1301.0 - Year Book Australia, 2005
ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 21/01/2005
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International accounts cover the closely related and integrated balance of payments and international investment position statistics. Diagram 30.1 presents the broad structure and relationship of these statistics. 30.1 RELATIONSHIP BETWEEN THE BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION STATEMENTS Conceptual framework Australia's international accounts statistics, which cover both the balance of payments and the international investment position, are compiled in accordance with international statistical standards as defined in the fifth edition of the International Monetary Fund's Balance of Payments Manual (BPM5). The concepts of residency, transactions, valuation and time of recording are common to the balance of payments and international investment position statistics. The balance of payments accounts, which present systematically the economic transactions between Australia and the rest of the world, incorporate four types of economic transactions. The first involves the provision of real resources, that is, transactions in goods, services and income. The second involves the provision of financial resources, that is, foreign financial assets and liabilities. The third covers those one-sided transactions of a current nature (described as current transfers) that are offsets to transactions in current real or financial resources undertaken without an exchange. Current resources are not associated with, nor finance, fixed assets. For example, famine relief, whether in cash or in kind, would have its offset in current transfers. The fourth type is capital transfers that offset transactions undertaken, without exchange, in fixed assets or in their financing (such as development aid). For example, migrants' funds represent the shift of the migrants' net worth to or from Australia, and are classified as capital transfers. The first and third of these types of transactions make up the current account, while the second type makes up the financial account. The fourth type (capital transfers), together with a minor item for the acquisition and disposal of non-produced, non-financial assets (such as patents), make up the capital account. The double entry accounting system is used for recording balance of payments transactions. Under this system, credit entries, which are shown with no arithmetic sign, are used to record the provision of real or financial resources. Credit entries are therefore required for exports of goods and services, and for income earned by residents (a return for providing the use of financial capital to non-residents, or for providing the labour of Australian residents). Credit entries are also required for providing financial resources to the rest of the world, either as new liabilities (such as issuing bonds), or through returning existing foreign assets (such as selling foreign equity securities to non-residents). Therefore, any credit entry in the financial account will reflect either an increase in Australia's foreign liabilities (more foreign debt or foreign ownership), or a decrease in Australia's foreign financial assets (such as a run-down in foreign exchange reserves). Conversely, debit entries, which are identified by a minus sign (-), are used to record the provision by the rest of the world of real or financial resources to Australia, and are shown against imports of goods and services, income earned from Australia by non-residents, and financial transactions involving either an increase in foreign financial assets or a decrease in foreign liabilities. Transactions in a double entry accounting system are reflected in pairs of equal credit and debit entries. For example, an export transaction for which payment is received through the banking system involves a credit entry for providing the good to a non-resident and a debit entry for being provided with foreign exchange assets due as payment for the export. Any entries that are not automatically paired in a transaction, that is, for which there is no 'quid pro quo', are matched by special offsetting entries. Such offsetting entries are made in the categories 'current transfers' (when offsetting the provision of current resources such as food for famine relief) and 'capital transfers' (when offsetting the provision of capital resources such as development aid to build a new dam). In principle, the net sum of all credit and debit entries is zero. In practice, some transactions are not measured accurately (errors), while others are not measured at all (omissions). Equality between the sums of the credit and debit entries is then brought about by the inclusion of a 'net errors and omissions' item which balances the accounts. Transactions and other changes should be valued in the balance of payments at market prices. However, for practical reasons, transactions are generally valued in the statistics at transaction prices as this basis provides the closest practical approximation to the market price principle. Transactions and other changes recorded in the balance of payments should be recorded at the time of change of ownership. For current account transactions, this occurs when ownership of goods changes, or services are provided. Investment income is recorded on a full accrual basis, that is, when it is earned. Reinvested earnings are calculated for the earnings of the period of account, using current replacement cost estimates of depreciation and excluding holding gains and losses. Current and capital transfers should be recorded when the goods, services, cash, etc., to which they are offsets, change ownership. Those transfers, such as taxes and fines, which are imposed by one party on another, should ideally be recorded at the time of occurrence of the underlying transactions or other flows or events that give rise to the liability to pay. For financial account transactions, the time of recording is at the change of ownership of the financial claims, which by convention is the time at which transactions are entered in the books of the transactors. In practice, the nature of the available data sources is such that the time of recording of transactions will often differ from the time of change of ownership. Where practical, timing adjustments are made for transactions to ensure that they are recorded in the time period in which change of ownership occurs. International investment position statistics provide information on the levels (stock) of Australia's foreign financial assets and liabilities. The investment position at the end of a period reflects the foreign financial asset and liability positions at the start of the period, and the financial transactions (investment flows) from the balance of payments which increase or decrease these assets and liabilities, together with the non-transaction changes due to exchange rate effects, other price effects and changes in the volume of these assets and liabilities that are not due to transactions (such as debt write-off). While the international investment position statistics form an integral part of Australia's balance of payments (diagram 30.1), they are also useful in their own right, for example, in determining the impact of foreign investment policies and the level of Australia's foreign assets and liabilities, including foreign debt. They are also useful when analysing the behaviour of financial markets. As with the balance of payments, market price is the principal method of valuation in international investment position statistics, and financial assets and liabilities are recognised on a change of ownership basis, that is, at the time when the foreign financial asset or liability is acquired, sold, repaid or otherwise disposed of. By convention, this is generally taken to be the time at which the event is recorded in the books. Classifications In the following tables, estimates are presented of the current, capital and financial accounts of Australia's balance of payments. Current and capital account transactions are generally recorded gross. This means that, for each item in the current and capital accounts, the credit entries are recorded separately from the debit entries. For example, goods credits are shown separately from goods debits. For each item in the financial account, however, debit and credit transactions are combined to produce a single result for the item which may be either a net credit or a net debit. For example, in a given period, non-resident purchases of shares issued by companies in Australia (credit) are netted against sales of Australian shares to residents by non-residents (debit) and the net result is recorded in the financial account as either a net credit or a net debit. The current account records transactions between Australian residents and non-residents in goods, services, income and current transfers. Goods are classified into five main components: general merchandise; goods for processing; goods procured in ports by carriers; repairs on goods; and non-monetary gold. Changes of ownership from residents to non-residents are recorded as credits (also referred to as exports), and changes from non-residents to residents are recorded as debits (also referred to as imports). Services, comprising 11 primary components, cover services provided by Australian residents to non-residents (credits) and by non-residents to residents (debits), together with transactions in a few types of goods (e.g. goods purchased by travellers). Income, comprising investment income (e.g. dividends and interest) and compensation of employees (e.g. wages), covers income earned by Australian residents from non-residents (credits) or earned by non-residents from residents (debits). Current transfers cover the offsetting entries required when resources are provided, without something of economic value being received in return. When non-residents provide something to Australian residents, offsetting credits are required; when residents provide resources to non-residents, offsetting debits are required. General government transfers (e.g. official foreign aid) are distinguished from transfers by other sectors. The capital account covers capital transfers (such as migrants' funds), distinguished between general government and other sectors, and the acquisition/disposal of non-produced, non-financial assets. The financial account shows transactions in foreign financial assets and liabilities. The primary split is by functional type of capital (direct investment, portfolio investment, financial derivatives, other investment and reserve assets) further split into assets and liabilities (where appropriate). Within the asset and liability categories, details are presented of instruments of investment and resident sectors (for other than direct investment), and in some cases the contractual maturity of the instruments used. The primary distinction used in international investment position statistics is between assets and liabilities. Assets primarily represent Australian investment abroad, and liabilities primarily represent foreign investment in Australia. The difference between the two represents the net international investment position (graph 30.8 and table 30.9). Australian investment abroad refers to the stock of foreign financial assets owned by Australian residents, after netting off any liabilities of Australian direct investors to their direct investment enterprises abroad. Conversely, foreign investment in Australia refers to the stock of financial assets in Australia owned by non-residents, after netting off any claims of Australian direct investment enterprises on their foreign direct investors. The first breakdown below this asset/liability dichotomy is by functional type of capital, with details of the instruments of investment (table 30.11), the resident sectors and contractual maturities involved. While many types of instruments of investment can be identified, similar instruments are combined for analytical reasons and ease of reporting. Some of those instruments are: Equity capital - which includes ordinary and participating preference shares, units in trusts and net equity in branches. Reinvestment of earnings of direct investors - which refers to income retained within the enterprise from after-tax profits that is attributable to direct investors. Debt securities - which include longer term, generally tradable security instruments such as bonds and debentures, with a contractual maturity of more than one year after issue, together with money market instruments (e.g. bills, commercial finance paper, negotiable certificates of deposit) with a contractual maturity of one year or less. Trade credits - which cover the direct extension by suppliers and buyers for goods and services, including advances for work in progress or to be undertaken. Loans - which cover the direct lending of funds either without a security evidencing the transaction, or with non-negotiable documentation. They include financial leases. Deposits - which comprise both transferable and other deposits. Other assets and liabilities - which consist of miscellaneous accounts in respect of interest, dividends, etc. Statistical overview As shown in table 30.2, the balance on current account for 2003-04 was a deficit of $47.4b, an increase of $7.1b (18%) on the previous year. The deficit on goods and services was $24.1b, an increase of $5.5b on the 2002-03 deficit of $18.6b. The main contributing factors were the decrease in goods credits of $6.8b, down from $116.0b in 2002-03 to $109.2b in 2003-04, and the $1.5b increase in services debits, up from $32.9b in 2002-03 to $34.4b in 2003-04. The net goods deficit rose by $5.4b, the net services deficit by $0.1b and the net income deficit by $1.8b on the previous year. The surplus on capital account increased by $0.2b (21%) to $1.2b in 2003-04. The balance on financial account recorded a net inflow of $47.1b, up $6.9b (17%) on the previous year. Direct investment recorded a net outflow of $14.8b, a $24.6b turnaround on the net inflow of $9.8b in 2002-03. Contributing to the net outflow were a rise in Australian direct investment abroad of $16.2b to $24.4b and a fall of $8.3b in the net inflow of direct investment into Australia. The net inflow on portfolio investment increased $57.5b, while other investment recorded a turnaround of $27.4b to record a net outflow of $11.3b in 2003-04. Reserve assets fell $0.5b, while financial derivatives recorded a turnaround of $0.9b to be $0.9b in 2003-04.
Graph 30.3 illustrates the differing influences of the trade balance and the net income deficit on the balance on current account. The net income deficit rose from $9.2 in 1987-88 to $23.3b in 2003-04. The underlying level of net income continues to drive the level and direction of the current account deficit, as Australia continues to service its external liabilities. However, the trade deficit has fluctuated quite significantly over the past 16 years, moving from a deficit of $2.3b in 1987-88 to a deficit of $24.1b in 2003-04. Table 30.4 shows the annual levels of Australia's official reserve assets and both the end of year and period average exchange rates for the major currencies, special drawing rights, and the trade weighted index.
International trade in goods and services (balance of payments basis) Australia's international trade in goods and services for the six years to 2003-04 is shown in tables 30.5 (exports or credits) and 30.6 (imports or debits). The tables provide both current price and chain volume measures. The components of merchandise goods shown in tables 30.5 and 30.6 are defined in terms of groupings of items in the United Nations Broad Economic Categories (BEC) for credits, and a version of the BEC for Balance of Payments purposes modified for debits. Chain volume measures of exports and imports remove the effects of price changes. They provide measures, in dollar values, which indicate changes in the actual volume of exports and imports. The current price value of a transaction may be expressed conceptually as the product of a price and quantity. The value of the transaction in chain volume measures may then be thought of as being derived by substituting, for the current price, the corresponding price in the chosen reference year. There are, however, many transactions recorded in statistics of international trade in goods and services for which it is not possible to apply such an approach. In such cases it is necessary to make assumptions and approximations (e.g. revaluing by means of the price index which is considered to be most closely related to the commodity involved). The published chain volume measures should be viewed in this light. For more information on chain volume measures refer to Information Paper: Australian National Accounts, Introduction of Chain Volume and Price Indexes (5248.0). In current price terms the balance on goods and services recorded a deficit of $24.1b in 2003-04, an increase of $5.5b (29%) on the $18.6b deficit recorded in 2002-03. Between these two years, goods and services credits fell $5.4b to $143.2b (down 4%) while debits rose by $0.1b to $167.3b (up 0.1%). Over the same period goods credits fell $6.8b (6%) to $109.2b, with rural goods falling $1.0b and non-rural goods down by $5.0b. Goods debits fell by $1.4b (1%) to $132.9b. Consumption goods rose $1.7b, capital goods rose $0.4b, while intermediate and other goods fell $3.0b. Contributing to the fall in the intermediate and other goods were imports of parts for transport equipment, down $0.7b to $6.6b, and other goods down $0.6b to $5.1b in 2003-04. More detailed information on exports and imports of goods, on a merchandise trade basis without adjustment for balance of payments purposes and trade in services, are shown later in this chapter.
Table 30.7 presents various price indexes for Australia's trade in goods and services. The implicit price deflators (IPDs) are derived by dividing the current price measures by the corresponding chain volume measures. These IPDs reflect not only price change, but compositional effects from year to year. Unlike IPDs, chain price indexes measure only the impact of a price change. The chain Laspeyres price index for goods and services credits fell 4.1% in 2003-04 to 95.9. The fall resulted from a stronger Australian dollar in 2003-04. The chain Laspeyres price index for goods and services debits fell 11.1% to 88.9. Australia's terms of trade (derived by dividing the IPD for credits by the IPD for debits) rose by 8.0% in 2003-04, resulting from a 4.5% fall in the IPD for goods and services credits and a 11.5% fall in the IPD for goods and services debits (table 30.7).
International investment position Australia's net international investment position is the difference between the levels of Australia's foreign financial liabilities and the levels of its foreign financial assets. Historically, Australia has had a net liability position with the rest of the world. Australia's net international investment position at 30 June 2004 was a net foreign financial liability of $501.1b. This was up $50.4b (11.2%) on the position a year earlier and resulted from net increases of $14.1b in the level of foreign equity and $36.3b in the level of foreign debt. Graph 30.8 shows the components of Australia's international investment position between 30 June 1994 and 30 June 2004. It shows that the increase in net foreign liabilities primarily reflects increase in net foreign debt liabilities. Table 30.9 shows a reconciliation between opening and closing levels for foreign financial assets, foreign financial liabilities and Australia's net international investment position. Increases or decreases in these assets and liabilities are due to financial transactions (investment flows), price changes, exchange rate changes and other adjustments.
Foreign debt Foreign debt is a subset of the financial obligations that make up a country's international investment position. It includes all the non-equity components of the net international investment position, that is, all recorded assets and liabilities other than equity securities and direct investment equity capital, including reinvested earnings. The level of borrowing and other non-equity liabilities of Australian residents at a particular date make up Australia's foreign debt liabilities. The level of Australian lending abroad and other non-equity assets at the same date are deducted from the level of borrowing to arrive at Australia's net foreign debt. The level of net foreign debt at 30 June 2004 was $393.5b, up $36.3b (10.2%) on 30 June 2003. The increase during 2003-04 resulted from a $75.5b (13.0%) increase in foreign debt liabilities partly offset by an increase of $39.2b (17.7%) in foreign debt assets (table 30.10). At 30 June 2004 the net foreign debt of the public sector (general government plus public financial and non-financial corporations) was $6.2b, which accounted for 1.6% of total net foreign debt. Net foreign debt levels of private financial corporations and private non-financial corporations were $314.0b (79.8% of total net foreign debt) and $73.2b (18.6%) respectively (table 30.10).
Levels of foreign investment in Australia and Australian investment abroad In table 30.11, levels of investment are categorised by direction (Australian investment abroad and foreign investment in Australia), type of investment (direct, portfolio, financial derivatives, other and reserve assets) and instrument. Direct investment is a category of international investment that reflects the objective of obtaining a lasting interest by a resident in one economy in an enterprise in another economy, and implies a significant degree of influence by the investor in the management of the enterprise. A direct investment relationship is established when an investor, who is a resident in one economy, holds 10% or more of the ordinary shares or voting stock of an enterprise (direct investment enterprise) in another economy. The portfolio investment category covers investment in equity and debt securities other than direct investment, financial derivative assets, other investment assets and reserve assets. The items Australian investment abroad and foreign investment in Australia in table 30.11 do not equate with foreign assets and liabilities respectively in table 30.9. The difference is due to netting of assets and liabilities in regard to direct investment, both abroad and in Australia. Debt claims by direct investment enterprises on their direct investors, separately identified in table 30.11, are netted off in that table against liabilities to direct investors. These items are not netted off in table 30.9. At 30 June 2004 Australian investment abroad totalled $557.3b, up $91.8b (19.7%) on the level a year earlier. This rise was the net effect of a $27.9b increase in direct investment abroad, a $38.2b increase in portfolio investment assets, a $1.2b increase in financial derivative assets, a $15.0b increase in other investment assets and a $9.6b increase in reserve assets. Foreign investment in Australia totalled $1,058.5b at 30 June 2004, up $142.2b (15.5%) on June 2003. This rise was due to a $16.7b increase in direct investment in Australia, a $126.6b increase in portfolio investment liabilities, a $5.2b decrease in financial derivative liabilities and a $4.1b increase in other investment liabilities.
Ratios Table 30.12 and graph 30.13 show the ratio of the current account deficit to gross domestic product (GDP) was 5.8% in 2003-04, an increase on the previous year, and above the average for the past 10 years (4.5%). Graph 30.14 shows the ratio of Australia's net foreign liabilities (Australia's net international investment position) to GDP has risen for most years since 1994 and reached its highest level of 61.8% at 30 June 2004. The ratio of net foreign debt to GDP was 48.5% at 30 June 2004, an increase over the 47.2% recorded the previous year. The ratio of net foreign equity to GDP was 13.3% at 30 June 2004, up on the ratio at 30 June 2003 and above the average for the last 10 years (12.8%). Table 30.12 shows the net investment income payable on net foreign debt as a percentage of goods and services credits was 8.5% in 2003-04. The ratio of net investment income payable on equity to goods and services credits was 7.4% in 2003-04, up from 6.4% the previous year.
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