Australian Banks Are Hungry For Foreign Debt Essay

This report will show an overview of the current state of the Australian economy and its management by the Federal government through examining economic indicators such as economic growth (GDP), unemployment, inflation and trade.

The figure obviously had not return to pre-crisis level. Moreover, recent commodity prices had fallen significantly which will affect Australia’s short and long term economy.

Australia’s net foreign debt to GDP ratio has grown dramatically during the period of globalisation. After rapid growth in the 1980s’ foreign debt stabilised at roughly 35% of GDP, this was party due to a higher level in asset sales being used to fund the CAD instead of increased debt. Debt began to increase again the late 1990’s, this was due to a decrease in the value of the Australian dollar, because most of our debt had been borrowed in foreign currency’s, the depreciation increased the Australian dollar value of our foreign debt. The slower rate of growth in debt and overall liabilities in the past few years reflect the lower level of current account deficits. The growth in net foreign debt has eased slightly since the global financial crisis of 2008-09 but is now around 50% of GDP.

Operating in an international economy is a must for every nation. However in order to keep an economy out of long term debt the foreign sector need to be as balanced as possible. As shown in the circular flow model (figure 2) too many imports can lead to major leakages in our economy causing foreign debt to rise. To slow rising foreign debt the causes need to be considered:

The Australian exception could be related to the relative proximity of the fast growing Asian developing countries such as China which can bolster Australian’s economic activities. It could also be related to the relative good health of Australia’s financial market before the financial crisis that made it more resilient to it. Or it could also be that the Australian government’s actions were efficient at counteracting the financial

The Australian economy marks external stability as an important objective because it can influence other important aims such as economic growth, unemployment and inflation. External stability is the concept of sustaining a nation’s external accounts so that in the future, it is able to service its foreign liabilities and can avoid currency volatility. When looking at external stability, we must examine Australia’s balance of payments, which records all economic transactions between Australia and the rest of the world. Australia’s balance of payments has two components, which is the current account and the capital and financial account. The current account measures the receipts and payments for trade in goods and services, transfer payments and income flows, while the capital and financial account shows international borrowing, lending, purchasing and sales of assets.

Foreign investment has allowed the Australian economy to thrive cutting unemployment, doubling the country’s wealth and reducing national debt. Australia has leveraged trade to its advantage, with mining and other industries taking advantage of the fast-growing Chinese economy. Australia removed most trade tariffs and opened its banking to foreign partners, creating a successful investment climate.

Although the Wall Street Crash signalled the beginning of the Great Depression across the globe, there were other significant underlying factors that contributed to the devastating impact it had on Australia. The Government had been borrowing money from the United States in the form of loans or buying things on credit. The Wall Street Crash led the American Government to begin to recall all borrowed offshore money in order to get their economy back up and running, this was a problem for many nations who were in debt to the U.S. There was also a decrease in the amount of exports shipped from Australia and in turn, their price was then lowered which resulted in a fall in off shore spending and lead to a reduction in Government capital spending (Cooksey, 1970)

This report will detail the state of the Australia economy using key economic indicators, and provide an analysis and pinpoint any economic problems. Using this information it will further provide recommendations how to apply the monetary policy in the short and medium term to help the Australian government achieve its main economic objectives. Finally it will state the effects of these recommendations using three outlined economic criteria.

2011). A depreciating Australian currency is potentially inflationary, the depreciation of the Australian dollar lead to high Australian inflation rates, it cause a loss of export markets and reduce demand for Australian currencies. In this way, Australia’s inflation rates and costs are higher than its overseas competitors, at the same time domestic goods in Australia would be more expensive (Edge, K 2009). As well as inflationary pressures in Australia will increase, as imports would now be more expensive. This may increase pressure on the RBA to raise interest rates to defend its inflation target. With the result that Australian multinational corporations would cause it lost their overseas’ markets and customers, profit which from overseas would be decline and also pay for more interest

With a GDP of over $1 trillion USD, the Australian economy is among the largest in the world (Cornett and Saunders, 2014). Australia is trading partners with the United States, China, and Japan, but their economic ties are mainly centered in the Pacific Rim. Exports are crucial to the country’s GDP and this has created problems regarding sustainability in the Australian economy.

The second key national interest of Australia is the economy. Australia’s capital, jobs, standards of living, technological innovations and social advances rely substantially on exports and commodity values within Southeast Asia and the Pacific (Department of Foreign Affairs and Trade 2016a). The stability of South East Asia and the Oceania

There are three major economic factors that have combined contribution to FMG’s growth over the past 5 years, including the strong AUD , the amazing export feature due to the Chinese boom which drives up the commodity price and the interest rate decision by RBA. Australia dollar has appeared strong for the past 5 years and maintained at $6-$6.8 level for AUD/CNY at most time. It promised a high level of foreign income for Australia exporter. In 2009, China demanded almost 60% of the world’s iron ore to produce 47% of world’s steel production. It contributes the most to the price rocket from $31.78 to $180.6 US cents/mts in 5 years time. In addition, Australia borrowing cost remains high over the past few years which may alter the finance decisions of FMG.

In March 2015, Greg Jericho published an article called Weak, weak growth and six things about the state of Australia’s economy that outlined how in the past 6 out of 10 quarters the Australian

Cross-border government borrowing plays an integral role in the modern international finance system. Cross-border government borrowing enables governments to substantially increase their access to cheap credit and is a particularly attractive option to finance government programs. While raising taxes or cutting government expenditure can be politically treacherous, borrowing in the form of government-issued-bonds enables governments to fund programs and prompt growth, which is especially important in developing nations, while “smoothing over” the costs over a longer period of time in the future. And while governments may be able to issue and sell bonds to exclusively its domestic population, doing so is less desirable. For one, the limited amount of domestic creditors means the government will be forced to pay higher interest rates on their bonds. Secondly, issuing bonds to exclusively the domestic population is more contractionary than the alternative of selling bonds to the international community at large, as it takes money out of the money supply, which can slow economic growth. Therefore, in order to eschew some of the negative effects that comes with selling bonds exclusively to a domestic population, many governments are willing to engage in cross-border governmental borrowing. While there are some risks associated with cross-border government borrowing, to be certain, the opportunities that cross-border lending presents in terms