5302.0 - Balance of Payments and International Investment Position, Australia, Dec 2015 Quality Declaration 
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A VIEW INTO UNITED STATES DOLLAR EXPOSURE

1 This is the second article released as part of the Balance of Payments and International Investment Position (cat. no. 5302.0) publication looking at aspects of Australia’s relationship with individual trading and investment partners.

2 The United States Dollar (USD) is one of the world’s reserve currencies, it is the dominant currency in global trade and is one of the most predominant currencies in which debt is issued world-wide, often without either side of the transaction actually involving the United State of America (USA) or a dollarised economy.

3 This article explores Australia’s relationship with the United States dollar in equity investments, debt obligations, income and trade, and provides a view of its exposure across broad investment and trade activity.


UNITED STATES DOLLAR EXPOSURE

4 The United States dollar is the most commonly used foreign currency for Australian investments and trade, not just because of the importance of bilateral links with the US, but also because of the United States dollars status as international currency.

5 The United States dollar accounted for $352.7b (33%) of the total foreign equity assets of $1,056.3b as at 31 December 2015, with $342.5b of equity domiciled in the USA and $10.2b of equity assets domiciled in dollarised states. (footnote 1)

6 The United States dollar accounted for $436.6b (60%) of the total foreign currency denominated debt assets of $723.8b, and accounted for $799.6b (67%) of the total foreign currency denominated debt liabilities of $1,182.5b as at 31 December 2015.

7 Net United States dollar denominated payments of investments income was $12.9b for the calendar year ending December 2015. Australian dollar denominated receipts and payments of income on investments from the USA was used as a proxy for this item (See para 19).

8 In the year ending December 2015, the United States dollar invoiced receipts from trade were $204.8b while the United States dollar invoiced payments for trade were $151.7b leaving the net United States dollar receipts from trade exposed at $53.1b, assuming no financial hedging was in place.

Table 1: USD currency exposure (a)

2015
$m
2014
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m

Foreign equity assets in USA
342,495
347,584
301,988
239,615
211,736
211,580
209,864
Foreign equity assets in USD dollarised states (b)
10,205
11,659
9,559
9,110
8,136
7,554
6,452
USD denominated Debt Assets
375,427
292,974
219,675
194,618
219,338
220,450
163,908
USD denominated Debt Liabilities
734,095
643,681
573,135
485,649
504,205
441,158
416,709
Net USD balance sheet exposure
-5,969
8,536
-41,914
-42,307
-64,994
-1,574
-36,484
Income receipts on Australian Investment in the USA
9,539
10,674
8,050
7,434
8,734
10,279
8,230
Income payments on USA investments in Australia
22,478
22,233
22,860
22,064
19,853
21,887
15,767
Net USD denominated receipts from investment income (c)
-12,939
-11,559
-14,810
-14,630
-11,118
-11,608
-7,537
USD invoiced receipts from trade
204,782
222,810
219,876
205,334
220,533
191,278
154,896
USD invoiced payments for trade
151,732
144,450
134,270
135,413
128,548
111,545
103,784
Net USD invoiced receipts from trade
53,050
78,360
85,606
69,921
91,985
79,734
51,112
Net USD currency exposure (before derivatives holding)
34,142
75,336
28,883
12,985
15,873
66,551
7,090
Net USD denominated derivatives exposure
-4,368
33,058
-8,757
3,074
-2,171
4,648
4,393
Net USD currency exposure (after derivatives holding)
29,774
108,394
20,126
16,059
13,702
71,199
11,483

a This table assumes that all equity assets are held in the USA and the stated dollarised states, and does not account for United States dollar denominated equity assets in other economies.
b Sovereign states which use the USD as primary currency are the British Virgin Islands, East Timor, Ecuador, El Salvador, Marshall Islands, Federated States of Micronesia, Palau, Panama and Turks and Caicos Islands.
c The ABS does not collect currency information for income on investments. A proxy based on country of counterpart domicility (in this case the USA) has been used as values for interest income.


NATURAL HEDGES THROUGH EQUITY INVESTMENTS, USD INVOICING OF TRADE AND INCOME ON INVESTMENTS

9 Natural hedges are created when payment obligations and/or receipts are at least partially offsetting to mitigate the effects of exchange rate fluctuations. For instance, the foreign currency risks associated with payments in United States dollar is reduced when there are counter United States dollar denominated receipts as inverse effects of currency fluctuations on either side of the transactions effectively reduces the exposure to currency fluctuations.


Equity Assets

10 Direct Investment in foreign equity assets are long term by nature, therefore explicit hedging using derivative hedging over the longer period may only provide marginal benefits over the long run. As evidenced in the Foreign Currency Exposure (cat. no. 5308.0) publication there tends to be little formalised derivative hedging on exposures associated with direct investment in foreign equity assets. However, foreign currency borrowing associated with foreign direct equity assets holdings are in most naturally hedged by the equity holdings underpinning the investment. For instance, an Australian company holding direct investment equity assets in a USA domiciled enterprise may fund the purchase with borrowing in United States dollar meaning the exposed equity asset denominated in United States dollars is offset against its United States dollar borrowing, reducing the net currency exposure.

11 The growth in USA domiciled portfolio investments equity assets reflect the growth in Australian funds under management. As diversified and pooled products are offered by the funds management industry, likewise formalised hedging is increasingly underpinning these portfolio equity investments, therefore portfolio activity is generally not naturally hedged.

12 As at 31 December 2015, total USA domiciled equity assets was $342.5b of which $101.3b (30%) was through direct investment, equity and investment fund share and $241.1b (70%) was through portfolio investment, equity and investment fund share.

Table 2: Levels of foreign equity in the USA

2015
$m
2014
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m

LEVELS OF FOREIGN (EQUITY) ASSETS
342,495
347,584
301,988
239,615
211,736
211,580
209,864
Investment profile
Direct investment, equity and investment fund share
101,265
117,386
110,271
94,752
85,359
93,306
95,533
Portfolio investment, equity and investment fund share
241,103
230,088
191,623
144,780
126,299
118,199
114,252



13 United States dollar denominated equity assets are measureable and also exist in dollarised states. Sovereign states which use the United States dollar as primary currency are the British Virgin Islands, East Timor, Ecuador, El Salvador, Marshall Islands, Federated States of Micronesia, Palau, Panama and Turks and Caicos Islands. At 31 December 2015, total equity assets in the dollarised states was $10.2b of which $8.0b (78%) was through direct investment, equity and investment fund share and $2.2b (22%) was through portfolio investment, equity and investment fund share.

Table 3: Levels of foreign equity in USD dollarised state

2015
$m
2014
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m

LEVELS OF FOREIGN (EQUITY) ASSETS
10,205
11,659
9,559
9,110
8,136
7,554
6,452
Investment profile
Direct investment, equity and investment fund share
7,986
9,493
7,449
6,427
5,681
5,572
4,761
Portfolio investment, equity and investment fund share
2,220
2,165
2,110
2,682
2,455
1,981
1,691



USD invoiced receipts and payments from trade

14 As mentioned earlier, natural hedges are created when payment obligations and/or receipts are at least partially offsetting to mitigate the effects of exchange rate fluctuations.

15 The United States dollar invoiced receipts from trade were $204.8b in the calendar year ending December 2015, with the largest contributing export commodity in United States dollar being crude material, inedible, except fuels at $77.4b, followed by minerals fuels, lubricants and related materials at $58.8b. The highest levels in United States dollar invoiced receipts from trade were $222.8b in the calendar year ending December 2014 with the largest contributing export commodity in United States dollar being crude material, inedible, except fuels at $93.7b. In the calendar year ending December 2009 the largest contributor to the United States dollar invoiced receipts from trade of $154.9b was minerals fuels, lubricants and related materials at $52.2b, followed by crude material, inedible, except fuels at $47.4b. In the calendar year ending December 2010 crude material, inedible, except fuels surpassed minerals fuels, lubricants and related materials as the largest contributor to United States dollar invoiced receipts from trade.
Table 4: Exports invoiced in USD

SITC Commodities
2015
$m
2014
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m

0 Food and live animals ;
22,468
20,218
17,632
16,402
15,466
12,518
12,678
1 Beverages and tobacco ;
409
356
359
311
322
362
410
2 Crude materials, inedible, except fuels ;
77,405
93,709
97,311
81,630
91,601
72,268
47,435
3 Mineral fuels, lubricants and related materials ;
58,828
65,328
62,346
65,210
68,752
62,379
52,192
4 Animal and vegetable oils, fats and waxes ;
509
557
516
444
533
391
355
5 Chemicals and related products, nes ;
3,610
3,127
2,894
2,674
2,711
2,793
2,678
6 Manufactured goods classified chiefly by material ;
11,783
12,441
11,374
10,618
12,347
11,608
10,246
7 Machinery and transport equipment ;
6,903
5,793
5,471
5,142
4,787
4,876
4,804
8 Miscellaneous manufactured articles ;
2,232
1,830
1,686
1,612
1,676
1,514
1,643
9 Commodities and transactions not classified elsewhere in the SITC ;
20,633
19,450
20,288
21,293
22,338
22,568
22,454
Total exports invoiced in USD
204,782
222,810
219,876
205,334
220,533
191,278
154,896

Detailed invoice currency data derived from sources for the International trade in goods and services (cat. no. 5368.0) publication.


16 The United States dollar invoiced payments for trade were $151.7b in the calendar year ending December 2015, with the largest contributing import commodity invoiced in United States dollar being machinery and transport equipment at $45.4b, followed by minerals fuels, lubricants and related materials at $28.6b. In the calendar year ending December 2009 the largest contributor to the United States dollar invoiced payments for trade of $103.8b was machinery and transport equipment at $28.4b, followed by minerals fuels, lubricants and related materials at $23.4b. Between 2009 and 2015 imports of machinery and transport equipment invoiced in United States dollar increased by $16.9b (62%) while minerals fuels, lubricants and related materials invoiced in United States dollar increased by $5.2b (22%).
Table 5: Imports invoiced in USD

SITC Commodities
2015
$m
2014
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m

0 Food and live animals ;
6,366
5,787
4,954
4,484
4,293
3,922
3,917
1 Beverages and tobacco ;
583
427
381
316
340
318
335
2 Crude materials, inedible, except fuels ;
2,328
2,146
1,670
1,876
2,026
1,616
1,361
3 Mineral fuels, lubricants and related materials ;
28,606
39,651
39,637
38,526
36,158
27,112
23,397
4 Animal and vegetable oils, fats and waxes ;
437
383
344
356
359
299
336
5 Chemicals and related products, nes ;
12,955
11,561
10,637
10,122
9,622
8,700
8,394
6 Manufactured goods classified chiefly by material ;
21,696
18,282
15,791
15,430
14,546
12,917
11,619
7 Machinery and transport equipment ;
45,370
38,681
35,114
38,661
34,755
31,818
28,444
8 Miscellaneous manufactured articles ;
25,943
21,454
18,769
17,183
16,026
14,221
13,599
9 Commodities and transactions not classified elsewhere in the SITC ;
7,448
6,077
6,973
8,459
10,421
10,621
12,382
Total imports invoiced in USD
151,732
144,450
134,270
135,413
128,548
111,545
103,784

Detailed invoice currency data derived from sources for the International trade in goods and services (cat. no. 5368.0) publication.


17 In the calendar year ending December 2015, the United States dollar invoiced receipts fortrade were $204.8b while the United States dollar invoiced payments for trade were $151.7b, effectively hedging all USD invoiced payments leaving a total leaving $53.1b of United States dollar invoiced receipts from trade exposed unhedged to fluctuations in exchange rate.


USD denominated receipts and payments from investment income

18 Similar to receipts and payments from trade a natural hedge can exist for receipts and payments of investment income.

19 Credits and debits of investment income information collected by the ABS are recorded in Australian dollars. These values are used as proxies to generate United States dollar exposure values. In order to accurately measure investment income in United States dollar requires recording of income in USD as income is accrued.

20 Income credits from investments in the USA were $9.6b for the calendar year ending December 2015. Income credits on portfolio investments assets contributed $8.6b of which $5.5b was from investment income on equity and investment fund share and $3.1b was from interest.

Table 6: Income receipts on Australian investments in the USA

2015
2014
2013
2012
2011
2010
2009
$m
$m
$m
$m
$m
$m
$m

PRIMARY INCOME CREDITS
9,539
10,674
8,050
7,434
8,734
10,279
8,230
Investment income
9,539
10,674
8,050
7,434
8,734
10,279
8,230
Direct investment assets
649
2,867
1,807
1,923
2,218
2,286
2,328
Income on equity and investment fund shares
312
2,660
1,702
1,808
2,121
2,157
2,222
Interest
337
206
106
115
97
129
106
Portfolio investment assets
8,565
7,588
6,010
5,305
6,204
7,669
5,396
Investment income on equity and investment fund shares
5,513
4,665
3,125
2,284
2,153
3,368
1,657
Interest
3,052
2,924
2,885
3,021
4,051
4,301
3,739
Other investment assets
np
np
np
np
np
np
np
Reserve assets
np
np
np
np
np
np
np

np - Not available for publication but included in totals where applicable, unless otherwise indicated.


21 For the calendar year ending December 2015, Income debits to the USA on investments in Australia was $22.5b, of which income debits on portfolio investment liabilities was $13.2b and income debits on direct investment liabilities was $8.2b. Debits of income on equity and investment fund share were $12.1b and debits of income on interest were $9.3b.

Table 7: Income payments on USA investments in Australia

2015
2014
2013
2012
2011
2010
2009
$m
$m
$m
$m
$m
$m
$m

PRIMARY INCOME DEBITS
22,478
22,233
22,860
22,064
19,853
21,887
15,767
Investment income
22,478
22,233
22,860
22,064
19,853
21,887
15,767
Direct investment liabilities
8,192
8,609
8,465
9,984
12,069
14,237
8,050
Income on equity and investment fund shares
4,911
5,532
6,193
7,880
10,083
13,023
7,080
Interest
3,281
3,077
2,272
2,104
1,986
1,214
970
Portfolio investment liabilities
13,200
12,578
13,379
11,154
7,006
6,993
6,776
Investment income on equity and investment fund shares
7,172
7,065
7,584
5,116
52
14
13
Interest
6,028
5,512
5,794
6,038
6,953
6,979
6,762
Other investment liabilities
1,086
1,046
1,017
926
778
657
941



22 The exposed net payments of investments income to the USA was $12.9b for the calendar year ending 2015.

23 The net current account exposure of United States dollar was $40.1b in the calendar year ending December 2015, mainly driven by United States dollar invoiced receipts and payments from trade.


FORMALISED HEDGING INSTRUMENTS OF DEBT AND DERIVATIVES

Debt assets and liabilities

24 Debt liabilities denominated in United States dollar are a significant contributor to the United States dollar exposure, as at 31 December 2015 it accounted for 68% of total foreign currency liabilities. Results of the Foreign Currency Exposure (cat. no. 5308.0) publication indicate at 31 March 2013 approximately 75% of United States dollar denominated debt securities liabilities was fully hedged using derivatives contracts, and further, with 71% of United States dollar denominated debt securities liabilities the maturities of the derivatives used to hedge against foreign currency risk were matched to the maturities of the underlying debt securities. The Foreign Currency Exposure (cat. no. 5308.0) publication data also suggest that a sizeable share of the foreign currency debt liabilities had natural hedges, where the value and currency composition of some foreign currency debt assets were closely matched to that of liabilities.

25 At 31 December 2015, Australia gross debt assets denominated in United States dollar was $375.4b. Depository corporations held $184.3b in United States dollar denominated loan assets and the other financial corporations held $52.2b in United States dollar denominated debt securities. Of the gross debt assets denominated in United States dollar, 33% was long term, mainly in the form of debt securities from other financial corporations, and 67% was short term, mainly in form of loans from depository corporations. Loan assets held by depository corporations increased $144.1b (359%) to $184.3b in 2015 from $40.1b at 31 December 2009.

Table 8: Debt Assets in USD

2015
2014
2013
2012
2011
2010
2009
$m
$m
$m
$m
$m
$m
$m

General Government
22,754
19,357
16,026
19,443
21,758
24,316
20,020
Debt
7,275
7,925
8,141
11,186
12,516
16,274
12,932
Trade Credit
12,949
9,790
6,867
6,689
6,753
6,214
5,787
Deposits
2,530
1,642
1,018
1,569
2,489
1,828
1,301
Financial Corporation
307,167
223,855
146,083
132,626
142,524
148,530
109,395
Monetary authorities
15,571
15,180
18,319
13,192
15,168
14,303
16,400
Currency and Deposits
1,803
2,451
4,268
4,338
7,468
4,015
7,007
Debt Securities
13,768
12,729
14,051
8,854
7,700
10,288
9,392
Depository corporations
230,185
146,367
83,889
76,025
82,140
82,218
54,713
Debt
22,615
12,293
4,636
4,500
3,466
4,247
2,171
Loans
184,285
119,578
71,511
65,236
68,830
53,529
40,171
Deposits
21,134
13,322
7,048
5,712
8,241
24,039
11,671
Other assets (incl Trade Credits)
2,151
1,175
695
576
1604
403
699
Other financial corporations
61,411
62,307
43,875
43,409
45,216
52,009
38,282
Debt
52,172
52,144
36,277
38,995
40,923
42,808
31,672
Loans
2,474
2,418
1,596
1,326
1,128
4,140
3,681
Deposits
5,396
5,686
4,117
3,233
3,370
4,539
2,945
Other assets (incl Trade Credits)
1,179
2,054
1,885
-146
-204
523
-17
Other sectors
45,506
49,762
57,566
42,548
55,057
47,604
34,494
Debt
4,104
4,166
16,899
8,176
9,801
9,577
8,322
Loans
23,798
35,628
18,788
25,256
34,274
28,188
18,844
Deposits
10,460
1,825
14,020
1,952
2,685
1,900
2,026
Other assets (incl Trade Credits)
7,142
8,143
7,859
7,165
8,297
7,939
5,302
Gross Debt Assets
375,427
292,974
219,675
194,618
219,338
220,450
163,908
Financial derivatives assets
61,132
82,155
33,545
24,106
20,214
30,796
19,679
FOREIGN DEBT ASSETS
436,559
375,129
253,219
218,724
239,553
251,246
183,587


26 Gross Australian debt liabilities denominated in United States dollar was $734.1b as at 31 December 2015. Gross debt liabilities denominated in the United States dollar for depository corporations was $473.6b, driven by Issuances of debt securities of $305.2b and acceptance of deposits of $128.2b. Gross debt liabilities denominated in the United States dollar for other sectors was $244.6b, driven by Issuances of debt securities of $132.6b and drawing of loans of $100.2b. Of the gross debt liabilities denominated in Unites States dollars, 53% was long term, mainly in form of debt securities issuance from depository corporations and 47% was short term, mainly in form of debt from depository corporations.

Table 9: Debt liabilities in USD

2015
$m
2014
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m

General Government
15
8
8
7
9
9
10
Debt
8
8
8
7
9
9
10
Trade Credit
7
1
0
0
0
0
0
Financial Corporation
489,556
421,726
388,415
338,260
366,654
332,707
322,285
Depository corporations
473,574
405,244
364,291
311,268
337,029
301,962
287,460
Debt
305,242
261,808
243,209
212,330
249,308
241,604
204,598
Loans
33,484
24,455
25,297
18,048
22,903
21,533
37,334
Deposits
128,249
113,637
89,700
77,504
63,754
38,137
43,891
Other liabilities (incl Trade Credits)
6,600
5,343
6,091
3,387
1,064
688
1,637
Other financial corporations
15,982
16,482
24,124
26,992
29,625
30,746
34,825
Debt
10,005
10,424
19,013
23,646
25,168
23,786
26,068
Loans
3,548
3,782
2,890
2,796
2,979
5,857
8,510
Other liabilities (incl Trade Credits)
2.430
2,2,77
2,224
564
1,479
1,620
29
Other sectors
244,524
221,947
184,712
147,381
137,541
108,442
94,414
Debt
132,551
98,676
106,655
93,339
91,191
66,199
59,436
Loans
100,169
115,550
70,814
47,107
39,802
35,783
28,273
Deposits
0
0
0
0
0
0
0
Other liabilities (incl Trade Credits)
11,804
7,722
7,243
6,935
6,549
6,460
6,705
Gross Debt Liabilities
734,095
643,681
573,135
485,649
504,205
441,158
416,709
Financial derivatives liabilities
65,501
49,097
42,301
21,032
22,385
26,148
15,286
FOREIGN DEBT LIABILITIES
799,596
692,778
615,437
506,681
526,590
467,306
431,995



Net debt and derivatives

27 According to the Foreign Currency Exposure, Australia (cat. no. 5308.0) publication, the notional principle value for derivative contracts in foreign currency was $1,492.1b as at 31 March 2013.

28 After taking into consideration natural hedges, businesses that still find the exposure of exchange rate fluctuations to their balance sheets undesirable often use financial derivative contracts to lessen exposures. The main types of derivatives used in hedging are forward foreign exchange contracts, cross-currency interest rate swaps, and foreign exchange options.

29 The Foreign Currency Exposure, Australia (cat. no. 5308.0) publication found that at 31 March 2013, cross currency interest rate swaps accounted for 65% of derivative contracts involving the purchase of foreign currency and the sale of the Australian dollar whereas forward foreign exchange contracts account for 27%. The publication also found that cross currency interest rate swaps accounted for 48% of derivative contracts involving the sale of foreign currency and the purchase of the Australian dollar whereas forward foreign exchange contracts account for 44%.

30 Foreign debt assets denominated in United States dollar was $436.6b at 31 December 2015 with financial derivatives assets in United States dollar contributing $61.1b, while foreign debt liabilities denominated in United States dollar was $799.6b with financial derivatives liabilities in United States dollar contributing $65.5b. The net exposed United States dollar, after Investments, trade and derivatives was $53.1b.

31 For further information contact Sachind Naidu on (02) 6252 6417 or email balance.of.payments@abs.gov.au.

Footnote

1. IMF uses the word dollarised to cover any use of a foreign currency as the main currency of the country. For the purposes of this article ‘dollarised States’ include Sovereign states which use the United States dollar as primary currency these include, British Virgin Islands, East Timor, Ecuador, El Salvador, Marshall Islands, Federated States of Micronesia, Palau, Panama and Turks and Caicos Islands. <back