FOREIGN DEBT

In recent years, Australia's debt to the rest of the world has increased. Real net foreign debt grew on average by 6.1% per year on a per capita basis between June 1999 and June 2009, increasing from $15,400 to $27,900 (in 2007-08 prices).

The growth in a country's foreign debt can reflect several related influences. The value of its imports and other current payments to foreigners may outstrip the value of its exports and other current receipts from foreigners – if so, the nation experiences a deficit on its current account which must be funded. The value of foreign debt is also influenced by exchange rate and price fluctuations and the current composition of the debt.

Current account deficits and saving shortfalls are conceptually the same phenomenon; they may be financed by, say, selling equity in enterprises to residents of other countries, or by borrowing from residents of other countries, or by running down financial assets held abroad. An alternative view is that the saving of a country's residents may be outstripped by its needs for investment – i.e. the country experiences a shortfall in saving.

Australia's net foreign debt is the net outcome of:

• Australian liabilities to overseas ($567b in current-price terms in June 2009).
• Foreign liabilities to Australia ($1,201b in current-price terms in June 2009).

Debt liabilities can be held by the public sector (for example, Commonwealth, state and local government, the Reserve Bank and other public sector corporations) and the private sector (for example, private financial and non-financial corporations). The public sector and private sector components of foreign debt showed markedly different trends during the past decade.

The real net foreign debt per capita of the public sector fell from $2,300 in June 1999 to a low of -$800 in June 2007 before rising again to $1,600 in June 2009. The real net foreign debt per capita of the private sector rose steadily from $13,100 in June 1999 to a peak of $27,200 in June 2007 before falling to $26,200 in June 2009.

Real net foreign debt(a) per capita by sector

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	30 June 1999	30 June 2009	Average annual growth rate
	$	$	%
General government	1 554	1 540	-0.1
Other public sector	775	98	-18.7
Total public sector	2 329	1 638	-3.5
Private financial corporations	9 756	19 255	7.0
Private non-financial corporations	3 304	6 988	7.8
Total private sector	13 059	26 243	7.2
Australia	15 388	27 881	6.1

(a) Reference year 2007-08.
Sources: ABS Balance of Payments and International Investment Position, September 2009 (cat. no. 5302.0); ABS Australian Demographic Statistics (cat. no. 3101.0)

Australia's capacity to service its foreign debt

Australia must pay income (profits, or dividends interest, or allocate a proportion of retained earnings) on foreign holdings of Australian equity and debt, which are both forms of liability to foreign residents. However, if by incurring those liabilities Australia has been able to acquire capital or other assets that enhance its productive capacity and income-generating potential, then the increased liabilities may not, on balance, have a deleterious impact on progress. During the past decade, Australia's debt servicing ratio has deteriorated from 9.5% in 1998–99 to 10.5% in 2008–09.