Australian Investment Aboard and the Current Account
An article in the most recent RBA Bulletin discusses the implications of a trend we have highlighted on this blog many times before: the growing stock of Australian investment abroad, particularly direct investment capital. Australia’s stock of foreign assets is growing faster than its stock of foreign liabilities. As the article notes:
Australia’s external assets are relatively skewed towards equities while liabilities are more skewed towards debt. As such, the valuation gains on assets in absolute terms on average exceed those on liabilities. One corollary of this is that the official measure of the current account deficit probably overstates the true ‘economic’ deficit, since the valuation gains are part of the overall return on foreign assets, but are not measured in the current account which includes only income flows…
In Australia’s case, if we were to treat the net valuation gains on foreign assets as all being part of the ‘income’ from these investments and include them in the current account, the current account deficit would have been on average about 0.3 percentage points of GDP per year lower than was actually recorded over the 15-year period.
The article also examines the implications of hedging for the change in Australia’s net foreign liabilities as a result of an exchange rate depreciation. The results make a nonsense of Nouriel Roubini’s recent forecast of a currency and financial crisis in the dollar bloc periphery.
posted on 01 May 2006 by skirchner
in Economics
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Comments
Isn’t this the same ‘dark matter’ argument made a few months ago, regarding the US?
Posted by cb on 05/02 at 01:03 AM
The dark matter argument is in relation to unmeasured trade in intellectual property. However, arguments about investment abroad as an offset to the measured currrent account deficit have also been made in the US context. See, eg:
http://www.mckinsey.com/aboutus/mckinseynews/pressarchive/ustradedeficit.asp
Posted by skirchner on 05/02 at 10:01 AM
The RBA just wiped out a few more exporters in an attempt quell inflation and ‘fix’ the current account deficit.
I wonder if we’ll hear anything in the media today about the strong dollar and more pain for exporters ... nah, silly me, a strong dollar can only be good news, can’t it?
Posted by .(JavaScript must be enabled to view this email address) on 05/03 at 10:09 AM
AUD-NZD and AUD-CAD have been broadly steady, so the rise in AUD-USD probably has more to do with generalised USD weakness than RBA policy. Still, it was a strange tightening in view of previous statements. Most economists (myself included) thought they would not tighten today.
Nouriel Roubini’s currency crisis in the dollar bloc periphery will just have to wait a little longer!
Posted by skirchner on 05/03 at 02:38 PM
The AUD spiked against every currency on the stroke of 9:30am. It jumped from USD 0.7600 to 0.7665 the moment the announcement was made. Did the Fed announce something in the middle of the night?
Posted by .(JavaScript must be enabled to view this email address) on 05/03 at 02:47 PM
AUD is still short of its recent highs against CAD and NZD.
Posted by skirchner on 05/03 at 02:53 PM
Well that’s all very interesting but I don’t know too many exporters who live and die by the AUD-CAD rate, its the AUD-USD rate that matters.
The Age says:
“The Australia dollar soared after the announced rate increase, rising as high as $US76.78, compared with about $US76.07 just prior to the RBA move. The dollar has risen about 7.25 per cent in the past month, the most of any of the 62 currencies tracked globally by Bloomberg News”
http://www.theage.com.au/news/business/pm-shrugs-off-rates-rise/2006/05/03/1146335767318.html
Hmmm ... doesn’t sound like a USD story to me.
Posted by .(JavaScript must be enabled to view this email address) on 05/03 at 03:21 PM