 

agreements with other central banks totaling RMB650 billion ($95 billion).7 Third, since May 

2009, several Hong Kong-funded banks within China have won approval to issue renminbidenominated bonds in Hong Kong. China’s Ministry of Finance also launched its first renminbidenominated sovereign bond sale outside the mainland in late September, issuing $879 million in 

bonds in Hong Kong. Finally, the PBOC currently is exploring allowing domestic companies to 

lend funds to their foreign subsidiaries without seeking approval from Chinese authorities. At 

the first S&ED China agreed to further reduce capital controls by accelerating the allocation of 

quotas for Qualified Foreign Institutional Investors, which allow non-residents to invest in 

China’s capital markets. 

The stability of the renminbi against the dollar over the past year, the real effective depreciation 

that has taken place during the reporting period, continuing productivity growth in the Chinese 

economy, and the acceleration of foreign reserve accumulation this year all suggest that the 

renminbi remains undervalued. China currently holds $2.1 trillion worth of foreign reserves, 

equivalent to 49 percent of its 2008 GDP or over two years of imports. In the first half of 2009, 

China’s reserve assets increased by $186 billion. 

Renminbi adjustment alone, however, will not be sufficient to reduce materially China’s current 

account surplus or achieve more balanced, sustained Chinese growth. For this, China must 

continue to reform its development strategy away from export and investment-led growth. 

Chinese authorities have stated that they recognize the need to address the imbalances in the 

domestic economy and have made “rebalancing” growth a key feature of China’s 11th Five-Year 

Plan. In its second quarter report the PBOC noted, “while the protracted contraction of external 

demand will extend into the medium- and long-term period, the fundamental way to achieve sound 

and relatively rapid economic development is to accelerate reform and restructuring programs, with a 

priority on boosting consumption and domestic demand.” While some progress has been made, 

household consumption growth remains near or below the growth rate of GDP. As a result, the 

share of household consumption in GDP declined from a recent peak of 46.4 percent in 2000 to 

 

6

 The first program allows corporations in the Yangtze River Delta and Guangdong to settle their trade in renminbi 

with Hong Kong and Macao, while the second program allows corporations in Yunnan and Guangxi provinces to 

settle trade in renminbi with ASEAN countries. 

7

 An official PBOC announcement on March 31 suggests that the new swap agreements allow firms in participating 

countries to use renminbi to directly purchase Chinese imports. Unlike U.S. dollar swaps, governments cannot use 

the renminbi swaps to engage in exchange rate intervention because the renminbi is not fully convertible. Nor can 

recipient central banks exchange the renminbi received for China’s dollar holdings, according to the terms of the 

swap. There is no evidence that any central bank has drawn on the swap lines. 

14
35.3 percent in 2008, well below average for an economy of China’s income level. The low 

share of consumption reflects a weak social safety net, demographic trends, and the limited 

availability of financial services to households, including ceilings on bank deposit rates. 

Shifting China’s growth to a more sustainable, consumption driven path will require policy 

measures of a scale sufficient to bring about marked changes in the pattern of saving and 

investment. A key element of this effort is the provision of better social services and a stronger 

social safety net to reduce Chinese households’ need for precautionary savings. China has 

recently taken important steps in this direction, including the announcement of a $124 billion 

plan to extend basic health care coverage to most of the population by 2011. China also revised 

the allocation of its fiscal stimulus in April, redirecting $63 billion (about 11 percent of the 

stimulus package) from transportation and infrastructure investment and environmental 

protection to low income housing, health, education, and technology innovation. 

Corporate saving has risen rapidly over the last couple of years and now is the largest component 

of China’s national saving. High corporate saving reflects a number of factors, including the 

growing profitability of Chinese enterprises in recent years, low inflation-adjusted interest rates 

and the cost of land and other inputs, and low dividend payouts from state-owned enterprises 

(SOEs). China has begun collecting dividends from a portion of SOEs under a trial program that 

started in late 2007, but at 5 to 10 percent of after-tax profits, the dividends remain low by 

international standards. There are reports that the government is considering broadening the 

dividend collection program to include more SOEs and increasing the level of dividends that 

SOEs are required to pay. This would help reduce corporate savings if these additional resources 

were transferred to households or invested in the social safety net, instead of being held or 

reinvested in the enterprise sector. 

As China’s recovery strengthens, moving to a more flexible exchange rate will give monetary 

authorities greater scope to maintain price stability, particularly as China reduces capital controls 

to promote greater international use of the RMB. In addition, greater exchange rate flexibility 

will complement other structural reforms in promoting consumption-led growth by inducing 

greater investment in services and other sectors more oriented towards China’s domestic market. 

In the first Strategic and Economic Dialogue (S&ED) between the United States and China, held 

in Washington DC in July 2009, both countries agreed to “pursue policies of adjusting domestic 

demand and relative prices to lead to more sustainable and balanced trade and growth.” China also 

agreed that it will continue to “implement structural and macroeconomic policies to stimulate 

domestic demand and increase the contribution of consumption to GDP growth; further enhance 

access in its service market and expand areas and channels for non-government investment, with 

a view to expedite the development of its services industry and increase the share of services in 

GDP. China committed to deepening further reform of its social safety nets, including 

strengthening its basic old-age insurance system and enterprise annuities which should reduce 

excess saving. The next S&ED will be held in China in the summer of 2010. 

India 

India’s economy is less exposed to the international economy than many other emerging 

markets, and this has reduced the effect of the crisis on the Indian economy. Exports are a 

15
smaller share of output than in most Asian economies and controls on capital flows are greater. 

Nevertheless, the crisis has lowered economic growth. After exceeding 9 percent growth for 

three years, growth slowed to 7.4 percent in 2008, reaching a low of 3.5 percent on an annualized 

basis in the fourth quarter. Growth rebounded to 6.6 and 7.2 percent in the first and second 

quarters of 2009, respectively, but the IMF expects the economy to grow by 5.4 percent this year 

as lower demand and weak credit conditions are compounded by a poor monsoon season. 

India has used both monetary and fiscal policy to stimulate the economy. The Reserve Bank of 

India (RBI) reduced its repurchase rate by 425 basis points to 4.75 percent between October 

2008 and April 2009. The reverse repurchase rate was cut by 275 basis points to 3.25 percent 

and, the cash reserve ratio for banks was lowered by 400 basis points to 5.0 percent. 

Fiscal stimulus measures, estimated by the IMF at around 0.6 percent of GDP, were announced 

in early 2009. The package includes measures to boost consumption and investment in 

infrastructure and to promote exports. India has limited room for additional fiscal stimulus. The 

FY 2008/09 (April to March) consolidated fiscal deficit was 11.4 percent of GDP and public debt 

is 80 percent of GDP. 

Following an expansion of the current account deficit for much of 2008, the deficit narrowed to 

1.5 percent of GDP in the first quarter of 2009, as imports fell by twice the rate of decline in 

exports. In the second quarter, a rebound in trade flows resulted in a rise in the merchandise 

trade deficit but a rising surplus in trade in services and increases in transfer payments resulted in 

a further reduction in the current account deficit to 0.9 percent of GDP. The U.S. bilateral trade 

deficit with India narrowed to $2.6 billion in the first half of 2009, from $4.7 billion in the first 

half of 2008, as U.S. imports from India fell sharply. 

India’s official exchange rate arrangement is a managed float, and the rupee moved in both 

directions during 2009. The rupee appreciated by 1.8 percent against the dollar in the first half 

of 2009 but the exchange rate was unchanged in the third quarter. On a real effective basis, the 

rupee depreciated by 0.3 percent in the first half of 2009, but was down 3.2 percent for the year 

through September. Foreign currency reserves, after falling by $56 billion in the second half of 

2008 rose by $7.5 billion in the first half of 2009 to $254.1 billion. 

The stated aim of foreign exchange intervention is to smooth volatility. While the RBI seeks to 

achieve its monetary objectives of price stability and well-anchored inflation expectations by 

adjusting market liquidity through its policy rates and the cash reserve ratio, at times, it has used 

the exchange rate to help meet monetary objectives. 

Japan 

Despite the relative insulation of Japan’s financial system from the global financial turmoil, the 

crisis has resulted in the most severe recession in Japan's post-war history, lasting four 

consecutive quarters and amounting to a cumulative 8.7 percent decline in output. Japan has 

been particularly vulnerable to the global economic downturn due to the large share of 

manufacturing in GDP and its high dependence on exports (notably autos and electronics) for 

growth. Real exports fell by 64 percent in the first quarter of 2009, compared to the fourth 

quarter on an annualized basis. A 28 percent increase in exports in the second quarter, compared 

to the first quarter, and fiscal stimulus measures adopted by the Japanese government helped 

16
boost real GDP growth to a 2.3 percent annualized rate. The IMF expects real GDP to fall by 5.4 

percent in 2009 followed by 1.7 percent growth in 2010. 

Continued weak domestic demand resulted in a decline in imports in both the first and second 

quarters. Exports fell by more than imports in the first quarter resulting in a trade deficit but the 

second quarter increase in exports led to a trade surplus in the second quarter. Japan’s 

substantial net income on foreign investment was enough to ensure that its current account 

balance remained in surplus, rising from 1.5 percent of GDP in the first quarter of 2009 to 3.1 

percent in the second quarter. Japan’s merchandise trade surplus with the United States 

decreased from $40 billion in the first half of 2008 to $18 billion in the first half of 2009. 

Exports to the United States declined by 42 percent year-over-year in the first half of 2009, 

compared to a 25 percent decline in imports from the United States. 

Japanese financial markets have improved significantly in the first half of 2009, in parallel with 

global financial markets. Japan’s benchmark TOPIX stock price index rose by 10 percent in the 

first half of the year, following a 42 percent drop in 2008 (its sharpest one-year percentage drop 

in history). Money market and corporate credit conditions also have improved substantially due 

to targeted efforts by Japanese authorities and the thawing of international credit markets. The 

precipitous drop in equity prices that continued into the first quarter of the year, however, put 

significant stress on Japanese banks, due to their sizeable corporate equity holdings, as 

internationally active Japanese banks are required to recognize unrealized market losses on their 

equity holdings, subtracting from Tier 1 capital. According to the IMF, major Japanese banks 

raised over $32 billion in private capital in the first half of 2009 in response to the decline in Tier 

1 capital. The share of preferred stock and hybrid instruments in Tier 1 capital remains high, 

however, at between 20 and 60 percent, compared to core Tier 1 capital and tangible common 

equity. Major Japanese banks maintained a Tier 1 capital ratio near 7.7 percent during fiscal 

year 2008 (April 2008-March 2009). 

Japanese authorities have responded to the financial crisis with a variety of fiscal, monetary, and 

financial policy measures. On the fiscal side, the government announced a fourth stimulus 

package in April 2009, following three separate stimulus packages in 2008. The IMF expects the 

April package to add approximately 2.0 percentage points to GDP over the next two years, and 

expects the cumulative impact of the fiscal packages on output in 2009 and 2010 to be equivalent 

to 1.8 percent and 1.0 percent of GDP, respectively. The consolidated fiscal deficit is projected 

to widen from 3.3 percent of GDP in fiscal year 2007 to about 12 percent in fiscal year 2009 as a 

result of increased spending measures and a fall in government revenue. 

On the monetary side, the Bank of Japan (BOJ) has maintained an accommodative policy stance 

by keeping its policy rate (the uncollateralized overnight call rate) at 0.1 percent. Japan slipped 

back into deflation in early 2009. In August, headline consumer prices fell 2.4 percent yearover-year, the fastest pace of decline on record. Core prices (excluding perishable foods and 

energy) were down 0.9 percent in August. 

The BOJ also has promoted financial market stability and improved corporate financing 

conditions by continuing to accept a broad range of collateral in its discount operations; 

increasing the amount of its Japanese government bond purchases; buying outright commercial 

paper, asset-backed commercial paper, corporate bonds, and stocks held by banks; and creating a 

facility to provide subordinated loans to banks as Tier 2 regulatory capital. In addition, the BOJ 

17
and the Federal Reserve have extended an unlimited dollar liquidity swap line until February 

2010. The government and regulatory authorities have also continued to provide support to the 

financial sector by increasing public funds available for bank recapitalization (about $120 

billion); allocating funds to purchase corporate equities from banks (up to $200 billion); 

adjusting the capital adequacy calculation methodologies for banks; and easing mark-to-market 

accounting rules in measurement and classification. 

Japan maintains a floating exchange rate regime and Japanese authorities have not intervened in 

the foreign exchange market since March 2004. Japan’s foreign exchange reserves fell by 1.5 

percent in the first half of 2009 to $988 billion as a result of lower interest earnings and valuation 

changes on existing reserve holdings. 

The Japanese yen appreciated against the dollar in the last half of 2008 continuing through 

January 2009. The yen depreciated by 14 percent between mid-January and mid-April, but has 

moved upward since then. In the first half of 2009, the yen depreciated by 6.2 percent against 

the dollar, but is up 1.1 percent for 2009 through September. On a real effective basis, the yen 

depreciated by 11 percent in the first half of 2009. The yen’s depreciation early in the year 

reflected Japan’s weak economic outlook and an increase in investors’ risk appetite. Net 

outflows of private capital increased in the first half of 2009 to approximately $80 billion from 

$69 billion in the second half of 2008. 

Malaysia 

The Malaysian economy is heavily dependent on exports and was hard hit by the decline in 

global demand in the first quarter of 2009. Real GDP fell at an annual rate of 18.3 percent in the 

first quarter of 2009, with sharp declines in both exports and domestic demand. In the second 

quarter, real GDP rose at an annual rate of 14.1 percent as trade flows rose and policy measures 

boosted domestic demand. 

Malaysia implemented aggressive fiscal and monetary measures in response to the global crisis. 

Last November, it announced a 1 percent of GDP fiscal stimulus plan and, in March 2009, it 

announced a second, much larger stimulus plan (8 percent of GDP) to be implemented over 2009 

and 2010. On the monetary policy side, the central bank cut its overnight policy rate by 25 basis 

in November and a further 125 basis points in two moves in early 2009, bringing the overnight 

policy rate to 2.0 percent. Concurrently, reserve requirements were lowered to further improve 

liquidity conditions. 

In addition, Malaysian officials have implemented proactive policies that have helped the 

financial system cope with the global economic slowdown. Among these measures, the 

government has implemented blanket guarantees for all ringgit and foreign currency deposits; an 

extension of the central bank’s liquidity facility to insurance companies; and a small- and 

medium-sized enterprise credit guarantee program. The central bank has also established a 

roughly $11 billion bilateral currency swap with the People’s Bank of China. 

In April, the government announced plans to liberalize the services sector, including measures 

aimed at increasing the share of services in GDP. In addition to its newly promoted service 

sector reforms, the government aims to increase openness in the financial sector. This includes 

relaxing restrictions on foreign financial institutions allowed to operate in Malaysia, permitting a 

18
higher threshold for foreign equity investments in Malaysian banks and insurance companies, 

and granting increased operational flexibility to foreign banks. Many of these steps are aimed at 

attracting increased foreign direct investment. 

Malaysia’s current account surplus has remained above 10 percent of GDP since late 2002, the 

reflection of its persistent saving-investment imbalance. Saving in Malaysia remains high, while 

investment has yet to recover to its pre-Asian financial crisis peak in 1997. The current account 

surplus has not declined during the global economic downturn. In the second quarter of 2009, 

Malaysia’s current account surplus was 18.5 percent of GDP. Malaysia’s bilateral trade surplus 

with the United States, however, has fallen from $9.5 billion in the first half of 2008 to $5.8 

billion in the first half of 2009, as exports to the United States have fallen sharply. 

Malaysia ended the ringgit’s fixed exchange rate pegged to the dollar and revalued the currency 

in July 2005. It has since maintained a managed floating exchange rate regime. Officially, the 

central bank intervenes in both directions to smooth out excessive volatility in the ringgit 

exchange rate and has no explicit exchange rate target. After falling by 28 percent during the 

second half of 2008, Malaysia’s holding of foreign exchange reserves fell by $404 million, or 1 

percent, during the first half of 2009 to $85.3 billion. 

The ringgit depreciated by 7.9 percent against the dollar between the end of December 2008 and 

mid-March, but has appreciated since then. For 2009, through September the ringgit is roughly 

unchanged against the dollar. On a real effective exchange rate basis, based on the BIS index, 

the ringgit depreciated 2.4 percent in the first eight months of 2009. 

Over the long term, a more flexible exchange rate policy would contribute to more balanced and 

stable economic growth in Malaysia by allowing domestic consumption and private investment 

to play a greater role in the economy and by enabling the economy to adjust more effectively to 

external shocks. 

Singapore 

Singapore’s highly trade dependent economy (imports and exports represent 350 percent of 

GDP) was hit hard by the global crisis. Real GDP declined at an annual rate of 12.2 percent in 

the first quarter of 2009, the fourth consecutive quarterly decline, led by declining exports. 

There are signs, however, that a recovery is underway. Real GDP rose at an annual rate of 20.7 

percent in the second quarter. Merchandise exports, which fell by 46 percent between July 2008 

and January 2009, rose by 29 percent between January and August. The IMF is projecting a 3.3 

percent decline in real GDP in 2009, but a 4.1 percent increase in real GDP in 2010. 

Weak domestic demand and falling commodity prices resulted in a reversal in inflation over the 

past year. Prices declined by 0.5 percent in June on a year-over-year basis, down from a 7.6 

percent inflation rate in April 2008. The decline in prices moderated to 0.3 percent in August, 

but the authorities continue to forecast deflation of between 0 and 1 percent over the near-term. 

The government has deployed a range of monetary and fiscal instruments over the first half of 

the year to help lessen the impact of the global recession. Following approval of an 

expansionary budget in January, the government moved quickly to implement a fiscal stimulus 

package. Focused on saving jobs and helping viable businesses stay afloat and increase 

19
competitiveness, the stimulus measures are estimated to provide a fiscal impulse of about 3 

percent of GDP in 2009-2010. The stimulus measures are expected to increase the fiscal deficit 

to 3.5 percent of GDP (the largest in Singapore’s history) in FY2009 (April 2009-March 2010); 

because of ample fiscal reserves, however, the government will not need to borrow from the 

public. 

To promote financial sector stability, in late 2008 the government expanded Singapore’s deposit 

guarantee program to cover all Singapore dollar and foreign currency deposits of individual and 

non-bank customers until 2010. The central bank also entered into a $30 billion currency swap 

arrangement with the Federal Reserve, which was later extended through February 2010. 

Singapore has not drawn on the swap line. 

Singapore’s banking sector has remained stable throughout the financial crisis, although the 

economic slowdown has increased the number of non-performing loans and decreased bank 

profits. Nonetheless, overall loan growth has recovered more quickly than in past recessions, 

with sizeable increases in May and June. 

The Monetary Authority of Singapore (MAS) manages the Singapore dollar exchange rate 

against an undisclosed basket of major trading partner currencies to maintain domestic price 

stability, allowing domestic prices to be largely determined by the pass-through of international 

prices. In October 2008, MAS shifted from a policy of “modest and gradual” nominal 

appreciation of the Singapore dollar against the currency basket to a zero appreciation policy. In 

the face of declining exports and a deepening recession, in April the central bank further eased 

monetary policy by re-centering the exchange rate band on the prevailing nominal effective 

exchange rate (NEER) level, while maintaining the band width and slope (currently at zero 

percent appreciation). The move resulted in a devaluation of the Singapore dollar by 

approximately 1.5 percent against the currency basket. To reduce pressure for faster 

appreciation, the authorities intervene in the foreign exchange market and sterilize the 

interventions through foreign exchange swaps, direct borrowing, and repos. 

The Singapore dollar depreciated by 1.1 percent against the U.S. dollar in the first half of 2009, 

but appreciated by 2.7 percent in the third quarter. On a real effective basis, the Singapore dollar 

depreciated by 4.7 percent based on the JP Morgan Real Effective Exchange Rate Index in the 

first half of 2009, but depreciated by a lesser 2.8 percent based on the BIS index. Foreign 

exchange reserves fell by $2.8 billion in the first half of 2009, to $174.7 billion, but remain 

roughly equal to the country’s GDP and short-term debt. These reserve numbers do not include 

the government’s substantial stockpile of net fiscal reserves, which are estimated at more than 

$200 billion (about 100 percent of GDP). 

Singapore’s two sovereign wealth funds, GIC and Temasek, manage the country’s large 

accumulation of foreign assets. As of end-August 2009, Temasek managed $134 billion, up 

considerably from the $85 billion under management by end-November 2008. GIC discloses 

less information about assets and returns, indicating only that the fund manages well in excess of 

$100 billion. GIC did disclose a 25 percent loss at the height of the crisis, but has not published 

any current statistics. 

 

Singapore’s large current account surplus – the product of a high national saving rate relative to 

domestic investment – fell to 9.2 percent of GDP in the first quarter of 2009, before rising to 

20
10.5 percent in the second quarter. The current account surplus has fallen substantially from its 

28 percent of GDP peak in early 2007. Net capital outflows increased significantly in the first 

half of 2009, to nearly 15 percent of GDP (from 6 percent of GDP in 2008). 

The United States and Singapore have a free trade agreement, and Singapore typically runs a 

bilateral trade deficit with the U.S. Weak domestic demand resulted in declining trade between 

the two countries in the first half of 2009, but with U.S. exports to Singapore falling at twice the 

rate of U.S. imports from Singapore, Singapore’s trade deficit declined from $6.3 billion in the 

first half of 2008 to $3.0 billion in the first half of 2009. 

South Korea 

After being hard-hit by the global crisis in late 2008, the South Korean economy has recovered 

strongly in 2009 as a result of significant domestic economic stimulus and improved terms of 

trade. Following an 18.8 percent annualized decline in real GDP in the fourth quarter of 2008, 

Korea’s economy expanded by 0.5 percent in the first quarter of 2009, and 11.0 percent in the 

second quarter. Growth in the first quarter was driven by net exports and government spending, 

while growth in the second quarter was driven by net exports and private consumption. The IMF 

has pared its estimate for the 2009 decline in Korean GDP from 4.0 percent, projected in April, 

to 1.0 percent, projected in October. 

In response to the external shock from the international financial crisis, the Korean government 

implemented significant fiscal and monetary stimulus. Korea’s 2009 fiscal stimulus totals 3.8 

percent of GDP ($30 billion), one of the largest among G-20 countries. The fiscal stimulus 

includes roughly 1.2 percent of GDP in tax cuts and 2.6 percent in new expenditures. On the 

monetary side, between September 2008 and February 2009, the Bank of Korea (BOK) reduced 

its benchmark interest rate by 325 basis points to 2 percent, the lowest level in over a decade. 

From the second quarter of 2008 through the first quarter of 2009, Korea’s merchandise exports 

fell by 31 percent, as a result of the sharp drop in global demand. In the second quarter of 2009, 

exports expanded 10 percent as global trade flows improved. Korea’s exports to China, which 

make up a quarter of its total exports, are recovering strongly, while exports to the United States 

and the European Union, which make up 20 percent of exports, continue to be weak. In the first 

half of 2009, Korean exports to the United States declined 23 percent from the first half of 2008, 

while imports from the United States fell 35 percent. As a result, Korea’s bilateral trade surplus 

with the United States increased from $3.7 billion in the first half of 2008 to $5.1 billion in the 

first half of 2009. 

Korea’s overall nominal trade balance has shifted from a deficit of $1.2 billion in the first half of 

2008 to a surplus of $22.1 billion in the first half of 2009. This shift has been driven by a 10 

percent improvement in Korea’s terms of trade from end-June 2008 to end-June 2009, and a 22 

percent depreciation of the won against the U.S. dollar in the same period. Korea’s current 

account, driven by the shift in the trade balance, shifted from a 3.8 percent of GDP deficit in the 

third quarter of 2008 to a 7.0 percent surplus in the second quarter of 2009. 

The Bank of Korea (BOK) intervenes on both sides of the foreign exchange market to limit won 

volatility. Between end-June 2008 and end-February 2009, the period encompassing the worst 

of the crisis, the Korean won depreciated 31 percent against the U.S. dollar, and 25 percent in 

real effective terms. During this period of significant won weakness foreign exchange reserves 

21
fell from $258 billion at end-June 2008 to $201 billion in end-February 2009. In addition, the 

BOK drew down $18 billion on a $30 billion swap line with the U.S. Federal Reserve. 

From the beginning of March through the end of September the won has appreciated 25 percent 

against the dollar, and 13 percent in real effective terms, as global financial conditions and 

liquidity began to improve and the Korean economy returned to growth. During this period, 

foreign exchange reserves have increased to $254 billion as of end-September 2009. In addition, 

the BOK has repaid $15 billion of the $18 billion it has drawn on its swap line with the Federal 

Reserve. Korea’s foreign currency reserves equal 172 percent of total short-term external debt 

and 10.6 months of imports. 

Taiwan 

Taiwan experienced a sharper contraction in real GDP than any other economy in Asia due to 

slowing global demand in the second half of 2008 and the first quarter of 2009. Following a 27 

percent decline in real GDP (at an annual rate) in the fourth quarter, output fell at an annual rate 

of 10.2 percent in the first quarter of 2009, the fourth consecutive quarterly decline. In the 

spring, the economy began to strengthen as export growth resumed. Second quarter real GDP 

increased at an annual rate of 20.7 percent. The government predicts that real GDP will decline 

by 4.0 percent in 2009, and then grow by 3.9 percent in 2010, driven by ongoing stimulus 

spending and a continued improvement in exports. The IMF forecast is similar, with real GDP 

falling by 4.1 in 2009 but growing by 3.7 percent in 2010. 

Despite the fall in demand for Taiwan’s exports, the drop in domestic activity and the associated 

decline in import demand led to an increase in Taiwan’s current account surplus in the first half 

of 2009 to $23.3 billion (12.9 percent of GDP), from $16.0 billion in the first half of 2008. 

While both imports and exports registered year-over-year declines in the first half of 2009 – 

falling by 31.2 percent and 34.3 percent respectively – both increased in the second quarter, 

benefiting from the gradual stabilization of the world economy. Exports increased by 6.9 percent 

and imports increased by 10.7 percent on a quarterly basis in the second quarter. Trade flows 

between Taiwan and the United States also began to stabilize in the second quarter, after falling 

steadily throughout 2008 and the first quarter of 2009. For the first half of 2009, the U.S. 

bilateral trade deficit with Taiwan was $5.7 billion, up from $4.2 billion in the first half of 2008. 

Taiwanese authorities have responded to the recession with significant monetary and fiscal 

easing. From September 2008 to February 2009, Taiwan’s central bank cut its main policy rate 

by a total of 237 basis points, to a record low 1.25 percent. Taiwan also introduced a series of 

fiscal measures, earmarking US$4.5 billion for stimulus under a four-year US$15.2 plan. Most 

of the 2009 spending is scheduled to take effect in the second half of the year. The focal point of 

the long-term fiscal plan is the “i-Taiwan 12 projects,” under which $US121 billion will be 

invested over the next eight years in infrastructure and industrial development projects. Taiwan 

plans to spend $5.1 billion (1.3 percent of GDP) on the i-Taiwan 12 projects in 2009, and the 

authorities also distributed $2.5 billion in shopping vouchers earlier in the year to encourage 

consumer spending. Following an August typhoon, Taiwan’s government approved $3.6 billion 

in spending over three years for relief and reconstruction work. Typhoon Morakot caused the 

island’s worst flooding in 50 years and over $426 million in agricultural losses. 

22
The IMF expects Taiwan’s budget deficit to increase from 0.8 percent in 2008 to 4.7 percent in 

2009. In September, Taiwan’s finance ministry announced a comprehensive budget-reform 

program aimed at keeping public debt below the 40 percent legal limit established by Taiwan's 

Public Debt Law. 

After declining 8.0 percent against the dollar in the second half of 2008, the New Taiwan Dollar 

(NTD) depreciated a further 6.8 percent in the first two months of 2009, amid continued 

deterioration of Taiwan’s economy. The NTD ended the first half of 2009 unchanged against the 

dollar and by the end of September had appreciated 2.4 percent for the year. On a real effective 

basis, the NTD depreciated 0.9 percent in 2009 through September. According to Taiwan’s 

central bank, Taiwan’s exchange rate is market-determined except in instances when “the market 

is disrupted by seasonal or irregular factors” and the central bank intervenes. 

Taiwan's foreign-exchange reserves, which are the world’s fourth largest, increased by 8.9 

percent ($25.9 billion) in the first half of 2009, and reached US$321.1 billion at the end of July. 

Taiwan’s central bank attributed the increase in foreign reserves in 2009 to “returns from foreign 

exchange reserves management” and valuation changes reflecting the appreciation of the euro, 

pound sterling, yen, and “other major currencies.” Taiwan’s foreign reserves amount to 82 

percent of its 2008 GDP, 21 months of imports, and about four times the economy’s short-term 

external debt. Taiwan’s central bank does not disclose the currency composition of its foreign 

exchange reserves, but states that “foreign exchange reserves in the U.S. dollar account for a 

major share of total reserves, followed by the euro and the Japanese yen.” 

Europe

Euro Area 

Real GDP in the 16 countries making up the euro area declined at an annual rate of 9.5 percent in 

the first quarter of 2009, the fourth consecutive quarterly decline. Real GDP continued to 

contract in the second quarter, but by a lesser 0.5 percent annual rate. Country-specific results, 

however, varied widely. In the second quarter, real GDP expanded in Germany and France, at 

annual rates of 1.3 and 1.1 percent, respectively, while Spain, Italy, and the Netherlands 

remained in recession. 

In response to the crisis, euro area governments implemented fiscal support and financial repair 

measures. The region has committed roughly 1.5 percent of GDP in fiscal stimulus for the 2009-

2010 period. Automatic stabilizers, such as unemployment benefits and other social welfare 

payments are estimated to add an additional 1.7 to 1.9 percent of GDP. On the financial front, 

government support commitments – in the form of recapitalization and new bank debt guarantees 

– have reached about 6.5 percent of GDP. Commitments by euro area governments in the form 

of guarantees amount to about $1.5 trillion and capital injections to about $260 billion. The 

European Central Bank (ECB) has provided substantial liquidity support to mitigate the effects 

of the crisis by: (1) cutting the minimum refinancing rate by 325 bps to 1 percent since 

September 2008; (2) providing full allotment, fixed rate (at the minimum refinancing rate) repo 

auctions for up to 12 months; (3) expanding the definition of acceptable collateral by lowering 

the minimum credit rating to BBB- and accepting a broad range of asset-backed securities; and, 

(4) adopting a $90 billion program in June 2009 to directly purchase covered bonds. 

23
As a result of the financial crisis, euro area banks have made approximately $350 billion in 

write-downs. The IMF estimates that additional write-downs by euro area banks in between the 

third quarter of 2009 and the end of 2010 could total as much as $470 billion. Even without 

additional write-downs, the IMF estimates that euro area banks are less capitalized than banks in 

the United States (an average 8.5 percent Tier 1 Capital to Risk-Weighted Asset ratio compared 

to 11.5 percent in the United States at the end of the second quarter of 2009). Euro area banks 

have not attracted significant amounts of new private capital. As a result, there is continuing 

deleveraging by euro area banks which has led to a deceleration of credit growth to the private 

sector from 8.4 percent on a year-over-year basis in August 2008 to 0.3 percent in August 2009. 

The European Union stress test of 22 systemically relevant banks, however, does not reflect a 

capital shortage even in an aggravated scenario. However, Europe’s stress test does not 

disaggregate results to reveal bank-specific results nor were assumptions related to probability of 

default, loss given default or projected bank profits. 

Declining real GDP and the fiscal stimulus measures have weighed on public sector balance 

sheets. The region’s weighted-average budget deficit is projected to deteriorate to 5.6 percent of 

aggregate GDP in 2009 and 7.0 percent in 2010, from 1.9 percent in 2008. Rapidly rising 

deficits are forecast to push public debt levels from 70 percent of GDP in 2008 to 86 percent by 

2010. 

The rapid decline in domestic demand, coupled with the fall in energy prices, resulted in a 0.2 

percent decline in consumer prices in August, on a year-over-year basis. The ECB’s current 

policy interest rate is 1 percent, but the over-night interbank has fallen to nearly 30 bps (nearly 

zero in real terms) in view of heavy ECB liquidity infections. The ECB has indicated that it hold 

the policy rate at this level until the economic rebound gains traction. 

The value of the euro in foreign exchange markets is market-determined. The ECB has not 

intervened in the foreign exchange market since November 2000 when it defended the euro 

against depreciation in a concerted G-7 action. The euro fell by 12.7 percent against the dollar in 

the second half of 2008 and continued to decline against the dollar through early March. 

However, since early March, the euro has been on an upward trend, appreciating 4.6 percent 

against the dollar in the first nine months of 2009. On a real effective basis, the euro was 

unchanged in the first half of 2009 and rose by 0.2 percent through September. 

Falling global demand in the wake of the crisis caused the euro area’s current account deficit to 

increase to 2.0 percent of GDP in the first quarter of 2009 before moderating to 0.5 percent in the 

second quarter as exports steadied and imports continued to fall. Bilaterally, the euro area’s 

trade surplus with the United States peaked in 2006 and has fallen as demand for euro area 

exports from the U.S. slackened and the euro appreciated vis-à-vis the dollar. The euro area 

trade surplus with the United States almost halved from to $41 billion in the first half of 2008 to 

$22 billion in the first half of 2009. 

Norway 

After several years of strong growth, Norway entered its first recession in decades in 2009. 

Tighter domestic credit and reduced external demand for Norwegian exports, notably 

commodities, led real GDP to decline at an annual rate of 3.1 percent in the first quarter of 2009 

and at a 5.0 percent rate in the second quarter. Norway’s accumulated oil savings in its 

24
Government Pension Fund-Global (GPF-G) and the relatively strong stance of its banks meant 

that Norway entered the crisis in a strong position with cushions in place to mitigate the severity 

of the downturn. 

Both fiscal and monetary policies have been used to mitigate the effects of the crisis. The 

authorities’ revisions to the national budget in May increased the spending of oil revenues this 

year beyond what is normally allowed by Norway’s fiscal guidelines, pushing the total fiscal 

stimulus for 2009 to 3 percent of GDP. The Bank of Norway cut its policy rate 450 bps to 1.25 

percent between September 2008 and July 2009. 

Norway has a floating exchange rate and has not intervened in exchange rate markets since 

January 1999. The central bank frequently undertakes foreign exchange transactions for 

operational purposes, including the management of GPF-G, which can indirectly affect the 

country’s exchange rate. After falling by 37 percent against the U.S. dollar in the second half of 

2008, the krone regained some ground in 2009, appreciating 7.5 percent against the dollar in the 

first half of 2009 and 17 percent through September. On a real effective basis, the currency rose 

13.4 percent in the first half of 2009 and 19 percent through September. 

Norway has run current account surpluses since 1999 due to its position as a major oil and gas 

exporter. With the drop in commodity prices from 2008 highs, Norway’s current account surplus 

narrowed somewhat to 17.4 percent of GDP in the second quarter of 2009 from 20.7 percent in 

the fourth quarter of 2008. Norway’s trade surplus with the United States was $1.4 billion in the 

first half of 2009, down from $2.4 billion in the first half of 2008. Norway’s exports to the 

United States declined twice as much as imports from the U.S. over this period. 

Norway’s sustained large external surpluses have allowed it to build up nearly $50 billion in 

official foreign exchange reserves. An additional $374 billion in accumulated surpluses is held 

in the GPF-G which, at end-June, was the second-largest sovereign wealth fund after the Abu 

Dhabi Investment Authority. For the past decade, the government has had a fiscal rule which 

limits transfers from the GPF-G to the budget to no more than the expected long-run real rate of 

return of the fund, estimated at 4 percent. The government uses these transfers to finance the 

country’s non-oil budget deficit, which has typically been in the range of 3-4 percent of GDP. 

Russia 

Russia’s economy contracted sharply in the first half of 2009, as the impact of falling commodity 

prices and a sharp drop in external demand fed through to the domestic economy. Real GDP fell 

at an annual rate of 31 percent in the first quarter of 2009, and by 2.1 percent in the second 

quarter. The IMF expects Russia’s economy to contract 7.5 percent in 2009 and to return slowly 

to 1.5 percent growth in 2010. Inflation, which had risen to over 15 percent on a year-over-year 

basis as of mid-2008 has slowed, but, at 12.3 percent in July 2009, remains high. Russia’s fiscal 

deterioration has been striking: the combined impact of declining economic activity, a collapse in 

the value of trade, and a large stimulus package has pushed revenues down by one-third in the 

first seven months of this year from the same period in 2008, while expenditures have risen by 

one-third. The IMF projects a fiscal deficit of 5.5 percent of GDP for 2009, compared to a 4.1 

percent of GDP surplus in 2008. 

25
After extensive intervention between September 2008 and January 2009 (capped by $75 billion 

in net sales of foreign currency during December alone)8

 to slow depreciation of the ruble, the 

Central Bank of Russia (CBR) announced on January 21, 2009, that it would widen the ruble’s 

exchange rate band by 10 percent. The CBR also tightened ruble liquidity to staunch the loss of 

reserves and stabilize the currency. After falling by 30 percent against the dollar in the last six 

months of 2008, the CBR’s policies have broadly stabilized the ruble (which depreciated 3.7 

percent against the dollar in the first half of 2009, and 1.7 percent in the first nine months). 

Foreign currency reserves fell from $406 billion to $346 billion in January 2009, but have since 

grown to $365 billion as of June 30. According to the JP Morgan Real Effective Exchange Rate 

Index, the ruble fell in real terms by 4.2 percent during the first half of 2009 and 4.4 percent 

through September. With CBR policy shifting away from a heavily managed exchange rate 

arrangement to inflation targeting, the CBR recently has taken action to reduce interest rates and 

facilitate a recovery. 

The sharp decline in commodity prices and fall in external demand fueled a sharp adjustment in 

Russia’s current account balance. The current account surplus declined from 6 percent of GDP 

in 2008 to 0.9 percent of GDP in the first quarter of 2009. The current account surplus rose to 

3.1 percent in the second quarter as exports rebounded. The U.S. merchandise trade deficit with 

Russia fell from $8.7 billion in the first half of 2008 to $6.1 billion in the first half of 2009. 

Analysis by the IMF continues to suggest that Russia’s real exchange rate is broadly in 

equilibrium, and that the scale of the ruble’s real depreciation was appropriate given the change 

in Russia’s long-term fundamentals. 

The balance of Russia’s oil Reserve Fund has declined to $88.5 billion as of July 2009, from 

$137 billion in December 2008. The Russian government projects that the Fund will be 

essentially depleted by end-2010, barring higher-than-expected oil prices. Russian officials plan 

to increase issuance of domestic debt and to issue as much as $20 billion in external debt in 2010 

in order to limit recourse to the National Welfare Fund. 

Switzerland 

Switzerland has been heavily impacted by the financial crisis due to its large financial sector, 

which holds assets equaling six times the country’s GDP. Swiss banks are heavily exposed to 

the sub-prime and Alt-A mortgage markets, and have announced almost $85 billion in writedowns since the crisis began. The Swiss economy has been contracting since the second half of 

2008, with real GDP falling at an annual rate of 3.5 percent in the first quarter of 2009, and 1.0 

percent in the second quarter, as exports of both goods and services fell sharply. The 2.0 percent 

contraction in growth expected by the IMF for 2009 would be the worst downturn in decades in 

Switzerland. 

The Swiss government’s strong fiscal position (net debt at 10 percent of GDP at the end of 2008 

and a fiscal surplus of 0.9 percent of GDP in 2008) allowed it to implement countercyclical 

measures worth about 0.8 percent of GDP for 2009, as well as financial support for the banking 

system of almost 9 percent of GDP. Late in 2008, the Swiss government injected approximately 

$5.2 billion into UBS, the largest bank in Switzerland, but sold this stake to institutional 

 

8

 Intervention figures reported by the CBR include repo-related transactions; the IMF’s definition of foreign 

currency reserves excludes other reserve assets (such as reverse repos). 

26
investors on August 20, 2009. Also in late 2008, the government created a $60 billion fund to 

remove illiquid assets from UBS’s balance sheet, a fund which continues to be managed by the 

Swiss National Bank (SNB). 

The central bank also responded to the global financial and economic turmoil by aggressively 

easing monetary policy to help stabilize the financial sector and real economy. Building on 225 

basis points in rate cuts it announced late in 2008, the SNB further cut its central target for the 

Swiss three-month LIBOR by 25 basis points to “approximately” 0.25 percent in March 2009, 

but simultaneously announced more dramatic measures. Given that short-term interest rates 

were already close to zero and that deflationary pressures were building, on March 12, 2009, the 

SNB announced unconventional measures to ease monetary policy and combat the threat of 

deflation, including both foreign currency intervention as well as credit easing through the 

purchase of private bonds. Since the crisis began, the SNB has been actively supplying both 

Swiss franc and foreign currency liquidity to domestic banks (as well as Swiss franc liquidity 

abroad) through swap agreements with the Federal Reserve, the European Central Bank, and 

central banks in Central and Eastern Europe. The SNB has an unlimited swap arrangement with 

the Federal Reserve that, along with the Federal Reserve’s other swap lines, recently was 

extended to February 2010. At the height of the crisis last October, the SNB auctioned off as 

much as $13 billion daily, but interest has since declined and there are currently no funds 

outstanding. 

The U.S. dollar rose 4.5 percent against the Swiss franc in the second half of 2008, and a further 

11.3 percent in 2009 through mid-March. Since then, through September, the dollar has 

depreciated against the Swiss franc by 12.7 percent. For 2009, through September, the dollar has 

depreciated 2.9 percent against the Swiss franc. On a real effective basis, the franc rose by 3.0 

percent in the first half of 2009 and has appreciated by 3.4 percent in 2009 through September. 

While Switzerland continues to maintain a floating exchange rate, since March, the central bank 

has intervened in the foreign exchange market to prevent further appreciation of the Swiss franc 

vis-à-vis the euro. These interventions have caused the currency to depreciate 2.8 percent versus 

the euro in the first half of 2009, after strengthening 7.7 percent in the second half of 2008. 

While the SNB’s actions in this regard are intended to address tight financial conditions in 

Switzerland, it also had the effect of reducing pressures in Central and Europe, where Swiss 

franc-denominated loans are common and where the franc’s recent appreciation was beginning to 

threaten financial stability. Switzerland’s foreign exchange reserves rose by 71 percent to $75.4 

billion in the first half of 2009 due to the SNB’s policy of currency intervention. 

Switzerland has not faced significant balance of payments pressures due to its large net creditor 

position vis-à-vis the rest of the world, but the financial crisis has impacted both the current 

account and capital flows. Switzerland’s current account surplus fell from 11 percent of GDP in 

the second half of 2008 to 8.1 percent in the first quarter of 2009, as the difficult external 

environment reduced Switzerland’s net exports of goods and services. The financial crisis also 

contributed to swings in Switzerland’s financial account. Switzerland recorded a financial 

account surplus of $9.8 billion in the first quarter of 2009, compared with a deficit of $41.2 

billion in the second half of 2008, as foreign depositors rushed into Switzerland amid the 

financial crisis. The U.S. merchandise trade surplus with Switzerland was $1.7 billion in the first 

half of 2009, down from $3.7 billion in the corresponding period in 2008 as U.S. exports to 

Switzerland fell by 26 percent and imports fell by 14 percent. 

27
United Kingdom 

The United Kingdom continued to feel the impact of the financial and economic crisis through 

the first half of 2009, as the highly leveraged household sector cut back on consumption 

spending and housing investment, while financial sector strains contributed to declining business 

investment. The economy contracted at an annual rate of 9.3 percent in the first quarter and by 

2.6 percent in the second quarter of 2009. The IMF projects a 4.4 percent decline in real GDP 

this year, with growth of 0.9 percent in 2010. Falling commodity prices and weak domestic 

demand have slowed overall consumer price inflation, from a peak of 5.3 percent year-over-year 

in September 2008 to 1.6 percent in August 2009. 

The Bank of England (BOE) cut its base rate by 450 basis points between October 2008 and 

March 2009, to 0.5 percent, the lowest in the BOE’s history. With the base rate approaching the 

zero lower bound, the BOE adopted “quantitative easing” measures targeted at increasing the 

level of bank reserves in an effort to affect longer-term asset prices and provide additional 

stimulus. In March 2009, the BOE established a roughly $120 million program to increase bank 

reserves through regular purchases of long-term government debt, as well as smaller amounts 

(less than 2 percent of the total combined) of commercial paper and corporate bonds. The size of 

the program was expanded to $240 billion in May and to $280 billion in August. 

The BOE and the government have also implemented a range of measures to provide liquidity 

and capital support to banks hit by the global financial crisis and falling domestic asset prices. 

The BOE measures included facilities to swap private sector debt securities for Treasury bills, 

U.S. dollar repo operations arranged in coordination with the Federal Reserve, and discount 

window loans. The government’s measures include about $79 billion spent to resolve troubled 

banks, plus $127 billion in capital injections into open banks. In addition, the government has 

assumed around $1.3 trillion in contingent liabilities through various asset and bank borrowing 

guarantee programs. 

The government implemented a fiscal stimulus package in November 2008 that includes tax cuts 

and spending measures amounting to about 2 percent of GDP through next year, offset by tax 

increases and spending cuts amounting to about 1 percent of GDP in subsequent years. The 

fiscal deficit widened from 2.7 percent of GDP in 2007 to 7.0 percent in 2008 as a result of the 

recession’s impact on tax revenues and mandatory social spending such as unemployment 

compensation. The government deficit is projected to widen to more than 13 percent of GDP in 

both 2009 and 2010, primarily due to the fiscal impact of the recession but also as a result of the 

stimulus measures. 

After depreciating by 37 percent against the dollar in the second half of 2008, the pound 

recovered some ground, appreciating by 11.4 percent against the dollar in the first half of 2009. 

In the third quarter, the pound depreciated by 3.0 percent against the dollar. On a real effective 

basis, the pound appreciated by 9.8 percent in the first half of 2009 but depreciated by 3.4 

percent in the third quarter. Foreign exchange reserves fell by $0.4 billion in the first half of 

2009 as the result of valuation adjustments. The U.K. has a freely floating market-determined 

exchange rate, and the BOE has not intervened since 1992. 

The U.K. current account deficit widened to 3.3 percent of GDP in the second quarter of 2009 as 

the goods and services deficit rose and the investment income surplus declined. U.S. imports 

28
from the U.K. fell more rapidly than U.S exports to the U.K. in the first half of 2009 relative to 

same period in 2008. As a result, the U.S. bilateral trade balance went from a deficit of $1 

billion in the first half of 2008 to a $1.2 billion surplus in the first half of 2009. 

Middle East

Gulf Cooperation Council 

Six countries make up the Gulf Cooperation Council (GCC): Bahrain, Kuwait, Oman, Qatar, 

Saudi Arabia, and the United Arab Emirates (UAE). These countries entered the global 

economic crisis with substantial fiscal and foreign currency reserve cushions after several years 

of rising oil prices. Strong foreign asset positions have provided GCC members the resources to 

mitigate the impact of the global slowdown and to run countercyclical policies. Policy responses 

have focused on liquidity management through lowering reserve requirements and interest rates, 

the provision of deposit guarantees, and capital injections into domestic banking sectors. Saudi 

Arabia and Bahrain have also increased government spending to stimulate domestic demand. 

Largely mirroring global market trends, GCC financial market indicators have improved since 

March 2009. 

With the exception of Kuwait, GCC countries peg their exchange rates to the U.S. dollar. 

Kuwait dropped its peg in May 2007 in favor of a peg to a basket of currencies as revaluation 

pressures in the region increased. Forward markets imply continued stability in GCC exchange 

rates. 

In May 2009, the UAE announced it would not participate in the planned GCC monetary union. 

The following month, the governments of Saudi Arabia, Bahrain, Qatar, and Kuwait signed a 

formal agreement, pledging to move forward with the monetary union. The agreement must still 

be approved by each Gulf state. Gulf leaders have chosen the Saudi capital Riyadh as the site for 

the future GCC Central Bank. 

Saudi Arabia 

Saudi Arabia entered the global economic crisis with substantial fiscal and foreign currency 

reserve cushions after several years of rising oil prices, high government revenues, and restrained 

increases in government spending. The IMF projects that government gross domestic debt fell to 

13.4 percent of GDP at the end of 2008 from a high of 103 percent of GDP at the end of 1999. 

These cushions facilitated recent government support to the economy and financial sector while 

preserving creditworthiness. 

The Saudi Arabian Monetary Agency (SAMA) continued to take actions in response to the 

global crisis to support the banking system and spur lending. SAMA lowered its official lending 

rate by 50 basis points to 2 percent in January 2009, following cuts totaling 300 basis points in 

the fourth quarter of 2008. It reduced the reserve repo rate (the interest rate on bank reserves 

held at SAMA) by 50 basis points in December 2008 and a further 125 basis points in the first 

half of 2009 to encourage bank lending. Nevertheless, commercial bank deposits at SAMA were 

up 50 percent in the first half of 2009. 

29
Saudi Arabia is providing one of the largest official discretionary fiscal stimulus packages (per 

GDP) of all G-20 countries, at approximately 3.3 percent of GDP in 2009. The 2009 budget is 

its largest on record, with a heavy focus on capital spending to support physical and social 

infrastructure development. The government has budgeted for a 16 percent increase in 

expenditures in 2009, sending a clear signal that the fall in oil prices will not prevent it from 

implementing its long-term investment plans. The IMF expects growth to contract slightly this 

year, following 4.4 percent real GDP growth in 2008. 

The IMF projects Saudi Arabia’s current account surplus will narrow sharply from 29 percent of 

GDP in 2008 to 3.7 percent in 2009, largely as a result of lower oil prices. Saudi Arabia’s 

merchandise trade surplus with the United States declined from $21.5 billion in the first six 

months of 2008 to $4.5 billion in the first six months of 2009. Saudi exports to the United States 

fell by about 64 percent during the same time period. Balance of payments pressure is evident in 

the fall in international reserves and decline in net foreign assets (NFA). Official reserves fell by 

20 percent from a peak of $38.9 billion in July 2008 to $30.9 billion in July 2009. However, 

SAMA’s $385 billion in net foreign assets as of July 2009 dwarfs the official reserve position. 

SAMA brought approximately $60 billion of its net foreign assets onshore since mid-2008 to 

help preserve financial stability and support the Saudi economy. 

The Saudi riyal is pegged to the U.S. dollar. On a broad real effective basis, the riyal has risen 

0.3 percent in 2009, through September. The real exchange value of the riyal rose in the first 

quarter but it has declined since then. These movements reflect both changes in Saudi inflation 

and movements in the U.S. dollar. 

Western Hemisphere

Brazil 

Brazil’s economy is recovering from the crisis relatively quickly. Several years of adherence to 

a strong macroeconomic framework provided space for modest fiscal expansion and significant 

monetary policy expansion to cushion the economy from the financial crisis. As a result, Brazil 

suffered a sharp but short recession, and has shown signs of recovery beginning in the second 

quarter of 2009. Real GDP contracted at an annual rate of 3.8 percent in the first quarter of 

2009, but rebounded by 7.9 percent in the second quarter, led by rising household consumption. 

The IMF expects growth to contract by 0.7 percent in 2009, but to grow by 3.5 percent in 2010. 

Brazil was affected by the global crisis primarily through its external accounts. Weak foreign 

demand reduced commodity prices and export volume. Capital outflows caused a rapid 

depreciation (nearly 45 percent) of the Brazilian real against the dollar in late 2008, but increased 

investor confidence in future growth and recovering commodity prices since have led to a 

reversal. In the first half of 2009, the Brazilian real appreciated 15.4 percent against the dollar, 

and a further 9.6 percent in the third quarter. On a real effective basis, the real has increased by 

22 percent in 2009 through September. 

Exports declined 14.5 percent in the first quarter of 2009, before rebounding 22.5 percent in the 

second quarter. Imports have continued to decline, leaving Brazil with a growing trade surplus. 

In the first half of 2009, the United States ran a $2.4 billion bilateral trade surplus with Brazil, up 

30
from a deficit of $0.1 billion in the same period in 2008 as the U.S. recession continued to reduce 

demand for Brazilian exports. 

Growth in outward profit remittances have offset Brazil’s positive trade balance, leading to a 

current account deficit of 1 percent of GDP in the first quarter of 2009. A resumption of capital 

inflows has helped finance the current account deficit. In the first half of 2009, Brazil received 

portfolio inflows of $4.4 billion and $12.7 billion in foreign direct investment (FDI). The pace 

of fixed income investment and FDI growth has slowed in reaction to the international crisis and 

domestic recession, but the pace of equity market investment picked up markedly in the first half 

of 2009 following strong outflows at the end of 2008. 

Brazil responded to the crisis through fiscal stimulus, direct support to public banks, and 

monetary policy easing. The government implemented a series of fiscal policy measures, 

including moving forward purchases and investments and implementing temporary reductions in 

various tax rates. In the first half of 2009, Brazil’s net public sector debt ratio was 43 percent of 

GDP, up from 36 percent at the end of 2008, due largely to the government’s fiscal stimulus 

programs. 

Since the onset of the crisis, public sector bank lending has grown as a share of total outstanding 

credit. From December to June, public bank lending increased 11.8 percent, while domestic 

private bank lending grew only 1.4 percent and foreign private bank lending contracted 1.9 

percent. BNDES, Brazil’s main public development bank, has also increased lending by 8.0 

percent in the first half of 2009. Petrobras, Brazil’s state-controlled oil company, and BNDES, 

along with Brazil’s agricultural, automobile, and mortgage sectors, each received substantial 

assistance through allocated lending and increased funding. Still, loan-to-deposit interest rate 

spreads remain high, due in part to the global retrenchment of credit. The average capital ratio 

for Brazilian banks is currently 18 percent (well above both the minimum requirement of 11 

percent and international benchmark 8 percent), though there are signs of continued risk aversion 

by private banks. 

The central bank reduced the target policy rate by 5.0 percentage points (to 8.75 percent) in the 

first half of 2009, and provided $40.4 billion in monetary stimulus through reductions in reserve 

requirements on deposit accounts. The central bank continued 2008 actions to increase dollar 

liquidity and trade finance through repurchase and swap market transactions and through the 

dollar facility for Brazilian importers and exporters whose market access to trade finance had 

been interrupted. In addition, a dollar facility exists for firms whose external debts mature in 

2009. The $30 billion swap line established between the Federal Reserve and Brazil’s central 

bank in October 2008 was extended through February 1, 2010. Through August 2009, the 

central bank had not drawn on the swap line. 

Since September 2008, the central bank has intervened repeatedly in the foreign exchange 

market, initially to support the Brazilian real and promote orderly conditions. More recently 

intervention has aimed at smoothing appreciation of the real in response to capital inflows. The 

central bank purchased $18 billion in the first half of 2009, and now holds $201 billion in foreign 

currency reserves, which exceeds its total external debt ($195 billion). 

31
Canada 

The financial crisis affected Canada primarily through a drop in external demand leading to a 

decrease in employment and output. Real GDP contracted at an annual rate of 3.4 percent in the 

second quarter of 2009, following a 6.1 percent decline in the first quarter. Between October 

2008 and July 2009, employment in Canada fell by 414,400, or 2.2 percent of the labor force. 

The values of the Canadian dollar and of Canadian equities, both of which are closely linked to 

commodities prices, hit troughs in March 2009, but have since recovered to late-2008 levels. 

The Canadian financial system has proved relatively resilient throughout the crisis due to lower 

leverage and more conservative lending practices, although strains in the Canadian wholesale 

funding markets have been significant. 

In the fourth quarter of 2008, Canada’s current account surplus, which it had maintained for a 

decade, turned into a deficit, as both the quantity and price of exported commodities collapsed. 

Canada's overall current account deficit expanded to $9.8 billion, or 3 percent of GDP, during 

the second quarter of 2009, which also marked the first quarterly deficit for it merchandise trade 

balance in more than 30 years. Trade flows with the United States have been a significant factor 

in this development, as Canada’s goods surplus with the United States narrowed to $8.6 billion 

in the first half of 2009, from $41.3 billion in the first half of 2008. Canada’s imports from the 

United States were down 29 percent but its exports to the U.S. fell by 41 percent. 

The government has taken several measures to counter the effects of the crisis. In an effort to 

stimulate domestic consumption, the government’s budget passed in March 2009 includes a 

fiscal stimulus of 2.9 percent of GDP over two years. Starting in October 2008, the Bank of 

Canada responded by expanding its provision of liquidity through an increase in term purchase 

and resale agreements, widening eligible collateral, extending the range of counterparties, 

creating a facility to provide insurance on wholesale term borrowing of deposit-taking 

institutions, and implementing a program to purchase up to $75 billion of insured mortgages. 

The Bank of Canada’s $30 billion swap arrangement with the Federal Reserve has been extended 

until February 2010. Through the end of September, no drawings had been made. 

The Bank of Canada also cut its main policy rate by 50 basis points in March and a further 25 

basis points in April to a record low of 0.25 percent, which it judges to be the effective lower 

bound. Prices fell by 0.8 percent year-over-year in August 2009, a turnaround from a 3.5 percent 

inflation rate in August 2008. Most of the decrease in prices is attributable to falling energy 

prices, but core inflation at 1.6 percent has fallen under the Bank of Canada’s 2 percent target. 

There are signs that Canada’s economy is responding to the fiscal and monetary stimulus. The 

decline in quarterly real GDP moderated to an annual rate of 3.4 percent in the second quarter 

and final domestic demand rose by 0.4 percent. Monthly GDP increased at an annual rate of 1.2 

percent in June 2009, the first increase since July 2008. 

The Canadian dollar appreciated 4.4 percent against the U.S. dollar in the first half of 2009 and 

an additional 8.0 percent in the third quarter. On a real effective basis, the Canadian dollar has 

appreciated 9.1 percent in 2009 through September. Canada has a freely floating, marketdetermined exchange rate and relies on inflation targeting to guide monetary policy. Canada’s 

monetary authorities have not intervened in the foreign exchange market since September 2000, 

when they did so in coordination with other G-7 members to support the euro. 

32
Mexico 

The combination of the global crisis, the U.S. downturn, and the swine flu epidemic has 

propelled Mexico into its worst recession in decades. Real GDP has fallen for four consecutive 

quarters on a seasonally adjusted annualized basis, and, as of the second quarter of 2009, was 

down nearly 10 percent from its year-ago peak. The ailing industrial sector – critically 

dependent on U.S. demand – has been the biggest drag on the Mexican economy, pulled down 

by sharp declines in auto output and auto exports. The year-long slide in industrial production, 

however, shows signs of abating. Remittances fell by 11.9 percent year-over-year in the first 

half of 2009, reflecting exposure to U.S. housing markets, and exports to the United States 

shrank by nearly 30 percent. Although both oil and manufacturing exports contracted in the first 

half of 2009 – by 40 percent and 25 percent, respectively – oil exports expanded in the second 

quarter on rising oil prices, while the decline in manufacturing exports eased slightly. 

To mitigate the length and depth of the downturn, the Mexican authorities passed an 

expansionary 2009 budget in November 2008 and introduced a second stimulus package in 

January 2009. The combined packages are estimated at 1.5 percent of 2009 GDP and aim to 

increase infrastructure spending, expand financing to federal housing agencies, increase support 

to small- and medium-sized enterprises and the agricultural sector, and protect employment and 

provide income support. The government announced an additional 0.16 percent of GDP 

stimulus following the swine flu outbreak in the spring. However, as a result of below-budget oil 

and tax revenue in the first half of the year, the government has been forced to make spending 

cuts totaling 0.7 percent of GDP. 

The current account moved from a 2.8 percent of GDP deficit in the fourth quarter of 2008 to a 

0.2 percent of GDP surplus in the second quarter of 2009 – the first quarterly surplus since 2005. 

Underlying this improvement was a 29.0 percent decline in imports, reflecting the decline in 

domestic demand in Mexico, which exceeded the 24.8 percent contraction in exports. The U.S. 

bilateral trade deficit with Mexico declined to $21.2 billion in the first half of 2009, down nearly 

$15 billion from the same period in 2008, as the fall in U.S. imports outpaced the fall in U.S. 

exports. 

As Mexico’s economy faltered in fall 2008, risk aversion in global financial markets and the 

unwinding of derivatives contracts triggered a sudden, massive peso depreciation and 

considerable stress in credit markets. The peso depreciated by 13 percent against the dollar in 

2009 through mid-March, following 33 percent depreciation in the last half of 2008. As risk 

aversion abated in the spring, the peso strengthened and is up 1.7 percent against the dollar 

through the first nine months of 2009. On a real effective basis, the peso has appreciated 0.8 

percent through September 2009. 

Mexico has a flexible exchange rate and employs an inflation-targeting monetary policy regime. 

Pemex, the state-controlled Mexican oil company, is obligated by law – along with the rest of the 

non-financial public sector – to sell its foreign currency earnings to the Bank of Mexico to 

service the country’s foreign debt. Reserves accumulate, therefore, when the foreign currency 

obtained by the Bank of Mexico is greater than foreign debt payments. 

Following the 17 percent depreciation of the peso last October, the central bank reinstated the 

daily dollar sales mechanism (suspended in July 2008) to reduce volatility and maintain market 

33
liquidity.9

 Rather than managing foreign exchange reserves accumulation as before, however, 

the central bank now auctions dollars at a 2 percent depreciated peso rate every day. These 

auctions were initially set at a maximum of $400 million a day, but the Foreign Exchange 

Commission has twice lowered the maximum amount sold at below-market rates to its current 

level of $250 million a day. It also added a daily sale of $100 million – which it subsequently 

reduced to $50 million – at market rates to the interbank market, but announced the suspension 

of this auction effective October 1. 

The central bank began to intervene in the foreign exchange market on a discretionary basis by 

supplying dollars directly to banks and brokers when the currency came under pressure in 

October 2008 and again in early February 2009. In the first half of 2009, the central bank sold 

$12 billion to reduce volatility in the foreign exchange market. As a result, the stock of 

international reserves stood at $74.2 billion at the end of June, down from $85.4 billion at end2008. As of September, reserves rose to $77.2 billion after Mexico received $4 billion in SDRs 

from the IMF’s general allocation. 

To ensure sufficient liquidity for banks and corporations and relieve pressure in local debt 

markets, the central bank announced in late 2008 that it would pay interest on commercial bank 

deposits, and took measures to reduce the supply of long-term bonds for an increase in shortterm tenors. In April the Mexican central bank tapped $4 billion of its $30 billion swap line with 

the Federal Reserve, to support corporate refinancing needs. In June, the swap line was extended 

until February 1, 2010. To help stabilize financial markets, public sector financial institutions 

have provided guarantees for commercial paper and mortgage-backed securities. 

Inflation remained well above the central bank’s 3.0 percent target in the first half of the year, 

but has declined since the start of 2009, falling to 5.1 percent in August, confirming expectations 

that the sharp contraction will drive disinflation. As the economic contraction intensified and 

inflation fell, the central bank reduced its policy rate by a cumulative 375 basis points in the first 

half of 2009 to 4.5 percent. 

Venezuela 

The global crisis continues to affect Venezuela primarily through the price of oil. As oil prices 

plunged in the first quarter of 2009, the economy contracted at an annual rate of 16.4 percent. 

With the moderate rebound in oil prices in the second quarter, the economy expanded 5.4 

percent. 

 

Markedly lower oil revenues have led the government to draw down international reserves and 

increase its reliance on local debt to finance its expansionary fiscal policy. On-budget 

expenditures expanded by 37 percent in 2008, but slowed to 2 percent year-over-year in the first 

quarter of 2009 as government revenues have declined. In January 2009, the central bank 

transferred $12.5 billion of its foreign currency reserves to the National Development Fund, an 

off-budget fund used by the government to finance domestic and international development 

projects. (This reserve transfer largely explains the 27 percent fall in Venezuela’s reserves to 

$30.5 billion during the first eight months of the year.) In March 2009, the government tripled 

 

9

 Under this mechanism, the central bank sells half of the reserves it has accumulated in the previous quarter at a 

constant daily amount. 

34
the domestic debt issuance ceiling for 2009. Banks are expected to take on the bulk of the 

domestic debt, increasing the probability of crowding out lending to the private sector. PDVSA, 

the state-owned oil company, has also tapped local debt markets to compensate for lower oil 

export receipts. In June and July, it issued $3 billion in bonds to pay overdue debts to local 

currency suppliers. 

Domestic inflation remains high, despite moderating during the first half of 2009, reflecting 

continued expansionary monetary and fiscal policy. Inflation in July was 26.2 percent on a yearover-year basis, down from 34.5 percent in September 2008. Domestic real interest rates 

continue to be significantly negative. The fixed nominal exchange rate, combined with high 

domestic inflation, resulted in a 6 percent appreciation of the real effective exchange rate in the 

first half of the year, on top of a 35 percent appreciation during the second half of 2008. 

Meanwhile, the parallel exchange rate depreciated approximately 18 percent in the first half of 

the year but has remained stable through August. 

Venezuela pegged its currency to the U.S. dollar in 2003, following a period of rapid exchange 

rate depreciation, capital outflows, and falling international reserves. On January 1, 2008, the 

currency was redenominated when the authorities removed three zeroes and renamed it the 

“strong bolivar,” although the exchange rate vis-à-vis the U.S. dollar was virtually unchanged. 

The official nominal exchange rate of 2.15 strong bolivars per U.S. dollar has been effectively 

constant since April 2005. The government maintains this peg through tight controls on capital 

movements and the supply of available foreign exchange. Purchases of foreign exchange in 

Venezuela are subject to approval by CADIVI, the government’s foreign exchange authority. 

The current account balance moved into deficit in the fourth quarter of 2008 for the first time in 

seven years, and the balance continued to decline in the first quarter of 2009 driven by the 

significant decline in oil prices. In the second quarter the current account balance returned to a 

slight surplus, as exports (notably oil) increased. Foreign direct investment recorded a $2.5 

billion outflow (not seasonally adjusted) in the second quarter, reflecting the continued poor 

business environment in spite of developmental opportunities in the oil and gas sector, and the 

public sector repatriated $4.5 billion of deposits abroad to finance the fiscal deficit and settle the 

nationalization of several private assets. Bilaterally, the U.S. trade deficit with Venezuela 

narrowed to $7.1 billion in the first half of 2009, a decrease of $13 billion from the first half of 

2008, largely the result of lower U.S. oil imports. 

35
Appendix 1: An Historical Perspective on the Reserve Currency Status of the U.S. Dollar 

The United States dollar has been the world’s primary reserve currency for over 60 years. Under 

the Bretton Woods system, the dollar was pegged to gold and most other currencies were pegged 

to the dollar. As a result of this arrangement, dollars were used as the main intervention 

currency and, hence, reserve currency. Limits on convertibility of some currencies, particularly 

in the early years of the Bretton Woods system, also supported the use of the dollar as a reserve 

currency. With the collapse of the Bretton Woods system, fluctuations in the dollar’s exchange 

rate and the rise of other global economic powers, there have been various predictions of the 

demise of the dollar as the primary reserve currency. Yet, data on currency composition of 

reserves indicate that the dollar’s share of reserves today is roughly the same as 30 years ago, as 

is the euro’s.10 There have been variations in the dollar’s share, but it has never fallen below 50 

percent. 

The rise of Germany and Japan as major economic powers led to the view that the deutschemark 

and the yen would rival the dollar, dividing the world into three currency blocs. The yen’s share 

of global foreign currency reserves did rise in the 1980s, but peaked at close to 9 percent in 1991 

and since has declined to less than 3 percent. The deutschemark was the main reserve currency 

among the euro legacy currencies and accounted for the largest share of reserves after the dollar. 

The share of reserves held in deutschemarks ranged from 10 to 18 percent between 1979 and 

1998. 

The decision to establish the European monetary union led to further predictions of the dollar’s 

demise. The euro is currently the only other major reserve currency, accounting for one-fourth 

of foreign currency reserves. Throughout the 1980s, the combined share of the euro legacy 

currencies plus the European Currency Unit (ecu) hovered at around 30 percent.11 

The dollar’s role as the primary reserve currency (and, more generally, as the primary 

international currency) was not established by decree but, rather, because of the emergence of the 

U.S. as the world’s major economy. Economists point to several key factors that determine the 

use of a currency for reserves. These are: 

• the size of the domestic economy, 

• the importance of the economy in international trade, 

• the size, depth, and openness of financial markets, 

• the convertibility of the currency, 

• the use of the currency as a currency peg, and 

• domestic macroeconomic policies. 

 

10 Reserve composition data is reported on a voluntary basis and compiled by the IMF. Data prior to 1995 is only 

available in IMF annual reports. More recent data is available from the IMF’s Currency Composition of Official 

Foreign Exchange Reserves (COFER) database. Currently there are 140 entities that report to COFER, including 

IMF member countries, non-members, and other foreign exchange reserves holding entities. Reporting is 

confidential, but the IMF has indicated that all advanced economies (as classified by the IMF) report to COFER. 

The results of the analysis in this appendix would not change unless non-reporters hold sharply different currency 

compositions of reserves and have changed those compositions over time. 

11 The ecu was the unit of account for the European Monetary System (EMS) the precursor to European monetary 

union. It was computed as a weighted average of the currency participating in the EMS. 

36
Most of these factors suggest that the dollar and the euro would account for equal shares of 

global reserves. The size of the euro area economy is only slightly smaller than the U.S. 

economy. The economy of the euro area is only slightly smaller than the U.S. economy. Both 

the euro area and the United States account for a large share of global trade. Both the euro and 

the dollar are freely convertible, and both economies have a history of sound macroeconomic 

policies. In addition, the dollar and the euro are the only currencies to which other currencies are 

regularly pegged. 

The key factor that may explain the smaller share of the euro as a reserve currency is the size and 

depth of government bond markets. Although total sovereign debt outstanding in the euro area 

rivals that of the United States, there is no common euro area sovereign debt market. This 

reduces the ease with which holders of euro-denominated securities can buy and sell them, 

compared with U.S. Treasury securities. 

These factors also explain why no emerging market currency accounts for a visible share of 

global foreign currency reserves. A few emerging markets have become large economies and 

global trading powers. Likewise, several of the emerging markets have established a history of 

sound macroeconomic policies resulting in low inflation and sustainable public debt levels. 

Emerging economies typically, however, do not have well developed and open domestic 

financial markets and, in some cases, limit convertibility. Over time, financial markets in many 

emerging markets are almost certain to become more developed and integrated with global 

capital markets. Financial market development combined with sound macroeconomic policies 

and open markets should lead to an increased international role for emerging market currencies 

and a greater diversification of foreign currency reserves. Nevertheless, as long as the United 

States maintains sound macroeconomic policies and deep, liquid, and open financial markets, the 

dollar will continue to be the major reserve currency. 

0

10

20

30

40

50

60

70

80

1979198119831985198719891991199319951997199920012003200520072009

Note: Prior to 1999 data for euro is the sum of reserves held in the legacy 

currencies and ecus.

Currency Composition of Foreign Reserves

(percent of allocated reserves)

dollar

euro

sterling yen

37
Appendix 2: Report to Congress on IMF Bilateral and Multilateral Surveillance over 

Members’ Policies 

The Supplemental Appropriations Act, 2009 requires Treasury to (1) report on ways in which 

the IMF's surveillance function under Article IV could be enhanced and made more effective in 

terms of avoiding currency manipulation; (2) report on the feasibility and usefulness of 

publishing the IMF's internal calculations of indicative exchange rates; and (3) provide 

recommendations on the steps that the IMF can take to promote global financial stability and 

conduct effective multilateral surveillance.12 

Background on IMF Surveillance

The IMF was founded in 1944 against the backdrop of the destructive mercantilist economic 

policies of the 1930s, including highly protectionist trade policies and beggar-thy-neighbor 

competitive exchange rate depreciations. From the start, exchange rate issues were at the core of 

the Fund’s fundamental responsibilities in the international monetary system. 

IMF member countries have the right to select an exchange rate regime of their choosing but also 

an obligation not to manipulate their exchange rate for the purposes of preventing effective 

balance of payments adjustment or gaining an unfair competitive advantage in international 

trade. The IMF is charged with overseeing the international monetary system to ensure its 

effective operation and monitoring each member’s compliance with its policy obligations. This 

involves both bilateral and multilateral surveillance of exchange rates. 

Obligations over bilateral surveillance were operationalized in the landmark 1977 Executive 

Board Decision on Surveillance of Members’ Exchange Rate Policies. In fulfillment of its 

surveillance responsibilities, the IMF’s Executive Board conducts Article IV consultations with 

each member country, typically once a year. IMF Management, or a country, may delay the 

Article IV consultation for a reasonable period. During the Article IV process, an IMF staff team 

meets a country’s economic officials at the technical, senior policy, and typically the 

Ministerial/Central Bank Governor level. IMF staff views are then set forth in a staff report that 

summarizes economic developments and prospects, as well as discussions with the national 

authorities. The staff report is discussed by the IMF Executive Board. Publication of both the 

summary of the IMF Executive Board meeting and the staff paper are voluntary but presumed, 

though the country in question has the right to delete “market sensitive” information, and may 

decline to permit publication altogether. 

The key instruments of the IMF’s multilateral surveillance are two semi-annual publications 

produced by the Fund – the World Economic Outlook (WEO) and Global Financial Stability 

Report (GFSR). The WEO presents IMF staff analyses of global economic developments during 

the near and medium term. The GFSR focuses on current conditions in global financial markets, 

highlighting issues that could pose a risk to financial market stability. In addition, broad 

developments in the exchange rates of systemically important countries are reviewed 

periodically by the Executive Board, e.g., through discussions of the WEO, the GFSR, and crosscountry analysis of key themes in bilateral surveillance. 

 

12 Title XIV, Section 1403(c) of the Supplemental Appropriations Act, 2009 (P.L.111-32). 

38
Improving IMF Bilateral Exchange Rate Surveillance

In June 2007, the IMF Executive Board adopted a new Decision on Bilateral Surveillance over 

Members’ Policies, replacing the 1977 Decision on Surveillance over Exchange Rate Policies as 

the guiding document on surveillance. The new decision was strongly backed by the U.S. 

Treasury Department in an effort to refocus the Fund on its core mandate.13 In addition to 

formalizing the de facto coverage of fiscal, monetary, and financial sector policies in the conduct 

of bilateral surveillance, the new IMF surveillance framework reaffirmed the central role of 

exchange rate work in the Fund’s daily life. 

The 2007 Decision restored exchange rate surveillance’s position at the core of the IMF’s 

mandate. Since the Decision, IMF surveillance of exchange rates has improved in both breadth 

and quality. The IMF’s Independent Evaluation Office found only 63 percent of Article IV 

reports from 1995-2005 included a clear assessment of the exchange rate’s value in relation to 

economic fundamentals. 14 In contrast, the 2008 Triennial Surveillance Review found that that 

number had risen to 92 percent after the Decision.15 Selected issues papers accompanying 

Article IV staff reports have been increasingly devoted to exchange rate issues and the 

sophistication of exchange rate assessments has improved, as econometric assessments of the 

exchange rate’s equilibrium value have become more common. 

Despite these improvements, the IMF’s bilateral exchange rate surveillance still needs 

improvements in its candor, consistency, and transparency. In terms of candor, the 2008 

Triennial Surveillance Review noted that a large portion of IMF exchange rate assessments 

completed since the 2007 Decision conclude that the exchange rate is broadly in line with 

fundamentals, even when large current account imbalances exist. IMF staff are too quick to 

explain current account imbalances as a result of temporary factors and 1 in 5 IMF Mission 

Chiefs cited the “need to preserve quality relationships with the authorities” as a challenge to full 

treatment of exchange rate issues. Taken together, this suggests IMF bilateral surveillance is 

biased towards accommodation of large external imbalances, as opposed to adjustment. With 

IMF staff facing strong pressure from country authorities to avoid conclusions of over or 

undervaluation of the exchange rate, improving the candor of IMF exchange rate surveillance 

requires providing IMF staff with counterbalancing institutional incentives for frank 

assessments. In particular, the IMF must explore methods to make both staff and management 

more accountable for their surveillance conclusions. Two possible methods are either ex-post 

assessments of bilateral surveillance conclusions or peer review of exchange rate assessment 

conclusions (i.e. the assessments would be ‘refereed’). 

In terms of consistency, the IMF needs to deepen the integration between multilateral and 

bilateral surveillance and devote more consideration in Article IVs to the external implications of 

a member’s policies. The IMF has increasingly incorporated some treatment of the external 

implications of members’ policies (including exchange rate policies) into bilateral surveillance of 

systemically important countries. However, the IMF’s bilateral surveillance of members at times 

continues to condone policies (such as excess reserve accumulation) that seem inconsistent with 

 

13 See, for example, remarks by Under Secretary for International Affairs Tim Adams at the American Enterprise 

Institute Seminar, “Working with the IMF to Strengthen Exchange Rate Surveillance,” February 2, 2006. 14 Independent Evaluation Office of the International Monetary Fund, “An IEO Evaluation of IMF Exchange Rate 

Policy Advice, 1999-2005,” 2007. 

15 International Monetary Fund, “2008 Triennial Surveillance Report – Overview Paper,” September 2, 2008. 

39
the risks highlighted in the IMF’s multilateral surveillance. Discussion of external and internal 

spillovers is rare in surveillance of less systemically important countries, even though these 

countries in aggregate can also influence the global system. Improving the consistency of 

surveillance requires better use of use multilateral surveillance analysis in the WEO and GFSR 

as inputs into bilateral surveillance. Strengthening cooperation between the country teams for 

interdependent economies (for example, by rotating staff) might also help increase the focus on 

cross-border spillovers. 

Finally, the transparency of the IMF’s exchange rate assessments must increase. The most 

important transparency measure is to continue to encourage IMF members, particularly 

systemically important countries to consent to timely Article IV reviews and the publication of 

their Article IV staff reports. Among the G-20 economies for example, two have not held an 

Article IV consultation with IMF staff in the past two years (Argentina and Turkey) and four 

more did not consent to publication of the staff reports from their most recent Article IVs (China, 

Brazil, Indonesia, and Saudi Arabia). 

The transparency of the analysis behind the IMF’s exchange rate assessment conclusions also is 

lacking in some cases. The 2008 Triennial Surveillance Review found that 22 percent of staff 

reports in the 50-country sample did not include clear presentations of the methodologies used in 

the exchange rate assessment. In some cases, the IMF simply states its conclusion that a 

currency is in line with its equilibrium, without providing supporting rationale. In other cases, 

the IMF presents the results of quantitative equilibrium exchange rate exercises without 

providing analysis and support for the conclusions. IMF staff could better document their 

exchange rate assessment analysis, in either the Article IV report itself or in accompanying 

documents. 

Publication of IMF CGER Estimates

Since 1997, the IMF Consultative Group on Exchange Rate issues (CGER) has been conducting 

biannual exchange rate assessments to determine whether the exchange rate is broadly in line 

with fundamentals. Over time the methodologies used in the assessments have been revised and 

the number of currencies included in the assessments has been expanded. Currently 

CGER covers 27 advanced and emerging market economies with the assessments based on three 

distinct but complementary methodologies—the macroeconomic balance approach, a reduced 

form equilibrium real exchange rate approach, and an external sustainability approach. 16 

The results of this exercise are not publicly available, but CGER estimates for a particular 

currency may be published as part of the bilateral Article IV report. For example, CGER or 

CGER-type estimates were published for 11 of the G-20 economies in 2009. Three reports refer 

to the results of the CGER analysis but do not provide estimates. In the 4 cases where the Article 

IV report was not published, a “Public Information Notice” was released. Each of these 

provided a qualitative assessment of the real effective exchange rate relative to equilibrium but 

not data are given. Publication of the Article IV staff reports is at the discretion of the member 

country and each member retains the right to delete market sensitive information from a staff 

 

16 These methodologies are described in “Exchange Rate Assessments: CGER Methodologies,” International 

Monetary Fund Occasional Paper #261, 2008. 

40
report before publishing. Similarly, publication of the CGER analysis would require approval of 

the member countries whose exchange rates are included in the assessment. 

Because the IMF publishes the methodologies used in the CGER assessments it is possible for 

researchers to develop similar estimates. An exact replication of the CGER assessments may not 

be possible as some of the data (notably import and export elasticities for individual economies) 

are not published and the IMF applies judgment to the results from the three methodologies to 

develop an overall exchange rate assessment. Nevertheless, researchers in academia, think tanks, 

and, financial markets use similar data and models to produce exchange rate assessments for a 

range of currencies. 

Publication of CGER estimates would increase the transparency of the IMF’s exchange rate 

surveillance, and expose the measures to outside scrutiny which could lead to refinements in 

methodologies. At this point, however, the CGER assessment does not cover most emerging 

market currencies. Technical challenges remain to expanding the analysis to commodity 

dependent economies and to economies undergoing rapid structural change but the IMF has 

developed methodologies to address some of these challenges. Even if the CGER assessments 

were published it is important to bear in mind that no precise methodology exists to identify real 

effective exchange rate misalignments. Nevertheless, models of equilibrium exchange rates can 

provide useful information especially when various models reach generally similar conclusions 

in direction and magnitude, (but even when they do not). Further, when model-based results are 

coupled with other available data composite judgments can be reached. 

Improving IMF Multilateral Surveillance

In light of the global economic crisis, the IMF’s multilateral surveillance mission has taken on 

increasing importance. Enhanced multilateral surveillance by the IMF is crucial for both 

recovery from this crisis and prevention of future economic instability. The IMF’s participation 

in the G-20 mutual assessment mechanism, the new joint IMF and Financial Stability Board 

(FSB) early warning exercise, and the IMF’s role in coordinating exit strategies are important 

inputs in this enhanced multilateral surveillance framework. 

As part of the Framework for Strong, Sustainable, and Balanced Growth agreed to at the 

Pittsburgh G-20 Summit, the IMF will play a key advisory role in the G-20 mutual assessment 

mechanism. The IMF will develop a forward-looking analysis of whether policies pursued by 

individual G-20 countries are collectively consistent with more sustainable and balanced 

trajectories for the global economy, and report regularly to both the G-20 and the International 

Monetary and Financial Committee (IMFC). 

The IMF/FSB Early Warning Exercise is intended to identify risks and vulnerabilities across 

financial institutions, markets, and countries, with particular emphasis on tail risks—defined as 

low probability, high impact events—that could lead to systemic crisis. The IMF and FSB 

conducted a dry-run of the EWE during the 2009 Spring Meetings and the first full EWE round 

was launched during the 2009 Annual Meetings. 

Finally, the IMF will play an important role in coordinating exit strategies from extraordinary 

crisis-related measures. At the Pittsburgh, G-20 Summit leaders tasked the IMF and FSB with 

assisting Finance Ministers in developing a plan for coordinated exit strategies. The recent IMF 

41
42

WEO highlights the difficulty of coordinating exits. Countries authorities must carefully time 

exit from accommodative policies so that it is neither premature nor delayed. The optimal timing 

of exit will vary with country circumstances, which could create cross-border spillovers that will 

affect the global recovery. Substantive contributions from the IMF to this difficult analytical 

problem are importantly needed.