Into The Big Borrowers' League

Sydney Morning Herald

Wednesday April 6, 2005

John Garnaut

Australia has become the second largest consumer of international capital, with trade figures suggesting the current account deficit will remain close to its highest level in half a century.

A report to be published overnight by the International Monetary Fund shows Australia absorbed 4.1 per cent of the world's surplus capital in 2003. This equalled Britain and was second only to the US, which consumed 71.5 per cent.

Australia requires global capital, in the form of foreign debt and investment, to balance its burgeoning current account deficit, which reached 7.1 per cent of GDP in the December quarter.

The deficit shows Australia is paying far more to the world in interest, company dividends necessary to service this foreign capital, as well as for imports of good and services, than it receives in return.

Harvinder Kalirai, an Asia Pacific strategist at State Street Global Markets, said Australia's capital inflows were even larger last year, when a net $71 billion poured into the local bond market, and they remained strong.

"Net fixed income flows were more than enough to cover the current account deficit, and this lent significant support to the Australian currency," he said.

The Bureau of Statistics said the trade deficit for February was $2.2 billion, while the January figure was revised from $2.7 billion to $2.3 billion.

While the trend has declined, the cumulative deficit forthe year to February was $25.9 billion, the largest on record. Exports rose 1.1 per cent in February and a revised 2 per cent in January, providing the first hint of an export recovery.

Farm exports rose 7 per cent in the month after falling by a quarter since June, while non-rural exports fell 1 per cent. The rise in export receipts was largely due to commodity price rises.

Economists at ABN Amro said they expected the shortfall between imports and export growth to reduce GDP by 0.5 per cent in the March quarter, while the current account deficit would fall only slightly, to 6.8 per cent.

A discussion paper from the Reserve Bank yesterday said the long-run decline in Australia's export prices relative toimport prices had recentlybeen reversed. Two economists, Christian Gillitzer and Jonathan Kearns, said Australia continued to rely on commodity exports and manufacturing imports, but trade had diversified towards higher-priced export commodities and relatively low-priced manufactures.

"The terms of trade will have increased by around 50 per cent over the period 1987 to 2006, unwinding the decline over the preceding 30 years," the paper said.

Since the mid-1970s commodity prices after adjusting for inflation have fallen much faster than export prices, while Australian import prices have been falling relative to world prices for manufactured goods.

© 2005 Sydney Morning Herald

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