Foreign Inv Flashcards
(17 cards)
Foreign liabilities (investment)
-Aus financial obligations to the ROW - total amount of assets we owe to overseas citizens (because we either borrowed money or sold Aus assets)
-borrowed money: debt/loan (interest)
-assets: equity (dividends)
Net foreign liabilities
-Aus financial obligations to the ROW MINUS ROW total financial obligations to Aus a.k.a ( gross foreign liability-gross foreign assets)
-International inv position (IIP) = foreign inv in Aus (FIA) - Aus inv abroad (AIA)
Foreign debt:
Definition: money borrowed by Aus citizens from foreign investors, it generates income for the investor via interest payments
+ can access capital without giving up ownership (companies, assets, land)
-total sum must be give back at end of period
Foreign equity
Definition: Aus citizens selling ownership of assets ( businesses, property etc.) to foreign investors, it generates income for the investor via dividends ( profits)
+ allows access to larger sums of money
-lose ownership + sovereignty over the asset
Aus foreign liabilities
-Aus net foreign liabilities has decreased over the last 10 years from 52% of GDP to.. 27%
-Aus foreign debt has increased over this time as businesses continue to prefer loans to acquire capital rather than selling assets
-Aus foreign equity has drastically decreased to a net assets position because Aus has significantly increased the amount we are investing overseas (a lot of wealth accumulating over the mining boom + growth in super accounts)
-Aus GDP has grown steadily over this period.
Debt v equity
-having foreign liabilities in the form of debt is preferred by Aus businesses over equity because you don’t give up sovereignty
-however need to be able to make interest payments
Debt trap
-a debt trap is where an individual or country accumulates so much debt that they are unable to make the interest payments without borrowing more money, leading to a cycle of increasing debt
-could lead to a country being forced to sell key assets
Public v private debt
-PRIVATE is liabilities held by Aus businesses
-PUBLIC is debt held by Aus gov
-most of Aus foreign debt is private (70%)
-this is preferred- private is always taken out for profits (likely to boost investment and boost productivity income: easier to pay debt)
-PUBLIC debt could potentially be a burden to an economy- debt could’ve been spent on projects that don’t increase income, making it harder to pay back- higher chance its spent inefficiently less accountability
Link between FI and CAB
-DEBT generates income in the form of interest which is recorded in CAB (primary income)
-EQUITY generates income in the form of dividends which is recorded in the CAB ( primary income)
-Aus currently has a liability position for foreign debt, leads to deficits in the CAB
-Aus currently has an asset position for foreign equity, leads to surpluses in CAB
-Aus IIP is currently a liability position leading to deficits in CAB
Benefits of FI
-helps bridge savings inv gap
-allows industries to develop comparative advantage
-triggers multiplier process
-brings in tech, skills + new work practices
-PROVIDES A COMPETITIVE BOOST TO LOCAL PRODUCERS WHO DONT RECEIVE INVESTMENT, INCREASES PRODUCTIVITY
-raises gov revenue through taxes
Costs of FI
-loss of control or econ sovereignty - loss of national security (energy/ food)
-outflow of dividends/profits - less innovation research funded bc profits extracted
-might lower credit rating - can’t access funding to stimulate growth in a recession
- bad behaviour from MNC’S - may avoid taxes/ market power
-might lead to a debt trap
Direct v portfolio inv
-DIRECT is when ownership >10%
-PORTFOLIO is when ownership <10%
-debt and equity can both be direct or portfolio
-DIRECT: long term stable, loss of control/sovereignty, competition for local firms, bigger impact on economy
-PORTFOLIO: short term less stable, no loss of control, speculation can exacerbate crises
Bonds
-a bond is either a 3, 5, 10 year loan to the gov and the ‘yield’ is the interest income you earn
-issuing bonds is how the gov earns money when needed and acquires debt
-lower yield = safer investment
Credit rating
-a credit rating reflects how reliable a person or company is at managing debt (paying on time, in full)
-if a gov or country is too much in debt then this can negatively effect credit rating
-poor credit rating - higher IR, or no access to credit when needed (economic crisis)
-Aus credit rating is currently AAA (highest)
Trends
Trend in foreign debt - INCREASING LIABILITY POSITION
Trend in foreign equity - INCREASING ASSET POSITION
Trend in IIP - DECREASING OVERRALL
International investment position (IIP)
-definition: a measure of the stock (value) of Australian foreign assets (what we own that’s overseas) and foreign liabilities ( what we owe to foreigners) at a point in time
-IIP = FIA- AIA
-ASSET position = AIA>FIA
-LIABILITY position = AIA< FIA
-IIP reflects the current stock of inv in AUS, the financial account in the BOP records the flow of investment
-if inv inflow is greater than outflow, stock is in a SURPLUS
-if FA in surplus, stock DECREASING (liability growing)
-IIP fluctuates with movements in AUD ER and price
IIP trends
-31 Dec 2014- $866.1b (liability)
-31 dec 2024- $653.2b (liability)
