Foreign Investment

Question 1

Foreign investment

Answer 1

Overseas companies investing in stakes in Australian companies or assets

Question 2

Different types of foreign investment

Answer 2

Direct (26%) - buying more than 10% of an asset (ownership).
Portfolio (51%) - buying less than 10% of an asset - (satisfactory level of return) -> all loans are classified as portfolio.
Other - Includes trade credits, loans and deposits.

Question 3

Foreign liabilities (investment into Australia) - FIA

Answer 3

Created when Australian residents borrow money from overseas or sell assets as shares to foreign residents

Liabilities mean that you’re in debt

Question 4

Foreign assets (investment abroad) - AIA

Answer 4

Created when Australian residents lend money to foreign residents or purchase foreign assets.

Question 5

Foreign debt

Answer 5

Borrowing money from overseas banks, that we owe

Question 6

Gross foreign debt

Answer 6

Total of Australia’s overseas borrowing

Question 7

Net foreign debt

Answer 7

Gross debt - Australian lending to overseas residents

Question 8

Foreign equity

Answer 8

Overseas companies buying assets in Australia

Question 9

2 types of foreign liabilities

Answer 9

Foreign debt and foreign equity

Question 10

Why foreign liabilities aren’t a problem?

Answer 10

Because growth in foreign debt and foreign investment leads to increases in economic development and overall living standards

Question 11

Foreign equity?

Answer 11

Capital inflow in the form of investments in Aus assets

Question 12

Foreign debt?

Answer 12

capital inflow as borrowing, amount of money Australia’s owe

E.g. Borrowing money from overseas banks

Question 13

Most of Aust’s foreign liabilities are debt rather than equities…

Answer 13

This is because borrowing provides a far more flexible and prudent approach than selling ownership of one’s assets.

Question 14

Foreign debt and foreign equity both..

Answer 14

Involve an income payment to foreign interests

Need to be serviced by interest payments

Question 15

Recent trends for foreign investment in the past 10 years

Answer 15

2006-2016 - net foreign debt has increased from 50% of GDP to 64% of GDP.

This reflects the accumulation of debt overtime resulting from continued CAD’s.

Australia has to use its foreign savings to fund national investment as its domestic savings are insufficient.

Borrowing = adds to foreign debt. Australians prefer borrowing money overseas and not sell their assets.

Buying = adds to foreign equity.

Government borrowing has increased since the GFC, some of which is sourced from overseas.

Interest rate burden has gradually fallen over time - mainly due to world interest rates declining over this period and by the fact that Australia’s export performance has improved.

By 2016 -> interest payments had fallen to 7% of export income.

Question 16

Liability

Answer 16

Something you owe

Question 17

Asset

Answer 17

Something you own

Question 18

Australia’s net foreign debt in 2016 was

Answer 18

1,045 billion

Question 19

Financial account

Answer 19

FIA goes into the financial account

AIA goes out of the financial account

Question 20

Current account

Answer 20

Income from interest, dividends and profits which are produced from the investments that are bought

Question 21

When Australian invests overseas

Answer 21

Increases our foreign assets
Australian lending
Australian equity

Question 22

When people into invest into Australia from overseas

Answer 22

Increases foreign liabilities
Foreign debt
Foreign equity

Question 23

Private debt

Answer 23

Most likely to result in increased investment and therefore increased income (more superior to public debt)
76% of our debt is private debt

Question 24

Public debt

Answer 24

24% is public debt

Question 25

Why is foreign debt not an issue?

Answer 25

Debt is used for projects which increase the nations production, wealth output and employment.

Australia’s net wealth has been increasing overtime..
Since 2000, Australians foreign liabilities increased by two trillion - however, that’s resulted in Australia’s assets increased by 5.3 trillion.

2016 Australian assets was 13.8 trillion and Australian liabilities 3.1 trillion - which results in a net worth of 10.7 trillion.

76% of debt is private debt.

The buildup of foreign debt mirrors the increase of foreign investment. It’s enabled Australia to increase its level of real income and living standards.

All critics arguments aren’t necessarily that valid because they consist of “ifs” or “mays” nothing’s particularly proven.

Question 26

Criticism against foreign debt

Answer 26

• IF Australia’s credit rates get downgraded their interest rates will increase
• Interest rates lower a nations standard of living (meaning there is less disposable income).
• If the growth rate of our trading partners fall -> decrease export income, increase in the burden of the debt.

Question 27

Example of direct investment

Answer 27

Establishment of Australian branches of multinational companies

Question 28

Example of portfolio investment

Answer 28

The purchase of property or shares in Australian companies

Purchase of government bonds by foreign superannuation

Question 29

Australia’s net foreign equity was

Answer 29

-9 billion

Question 30

Benefits of foreign investment

Answer 30

Increase economic activity 
Employment 
National income 
Boosts GDP 
Increases production capacity

Question 31

Why is foreign investment important?

Answer 31

If funds from foreign investment were to fall, then Australia’s standard of living would decline since less goods and services could be consumed