Dollar's strength fuelled by mining investment: RBA

Date
April 16, 2013

The decade-long boom in mining investment has been largely funded by capital flows from abroad, a tide of money that has also kept the local dollar higher than it would otherwise be, RBA assistant governor Guy Debelle says. Mr Debelle said today almost all of the $284 billion spent on mining expansion since 2003 had been funded by company earnings, rather than by borrowing. He said about four-fifths of this funding had come from offshore, partly directly and partly through foreign share holdings in Australian companies such as BHP Billiton and Rio Tinto. As a result foreign capital flows into the resources sector had more than tripled to around 3.5 per cent of Australia's $1.5 trillion in economic output. At the same time, offshore investors had greatly expanded their holdings of federal government debt to around 70 per cent of the amount on issue. In contrast, the big banks had cut back on their borrowing abroad in recent years, favouring to build domestic deposits instead. "The net effect of all these flows however, is that the Australian dollar is higher than one would expect, given fundamentals such as the terms of trade and interest differentials," said Mr Debelle, who head the central bank's financial markets division. The local dollar touched a 28-year high in trade weighted terms last week, though it has since pulled back somewhat. Mr Debelle said around 75 per cent of the foreign direct investment in resources had been in the form of reinvested earnings. The way these funds were treated in the national accounts in turn tended to overstate the size of Australia's current account deficit, he added. Mr Debelle said Australias international trade balance data shows foreign capital inflows to Australia grew to 3.5 per cent of annual gross domestic product in 2012, from one per cent in 2007. He said the large inflow of resources-sector investment in Australia was not because of Australia getting through the global financial crisis relatively unscathed, while the US and Europe were hit hard. Obviously a direct product of the resources boom, which is itself a function of the large increase in commodity demand from emerging markets, he said.

Commerce terminology: boom, markets, capital flow, gross domestic product, economic output, funding, foreign share holdings. Why I chose this: I chose this because I didnt quite understand what the article was talking about and as previously stated in other media files, I find that doing a media file on an article helps me to better understand what it is talking about, and once again, doing a media file has actually helped to understand the article. Analysis: Although this article would appear to be about mining at first it is more so about the Australian Dollar, and how well it is performing. This article gives the view that the Australian dollar is indeed performing particularly well. It says that the Australian dollar had reached a 28 year high in trade weighted terms, even though the Australian dollar has since

pulled back a bit from what it was at the high, it is still going strong. This article relates to the commerce course through the topics of markets and finance.