External Stability

What CAD:GDP ratio does the IMF see as risky?

Above 5% of GDP

What is Net Foreign Debt (NFD)? What does a high NFD:GDP ratio suggest?

Debt Australia owes foreigners, minus debt owed to Australia (loans, bonds, deposits); a high ratio suggests low national savings and a big savings-investment gap

What is Net Foreign Liabilities (NFL)? Give its formula.

NFD + NFE (Net Foreign Equity) - all foreign claims on Australian assets; NFL% = (NFL ÷ GDP) × 100

What is Net Foreign Equity (NFE)?

Foreign-owned Australian equity minus Australian-owned foreign equity (shares, FDI, portfolio investment)

What is Terms of Trade (ToT)? Give its formula.

Export prices compared to import prices; ToT = (Export Price Index ÷ Import Price Index) × 100

What is the exchange rate here, and when did the AUD float?

AUD's price in another currency; floated in 1983; measured via the TWI or a bilateral rate

What is international competitiveness (external stability)?

How Australia's export costs/quality compare to other countries, often shown via the exchange rate; higher competitiveness means better exports, lower CAD, more external stability

Balance of Payments: what's a credit and what's a debit?

Credit = money flows IN (e.g. exports, foreign investment in). Debit = money flows OUT (e.g. imports, money sent overseas). Also called non-refundable (Current Account) vs refundable/reversible (Capital/Financial Account)

Current Account: what are its 3 parts?

(1) Balance on Goods/Services (BOGS = X−M). (2) Net Primary Income (returns on factors of production - often a deficit). (3) Net Secondary Income (foreign aid, remittances, superannuation)

Capital and Financial Account: what's in it?

Capital Account: buying/selling non-financial assets like IP, and conditional loans (with interest/conditions). Financial Account: investments, reserve assets, financial instruments

What's the formula linking the Current Account and the Capital/Financial Account?

CA = −KAFA (they move in opposite directions - a CA deficit is funded by a KAFA surplus)

Why does Australia borrow from overseas? What are the 2 root causes of the CAD?

(1) Low national savings rate, (2) the Savings-Investment gap - partly from a 'conspicious consumption' culture

Give 3 real reasons the government runs a budget deficit (G>T), needing to borrow.

(1) Government service spending (e.g. university funding); (2) tourism/service exports falling; (3) crisis spending like JobKeeper/JobSeeker

When the government borrows to cover a deficit, what are the 2 options and their effects?

Borrow DOMESTICALLY: competes with private borrowers for savings, pushing up interest rates ('crowding out'). Borrow from OVERSEAS: credit inflow now (Financial Account), but creates future interest payments out (NPY debit) - this is what drives the CAD over 5%

What is the 'crowding out effect'?

When government borrows heavily at home, it competes with businesses/individuals for limited savings, pushing up interest rates and squeezing out private borrowing

What is Pitchford's Thesis (in full)?

A CAD is sustainable if the foreign borrowing goes toward export industries that can offset the NPY deficit through a BOGS surplus - i.e. borrowing to invest productively is fine if it pays for itself through exports

What is the Twin Deficit Hypothesis (Theorem)?

A close link between the budget deficit and the CAD - when the government deficit rises, the CAD tends to rise too, since government borrowing overseas adds to NPY outflows

What's the split between structural and cyclical causes of the CAD (mining example)?

Structural: a narrow export base (heavy reliance on mining) means the CAD responds to supply-side shifts. Cyclical: swings in global demand for exports

CAD/NFL/NFD: 2013-14 and 2014-15?

2013-14: CA −$47,056m, NFD $865,462m. 2014-15: CA −$56,979m, NFD $976,056m

CAD/NFL/NFD: 2015-16?

CA −$72,828m; NFL 63.3% of GDP; NFD $1,044,505m

CAD/NFL/NFD: 2018-19?

CA −$12,002m; NFL 52.2% of GDP; NFD $1,143,464m

CAD/NFL/NFD: 2021-22 (a surplus)?

CA +$49,706m (+3.2% of GDP); NFD $834,393m; NFL 37.5%; total NFL $1,157,730m

CAD/NFL/NFD: 2023-24?

CA −$52,400m; NFD $653,200m; NFL 22.3%; total NFL $1,388,600m (47.5%)

External stability: 2013-14 to 2015-16?

Persistent CADs (−3% to −3.8%) from a big savings-investment gap and reliance on foreign capital; commodity prices fell after the mining boom, hurting ToT; NPY debits rose (more interest/dividends owed); NFD/NFL passed 60% of GDP

External stability: 2016-17 to 2017-18?

Moderate CADs (−2.1% to −2.9%); exports rose and the AUD depreciated slightly; Chinese demand helped ToT recover a bit; but the narrow export base and steady import demand limited gains

External stability: 2018-19?

CAD narrowed sharply to −1.2% on rising LNG/iron ore exports; the AUD had depreciated since 2012, helping competitiveness; NPY deficit stayed high but better BOGS helped the CA - early signs of rebalancing

External stability: 2019-20 (first surplus in 44 years)?

First CA surplus in 44 years (+3.5%) - COVID cut imports and outbound income; ToT spiked from strong commodity demand amid global stimulus - a CYCLICAL surplus, not a lasting shift

External stability: 2020-21?

Surplus strengthened to +3.4% on record iron ore prices (>$200/tonne mid-2021); border closures kept suppressing imports/tourism deficits; higher savings cut reliance on foreign borrowing, steadying NFD

External stability: 2021-22?

CA surplus held at +3.2% (down slightly from peak); global energy shortages and the Ukraine war kept commodity prices high; more Australian investment abroad (NFE more negative) helped cut NFL

External stability: 2022-23?

Surplus narrowed to +1.2% as commodity prices fell and global growth slowed; NPY deficit worsened as global rates jumped (pricier debt); despite this, NFL fell to 32.9% of GDP from valuation effects and more outward investment - rising risk despite the surplus

External stability: 2024-25?

Back to a moderate deficit (1.5% of GDP) from sustained income outflows (high global rates, strong dividends to foreign investors); NFD rose slightly from currency effects while NFL fell on better outward equity investment; ToT stabilised (iron ore, gold improved)

AUD/USD exchange rate: causes and effects?

Causes: falling commodity prices post-boom; global risk-off sentiment; interest rate gaps (lower RBA rate vs US Fed); weak foreign demand for AUD assets. Effects: depreciation helps exports but raises import prices (inflation) and foreign debt servicing costs

Terms of Trade: causes and effects?

Causes: global iron ore/coal/LNG prices; Chinese demand, supply constraints, war shocks; rising import costs can lower ToT. Effects: higher ToT → more export income → better CAD/GDP. Lower ToT → less income → more pressure on BOGS/CAD

International Competitiveness: causes and effects?

Causes: productivity, unit labour costs, infrastructure, currency value; relative inflation (if Australia's prices rise faster than rivals, competitiveness falls). Effects: higher competitiveness → more exports, fewer imports → better BOGS/CAD

Low national savings rate: type, and effect on external stability?

STRUCTURAL; not enough saving means relying on foreign capital → more borrowing → higher NFD → bigger NPY deficit → worse CAD/stability

High NPY deficit: type, and effect?

STRUCTURAL; ongoing interest/dividend payments on debt and foreign-owned equity → a persistent CAD even during trade surpluses, and higher foreign ownership risk

Narrow export base: type, and effect?

STRUCTURAL; relying on commodities (iron ore, coal, LNG) leaves exports exposed to global shocks; falling ToT in a downturn cuts export income, worsening BOGS/CAD

Terms of Trade rising: type, and positive effect?

CYCLICAL; higher export prices or cheaper imports raise national income and improve the CAD

Commodity price downturn: type, and effect?

CYCLICAL (negative); falling export prices (e.g. China slowdown) cut export earnings, raising the CAD and external risk

AUD depreciation: effect on external stability (both sides)?

CYCLICAL; a weak AUD helps exports and discourages imports (improves BOGS/CAD) - BUT makes foreign debt more expensive to service

AUD appreciation: effect on external stability?

CYCLICAL; a strong AUD hurts competitiveness and boosts imports, worsening BOGS/CAD

Rising global interest rates: type, and effect?

CYCLICAL; makes debt servicing pricier, raising NPY outflows and worsening the CAD/debt sustainability

Productivity improvements/wage restraint: type, and effect?

STRUCTURAL (positive); better competitiveness means more exports and fewer imports, improving the CAD long-term

Foreign investment inflows: type, and effect?

STRUCTURAL and CYCLICAL; brings capital/skills but causes future NPY outflows; good if invested productively, bad if used for consumption or gives low returns

Safe haven capital inflow: type, and effect?

CYCLICAL; flows in during global uncertainty; cuts NFL short-term, but AUD appreciation can hurt competitiveness - a mixed effect