Macroeconomic and 

Foreign Exchange 

Policies of Major 

Trading Partners of the 

United States

REPORT TO CONGRESS

U.S. DEPARTMENT OF THE TREASURY

OFFICE OF INTERNATIONAL AFFAIRS

December 2020
Contents

EXECUTIVE SUMMARY......................................................................................................................... 1

SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS...................................12

U.S. ECONOMIC TRENDS ....................................................................................................................................12

ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS......................................................24

ENHANCED ANALYSIS UNDER THE 2015 ACT................................................................................................48

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS.......................63

KEY CRITERIA .....................................................................................................................................................63

SUMMARY OF FINDINGS .....................................................................................................................................67

GLOSSARY OF KEY TERMS IN THE REPORT ...............................................................................69

This Report reviews developments in international economic and exchange rate policies

and is submitted pursuant to the Omnibus Trade and Competitiveness Act of 1988, 22

U.S.C. § 5305, and Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015,

19 U.S.C. § 4421.1

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

International Monetary Fund management and staff in preparing this Report.
1

Executive Summary

The global economy experienced a significant negative shock at the beginning of 2020

when the SARS-Cov-2 (COVID-19) pandemic spread throughout the world. Global growth

in 2019 slowed to 2.8%, but the impact of the virus led to a deep contraction in the first half

of 2020. Governments implemented public health policies and restrictions on mobility to

arrest the spread of the virus, and households and business became more cautious in

spending and investment decisions. Governments also provided historic economic support

to offset the damaging effects of the virus through direct fiscal spending as well as indirect

measures. Central banks also took prompt actions to support economic conditions through

expansions and extensions of monetary easing as well as policies aimed at stabilizing

financial markets. 

Global economic conditions have stabilized relative to earlier in the year, but the sharp

slowdown in economic activity in the first half of the year indicates that real GDP will

decline in 2020. The International Monetary Fund (IMF) forecasts the global economy to

contract 4.4% in 2020, the worst recession since the Great Depression. The IMF expects

global growth to return in 2021, but the level of GDP in many economies is expected to

remain below end-2019 levels in 2021 and beyond. Against this backdrop, it is critical that

fiscal and monetary policies in the major economies remain supportive of near-term

activity, while structural policies are used to boost medium-to-long-term growth.

With global growth prospects subdued, it is important that governments bolster domesticled growth rather than seek to raise exports and increase contributions from their external

sectors. Over the four quarters through June 2020, a number of economies have

experienced significant expansions in their current account surpluses, including China,

Taiwan, and Vietnam, while other countries, including Germany and Switzerland, have

maintained large trade and current account surpluses, which allowed for external asset

stock positions to widen further. The total U.S. goods trade deficit widened to 4.5% of GDP

in the second quarter of 2020 from 3.6% of GDP in the first quarter. The current account

deficit expanded to 3.5% of GDP in the second quarter, 1.4 percentage points larger than in

the first quarter and the largest U.S. deficit since the final quarter of 2008. Treasury

remains concerned by these persistent and excessive trade and current account

imbalances. 

Treasury is also concerned by certain economies raising the scale and persistence of

foreign exchange intervention to resist appreciation of their currencies. Treasury

continues to press other economies to uphold the exchange rate commitments they have

made in the G-20, the G-7, and at the IMF. All G-20 members have agreed that strong

fundamentals, sound policies, and a resilient international monetary system are essential

to the stability of exchange rates, contributing to strong and sustainable growth and

investment. G-20 members have also committed to refrain from competitive devaluations

and not target exchange rates for competitive purposes. G-7 economies, meanwhile,

remain committed to market-determined exchange rates, using domestic tools to meet

domestic objectives, and consulting closely and cooperating as appropriate with regards to
2

action in foreign exchange markets. IMF members have committed to avoid manipulating

exchange rates to gain an unfair competitive advantage over other members. 

Nevertheless, a number of countries have conducted foreign exchange market intervention

in a persistent, one-sided manner that exceeds Treasury criteria pursuant to the Trade

Facilitation and Trade Enforcement Act of 2015 (the “2015 Act”). These actions occurred

mostly during a period of dollar weakness as countries sought to limit appreciations of

their currencies. Over the four quarters through June 2020, four major U.S. trading

partners – Vietnam, Switzerland, India, and Singapore – intervened in the foreign exchange

market in a sustained, asymmetric manner. Two of these economies – Vietnam and

Switzerland – exceeded the two other objective criteria established by Treasury to identify

potentially unfair currency practices or excessive external imbalances, which could weigh

on U.S. growth or harm U.S. workers and firms. 

Treasury Analysis Under the 1988 and 2015 Legislation

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

Secretary of the Treasury to provide semiannual reports to Congress on international

economic and exchange rate policy. Under Section 3004 of the 1988 Act, the Secretary

must:

“consider whether countries manipulate the rate of exchange between their currency

and the United States dollar for purposes of preventing effective balance of payments

adjustments or gaining unfair competitive advantage in international trade.” 

This determination may encompass analysis of a broad range of factors, including not only

trade and current account imbalances and foreign exchange intervention (criteria under

the second piece of legislation discussed below), but also currency developments, the

design of exchange rate regimes and exchange rate practices, foreign exchange reserve

coverage, capital controls, monetary policy, and trade policy actions, as well as foreign

exchange activities by quasi-official entities that may be undertaken on behalf of official

entities, among other factors.

The 2015 Act calls for the Secretary to monitor the macroeconomic and currency policies of

major trading partners and conduct enhanced analysis of and engagement with those

partners if they meet certain objective criteria that provide insight into possibly unfair

currency practices. 

In this Report, Treasury has reviewed 20 major U.S. trading partners with bilateral goods

trade with the United States of at least $40 billion annually against the thresholds Treasury

has established for these three criteria:
3

(1) A significant bilateral trade surplus with the United States is one that is at least $20

billion over a 12-month period.2 This threshold captures a group of trading partners

that represented roughly 80% of the value of all trade surpluses with the United States

in 2019. It also captures all trading partners with a trade surplus with the United States

that is larger than about 0.1% of U.S. GDP.

(2) A material current account surplus is one that is at least 2% of gross domestic

product (GDP) over a 12-month period. This threshold captures a group of economies

that accounted for about 86% of the nominal value of current account surpluses

globally in 2019. 

(3) Persistent, one-sided intervention occurs when net purchases of foreign currency

are conducted repeatedly, in at least 6 out of 12 months, and these net purchases total

at least 2% of an economy’s GDP over a 12-month period.3 Looking over the last two

decades, this quantitative threshold would capture all significant instances of sustained,

asymmetric foreign exchange purchases by major U.S. trading partners.

Treasury’s goal in establishing these thresholds is to identify where potentially unfair

currency practices or excessive external imbalances that could weigh on U.S. growth or

harm U.S. workers and businesses may be emerging.

Because the standards and criteria in the 1988 Act and the 2015 Act are distinct, an

economy could be found to meet the standards identified in one of the Acts without being

found to have met the standards identified in the other. 

Treasury Conclusions Related to Vietnam

Vietnam met all three criteria under the 2015 Act over the four quarters through June

2020. Treasury has conducted enhanced analysis of Vietnam in this Report and will also

commence enhanced bilateral engagement with Vietnam in accordance with the Act. The

bilateral engagement will include urging the development of a plan with specific policy

actions to address the underlying causes of Vietnam’s undervaluation of its currency.

Vietnam has tightly managed the value of the dong relative to the dollar at an undervalued

level since 2016. Vietnam has applied this policy consistently in periods of both

appreciation and depreciation pressure. Additionally, Vietnam entered 2019 with a

relatively low level of reserves. Over the four quarters through June 2020, however,

Vietnam conducted large-scale and protracted intervention, much more than in previous

periods, to prevent appreciation of the dong, in the context of a larger current account

2 The Report covers data from the 12-month period ending in June 2020. Given data limitations, Treasury

focuses in this Report on trade in goods, not including services. The United States has a surplus in services

trade with many economies in this Report, including China, Japan, Korea, Singapore, and Switzerland. Taking

into account services trade would reduce the bilateral trade surplus of these economies with the United

States.

3 These quantitative thresholds for the scale and persistence of intervention are considered sufficient on their

own to meet this criterion. Other patterns of intervention, with lesser amounts or less frequent interventions,

might also meet this criterion depending on the circumstances of the intervention.
4

surplus and a growing bilateral trade surplus with the United States. Intervention has also

contributed to undervaluation of the dong on a real, trade-weighted basis, with the real

effective exchange rate undervalued in 2019. Treasury therefore assesses based on a range

of evidence and circumstances that at least part of Vietnam’s exchange rate management

over the four quarters through June 2020, and particularly its intervention, was for

purposes of preventing effective balance of payments adjustments and gaining unfair

competitive advantage in international trade. Hence, Treasury has determined under the

1988 Act that Vietnam is a currency manipulator. Consistent with the 1988 Act, in the

context of forthcoming negotiations with the Vietnamese authorities, Treasury will press

for the adoption of policies that will permit effective balance of payments adjustments and

eliminate the unfair advantage created by Vietnam’s actions.

• Vietnam enacted a prompt, aggressive response to the COVID-19 outbreak,

including closing the northern border with China in January, banning flights starting

in February, and imposing a nationwide lockdown. These actions helped contain

the outbreak, though the pandemic and public health response have weighed

heavily on growth. The authorities enacted countercyclical fiscal measures totaling

approximately 3.6% of GDP, which included cash transfers, tax deferrals, and a cut

in the corporate income tax rate for small and medium enterprises (SMEs). The

effectiveness of Vietnam's initial public health response enabled the government to

loosen many of the restrictions on domestic activity, facilitating a bounce-back in

the third quarter of 2020.

Vietnam’s trade surplus continued to expand year-over-year in the first half of

2020, helping push the current account surplus over the four quarters through June

2020 to 4.6% of GDP.4 Over the same period, Vietnam’s goods trade surplus with

the United States reached $58 billion, the fourth largest among the United States’

trading partners. The Vietnamese authorities have conveyed credibly to Treasury

that net purchases of foreign exchange in the four quarters through June 2020 were

$16.8 billion, equivalent to 5.1% of GDP. The majority of these purchases occurred

in the second half of 2019, prior to the onset of the COVID-19 pandemic.

Vietnam should move expeditiously to strengthen its monetary policy framework to

facilitate greater movement in the exchange rate to reflect economic fundamentals,

while reducing intervention and allowing for the appreciation of the real effective

exchange rate. Vietnam should also increase the transparency of foreign exchange

intervention and reserve holdings.

Vietnam should also work to durably reduce its external imbalances and strengthen

domestic demand by leveling the playing field for the domestic private sector

through measures such as improving its access to land and credit, reducing the role

of state-owned enterprises in the economy, and improving financial supervision to

4 Vietnam is in the process of revising its GDP figures, resulting in significant revisions to GDP levels. 

However, quarterly revised figures are not available. In this Report, we estimate a revised series of quarterly

GDP based on the degree of revisions to the annual figures used when calculating current account balances

and foreign exchange intervention as a share of GDP.
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help facilitate more productive lending and spur private domestic investment. 

Vietnam also needs to dismantle barriers to U.S. companies and U.S. exports in

Vietnam to reduce the bilateral trade imbalance. 

Treasury Conclusions Related to Switzerland

Switzerland met all three criteria under the 2015 Act over the four quarters through June

2020. Treasury has conducted enhanced analysis of Switzerland in this Report and will

also commence enhanced bilateral engagement with Switzerland in accordance with the

Act. The bilateral engagement will include urging the development of a plan with specific

policy actions to address the underlying causes of Switzerland’s external imbalances.

The Swiss franc has long been considered a safe haven currency that investors acquire

during periods when global risk appetite recedes or financial volatility accelerates. These

large safe haven flows pose challenges for Swiss macroeconomic policymakers, particularly

in a period of negative interest rates and deflation. The Swiss National Bank (SNB) over the

years has employed a range of tools to try to offset appreciation pressure on the franc and

limit any associated negative impacts on inflation and domestic growth. Over the second

half of 2019 and particularly in the first six months of 2020, Switzerland conducted largescale one-sided intervention, significantly larger than in previous periods, to resist

appreciation of the franc and reduce risks of deflation, as the SNB’s policy interest rates

were significantly negative. While we recognize the extraordinary financial volatility in the

first half of 2020 resulting from the COVID-19 crisis, the intervention was taken in the

context of an extremely large current account surplus along with a growing bilateral trade

surplus with the United States and contributed to stemming the appreciation of the franc

on a real, trade-weighted basis. Further franc appreciation would help facilitate gradual

adjustment of Switzerland’s excessive current account surplus. Treasury therefore

assesses, based on a range of evidence and circumstances, that at least part of Switzerland’s

exchange rate management over the four quarters through June 2020, and particularly its

foreign exchange intervention, was for purposes of preventing effective balance of

payments adjustments. Hence, Treasury has determined under the 1988 Act that

Switzerland is a currency manipulator. In the context of forthcoming negotiations with the

Swiss authorities, Treasury will press for the adoption of policies that will permit effective

balance of payments adjustments.

• Switzerland was one of the countries in Europe hit early and hard by COVID-19,

leading the government to declare a national state of emergency in mid-March. The

number of active and new cases declined sharply from mid-to-late April but started

rising again from mid-June as the authorities eased public health and mobility

restrictions. Since mid-October, the number of new COVID-19 cases has surged,

with new infections significantly above spring 2020 highs, leading the Swiss Federal

Council to re-introduce several containment measures. 

Switzerland has for many years run extremely large current account surpluses, with

the surplus reaching 10.9% of GDP in 2019. The current account surplus declined

marginally, but remained elevated, at 8.8% of GDP over the four quarters through
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June 2020. The United States’ goods trade deficit with Switzerland widened notably

over the last year, reaching $49 billion over the four quarters through June 2020,

due partially to an increase in Swiss gold exports in the first half of 2020. The SNB

disclosed that it spent $93 billion (90 billion francs) on currency interventions in

the first half of 2020. Between July 2019 and June 2020, Treasury estimates that

SNB net foreign purchases have totaled $103 billion (or 14% of GDP). 

Switzerland should employ a more balanced macroeconomic policy mix. Monetary

policy continues to be relied on heavily despite the reduced effectiveness of

unconventional tools, especially against a backdrop of persistent deflationary risks. 

We urge the SNB to deploy a broader and more balanced mix of monetary policy

instruments, including domestic quantitative easing. Central to this recommended

recalibration of monetary policy, we continue to urge the SNB to limit foreign

exchange intervention to lean against large appreciation surges and allow real

appreciation in line with the long-term trend. Treasury welcomes the SNB’s recent

step to disclose foreign exchange intervention on a quarterly basis. Increased

frequency of these disclosures – such as on a monthly basis – will help further

improve transparency of the SNB’s actions. Fiscal policy should be deployed to

reduce the economy’s reliance on the SNB’s policy measures, rebalance its external

sector, and boost potential growth. The authorities should also take steps to raise

potential growth by raising labor force participation rates and productivity growth,

actions that would reduce Switzerland’s external imbalances and reliance on

unconventional monetary policy. 

Treasury Assessments of Other Major Trading Partners

Pursuant to the 2015 Act, Treasury has found in this Report that no major trading partner

other than Vietnam and Switzerland met all three criteria during the four quarters ending

June 2020. Treasury has also concluded that no major trading partner of the United States

other than Vietnam and Switzerland met the standards identified in Section 3004 of the

1988 Act during the relevant period.

Regarding the 2015 Act, Treasury has established a Monitoring List of major trading

partners that merit close attention to their currency practices and macroeconomic policies. 

An economy meeting two of the three criteria in the 2015 Act is placed on the Monitoring

List. Once on the Monitoring List, an economy will remain there for at least two

consecutive Reports to help ensure that any improvement in performance versus the

criteria is durable and is not due to temporary factors. As a further measure, the

Administration will add and retain on the Monitoring List any major U.S. trading partner

that accounts for a large and disproportionate share of the overall U.S. trade deficit even if

that economy has not met two of the three criteria from the 2015 Act. In this Report, the

Monitoring List comprises China, Japan, Korea, Germany, Italy, Singapore, Malaysia,

Taiwan, Thailand, and India, the last three being added in this Report.

Ireland has been removed from the Monitoring List in this Report, having met only one out

of three criteria – a significant bilateral surplus with the United States – for two consecutive
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Reports. After Ireland ran a sizable current account surplus in 2018, the current account

swung into deficit over the four quarters through June 2020. 

With regard to the ten economies on the Monitoring List:

• China’s real GDP contracted 6.8% year-over-year in the first quarter of 2020, as a result

of the COVID-19 outbreak and strict containment measures, but grew 3.2% year-overyear in the second quarter and 4.9% year-over-year in the third quarter, with industrial

activity leading the recovery. The authorities initially responded to the COVID-19

outbreak with targeted fiscal stimulus focused on health spending and fee waivers, but

announced infrastructure investment measures in May, bringing the total discretionary

fiscal measures announced to around 4.7% of GDP. Monetary stimulus has been

moderate, with a focus on supporting small- and medium-sized enterprises. As Chinese

policymakers work to contain future outbreaks of the virus and boost economic

activity, they will need to rely on on-budget fiscal measures and balance monetary

stimulus against increasing financial stability risks. To solidify the near-term recovery

and strengthen long-term growth prospects, China should take measures to enhance

social safety nets, support household demand and reduce precautionary savings, and

permit a greater role for market forces. 

China’s bilateral goods trade surplus with the United States remains by far the largest of

any U.S. trading partner but has contracted over the past year. Over the four quarters

through June 2020, China’s bilateral goods trade surplus with the United States totaled

$310 billion, compared to $400 billion over the four quarters through June 2019. Over

the four quarters through June 2020, China’s current account surplus rose to 1.1% of

GDP, supported by a rapidly increasing overall trade balance and a large current

account surplus of 3.1% in the second quarter of 2020. Given the longstanding

challenges posed by China’s extraordinary levels of both saving and investment, China

needs to adjust its macroeconomic policies to support domestic consumption more

forcefully and reduce further the Chinese economy’s reliance on investment and

exports. 

On January 15, 2020, the United States and China signed a Phase One trade agreement

that requires changes to China’s policies and practices in several key areas, including

currency issues. In this agreement, China has made commitments to refrain from

competitive devaluation and to not target its exchange rate for competitive purposes. 

Since the last Report in January, when Treasury lifted its designation of China as a

currency manipulator, the renminbi (RMB) has appreciated 3.0% against the dollar

through end-October. 

China provides limited transparency regarding key features of its exchange rate

mechanism, including limited transparency regarding the policy objectives of its

exchange rate management regime, the relationship between the central bank and

foreign exchange activities of the state-owned banks, and its activities in the offshore

RMB market. China does not publish foreign exchange intervention data, forcing

Treasury staff to estimate the scale of China’s intervention, both directly by the People’s
8

Bank of China (PBOC) and indirectly through state-owned banks. The PBOC appears to

have refrained from intervening in foreign exchange markets in 2019, but financial

entities beyond the PBOC (notably state banks) purchased foreign exchange on net over

the four quarters through June 2020. While intervention proxies do not provide

definitive evidence that the PBOC intervened in foreign exchange markets over the

review period, this issue warrants further investigation. In particular, the small scale of

foreign reserve accumulation relative to China’s substantial trade and portfolio inflows

in the second quarter of 2020, coupled with the RMB’s relative stability over the same

time period, raises concerns. China should publish its foreign exchange intervention

and increase public understanding of the relationship between the PBOC and the

foreign exchange activities of the state-owned banks, including the use of foreign

exchange derivatives and activities in the offshore RMB market. In addition, China

should report fully FX derivatives data in line with the IMF’s Standards for Data

Dissemination template.

• Japan has employed a range of public health measures to contain the COVID-19

outbreak. Even so, amid the pandemic, economic activity contracted sharply, with the

IMF projecting that GDP will decline 5.3% this year. A series of large fiscal spending

measures including cash transfers to households and businesses, coupled with

additional monetary easing, helped to mitigate the collapse in aggregate demand. The

yen appreciated 4% against the dollar in 2020 through end-October, strengthening

1.5% in real effective terms over the same period. Japan has not intervened unilaterally

in the foreign exchange market since 2011. Japan posted a sizable current account

surplus of 3.1% of GDP over the four quarters ending in June 2020 and a bilateral goods

trade surplus of $57 billion with the United States over the same time period. As

economic recovery takes hold, Japan should pursue reforms that raise productivity,

increase potential output, and facilitate strong and balanced growth. 

• Korea implemented comprehensive public health measures that limited the spread of

COVID-19. Nevertheless, Korea’s financial markets experienced volatility, and its

growth outlook deteriorated as the pandemic spread worldwide. The authorities eased

monetary policy, took steps to stabilize financial markets, and enacted cumulative

direct fiscal stimulus totaling 3.9% of GDP through September 2020. Korea’s large

external surpluses have continued to narrow, with the current account surplus falling to

3.5% of GDP over the four quarters ending in June 2020. Korea’s goods trade surplus

with the United States contracted over the same time period to $20.0 billion, as the

pandemic weighed on exports. Over the four quarters through June 2020, Korea

reports that it intervened on net to support the won in the spot market with foreign

exchange sales of $9.1 billion (0.6% of GDP), including substantial net foreign currency

selling as depreciation pressures intensified amidst the COVID-19 outbreak. Treasury

welcomes Korea’s steps to increase the transparency of its foreign exchange

intervention, including by transitioning to quarterly disclosure from semiannual in

December 2019. Given the slowdown in growth that was already underway prior to the

pandemic, a stronger fiscal response seems warranted, particularly if growth wanes or

further risks materialize.
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• In Germany the economic impact of the COVID-19 pandemic has been severe, but the

government has taken swift and targeted fiscal measures to mitigate the impact on

employment, credit flow, and consumption. The government has approved 8.3% of

GDP in direct fiscal support and has on offer liquidity support totaling 30.8% of GDP for

firms seeking loans, equity, or guarantees. Germany’s current account surplus stood at

6.8% of GDP over the four quarters through June 2020, and, at $253 billion, remains the

largest in the world in nominal terms. Germany maintained a large bilateral goods

trade surplus with the United States, at $62 billion over the same time period. The

persistence of the massive current account surplus and the large bilateral trade

imbalance with the United States continues to result from persistently weak domestic

demand in Germany and an undervalued real effective exchange rate. While Germany’s

COVID-19 response measures should meaningfully support domestic demand in the

near term, Germany still needs to undertake permanent reforms to unleash robust

domestic investment and consumption. This would help underpin domestically driven

growth and reduce large external imbalances. The European Central Bank (ECB) has

not intervened unilaterally in foreign currency markets since 2001.5 

• Italy’s economy has contracted sharply this year, as Italy is among the countries hit

earliest and hardest by the COVID-19 pandemic. To date, the authorities have

responded with direct fiscal support totaling around 6.5% of GDP and loan guarantees

approaching 50% of GDP. Fiscal support at both the Italian and European level remain

critical to help Italy weather the pandemic and recover from the economic impact. Italy

recorded a current account surplus of 3.0% of GDP over the four quarters through June

2020, while its goods trade surplus with the United States stood at $30 billion over the

same period. Once the public health crisis abates and the economic recovery takes hold,

it is important for Italy to undertake structural reforms to raise long-term growth —

consistent with reducing high unemployment and public debt — and safeguard fiscal

and external sustainability. The NextGenerationEU fund, including an unprecedented

amount of grants, provides a key opportunity for Italy to tackle longstanding structural

impediments to durably raising long-term growth. The ECB has not intervened

unilaterally in foreign currency markets since 2001.

• Singapore was one of the first countries hit by COVID-19 once the virus spread beyond

China, and the economy contracted sharply over the first half of 2020. The government

responded with substantial fiscal support totaling approximately 20% of GDP,

alongside monetary easing and temporary regulatory forbearance to help cushion the

blow to businesses and households. Singapore had one of the largest current account

surpluses in the world as a share of GDP at 16% in the four quarters through June 2020. 

Notwithstanding this large overall external surplus, Singapore has consistently run a

bilateral goods trade deficit with the United States, which stood at $0.8 billion in the

four quarters through June 2020. Singapore’s central bank disclosed publicly its foreign

exchange intervention, totaling $74.3 billion in the same period, equivalent to 21.3% of

GDP. As economic recovery from the pandemic takes hold, Singapore should undertake

5 For the purposes of Section 701 of the 2015 Act, policies of the ECB, which holds responsibility for monetary

policy for the euro area, will be assessed as the monetary authority of individual euro area countries. 
10

reforms to lower its high saving rate and boost low domestic consumption, including

allowing the real effective exchange rate to appreciate, in order to help narrow its large

and persistent external surpluses and reduce the need for such large-scale foreign

exchange intervention.

• Malaysia’s economy faced supply chain disruptions and weaker exports due to the

COVID-19 pandemic, contracting sharply over the first half of 2020. The authorities

responded with monetary easing, direct fiscal support of around 5% of GDP, and

liquidity support that brings the total stimulus to around 20% of GDP. Malaysia has

made substantial progress on external rebalancing over the last decade. Following a

modest uptick in 2019, the current account surplus declined to 2.5% of GDP in the four

quarters ending in June 2020, reflecting lower earnings from oil and gas and a wider

services deficit. Malaysia also maintains a significant bilateral goods trade surplus with

the United States, which totaled $29 billion in four quarters ending in June 2020. 

Malaysia does not publish foreign exchange intervention data, forcing Treasury staff to

estimate the scale of Malaysia’s intervention. Treasury estimates that net purchases of

foreign exchange amounted to $3.7 billion, or 1.1% of GDP, in the four quarters through

June 2020. Malaysia should allow the ringgit to appreciate to help reduce its large and

durable external surpluses. As economic recovery from the pandemic takes hold,

Malaysia can advance further external rebalancing through targeted policies that

encourage quality investments and maintain sufficient social spending, which can help

spur domestic demand and avoid excessive precautionary saving. Treasury also urges

the Malaysian authorities to increase the transparency of foreign exchange

intervention.

• Thailand’s economy has been significantly affected by the COVID-19 pandemic,

compounding the negative effects of a severe drought. Thailand was one of the first

countries outside of China to experience an outbreak, and containment measures

included a full border closure from late March to early July and significant restrictions

on activity. Thai authorities are implementing a comprehensive monetary and fiscal

package of approximately 15% of GDP to help cushion the impact of the pandemic.

Coming into 2020, Thailand had run large current account surpluses for several years,

reaching 7% of GDP in 2019, buoyed by large surpluses in both goods and services. The

collapse of tourism receipts in 2020 caused the current account surplus to moderate to

6% of GDP in the four quarters though June 2020. In contrast, Thailand’s bilateral

goods trade surplus with the United States has continued to grow, reaching $22 billion

during the same four quarters. The Thai authorities have credibly conveyed to

Treasury that net purchases of foreign exchange amounted to 1.8% of GDP during this

period. Thailand should allow the baht to appreciate to help reduce its large and

durable external surpluses. The authorities should also take steps to reduce Thailand’s

external imbalances through policies that encourage private investment, reduce

precautionary saving, and promote greater openness in domestically oriented sectors. 

• Taiwan’s swift and effective public health response to the COVID-19 pandemic helped it

contain the outbreak and limit economic damage compared to many other economies. 

Real GDP growth contracted 0.6% year-over-year in the second quarter of 2020,
11

weighed down by declines in consumption and investment, before recovering to 3.3%

year-over-year growth in the third quarter. The central bank implemented several

measures to ease monetary conditions and stabilize financial markets, and the

authorities approved a cumulative fiscal package of 5.5% of GDP to support public

health, vulnerable firms, and household consumption. Taiwan’s persistently large

current account surplus expanded in the first half of 2020, reaching 10.9% of GDP over

the four quarters through June 2020. Its bilateral goods trade surplus with the United

States expanded sharply over the four quarters through June 2020, rising to $25 billion

from $18 billion a year prior. Taiwan disclosed net foreign exchange purchases totaling

$10.5 billion over the four quarters ending in June 2020, equivalent to 1.7% of GDP. In

March 2020, Taiwan disclosed publicly its foreign exchange intervention earlier this

year in addition to its monthly swap position. Taiwan should allow the new Taiwan

dollar to appreciate to help reduce its large and durable external surpluses. The

Treasury welcomes Taiwan’s recent steps toward transparency and looks forward to

continued efforts in this area.6

• India’s economy contracted sharply in the first half of 2020 due to the collapse in

domestic demand brought on by the COVID-19 pandemic. The authorities responded

with modest direct fiscal support of around 2% of GDP and substantial monetary

easing. India’s deep domestic demand contraction and slower recovery relative to its

key trading partners contributed to the economy’s first four-quarter current account

surplus since 2004 (0.4% of GDP over the year to June 2020). India for several years

has maintained a significant bilateral goods trade surplus with the United States, which

totaled $22 billion in the four quarters through June 2020. 

Based on the central bank’s regularly published intervention data, India’s net purchases

of foreign exchange accelerated notably in the second half of 2019, and following sales

during the initial onset of the pandemic, India sustained net purchases for much of the

first half of 2020. This pushed net purchases of foreign exchange to $64 billion, or 2.4%

of GDP, over the four quarters through June 2020. Treasury continues to welcome

India’s long-standing transparency in publishing foreign exchange purchases and sales. 

Treasury encourages the authorities to limit foreign exchange intervention to periods of

excessive volatility, while allowing the rupee to adjust based on economic

fundamentals. By further opening the economy to foreign investors, India can also

support economic recovery and bolster long-term growth.

Treasury continues to track carefully the foreign exchange and macroeconomic policies of

U.S. trading partners under the requirements of both the 1988 and 2015 Acts. Treasury

also continues to stress the importance of all economies publishing data related to external

balances, foreign exchange reserves, and intervention in a timely and transparent fashion. 

6 Taiwan is the only major economy in Asia not to publish the full details of international reserves in

accordance with the IMF’s Standard Data Dissemination Standards.
12

Section 1: Global Economic and External Developments

This Report covers economic, trade, and exchange rate developments for the four quarters

through June 2020 and, where data are available, developments through end-October

2020. This Report covers developments in the 20 largest trading partners of the United

States, whose bilateral goods trade with the United States exceeded $40 billion over the

four quarters through June 2020. These economies’ total goods trade with the United

States amounted to more than $3.2 trillion in the four quarters through June 2020, more

than 80% of all U.S. goods trade during that period. For assessments of the criteria in

Section 701 of the 2015 Act, data over the four quarters through June 2020 are considered. 

U.S. Economic Trends

Before the emergence of SARS-Cov-2 (COVID-19), the United States was in an historically

strong economic position. In the year before the pandemic, the expansion became the

longest in history, and the overall unemployment rate fell to a five-decade low. In the year

before the pandemic, unemployment rates for African Americans, Asian Americans, and

Americans of Hispanic and Latino ethnicity reached record lows. Moreover, pro-growth

policies yielded the fastest wage growth in two decades for the bottom decile of earners,

and low-wage earnings have frequently grown faster than earnings for workers at the

median, third quartile, or top decile since 2017.

However, COVID-19’s rapid spread around the world severely affected U.S. and global

economic performance, especially in March and April. In the United States, stay-at-home

orders, mandated business closures, and other measures caused significant declines in real

GDP growth in the first and second quarters. The unemployment rate rose to a post-World

War II high; activity in the manufacturing and services sectors contracted; and consumer

sentiment deteriorated sharply. At the same time, deflationary pressures mounted,

reflecting a sharp decline in energy prices and weaker aggregate demand.

As economic activity resumed in May and the Administration’s stimulus policies took hold,

employment rebounded more rapidly than expected: from May through October,

employers added almost 12.3 million payroll jobs, or 56% of what was lost in March and

April. This rebound compares favorably with that experienced after the previous

recession, when only 9% of lost jobs were regained in the first six months of labor market

recovery. Retail sales have recovered fully to their pre-COVID-19 levels, even growing

5.7% year-on-year through end-October. Further, manufacturing and services have

expanded in the past five months, at rates above 2019 averages, and deflationary pressures

have abated. 

Real GDP growth in the third quarter was substantial as well as historic: the economy grew

by 33.1 percent at an annualized rate, the fastest quarterly pace in seventy years, and

recovered roughly two-thirds of the cumulative loss of output during the first half of 2020. 

Even so, the economy will take time to recover fully given the severity of the recession. In

early November, a consensus of private forecasters did not expect economic activity to

recover to pre-pandemic levels until 2021 Q4 or later. They predicted that real GDP would
13

decline 2.6% in 2020 on a fourth quarter over fourth quarter basis, before rebounding

3.4% in 2021.

Onset of U.S. Recession

The economy had shown resilience during the latter half of 2019, growing 2.5% at an

annual rate despite headwinds such as slowing global growth, policy uncertainty, and the

grounding of the Boeing 737 MAX aircraft. However, the spread of the COVID-19 virus and

the measures to contain it led to a historically severe and sharp economic contraction. In

early June, the National Bureau of Economic Research’s Business Cycle Dating Committee

identified the peak of the most recent U.S. expansion as having occurred in February 2020 –

making it the longest expansion on record at 128 months. 

During the latter part of March, stay-at-home orders and closures of non-essential

businesses caused a steep deterioration in economic activity, and real GDP dropped 5.0%

at an annual rate during the first quarter of 2020. According to the third estimate for

second quarter economic activity, real GDP fell 31.4% at an annual rate, marking the first

back-to-back quarterly declines in real GDP in over a decade.

Combined, real GDP dropped 19.2% at an annual rate during the first half of 2020,

contrasting with the 2.5% advance during the latter half of 2019. Domestic final demand

fell 20.2% during the first half of 2020, after rising 2.1% in the second half of 2019. 

Consumer spending decelerated precipitously during the first half of this year, dropping

21.1%, after growing 2.1% in the second half of 2019. After rising 0.8% during the second

half of 2019, business fixed investment plunged 17.6% during the first half of 2020. The

latter decline reflected a number of factors in the first and second quarters, including

slowing international growth, policy uncertainty, decreased investment in oil and gas

drilling rigs related to low oil prices, and company-specific difficulties (such as at Boeing

and a labor dispute at GM). During the second half of 2019, residential investment

constituted a bright spot in the economy and rose 5.2%, but it turned negative in the first

half of 2020 and decreased 12.4%. Overall government spending growth slowed to 1.9%

during the first half of 2020, following 2.3% growth during the latter half of 2019. 

However, the pace of federal government spending roughly doubled, accelerating from

4.4% during the latter half of 2019 to 8.7% during the first half of 2020. In contrast, state

and local government spending growth declined 2.2% during the first half of 2020, after

rising 1.0% during the second half of 2019. Net exports contributed an average 0.9

percentage point to growth during the first half of this 2020, after adding an average 0.8

percentage point to growth during the second half of 2019. Inventory accumulation

subtracted 2.4 percentage points from growth during the first half of 2020, after shaving an

average 0.5 percentage point from growth during the second half of 2019. 

U.S. Government Policy Response

The U.S. government responded quickly with unprecedentedly bold fiscal and monetary

actions to support American households and small businesses during the pandemic. This
14

degree of coordination has been significantly greater in scale, and faster in implementation,

than what was deployed following the 2008 financial crisis.

On the fiscal side, Congress has authorized record-setting economic aid packages of

roughly $2.7 trillion through October. The Federal Government has aided Americans

through Economic Impact Payments and has helped the unemployed by adding a

temporary weekly federal benefit to normal state unemployment compensation and

expanding eligibility for benefits to the self-employed and gig workers. The Administration

also postponed tax payments and delayed loan payments for borrowers of federally backed

student loans to boost disposable incomes and help American households weather the

pandemic.

In addition, Treasury and the Small Business Administration launched the Paycheck

Protection Program (PPP) less than a week after its authorization at the end of March. The

Administration worked directly with private lenders and used their infrastructure to

hasten businesses’ receipt of funds. In less than two weeks, the PPP had exhausted its

initial funding: it had processed nearly 1.7 million loans worth $342 billion. After a second

appropriation, the PPP provided nearly 5 million loans, worth over $520 billion. Lenders

have reported that PPP loans supported over 51 million jobs throughout the United States.

On the monetary side, the Federal Reserve swiftly cut its interest rate target to zero and

implemented large-scale purchases of Treasury securities and agency mortgage-backed

securities. Also, with the consent and backing of the Treasury Department, the Federal

Reserve established emergency lending facilities through its Section 13(3)

authority. Though current usage on these facilities is modest, their presence as a backstop

helped to assuage the acute market stresses that arose in March and promote private

lending to the economy. More recently, the Federal Reserve adopted a “flexible average

inflation target” strategy that intends to better ensure that its 2-percent inflation target is

an average to be maintained over time rather than a ceiling. This strategy, if successful, is

expected to help expedite economic recoveries from downturns.

The Economy Remains Resilient

Due in part to the federal government’s robust response, the economy started to recover in

May after just two months of contraction. In the third quarter, real GDP rebounded 33.1%

at an annualized rate, led by private consumption, private fixed investment, and the change

in private inventories. Domestic final demand advanced 38.1% at an annualized rate in the

third quarter. Personal consumption expenditures grew 40.7% at an annualized rate,

recovering 71% of the household spending lost in the first and second quarters due to state

and local lockdowns. Business fixed investment rose 20.3% at an annualized rate, driven

by a 70.1% surge in equipment investment. Residential investment jumped 59.3% at an

annualized rate in the third quarter, its largest advance since 1983. The change in private

inventories added 6.6 percentage points to growth in the third quarter. Although

government spending was down 4.5% at an annualized rate in the third quarter, the

decline was from an elevated base in the second quarter, when implementation of the

CARES Act boosted public expenditures significantly. Net exports subtracted 3.1
15

percentage points from growth in the third quarter, although the widening of the trade

deficit also reflected the recovery of domestic demand, including demand for imports.

The recovery was also robust in labor markets. Before the pandemic, nonfarm payroll

employment grew 207,000 jobs per month on average during the second half of 2019,

accelerating to 233,000 jobs per month on average during the first two months of 2020. 

The unemployment rate trended lower over the course of 2019, ending the year at a halfcentury low of 3.5%, where it stood in February 2020. The labor force participation rate

(LFPR) has trended higher in recent years, rising to a six-year high of 63.4% in February

2020. Among prime-age (ages 25-54) workers, the LFPR in January 2020 was 83.1%, its

highest level since September 2008. Compensation growth remained solid through early

2020: nominal average hourly earnings for production and nonsupervisory workers rose

3.3% year-over-year in early 2020.

During March and April, however, the economy lost nearly 22.2 million jobs. Widespread

business closures and declining aggregate demand pushed the unemployment rate up to

14.7% by April – a post-WWII high. Moreover, the LFPR fell to 60.2%, its lowest level since

January 1973, and the prime-age LFPR declined to a 37-year low of 79.9%.

By November, 56% of the jobs lost had been recovered, and the unemployment rate had

dropped 8.0 percentage points to 6.7%. The LFPR had rebounded to 61.5% in November,

while the prime-age LFPR had recovered to 80.9%.

Nominal average hourly earnings for production and nonsupervisory workers were up

3.2% over the year through December 2019, then advanced 4.5% over the year through

November 2020, as the loss of lower-wage jobs boosted the average. In real terms,

earnings growth accelerated as the pace of inflation slowed during the pandemic. Real

average hourly earnings rose 0.9% over the year through December 2019, and growth

accelerated to 3.2% over the 12 months through October 2020. Wages and salaries for

private industry workers, as measured by the Employment Cost Index, advanced 3.0% over

the four quarters ending in December 2019 and rose by 2.7% over the four quarters ending

in September 2020.

Deflationary pressures emerged in March 2020 due to the pandemic but dissipated quickly. 

Nonetheless, 12-month inflation measures remain below year-ago levels. The Consumer

Price Index (CPI) rose 1.2% over the year through October 2020, slower than the 1.8%

year-earlier pace. The core CPI, which excludes food and energy, rose 1.6% over the 12

months through October 2020, slowing from 2.3% over the year through October 2019.

Due to the shutdown of the economy as well as uncertainty about the COVID-19 virus,

consumers’ and businesses’ outlooks deteriorated in the first half of 2020. Consumer

sentiment, as measured by the Reuters/Michigan index, fell from 101.0 in February 2020 to

71.8 in April. However, sentiment trended higher as government financial assistance and

the re-opening of the economy boosted incomes and jobs. By November the index rose to

76.9. Consumer confidence, as measured by the Conference Board index, exhibited a

similar pattern.
16

After rising to multi-year highs in 2018, measures of business activity trended lower in

2019. In August 2019, the Institute for Supply Management’s (ISM) manufacturing index

slipped below the growth threshold for the first time since 2016, and remained below, or

essentially even with, that threshold through May 2020. Nonetheless, as of November

2020, the ISM’s manufacturing index stood at 57.5, signaling expansion for the fifth

consecutive month, and also rising well above the 2019 average level of 51.2. Nonmanufacturing business growth also slowed in 2019 but continued to signal business

activity expansion throughout the year and into 2020, save for a dip into negative territory

in April and May. However, the continued uncertainty surrounding the pandemic, as well

as possible new actions to combat the recent sharp rise in cases, could soften an economic

recovery in the near-term.

Public Finances

The Federal Government’s deficit and debt were trending higher before the pandemic but

rose sharply as a result of the fiscal response to combat the pandemic’s effect on the

economy. At the end of fiscal year 2019, the deficit rose to 4.6% of GDP ($984 billion) and

excluding net interest payments, the deficit was 2.9% of GDP. Federal debt as a share of

GDP held by the public, or federal debt less that held in government accounts, increased to

79.2% of GDP in FY 2019.

For FY 2020, the federal deficit was $3.13 trillion, up $2.15 trillion from FY 2019. Federal

net outlays totaled $6.55 trillion in FY 2020, up $2.10 trillion (47.3%) from FY 2019,

largely due to the fiscal measures enacted to counter the pandemic and consequent

recession. In addition, total revenues were down $44 billion (1.3%) from FY 2019.

U.S. Current Account and Trade Balances

The U.S. current account

deficit rose in the second

quarter of 2020 to 3.5% of

GDP, up 1.4 percentage

points from the first

quarter. This was the

largest deficit since the final

quarter of 2008. In the

second quarter of 2020, all

major current account

transactions declined when

compared to the prior

quarter. This mainly

reflects the economic disruptions of the pandemic, as many businesses were operating at

limited capacity or ceased operations completely, and the movement of travelers across

borders was restricted. Both exports and imports of goods fell, with the decline in exports

outpacing the drop in imports. Receipts of income fell more rapidly than payments of

-5

-4

-3

-2

-1

0

1

2

3 H1 2012

H2 2012H1 2013H2 2013H1 2014H2 2014H1 2015H2 2015H1 2016H2 2016H1 2017H2 2017H1 2018H2 2018H1 2019H2 2019H1 2020

Percent of GDP

U.S. Current Account Balance

Income Services Goods Current Account Balance

Sources: Bureau of Economic Analysis, Haver
17

income resulting in a reduced

income surplus. Prior to the

second quarter of 2020, the

headline U.S. current account

deficit had been quite stable,

around 2-2.5% of GDP since

2015.

The U.S. goods trade deficit

widened to 4.5% of GDP in the

second quarter of 2020 from

3.6% of GDP in the first

quarter. Relative to the first

quarter, goods exports

declined 28.4% while imports

fell 14.6%, mainly as a result

of pandemic-induced demand

weakness and supply

disruptions both in the United

States as well as abroad. The

goods trade deficit has been

relatively stable in recent

years, in the range of 4-4.5%

of GDP, with the exception of

the narrower deficit in the

first quarter of 2020.

At the end of the second quarter, the U.S. net international investment position marked a

net liability of $13.0 trillion (a record 66.9% of GDP), a deterioration of $0.9 trillion

compared to the first quarter. The value of U.S.-owned foreign assets was $28.9 trillion,

while the value of foreign-owned U.S. assets stood at $41.9 trillion. Deterioration in the net

position in the second quarter of 2020 was due in part to the outperformance of U.S. equity

markets relative to global peers.

International Economic Trends

World economic growth was decelerating prior to the pandemic. Global growth slowed

from 3.5% in 2018 to 2.8% in 2019, with the deceleration evident in both advanced and

emerging market economies. A wide range of factors weighed on global activity in 2019,

including political uncertainty in Europe and Latin America, financial turbulence in some

large emerging markets, China’s efforts to address corporate debt vulnerabilities, and

ongoing geopolitical tensions. 

The outbreak of COVID-19 at the end of 2019 and its spread across the world in early 2020

altered drastically the economic landscape, pushing the global economy into its sharpest

and deepest recession since World War II. Efforts to arrest the spread of the virus —

-40

-30

-20

-10

0

10

20

30

2007 2009 2011 2013 2015 2017 2019

Percent

U.S. Trade Growth

Note: Trade growth calculated as year-over-year percentage change in the sum 

of exports and imports.

Source: U.S. Census Bureau, Haver 
18

including mass lockdowns as well as widespread voluntary social distancing — brought

many forms of economic activity to a halt during the first half of the year. Equity markets

fell precipitously in February and March, capital fled from emerging markets, and financial

conditions tightened. During the second quarter, output fell at a historic rate. While many

economies experienced sharp rebounds in activity during the third quarter as their

economies reopened, efforts to prevent the virus from resurging will continue to weigh on

activity. The IMF has forecasted that the global economy will contract by 4.4% in 2020.

Given the unprecedented nature of the shock, many governments and central banks have

taken extraordinary actions to support their economies. Advanced economy central banks

have lowered interest rates, resumed or accelerated asset purchases, and implemented a

variety of programs to ease credit conditions. Emerging market central banks have

likewise eased financial conditions by lowering interest rates. Some emerging market

central banks have also pursued quantitative easing for the first time, albeit to a more

modest extent than in advanced economies. Governments have used fiscal policy to

support the unemployed, increase demand, and extend credit to keep businesses afloat. 

The IMF projects government deficits of advanced economies to more than quadruple from

3.3% of GDP in 2019 to 14.4% of GDP in 2020. 

All of the aforementioned policies to boost domestic demand support wider growth across

the globe as well. It is imperative that policymakers continue with such policies and do not

turn to beggar-thy-neighbor actions that could hamper global recovery. Moreover, while

the focus must remain on assistance and stimulus right now, policymakers also need to

begin thinking through how support programs should evolve once economic recoveries

become more established. 

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10 China Vietnam Taiwan Hong Kong Brazil Thailand India Mexico

2019

2020 H1 -40

-35

-30

-25

-20

-15

-10

-5

0

5

10 Korea Ireland Japan Switzerland Netherlands United States Germany Canada Singapore BelgiumItaly France UK Percent change (annualized rate)

Real GDP Growth

Note: Based off semester average of Q/Q SAAR growth rates. China, India, and Vietnam based off Y/Y NSA data for the final quarter of 

each period.

Sources: National Authorities, Haver

Advanced Economies Emerging Market Economies
19

Foreign Exchange Markets7

After strengthening notably over 2018, the U.S. dollar depreciated slightly on net in 2019,

with the nominal effective (trade-weighted) dollar 0.7% weaker at end-2019 compared to

end-2018. Across other major currencies, the pound was 4.0% stronger against the dollar,

driven by Brexit-related developments, while the euro continued to be weighed down by

concerns about slowing growth in Europe, particularly in Germany. Across emerging

market currencies, the dollar appreciated nearly 4% against the Korean won and the

Brazilian real over 2019 as slowing economic growth and expectations of monetary easing

weighed on both currencies. 

In the early months of 2020, the spread

of COVID-19 set off a dash for safety to

the dollar. Dollar funding markets

tightened and the dollar experienced a

sharp appreciation, with the nominal

trade-weighted dollar spiking 10.2%

from the beginning of the year to a

recent peak on March 23. The dollar

strengthened against the currencies of

nearly every major trading partner,

including more than 20% against the

Brazilian real and Mexican peso and

more than 10% against the British

pound and many other currencies. 

Since mid-March, central bank action to

ease dollar funding strains and support

the economy, fiscal stimulus,

stabilization of financial markets, and a

gradual reopening of economies have

helped lessen the rush to the dollar. 

The nominal trade-weighted dollar

weakened 7.9% from March 23 to the

end of October, leaving it 1.6% stronger

for the first ten months of the year. 

Sustained dollar strength is concerning

given that the IMF continues to judge

that the dollar is overvalued on a real

effective basis (see chart below). Though the real effective value of the dollar weakened by

7 Unless otherwise noted, this Report quotes exchange rate movements using end-of-period data. Bilateral

movements against the dollar and the nominal effective dollar index are calculated using daily frequency or

end-of-period monthly data from the Federal Reserve Board. Movements in the real effective exchange rate

for the dollar are calculated using monthly frequency data from the Federal Reserve Board, and the real

effective exchange rate for all other currencies in this Report is calculated using monthly frequency data from

the Bank for International Settlements (BIS) or JP Morgan if BIS data are unavailable.

-20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50

EME basket

Brazil

Mexico

India

Korea

Malaysia

China

Singapore

Vietnam

Taiwan

Thailand

Sources: FRB, Haver

-20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50

AFE basket

UK

Euro

Canada

Japan

Switzerland

Advanced Foreign Economies (AFE)

-15 -10 -5 0 5 10 15 20 25 30 35 40 45 50

2019 2020 Q1 April 2020-October 2020

U.S. Dollar vs. Major Trading Partner Currencies

(+ denotes dollar appreciation)

Percent change (relative to end-December 2018)

Broad dollar index

Emerging Market Economies (EME)
20

0.5% on net in 2019, as worries regarding global uncertainty eased at the end of the year, it

remained elevated at roughly 7% above its 20-year average. Sustained dollar

overvaluation could exacerbate persistent trade and current account imbalances. It is also

concerning that the real effective exchange rates of several surplus economies that the IMF

assesses to be undervalued depreciated further in 2020 (e.g., Thailand, Malaysia, and

Singapore). Since the start of 2020, the real dollar has strengthened 0.3% on net and at

end-October was nearly 8% above its 20-year average. 

Treasury judges that foreign exchange markets continued to function smoothly in 2019. 

Though market functioning deteriorated in the early months of 2020 in response to the

COVID-19 shock, swift central bank action calmed conditions and markets have been

functioning more smoothly in the period since. The dollar continues to be the world’s

principal currency in international foreign exchange markets, reflecting its dominant global

position both in terms of market turnover (being bought or sold in 88% of all currency

trades) and trade settlement.8

8 Currency market turnover according to the 2019 Bank for International Settlement Triennial Central Bank

Survey of Foreign Exchange and OTC Derivatives.

-30

-20

-10

0

10

20 United States BelgiumU.K. Canada France India Ireland Mexico Brazil Italy Switzerland Japan China Euro Area Korea Netherlands Vietnam Germany

Singapore

Malaysia Thailand Percent

2019 REER Gap Assessment (mid)1 2020 YTD REER ∆2

CA Deficit Economies CA Surplus Economies

IMF Estimates of Exchange Rate Valuation Undervalued Overvalued Sources: IMF 2020 External Sector Report, IMF 2019 Article IV Consultation Staff Reports for Vietnam and Ireland, BIS REER Indices, JP 

Morgan, FRB

1/The IMF's estimate of real effective exchange rate (REER) gap (expressed as a range) compares the country's average REER in 2019 

to the level consistent with the country's medium-term economic fundamentals and desired policies. The midpoint of the gap range is 

depicted above. For Ireland and Vietnam, the 2018 REER gap is used.

2/Change through October 2020 versus 2019 average. For Ireland and Vietnam, change through October 2020 versus 2018 average.

Note: The IMF does not provide an estimate of Taiwan's REER gap.
21

Global Imbalances

Global current account imbalances have been broadly stable between 2017 and 2019,

averaging around 1.7% of global GDP.9 Although some very large surpluses have narrowed

in recent years, many remain high. Furthermore, while the IMF forecasts that current

account surpluses and deficits will narrow in 2020 to their lowest levels in two decades,

recent balance of payments and trade data for the United States and other countries

suggest persistent imbalances, potentially offsetting any reduction due to contractions in

trade earlier this year. Among major U.S. trading partners, the very large surpluses of

Germany, Netherlands, Singapore, Switzerland, Taiwan, and Thailand have each remained

significant as a share of GDP, with the combined surpluses of these economies totaling

$558 billion over the four quarters through June 2020 (roughly equivalent to 0.7% of

global GDP). Japan’s surplus is slightly smaller than in the same period in 2019 as a share

of GDP at 3.1%, but in dollar terms is comparatively high at $158 billion. China’s surplus,

while relatively low as a share of GDP, also remains high in dollar terms at $157 billion in

the four quarters through June 2020. Moreover, external stock positions continue to

widen, reaching historical peaks.

In many cases, these imbalances reflect past policy distortions. Meanwhile, the recent rise

in China’s trade surplus is likely to continue weighing on global imbalances. In general, and

especially at a time of slowing global growth, adjustments to reduce imbalances should

occur through a symmetric rebalancing process that sustains global growth momentum

rather than through asymmetric compression in deficit economies — the channel which

too often has dominated in the past. In 2020, global imbalances have been affected by

saving and investment shifts driven by the COVID-19 crisis and policy responses. As the

global economic recovery path stabilizes, it is critical to adopt policies that allow for a

narrowing of both surplus and deficit imbalances. 

9 Specifically, global current account surpluses have totaled 1.7% of global GDP in recent years. 

Correspondingly, global current account deficits, along with the statistical discrepancy (which has

consistently been negative for more than a decade), also equal 1.7% of global GDP.
22

Capital Flows

Relaxed global liquidity conditions in the first quarter of 2019, brought on by major central

banks taking steps to address negative growth outlooks, led to strong inflows into

emerging market economies. As the global growth outlook was marked down further and

risk sentiment deteriorated in the second quarter of 2019, net outflows accelerated over

the remainder of the year. Net portfolio and other flows to emerging markets totaled -$197

billion over 2019, remaining relatively unchanged compared to 2018, where emerging

markets experienced a slow yet sustained pullback of nonresident portfolio flows. Foreign

direct investment to emerging markets remained resilient in 2019 and was more than

sufficient to offset portfolio and other outflows over the course of the year. 

With the onset of the

COVID-19 pandemic,

global financial

conditions tightened

sharply in the first

quarter of 2020, with

emerging market

sovereign bond spreads

widening and currencies

depreciating against the

dollar. This precipitated a

selloff of portfolio debt

and equity flows

unprecedented both in

scale and pace. On net,

portfolio outflows from

-3

-2

-1

0

1

2

3 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Percent of Global GDP

Global Current Account Imbalances

China Germany Japan

Other Surplus United States Other Deficit

Statistical Discrepancy

Sources: IMF WEO, Haver

-300

-200

-100

0

100

200

300

400

Q2-08 Q2-10 Q2-12 Q2-14 Q2-16 Q2-18 Q2-20

USD Billions

Net Capital Flows to Emerging Markets

Financial Derivatives (Net) Other Investment (Net)

Direct Investment (Net) Portfolio Investment (Net)

Net Capital Flows (excl reserves)

Note: Financial account (excluding reserves) adjusted for errors and ommissions. 

2020 reflects data through the end-June where available.

Source: National Authorities, U.S. Department of the Treasury Staff Calculations

Capital Outflows

Capital Inflows
23

emerging markets increased to $131 billion in the first quarter of 2020 (based on data

available as of mid-December), marking the largest quarterly outflow in decades. 

Meanwhile, net foreign direct investment inflows remained buoyant, while net other

investment continued to flow out of emerging markets at comparable levels prior to the

onset of the pandemic. 

Global dollar funding strains began to relax in late March after the Federal Reserve

announced the enhanced provision of dollar liquidity through swap lines with other major

central banks and its new repo facility. Since then, dollar funding pressures have eased,

although financial stress remains elevated relative to early 2020. Consequently, net capital

flows began to recover as nonresident portfolio flows rebounded in the second quarter of

2020. Higher frequency data (from sources beyond quarterly balance of payments data)

suggest that, since end-June, the pace of outflows has slowed substantially. Despite these

more muted flows in recent months, cumulative portfolio outflows from the COVID-19

shock are on track to be one of the most severe episodes of recent decades. 

Foreign Exchange Reserves

With the onset of the

COVID-19 pandemic,

global foreign currency

reserves declined to

$11.7 trillion at the end

of the first quarter of

2020, a fall of $122

billion relative to end2019 levels. This

resulted largely from

valuation effects (which

reduced reserves $119

billion) caused by the

appreciation of the

dollar against other

currencies over the

first quarter of 2020. 

Meanwhile, net foreign

exchange purchases

only offset minimally

the decline in the global

level of reserves. 

Global foreign currency

reserves have since

risen slightly, reaching

$12.0 trillion at the end

of the second quarter of

2020. This rise was

FX Reserves 

(USD Bns)

1Y Δ FX 

Reserves 

(USD Bns)

FX Reserves 

(% of GDP)

FX Reserves 

(% of ST debt)

China 3,112.3 -6.9 22% 267%

Japan 1,306.5 50.1 26% 39%

Switzerland 896.1 117.9 123% 86%

Taiwan 488.7 21.7 79% 258%

India 465.8 65.1 18% 444%

Korea 398.6 6.3 25% 258%

Brazil 336.8 -41.3 20% 471%

Singapore 309.8 38.3 89% 25%

Thailand 230.3 23.7 44% 439%

Mexico 183.1 9.1 16% 359%

UK 134.9 9.3 5% 2%

Malaysia 98.8 0.0 29% 103%

Vietnam 83.4 19.5 25% 334%

Canada 74.7 -0.2 4% 11%

France 53.8 4.9 2% 2%

Italy 43.0 1.8 2% 4%

Germany 37.9 1.1 1% 2%

Belgium 10.9 0.4 2% 2%

Netherlands 4.0 -0.2 0% 0%

Ireland 3.3 0.3 1% 0%

World 12,007.5 272.3 n.a. n.a.

Foreign exchange reserves as of June 2020.

GDP caluclated as sum of rolling 4Q GDP through Q2-2020.

Short-term debt consists of gross external debt with original maturity of one year or 

less, as of the end of Q2-2020.

Sources: National Authorities, World Bank, IMF, BIS

Table 1: Foreign Exchange Reserves
24

chiefly a product of large net foreign exchange purchases, with modest valuation effects

($78 billion) caused by the depreciation of the dollar against other currencies contributing

to the rise in reserve levels.

The economies covered in this Report continue to maintain ample — or more than ample

— foreign currency reserves compared to standard adequacy benchmarks. Reserves in

most economies are more than sufficient to cover short-term external liabilities and

anticipated import costs. Excessive reserve accumulation imposes costs both on the local

economy (in terms of sterilization costs and foregone domestic investment) and the world. 

Economies should focus on enhancing resilience through stronger policy frameworks, as

recommended by the IMF, rather than through increasing reserves to excessive levels.

Economic Developments in Selected Major Trading Partners

China

China’s economy was the first to be impacted significantly by the COVID-19 outbreak and

associated containment measures. The impact was broad-based, with China’s real GDP

growth falling from 6.0% year-over-year in the fourth quarter of 2019 to a contraction of

6.8% year-over-year in the first quarter in 2020 – the first recorded contraction since 1976

– driven by a sharp decline in consumption. Surveyed urban unemployment peaked at

6.2% in February, from 5.2% in December, but the actual level of unemployment may likely

be much higher given data limitations. China’s real GDP subsequently increased 3.2% yearover-year in the second quarter and 4.9% year-over-year in the third quarter, though the

recovery itself has been highly imbalanced with private demand lagging industrial output.

These shocks to activity have

generated a marked swing in

China’s external position in

2020. China’s current

account swung to a deficit of

1.1% of GDP in the first

quarter of 2020, with both

imports and exports

contracting sharply.10 This

was followed by a large

current account surplus of

3.1% of GDP in the second

quarter, as China’s goods surplus increased by nearly 54% year-over-year and the services

deficit decreased by over 55% year-over-year as outbound tourism suffered as a result of

global travel restrictions. Overall, in the four quarters through June 2020, China’s current

account surplus widened to 1.1% of GDP ($157 billion), compared to a surplus of 0.9% of

GDP ($127 billion) in the four quarters through June 2019. More recently, in preliminary

balance of payments data for the third quarter, China recorded a current account surplus of

10 Seasonal adjustment issues, as well as the timing of the lunar new year holiday with the beginning of the

COVID-19 outbreak, may have also played into the swing in the current account in the first quarter.

-5

0

5

10

200820092010

201120122013201420152016201720182019

2020H1

Percent of GDP

China: Current Account Balance

Income Services Goods Current Account Balance

Sources: SAFE, Haver
25

around 2.4% of GDP ($94 billion), supported by a substantial goods trade surplus of $155

billion, a 27% year-over-year increase, while the services deficit of over $40 billion, a 44%

year-over-year decrease, continued to reflect subdued outbound tourism due to travel

restrictions. China appears likely to run a larger external surplus this calendar year

relative to the previous year, even though global demand remains weak.

China’s bilateral goods trade surplus with the United States remains the largest by far of

any U.S. trading partner, although it has been trending downward. Since peaking at almost

$420 billion in 2018, China’s bilateral goods trade surplus with the United States has

declined steadily, reaching $345 billion in 2019 and narrowing further in the four quarters

through June 2020 to $310 billion. China continues to run a deficit in its bilateral services

trade with the United States, which totaled $30 billion in the four quarters through June

2020, compared to $36 billion in the four quarters through June 2019. 

China’s fiscal response to the COVID-19 crisis has been more targeted and smaller

compared to most other G20 economies. The initial response focused on health spending

and fee reductions, followed by the authorities’ announcement of additional fiscal stimulus

at the May National People’s Congress, including cuts to the value added tax and corporate

social insurance payments, and plans for infrastructure investment. Although the

authorities announced a relatively small increase in the general government deficit (to

3.6% from 2.8% of GDP), total discretionary stimulus amounts to more than 4.7% of GDP

when accounting for additional spending in the broad budget (which includes social

security and other government funds). Authorities also issued special treasury bonds, for

the first time since 2007, as well as proposed increasing the local government bond

issuance quota to help finance the fiscal response. 

China’s monetary policy response to the pandemic has also been restrained relative to

developed economies, with greater emphasis on facilitating indirect support through bank

lending. Measures include liquidity injections through open market operations, cuts to key

policy rates and reserve ratio requirements and expanding re-lending and re-discounting

facilities to ease financial conditions, and window guidance to direct banks to increase

lending, especially to the private sector and small- and medium-sized enterprises (SMEs). 

The authorities have also relied heavily on regulatory forbearance measures, including

delaying loan repayments for SMEs, and permitting banks to maintain higher levels of nonperforming loans. Credit growth has thus increased across the board, mainly driven by

household loans and government and corporate bond issuances. 
26

This year, the RMB has

appreciated 4.0% against the

dollar and 4.2% against the

PBOC China Foreign

Exchange Trade System

nominal basket through the

end of October.11 The real

effective exchange rate has

strengthened by 2.8%

through the end of October. 

In the first half of this year,

the RMB remained relatively

stable compared to other emerging market currencies, depreciating only 1.5% against the

dollar despite significant market volatility that led to increased capital outflows in the first

quarter of 2020, followed by a large current account surplus and portfolio inflows in the

second quarter of 2020. More recently, the RMB has strengthened 5.6% against the dollar

since the end of June through the end of October supported by favorable interest rate

differentials, increased investment inflows, and positive economic data, including a

substantial trade surplus. 

China provides very limited transparency regarding key features of its exchange rate

mechanism, including the policy objectives of its exchange rate management regime, the

relationship between the central bank and foreign exchange activities of the state-owned

banks, and its activities in the offshore RMB market. The PBOC manages the RMB through

a range of tools, including the setting of the central parity rate (the “daily fix”) that serves

as the midpoint of the daily trading band. In May 2017, the authorities introduced a

“counter-cyclical factor” that allowed for more discretion in the setting of the daily fix. In

October, the authorities announced that use of the counter-cyclical factor would be

suspended, although whether this is a permanent suspension is unclear. This follows a

decision earlier that month by the authorities to remove the risk reserve ratio on foreign

exchange forwards first imposed in 2018. While both announcements appear consistent

with the authorities’ desire to reform the exchange rate mechanism, in the near term, these

changes may also limit the RMB’s appreciation against the dollar. The PBOC can manage

the RMB through other tools, including by influencing the interest rates of RMBdenominated assets that trade offshore, influencing the timing and volume of forward swap

sales and purchases by China’s state-owned banks, and through direct intervention in

foreign exchange markets.

11 The China Foreign Exchange Trade System (CFETS) RMB index is a trade-weighted basket of 24 currencies

published by the People’s Bank of China (PBOC).

85

90

95

100

105

110

Indexed December 2014 = 100

China: Exchange Rates

CFETS Bilateral vs. USD

Sources: CFETS, FRB
27

China does not publish its

foreign exchange market

interventions, forcing

Treasury staff to estimate

China’s direct intervention in

the foreign exchange market. 

Official foreign exchange

reserves have remained

roughly unchanged on net

since the beginning of 2019,

standing at $3.1 trillion as of

June 2020. Reserves did

fluctuate briefly this spring,

decreasing by $46.1 billion in March – the largest monthly decrease since November 2016 –

and subsequently bouncing back by $30.8 billion in April. More comprehensive measures

that proxy for intervention, however, have been less volatile. Monthly changes in the

PBOC’s foreign exchange assets have been modest so far this year, while net foreign

exchange purchases by financial entities beyond the PBOC, notably state banks, have

moderately increased this year through June. Given China’s substantial trade and portfolio

inflows in the second quarter of 2020 and the RMB’s relative stability over the same time

period, the lack of substantial official foreign exchange reserve accumulation in the second

quarter merits close attention. Treasury will be monitoring closely foreign exchange

intervention proxies and related data for signs of possible intervention by the PBOC or the

state banks. 

China’s growth had been slowing prior to the COVID-19 shock, with real GDP rising 6.1% in

2019 amidst the authorities’ deleveraging campaign. Capital outflow pressures increased

modestly but remain far below the peak levels witnessed in previous years. Treasury

estimates that, in the four quarters through June 2020, net capital outflows (excluding

flows accounted for by trade and direct investment) totaled $297 billion, compared to $256

billion in outflows for the four quarters through June 2019. Separately, in the second

quarter of 2020 China recorded a large net errors and omissions deficit of nearly $76

billion, suggesting an uptick in undocumented capital outflows that are not captured within

the conventional components of the financial account.12 Overall pressure on the financial

account has been curbed in recent years by relatively tight controls on outbound flows and,

more recently, by strong portfolio inflows.

As the authorities attempt to balance supporting economic activity and containing future

outbreaks of the virus, they will need to rely on budget fiscal measures and balance

monetary stimulus against increasing financial stability risks. To strengthen long-term

growth prospects, China should take decisive steps to further rebalance its economy and

allow for greater market openness by implementing structural reforms to reduce state

intervention, strengthen household consumption growth, and permit a greater role for

market forces. Structural reforms should include measures to enhance social safety nets

12 China’s reporting of its net errors and omissions data has historically lagged behind reporting of other

balance of payments data, raising additional questions about data quality and disguised capital outflows.

-200

-150

-100

-50

0

50

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

China: Estimated FX Intervention

Preferred Methodology* Bank FX Settlement

Sources: PBOC, SAFE, U.S. Treasury Estimates

*Based on change in FX-denominated assets on PBOC balance sheet
28

and increase spending on social welfare, including healthcare, to lower precautionary

savings and support greater household consumption growth to rebalance the economy.

Japan

At the beginning of 2020, Japan’s economy was on weak footing having already contracted

7.2% at an annualized rate in the fourth quarter of 2019 following last October’s

consumption tax hike. In Q1 2020, at the onset of the pandemic, real GDP contracted 2.1%

at an annualized rate. The implementation of state of emergency measures in Q2 2020,

coupled with lower business investment, flagging net exports, and public reluctance to

engage in various economic activities, contributed to a historic annualized contraction of

real GDP of 29.2%. Output rebounded strongly by a 22.9% annualized rate in the third

quarter, and higher frequency data suggest additional gains in the fourth quarter. 

Nevertheless, according to the IMF, economic output in Japan will not fully recover to end2019 levels until 2024. Over the first half of 2020, state of emergency measures

encouraging citizens to stay home and public reluctance to engage in various economic

activities amid the pandemic drove an acute slowdown in private consumption and

investment amid the pandemic. 

Japan’s government has responded to the crisis with three large supplemental budgets that

are among the largest stimulus packages announced by any advanced economy, totaling

more than 50% of GDP in both direct and indirect support. Direct spending accounts for

roughly one-quarter of the total fiscal response and includes measures to ease hardships

for households and businesses through the provision of cash transfers to those affected by

the downturn. The more substantial indirect measures include tax payment deferrals and

concessional loans to businesses, with specific support for small-and-medium enterprises. 

The Bank of Japan (BOJ) has taken a number of measures to further ease monetary

conditions including by removing the ceiling on government bond purchases and

increasing asset purchase limits for exchange-traded funds, Japan real estate investment

trusts, commercial paper, and corporate bonds. The BOJ also implemented multiple

financing initiatives to support bank lending. In March 2020, the USD/JPY cross-currency

basis plummeted about 120 basis points on a three-month basis amid emerging dollar

liquidity pressures.13 On March 17, to ease dollar liquidity constraints among Japanese

banks, the BOJ drew upon its standing swap line arrangement with the Federal Reserve. As

dollar liquidity demands eased over the following months, BOJ drawing on the swap fell

from $223 billion in May to $750 million as of end-November 2020. 

13 A cross-currency basis swap is the simultaneous exchange of a loan in dollars for a one in a foreign

currency. The interest rate on the dollar principal is based on the dollar reference rate, while that of the

foreign principal is tied to the reference rate of the foreign currency plus a spread, which is commonly

referred to as the basis. The counterparty that borrows foreign currency pays the basis, while the one that

borrows dollars receives the basis.
29

After appreciating close to 

1% against the dollar in 

2019, the yen appreciated an 

additional 4.0% against the 

dollar through end-October, 

as the deterioration in global 

risk sentiment sparked by 

the spread of COVID-19 

drove flows into traditional 

safe haven currencies. On a 

real effective basis, the yen 

rose 1.5% through endOctober, after appreciating 

1.5% in 2019. Despite the recent appreciation, the real effective yen remains weaker than 

average historical levels. Japan publishes its foreign exchange interventions and has not 

intervened in foreign exchange markets since 2011. Treasury’s firm expectation is that in 

large, freely traded exchange markets, intervention should be reserved only for very 

exceptional circumstances with appropriate prior consultations.

Japan’s current account

surplus was 3.6% of GDP in

2019. The drag on global

trade from the COVID-19

shock weighed modestly on

Japan’s trade balance in the

first half of 2020, pulling the

current account surplus

down to 3.1% of GDP over

the four quarters through

June 2020. Japan’s current

account surplus continues to

be driven primarily by

income on its substantial net foreign assets. Earnings remained the same over the four

quarters ending June 2020 compared to calendar year 2019, but net exports of goods and

services fell into deficit by 0.4% of GDP. The goods trade surplus with the United States

over the four quarters ending in June 2020 was $57 billion, down 18% over the same

period in 2019 year-over-year. 

Looking ahead, the IMF projects Japan’s real GDP will contract 5.3% in 2020 and rebound

to 2.3% positive growth in 2021. Policymakers should prioritize containing COVID-19 and

mitigating its economic impact while smoothing a transition to longer-term objectives. 

Once economic activity normalizes, Japanese authorities should pursue structural reforms

to reduce macroeconomic imbalances, increase productivity, and raise potential growth

while maintaining fiscal flexibility to support growth in the near-term. 

60

80

100

120

140

60

80

100

120

140

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Japan: Exchange Rates

REER NEER Bilateral vs. USD

Sources: FRB, Bank for International Settlements

-3

0

3

6 2008

20092010201120122013

201420152016201720182019

2020H1

Percent of GDP

Japan: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Japan, Ministry of Finance, Cabinet Office 
30

Korea

In early 2020, Korea

experienced one of the first

COVID-19 outbreaks outside

of China. By mid-March,

Korea implemented

comprehensive public health

measures which limited the

spread of the virus without

large-scale mobility

restrictions. Nonetheless,

the escalation of COVID-19

cases in Europe and the

United States spurred

marked volatility in global and Korean financial markets, with foreign investors selling

$10.5 billion in Korean equities in the first quarter of 2020. Dollar liquidity pressures also

emerged, with the FX swap basis spread between the won and dollar widening to over 400

basis points in early March. The Federal Reserve announced a temporary $60 billion swap

line with the Bank of Korea (BOK) on March 19, which supported nearly $20 billion in

dollar auctions through May, helping alleviate liquidity pressures. Nonetheless, from

January through May, the won depreciated 6.6% against the dollar. 

Depreciation pressures began to abate in May, supported by slowing non-resident outflows

from Korean equities and continued non-resident inflows into Korean debt. Inflows into

Korean debt remained stable throughout the year. The BOK ceased foreign exchange

auctions through the Federal Reserve swap line on May 8, and the outstanding balance of

Federal Reserve swap line positions declined to zero by July 30.

The BOK has taken several measures to ease monetary conditions and stabilize financial

markets, including lowering the policy rate by a cumulative 75 basis points to 0.5%. Korea

also enacted emergency fiscal measures from March to September to address the health

and economic crisis totaling 3.9% of GDP in direct stimulus. These measures included

support for disease prevention and treatment, loans and guarantees for affected firms, and

direct transfers to households. Though historically large for Korea, these measures are

small relative to other advanced economies. With a relatively low debt-to-GDP ratio of

approximately 44%, Korea has ample fiscal space to support growth. 

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Korea: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
31

Prior to the pandemic,

growth of the Korean

economy was already

slowing. Growth in 2019 was

2.0% year-over-year, a

seven-year low. In the face of

simultaneous supply and

demand shocks caused by

COVID-19, Korea’s GDP

contracted 8.6% at an annual

rate in the first half of 2020,

its sharpest drop since the

fourth quarter of 2008. 

Exports were particularly hard hit, falling 31.4% at an annualized rate over the first half of

the year. The Korean economy returned to growth in the third quarter of 2020, with

output rising 8.8% at an annual rate. Third quarter growth was led by a large positive

contribution from the external sector, with real exports increasing 81.0% (annualized)

from the second quarter. Korea’s current account balance continued to narrow over the

four quarters through June 2020 to 3.5% of GDP, as a large goods trade surplus has

narrowed steadily from its peak in 2015. Korea’s bilateral goods trade surplus with the

United States contracted in the four quarters through June 2020 to $20.0 billion. Downside

risks such as weak global demand may continue to weigh on the goods surplus going

forward, though this may be offset to some degree by a narrowing of the services

(particularly tourism) deficit. 

Korea reported net foreign

exchange sales of $9.1 billion

(0.6% of GDP) in the spot

market to support the won

over the four quarters ending

in June 2020. Over the same

period, the won depreciated

3.8% against the dollar and

depreciated 2.2% on a real

effective basis. Korea has

well-developed institutions

and markets and should limit

currency intervention to only

exceptional circumstances of disorderly market conditions. Korea maintains ample

reserves at $408 billion as of September 2020, equal to 2.6 times gross short-term external

debt. Treasury welcomes Korea’s steps to report foreign exchange intervention in a more

transparent and timely manner, including by transitioning to a quarterly from a

semiannual disclosure schedule in December 2019.14 

14 Treasury’s estimates are more frequent and are based on valuation-adjusted changes in foreign exchange

reserves as well as changes in the central bank’s forward position. For the four quarters ending in June 2020,

-4

-2

0

2

4

6

8

10

200820092010201120122013

201420152016201720182019

2020H1

Percent of GDP

Korea: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Korea, Haver

-10

-5

0

5

10

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

Korea: Estimated FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources: Bank of Korea, U.S. Treasury estimates
32

Given the scale and duration of the economic shock emanating from the pandemic, it will be

important for the authorities to continue to calibrate policy support measures —

particularly fiscal support — to facilitate a full recovery. Moreover, given the slowdown to

growth that was underway even prior to the pandemic, a stronger fiscal response (more in

line with other advanced economies) seems warranted, particularly if growth wanes or

further risks materialize. Structural measures will also be required to increase potential

growth over the medium term, including comprehensive labor reforms that address duality

in the labor market and expanding social safety net programs in order to reduce old-age

poverty and support domestic demand.

The Euro Area

The COVID-19 pandemic has triggered the biggest economic slump in Europe since World

War II. Euro area economic output shrank by a record 15.1% from the fourth quarter of

2019 to the second quarter of 2020 as activity ground to a halt for much of March and April

due to the pandemic and broad implementation of restrictive health measures. Economic

activity regained momentum over the summer as infection rates and lockdown measures

eased across the euro area, but the nascent recovery has been put at risk by a resurgence in

coronavirus infections in the fall and the corresponding reintroduction of containment

measures across the euro area.

Policymakers have launched an unprecedented combined monetary and fiscal response to

ease the retrenchment in private demand and alleviate potential supply disruptions, in

hopes of maintaining the foundations for a restoration in economic activity as restrictions

ease. At the national level, this includes country-level discretionary fiscal measures

amounting to around 4.5% of euro area GDP in 2020, and loans and guarantees or capital

injections with a total envelope of around 24% of euro area GDP. At the European Union

(EU) and euro area level, it includes a number of monetary and fiscal measures. Most

notably, the European Central Bank (ECB) created a new bond buying program, the

Pandemic Emergency Purchase Program (PEPP) with an envelope of up to €1.35 trillion

($1.6 trillion) running through June 2021, and massively expanded ECB term lending to

euro area banks at highly favorable rates to support the monetary policy transmission

mechanism. On the fiscal side, in April the EU agreed a €540 billion ($650 billion) package

of loans. This was followed by agreement in July on a €750 billion ($900 billion) recovery

fund to be funded by the issuance of long-term bonds and consisting of grants and loans to

member countries and sectors hardest hit by the pandemic. The recovery fund, in

particular its grant portion, should help promote a more symmetric recovery across

European countries and, together with ECB policy, further reduce tail risks related to the

viability of the monetary union. Still, the future path for the euro area economies is difficult

to gauge given the exceptional nature of the shock, and will depend on the path of the virus

Treasury estimated $5.2 billion by Korea in spot purchases in addition to $1.1 billion in forward contracts, for

a net of $6.3 in estimated foreign exchange purchases. Increases in Korean domestic banks’ foreign exchange

deposits with the BOK and realized capital gains from the BOK’s sales of foreign currency securities amid

volatile market conditions appeared to drive the unusually large gap between Treasury’s estimate and the

Korean authorities’ reported intervention figure.
33

itself, the nature and duration of public health measures, their impact across sectors, and

the speed at which economic activity normalizes.

The European Commission projects that the euro area current account surplus will narrow

modestly to 2.6% of GDP in 2020 (from 3.1% of GDP in 2019), led by falling manufacturing

exports in Germany and the Netherlands and sharp declines in services exports among

tourism-oriented economies.

As global financial market

volatility rose this spring

amid the widening COVID-19

pandemic, spot rate swings

and option-implied volatility

between the euro-dollar

currency pair reached multiyear highs in March. On

March 15, the Federal

Reserve, the ECB, and four

other major central banks

announced adjustments to

their standing U.S. dollar

liquidity swap line arrangements to enhance the availability and effectiveness of U.S. dollar

liquidity operations. Subsequently, European banks through the ECB drew up to $145

billion through the swap line arrangement.15 In combination with other actions by the

Federal Reserve, this helped alleviate global dollar liquidity pressures, and by the end of

April, market pricing and volatility had receded closer to normal historical levels. On net in

2020 the euro is stronger against the dollar (3.7% through end-October), having gradually

strengthened since late April. The euro has strengthened somewhat more on a tradeweighted basis, rising 6.6% and 5.0% on a nominal and real effective basis, respectively,

over 2020 though end-October. The IMF’s most recent assessment judged the euro area’s

external position to be moderately stronger than warranted by medium-term economic

fundamentals and desirable policies. 

The ECB publishes its foreign exchange intervention and has not intervened unilaterally in

foreign exchange markets since 2001.

Germany

Germany acted swiftly to contain the initial spread of COVID-19 in the spring, allowing the

government to gradually reopen the economy in early May and limit the economic

consequences of the pandemic relative to other countries in Europe. However, in

November Germany again closed most commercial activities to stem the second wave of

COVID-19 infections. The partial lockdown will last until at least December 20 and halt

GDP growth in the fourth quarter, with the government forecasting that the German

15 As of end-October, outstanding amounts under the swap line with the ECB stood at $0.9 billion.

80

90

100

110

120

130

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18

Jan-19Jan-20

Indexed to 20Y Avg = 100

Euro: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
34

economy will contract 5.1% in 2020.16 Germany has demonstrated its willingness to

abandon, at least temporarily, its prior strict fiscal stance by adopting large fiscal stimulus

measures and suspending its constitutional debt brake to take on unprecedented deficit

spending.17 Germany has approved $316 billion (8.3% of GDP) in direct assistance for

shuttered businesses, targeted sectors, and supplemental wages. In addition, Germany has

approved $1.2 trillion (30.8% of GDP) in loans, equity, and guarantees to firms, even

though take up remains low due to lower financing needs and higher use of direct

assistance, as well as the higher cost of certain guarantee schemes. These early and large

fiscal measures contributed to a strong recovery in German economic activity in the third

quarter, particularly on the demand side. Current measures in place to support closed

businesses and affected workers through the latest closures include grants to firms for up

to 75% of their November 2019 sales, subsidies for the automotive and airline sectors, and

extending financing for small- and medium-sized firms until June 2021. Other stimulus

measures introduced by the German government, including the temporary cut in the VAT

rate, have also supported domestic demand. 

Germany’s large current

account surplus has

narrowed somewhat in 2020

as the shock to global trade

has weighed on exports. The

current account surplus

stood at 6.8% of GDP over

the four quarters through

June 2020 (down from 7.2%

of GDP in 2019). 

Nonetheless, Germany’s

current account surplus

remains the largest in the

world in nominal terms (at $253 billion over the four quarters through June 2020). While

German domestic demand contributed substantially to growth from 2015-2019, helping

gradually narrow the current account surplus, it was not sufficient to reduce appreciably

external imbalances. There are signs, however, that the current crisis is accelerating the

shift of Germany’s growth composition toward domestic demand, which has held up well in

recent months amid fiscal stimulus measures, compared to the precipitous drop in exports. 

For this shift to take hold beyond the current crisis, Germany will need to implement

economic policies to address the structural factors that contribute to high domestic saving

and low consumption and investment. 

Germany’s bilateral goods trade surplus with the United States stood at $62 billion over the

four quarters through June 2020, down modestly from $67 billion over the period one year

prior. 

16 Source: Germany Council of Economic Experts.

17 In its 2021 proposed budget, the German Parliament plans for nearly $215 billion in new debt.

-5

0

5

10

2008200920102011201220132014201520162017

20182019

2020H1

Percent of GDP

Germany: Current Account Balance

Income Services Goods Current Account Balance

Source: Deutsche Bundesbank
35

Germany’s economic policies — notably excessively tight fiscal policy emanating from high

tax levels — have for many years restrained domestic consumption and investment. The

measures announced in response to COVID-19, including the VAT cut and the suspension of

the national fiscal rules to allow for new debt issuance, are steps in the right direction but

are temporary in nature. These measures fail to address the overly conservative budget

processes which have played a role in Germany’s excessively tight fiscal stance. Since 2014,

Germany’s approved budgets have called for fiscal balance, but stronger-than-forecast

revenues and under-execution of spending plans have meant that in fact fiscal surpluses

have averaged 1.2% of GDP over this time period, while reaching historic records of 1.9%

of GDP in 2018 before declining modestly to 1.4% of GDP last year. As the public health

crisis is overcome and recovery takes hold, Germany’s substantial fiscal space should be

deployed through structural fiscal measures that will bolster current activity, reduce the

burden of taxation — particularly through tax cuts that would lower the labor tax wedge —

and reinvigorate investment, which would help external rebalancing proceed at a

reasonable pace. 

Italy

Italy was first among European countries hit by COVID-19 (with the outbreak first

confirmed on February 21), and it is among the countries hardest hit. In the second

quarter of 2020, real GDP contracted a record 42.7% annualized rate (-18% year-overyear) as the government-imposed lockdowns and other restrictive measures to stem the

pandemic. While Italy saw a stronger-than-expected rebound in the third quarter, the

recent resurgence of COVID-19 will weigh on the growth outlook. In its autumn forecast,

the European Commission projects Italian GDP to contract nearly 10% in 2020. To counter

the immediate crisis, the government has passed three fiscal packages totaling $100 billion

in direct support (around 5.3% of GDP), as well as around $912 billion (close to 50% of

GDP) in authorized loan guarantees. Total fiscal response measures will likely widen the

fiscal deficit to around 11% of GDP and increase public debt to over 160% of GDP in 2020. 

Italy’s current account has

been broadly stable in recent

years and stood at 3% of GDP

over the four quarters

through June 2020 (roughly

unchanged from its 2019

level). The United States is

Italy’s third-highest export

destination, and Italy’s goods

trade surplus with the United

States stood at $30 billion

over the four quarters

through June 2020. The

IMF’s most recent assessment describes Italy’s external position as broadly in line with

medium-term economic fundamentals and policies. 

-4

-2

0

2

4 2008

200920102011201220132014

20152016201720182019

2020H1

Percent of GDP

Italy: Current Account Balance

Income Services Goods Current Account Balance

Sources: Ufficio Italiano dei Cambi, Banca d'Italia
36

Italy’s persistently anemic growth and pre-pandemic fundamentals highlight the difficult

road towards economic recovery. These longstanding trends have been further

exacerbated by the second COVID-19 wave and the reintroduction of containment

measures. In light of the unfolding circumstances, Italy should continue to provide fiscal

support to impacted households and firms. EU-level fiscal support – including European

instrument for temporary Support to mitigate Unemployment Risks in an Emergency

(SURE) and NextGenerationEU funding – should also help Italy weather the crisis, with Italy

set to receive as much as $246 billion in grants and loans. The crisis has only further

demonstrated the need, once the pandemic is past and economic recovery takes hold, for

Italy to undertake fundamental structural reforms to tackle deep-rooted rigidities and

boost competitiveness and potential growth. 

Singapore

Singapore was one of the first countries hit by COVID-19 once the virus spread beyond

China, and its status as a small, open economy makes it particularly suspectable to changes

in the global economy. The Singapore economy contracted sharply over the first half of the

year, with real output falling 6.8% year-over-year over the first half of 2020. The GDP

contraction in the second quarter was particularly pronounced, with economic activity

falling 13% year-over-year. Strict lockdown and social distancing measures enacted during

the second quarter impacted severely the construction and tourism sectors and slowed

consumer demand. These factors, coupled with low oil prices and a weak labor market,

have resulted in several months of headline and core deflation. Despite a GDP rebound in

the third quarter on a quarter-over-quarter basis, the economic outlook remains subdued

as the effects of the pandemic will continue to weigh on growth over the coming year.

In response to the COVID-19 outbreak, Singapore introduced unprecedented measures to

support the economy. Multiple rounds of fiscal stimulus yielded over $70 billion in

support, equivalent to approximately 20% of GDP, half of which was funded by Singapore’s

sovereign wealth fund reserves. The measures aim to alleviate the economic damage to

both households and businesses, with a particular focus on maintaining employment. The

government signaled it may take additional measures during the coming year.

While fiscal policy has been the authorities’ primary tool to respond to the economic effects

of the pandemic, the Monetary Authority of Singapore (MAS) has also taken supportive

measures. In March, MAS eased monetary policy by adopting a 0% annual rate of

appreciation of its exchange rate policy band and reducing the midpoint to the prevailing

nominal effective exchange rate. Earlier the same month, the Federal Reserve and MAS

announced the establishment of a $60 billion currency swap facility, which MAS has used to

provide dollar liquidity to Singapore banks through weekly auctions. Outstanding amounts

on the swap facility totaled nearly $600 million as of early November. In addition, MAS

adjusted regulatory and supervisory requirements to enable financial institutions to better

cope with the downturn while also allowing for individuals and certain types of businesses

to secure temporary forbearance on loans and other payments. 
37

Singapore’s outsized current

account surplus averaged

18% of GDP over the last

decade and totaled 16% in

the four quarters through

June 2020, driven by a very

large goods trade surplus,

partly offset by a sizable

deficit in its income balance. 

The IMF’s August 2020

External Sector Report (ESR)

found Singapore’s 2019

external position to be

substantially stronger than warranted by medium-term fundamentals and desirable

policies. Moreover, the IMF has assessed the Singapore dollar to be undervalued since it

began publishing the ESR in 2012.

The United States has run a steady bilateral goods trade surplus with Singapore, which

totaled $0.8 billion in the four quarters ending June 2020. However, this was well below

the prior year’s surplus of $4.2 billion, owing in part to a decline in U.S. exports to

Singapore starting in March and a temporary uptick in imports from Singapore. In the four

quarters ending June 2020, the top U.S. exports to Singapore included advanced machinery

and parts, aircraft, and mineral fuel and oil. The U.S. goods trade surplus with Singapore

reflects, in part, Singapore’s role as a regional transshipment hub, with some U.S. exports to

Singapore ultimately intended for other destinations in the region.

MAS uses the nominal

effective exchange rate of the

Singapore dollar (the

S$NEER) as its primary tool

for monetary policy and

executes its policy by

purchasing and selling

currency in the foreign

exchange market. MAS, in a

welcome step toward greater

transparency, began to

disclose its foreign currency

intervention earlier this year. 

MAS announced it will continue to disclose net purchases of foreign exchange on a sixmonth aggregated basis, with a three-month lag from the end of the reporting period. In

April and October 2020, MAS published data on intervention covering the second half of

2019 and first half of 2020, indicating net purchases of $29.9 billion and $44.4 billion,

respectively. This substantial increase in net purchases in the first half of 2020 may have

reflected the broader recovery in international liquidity during the second quarter,

-15

-10

-5

0

5

10

15

20

25

30

35

200820092010201120122013201420152016201720182019

2020H1

Percent of GDP

Singapore: Current Account Balance

Income Services Goods Current Account Balance

Sources: Monetary Authority of Singapore, Department of Statistics

-15

-10

-5

0

5

10

15

20

25

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

Singapore: Estimated FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources: Monetary Authority of Singapore, U.S. Treasury estimates
38

combined with Singapore’s efforts to prevent sustained appreciation and maintain its

exchange rate policy band.

Amid the COVID-19 shock,

the Singapore dollar, like

most emerging market

currencies, came under

pressure, weakening 5.4% in

the first quarter. However, it

subsequently recovered

much of the decline,

strengthening 4.1% over the

next two quarters. On net,

the Singapore dollar

depreciated 1.5% against the

U.S. dollar over the first ten

months of the year, while weakening 2.0% and 2.8% on a nominal and real effective basis,

respectively, over the same period. The IMF’s August 2020 External Sector Report noted

Singapore’s 2019 real effective exchange rate is 2-14% weaker than warranted by

fundamentals. 

As the public health situation and economy begin to improve, a number of reforms would

help reduce external imbalances. Expanding the provision of social services in areas like

healthcare, unemployment insurance, and retirement would help reduce incentives for

private saving and support stronger consumption. Reductions in the high rates for

mandatory contribution to the government pension scheme would have similar benefits in

strengthening domestically driven growth. Further appreciation of the nominal and the

real effective exchange rate over the medium term, consistent with economic

fundamentals, should also play a role in facilitating external rebalancing.

Malaysia

The Malaysian economy contracted sharply during the first half of 2020, owing initially to

supply chain disruptions and weaker exports due to the COVID-19 pandemic, and later due

to a contraction in domestic demand as strict lockdown orders and social distancing

requirements unveiled in March curtailed strongly domestic activity. Growth collapsed in

the second quarter of 2020, with GDP falling 17.0% year-on-year, as Malaysia experienced

its first GDP contraction since the Global Financial Crisis. Malaysia’s real GDP rebounded in

the third quarter, contracting only 2.7% year-on-year. However, a recent resurgence of

COVID-19 cases and renewed social distancing measures will continue to weigh on nearterm growth. 

In response to the downturn, the authorities introduced a wide range of fiscal, monetary,

and financial sector measures to alleviate the impact of the pandemic. Direct fiscal support

of approximately 5% of GDP focused on cash transfers to households and support to

businesses intended to maintain payroll and employment. The authorities also enacted a

80

90

100

110

120

130

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16

Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Singapore: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
39

number of financial sector policies to alleviate cash flow and balance sheet strains on

individuals and small businesses, including a moratorium on loan repayments, loan

guarantees for businesses, flexible repayment schemes, tax relief measures, and a

relaxation of regulations to allow individuals penalty-free access to a portion of pension

savings. At the same time, the authorities have introduced incentives to support hiring,

promote new investments, and boost select industries. The Malaysian authorities have

estimated the total stimulus, including measures provided through the financial sector and

accelerated drawdowns in savings, reached approximately 20% of GDP. Bank Negara

Malaysia (BNM) has also cut the policy interest rate by a cumulative 125 basis points to

1.75%. To counteract the tightening of financial conditions, BNM also lowered bank

reserve requirements and allowed banks to use government bond holdings to meet these

requirements, while increasing significantly its own holdings of government securities. 

Malaysia has made substantial progress rebalancing its external sector over the past ten

years as savings rates declined gradually on stronger consumption amid a strengthened

labor market, rising household borrowing, and increased government transfers. In the face

of the effects of the pandemic, Malaysia recorded its first monthly trade deficit in 22 years

in April 2020, led by substantial contractions in exports of manufactured goods, palm oil,

natural gas, and petroleum. With exports equal to almost 70% of GDP in the four quarters

ending in June 2020, disruptions to supply chains and low global demand for petroleum

and gas have significantly weakened Malaysian exports, with knock-on effects on growth. 

Prior to the pandemic,

Malaysia’s current account

surplus widened in 2019 to

3.4% of GDP after several

years in which the surplus

remained below 3% of GDP. 

The expansion was primarily

driven by a narrowing of the

income deficit, reflecting

higher remittances and

profits from overseas

investments, alongside a

decline in capital imports as

large public infrastructure projects were postponed. However, in the four quarters ending

in June 2020, the current account surplus declined to 2.5% of GDP, reflecting lower

earnings from oil and gas and a wider services deficit.

Malaysia’s bilateral goods trade surplus with the United States reached $29 billion in the

four quarters ending in June 2020. Malaysia and the United States have strong supply

chain linkages, and as a result the bilateral trade balance is driven by supply integration in

key industries such as electrical machinery parts, nuclear reactor and boiler parts, and

optical and medical instruments. Malaysia’s growing trade surplus with the United States

reflects, to a degree, the growing sophistication of its manufacturing and its increasing

importance in global supply chains.

-10

-5

0

5

10

15

20

25

200820092010201120122013

201420152016201720182019

2020H1

Percent of GDP

Malaysia: Current Account Balance

Income Services Goods Current Account Balance

Source: Department of Statistics Malaysia
40

Malaysia’s historical external

imbalances have in part

reflected a ringgit that has

been misaligned with

fundamentals. The IMF has

assessed the ringgit to be

undervalued for over a

decade; its August 2020

External Sector Report puts

the ringgit around 7%

undervalued for 2019. Like

most other emerging market

currencies, the ringgit came

under considerable pressure in 2020 at the outset of the COVID-19 shock, but subsequently

recovered much of the decline. On net, the ringgit depreciated 1.4% against the U.S. dollar

over the first ten months of the year, while falling 1.7% and 3.8% on a nominal and real

effective basis, respectively, over the same period.

Malaysia does not publish

foreign exchange

intervention data, forcing

Treasury staff to estimate the

scale of Malaysia’s

intervention. Based on

Treasury estimates of BNM

intervention activity, BNM

has demonstrated a pattern

of intervening on both sides

of the market. Treasury

estimates net purchases of

foreign exchange amounted

to $3.7 billion, or 1.1% of GDP, in the four quarters ending in June 2020. 

As the public health situation and economy improve, the authorities should take steps to

strengthen growth and entrench rebalancing by continuing to promote efficient and welltargeted social spending to avoid excessive levels of precautionary saving, and supporting

quality investments which will also help spur domestic demand. The authorities should

continue to allow the exchange rate to move to reflect economic fundamentals and limit

foreign exchange intervention to circumstances of disorderly market conditions, while

increasing transparency of foreign exchange intervention. 

Thailand

The COVID-19 pandemic has deeply affected the Thai economy, most notably the travel and

tourism sector, which provides nearly a fifth of export receipts. Tourist arrivals collapsed

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16

Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Malaysia: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements

-8

-6

-4

-2

0

2

4

6 Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

Malaysia: Estimated FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources: Bank Negara Malaysia, U.S. Treasury estimates
41

in the first half of 2020 due to restrictions on international travel, driving disruptions in

tourism-dependent sectors, including hospitality, aviation, and the informal sector. The

manufacturing sector has also been affected negatively due to the closure of factories and

borders, supply chain disruptions, and the contraction in global demand. 

In response to the pandemic, the government is implementing an ambitious relief package

of approximately 15% of GDP combining fiscal stimulus and liquidity support. The fiscal

stimulus measures seek to address the lack of a social safety net for Thailand’s large

informal economy, remedy weaknesses in the healthcare system, and provide tax relief as

well as financial aid to workers. The Bank of Thailand (BOT) is implementing $30 billion in

monetary and credit measures to support businesses and stabilize the financial sector,

including through soft loans for banks to on-lend to SMEs, and facilities to purchase

corporate debt, treasury bills, bonds, and other assets.

Thailand has for the most

part run current account

surpluses over the two

decades since the Asian

financial crisis, with

surpluses averaging 4% of

GDP between 1998 and

2019. In the aftermath of the

late 1990s crisis, a surge in

foreign direct investment in

manufacturing and

integration into global supply

chains helped support over

the next decade an expansion of the manufacturing sector and merchandise exports. More

recently, tourism has evolved into a key export, supporting steady surpluses in services

trade since 2013. With a resurgence in the goods trade surplus in recent years, the current

account surplus rose to an average of 8% of GDP from 2015 to 2019. 

Over the four quarters through June 2020 Thailand’s current account surplus shrank to

6.3% of GDP primarily due to the collapse in tourism receipts after the outbreak of the

pandemic. The pandemic likely will continue to weigh on both manufacturing trade and

(particularly) tourism, placing downward pressure on the current account surplus. At the

same time, a slowdown in domestic investment (and associated capital imports) and a

lower import bill due to weak consumer confidence and lower oil prices should partially

offset these factors. 

Thailand’s goods trade surplus with the United States has grown steadily over the last

decade, reaching $22 billion during the 12 months through June 2020, as Thailand has

increased exports of tires, vehicle parts, and electronic equipment, among other

goods. Thailand maintains significant barriers that impede U.S. firms trying to access the

domestic Thai market, including relatively high tariffs in many sectors.

-10

-5

0

5

10

15

200820092010201120122013

201420152016201720182019

2020H1

Percent of GDP

Thailand: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Thailand, National Economic & Social Development Board
42

Thailand intervenes

frequently in foreign

exchange markets in both

directions. However,

intervention activity has

been skewed heavily towards

purchases since 2016, with

reserves rising to over $230

billion as of June 2020. The

Thai authorities have

conveyed credibly to

Treasury that net purchases

of foreign exchange over the

12 months through June 2020 were 1.8% of GDP. This figure is equivalent to almost $10

billion. 

The baht appreciated steadily

from 2015 to 2019, with the

real effective exchange rate

rising almost 15% from end2015 through end-2019. 

However, the IMF still

estimates that Thailand’s

external position in 2019 was

substantially stronger than

warranted by medium-term

fundamentals and desired

policies, and that the real

effective exchange rate was

9.5% undervalued. After appreciating 8.6% against the dollar in 2019, the baht fell by

9.0% against the dollar in the first quarter of 2020, as emerging market currencies were

weighed down by the sharp deterioration in global risk appetite. The baht subsequently

retraced much of this decline, and as of end-October stood 4.6% weaker against the dollar

year-to-date in 2020, and 5.9% weaker on a real effective basis.

During recent periods of baht appreciation, the BOT took steps to limit short-term capital

inflows and accelerate medium-term plans to increase capital outflows. In July 2019, the

BOT reduced the limit on non-resident baht accounts by one-third (to 200 million baht or

$6.5 million), and increased reporting requirements for non-resident accounts. In

November 2019, the BOT permitted outward transfers based on a negative rather than

positive list, allowed retail investors to invest directly up to $200,000 abroad annually,

approved gold trading in foreign currency, and raised the threshold for FX proceeds that do

not need to be repatriated to $200,000 from to $50,000. In February 2020, the central

bank further raised the repatriation threshold to $1 million. In November 2020, following

three weeks of baht appreciation, the BOT raised further the ceiling on retail investors’

overseas investments to $5 million, eliminated outbound investment limits for institutional

-10

-5

0

5

10

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

Thailand: Estimated FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources: Bank of Thailand, U.S. Treasury estimates

90

100

110

120

130

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17

Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Thailand: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
43

investors, permitted residents to freely deposit funds in foreign-currency accounts, and

imposed new registration requirements on foreign investors in Thai debt securities. In the

run-up to the introduction of these most recent measures, both the Ministry of Finance

(MOF) and BOT had expressed concern with the baht’s appreciation.

The authorities should take steps to reduce Thailand’s external imbalances through

policies that encourage private investment, reduce precautionary savings, and promote

greater openness in domestically oriented sectors. Thailand should continue to ensure that

its foreign exchange policy does not resist appreciation of the baht in line with economic

fundamentals in the context of large and durable external surpluses. Thailand is wellpositioned to pursue such policies, which also would help to support domestic growth,

given its large external buffers and low share of public debt held by nonresidents.

Taiwan

Taiwan’s swift public health response to the COVID-19 pandemic helped it contain quickly

its domestic outbreak, but external shocks weighed on Taiwan’s economy and contributed

to moderate volatility in its financial markets. Private consumption declined 4.9% yearover-year in the second quarter of 2020, driving a 0.6% year-over-year contraction in real

GDP. Net portfolio outflows in the first half of 2020 totaled $39 billion, an increase from

outflows of $23 billion in same period of 2019 but a decrease from outflows of $53 billion

in the first half of 2018. Government measures such as an initiative introduced in 2019 to

encourage Taiwanese companies to bring accumulated offshore FX holdings back onshore

appear to have played a mitigating role. Taiwan’s central bank implemented several

measures to ease monetary conditions and stabilize financial markets, including lowering

the discount rate 25 basis points to 1.125% in March, a record low and its first rate cut

since 2016. The authorities also approved cumulative fiscal measures totaling $35 billion

(5.5% of GDP), which included measures to support public health, vulnerable firms, and

coupons to support consumption. 

Taiwan’s external balances remained broadly steady in the first half of 2020. Taiwan’s

current account balance stood at 10.9% of GDP over four quarters through June 2020,

roughly equal to the 11.0% of GDP balance recorded over the previous four-quarter period. 

Exports of electronic goods have remained resilient during the pandemic as external

demand for computing equipment partially offset the decline in non-electronic goods

exports. 
44

Taiwan has run large

external surpluses for many

years, with the current

account balance averaging

above 10% of GDP over the

last decade and peaking at

14.1% of GDP in 2017. 

Taiwan’s goods trade surplus

with the United States

expanded sharply in the 12

months through June 2020 to

$25 billion, growing by $7

billion compared to a year

prior. 

Taiwan officially maintains a managed float exchange rate and the new Taiwan dollar

(TWD) has appreciated steadily against the dollar in 2020. While many currencies

depreciated against the dollar over the first half of 2020 amid the COVID-19 shock, the

TWD appreciated 1.6% over this period. As of end-October, the TWD had appreciated 3.0%

on a real effective basis. 

In March, Taiwan took the

welcome steps of disclosing

publicly its foreign exchange

intervention, initially

covering activity in 2019, and

its outstanding swap position

(see box).18 Treasury

welcomes Taiwan’s efforts to

make its foreign exchange

operations and reserve

management more

transparent. Taiwan

disclosed net foreign

exchange purchases totaling $3.9 billion (0.6% of GDP) over the first half of 2020 to resist

appreciation pressures, following net foreign exchange purchases totaling $6.6 billion over

H2 2019 (1.1% of GDP).19 Taiwan has abundant foreign exchange reserves, totaling $489

18 The central bank reported net purchases of $5.5 billion in 2019 in its semi-annual report to Taiwan’s

Legislative Yuan (https://www.cbc.gov.tw/dl-141986-dc3350360f3644cb86c1d4ac4df65b01.html). On

October 15, 2020, the central bank disclosed net purchases of $6.6 billion in H2-2019 and net purchases of

$3.9 billion in H1-2020 in its second semi-annual disclosure to the Legislative Yuan

(https://www.cbc.gov.tw/tw/dl-159657-4b8126ec19eb4fa3897ccaa9cda0e232.html). 

19 Treasury’s estimates are more frequent and cover activity in the spot market as well as in the central bank’s

forward position. For the six months ended June 2020, Treasury estimated $9.8 billion in FX purchases by

Taiwan in the spot market before subtracting $4.1 billion to account for the decrease in the central bank’s

outstanding USD receivables swaps position, resulting in an estimated $5.7 billion in estimated net FX

intervention. 

-5

0

5

10

15

20

200820092010201120122013201420152016201720182019

2020H1

Percent of GDP

Taiwan: Current Account Balance

Income Services Goods Current Account Balance

Sources: Taiwan central bank, Haver

-2

0

2

4

6 Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

Taiwan: Estimated FX Intervention

Sources: Taiwan central bank, U.S. Treasury estimates
45

billion (78% of GDP) as of June 2020. Treasury urges the authorities to limit foreign

exchange intervention to only exceptional circumstances of disorderly market conditions

and to avoid asymmetrical intervention to resist appreciation in line with economic

fundamentals. We also encourage the Taiwanese authorities to take further action,

particularly with respect to reporting foreign exchange reserves in the widely accepted

format of the IMF’s Special Data Dissemination Standard. 

The IMF does not currently

publish a valuation

assessment of the TWD. 

External analysts assessed in

2018 that the TWD was

undervalued by as much as

21%, an assessment that is

consistent with a sustained,

large external surplus, and

relatively limited adjustment

of the real exchange rate over

time.20 

Box 1: The Swap Position of Taiwan’s Central Bank

Taiwan’s large life insurance 

industry generates demand for 

foreign assets such as corporate 

bonds, which offer higher yields 

than Taiwanese domestic bonds. 

Taiwan’s life insurers partially 

hedge their exposure to these 

foreign assets through the local 

banking system. Taiwan’s central 

bank, in turn, provides foreign 

currency liquidity to the local 

banking system through the 

foreign exchange swap market.21 

The accumulation of a large net 

long position in foreign currency 

swaps has also had the effect of sterilizing a portion of the central bank’s foreign 

20 “Estimates of Fundamental Equilibrium Exchange Rates,” William R. Cline, Economic International Inc.,

November 2018.

21 The central bank’s 2018 Annual Report notes: “...to facilitate smooth corporate financing and provide

sufficient foreign currency liquidity within the banking system, the Bank continued to conduct foreign

currency swap transactions with banks...”

https://www.cbc.gov.tw/en/public/Attachment/961318214371.pdf. 

80

90

100

110

120

80

90

100

110

120

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17

Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Taiwan: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
46

exchange intervention.22 External analysts have previously written on the potential size 

of Taiwan’s swap position.23 In a welcome development, Taiwan’s central bank began 

disclosing publicly information on its foreign exchange swap position, initially on an 

annual basis covering 2009-2019 and then on a monthly basis beginning in March 

2020.24 The position stood at $101.3 billion at the end of 2019 (16.6% of GDP). Taiwan 

has added $50 billion to its swap position since 2009, with the largest increase of $28.2 

billion in 2016. Since 2016, the trend has moderated, with its outstanding swap position 

remaining relatively flat between 2017 and 2019 before declining by $4 billion in the 

first six months of 2020. 

India

In the first half of 2020, India experienced one of the world’s largest COVID-19 outbreaks

and the steepest quarterly growth contraction among G20 economies. India’s GDP shrank

24% year-over-year in the second quarter as domestic demand and supply chains

collapsed during a strict lockdown, which began March 25. Economic activity has started

to return slowly since reopening began at the end of May and the pace of the country’s

COVID-19 spread began slowing in the middle of September.

India’s federal government has offered a modest fiscal stimulus while the central bank has

pursued substantial easing measures. The central government’s direct fiscal support has

amounted to about 2% of GDP, balancing the need to support the economy with avoiding a

larger fiscal deficit and risks to its credit outlook. The direct stimulus targets low-income

households and the healthcare sector while the government has used indirect fiscal

measures to help ease the flow of credit to small businesses. Meanwhile, the Reserve Bank

of India (RBI) reduced its policy rate 115 bps to 4.0% before pausing in August in the face

of stubbornly high inflation — which reached 7.3% year-on-year in September — above

the monetary authority’s 4±2% target. RBI liquidity measures equivalent to 5.9% of GDP

and a temporary loan repayment moratorium have supported corporates, small businesses,

and non-bank financial companies.

India’s current account registered a 0.4% of GDP surplus in the four quarters through June

2020, the country’s first 12-month surplus since 2004, as imports fell faster than exports

reflecting India’s weak domestic demand during the COVID-19 lockdown. The surplus was

22 A central bank can buy foreign currency spot, then enter a foreign exchange swap contract in which it

provides foreign currency in the front leg and receives it on the back leg. The resulting net forward position

has no visible impact on gross foreign exchange reserves on the balance sheet until it is closed but is publicly

disclosed by central banks using the IMF’s Special Data Dissemination Standard Template on International

Reserves and Foreign Currency Liquidity. Taiwan does not currently report foreign exchange reserves

according to this template. Because of the manner in which changes in net forward positions can mask

buying and selling of foreign exchange in the spot market, Treasury includes such positions when estimating

foreign exchange intervention. 

23 Setser, Brad and S.T.W., “Looking for the Mysterious Hedging Counterparty of Taiwan’s Lifers,” Council on

Foreign Relations, 29 October 2019, https://www.cfr.org/blog/looking-mysterious-hedging-counterpartytaiwans-lifers.

24 Outstanding USD/TWD swaps stood at $97.3 billion as of June 2020 (https://www.cbc.gov.tw/dl-141986-

dc3350360f3644cb86c1d4ac4df65b01.html).
47

also supported by low oil prices, relatively resilient remittance inflows, and steady services

exports. India typically runs a current account deficit as the country is a large importer of

commodities such as gold and petroleum.

India’s goods trade surplus

with the United States was

$22 billion for the four

quarters through June 2020,

broadly in line with its

average level over the

preceding five years. India

also ran a $5 billion services

trade surplus with the United

States in 2019. India’s

exports to the United States

are concentrated in sectors

that reflect India’s global

specialization (notably diamonds, pharmaceuticals, and IT services), while U.S. exports to

India reflect India’s domestic needs (fuels, aircraft, higher education, and software).

India has been exemplary in publishing its foreign exchange market intervention,

publishing monthly spot purchases and sales and net forward activity with a two-month

lag. The RBI states that the value of the rupee is broadly market-determined, with

intervention used only to curb undue volatility in the exchange rate.

The RBI purchased foreign

exchange on net in 10 of the

12 months through June

2020, with net intervention

(both spot and forward

intervention) reaching $64

billion, or 2.4% of GDP. 

While purchases slowed

during the onset of the

pandemic, and the RBI

engaged in net sales in

March 2020, the RBI’s net

purchases again accelerated

in mid-2020 as portfolio inflows resumed and foreign direct investment remained strong. 

Rupee volatility did not appear to have been particularly elevated in the four quarters

through June 2020, however. 

These purchases have led to a rapid rise in total reserves that are now well in excess of

standard reserve adequacy benchmarks. As of June 2020, foreign currency reserves stood

at $466 billion, equal to 4.4 times gross short-term external debt. Reserves have continued

to grow in recent months, reaching $502 billion in September 2020 as purchases

-15

-10

-5

0

5

10

20082009

201020112012201320142015201620172018

2019

2020H1

Percent of GDP

India: Current Account Balance

Income Services Goods Current Account Balance

Source: Reserve Bank of India

-15

-10

-5

0

5

10

15

20

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

India: FX Intervention

Net Spot Market Intervention Change in Net Forward Book

Source: Reserve Bank of India
48

accelerated further in July and August. By comparison, at end-2018, foreign currency

reserves were valued at $370 billion, equal to 3.6 times gross short-term external debt. 

India also maintains ample reserves (163% of ARA metric in 2019) according to IMF

metrics for reserve adequacy, particularly given that India maintains some capital controls. 

Like most emerging market

currencies, the rupee has

been buffeted this year by

swings in global risk

appetite and associated

shifts in capital flows. After

depreciating 3.4% against

the dollar in the second half

of 2019, the rupee

depreciated an additional

5.5% during the first half of

2020. The rupee weakened

6.6% and 1.7% on a nominal

and real effective basis, respectively, over the four quarters through June 2020. The rupee

has diverged somewhat from peer currencies, however, amid RBI intervention. While

many emerging market currencies started to rebound from their March lows in May and

June, the rupee remained relatively rangebound as the RBI resumed large foreign exchange

purchases. The rupee has appreciated somewhat since late August, but it has still not

recovered as much lost ground as its emerging market peers have. In its August 2020

External Sector Report covering 2019, the IMF assessed the real effective exchange rate to

be in line with economic fundamentals.

The authorities should allow the exchange rate to move to reflect economic fundamentals

and limit foreign exchange intervention to circumstances of disorderly market conditions. 

India can also leverage the recovery period to pursue structural reforms that will open its

market further to foreign investment and trade, including foreign portfolio investment in

Indian sovereign and sub-sovereign bonds, thereby fostering stronger long-term growth. 

Enhanced Analysis Under the 2015 Act

Vietnam

Recent Developments

Vietnam enacted a prompt, aggressive response to the COVID-19 outbreak, including

closing the northern border with China in January, banning flights starting in February, and

imposing a nationwide lockdown. This helped contain the outbreak to fewer than 1200

cases and 50 deaths through October, though the pandemic and public health response

have weighed heavily on growth.

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14

Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

India: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
49

The government’s fiscal response to the pandemic totals approximately 3.6% of GDP. Key

measures include: a cash transfer program for households and workers impacted by

COVID-19; deferrals on value-added tax, corporate income tax, and land rental fees; and a

reduction in the corporate income tax rate for SMEs. Accompanying these actions, the

government allowed companies and workers to defer contributions to the state pension

fund for up to one year, without interest penalties. Finally, the government is aiming to

fully execute its public investment budget of 5.8% of GDP.

Monetary policy has also been eased, with the State Bank of Vietnam (SBV) lowering its

policy rate 200 basis points in 2020 as of end-November. The SBV also issued guidelines

for commercial banks to reduce or eliminate interest payments, as well as to provide

forbearance, on loans to companies facing losses due to COVID-19. By mid-September,

banks had registered a total credit package valued at 3.8% of GDP through such measures,

including the extension of new loans. While most regional peer currencies were relatively

volatile in 2020, depreciating sharply against the dollar in the early phases of the COVID-19

shock and then recovering somewhat over the summer and fall, the Vietnamese dong

remained virtually flat against the dollar over the first ten months of 2020. The Vietnamese

authorities have conveyed credibly to Treasury that net purchases of foreign exchange in

the four quarters through June 2020 were $16.8 billion, which is equivalent to 5.1% of GDP. 

The majority of these purchases occurred in the second half of 2019, prior to the onset of

the COVID-19 pandemic.

Vietnam’s growth fell to its slowest pace in at least 30 years in Q2 2020, at 0.4% year-overyear, after slowing to 3.7% year-over-year in Q1, as the pandemic impacted the

manufacturing and tourism sectors, which are highly dependent on the global economy. 

Goods exports fell 6% year-over-year in the second quarter of 2020, while imports fell 9%,

resulting in an overall goods trade surplus of $4 billion in the second quarter of 2020. The

effectiveness of Vietnam’s initial public health response enabled the government to loosen

many of the restrictions on domestic activity. Recent data show tentative signs of rising

economic activity. Vietnamese authorities reported Q3 GDP growth to be 2.6% year-overyear and the IMF projects Vietnam’s economy will grow 2.4% for full year 2020. Downside

risks include a resurgence in COVID-19 cases domestically and more widespread or

persistent outbreaks globally that would weigh on external demand.

Enhanced Analysis

Economic liberalization has transformed Vietnam from one of the poorest countries in the

world to a lower middle-income country within a quarter of a century. From 1990 to 2019,

real growth has averaged almost 7% annually. Over the same time period, the ratio of

population in poverty has fallen from over 50% to less than 2%, with substantial gains in

health and education outcomes. 

Since Vietnam joined the World Trade Organization in 2007, foreign direct investment

(FDI) has helped integrate Vietnam into global and Asian supply chains. Vietnam’s large

and skilled labor force, competitive wages, young and well-educated population, combined

with its undervalued exchange rate have produced substantial comparative advantages
50

that have drawn large numbers of foreign invested enterprises (FIEs) to Vietnam. As a

result, Vietnam’s inbound FDI stock, the majority of which is concentrated in export

sectors, has grown five times larger since 2007. In 2019, inbound FDI flows reached a

record $16 billion, about 5% of GDP. Vietnam has ambitiously pursued trade agreements,

including with the Association of Southeast Asian Nations (ASEAN), Japan, China, and

Korea. A trade agreement with the EU entered into force in August. Vietnam is also party

to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a

multilateral trade agreement among 11 economies in Asia and the Western Hemisphere, as

well as the 15-member Regional Comprehensive Economic Partnership (RCEP) that was

signed in November 2020. 

Vietnam’s rapid growth over the past two decades was accompanied by rising financial

vulnerabilities, creating challenges for macroeconomic management and financial stability. 

Credit as a share of GDP tripled from 2000 to 2009, with particular vulnerabilities building

in the real estate sector. During this period of rapidly rising leverage, under-developed

monetary policy and supervisory tools made it difficult for Vietnamese economic officials

to prevent economic overheating. This situation contributed to bouts of double-digit

inflation in both 2008 and 2011. Macroeconomic instability helped burst a real estate asset

bubble in 2011, and non-performing loans surged to over 15% of banking system assets. 

The lack of macroeconomic stability, combined with substantial dollarization and use of

gold in the economy, also compounded volatility and weakness of the exchange rate. 

In more recent years, macroeconomic conditions have been relatively stable, and the

Vietnamese economy has grown strongly, with real GDP growth averaging above 6%

annually from 2014 through 2019. Nonetheless, some financial vulnerabilities remain. In

the wake of a severe downturn in the real estate sector in 2012-2013, leverage has

continued to climb, with domestic credit to the private sector reaching 138% of GDP in

2019. Further, public debt remains relatively high following many years of significant fiscal

deficits, though over 2018 and 2019 a combination of fiscal consolidation and strong

growth resulted in public debt declining from a peak of 60% of GDP in 2016 to 54% in

2019. The IMF’s most recent assessment put Vietnam at low risk of debt distress. 

The rapid growth of the FIE

sector has transformed

Vietnam’s external position. 

Whereas until 2011 a large

deficit in goods trade kept

the current account in deficit,

the goods trade balance

swung into surplus

beginning in 2012, with the

goods surplus consistently

above 3% of GDP since then

(and 6.6% of GDP in 2019). 

The FIE sector drives the

goods trade surplus, particularly in electronics and other manufacturing. In recent years,

-15

-10

-5

0

5

10

2007200820092010201120122013201420152016201720182019

2020H1

Percent of GDP

Vietnam: Current Account Balance

Income Services Goods Current Account Balance

Sources: IMF BOP statistics, State Bank of Vietnam
51

there has been a large gap between the trade surplus in the FIE sector and a trade deficit in

the non-FIE domestic economy. For example, the IMF estimated that the FIE

manufacturing sector generated a trade surplus of 15% of GDP in 2018, while the domestic

non-FIE sector ran a trade deficit of 8% of GDP. 

The swing in the goods trade balance has pushed the broader current account into surplus

since 2011, though typically at a level below the elevated goods surplus. In part, this is

because Vietnam has run consistent, modest deficits in services trade over the last two

decades. Moreover, an increasingly important factor in recent years has been a substantial

deficit in the primary income balance (with the deficit averaging above 5% of GDP from

2015-2019), as the FIE sector remits profits to foreign owners abroad. 

The other notable feature of the current account is the sizable surplus in secondary income,

as Vietnam is a significant recipient of remittances. The World Bank estimates that

Vietnam’s remittance inflows in 2019 reached $17 billion (6.5% of GDP), up from $7 billion

in 2008. The United States is the largest source of remittances, followed by Australia and

Canada. On their own, these remittance inflows should boost demand for Vietnam’s

currency, though in recent years remittances have been outweighed by the large income

payments to non-residents, leaving the income balance overall in modest deficit.

In 2019, the current account surplus was 4.0% of GDP. The goods surplus was substantial

in the second half of 2019 and Q1 2020. This dynamic pushed the current account surplus

over the four quarters through June 2020 to 4.6% of GDP. 

The IMF’s most recent assessment of Vietnam’s external position, based on 2018 data,

found it to be substantially stronger than warranted by fundamentals and desirable

policies, reflecting the relatively unproductive domestic economy and constraints on

private investment coupled with significant levels of foreign investment and productivity

growth in the export sector. Due to the pandemic, the IMF had not published an

assessment for 2019 as of November 2020.

Vietnam has accounted for a growing share of U.S. trade over the last decade, and its trade

surplus with the United States has expanded rapidly in recent years. The growing trade

surplus with the United States reflects a large expansion of Vietnam’s export capacity in

apparel and technology, and its growing global supply chain integration. The growing

surplus also reflects some degree of transshipment, and tariff and non-tariff barriers that

have impeded U.S. companies’ and agricultural producers’ access to the Vietnamese market

in automobiles, agricultural products, digital trade, electronic payments, and other areas. 

Over the four quarters through June 2020, Vietnam’s goods trade surplus with the United

States reached $58 billion, the fourth largest among the United States’ trading partners and

a 25% increase over the annual surplus of $47 billion in the four quarters through June

2019.

Recent trade developments have also been impacted by ongoing shifts in regional supply

chains. There was a continued rise over 2019 in U.S. imports of certain goods from

Vietnam, which tracks the fall in U.S. imports of similar goods from China. This included
52

both some lower value-added products such as apparel, shoes, and bags, as well as higher

value-added electronics and electrical equipment. Notably, U.S. imports of cell phones and

other household goods from Vietnam more than doubled in 2019, to $12 billion. 

Some of these supply chain migration effects may be overstated because of illicit

transshipment to avoid tariffs on Chinese imports. The Vietnamese authorities have stated

that the products most susceptible to transshipment are textiles, footwear and leather

bags, computers, electronic devices and parts, and aluminum and steel. The Vietnamese

authorities have acknowledged this problem and claim to have prosecuted a significant

number of cases of trade-related fraud since early 2019. In addition, Vietnam and the

United States signed a Customs Mutual Assistance Agreement in December 2019 to

strengthen bilateral cooperation on security and the facilitation of lawful trade, and

updated regulations regarding country-of-origin labeling. Also, in December 2019,

Vietnam introduced a resolution intended to address increasing cases of transshipment

and origin fraud by promoting cooperation among Vietnamese government agencies and

completing more rigorous product origin checks. Vietnam should continue to strengthen

enforcement measures to reduce illicit transshipment. 

The most significant categories of U.S. exports to Vietnam are cotton and other agricultural

commodities, and computer components. As Vietnam’s GDP per capita has risen rapidly in

recent years, Vietnamese consumers’ demand for U.S. goods has also increased

significantly, albeit from a low base, with U.S. goods exports to Vietnam totaling almost $11

billion in 2019. In 2020, U.S. goods exports to Vietnam totaled $7.4 billion through

September, down from $8.1 billion in the first nine months of 2019.

Vietnam’s authorities tightly manage the value of the dong. Since January 2016, the official

policy of the SBV is to allow the dong to float +/- 3% against a basket of currencies within a

previously established trading band, with daily updates to the reference rate. Based on

cross rates between the dong and the currencies in the basket, however, the SBV still

appears to manage the dong far more closely to the U.S. dollar than to any other reference,

and the dong reached the edge of the band during trading in very few instances.

The dong has been relatively

stable on a nominal basis

since 2011, both against the

dollar and on a broad, tradeweighted basis. In this

context, and amid strong

productivity growth with the

rise of the FIE sector and

bouts of much higher

inflation than trading

partners, the real effective

exchange rate appreciated

notably from end-2010 to

end-2015, rising by 22%. Appreciation of the real effective exchange rate moderated after

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Vietnam: Exchange Rates

Bilateral vs. USD REER NEER

Sources: Vietcombank, JP Morgan
53

2015, though the real effective exchange rate has risen gradually over the last two years. 

The most recent IMF assessment indicated that the dong was 8.4% undervalued on a real

effective basis in 2018. 

The dong was virtually flat against the dollar in 2019, as well as during the first ten months

of 2020. On a trade weighted basis, the dong appreciated in nominal and real terms in the

first half of 2020, but has weakened in recent months, resulting in year-to-date

depreciation of 1.9% and 2.2% in nominal and real terms, respectively, over the first ten

months of 2020. 

Vietnam does not publish

data on foreign exchange

intervention. However, the

Vietnamese authorities have

conveyed credibly to

Treasury that net purchases

of foreign exchange in the

four quarters through June

2020 were $16.8 billion,

equivalent to 5.1% of GDP.25 

Vietnam intervened largely

in one direction in 2019 and

the outset of 2020,

purchasing large amounts of foreign exchange reserves during a period of ample global

liquidity, while net purchases then declined notably as global financial conditions tightened

amid the COVID-19 pandemic. Throughout this period and amid drastically changing

global conditions, the authorities allowed almost no movement of the dong against the U.S.

dollar.

Coming into 2019, Vietnam’s foreign exchange reserves had been below standard adequacy

metrics for several years. During the period of currency market stress in 2015, reserves

declined to $29 billion, equivalent to 12% of GDP and roughly 60% of the IMF’s metric for

assessing reserve adequacy for countries with fixed exchange rate regimes. The central

bank rebuilt reserves from that point forward. At the beginning of 2019, the IMF’s metric

for assessing reserve adequacy for countries with a fixed exchange rate regime indicated

that Vietnam’s reserves stood at 76% of adequate levels. By comparison, the IMF’s metric

for floating exchange rate regimes would have assessed Vietnam’s reserves to be fully

adequate entering 2019. Since the beginning of 2019, Vietnam’s foreign exchange reserves

have increased rapidly and stood at $83.4 billion at the end of H1 2020. Although the IMF

has not yet published an updated estimate as of October 2020, Vietnam’s reserves likely are

at least at roughly adequate levels now relative to the IMF metric for fixed exchange rate

regimes given the substantial purchases over the last 18 months.

25 Forward intervention is included on a trade date basis.

-2

-1

0

1

2

3

4

5

6 Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Billion U.S. Dollars

Vietnam: Estimated FX Intervention

Sources: State Bank of Vietnam, U.S. Treasury estimates
54

In the context of an increasingly open economy, Vietnam has limited tools to accomplish

the multiple and sometimes conflicting aims of its monetary and exchange rate policies—

controlling inflation, maintaining macroeconomic and exchange rate stability, and

supporting economic growth, including through an undervalued exchange rate. A number

of factors constrain the transmission of Vietnamese monetary policy and affect the degree

of exchange rate volatility that the SBV is willing to tolerate, including historically high

levels of dollarization and widespread reliance on gold. 

Treasury assesses that on balance Vietnam’s capital control measures are primarily

designed to limit outflows and are generally in line with Vietnam’s stage of development. 

The greatest restrictions are on individuals, who can hold foreign currency accounts but

can only transfer funds abroad for specific reasons (and with authorization). Firms have

wider latitude in the use of foreign currency, allowing for the export and import of goods,

services, and investment and legal capital with foreign individuals and institutions. 

Vietnam allows investment funds to generally move more freely, though there are limits to

foreign ownership of public companies and limits on individual investments abroad. 

Vietnam has actively pursued policies to reduce the level of dollarization in its economy,

including mandating the use of local currency for all local transactions as well as requiring

that foreign currency denominated deposits in the local banking system not earn interest. 

The SBV has also prohibited all domestic lending in foreign currency in 2019. These

policies have shown some success, as the level of foreign currency deposits in the banking

system has fallen from almost 15% in 2013 to about 11% in 2019. Anecdotally, however,

there may still be significant dollar holdings outside of the formal financial system.

Gold also remains an important medium of exchange and hedge against inflation and

currency volatility in Vietnam. Gold trades at a price premium in Vietnam to world market

prices, explained in large measure by the fact that Vietnamese households actually take

physical possession of gold, unlike world markets where custody is maintained by a central

depository. Gold deposits are accepted by banks, and Vietnamese homes are frequently

priced in gold. Gold has also historically played a central role in Vietnamese investment

portfolios.

Vietnam should reduce its currency intervention and allow for movement in the exchange

rate in line with economic fundamentals, including more rapid appreciation of the real

effective exchange rate, which will help reduce external imbalances. Treasury also urges

the authorities to enhance the transparency and timeliness of data on intervention, foreign

exchange reserves, and external balances. A stronger, modernized monetary policy

framework would allow the SBV to transition to an inflation-targeting monetary policy

regime, rather than relying so heavily on the exchange rate to serve as a nominal anchor. 

Rebalancing Vietnam’s economy also requires leveling the playing field for the domestic

private sector by improving its access to land and credit and reducing the role of stateowned enterprises in the economy. While the export-oriented sectors of the economy have

thrived in spite of periodic macroeconomic instability, the domestic economy has

underperformed, held back by significant structural impediments. Large state-owned
55

enterprises enjoy monopolies in many sectors of the economy, and over time they have

received significant government subsidies, preferential tax treatment, and privileged

access to land, finance, and government procurement contracts. Declining productivity and

high leverage within the state-owned enterprises, exacerbated by the misallocation of

investment and over-concentration among a few conglomerates, has dramatically reduced

economic efficiency across the domestic economy. The creation of an independent body to

oversee all large state-owned enterprises should help improve accountability and

efficiency, but political will is crucial for this effort to succeed where past efforts have

failed. 

As the pandemic eventually subsides and related measures expire, Vietnam should move

more quickly to ensure capital adequacy in the banking sector and to resolve nonperforming loans held by the state asset management company. Currently, most stateowned banks lend primarily to the large state-owned enterprises, which has resulted in

undercapitalization because of high non-performing loans and poor risk controls. A

stronger and better-supervised banking system can also create additional room for private

investment in the domestic sector. Vietnam should prioritize improving the quality and

accuracy of financial data, which will allow the SBV to better monitor and respond to

financial vulnerabilities. Reducing the reliance on credit growth targets, which contributes

to financial sector risks, will enable financial institutions to better allocate capital and

manage risks. 

Vietnam also should level the playing field for American workers and firms by diligently

dismantling the barriers to U.S. companies and U.S. exports. Vietnam should focus on

administrative reforms that enhance the transparency, clarity, and predictability of tradeand tax-related processes. Legislation that entrenches Vietnamese monopolies, imposes

onerous requirements on U.S. companies, or otherwise restricts their ability to compete

through exports from the United States, will only exacerbate the growing trade imbalance.

Switzerland

Recent Developments

Switzerland was one of the countries in Europe hit early and hard by COVID-19, leading the

government to declare a national state of emergency in mid-March. The number of active

and new cases declined sharply from mid-to-late April but started rising again from midJune as the authorities eased public health and mobility restrictions. Since mid-October,

the number of new COVID-19 cases has surged, with new infections significantly above

spring 2020 highs, leading the Swiss Federal Council to re-introduce several containment

measures. 

Economic activity has been hard hit by the pandemic and associated containment efforts,

with Switzerland’s economy contracting 4.1% year-over-year in the first half of 2020. 

Growth rebounded in the third quarter by 7.2% quarter-over-quarter as restrictions to

combat COVID-19 were lifted, but the resurgence of cases in the fall across Europe presents

downside risks to the fourth quarter. The Swiss National Bank (SNB) projects the real
56

economy will contract 5% in 2020, roughly in line with the IMF’s growth forecast of -5.3%,

and this forecast remains subject to significant downside risks.

The sharp pullback in global

risk appetite this spring amid

the widening pandemic

generated safe haven capital

flows into Switzerland,

putting pressure on the Swiss

franc to strengthen and

weighing on domestic

inflation pressures. Over the

first ten months of 2020, the

Swiss franc (CHF) remained

broadly unchanged against

the euro, appreciated 5.6%

against the dollar, and around 4.3% on a real effective basis. 

To buffer the economic impact of the pandemic, Switzerland eased macroeconomic policy

significantly. The federal government’s announced fiscal response amounts to nearly 11%

of GDP, including both direct and indirect measures. Direct fiscal measures include partial

unemployment compensation and aid to affected firms. These were implemented in

conjunction with larger indirect fiscal measures in the form of loan guarantees to smalland medium-sized enterprises and start-ups, temporary deferral of social security

payments for affected companies, and an extension of tax and other payments owed to the

federal government. However, the take-up of bridge loans under the federal guarantee

program, as well as assistance to the self-employed, has been lower than budgeted. 

Monetary policy was also

eased through a range of

available measures to buffer

the shock to activity, limit

franc appreciation, and

combat deflationary risks. 

The SNB increased massively

its intervention in foreign

exchange markets over the

spring, purchasing $93

billion (90 billion francs) in

foreign exchange over the

first half of 2020 (equivalent

to 26% of H1 2020 GDP). In April, the SNB raised the exemption threshold from negative

interest rates for sight deposits to 30 times minimum reserves (up from 25 times

previously). The SNB introduced a COVID-19 refinancing facility that would operate in

tandem with surety and loan guarantee programs offered by the federal government and

cantons to allow banks to obtain liquidity from the SNB. Since April, the SNB has been

providing liquidity via the repo market, and, in July, adjusted the rate calculation to

-5

0

5

10

15

20

25

30

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Billion U.S. Dollars

Sources: Swiss National Bank, U.S. Treasury estimates 

Switzerland: Estimated FX Intervention

70

80

90

100

110

120

130

140

70

80

90

100

110

120

130

140

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15

Jan-16Jan-17Jan-18Jan-19Jan-20

Indexed to 20Y Avg = 100

Switzerland: Exchange Rates

Bilateral vs. USD REER NEER

Sources: FRB, Bank for International Settlements
57

effectively lower the borrowing cost from its liquidity shortage facility. The SNB also drew

on its standing U.S. dollar

swap line with the Federal

Reserve for the first time

since spring 2012.26 In its

September Monetary Policy

Committee meeting, the SNB

maintained its main policy

rate at -0.75% and

reasserted that it considers

the franc to be “highly

valued.” While the SNB’s

inflation outlook has

improved since the June

assessment due to higher oil

prices, the SNB projects deflation (-0.6%) in 2020 and a slow return to barely positive

inflation in 2021.

Enhanced Analysis

Switzerland has long been one of the most wealthy, productive, and innovative economies

in the world. Switzerland’s high labor productivity and high employment rates generate

the fourth-highest GDP per capita in the OECD. Switzerland is a major global financial

center, with a large and stable banking sector. The Swiss authorities have a history of

restrained macroeconomic management, particularly a conservative fiscal policy approach

that has prioritized debt reduction over the last two decades. Moreover, the country’s

highly competitive corporate tax system has made Switzerland a destination for

multinational enterprises, contributing to Switzerland’s outsized role in some high valueadded global industries (e.g., pharmaceuticals). These factors have contributed to

persistent, and often extremely large, current account surpluses over four decades.

The Swiss franc has been one of the global reserve currencies throughout the modern era

of international finance, though its share of global foreign exchange reserves has been

relatively low. The franc has also long been a safe haven currency that investors acquire

during periods when global risk appetite recedes, or financial volatility accelerates which

can pose challenges for Swiss macroeconomic policymakers. 

Switzerland is a small, open economy with significant exposure to external factors, and

exchange rate movements can often have a major impact on inflation. The Swiss franc is a

managed-floating currency, and the SNB sets monetary policy to keep inflation stable. In

times of heightened regional and global risk, large safe haven inflows can put considerable

appreciation pressure on the franc, and sustained appreciation will weigh on domestic

inflation. 

26 Drawings on the swap line peaked at $10.7 billion in April and stood at $2.1 billion as of October.

-10

-5

0

5

10

15

2008200920102011201220132014201520162017

20182019

2020H1

Percent of GDP

Switzerland: Current Account Balance

Income Services Goods Current Account Balance

Sources: Swiss National Bank, Haver
58

Over the last 15 years, the franc has been subject to notable pressures from large swings in

global risk appetite, particularly emanating from the global financial crisis, the euro area

sovereign debt crisis, and most recently the COVID-19 pandemic. The SNB has employed a

range of tools to try to offset appreciation pressure on the franc and limit negative impacts

on inflation and domestic growth. Key tools have included negative interest rates, an

exchange rate floor, and large-scale unsterilized foreign exchange intervention. Price

stability, however, has remained a challenge for the SNB, with annual inflation below the

midpoint of the SNB’s 0-2% target range throughout the last decade, and outright deflation

in five of ten years. The weakness of domestic price pressures has also been reinforced by

tight fiscal policies that have prioritized debt reduction coming out of the global financial

crisis. Despite the persistence of deflationary pressures and negative short-term interest

rates, the Swiss government ran fiscal surpluses most years over the last decade. This has

increased the reliance on certain monetary policies to support the economy and combat

deflation.

At the onset of the global financial crisis, the SNB was one of the first major central banks to

engage in quantitative easing, expanding the money supply by increasing its holdings of a

range of assets, including Swiss franc securities. The SNB abandoned the use of domestic

quantitative easing relatively quickly, as it was concerned about creating domestic

distortions across Swiss franc asset markets. The relatively limited stock of Swiss

government debt (exacerbated by strict fiscal discipline) reinforced the SNB’s concerns. As

a result, the SNB’s balance sheet did not experience the same significant expansion of

domestic asset holdings that has been seen over the last decade across other advanced

economy central banks. Instead, the SNB shifted its focus and relied increasingly on

unsterilized foreign exchange purchases to absorb safe haven flows, limit franc

appreciation, and support inflation.

In 2010-2011, the euro area sovereign debt crisis, budget discussions in the U.S. Congress,

and weak global economic data combined to lead the franc to appreciate against the dollar

and the euro. The pace of appreciation of the real effective franc accelerated to a rate of

2.5% per month between April and August 2011, causing the SNB to express concern over

the franc’s rapid appreciation. The SNB’s concern about the franc’s strength versus the

euro was particularly acute as the EU is Switzerland’s main trading partner. The SNB

responded by taking a series of extraordinary policy steps, including driving interest rates

to near zero by flooding the market with liquidity, significant foreign exchange

intervention, and establishing a floor on the franc against the euro to prevent the currency

from appreciating past 1.20 francs per euro. 

In August 2011, the SNB lowered the upper limit of its target range for the three-month

LIBOR to 0-0.25% (from 0-0.75%) and announced additional measures to increase

liquidity, including injecting more liquidity into the Swiss money market and conducting

foreign exchange swap transactions (a policy previously used in late 2008). The franc

nonetheless continued to strengthen, and the SNB increased its volume of foreign exchange

intervention. In August 2011 alone, the SNB’s net purchases totaled $211 billion according

to Treasury estimates. On August 11, 2011, an SNB official said that a temporary peg to the

euro was possible and the comment resulted in a 4.5% depreciation of the franc against the
59

euro the following day. The franc continued to depreciate through August, but by early

September franc resumed strengthening. On September 6, 2011, the SNB announced its

CHF1.20 per euro exchange rate floor. In the announcement, the SNB stated it was “aiming

for a substantial and sustained weakening of the Swiss franc,” and was prepared to buy

foreign currency in “unlimited quantities” to enforce the floor.

The exchange rate floor remained in place until early 2015. For most of 2013-2014, the

floor faced little pressure. However, in late 2014, the SNB resumed intervening heavily to

defend the floor in response to increased capital inflows driven by a combination of events,

including anticipation of the ECB’s quantitative easing program. At the same time, the SNB

also cut the interest rate on SNB deposits to -0.25% from zero to discourage new inflows,

but it still needed to engage in heavy intervention to defend the peg. On January 15, 2015,

concerned that continued intervention would cause SNB balance sheet losses as the franc

depreciated against the dollar and that publication of the magnitude of interventions would

lead to increased market speculation that the SNB would eventually abandon the peg, the

SNB abandoned the floor and returned to a managed float exchange rate regime. At the

same time, the SNB lowered the policy rate deeper into negative territory and engaged in

sizable intervention to prevent the franc from appreciating against the euro. Over the first

half of 2015, the NEER appreciated 10.8% and the REER appreciated 9.4%, although most

of this strength emerged in the immediate aftermath of the SNB’s removal of the franc floor.

From mid-2017 to mid-2019, the scale and frequency of the SNB’s foreign exchange

purchases decreased notably and the franc remained broadly stable on a real effective

basis. By spring 2018, the REER returned to the level that prevailed during the exchange

rate floor period and was around 11% stronger than the level in 2000. The IMF’s

assessment of 2019 external positions found that the Swiss current account surplus was

over 5% of GDP stronger than the level implied by medium-term fundamentals and

policies. IMF staff, however adjusted that amount down significantly for Swiss-specific

factors,27 which had the impact of significantly reducing the size of IMF’s estimate of

exchange rate undervaluation. Even so, IMF staff found the franc to be undervalued by

about 3.5 percent on a real effective basis. Between July and August 2019, foreign

exchange purchases by the SNB increased markedly as global risk appetite deteriorated

amid geopolitical tensions and further ECB monetary stimulus. While purchases declined

towards end-2019, Switzerland experienced intensified pressure from safe haven inflows

in the first half of 2020 as a result of the COVID-19 crisis. The SNB responded by stepping

up its foreign exchange purchases significantly to stem franc appreciation.

In September 2020, the SNB also signaled its intention to intervene “more strongly” in the

foreign exchange market as circumstances necessitate. This followed a marked increase in

SNB foreign exchange purchases during July and August of 2019, and again from early 2020

as global risk appetite deteriorated. The SNB is concerned with the long-term trend of

franc appreciation and the concurrent deflationary pressure. Between 2008 and 2019, the

REER strengthened around 18%, including two episodes of rapid appreciation due to safehaven inflows in July 2011 during the euro area crisis as well as immediately after

27 These factors include the inclusion of estimated retained earnings on portfolio equity investment and

compensation for valuation losses on fixed-income securities arising from inflation.
60

Switzerland removed its exchange rate floor in January 2015. While the SNB’s foreign

exchange purchases have been contained largely to periods of inflow surges, they

nonetheless have been relied upon as a key policy tool and resulted in a significant increase

in the SNB’s balance sheet and foreign reserves.

In late-September 2020, the SNB announced it would start reporting the volume of foreign

exchange market operations on a quarterly basis (compared to its previous annual

disclosure). The SNB disclosed that it spent $93 billion (90 billion francs) on currency

interventions in H1 2020. Between July 2019 and June 2020, Treasury estimates that SNB

net foreign purchases have totaled $103 billion (or 14% of GDP). As a result of

interventions and valuation changes, the SNB’s foreign exchange reserves had grown to

$896 billion (around 123% of GDP) by the end of June 2020 (up from $798 billion at end2019).

As a result of the SNB’s monetary policy actions from the global financial crisis onwards,

the SNB’s balance sheet and foreign exchange reserves have increased significantly. 

Between 2007 and Q2 2020, the SNB’s balance sheet expanded from 21% of GDP to 126%

of GDP, mainly through foreign asset purchases, making it one of the largest central bank

balance sheets in the world relative to GDP. As of Q2 2020, Switzerland’s foreign currency

reserves stood at $896 billion, or 123% of GDP. The SNB’s reserves portfolio, which

includes gold and highly rated sovereign bonds, as well as other assets, also rose. As of Q2

2020, gold accounts for around 5% of the SNB’s foreign assets. Broken down by currency,

around 41% of the SNB’s foreign currency investments is in euros, 35% in dollars, 8% in

yen, and around 16% in other currencies. By the IMF’s metric for assessing reserve

adequacy, Switzerland’s foreign exchange reserves are considered adequate (despite its

large financial sector), covering 86% of short-term debt.

Since 2006, Switzerland’s fiscal balance has been in surplus almost every year (except for

2013 and 2014, and now 2020 as a result of the COVID-19 crisis), and Switzerland’s debt

ratio has since declined to 41% of GDP in 2019 from 57% in 2003. Switzerland’s tight fiscal

policy is a result, in part, of its federal “debt brake” rule. The debt brake rule was first

included in the 2003 federal budget – prompted by the rapid growth in its debt-to-GDP

ratio in the 1990s from 31% in 1990 to 54% in 1998 – and emanating from a 1998

constitutional amendment that sought to eliminate the federal deficit by 2001

(‘Stabilisierungsprogramm’). The debt brake rule intends to establish a sustainable and

stable fiscal trajectory over the long term, while avoiding a pro-cyclical fiscal stance. It calls

for a structural fiscal balance on an ex ante basis, and in the case of ex post spending

overruns, requires offsetting structural surpluses in the following years. The federal debt

brake rule is reinforced further by separate fiscal rules implemented by Swiss cantons,

which vary substantially across regions.

The debt brake rule’s design and implementation tend to skew towards tighter fiscal policy

than warranted, due to consistently conservative forecasting of structural revenue and

under-execution of expenditures. Switzerland ends almost each year with a larger budget

surplus than expected, and Switzerland has seen significant debt reduction since

implementing the debt brake rule, rather than the original intent of debt stabilization. In
61

addition, the rule is applied asymmetrically, as it mandates an offset requirement in case of

ex post overspending, but not for ex post underspending. Due to these factors,

Switzerland’s fiscal policy has consistently overperformed the rule’s objective, thereby

weighing on economic growth and complicating efforts to maintain positive inflation. 

Between 2006 and 2019, the IMF estimates that structural surpluses averaged 0.5% of GDP

(rising cumulatively to around 6% of 2018 GDP), significantly above the debt brake rule’s

balanced position mandate. Consequently, Switzerland’s fiscal policy framework leads to

an over-reliance on monetary policy to provide support to growth. 

Switzerland has for many years run extremely large current account surpluses, with the

surplus reaching 10.9% of GDP in 2019. The current account surplus declined marginally

but remained elevated at 8.8% of GDP over the four quarters through June 2020. The

United States’ goods trade deficit with Switzerland widened notably over the last year,

reaching $49 billion over the four quarters through June 2020, due partially to an increase

in Swiss gold exports in H1 2020. 

Consistent government saving is a significant driver of Switzerland’s large and persistent

current account surpluses. Other structural factors also play a role, including high per

capita income; a large prime-saver-aged and aging population; a high household savings

rate; limited domestic investment opportunities; and a large net international investment

position (NIIP), whose returns increase the income balance. The current account surplus

has averaged nearly 10% of GDP over the past decade, although it has declined since the

global financial crisis (when it reached nearly 15% of GDP). Since the global financial crisis,

the composition of the current account has evolved with the primary income and services

trade surpluses declining, and the goods surplus expanding due to merchanting and the

pharmaceutical sector.

In 2019, Switzerland’s goods trade surplus with the United States reached $27 billion, a

41% increase over the annual surplus of $19 billion in 2018. Switzerland maintains a large

and rising goods trade surplus with the United States, but this has been mirrored largely by

a services trade deficit. Switzerland’s bilateral goods trade surplus with the United States

expanded in 2020, growing 180% year-over-year to $34 billion over the first six months of

2020, up from $12 billion in the first six months of 2019. Over the four quarters through

June 2020, the bilateral surplus stood at $49 billion. This large increase can be attributed

partially to a surge of gold exports to the United States as the COVID-19 pandemic

worsened and U.S. investors increased gold bullion purchases. At end-2019, Switzerland’s

bilateral services trade deficit with the United States stood at $22 billion. This figure

remained broadly unchanged year-over-year in the first half of 2020.

Switzerland maintains tariff and nontariff barriers that limit U.S. firms’ access to Swiss

markets, particularly with respect to agriculture, but also for intellectual property. In

agriculture, U.S. market access is restricted by high tariffs on certain products, preferential

tariff rates for products from other trading partners, and certain government regulations. 

Swiss agriculture is highly subsidized and regulated with price controls, production quotas,

import restrictions, and tariffs, all of which support domestic production. With respect to

intellectual property, Switzerland has taken measures to address copyright protection and
62

enforcement and the United States is monitoring measures to address copyright piracy. 

Switzerland has not implemented capital controls in recent years. 

Switzerland should employ a more balanced macroeconomic policy mix. Switzerland

continues to rely heavily on monetary policy despite the reduced effectiveness of

unconventional tools, especially against a backdrop of persistent deflationary risks. We

urge the SNB to deploy a broader and more balanced mix of monetary policy instruments,

including domestic quantitative easing. Central to this recommended recalibration of

chosen monetary policies, we continue to urge the SNB to limit foreign exchange

intervention to lean against large appreciation surges and allow real appreciation in line

with the long-term trend. Treasury welcomes the SNB’s recent step to disclose foreign

exchange intervention on a quarterly basis. Increased frequency of these disclosures –

such as on a monthly basis – will help further improve the transparency of the SNB’s

actions. 

We strongly urge Switzerland to use its substantial fiscal space to reduce the economy’s

reliance on the SNB’s policy measures, rebalance its external sector, and boost potential

growth.

Switzerland’s fiscal expenditures remain well below its OECD peers, and its entire yield

curve is in negative territory. Increased public investment would lower government net

savings and help Switzerland meet its long-term challenges associated with an ageing

population. According to the OECD, net public investment in Switzerland averaged 0.25%

of GDP over 2013-2017, relative to 0.5% in the median OECD country. The high level of

household savings could also be addressed via amending the pension system to reduce

barriers to working longer; equalizing and then raising male and female retirement ages;

and, continued efforts to contain rising healthcare costs. 

We also urge the Swiss authorities to re-examine the debt brake rule to reorient its

purpose towards debt stabilization. In particular, the debt brake should operate

symmetrically to reduce persistent under-execution of the budget and lower Swiss fiscal

policy’s bias towards subtracting from growth. Examining estimation methods to avoid

underestimating structural revenue and investigating causes of systematic underspending

in the annual budget could also improve the rule’s efficacy without jeopardizing fiscal

sustainability. 

The authorities should also take steps to raise potential growth by raising labor force

participation rates and productivity growth. Specifically, raising the female participation

rate, which is well below that for males, can be supported by expanding affordable

childcare, facilitating access to early childhood education – which would allow for women

to expand their working hours – and narrowing gender pay gaps. Switzerland’s labor

productivity is relatively high, but productivity growth has been weak since the global

financial crisis (like in many other advanced economies). To raise overall productivity, the

Swiss authorities could target measures in less-productive sectors through corporate

income tax reform to lower investment costs for small- and medium-sized enterprises,

provide funding for STEM education, and incentivize R&D activities.
63

Section 2: Intensified Evaluation of Major Trading Partners

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

Secretary of the Treasury to provide semiannual reports to Congress on international

economic and exchange rate policy. Under Section 3004 of the 1988 Act, the Secretary

must:

“consider whether countries manipulate the rate of exchange between their currency

and the United States dollar for purposes of preventing effective balance of payments

adjustment or gaining unfair competitive advantage in international trade.” 

This determination may encompass analysis of a broad range of factors, including not only

trade and current account imbalances and foreign exchange intervention (criteria under

the second piece of legislation discussed below), but also currency developments, the

design of exchange rate regimes and exchange rate practices, foreign exchange reserve

coverage, capital controls, monetary policy, and trade policy actions, as well as foreign

exchange activities by quasi-official entities that may be undertaken on behalf of official

entities, among other factors.

The Trade Facilitation and Trade Enforcement Act of 2015 (the “2015 Act”) requires the

Secretary of the Treasury to provide semiannual reports on the macroeconomic and

foreign exchange rate policies of the major trading partners of the United States. Section

701 of the 2015 Act requires that Treasury undertake an enhanced analysis of exchange

rates and externally-oriented policies for each major trading partner “that has— (1) a

significant bilateral trade surplus with the United States; (2) a material current account

surplus; and (3) engaged in persistent one-sided intervention in the foreign exchange

market.” Additionally, the 2015 Act establishes a process to engage economies that may be

pursuing unfair practices and impose penalties on economies that fail to adopt appropriate

policies.

Key Criteria

Pursuant to Section 701 of the 2015 Act, this section of the Report seeks to identify any

major trading partner of the United States that has: (1) a significant bilateral trade surplus

with the United States, (2) a material current account surplus, and (3) engaged in

persistent one-sided intervention in the foreign exchange market. Required data for the

period of review (the four quarters through June 2020, unless otherwise noted) are

provided in Table 1 (p. 23) and Table 2 (p. 64). 

As noted earlier, Treasury reviews developments in the 20 largest trading partners of the

United States whose bilateral goods trade exceeds $40 billion annually; these economies

accounted for more than 80% of U.S. trade in goods in 2019. This includes all U.S. trading

partners whose bilateral goods surplus with the United States in 2019 exceeded $20

billion. Treasury’s goal is to focus attention on those economies whose bilateral trade is

most significant to the U.S. economy and whose policies are the most material for the global

economy. 
64

The results of Treasury’s latest assessment pursuant to Section 701 of the 2015 Act are

discussed below.

Criterion (1) – Significant bilateral trade surplus with the United States:

Column 1 in Table 2 provides the bilateral goods trade balances for the United States’ 20

largest trading partners for the four quarters through June 2020.

28 China has the largest

trade surplus with the United States by far, after which the sizes of the bilateral trade

surpluses decline notably. Treasury assesses that economies with a bilateral goods surplus

of at least $20 billion (roughly 0.1% of U.S. GDP) have a “significant” surplus. Highlighted

in red in column 1 are the 14 major trading partners that have a bilateral surplus that met

this threshold the four quarters through June 2020. Table 3 provides additional contextual

information on bilateral trade, including services trade, with these trading partners. 

28 Although this Report does not treat the euro area itself as a major trading partner for the purposes of the

2015 Act – this Report assesses euro area countries individually – data for the euro area are presented in

Table 2 and elsewhere in this Report both for comparative and contextual purposes, and because policies of

the ECB, which holds responsibility for monetary policy for the euro area, will be assessed as the monetary

authority of individual euro area countries.
65

Goods Surplus with 

United States (USD 

Bil., Trailing 4Q) 

(1)

Balance

(% of GDP, 

Trailing 4Q)

(2a)

3 Year Change 

in Balance

(% of GDP) 

(2b)

Balance

(USD Bil., 

Trailing 4Q)

(2c)

Net Purchases

(% of GDP, 

Trailing 4Q)

(3a)

Net Purchases

(USD Bil., 

Trailing 4Q)

(3b)

Net Purchases

(USD Bil., 

Trailing 2Q)

(3c)

Net Purchases

6 of 12 

Months†

(3d)

China 310 1.1 -0.3 157 -0.1 -10 -8 No

Mexico 96 -0.2 1.9 -2 0.0 0 0 No

Germany 62 6.8 -0.9 253 . . . . . . . .

Vietnam 58 4.6 6.5 15 5.1* 17 5 Yes

Japan 57 3.1 -0.8 158 0.0 0 0 No

Ireland 55 -5.5 6.4 -22 . . . . . . . .

Switzerland 49 8.8 -0.3 64 14.2 103 93 Yes

Italy 30 3.0 0.4 55 . . . . . . . .

Malaysia 29 2.5 -0.2 9 1.1 4 4 Yes

Taiwan 25 10.9 -1.5 68 1.7 11 4 Yes

Canada 24 -1.9 0.7 -31 0.0 0 . . No

Thailand 22 6.3 -3.1 33 1.8** 10 4 Yes

India 22 0.4 1.6 10 2.4 64 33 Yes

Korea 20 3.5 -1.3 57 -0.6 -9 -6 Yes

France 15 -1.6 -0.7 -41 . . . . . . . .

Singapore -1 16.1 -1.1 56 21.3 74 44 Yes

United Kingdom -8 -2.8 1.9 -76 0.0 0 . . No

Belgium -11 0.6 0.9 3 . . . . . . . .

Brazil -13 -2.8 -1.9 -47 -2.3 -39 -37 Yes

Netherlands -18 9.4 -0.2 83 . . . . . . . .

Memo: Euro Area 152 2.1 -0.5 271 0.0 0 0 No

* Vietnam does not publish FX intervention. Authorities have conveyed bilaterally to Treasury the size of net FX purchases during the four quarters ending June 2020.

** Thailand does not publish FX intervention. Authorities have conveyed bilaterally to Treasury that net FX purchases were less than 2% of GDP during the four quarters 

ending June 2020.

† In assessing the persistence of intervention, Treasury will consider an economy that is judged to have purchased foreign exchange on net for 6 of the 12 months to have 

met the threshold.

Table 2. Major Foreign Trading Partners Evaluation Criteria

Current Account FX Intervention

Sources: Haver Analytics; National Authorities; U.S. Census Bureau; and U.S. Department of the Treasury Staff Estimates

Bilateral Trade

Note: Current account balance measured using BOP data, recorded in U.S. dollars, from national authorities.
66

Criterion (2) – Material current account surplus:

Treasury assesses current account surpluses in excess of 2% of GDP to be “material” for the

purposes of enhanced analysis. Highlighted in red in column 2a of Table 2 are the 11

economies that had a current account surplus in excess of 2% of GDP in 2019. In the

aggregate, these 11 economies accounted for nearly two-thirds of the value of global

current account surpluses in 2019. Column 2b shows the change in the current account

surplus as a share of GDP over the last three years, although this is not a criterion for

enhanced analysis. 

Criterion (3) – Persistent, one-sided intervention: 

Treasury assesses net purchases of foreign currency, conducted repeatedly, in at least 6 out

of 12 months, totaling at least 2% of an economy’s GDP to be persistent, one-sided

intervention.29 Columns 3a and 3d in Table 2 provide Treasury’s assessment of this

29 Notably, this quantitative threshold is sufficient to meet the criterion. Other patterns of intervention, with

lesser amounts or less frequent interventions, might also meet the criterion depending on the circumstances

of the intervention. Goods Surplus with 

United States (USD 

Bil., Trailing 4Q) 

(1a)

Goods Surplus with 

United States (% of 

GDP, Trailing 4Q) 

(1b)

Goods Trade 

(USD Bil., 

Trailing 4Q) 

(1c)

Services Surplus with 

United States (USD 

Bil., Trailing 4Q)* 

(1d)

Services Surplus with 

United States (% of 

GDP, Trailing 4Q)* 

(1e)

Services Trade 

(USD Bil., 

Trailing 4Q)* 

(1f)

China 310 2.2 518 -30 -0.2 64

Mexico 96 8.3 549 -5 -0.5 53

Germany 62 1.7 177 0 0.0 67

Japan 57 1.1 199 -12 -0.2 79

Italy 30 1.6 74 1 0.0 17

Taiwan 25 4.0 87 -3 -0.5 17

Canada 24 1.5 551 -24 -1.5 96

India 22 0.8 80 6 0.2 49

Korea 20 1.2 130 -11 -0.7 31

France 15 0.6 81 -3 -0.1 36

Singapore -1 -0.2 59 -13 -3.7 34

United Kingdom -8 -0.3 122 -13 -0.5 127

Brazil -13 -0.8 66 -14 -0.8 27

Netherlands -18 -2.1 78 -5 -0.6 33

Memo : Euro Area 152 1.2 608 -53 -0.4 284

Vietnam 58 17.6 80 -1 -0.4 4

Ireland 55 13.9 74 -34 -8.6 81

Switzerland 49 6.7 80 -22 -3.0 72

Malaysia 29 8.4 55 -1 -0.2 5

Thailand 22 4.3 48 -1 -0.2 6

Belgium -11 -2.1 50 -1 -0.2 10

Source: U.S. Census Bureau, Bureau of Economic Analysis

*Quarterly services data is through Q2 2020. For trading partners where quarterly bilateral services trade data are not available, annual services data through 

2019 is used. Services data is reported on a balance of payments basis (not seasonally adjusted), while goods data is reported on a census basis (not 

seasonally adjusted).

Economies with quarterly services trade data through Q2 2020

Economies with annual services trade data through 2019

Table 3. Major Foreign Trading Partners - Expanded Trade Data

Bilateral Trade
67

criterion.30 In economies where foreign exchange interventions are not published,

Treasury uses estimates of net purchases of foreign currency to proxy for intervention. 

Vietnam, Switzerland, India, and Singapore met this criterion over the four quarters

through June 2020, per Treasury estimates.

Summary of Findings

Pursuant to the 2015 Act, Treasury finds that Vietnam and Switzerland met all three

criteria in the current review period of the four quarters through June 2020 based on the

most recent available data. Additionally, nine major trading partners met two of the three

criteria for enhanced analysis under the 2015 Act in this Report or in the January 2020

Report. Further, one major trading partner, China, constitutes a disproportionate share of

the overall U.S. trade deficit. Ten economies — China, Japan, Korea, Germany, Italy,

Singapore, Malaysia, Thailand, Taiwan, and India — constitute Treasury’s

Monitoring List. 

• China has met one of the three criteria in every Report since the October 2016 Report,

having a significant bilateral trade surplus with the United States, with this surplus

accounting for a disproportionate share of the overall U.S. trade deficit. 

• Japan and Germany have met two of the three criteria in every Report since the April

2016 Report (the initial Report based on the 2015 Act), having material current account

surpluses combined with significant bilateral trade surpluses with the United States. 

• Korea has met two of the three criteria in every Report since April 2016 with the

exception of the May 2019 Report, having a material current account surplus and a

significant bilateral trade surplus with the United States. While Korea’s bilateral trade

surplus with the United States briefly dipped below the threshold in 2018, it rose back

above the threshold in 2019. 

• Italy and Malaysia have met two of the three criteria since the May 2019 Report, having

a material current account surplus and a significant bilateral trade surplus with the

United States. 

• Singapore has met two of the three criteria since the May 2019 Report, having a

material current account surplus and engaged in persistent, one-sided intervention in

the foreign exchange market.

• Switzerland met two of the three criteria in the January 2020 Report, having a material

current account surplus and a significant bilateral trade surplus with the United States. 

Switzerland previously was included on the Monitoring List in every Report between

October 2016 and October 2018, having a material current account surplus and

30 Treasury uses publicly available data for intervention on foreign asset purchases by authorities, or

estimated intervention based on valuation-adjusted foreign exchange reserves. This methodology requires

assumptions about both the currency and asset composition of reserves in order to isolate returns on assets

held in reserves and currency valuation moves from actual purchases and sales, including estimations of

transactions in foreign exchange derivatives markets. Treasury also uses alternative data series when they

provide a more accurate picture of foreign exchange balances, such as China’s monthly reporting of net

foreign assets on the PBOC’s balance sheet and Taiwan’s reporting of net foreign assets at its central bank. To

the extent the assumptions made do not reflect the true composition of reserves, estimates may overstate or

understate intervention. Treasury strongly encourages those economies in this Report that do not currently

release data on foreign exchange intervention to do so.
68

engaged in persistent, one-sided intervention in the foreign exchange market.

Switzerland met all three of the criteria in this Report. 

• Thailand and Taiwan met two of the three criteria in this Report, having a material

current account surplus and a significant bilateral trade surplus with the United States. 

Taiwan previously was included on the Monitoring List in every Report between April

2016 and April 2017, having a material current account surplus and engaged in

persistent, one-sided intervention in the foreign exchange market.

• Vietnam met two of the three criteria in the May 2019 Report, having a material current

account surplus and a significant bilateral trade surplus with the United States, and met

one of the three criteria in the January 2020 Report, having a significant bilateral trade

surplus with the United States. Vietnam met all three of the criteria in this Report. 

• India met two of the three criteria in this Report, having a material current account

surplus and engaging in persistent, one-sided intervention over the reporting period. 

Treasury will closely monitor and assess the economic trends and foreign exchange

policies of each of these economies.

In Ireland, the current account swung from a sizable surplus in 2018 to a deficit in 2019

due to a substantial widening of the services deficit in the second quarter of 2019. Ireland

did not meet the criteria for having a material current account surplus in either the January

2020 Report or this Report. Ireland has been removed from the Monitoring List. 

Further, based on the analysis in this Report, Treasury has concluded that China no longer

meets the standard in the 1988 Act of manipulating the rate of exchange between its

currency and the United States dollar for purposes of preventing effective balance of

payments adjustments or gaining unfair competitive advantage in international trade

during the period covered in the Report. However, Treasury has concluded that Vietnam

meets the standard in the 1988 Act of manipulating the rate of exchange between its

currency and the United States dollar for purposes of preventing effective balance of

payments adjustments and gaining unfair competitive advantage in international trade

during the current review period. Similarly, Treasury has concluded that Switzerland

meets the standard in the 1988 Act of manipulating the rate of exchange between its

currency and the United States dollar for purposes of preventing effective balance of

payments adjustments during the current review period.

Global growth continues to be held back by the lack of adequate policy support, especially

from fiscal policy, and from slow progress in implementing growth-friendly structural

reforms. Moreover, the global economy remains marked by persistent and excessive trade

and current account imbalances. Subdued real interest rates across the global economy are

a symptom of substantial excess saving that is not being productively employed within the

domestic economies of Germany, the Netherlands, China, and other major economies. 

Global growth would be both stronger and more balanced if key economies that have

maintained large and persistent external surpluses would reduce the burden of taxation,

roll back regulatory impediments to investment and innovation, and dismantle barriers to

trade. This would establish a firmer foundation for strong, domestically driven growth

across the global economy.
69

Glossary of Key Terms in the Report

Exchange Rate – The price at which one currency can be exchanged for another. Also

referred to as the bilateral exchange rate.

Exchange Rate Regime – The manner or rules under which an economy manages the

exchange rate of its currency, particularly the extent to which it intervenes in the foreign

exchange market. Exchange rate regimes range from floating to pegged.

Floating (Flexible) Exchange Rate – An exchange rate regime under which the foreign

exchange rate of a currency is fully determined by the market with intervention from the

government or central bank being used sparingly.

Foreign Exchange Reserves – Foreign assets held by the central bank that can be used to

finance the balance of payments and for intervention in the exchange market. Foreign

assets consist of gold, Special Drawing Rights (SDRs), and foreign currency (most of which

is held in short-term government securities). The latter are used for intervention in the

foreign exchange markets.

Intervention – The purchase or sale of an economy’s currency in the foreign exchange

market by a government entity (typically a central bank) in order to influence its exchange

rate. Purchases involve the exchange of an economy’s own currency for a foreign currency,

increasing its foreign currency reserves. Sales involve the exchange of an economy’s

foreign currency reserves for its own currency, reducing foreign currency reserves. 

Interventions may be sterilized or unsterilized.

Nominal Effective Exchange Rate (NEER) – A measure of the overall value of an

economy’s currency relative to a set of other currencies. The effective exchange rate is an

index calculated as a weighted average of bilateral exchange rates. The weight given to

each economy’s currency in the index typically reflects the amount of trade with that

economy. 

Pegged (Fixed) Exchange Rate – An exchange rate regime under which an economy

maintains a set rate of exchange between its currency and another currency or a basket of

currencies. Often the exchange rate is allowed to move within a narrow predetermined

(although not always announced) band. Pegs are maintained through a variety of

measures, including capital controls and intervention.

Real Effective Exchange Rate (REER) – A weighted average of bilateral exchange rates,

expressed in price-adjusted terms. Unlike the nominal effective exchange rate, it is further

adjusted for the effects of inflation in the countries concerned. 

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.