Each quarter the Australian Bureau of Statistics (ABS) publishes comprehensive details of Australia's international accounts-balance of payments and international investment position statistics. A key indicator for any economy and one which is widely quoted in the media is the level of foreign debt.
Foreign debt is also referred to as external debt. Foreign debt is distinguished from other kinds of foreign investment capital inflow such as foreign ownership, because it carries with it the obligation to pay interest or to repay principal.
There are two ways of looking at debt. One is simply to add up all non-equity liabilities. This is gross foreign debt, the major component of which is the total amount of borrowings from non-residents by residents of Australia. Net foreign debt is equal to gross foreign debt less non-equity assets such as foreign reserves held by the Reserve Bank and lending by residents of Australia to non-residents.
Current Australian Situation.
As can be seen in the Appendix, Australia's net foreign debt has grown dramatically from the beginning of the 1980's, reaching a peak of $330 billion in 2001-02. This is very high, especially when considering that in 1979-80 it was only $6.8 billion, or 5.8% of GDP. During the 1990's the foreign debt stabilized at around 40% of GDP, but this was partly due to a higher level of asset sales being used to fund the CAD instead of increased debt.
In the long term, the growth of Australia's foreign debt can lead to a debt sustainability problem. This means that it becomes increasingly difficult for Australia to service the debt. If the size of the debt is rising faster than the increase in GDP, as it has done in most years shown in the Appendix, the interest repayments take up a greater proportion of Australia's GDP, which reduces both the overall standard of living and the economic growth potential of the domestic economy.
Further, international financial markets generally consider that when a country's net foreign debt rises too far it may pose repayment problems for the debtor country.
