Australia’s Debt Blow Out.

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Australia’s Debt Blow Out
August 31 2007 - Australasian Investment Review – (AIR)

It might be a bit over the top, but if Australia was a sub-prime mortgage holder, would you refinance, given the financial background?

On the plus side, we are well-placed to ride the China economic boom. We have no net Federal Government debt (but we do have Federal Government liabilities for superannuation), we have a strong economy, a solid Federal Budget surplus, strong economic growth, an inflation niggle or three, not to mention low unemployment and solid consumer and business demand and investment.

Our superannuation and other investment funds had $1.3 trillion (yes $1.3 trillion) in assets at June 30

But on the other side, before you get the chequebook out,consider this: our trade deficit, while falling, won’t go away, the current account deficit in the year to June 30 was a very large $59 billion (yes, $59 billion), and our net foreign debt is more than $544 billion (yes $544 billion).

That’s over 60% of our gross domestic product.

Official interest rates are 6.5% (remember the higher the reward, the higher the risk), we save very, very little and we spend more than we save.

And the dollar bounces around and seems to be driven more by speculators than fundamentals.

The latest figures from the Australian Bureau of Statistics yesterday showed the extent of our debt, which is bit more than a home mortgage and a bit on the credit card.

The ABS said Australia’s Net International Investment Position rose $15.7 billion to a net liability position of $642.4b. Net foreign debt was $544.1b, an increase of $8.9b. Net foreign equity increased by $6.8b to a liability of $98.4b (that’s what we own overseas).

The ABS said that Australia’s net international investment position as at 30 Juneof $642.4b was up $89.9b (16%) on the position a year earlier.

The Bureau said that during 2006–07, the level of net foreign equity increased to a liability of $98.4b, (that’s the net amount we own overseas) up $46.6b (90%) on the previous year; net foreign debt rose to $544.1b, up $43.3b (9%) on the previous year: that’s the key figure.

Thatnet foreign debt of $544.1 billion was cut by $15 billion over the year by the appreciation of the Aussie dollar.

The ABS said that at June 30, the ratio of Australia’s net international investment position to Gross Domestic Product, using the latest available GDP figure (for the year ended 31 March 2007 using current prices) was 62.7%. This compares with 57.2% one year ago and 53.2% one decade ago.

That will be adjusted next Tuesday when the National Accounts for the June quarter and the 2007 financial year are released.

It’s another thing the Reserve Bank will have on its plate when it looks at the economic picture at its monthly board meeting on Tuesday. Interest rates will be skated over, likewise inflation, despite what the Governor, Glenn Stevens, said a couple of weeks ago.

As the accompanying ANZ Bank story shows, the credit crunch caused by the sub-prime crisis is pushing up money market interest rates and that’s having a direct impact on banks and mortgage rates.

The RBA won’t need to touch interest rates again because of the credit crunch.

Besides our spiralling international debt position, our current account performance is nothing to boast about.

Try as we might, we just can’t seem to get the resources boom producing the surge in mineral exports that all the developments promise: exports have risen very nicely in the past couple of years, but it’s still not boom-like.

The ABS yesterday said that in original terms, the balance on current account for 2006–07 was a deficit of $59.2 billion, up 10% on the deficit of $53.9 billion recorded for 2005–06.
That’s 10% of foreign debt, around 5% of Gross Domestic Product. Our trade performance has improved because the resources boom is pushing more and more minerals into the world economy, most of which are at good prices (not withstanding the stronger Aussie dollar).

That can be seen from the balance on goods and services deficit was $12.0 billion a decrease of $2.5b on the deficit of $14.5b recorded in 2005–06. Exports increased $15.2b or 10% (due to increases in both volumes and prices) and imports increased $13.7b or 8% (due largely to an increase in volumes).

The trade performance was cut twice in the year by bad weather in NSW (June), Queensland and Western Australia and the Northern territory(February-March).

The 2006–07 services surplus of $1.8 billion was an increase of $1.0b on the surplus of $0.8b in 2005–06.

The 2006–07 net income deficit rose $7.8b (20%), with an increase in income credits of $7.9b (32%) and an increase in income debits of $15.7b (25%). (That’s all those interest payments on our foreign debt.)

The balance on financial account recorded a net inflow of $57 billion, with a net inflow on debt of $57.7b and a net outflow on equity of $0.5b.

Much of the debt we are importing is to finance things like mortgages, credit cards and car loans: it’s an alternate funding source to domestic sources for banks, home loan providers (non-bank) and others in the finance sector.

The answer about lending to us would probably be yes: like many food prospects with high debts, we have strong and growing cashflows.

Unlike the 1980s we are not living beyond our means, but should China stumble and slow sharply…

Meanwhile, the ABS also released details of our managed funds at the end of June.

It said the total consolidated assets of managed funds institutions was $1,334.7b at 30 June 2007, an increase of $85.4b (6.8%) on the revised March quarter 2007 figure of $1,249.3b.

Consolidated assets of superannuation funds increased by $59.0b (8.2%), public unit trusts were up by $11.6b (4.5%), life insurance offices up by $7.7b (3.6%), cash management trusts up by $5.9b (14.5%), and common funds up by $1.0b (9.6%).

Consolidated assets of friendly societies increased $0.2b (4.6%) on the March quarter figures.

Investment in equities and units in trusts increased by $27.2b (5.3%). Other increases were recorded in cash and deposits, up $20.0b (18.8%), assets overseas, up $14.8b (5.6%), land and buildings, up $5.8b (4.4%) and short-term securities, up $4.6b (5.2%).

During the June quarter 2007, the S&P/ASX 200 rose 4.7%, the price of foreign shares (represented by the US S&P 500) rose 5.8% and the $A appreciated against the $US by 5.2%.

In addition, the 5-year Treasury Bond yield, averaged over the three months within the quarter, increased from 6.00% to 6.19%.

Investment managers had $1,226.0b in funds under management at 30 June 2007, up $62.6b (5.4%) on the revised March quarter 2007 figure of $1,163.4b.

They managed $852.1b (63.8%) of the consolidated assets of managed funds institutions.

Now that’s a boom.

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