Financial Investment

Question 1

Why does Aus rely on foreign investment

Answer 1

Australia has a saving investment gap (I>S)
Small pop + high infastructure/mining needs –> not enough domestic savings
Foreign investment fills gap via borrowing or selling equity –> capital inflow

Question 2

what is capital inflow and outflow

Answer 2

inflow = money into Aus –> credit in FA
outflow = money out of australia –> debit in FA

Question 3

Define foreign liabilities and foreign assets

Answer 3

liabilities: Aus assets owned by foreigners (debt/equity) –> increases capital inflow
Assests: overseas assests owned by aus –> increase capital outflow

Question 4

What is the international investment position

Answer 4

IIP: stock of foreign liabilities - foreign assets
Indicates net position: what aus owes vs owns
Aus = Positive IIP

Question 5

Recent trends in IIP and foreign liabilities

Answer 5

net foreign liabilities decrease: from 58% of GDP(2010) to 27%(2024)
net foreign equity decrease: from 6% to -21% (aus owns more abroad)
net foreign debt decreased slightly: 52% to 48% of GDP

Question 6

what is foreign debt and equity

Answer 6

debt: borrowing/lending of money
equity: buying/selling ownership (shares)
IIP = net foreign debt + net foreign equity

Question 7

charecteristics of FDI

Answer 7

long-term stable
includes reinvested profits
attracted by:
- strong economy, FTAs, skilled workforce, low corruption
- proximity to asia

Question 8

Characteristics of Foreign portfolio investment

Answer 8

short term speculative
usually through debt instruments
used by super funds, banks to diversify portfolios

Question 9

recent trends in foreign investment in Aus

Answer 9

Aus remains a capital importer
Foreign capital supports economic growth & higher living standards
Portfolio investment has dominated, but direct investment is stable and long term

Question 10

How does direct investment impact the current account

Answer 10

Creates a financial account surplus (credit), but dividends paid abroad become a debit in the current account, increasing CAD

Question 11

How does Portfolio Investment (Debt) impact the Current Account?

Answer 11

Capital inflow (credit) increases financial account surplus. But interest payments out increase income deficit → CAD rises.

Question 12

What effect does foreign investment have on the AUD

Answer 12

Causes AUD appreciation, making exports less competitive and increasing CAD.

Question 13

How can foreign investment improve the Current Account?

Answer 13

By expanding the economy, leading to higher exports → higher trade surplus.

Question 14

Benefits of Foreign Investment in Australia

Answer 14

Fills Savings-Investment Gap

Boosts GDP & Infrastructure

Creates Employment

Transfers Technology & Skills

Provides Tax Revenue

Improves Productivity

Diversifies Markets

Can Benefit from Tax Incentives

Question 15

Costs of Foreign Investment

Answer 15

Increases CAD (dividends/interest outflows)

Loss of Australian Ownership (FDI)

Reduced Competition → Higher Prices (FDI)

Can Be Speculative (FPI)

Currency Depreciation Risk (FPI)

Question 16

What are the types of foreign debt

Answer 16

Public Debt: 26% of GDP
Private Debt: 74% of GDP (more productive)

Question 17

Why does Australia borrow?

Answer 17

Insufficient domestic savings to fund large-scale investment (esp. mining)

Question 18

Benefits of Foreign Debt

Answer 18

Drives Business Investment (Private)

Stimulates Economic Growth

Appreciated AUD Reduces Servicing Costs

Question 19

Costs of Foreign Debt

Answer 19

Credit Rating Downgrades

High Interest Payments

Exposure to External Shocks

Reduced Investor Confidence

Worsening Terms of Trade → Higher Burden

Depreciation Increases Repayment Costs