Australia s foreign debt data and trends


Research Paper Index

Research Paper no. 30 2008–09

Australia s foreign debt data and trends

Tony Kryger
Statistics and Mapping Section
7 May 2009

Contents

Introduction
Level of foreign debt
Dollar amount of foreign debt
Relative size of foreign debt
Interest liability on foreign debt
Dollar amount of interest liability
Relative size of interest liability
Historical perspective
Relative size of foreign debt
Relative size of interest liability
Composition of gross foreign debt by institutional sector
Composition of gross foreign debt by currency
Composition of gross foreign debt by country
Composition of gross foreign debt by maturity
Components of increase in net foreign debt
Composition of net foreign investment debt and equities

 

Executive Summary

     Australia has always been a net recipient of overseas funds.

  • Australia’s foreign debt has grown rapidly. Between 1976 and 2008, the level of gross foreign debt increased from $8 billion to $1 072 billion, or from 9 to 95 per cent of gross domestic product (GDP). Net foreign debt increased from $3 billion to $600 billion, or from 4 to 53 per cent of GDP. (Table 1.)
  • Gross interest paid overseas averaged around half of one per cent of GDP through the 1960s and most of the 1970s. It then increased rapidly and by 2007–08 was equal to 3.8 per cent of GDP, or its second highest level ever. (Table 2.)
  • Estimates of Australia’s gross foreign debt are available back to 1901. These show that at 95 per cent of GDP, Australia’s gross foreign debt in 2008 was at its highest level ever. (Table 3.)
  • The general government and Reserve Bank’s share of gross foreign debt has fallen sharply since the 1980s, as has the share held by private non-financial corporations. At 74 per cent of GDP, the largest holders of debt in 2008 were private financial corporations. (Table 4.)
  • The proportion of debt denominated in Australian dollars increased from 15 per cent in 1981 to peak at 47 per cent in 1995. In 2008 it was equal to 39 per cent. (Table 5.)
  • The most important creditor countries for Australia are the United Kingdom and the United States which, in 2007, accounted for 23 and 22 per cent (respectively) of Australia’s gross foreign debt. (Table 6.)
  • The turnover of foreign debt is rapid with many loans outstanding due within a very short period. In 2008, 37 per cent of loans were due within 90 days. (Table 7.)
  • Exchange rate movements can have a significant impact on the level of debt. (Table 8.)
  • Debt accounted for 87 per cent of net investment in 2008; the corresponding figure in 1980 was just 29 per cent. (Table 9.)

 

Introduction

This research paper on foreign debt is the fourth update of a Parliamentary Library paper originally published in September 1989.[1]

The objectives of the paper are to provide statistical information on:

  • the levels of gross and net foreign debt;
  • comparisons over time;
  • the interest liability on foreign debt;
  • composition of foreign debt by institutional sector, currency, country and repayment period.

The tables in this paper do not all cover the same period of time. This is due mainly to changes in international standards (including definitions) and availability of data.

Australian Bureau of Statistics (ABS) publications used in compiling statistics for this paper were: Balance of payments and international investment position, Australia (Cat. no. 5302.0); International investment position, Australia: supplementary statistics (Cat. no. 5352.0); and Australian national accounts: national income, expenditure and product (Cat. no. 5206.0).

Level of foreign debt

Dollar amount of foreign debt

Concepts

Foreign debt is defined as all non-equity liabilities by residents of Australia to non-residents. It is not to be confused with external debt which excludes financial derivatives[2]. Foreign debt is distinguished from other forms of foreign investment capital inflow such as foreign ownership, because it carries with it the obligation to pay interest and repay the principal. It should be noted that foreign debt does not equal national debt . The latter is the total government debt which comprises government borrowings from overseas residents and government borrowings from Australian residents and thus excludes overseas borrowings by the private sector.

Gross foreign debt is the sum of all non-equity liabilities by Australian residents, the major component of which is the total amount of borrowings from non-residents by residents of Australia. It includes securities issued such as bonds as well as loans, advances, deposits, debentures and overdrafts.

Net foreign debt is equal to gross foreign debt minus lending by residents of Australia to non-residents and non-equity assets such as foreign reserves held by the Reserve Bank. Reserve assets held by the Reserve Bank comprise gold, foreign exchange, special drawing rights and Australia s reserve position in the International Monetary Fund.

Comments

Gross foreign debt at June 2008 was $1 072 billion. After deducting Australia s reserve assets and lending abroad of $472 billion, there was a net foreign debt of $600 billion. Foreign debt increased steadily from 1981, after being fairly low and stable through the late 1970s and early 1980s. This occurred largely as the result of the accumulation of high current account deficits and the expansion of Australian equity investment abroad, part of which was funded by increased borrowings.

Between 1976 and 2008, gross foreign debt increased at an annual average rate of 16.7 per cent. The corresponding figure for net foreign debt was higher at 17.8 per cent, indicating that Australian lending abroad has not risen as fast as Australian borrowing abroad.

Statistics: Table 1 and Chart 1a.

Relative size of foreign debt

Concepts

Foreign debt is often expressed as a percentage of annual gross domestic product (GDP) in order to show its significance relative to the size of the overall economy. It allows more appropriate comparisons over time, as GDP grows with inflation and population, and reflects to a degree the economy s capacity to repay the debt. GDP is a measure of the total output of the economy. Although the ratio is a conventional measure, it does not mean that this proportion of GDP must be applied to the repayment of foreign debt. GDP is a flow of goods and services during a period, while foreign debt is a level at a point in time which will involve interest and repayments of principal over many periods into the future.

Another measure of the relative size of foreign debt is the ratio of gross foreign debt to the value of exports of goods and services.

Data on average debt per person (or family) are sometimes used as a dramatic way of presenting foreign debt statistics. This may make large numbers easier to comprehend, but can be misleading to the extent that it suggests that liability for the debt is evenly divided throughout the whole population. In fact, liability lies largely with business (including foreign-owned), which financed the purchase of assets which in turn generate income to service and repay the debt.

Comments

Throughout the late 1970s and early 1980s, gross foreign debt was fairly low at less than 15 per cent of GDP. It grew rapidly after 1981 and in the six years to June 1987 it more than tripled from 13 to 44 per cent of GDP. It grew steadily over the next decade to 56 per cent at June 1997, rising sharply thereafter to 95 per cent at June 2008.

Net foreign debt has followed a similar pattern, rising quickly at first from 6 to 32 per cent of GDP between June 1981 and June 1987, followed by a more modest increase to 38 per cent at June 1997 and then rising again sharply to 53 per cent at June 2008.

Gross foreign debt has risen from 68 per cent of annual exports of goods and services as at June 1976, to well over quadruple those exports for the entire period from June 2004. As at June 2008, gross foreign debt was 4.6 times the value of exports.

Net foreign debt per capita has increased in nominal terms from $223 at June 1976 to $28 069 at June 2008.

Statistics: Table 1 and Chart 1b.

Chart 1a and 1b

Sources: ABS, Balance of payments and international investment position, Cat. no. 5302.0; ABS, Australian national accounts: national income expenditure and product, Cat. no. 5206.0.

Interest liability on foreign debt

Dollar amount of interest liability

Concepts

Interest payments on debt are an important aspect of foreign debt. While the level of debt reflects the amount of principal that needs to be repaid, interest liabilities have also to be paid on the level of debt outstanding at various points in time.

Comments

After being fairly low for a number of years, gross interest paid overseas increased from $1 billion in 1979 80 to $16 billion in 1990 91. It then fell as a result of declining average interest rates to $11 billion in 1993 94. Gross interest paid overseas increased sharply after 2003 04 and in 2007 08 was equal to $43 billion.

After deducting the $15 billion in interest received from overseas, the net interest paid overseas in 2007 08 was $28 billion. The net interest paid adds directly to the current account deficit. Between 2006 07 and 2007 08, net interest paid overseas increased by $4 billion and accounted for a third of the increase in the current account deficit ($11 billion) that occurred over this period.

Statistics: Table 2 and Chart 2a.

Relative size of interest liability

Concepts

As with the level of debt, it is useful to obtain a measure of the relative size of interest on foreign debt. The method most commonly used is interest as a percentage of exports of goods and services (or debt service ratio). This measure emphasises the international liquidity aspects of interest payments since exports provide a source of foreign exchange income that can be applied to meeting interest payments. (Other sources of foreign exchange income are property and labour income, transfer payments and further borrowings.) The debt service ratio enables more meaningful comparisons over time, because both interest and exports are affected by inflation.

Another measure of the relative size of interest on foreign debt is interest as a percentage of GDP, which emphasises the burden on incomes.

An estimate of the average interest rate can be made by dividing gross interest paid overseas in a given year by the weighted sum of two-thirds the debt stock at the start of the year and one-third the debt stock at the end of the year. This accords with a method published by the former Economic Planning Advisory Council.[3]

Comments

Gross interest paid overseas was around half of one per cent of GDP through all of the 1960s and most of the 1970s. It increased through the 1980s to peak at 3.9 per cent in 1990 91, later falling to 2.1 per cent in 2002 03. It subsequently increased again and in 2007 08 was equal to 3.8 per cent of GDP, meaning that 3.8 per cent of the value of all goods and services produced within Australia was required to meet the interest commitment on our gross foreign debt.

For many years, interest received from overseas was relatively small, often less than half of one per cent of GDP. In recent years, however, it has increased and in 2007 08 was equal to 1.3 per cent of GDP the difference between gross and net interest paid overseas of 3.8 and 2.5 per cent of GDP respectively.

As a percentage of exports of goods and services, gross interest paid overseas has increased from between 3 and 5 per cent in the 1960s and 1970s to a high of 24.0 per cent in 1990 91. It then fell to 10.7 per cent in 2002 03 and by 2007 08 had climbed back up to 18.2 per cent of the value of goods and services exported.

The average interest rate for 2007 08 was 4.2 per cent. This is lower than domestic interest rates at the time because the majority of debt is denominated in foreign currencies, which have had lower interest rates than those for the Australian dollar. Average interest rates are now at levels half those reached during several years in the 1980s.

Statistics: Table 2 and Chart 2b.


Chart 2a and 2b

 

Sources: ABS, Balance of payments and international investment position, Cat. no. 5302.0; ABS, Australian national accounts: national income expenditure and product, Cat. no. 5206.0.

Historical perspective

Relative size of foreign debt

Concepts

Long-term data can be used to give an historical perspective on Australia s current foreign debt situation. Comprehensive estimates of foreign debt are only available from 1976 onwards. However, data for public securities held overseas are available for the whole of the twentieth century. Although public securities now represent only a minor part of foreign debt, this was not the case in the past. While estimates of private foreign debt are not available for earlier years, data on interest paid suggest that the level of this debt was insignificant prior to the mid-1960s. Therefore, there exists a reasonable, although not comprehensive, measure of foreign debt since 1901.[4]

Comments

As a proportion of GDP, Australia s gross foreign debt has risen sharply from less than 10 per cent in the mid-1970s to 95 per cent today. Since the level of debt on public securities represents almost the total foreign debt during the first half of the last century, it is possible to say that as a percentage of GDP, Australia s gross foreign debt in 2007 08 was at its highest level ever.

Statistics: Table 3 and Chart 3a.

Relative size of interest liability

Concepts

Interest payments on public securities held overseas are also available for the whole of the twentieth century. Total interest payments on foreign debt are available since official balance of payments statistics were first compiled, i.e. for 1936 37 to 1939 40 and from 1945 46 onwards. The difference, however, between total interest payments on foreign debt and interest payments on only public securities held overseas is so small (not more than $2 million) as to be virtually negligible before 1959 60.

Comments

For the first four decades of last century, Australia s interest liability on foreign debt (approximated in these early years by its interest liability on public securities held overseas) fluctuated between 2 and 4 per cent of GDP. It then fell to less than one per cent for all of the

1950s, 1960s and 1970s, before rising to 3.9 per cent in 1990 91. It fell below 3 per cent for almost all of the years following, rising to 3.8 per cent in 2007 08.

The ratio of Australia s interest on foreign debt to the value of its exports of goods and services (or debt service ratio) follows a similar pattern. Rates in excess of 10 per cent, and sometimes higher than 20 per cent, were recorded during the first four decades of last century. It then fell to below 5 per cent for most of the period that followed until the early 1980s when it started to rise again. It peaked at 24.0 per cent in 1990 91, before falling by more than half to 10.7 per cent in 2002 03. It then rose again and in 2007 08 Australia s interest on foreign debt was equal to 18.2 per cent of the value of exports.

Statistics: Table 3 and Chart 3b.


Chart 3a and 3b

 

Sources: Department of Economic History, Research School of Social Sciences, Australian National University; ABS, Balance of payments and international investment position, Cat. no. 5302.0; ABS, Australian national accounts: national income expenditure and product, Cat. no. 5206.0.

Composition of gross foreign debt by institutional sector

Concepts

Foreign debt may be classified by the type of borrower.

The private sector comprises all corporations outside the general government sector. It can be subdivided into financial and non-financial corporations. General government consists of departments, offices and organisations which are agents of the Commonwealth government. Public financial corporations include the Reserve Bank and central borrowing authorities. Central borrowing authorities are entities set up by state and territory governments to centralise their borrowing and financial assets management. It is only since 1984 that state and territory governments have begun borrowing in their own right.[5] Local government foreign borrowing is negligible.

Comments

Some interesting trends in shares of gross foreign debt by institutional sector are:

  • Decline in the general government and Reserve Bank s share of gross foreign debt from 35 per cent in 1980 to 8 per cent in 1992, rising to 14 per cent in 1996 and falling again to 3 per cent in 2008.
  • Growth in the central borrowing authorities (i.e. state and territory governments) share from 1 per cent in 1984 to 18 per cent in 1995, falling to 5 per cent in 2008.
  • Little change in the private sector s share during the 1980s and the first half of the 1990s, increasing rapidly from 63 per cent in 1996 to 92 per cent in 2008.
  • Rapid rise in the private financial corporations share from 7 per cent in 1980 to 74 per cent in 2008.
  • Decline in the private non-financial corporations share from 48 per cent in 1980 to 18 per cent in 2008.

Statistics: Table 4 and Chart 4.

Table 4

Chart 4

Source: ABS, Balance of payments and international investment position, Cat. no. 5302.0.

Composition of gross foreign debt by currency

Concepts

Loans in foreign currencies are converted to Australian dollars ($A) using market rates of exchange prevailing at the reference date (end of the quarter).

The greater the proportion of debt that is denominated in foreign currency, the greater the risk that a fall in the $A with respect to another currency will increase the $A value of the debt denominated in that currency. To eliminate or reduce exposure to such risk, many Australian enterprises engage in hedging activities, predominantly through foreign currency derivative contracts. According to a survey conducted by the ABS, Australian resident enterprises in 2005 had policies in place that had the intent of hedging 79 per cent of the value of their foreign currency denominated debt assets and liabilities.[6]

Comments

The proportion of Australia s foreign debt denominated in Australian dollars increased rapidly during the 1980s and much of the 1990s from 15 per cent in 1981 to 47 per cent in 1995 reflecting an increased willingness by foreigners over this time to hold $A denominated assets. It then fell to 33 per cent in 2001 but climbed back up to 39 per cent by 2008.

Of debt denominated in foreign currency, the largest share is that expressed in United States dollars which peaked at 59 per cent in 1984, but then fell to a low of 32 per cent in 2008. Significantly smaller proportions of debt are denominated in Euros (13 per cent in 2008), Pounds Sterling (6 per cent) and Japanese Yen (4 per cent).

Statistics: Table 5 and Chart 5

Table 5


chart 5

Source: ABS, Balance of payments and international investment position, Cat. no. 5302.0.

Composition of gross foreign debt by country

Concepts

Country refers to the foreign creditor. International capital markets such as the Euro Bond market cannot be subdivided by country. Similarly, international institutions cannot be classified to one country.

Comments

For several years, the most important creditor countries for Australia have been the United Kingdom and the United States, representing 23 and 22 per cent of gross foreign debt respectively in 2007. Unallocated (principally international capital markets) account for almost a third of all debt. In 2007, almost 60 per cent of debt was owed to residents of OECD countries and (while not mutually exclusive) 35 per cent was owed to residents of APEC countries.

While the United Kingdom and the United States are currently the most important creditor countries, this has not always been the case and in the early 1990s that position was occupied by Japan. The relative importance of Japan, however, has declined significantly and in 2007 less than 3 per cent of debt was owed to Japan.

Statistics: Table 6 and Chart 6.

Table 6

Chart 6

Source: ABS, International investment position, Australia: supplementary statistics, Cat. no. 5352.0.

Composition of gross foreign debt by maturity

Concepts

The maturity profile of foreign debt shows the period left to repayment of the debt and thus points to the liquidity or flow aspects of foreign debt.

Comments

A large proportion of loans outstanding are due within a very short period. In 2008, 37 per cent of loans were due within 90 days and 48 per cent were due within a year. Only about a fifth of all loans were due later than 5 years.

Over the period 2000 to 2008, the level of debt outstanding has grown significantly in relation to GDP. This has been particularly so for loans due within 90 days which have grown from 22 to 35 per cent of GDP, and loans due between one and 5 years which have grown from 18 to 30 per cent of GDP.

Statistics: Table 7.

Table 7

 

Components of increase in net foreign debt

Concepts

There are four components of an increase in net foreign debt that are identified in Australian Bureau of Statistics data:

  • transactions;
  • exchange rate movements;
  • price changes; and
  • other.

Transactions refers to the net increase in new borrowings from non-residents and is the difference between drawings and repayments.

Exchange rate movements can have a significant impact on the level of debt expressed in Australian dollars. Foreign debt data are expressed in Australian dollars, although the majority of debt is denominated in foreign currencies. Estimates of debt denominated in foreign currencies are converted to Australian dollars using market rates of exchange prevailing at the reference date (end of the quarter).

Price changes refer mainly to revaluations of issued shares and securities purchased by overseas investors. It also includes changes in the market values of bonds.

The other component is small and includes write-off of bad debts and classification changes.

Comments

Net new borrowings (i.e. transactions) are often the single largest contributor to an increase in net foreign debt, although in some years other factors can also have a significant impact. In 2000 01, for example, exchange rate movements added four times as much as net new borrowings to the increase in net foreign debt. On several occasions the effect of exchange rate movements, security revaluations and other adjustments (collectively referred to as valuation effects) has been to reduce the level of net foreign debt below what it would otherwise have been. In 2007 08, net new borrowings rose by $81 billion but net foreign debt increased by only $53 billion due to these valuation effects.

Statistics: Table 8 and Chart 7.

Table 8

Chart 7

Sources: ABS, Balance of payments and international investment position, Cat. no. 5302.0.

Composition of net foreign investment debt and equities

Concepts

Borrowing is only one kind of capital inflow. Another is investment in ownership of Australian assets including shares, property and retained earnings of foreign owned companies. Capital transfers (debt forgiveness involving the cancellation of liabilities by mutual agreement between creditor and debtor, and migrant transfers) is another category of capital inflow but is relatively small.

Comments

In the early 1980s, well over half of Australia s net foreign investment was in the form of equities. From 1983, however, that situation reversed with debt accounting for 51 per cent of net foreign investment in that year and climbing to above 70 per cent in the latter half of the 1980s and all of the 1990s. Since 2000, it has consistently been above 80 per cent, peaking at 93 per cent in 2006. In 2008, debt accounted for 87 per cent of net foreign investment.

Statistics: Table 9 and Chart 8.

Table 9

Chart 8

Sources: ABS, Balance of payments and international investment position, Cat. no. 5302.0; ABS, Australian national accounts: national income expenditure and product, Cat. no. 5206.0.


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[1]. Robert Dippelsman, Australia s Foreign Debt , Current Issues Paper no. 4, 1989 90, Legislative Research Service, Parliamentary Library.

[2]. Financial derivatives are securities that derive their value from other securities.

[3]. Economic Planning and Advisory Council, External Balance and Economic Growth , Council Paper no. 22, October 1986.

[4]. Historical estimates were compiled from various public records held by the Department of Economic History, Research School of Social Sciences, Australian National University.

[5]. For many years a Gentlemen s Agreement existed which brought borrowings by state semi-governmental authorities under Loan Council supervision. This meant that all borrowings by the states were effectively undertaken by the Commonwealth and secured by the issuance of Commonwealth securities. This agreement, however, unravelled when the states established central borrowing authorities (CBAs) to circumvent Loan Council borrowing limits and began borrowing in their own right by issuing CBA securities. The Commonwealth responded to the situation in 1984 by suspending the Gentlemen s Agreement . (See Richard Webb, The Australian Loan Council , Research Note No. 43, 2001 02, Information and Research Services, Parliamentary Library.)

[6]. Australian Bureau of Statistics, Foreign Currency Exposure, Australia, March 2005 (Cat. no. 5308.0), p.4.

 

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