Australia’s incredible shrinking net foreign liability position
Now better than the US, but not much help to AUD
The RBA’s Penny Smith gave a speech this week noting the decline in Australia’s net foreign liability position. This was a trend I highlighted in my 2019 paper for USSC The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy. Penny’s chart puts this in historical perspective:
The point I made in my USSC paper was that Australia and the US looked increasingly similar on this measure, converging from opposite directions. Demonstrating the prescience of my analysis, the US and Australian measures crossed over at the time writing, although this was only confirmed later given reporting lags. These trends have continued since. Here is the updated chart from my USSC paper:
Penny Smith elaborates on the traditional ‘consenting adults’ case for not being concerned about the net foreign liability position (the stock version of the flow case in relation to the current account deficit):
Australia benefits from strong institutional arrangements, the ability to issue debt in Australian dollars, and deep and liquid foreign exchange hedging markets that Australia developed after the float. Most external debt is longer-term debt and issued in Australian dollars. And debt that is issued in foreign currencies is very well hedged. Together these features have enabled Australia to significantly benefit from the decision 40 years ago to float the exchange rate and liberalise the capital account.