Current account deficits in selected Emerging Market Economies

Abstract

The 2022 IMF External Sector Report paints a clear picture of large current account imbalances in the build-up to the global financial crisis (GFC). Many analysts have argued that one fundamental cause of the GFC was global financial imbalances caused by large current account imbalances between the United States as the leading deficit country and China as the leading surplus country. Thus, renewed interest in the current account dynamics emerged following the crisis. This paper gives an insight into current account adjustments using a comparative analysis between selected emerging market economies (Hungary, India, Mexico and South Africa). We answer the following question: Why did some countries with persistent current account deficits experience external crises and similar peers did not? Our analysis shows that the external crisis episodes from the countries that have had large and persistent current account deficits can be associated with sizeable current account deficits, appreciation of real exchange rate, low ratio of exports to GDP and depletion of international reserves. JEL Codes: F41, F49, F62