Foreign Investment
Definition of stock compared to inflow
the accumulation of borrowed funds and asset sales over many years, whereas capital inflow refers to money flows, as recorded in the Financial Account, in a particular year.
Definition FI
the stock of Australian foreign assets and liabilities, and financial transactions, recorded in the Financial Account of the BoP, that change this stock.
gross foreign debt
the total of Australia's overseas borrowing
net foreign debt
the total of Australia's overseas borrowing minus Australian lending to o/s residents Net f.debt provides the best view of our debt situation.
describe the main 1- sources of FI 2- industry recipients of FI
three countries account for nearly half of all foreign direct investment into Australia. US 24%, Japan 12%, UK (10%), has been an increase in capital inflow from the ASEAN economies and China Mining industry comprised the largest share of the stock of foreign direct investment in AUS 295 billion (2015). manufacturing 12% real estate activities 9% finance and insurance 8% wholesale and retail trade 7% mining has highest proportion of foreign ownership 16% 97% of all businesses are australian owned
identify factors that influence FI into Australia in recent times (last 10 years)
- interest rates are high, so investors come in to get a return on their money, to take advantage of high profits - last 12 months, we are more politically stable (trump and brexit) - interest in china in investing in agricultural sector of australia to guarantee a food supply - investment came in for mining boom - future speculation that lithium will take off, require investment
give the current level of debt in AUD terms and as a % of GDP
1 014 963 million which is 62% GDP
differentiate between the effects of direct and portfolio investment on 1- the BoP 2- foreign debt
1- BoP, portfolio is mostly borrowing (debt) the effect on BoP is any increase in portfolio, increase in debit items, increase in credit in current account direct investment is debit in financial but lesser records in current as only paid if profit and often the profit is re-invested. 2- foreign debt Any change in portfolio is a change in foreign debt, as portfolio is mainly borrowing, any in direct is usually equity so it doesn't affect the foreign debt
Trends in foreign debt
2006-2016 net foreign debt has increased from 50% of GDP to 64%.. this reflects the accumulation of debt over time resulting from continued CADs. Australia must use foreign savings to fund its national investment since its domestic savings are insufficient. over the past decade foreign equity has fallen, while foreign debt has increased. Australian firms prefer to borrow against selling their assets. Increased government borrowing now accounts for 1/4 of Australia's foreign debt
Definition Foreign Assets
AUSTRALIANS OWNING FOREIGNERS the stock of o/seas financial assets owned by Australian residents, usually in the form of debt or equity, and capital outflow in the Financial Account of the BoP. e.g when australians lend money o/s
Definition foreign liabilities
FOREIGNERS OWNING AUS foreign investment into australia. the stock of Australian financial assets owned by non-residents, usually in the form of debt or equity, and capital inflow into the Financial Account of the BoP. e.g when australian residents borrow money from overseas or sell assets such as shares to foreigners. they are a stock variable (accumulated over time), should be measured relative to the physical capital stock of the country
foreign debt
Foreign investment (foreign liabilities) that is in the form of BORROWING amount of money both australian private and public sector owe to the rest of the world
foreign equity
Foreign investment (foreign liabilities) that is in the form of OWNERSHIP represent the extent to which foreign residents own australian assets payments of dividens but only if the firm makes a profit
Explain the relationship between the CAD and the level of foreign debt
Foreign investment flows are recorded in the financial account, there is more capital inflow than outflow (mainly in the form of borrowing) so this creates a FAS, the servicing costs associated with the foreign liabilities 9 such as dividend payments or interest) create a large deficit in the primary income account, recorded in the current account and cause a CAD. 1 trillion we lend overseas 2 trillion is invested into australia net position 1 trillion to finance the CAD you have to borrow/sell shares if you borrow you create a greater foreign debt
Outline positive and negative effects of FI. MAke sure you differentiate between foreign equity and foreign debt investments
Foreign investment has raised total Australian investment above that level possible from purely domestic sources, and thus raised the productive capacity (economic growth) of the Australian economy. The capital inflow has raised the overall level of investment in Australia, creating more jobs, and having a multiplier effect on the economy raising living standards and net wealth (over time). The following benefits apply only to FDI. A foreign parent company may introduce new technology to its Australian subsidiary company. Thus the benefits of overseas research and development will become available in Australia. This can lead to increases in productivity and output of export and import-competing businesses. The parent company may also enable access to new markets for the Australian exports. Foreign investment may enable the establishment of new industries, increasing the diversification of industry overall. Profits tend to be reinvested providing funds for future expansion, whilst subsidiaries create employment opportunities and are a source of taxation for the Government.
Establish what foreign investment is
Foreign investment into Australia has enabled the Australian economy to attain a standard of living, wealth and growth rates beyond that possible if financing of expansion was limited to only domestic savings. Foreign investment in Australia is simply foreign savings coming into the economy.
negatives of foreign investment
Foreign investment, both equity and debt, creates debit items in Australia's primary income section of the current account ie dividend and interest payments to foreign investors. This diverts income from domestic spending and may lead to a larger CAD that will require further financing. Foreign direct investment may result in the loss of ownership. The parent company may be more concerned with a global/national view and may thus close down the Australian branch creating structural unemployment. They might also require inputs to be purchased from the parent company's country rather than local producers. They may engage in transfer pricing to avoid paying tax. Foreign direct investment involving takeovers of Australian firms may reduce competition. This could eventually lead to higher prices that would be disadvantageous to consumers. However, foreign firms are subject to the same regulations as domestic firms and the same scrutiny by the ACCC. Portfolio investment (debt) can be short term and speculative which may be destabilising for the economy. If Australia's level of foreign debt was to be considered a 'risk' then it could lead to a possible credit rating downgrade, that results in future higher interest rates for borrowing on international markets. This could then impact on domestic interest rates. However, this has not occurred in the last decade, despite global uncertainty and Australia's high CAD and debt. If the AUD depreciates, then the level of foreign debt and interest payments will increase making debt servicing more difficult (the valuation effect). Reliance on debt to finance expansion may put upward pressure on interest rates to encourage capital inflow; however there is little evidence of this occurring in the last decade.
Australia's foreign liabilities are much greater than its foreign assets and thus we can say that Australia owes more than it owns, in relation the foreign sector. Why is this so?
Massive savings/investment gap Small popn 24 mill Mines require large investment We borrow what we can and sell shares in australia but not enough Big banks borrow from overseas
Describe the composition of Australia's foreign debt in terms of the public sector component and private sector component
Most of Australia's foreign debt is private debt- out of a total of $1,045 billion in 2016, private debt amounted to $794 billion (76%). Government's share was 24%. Private sector debt is superior to public debt in that it is incurred with the profit motive as the guiding hand. Private debt is more likely to result in increased investment and therefore to increased future income to service the debt.
Outline the impacts both positive and negative , of a high level of foreign debt
Some commentators worry that the income payments (interest/dividend) are a drain on the economy and will cause the current account deficit to widen and become unsustainable. (this is incorrect) - CCAD reflects the gap between national investment and national savings, so a higher level of investment will increase the nation's capital stock. this will expand the economy's productive capacity and provide for future income growth that will help service the CAD
portfolio investment
Under liabilities (debt or equity) and it is less than 10%. Majority is under debt
Differentiate between equity and debt foreign liabilities
both are investment into australia, debt is in the form of borrowing whilst equity is in the form of foreign ownership of australian assets
Define and give the current Debt servicing ratio in Australia
debt servicing ratio is interest payments as a percentage of export income declined 13% in 2007 to 7% in 2016
Def'n foreign direct investment
direct means either under equity or debt and when foreigners but more than 10% Largest proportion of direct investment is under equity (getting ownership)
Explain how changes in the exchange rate for the AUD can impact on foreign debt
foreign debt is in australian dollars, have to pay back interest in USD, therefore if the AUD depreciates then you have to convert a greater amount of AUD to pay back the original AUD
Outline the nature and purpose of the FIRB
if an investment was considered to be against the national interest, then the Financial Investment Review Board (FIRB) and/or the Treasurer would not allow the foreign investment to occur. Any foreign ownership has to go thru the FIRB. Merges or takeovers and if it lead to domination the FIRM wouldn't let it occur
give examples of direct and portfolio investment
portfolio- o/s investor purchasing less than 10% shares in an australian business o/s financial institutions putting money to australian institutions (banks lending banks) direct- mainly equity only some debt debenture is a bond, pay an interest rate start-up of new businesses 10% of value
Definition net international investment position
records the stock or level of foreign investment into Australia (FIA) and the level of Australian investment abroad (AIA)
Explain how changes in the net income deficit can affect the level of foreign debt
when there is a greater income deficit that means more interest payments are being made which implies more investment into australia so therefore a higher level of foreign debt.
