Over the past few weeks we have been focussing on the “PAINTBRUSH” countries that we highlighted back in February 2014 as being particularly vulnerable. Recently we have highlighted the Polish Zloty as being particularly exposed, given the country’s high level of indebtedness.
The second letter in our acronym is ‘A’ for Australia. Unlike Poland, which is indisputably an emerging country with a GDP per capita of under USD 14,000, Australia is often considered to be a wealthy, advanced economy. It may be an advanced economy, but the term wealthy depends on how you define it. At Stratton Street we make the simple observation that if your net debt to foreigners is greater than the value of your domestic assets, then as a net debtor, you can’t be considered a wealthy country.
Australia’s Achilles heel is its dependency on overseas capital. On our estimates, Australia’s net foreign liabilities are greater than our cut-off of 50% of GDP, the threshold that IMF research indicates is associated with increasing risk of external crises, making it ‘an avoid’ from an investment point of view and this has been our view for as long as we can remember (and for many of us at Stratton Street, that is a very long time indeed!). The root of Australia’s problems is the current account deficit. The latest data from the IMF’s World Economic Outlook database show that between 1980 and based on projections out to 2023, Australia will NEVER have run a current account surplus! That is quite an achievement, increasing borrowing from abroad for 43 consecutive years!
Government officials have commented on this in the past, with a former Treasurer stating, "If this government cannot get the adjustment, get manufacturing going again, and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for. We will just end up being a third-rate economy, a banana republic,". That was in 1986 and the comment was from Paul Keating, Australia’s then Treasurer but unfortunately Australian’s did not heed his words.
The day of reckoning will come, eventually, when the ‘assets’ Australian’s hope to sell to pay off their debts, start to decline in value. That usually means property, and an early warning sign of impending trouble may be fact that Australia property prices have fallen for 11 consecutive months. Whilst all the major rating agencies currently rate the country Aaa, we believe Australia is long overdue for a rating downgrade.
In case you are wondering how the Aussie dollar has fared, since Feb 2014, when we coined the PAINTBRUSH term, the currency has fallen by 20.6% which compares unfavourably to the Polish Zloty which is down 19.1% over the same period. In fact the Aussie ranks 12 out of the 31 currencies we track in terms of worst performing currencies since early 2014 and despite it’s ‘wealth’ the Aussie dollar has underperformed the currency of India a relatively poor country in terms of GDP per head, but much wealthier in terms of net foreign assets. That seems like poetic justice given that India is the world’s largest exporter of bananas!