External Stability

External Stability

External Stability is a goal of financing. It is achieved when export income is sufficient to finance import expenditure.   External stability involves containing the current account deficit (CAD) to under -5% of GDP, ensuring that the servicing cost of net foreign liabilities is met, and that the exchange rate is relatively stable over time. There are three measures of external stability: CAD/GDP ratio; net foreign liabilities (debt + equity)/GDP ratio; net foreign debt/GDP ratio. Net foreign liabilities refer to the difference between Australia’s foreign assets (debt + equity lending from overseas) and Australia’s foreign liabilities (debt + equity borrowings from overseas). Its is an indication of Australia’s total debt and equity servicing costs of accumulated current account deficits. Net foreign debt refers to foreign debt assets (Australia debt lending overseas) minus foreign debt liabilities (overseas debt lending to Australia).

Historically, Australia has recorded persistent current account deficits. The CAD grew in nominal dollar terms from -4% of GDP in 1980-81 to -3.2% of GDP by 2008-09. To finance the growth in the size of the CAD, net foreign liabilities grew from 13% of GDP in 1980-81 to 60.6% of GDP by 2008-09. Net foreign debt grew from 6% of GDP in 1980-81 to 52.9% of GDP by 2008-09.

The servicing cost of net foreign debt required interest payments abroad which are recorded as income debits in the current account. Since the 1980s, Australia’s private foreign debt has risen at an unprecedented rate. This trend was accentuated by the ‘debt for equity swap’ (1980s) when the private sector firms preferred to borrow overseas rather than using equity borrowings. The escalation of net income payments overseas during this time was a reflection of the debt servicing burden on Australia.

The financing of successive current account deficits by borrowing overseas set up a requirement for continued interest payments to overseas...