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Net Foreign Debt

the balance of all of the money Australia owes overseas countries minus the money that overseas countries owe Australia.

Two ways to measure Net foreign debt (NFD):

1. Public sector or or official government borrowing-Federal

2. Private sector or non-official borrowing

1. Public sector or or official government borrowing-Federal

state and local governments borrowing overseas money to finance budget deficit.

2. Private sector or non-official borrowing-

Large companies or banks who use foreign money to finance expansion or spending

Causes of net foreign debt

1. Lack of domestic savings

2. Many budget deficits- part of the deficits will be financed by selling Govt bonds to overseas i.e. borrowing abroad

1. Lack of domestic savings

Australians don’t save enough to finance investments and this has contributed to high interest rates. High AUD interest rates encourage our banks, firms to borrow from overseas

2. Many budget deficits

part of the deficits will be financed by selling Govt bonds to overseas i.e. borrowing abroad

Positive Effects of Foreign Debt

• can help to finance future expansion and grow productive capacity and potential GDP

• Provides access to cheaper credit than if this was borrowed locally, creating more favorable aggregate supply conditions for firms

Negative Effects of Foreign Debt

• May cause economic hardship as a result of rises in taxes or reduced budget outlays, in order to repay debt

• there is the burden of debt repayment for the future generations (Gen-z paying for Covid borrowng)

• Australia may lose its AAA credit rating resulting in higher borrowing costs

• Interest repayments abroad weaken our current account balance

Measuring the Net Foreign Equities

• foreign ownership of Australian assets, such as property and shares, minus the Australian ownership of foreign assets

• simple terms: the difference between the value of Australian assets owned by foreigners and the value of foreign assets owned by Australian’s

Causes of Net Foreign Equity

• negative NFE figure is Australia’s large pool of superanuation funds

• over $3 trillion of superannuation assets in Australia, many of which is invested overseas