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Otaviano Canuto
Center for Macroeconomics and Development

Brazil, China, Commodities, Economics, Emerging Markets, Emerging markets, Fiscal policy, global economy, IMF, International Trade, Latin America, Long term finance, natural resources, Sovereign ratings, Uncategorized

Global imbalances and currency bullying

 Coming out next Monday, July 30, on Seeking Alpha, INTERFIMA, Roubini EconoMonitor, and OCP Policy Center

The IMF released last July 24 its latest assessments of the current account balances for the 30 largest economies in its External Sector Report 2018 (ESR). There was no major change in 2017 relative to previous years and the reconfiguration of surpluses and deficits that has prevailed since 2013 was essentially extended. However, there are reasons to expect more abrupt alterations ahead, as the U.S. fiscal easing under high employment conditions unfolds. Given the context of ongoing U.S.-led trade wars, as well as the recent bout of Chinese exchange rate depreciation, one may wonder about the prospects of currencies also becoming subject to war or rather to what Citi has called “currency bullying”.

Global current account balances have evolved along a stable configuration since 2013…

Chart 1 depicts the evolution of current account balances of major 30 economies in the period of 1997-2017. After the substantial climb prior to – and its unwinding in the aftermath of – the global financial crisis, the absolute sum of surpluses and deficits has remained close to 3.25% of global GDP (the peculiarities of the first phase are approached in Canuto (2017)).

Canuto - chart1 global imbalances currency bullying

The overall stable landscape featured changes in composition. More recently, China’s current account surpluses have gradually diminished, while Japan, euro area debtor countries and oil-exporting countries have moved in the opposite direction. Below the line, in the case of deficit countries, while the U.S. stayed as the major case, emerging market economies have displayed divergent trajectories: Brazil, India, Indonesia, Mexico and South Africa have left the “fragile” position of the “taper tantrum” in 2013, while Argentina joined Turkey in that zone (Canuto, 2013)  (Canuto, 2018).

Asymmetric macroeconomic policy stances among advanced economies since 2013 have also affected the evolution of balances. While some economies have combined large surpluses and weak domestic demand (e.g., Germany, Japan, Netherlands), United Kingdom and United States exhibited stronger recoveries in their domestic demands.

In the case of the U.S., the expansionary effects of last year’s tax cuts have already started to appear in the GDP figures of the second quarter. Although accompanied by a surge in exports, to some extent reflecting anticipation of sales abroad for fear of trade wars becoming fiercer, the U.S. current account deficit is poised to rise.

Stock positions of countries in terms of net international investments evolve according to previous current account balances and the corresponding valuation of assets. Those stocks, in turn, are also among factors determining future current account balances (Alberola et al, 2018). In 2017, valuation effects – including from U.S. dollar weakening – led to a stability of global stock positions (IMF, 2018).

… while real effective exchange rate (REER) and current account gaps have remained significant…

National economies are not expected to exhibit zero current-account balances and stocks of net foreign assets. At any period, domestic absorption – consumption and investment – can be larger or smaller than the local GDP, triggering inflows or outflows of capital, due to “fundamental” factors (Canuto, 2017):

  • Differences in intertemporal preferences and age structures of their populations mean different ratios of domestic consumption to GDP;
  • Differences in opportunities for investment also tend to lead to capital flows;
  • Differences in institutional development levels, reserve currency statuses and other idiosyncratic features also generate capital flows and imbalances;
  • Cyclical factors – including fluctuations in commodity prices – may also cause transitory increases and declines in balances; and
  • As referred above, countries’ outstanding stocks of net foreign assets also have a counterpart in terms of service payments in their current accounts.

When global imbalances – and corresponding real effective exchange rates (REERs) – reflect such fundamentals, economies are in a better place than they would be in autarky (isolated with zero balances). There are situations, however, in which such imbalances may be gauged as in excess with respect to notional values suggested by fundamentals.

The IMF External Sector Report has now for six years offered assessments comparing actual current account balances – and REERs – with those that would reflect medium-term fundamentals and desired policies. Chart 2 shows the evolution of current account gaps in 2012-2017, where stronger (weaker) means that a current account balance is larger (smaller) than that “consistent with fundamentals and desirable policies”.

Last year, Germany, the Netherlands, Singapore and Thailand (“substantially stronger”); Malaysia (“stronger”); and China, Korea and Sweden (“moderately stronger), held current account gaps above 4, between 2 and 4, and between 1 and 2 percentage points of GDP, respectively. The euro area was also “moderately stronger,” moving up from the alignment of previous years.

Canuto - chart2 global imbalances currency bullying

On the other side, Argentina, Belgium, Saudi Arabia, Turkey and the United Kingdom (“weaker”); and Canada, France, Russia, South Africa, Spain and the U.S. (“moderately weaker”), showed negative current account gaps in the ranges of 2-4 and 1-2 percentage points of GDP, respectively. Within the euro zone, large positive gaps (Germany, Netherlands) have co-lived asymmetrically with negative gaps (Belgium, France, Spain), and the euro zone as a whole moved to a positive gap because of shrinking negative gaps in France, Italy and Spain. Notice the absence last year of “substantially weaker” cases.

As one might expect, REER and current account assessments, according to the IMF report, are closely linked to each other. Stronger (weaker) REERs in Chart 2, corresponding to “undervaluation” (“overvaluation”), may also be seen in Chart 3.

 Canuto - chart3 global imbalances currency bullying

… and the U.S. Treasury is scheduled to present the next FX report in October

Next October, the U.S. Treasury will report again to Congress on “macroeconomic and foreign exchange policies of major trading partners of the United States” (last time was April). A country may be named a “currency manipulator” according to three criteria, besides being considered a major U.S. trading partner: certain levels of bilateral trade surplus with the U.S., overall current account surplus, and one-sided foreign exchange interventions geared at maintaining depreciation. Japan (1988), Taiwan (China) (1988 and 1992), and China (1992-1994) have ben previous cases of such denomination.

In case a country is considered as crossing the 3 lines and is labeled as “currency manipulator”, down the road there may be consequences as denial of access to the U.S. government procurement, the USTR taking it into account in bilateral or regional agreements, and others (see Citi Global Economics View, “Currency bullying and currency manipulators”, 25 July 2018).There are no countries currently named as “currency manipulators”, but China, Japan, Korea, Germany, India, and Switzerland comprise the current “monitoring list” because they are classified as fulfilling 1 or 2 of those criteria. There are hints that this watch list might be increased, although analysts are not expecting any labeling of “currency manipulator” in this forthcoming report – the application of previously used thresholds does not point to any country crossing all three fault lines (Chart 4).

Canuto - chart4 global imbalances currency bullying

The Chinese Renminbi has depreciated sharply in recent weeks, partially reversing the course of appreciation that started mid-2007. The IIF (2018) alludes to a possibility that Chinese authorities might be adopting a “neglect” stance as a signal amid the ongoing trade battles with the Trump government, but also highlights risks of substantial capital outflows being triggered – like in 2015 (Chart 5) – with corresponding shocks on China’s financial markets and elsewhere in the world, including global risk assets. The possibility of mutually damaging financial effects between U.S. and China might impose some limits to the “currency bullying” as a proxy to the trade war. Furthermore, as we saw, the U.S. Treasury is not likely to name China as a “currency manipulator”. Nonetheless, rhetoric and “currency bullying” are likely to remain loud as the U.S. trade and current account deficits rise ahead and global imbalances aggravate.

Canuto - chart5 global imbalances currency bullying

Otaviano Canuto is an Executive Director of the World Bank. The opinions expressed in this article are his own. Follow him at @ocanuto

Brazil, China, Climate change, Commodities, Corporate Finance, Debt restructuring, Economics, Emerging Markets, Emerging markets, Fiscal policy, Gender equality, global economy, IMF, infrastructure, International Trade, Latin America, Long term finance, Middle income trap, natural resources, poverty and inequality, Shadow Banking, Small States, Sovereign ratings, Uncategorized, World Bank



Peer-reviewed articles (PR), books and chapters, policy papers and op-eds

 By Topics

Middle-Income Growth Traps

 Emerging Market Economies

 Latin America and the Caribbean


Fiscal policy and public sector management

Subnational Debt, Debt Restructuring and national sovereign ratings

Monetary policy and the global economy

International Trade and Technology

Natural-Resource Led Development

Commodity Prices

Infrastructure: finance and the macroeconomy

 Gender equality and economic growth

Climate Change

Jobs, Poverty, Inequality and Migration



Brazil, China, Commodities, Corporate Finance, Economics, Emerging Markets, Emerging markets, global economy, IMF, International Trade, Latin America, Long term finance, Shadow Banking, Uncategorized, World Bank

Articles 2017 by Otaviano Canuto

Articles 2017 (Otaviano Canuto)


I – Global Economy


China and the new phase of trade expansion, OMFIF, Huffington Post, INTERFIMA, Seeking Alpha, December 2017

Two globalization processes will evolve in parallel, and might even reinforce each other. Much will depend on the extent to which anti-globalization sentiment rises or falls in key markets. Progress on trade deals like the new TPP and the wide reach of the Belt and Road should engender some confidence that international economic cooperation has not reached a nadir under President Trump – but can strike out in new and positive directions.


Overlapping Globalizations, Huffington Post, INTERFIMA, Seeking Alpha, November 2017

Current technological developments in manufacturing are likely to lead to a partial reversal of the wave of fragmentation and global value chains that was at the core of the rise of North-South trade from 1990 onward. At the same time, China – the main hub of the global-growth-cum-structural-change of that period – may attempt to extend the previous wave through its “One Belt, One Road” initiative.


The Metamorphosis of Financial Globalization Capital Finance International, Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, autumn 2017

After a strong rising tide starting in the 1990s, financial globalisation seems to have reached a plateau since the global financial crisis. However, that apparent stability has taken place along a deep reshaping of cross-border financial flows, featuring de-banking and an increasing weight of non-banking financial cross-border transactions. Sources of potential instability and long-term funding challenges have morphed accordingly.


Bloated central bank balance sheets  Capital Finance International, Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, spring 2017 (w/ Matheus Cavallari)

Central banks of large advanced and many emerging market economies have recently gone through a period of extraordinary expansion of balance sheets and are all now possibly facing a transition to less abnormal times. However, the fact that one group is comprised by global reserve issuers and the other by bystanders receiving impacts of the former’s policies carries substantively different implications. Furthermore, using Brazil and the U.S. as examples, we also illustrate how the relationships between central bank and public sector balance sheets have acquired higher levels of complexity, risks and opacity. (.pdf version here from OCPPC)


Global Imbalances on the Rise  Capital Finance International, winter 2017

Signs of a possible resurgence of rising global current-account imbalances have returned attention to the issue. We argue here that, while not a threat to global financial stability, the resurgence of these imbalances reveals a sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential. In addition, we approach how the re-orientation of the US economic policy already announced by president Trump suggests risks of new bouts of tension around global current account imbalances.


NAFTA at the Crossroads  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, May (w/ Michael McKeon and Samuel George)

The U.S. Senate voted to confirm Robert Lighthizer as United States Trade Representative last week, rounding out President Donald Trump’s cabinet and giving momentum to his trade agenda. At his swearing-in ceremony on May 15, Ambassador Lighthizer predicted that President Trump would permanently reverse “the dangerous trajectory of American trade,” and in turn make “U.S. farmers, ranchers and workers richer and the country safer.” This policy shift will begin in earnest in the coming weeks, when Lighthizer meets with congressional trade leaders to discuss the administration’s plan to renegotiate the North American Free Trade Agreement (NAFTA).


II – Infrastructure Finance


Bridging Finance and Infrastructure, Cornell on Emerging Markets, December 1, 2017 (w/ Aleksandra Liaplina)

A bridge between private sector finance and infrastructure can be built if properly structured projects are developed, with risks and returns distributed in accordance with different incentives of stakeholders.


Filling the infrastructure financing gap,  OMFIF, Huffington Post, INTERFIMA, Seeking Alpha, December 2017

Infrastructure investment has fallen short of what is needed to support potential growth. At the same time, financial resources in world markets have contended with low long-term interest rates, while opportunities for greater returns from potential infrastructure assets are missed.


Matchmaking Finance and Infrastructure  Capital Finance International, Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center summer 2017 (w/ Aleksandra Liaplina)

The world economy – and emerging market and developing economies in particular – display a gap between their infrastructure needs and the available finance. On the one hand, infrastructure investment has fallen far short from of what would be required to support potential growth. On the other, abundant financial resources in world markets have been facing very low and decreasing interest rates, whereas opportunities of higher return from potential infrastructure assets are missed. We approach here how a better match between private sector finance and infrastructure can be obtained if properly structured projects are developed, with risks and returns distributed in accordance with different incentives of stakeholders. (.pdf version here from OCPPC)


III – Brazil


Brazil’s Economic Deliverance Project Syndicate, September 28

Brazil’s proliferating corruption scandals have imposed substantial costs on some of the country’s largest companies. But, in the long term, today’s efforts to strengthen the rule of law and ensure fair market competition will prove to have been well worth it.


Dissolving corruption in Brazil  OMFIF, Huffington Post, INTERFIMA, Seeking Alpha, October  

The prevalence of crony relationships between public and private agents is neither new to Brazil nor singular to the country. The dissolution of this framework, even if painful in the short term, has great potential to create economic, political, and social gains in Brazil, and may provide an example for other countries around the world.


Does Brazil’s Sector Structure Explain Its Productivity Anemia?   Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, June (w/ Fernanda De Negri)

Brazil’s labor and total-factor productivity (TFP) have featured anemic increases in the last decades. As we illustrate here, contrary to common view, sector structures of the Brazilian GDP and employment cannot be singled out as major determinants of productivity performance. Horizontal, cross-sector factors hampering productivity increases seem to carry more weight.


Long-term finance and BNDES tapering in Brazil  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, June (w/ Matheus Cavallari)

One major policy issue in Brazil is how to boost productivity, while following a path of fiscal consolidation that will take at least a decade to bring the public-debt-to-GDP ratio back to 2000 levels. The productivity-boosting agenda includes not only the implementation of a full range of structural reforms, but also recovering and upgrading the national infrastructure and other long-term investments. Given that fiscal consolidation has already been leading to less transfer of funds—in fact, the reversal—from the Treasury to the National Economic and Social Development Bank (BNDES) and a consequent downsizing of the latter’s operations, pursuing the double objective of raising productivity and adjusting fiscal accounts will require an expansion of alternative sources of long-term asset finance.


Brazil’s Pension Reform Proposal is Necessary and Socially Balanced  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, April

Last week the World Bank released a Staff Note analyzing the pension reform proposal sent last December by Brazil’s Federal Government to Congress. It concludes that:  “… the proposed pension reform in Brazil is necessary, urgent if Brazil is to meet its spending rule, and socially balanced in that the proposal mostly eliminates subsidies received under the current rules by formal sector workers and civil servants who belong to the top 60 percent of households by income distribution.” With the help of some charts extracted from the note, we summarize here some of the reasons for such a statement.


The Brazilian debt hangover  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, January

With the help of five charts, we approach the Brazilian credit cycle, the downward phase of which helps understand why the post-crisis recovery has been so hard to obtain. In our view, the profile of such a credit cycle in effect points to it as a special chapter of our previously approached determinants of the Brazilian economic crisis.


The Brazilian productivity anemia  Cornell on Emerging Markets, April 2017

Brazil has been suffering from “anemic productivity growth”. This is a major challenge because in the long run, sustained productivity increases are necessary to underpin inclusive economic growth. Without them, increases in real labor earnings tend to conflict with global competitiveness; collecting taxes in order to fund government expenditures on infrastructure and social policies becomes a heavy burden; returns to private investment becomes harder to achieve; and ultimately citizens will have less access to high-quality goods and services at affordable prices. The focus on urgent fiscal reforms adopted by the new government– public spending cap, social security reform – must be accompanied by action on the productivity front.


IV – Emerging Markets


Beyond the Ballot: Turkey’s Economy at the Crossroads  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, March 2017 (w/ Sam George)

In the current environment, Erdogan is no longer striving to prove Turkey is ready for the EU and many believe that this course has rendered Turkish accession extremely unlikely, at least in the near term. From a purely economic standpoint, a political falling out would be a shame. The European Union is the most important trading partner for Turkey, and 40 percent of Turkey’s exports are destined for European countries. Turkey has increasingly become a part of European production chains for manufacturing as well. If political ties are not deepened, these economic links may not reach their full potential. In the meantime Turkey’s economy continues to grow, and the country maintains its momentum. But as Turks prepare to take to the polls to address a political crossroads, they must not lose track of the economic crossroads bearing down on them from beyond the bend.


Colombia: getting growth, getting peace  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, March 2017 (w/ Diana Quintero)

The Santos administration has delivered on two of its main promises: sign a peace agreement with the FARC guerrilla and get approved a significant structural tax reform. We approach here why both are expected to become strong pillars to help keep the growth-cum-poverty-reduction momentum of the last decades.


Cuba Online  Huffington Post, INTERFIMA, Seeking Alpha, OCP Policy Center, August 2017 (with Sam George)

Dual transitions are under way in Cuba. The island is slowly opening its economy, and a new crop of younger political leaders, potentially more open to democratic norms, waits in the wings. A third transition, the rise of digital access, is also in an early stage. But it is this third transition that arguably has the most momentum and could significantly accelerate the first two.