Saturday, May 2, 2009

Financing Australia's current account deficit

With constraints on foreign borrowing (and in the absence of significant official intervention in the market for foreign exchange), how is Australia to finance its current account deficit during a global recession? Michael Stutchbury provides the answer, and quotes Access Economics' Director Chris Richardson.

“The boom years masked an underlying worsening in Australia’s foreign debt trajectory, but the downturn is now making our vulnerability on this front clearer,” Richardson says. This limits how much more Australia can borrow abroad to get it through the recession. The alternatives are a recession to club local credit demand and increased foreign equity investment in the Australian economy.

With falling oil prices drying up the petro-dollars, China and Japan have the biggest financial surpluses to invest abroad. This is driving the surge of Chinese investment in Australia’s mining sector, capped by Chinalco’s $US19.5 billion bid to double its equity stake in Rio Tinto to 18 per cent.

In opposing Chinalco’s bid as against the national interest, Turnbull yesterday depicted it as a strategic play by the Chinese state to control Australian resources. But debtors can only be so choosy. Blocking an equity investment from the world’s biggest source of savings amid a global credit crunch would increase Australia’s recession risks. “If we didn’t want Chinalco to be buying up bits of Australia, we shouldn’t have bought so many plasma TVs,” Richardson says.

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