Essay # 5 ~ Analyse how changes in Australia's BOP impact external stability in the Australian economy (20 marks).

Introduction

External stability, being the goal of financing import expenditure with export income, is measured as a percentage of GDP, specifically, the CAD as a % of GDP ≤ 5% of GDP, net foreign liabilities ≤ approximately 60% of GDP and via a stable exchange rate. In recent years, Australia’s external stability has strengthened. The current account shifted from a -2.1% deficit in 2018 to a 3.5% surplus in 2021, while net foreign liabilities fell from 64% to 32% of GDP—the lowest level since the mid-1980s. However, the Australian dollar depreciated from USD 0.77 (2018) to USD 0.63 (2025).

PDEAL 1 ~ Trade stuff (BOGS)

A major change in Australia’s BOP has been the balance of goods and services (BOGS) that transitioned from a deficit to a surplus due to a surge in iron ore exports. This was driven by Australia’s largest trading partner, China's strong demand for iron ore to produce steel. In 2021, Australia exported 694 million tonnes to China, slightly down from 713 million tonnes in 2020, contributing about 70% of total iron ore exports and 60% of China’s imports. This demand was fueled by China’s steel manufacturing industry responsible for infrastructure and property development. As a result, Australia’s iron ore export earnings rose to a record $154.2 billion in 2021, up 32% from 2020, comprising over 52% of Australia’s mineral export earnings recorded as a higher credit on BOGS. With credits being greater than debits, assuming ceteris paribus, the BOGS surplus grew to $66.28 billion USD, a 31% increase, boosting the current account surplus to USD $14.3 billion in September 2021 and strengthening Australia’s external stability.

OR (If you need a more structured PDEAL, try a simple version)

A major change in Australia’s BOP has been the balance of goods and services (BOGS) transitioning to a surplus. BOGS records exports such as mining, manufacturing, rural and services (recorded as credits) and imports such as capital, consumer goods, intermediate goods and services (recorded as debits). In recent years, there has been a global surge in iron ore exports. This was driven by China's strong steel demand, Australia’s largest trading partner. In 2021, Australia exported 694 million tonnes to China, making up 70% of total iron ore exports and 60% of China’s imports. This demand was fueled by China’s steel manufacturing industry responsible for infrastructure and property development. Australia’s iron ore export earnings rose to $154.2 billion in 2021, up 32% from 2020, comprising over 52% of Australia’s mineral export earnings recorded as a higher credit on BOGS. With credits being greater than debits, assuming ceteris paribus, the BOGS surplus grew to $66.28 billion USD, a 31% increase, boosting the current account surplus to USD 14.3 billion in September 2021 and strengthening Australia’s external stability.

PDEAL 2 ~ Financial stuff (FDI)

Another major change in Australia's BOP has been the emergence of a financial account deficit, driven by the fall in foreign investment relative to Australian investment abroad (AIA). In 2018, foreign investment stood at $3,514.4 billion and AIA at $2,538.8 billion, but by 2023, AIA grew more rapidly to $3,822.9 billion. This narrowing reflected global interest rate differentials, with the U.S. cash rate rising to 2.5% while Australia's stayed at 1.5%. Higher U.S. returns encouraged Australian superannuation funds to invest overseas, while lower domestic rates reduced FDI inflows recorded as higher debits and lower credits on the financial account, respectively. By March 2023, capital outflows exceeded inflows, resulting in a financial account deficit of $5.6 billion comprising a $5.3 billion net outflow of debt and a $0.3 billion net outflow of equity. As a result, this shift positioned Australia as a net exporter of capital, reducing its reliance on foreign capital and thereby enhancing Australia’s external stability.

OR (If you need a more structured PDEAL, try a simpler version)

Another major change in Australia's BOP has been the emergence of a financial account deficit, driven by the fall in foreign investment relative to Australian investment abroad (AIA). The financial account records Australian Investments Abroad (AIA) (as a capital outflow ~ debit) and Foreign Investment (as a capital inflow ~ credit). In 2018, foreign investment stood at $3.5 billion and AIA at $2.5 billion. By 2023, AIA grew more rapidly to $3,822.9 billion. This narrowing reflected global interest rate differentials, with the U.S. cash rate rising to 2.5% while Australia's stayed at 1.5%. Higher U.S. returns encouraged Australian superannuation funds to invest overseas, while lower domestic rates reduced FDI inflows. By March 2023, capital outflows exceeded inflows, resulting in a financial account deficit of $5.6 billion. This shift positioned Australia as a net exporter of capital, enhancing external stability.

PDEAL 3 ~ Financial stuff (NFL)

A third major change in Australia's BOP positively impacting external stability has been the improvement in net foreign liabilities (NFL), the difference between Australia's foreign liabilities and assets. Since 2018, the NFL has declined from 55% of GDP in 2018 to 32% of GDP in 2023 ~ the lowest level since the mid-1980s. This improvement was driven by higher national savings relative to investment, with Australia’s gross national saving rate increasing from 21% of GDP in 2018 to 24% in 2023. This occurred as a result of higher household savings during COVID-19 and sustained superannuation contributions post-1993 reforms. This supported consistent current account surpluses (CAS), averaging 1.1% of GDP between 2020 and 2023, strengthened Australia’s external stability by lowering vulnerability to global financial shocks and improving the sustainability of the current account position.

OR (If you need a more structured PDEAL, try a simple version)

A third major change in Australia's BOP impacting external stability has been the improvement in net foreign liabilities (NFL), the difference between Australia's foreign liabilities and assets. Since 2018, the NFL has declined from 55% of GDP in 2018 to 32% of GDP in 2023 —the lowest level since the mid-1980s. This improvement was driven by higher national savings relative to investment, with Australia’s gross national saving rate increasing from 21% of GDP in 2018 to 24% in 2023. This occurred as a result of higher household savings during COVID-19 and sustained superannuation contributions post-1993 reforms. This supported consistent current account surpluses (CAS), averaging 1.1% of GDP between 2020 and 2023, strengthened Australia’s external stability by lowering vulnerability to global financial shocks and improving the sustainability of the current account position.

PDEAL 4 ~ Financial stuff (NPY)

A final change in Australia’s BOP that has positively impacted its external stability since 2018 is the narrowing of the net primary income (NPY) deficit. The NPY account records income payments on Australia’s foreign liabilities and receipts from Australian investments abroad. Under a floated exchange rate, the increased size and returns of Australian investments abroad (AIA) have helped reduce the NPY deficit. According to the Australian Bureau of Statistics, the NPY deficit declined from $66.1 billion in 2018 to $54.5 billion in 2022–23. This shift reflects stronger dividend and interest earnings on Australian superannuation and overseas investments, offsetting income outflows on foreign debt and equity. This narrowing NPY deficit contributes to improving Australia’s current account balance and, in turn, Australia’s external stability.

OR If you want to link this to the AUD, see below:

A final change in Australia’s balance of payments that has positively impacted its external stability since 2018 is the narrowing of the net primary income (NPY) deficit. The NPY account records income payments on Australia’s foreign liabilities and receipts from Australian investments abroad. Under a floated exchange rate, the increased size and returns of Australian investments abroad (AIA) have helped reduce the NPY deficit. According to the Australian Bureau of Statistics, the NPY deficit declined from $66.1 billion in 2018 to $54.5 billion in 2022–23. This shift reflects stronger dividend and interest earnings on Australian superannuation and overseas investments, with AIA income credits increasing from $19 billion in 2018 to about $30 billion in 2022–23, offsetting income outflows on foreign debt and equity. The increased AIA income credits strengthened demand for the Australian dollar,r placing upward pressure on the AUD Before broader global monetary tightening offset this effect, the AUD depreciated from USD 0.77 in 2018 to USD 0.63 by 2025, promoting external stability in Australia.

PDEAL 5 ~ if you can write fast, try a 5th PDEAL!

Australia’s improved external stability since 2018 has allowed the federal government to shift its demand, short-medium term macroeconomic policy focus ~ i.e. fiscal and monetary policies ~ from external vulnerability to domestic economic objectives. With the current account moving from a deficit of -2.1% of GDP in 2018 to a surplus of 0.25% in 2023, and net foreign liabilities declining to 32% of GDP, fiscal and monetary policy aim to prioritise employment and price stability, respectively. For instance, the federal annual budget moved from stimulus during COVID-19 to fiscal consolidation in 2023–24, forecasting a $9.3 billion surplus. Meanwhile, the RBA raised the cash rate from 0.1% in 2022 to 4.35% in 2023 to manage inflation, confident in Australia’s external stability.

Conclusion

Thus, structural shifts in Australia’s BOP, including a regular BOGS surplus, declining NFL, expanding AIA, and a narrowing NPY deficit, have strengthened Australia’s external stability, reduced dependency on foreign capital, and positioned the Australian economy to better absorb global financial volatility and external economic shocks.