overview: external sector in myanmar - imf · overview: external sector in myanmar introductory...

Overview: External SectorOverview: External SectorIn MyanmarIn Myanmaryy

Introductory Workshop toFinancial Programming and PoliciesFinancial Programming and Policies

Yangon, MyanmarJanuary 19–23, 2015

Jan GottschalkTAOLAMTAOLAM

IMF-TAOLAM training activities are supported by funding of the Government of Japan

OutlineOutline

I. External Sector Overview

II. Useful Concepts & Indicators

III. Balance of Payments Developments in Myanmar

IV. External Sector Considerations

2This training material is the property of the International Monetary Fund (IMF) and is intended for the use in IMF courses. Any reuse requires the permission of the IMF.

External Sector OverviewExternal Sector Overview

Basic structure of Balance of Payments

Ab

Basic structure of Balance of Payments

Current Account

Capital and Financial Account

bove the liine

O ll B l

Errors and omissions

Financing

Below th

Overall Balance

3

he line


Basic Structure of current account balance ( l t ti )

Trade Balance (Goods) = Exports - Imports

(real transactions)

Trade Balance (Goods) = Exports - Imports

Trade Balance (Services) = Exports - Imports

Net Income (e.g., Interest, Profit Repatriation)

N t T f (Offi i l P i t )Net Transfers (Official, Private)

Current Account Balance

4


Basic Structure of capital and financial account balance (financial transactions)

Capital Account (e.g., Debt forgiveness)

(financial transactions)

Financial AccountDirect Investment

Portfolio Investment

Other Investment (e g net loans disbursements minus repayment;Other Investment (e.g., net loans—disbursements minus repayment; currency and deposits)

5

Financial and Capital Account Balance


Flows StocksBasic structure: financing

-Overall Balance = Financing

Change in Net Financial Reserves Foreign Reserve Levels

Ch iChange in Arrears Stock of Arrears

6

Exceptional Financing


CurrentAccount

•Trade•Services

OverallBalance

Surplus?Accumulate

reserves•Income•Transfers

BalanceWhat

happensto D fi i ?

Financing

to reserves?

Deficit?Run downreservesFinancing

•Cap & Fin Account

Putting it all together …

7

Putting it all together …

OutlineOutline



III. Balance of Payments Developments in Myanmar


8

Useful Concepts & IndicatorsUseful Concepts & Indicators

The exchange rateKyat-US dollar exchange rate:• Devaluation• Devaluation• Appreciation

What determines theWhat determines the exchange rate?

For what does the h t tt ?exchange rate matter?

But first, two different ways of measuring the

9

ways of measuring the exchange rate …


Measuring the Exchange Rate as Kyat/US$ RateKyat/US$ Exchange Rate

1,000

1,050

Kyat/US$ Exchange Rate

950

1,000

850

900

800 2012 A

2012 J

2012 A

2012 O

2012 D

2013 F

2013 A

2013 J

2013 A

2013 O

2013 D

2014 F

2014 A

2014 J

2014 A

2014 O

10

Apr

un

Aug

Oct

Dec

Feb

Apr

un

Aug

Oct

Dec

Feb

Apr

un

Aug

Oct


Measuring the Exchange Rate as US$/Kyat Rate

0.00120

0.00125

US$/kyat Exchange Rate

0.00110

0.00115

0.00100

0.00105

0.00095 2012 Ap

2012 Ju

2012 Au

2012 Oc

2012 De

2013 Fe

2013 Ap

2013 Ju

2013 Au

2013 Oc

2013 De

2014 Fe

2014 Ap

2014 Ju

2014 Au

2014 Oc

11

pr n ug ct ec

eb pr n ug ct ec

eb pr n ug ct


What determines the exchange rate?

• Availability of foreign exchange

Depends on …Balance ofBalance of Payments Central bankCentral bank intervention

12


Fundamental exchange rate factor: price differentials

Similar good in two countries should cost about the same

exchange rate t f icorrects for price

differential

Called Called ‘Purchasing Power Parity’

13


Real Exchange Rate

Comparing the price level in Myanmar with that of other countries, all expressed in US$:

What does it mean if the real exchange rate increases?• Goods in Myanmar become more expensive relative to their

t t i th USAcounterparts in the USA• Kyat becomes more expensive in terms of US dollarsThis is called a real appreciation: what do you think is the impact

14

This is called a real appreciation: what do you think is the impact on the economy? (Think in terms of competitiveness …)


The NEER is a weighted average of indexed nominal bilateral ratesNominal Effective Exchange Rate (NEER)

g g• Bilateral cross rates are expressed in foreign currency per domestic currency

and indexed to 100 [note: an increase in US$/kyat rate means the kyat appreciates against the US dollar]

Exchange

• The more “important” a competitor, the higher the weight of its currency

NEER

ExchangeRates

Averagingf lformula

Weights

15


Myanmar NEER and US$/kyat Exchange RateNominal Effective & US$/kyat Exchange Rate (2012:4 100)

100

105

Nominal Effective & US$/kyat Exchange Rate (2012:4=100)

95

US$/k t

85

90 US$/kyat

Nom Eff

80 2012 Ap

2012 Ju

2012 A u

2012 Oc

2012 De

2013 Fe

2013 Ap

2013 Ju

2013 A u

2013 Oc

2013 De

2014 Fe

2014 Ap

2014 Ju

2014 A u

2014 Oc

16

pr n ug ct ec

eb pr n ug ct ec

eb pr n ug ct


Myanmar Real Effective Exchange RateEffective Exchange Rate Developments (2012:4 100)

105

110

Effective Exchange Rate Developments (2012:4=100)

95

100

Real Eff

85

90Nom Eff

Rel Price

80 2012 Ap

2012 Ju

2012 A u

2012 Oc

2012 De

2013 Fe

2013 Ap

2013 Ju

2013 A u

2013 Oc

2013 De

2014 Fe

2014 Ap

2014 Ju

2014 A u

2014 Oc

17

pr n ug ct ec

eb pr n ug ct ec

eb pr n ug ct


For what does the exchange rate matter? External competitiveness

Export volume = f ( PD/PD* ·ER); YR*; )

External competitiveness

Export volume f ( PD/PD ER); YR ; …)

Price Foreign income

where:• ER = nominal exchange rate (in home currency per $)

Price effect (-)

Foreign incomeeffect (+)

ER nominal exchange rate (in home currency per $)• PD = domestic price level (in home currency)• PD* = foreign price level (in $)• YR* = foreign income (proxied by real GDP)• YR = foreign income (proxied by real GDP)

18


Reserve adequacy

I l ti t t d In relation to trade: import coverage Rule of thumb: reserves should cover 5-6 months of imports (IMF analysis)(IMF analysis)

19


In relation to capital flows: vulnerability to sudden capital outflows?

20

OutlineOutline



III. Balance of Payment Developments in Myanmar


21

Balance of Payment Developments in MyanmarBalance of Payment Developments in Myanmar

22


Analyze Myanmar’s BOP developments both in US dollar terms and in percent of GDP:US dollar terms and in percent of GDP:

Your task!

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Let’s generate a BOP forecast for 2014/15:We need a BOP forecast both in US dollar terms and in % of GDP:We need a BOP forecast both in US dollar terms and in % of GDP:• The first step is generating a forecast for the kyat/US$

exchange rate (which we need for computing the GDP ratios): g ( p g )consider the monthly development of the exchange rate and extrapolate it to the end of the fiscal year

• The second step is adding the BOP forecast in US dollar terms• The second step is adding the BOP forecast in US dollar terms: this is complicated and for now we simply use the IMF forecast in the last Article IV report

• What do you see? Consider … … the main developments in 2014/15 projected by the IMF

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what does this imply for the build up of reserves?

OutlineOutline



III. Balance of Payment Developments in Myanmar


25

External Sector ConsiderationsExternal Sector Considerations

Main considerationsFrom a macroeconomic viewpoint, analysis of external sector often focuses on:

• External sustainability

• Growth contribution• Growth contribution

26


External sustainabilityKey question: if country runs current account deficits, are they sustainable?

Thi i 2 0%

4.0%

Contributors to the Current Account Balance (in percent of GDP)

This issue matters for Myanmar! 4 0%

-2.0%

0.0%

2.0%

Net transfers

Net income

Services balancey

-8.0%

-6.0%

-4.0% Services balance

Trade balance

Current account

27


Consider ThailandExternal sustainability

Th il dConsider Thailand crisis:• Large deficits 40

50

10

15Thailand

Large deficits prior to crisis• Inability to 20

30

40

0

5

10

finance deficits was critical cause of crisis

0

10

-10

-5

1 1 1 1 1 1 1 1 1 1cause of crisis• … and led to currency crisis

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Thailand: Current Account Balance (in % of GDP)

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currency crisisBaht/US$ fx rate (right axis)


Consider Mongolia crisis:External sustainabilityConsider Mongolia crisis:• Mongolia has large natural

t200010

Mongolia

resource exports• Current account surplus prior to 1000

1500

-5

0

5

p pcrisis• Sharp drop in international

0

500

-15

-10

5

2 2 2 2 2 2 2 2 2 2international commodity prices during GFC led to current account and

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Mongolia Current Account Balance (in % of GDP)

29

current account and currency crisis

Togrog/US$ fx rate (right axis)


Important factor for sustainability of current accountExternal sustainability

Important factor for sustainability of current account deficits is how they are financed:• Stable financing

l kContributors to the Financial Account Balance (in

percent of GDPsource lowers risk of crisis

FDI is a fairly 6.0%

8.0%

10.0%

percent of GDP

Other flows• FDI is a fairly stable financing source

0.0%

2.0%

4.0%

6.0%

Other investment

Direct investment, net

• This is (mostly) good news for Myanmar!

-4.0%

-2.0%Capital and financial account

30

Myanmar!


Another important factor for sustainability of currentExternal sustainabilityAnother important factor for sustainability of current account deficits is levels of foreign exchange reserves:

• They serve as a b ff f

Does Myanmar

buffer in case of a crisis

• Does Myanmar have sufficient reserves?

31


Large expansion of manufacturing sector was key driverGrowth contributionLarge expansion of manufacturing sector was key driver of growth in Asia!• Export-driven growth strategy• Manufacturing-

l d FDIrelated FDI inflows

External• External competitiveness is key for this

32

strategy to work


R l h i i di t f t lGrowth contributionReal exchange is common indicator for external competitiveness

R l• Real appreciation undermines external competitiveness• Is Myanmar’s real appreciation since mid-2000s

33

since mid 2000s a problem?

OutlookOutlook

Next, we will explore in more detail …

• … the monetary sector, which helps with analyzing inflation and the exchange rateanalyzing inflation and the exchange rate.

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overview: external sector in myanmar - imf · overview: external sector in myanmar introductory...

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