Insights from the non-financial corporations' balance sheet

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Released
30/10/2020
Source
Australian System of National Accounts, 2019-20 financial year

Balance sheets are important economic analysis tools that provide an overview of the non-financial assets[1] and financial[2] resources of the Australian economy. This spotlight focuses on the balance sheet of non-financial corporations and how it has evolved over the last 30 years. Underlying trends in capital investment, their funding, and the value of Australia’s mineral and energy resources which are mined by some non-financial corporations are examined.

Investment in produced non-financial assets (known as gross fixed capital formation), such as mining infrastructure, requires current production and generates future productive activity. As such the level of investment in these assets is an important contributor to GDP and to related employment and productivity.

Historically, the household sector has been the biggest holder of excess financial assets, such as deposits, shares and superannuation. The majority of these household financial assets are issued through the financial sector, which uses these funds to provide financial resourcing to non-financial corporations to invest in productive capital.

In the past, capital investment by non-financial corporations has generally been financed through both saving and borrowing mainly facilitated through equity markets and loan borrowings. Over the last couple of years borrowing by non-financial corporations has slowed, especially for private non-financial corporations[3]. In 2020, private non-financial corporations funded investment through saving, lending their excess saving to other sectors, and became a net lender.

Non-financial corporations' investment trends

Non-financial corporations hold the majority of fixed assets in the Australian economy with non-dwelling construction (NDC), which includes buildings, infrastructure and mining construction being their largest holding of fixed assets.

From 1990 to 2015 the share of total NDC assets held by non-financial corporations increased from just under 50% to a peak of 67%. This period saw an average annual growth of 7.4% with the total value of assets rising from $278 billion to over $1.6 trillion. This was primarily due to large investments by mining corporations between 2005 and 2015.

In the past five years, non-financial corporation investment in NDC slowed, resulting in an average annual growth of 4% of NDC assets. Government investment in NDC assets picked up during this period, but there remained relatively low levels of growth of national NDC assets from 2015 to 2020.

Financial assets as a proportion of non-financial corporations’ total assets has significantly risen since 2017. Currency and deposit assets in particular increased in recent years as businesses opted to invest their profits (measured as gross operating surplus) in financial assets rather than in fixed assets. In 2020, the increase in deposit assets was $96.7b, this long-term trend was exacerbated by the uncertainty brought on by COVID-19.

Private non-financial corporations’ sources of financing

Over the five years to 2019, private non-financial corporations’ funding through equity increased from 64% to 69% of total liabilities[4] reflecting increased issuance coupled with positive price changes in most years. In contrast, for the same period the share of funding through loans decreased from 25% to 23% and debt securities fell from 11% to 8% as the weak appetite for investment required lower funding.  The COVID-19 pandemic did disrupt these trends in 2020, as non-financial corporations increased their loan borrowing in response to short term liquidity requirements in response to economic uncertainty.

Rest of the world funding from debt securities, loans and equities showed growth in line with growth in NDC investment from the period 1990 to 2015. The Australian economy includes private non-financial corporations that are owned by non-residents, particularly in the mining sector.  These corporations obtain some of their funding directly from their non-resident parent company.  Funding from the rest of the world increased from $133 billion in 1990 to $1.2 trillion in 2015, growing on average 8.9% a year. This changed in the last 5 years with average growth in funding slowing to 6.6%. The funding slowdown was driven by loan and debt security markets and was closely linked to lower demand in capital investment, particularly in the mining sector as NDC investment wound down. 

The weakness in capital investment coupled with strong equity issuance resulted in relatively strong profits from 2016 onwards, which were funnelled into dividend payments, particularly in 2018 and 2019. In 2020, many private non-financial corporations reduced or cancelled dividend payments to preserve liquidity in response to COVID-19.

Mineral and energy resources

Much of the growth in private non-financial corporations’ deposit assets and dividend payments was driven by mining company profits. In the last two years, the key driver was the surge in the value of mineral and energy resources, in particular iron ore due to favourable export prices.

The unmined minerals and energy resources (future mining corporation production), are included as a non-produced asset in the national balance sheet. The value of these unmined assets increases as price increases for mined mineral and energy resources, as well as when further discoveries are made or new mining infrastructure allows extractions which were previously uneconomic.

In Australia unmined mineral and energy resources are owned by the general government and are recorded on the general government balance sheet as non-produced assets. The mining corporations that mine these assets pay the government mining royalties, which are recorded in the non-financial corporation income account as rent on natural assets.

The value of iron ore increased substantially from 2010 as demand from China drove up prices and completion of infrastructure projects enabled a surge in production. At the same time LNG increased rapidly as new investment projects were completed, expanding production capacity. Gold and crude oil make up the majority of the value of other commodities. The value of gold increased steadily from 2005 as prices rose while production remained relatively stable. In contrast, the value of crude oil reached its peak in 2009, before falling prices drove a decline in value.

Footnotes

[1] The non-financial assets are broken down to produced and non-produced assets. Produced assets are outputs of the production process and are also productive capital inputs to the production of goods and services in the economy. There are two categories of produced assets, fixed assets (e.g. dwellings, non-dwelling construction and machinery and equipment) and inventories. Non-produced assets come into existence in ways other than through the production process, and include natural resources such as land and mineral and energy resources.

[2] Financial assets and liabilities are resources available in the economy either for investment in production of non-financial assets, or stored value for future investment or consumption.

[3] Non-Financial corporations are further categorised as private and public in the Australian National Accounts, this split is not available for the balance sheets.

[4] For funding, the total liabilities definition excludes derivatives and accounts payable.