Appendix I: Patterns of Indicators

Appendix I of the autumn 2005 Report to the Congress on International Economic and Exchange 

Rate Policies, Analysis of Exchange Rates Pursuant to the Act, discussed the use of indicators in 

considering the question of 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”. 1

 That Appendix 

stressed that in considering the question of designating countries pursuant to the terms of the Act, 

a range of indicators need to be assessed. While individual indicators – such as a reserve or a 

current account position – yield important information, they do not in and of themselves provide 

a comprehensive picture of a country’s economic situation or external position.2,3 Also, the 

pattern of change in indicators typically provides the most useful information. For example, a 

country with a large current account surplus would be viewed one way if the country also had a 

large reserve increase and a depreciating exchange rate, and viewed another way if its reserves 

were not increasing and the exchange rate were appreciating. In addition, patterns of movements 

of indicators must be examined in terms of the specific country and the global economic 

environment. 

The current analysis is an extension of that presented in the autumn 2005 report, but incorporates 

full-year 2005 data. This analysis provides a useful framework for understanding the wide array 

of factors that can underpin economies’ external positions, even economies with sizeable current 

account surpluses. Also, as previously noted, at a time when the United States – the world’s 

largest economy – runs a large current account deficit, the counterpart to that deficit is inevitably 

going to be large surpluses in some other countries of the world. Table 1 updates the limited set 

of numerical indicators constructed for a cross section of significant economies that was 

described in the autumn 2005 Report. 

 

1

 The Omnibus Trade and Competitiveness Act of 1988 states, among other things, that: “The Secretary of the 

Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the 

International Monetary Fund, and 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.” 

2

 The autumn 2005 Appendix also included a discussion of various indicators and their relevance. That work was 

derived from Treasury’s March 11, 2006, Report to the Committees on Appropriation on Clarification of Statutory 

Provisions Addressing Currency Manipulation. The report can be found at 

http://www.treas.gov/press/releases/js2308.htm. 3

 The General Accounting Office (GAO) report, “Treasury Assessments Have Not Found Currency Manipulation, 

but Concerns about Exchange Rates Continue”, discussed Treasury’s assessments. The GAO report can be found at 

http//www.gao.gov/cgi-bin/getrpt?GAO-05-351. 
2

Table 14

The same methodology used in the November 2005 report is used below to examine more 

closely the patterns of indicators by assigning qualitative values of low, medium, or high 

(numerically 0, 1, or 2) to the indicators and constructing indices based on alternative weighting 

schemes which give different emphasis to the various indicators. The three schemes are: 

• A focus on changes in the current account balances, in foreign exchange reserves and in real 

effective exchange rates, assigning each a 1/3 weight. 

• A focus on current account balances, changes in current account balances, changes in foreign 

exchange reserves, changes in real effective exchange rates, and relative dependence of GDP 

growth on the external sector, assigning each a 1/5 weight. 

• A focus on current account balances, changes in current account balances, and relative 

dependence of GDP growth on the external sector, assigning each a 1/3 weight. 

 

4

 The “Contribution to Growth of the External Sector” is calculated as the annual change in real net exports (in the 

National Income and Product Accounts) as a percent of real gross domestic product. The “Relative Dependence of 

GDP Growth on the External Sector” is measured as the external sector’s contribution to GDP growth minus the 

contribution of the growth in domestic demand. This dependency measure reflects the view that a country will be 

generally more concerned about the contribution of the external sector to GDP growth if the contribution of the 

domestic sector to GDP growth is relatively small. For example, Singapore’s export sector contributed 5.6 percent 

to GDP growth during 2003-2005 while domestic demand contributed only 0.4 percent. China’s export sector, on 

the other hand, contributed only 1.0 percent to GDP growth during 2003-2005 while domestic demand contributed 

9.0 percent. Turkey’s external sector subtracted 3.0 percent from GDP growth during this period while domestic 

demand contributed 9.9 percent. The “Real Effective Exchange Rate” is JP Morgan’s Broad Real Effective 

Exchange Rate Index. 

Real Effective External Sector Relative Dependence

Level Change Ratio to Ratio to short-term Change Exchange Rate Contribution to of GDP Growth

over period 2005 GDP external debt in reserves (% appreciation) Growth Rate on External Sector

 (%GDP) (%GDP) (%) (%) (%) (Average %) (Average %)

2005 2002-2005 Dec 2005 September 2005 Dec04 to Dec05 Feb02 - Feb06 2003-2005 2003-2005

Singapore 28.5 7.2 98.8 124.1 3.4 16.4 5.6 5.2

Saudi Arabia 28.3 22.0 7.8 151.4 3.4 -19.4 0.7 -5.1

Norway 16.7 3.9 15.6 45.6 7.1 14.0 -1.4 -4.9

Malaysia 15.3 6.9 55.1 371.1 10.1 -11.3 -0.6 -7.1

Venezuela 18.1 9.9 16.4 717.4 28.7 3.5 0.1 -5.7

Switzerland 13.7 5.2 9.6 7.4 -34.2 -5.1 0.1 -0.9

Russia 11.4 3.0 22.9 413.5 45.4 28.6 -0.2 -7.3

China 7.1 4.4 36.9 1110.8 34.3 -4.0 1.0 -8.0

Sweden 6.6 1.3 6.0 11.4 3.6 -0.3 1.0 -0.8

Netherlands 6.3 3.8 na na na na 0.6 0.3

Taiwan 4.7 -4.0 73.1 618.3 4.8 -6.4 1.0 -2.3

Germany 4.2 2.1 na na na na 0.5 0.1

Japan 3.7 0.8 18.1 211.3 0.6 -11.5 0.6 -1.2

Korea 0.7 0.4 26.7 294.4 6.0 23.3 2.5 1.1

Canada 2.2 0.3 2.7 21.3 1.7 20.1 -1.6 -5.8

Mexico -0.8 1.3 9.5 300.3 16.3 -1.0 0.3 -2.3

Euro Area -0.3 -1.1 1.7 5.0 -7.4 17.5 -0.1 -1.6

United Kingdom -2.6 -1.1 1.9 1.9 3.6 -3.3 -0.6 -3.7

Thailand -2.0 -7.6 28.6 372.1 4.2 6.5 0.2 -5.4

India -1.8 -3.4 18.1 447.2 4.7 0.9 0.2 -7.7

Australia -6.0 -2.1 5.8 22.2 20.9 38.6 -1.9 -6.9

Turkey -6.5 -5.7 14.1 120.9 42.1 14.8 -3.0 -12.9

United States -6.4 -1.9 0.3 2.8 -11.4 -19.2 -0.5 -4.5

Spain -7.4 -4.1 na na na na -1.8 -6.7

Portugal -9.3 -1.4 na na na na -0.3 -0.6

Current Account Balance Foreign Exchange Reserves
3

Results

The three weighting schemes yielded the following rankings: 

• As in the appendix to the autumn 2005 Report, oil-exporting economies score high 

whichever weighting scheme is chosen. This primarily reflects the impact of recently 

increasing oil prices that have resulted in recent large current account surpluses and reserve 

accumulations. These countries also maintain relatively fixed exchange rates. Saudi Arabia, 

for example, ran a current account surplus of around $85 billion in 2005, or 28 percent of 

GDP. Russia also ran a current account surplus of $85 billion, or greater than 10 percent of 

GDP, while reserves rose 45 percent. Norway ran a current account surplus of $50 billion, or 

17 percent of GDP. 

In past periods of sharp run-ups in oil prices, some oil-exporting countries quickly spent 

increased proceeds, often on projects with low rates of return, and then ran large fiscal 

deficits and built up debt burdens during periods of low oil prices. There are reasons to 

believe that the rise in oil prices in the current cycle will prove to be a more lasting and 

durable phenomenon. This factor, coupled with the limited short-term absorptive capacity of 

a number of oil exporters, raises the question of their appropriate policy response. 

The appropriate response will entail a mix of increased saving, increased spending, and 

perhaps exchange rate appreciation. It is understandable that countries would wish to 

maintain sound fiscal positions, build up stabilization funds, and reduce debt burdens. It is 

also important to ensure that spending achieves high social rates of return. Moreover, 

spending plans cannot be implemented overnight. Accordingly, increasing saving is an 

understandable response. As fiscal positions strengthen, spending should increase, 

promoting the recycling of petrodollars. Some exchange rate adjustment could also facilitate 

Scheme I Scheme II Scheme III

Saudi Arabia 1.7 Singapore 1.4 Singapore 2.0

Malaysia 1.7 Saudi Arabia 1.4 Switzerland 1.7

Venezuela 1.3 Malaysia 1.4 Netherlands 1.7

Switzerland 1.3 Switzerland 1.4 Saudi Arabia 1.3

China 1.3 Venezuela 1.2 Norway 1.3

Japan 1.3 China 1.2 Malaysia 1.3

Singapore 1.0 Sweden 1.2 Venezuela 1.3

Russia 1.0 Japan 1.2 Sweden 1.3

Sweden 1.0 Norway 1.0 Germany 1.3

Taiwan 1.0 Russia 1.0 Korea 1.3

Mexico 1.0 Netherlands 1.0 Russia 1.0

Norway 0.7 Taiwan 1.0 China 1.0

Korea 0.7 Korea 1.0 Japan 1.0

Canada 0.7 Germany 0.8 Taiwan 0.7

United Kingdom 0.7 Mexico 0.8 Canada 0.7

India 0.7 Canada 0.6 Mexico 0.7

Turkey 0.7 United Kingdom 0.6 Euro Area 0.3

Netherlands 0.3 India 0.4 United Kingdom 0.3

Germany 0.3 Turkey 0.4 Portugal 0.3

Thailand 0.3 Euro Area 0.2 Thailand 0.0

Australia 0.3 Thailand 0.2 India 0.0

Euro Area 0.0 Australia 0.2 Australia 0.0

Spain 0.0 Portugal 0.2 Turkey 0.0

Portugal 0.0 Spain 0.0 Spain 0.0
4

the global adjustment process, translating oil producers’ higher oil revenue stream into higher 

real incomes and imports. 

• Germany appears in the middle the weighting schemes. Germany has a large current account 

surplus, roughly $130 billion and equal to 4.2 percent of GDP. Yet, Germany is part of the 

Euro-zone and thus cannot conduct an independent monetary policy. Further, the euro is a 

freely floating currency, and the Euro-zone in aggregate has a small external deficit. German 

growth in 2005 rested almost entirely on the contribution of external demand. On balance, 

Germany’s current account surplus is fundamentally associated with persistently weak 

investment and domestic demand. 

• Japan can be found in the upper half. Japan’s current account surplus as a share of GDP in 

2005 was 3.6%, and in dollar terms over $170 billion. Japan has intervened heavily in 

foreign exchange markets in the past but has not done so since March 2004. Though 

Japanese private saving has declined in past years and the public sector has run fiscal deficits, 

corporate saving has been strong. But investment and domestic demand have been weak. In 

2005, Japan gained economic momentum, and the economy became less reliant on external 

demand for stimulus. However, low Japanese interest rates – a product of Japan’s 

appropriately and highly accommodative monetary policy aimed at overcoming deflation – 

stimulated large capital outflows from Japan in 2005. Japan has moved down the list since 

the November report in two of the three schemes. 

• Switzerland again remains toward the top of the weighting schemes. It has a large current 

account surplus reflecting not its merchandise trade balance, but rather significant surpluses 

in trade in financial services and investment income. The Swiss franc is an independently 

floating currency, and Swiss authorities have not intervened in the exchange market. 

 

• As in last autumn’s report, China is toward the upper end of the first weighting scheme, in 

the middle of the second, and in the middle of the third. China’s current account surplus as a 

share of GDP rose sharply in 2005, reaching 7.1 percent of GDP. China’s reserve 

accumulation was large and excessive last year, and reserves are continuing to rise rapidly 

this year. The currency remains rigidly managed. These factors account for the high ranking 

using the first weighting scheme, which underscores the need for continued fundamental 

reform in Chinese exchange rate policy. Still, the real effective exchange rate has 

strengthened, especially over the last year. The contribution of China’s external sector to 

growth is positive,5

 but growth in domestic demand is so strong that the overall external 

contribution appears to be modest. Indeed, China’s strong growth is an important source of 

demand for the global economy. These considerations impact China’s ranking in the second 

and third weighting schemes. 

• Malaysia tends to have a high ranking, on the whole, in the weighting schemes. It has a 

tightly managed exchange rate. It ran a 14 percent of GDP current account surplus last year, 

in part due to higher oil export earnings, and its reserves rose rapidly. 

 

5

 As noted above this measure is of the change in net exports relative to the size of GDP. Given the size of China’s 

economy, the level of the current account surplus is large by international standards. 
5

• Singapore also has a relatively high ranking in each of the three schemes. Singapore’s 

current account surplus, at a very large 29% of GDP, is due to demographically-related high 

saving. The monetary authorities pursue a managed currency in terms of a currency basket 

(the composition of the basket is not published), and Singapore uses its heavily managed 

foreign exchange rate as its monetary policy anchor. 

• Russia is running a large current account surplus and for several years has had one of highest 

rates of reserve accumulation in the world. Its real trade-weighted exchange rate has 

appreciated over the last year due to its continuing double digit inflation. Although its large 

and growing current account surplus and rapidly growing reserves have pushed Russia up in 

two of the weighting schemes, real ruble appreciation has constrained its movement toward 

the top of the weighting schemes. The Russian economy is, in fact, partially adjusting to 

increases in the value of its oil exports without nominal exchange rate adjustment through 

inflation and the reduction in competitiveness of its non-oil sector. 

Conclusions 

This Appendix has updated the three weighting schemes used in the November report to include 

full year 2005 data. The picture largely remains the same. 

• Some oil-exporting countries remain atop the various schemes, highlighting ongoing high oil 

prices. The analysis, though, highlights the need to give greater attention to the policy 

choices facing oil-producing countries, especially those with low absorptive capacity and 

high debt burdens, in a period of sustained high oil prices. 

• Some major developed countries also remain atop some of the weighting schemes. This 

pattern is in fundamental respects associated with economic performance that has been 

persistently weak in the past but that, hopefully, will improve. 

• Another effect of adding full-year 2005 data to the analysis is to move China and Malaysia, 

two countries featured prominently in the autumn report, slightly higher. Interestingly, 

Malaysia scores higher than China in each weighting scheme. China’s strong contribution to 

the global economy is welcome. But the weighting schemes, particularly after the relevant 

indicators are further scrutinized in-depth, underscore the very real and difficult 

considerations raised for the global economy by Chinese and Malaysian external 

performance and the continuing need for fundamental policy reforms, including in exchange 

rate management.