하나은행 하나금융경영연구소

Global imbalances have been emerged as a key issue for global economy along with the financial crisis

● As global imbalances have been pointed out as one of the key reasons for the financial crisis, interest in how global imbalances will develop in connection with sustainable development of global economy are growing,

- Since reform of the current international monetary order as well as foreign exchange rate adjustment and macroeconomic policy coordination is likely to be requested to resolve global imbalances, discussion over global imbalances is closely related to re-establishment of global governance.

● Against this backdrop, the future direction of global imbalances and its impacts on key foreign exchange rates were reviewed.

 

Review of existing discussion made before the financial crisis : Opinions over substantiality of global imbalances depending on their reasons are divided

● Global imbalances defined as global current account imbalances have significantly expanded in its size and duration since in the mid-to-late 2000s compared to before.

● The equilibrium approach considering such global imbalances as a sustainable trend focuses on cross-boarder flow of funds, that is dollar recycling, instead of current account imbalances.

- In other words, it would not difficult that US makes up for its massive current account deficit because massive savings accumulated by emerging nations due to their rapid economic growth 1) stably yield high returns under the financial system of advance nations or 2) flow into advanced deficit countries, especially US, to prepare for export based hight growth resulting from a undervalued exchange rate or a risk of rapid outflow of foreign currencies.

● The disequilibrium approach considering global imbalances as an unsustainable trend points out that global imbalances have spread too much to be sustainable and are attributable to macro-imbalances of leading nations.

- Global imbalances need to be resolved for the following reasons: Global imbalances are caused by 1) savings glut resulting from export driven growth strategies and lack of social infrastructures and 2) consumption overpopulation (over-investment) resulting from high level of consumption and failure of monetary policies in advanced deficit nations, especially US.

 

Post financial crisis : Global imbalances have significantly decreased, but substantiality of a downward trend is not certain

● There are difference opinions regarding whether global imbalances are a direct reason for the financial crisis. However, there is no objection to the idea that cross-border capital flows and macroeconomic policy management methods resulting in global imbalances are closely related the financial crisis.

● Meanwhile, compulsory demand adjustment and unstable financial system in advanced nations since the financial crisis will contribute to a decrease in global imbalances. However, considering emerging nations' demand for foreign reserves or lack of macroeconomic policy coordination, global imbalances are less likely to decrease to the sustainable level.

Demand adjustment and exchange rate adjustment were discussed at G20 to address global imbalances

● As a recent trend of global imbalance decrease is temporary and it is likely to increase again, demand adjustment and exchange rate adjustment aimed at decreasing global imbalances have been discussed at the G20. However, macroeconomic policy coordination between nations are not easy now.

● Without a global agreement, advanced nations have actively engaged in quantitative easing while emerging nations have implemented capital control measures and have intervened in the foreign exchange market. Accordingly, there is a risk of tougher exchange rate conflict and stronger protectionism.

● In addition, since global imbalances are one of the consequences of the world's current currency system under which an individual nation's single currency is used as a key currency, global imbalances are likely to support discussion over reform of the world's currency system.

 

Amid the continuously weak dollar, surplus countries will face increasing pressure to appreciate their currency

● Considering massive current account deficit and fiscal deficit, a weak dollar trend will be hard to change. In particular, despite such a dollar risk, the dollar's key currency status which has prevented weak dollar will be weak, possibly leading to a sharp decrease in the dollar.

● Long-term economic downturn resulting from the financial crisis will put pressure on the euro zone to depreciate the euro. However, since current account surplus trend remains unchanged and most impacts of the financial crisis have been already reflected, the euro will rise again.

● Considering a long-term current account surplus trend and a carry trade decrease since the financial crisis, the yen/dollar exchange rate will continue to decrease.

● Since half of US current account deficit is attributable to China, yuan appreciation will be inevitable. For its part, China will also support yuan appreciation because it is required to change its growth structure into domestic demand based one.

 

Amid a weak dollar, emerging nations will face increasing pressure to appreciate their currency

● In the process of global imbalance adjustment, Korea's export to US will slow down. However, considering the buffer effect of China's domestic demand increase, Korea's trade imbalances decrease will be relatively smooth.

● Favorable economic fundamentals such as relatively rapid growth and current account surplus in Korea will continuously lead to inflows of foreign capital of foreign investment, but such inflows will gradually decrease.

● Besides, considering improvement of foreign liquidity conditions and upward pressure on won resulting from yen and yuan increase trend after the financial crisis, the won/dollar exchange rate decrease (won appreciation) will continue.

● Based on mid-and long-term interrelation between current account balance and real effective exchange rate, the won/dollar exchange rate will reach 1,000 won in 2012.