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During December quarter 2015, private non-financial corporations invested $48.3b in gross fixed capital formation, funded through gross saving (net saving plus consumption of fixed capital) of $41.4b and net borrowing of $29.3b (change in net financial position). Their net borrowing was a result of incurring $17.8b in liabilities, mainly in the form of equity issuance ($10.0b) and loans and placements ($8.7b), and the sale of financial assets (-$11.5b), driven the repayment of loans of -$15.3b during the quarter.
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 0.75 in December quarter 2015, decrease of 0.03 from September Quarter 2015.
As at December 2015 the adjusted ratio was 1.22, a slight fall from the September 2015 ratio. The adjusted ratio reflects the removal of price change from the original series and therefore provides an indicator of leverage without the market price changes.
FINANCIAL ASSETS AND LIABILITIES OF FINANCIAL CORPORATIONS
During December quarter 2015 financial corporations acquired $25.7b in financial assets. Loans to the household sector ($26.9b), the rest of the world ($14.2b) and other private non-financial corporations ($9.0b) drove the acquisition in assets, along with $26.8b in equity holdings during the quarter. To fund their asset acquisition financial corporations incurred $23.8b of liabilities, with $20.9b from insurance technical reserves (most of which were superannuation reserves) and $20.8b from deposits.
Graph 2. Banks liabilities as a proportion of their assets
Banks funding of their total assets through deposits increased to 56.1% during December quarter 2015, while the proportion of banks funding through debt securities increased slightly, due to short term securities. Banks net equity issuance of $4.6b and revaluations of $43.5b increased banks funding through equity to 16.5% in December quarter 2015.
Financial asset portfolio of pension funds, life insurance corporations and non-money market investment funds at end of quarter
Graph 3. Assets of Pension funds, Life insurance corporations and Non-money market investment funds
Source(s): Table 18. Financial Assets and Liabilities of Pension Funds ($ 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)
The graph above illustrates the financial asset mix at the end of December quarter 2015 of pension funds, life insurance corporations and non-money market investment funds. Overall, these three institutions invest predominately in equity assets.
During December quarter 2015, pension funds increased shares and other equity holdings by $43.2b or 4.1%, driven mainly by revaluations ($29.5b). At the end of December quarter 2015, pension funds held $1,092.5b in shares and other equity (55.8% of their assets) of which $752.2b were issued domestically and $340.3b were issued by the rest of world.
At the end of December quarter 2015, life insurance corporations held $242.3b in shares and other equity (82.1% of their assets), an increase of $5.5b or 2.3%. Life insurance corporations predominately held shares and other equities in non–money market financial investment funds $200.6 and other private non-financial corporations $19.2b.
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 December quarter 2015 the household sector claims on the net equity in reserves of pension funds and of life insurance corporations were $1,936.6b and $61.9b respectively, while shareholders of life insurance corporations had claims of $22.6b. Of the total $1,958.4b assets of pension funds, 44.6% was invested through investment managers, 44.9% was directly invested in financial markets and 10.5% was invested directly in life insurance corporations..
During the December quarter 2015, general government invested $12.6b in gross fixed capital formation with state and local general government accounting for majority of this investment at $8.2b. State and local general government investment in gross fixed capital formation was funded through $7.7b in net savings plus consumption of fixed capital and $0.8b in net borrowings.
Graph 4. Change in net financial position, General government
National General Government
During December quarter 2015, the net change in financial position (net borrowing) for national general government was -$8.2b. National general government sold a net $4.0b in financial assets while incurring $4.2b in liabilities. Net incurrence of liabilities was driven by net issuances of Commonwealth government bonds ($8.4b) and partially offset by Treasury notes maturities ($3.5b).
National general government disposed of financial assets during the quarter driven by the withdrawal of deposits with the central bank (-$11.6b). This was partially offset by transactions in accounts receivable of $7.7b.
At the end of the December quarter 2015, national general government had total financial assets of $482.8b and total liabilities of $798.8b.
State and Local General Government
During December quarter 2015, the net change in financial position (net borrowing) of state and local general government was $0.8b. During the quarter transactions in total financial assets were -$2.1b and total liabilities were -$2.9b.
Net disposal of financial assets was driven by the sale of equities issued by state and local public non-financial corporations of -$10.8b, which was offset by the issuance of loans and placements of $3.1b with central borrowing authorities and $5.4b in deposits accepted by banks. These transactions were driven by the privatisation of state owned non-financial corporations.
Net transactions in liabilities were driven by repayment of long term loan borrowings ($3.5b). At the end of December quarter 2015, state and local general government had total financial assets of $469.0b and total liabilities of $327.9b.
Graph 5. Net issue of debt securities, National general government and Central Borrowing Authorities
The graph above illustrates the quarterly net issuance of debt securities for the operations of the national and state and local general governments. For state and local general government, the central borrowing authorities are responsible for the issuance of their debt.
Central borrowing authorities recorded total transactions of -$5.1b in liabilities. This was driven by transactions of -$3.1b in short term loans and placements and -$2.4b in bonds. Total transactions in financial assets was -$6.7b. This was driven by loans and placements of -$6.5b. At the end of December quarter, central borrowing authorities had total liabilities of $384.2b and total assets of $366.6b.
REST OF WORLD
Australia’s net international investment position at the end of December quarter 2015 was a net foreign liability of $943.7b (net financial asset position of the Rest of World), an increase of $19.2b from the previous quarter with net transactions of $21.1b and valuation decreases of $1.9b.
Non-residents had net transactions of -$2.4b of Australian financial assets and valuation decreases of $30.3b, which resulted in a decrease in their holdings of Australian financial assets to $3,086.2b during December quarter 2015. The valuation decreases were driven by bonds (-$32.7b), loans and placements (-$9.1b) and deposits (-$6.7b). These valuation decreases were offset by a valuation increase in equities ($19.8b), an increase after two consecutive quarterly declines.
Australian residents had net transactions of -$23.5b in the rest of world liabilities and valuation decreases of $28.5b, which resulted in $2,142.5b of rest of world assets held by Australian residents during December quarter 2015. The negative transactions were driven by derivatives (-$38.8b), partially offset by $17.7b in deposits. The valuation decreases were driven by derivatives (-$19.5b), deposits (-$5.2b) and bonds (-$4.4b).
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