Research Paper Index

Research Paper no. 3 2002-03

Australia's Foreign Debt

Tony Kryger
Statistics Group
3 March 2003

Contents

Major Issues
Introduction
Level of Foreign Debt
As a Percentage of Gross Domestic Product
Interest Liability
As a Percentage of Gross Domestic Product
Historical Perspective
Interest as a Percentage of Gross Domestic Product
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
Endnotes

List of Tables
Table 1. Gross and Net Foreign Debt, 1976-2002
Table 2. Interest on Foreign Debt, 1959-60 to 2001-02
Table 3. Historical Data, 1900-01 to 2001-02
Table 4. Composition of Gross Foreign Debt-Institutional Sector, 1980-2002
Table 5. Composition of Gross Foreign Debt-Currency, 1981-2002
Table 6. Composition of Gross Foreign Debt-Country, 1992-2001
Table 7. Composition of Gross Foreign Debt-Residual Maturity of Debt Outstanding, 1997-2002
Table 8. Components of Increase in Net Foreign Debt, 1988-89 to 2001-02
Table 9. Net Foreign Investment In Australia-Levels, 1980-2002

Major Issues

• Australia has always been a net recipient of overseas funds.
• After being fairly low and stable for a number of years, Australia's foreign debt grew rapidly after 1981. Between 1981 and 2002, the level of foreign debt increased from $19 billion to $527 billion in gross terms and from $9 billion to $330 billion in net terms, i.e. after deducting Australia's reserve assets and lending abroad. (Table 1.)
• The foreign debt to gross domestic product (GDP) ratio gives an indication of what has been happening to debt relative to the size of the economy. Between 1981 and 2002, Australia's gross foreign debt increased from 13 to 74 per cent of GDP, while net foreign debt increased from 6 to 46 per cent. (Table 1.)
• The ratio of Australia's interest payments on gross foreign debt to GDP averaged around half of one per cent through the 1960s and most of the 1970s. It then increased rapidly to peak at 4.0 per cent in 1990-91, falling to 2.6 per cent in 2001-02. Therefore, 2.6 per cent of the value of all goods and services produced within Australia in 2001-02 was required to meet the interest commitment on our gross foreign debt in that year. (Table 2.)
• In 2002, Australia's gross foreign debt as a proportion of GDP was at its second highest level in more than 60 years. A higher level of debt was recorded in 2001 but before this, the only times when debt as a proportion of GDP was higher, were the periods 1901 to 1906 and 1931 to 1937. (Tables 1 and 3.)
• For all of the period from the mid-1940s through to the early 1980s, the ratio of Australia's interest payments on gross foreign debt to the value of its exports of goods and services (or debt service ratio) was below 6 per cent. It increased steadily thereafter and by 1991 had climbed to 24 per cent, falling to 12 per cent in 2002. (Table 3.)
• Over the past couple of decades, the general government and Reserve Bank's share of gross foreign debt has fallen sharply, as has the share held by private non-financial corporations. Whereas the latter were for many years the largest holders of debt, that position has long since been overtaken by private financial corporations which in 2001 held 69 per cent of gross foreign debt. (Table 4.)
• The proportion of debt denominated in Australian dollars increased substantially from 12 per cent in 1981 to 45 per cent in 1997, falling to 33 per cent in 2002. The greater the proportion of debt denominated in Australian dollars, the lower the risk that a fall in the $A will increase the level of debt. (Table 5.)
• The most important creditor countries for Australia have consistently been the United States, United Kingdom and Japan. The relative importance of these countries has changed over time so that whereas Japan was the most important creditor country in the early 1990s, that position has now gone to the United States. In 2001, the United States accounted for 26 per cent of Australia's gross foreign debt. (Table 6.)
• The turnover of foreign debt is rapid with most loans outstanding due within a very short period. In 2002, 55 per cent of loans were due within a year and 40 per cent were due within 90 days. (Table 7.)
• Exchange rate movements have at times had a significant impact on the level of debt. For example, well over half the increase in net foreign debt that occurred between June 2000 and June 2001 was due to the decline in the value of the Australian dollar that occurred over this time. (Table 8.)

For many years, foreign investment in Australia has been predominantly in the form of borrowed funds from overseas. This was not always the case and whereas debt accounted for 86 per cent of net foreign investment in 2002, the corresponding figure in 1980 was only 29 per cent. (Table 9.)

Introduction

This paper on foreign debt is the third update of a paper originally prepared in September 1989⁽¹⁾.

The objectives of this paper are to provide explanation and detailed 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; and
• the relationship between foreign borrowings and other capital inflows.

Level of Foreign Debt

Dollar Amount

Concepts

Foreign debt is defined as the amount borrowed from non-residents by residents of Australia. It is also called external debt or the level of foreign borrowing. Foreign debt is distinguished from other kinds 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 borrowing from overseas residents and government borrowing from Australian residents-and thus excludes overseas borrowings by the private sector.

Gross foreign debt is the total amount of borrowings from non-residents. It includes securities issued such as bonds as well as loans, advances, deposits, debentures and overdrafts.

Net foreign debt is the gross foreign debt, minus the value of foreign reserves held by the Reserve Bank of Australia and minus lending by residents of Australia to non-residents. 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

The gross foreign debt at June 2002 was $527 billion. After deducting Australia's reserve assets and lending abroad of $196 billion, there was a net foreign debt of $330 billion. After being fairly low and stable through the late 1970s and early 1980s, foreign debt increased steadily after 1981, largely as a result of the accumulation of high current account deficits and the expansion of Australian equity investment abroad. Part of this overseas investment was funded by increased borrowings.

Between June 1981 and June 2002, gross foreign debt rose at an annual average rate of 17.2 per cent. The corresponding figure for net foreign debt was higher at 18.5 per cent, reflecting the fact that Australian lending abroad has not risen as fast as Australian borrowings.

Details: Table 1 and Figure 1.

As a Percentage of Gross Domestic Product

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. GDP is a measure of the total output of the economy. Although this ratio is a conventional measure, it does not mean that this proportion of GDP must be applied to foreign debt. GDP is a flow of goods and services during a period, while foreign debt is a level at one point in time which will involve interest and repayments of principal over many periods into the future.

Two other measures of the relative size of foreign debt are presented in Table 1. One is the ratio of foreign debt to the capital stock (i.e. the total value of dwellings, other buildings, engineering construction and equipment). The second is the ratio of 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 through the whole population. In fact, liability lies largely with businesses (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 increased rapidly after 1981 and in the six years to June 1987 it more than tripled from 13 to 45 per cent of GDP. It continued to increase steadily over the next few years to 61 per cent at June 1999, rising sharply to 74 per cent at June 2001.

A similar pattern is evident for net foreign debt as a proportion of GDP which has increased more than seven-fold since June 1981.

Gross foreign debt has risen from around 80 per cent of annual exports of goods and services in June 1981, to well over triple those exports for the entire period from June 1998. Gross foreign debt is currently 3.4 times the value of exports.

Net foreign debt per capita has increased from $600 in June 1981 to $16,800 in June 2002.

Details: Table 1 and Figure 2.

Table 1. Gross and Net Foreign Debt, 1976-2002

Interest Liability

Dollar Amount

Concepts

Interest payments on debt are an important aspect of the impact of foreign debt. While the level of debt reflects the amount of principal that needs to be repaid over a number of years, interest liabilities are incurred throughout the period of the loan.

Comments

After being fairly low for a number of years, Australia's interest liability on foreign debt increased from $1 billion in 1979-80 to $16 billion in 1990-91. It then fell, as the result of declining interest rates, to $11 billion in 1993-94, increasing to $17 billion in 1999-00 and $19 billion in 2000-01. In 2001-02, Australia's interest liability on foreign debt was $18 billion.

Details: Table 2 and Figure 3.

As a Percentage of Gross Domestic Product

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. Another method is interest as a percentage of GDP, which emphasises the burden on incomes.

The debt service ratio makes possible more meaningful comparisons over time, because both interest and exports are affected by inflation. As well, exports of goods and services provide a source of foreign exchange income that can be applied to meeting interest payments. (Other sources of foreign exchange are property and labour income, transfer payments and further borrowing.)

An estimate of the interest rate on gross foreign debt can be obtained by dividing the interest paid 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 former Economic Planning Advisory Council⁽²⁾.

Comments

Interest paid on gross foreign debt was around half of one per cent of GDP through the 1960s and most of the 1970s. The interest liability climbed to around 3 per cent in the latter half of the 1980s and peaked at 4.0 per cent in 1990-91. It has since fallen and for all of the period since 1992-93 it has remained below 3 per cent. In 2001-02, Australia's interest liability was 2.6 per cent of GDP, meaning that 2.6 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.

Interest received from overseas is relatively small. In 2001-02 it amounted to 0.6 per cent of GDP.

As a percentage of exports of goods and services, gross interest has risen from between 3 and 5 per cent in the 1960s and 1970s to peak at 24.0 per cent in 1990-91. By 2001-02, gross interest had fallen to 12.0 per cent and net interest to 9.2 per cent of the value of goods and services exported.

The average interest rate for 2001-02 was 3.6 per cent per annum, considerably below rates of between 8 and 9 per cent that were common during the 1980s.

Details: Table 2 and Figure 4.

Table 2. Interest on Foreign Debt, 1959-60 to 2001-02

$ Million and Debt Service Ratios

Table 2. Interest on Foreign Debt, 1959-60 to 2001-02 continued

$ Million and Debt Service Ratios

Note: Where interest on foreign debt was not available, total interest paid overseas was used.

Historical Perspective

Debt as a Percentage of Gross Domestic Product

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 last 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. There exists therefore a reasonable, although not comprehensive, measure of foreign debt since 1901.

Comments

As a proportion of GDP, Australia's foreign debt has risen rapidly from less than 10 per cent in the mid 1970s to 74 per cent today. Since the level of debt on public securities represents almost all of total debt during the first half of last century, it is possible to say that Australia's gross foreign debt as a proportion of GDP in 2001-02 was at its second highest level, while in 2000-01 it was at its highest level, in more than 60 years. Higher levels of debt were recorded in the periods 1900-01 to 1905-06 and 1930-31 to 1936-37.

Details: Table 3 and Figure 5.

Interest as a Percentage of Gross Domestic Product

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 (for 1936-37 to 1939-40 and from 1945-46 onwards). The difference between total interest payments on foreign debt and interest payments on only public securities held overseas is so small, however, as to be virtually negligible before the mid-1960s.

Comments

For the first three decades of last century, Australia's interest liability on foreign debt (approximated by its interest liability on public securities held overseas) fluctuated mostly between 2 and 3 per cent of GDP. It then climbed to 4.4 per cent in 1930-31, before falling to less than one per cent for all of the 1950s, 1960s, 1970s and the early part of the 1980s. It climbed to 4.0 per cent in 1990-91, before falling again and in 2001-02 was equal to 2.6 per cent of GDP.

For all of the period from the mid-1940s through to the early 1980s, the ratio of Australia's interest on foreign debt to the value of its exports of goods and services (or debt service ratio) was below 6 per cent. It climbed steadily thereafter and by 1990-91 it had reached 24.0 per cent, falling by half to 12.0 per cent in 2001-02.

Details: Table 3 and Figure 6.

Table 3. Historical Data, 1900-01 to 2001-02