External Stability

974 WordsApr 27, 20114 Pages
External Stability External stability is the government objective that seeks to achieve current account sustainability, a continued capacity to service foreign liabilities, and a foreign exchange rate; all of which are necessary to facilitate and encourage economic transactions between Australia and the rest of the world. External stability is the aim of government policy that seeks to promote stability and sustainability in Australia’s external sector so that Australia can service its foreign liabilities in the medium to long run and avoid currency volatility. There are three main components to external stability: 1. A sustainable current account deficit (CAD) 2. A serviceable level of foreign liabilities 3. A stable…show more content…
The primary measure of the sustainability of a country’s foreign debt is the debt-servicing ratio, while the primary measure of foreign equity sustainability is the equity-servicing ratio. These ratios indicate the proportion of export revenue that must be spent on interest payments for foreign debt (or dividend payment on foreign equities). In the long term, extensive growth of Australia’s foreign debt can lead to a sustainability problem, as the costs of servicing current debt can create difficulty when servicing future debts. If foreign debt rises faster than GDP, interest repayments and other servicing costs on this debt will begin to take a proportionately larger part of GDP, constraining economic growth and jeopardising living standards. If prolonged, this may lead to a debt trap scenario. Australia’s Exchange Rate Because Australia has a floating exchange rate, the currency’s value is left to be determined by the market forces of international demand and supply. There is no specific measure of exchange rate volatility. Economists instead refer to movements in Australia’s bilateral exchange rate or movements in Australia’s TWI to demonstrate exchange rate volatility. Since floating in 1983, Australia’s exchange rate has been remarkably volatile. This has been seen especially in the past six to seven years, where the Australian dollar has appreciated substantially against the US dollar, from record lows in August 2001 of US48 cents
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