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BOP links. CAD + C and F account = 0 - $68b + $68b = 0 This occurs because Australia has a flexible exchange rate. For every debit transaction there is an equal credit transaction in FOREX markets. Economists say that the C and F account finances the CAD.
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CAD + C and F account = 0 - $68b + $68b = 0 This occurs because Australia has a flexible exchange rate. For every debit transaction there is an equal credit transaction in FOREX markets. Economists say that the C and F account finances the CAD. Financing the CAD
CAD Sell AUD – supply of AUD on FOREX Interest paid to foreign investors Foreigners buy AUD to invest in Aust- C & F account Foreign Debt surplus increases Debt Trap
Therefore a significant reason for Australia’s CAD is the foreign debt- interest is paid to foreign lenders through the current account. As more money is borrowed more is repaid in interest each year. Borrowing today adds to future CADs.
A currency depreciation can increase NFL and an appreciation can decrease NFL. This is called the valuation effect. Debt sustainability- this is Australia’s ability to repay interest on FD. Australian firms have generally been able to pay interest although the interest bill continues to grow each year. Aust still has a good credit rating despite its FD levels being high- this is because FD is private sector not public sector Issues with Foreign debt
Debt Servicing Ratio- measures the % of export revenue used to repay interest overseas. It is currently around 11% but has been over 20% in the past. This indicates that export growth has been strong and global interest rates have fallen.