External Indicators Affecting Australia's External Liability

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External stability is a term used to describe a situation where external indicators are at levels at which they can remain in the long term without negative economic consequences. The three main external indicators affecting external stability are the current account deficit (CAD), the level of net foreign liabilities and stability of the exchange rate. Trends in these indicators are used by the government and the Reserve bank to help set macroeconomic policy and consider the need for microeconomic reform.

A key measure of Australia’s external stability is the current account deficit (CAD) as a percentage of GDP. A CAD is a measure of an economy’s trade where the value of goods, services, and capital it imports is higher than the value it …show more content…
Net foreign liabilities indicates Australia’s total financial obligations to the rest of the world, minus the rest of the world's financial obligations to Australia. It is made up of net foreign debt, which is the funds owed by Australian’s to foreigners, and net foreign equity, which is the total value of assets in Australia in foreign ownership. In Figure 3, net foreign liabilities as a percent of GDP has continued to increase over the past 3 decades. Australia’s net foreign liabilities grew from $170B (46% of GDP) in 1989-90 to $517B (60% of GDP) during 2004-05 and $923B (around 52% of GDP) by 2014-15. Excessive growth in Australia's foreign debt in the long term could have major economic implications should it become unsustainable. As interest payments increase, it can reduce Australia’s potential for growth and its standard of living. A debt trap scenario could develop if financial markets lose confidence and Australia’s international credit rating reduces, resulting in increases in interest rates. Global interest rates have declined over the past decade following the GFC, and recently the global interest rate remains low and Australia’s debt servicing ratio has remained relatively stable. However, global interest rates may rise in the near …show more content…
The exchange rate is the value of one currency in terms of another currency. Australia has a high level of volatility as seen in Figure 4, ranging from US$0.47 in 2001 to US$1.10 in 2011 over the past two decades. This is due to a large reliance on commodity exports which further attract high levels of speculative investment. Changes in the exchange rate affect the international competitiveness of Australian products and services as well as the size and servicing costs of its foreign debt. Hence, fluctuations in exchange rates also affect the CAD and net foreign liabilities. An example of currency fluctuation was given in an ABC article which indicated a reduction in net exports in the March 2017 quarter which saw an immediate sell-off of the Australian dollar.

Figure 4 - Australia’s exchange rate in terms of the US
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