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Current account posts first surplus in 44 years as commodity exports surge

By business reporter Michael Janda
Posted , updated 
Wide shot of an iron ore ship tied up at Port Hedland dock loaded with iron ore from Gina Rinehart's Roy Hill mine.
Iron ore exports contributed to the surplus, but 75 per cent of the profits flow overseas.(ABC News: Rob Koenig-Luck)
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In the mid-1980s, Paul Keating argued Australia was at risk of becoming a banana republic.

For those unfamiliar with the term, it refers to a small state left economically and politically vulnerable to the vagaries of markets due to its reliance on a single export controlled by foreign owners.

The then-treasurer said of Australia:

Keating issued the warning at a time when Australia's current account deficit was blowing out — this ABS figure essentially measures how much money is flowing out of Australia (in the form of imports, interest payments and dividends to foreign shareholders) versus how much is coming in.

After mainly modest deficits smattered with a handful of surpluses in the 1960s and first half of the '70s, Australia posted its last quarterly surplus in June 1975.

What followed was a rapidly ballooning series of deficits — September 1978 marked the first billion-dollar deficit (a very big number for the time), but this became standard in the early 1980s, with $2-4 billion deficits typical by the time Keating warned of a banana republic, and the decade ending with the deficit peaking at $6.9 billion.

Over that time the economy has grown and inflation has shrunk the real value of these deficits so that the September quarter 2015 record of $23.7 billion isn't quite as big as it first seems — although, at around 5 per cent of Australia's economic output, it wasn't exactly small.

In fact, Australia just delivered its largest current account surplus on record — $5.9 billion, smashing previous positive results.

It is, as noted above, the first surplus in exactly 44 years.

Commodity boom the foundation for surplus

Recently, the Reserve Bank's deputy governor Guy Debelle delivered a speech on the subject, basically saying Australia's financial relationship with the rest of the world is in rude health.

"Through the 1980s, 1990s and 2000s, the CAD [current account deficit] averaged around 4 per cent of GDP," he said.

"But since 2015, the CAD has narrowed to be currently around 1 per cent of GDP. In the March quarter this year, the deficit was 0.6 per cent of GDP."

That's partly because commodity boom mark three — as China ramped up construction to stimulate a struggling trade-war-ravaged economy and many Brazilian iron ore mines stopped production amid the threat of further dam collapses — has pushed up the price of our main exports.

A string of consecutive trade surpluses have been the immediate driving force in that exports/interest payments/dividends equation, pushing Australia from recent small current account deficits to a surplus.

In large part, the surplus doesn't blunt Keating's warning, because it has been delivered by a temporary surge in the price of Australia's commodity exports and can — indeed, probably will — disappear just as quickly.

Benchmark iron ore prices slumped a record 30 per cent in August, with commodity traders effectively wiping out a large chunk of the next quarter's trade surpluses.

Australians owning the world

But this isn't the full picture.

As far as the balance of payments is concerned, a large part of the commodity export revenue that comes into Australia goes straight out again as dividend to the big resources firms that are around three-quarters foreign-owned.

So the current account benefit from the commodity export boom hasn't been as big as it first appears, meaning the hit from the next price downturn also won't be as bad.

And, while foreigners may own an overwhelming majority of our big resources producers since 2013 Australians have owned more of foreign companies that overseas investors have owned of ours.

The main reason? Your retirement savings.

"This largely reflects the significant allocation to foreign equity by the Australian superannuation industry together with the fact that the superannuation sector is relatively large as a share of the Australian economy," Debelle explained.

Dollar dive boosts surplus

Australians still owe a lot more to foreigners in terms of debt than they owe to us — above $1.1 trillion more in fact — and net international liabilities passed through a trillion dollars for the first time, despite another $10 billion increase in net overseas shareholdings.

But record low interest rates globally have reduced the cost of interest payments on that debt.

Moreover, 68 per cent of Australia's debt is in Australian dollars and a further 17 per cent is hedged, or protected, against currency moves.

In contrast, our holdings of overseas shares are denominated in their local currency.

So, when the Australian dollar declines, as it has done recently, the size of our debt to the rest of the world doesn't increase much — unlike, say Argentina, which has had repeated financial crises due to US dollar-denominated debt.

But the value of our shareholding in overseas companies goes up in Australian dollar terms.

So the recent fall in the dollar to decade lows has greatly assisted the current account, as Guy Debelle noted last week.

"When the exchange rate depreciates, the value of net foreign liabilities actually declines rather than increase," he observed.

"Australia's net foreign liabilities, that is, how much we owe foreigners less how much foreigners owe us, have been declining for the past decade to be at their lowest as a share of GDP since the early 2000s."

And, with another very weak set of economic growth numbers expected tomorrow and further Reserve Bank interest rate cuts seen as almost inevitable, the Australian dollar may have quite a bit of decline left yet.

Posted , updated