- Net foreign liabilities are equal to
- Australia’s financial obligations to the rest of the world
- (foreign debt plus foreign equity)
- minus the rest of the world’s financial obligations to Australia.
- Australia’s financial obligations to the rest of the world
- The two components of net foreign liabilities are:
- net foreign debt
- outstanding loans which Australia has to pay off overseas
- net foreign equity
- assets owned by foreigners (stocks)
- net foreign debt
Net foreign liabilities as a percentage of GDP
-
One of the long-term impacts of current account deficits is the growth of net foreign liabilities
-
In recent years
- all of Australia’s foreign liabilities are in the form of debt
- Australia’s net foreign equity is currently in a surplus
- i.e. Australian’s own more foreign investments
-
Businesses investment requirements are higher than net level of savings
- leading to businesses borrowing funds from overseas
- → an increase in net foreign debt → + net foreign liabilities → ++ CAD
- leading to businesses borrowing funds from overseas
-
long term CAD leads to a growth of net foreign liabilities
Net foreign debt as a percentage of GDP
-
for an increase in Net foreign debt:
- Causes:
- persistent and increasing CAD, requiring financing
- shift from equity financing to debt financing (deregulation of financial sector)
- ==private sector now represents 75% of foreign debt==
- long-term depreciation of $AUD
- decline in domestic savings
- government budget deficits
- Effects:
- increased Net Foreign Liabilities (NFL) as servicing costs increase
- increased exposure to external shocks (e.g. ToT collapses)
- increased potential capital outflows if foreign investors/lenders lose confidence in Aus
- more susceptible to ER fluctuations (substantiated by Valuation effect on debt)
- impacts Australia’s credit rating
- ==as of 2020, Aus has a AAA credit rating==
- if it falls → low investor confidence → increased interest rates for Australia to borrow money overseas
- ==as of 2020, Aus has a AAA credit rating==
- Causes:
-
A good metric to measure a country’s ability to service it’s foreign debt:
- it’s ==debt servicing ratio==
- indicates the proportion of export revenue that must be spent on interest payments on foreign debt.
- From 2021-2023, Australia rose from 2.9% to 4.8%, reflecting the rising level of global interest
- it’s ==debt servicing ratio==