No need to worry about the debt you never hear about
But that's chicken feed compared with our "net foreign debt" which reached $760 billion - 51 per cent of GDP - in December.
Whereas the net public debt is the net amount owed by the federal government to people who hold its bonds (whether they're Australians or foreigners), the net foreign debt is the net amount Australian governments, companies and households owe to foreigners.
One reason for the lack of trumpeted concern about the foreign debt is you can't score any party-political points with it. In dollar terms, at least, it's just kept growing under Liberal and Labor governments.
A better reason is there isn't a lot to worry about. Throughout the history of white settlement, Australia has always been a net importer of foreign capital because our scope for economic development has always been greater than we could finance with just our own saving.
And, as Treasury points out in this year's budget papers, there's now even less reason to worry than there used to be.
The net foreign debt is the partial consequence of a deficit that rarely rates a mention these days, the deficit on the current account of our balance of payments. (The balance of payments records all the transactions between Australians and the rest of the world.)
The current account deficit is usually thought of as the sum of our trade deficit (exports minus imports) and our "net income deficit" (our payments of interest and dividends to foreigners minus their payments of interest and dividends to us).
But it can also be thought of as the extent to which we have called on the savings of foreigners to fund that part of the nation's investment spending (on new homes, business equipment and structures, and public infrastructure) the nation has been unable to fund with our own saving (by households, companies and governments).
Actually, borrowing foreigners' savings is only one way to make up the saving deficiency. The other way is to attract foreign "equity" investment (ownership) in Australian businesses. In December, when our net borrowing from foreigners totalled $760 billion, the net value of foreigners' equity investment in Australia was $110 billion, taking our total net foreign liabilities to $870 billion.
Our net foreign liabilities represent the accumulation of all our past current account deficits (and we've run such a deficit almost every year for at least the past 200).
Treasury makes the point that just because we don't save enough to finance all our annual new investment doesn't mean we don't save much. We save a higher proportion of national income (GDP) than many developed countries, and we've been saving a lot more since the early noughties.
Though governments are saving less, it's well known that households are saving a lot more. And companies are saving more by retaining a higher proportion of their after-tax profits. So national saving has risen to about 25 per cent of GDP.
Some of this rise has been offset by an increase in national investment spending, driven by the mining construction boom, which has taken national investment spending up to about 28 per cent of GDP.
Even, so we've still reduced the gap between national investment and national saving to about 3 percentage points of GDP, which compares with an average of 6 percentage points in the years leading up to the global financial crisis. Treasury says this smaller gap (that is, smaller current account deficit) is likely to continue for at least the next two years.
Before the financial crisis, the dominant form of net capital inflow was "portfolio debt", Treasury says. This debt was held largely by our banks, but their foreign borrowing was really to meet the borrowing needs of their household and business customers.
Since the crisis, however, the household sector has ceased to be a net borrower and reverted to its more accustomed position as a net lender to other sectors of the economy. The corporate sector (excluding the banks) is still a net borrower, but the mining companies in particular have funded a lot of their investment in new mining construction from retained earnings rather than borrowings. Since the miners are largely foreign-owned, however, this use of retained earnings shows up in the balance of payments as an inflow of foreign equity.
This implies we've become less dependent on foreign borrowing to finance the current account deficit. As part of this, our banks have been net repayers of their total foreign liabilities since mid-2010.
(The counterpart of this is that they've been getting a lot higher proportion of their funding from Australian household depositors, particularly through term deposits.)
One lesson from the financial crisis is that severe dislocations in foreign funding markets can impede the ability of even the most creditworthy borrowers (our banks, for instance) to obtain funds, even if only for a short time.
This helps explain our banks' subsequent move back to reliance on household deposits (made more possible by our households' changed saving behaviour, of course) and also their move to reduce their exposure to "roll-over risk" (having trouble replacing a maturing debt with a new debt) by lengthening the average term of their foreign borrowers.
These days, 63 per cent of our foreign debt is more than a year from maturity, including almost a third with more than five years to run.
Finally, some people worry that, when we borrow in foreign currencies, a fall in our dollar would automatically increase the Australian-dollar amount of our debt. But Treasury points out, these days, almost two-thirds of our net foreign debt has been borrowed in Aussie dollars.
Twitter: @1RossGittins
Frequently Asked Questions about this Article…
Net public debt is what the federal government owes to holders of its bonds (Australians or foreigners) — recently around $162 billion and forecast to peak near $192 billion. Net foreign debt is the net amount owed by Australian governments, companies and households to foreigners and is much larger (about $760 billion or roughly 51% of GDP as reported).
Not necessarily. The article explains that Australia has long been a net importer of foreign capital because investment opportunities have outpaced domestic saving. Treasury notes there’s less to worry about now: national saving has increased, the current account deficit has narrowed, and the economy relies less on short-term foreign borrowing than before the global financial crisis.
The current account deficit is essentially the gap between what Australia saves and what it invests. If saving falls short of investment (on homes, business equipment, infrastructure), that gap is filled by foreign savings via borrowing (foreign debt) or foreign equity investment. So repeated current account deficits accumulate into net foreign liabilities.
Foreign equity investment means foreigners buy ownership stakes in Australian businesses rather than lending money. In December the article notes net borrowing from foreigners was about $760 billion while the net value of foreign equity investment was around $110 billion, bringing total net foreign liabilities to about $870 billion. Equity inflows are an alternative source of funding to debt.
Households shifted from net borrowers back to net lenders, increasing deposits. Companies (excluding banks) remain net borrowers overall, but many mining companies funded expansion from retained earnings. Banks have reduced reliance on foreign funding and become net repayers of foreign liabilities since mid‑2010, relying more on Australian household deposits.
Yes. Banks and borrowers have lengthened the average term of foreign borrowing to reduce rollover risk. About 63% of foreign debt now has more than one year to maturity, and almost one‑third has more than five years remaining, which lowers the risk of being unable to replace maturing debt quickly.
Not as much as people fear. While borrowing in foreign currencies can increase the AUD value of debt if the dollar falls, Treasury points out that nearly two‑thirds of Australia’s net foreign debt is borrowed in Australian dollars, which reduces currency‑exchange exposure.
Treasury notes national saving has risen to about 25% of GDP, while national investment has increased to roughly 28% of GDP (driven in part by mining construction). That has narrowed the gap between investment and saving to about 3 percentage points of GDP — down from an average gap of about 6 percentage points before the global financial crisis — and Treasury expects this smaller current account deficit to persist for at least the next two years.
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