Current Account, Global

Imbalances & BOP

Contents

1. Current Account Deficit (CAD), Devaluation & Trade

Liberalization.

2. Are present day global imbalances the fault of USA,

or China or other emerging economies? Real Debate

session!

3. What causes the Disequilibrium in the BOP and what

actions can run to correct it?

4. BOP surplus despite of Trade Deficit

5. Conclusions

Persistent & Large Current Account Deficit

Countries should Devalue & Liberalize.

Is this good advice?

G140868E

Muhammad fahminizam

Bin kamarolzaman

What is current account

deficit

a measurement of a country’s trade whereby the value

of goods and services it imports is more than the

value of goods and services it exports.

net income, such as interest and dividends, as well as

transfers, such as foreign aid were also part of the

current account

A current account deficit represents a negative net sale

abroad.

Does it matter how long a country runs

a current account deficit?

• It depends wether the country be willing and able to (eventually)

generate sufficient current account surpluses to repay what it has

borrowed.

• For instance some countries (such as Australia and New Zealand) have

been able to maintain current account deficits averaging about 4½ to

5 percent of GDP for several decades.

• However others (such as Mexico in 1995 and Thailand in 1997)

experienced sharp reversals of their current account deficits after

private financing withdrew in the midst of financial crises.

• As a result these country is forced to run large surpluses to repay in

short order its past borrowings.

So are Deficits Bad?

Bad

• If the deficit reflects an excess of imports over exports, it may be

indicative of competitiveness problems

• If the deficit reflects low savings rather than high investment, it could be

caused by reckless fiscal policy or a consumption binge

Good

• If the current account deficit implies an excess of investment over

savings, it could equally be pointing to a highly productive, growing

economy.

• If it could reflect perfectly sensible intertemporal trade, perhaps

because of a temporary shock or shifting demographics.

Devaluation

• A deliberate downward adjustment to the value of a

country's currency, relative to another currency,

group of currencies or standard

• Devaluating a currency is decided by the

government issuing the currency, and unlike

depreciation, is not the result of non-governmental

activities.

• Devaluation causes a country's exports to become

less expensive, making them more competitive on

the global market.

Under What Circumstances Might

a Country Devalue?

• The interaction of market forces.

• To reduce the current account deficit.

• To boost aggregate demand in the

economy in an effort to fight

unemployment.

Effects of Devaluation

• Inflation that will lead to raise of interest

rate thus slowing the economic growth.

• A sign of economic weakness

• Round of successive devaluations

Liberalisation

• A process that removes restrictions on capital

movement.

• Companies striving for bigger markets and

smaller markets seeking greater capital and

domestic economic goals can expand into the

international arena, resulting in a stronger global

economy.

• Encourages FDI and portfolio foreign investment

Negative effects of

liberalisation

It attracts portfolio foreign investments which Are generally short-term and

easily liquidated instead of more long term and harder to dispose of

quickly

When speculation rise and panic spread, capital flow will experience a

reversal and money will be pulled out of capital markets.

Economies have to pay their short-term liabilities before capital gains could

be reaped. Stock market activity will suffer, foreign reserves depleted,

local currencies depreciated and financial crises will set in

Devaluation and liberalisation analysis

on the south east asian country

(Thailand)

Thailand as an examples in devaluation and

liberalisation between 1997-1998 asian financial crisis

Pre-financial crisis(1990s)

Financial crisis(1997-1998)

Post-financial crisis(1999-2000s)

Pre-financial crisis (1990s)

• Thailand had strict financial regulation that

limit financial expansion commercial banks.

• Beginning of 1990s, Thai government decides

to accommodate a policy of financial market

deregulation and capital account liberalisation.

Nominal exchange rate stability which fluctuates between

24.91-25.59 Baht per dollar

Table 1. Nominal Exchange Rate (to the US Dollar). Period average.

1990 1991 1992 1993 1994 1995 1996 1997 1997f

Korea 707.76 733.35 780.65 802.67 803.45 771.27 804.45 951.29 1695

Indonesia 1842.8 1950.3 2029.9 2087.1 2160.8 2248.6 2342.3 2909.4 4650

Malaysia 2.7 2.75 2.55 2.57 2.62 2.5 2.52 2.81 3.89

Phillippines 24.31 27.48 25.51 27.12 26.42 25.71 26.22 29.47 39.98

Singapore 1.81 1.73 1.63 1.62 1.53 1.42 1.41 1.48 1.68

Thailand 25.59 25.52 25.4 25.32 25.15 24.91 25.34 31.36 47.25

Hong Kong 7.79 7.77 7.74 7.74 7.73 7.74 7.73 7.74 7.75

China 4.78 5.32 5.51 5.76 8.62 8.35 8.31 8.29 8.28

Taiwan 26.89 26.82 25.16 26.39 26.46 26.49 27.46 28.7 32.64

Source: International Financial Statistics of IMF

Keeping inflation rate low between 3.36% and 5.7%

Table 2. Inflation Rate

1990 1991 1992 1993 1994 1995 1996 1997 1997f

Korea 9.3 6.22 4.82 6.24 4.41 4.96 4.45

Indonesia 9.4 7.59 9.6 12.56 8.95 6.64 11.62

Malaysia 4.4 4.69 3.57 3.71 5.28 3.56 2.66

Phillippines 18.7 8.93 7.58 9.06 8.11 8.41 5.01

Singapore 3.4 2.32 2.27 3.05 1.79 1.32 2

Thailand 5.7 4.07 3.36 5.19 5.69 5.85 5.61

Hong Kong 11.6 9.32 8.52 8.16 8.59 6.3 5.83

China 3.5 6.3 14.6 24.2 16.9 8.3 2.8

Taiwan 3.63 4.5 2.87 4.09 3.75 3.01 0.9

Source: International Financial Statistics of IMF

Fiscal balances surpluses

Table 3. Government Fiscal balances (% of GDP)

1990 1991 1992 1993 1994 1995 1996 1997 1997f

Korea -0.68 -1.63 -0.5 0.64 0.32 0.3 0.46 0.25

Indonesia 0.43 0.45 -0.44 0.64 1.03 2.44 1.26 0

Malaysia -3.1 -2.1 -0.89 0.23 2.44 0.89 0.76 2.52

Phillippines -3.47 -2.1 -1.16 -1.46 1.04 0.57 0.28 0.06

Singapore 10.53 8.58 12.35 15.67 11.93 13.07 14.1 9.52

Thailand 4.59 4.79 2.9 2.13 1.89 2.94 0.97 -0.32

China -0.79 -1.09 -0.97 -0.85 -1.22 -1 -0.82 -0.75

Taiwan 1.85 -2.18 -5.34 -3.88 -1.73 -1.09 -1.34 -1.68

Source: International Financial Statistics of IMF

• with high saving rates of 33.5% of GDP

As a result, the Thai economy became attractive to

international speculators

They(investors) had channeled large sums of capital out

of japan due to lengthy period of stagflation & low

interest rates

In short, Thailand’s economy boomed with its banking

sector ranking among the world’s most profitable

But the growth of capital inflows and lending practices of

the financial institution were not healthy nor wise

Large part of the capital were put into non-productive

sector e.g. real estate thus reducing export

Financial crisis (1997-1998)

• Starting from 1995 economic growth slowed down

significantly due to contraction in real estate and the

emergence of China as a competitor in international trade

• Too many houses and business buildings were built with high

rate of vacancy

• Real estate business became unprofitable and most defaulted

in their payment

• on top of that, the Thai people’s consumption became

excessive especially in imported commodities

Then came speculators whom had

seen Thailand’s slowing economy

decided to liquidate domestic assets

and claimed back their foreign assets

which resulted in a severe credit

crunch.

Large number of Thai financial

institution were not able to repay debt.

Financial crisis set in.

Post-financial crisis (1999-

2000s)

• On 20th august 1997, IMF's Executive Board

approved financial support for Thailand of about

US$4 billion, over a 34-month period.

• Thai authorities adapted monetary policy to a

managed float of the baht effectively devaluing it.

• Programs concentrating on the liquidation of finance

companies, government intervention in the weakest

banks, and the recapitalization of the banking

system.

In 1998, the reform effort accelerated, focusing on

privatising the intervened banks, disposing of assets

from the finance companies and restructuring

corporate debt

Authorities made great strides by strengthening the

institutional framework, including the reform of the

bankruptcy act, foreclosure procedures and foreign

investment restrictions

Thailand's economy returned to positive growth in

late 1998, and GDP growth reached over 4 percent

in 1999 and should grow by 4.5-5.0 percent in 2000

Selected Economic Indicators

1996 1997 1998 1999* 2000**

(Percent change)

Real GDP Growth 5.9 -1.7 -10.2 4.2 4.5 to 5.0

Consumer prices (period average) 5.9 5.6 8.1 0.3 3.0

(Percent of GDP [minus sign signifies a deficit])

Central government balance*** 1.9 -0.9 -2.4 -2.9 -3.0

Current account balance -6.0 -7.9 -2.0 12.7 9.1

(In billions of U.S. dollars)

External debt 90.5 93.4 86.2 76.0 67.8

Conclusion

• Devaluation and liberalisation may be good

advice if handled with care and consideration.

• Devaluation should be enacted only to the

extent of economic stabilisation and not

extending after whereas liberalisation, total

transparency might be detrimental in the long

run, so caution is needed when applying this

manoeuvre.

GLOBAL IMBALANCES

Phidel Marion

G. Vineles

CURRENT SITUATION

1. Narrowing of global current account

imbalances

2. The shifting position of Latin America in global

distribution

3. The relative share of East Asian countries in

global imbalances has increased since 2008

4. US Perspective: Global Imbalances

Narrowing of CA Imbalances

• Figure 1 shows

that global

imbalances peak

in 2007-2008

and shrunk

sharply in 2009.

The US deficit

shrank by over 1

percent of world

GDP during the

period 2006-

2013, and

current account

imbalances in

“deficit Europe”

shrank by 80

percent between

2007-2013.

Source: IMF, 2014

Does it mean that global

imbalances are “over”?

Obviously, NO!

Global creditor and debtor positions have not shrunk as a ratio

of GDP, as they have widened since 2007.

As of 2012, there were four major “creditors” with roughly

similar net foreign assets ($3 trillion).

There were 3 major debtor areas with liabilities of over $4

trillion: the United States, European deficit countries, and the

rest of the world.

Australia, Brazil, Canada, France, India, and Mexico account for

the lion share of the rest of the world’s liabilities

Outlook for Imbalances over

the Medium TermSource: IMF, 2014

Outlook for Imbalances over

the Medium Term

According to IMF’s World Economic Outlook, current account

imbalances have continued to shrink in 2013 and are projected

to post a further modest decline over the medium term.

It is expected that the deficits of other European countries and

the rest of the world will shrink over the next five years, while US

deficit will remain broadly stable.

However, it is envisaged to have some widening of surpluses in

Asian economies in world GDP over the next five years,

particularly China.

It will be further offset by a projected shrinking surplus in

advanced European countries and especially oil exporters.

Shifting Position of Latin

America in Global Distribution For the last 15 years, the regional current account balance

improved between 1998 and 2006.It reached a surplus of 1.5 percent of regional GDP.

However, the World Economic Outlook envisaged a further modest deterioration of the regional current account balance after its sharp worsening in 2013.

In relation to this, WEO projections for current account balances and GDP for the period 2014-19 suggests a further deterioration of the region’s net foreign asset position by some 10 percentage points of GDP.

The region’s net external liabilities account for 1/3 of the net external liabilities of the “rest of the world” group.

Increased Share of East Asia in

Global Imbalances

Although the overall size of the global imbalances decreased in

terms of US current account deficit, THE RELATIVE SHARE OF

EAST ASIAN COUNTRIES in the global imbalances have

INCREASED since 2008.

East Asian countries’ total portfolio investment in US reached

US$4.5 trillion by June 2012. On the other hand, US investment

in East Asia was US$1.3 trillion.

East Asia has a US$3.2 trillion net portfolio investment surplus

vis-à-vis the US, which corresponds to 57.3% of the world’s net

portfolio investment surplus vis-à-vis the US

Source: Lee & Park, 2013

Source: Lee & Park, 2013

Observations

Based on the figures shown, East Asian countries have a

much larger surplus in bond investment but a relatively small

deficit in equity investment.

Bond investment rather than equity investment drove the

rapid expansion of East Asia’s portfolio investment in US.

It also shows that East Asia’s net bank lending position has

declined.

US, China, and Global

Imbalances

The global imbalances issue is usually framed

between the bilateral relationship between US

and China.

Therefore, it is important to understand their

respective views.

Global Imbalances: US Perspective

-Why US should not be blamed on Global Imbalances?

-China’s undervalued currency has been an issue of

concern for many in US Congress that are used to

convey an unfair competitive advantage to Chinese

producers and exporters.

-An undervalued Renminbi (RMB) is regarded as a

major contributor to the large annual US trade deficits

with China and a decline in US manufacturing jobs in

recent years.

In February 2010, President Obama

stated that China’s undervalued

currency puts US firms at a “huge

competitive disadvantaged”

In November 2011, President

Obama said that China should “go

ahead and move towards a

“market-based system for their

currency.”

Undervalued Currency

China pegged the RMB to the US Dollar at an exchange rate of roughly 8.28 yuan to the dollar.

The Chinese central bank maintained this peg buying (or selling) as many dollar denominated assets in exchange for newly printed yuan as needed to eliminate excess demand (supply) for the yuan.

The People’s Bank of China regularly intervenes in the currency market.

IMF’s Currency Manipulation

Clause

On July 21, 2005, the Chinese government modified its

currency based on a market supply and demand with

reference to exchange rate movements of currencies.

However, China halted its currency manipulation currency in

2008, mainly because of the declining global demand for

Chinese products.

It is against the IMF’s currency manipulation clause:

“securing fundamental exchange rate misalignment in the

form of an undervalued exchange in order to increase net

exports.”

Up and Down RMB Exchange

Rate

Concerns Over China’s

Currency Policy

Many US policymakers charged that the Chinese government

manipulates its currency in order to make it significantly

undervalued vis-à-vis the US dollars.

Making Chinese exports to the United States less expensive,

and US exports to China more expensive.

Undervalued currency has been a major factor behind the

burgeoning trade deficit with China.

It is estimated that US trade deficit with China grew from $84

billion in 2000 to $315 billion dollar in 2012.

Concerns Over China’s

Currency Policy

China’s massive accumulation of foreign exchange reserves.

China is the world’s largest holder of foreign exchange

reserves, which grew from $212 billion in 2001 to $3.3 trillion

in 2012.

Many critics argued that the large increases in China’s foreign

exchange reserves reflect the significance of the Chinese

intervention in currency markets to hold down the value of the

RMB, which has been a major factor behind China’s large

annual current account surpluses.

The figure shows

that foreign

exchange reserves

grew from 2004 to

2011, averaging a

$363 billion in new

reserves each year,

but that growth

slowed sharply in

2012 ($129

billion).

Beggar-Thy-Neighbor Policy?

According to Economic Policy Institute, US trade deficit with China (which is largely the result of China’s currency policy) led to the loss or displacement of 2.7 million jobs (77% were in manufacturing) between 2001 and 2011.

US economist Paul Krugman argued that the undervalued RMB had become a significant drag on global economic recovery.

Undervalued currency had lowered global GDP by 1.4 percent and had especially hurt poor countries.

According to Ferguson and Schularick (2009), the RMB was undervalued against dollar by rate of 50%.

What to do?

To resolve global imbalances, it is recommended that

countries with current account surplus increase

consumption and countries with current account deficit

increase national savings.

Deficit countries need to follow a growth strategy

based on external demand, while surplus countries

need to change their export-led patterns into domestic

demand creation.

Suggested Policies for Surplus Economies by Lim

& Pontines (2012)

1. POLICIES THAT STRENGTHEN DOMESTIC DEMAND

-policies that encourage greater domestic consumption

-policies that stimulate domestic investments

-policies that promote greater deepening of financial markets

2. INTENSIFY REGIONAL COOPERATION & COORDINATION

-facilitate the development of Local Currency Bond Market

-develop stronger regional safety net

-Coordinate collective regional currency appreciation

“The global imbalances have a number of causes and can only

safely be unwound if several countries take action.”

Nouriel Roubini,

Professor of Economics, New York University

Current Account BOP

May Pyeetson Aung

G1400899G

Balance of Trade (Visible)

The Gap value that results from the imports and exports

of goods and services among countries.

If the gap is positive, the exports are higher than imports,

then the country is in balance of trade surplus.

If the gap is negative, the country is in balance of trade

deficit.

The Balance of Invisible

The services that are exported and imported are called

invisibles.

Eg. Banking services, IT services, etc.

These services cannot be physically observed while it’s being

imported or exported.

The “balance of invisible” is the gap between these imports

of exports of services.

If the import and export values are not balanced and one is

more or less than the other in the trade of services between 2

countries. This difference value of services is called the Balance

of invisibles.

Current Account (CA)

Balance of Visible + Balance of Invisible = CA

Bal. of Trade surplus + Bal. of invisible surplus= Current

Account surplus (CAS)

Bal. of Trade deficit + Bal. of invisible deficit= Current

Account Deficit (CAD)

Balance of Payments

BOP

Balance of Payments (BOP)

The BOP is a statement which reflects all monetary transactions

between a country and the rest of the world.

The BOP is divided into 3 main categories:

1) Current Account

2) Capital Account

3) Financial Account

Theoretically, the BOP should be zero, meaning that assets

(credits) and liabilities (debits) should balance, but in practice

this is rarely the case.

Current, Capital & Financial

Current Account: The inflow of goods & services into a country.

Capital Account: where International capital transfers are

recorded.

+ FDI

+ Portfolio Investment

+ Other Investment

+ Reserve Account

Financial Account: Where transactions that arise from the trade in

financial assets are recorded,

Current Account Balance

CAB = X - M + NY + NCT

CAB= Current Account Balance

X = Exports of goods and services

M = Imports of goods and services

NY = Net income abroad

NCT = Net current transfers

The Balancing Act

The CA should be balanced

against the combined-capital and

financial accounts; however, as

mentioned above, this rarely

happens.

With fluctuating exchange rates,

the change in the value of money

can add to BOP discrepancies.

What Does It Tell Us?

Theoretically, the balance

should be zero, but in the

real world this is

improbable, so if the current

account has a surplus or a

deficit, this tells us

something about the

government and state of the

economy in question, both

on its own and in

comparison to other world

markets.

Factors causing the Imbalance

A number of factors may cause disequilibrium in the BOP.

These various causes may be broadly categorized into:

1) Economic factors - Development, Capital, Secular &

Structural. Inflation

2) Political factors - Instability of the country

3) Sociological factors - changes in tastes, habits,

preferences, fashion, etc.

4) Natural factors - calamities, floods, drought, earthquake,

etc.

Economic Factors

(1) Development Disequilibrium

Large-scale development costs increase the purchasing

power, aggregate demand & prices, resulting in substantially

large imports.

Common in developing countries as large-scale capital

goods imports are needed for development and this rise to a

deficit in the BOP.

Economic Factors

(2) Capital Disequilibrium

Cyclical fluctuations in business activities are one of the

prominent reasons for the balance of payments

disequilibrium.

As Lawrance W. Towle points out, depression always brings

about a drastic shrinkage in world trade, while prosperity

stimulates it. A country enjoying a boom all by itself ordinarily

experiences more rapid growth in its imports than its exports,

while the opposite is true of other countries. But production in

the other countries will be activated as a result of the

increased exports to the boom country.

Economic Factors

(3) Secular Disequilibrium

High disposable incomes -> high aggregate demand.

Higher wages ->high production costs -> higher prices

These two factors – high aggregate demand & higher

domestic prices may result in the imports being much higher

than the exports.

Cont...(4) Structural Disequilibrium

Development of alternative sources of supply, better

substitutes, the exhaustion of productive resources, the

changes in transport routes and costs, etc.

Political Factors:

Large capital outflows, inadequacy of domestic investment

and production, etc.

War, changes in world trade routes, monetary policies,

government policies, etc.

Re-balancing acts?

Deflation

Depreciation

Devaluation

Ex-change

control

Deflation

Reduce the quantity of money in order to reduce the prices & the money income of the people.

Fall in prices will increase exports and reduction in income checks imports.

Higher interest rate in the domestic market attracts foreign funds that can be used for correcting disequilibrium.

Drawbacks

Reduction in income or wages conflicts trade unions.

Causes unemployment to the working class.

In a developing economy, expansionary monetary policy rather than contractionary (deflationary) monetary policy is required to meet the developmental needs.

Depreciation

A currency will depreciate when its supply in the foreign

exchange market is large in relation to its demand. In other

words, a currency is said to depreciate if its value falls in terms

of foreign currencies, i.e., if more domestic currency is

required to buy a unit of foreign currency.

The effect of depreciation of a currency is to make imports

expensive and exports cheaper.

It works in a flexible exchange rate system and can correct a

mild adverse BOP if the country's demand for imports and the

foreign demand for its exports are fairly elastic.

Drawbacks of Depreciation

Not suitable for a country which follows a fixed exchange rate system.

It makes international trade risky and thus, reduces the volume of trade.

The terms of trade go against the country whose currency depreciates because the foreign goods have become costlier than the local goods and the country has to export more to pay for the same volume of imports.

Experience of certain countries has indicated that exchange depreciation may generate inflationary pressure by increasing the domestic price level and money income.

The success of the method of exchange depreciation depends upon the cooperation of other countries. If other countries also start depreciating their exchange rates, then these methods will not benefit any country.

Devaluation

Reduction of the external values of a currency.

Difference between devaluation and depreciation is that while

devaluation means the lowering of external value of a currency by

the government, depreciation means an automatic fall in the

external value of the currency by the market forces; the former is

arbitrary and the latter is the result of market mechanism.

Thus, devaluation serves only as an alternative method to

depreciation. Both the methods imply the same thing, i.e., decrease

in the value of a currency in terms of foreign currencies.

Both the methods can be used to produce the same effects; they

discourage imports, encourage exports and thus lead to a reduction

in the balance of payments deficit.

Drawbacks of Devaluation

Devaluation is a clear revelation on the country's economic

weakness.

Reduces the confidence of the people in country's currency

leading to speculative outflow of capital.

Encourages inflationary tendencies in the home country.

Increases the burden of foreign debt.

Involves large time lag to produce effects.

A temporary device and does not provide a permanent remedy

to correct adverse balance of payments.

Ex-change Control

Refers to the control over the use of foreign exchange by the

central bank.

Under this method, all the exporters are directed by the central

bank to surrender their foreign exchange earnings. Foreign

exchange is rationed among the licensed importers. Only

essential imports are permitted.

The most direct method of restricting a country's imports.

Drawbacks:

Deals with the deficit only, and not its causes. Rather it may

aggravate these causes and thus may create a more basic

disequilibrium. Does not provide a permanent solution for a

chronic disequilibrium.

Are persistent trade deficits a bad

thing?

Deficits that result from a loss of competitiveness can be trouble

Having accumulated inflation differentials vis-a-vis other

countries.

In such a case, if prices are sticky, a devaluation of the nominal

exchange rate is needed to restore competitiveness.

Otherwise, the export sector will be depressed, and economic

activity will remain low.

Over time, the trade balance should restore itself as residents

owe more money to the rest of the world and cut consumption.

This is a painful adjustment process which is contractionary.

Why Persistent Deficits?

At times of economic expansion, the trade balance of

countries with export-led growth, mainly the developing

nations, will typically improve while economies with

domestic demand led growth, such as the US, will

experience a worsening.

Persistent Deficits Causes

Some argue that America buys more from the world than it

sells because its companies are growing less competitive.

“Unfair" trade restrictions and labor policies of other countries.

Still others point to the underlying strength of the dollar, which

makes American goods and services more expensive for

foreign buyers.

U.S. firms prefer to sell goods and services abroad through

their foreign affiliates instead of exporting them from the US.

Example; In 1998, U.S. foreign-affiliate sales topped a

staggering $2.4 trillion, while U.S. exports totaled just $933

billion, or less than 40 percent of affiliate sales.

“Change” matters most

Not only do reports showing a trade surplus or deficit matters, but the change from the previous period as well.

For example, if the US economy was reported to have been running a trade surplus for the past five months, what would matter the most during the sixth month is the change in the amount of the surplus, rather the fact that the trade balance remains on the upside.

If Americans’ exports have been steadily outstripping imports for the last five months and this trend seems to continue in the sixth, this would be of greater significance than the fact itself we have a surplus, thus providing the US dollar with strong support.

On the other side, if we have a decline in the surplus in the sixth month after five consecutive monthly gains, this would at least partially offset the positive sentiment from the fact that the trade balance remained at a surplus.

Current Account in Vietnam

Vietnam

Just as Notes (no ppt)

The CAB of Vietnam ran a deficit from 2002 to 2011.

In 2011, the CAD was 4.7% of the GDP.

The country’s overall BOP in 2010 was a deficit of USD 4.6

billion, as compared to USD 8.8 billion in 2009.

In 2012, Vietnam enjoys a BOP surplus of nearly US$4.3

billion in Q1, US$2 billon in Q2 and US$6 billion.

This marks a significant shift which helps recover the country’s

foreign reserve, improve financial power, stabilize the

exchange rate and ease inflation pressure.

Vietnam recorded a Current Account surplus of 1737 USD Million

in 2013.

The CA averaged -1113.39 USD Million from 1983 until 2013,

reaching an all time high of 9061 USD Million in 2012 and a

record low of -10823 USD Million in 2008.

• Vietnam had a trade surplus of 107 USD Million in Aug 2014.

The Balance of Trade in Vietnam averaged -431.30 USD Million from

1990 until 2014, reaching an all time high of 1444 USD Million in

January of 2014 and a record low of -3888 USD Million in December

1996

Reasons for the surplus

Government’s top priority to rein in inflation, stabilize macro-

economy, ensure social welfare, restructure the economy and

transform growth model.

Noticeably, the Government had been sticking to control

inflation and stabilize macro-economy even when the consumer

price index dipped for 2 consecutive months.

Moreover, the ratio of investment to GDP declined sharply from

42.7% in the 2006-2010 period to only 34.6% in 2012 and

projected to down to 33.5% in 2012.

Also, budget overspending fell from 6.7% in 2008 to 4.9% in

2011 and about 4.8% in 2012 and the CA gained surplus of

US$4.774 billion in the first half of 2012.

Cont..

Besides, trade balance posted a surplus of US$2.191

billion in Q1/2012; US$1.930 billion in Q2/2012 after

suffering a deficit of US$ 2 billion in the same period last

year.

The BOP surplus pushed foreign reserve to increase by

nearly US$6.5 billion in the first six months.

The surplus is forecast to continue to the end of this year

thanks to recovering current account, excess of exports

over imports, and stable remittances.

BOP Surpluses Despite Trade

Deficits

Case Study on Sri Lanka

In 2011, the trade deficit was US$ 9.7 billion, yet the deficit

in the overall BOP was only US$ 1.1 billion.

In 2012, despite the trade deficit of 9.4 billion, the country

achieved a small overall BOP surplus of US$ 151 million.

In 2013, in spite of a trade deficit of US$ 7.6 billion, the BOP

had surplus of US$ 991 million.

The prospect of the trade deficit declining to about US$ 6

billion in 2014 provides the possibility of achieving a

significant overall BOP surplus this year.

Reason behind the surplus

International transfers (workers’ remittances here) are the

main source of funds.

These transfers of money by Sri Lankan nationals working

abroad have offset between 55% - 70% of the trade deficit in

recent years and as much as 90% of the trade deficit in 2013.

Although most of these funds are from workers in the Middle

East, Sri Lankan nationals in many countries, including North

America, Australia, Europe and East Asian counties have

remitted significant amounts of funds.

Other Reasons

In 2012, tourist earnings estimated at US$ 1.4 billion offset 18% of the trade deficit.

Other services, i.e, port handling and IT services that have been increasing and are expected to reach $1 billion soon. These service receipts contributed about US$ 850 million in 2012.

Remittances, tourist earnings and other services have more than offset the trade deficit and the BOP achieved a surplus in 2013.

All this would enable a reduction in foreign debt and an improvement in the foreign reserves.

FDI and net inflows into the stock market too contributed to the BOP. FDI in the first 9 months of 2013 were US$ 870 million while net inflows into the stock market were US$ 270 million.

Evaluation

Despite persistent large trade deficits, BOP has either recorded

lower deficits or surpluses as in 2012 and 2013.

If a trade deficit of US$ 6 billion is achieved this year that BOP

would be a significant surplus of about US$ 2 billion.

Despite the BOP surplus, large trade deficits must be

recognized as a fundamental disequilibrium in the economy

that must be corrected.

Imports of nearly twice export earnings are a clear sign of

fundamental weaknesses for the Sri Lankan economy.

The overall BOP surplus is not a good reason for disregarding

the correction of this fundamental trade imbalance that is

symptomatic of structural weaknesses in the economy.

Can China's economic policy be

seen as neo-mercantilist?

It is certainly possible to see China’s economic policies as neo-mercantilist, though people in China might not agree.

Mercantilism was the economic doctrine that held that a country must export more than it imported in order to be economically strong. Mercantilist countries tried to promote exports and reduce imports. From the perspective of many Americans, China engages in such policies today. Many Americans believe that China artificially weakens its currency so that it will be easier for Chinese firms to export. China is also said to put informal barriers in the way of imports and to heavily subsidize exports. All of these actions can be seen as neo-mercantilism.

Our Conclusions…

The fact that the country has reserves should not blind policy makers to the adverse consequences of financing the trade deficit through foreign borrowing.

The use of foreign borrowing to meet the balance of trade deficit is costly as foreign borrowings are a contingent liability and their use to bridge the balance of payments deficit could lead to a strain in the balance of payments in the future.

It is vital that the trade balance is reduced to the extent that the country does not have to borrow to finance its imports. Although containing the trade deficit is a challenging task, it is imperative that further policy measures are put in place to contain import expenditure. This is especially so with respect to intermediate and investment goods imports which have risen sharply.

Increasing export earnings is not a realistic option immediately. In the long-run the country’s exports must be expanded, while in the short-term there should be a curtailment of imports. An economic policy framework that provides incentives for exports is a precondition to increasing exports. A wide range of economic policies is needed to achieve this. Meanwhile a tightening of the belt to reduce import expenditure is needed. This must encompass a reduction in government expenditure on imports.

A deficit is not necessarily a bad thing for an economy, especially for an economy in the developing stages or under reform: an economy sometimes has to spend money to make money.

Conclusions Cont…

To run a deficit intentionally, however, an economy must be

prepared to finance this deficit through a combination of

means that will help reduce external liabilities and increase

credits from abroad. For example, a current account deficit

that is financed by short-term portfolio investment or

borrowing is likely more risky.

This is because a sudden failure in an emerging capital

market or an unexpected suspension of foreign government

assistance, perhaps due to political tensions, will result in

an immediate cessation of credit in the current account.

References

"The Balance of Payments Problem." Foreign Affairs. N.p., 23 Sept. 2014. Web. 23 Sept.

2014. http://www.foreignaffairs.com/articles/71549/robert-b-anderson/the-balance-of-

payments-problem.

http://www.sundaytimes.lk/140316/columns/achieving-balance-of-payments-

surpluses-despite-trade-deficits-89269.html

http://www.binarytribune.com/forex-academy/current-account-balance-of-trade/

http://www.euromoneycountryrisk.com/Wiki/Vietnam

http://www.talkvietnam.com/2012/10/balance-of-payments-from-deficit-to-surplus/

http://www.frbsf.org/education/publications/doctor-econ/2007/june/trade-deficit-

exchange-rate

Thank you for your kind

attention! ^__^

Presented by~

May Pyeetson Aung

Muhammad Fahminizam bin Kamaraolzaman

Phidel Marion G. Vineles

Sun Cong