External Stability

Analyze the government policy option to achieved external stability in the Australian Economy
External Stability occurs when export income is sufficient to finance import expenditure and to
meet its short and long term financial obligations. This in turn requires a nations current
account and levels of foreign liability and net foreign debt are sustainable and there is stability
in exchange rate.
Australia records a persistent current account deficit in its BOP because of a large net income
deficit and a trade deficit. (Refer to ABS for stats on: trade deficit current account deficit and
income deficit)
Government policy options to achieve external stability include both macro and microeconomic
policies.
1. Restrictive fiscal policy stance In order to encourage high levels of domestic savings
appropriate for financing domestic spending and constraining the growth of gross
national expenditure, including spending on imports, the government have used fiscal
surpluses to retire public debt and incentives such as tax cuts and superannuation to
boot private savings. (In short government spends domestic to encourage domestic to
save and spend on themselves through various means through import control, tax cut
and subsidies.)
2. Monetary Policy A less directive role but aim at the achievement of non inflationary
economic growth with RBA using inflation target of 2-3% over the business cycle.
Hence the achievement of this target has restrained price and wage pressure. This has
effectively strengthened international competition of Australian exporters and import-
competing firms. (If RBA raised the cash rate due to growth this will be good for the
economy however if it raises the cash rate due to bad inflation there will be strand of
unintended consequences)
3. Microeconomic Reform Objectives: regulation and competition. Theme: To
understand the movement of money supply (lending rate)
Regulatory situation
Capital position in banks
Confidence
The initiative to boost export performance and import competitiveness including;
Reduction in industry protection levels and reform of industry assistant policy
National Competition Policy
Deregulation of the labour market
Privatisation of GBEs
Tax reform to make the tax system more competitive and efficient
4. Trade Policy This has played a major role in gaining market access in Australian export.
For instance the Australian government lobbied for a reduction in agricultural subsidies
in the WTO. Moreover Australian policy has been directed a major regional and bilateral
free trade groupings. (APEC AND ANZCERTA).
Provide statistics for the projections of export and import.
Global economy Vs External Balance: Global Economy refers to the group of countries which
produce and trade goods and services, contribute to gross world product (GWP). These
countries consist of the advance industrialized economies, Newly industrialized economies,
developing economies, and economies in transition. Much of global economy is centred around
trade and investment flows between US, European Unions, China, Japan and industrialized
economies in Asia. External balance refers to 3 elements which influences Australias BOP.
i. Current account deficit
ii. The level of foreign liability and debt
iii. Movements in the exchange rate

The global economy has a large impact on Australia in terms of trade flows, capital flow (direct
and portfolio investment) and technology transfer. This process of globalization which led to a
greater integration between the world economy and accelerated the extent to which Australia
external balance has been affected.
Australia has increased both export and import as a percentage of GDP to over 30% since 2000s
(for instance CAPEX; 5 and 10 years plan). However the growth in import has outstripped the
growth in export and Australia has a deficit in goods and services (despite the commodity price
boom in the last 6 years). China has led to high commodity price for Australian exporter and
high term of trade (Moreover, since the crisis 2008, commodity is seen as a safe asset for
financial markets and hence its demand drove the price even higher).
Australia consistently records deficit in goods and services it borrows both debt and equity
funds from overseas financial markets the services costs of these funds in terms of dividends
and interest repayments exceeds the inflow of income from Australian lending abroad. Hence,
this has led to a large net income deficit in the current account. Moreover, with the rising
current account deficit Australia has to borrow funds from overseas because the level of nation
saving is too small to finance domestic investment. For instance, foreign liabilities and foreign
debt compose of over 60% of GDP to service cost to Australian borrower. Any rise in world
interest rate or fall in export income leaves Australia vulnerable to higher debt servicing ratio. In
recent time confidence by foreign investor has been high in particular shares by mining
companies involving the export resource boom (CAPEX), as such foreign investor have been
willing to continue lending to Australian businesses.
The Global economy also influences the value and volatility of AUD (which is regarded as the top
5 currencies in the world as well as a commodity based currency). However, ongoing CAD that
account over 6% of GDP, the AUD is vulnerable to the loss of foreign investors confidence; since
GFC 08 AUD has been consistently high due to the following reasons: commodity boom, credit
rating and USD weakness.
The Global economy has a major impact on Australian TOT flows, capital flows and movement in
the exchange rate. The Australian government attempts to achieve external balance through the
use of monetary, fiscal and microeconomic policies. However CAD is still extremely high relative
to GDP (over 6%) and the level of foreign debt is over 60% of GDP, which results in a large debt
servicing cost and a further potential loss of investor confidence in AUD.