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During June quarter 2017, private non-financial corporations invested $43.5b in gross fixed capital formation, funded through gross saving (net saving plus consumption of fixed capital) of $42.0b and net borrowing (change in net financial position) of $15.4b. Net borrowing was as a result of incurring $42.1b of liabilities, primarily through equity issuance of $32.5b, and loan borrowings of $7.2b. Private non-financial corporations acquired $26.7b in financial assets, which was driven by deposits of $9.4b with the rest of the world.
Graph 1 Private non-financial corporations, Debt to equity ratio
The debt to equity ratio provides an assessment of a corporation's financial leverage calculated as [(total liabilities less equity) / equity]. The ratio indicates in what proportion the corporation is using equity and debt to finance its activities. During periods of buoyant income and stable interest rates, a leveraged corporation stands to make a substantial return on equity compared with an un-leveraged corporation. However, during more uncertain times a leveraged corporation is at risk from fluctuations in earnings and / or rising interest rates, such that debt servicing costs may not be met. The ratios presented here are averages for all private non-financial corporations.
The private non-financial corporations debt to equity ratio was 0.67 in June quarter 2017, decreasing slightly from March quarter 2017 ratio of 0.68. This is the lowest the ratio has been since December quarter 2007.
In contrast, the adjusted debt to equity ratio, adjusted for price changes was 1.06 in June quarter 2017. This ratio has been trending downwards for the last 7 quarters, indicating that private non-financial corporations have a declining ‘real’ level of debt to equity.
FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS
To fund their financial asset acquisition, financial corporations incurred $91.8b of liabilities, driven by insurance technical reserves ($55.8b), loan borrowings ($13.8b), and deposit acceptances ($11.6b). Offsetting these acquisitions was maturity of derivative contracts ($9.9b).
Graph 2. Banks liabilities as a proportion of their financial assets
Banks’ funding of their total financial assets was relatively unchanged this quarter. Funding through deposits increased slightly to 60.4%, which is the highest proportion seen in the time series. The proportion of bank debt securities as a source of funding increased slightly this quarter, while the proportion of funding from equities decreased slightly to 15.8%.
Financial asset portfolio of pension funds, life insurance corporations and non-money market investment funds at end of quarter
Graph 3. Financial assets of Pension funds, Life insurance corporations and Non-money market investment funds
Source(s): Table 18. Financial Assets and Liabilities of Pension Funds ($ million); Table 19. Financial Assets and Liabilities of Life Insurance Corporations ($ million) ; Table 22. Financial Assets and Liabilities of Non-money market investment funds ($ million)
Graph 3 illustrates the financial asset mix at the end of June quarter 2017 of pension funds, life insurance corporations and non-money market investment funds. Overall, these three institutional sectors invest predominately in equity assets.
During June quarter 2017, pension funds increased shares and other equity holdings by 3.2%. At the end of June quarter 2017, pension funds held $1,311.2b in shares and other equity (61.4% of their financial assets), of which $893.6b were issued by domestic sectors and $417.7b were issued by the rest of world.
At the end of June quarter 2017, life insurance corporations held $175.1b in shares and other equity (77.5% of their financial assets), a decrease of 0.2% from the March quarter 2017. Life insurance corporations predominately hold shares and other equities in non-money market financial investment funds ($141.0b) and other private non-financial corporations ($13.2b).
Financial claims between the household sector, pension funds, life insurance corporations, rest of world and investment managers at end of quarter
At the end of June quarter 2017 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $2,271.2b and $62.6b respectively, while shareholders of life insurance corporations had claims of $23.3b. Of the total $2,299.1b assets of pension funds, 47.6% was invested through investment managers, 46.6% was directly invested in financial markets and 5.8% was invested directly in life insurance corporations.
During June quarter 2017, general government invested $22.0b in gross fixed capital formation, with state and local general government accounting for the majority of this investment ($16.2b). National general government invested $5.8b in gross fixed capital formation. State and local general government and national general government recorded gross saving of $7.2b and $7.7b respectively during the quarter. State and local general government and national general government funded their gross fixed capital formation by borrowing in June quarter 2017.
Graph 4. Change in net financial position, General government
National General Government
During June quarter 2017, the net change in financial position for national general government was -$2.8b. This was made up of national general government borrowing $20.9b and acquiring $18.1b in financial assets. The borrowing was predominately driven by $18.1b in issuances of Commonwealth government bonds.
At the end of the June quarter 2017, national general government had total financial assets of $572.6b and total liabilities of $953.3b.
State and Local General Government
During June quarter 2017, the net change in financial position of state and local general government was -$0.6b. State and local general government acquired $0.6b of financial assets, while incurring a net $1.2b of liabilities. This net acquisition of assets was driven by loans and placements ($8.4b) and offset by the sale of equity ($9.3b). State and local general government's net incurrence of liabilities was driven by other accounts payable. At the end of June quarter 2017, state and local general government had total financial assets of $536.0b and total liabilities of $324.7b.
Graph 5. Net issue of debt securities, National general government and Central Borrowing Authorities
Graph 5 illustrates the quarterly net issuance of debt securities for the operations of the national and state and local general governments. During June quarter 2017, the Commonwealth government issued $18.1b of bonds and repaid $0.5b one name paper. For state and local general government, the central borrowing authorities are responsible for the issuance of their debt. During June quarter 2017, the central borrowing authorities issued $3.4b of bonds and repaid $4.4b one name paper.
Central borrowing authorities net incurrence of liabilities was $12.1b and was driven by short-term loan borrowings ($9.5b). Central borrowing authorities acquired $1.7b of financial assets, this was driven by the acceptance of deposits. At the end of June quarter 2017, central borrowing authorities had total financial assets of $362.9b and total liabilities of $390.3b.
REST OF WORLD
Australia’s net international investment position at the end of June quarter 2017 was a net foreign liability of $1,000.3b (net financial asset position of the rest of world), a decrease of $24.4b from the previous quarter with net transactions of $3.9b (net change in financial position) and valuation decreases of $20.5b.
Non-residents investment in Australia recorded transactions of $25.8b and valuation increases of $9.1b, which resulted in an increase of their holdings of Australian assets to $3,237.9b during June quarter 2017. The positive transactions were driven by the acquisition of equities ($24.4b), other accounts payable ($5.2b) and issuance of loans ($4.8b). These were offset by settlement of derivative contracts ($10.1b) and disposal of deposits ($4.4b). The valuation increases were driven by holding of derivative contracts ($18.7b) and bonds of $9.8b.
During June quarter 2017, non-residents increased their liabilities to Australia, with net transactions of $21.9b and valuations of $37.4b, resulting in $2,237.6b of rest of world assets held by Australian residents. The transactions were driven by acceptance of deposits ($19.9b), accounts payable ($13.7b) and loans borrowings ($6.3b), offset by settlement of derivative contracts ($12.2b). The positive valuations were driven by the derivatives market ($23.1b) and unlisted shares and other equities ($11.8b).
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