MGMT615: Global Imbalances

Global

Imbalances

4

3

2

1

-1

-2

-3

-4

GLO

BA

L C

UR

REN

T A

CC

OU

NT

BA

LAN

CE

(% o

f W

orld

GD

P)

MBA Class of ’14 MGMT615: Current Issues in Asian Business | Group C

Unless otherwise specified, all data extracted from IMF’s World Economic Outlook database

BALANCE OF PAYMENTS

CURRENT

ACCOUNT

FINANCIAL

ACCOUNT

Significant deficits and surpluses

in BOP across countries

Balance of trade

Net income from abroad

Transfer payments

Export - Import (Goods & Services)

Net Investment Income

Remittance, Aid

China Emerging Asia Surplus Japan Euro Zone Surplus Oil Exporters Surplus ROW Surplus

GLOBAL CURRENT ACCOUNT BALANCE % OF WORLD GDP

U.S. key driver of imbalances?

ROW Deficit Oil Exporters Deficit Eurozone Deficit United States Emerging Asia Deficit

Key reasons for U.S. deficit

Low interest rates

Over-consumption

Tax cuts (debt-financed)

High government spending (war spending, welfare,

bailouts)

Cheap money, loose monetary policy

Fiscal deficit

Why are global imbalances undesirable

USD is main contributor of world’s deficit; it is held as global reserve currency

Deficit funded by foreign financing of deficit subject to investors’ confidence in the USD

If perceived to be unsustainable & solvency is questioned: Cut in available financing Increase in U.S. interest rates Increase in borrowing costs Decrease in U.S. consumption & investment

Destabilising of global financial & economy system

Drastic devalue of global reserves in all countries Global ripples from U.S. growth brake

from U.S.’ perspective

Why are global imbalances undesirable

Asia’s reliance on export-led growth Short-term growth dependent on foreign demand Unsustainable in long-run

Over-saving and under-investing

Welfare costs from not investing Opportunity costs from not lending High foreign currency reserves held exposed to currency crisis risk Value of USD reserves depreciating with QE

from Asia’s perspective

Not policy targets

Imbalances Good

Optimal capital allocation

Imbalances Bad

Underlying distortions

Domestic versus Systematic

IMBALANCES

GOOD? BAD?

Tool required to analyse CAs, RERs, NFA positions

Multilaterally-consistent

Balance & uniqueness

IMF surveillance Effects of policies (local) Reserve accumulation & capital controls Fiscal policy & social protection Foreign versus domestic policies

ASSESSING IMBALANCES

Dispersion of Current Account positions Magnitude Concentration Persistence

CA deficits concentrated

CA surpluses spread Coordination required

Persistence shown Increasing surpluses or

deficits Little switching

CURRENT ACCOUNT POSITIONS

Significant increase

US highest liabilities in the World

Decrease in US liabilities since ’02

Relatively small share Net Foreign Liabilities vs. CA

Risk of Switching

FOREIGN ASSET POSITIONS

NET FOREIGN ASSET POSITIONS

In functioning of global goods and financial markets

Net welfare loss FX interventions Macro & Structural policies Role of governments International regulatory

barriers

DISTORTIONS

INDEX OF REGULATORY TRADE BARRIERS

Distortions as source of additional risk

Lawson doctrine might not hold true

Risk of disorderly adjustment Sharp price movements, substantial output drop Low probability, but high impact Risk to local economy versus global economy

Risk of protectionist backlash

Risks leading to distortions

RISKS

U.S. POLICY RECOMMENDATIONS

(S – I) + (T – G) = (X – M)

MACROECONOMIC POLICIES

Increase exports, reduce imports Make US exports more competitive, especially against

China

Promote investment, reduce unemployment rates

Compete in high value-added products / services


(S – I) + (T – G) = (X – M)


More jobs, more savings

Tax Policy Tax relief for savings – e.g. CPF Tax on consumptions instead of income – e.g. VAT on

imports

PROMOTE SAVINGS

(S – I) + (T – G) = (X – M)

Contractionary fiscal policy Focus on domestic spending

APPROPRIATE SPENDING

(S – I) + (T – G) = (X – M)

Focus on Capital Requirements: U.S.: 8% CAR, Singapore: 10% CAR Leverage Ratio: Tier 1 RWA / Total Asset = 3% Liquidity Requirements: Sufficient assets to cover cash

outflow

Stress test

FINANCIAL SUPERVISION

INT’L POLICY RECOMMENDATIONS

Reducing surplus

Gradual shift in global demand

Reduction in excess

precautionary savings

Focus on domestic growth

Increased flexibility in

exchange rates

IMF Pilot External Sector Report, 2012

GRADUAL SHIFT IN

GLOBAL DEMAND

Gradual, orderly shift from deficit regions to surplus regions

Presently - Imbalance between productivity & effective demand, hence a need to deflate inaccurate price bubbles

Historically - Shock therapy measures lead to artificial impacts & do not contribute to meaningful economic recovery

REDUCTION IN

SAVINGS

Improve welfare by reducing precautionary reserves Especially so if surpluses are caused by market distortions

or misguided policy interventions

Structural Reforms Social safety nets to reduce private savings

Financial market development

Shift from speculation to lending to allow firms and households to access credit, hence reducing the need for savings

Promote longer-term development

FOCUS ON DOMESTIC

GROWTH

Favourable conditions to strong domestic growth

Increase spending in non-tradable sectors Attract foreign investments to fund domestic growth Improve living standards Gear up for longer-term development

Encourage higher wages + progressive tax reforms Increase domestic spending Reduce income inequality

INCREASED

FLEXIBILITY IN

EXCHANGE RATES

External imbalances implies pressure to correct exchange rates

Increased flexibility + bilateral interventions




WHERE ARE WE HEADED?

STABILISATION OF IMBALANCES

Relative stability


China’s surplus projected to rise as external demand recovers

Oil exporters’ surplus may fall If commodity prices retreat

US’ deficit might remain as domestic demand recovers

PROJECTIONS



NOT YET AT DESIRABLE LEVELS

UNRESOLVED DOMESTIC DISTORTIONS

Low private consumption in China

Low investment in Germany

Low public savings in US

PRIVATE CONSUMPTION EXPENDITURE

GROSS FIXED CAPITAL FORMATION

GROSS PUBLIC SAVINGS

External & internal balances are achieved

Imbalances appropriate but distortions remain

Global imbalances intensify

POSSIBLE FUTURE SCENARIOS





In the U.S. - Rise in public savings, recovery in investments, and modest improvements to current account balance

Surplus countries allow some currency appreciation, increase reliance on domestic demand, and achieve internal rebalancing (re-composition of demand)









Export-led growth model continues to persist in surplus countries who also resist appreciation

Domestic distortions remain unaddressed as consumption-investment imbalances remain

CONCLUSION

Policy adjustments are required for removing distortions & restoring balance Deficit countries: aptly-paced fiscal

consolidations

Surplus countries: greater reliance on internal relative to external demand

Deficit & surplus countries: appropriate structural and financial reforms

Economy & Finance

MGMT615: Global Imbalances