External stability refers to a country's ability to meet its international financial obligations and maintain a sustainable balance of payments position. For Australia, a resource-rich, open economy, external stability is particularly important due to its significant trade relationships and reliance on international capital flows.

What are the key Trends in Australia's External Stability?

As mentioned before, Australia relies heavily on its trade relationships with other countries. Thus, its external stability has changed over time. The following trends outline how Australia's external stability has changed:

Australia's Current Account Balance

The current account balance includes trade in goods and services, net income from abroad, and current transfers. A current account deficit (CAD) indicates that a country imports more than it exports, requiring financing through foreign capital. Thus, one of the most significant trends in Australia's external stability has been the shift from a persistent current account deficit to a surplus in recent years.

In recent years, Australia has seen fluctuations in its current account balance, moving from persistent deficits to occasional surpluses. For example, in 2019, Australia recorded a current account surplus for the first time in decades due to strong exports and a reduction in the net income deficit. By 2023, the CAS had shifted back to a CAD, being approximately 2.5% of GDP. This indicates a manageable deficit driven by strong commodity exports.

Australia's Net Foreign Liabilities

Net foreign liabilities encompass both net foreign debt and net equity liabilities. Australia's net foreign liabilities as a percentage of GDP have shown a gradual declining trend in recent years. In terms of GDP percentage, Australia's net foreign liabilities have significantly declined over the past few decades, reaching around 32% of GDP in 2023. This is beneficial to the Australian economy, as it reduces overall vulnerability to external shocks and provides increased potential for improving credit ratings.

Australia's Terms of Trade

Australia's terms of trade have experienced significant volatility but remain at historically high levels. An improvement in TOT indicates that a country can buy more imports for a given amount of exports, enhancing national income. As of 2023, Australia's TOT remains relatively strong due to increased demand for iron ore by China and increased demand for other commodities across the globe.

Australia's consistent TOT growth, and increase in exporting its commodities and services, is demonstrated by the graph below.

Australia's Exchange Rate Trends

The Australian dollar has experienced notable fluctuations in recent years. It (AUD) has fluctuated between USD 0.70 and USD 0.80 in recent years, reflecting changes in commodity prices and global economic conditions.

Australia's inability to properly stabilise its exchange rate is demonstrated by the graph below:

As seen in the graph, Australia's exchange rate vs the US dollar has experienced moderate amounts of volatility over the last decade.

Australia's Foreign Direct Investment (FDI) Trends

Australia continues to be an attractive destination for foreign investment. Specifically, from growing investment from Asian countries, Australia has increased its diversification of FDI sources. This is reflected in Australia's FDI stock, which was approximated to be $1.1 trillion by the end of 2022. Additionally, due to its quick economic recovery from the Covid-19 pandemic, coupled with the RBA's interest rate hikes, Australia became increasingly attractive to foreign investors. As a result, Australian FDI inflows increased from $56 billion in 2021 to $74 billion in 2022.