Overview: External Sector In Myanmar - IMF ... · Overview: External Sector In Myanmar ... Ch iChange in Arrears Stock of Arrears 6 Exceptional Financing. ... The exchange rate

Overview: External SectorOverview: External SectorIn MyanmarIn Myanmaryy

Workshop for Staff of Ministry of National Planning and Economic DevelopmentMinistry of National Planning and Economic Development

Nay Pyi Taw, MyanmarJune 2 – 3, 2014

Jan Gottschalk

TAOLAMTAOLAM

IMF-TAOLAM training activities are supported by funding of the Government of Japan

OutlineOutline

I. External Sector Overview

II. Useful Concepts & Indicators

III. Balance of Payments Developments in Myanmar

IV. External Sector Considerations

2This training material is the property of the International Monetary Fund (IMF) and is intended for the use in IMF courses. Any reuse requires the permission of the IMF.

External Sector OverviewExternal Sector Overview

Basic structure of Balance of Payments

Ab

Basic structure of Balance of Payments

Current Account

Capital and Financial Account

bo

ve the liin

e

O ll B l

Errors and omissions

Financing

Belo

w th

Overall Balance

3

he lin

e


Basic Structure of current account balance ( l t ti )

Trade Balance (Goods) = Exports - Imports

(real transactions)

Trade Balance (Goods) = Exports - Imports

Trade Balance (Services) = Exports - Imports

Net Income (e.g., Interest, Profit Repatriation)

N t T f (Offi i l P i t )Net Transfers (Official, Private)

Current Account Balance

4


Basic Structure of capital and financial account balance (financial transactions)

Capital Account (e.g., Debt forgiveness)

(financial transactions)

Financial Account

Direct Investment

Portfolio Investment

Other Investment (e g net loans disbursements minus repayment;Other Investment (e.g., net loans—disbursements minus repayment; currency and deposits)

5

Financial and Capital Account Balance


Flows StocksBasic structure: financing

-Overall Balance = Financing

Change in Net Financial Reserves Foreign Reserve Levels

Ch iChange in Arrears Stock of Arrears

6

Exceptional Financing


CurrentAccount

•Trade•Services

OverallBalance

Surplus?Accumulate

reserves•Income•Transfers

BalanceWhat

happensto D fi i ?

Financing

to reserves?

Deficit?Run downreservesFinancing

•Cap & Fin Account

Putting it all together …

7

Putting it all together …

OutlineOutline



III. Balance of Payments Developments in Myanmar


8

Useful Concepts & IndicatorsUseful Concepts & Indicators

The exchange rate

Kyat-US dollar exchange rate:exchange rate:

• Devaluation

• Appreciation• Appreciation

What determines the exchange

t ?rate?

For what does the exchange rate

9

matter?


What determines the exchange rate?

• Availability of foreign exchange

Depends on …

Balance ofBalance of Payments

Central bankCentral bank intervention

10


Fundamental exchange rate factor: price differentials

Similar good in two countries should cost about the same

exchange rate t f icorrects for price

differential

Called Called ‘Purchasing Power Parity’

11


Market and Effective Exchange Rates (EER) 1/

Real Exchange Rate

Comparing the price level in Myanmar with that of other countries all expressed in

0

200220240

Real EER

Market and Effective Exchange Rates (EER) 1/(Index, 2005=100)

countries, all expressed in kyat:

400

600

800

1000140160180200 Nominal EER

Kyat/USD (RHS, reverse)

1000

1200

1400

16006080

100120

160060

2005

2006

2007

2008

2009

2010

2011

2012

2013

1/ Auction rates (kyat/USD) are applied starting April 2012.

12


For what does the exchange rate matter? External competitiveness

Export volume = f ( PD/PD* ·ER); YR*; )

External competitiveness

Export volume f ( PD/PD ER); YR ; …)

Price Foreign income

where:

• ER = nominal exchange rate (in home currency per $)

Price effect (-)

Foreign incomeeffect (+)

ER nominal exchange rate (in home currency per $)

• PD = domestic price level (in home currency)

• PD* = foreign price level (in $)

• YR* = foreign income (proxied by real GDP)• YR = foreign income (proxied by real GDP)

13

OutlineOutline



III. Balance of Payment Developments in Myanmar


14

Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar

15


Current account balance (in % of GDP)

3%

Contributors to the Current Account Balance (in percent of GDP)

Current account d fi i

0%

1%

2% Net transfers

Net income

Ser icesdeficit has been rising 3%

-2%

-1%

Services balance

Trade balance

Currentrising …

-5%

-4%

-3% Current account

16

-6%

2009/10 2010/11 2011/12 2012/13


Trade balance (in % of GDP)

20%

25%

Contributors to the Trade Balance (in percent of GDP)

… mainly due to 5%

10%

15% Non-gas exports

Gas exportsdue to strong imports

10%

-5%

0% Imports

Trade b l

-20%

-15%

-10% balance

17

-25%

2009/10 2010/11 2011/12 2012/13


Financial account balance (in % of GDP)

7%

Contributors to the Financial Account Balance (in percent of GDP)

Oth fl

Financial account

4%

5%

6%Other flows

Direct investment, net

benefited from large FDI

2%

3%

4%

Other investment

Capital andlarge FDI inflows

0%

1%

Capital and financial account

18

-1%

2009/10 2010/11 2011/12 2012/13


Overall balance (in % of GDP)

Deficits and surpluses of

8%

Contributors to the Overall Balance(in percent of GDP)

surpluses of current account and financial 2%

4%

6%

account broadly offset each -2%

0%

2%

other-6%

-4%

2009/10 2010/11 2011/12 2012/13

19

Current account Capital and financial account

Errors and omissions Overall balance


Gross official reserves (in millions of US$)

Offi i l5000

Gross Official Reserves - Flows and Stocks (in millions of US$)

Official reserves, incl. those held by

3500

4000

4500

Change in Gross official reserves

those held by state banks, have increased,

1500

2000

2500

3000

Stock of Gross official reserves

but by enough?

0

500

1000

1500

20

0

2009/10 2010/11 2011/12 2012/13


Reserve adequacy

I l ti t t d In relation to trade: import coverage Rule of thumb: reserves should cover 5-6 months of imports (IMF analysis)(IMF analysis)

21


In relation to capital flows: vulnerability to sudden capital outflows?

22

OutlineOutline



III. Balance of Payment Developments in Myanmar


23

External Sector ConsiderationsExternal Sector Considerations

Main considerations

From a macroeconomic viewpoint, analysis of external sector often focuses on:

• External sustainability

• Growth contribution• Growth contribution

24


External sustainability

Key question: if country runs current account deficits, are they sustainable?

Contributors to the Current Account Balance

Thi i 1%

2%

3%(in percent of GDP)

Net transfersNetThis issue

matters for Myanmar! -2%

-1%

0%

1% Net incomeServices balanceTrade balance

y

-5%

-4%

-3%balanceCurrent account

25

-6%

2009/10 2010/11 2011/12 2012/13


Consider ThailandExternal sustainability

Th il dConsider Thailand crisis:

• Large deficits 40

50

10

15

Thailand

Large deficits prior to crisis

• Inability to 20

30

40

0

5

10

finance deficits was critical cause of crisis

0

10

-10

-5

1 1 1 1 1 1 1 1 1 1cause of crisis

• … and led to currency crisis

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

Thailand: Current Account Balance (in % of GDP)

26

currency crisisBaht/US$ fx rate (right axis)


Consider Mongolia crisis:

External sustainabilityConsider Mongolia crisis:

• Mongolia has large natural

t

200010

Mongolia

resource exports

• Current account surplus prior to 1000

1500

-5

0

5

p pcrisis

• Sharp drop in international

0

500

-15

-10

5

2 2 2 2 2 2 2 2 2 2international commodity prices during GFC led to current account and

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Mongolia Current Account Balance (in % of GDP)

27

current account and currency crisis

Togrog/US$ fx rate (right axis)


Important factor for sustainability of current account

External sustainabilityImportant factor for sustainability of current account deficits is how they are financed:

• Stable financing l k

Contributors to the Financial Account Balance (in percent of GDP)source lowers risk

of crisis

FDI is a fairly 5%

6%

7%(in percent of GDP)

Other flows

• FDI is a fairly stable financing source 3%

4%

5%

Direct investment, net

• This is good news for Myanmar!

0%

1%

2% Other investment

28

Myanmar!-1%

2009/10 2010/11 2011/12 2012/13


Another important factor for sustainability of current

External sustainabilityAnother important factor for sustainability of current account deficits is levels of foreign exchange reserves:

• They serve as a b ff f

Does Myanmar

buffer in case of a crisis

• Does Myanmar have sufficient reserves?

29


Large expansion of manufacturing sector was key driverGrowth contributionLarge expansion of manufacturing sector was key driver of growth in Asia!

• Export-driven growth strategy

• Manufacturing-l d FDIrelated FDI

inflows

External• External competitiveness is key for this

30

strategy to work


R l h i i di t f t l

Growth contribution

Real exchange is common indicator for external competitiveness

R lMarket and Effective Exchange Rates (EER) 1/(Index, 2005=100)

• Real appreciation undermines

0

200

400180200220240

Real EERNominal EER

( , )

external competitiveness

600

800

1000

1200100120140160180 Kyat/USD (RHS, reverse)

• Is Myanmar’s real appreciation a problem?

1200

1400

16006080

10000

5

006

007

008

009

010

011

012

013

31

a problem? 20 20 20 20 20 20 20 20 20

1/ Auction rates (kyat/USD) are applied starting April 2012.

OutlookOutlook

Next, we will explore in more detail …

• … the monetary sector, which helps with analyzing inflation and the exchange rateanalyzing inflation and the exchange rate.

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Documents

Overview: External Sector In Myanmar - IMF ... · Overview: External Sector In Myanmar ... Ch iChange in Arrears Stock of Arrears 6 Exceptional Financing. ... The exchange rate