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30.1 RELATIONSHIP BETWEEN THE BALANCE OF PAYMENTS AND INTERNATIONAL INVESTMENT POSITION STATEMENTS
Source: Balance of Payments and International Investment Position, Australia: Concepts, Sources and Methods (5331.0).
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, 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 do they 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. For example, the provision of foreign aid funds to build roads is classified as a capital transfer.
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 as payment for the export. Any entries 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 are the balance sheet of the levels (stock) of Australia's foreign financial assets and liabilities. The investment position at the end of a specific period reflects the financial transactions (investment flows) and other changes (non-transaction changes) due to exchange rate effects, other price effects and changes in the volume of these assets and liabilities, all of which affect the level of assets and liabilities that occurred during the period.
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.
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), with general government distinguished from 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.
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 presentation 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 tradeable 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 of credit 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.
The balance on current account for 2004-05 was a deficit of $57.2 billion (b), an increase of $9.4b (20%) on the previous year (table 30.2). The net income deficit rose $7.5b (32%) with an increase in income debits of $11.2b (28%) partly offset by an increase in income credits of $3.7b (22%). The deficit on goods and services was $25.5b, an increase of $1.8b on the 2003-04 deficit of $23.8b. The net goods deficit rose by $0.1b and the net services deficit rose by $1.7b on the previous year.
The surplus on capital account increased by $0.1b (10%) to $1.2b in 2004-05.
The balance on financial account recorded a net inflow of $55.7b, up $9.8b (21%) on the previous year. Direct investment recorded a net inflow of $56.9b, a $73.0b turnaround on the net outflow of $16.0b in 2003-04. Contributing to the net inflow was a rise in Australian direct investment abroad of $83.0b to $55.4b and a fall of $10.1b in the net inflow of direct investment into Australia. The net inflow on portfolio investment decreased $74.2b, while other investment recorded a turnaround of $12.4b to record a net outflow of $1.8b in 2004-05. Reserve assets rose $3.0b, while financial derivatives recorded a turnaround of $1.6b to be $0.7b in 2004-05.
Graph 30.3 shows the differing influences of the trade balance and the net income deficit on the balance on current account. The net income deficit rose from $12.2b in 1988-89 to $31.2b in 2004-05. The underlying level of net income drives the level and direction of the current account deficit, as Australia continues to service its external liabilities. The trade deficit moved from a deficit of $6.9b in 1988-89 to a deficit of $25.5b in 2004-05 but fluctuated quite significantly over this period.
Table 30.4 describes 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 2004-05 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 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.
The current price value of a transaction may be expressed as the product of a price and quantity.
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.
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).
In current price terms, the balance on goods and services recorded a deficit of $25.5b in 2004-05, an increase of $1.8b (7%) on the $23.8b deficit recorded in 2003-04. Between these two years, goods and services credits rose $18.8b (13%) to $162.3b while debits rose $20.6b (12%) to $187.8b.
Over the same period, goods credits rose $17.8b (16%) to $127.3b, with rural goods up $1.1b and non-rural goods up $16.8b. Goods debits rose $17.9b (13%) to $150.9b. Consumption goods rose $4.2b, capital goods rose $3.8b, while intermediate and other goods rose $9.8b. Contributing to the rise in the intermediate and other goods were imports of fuels and lubricants, up $4.8b to $14.8b, and processed industrial supplies, up $2.0b to $14.0b.
More detailed information on exports and imports of goods, on a merchandise trade basis without adjustment to a balance of payments basis, and trade in services, is 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 rose 10.7% in 2004-05 to 110.7. The chain Laspeyres price index for goods and services debits rose 0.7% to 100.7.
Australia's terms of trade (derived by dividing the IPD for credits by the IPD for debits) rose by 9.8% in 2004-05, resulting from a 10.4% rise in the IPD for goods and services credits and a 0.5% rise 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 2005 was a net foreign financial liability of $516.8b. This was up $46.3b (9.8%) on the position a year earlier and resulted from net increases of $11.1b in the level of foreign equity and $35.3b 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 2005. It shows that the increase in net foreign liabilities primarily reflects increase in net foreign debt liabilities.
Table 30.9 provides 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 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 2005 was $430.0b, up $35.3b (8.9%) on 30 June 2004. The increase during 2004-05 resulted from a $49.1b (7.4%) increase in foreign debt liabilities partly offset by an increase of $13.8b (5.2%) in foreign debt assets (table 30.10).
At 30 June 2005 the net foreign debt of the public sector (general government plus public financial and non-financial corporations) was $7.3b, which accounted for 1.7% of total net foreign debt. Net foreign debt levels of private financial corporations and private non-financial corporations were $334.7b (77.8% of total net foreign debt) and $87.9b (20.5%) 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 foreign 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 2005 Australian investment abroad totalled $590.4b, down $2.2b (0.4%) on the level a year earlier. This fall was the net effect of a $29.1b decrease in direct investment abroad, a $24.5b increase in portfolio investment assets, a $4.0b decrease in financial derivative assets, a $0.5b increase in other investment assets and a $5.8b increase in reserve assets. The item 'Australian investment abroad in portfolio investment assets; debt securities' includes investment by residents of Australia in Kangaroo bonds (see article Kangaroo bonds in this chapter).
Foreign investment in Australia totalled $1,107.2b at 30 June 2005, up $44.1b (4.2%) on June 2004. This rise was due to a $3.1b increase in direct investment in Australia, a $40.7b increase in portfolio investment liabilities, a $4.3b increase in financial derivative liabilities and a $3.9b decrease in other investment liabilities.
Table 30.12 and graph 30.13 show that the ratio of the current account deficit to gross domestic product (GDP) was 6.7% in 2004-05, an increase on the previous year, and above the average for the past ten years (4.7%).
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 60.8% at 30 June 2005. The ratio of net foreign debt to GDP was 50.6% at 30 June 2005, an increase over the 48.5% recorded the previous year. The ratio of net foreign equity to GDP was 10.2% at 30 June 2005, up on the ratio at 30 June 2004 and below the average for the last ten years (11.2%).
Table 30.12 shows the net investment income payable on net foreign debt as a percentage of goods and services credits was 9.5% in 2004-05. The ratio of net investment income payable on equity to goods and services credits was 9.4% in 2004-05, up from 7.3% the previous year.
FOREIGN OWNERSHIP OF EQUITY IN AUSTRALIA
The total value of equity on issue by Australian enterprise groups at 30 June 2005 stood at $1,538b (table 30.15). Of this total, 63% related to shares or equivalent equity instruments issued by non-financial corporations. Banks accounted for a further 15% of total equity issued, and other financial enterprises, including life offices and superannuation funds (but excluding non-bank deposit taking institutions and the central bank), accounted for 19%. Lesser amounts were issued by non-bank deposit taking institutions (3% of the total) and the central bank (1%).
Of the total equity on issue by Australian enterprise groups at 30 June 2005, non-residents held equity valued at $429b (29%), while residents held $1,108b (71%).
Although the proportion of equity held by non-residents remained relatively stable, the total value of equity on issue increased by 28%, from $1,205b to $1,538b, over the period from 30 June 2001 to 30 June 2005.
Analysed by sector, the value of equity on issue by non-financial corporations rose 21% to $971b over the period 30 June 2001 to 30 June 2005, while the proportion held by non-residents decreased slightly from 33% to 32%.
The amount issued by banks increased by 27% between 30 June 2001 and 30 June 2005, while the proportion of non-resident holdings of the total equity issued by banks decreased from 27% to 25% over the same period.
The value of equity issued by life offices, superannuation funds and other financial enterprises increased by 54% over the period from 30 June 2001 to 30 June 2005, with foreign ownership of this equity falling from 19% to 17% over the same period.