News Item : 43 Date Posted : 5/12/2005 Posted By : david
Foreign debt to soar
Foreign debt to soar By staff writers with AAP May 06, 2005 From: AAP
RISING global interest rates are set to substantially push up Australia's foreign debt further into record territory, the Reserve Bank has warned. In its quarterly statement on monetary policy released today, the central bank painted a sober picture for exporters, particularly those in the rural and manufacturing areas, and an even gloomier vision of foreign debt.
The current account deficit is now more than seven per cent of GDP, the highest since the early 1950s, while total foreign debt has soared past the $400 billion mark.
The huge deficit has prompted analysts to warn Australia is heading into "bannan republic" territory. Advertisement:
In the December 2004 quarter, net foreign debt hit $422 billion, the highest ever.
The central bank said net income deficit, that is the income that flows to foreigners on their debts and investments in Australia, is now at 3.75 per cent GDP, the highest recorded since 1996.
In a clear warning that the situation will worsen, the Reserve Bank said higher global interest rates would certainly push up net income deficit and with it, total foreign debt.
"The cost of servicing Australia's net foreign debt liabilities may rise from its current relatively low base, as global interest rates rise and the stock of foreign debt liabilities increases in line with projected ongoing current account deficits," it said.
The bank held out little room for optimism on the current account deficit, attributing the strong export performance of recent months to much higher prices for key commodities rather than any surge in the volume of Australian exports.
It said by contrast, import volumes were continuing to grow.
"Important volumes appear to have considerable momentum," it said.
The bank said there were some risks to the relatively optimistic forecasts made for the rural sector at the start of the year because of the growing threat of drought.
The Reserve Bank said it did not expect the manufacturing sector, which enjoyed strong export growth in the 1990s, to have such a revival in coming years.
It said the strong dollar, plus the advent of competitors such as China and India, were making life very difficult for Australian farms.
"The high level of the exchange rate and the flow of low-cost goods from developing countries onto the world market are hampering competitiveness of Australian producers," it said.
