Transcript Net Foreign Debt - Kevin Ladd Simonds

 Net
Foreign Debt (NFD): is the difference in
the value between what Australian
households, businesses and governments
have borrowed from and owes overseas
minus what Australia has lent or invested
abroad.
 Two types of borrowings:


Public sector or official government borrowing
Private sector or non-official borrowing
 Government
borrowing – that part of the
borrowing program of the government to
finance its spending that comes from
overseas.
 This component of external debt has been
declining as a percentage of the total debt
over this decade
 The government is attempting to reduce
their share of total foreign debt
 Private
foreign debt
 The main private sector borrowers are the
large companies who need to raise capital
for financing business expansion and
takeovers e.g. Qantas needs to raise billions
of dollars to purchase aircraft.
 High
domestic interest rates and a lack of
local savings (Australia is a small economy)
especially contribute to this problem.
 Debt
can be good, providing that it is used wisely
for sound projects – e.g. Financing an airport
that increases transport efficiency.
 Our
overseas debt can also make up for
deficiency in local savings and make access to
credit more affordable if domestic interest rates
are high (Australian interest rates are generally
higher than in Europe and North America)
 However,
as with all debt, the main problem is
affording the interest repayment – especially if
interest rate rise overseas or our currency
depreciates.
 Additionally,
if our foreign debt rises too quickly
and exceeds our capacity to sustain repayments,
our credit rating as a nation may be downgraded.
High foreign debt can create a vicious cycle, sometimes known
as the debt trap scenario.
Starts with a high current account deficit (CAD)

This requires an inflow of funds which come in the form of foreign
debt or selling Aust assets to foreigners

With larger foreign debt, Australia’s interest repayments on that
debt become bigger

These interest repayments constitute a large part of income debits
that flow into the current account

Thus, today’s foreign debt adds to the future CAD.

In the long term the growth in Australia’s foreign debt lead to a
debt sustainability problem. Interest repayments on debt take up a
greater proportion of our GDP. This limits Australia’s overall living
standard and the economic growth potential of the economy.