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1992 Feature Article - Australia's Foreign Debt
GRAPH 1. FOREIGN DEBT, AT END OF YEAR
The components of a change in foreign debt are capital transactions (recorded on a net basis, for example, drawings less repayments); changes due to exchange rate movements; and other factors, such as changes in the market value of a claim or liability, reclassifications and reconciliation errors.
As shown in Table 1, $105,309 (88 per cent) of the change in the level of net debt during the period 30 June 1984 to 30 June 1992 was through capital transactions, while $10,491 million. (9 per cent) of the change in level of net debt was due to changes in the exchange rate.
TABLE 1. RECONCILIATION OF OPENING AND CLOSING LEVELS OF NET FOREIGN DEBT ($A MILLION)
Several factors contributed to the rise in Australia’s net foreign debt over the period of observation.
GRAPH 2. NET CAPITAL TRANSACTIONS, PROPORTIONS OF TOTAL BY INSTRUMENT OF INVESTMENT
FOREIGN DEBT TO GDP
The comparison of the level of foreign debt with other economic variables allows a more meaningful interpretation of its significance. To place the extent of foreign debt in context and to permit more valid comparisons over time and between countries, the level of debt is often expressed as a percentage of the national accounting measure of domestic production, Gross Domestic Product (GDP). Movements in the ratio are a useful indicator of the changing significance of foreign debt.
GRAPH 3. RATIO OF FOREIGN DEBT TO GDP
A constant foreign debt to GDP ratio during a period when foreign debt is increasing could reflect, for example, the financing requirements of an expanding economy. As can be seen in Table 2 below, Australia’s net debt ratio increased rapidly over the period 1980-81 to 1985-86, from 6.1 per cent to 31.4 per cent, as debt rose more quickly than GDP. It then increased more slowly to 39.0 per cent in 1991-92.
TABLE 2. AUSTRALIA'S NET FOREIGN DEBT AND GDP
MEASUREMENT OF DEBT BURDEN
The existence of foreign debt involves an obligation of the domestic economy to service that debt. Interest payments on debt are an important aspect of the impact of foreign debt. The interest burden adds directly to the current account deficit. The amount of net interest payable abroad on net foreign debt increased steadily up until 1990-91 as the level of net foreign debt increased. However, in 1991-92 net interest payable abroad fell to $11,355 million, a decrease of 11 per cent, reflecting the falls in Australian and overseas interest rates.
It is important to distinguish between gross and net interest payable. Gross interest payable is income payable on foreign borrowing, while net interest payable is income payable on foreign borrowing less income receivable on Australian lending abroad and reserve assets. The gap between gross and net interest payable has been widening in recent years as income receivable on Australian lending abroad and reserve assets has grown, from $96 million in 1980-81 (estimates of interest payable on net foreign debt and other liabilities are not available separately for periods prior to 1980-81) to $2,196 million in 1991-92. However, it is clear from Graph 4 that, compared to the growth in interest receivable, the growth in interest payable on foreign borrowing was substantial. Over the same period, it rose from $1,175 million to $13,551 million, an increase of $12,376 million.
GRAPH 4. INTEREST PAYABLE ON FOREIGN BORROWING
Debt service ratios portray an economy’s “capacity to pay” the costs associated with debt obligations. There are a number of alternative measures:
GRAPH 5. NET INTEREST PAYABLE RATIOS
Interest payable is affected by many factors, including the level of debt financing, the relative attractiveness of debt versus equity, different interest rates available overseas compared with those prevailing in Australia, and the currencies in which borrowing is denominated. In Australia’s period of high inflation, interest rates were high, leading to enterprises borrowing from abroad, where interest rates were comparatively lower. In turn, this resulted in a rise in foreign debt and consequently a rise in interest payable abroad. However, low inflation and falling interest rates in recent years helped negate this impact.
As different foreign currencies have different interest rates, changes in the currency composition of Australia’s net foreign debt will affect the amount of net interest payable on that debt. Graph 6 shows the percentage of foreign borrowing denominated in Australian dollars, US dollars and other currencies. At 30 June 1992, 59 per cent of foreign borrowing was denominated in foreign currency, and two-thirds of that was denominated in US dollars. The different interest rates underlying this range of currencies will impact on the level of interest payable and the extent of the impact will vary as these rates change and as the currency composition of debt changes. The proportion of Australia’s foreign debt denominated in Australian dollars grew steadily over the period 1985-86 to 1991-92 (a consistent time series for currency data is available from 30 June 1986), from 23 percent to 41 percent.
GRAPH 6. FOREIGN BORROWING BY CURRENCY, AT END OF YEAR
The maturity structure of foreign borrowing also changed over time. In the years of high inflation and high interest rates in the 1980s, investors preferred borrowing at call within a year or with short contractual terms so that they were not locked into long term commitments. While inflation in Australia had fallen by the end of 1991-92, Australian interest rates remained high in relation to those prevailing in the rest of the world and the trend towards short term borrowing continued.
Graph 7 shows that the value of foreign borrowing with terms of more than ten years declined slowly over the period 1985-86 to 1991-92 (the period for which maturity data are available). In contrast, debt with a term of less than one year rose steeply. At 30 June 1986, the value of foreign borrowing outstanding with a contractual maturity of one year or less was $15,871 million (22 per cent of foreign borrowing domiciled abroad). By 30 June 1992, this had reached $67,939 million (44 per cent of foreign borrowing domiciled abroad).
GRAPH 7. FOREIGN BORROWING DOMICILED ABROAD (a) MATURITY OF LEVELS OUTSTANDING, AT END OF YEAR
COMPOSITION OF AUSTRALIAN BORROWING
The main countries to whom foreign borrowing is owed are the USA, Japan, the UK, the ASEAN countries, Switzerland and the international capital markets (the category used for securities issued on several markets at once, e.g. Eurobonds). These account for 78 per cent of all foreign borrowing domiciled abroad at 30 June 1992. The main sources of funds have changed over time. It can be seen in Table 3 that the relative importance of both the USA and the UK declined by about half over the period 30 June 1978 to 30 June 1992, while the proportion of debt owed to Japan trebled. Capital raisings on international capital markets more than trebled over the period 30 June 1985 to 30 June 1992.
TABLE 3. PERCENTAGE SHARE OF TOTAL FOREIGN BORROWING IN AUSTRALIA BY COUNTRY OF CREDITOR
Changes in the exchange rate also affect the level of net foreign debt. When the exchange rate deteriorates, the amount of foreign borrowing, converted to Australian dollars, increases. Although the Australian dollar value of Australian lending abroad and reserve assets is also affected by exchange rate variations, it will be affected differently due to the different currency composition of foreign borrowing and lending and reserve assets. It can be seen in Table 1 that in the years 1984-85, 1987-88 and 1990-91, exchange rate movements represented a significant proportion of the change in the level of debt. This coincided with the marked depreciations (1984-85 and 1990-91) and appreciations (1987-88) of the Australian dollar against other currencies. Overall, exchange rate movements contributed $10,491 million to the change in the level of net foreign debt from 30 June 1984 to 30 June 1992 (see Table 1).
The proportions of foreign borrowing attributable to the official and non-official sectors changed very little over time. The official sector, comprising General Government institutions and the Reserve Bank, increased its share of borrowings from 23 per cent ($1,403 million) at 30 June 1976 to 24 per cent ($45,290 million) at 30 June 1992. However, within this category the relative importance of “Commonwealth” and “State” governments was reversed. At 30 June 1984 the relative proportions were 96 per cent and 4 per cent respectively but by 30 June 1992 the proportions were 34 per cent and 66 per cent. This largely reflects:
GRAPH 8. LEVELS OF OFFICIAL SECTOR BORROWING, AT END OF YEAR
In the non-official sector, public trading and financial enterprises accounted for 18 per cent ($33,156 million) of total foreign borrowings at 30 June 1992 while the private sector accounted for 58 per cent ($107,351 million). This compares with shares of 11 per cent ($1,497 million) and 47 per cent ($6,314 million) respectively at 30 June 1980 (data only being available from 1980).
GRAPH 9. LEVELS OF NON-OFFICIAL SECTOR BORROWING, AT END OF YEAR
Financial enterprises and trading enterprises have had different impacts on net foreign debt. The net foreign debt of trading enterprises declined for the first time during the period of this study from a high of $65,764 million at 30 June 1990 to $62,591 million at 30 June 1992. Financial enterprises continued to expand their levels of net foreign debt (by 14 per cent in 1989-90, 21 per cent in 1990-91, and 16 per cent in 1991-92) to reach a level of $65,212 million at 30 June 1992. This differing pattern reflected in part the shakeout in the trading enterprises sector in the late 1980s and early 1990s when assets were sold and the proceeds were used to repay debt. In addition, trading enterprises refinanced locally as domestic interest rates fell, while financial enterprises continued to source funds for on-lending from offshore.
GRAPH 10. FINANCIAL AND TRADING ENTERPRISES NET NON-OFFICIAL FOREIGN DEBT
It is not possible to make reliable international comparisons of foreign debt. There are major data gaps and inconsistencies between countries. Even the terms “gross debt” and “net debt” can be highly misleading as different countries use various criteria for determining what is and is not, included in measures of debt. Differences in coverage and valuation also limit international comparability of foreign debt statistics. For example, New Zealand does not include domestically issued securities held by non-residents in its debt statistics. In addition, most countries still collect data on a book value basis, while Australia collects data on a market value basis in accordance with internationally agreed principles.
Australia’s net foreign debt increased steadily over the period of this study and reached $150,050 million at 30 June 1992 . Although exchange rate variations contributed to the increase, net new borrowings were consistently the main component of the increase in net foreign debt. The official sector accounted for only a small part of these borrowings - the majority of borrowings were by private trading enterprises, sourced mainly from the USA, UK, Japan and international capital markets. The ratio of net foreign debt to GDP rose from 3.1 per cent at 30 June 1976 to 39.0 per cent at 30 June 1992.
This feature article was contributed by Jane Griffin-Warwicke, ABS.
For more information
The data used in this article are mainly from the annual publication International Investment Position: Australia (cat. no. 5305.0) and the quarterly publication International Investment Position: Australia (cat. no. 5306.0).
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