Conversations in Economics Yr12 Foreign Investment Special

⌘ShiftL Resize main navigation Podcast Episode 16 Sept 12 min 47 sec Description Transcript Chapters This transcript was generated automatically. Its accuracy may vary. 0:00 Setting the Stage for Foreign Investment Discussion Good morning and welcome to Conversations in Economic. 0:03 Speaker 2 Sector, good morning. 0:04 Speaker 1 Good morning to you, DJ. Here we are in the Butterfly Cafe. 0:08 Speaker 2 Week 9, Week 9, just before the mock exam, just. 0:11 Speaker 1 Before the big events, now the first thing we're going to be doing today, DJ, is we are doing a foreign investment special. 0:17 Speaker 2 Yes, because. 0:18 Speaker 1 There are a number of students who are seeming to be getting a little bit. 0:24 Speaker 2 Well, it's tricky in the tricky in the sense that you just need to get your definitions right. Well, that is. 0:30 Speaker 1 Correct. 0:30 Speaker 2 Yes, I think it's one of the. 0:31 Speaker 1 You need to get. 0:32 Speaker 2 Your knickers. No, I think it's one of those ones that if you know if you know it, it's actually not bad. Like it's not it's not tricky in the sense they can't give you a trick. They won't give you a trick question because the the just standard questions though. 0:43 Speaker 1 Now, as fortune would have it do, Joe, I was sitting here with the. 0:46 Speaker 2 Syllabus I can see excellent. 0:47 Speaker 1 Now we for, for our knowledge, what we need to be able to know. We've got 1234, we've got 6 not. 0:54 Speaker 2 Points. Yes, and a lot of this is stuff we already know. 0:56 Speaker 1 Well, it is because it links to the bounce. 0:58 Speaker 2 Space sure does and. 1:00 Speaker 1 The exchange rate. 1:01 Speaker 2 It does indeed. 1:02 Understanding Capital Inflow, Liabilities, Debt, and Equity Now, first of all, foreign investment, what are we talking? 1:05 Speaker 2 About, OK, we're talking about the the flows of, of basically savings from overseas, flows of money from overseas, Yes, we call it capital inflow, yes. And we know that it comes in three main forms, yes. Tell us what the idea is. We're talking about direct investment, portfolio investment and other investments. 1:22 Speaker 1 Which is largely debt. What's that? 1:25 Speaker 2 Debt, what is yes, debt and what you talk about it, OK. And so the foreign investment comes in and then we we record that of course on the financial account, yes, we do as credits. Is that money coming in? Yes. And that here's the key thing is that leads to an accumulation of liabilities. 1:44 Yes, he does in the two types. So debt you've already mentioned and the other one is equity, OK. And so you got to understand that the liabilities are the flip side of the investment. So we have the foreign investment coming in and then you have a liability. 1:59 Speaker 1 Yes. Now the problem here is that people get confused because the money comes in and is thus a credit on the balance. 2:07 Speaker 2 Payments. 2:08 Speaker 1 But by coming in, it's creating a liability because we now owe something. 2:13 Speaker 2 That's right. 2:13 Speaker 1 Right. And so now then there will be a debit from the income account to pay the liability. 2:19 Speaker 2 OK, and that is a set that is not double entry. That is a separate thing, OK. And so yes, that that that you you have these liabilities accumulate over time and then yes, you have debits on the primary income. 2:32 Speaker 1 Now you mentioned capital inflow, there's also capital. 2:34 Speaker 2 Out there, absolutely right. And so of course, because Australians are going to look for opportunities overseas and again, they could be direct. 2:43 Speaker 1 Export our savings. 2:44 Speaker 2 Exactly. So that'd be capital outflow, yes. And so we we will have direct portfolio and other investments and that leads to an accumulation of foreign assets, OK, also known as Australian assets abroad. 2:58 Speaker 1 They are a negative number though. DJ. 3:01 Speaker 2 Yeah. 3:01 Speaker 1 Debits. 3:02 Speaker 2 Yes, yeah, the money goes out. And so if we have assets, they're recorded as a negative just because it's an outflow of money. And again, those assets are in the form of debt and equity. Where a lot of students get very confused is with that word asset and the word equity. 3:19 OK, Equity means we're acknowledging, yes, we're acknowledging that we we've transferred ownership of like shares or property or something like that. OK. So transfer of ownership means equity, debt means that we've borrowed money and we alone and then we now have debt. 3:35 It's a liability if we're the ones doing the borrowing and the selling of the property. It is an asset if we are the ones buying property overseas or lending money overseas. Yes. Does it make sense? Yes, it. 3:48 Speaker 1 Well, of course it does. I understand foreign investment, DJ. 3:50 Exploring Net Foreign Liabilities and Net Debt/Equity Well, right now let's talk about the fact we have an international investment position, the IIP. 3:56 Speaker 2 Yes, this. 3:57 Speaker 1 Is What have we done here, DJ? 3:58 Speaker 2 OK. So IIP is also known as net foreign liabilities, but IIP is the sort of newer terminology. 4:03 Speaker 1 But if they're looking at past examples, they might see net. 4:06 Speaker 2 Foreign, exactly. There's two ways to think about it. One is our IIP is our foreign liabilities minus our foreign assets, right. So you Add all the liabilities that we've accumulated, all the debt and equity and you Add all of the assets of the debt and equity that we've got, subtract them away and then that's your IIP at the moment it's about $700 billion and it's. 4:27 Speaker 1 A little bit of a positive number, DJ. 4:29 Speaker 2 Because we have more liabilities, yes. 4:32 Speaker 1 Than. 4:33 Speaker 2 Going out right, we have more liabilities. The other way to think about it is it's our net debt and our net equity correct now net being our liabilities of debt minus our assets of debt overall. 4:47 Speaker 1 Position. 4:47 Speaker 2 Right. And so for Australia it's it's over resoundingly positive over a trillion dollars of net debt, right. We've borrowed a trillion dollars more than we have lent. We have in the equity terms net. 4:59 Speaker 1 Equity. 5:00 Speaker 2 Right. So it is our it is our liabilities minus our assets of equity and that is -750 billion or something like that and that it's. 5:11 Speaker 1 Just a recent phenomenon. 5:13 Speaker 2 That, yes, that negative, that negative part, because we are seeing Australian companies investing more overseas now. That could be like superfunds, yeah. So I'd say it could be our mining companies like, you know, creating new mines in Africa and things like that. 5:29 Or the reality is our superfunds now have like $5 trillion of of money. And so some of that money they're going to send overseas and they're going to, you know, buy shares and bonds and all that sort of stuff overseas. 5:40 Key Differences and Impacts of Investment Types OK. Now what's the difference DJ between foreign direct investment and portfolio? 5:46 Speaker 2 So direct, the key determination is direct means you are selling more than 10% of a business. Yes, alright. Or it could be a, a complete startup or it could be a Yep, what's it called? A joint partnership agreement, something like that. So the key define thing, joint venture, there you go. 6:04 The key thing is that it's more than 10% and you're trying to get a controlling interest, right? So you're trying to exercise some control over the company? 6:12 Speaker 1 But it does bring some added extras. 6:14 Speaker 2 Yeah. So they do like to see this that you understand that you know that means if that company. 6:18 Speaker 1 Get one free. 6:19 Speaker 2 Yes, you, you've created a a long lasting relationship and so that that new company that's coming in is going to bring their managers and their technology and they're going to great jobs, great jobs, They're going to upskill their workers. 6:32 Speaker 1 Which will then spread through the economy. 6:34 Speaker 2 Right, because it's going to lead to Unit 4 stuff productivity it. 6:38 Speaker 1 Precisely the. 6:38 Speaker 2 Precisely the Yeah. So that's a nice little bonus from Jury, yes. 6:41 Speaker 1 But of course, the profits from these, yes. 6:45 Speaker 2 Some of them, some get reinvested, yes, right. Gets overblown that we have a whole lot of profits get reinvested back in Australia. 6:51 Speaker 1 A lot of it goes over. 6:52 Speaker 2 Overseas, a lot of it goes overseas again on the on the primary income as a debit. 6:56 Speaker 1 Correct, Yeah. Now, what about this portfolio? 6:58 Speaker 2 Investment, well, portfolio is more short term, it's more speculative, yes, it's a bit less like Mr. B. 7:05 Speaker 1 He has a portfolio. 7:06 Speaker 2 Mr. B, what has he got? 7:08 Speaker 1 He's got all manner of shares in all manner of countries. 7:10 Speaker 2 Really, doesn't he? He does because. 7:11 Speaker 1 Obviously I'm coming on 78 this year this week and so I obviously have. How do you? 7:15 Speaker 2 Think about my retirement on your portfolio. 7:16 Speaker 1 My Portfolio, yes. 7:19 Speaker 2 Yes, yeah. And so look that that is more short term, that's more speculative. It's again like how Superfund's buying, but it's the same sort of things, you know, firms trying. 7:28 Speaker 1 To make quick. 7:29 Speaker 2 Money. Yeah, exactly. It's like, OK, the Australian share market is doing well, so people will send their money to Australia. 7:34 Recent Shifts in Australia's Foreign Investment Flows Exactly. 7:34 Speaker 1 Yeah, OK, Now, what's happened to foreign investment flows over recent times? Well, what do students need to know? Well, it's been walking Encyclopedia. 7:42 Speaker 2 No, no. Well, of course it links back to our current account surplus we had a few years ago. We ran the current account surplus, which meant we had a financial account deficit which. 7:51 Speaker 1 Is quite unusual. 7:52 Speaker 2 It is unusual, very unusual. First time, 44 years, Yes, I've mentioned that a couple of times. Yes. And so if we had a financial account deficit, I mean, for those was it 3 or 4 years, we had an A net outflow on, Yeah. So our net foreign liabilities fell, right? 8:08 Yeah. And and the other trend is, is that, that net equity is larger, a lot negative than it was. Yeah. So we've seen an outflow there. And then really the trend in the last year is it started to pick up a little bit because we've gone back to a current account deficit. Yeah, we're starting to see foreign investment return. 8:23 Yeah. Net debt has sort of picked up a little bit, yeah and yeah. 8:27 Speaker 1 Yeah, that's that's all we need to. 8:28 Speaker 2 Know, I think. 8:29 How Foreign Investment Drives Growth and Productivity To hear now the last thing they've got to do is the cost and benefit. Now this is 1 where they probably three costs. 8:35 Speaker 2 Three benefits, Yeah. Good idea. Little paragraphs, Yeah. 8:38 Speaker 1 And what sort of things would you well? 8:41 Speaker 2 Let's do benefits. So of course we go back to our savings investment that's. 8:44 Speaker 1 Got to be starting. 8:44 Speaker 2 That's the starting point, right. So at the end of the day, we go back to what we know. It's about filling the savings investment gap and that therefore is being used to fund investment. 8:53 Speaker 1 And make us very. 8:54 Speaker 2 Don't confuse, again, don't confuse foreign investment with investment. So foreign investment is the money coming in and then investment is the capital that could expand. 9:03 Speaker 1 But it's essentially allowed us to grow and it's allowed our two key capital intensive. 9:08 Speaker 2 Sectors. 9:08 Speaker 1 Agriculture and mining? Yeah. Excel. 9:10 Speaker 2 Yeah, which you could almost stretch out as being the second benefit and saying how we've developed the mining sector in particular using foreign investment. The mining, Yeah, I think so, yeah. Yeah, because we're very capital. 9:22 Speaker 1 Yeah, yeah. And we, we just wouldn't have been able to achieve it without foreign investment. Yeah, exactly. And I always say to the students that we've had this in and it take aside COVID, we've had 30 years of uninterrupted growth. Yes, a lot of that is down to this. 9:33 Speaker 2 Investment that we've. 9:34 Speaker 1 Been using to. 9:35 Speaker 2 Progress and that's again you could, you could make that as your third, the idea that it's generating growth, it's generating jobs, raising incomes and improving our living standards. So you can have a full on discussion. So that's what I would do. The other one, yeah, that's good. And the other one, of course is they love that one about direct investment in particular leading to more productivity. 9:52 Speaker 1 And that's the. 9:53 Speaker 2 Benefits, you know, so that's a good one to. 9:54 Potential Risks and Challenges of Foreign Investment Do now What about costs? 9:55 Speaker 2 Costs, well, I mean, for direct, let's see that specifically you could lose control of a key asset in Australia. Some of this is overblown. Like people get worried about like, you know, selling the family farm and all that sort of stuff because the farm's real. The farm's, Yeah, exactly the farm's. 10:12 Speaker 1 Still there because as you know, I'm buying and selling a house at the moment. Yeah. And we have to prove that we're not foreign investors, which I am very pleased about. 10:19 Speaker 2 There you go. It's interesting, isn't? 10:20 Speaker 1 It yes, but I'm. 10:21 Speaker 2 Pleased that we've tightened up a lot on that. 10:22 Speaker 1 Because that actually is what should. 10:24 Speaker 2 Be happening, yeah, yeah, well, there's not enough houses here for Australians so yeah. And so there's that. But there's assets like the port in Darwin is an interesting one because it's been sold to a Chinese company and of course now there's sort of security issues. There are indeed. 10:39 There's also issues if it's a key, like if let's say it's like for instance, like WA Water Corp, which is actually profitable, yeah, you don't really want to sell that to, you know. So there's that, that aspect. Other negatives, of course, is that it does lead to a primary. 10:55 I mean, we have a current account deficit because the primary income deficit. 10:58 Speaker 1 Within a deficit. 10:58 Speaker 2 Right. And that's and so it's is that a, is that a negative like it's potentially it? 11:03 Speaker 1 Gets too big. 11:03 Speaker 2 That's the quick, that's the point, right? Is it sustainable to? 11:07 Speaker 1 Our AAA. 11:07 Speaker 2 Rating, there you go. And so there's another, there's a third one we could get a credit rating downgrade. QLD for instance, their government was downgraded last week. Was it really went from AA plus to AA. 11:18 Speaker 1 Now that's. 11:18 Speaker 2 There was a really good table in the Australian. I meant to get get it. Let's get it showed all the different credit ratings but QLD downgraded, got a. 11:26 Speaker 1 AAA. 11:27 Speaker 2 Yeah, for now, because. 11:28 Speaker 1 Because in fairness to Mark Mcgow, yeah. 11:30 Speaker 2 Yeah, it was very. 11:31 Speaker 1 Prudent and got that rating back. 11:32 Speaker 2 Up. Yes. Yeah, because of in terms of trading, but I but. 11:35 Speaker 1 I mean he. 11:36 Speaker 2 Was prudent as soon as soon as terms of trade comes down, what else trip our credit rating. But yeah, it, it's that whole discussion. I mean, I put a lot of sort of facts and figures in my notes. The stuff about as long as the interest payments are being met by, you know, like export income, like there's that discussion, then it's fine, right? 11:58 The issue will be if we had, if the terms of trade fall, if the exchange rate falls, if the economy slows, then that debt and AAA credit rating downgraded, that debt becomes a lot more. 12:08 Speaker 1 Expensive, but of course over 2/3 of this debt is private debt. 12:12 Speaker 2 Which is a that's a positive. 12:13 Speaker 1 Because it's that they make decisions on commercial yeah basis don't. 12:17 Speaker 2 They profit driven as opposed to the government which is driven by popularity basis. 12:20 Speaker 1 Well, potentially, yes, yes. 12:22 Final Thoughts on Foreign Investment's Role in Economy So really the students have got to have those sort of three mini paragraphs ready, so they're ready to go. But overall you'd have to say foreign investment is good for the Australian. 12:31 Speaker 2 Economy, absolutely. That's the conclusion. You can't and you cannot tell me that foreign liabilities are terrible. No. And foreign investments, great. They're the same thing. Yeah. Yeah, the liabilities are the investment, yeah. 12:41 Speaker 1 Yeah, now that I think that in a nutshell as it. 12:42 Speaker 2 Did. Yeah, I think that's it. Yep. Right Cheerio. 12:45 Speaker 1 Cheerio all.