# Foreign Debt



## mime (31 May 2005)

I thought Australia had little or no foreign debt. But then on the news it said it was about $400 million. What's going on?


----------



## It's Snake Pliskin (31 May 2005)

Compared to most countries in the western world we have a low debt level. There is still debt though.


----------



## roddy radar (1 June 2005)

Snake Pliskin said:
			
		

> Compared to most countries in the western world we have a low debt level. There is still debt though.




Hardly low as a percentage of GDP - what was that about a banana republic from Paul Keating?


----------



## Smurf1976 (1 June 2005)

Our current account deficit is amongst the highest in the world. Worse than the US.


----------



## Investor (1 June 2005)

Australia has one of the highest foreign debt per capita, in the world (owed largely by the banking sector). It used to be the highest for many years but might have been overtaken by America (I am waiting to read the latest figures).

The foreign debt which was $425 billion as at 31/3/05 is part of the net external liabilities which total around $1 trillion. Included in this is foreign ownership of ASX stocks (which they can sell anytime they want to); foreign ownership of unlisted companies (eg ING bank, ABN Amro, UBS, Merrills, Deutsche Bank, local arms of Citicorp/HSBC, etc.) and foreign ownership of commercial properties (hotel/office buildings); industrial buildings and residential apartments (many of the new apartments are foreign owned).

Australia's economy is one of the most economically exposed to foreign investment sentiments. A major withdrawal by foreign investors would lead to a severe economic recession.

Paul Keating warned of the dangers of becoming a "banana republic" in 1996.

Here is an article from The Age which provides some guidance:


*The borrowing binge consuming our future*
By Tim Colebatch
May 17, 2005

Forget the boom-time budget. We are living way beyond our means.

It's a strength of the Bracks Government that it understood what its predecessor achieved and kept up its legacy. It's a weakness of the Howard Government that it never understood what its predecessor achieved and let it rot.

The Kennett government's great achievements were to put state finances on a sustainable basis and make Victoria a good place to do business. Bracks and Brumby have kept up the fiscal stringency to a fault. We can argue over how well they have looked after business, but they certainly have tried.

Hawke and Keating's great achievements were to get us to accept tough, painful reforms to make Australia a good place to do business and to focus on generating exports and globally competitive manufacturing. Howard began with more reforms, but then switched to spending our money where it could best buy votes.

The Coalition never grasped the second part of the Hawke-Keating-Button legacy, which saw Australia's share of world exports grow in the late '80s and '90s as if it were an Asian tiger. Between 1986 and 1997 export volumes grew by 10 per cent a year, and manufactured exports by 15 per cent a year, swelling almost fivefold. Had that continued, Australia would be running trade surpluses.

But the 1996 budget junked most of the policies by which Labor achieved this. Since 1997, export volumes have grown by just 4 per cent a year, manufactured exports by 5 per cent. The World Trade Organisation reports that Australia sold just 0.99 per cent of world exports in 2004, down from 1.18 per cent in 1996.

Why does this matter? *Because we are living beyond our means. Since 1980, Australia as a nation has spent $105 for every $100 it has earned. To pay our way, we must increase exports faster than imports - not for one year, but for many*.

That should have been this budget's focus. Amid the war of words over its tax cuts and whether they will make the Reserve Bank lift interest rates (they won't), its real failure is something else. It is a wasted opportunity to win back lost competitiveness.

The Government tells us only the good numbers: GDP has grown rapidly, unemployment has fallen, real wages and net household assets have risen. It tells us good policy has led to sustained growth in demand, lifting all boats.

But it ignores the dark side, without which all this would have been impossible. Australia began the '80s with negligible foreign debt. *Now it is one of the world's largest debtor nations, owing a net $422 billion, more than half its output. And that debt is growing by $1 billion a week*.

Debt can be good for you. Companies use debt to invest in projects that increase their future income. Good governments do the same: the Bolte government went heavily into debt to build Victoria's infrastructure. Singapore and South Korea did so to make themselves export dynamos.

Households take on debt to buy or renovate homes, then repay it over time. We choose to limit consumption of other things so we can enjoy better housing. Our debts are born big, but shrink as they get older. If we can afford it, that's fine.

But there is no similarity between these debts and Australia's foreign debt. We are not borrowing to invest in income-creating projects but in housing. We are not paying back our debts; rather, each year we borrow more.

This budget did some good things. It removed the $300-million-a-year of "nuisance" tariffs Peter Costello imposed on manufacturers in 1996.

The Future Fund will lift savings and put money aside for future governments to pay debts we are running up now. The Government has yet to grasp the real nettle on welfare reform, but these changes should do more good than ill.

Labor's amendments can only be token. It just wants us to know it stands for making the tax cuts fairer, investing more to train skilled workers, and changing the Future Fund to an infrastructure fund.

I agree with two of those priorities, but they suggest that Labor, too, still hasn't got it.

Like Singapore and South Korea in the past, Australia needs to invest in its industry: its farmers, manufacturers and miners, who are competing in global markets against countries with much lower wages and/or far greater government support.

We cannot win global markets by undervaluing our currency, as China does. We cannot rebuild the tariff wall. But our governments can invest heavily in research and development to help industry create unique products that command premium prices.

We can put serious money and bite into the action agendas set up by John Moore as Industry Minister, which now lack money, teeth, or friends that matter. We can do far more to give business incentive to export and to produce here.

We don't know how and when Australia's borrowing binge will end. But end it will, and the top priority of any government should be to head off a bust by making our economic growth sustainable.

Both sides are failing that test.

Tim Colebatch is economics editor.


----------



## Investor (1 June 2005)

All downhill as Australia hits the skids
By Tim Colebatch
Economics Editor, The Age
Canberra
June 1, 2005

Australia could be entering an economic U-turn, with a deluge of figures showing that banks repaid more than $10 billion of foreign debt in the March quarter, annual credit growth slowed again in April, while the hottest April for 50 years sent department stores into free fall.

The signs of a slowing in Australia's debt-led consumer boom came as the Bureau of Statistics revealed that the current account deficit hit another record in the March quarter, mounting to a seasonally adjusted $15.6 billion, or 7.1 per cent of GDP.

Treasurer Peter Costello forecast a better result for the June quarter, with exports lifted by last month's sharp rises in coal and iron prices. The March trade deficit was $7.1 billion, just below December's record.

The Bureau of Statistics said exports had risen just 4 per cent since 2001 while imports swelled 50 per cent.

It said the imbalance of exports and imports in the March quarter would slice 0.3 per cent off GDP figures to be released today. Market forecasters tip a growth rate of just under 1 per cent.

"The earlier weakness (in GDP growth) now looks overstated," said Commonwealth Bank chief economist Michael Blythe. "Flat or falling prices have obscured the strength in consumer spending volumes."

*Net foreign debt rose by just $3 billion to $425 billion, roughly 50 per cent of GDP, as the banks pulled back from derivatives positions and repaid more foreign debt than they took on - a sharp change after borrowing a net $50 billion in 2004*.

The more subdued approach continued in April. Growth in household credit was just 0.8 per cent, half its average 2003 level, and retail sales fell 0.5 per cent.In a stunning twist, department store sales slumped 11 per cent after seasonal adjustment, a decline the Bureau attributed in part to unusually warm weather leading consumers to delay winter buying.

Even without seasonal adjustment, the bureau said, department store sales declined in what is usually a bumper month. By contrast, sales by all other retailers rose 1.2 per cent in raw terms and 0.4 per cent after seasonal adjustment.

The figures help explain why Coles Myer and DJs decided to launch this year's July sales in May. Even in smoothed trend terms, department store turnover has risen just 0.7 per cent in the past year.

In sharp contrast, sales jumped 7.4 per cent in household goods stores, 4.3 per cent in clothing stores and 6.7 per cent in recreational goods stores.

Mr Costello told Parliament retail trade appeared to have softened. "This is consistent with other evidence that Australian households are moderating consumption," he said.

*But Mr Costello ducked for cover when shadow treasurer Wayne Swan reminded him that in 1995 he had exclaimed about a smaller current account deficit: "How long do we have to watch this convoy of trucks run over Australia month after month?"*

*Mr Swan said Australia had now had 41 trade deficits in a row, and economists were warning that the net income deficit could become unsustainable*.

*"When this Government was in opposition, they had a debt truck," Mr Swan said. "They would need a semi-trailer now. "*

*"As a country we're living beyond our means. We're importing too much, we're selling too much of the farm, and we're borrowing too much from the rest of the world."*


----------



## Investor (1 June 2005)

Also in The Age today:

Back in 1986, then treasurer Paul Keating claimed Australia risked becoming a banana republic when the current account deficit (CAD) breached 6.2 per cent of GDP.

Today's first-quarter CAD was a record 6.8 per cent of GDP - only Hungary and Bulgaria are worse (excluding the genuine banana republics).

Australia's CAD was a record $15.7 billion in the March quarter. Another troub-ling rise in the income deficit and a deteriorating trade balance triggered the unex-pectedly large external imbalance. The net income balance fell $224 million (income debits surged by $774 million, or 6 per cent), partly due to rising interest rates overseas and the blow-out in overseas debt. The goods deficit rose $231 million as farm exports fell 5 per cent, and consumer goods imports rose 5 per cent.

Australia's external deficit is the third-highest in the developed world, yet JPMorgan expects the deficit to get worse before it gets better. The trade deficit probably will shrink as exports rebound, but the net income deficit will blow out as over-seas interest rates rise. The trade balance represents only 38 per cent of Australia's cur-rent account, so any improve-ment will be swamped by the blow-out in net income deficit - 62 per cent of the total.

The income deficit is likely to become even larger as interest rates rise offshore. That means Australia's interest payments on foreign invest-ment in debt instruments in Australia will rise. On top of that, more extensive foreign ownership of previously Australian-owned assets means dividend payments are rising too. JPMorgan forecasts the CAD to peak above 7 per cent of GDP in 2006.

By then, Australia will have the second-largest CAD in the world (behind Hungary).

A growing CAD will be the biggest headwind for the $A. *JPMorgan has revised down $A forecasts for 2005, with a year-end tip of 75  ¢ against the $US, and 73  ¢ by end of March 2006. The forecast long-term average is unchanged at 67  ¢*.

Jarrod Kerr is an economist at JPMorgan Securities Australia.


----------



## mime (1 June 2005)

So the debt is privately owned not government owned? We should be fine. With the world as it is all westen counties have a trade deficit. It's the result of having a stronger currency. When the government has major debt then the worry sets in.


----------



## markrmau (1 June 2005)

mime said:
			
		

> So the debt is privately owned not government owned? We should be fine.



I don't think we get off all that easy. This foreign investment is part of what has been making us grow so strongly and provide high employment rates. However, if the FX markets start thinking our net foreign debt is too high, they might start selling our dollar. This will make the value of the foreign investments drop, so they will start pulling out of Australia. Our miracle economy will fall straight of a cliff into recession - housing prices, ecenomic activity, consumption... - everything will head south. As long as the rest of the world wants our minerals, we should be ok though.

Maybe someone else can provide a better explanation though.


----------



## Smurf1976 (1 June 2005)

markrmau said:
			
		

> I don't think we get off all that easy. This foreign investment is part of what has been making us grow so strongly and provide high employment rates. However, if the FX markets start thinking our net foreign debt is too high, they might start selling our dollar. This will make the value of the foreign investments drop, so they will start pulling out of Australia. Our miracle economy will fall straight of a cliff into recession - housing prices, ecenomic activity, consumption... - everything will head south. As long as the rest of the world wants our minerals, we should be ok though.
> 
> Maybe someone else can provide a better explanation though.



I trade forex and looking at both the long term charts and thinking about the fundamentals I am of the view that the AUD is set to fall. And I don't mean fall by just one or two cents.

I have always thought that our "real" industries can be measured in terms of importance by how much they export. For example, most people would say the biggest industry in Tasmania is tourism. I would say it is the Zinifex plant in Hobart which accounts for more than a sixth of the state's exports. I think in terms of export $ rather than jobs created. 

Unfortunately, most Aussies think the important industries are things like tourism, hospitality, financial services, banking and the like. Few would start their list with coal mining, aluminium smelting etc. 

At the risk of being overly political, the easy way to identify important export industries in my opinion is to see which ones the greens don't like. Sorry to say it but history to date suggests it's true despite these industries generally not being the environmental ogres they are portrayed as being. They are big business and therefore an easy target. BIG exporting business - just what we need if we are going to solve the deficit problem! (If the opponents ever think about just how incredibly polluting their beloved tourism really is their attitude might change...). Productive industry faces massive hurdles in this country unfortunately. (I'm by no means anti-environment, I just like facts in a debate rather than emotion.)

I note the flat to inverted (depending on which timeframes you look at) yield curve which historically is a VERY good indicator of a coming recession.

Just one problem. If a recession was on the way then wouldn't the All Ords be trending noticeably lower? (Or have we recently seen a major top???).


----------



## mime (1 June 2005)

I don't think a recession is comming with a Liberal govt is in power. I think it's just BIS doomsdaying. And whiles China's economy is still strong we'll be fine. China sinks(asia crisis type problem) we will be in major problems.


----------



## markrmau (2 June 2005)

I think at this stage we are at the mercy of international events - regardless of who is in power here. 



			
				Smurf1976 said:
			
		

> I note the flat to inverted (depending on which timeframes you look at) yield curve which historically is a VERY good indicator of a coming recession.
> 
> Just one problem. If a recession was on the way then wouldn't the All Ords be trending noticeably lower? (Or have we recently seen a major top???).




I really don't know of course, but my guess is we won't see a resession while the china / india are growing strongly. I think that the previous recessions following inverted yeild curves have occurred when the initial interest rates were a lot higher than now. 

Why the inverted yeild curve? Is this an outcome of the worlds current peculiar fiscal situation? Our inverted yeild curve could just be in sympathy for America's inverted yeild curve. The US inverted yeild is because Asian central banks keep buying US bonds. What percentage of 10yr bonds are owned by Asian central banks? (how distorting is their influence?)

Maybe things will be different this time? (the yeild curve will rise rather than the economy following the curve south). Then again, everyone thought things were different in the dotcom bubble.

BTW, this is not my area of expertise.


----------



## markrmau (2 June 2005)

Forget that. The US yeild curve isn't inverted now, though I believe 10yrs has broken below 4%


----------

