BOP LINKS

FINANCING THE CAD

CAD + C and F account = 0 - $68b + $68b = 0This occurs because Australia has a

flexible exchange rate. For every debit

transaction there is an equal credit transaction in FOREX

markets.Economists say that the C and F account finances the CAD.

DEBT TRAP

CAD Sell AUD – supply of AUD on FOREX Interest paid to foreign investors Foreigners

buy AUD to invest in Aust-

C & F account Foreign Debt surplus increases

CAD

Sell AUD- supply of AUD on FOREX market

Foreigners buy AUD to invest in Aust. C & F

account surplus- credit transaction

Foreign debt increases

Interest paid to foreign investors is recorded as an income debit in CAD

Therefore a significant reason for Australia’s CAD is the foreign debt- interest is paid to foreign lenders through the current account. As more money is borrowed more is repaid in interest each year. Borrowing today adds to future CADs.

NET FOREIGN LIABILITIES

Net Foreign

Debt

Net Foreign Equity

Net Foreign Liabiliti

es

RECENT FOREIGN DEBT STATISTICS

Can you find Net Foreign Debt statistics for Australia?

ISSUES WITH FOREIGN DEBT

A currency depreciation can increase NFL and an appreciation can decrease NFL. This is called the valuation effect.

Debt sustainability- this is Australia’s ability to repay interest on FD. Australian firms have generally been able to pay interest although the interest bill continues to grow each year.

Aust still has a good credit rating despite its FD levels being high- this is because FD is private sector not public sector

Debt Servicing Ratio- measures the % of export revenue used to repay interest overseas. It is currently around 11% but has been over 20% in the past. This indicates that export growth has been strong and global interest rates have fallen.