Macroeconomic Diagnostics (MDSx) Module

Transcription

1 Macroeconomic Diagnostics (MDSx) Module 11 External Sustainability and External Vulnerability This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Institute for Capacity Development (ICD) courses. Any reuse requires the permission of the IMF and ICD.

2 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 1 Video #: Video Title: Video Type: 1 About Module 11 Standard

3 Key Ideas External financing tightening / sudden stops / currency crises Output drop, high unemployment, import compression Insolvent and illiquid countries are the most vulnerable

4 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 1 Balance of Payments and Debt Creating Flows Standard

5 Balance of Payments and Debt Creating Flows CA = NX + Primary and Secondary Income Primary Income Cross-border compensation of employees Investment Income: Secondary Income Receipts minus payments, including dividends, repatriated profits and interest paid on foreign debt Transfers, including: Government donations/aid Worker s remittances Taxes, social contributions, other items.

6 Balance of Payments and Debt Creating Flows f Primary Income =- i D f + other primary income f f i D = interest payments on debt f i = external (dollar) interest rate f D = (gross) outstanding debt

7 Balance of Payments and Debt Creating Flows The primary current account (CAP): CAP = NX + "Other primary income" + secondary Income Primary Income = ioa t Income on other assets,labor idt f Secondary Income = tr t Transfers

8 Balance of Payments and Debt Creating Flows Financial account: Non-debt financing items (FDI, equity) and debt creating flows. Financial account = oaf t Other net asset flows d f t

9 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 2 Debt and the NFA Standard

10 Debt and the NFA Net Foreign Assets (NFA) also called the Net International Investment Position (NIIP) Comprehensive measure NFA ALL accumulated claims on ROW minus ALL ROW s accumulated claims on us What the rest of the world owes us minus what we owe them.

11 Debt and the NFA Let us recall: NFA = NFA + CA + KG + EO t t 1 t t t KGt EOt Capital gains from valuation changes KA transfers, errors/omissions Assume for simplicity: KG i EO, t = i, t = 0

12 Debt and the NFA NFA < 0 We owe rest of the world more than it owes us. NFA > 0 Rest of the world owes us more than we owe it.

13 Debt and the NFA Composition of NFA:

14 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 3 External Debt Dynamics Standard

15 External Debt Dynamics (1 + r ) d d cap oaf g f = t f + t t 1 t t (1 + ) t Today s foreign debt increases when: Interest rate increase Growth decreases Primary current account increases Other asset flows increase (borrowing to financing outward FDI )

16 External Debt Dynamics Steps to get debt-gdp ratio dynamics: 1. Derive in dollar (or other currency) terms. 2. Scale by GDP.

17 External Debt Dynamics f f CABt = FAt = (Non-debt creating inflows OAF t) Dt Dt 1 Asset+ Debt creating flows f f Dt Dt 1 = CAB t + ( Non - debt creating inflows OAF t ) Asset+ Derive in dollar (or other currency) terms: Split up FA debt/non debt Solve for change in debt

18 External Debt Dynamics f f = f f + t t 1 t t 1 t t D D i D CAP OAF D = (1 + i ) D ( CAP OAF ) f f f t t t 1 t t Derive in dollar (or other currency) terms: Split up FA debt/non debt Solve for change in debt Split out primary current account and interest payments

19 External Debt Dynamics f = (1 + f ) f + t t t 1 t t D i D CAP OAF Today s foreign debt equals : Yesterdays foreign debt capitalized Minus primary current account balance Plus other asset flows increase (borrowing to finance outward FDI)

20 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 4 External Debt to GDP Ratio Standard

21 External Debt/GDP Ratio Steps to get debt-gdp ratio dynamics: 1. Derive in dollar (or other currency) terms. 2. Scale by GDP.

22 External Debt/GDP Ratio D = (1 + i ) D ( CAP OAF ) f f f t t t 1 t t E * D E D E *( CAP OAF ) f f t t f t t 1 t t t = (1 + it ) PY t t PY t t PY t t

23 External Debt/GDP Ratio Today s exchange rate equals yesterday s times one plus growth rate. E (1 ) t = E ε t 1 + t Today s nominal output equals yesterday s times one plus growth rate. PY = P Y (1 + g) * (1 + π ) t t t 1 t 1 t t

24 External Debt/GDP Ratio (1 + i ) ED (1 + i )(1 + ε ) E D = PY (1 + π )(1 + g) P Y f f f f t t t 1 t t t 1 t 1 t t t t t 1 t 1 f f f Et* Dt (1 + it )(1 + εt) Et 1Dt 1 Et* ( CAPt OAFt) = PY (1 + π )(1 + g) P Y PY t t t t t 1 t 1 t t Today Yesterday Today

25 External Debt/GDP Ratio Effective NOMINAL interest factor = f (1 + i )(1 + ε ) t t Effective REAL interest factor = (1 + r ) = t f (1 + i )(1 + ε ) t (1 + π ) t t Growth adjusted REAL interest factor = f (1 + it )(1 + εt) (1 + rt) = (1 + π )(1 + g ) (1 + g ) t t t

26 External Debt/GDP Ratio Final expression debt dynamics in percent of GDP: (1 + r ) d d cap oaf g f = t f + t t 1 t t (1 + ) t cap = nx + ioa + tr t t t t

27 External Debt/GDP Ratio (1 + r) d = d pb (1 + g) t t 1 t (1 + r) d = d cap + oaf (1 + g) f f t t 1 t t Fiscal External

28 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 5 Debt Dynamics and Stabilization in Excel, Part 1 Excel

29 Debt Dynamics and Stabilization (1 + r ) d d cap oaf g f = t f + t t 1 t t (1 + ) t

30 Placeholder to EXCEL insert full canvas diagram or chart. (Draft in PowerPoint and within the guides.)

31 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 6 Debt Dynamics and Stabilization in Excel, Part 2 Excel

32 Placeholder to EXCEL insert full canvas diagram or chart. (Draft in PowerPoint and within the guides.)

33 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 2 Video #: Video Title: Video Type: 7 External Debt Sustainability Standard

34 External Debt Sustainabilty How we close the gap: Exchange rate adjustment ( expenditure switching ) As discussed in previous module Caution If RER depreciates, debt ratio by itself also rises (effective real interest rate).

35 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 3 Video #: Video Title: Video Type: 1 Benefits and Costs of International Reserves Standard

36 Benefits and Costs of International Reserves

37 Benefits and Costs of International Reserves Benefits: Insurance/buffer as we will discuss Higher reserves more market confidence, less speculation Costs: Opportunity cost/alternative use: retire public debt, finance capital expenditure Sterilized intervention interest rate costs

38 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 3 Video #: Video Title: Video Type: 2 Reserves and Financial Shocks Standard

39 Reserves and Financial Shocks External financial tightening: Sterilized foreign exchange intervention Prevent depreciation by selling reserves and purchasing domestic money Stabilize liquidity and interest rates through sterilization which is offsetting increase in net domestic assets Shield economy from disruptive short-term financial volatility

40 Reserves and Financial Shocks The perils of foreign exchange intervention: An risky but attractive option Keeping interest rates low may encourage more financial outflows Financial tightening may last longer than expected Reserves loss can be worse than originally envisaged

41 Reserves and Financial Shocks Speculation may hasten the depletion of reserves: Speculators would like to buy foreign exchange while cheap Anticipating a devaluation they will purchase reserves even faster Higher reserve holdings can help to buttress confidence Even so sterilized intervention is only a short-run option

42 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 3 Video #: Video Title: Video Type: 3 Reserves and Trade Shocks Standard

43 Reserves and Trade Shocks Decrease in Terms of Trade (ToT): Similar logic to financial case Shortfall originates in current account (not financial account). Lower export prices without intervention lead to exchange depreciation Sterilized intervention performs the same smoothing over function

44 Reserves and Trade Shocks More perils of intervention: Terms of trade decline temporary vs. permanent Failure to adjust exchange rate may delay needed shifts in composition of production and spending Once again sterilized intervention is not a long-run option Speculative dangers lurk here as well

45 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 3 Video #: Video Title: Video Type: 4 The Reserve Adequacy Metric Standard

46 Assessing Reserve Adequacy Traditional Metrics: Import cover for countries with relatively closed capital accounts Short-term debt for countries with large shortterm cross-border financial transactions Broad money (M2) for countries with large banking sectors and very open capital accounts

47 Assessing Reserve Adequacy IMF s Assessment Method: Percent (%) Short-term debt Other liabilities Broad money Exports Revised Fixed 30% 20% 10% 10% Float 30% 15% 5% 5%

48 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 3 Video #: Video Title: Video Type: 5 The Reserve Adequacy Metric in Excel Excel

49 Placeholder to EXCEL insert full canvas diagram or chart. (Draft in PowerPoint and within the guides.)

50 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 4 Video #: Video Title: Video Type: 1 Summarizing What We Have Learned Standard

51 Summarizing What We Have Learned Different perspectives of External Vulnerabilities Previous modules: Composition of current and financial account. External balance assessment of current account and real exchange rate. This module: Debt sustainability Reserves adequacy

52 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 4 Video #: Video Title: Video Type: 2 [CONVERSATION] Standard

53 Required to effectively communicate video segments. Course: Module: Section: MDSx 11 5 Video #: Video Title: Video Type: 1 Assessing Diagnostica Standard

54 Reserves and Financial Shocks CA = FA(non - res)+ ΔInt'l Reserves WE MAY NOT NEED THIS. Stock / flow relationships foreign exchange intervention. Peg exchange rate more valuable than the market spend reserves. Peg exchange rate that is cheap relative to the market accumulate reserves.

55 Reserves and Trade Shocks Increase in Terms of Trade (ToT): Intervention to keep RER from appreciating Financial inflows remain constant Central bank must sell international reserves Central bank will eventually run out of reserves

56 Key Ideas Assess capacity to: Service external obligations external debt sustainability Smooth currency fluctuations and weather headwinds reserve adequacy

57 Debt and the NFA Fiscal sustainability: Will public sector be able to cover principle and interest on debt no default, restructuring, or high inflation. External debt sustainability: Will country be able to cover principle and interest on debt no default, restructuring, or high inflation.

58 Debt and the NFA Contractural Debt Elements of NFA:

59 Debt and the NFA Resources to service debt come from: Net exports Inward transfers Other asset income Elements of the primary current account.

60 Assessing Reserve Adequacy 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% URY BOL PHL PER THA ALB BRA MDA CHN COL RUS POL ROM IND ARM GEO CHL MYS HUN BGR MEX CRI BIH GTM MKD JOR IDN ZAF TUR KAZ HRV MAR TUN LVA SLV LTU JAM DOM UKR PAK EGY BLR MUS PAN ECU

61 Assessing Reserve Adequacy IMF s Assessment Method: Percent (%) Short-term debt Other liabilities Broad money Exports Revised Fixed 30% 20% 10% 10% Float 30% 15% 5% 5% Note: Existence of capital controls allows for judgment in reducing weights on broad money and other liabilities.