Trends in CA

Question 1

Intro

Answer 1

• BOP: the record of the transactions between Australia and the rest of the world during a given period. Consisting of the current account and the capital and financial account
• CA shows the money flow from all X and M of goods and services, income flows and non-market transfers
• Bogs, NPY, NSY
• 2021-22 balance surplus of $49.7 billion
• Decades prior to 2010s, CA consistently deficit averaging 4% of GDP
• Reached a record level of 6.6% of gdp in 2007-2008
• 2021-22 recorded a third consecutive financial year surplus → not having recorded a CAS since 1973
• Treasury forecast for a return to a large CAD at 6% of GDP by 2023-24
• Recent CAS has been driven by strong commodity prices, low global IR rates and larger contractions in imports than exports during covid recession → short term factors hence the forecast return to a CAD

Question 2

P1 (BOGS)

Answer 2

• Recorded an improving trend in recent years, consistently in surplus since 2016-17 average 2.9% of GDP
• Reflects strong growth in income from aus resource and energy exports
• BOGS surplus of 147.4 billion 2021-22 → highest on record, reflects surge in commodity prices (supply chain shortage/russia ukraine) and a slower recovery of service importsCyclical factors
• ER, TOT, rate of eco growth in aus and global
• ER: movements in ER affect int competitiveness of Aus X and relative price of G/S that Aus imports
• Depreciation decreases foreign currency price of aus X —> int competitive ^
• Depreciation increases the aus $price of M and discourages consumers from purchasing M → also improves bogs

Question 3

P2 (terms of trade)

Answer 3

TOT: greatest influence on Aus BOP in recent years
Relationship between prices aus receives for X and price it pays for M
Improvement in tot → same volume X can buy more M → improvement in BOGS
Decrease in CAD
2 decades since 2003 → aus has experience largest sustained TOT boom
Reflects impact of a long boom in prices for global commodities
Rise of china, low-cost emerging economies → flooded world markets with low cost manufactured goods, reducing import prices
By 2022, TOT double its level in 2003
Eco Growth: higher levels of business investment and household consumption → spill over into ^imports
* If eco growth is driven by investment in productive capacity → expands exports // worsening of bogs reversed in medium term → mining boom 2003, BOGS worsened before turnaround in 2010s

Question 4

P3 (tot, structural)

Answer 4

• Narrow X base → aus X weighted towards small no.1 of commodities, comparative advantage in products that involve little added value (minerals/agriculture) (⅔ of aus X earnings)
• Recent years there has been upturn in prices for agricultural X, 28% ^ since 2010 than 1990s,2000s, → reflects global foods demands, rising Y etc.
• Lack of int competitiveness → lacks int competitiveness in manufacturing, relies heavily on M products whilst relying on X of commodities → historically BOGS tended to be deficit
• Hence aus should diversity X towards ETMs (high value stuff)
• Pre covid, Service X reached $97 bill 2018-19 (strongest growth opp.)

Question 5

P4 (NPY)

Answer 5

• Composed mainly of payments on interest and dividences on aus NFD and equity
• Tends to record deficit between 2-3% of GDP, 2021-22 deficit 3.6%

Cyclical factors
* Three factors driving servicing costs: dom eco growth, ER, IR
* DOM eco growth: approx 40% of aus public share → foreign owed, higher dom profits ^ equity servicing costs in the form of dividend outflow → increase NPY deficit (mining sect mostly owned by foreign companies) → significant outflow
* ER: valuation effect → generally pretty limited effect, foreign debt ‘hedged’, alot of foreign debt denominated in AUD
* Changes in IR:decline in aus and global IR to record low levels → reduced debt servicing cost (net 17bill in 2021-22)

Structural
* Gap between savings and investment, small country/low savings, requires ^levels of capital and investment (major export industry → minerals, resources)
* Aus funds large part of investment overseas → increases NFD, outflows → deficit
* Growth in aus overseas investment (superannuation) → inflow of earnings, contributed to trend of lower NPY deficit in 2010s
* Historically, aus households had 2x debt (proportion of their household Y) than other countries
* COVID caused ^in savings

Question 6

P5 (CAD)

Answer 6

Debt on NPY is caused by
* International borrowing - more imports than exports
* Trade deficit - slow export growth, reliance on imports, high domestic consumption
* Foreign investment - foreign owners get DRIP from aus companies

CAD debt accumulation cycle
* CAD
* Increase net foreign debt by borrowing from overseas
* Increase NPY deficit → increase the servicing costs because there is more debt
Increased net income deficit → entire CA goes into deficit (link back to 1)

Effects of a CAD
* Increased Debt Servicing: A high CAD implies that Australia is borrowing more from overseas, leading to higher debt servicing costs in terms of interest payments.
* Exchange Rate Vulnerability: A high CAD can put downward pressure on the exchange rate. If the exchange rate falls too quickly, it can lead to inflation and economic instability.
* Dependence on Foreign Investment: A high CAD indicates a reliance on foreign capital to fund the deficit. This can make the economy vulnerable to changes in global financial conditions.
* Potential for Economic Slowdown: If overseas investors lose confidence and reduce their lending, it could lead to an economic slowdown or recession.
* Contractionary monetary policy