Did you know that, at the end of last year, the value of Australians'
equity investments abroad exceeded the value of foreigners' equity
investments in Australia by more than $23 billion?
It's the first time
we've owned more of their businesses, shares and real estate ($891
billion worth) than they've owned of ours ($868 billion).
These
days in economics there's an easy way to an exclusive: write about
something no one else thinks is worth mentioning, the balance of
payments. We'll start at the beginning and get to equity investment at
the end.
Before our economists decided the current account
deficit, the foreign debt and our overall foreign liability weren't
worth worrying about, we established that, when measured as a percentage
of national income (gross domestic product), the current account
deficit moved through a cycle with a peak of about 6 per cent, a trough
of about 3 per cent and a long-term average of about 4.5 per cent.
Those
dimensions were a lot higher in the global era of floating exchange
rates than they'd been in the era of fixed exchange rates (which ended
by the early '80s). This worried a lot of people, until eventually
economists decided the new currency regime meant there was less reason
to worry.
This explains why economists haven't bothered to note
that for four of the past five financial years, the figure for the
current account deficit as a percentage of GDP has started with a 3.
And, as we learnt earlier this month, the figure for the year to
December was 2.9 per cent.
So it seems clear that recent years
have seen a significant change in Australia's financial dealings with
the rest of the world. And the consequence has been to lower the average
level of the current account deficit.
The conventional way to
account for this shift is to look for changes in exports, imports and
the "net income deficit" - the amount by which our payments of interest
and dividends to foreigners exceed their payments of interest and
dividends to us.
The first part of the explanation is obvious:
over the past decade, the world's been paying much higher prices for our
exports of minerals and energy. This remains true even though those
prices reached a peak in 2011 and have fallen since then.
On the
other hand, the prices we've been paying for our imports have changed
little over the period. So, taken in isolation, this improvement in our
"terms of trade" is working to lower our trade deficit and, hence, the
deficit on the current account.
Next, however, come changes in the
quantity (volume) of our exports and imports. Here, over the full
decade, the volume of imports has grown roughly twice as fast as growth
in the volume of exports. Until the global financial crisis, we were
living it up and buying lots of imported stuff. And maybe as much as
half of all the money spent on expanding our mines and gas facilities
went on imported equipment.
The more recent development, however,
is that the completion of mines and gas facilities means enormous growth
in the volume of our mineral exports - with a lot more to come. At the
same time, as projects reach completion there's a big fall in imports of
mining equipment. That's a double benefit to the trade balance and the
current account deficit.
Turning to the net income deficit, it's
been increased by the huge rise in mining companies' after-tax profits,
about 80 per cent of which are owned by foreigners. Going the other way,
world interest rates are now very low and likely to stay low.
Put
all that together and it's not hard to see why current account deficits
have been lower in the years since the financial crisis, nor hard to
see they're likely to stay low and maybe go lower in the years ahead.
The
current account deficit has to be funded either by net borrowing from
foreigners or by net foreign "equity" investment in Australian
businesses, shares or real estate. This means the current account
deficit is the main contributor to growth in the levels of the national
economy's net foreign debt, net foreign equity investment and their sum,
our net foreign liabilities.
Historically, our high annual
current account deficits worried people because they were leading to
rapid growth in the levels of our net foreign debt and net total
liabilities.
But looking back over the past decade, and measuring
these two levels relative to the growing size of our economy (nominal
GDP), there's no longer a clear upward trajectory. Indeed, it's possible
to say our net foreign debt seems to have stabilised at about 50 per
cent of GDP, with net total liabilities stabilising a little higher.
Over
the decades, the level of net foreign equity investment in Australia
has tended to fall as big Aussie firms become multinational by buying
businesses abroad and Aussie super funds buy shares in foreign
companies, thus helping to offset two centuries of mainly British,
American, Japanese and now Chinese investment in Aussie businesses.
But
the net total of such equity investment is surprisingly volatile from
one quarter to the next, being affected not just by new equity
investments in each direction, but also by "valuation effects" - the ups
and downs of various sharemarkets around the world as well as the ups
and downs in the Aussie dollar.
Between the end of September and the end
of December, net foreign equity investment swung from a net liability
of $27 billion to a net asset of $23 billion. This was mainly because of
valuation effects rather than transactions, so I wouldn't get too
excited.
What it proves is that, these days, the value our equity
investments in the rest of the world isn't very different from the value
of their equity investments in Oz.
