Foreign Investment

What is the value of foreign liabilities in Australia? (4)

1. About $800billion 2. 55% of GDP 3. Foreign debt makes up 100% 4. Positive equity outflow. Australians own more assets overseas than foreign investors own of Australian assets.

What are some indicators of foreign debt? (5)

1. Debt servicing ratio - 15% which is below 50% problematic level. 2. Interest/GDP ratio - 3% 3. Net foreign debt/GDP - 55% lower than many OECD countries such as US 90%, UK 75% 4. Public Debt//GDP ratio: 12% 5. Credit Rating - Federal AAA, WA: AA+

What are the types of foreign investment and their %?

1. Direct 26% 2. Portfolio 56% 3. Financial derivatives 1% 4. Other 4% 5. Reserve Bank 13%

Why does Australia have a CAD and KAS? (3)

1. Investment - Savings Gap - resource rich but capital poor. National savings are insufficient due to a small population to finance domestic investment needs. 2. Expenditure production gap - If AE > GDP, the gap must be imported, causing a trade deficit, being financed by foreign investment. - Over spending - living beyond their means - Under-producing - Lack of international competitiveness 3. Net income outflows - Development of stock of foreign liabilities causes outflow of income. Foreign investment is required to finance the interest repayments.

What are some benefits and costs of foreign equity?

1. Larger capacity but 2. loss of sovereignty 3. Bad behaviour of MNCs.

What are the costs of foreign investment? (4)

1. Loss of CONTROL - Foreign equity investment will result in foreign ownership of Australian physical assets that could cause political problems & loss of control. 2. Increased VULNERABILITY in a crisis - portfolio investment (56%) is highly volatile. 3. Increased foreign debt SERVICE costs when interest rates rise. 4. Foreign investment results in speculative, unproductive PROPERTY investment.

Why has foreign equity become unpopular?

1. Tightening FIRB restrictions 2. Loss of control over foreign equity. 3. Uncertain returns - no guarantee to provide dividends or profits. 4. Accessibility of foreign capital - slow economic growth results in low demand for capital

What are Australia's top 5 direct investment destinations?

1. United States 2. United Kingdom 3. New Zealand 4. Germany 5. Canad

What is foreign liabilities?

Australia's foreign obligations to the rest of the world, in the form of foreign debt or foreign equity.

What is the reserve bank as a part of the types of foreign investment?

Changes in RBA holdings of foreign currencies, accounts in different countries, gold and special drawing rights (SDRs).

What are the trends in foreign equity?

Equity: General decline in equity - increased in GFC as equity did not require dividend payments and it was difficult to borrow money during the GFC. Equity rose from 0% to 8% of GDP. The maturing of the mining boom, and diminishing commodity profits saw a decline in equity back to 0.

What is foreign debt?

Foreign debt is the amount of money that Australian residents owes to the rest of the world.

What is foreign equity?

Foreign equity is the extent to which foreign residents own Australian assets. Gross - total assets owned by foreign residents. Net - gross foreign equity - foreign assets

What are the benefits of foreign investment? (8)

GIFTE 1. Increases GOVERNMENT revenue - increased employment and economic activity will increase government revenue 2. Allows for higher levels of the size of INVESTMENT - supplements saving 3. Provides FINANCE for industry - funds higher level of capital stock = increase in supply = increase GDP 4. Encourages the transfer of new ideas and TECHNOLOGIES 5. ECONOMIES of scale - increased exports

What are the factors affecting foreign investment into Australia? (7)

GRIPPEE 1. GEOGRAPHICAL location - financial hub in South East Asian 2. REGULATION & stability of financial markets. 3. INTEREST rate differential 4. PROFIT expectations 5. POLITICAL stability 6. EXCHANGE rate 7. State of the ECONOMY

What is sovereign debt?

Government foreign debt owed to the rest of the world.

What is financial derivatives?

Investments that are linked to indicators, commodity prices and "futures". Speculative in nature. Where two parties agree to buy or sell an asset at a fixed price at that time.

What are other investments?

Movements in bank deposits and flows of trade credits.

What are the trends in foreign debt?

Overall rise in debt, from 45% of GDP in 2006, to 55% in 2014. Debt became more favourable as businesses desired to retain control of management, tightening FIRB restrictions, and risk environment increases saw many investors desiring certainty in returns.

Why is foreign investment not a problem? (5)

PAIDS 1. Majority of Australia's debt is PRIVATE debt which provide economic growth and employment. 'Consenting adults' as they are basing their decision on commercial judgement and maximising profitability. 2. AUTOCORRECTION of CAD - When economy grows quickly, exchange rates will be higher to, increasing debits on CAD, slow growing economy reduces CAD - positioning servicing costs as manageable between 2%- 6% range. 3. Borrowing for INVESTMENT - productive if used to finance productive investment and develop Australian industry not consumption. Improved infrastructure and productive capacity will assist future generations. 4. Low DEBT RATIO by international standards - Low by international and IMF standards - borrowing helped to sustain economic growth and exports. Strong institutions help maintain a AAA credit rating. Debt-servicing ratio is 15%, only a problem once above 50% by the IMF. Public Debt 12% of GDP 5. New investment will increase the SUPPLY capacity of the economy which will increase export capacity and reduce need for imports, reducing the CAD in the long run.

What is foreign investment?

The cross-border movement of finance caused by borrowing and the sale of assets.

What are Australia's top 5 foreign investment sources?

US - 28.4% UK - 16.5% Belgium - 7.9% Japan - 6.6% Singapore - 3.3%