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The Australian central bank’s No. 2 official warned that the current threats to the global rules-based trading system were a major risk to both his country’s economy and the world’s.
Australia has been a key benefactor from global trade, as its current account approaches its first surplus since the 1970s, Deputy Governor Guy Debelle told an audience in Canberra Tuesday. The Aussie dollar has been able to repeatedly play a shock absorber role because a large share of the country’s foreign liabilities were denominated in the local currency.
“These developments have taken place under the rules-based global trading system that has been in place for a number of decades now,” Debelle said. “Despite some flaws, that system has delivered sizable benefits for global growth and welfare. Australia has clearly been a major beneficiary of that system. The current threats to the system are a significant risk to both Australia and the world.”
Debelle, who didn’t directly address the current state of the economy or the outlook for monetary policy, was reflecting on the extraordinary closure of Australia’s current-account gap in recent years. Once seen as a key vulnerability -- demonstrated by the crises of other countries when their currency depreciated and foreign debt payments soared -- it’s now seen as a simple reality in a country with a small savings pool and lots of investment opportunities.
“To put some numbers on this, 68% of foreign liabilities are denominated in Australian dollars, this increases to 85% after hedging,” Debelle told the Economic Society of Australia. “The fact that the liabilities are effectively denominated in Australian dollars while the assets are in foreign currency does not impede the exchange rate adjustment. If anything, it actually helps the adjustment.”
From the 1980s through the 2000s, the current-account deficit averaged around 4% of GDP. But since 2015, it has narrowed to be currently around 1% of GDP, and in the first quarter it was 0.6%, Debelle noted, the narrowest since the fourth quarter 1979.
“The structure of Australia’s external accounts now resembles that of the United States,” he said in the text of a speech. “While Australia doesn’t have the exorbitant privilege of the U.S., the external accounts do not constitute a source of vulnerability and have become increasingly resilient over the past 30 years.”
