Exernal balance assessmen: Balance of paymens Macroeconomic Analysis Course Banking Training School, Sae Bank of Vienam Marin Fukac 30 Ocober 3 November 2017
Economic policies Consumer prices Economic aciviy Balance of paymens Inernaional economic condiions Financial (moneary) condiions Exchange raes Macroeconomic assessmen roadmap Economic policies Consumer prices Economic aciviy Balance of paymens Inernaional economic condiions Financial (moneary) condiions Exchange raes Economic policies Consumer prices Economic aciviy Balance of paymens Inernaional economic condiions Financial (moneary) condiions Exchange raes Economic policies Consumer prices Economic aciviy Balance of paymens Inernaional economic condiions Financial (moneary) condiions Exchange raes Economic policies Consumer prices Economic aciviy Balance of paymens Inernaional economic condiions Financial (moneary) condiions Exchange raes
Objecives Undersand why cenral banks monior balance of paymens Undersand where he monioring sis in erms of overall macroeconomic assessmen Srenghen essenial skills for expers monioring hese secors Learn basic ools for monioring he balance of paymens
Ouline 1. Seing he scene 2. Key daa 3. Key economic conceps 4. Key measuremen echniques
Seing he scene Why do cenral banks employ expers o monior balance of paymens developmens? Wha informaion are he secor expers expeced o provide o policymakers? Wha signals should hey look for in he daa?
Why do cenral banks employ expers o monior balance of paymens developmens? Open economies are naurally inerconneced wih he res of he world via rade and financial flows For long erm and shor erm exernal sabiliy i is necessary ha ha he counry achieves a susainable balance in hose flows BOP imbalances presen a poenial vulnerabiliy for exchange rae sabiliy (risk of exchange rae crisis) sock of foreign exchange reserves (BOP crisis) Exernal balance is linked o inernal balance Implicaions for moneary policy
Wha informaion are he secor expers expeced o provide o policymakers? Curren accoun developmens: sources, rends and vulnerabiliies Financial accoun developmens and how hey are relaed o financing he capial accoun: sources, rends and vulnerabiliies Monior macro-financial risks coming from rade and capial flows
Wha signals should hey look for in he daa? Trade flows affecing economic aciviy, prices and employmen in he expor secor Curren accoun misalignmen (gap) pressures on exchange raes pressures on foreign reserves Susainabiliy of inernaional invesmen posiion Counry risk premia (credi raing)
Key daa Balance of paymens and is componens Analyical accouns Inernaional invesmen posiion and foreign reserves
Balance of paymens The BOP summarizes: during a specified period of ime (flow concep) wih he res of he world economic ransacions of an economy The BOP records ransacions ha involve: change in ownership of goods and financial asses provision of services, labor, and capial Transacions ha ener he BOP: mus occur beween residens and non-residens Transacions are recorded on accrual basis
Balance of paymens (con.) CA + KA - FA = 0
Balance of paymens (con.) Real ransacions Curren Accoun a. Balance of Goods Expors Impors b. Balance of Services Transporaion Travel Oher services c. Primary Income Compensaion of employees Invesmen income d. Secondary income (ransfers) General governmen Oher secors Financial ransacions Capial Accoun Financial Accoun a. Direc invesmens b. Porfolio invesmens c. Oher invesmen Trade credi Loans Currency and deposis Oher asses d. Reserve asses Ne errors and omissions
Analyical accouns a. Curren accoun b. Capial accoun c. Financial accoun Direc invesmens Porfolio invesmens Oher invesmens d. Errors and omissions e. Overall balance Toal Financing Reserves asses IMF credi and loans Excepional Financing Change in arrears Forgiveness of obligaion of curren period
Inernaional invesmen posiion I records he sock of asses and liabiliies: ousanding a he end of he recording period a value prevailing a he end of he recording period The IIP also records valuaion changes, ha is changes in value originaing from movemens in prices or exchange raes. I is linked o he balance of he financial accoun.
Foreign reserves accumulaion Source: Sae Bank of Vienam
Sock of inernaional reserves Source: IMF Aricle IV saff repor, 2017
Key economic conceps Exernal and inernal balance BOP, curren accoun, and links o he naional accouns and inernal balance
Exernal and inernal balance Inernal balance: oupu a is poenial, sable inflaion (a desirable level) Exernal balance: curren accoun is financed wih a susainable level of capial flows
Inernal balance RER Inernal balance Y* Appreciaion Y < Y* underuilized Y >Y* overheaed Depreciaion Y* Absorpion (=invesmen + consumpion)
Exernal balance RER CA* Exernal balance Appreciaion CAB > 0 credior CAB < 0 borrower Depreciaion CA* Absorpion (=invesmen + consumpion)
Inernal and exernal balance RER EB CAB < 0; Y < Y* depreciae IB Appreciaion Depreciaion z* CAB > 0; Y < Y* ER adj. no enough (e.g., confidence crisis in Europe?) CAB < 0; Y > Y* ER adj. no enough (srucural problems?) CAB > 0; Y > Y* appreciae A* Absorpion (=invesmen + consumpion)
Balance of paymens and naional accouns From he expendiure approach of he Naional Accoun we know ha he Gross Domesic Oupu (GDP) is GDP = C + G + I + X M where C is privae consumpion, G is governmen consumpion, X denoes expors and M impors. By adding he balance of he primary income (BPI) and he balance of he secondary income (BSI) o he GDP we obain he Gross Naional Disposable Income GNDY = GDP + BPI + BSI
Balance of paymens and naional accouns (con.) Link beween he Naional Accouns and he Balance of Paymens GNDY = C + G + I + X M + BPI + BSI GNDY- (C + G) - I = X M + BPI + BSI = CAB S - I = X M + BPI + BSI = CAB where CAB is he curren accoun balance, S = GNDY- C G is domesic saving.
Balance of paymens and naional accouns (con.) The relaion CAB = S - I has several implicaions: 1. The curren accoun balance is he gap beween invesmen and domesic saving. Hence policies ha aim o affec he CAB should necessarily affec saving and/or invesmen decisions. 2. Undersanding he sources of he CA defici is crucial because is long run impac on he exernal posiion of he economy is differen depending on he facors creaing he defici. CA < 0 reducion of S relaive o I or o due o an increase of I relaive o S
Balance of paymens and naional accouns The inerrelaion of CAB wih invesmen and saving can be seen in more deail by disinguishing beween privae and governmen secor. S-I = Sp + Sg Ip Ig Sp is privae saving, Sg is public saving, Ip privae invesmen and Ig governmen invesmen. CAB = (Sp Ip) + (Sg-Ig) if he governmen secor defici is no compensaed by excess savings in he privae secor, hen CAB will be in defici. Hence, a susained defici in he governmen secor may be refleced as a defici in curren accoun balance (Twin deficis).
Key measuremen echniques Exernal susainabiliy assessmen Susainable level of curren accoun deficis
Exernal balance mehodology based on IMF s CGER Consulaive Group on Exchange Rae issues from 1997 3 complemenary mehodologies: Macroeconomic balance approach Difference bw. he CA balance projeced for he medium erm and he CA norm Exchange rae adjusmen o eliminae his difference Equilibrium real exchange rae approach Equilibrium RER is a funcion of medium-erm fundamenals Difference (adjusmen) bw. he equilibrium RER and is curren value Exernal susainabiliy approach The difference bw. he acual CAB and he CAB ha sabilizes NFA a a benchmark RER adjusmen o close he difference
Macroeconomic balance approach Sep 1. Panel regression o esimae equilibrium relaionship of CAB and fundamenals Sep 2. For each counry, compue he CA norm using sep 1 coefficiens and fundamenals ha should prevail in he medium erm so, he norm is undersood as a mid-erm equilibrium or susainable level Sep 3. Projec he underlying CA ha is likely o ake place in he medium run under he assumpions ha: all lagged exchange rae effecs play ou REER remains unchanged oupu gaps in all counries close (inernal balance) Sep 4. Compue REER adjusmen ha would close he gap beween he CA norm and he underlying CA balance
MB Approach: implemenaion Sep 1. CA β β X 2 N(0, ) i, 0 1 i, i, i, i i =1,,182 counries; = 1973..2009 CA i, is he curren accoun o GDP raio, counry i a ime, ~ Sep 2. CA norm i ˆ ˆ ˆ β0 β1xi, T H where βˆ, βˆ 0 1 - parameer esimaes of sep 1 regression ˆX i, T H - se of medium-erm ( equilibrium ) values of macro fundamenals H = 5y medium-erm horizon
CA deerminans in panel regression Fiscal balance (raio of he budge balance o GDP relaive o average budge balance of rading parners) Demographics (old age dependency raio and he populaion growh, relaive o rading-parners average) Ne foreign asses (an iniial NFA posiion before he period of reference for he curren accoun balance) Oil balance (he oil balance as a raio o GDP) Economic growh (he raio of PPP-based per-capia income o he U.S. level and real per-capia GDP growh rae relaive o is rading-parner average) Crises (indicaor of banking crisis episodes) Financial cener (dummy) Source: Lee e al (2008)
MBA: coefficien signs Fiscal balance: a surplus naional saving CAB Demographics: pensioners do no save CAB NFA: counries wih high NFA 1. can run deficis on an exended basis [-ve sign]; 2. Or have higher foreign invesmen income (par of he CA). This second effec is sronger [+ve sign] Oil balance: higher oil prices Oil balance (and CAB) of exporers Oil balance (and CAB) of imporers
MBA: coefficiens signs (con.) Economic growh: faser economic growh relaive o rading parners CAB [-ve] Relaive income: less developed counries (lower income) need o inves financed hrough exernal borrowing and CAB defici [+ve] Economic crises: CAB wih macroeconomic conracion and/or reduced inernaional financing [+ve] Financial cener: financial hubs end o run CA surpluses [+ve]
MBA: Implemenaion (2) Sep 3. For a counry assume a model relaing rade flows wih REER and domesic Y and foreign oupu gaps Y * X M ( Y ( Y, REER, REER Forecas: oupu gaps close and he REER remains a he ime level X M * assume ha he underlying CA is driven only by rade flows and hen i is lower case x and m indicae percenage of GDP CA f f f f U h ( Y ( Y, *, xˆ h REER,..., REER REER h,..., REER,..., REER mˆ h ) h ),..., REER ) )
MBA: Implemenaion (3) Sep 4. Inpu: Medium-run semi-elasiciy of CA i, w.r.. REER: x i and m i CA, i xi X mi ( M 1) are he shares of expors and impors in counry i s GDP, projeced in period T+h η X and η M are medium-run elasiciies (same across all i) of he volumes of expors and impors, respecively, w.r.. RER The ER misalignmen (required adjusmen): REERgap Noe: can also resore he implied Equilibrium REER: ln i, 1 U norm CAi, h CAi, h CA, i E REER i ln REERi, REERgapi,
MBA: Illusraive resuls Source: Lee e al (2008)
Exernal susainabiliy approach Sep 1. Calculae he CA balance sabilizing he NFA a a benchmark level (an equilibrium level ) Sep 2. Use his CA balance and he elasiciies as in MB approach o generae he REER adjusmen ha over he medium erm would bring he underlying CA balance in line wih he NFAsabilizing CA balance
ESA: Implemenaion BoP Ideniy (assuming no fin. flows): NFA i, NFAi, 1 CAi, Raios o GDP: Rewrie: NFA Y i, i, NFA Y i, 1 i, 1 1 ( ) Y / Y i, i, 1 ca i, CA Y i, i, nfa i, 1 1 g i nfa i, 1 g i is he medium-erm growh rae of nominal GDP (same currency as is CA) nfa i Keep nfa i, sable a. The required (norm) CA: 1 gi ca i, nfai 1 nfai : ca 1 g i 1 gi norm i Given ca i norm, apply rade elasiciies (η X and η M ) o calculae REER gap (Sep 3 in MB approach)
ESA: Illusraiuve resuls Source: Lee e al (2008)
Conclusion
Main akeaways