1. Current Account, Global
Imbalances & BOP

2. 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

3. Persistent & Large Current Account Deficit
Countries should Devalue & Liberalize.
Is this good advice?
G140868E
Muhammad fahminizam
Bin kamarolzaman

4. a measurement of a country’s trade whereby the value
What is current account
of goods and services it imports is more than the
value of goods and services it exports.
deficit
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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

10. 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

11. It attracts portfolio foreign investments which Are generally short-term and
easily liquidated instead of more long term and harder to dispose of
Negative quickly
effects of
liberalisation
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

12. Thailand as an examples in devaluation and
Devaluation and liberalisation analysis
liberalisation between 1997-1998 asian financial crisis
on the south east asian country
Pre-financial crisis(1990s)
Financial crisis(1997-1998)
(Thailand)
Post-financial crisis(1999-2000s)

13. 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.

14.  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

15.  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

16.  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

17. 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

18. 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

19. 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.

20. 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.

21.  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

22. 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

23. 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.

24. GLOBAL IMBALANCES
 Phidel Marion
G. Vineles

25. 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

26. 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

27. 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

28. Outlook for Imbalances over
the Medium Term
Source: IMF, 2014

29. 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.

30. 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.

32. 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

33. Source: Lee & Park, 2013

34. Source: Lee & Park, 2013

35. 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.

36. 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.

37. 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.

38.  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.”

39. 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.

40. 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.”

42. Up and Down RMB Exchange
Rate

43. 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.

44. 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.

45. 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).

46. 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%.

47. 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.

48. 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

49. “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

50. Current Account BOP
May Pyeetson Aung
G1400899G

51. 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.

52. 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.

53. 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)

54. Balance of Payments

55. BOP

56. 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.

57. 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,

58. 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

59. 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.

60. 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.

61. 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.

62. 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.

63. 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.

64. 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.

65. 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.

66. Re-balancing acts?
 Deflation
 Depreciation
 Devaluation
 Ex-change
control

67. 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.

68. 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.

69. 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.

70. 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.

71. 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.

72. 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.

73. 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.

74. 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.

75. 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.

76. “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.

77. Current Account in Vietnam

78. Vietnam

79. 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.

80.  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.

81. • 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

82. 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.

83. 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.

84. BOP Surpluses Despite Trade
Deficits

85. 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.

86. 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.

87. 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.

88. 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.

89. 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.

90. Our Conclusions…

91.  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.

92. 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.

94. 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

95. Thank you for your kind
attention!
^__^
Presented by~
May Pyeetson Aung
Muhammad Fahminizam bin Kamaraolzaman
Phidel Marion G. Vineles
Sun Cong