MGMT615: Global Imbalances
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Transcript of MGMT615: Global Imbalances
Global
Imbalances
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GLO
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L C
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REN
T A
CC
OU
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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
MACROECONOMIC POLICIES
(S – I) + (T – G) = (X – M)
MACROECONOMIC POLICIES
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
China Emerging Asia Surplus Japan Euro Zone Surplus Oil Exporters Surplus ROW Surplus
ROW Deficit Oil Exporters Deficit Eurozone Deficit United States Emerging Asia Deficit
GLOBAL CURRENT ACCOUNT BALANCE % OF WORLD GDP
WHERE ARE WE HEADED?
STABILISATION OF IMBALANCES
Relative stability
GLOBAL CURRENT ACCOUNT BALANCE % OF WORLD GDP
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
China Emerging Asia Surplus Japan Euro Zone Surplus Oil Exporters Surplus ROW Surplus
ROW Deficit Oil Exporters Deficit Eurozone Deficit United States Emerging Asia Deficit
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
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)
External & internal balances are achieved
Imbalances appropriate but distortions remain
Global imbalances intensify
POSSIBLE FUTURE SCENARIOS
External & internal balances are achieved
Imbalances appropriate but distortions remain
Global imbalances intensify
POSSIBLE FUTURE SCENARIOS
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