Foreign Debt

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Foreign debt is a subset of the financial obligations that comprise a country's international investment position. It includes all the non-equity components of the net international investment position, that is, all recorded assets and liabilities other that equity securities and direct investment equity capital, including reinvested earnings. The level of foreign debt in Australia continues to, and always will be of major concern to leading economists and politicians in our country; this level of foreign debt will be used to make political and economic decisions in the future to benefit our economy.

Net Foreign Debt

Net foreign debt, the net sum of debt liabilities and debt assets, consists of sectors, the public sector, such as government, public financial and non financial corporations, and the private sector, such as private financial and non financial corporations.

Cheap Custom Essays on Foreign Debt

At the end of the 000 financial year, the net foreign debt totalled $77804bn, the Public sector, contributed 6% ($1856bn) to the net foreign debt. The private sector, contributed 4% ($55bn) to the net foreign debt. As you can see in the graph below, this figure has been rapidly growing throughout Australia's history, whereas the public sector remains stable in its contribution to net foreign debt.

Figure 1

Image courtesy of Reserve Bank of Australia (August 000)

Note- figures below are in current AUD

Figure 1 represents the private sector as separate sectors, financial and non-financial, responsible for $15.b (75.6%) and $6b (4.4%) respectively. In the last half a decade net foreign debt has been steadily increasing as shown in the table below.

PeriodAssets($m)Liabilities($m)Net Debt($m)

16-17-4,180,84608,68

17-18-11,1846,717,78

18-1-1,1505,80,68

1-000-14,6741,77177,804

000-001-185,6748,7751,47

001-00-1,815,654,76

00-006,000

a negative figure implies a surplus.

Why we have Foreign Debt

Australia's economy will continue to include some level of foreign debt. There are several reasons for this, the size of our capital market will always be a problem, in Australia there is more domestic investment is greater that domestic savings, Australians tend to spend more that they save. Australia has an extremely low savings level, only .7% per household. Another reason is that the government borrows funds to finance a budget deficit and capital expenditure, when borrowing money, the exchange rate alters the level of our debt. The main reason we have foreign debt is because we have a Current Account Deficit (CAD), every month we have a CAD out debt increases by approximately 1.5 billion dollars, our imports are greater than our exports. We are living beyond our means and spending money we don't have. Foreign ownership is also a cause of foreign debt, money made in Australia is sent overseas instead of being invested back into the Australian market.

COSTS AND BENEFITS

As with everything, there are costs and benefits associated with foreign debt. These positive and negative effects of foreign debt are the basis for all decisions made concerning foreign debt, economists look at all possible outcomes and measure the value of risk associated with our debt at any one time, depending on overseas markets and the global economy, Australia's debt has changing effects on our economy. This is also important for political choices, if our foreign debt is costing the economy then the government will not increase and will try to decrease it, they will also try to use this as a political tool to win the votes of voters, pleasing then by promising a positive outlook on the economy by reducing debt or increasing their standard of living.

The costs affect Australia's economy in a negative fashion and increase the size of our debt, these costs include

•A decrease in Australia's credit rating

᠎This will make it harder in the future to borrow money when we need it; because of bad credit then the interest on the loan is likely to be higher, costing Australia more in the long run.

•A decrease in the standard of living

᠎Due to this more income will need to be used on the higher interest payments, income must be diverted from consumption.

•Deteriorated terms of trade

᠎This will decrease export income, because of this the burden of our debt increases

•Depreciation of the Australian dollar

᠎If the dollar depreciates then we will have to pay more back i.e. if $100,000,000 was borrowed when the dollar was at 56c and the dollar depreciates to 40c then we will have to pay an extra 16c per dollar to repay our debt. This will also increase the interest payments.

•A decrease in trading partners Growth rates

᠎If the this occurs this will decrease our export income and increase the burden of the debt

On the other hand the benefits associated with foreign debt are very beneficial to the Australian economy. When the borrowing is used for investment, capital equipment and expansion it is seen as a benefit. These include

•Improved terms of trade

᠎Any improvement in Terms of trade will increase our export sales, lessening the burden of our debt

•Appreciation of the Australian dollar

᠎As the dollar appreciates the net dollar total of the debt decrease as we have to pay less back per dollar i.e. if $100,000,000 was borrowed when the dollar was at 56c and the dollar appreciates to 68c then we have to pay back 1c less per dollar borrowed. Interest payments on the debt will lessen aswell

•Decline in interest rates

᠎If this occurs it will decrease the interest payments on our debt, thus we have more income to repay the debt. This may also increase the standard of living as less money is diverted from consumption.

•Decrease in Foreign debt

᠎The above benefits will all led to a decrease in foreign debt. As more income is brought into Australia we are able to repay our debts faster, taking advantage of low interest rates and the appreciation of the dollar.

COMPARISON TO OTHER COUNTRIES

When analysing Australia's foreign debt you must take into account several things, the size of the economy, the population and the location (whether it is landlocked or not) In comparison to other nations, Australia has a rather healthy manageable foreign debt, Australia; a second world country has a net foreign debt of $6 billion, a figure which is increasing as the years pass. In comparison to the US, a first world super power, the increase in total US debt was staggering. Between 180 and 00 levels of foreign debt trebled, from $10,000bn to $0,000bn. An average increase of $1000bn a year, Australia however has an annual increase of approximately $17bn. This could be attributed to the sizes of the two economies, Australia, a rather small developing economy, and America, a huge well established economy.

To give a broader idea of the condition of Australia's foreign debt you can also look at a small developing country, in this case, Slovakia. Slovakia, a small landlocked country, has only been an independent country for 10 years and is still a developing country. In 15, only two years after the country was established, the net foreign debt had accumulated to $4.6bn and looked to increase in the years to come, compared to Australia who had accumulated $10bn in 15. Yet another country to compare Australia to is our trade partner China. China, a huge land mass with an even huger population has a foreign debt in 1 or approximately $151bn RMB or $bn.

After comparing Australia's foreign debt to other countries of different economic positions we can see that Australia is somewhere in the middle in the world scale of foreign debt. After doing so, I believe that we are in a healthy economic position that our foreign debt is indeed manageable and of no real concern. The majority of our debt belongs to the private sector which is seen as desirable in terms of foreign debt

CONCLUSION

The foreign or external debt is the amount of money that Australian residents, both public and private, owe to the rest of the world. At present we have $6bn in foreign debt with the public sector owning only .7% and the other 6.% belonging to the private sector. We will always have foreign debt because we will always have a CAD, we will always want more and we will never be able to meet the demand domestically. Foreign debt can be costly and beneficial and it is this that the Economists and politicians use to make decisions in the interest of our country.

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