20 May 3-4, 2008
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PERSPECTIVE
THE MIGHTY DOLLAR
From previous page
ANZ economist Alex Joiner says:
‘‘All the variables we use in our
model – including two-year bond
yield splits between Australia and
the US, commodity prices, price
modelling in various economies
and the domestic cash rate –
worked well until January/
February. What the model didn’t
take into account is the higher
risk aversion now in evidence.
‘‘We estimated according to a
stable environment which no
longer exists. The Australian
dollar will trade on fundamentals
in the absence of other shocks.
The shock this year was the
financial volatility related to the
sub-prime crisis.
‘‘Right now, everything – the
cash rate here, the reduced cash
rate in the US and very strong
commodity prices – is working in
favour of the currency
appreciating. Everything except
this risk aversion.’’
Another factor could be very
bad news for the Australian
dollar. This is what JPMorgan
Australia chief economist Stephen
Walters refers to as the ‘‘big fur
ball’’ – a current account deficit
that, at 7.5 per cent of gross
domestic product, is at its highest
in 50 years. In absolute terms, it’s
the fourth-highest in the world.
In previous years, current
account deficits were thought to
be hugely influential on exchange
rates. That sort of thinking is out
of favour but Walters says it might
return. He believes the $A might
nudge US97¢ before falling back.
‘‘The deficit has been ignored
for the last few years,’’ he says.
‘‘It has been a puzzle. One of the
reasons we were quite bearish
then was that big current account
deficit. But clearly that wasn’t
what investors were looking for –
they were looking for yield.
‘‘As far as we can tell, yield is
still one of the main drivers of the
currency but once the current
easing and tightening cycles [in
the US and Australia] end, we
think investors will go down that
list of current account deficits and
find Australia pretty high on the
list of developed markets.’’
CommSec chief equities
economist Craig James agrees the
current account deficit could yet
rear its ugly head. ‘‘If there was a
downturn in the global economy,
investors would be quick to shun
high-debt countries so that does
mean we are vulnerable to an exit
of foreign investment dollars,’’
he says.
‘‘One thing which holds in our
favour is that the current account
deficit is almost wholly private
sector. It’s a huge range of
companies and consumers driving
that debt, rather than one central
government, so the economy as a
whole is not vulnerable.’’
On the whole though, James,
who thinks there is a 50/50
chance the dollar will go one for
one with the greenback in the
next couple of months, is inclined
to be bullish on both the dollar
and the economy.
‘‘Everything is falling into place
for Australia,’’ he says. ‘‘You have
to play to your strengths and ours
lie in mining and agriculture.’’
Not all are so optimistic.
In the future this could be
viewed as the time we failed to
invest in other sectors to ensure a
secure position in a carbon-
constrained future (see report at
right: The Curse of Plenty).
There are some signs the
services sector is beginning to
suffer from neglect.
On April 23, Prime Minister
Kevin Rudd was briefed about a
FBA 020
report that concluded growth in the casualties in other sectors,
services, particularly in such as receding services
knowledge-intensive industries, exports, or the factory closures
was slowing, while developing that would have been big news if
nations had lifted their game. unemployment were high.
The Business Council of Opinions differ on whether
Australia estimated last year that commodity prices have peaked.
Australia’s share of global AMP’s Oliver points out that
services exports had dropped previous booms were driven by
from 1.45 per cent in 1996 to demand from nations in which
1.15 per cent in 2005, equating to millions of people were swept up
a $9.7 billion loss in export by waves of industrialisation.
revenue. But these days it’s hard ‘‘This one is being powered by
to look past the commodity boom. billions of people so I would
It’s been such a big story for so suggest it has a lot longer to run,’’
long that people tend to overlook he says.
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And it’s not just demand and
supply pressures that are pushing
Growing foreign reserves up prices. In a recent research
note, Morgan Stanley points out
also push up commodity that growing foreign reserves also
prices and in January, push up commodity prices and in
January, foreign exchange
foreign exchange reserves reserves were growing at close to
were growing at close to 30 per cent.
‘‘This evidence suggests that
30 per cent. liquidity has been a driver of the
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current commodity boom, and it
may continue to remain so in the
near future,’’ says the note, which
concludes the $A was a buy from
a structural perspective.
Parity here we come.
❙ 왘 Editorial, page 62
Winners and losers
THE GOOD THE BAD
PETROL TOURISM
Bowser prices would be The tourism industry
even higher if the dollar has a human deficit
wasn't so high. There problem and it’s getting
are other factors at worse. The numbers of
play; whenever there are international tourists
supply problems coming here have
anywhere in the world, shippers put their dropped off this year while tens of
prices up and then there are wharfage thousands more Australians are
and insurance charges but nevertheless, holidaying overseas every month. The
said RACV’s David Cumming “if the strong Aussie dollar has combined with
dollar was worth less there is no doubt cheap flights to make overseas trips
we would be paying more’’. more attractive and holidaying here has
become a more expensive option,
US TRAVEL particularly for Americans. Some Asian
Now is the time to see countries, such as Korea, typically price
America. The number of travel in US dollars as well.
Australians travelling to
the US was up by 13.5 PORK
per cent in the first two Many businesses that
months of the year. compete directly with
Travel agents say around-the-world importers are struggling
tickets have become more popular in but spare a thought for
recent months as European-bound pig farmers. This
travellers add on a US stopover. industry is ‘‘imploding’’,
says Australian Pork chief executive
CARS Andrew Spencer, thanks to cheap
Makers of imported imports of frozen pigmeat (from
cars say favourable countries where the industry is heavily
exchange rates subsidised) and high grain prices.
eventually result in
extra features for no WINERIES
The rising currency has
extra dollars. Imported
goods have become cheaper to bring hit small business
into the country but car companies and exporters at a time
just about everyone else are reluctant to when they have also
pass on those savings directly by had to cope with higher
reducing prices. interest rates. More
than half of Australia’s wine production
ONLINE SHOPPING is exported and winemakers, many of
It's a great time to buy whom are already facing the water
goods from US internet shortage crisis in the Murray-Darling
retailers. Shoppers
basin, rely heavily on repatriated dollars.
around the world
appear to have EDUCATION EXPORTS
discovered this: Australian universities
Amazon reported its international sales started to build their
grew 44 per cent to $US2.01 billion in export business in the
the first three months of the year and 1990s so no one is quite
accounted for 49 per cent of total sure how a dollar close
revenue, up from 46 per cent last year. to parity with the US
dollar will affect enrolments. Most agree
it takes 18 months to filter through to
enrolments so if the strong dollar is a
deterrent, it will become apparent in the
numbers of foreign students starting
studies midyear.
The Weekend Australian Financial Review
THE CURSE
There is evidence that a
mismanaged resource
bounty can damage long-
term prosperity.
Story Paul Cleary
ate one evening in late
L
April 1999, foreign
minister Alexander
Downer retired to his
hotel room in Bali after
attending a special
summit with Indonesia’s president,
B. J. Habibie, on the ballot to be
held in East Timor in August that
year. After slipping into a dressing
gown and slippers, he invited some
members of his travelling party to
his room where he lit a pipe and
shared a few drinks.
As the foreign minister held
court the conversation quickly
turned to oil. The prospect of an
independent East Timor
immediately raised issues over
control of the Timor Sea’s vast oil
and gas resources. Would
Australia grant an independent
East Timor its right to a bigger
share of the resources?
With the minister looking and
sounding very much like Lord
Downer, this suggestion was
treated with disdain. The
Timorese, Downer thundered,
would piss it up against the wall. A
far better outcome would be where
Australia retained its control of the
vast majority of the resources and
in return East Timor would be
given foreign aid, Downer
explained.
Downer should have made the
same point at home. For his own
government – under prime minister
John Howard – has done exactly
what he predicted the East
Timorese would do and
squandered an absolutely massive
revenue windfall from Australia’s
own resources boom. The result
has been rising inflation and rising
interest rates.
It is called the resource curse,
the paradox of plenty or the Dutch
disease, but whatever the name it
means one thing – that a natural
resource bounty is often
mismanaged and can lower long-
term prosperity by inflating the
economy and undermining
competitiveness.
Former US Federal Resource
Board chairman Alan Greenspan
recently identified the ‘‘economic
affliction’’ that can result from ‘‘a
superabundance of natural
www.afr.
resources’’. ‘‘How is it possible
that a superabundance of natural
resources, oil, gas, copper, iron
ore, would not significantly add to
a nation’s production and wealth?
Paradoxically, most analysts
conclude that, particularly in
developing countries, natural
resource bonanzas tend to reduce
rather than enhance living
standards,’’ Greenspan wrote in
The Age of Turbulence.
‘‘[It] takes the form of an
economic affliction nicknamed the
Dutch disease. Dutch disease
strikes when foreign demand for
an export drives up the exchange
value of the exporting country’s
currency.’’
And it appears that Australia
has in recent years succumbed to
this disease. Yet it is no accident.
There has been a deliberate policy
to spend the proceeds of the
resources boom.
The fiscal profligacy of John
Howard, Peter Costello, Alexander
Downer, Brendan Nelson, Tony
Abbott and other senior ministers
in recent years has now been
documented in a recent paper by
Treasury economists Kirsty Laurie
and Jason McDonald, from the
department’s budget policy
division. Of the rise in tax revenue
since 2004-05 of $334 billion, new
spending decisions and income tax
cuts reduced the surplus by
$314 billion.
‘‘Effectively, the additional
revenue from the commodity boom
has been spent, or provided as tax
cuts,’’ the authors conclude.
There you have it officially –
94 per cent of the windfall revenue
from the resources boom was
spent. Over the life of the Howard
government the Australian people
became hooked on an ever-
increasing amount of fiscal
largesse. Real federal payments
increased by an astonishing 50 per
cent over the decade to 2007-08 at
a time when the economy was
booming.
Australia is now suffering from
the resource curse because it lacks
a mechanism to manage swings in
income from commodities. And it
lacks the fiscal discipline to ensure
that the tax revenue from natural
resources is spent at a sustainable
rate.
The floating Australian dollar
was to be the mechanism to help
Australia cope with roller-coaster
swings in national income. Former
prime minister Paul Keating, who
floated the currency 25 years ago
this year, argued that it acted like
a shock absorber. It provided
stimulus to the economy through
depreciation in economic