KIRIBATI, NAURU, TUVALU
Australia is a modern prosperous industrialized nation and a member of G-20. The Australian dollar ‘AUD’ is one of the world’s best performing hard currencies over the last few years amongst first world countries. The AUD also known as a commodity currency has had a terrific rise in value since a recent low in March 2001 at only 49.3 US cents, the AUD has rallied following the commodity boom over the last 5 years to a recent high of 88.5 US cents on July 24, 2007 (18 year high) representing a rise of 80 percent versus the US-dollar (USD) during this time. For such a large geographical size country rich in natural resources, Australia has a relatively small multicultural population of only 20.4 million. Australia’s future for its economy and currency lies in its successful change of attitude towards immigration and foreign investment. The net result is reflected in Australia enjoying a higher standard of living and a stronger currency. Foreigners and their capital are key building blocs for nations - capital & labor are required to establish new productive industries. Its ideal geography has also earned the AUD the reputation as an Asian currency with increased demand from places like Korea, China and Japan for Australia’s resource exports.
POLITICS: very stable modern democracy, national polls point to an election defeat for the ruling government lead by Prime Minister Howard this November 10, 2007.
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ECONOMY: robust and stable, a truly impressive 16 years of uninterrupted continual steady economic growth since 1992. During the 1990’s and since year 2000, Australia’s economy that is rich in minerals & metals boomed with strong annual GDP growth of 2.5 to 5 percent. Australia is still primarily a resource based economy with 60 percent of exports being commodities such as coal, gold, zinc, uranium, wool, natural gas, canola, cotton, wheat, livestock, etc. Strong agricultural exports (world’s largest beef exporter) coupled with being the biggest producer of coal in the world and the third largest producer of precious minerals have provided Australia with consistent foreign exchange earnings. Another important segment of the economy is the large foreign multi-national presence with their respective branch offices within Australia.
A concern similar to other industrialized countries in Australia is the misallocation of investment towards the housing industry rather than to more productive areas of the economy. It appears that the Australian housing market likely peaked in 2005. There has been a significant improvement in Australia’s debt levels as tens of billions have been repaid since Prime Minister Howard’s coalition took power in 1996. At present, Australia has successfully eliminated the nation’s net public debt. Future surpluses are now invested into the ‘Future Fund’ with assets measured at $40 billion USD equivalent as of March 2007. PM Howard’s government has also implemented tax reform with lower personal & corporate taxes and restructured the tax system.
Economic Statistics
Total GDP as measured by purchasing power parity stands at $675 billion USD (2006) with corresponding GDP/Capita at $33,000 USD. Market GDP at $645 billion USD (2006). GDP growth rates include year 2006 at 2.7 percent and 2007 estimated at 2.6 percent and year 2008 at 3.3 percent. Inflation quotes have year 2006 at 3.8 percent, year 2007 at about 2.1 percent, 2008 is estimated at 2.9 percent. The fiscal situation is presently sound with the economy recording consecutive surpluses since 2002. The current account is in deficit at 6 percent of GDP for 2005 reflecting strong demand for imports, year 2006 also at a large shortfall of 5.6 percent. The trade component is in deficit measuring $10.7 billion USD (2006). External debt at 52.2 percent (2006), net foreign liabilities at 57 percent of GDP (2006). Oil reserves are estimated at 3 billion barrels with the ability to expand in addition to coal & natural gas reserves to over 50 trillion cubic feet. Unemployment is at 5 percent (2006 - this is a 32 year low).
POSITIVE: sound political management, impressive productivity growth - one of the world’s best performances, very close to overall energy self-sufficiency. CONCERN: economic structure deficits including the current account, illegal wave of refugees and an increase in terrorism threats after the Bali attacks on Australian citizens in Indonesia in year 2002, ageing population with increasing social security & health care expenses, housing market with corresponding increase in personal debt levels.
REGIONAL ANALYSIS: New Zealand, Asia - China & Japan, India
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BANKING SYSTEM: sound, modern and sophisticated capital markets. Central bank of Australia, Reserve Bank of Australia has short term interest rates with the cash rate target at 6.5 percent which is above America’s 5.25 percent Fed rate and also well above Bank of Japan’s 0.5 percent rate. Australia’s banks with high level of competition are evolving into e-commerce and Internet services, strong financial position of the banking sector, competent central bank & prudent management by the ‘Reserve Bank’ with respect to monetary policy. As of June 2007, official reserve assets are at a very healthy $67 billion USD equivalent to 7 months of import coverage.
The biggest exchange valuation risk to the AUD in the short term is the fallout of an unwinding of the Japanese yen carry trade. On Aug 16, 2007, the AUD fell 4.68 percent, the JPY up 2.68 percent as the global markets saw a glimpse of the potential for a full fledged reversal in currency trading. The markets have since stabilized in the short term but remain dicey. The AUD is a popular world currency for global traders, it is the world’s fifth most traded currency.
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CURRENCY: ISO Symbol ‘AUD’, Australian dollar, nickname ‘the aussie’. At time of currency review on August 23, 2007, the exchange value for the aussie was valued at 1.2213 AUD (81.879 US cents) to the US-dollar (USD) and/or 1.6563 AUD to the Euroland euro (EUR). The currency regime follows that of a floating exchange rate, no exchange controls, shock absorber exchange rate to help mitigate changes in commodity prices. As measured by purchasing power parity, the AUD was approximately 13 percent overvalued on August 23, 2007 to the USD.
Critics of the AUD currency: Australian economy / AUD does not provide for the types of investments that international investors are seeking in high technology & bioengineering. This flavor of the day trend is currently in favor for Australia and its natural resources as the global economy is enjoying a commodities boom.
CURRENCY HISTORY: the AUD came into circulation in February 1966 replacing the Australian pound at an exchange rate of 2 AUD to the pound. This symbolized the end of the sterling era exchange framework for Australia. The new AUD was then pegged to the USD up until 1971, followed by a peg to a basket of currencies. By November 1976, the exchange regime moved to a crawling peg framework pegged to a trade weighted basket of currencies. In December 1983, the Labor government in power during that time floated the Australian dollar. There has been a cyclical trading pattern of relative stability as the AUD has had a history of trading in a band ranging from 65 to 75 US cents. Historical exchange quotes for 1 AUD include: July 2007 at 86.8 US cents, March 2006 at 73 US cents, February 2005 at 78.74 US cents, September 2004 at 70.42 US cents, August 2003 at 65.36 US cents, year 2002 at 54.3 US cents, April 2001 at 50.13, November 2000 at 52.19. The exchange rate for the period year 1999-2000 at an average of 59.9 US cents, 1998 at 61, 1997 at 65.3, 1996 at 79.7, 1995 at 74.5, year 1993 at 68 US cents and back in year 1991 at 77.96 US cents. Currency crisis dates include September 1974, November 1976, March 1983, February 1985, July 1986, February 1989, March 2001.
CURRENCY FORECAST: the AUD also referred now to as an ‘Energy Currency’ due to its correlation to commodity prices as they are projected to remain strong in the area of energy (coal, natural gas & oil, uranium), gold, agricultural - underpin value for AUD in the medium term. BankINTRO.com forecasts a high of 90 US cents for the AUD by 2009 then a counter correction inevitably back towards 75 US cents by 2010-11.
Currency risks: political - election of centre left, real estate slowdown, lower Australian interest rates & declining commodity prices. The greatest single threat to the AUD would be a quick significant appreciation of the JPY and an unwinding of the yen carry trade, similar to the events that took place in 1998 when the yen greatly appreciated from the fallout of the Long Term Capital implosion. Macro risks that are relevant for Australia include high net overseas debt position at 60 percent of GDP (2006), Australia’s current account shortfall is a concern to the economy.
In our view, Australia warrants a high currency safeness ranking particularly since it is now a net creditor nation. Further, low unemployment & inflation coupled with strong domestic demand for spurring imports which reflects in a current account shortfall is neglected by a strong fiscal surplus and healthy reserves.
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