External stability Flashcards
1
Q
Intro
A
- Australia’s X stab is historical poor due to low S-I gap and narrow Xport base
- S-I gap: from 1970s to 2000s, australia household savings decreased from 20% to 0% (RBA) due to incrased confidence and falling i/r. Alongside this, 1980s financial deregulation (16 foreign banks entered Aus market) = increased intl. Borrowing = NFD increased from 6% (1980) to 60% of GDP (2016)
- Narrow xport base: 60% of Aus Xports being mining, K-heavy industry, requires high level of K imports, evident with 80% of Aus’ imports by value being manufactured.
- Overall, it pushed CA into 44-year deficit til the surplus in 2019.
2
Q
Measures of ES
A
- Current Account Deficit (CAD) as a percentage of Gross Domestic Product
- net foreign debt as a percentage of Gross Domestic Product
- net foreign liabilities as a percentage of Gross Domestic Product
- terms of trade
- exchange rate
- international competitiveness
3
Q
P1 (cause - CAD debt accumulation cycle)
A
- Increased CAD will require increase international borrowing to fund = increawse in NPY debits = increased size of CAD = requires more intl borrowing etc.
- However, in recent years, CAS and NFD has not increased substantially (remained at 60%)
4
Q
P2 (cause: X rate volatility as a cause of poor X stability)
A
- Poor X stab leads to speculative “attack” on the AUD as
- 95% of currency transactions are speculative
- Evident during COVID with large-scale depreciation from 0.67USD in Feb 2020 to 0.62USD in march 2020.
- Led to speculative decrease in investment inflows, (by 48% in 2020 into aus)
- Overall, poor X stab via exchange rate hinders growth
5
Q
P3 (effect: credit rating)
A
- X stab deterioration = decrease investor confidence = decreas in credit rating for economy.
- Reduces borrowing capacity because there is less capital inflow funds (and less investment)
- Overall decrease future capacity for growth.
- Stat: during Covid-19 led to the S and P credit rating agency to change their outlook to negative on Australia’s AAA credit rating.
- However, because strong post-covid recovery = budget repair underway and projecting 4.3B surplus 2022-23, reversed mis-outlook.
6
Q
P4 (effect: financial contagion)
A
- If X stab is poor, Aus becomes more susceptible to financial contagion because of global financial market reliance
- This was evident during covid because FDI inflows halved in 2020 and there was a 13% TOT collapse pushing the economy into -6% GDP grwoth/recession in june 2020
- Therefore more susceptible to financial contagion. (likelihood of happenings in one financial market to affect another financial market/integratino of financial markets/if you have lots of liabilities overseas you’re screwed)
7
Q
P5 (effect: Pitchford thesis)
A
- Since ~80% of Aus debt is private, and the Consenting Adults Theorem states the private sector will only undertakes borrowing if the profits outweight the costs, there will be a net benefit for the economy.
- Australia has seen 44-year CAD due to high levels of intl borrowing alongside 29 years of recession-free growth. When the recession-free growth trend stopped, it was due to a cyclical, uncontrollable factor (covid).
- This is probably due to increased borrowing having increased expansion of firms -> increased LT e/g.
- [OPTIONAL: expansion of the LNG sector due to increased borrowing. According to Pitchford, LNG profits on BOGS will outweigh repayments on the NPY, which equals overall CA improvement.
- Could be a reason for the CAS since 2019.]
8
Q
P6 (fiscal policy)
A
- Since increased growth can increase the CAD through increased M expenditure and equity outflows (96% of LNG sector is foreign owned)
- To control size of CAD, govt may engage fiscal consolidation which constrains growth
- Stat: precovid budget moved from 39.6bn deficit (2015-16) to projected 6.2bn surplus (19/20)
- Led to below-par growth of 2.2% in December 2019
