Transformations In Australia Capital Account

Introduction

The understanding of capital accounts has attracted questions on how Australia has changed for the last 20 years. Capital account is a critical component in the country’s balance of payments. The capital account is regarded as a metric tool that weighs the financial transactions, which do not have an impact on the country’s current income, savings, and even production. The value attached to the capital accounts is largely based on what the country expects to produce in the near future. Upon generation of an income, the accounts are normally transferred to other balance of payments. The Australian financial system also behaves in the same manner while picking such examples of the foreign trademark, company’s acquisition of different rights, a foreign purchase, acquisition of the non-financial and non-produced assets and capital transfer among many others. Based on this prerequisite, the discussion will explore the Australian capital account for the last 20 years. In addition, the discussion will analyse and evaluate the country’s capital account and its impact on the economy, and its influence on the Australian dollar.

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The Capital Account over the 20 years

20 years of economic growth in Australian marked the beginning of a promising financial system that came in the spotlight in 1998. However, the financial reforms are said to have taken shape in 1970s and 1980s. In 1970s, Australia is said to have kept an eye in the exchange rate regime where the capital account transactions were restricted and the entire banking system was heavily regulated (Ballantyne et al., 2014). However, Australia was somewhat open to the foreign portfolio investment, which made it a promising economic hub compared to China and other countries around the world. Subsequent integration of the financial markets came in as a consequence of deregulation, which only made the Australian system ineffective (Debelle and Plumb, 2006). The Australian capital controls are said to have placed additional pressure in the crawling peg. The instantaneous capital controls and flows occurred from time to time in anticipation of the future change in terms of the exchange rate. The history has it that the exchange rate regime affected the entire money supply and made Australia to miss on the key monetary targets. Subsequent decisions made towards floating the Australian dollar had its impact felt in the 1990s (Battellino, 2010). The poor performance of the Australian capital account, at the time, gave room for the floating decision to liberalize the entire capital account with growing acceptance of the flexible exchange.

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framework. The financial instability risks also resurfaced during the floating exchange rate period, which led to introduction of the open capital account that grew with time. Regardless of the challenges, the performance of the Australian capital accounts can be evaluated through three key sectors in the economy. These include the mining sector, banking sector and the public sector (Peirson et al., 2014).

First, for the past 7 years, the mining sector has not only been a critical factor in Australia but also other countries around the world. Mostly, the private non-financial corporations are deemed as the largest recipient of the Australian foreign capital inflows. For almost a decade, the mining sector is thought to have been receiving almost 90% of total foreign capital inflows (Debelle and Plumb, 2006). However, most of the shares had been turned into fund investment across the resource sector during the investment phases linked to the mining boom, which picked in 2012 to production as well as export phase. During the investment boom, a portion of the expansion was heavily funded through the FDIs, which came on as the reinvested earnings. Perhaps, Australia seemingly funded the investment by use of the internal sources (Black et al., 2017). However, the Australian mining sector never generated high profits, which made it to miss the target of hitting an equivalent increase in terms of the Australian disposable income as measured through the national accounts. Currently, the capital accounts in the mining sector are said to be fruitful to an extent of funding the liquefied natural gas projects, which have also grown into an extra platform that taps new joint ventures.

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The second area of focus is the public sector where more foreigners are increasing holdings of the Australian debt. The purchases of the government debt for the past six years are said to have been supported by the Japanese investors. Large segments from the Japanese asset management sector are thought to have added weight on the international assets in Australia (Connolly and Lewis, 2010). Over the recent years, the government regulated the bonds held by foreign investors with statistics showing a decline of 20% in 2012. Later on, the collateralized lending of the AGS was substantially captured across the balance of payments. This means the collateralized lending aimed at reducing foreign ownership for the purposes of making the capital accounts to generate more income for the country and not the foreigners.

The final sector is the banking sector, which exhibits patterns of capital flows, which rarely change following a transition of bank funding to domestic deposits (Schaltegger and Burritt, 2017). It is believed that capital accounts, through the banking sector, have realized trivial net capital flows for the past one decade. With such an impact, the banks have remained stable for a good period of time as Australia keeps an eye on the foreign liability position.

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The Impact of Capital Accounts on the Economy

The thought of capital accounts has raised questions of whether they have impacted the economy in a positive or negative way. The entire Australian economy is regarded as the net recipient of the capital inflows in the better part of the country’s history (Dhaliwal et al., 2014). Prior to 2007, the Australian net capital inflow amounted to 5% of the GDP while peak side settled at 7% before the hit of the financial crisis. Evidence shows that the capital inflows have been declining with the economy realizing a contribution of less than 3% to the total GDP (Avdjiev et al., 2016). The decline is believed to have coincided with a possible marked reduction in terms of the gross capital flows since the pre-crisis levels. In the banking sector, the net capital inflows averaged at 5.5% of the GDP during the 10 years that preceded the financial crisis. However, this is edging to zero in the recent economic assessments. The decline has had a negative impact on the economy through two dimensions. First, the inconvenient shift of the bank funding is seemingly moving towards the domestic deposits while avoiding the wholesale debt. Secondly, the decline in terms of the loan asset growth is believed to have been slower compared to the pre-crisis levels (Debelle, 2012).

The questionable post-crisis credit growth has led to low growth of lending to the potential businesses within the economy (Rey, 2015). The only hope for the country is to increase the platform for domestic deposits, which can rarely be stable without the corporate sector. In addition, the hope of a resource boom is likely to push most of the resource projects towards the production phase. The latter can result into reduced capital inflows while resource export volumes can expand the export revenue while lowering the capital expenditure outlays.

The Impact of Capital Accounts on the Australian Dollar

Despite the alarming reduction of the capital inflows, the Australian dollar has retained the nominal bilateral rate (Avdjiev et al., 2016). The dollar performed fairly well in the 2000s as the Australian terms of trade doubled during the time. While capital accounts had a negative impact on the economy, the decline of the corporate sector seemingly raised the value of the resource sector with more domestic contribution boosting the equilibrium exchange rate. This can be explained in terms of the domestic demands from the prevailing higher incomes that attract tighter and stricter monetary policies, which attract higher interest rates (Garton et al., 2012).

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Conclusion

In conclusion, the thought of capital account has attracted the analysis and evaluation of the Australian economy and performance of the Australian dollar. The discussion traces the history of the Australian capital accounts for the past 20 years. The capital accounts has been described in terms of the exchange rates, the capital inflows and the floating decision that has its origin traced back in 1970s and 1980s. The success of capital accounts has been witnessed in terms of the performance of the mining sector, public sector and banking sector. The impact of capital accounts appears to be negative on the economy and positive on the Australian dollar.

References

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