Foreign Investment Flashcards
What are foreign liabilities and foreign assets?
foreign liabilities: created when Australian residents borrow money from overseas or sell assets to foreign residents, foreign investment into Aus
foreign assets: created when Australian residents lend money to foreign residents or purchase foreign assets called foreign investment abroad and is an outflow of money
Aus’s net internation investment position = foreign liabilities - foreign assets
What are measures of foreign liabilities?
- income flows associated with foreign liabilities recorded in the current account: Aus has a large primary income deficit due to high level of foreign investment and associated servicing costs (interest and profits). Some worry these income payments drain the economy and will cause the CAD to widen and become unsustainable. This is incorrect as the CAD reflects the gap between national savings and national investment. The higher the level of investment increases nation’s capital stock, expands the economy’s productive capacity and provide for future income growth that will service the CAD
- expressing foreign liabilities as a proportion of an economy’s GDP: foreign liabilities are a stock variable (accumalated over time) while GDP is a flow variable, so this measure is misleading. Since late 1980s, ratio has increased from 40 to 55%
- expressing foreign liabilities as a percentage of total financing in the economy: more relevant as it gives some indication of the proprtion of the economy’s funcing that is coming from offshore. Has remained steady at a little over 20% since 1980s
- foreign liabilities as relative to physical capital stock: gives indication of the porportion of capital stock being funded by foreign residents. Steady at 10% since 1980s
What do the measures of foreign liabilities tell us about the trend in them?
measures indicate that the rise in our foreign liabilities is not problematic as we rely on foreign capital not because our savings rate is too low, but because our investment ratio is so high
- national savings rate: over 22% (higher than ave.)
- national investment ratio: 27& (OECD ave. 21%
What is the position of Australia’s foreign debt and the government?
currently all of AUs’s foreign liabilities are in the form of foreign debt, CAD recorded leads to net foreign liabilities increase either as an increase in foreign debt and or and increase in foreign equity
Govt and debt
- most (74%) of Australia’s foreign debt is owed by private citizens
- prioir to 2009: govt. running budget surpluses, decreasing share of foreign debt
- 2008: all debt paid back and Aus, govt, net creditor
- post 2008-09: govt’s budget has been in deficit due to impact of GFC on economy. When the economy is in contraction this leads to govt’s budget balance falls as spending rises and the govt borrows funds. When the economy recovers, the budget deficit falls and moves into surplus, enabling the govt to pay back its debt
What is foreign debt, gross foreign debt and net foreign debt?
foreign debt: amount of money that Autralian residents owe to the rest of the world i.e. govt. securities, overseas borrowing
gross foreign debt: the total of Australia’s overseas borrowing
net foreign debt: gross debt - Australia lending to overseas residents, provides best view of our debt situation
What are trends in foreign debt?
- foreign debt has increased over time resulting from continued CAD. Australia must use foreign savings 9net capital inflows/foreign invetment) to fund its national investment as domestic savings are insuffecient
- if foreign investment is in the form of
- borrowing, it adds to Australia’s foreign debt
- buying Aus’s foreign assets, it adds to foreign equity
- financial account surplus reflects the flow of overseas savings into the Aus economy and over time the stock of foreign liabilities increases
- foreign equity has fallen while foreign debt has increased as Aus firms have preferred to borrow against, rather than sell assets
- govt. sector records deficits since GFC, leading to increased govt. borrowing (some sourced overseas)
- growth in interest payments to service foreign debt does not follow the same pattern as foreign debt due to decline world interest rates and the improvement of Aus export performance
- Aus has a similar amount of foreign debt (50% of GDP) however the size of the govt/ secto contribution is relatively smaller to other countries
- foreign liabilites have increased yet Aus assets have as well at a faster rate so our net worth/wealth has increased so to foreign investment has enable Aus to increase its level of real inceom
What are potential costs associated with excessive amounts of borrowing?
- Aus credit rating may be downgraded which means future borrowing will be subject to higher interest rates
- higher interest payments lower a nation’s standard of living as more income must be diverted from consumption
- if the terms of trade deteriorates this will reduce export income so that the burden of debt increases
- if the $A appreciated this will increase the size of foreign currency denominated debt, further increasing interest payments
- if the growth rates of our trading partner fall, this will decrease our export income and increase the burden of debt
What is foreign investment?
refers to the stock of financial assets in Aus owned by foreign residents and financial transactions in the balance of payments which increase or decrease this stock
made up of
- foreign debt , borrowing: i.e. if Australian residents borrow from overseas this increases our foreign debt, it is serviced with interest payments
- foreign equity, foreign ownership: o.e. if Australian sells assets to overseas residents this increases foreign equity and involves the remittance of profits and dividends
What are components of foreign investment?
- direct: foreign investor establish a new business or acquire 10% or more of an AUs enterprise (significant influence)
- portfolio: short term and less than 10%
- financial derivatives: linked to a specific financial instrument or indicator or particular commodity
- other investment
- reserve assets: external financial assets controlled by the RBA or Treasury for use in financing payment imbalances or intervention in foreign exchange markets
What are influences on foreign investment?
- profit expectations
- the Aus economy has been outperforming most OECD countries, representing a secure and safe haven for foreign capital
- interest rate differentials
- Aus interest rates have been relatively higher, attracting portfolio investment looking for higher returns
- political stability
- Aus has a well developed and regulated finacnial market which offers investors low risk returns
What are the benefit of foreign investment?
- an increase in investment leads to an increase in economic activity, employment and national income which shifts AD to the right, shifts the PPF outwards as it expands the productive capacity of the economy by increasing the stock of physical capital (shifts AS right), foreign investment boosts GDP and employment
- enabled Australia to fund a much higher rate of investment and therefore to enable the economy to grow at a higher rate and to enjoy a higher standard of living. If foreign investment were to fall, Aus standard of living would decline since less goods and services (imports) could be consumed and economic growth decreases as there would be insuffecient savings to finance the economy’s capital needs
- development of Australian industries and resources. It increases the economy’s infrastructure and by increasing the capital-labour ratio it can increase productivity
- direct foreign investment not only provides additional capital for Aus growth, it is also a source of additional competition of new technologies, management and marketing techniques and of skills development
What are the costs of foreign investment?
- foreign control might conflict with govt. economic policy and profits would be siphoned back to the parent company
- porfolio investment can be short term and speculative and therefore may be destabilising
