3.4 - Net Foreign Debt

Net Foreign Debt (NFD)

The total value of what Australia has borrowed from overseas (liabilities) minus what Australia has lent or invested overseas (assets).

NFD = Liabilities − Asset

Net Foreign Equity (NFE)

The difference between foreign ownership of Australian assets and Australian ownership of foreign assets.

NFE = Foreign-owned Australian assets − Australian-owned foreign assets

What sector makes up the majority of Australia’s net foreign debt?

Private sector —> 70% the remaining 30% is the Public sector

Why is a high level of net foreign debt a concern for Australia?

Means the country must repay debt with interest, often in foreign currencies, risky if:

• exchange rate falls (making foreign currency repayments more expensive)

• Interest rates rise, increasing the cost of repayments.

Two types of overseas borrowers

• Official —> public or gov sector borrowers leading to official debt

• non-official —> private sector borrowers leading to non-official debt

Two events in history that caused in increase in public sector borrowing

• The global financial crisis in 2008-2009

• COVID

Causes of Australia’s NFD

• Lack of domestic savings

• Many budget deficits

• Opportunities for foreign investors

• Lower value for Australian dollar

• Sound economic, politic and social climate

• Financial sector deregulation and globalisation

Australia has a _______, where current savings by Australian households, businesses and governments are not sufficient to finance our high levels of investment spending

national savings–investment gap

Positive affects of foreign debt

• help finance future expansion and grow productive capacity and potential GDP by making up for deficiency in local savings

• provides access to cheaper credit

How can foreign debt help finance future expansion and grow productive capacity and potential GDP?

by making up for deficiency in local savings

Negative effects of foreign debt

• High tax

• Reduced budget outlays

• Burden of debt for future generations