Economics@1
A stronger $A A stronger $A –– The Winners and The Winners and LosersLosers
La La Trobe Trobe UniversityUniversity26 November 200326 November 2003
Presentation to the VCTA Presentation to the VCTA Comview Comview Conference 2003Conference 2003
Melanie HaySenior Economist
Economics@2
The A$ has appreciated sharply since the August The A$ has appreciated sharply since the August 2002 trough2002 trough
Australian dollar exchange rates
Source: Reuters. Data up to morning of 20 November
0.500.550.600.650.700.75
2002 2003
US$ per A$
vs US$
0.52
0.57
0.62
0.67
2002 2003
€ per A$
vs Euro
606570758085
2002 2003
¥ per A$
vs Yen
45
50
55
60
65
2002 2003
Index
Trade weightedindex
Up 25%
Up 21%Up 34%
Up 10%
Economics@3
Traditional A$ drivers reasserting themselves Traditional A$ drivers reasserting themselves
40
50
60
70
80
90
100
90 92 94 96 98 00 02 04-200
0
200
400
600
800bpsUS cents
3mth differential (right)
AUD/USD
Interest rate spreads
40
50
60
70
80
90
100
84 86 88 90 92 94 96 98 00 020480
90
100
110
120
130
140
150US cents
AUD/USD
RBA commodity price index (US$) RHS
Index
Commodity prices
Economics@
50
55
60
65
70
75
80
85
90
95
100
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
US cents
A$ /US$
PPP valuesfor the A$
‘Purchasing power parity’ (PPP) values derived by multiplying the average value of the A$ since the float by the ratio of the US to the Australian price level.
Relative purchasing power parity (PPP) and the Relative purchasing power parity (PPP) and the AUD/USD rateAUD/USD rate
Economics@5
Whether a country has a current account deficit or Whether a country has a current account deficit or not matters as does how the deficit is financednot matters as does how the deficit is financed
Current account deficit
Net equity investment(incl. corporate bonds)
Net borrowing
Other (incl. central banks)
Source: US Bureau of Economic Analysis.
US current account deficit and its financing
-300
-200
-100
0
100
200
300
400
500
600
96 97 98 99 00 01 02 03
US$ bn - four quarter moving total q Unhedged equity inflows financed the US CAD until recently
q From 2001 the US has became more reliant on (hedged) debt financing
q This has led to a fall in the US$
q Purchases of US bonds by Asian central banks has partly offset this
Economics@6
Australia is more reliant on borrowing to finance Australia is more reliant on borrowing to finance its deficit, and this affects the behaviour of the A$its deficit, and this affects the behaviour of the A$
Current account deficit
Net equity investment
Net borrowing
Other (incl. central banks)
Sources: ABS
Australian current account deficit and its financing
-30
-20
-10
0
10
20
30
40
50
60
96 97 98 99 00 01 02 03
A$ bn - four quarter moving total q Australia relies on borrowing to fund the CAD
q Most of this borrowing is done by the banks and is hedged
q In 2003, a turnaround in net equity flows combined with large unhedged A$ bond purchases by Japanese retail investors has driven the A$ up sharply
Economics@7
Current account deficits do matterCurrent account deficits do matter
A re-run of the mid to late 1980s USD correction?
q Large CAD’s (>5%) have tended to be followed by slower growth and currency depreciation
q Typically the real depreciation has been around 20% from its peak:
– Nominal falls have been larger – From its February ‘02 peak,
the Fed’s major US$ index has fallen 20%
q A narrowing of the CAD will require much slower US growth vis a vis MTP plus currency depreciation
Source: Board of Governors of the Federal Reserve System International Finance Discussion Papers, Number 692, December 2000.
70
80
90
100
110
120
130
Y-2 Y-1 Peakyear
Y+1 Y+2
Starting point indexed to 100
USD “major currency” index
From Jan ’00 to November ‘03
Jan ‘83- Jan ‘88(before and afterPlaza agreement)
Economics@8
45
50
55
60
65
70
75
80
85
97 98 99 00 01 02 03 04
80
85
90
95
100
105
110
US ¢ Index (March1973 = 100)
A$/US$(left scale)
Index of US$ against other
major currencies(inverted;
right scale)
The risk is of further appreciation of the The risk is of further appreciation of the Australian dollarAustralian dollar
Sources: Datastream; Economics@ANZ
A$ vs US$
q The US$ depreciation has only a little way to go, suggesting that the A$ is near its peak
q All the ‘fundamentals’ remain positive for A$ strength
q Overshooting is a characteristic of these markets
q Over the longer-term the A$ is likely to moderate
Economics@9
-2.0
-1.5
-1.0
-0.5
0.0
0.5
Dec-03 Jun-04 Dec-04 Jun-05 Dec-05
%
Macro models suggest that a 10% appreciation of Macro models suggest that a 10% appreciation of the currency will knock 2% from real GDP growththe currency will knock 2% from real GDP growth
Source: Economics@ANZ
GDP q Profits fall by around 5%q The CAD would widen by
1% of GDPq Real exports cut 3½% and
real imports up 1½%q Unemployment rate would
increase 1¼%q Business investment fall
by 3% but resource related investment fall by 7%
q CPI would fall by 1¾%- Motor vehicle prices
down 5%
Divergence from base case after 10% TWI appreciation
Economics@10
0
20
40
60
80
<1% 14% 30% 55%
%
A small number of businesses are the largest A small number of businesses are the largest exporters and will be hit hardest by a strong $Aexporters and will be hit hardest by a strong $A
Source: ABS
q Around 5% of Australian businesses are exporters
q Less than 1% of exporters (around 200) account for 70% of goods exports
q Around 85% of exporters account for 3% of sales
q About 20% of goods exporters only export once or twice a year
q The most frequent exporters tend to be large scale exporters, with goods valued at $100m or more
Less than 1% ofexporters account for 70% of goods export sales!
Exporting businessesSales
Number of businesses
Economics@11
Exporters are concentrated in the mining, Exporters are concentrated in the mining, manufacturing and wholesaling industriesmanufacturing and wholesaling industries
Source: ABS
q The manufacturing, mining and wholesaling industries account for 90% of goods exported
q These industries are predominately exporters with little domestic business
– Nearly all mining and basic metal production is exported and two thirds of agricultural goods
– Less than half of manufactured food and energy products are exported
Mining
Wholesale
Manufacturing
AgricultureOtherFinance
Property & Business
Transport
Goods exports by Industry
Economics@12
Around 70% of goods exports are denominated in Around 70% of goods exports are denominated in US$ although this varies between exportsUS$ although this varies between exports
Source: ABS
q Around 75% of merchandise export revenue is generated from commodity sales
q Generally homogenous and can be sold in world markets at going price
q Prices are usually set in US$
q Determined by supply and demand factors
q A stronger $A will tend to reduce A$ revenue
Aust dollars
US dollars
OtherYenNZ$
Pound sterling
Invoice currency for exportsEuro
Economics@13
70
80
90
100
110
120
130
90 92 94 96 98 00 020.4
0.5
0.6
0.7
0.8
0.9
1US ¢Index (1989/90=100
A$/US$(right scale)
US$ commodity
prices
A$ commodity
prices
The A$ and commodity prices have resumed their The A$ and commodity prices have resumed their ‘normal’ relationship‘normal’ relationship
Sources: RBA, Datastream;Economics@ANZ
Commodity prices & the A$q The ‘normal’ relationship
between the A$ and US$ commodity prices tends to be a natural hedge
q Higher US$ commodity prices are associated with a higher A$ and vice versa
q This relationship broke down over 2001 and 2002, delivering a windfall
q It has now been re-established
Economics@14
-50
0
50
100
150
89 91 93 95 97 99 01 03
% change over the year
Total(ex mining)
Mining
The benefits of the weak dollar and strong The benefits of the weak dollar and strong commodity prices are clearly apparentcommodity prices are clearly apparent
Sources: ABS
Company profits before taxq Mining profits peaked in
early 2002 – same time that economy wide profits troughed
q Ex-mining profits are running at the fastest rate since the mid-1990s
q Mining profits have sagged recently under the weight of the rising $A
Economics@15
20
25
30
35
40
45
7577 798183 8587 89 919395 97 9901 03
% of total
Manufactures and services exports could be Manufactures and services exports could be affected by both lower prices and volumesaffected by both lower prices and volumes
Sources: ABS
Share of manufactured goods and services exports in total
q 40% of manufactured exports are in US$ about 5% in pound sterling, rest A$
q UK, US and the Middle East are big markets
q Exporters could face:- Lower A$ returns for those commodities priced in foreign currencies- Pressure to cut A$ prices if
competitiveness has deteriorated- Some impact on volumes
demanded
q Similar repercussions for services
Economics@16
-2000
-1000
0
1000
2000
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
0.40
0.45
0.50
0.55
0.60
0.65
0.70$m
Foreign exchange gains(LHS)
US cents
A$ (RHS)
Hedging has helped to mitigate the impact of the Hedging has helped to mitigate the impact of the stronger A$stronger A$
Sources: ABS; Economics@ANZ
Net foreign exchange gains q Exporters are the most active hedgers
q Australian businesses have around $50bn in foreign currency debt
q Net foreign exchange gains have been made recently
q This likely reflects a decrease in the market value of foreign currency denominated debt plus an increase in the market value of derivates contracts
Economics@17
The currency that companies cost base is The currency that companies cost base is denominated in will also impact on profitsdenominated in will also impact on profits
Source: ABS
Aust dollars
US dollars
Yen
OtherEuros
Sterling
Invoice currency for importsq 50% of all businesses that
export also importq Most (93%) imports are
manufactured goodsq Importers generally (55,000
of them) will benefit from a stronger $A
q While a 10% rise in the $A/$US would cut export incomes by around $10bn, it would also raiseimporters incomes by $8½bn, ceteris paribus
Economics@18
Falling imported prices will have widespread Falling imported prices will have widespread benefits for consumers and businessesbenefits for consumers and businesses
Source: ABS
q Importers usually take much of the currency fluctuations on their margins
q A$ strength will decrease consumer prices and increase purchasing power
q A$ strength will also reduce the cost of inputs into the production process, ie. fuel, machinery & equipment
Consumer goods prices
-8
-4
0
4
8
12
93 95 97 99 01 03
% change over the year
Import prices (across the
docks)
Retail*
* Tradeable goods prices
Economics@19
Exchange rate movements will also have an Exchange rate movements will also have an impact on volume demandimpact on volume demand
Source: ABS
-25
-20
-15
-10
-5
0
5
10
15
20
2585 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
-20
0
20
40% change over the year % change over the year
Import prices (LHS, inverted)
Import volumes(RHS)
Imported goods
Economics@20
1000
1500
2000
2500
3000
3500
87 89 91 93 95 97 99 01 03
45
50
55
60
65
$mMining
investment(LHS)
TWI(inverted
RHS)
Index
Notwithstanding any offsets, the rising dollar will Notwithstanding any offsets, the rising dollar will hit business investmenthit business investment
Sources: ABS, RBA
Mining investment & A$q Resources projects are
particularly sensitive to a strong A$
q Already some major projects have been cancelled
q Such projects are typically highly labour intensive in their construction phase
q Also penalised longer-term economic growth via exports
Economics@21
Appreciation of the A$ will have few implications Appreciation of the A$ will have few implications for foreign debt given that for foreign debt given that forex forex risk is hedgedrisk is hedged
Source: ABS
0
50
100
150
200
250
300
350
400
89 91 93 95 97 99 01 03
$bn
Total
FinancialInstitutions
Net foreign debt
Non-financialinstitutions
Public
0
50
100
150
200
250
97 99 01 03
$bn
Net foreign currencydenominated debt
Economics@22
Some conclusions..Some conclusions..
qThe overall impact on real GDP will be negative but a stronger A$ is not all bad news for the economy!
qWhile exporters will be hit, there are possible offsets from hedging and lower imported costs
qExports tend to be non-labour intensive so the direct effects on employment shouldn’t be too large although indirect effects could be larger
q Importers will benefit from fatter marginsqConsumers and businesses will benefit from
the lower price of imported goods
Economics@23
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