Australia’s large external deficits appear sustainable. There are, however, risks associated with the resulting external debt that need continued careful management. These deficits, which largely reflect high investment rather than low saving, should be sustainable as long as the Australian economy, especially its exports, grow strongly. The associated accumulation of foreign liabilities nonetheless leaves the country exposed to shocks, but these risks appear to be well managed. Australia’s fiscal policy appears to be broadly consistent with guidelines for fiscal management in the face of commodity price swings.

Abstract

Australia’s large external deficits appear sustainable. There are, however, risks associated with the resulting external debt that need continued careful management. These deficits, which largely reflect high investment rather than low saving, should be sustainable as long as the Australian economy, especially its exports, grow strongly. The associated accumulation of foreign liabilities nonetheless leaves the country exposed to shocks, but these risks appear to be well managed. Australia’s fiscal policy appears to be broadly consistent with guidelines for fiscal management in the face of commodity price swings.

I. Australia’s Large and Sustained Current Account Deficits: Should Consenting Adults be Trusted?1

1. Australia has persistently run large external current account deficits, raising questions about their sustainability. The debate in Australia has stressed that these deficits originate in the private sector, reflecting the decisions of “consenting adults.” The question therefore becomes whether these consenting adults should be trusted or whether there are risks associated with large current account deficits. This chapter summarizes the debate in Australia and discusses the country’s external deficits from several angles. The chapter analyzes saving-investment balances, the sustainability of large current account deficits, the risks associated with high current account deficits and large foreign liabilities, and concludes with a discussion of the country’s balance sheets.

A. Introduction

2. Australia’s external deficits are high and persistent. Since the floating of the Australian dollar and the liberalization of international capital flows in the mid-1980s these deficits have averaged 4.5 percent of GDP. This is high compared with other advanced economies, where the average current account balance is about zero. Persistent current account deficits have translated into rising net foreign liabilities, reaching 60 percent of GDP in 2005; Australia’s net foreign position is unusually negative by OECD standards.

Figure I.1.
Figure I.1.

Australia: Current Account, 1960-2005. Ratio to GDP

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics.

3. External deficits have triggered an extended and lively debate in Australia.2 The prevailing view used to be that current account deficits were a significant risk to Australia’s economic stability, and reigning in these deficits was one of the goals of economic policy. Indeed, a substantial fiscal consolidation in the second half of the 1980s was in part aimed—in the end, unsuccessfully—at

Figure I.2.
Figure I.2.

Australia: Net Foreign Liabilities, 1982-2005

(in percent of GDP)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics and Reserve Bank of Australia.

containing pressure on the external current account deficit, with Treasurer Paul Keating saying in 1989 that “we must never lose sight of the fact that the current account deficit and our external debt are unsustainably high.”3 The debate subsequently focused on the causes behind external deficits. Current account deficits owing to persistent fiscal deficits—the so-called “twin deficits”—are undesirable because they reflect an unsustainable fiscal policy. But current account deficits driven by private sector savings and investment should not be an issue, because these deficits reflect the optimal decisions of consenting adults in Australia, and also of the foreign savers who provide the required financing.4

Figure I.3.
Figure I.3.

Net Foreign Assets, 2004

(in percent of GDP)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: World Economic Outlook.

4. The academic literature provides foundations for the consenting adults view, but quantifying the optimal level of the current account deficit is a difficult exercise. Sachs (1981) formalized the idea that a current account deficit can be optimal because it reflects unusually good investment opportunities or a country smoothing consumption in response to a negative shock. Sheffrin and Woo (1992) quantified the optimal level of the current account deficit. Their methodology was subsequently applied to numerous countries (Obstfeld and Rogoff, 1995 and 1996 survey the early literature; Cashin and McDermott, 1998, and Bergin and Sheffrin, 2000 apply the methodology to Australia). The estimated optimal current account benchmarks tend to be very imprecise, however, and they are therefore not a reliable basis for assessing whether a country’s current account deficit is excessive (Mercereau and Miniane, 2004). Consequently, this chapter analyzes Australia’s current account deficit from several other perspectives.

B. Current Account Deficits and the Saving-Investment Balance

5. The current account equals saving minus investment. This accounting identity implies that a current account deficit will reflect low savings or high investment or a combination of the two. Low savings might suggest that a country’s current level of consumption is excessive and that an adjustment might be needed in the future. In this case, a current account deficit would signal an unsustainable situation. High investment, however, implies that the country’s output is more likely to grow strongly in the future so long as firms’ investment is not inefficient. In this case, a current account deficit would reflect good investment opportunities and signal a healthy economic outlook.

6. Australia’s current account deficits reflect high private investment:

  • Australian savings are not unusually low. Australia’s national saving has remained stable over the past 15 years at about 20 percent of GDP. In recent years, increased public and corporate saving have compensated for falling household saving.5 Moreover, Australia’s national saving is close to advanced nations’ average (Figure I.6).

  • Australian investment is high. Fixed investment has increased substantially in recent years, from about 22 percent of GDP in 2000 to 26 percent of GDP in 2006. Private sector investment accounts for all the increase, as public sector investment remained flat. While dwelling investment rose sharply in the early 2000s, it has since declined as a share of GDP. Rising business investment more than made up for this fall, and total private sector investment kept increasing. Australia’s investment is also high by international standards, owing to strong private investment rather than public investment (Figure I.6).6 The high level of business investment partially reflects Australia’s specialization in capital-intensive sectors, such as mining. There is also no sign that business investment is inefficiently high: corporate profitability is solid, returns on investment are healthy, and productivity has been rising strongly.

Figure I.4.
Figure I.4.

Australia: Gross National Saving

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics.
Figure I.5.
Figure I.5.

Gross Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics.
Figure I.6.
Figure I.6.

International Comparisons of Saving and Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: IMF, World Economic Outlook and OECD Database.

7. In conclusion, the sustained current account deficit reflects private sector choices rather than public sector developments. Moreover, high levels of investment are the main cause of Australia’s historical and recent current account deficits. The investment nature of the external deficit is a source of comfort for Australia, especially as indicators such as corporate profitability suggest that investments are generating solid returns.

Figure I.7.
Figure I.7.

Saving Minus Investment, and Current Account: 1985-2005.

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics.

C. Can Past Levels of Current Account Deficits be Sustained?

8. Another way to analyze external deficits is to assess whether past levels of deficits can be sustained. In other words, do accumulated deficits put the country’s net foreign liabilities on an explosive path, or at least a path that would lead investors to doubt the capacity of Australia to service these liabilities?

9. Net foreign liability and external debt service ratios will eventually stabilize if the external current account deficit is stable as a share of GDP. Gruen and Sayegh (2005) note that if the current account is constant as a share of GDP and nominal GDP growth is constant as well, then net foreign liabilities will converge to a constant share of GDP. More precisely, in the steady state net foreign liabilities will be:

nfl=cad/g,(1)

where g is nominal GDP growth and other variables are expressed as a share of GDP. For example, if the current account deficit remains stable at its historical average of 4.5 percent of GDP and nominal GDP growth stays at 6 percent, net foreign liabilities would eventually stabilize at 75 percent of GDP, or 25 percent above current levels. Net external interest payments were 9.1 percent of exports of goods and services in 2005. If the structure of the international investment position and rates of return are unchanged, this debt service ratio would rise in parallel with the increase in overall net foreign liabilities, to 11.4 percent of exports when net foreign liabilities reached 75 percent of GDP. Such a debt service ratio does not appear problematic, indeed, it would be below the levels observed during 1985 to 1996, largely owing to the decline in Australia’s nominal interest rates.

10. The implied steady-state level of net foreign liabilities and debt service ratios are, of course, sensitive to assumptions. For example, if nominal GDP growth is 5 percent instead of 6, then net foreign liabilities would stabilize at 90 percent of GDP and net external interest payments at 13.5 percent of exports (assuming that the stable current account deficit is still 4.5 percent of GDP). Alternatively, if the current account deficit remains at its 2005 level (6 percent of GDP) and nominal GDP growth is 5 percent, net foreign liabilities would stabilize at 120 percent of GDP and net external interest payments at 18 percent of exports. Moreover, it is important to keep in mind that net foreign liabilities are bounded, as a country cannot sell more than its entire future production of tradable goods. While it is difficult to quantify this upper-bound, the country’s balance sheets suggest that Australia’s debt levels are still far from it (see section E).

11. Strong GDP growth and a stable current account deficit are key to external sustainability, as equation (1) shows. The risks to external sustainability are therefore:

  • Lower than expected nominal GDP growth. Strong real GDP growth is essential to external sustainability. Continued ambitious structural reforms would not only raise Australia’s living standards and help address the challenge of an ageing population, it would also reduce the risk of a sharp adjustment in the country’s external position. Moreover, continued success in maintaining inflation within the RBA’s target range of 2-3 percent ensures that deflation will not contribute to making the external position unsustainable.

  • A deteriorating current account. Export growth in the past 5 years has averaged only 1¼ percent, well below the average of 7½ percent in the prior 15 years, although the severe drought in 2002-03 was a contributing factor. The current account deficit could further deteriorate if exports keep disappointing, although a widening trade deficit would eventually result in the currency depreciating, which would help improve the trade balance over time. The current account could also deteriorate if international interest rates rose or if Australia’s risk premium increased, perhaps as investors become wary of external deficits. However, by borrowing in domestic currency, or through use of hedging instruments, Australia effectively pays domestic interest rates on most of the external debt. As a result, the exchange rate transmits much of the impact of adjustments in international interest rates and risk premia, tending to improve the trade balance rather than resulting in a deterioration in the income balance.7

    Figure I.8.
    Figure I.8.

    Export Volumes (2000=100)

    Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

    Source: World Economic Outlook.

12. In conclusion, past levels of current account deficits seem sustainable. Achieving strong growth, especially in exports, will ensure sustainability and the continued confidence of foreign investors.

D. Are there Risks Associated with Large Current Account Deficits?

13. Cross-country studies shed light on whether current account deficits carry macroeconomic risks. Current account deficits have been used as an early warning indicator for currency crises in emerging markets (see, for example, Kaminsky and Reinhart, 1999). Other studies, following Milesi-Ferretti and Razin (1998), assess whether sharp reversals follow large current account deficits and, if so, what factors make such reversals more likely and more costly. Milesi-Ferretti and Razin (1998) use two criteria to define a current account reversal: (i) the average reduction in a current account deficit is at least 3 percent of GDP in the three years after the reversals compared with the three years before; and (ii) the maximum deficit after the reversal must be no larger than the minimum deficit in the three years preceding the reversal (this second criterion is to ensure that the reversal is permanent rather than temporary). Other studies use similar criteria to define a current account reversal. This section summarizes the broad results of this literature, and then discusses their implications and their limitations for Australia.

Cross-Country Studies Investigating Current Account Reversals.

Milesi-Ferretti and Razin (1998): 86 low- and middle- income countries, 1971–92.

Edwards (2004, 2005): 157 countries, 1970–2001.

Freund (2005): 25 industrial economies, 1980–97.

Freund and Warnock (2005): OECD countries, 1980–2003.

Debelle and Galati (2005): 21 industrial countries, 1974–2003.

Croke et al. (2005): industrial countries.

Adalet and Eichengreen (2005): industrial countries, 1880–1998.

14. Some factors tend to increase the probability of a current account reversal. Table I.1 summarizes the results found by the empirical studies listed in Box I.1. Larger current account deficits and higher levels of external debt seem to increase the probability of a reversal. Higher deficits or debt levels are seen as leaving a country more vulnerable to external shocks, although Debelle and Galati (2005) find that larger current account deficits do not increase the risk of reversal. Greater openness to trade seems to increase the probability of a reversal, although more open economies might be more vulnerable to external shocks. Higher reserves seem to reduce the probability of a reversal, possibly because higher reserves might reduce the risk of financing withdrawals, especially in emerging markets. Higher international interest rates, which might redirect capital flows away from indebted countries and increase their debt service, are associated with a higher probability of reversals. Wealthier economies are not less subject to reversals, and rates of economic growth, both domestic and worldwide, do not have a consistent impact on the probability of reversal.

Table I.1.

Determinants of Current Account Reversals

article image
« + » means « a high level of the variable significantly increases the probability of a reversal ».« - » means « a high level of the variable significantly decreases the probability of a reversal ».« ns » means « not significant ».

Only variables which appear in more than one study or which have a non-ambiguous impact are included in the table.

15. When current account reversals do occur, they tend to be associated with reduced GDP growth(Table I.2). Croke et al. (2005), for example, find that GDP growth falls on average 3 percentage points during current account reversals before bottoming out, although interestingly, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates, or declines in real stock prices. This finding is consistent with the argument of Debelle and Galati (2005) that current account reversals in industrial countries mostly reflect domestic economic cycles rather than shortfalls in net capital inflows driven by a loss in external confidence. Larger current account deficits and a more appreciated exchange rate increase the cost of reversal, while higher trade openness reduces it. Larger current account deficits might increase the needed adjustment. A more appreciated real effective exchange rate might signal greater misalignment with economic fundamentals. More open economies can rely more on trade rather than a domestic demand contraction to adjust. Surprisingly, a healthy fiscal position does not seem to reduce the cost of a reversal. More open capital accounts, which leave the country more subject to rapid capital outflows; higher GDP growth before the adjustment, which could reflect overheating; and higher international interest rates, which increase debt service, do not seem to increase the cost of reversal either.

Table I.2.

Determinants of the Growth Impact of a Reversal

article image
« + » means « a high level of the variable significantly increases the cost of a reversal ».« - » means « a high level of the variable significantly decreases the cost of a reversal ».« ns » means « not significant ».

Only variables which appear in more than one study or which have a nonambiguous impact are included in the table.

Trade deficit in Adalet and Eichengreen (2005)

16. The literature suggests that there are risks associated with Australia’s large current account deficits. Several factors increasing the probability of a reversal are at play in Australia: its current account deficit is high, despite exceptionally high terms of trade; the country has a relatively large external debt; and international interest rates, though still relatively low, are rising. Moreover, some factors might increase the cost of a reversal if such a reversal happened: Australia’s current account deficit is high; the economy is relatively closed;8 and the real effective exchange rate is significantly above its historical average, although it is not clear that the exchange rate is overvalued given the underlying economic fundamentals. Low reserves should not matter for Australia, however, since its currency has been floating for many years.

17. Several factors substantially mitigate the risks, however. The literature suggests that relatively closed economies, like Australia, are less subject to current account reversals. Freund and Warnock (2005) also find that when current account adjustments do take place, investment-driven external deficits result in milder adjustments than those that are consumption-driven. More importantly, the literature does not fully account for some important strengths of the Australian economy. For example, one would expect Australia’s healthy fiscal position and flexible exchange rate to help cushion the impact of a potential reversal on GDP growth, despite the fact that the empirical literature does not offer strong evidence supporting this. Extensive foreign exchange hedging and the robust financial system should also help mitigate the impact of adverse shocks. Overall, these strengths, together with the sound medium-term frameworks for monetary and fiscal policies, suggest that the Australian economy would adjust in a timely manner if external conditions turned less favorable.

E. Are there Risks Associated with Large Stocks of Foreign Liabilities?

18. Australia’s external liabilities are predominantly intermediated through the banking system. The stock of foreign liabilities has increased steadily, both in nominal terms and as a share of GDP, and the composition of liabilities has shifted toward more debt (Table I.3).9 Non-resident claims on the public sector have declined in recent years as the total public debt has fallen, so the private sector now accounts for about 90 percent of gross external debt, with financial corporations owing four-fifths of private external debt.

Figure I.9.
Figure I.9.

Gross Foreign Debt Liabilities by Sector

(In billions of $A)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics.
Table I.3.

Australia: External Liability and Reserve Indicators

(In percent of GDP or otherwise noted)

article image
Sources: Australian Bureau of Statistics, Reserve Bank of Australia, and Fund staff estimates.

19. The terms on which foreign investors are willing to continue to provide finance in the face of shocks determine whether these external liabilities are a source of vulnerability. International financial markets currently view Australian banks favorably, with risk premia on banks’ bonds and credit default swap premia at about 10 basis points. However, in the event of shocks investors may reevaluate the risks they face, and require higher expected returns, with a potentially large impact on interest rates and the exchange rate. The sensitivity of risk premia to shocks will depend on the underlying financial robustness of both the banks and their borrowers.

20. Private sector balance sheets are sound, although households remain exposed to a potential overvaluation of housing.10

  • The non-financial corporate sector is in a strong financial position. Businesses have enjoyed favorable conditions in recent years, notably strong commodity prices. Corporate profits increased 10 percent over 2005 and have reached their highest level as a share of GDP in over 30 years. While debt as a multiple of profits is high by historical standards, it remains below previous peaks. The debt-servicing ratio also remains around historical lows.

  • Households’ balance sheets also look sound. Household net worth was 639 percent of disposable income in March 2006, with this ratio up by one-half from its average of 427 percent during the 1990s. Household indebtedness has continued to rise, with debt reaching 152 percent of disposable income in the first quarter and interest payments at 10¾ percent of income, although debt is only one-fifth of household assets and 35 percent of housing assets. Moreover, household debt is concentrated on high income groups who have relatively low debt service burdens and significant financial assets.11 The RBA’s March 2006 Financial Stability Review finds few signs of household financial distress. Nonetheless, housing is almost 60 percent of total household assets, and house prices rose by over 60 percent in 2001-03. House prices have since been remarkably stable, but house prices remain high by historical standards. A substantial fall in house prices would adversely impact households’ balance sheets, especially of those households whose debt burden is significantly higher than the national average, which are most likely to be recent borrowers.

  • The financial sector is healthy, and stress tests indicate that it is well-placed to absorb shocks, including falls in house prices, as discussed in the Financial System Stability Assessment.

21. Vulnerabilities are also contained by private sector management of the foreign exchange and rollover risks associated with external debt:

  • Foreign currency risks are limited by extensive hedging, although associated counterparty risks remain. A 2005 survey by the Australian Bureau of Statistics showed that foreign currency assets of Australian entities exceeded foreign currency liabilities, with a net long foreign currency position of $218 billion, or 26 percent of GDP.12 In particular, private corporations appeared to have relatively minimal direct exposure to exchange risk: a significant portion of their overseas borrowing was hedged naturally. While banks have borrowed substantially in foreign currencies, they have made extensive use of derivatives to hedge the exposure. Around 77 percent of these derivative contracts are taken with non-residents. While the Australian dollar is the 6th most actively traded currency according to the BIS, there may still be concerns about counterparty risk on forwards and swaps becoming concentrated owing to a limited number of large global participants. Most of the remainder of the derivative positions were swap transactions with the Reserve Bank, which has undertaken such transactions for domestic liquidity management purposes. One indication of the effectiveness of the banks’ hedging is the limited variation in the sector’s earnings in the face of the sharp movements in the Australia dollar in recent years.

  • Australia’s external position entails roll-over risks, but there are several mitigating factors. Just under one-half of Australia’s external debt has a residual maturity of less than 1 year. At some point, Australian financial institutions may face unfavorable circumstances when they need to roll over their external financing, potentially reflecting shocks to financial markets in other countries or changes in investor perceptions. Because Australia’s financial markets are well-developed, its foreign exchange market is deep, and the banks have AA- credit ratings (Australia has a AAA- sovereign rating), in most circumstances, a relatively modest increase in risk premia would be sufficient to attract alternative investors in the same market, or to raise funds in other markets. Indeed, the banks have aimed to diversify their international funding sources and have made offerings in a large variety of instruments. However, the risk of more difficult circumstances cannot be ruled out. In such a case, banks would need to fall back on their liquidity buffers, which are subject to regulation by APRA. They could also turn to funding sources that may be less sensitive to shocks, such as mortgage securitization, because banks have maintained the infrastructure needed to make such issues even though they have securitized only a limited fraction of their portfolios.

Figure I.10.
Figure I.10.

Currency Composition of Australia’s External Position As at March 31, 2005

(In billions of $A)

Citation: IMF Staff Country Reports 2006, 373; 10.5089/9781451802108.002.A001

Source: Australian Bureau of Statistics.

22. Overall, strong financial supervision is needed to continue to contain the vulnerabilities associated with substantial private sector external debt. Appropriate supervision of credit risks underpins the financial health not only of the banks, but also of corporations and households, thereby underpinning foreign investors’ confidence in the capacity of the private sector to service external debt. Moreover, regulation of foreign exchange and liquidity risks is important to limit the potential for shocks, whether foreign or domestic, to become a significant threat to the solvency or liquidity of banks, which would likely have a significant impact on the confidence of foreign investors.

F. Should Australia’s Consenting Adults be Trusted?

23. Yes, Australia’s large external deficits appear sustainable. There are, however, risks associated with the resulting external debt that need continued careful management. These deficits, which largely reflect high investment rather than low saving, should be sustainable as long as the Australian economy, especially its exports, grow strongly. The associated accumulation of foreign liabilities nonetheless leaves the country exposed to shocks, but these risks appear to be well-managed, especially thanks to extensive hedging of foreign-currency-denominated liabilities. The sound macroeconomic framework and sustained implementation of structural reforms also reduce the risks by promoting macroeconomic stability and boosting growth. Looking forward, financial supervision must remain vigilant and ensure that financial institutions continue to manage risks in an appropriate manner.

References

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1

Prepared by Benoît Mercereau (ext. 3-4986).

2

Horne (2001) and Gruen and Sayegh (2005) survey the current account debate in Australia. The current account deficit is so prominent in policy discussions in Australia that it is commonly referred to using the acronym CAD.

3

Quoted in Horne (2001).

4

Makin (1988), Pitchford (1989), and Corden (1991) have been influential Australian proponents of the consenting adults view of current account deficits, which is also sometimes referred to as the “Lawson Doctrine,” after U.K. Chancellor of the Exchequer Nigel Lawson.

5

The net saving rate of Australian households fell in 2002-04 in conjunction with a boom in house prices, and rose only modestly in 2005. An alternative measure of household saving would be changes in net financial wealth, which includes changes in the valuation of financial assets. Based on this broader measure, the household saving rate in Australia has not declined recently and is not out of line with other developed countries (the Reserve Bank of Australia’s May 2006 Statement on Monetary Policy further discusses this point).

6

Studies surveyed by the Productivity Commission (2004) suggest that housing investors in Australia receive more generous tax treatment than investors in many other nations because they can make larger deductions of negative net rental earnings from taxable income and the treatment of depreciation is relatively favorable. While the tax regime may have a positive impact on dwelling investment in Australia, it remains that private non-residential investment is higher in Australia than in many developed economies.

7

The staff report’s external sustainability annex also quantifies the impact of various shocks on the external position and finds that external sustainability is robust to shocks within the range of historical experience.

8

Australia has low tariffs and few trade barriers. However, it ranks 28th out of 30 OECD countries in terms of openness, defined as exports plus imports relative to GDP. In addition, Australia is the 20th least open economy of the 136 countries and territories for which the Penn World Tables have data (the Reserve Bank of Australia further discusses this issue in its March 2005 Bulletin). Guttmann and Richards (2004) find that Australia’s distance to the rest of the world and to a lesser extent, its large geographic size explain the country’s low openness.

9

Annex I in 2005 Staff Report (IMF Country Report No. 05/331) discusses Australia’s external position in greater detail.

10

See also the Reserve Bank of Australia’s Financial Stability Review, March 2006.

11

Reserve Bank of Australia, Financial Stability Review, March 2005.

12

Reserve Bank of Australia, 2005, Australia’s Foreign Currency Exposure and Hedging Practices, RBA Bulletin, December.

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1

Prepared by Dmitriy Rozhkov (ext. 3-9745).

2

Since 2002, metals account for about 85 percent of the cumulative 65 percent real increase in the IMF non-fuel commodities price index.

3

Australian Financial Review, February 13, 2006.

4

For example, Barnett and Vivanco (2003), Pindyck (1999), and Akarca and Andrianacos (1998). An exception is Cashin, Liang, and McDermott (2000), who found evidence of strong persistence in oil price shocks in the post-World War II period, with no mean reversion of oil prices.

5

In real terms, futures metals prices fall by 46 percent from current levels; within metals, copper futures prices decline the most, by 55 percent in real terms (IMF, World Economic Outlook, October 2006).

6

Real growth in 2006-10 is expected to average about 9½ percent in China and about 6½ percent in India (IMF Country Reports Nos. 05/411 and 06/55).

7

The fund was introduced in January 2004 with a reference price of US$ 20 per barrel, which was later raised to US$ 27 per barrel (IMF Country Report No. 05/377).

8

Unlike oil, Australia’s export commodities will take a very long time to deplete. Therefore, we do not treat all revenue from mining as financing (as often recommended in the case of oil), and define the impact of commodity prices as the effect of prices deviating from their historical average.

9

Treasury’s estimate of the effect of higher commodity prices on company tax receipts is less than A$16 billion over the next four fiscal years (Australian Treasurer Press Release No. 051, June 1 2006, http://www.treasurer.gov.au/tsr/content/pressreleases/2006/051.asp).

10

The 2006/07 budget assumes that commodity prices fall in two discrete jumps, in 2007 and 2008, and stay flat in between, whereas we assume a smooth decline over the two years of the same magnitude.

11

In other words, we assume that higher or lower commodity prices (and therefore revenue) will not result in any change in policies.

Australia: Selected Issues
Author: International Monetary Fund