32 students!
Nifty, eh?
Friday, September 07, 2012
Thursday, September 06, 2012
Henry on our strange relationship with foreign investment
We don't want it to come, we don't want it to leave
Prime ministerial advisor Ken Henry has weighed in to the debate over the sale of Australian farms to Chinese investors labelling critics “irrational” and “misinformed”.
“I don't quite know how to say this without offending somebody,” the former Treasury Secretary told a forum on Chinese investment, “but one of the things that strikes me as odd about the discourse on foreign investment is that there has to be a willing seller.”
“I hear often people in the bush are outraged about foreigners buying their land - well they're the people selling the land.”
“I don't know what form of cognitive dissonance squares that circle, it's beyond me, but obviously there's something strange going on.”
Asked about the disarray in the Coalition over the sale to Chinese interests of Australia’s biggest cotton farm Cubbie Station, Dr Henry said he wouldn’t normally comment on Coalition policy, but he doubted there was genuine bipartisan support for Australia’s foreign investment regime.
Shadow treasurer Joe Hockey this week publicly rebuked Queensland National Party senator Barnaby Joyce for his opposition to the sale, saying he was “freelancing” and did not speak for the Coalition.
“It is remarkable how few of those people presently agitated about emergent Chinese foreign investment seem to be aware that the Foreign Investment Review Board was established in the mid 1970s as a result of concern about investment from the United States,” Dr Henry told the ANU seminar...
“Many of those same populist elements are the first to call on Australian governments to spend almost any amount of taxpayers money in efforts to hold to manufacturing entities like Japanese and American car manufacturers.”
“They don't want them to come it appears, but they don't want them to leave either.”
In today's Sydney Morning Herald and Age
Related Posts
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Read more >>
Prime ministerial advisor Ken Henry has weighed in to the debate over the sale of Australian farms to Chinese investors labelling critics “irrational” and “misinformed”.“I don't quite know how to say this without offending somebody,” the former Treasury Secretary told a forum on Chinese investment, “but one of the things that strikes me as odd about the discourse on foreign investment is that there has to be a willing seller.”
“I hear often people in the bush are outraged about foreigners buying their land - well they're the people selling the land.”
“I don't know what form of cognitive dissonance squares that circle, it's beyond me, but obviously there's something strange going on.”
Asked about the disarray in the Coalition over the sale to Chinese interests of Australia’s biggest cotton farm Cubbie Station, Dr Henry said he wouldn’t normally comment on Coalition policy, but he doubted there was genuine bipartisan support for Australia’s foreign investment regime.
Shadow treasurer Joe Hockey this week publicly rebuked Queensland National Party senator Barnaby Joyce for his opposition to the sale, saying he was “freelancing” and did not speak for the Coalition.
“It is remarkable how few of those people presently agitated about emergent Chinese foreign investment seem to be aware that the Foreign Investment Review Board was established in the mid 1970s as a result of concern about investment from the United States,” Dr Henry told the ANU seminar...
“Many of those same populist elements are the first to call on Australian governments to spend almost any amount of taxpayers money in efforts to hold to manufacturing entities like Japanese and American car manufacturers.”
“They don't want them to come it appears, but they don't want them to leave either.”
In today's Sydney Morning Herald and Age
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GDP. Good til the end of June, but...
Treasurer Wayne Swan has lashed out at “bizarro” critics as he has called on the nation to celebrate a world-beating 21 years of uninterrupted economic growth - more he says than the leading industrial nations of France, West Germany, Italy, Japan, United Kingdom, United States, Canada combined.“There will be ups and downs in the quarters ahead but sometimes when I listen to the debate it seems to be conducted in some bizarro world where every challenge is magnified and every strength is ignored,” he told reporters on the release of national accounts showing solid economic growth of 0.6 per cent in the June quarter and 3.7 per cent over the year to June.
“We have had 21 years of continuous growth and our growth in the past four years has outperformed every other major advanced economy. That’s like winning 21 continuous premierships in the row and winning the last four very, very comfortably.”
Asked to name the “bizarro” critics, he referred to “disgruntled vested interests,” adding later the views of mining magnate Gina Rinehart did not deserve the publicity they received.
The national accounts show an economy powered by mining over the past year, with engineering construction up a striking 60 per cent, the fastest annual growth in more than 30 years. But non-mining investment fell for the the third consecutive quarter, slipping to its lowest point as a proportion of gross domestic product in four decades. Exports climbed 6.6 per cent..
Household spending grew by a surprisingly weak 0.6 per cent in the June quarter as families saved a larger than expected proportion of the $2.85 billion carbon tax and schoolkids bonus payments delivered in May and June.
On both fronts the figures point to darker times ahead...
Mining investment plans are being cut back in response to dramatic slides in commodity prices, although the Treasurer said a record $260 billion in planned investment was already locked in.
Household spending will be without the support of government bonus payments in coming quarters and the Treasurer hinted at further budget tightening in the November budget review should commodity prices not improve.
“Commodity spot prices have fallen by more than we anticipated in May, and obviously there would be a further hit to the budget bottom line if these lower prices were sustained,” he said. “That will make our budget task harder, but we are absolutely committed to delivering a surplus in 2012-13.”
“The Government has a proven track record of delivering savings and we remain able and willing to do it again.”
Shadow treasurer Joe Hockey said July was turning out to have been “the worst possible time” to introduce a carbon tax and a mining tax. “All the indicators are trending in the wrong direction and exactly at this time the government is making life harder,” he said.
The accounts show the mining states of Northern Territory, Western Australia and Queensland jumping out even further ahead of the pack with annual spending growth of 28 per cent, 13 per cent and 7 per cent.
Spending in the Australian Capital Territory grew 6 per cent assisted by a boost in government expenditure. NSW was strongest of the other states, boosting spending an improved 3 per cent. State Treasurer Mike Baird crowed that (in seasonally adjusted terms) NSW had double the spending growth of Victoria, where spending grew in trend terms 2.3 per cent.
The measure of inflation in the national accounts is an extraordinarily low 1.6 per cent, giving the Reserve Bank ample room to cut interest rates if needed.
Published in today's Sydney Morning Herald and Age
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Wednesday, September 05, 2012
Switching jobs. The turbulence beneath the smooth job market surface
Australians who have been in their jobs five years or more are unusual. The latest comprehensive survey of labour mobility has found 56 per cent of Australia's 11.5 million workers have been in their jobs fewer than five years. And 20 per cent have been in their jobs less than a year.The Bureau of Statistics survey painted a picture of a labour market far more turbulent than the official employment numbers suggest. While total employment is said to have grown 77,600 in the year to July, beneath the surface about a fifth of the country's workers - 2.3 million people - gained and lost jobs.
Women were more likely to change jobs and move in and out of work. And they were more likely to do it voluntarily. About 66 per cent of women who left work during the year to February did so of their own volition. Only 60 per cent of men went voluntarily. An estimated 240,000 men were retrenched compared with 149,000 women.
Managers were those least likely to switch jobs, followed by professionals and clerks. Sales workers were by far the most likely to move on.
People who did change their jobs rarely changed their occupation. All but 77,000 of the 1.4 million managers who left work during the year moved into new management jobs. All but 90,000 of the 990,000 labourers who left work took up new labouring jobs...
Economists' guesses about the official employment numbers for last month, due out tomorrow, range from a drop of 10,000 to an increase of 15,000.
The labour mobility numbers suggest that the true movements are likely to be nearer 200,000 Australians leaving jobs and about the same number moving into jobs.
In last year's budget, the Treasury forecast jobs growth of 200,000 in 2011-12, or 17,000 a month. Instead, jobs grew by 47,000 - about 4000 a month.
In today's Sydney Morning Herald and Age
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Situation no longer normal. The Reserve prepares to ease
It has moved to 'an easing bias'
Published in today's Sydney Morning Herald, BusinessDay, and Age
Related Posts
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The Reserve Bank is preparing to cut interest rates in the wake of a free-falling iron ore price and the first billion dollar wind-back of an existing mining investment program.
The Bank is ready to cut rates as soon as next month. It sees no need to wait for the traditional Melbourne Cup day board meeting after the release of the inflation figures in late October.
The Bank signalled its new bias toward an October 2 easing in the statement released by governor Glenn Stevens after Tuesday’s Sydney board meeting.
Whereas the previous statement, released in August, included some optimistic lines about the world economy, noting in particular that China’s growth appeared to have stopped slowing, yesterday’s assessment of international conditions was intentionally pessimistic.
Europe was contracting, growth in the United States was “only modest” and recent indicators in China had been weaker, adding “to uncertainty about near-term growth”. Asia was suffering at the hands of more moderate expansion in China and weakness in Europe.
Some financial market economists failed to pick up on the change in sentiment saying the Bank was “on hold and still comfortable” and had “sensibly resisted calls for cuts”.
In fact the Bank is deeply concerned about what it calls “sharp” falls in “some commodity prices of importance to Australia”. The iron ore spot price has slid near vertically from $US135 a tonne in July to around $US89 last night.
Tuesday iron ore miner Fortescue became the first big resources company to scale back an investment program already underway, postponing the development of the Kings deposit at its Solomon mine in the Pilbra until prices recover. It hopes to save $1.6 billion and will let go of ‘‘several hundred’’ staff.
The Reserve Bank regards the development as significant because other cutbacks, such as those announced by BHP were to projects that had not yet begun. It is especially concerned that Australia’s sliding commodity prices are not being matched by a sliding Australian dollar, meaning declining prices is not being offset by a more competitive exchange rate.
Addressing the Association of Mining and Exploration Companies convention in Perth Prime Minister Julia Gillard acknowledged “uncertainty out there” and a softening of growth in China.
“But let's be clear,” she said. “Reports of the mining boom's death have been exaggerated. This is a boom with three distinct phases: A prices boom - which is now passing, an investment boom - still to reach its peak and a production boom for the years and decades ahead.”
The Reserve Bank believes the inflation outlook gives it ample room to cut interest should resource prices stay low or keep falling as international conditions worsen. It will be paying close attention to economic statistics from China due in the next fortnight.
Bank forecasters believe that even with the 0.7 per cent prices boost expected as a result of carbon tax Australia’s inflation rate is unlikely to climb above 3 per cent for the next one to two years. It has pledged to “look through” the carbon-price effect in adjusting rates meaning that for rate-setting purposes it will treat inflation as if it is between 2 and 2.5 per cent, well within its 2 to 3 per cent target band.
June quarter national accounts to be released today are expected to show consumer spending strong and economic growth robust. They are unlikely to be much of an impediment to a rate cut because the Bank believes some of the strength was temporary, flowing from billions of dollars in bonus payments payments that stopped in July.
Published in today's Sydney Morning Herald, BusinessDay, and Age
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Tuesday, September 04, 2012
Stimulus sugar-hit over, we're feeling weak
Retailers hoping for a return to the shops after $2.85 billion of government handouts have had their hopes dashed.The $2.85 billion in early carbon tax compensation and schoolkids bonus payments boosted retail spending 0.6 and 1.2 per cent in May and June, but when the sugar hit stopped in July - the month the government turned off its spending tap in order to return to surplus - spending slumped 0.8 per cent.
Department spending, which climbed 1.2 and 3.7 per cent in May and June, dived 10.2 per cent in July - its biggest slide in seven years.
The ABS figures suggest consumers brought forward planned department store purchases in May and June rather than deciding to re-embrace the sector. Over the past year department store sales are down 5.3 per cent.
David Jones sales have been falling for seven consecutive quarters. Myer sales have been shrinking for four years.
“Retailers had cautiously welcomed the significant improvements in trading figures in the past couple of months,” said Australian National Retailers Association chief executive Margy Osmond. “Sadly their caution proved correct"...
“With government stimulus from the federal budget, as well as carbon price compensation, families felt secure enough to shop – but now the bottom has dropped out of that and it’s back to the savings bunker they run.”
Every state and territory went backwards in August – including the mining states of Western Australia and Queensland for the first time this year. The Australian dollar slid half a US cent on the news to a five-week low of 102.40 US before recovering to close at 102.58 US cents, down half a cent on Friday.
Separately released ABS figures show company profits slid for the third consecutive quarter in June, slipping another 0.7 per cent to be down 6.5 per cent over the year.
Mining profits were down 18.3 per cent over the year, non-mining profits were flat. Over the quarter profits fell in 10 of the 15 industry groups. Manufacturing profits slid 8 per cent, retail profits 3.8 per cent.
Inventories grew 0.6 per cent driven by increases in only two sectors - mining and wholesale trade, suggesting a build up of stocks as demand slowed.
Wage and salaries grew just 0.8 in the quarter, the weakest growth since the global financial crisis. ANZ job advertisement figures also released yesterday show a further slide of 2.3 per cent in August - the fifth consecutive monthly fall. Job advertisements are down 9.6 per cent over the year.
Job advertisements have been weakening for six months in the mining-heavy states of Western Australia, Northern Territory and Queensland.
“Underneath this all are the falls in commodity prices which started back in late 2011,” said Deutsche Bank economist Adam Boyton. “With the latest slump in iron ore prices likely to see a pronounced fall in the terms of trade come the end of the year - and hence a more pronounced slowing in economy wide incomes growth - the case for further monetary easing in interest rates remains strong.”
The Reserve Bank is expected to leave rates on hold at its Sydney board meeting today (TUES) but might acknowledge concern about the weakness in iron ore prices in the statement released after the meeting, opening the door to a further cut in rates.
The TD securities inflation gauge climbed 0.6 per cent in August. Excluding volatiles it climbed 0.2 per cent. The RP Data house price index was flat.
In today's Sydney Morning Herald and Age
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Monday, September 03, 2012
'Ol 55? You're more likely to keep your job
Australians who have turned 55 can rest more easily. New Treasury calculations to be released today show they are more likely than ever to hang on to their jobs.Treasurer Wayne Swan will tell a Sydney conference employment rates among mature age workers have grown solidly for the past ten years and particularly strongly during the past three years.
He will release calculations showing that over the past year all of Australia’s employment growth has been among mature age workers.
In the year to July employment among Australians aged 55 and over surged 3.9 per cent. During the same period employment among Australians aged 54 and under grew not at all.
In Victoria the difference was particularly pronounced. Employment among mature Australians jumped 4.8 per cent while employment among younger Australians slipped 0.5 per cent. Around 23,000 more senior Australians are employed than a year ago and 11,000 fewer young Australians.
Australian National University labour market Bob Gregory said it would be wrong to conclude life was getting easier for older Australians without jobs.
“It’s still much harder to find a job if you are over 55, he told The Age. “But if you are already employed and you pass 55 you are much more likely to stay employed."...
“It’s been moving that way for a decade. Part of it is the aging of the population. There are more Australians over 55 than there used to be. Also there has been a dramatic growth in the employment of women in the past decade. As those women turn 55 and stay in work they push up the proportion of over 55s in work.”
“And there’s something else. A decade ago the government tightened access to the disability pension. Before that if a man was declared invalid, both he and his wife got the disability pension. A rule change by the Howard government meant only the man got the pension. It effectively halved the payoff from being declared invalid.”
Professor Gregory says as a result of the change both women and men have been working longer. But he says they have also been working longer in other countries suggesting more universal forces have been at work.
“It is particularly so among unskilled workers. No-one quite knows why.”
In today’s speech Mr Swan will emphasise that the prospects for older Australians who lose their jobs remain bleak.
He will say the average duration of unemployment for Australians 45 and over is 62 weeks, compared to 34 weeks for Australians aged under 45 and 24 weeks for Australians aged under 25.
In today's Canberra Times, Sydney Morning Herald and Age
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Message to Ukraine: Don't mess with our plain packs
And what business is it of yours anyway?
Australia has taken a hard line with Ukraine in the first round of its assault on Australia’s plain cigarette packaging rules at the World Trade Organisation in Geneva.
On Saturday the former Soviet republic asked the WTO set up a panel to hear a dispute on “measures concerning trademarks and other plain packaging requirements applicable to the tobacco products”.
The Ukraine has next to no cigarette trade with Australia but is home to a Philip Morris International subsidiary employing 1400 people. Corporations are not permitted to appeal to the WTO in their own names.
The Ukraine statement says Australia’s law requiring all cigarettes to be sold in plain packets is “more trade restrictive than necessary to achieve the stated health objectives and constitute an unnecessary obstacle to trade”.
Rather than agreeing to the establishment of a disputes resolution panel as is customary in less serious disputes Australia rejected the request, arguing the law was “a sound, well-considered measure designated to achieve a legitimate objective, the protection of public health”.
Public health measures are permitted under WTO rules so long as they don’t unnecessarily restrict trade.
Australia’s rejection of the request for a panel is a symbolic rather than a practical measure... The Ukraine will have to ask for a second time at the next World Trade Organisation meeting on September 28. Australia would be unable to reject a second request.
The dispute would take some months to hear during which time Australia could continue to require plain cigarette packets from December 1.
If the disputes panel finds against Australia the WTO will have the right to impose trade sanctions, should Australia continue to enforce the law.
Australia is fending off a second attack on its plain packaging laws in Hong Kong where Phili9p Morris International has moved the headquarters of its Australian holding company. It is arguing Australia has breached the requirements of an Australia - Hong Kong investment treaty that prevents it depriving Hong Kong entities of their investments.
British American Tobacco has begun an advertising campaign in New Zealand against proposed plain packaging laws warning of action against New Zealand in the WTO.
In today's Sydney Morning Herald and Age
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Read more >>
Australia has taken a hard line with Ukraine in the first round of its assault on Australia’s plain cigarette packaging rules at the World Trade Organisation in Geneva.On Saturday the former Soviet republic asked the WTO set up a panel to hear a dispute on “measures concerning trademarks and other plain packaging requirements applicable to the tobacco products”.
The Ukraine has next to no cigarette trade with Australia but is home to a Philip Morris International subsidiary employing 1400 people. Corporations are not permitted to appeal to the WTO in their own names.
The Ukraine statement says Australia’s law requiring all cigarettes to be sold in plain packets is “more trade restrictive than necessary to achieve the stated health objectives and constitute an unnecessary obstacle to trade”.
Rather than agreeing to the establishment of a disputes resolution panel as is customary in less serious disputes Australia rejected the request, arguing the law was “a sound, well-considered measure designated to achieve a legitimate objective, the protection of public health”.
Public health measures are permitted under WTO rules so long as they don’t unnecessarily restrict trade.
Australia’s rejection of the request for a panel is a symbolic rather than a practical measure... The Ukraine will have to ask for a second time at the next World Trade Organisation meeting on September 28. Australia would be unable to reject a second request.
The dispute would take some months to hear during which time Australia could continue to require plain cigarette packets from December 1.
If the disputes panel finds against Australia the WTO will have the right to impose trade sanctions, should Australia continue to enforce the law.
Australia is fending off a second attack on its plain packaging laws in Hong Kong where Phili9p Morris International has moved the headquarters of its Australian holding company. It is arguing Australia has breached the requirements of an Australia - Hong Kong investment treaty that prevents it depriving Hong Kong entities of their investments.
British American Tobacco has begun an advertising campaign in New Zealand against proposed plain packaging laws warning of action against New Zealand in the WTO.
In today's Sydney Morning Herald and Age
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Sunday, September 02, 2012
My blog is 10 years old, today.
Who'd have thought it?
Here is the first of what have been (so far) more than 3200 posts.
I filed it while I was doodling with BLOGGER at home on the night of Monday September 2 2002:
I had been absent-mindedly exploring Blogger after reading John Quiggin's new blog, started in June, three months earlier. Quiggin was the pioneer, the Grandfather of Australian economics blogging.
As it turned out I was not far behind.
It happened by accident.
The odd thing was that as soon as I had made that post, people on other blogs started pointing to it as if something significant had happened. I hadn't thought so. I hadn't really realised I had started a 'publication'.
At first I used the blog to keep a weekly account of my 'Home Economics' talks with Geraldine Doogue on Radio National's Life Matters. As soon as I had spoken to her I would go into the empty ABC studio next door, open up Internet Explorer and type in the gist of what I had just said while it was still fresh.
Here's my second post:
You get the idea.
I had just returned from Tokyo where I had been the ABC correspondent after 15 years reporting economics for the ABC, most of it as economics correspondent. 9/11 was very fresh in my mind. I moved to SBS to work on the Business Show. Shortly after I started blogging I started writing for the Sydney Morning Herald, then New Matilda. Then I joined the staff of the Canberra Times as its economics editor, and later The Age. Amalgamations mean I now work for all three.
The timing (starting a blog before writing for newspapers) meant that every word I have written for a newspaper is in this blog. I am rather glad.
In his new book about blogging The Rise of the Fifth Estate Greg Jerico points out this makes me unusual - a mainstream journalist with an independent blog. He also has nice words to say about the respect I have accorded to people in the blogosphere. I recommend his book.
I am glad too for the two-way discussion engendered by the blog in comments and emails. It has helped me much more than it has hurt me.
(Although being a broadcaster, two-way conversations took a bit of getting used to.)
Of course the internet has changed in the ten years since 2002.
This fun graphic from Infographic Directory and Best Education Sites reminds of much it has changed. We have TWITTER now. I was a skeptic, at first.
Thanks for being part of the ride. It means more to me than most other things.
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Friday, August 31, 2012
Mining investment - we're nearer the edge of the cliff
Applying the usual realisation ratios ANZ Bank says mining investment this financial year should be 40 per cent higher than last year’s record $81 billion - a stellar result, but down on 45 per cent higher implied by the previous survey conducted three months ago.
“This confirms our view that many of the resource investment projects over 2012-13 are either committed or under construction,” said senior economist Justin Fabo.
“Investment will remain a key driver of near-term growth.”
“Nonetheless, the recent deferral of several large projects suggests that a combination of factors – the weaker global economy, lower commodity prices, rising costs and the high Australian dollar – have created significant risks that relatively marginal proposals could be shelved beyond 2013.”
The finding is consistent with a slew of other private sector forecasts that have mining investment continuing to grow until 2014 regardless of the plunge in minerals prices...
Actual mining investment surged 72 per cent in the year to June, 10 per cent of it in the June quarter. Capital spending in all other industries combined slid 4.8 per cent, most of it in the June quarter.
Analysts expecting a much sharper collapse in mining investment than the usual realisation ratios suggest point to the winding back of expectations between the March and June quarters, the first such decline since 1998-99.
“Large declines in the terms of trade typically see growth in business investment turn negative,” said Deutsche Bank chief economist Adam Boyton. “To be sure, we accept that the nature of the pipeline and also the still-high level of commodity prices might mean this time is different. Commodity prices might also rebound. That said, we see the risks being clearly to the downside.”
AMP Capital economist Shane Oliver said the mining investment boom still had “another year or two to go” but the peak was starting to come into sight.
“While there is the risk of a timing mismatch around the end of the investment boom in 2014 as other sectors take over in driving economic growth, the eventual end of the mining investment boom should lead to more balanced growth,” he said. “It should mean lower interest rates as the risk of an overheating economy subsides, that the best is over for the Australian dollar and a more balanced share market.”
In today's Sydney Morning Herald and Age
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Thursday, August 30, 2012
Worst case - after the boom we look like Europe
Australia faces a run on its currency, a deeper collapse in housing prices and a bank funding crisis to rival Europe’s as it attempts to come to grips with life after the mining boom, according to a widely-circulating report from a boutique US advisory firm.Entitled Australia: The Unlucky Country the report from Variant Perception argues Australia faces a classic case of Dutch Disease, the erosion of capability that flows from a resources boom and an overvalued exchange rate.
“The mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector,” the report says.
The Australian dollar is overvalued on most metrics, one being the hamburger-based Big Mac Index which has the Aussie 15 to 20 per cent above par, Variant says. But it will need to fall well below par and stay there for some time for the rest of the economy to come to the fore after mining retreats.
“It will be almost impossible to move mining capacity to other sectors in Australia,” the report says. “This is a classic problem for economies who suffer from Dutch Disease. When the hangover arrives, writing off production capacity is often done at a considerable discount to cost. In addition, the manufacturing sector is under-developed and will not be able to take up the slack for the loss of momentum in construction and mining.”
Variant says the Aussie might slide smoothly as a result of the Reserve Bank cutting interest rates, or it could fall suddenly in a European-style crisis in which foreigners withdraw funding from Australian banks and corporates...
“A total funding need from external sources of 40 per cent is extraordinarily high. Moreover, about half is short term,” the report says. “This increases the risk yet further should Australia face a funding shock, driven either by events at home (a severely slowing economy), or abroad (eg a euro-driven credit event).”
“Australia’s net external debt levels resemble those seen in the European periphery. Its net international investment position is deeply negative, worse than that of countries such as Turkey and Brazil.”
Variant says the Reserve Bank will come to come to the rescue of the big four Australian banks in a crisis because they are too important to fail, “either by aggressively cutting interest rates or propping up banks through domestic open market operations akin to the liquidity injections seen by the European Central Bank”.
“Quantitative easing is also a possibility if the RBA is forced to buy bank debt to try to stave off a financial crisis. Under such a scenario, the Australian dollar would fall considerably,” the report says.
Australian analysts dismissed many of Variant’s conclusions as nothing new. “They’ve discovered the current account deficit,” said one. “We discovered it in the 1980s and got on with our lives.
“There is a flavour in the report of the current account being a binding constraint,” said Deloitte Access partner Chris Richardson. “It isn’t, unless markets get concerned.”
June construction figures released yesterday show housing at its lowest in a decade, down 15 per cent from its peak two years ago. Non-residential building fell almost 20 per cent after the windup of the building the Education Revolution program. Engineering remained near record highs.
Published in today's Sydney Morning Herald and Age
Australia: Running Out of Luck Down Under
By Jonathan Tepper, Variant Perception
Australia has been described as the lucky country, but it is running out of luck and has a terrible combination of fundamental factors. In fact, Australia reminds us in many ways of the housing bubbles in the UK, Spain and Ireland. In each case, the country experienced a banking crisis.
Australian growth has been dependent on two huge bubbles: a domestic housing market that is one of the most overvalued in the world and a reliance on the Chinese fixed asset investment craze. Despite extraordinary commodity exports, Australia has run current account deficits and has a terrible international investment position. A substantially weaker currency in Australia is inevitable given fundamental factors. Oversized banks dependent on external financing, a bursting housing bubble and a slowing Chinese economy are all fundamental factors which are likely to weigh on the currency. As we explain, a weaker currency can either come in the form of the Reserve Bank of Australia (RBA) reducing interest rates or a balance of payment-like crisis in which foreigners pull funding from the banking sector. In both cases, the RBA would likely have to expand domestic liquidity substantially to prop up the banking system.
Please visit our website for the full version of the report.
> Australia is a classic case of the Dutch Disease. The Dutch Disease denotes the loss of competiveness in the tradable manufacturing and industrial sector as a result of a resource/commodity boom which leads to an overvalued real exchange rate. In Australia, the mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector.
> Australia net external debt levels resemble those seen in the European periphery; the currency is fundamentally vulnerable. Australia has been running a persistent current account deficit since 1980 and the country's negative net international investment position is one of the largest in the world. On this background, the strong currency makes no sense and fundamentally the currency is very vulnerable to capital flight from the banking system.
> Australian banks and corporates rely heavily on foreign funding; the RBA will have to provide liquidity through LTROs. Structural global deleveraging and stop-go flows add volatility for Australian banks. As the housing market continues to correct, it may be difficult for Australian banks to fund themselves. Lowering interest rates will hurt the margins of the banks, and the RBA will likely be forced into domestic liquidity operations to prop up its banks.
> Two options to weaken the currency, lower rates or a balance of a payments crisis. The Australian currency will weaken in one or two ways. Either the RBA gradually reduces interest rates to accommodate a structurally slowing economy and a relative end to the mining boom or the economy will suffer from a balance of payment crisis as external financing dries up due to the decline in the terms of trade exposing the negative current account.
> Australia's commodity sector is tied to a structurally slowing Chinese economy. The commodity sector remains a force to be reckoned with in Australia and will remain cyclically tied to China. Still, the Chinese economy is structurally slowing down and this will impact the growth rate of mining and resource related activities in China. Australia is likely sitting on significant overcapacity in the mining sector which will be difficult to transfer to other sectors.
> The Australian consumer is overlevered, but demographics are relatively positive going forward. The correction in the Australian housing market is far from over and the Australian households remain overlevered. Yet, the savings rate has already increased substantially and in the long run demographics look far more robust than in eg Europe.
> Stay long government bonds in Australia on convergence towards low interest rates in the rest of the OECD. Whether it be as a result of the RBA gradually cutting rates to reflect slower growth or because foreigners start bidding up Australian bonds due to carry, yields are going down in Australia. We continue to like being long government bonds in Australia.
> Our long-term technical buy signal on Australian equities is in effect, but avoid miners and banks. We currently have a long term technical buy signal in effect on Australian equities as a result of the recent sharp sell-off. This is usually followed by good returns over the next 6 months or so. Although the market cap on the ASX 200 strongly favours overweight in mining and financials (market weight), we would avoid these two sectors and buy into defensives (consumer staples and health care) as well as industrials.
> Industrials and manufacturing will outperform on lower interest rates and a weaker currency. The gradual end to Dutch Disease will eventually lead to outperformance of the industrial sector. In the long run, our view is that the Australian equity market cap will re-weight away from mining and financials towards industrials and eventually consumer and retail.
> Buy CDS on big four Australian banks. Australian banks remain the weakest link in Australia's economy, and they are too big to fail. We like buying CDS on Australian large cap banks as an outright trade or as a hedge against the long-term technical buy signal on Australian equities mentioned above.
Unwind of Dutch Disease in Australia requires a significantly weaker currency
The Australian economy needs a substantially weaker currency to regain competitiveness outside the mining sector. As we detail below, this can happen either through the RBA reducing interest rates or through a balance of payment type crisis in which foreigners pull funding. In either case, the Australian dollar is set to weaken substantially.
Australia is likely to have built up significant overcapacity in mining relative to a global demand. In short, it is a bubble that is in the process of bursting.
Economic growth in Australia has been largely driven by two booming sectors, mining and construction (housing and real estate). Since 1989, mining and construction capex have increased by a factor of 4 and 2.5 respectively. Both of these, however, are now no longer viable as growth engines.
Australia is a classic case of the Dutch Disease, which is the process by which a resource boom leads to an appreciation in the currency that stifles the tradable sector (manufacturing). Classic cases of Dutch Disease are associated with excessive wage growth in the non-tradables sector leading to an appreciation in the real exchange rate. The adverse macroeconomic effects include potential overconsumption relative to future income and significant mis-allocation of capital as the windfalls from commodity exports are channelled into non-tradables (eg real estate and construction) where the risk of asset bubbles is high.
The Australian dollar is vastly overvalued on any fundamental metric. Australia's terms of trade have soared and the currency is overvalued on most metrics. On The Economist's famous Big Mac Index, the AUD is about 15% to 20% overvalued. Given the country's persistent current account deficit and large external debt load the currency looks vulnerable based on macroeconomic fundamentals.
But the problem isn't so much that Australia's currency is currently overvalued based on fundamentals, but that the economy is likely to need an undervalued currency for an extended period in order to rise to the challenge of correcting the damage inflicted by the Dutch Disease.
It will be almost impossible to move mining capacity to other sectors in Australia. This is a textbook problem for economies who suffer from Dutch Disease. When the hangover arrives, writing off production capacity is often done at a considerable discount to cost. In addition, the manufacturing sector is under-developed and will not be able to take up the slack for the loss of momentum in construction and mining.
Australia's external finances: It looks like the European periphery
The European periphery is an economic basket case. Australia resembles the European periphery in many important ways. The Australian banking system is highly reliant on external funding and will likely become dependent on the central bank for liquidity in the near future. Our view is that the RBA will have to become much more activist in supporting its major banks as the structural slowdown in China and the housing market continues.
We believe the RBA will ultimately be forced to take similar action to developed market central banks either by aggressively cutting interest rates or propping up banks through domestic open market operations akin to the liquidity injections seen by the ECB. Quantitative easing is also a possibility if the RBA is forced to buy bank debt to try to stave off a financial crisis. Under such a scenario, the AUD would fall considerably.
The crisis-stricken economies along the eurozone periphery share one key characteristic: their external debt is too high and their net international investment position (NIIP) - measuring the difference in stock value between assets held abroad and asset held domestically by foreigners - is deeply negative.
Yet, a closer look and you will find Australia and its neighbour New Zealand in the same company, with negative NIIPs well above countries such as Turkey and Brazil.
Australia's current account has been negative since 1980, but the interesting thing is that it has remained negative even as the export mining boom has accelerated in the past decade. This is similar to South Africa, that has also run current account deficits for most of the last decade – despite having a sizable export sector – as consumers essentially borrow to spend.
The remarkable fact is that while Australia's trade balance with China has risen steadily to reflect the mining boom (see sections below), the overall trade balance has not been consistently positive (quite the opposite).
As Australia's terms of trade starts to decline or even stops growing, the current account balance will become even more exposed due a now structurally negative income balance. This will add further fundamental pressure on the currency.
The majority of Australia's external debt is held in the country's banking sector with banks' gross external debt standing at around 45% of GDP in 2012.
Both Australian banks and Australian corporates are highly dependent on international funding for their financing operations with funding costs proxied by the basis swap (essentially what an Australian bank has to pay for USD funding).
However, based on the latest data from the RBA, the funding profile has improved in the past two years with deposits now accounting for a larger share of the total funding profile. Furthermore, the maturity of external wholesale debt has been extended significantly.
A total funding need from external sources at 40% of total funding is extraordinarily high. Moreover, about half of this external debt is short term. This increases risk yet further should Australia face a funding shock, driven either by events at home (a severely slowing economy), or abroad (eg a euro-driven credit event).
Cost of funding for Australian banks have gone up markedly since mid-2011 as competition for deposit funding has pushed up costs of term deposits. In addition, extending maturity on wholesale funding has also proven costly especially in relation to a heightened risk premium attached to bank credit in general, as well as the fact that many of the big Australian banks were recently downgraded by S&P.
In the event of a funding crisis, it is unthinkable that Australian banks would be left to the whims of international funding markets. There are two reasons for this. Firstly, the Australian banking system is essentially an oligopoly with four main big players, each of them systemic on their own. Their combined market cap is just shy of a fifth of GDP and their total assets, in combination, equal an impressive 183% of GDP (based on annualised Q1-12 GDP figures). Secondly, Australia is not in the same boat as the European periphery. It is much more like the UK in 2007. The RBA has full control of its balance sheet (and currency) and has all the tools it needs to inject liquidity into banking system through LTRO-type operations.
Moreover, if there was any sudden fall in dollar funding for Australian banks it is likely the Fed would step in with dollar swap lines, as it has done with the BoE and the ECB.
Ultimately, our view is that the Australian economy is very similar to the UK economy in several respects (overvalued property market, excessive household debt, etc). In part, as a result of the mining boom and as a result of low global interest rates in the past decade, Australia has also had a severe housing bubble. This bubble is now in the process of deflating.
There is considerable deleveraging ahead for the Australian consumer with household debt still at significant levels. Australian consumers remain overlevered with especially mortgage debt as a percentage of income still high, but the savings rate has also increased and looks to be sitting at a permanently higher level than seen at any point since 1990.
The RBA has openly stated that it is not worried about a slowdown in the Australian housing market, but as the slowdown grinds on it will be difficult for them not to take notice. A final note from GMO, the investment management firm. They did a study on bubbles and identified – using their definition for what a bubble is – 34 bubbles over the years. 32 of these are back to the trend from before the bubble began. The only two outstanding are the UK housing market and the Australian housing market.
Australia is levered to a slowing Chinese economy
Australia will continue to be cyclically tied to China, but structurally the economy is likely to suffer from substantial overcapacity relative to a slowing Chinese economy. China's structural growth rate is likely to fall significantly in the coming years and investment growth will wane. This is bearish for the Australian mining sector.
The best way to show the connection between growth in Australia and China is to overlay our leading indicator for industrial production in China with annual changes in the AUDUSD.
The strong correspondence between the charts clearly shows that the currency has been tightly correlated to the cycle in China in the last decade. The chart to the right shows a very high correlation between the Chinese and Australian business cycle.
The Australian trade balance with China has continued reaching new highs in the first half of 2012, and while the Chinese economy may certainly rebound in relative terms, Australia's strong dependence on China will turn into a disadvantage as the Chinese economy slows down.
There is no doubt that China may have had its best years in terms of headline GDP growth, but it is unlikely in our view that the economy will wither away as an important component of the global business cycle.
Cyclically, Australia will continue to benefit from expansions in China, but structurally, Australia will suffer as the trend growth of the Chinese economy slows down.
For Australia, the main problem lies in the structural slowdown that we are likely to see in China. Chinese GDP growth increased from about 6-7 % to a peak of 14% before the crisis. Growth rebounded to above 10% in the first half of 2010, but the country has not been able to sustain this rate.
Implications for asset prices – Rates and currency to go lower, banks and miners to underperform
The Australian currency has continued to defy the vulnerabilities of the economy and instead responded to the search by international investors for carry and yield. In a world where developed market interest rates are zero or even negative, the Australian dollar has become an attractive, and indeed one of the only, sources of yield.
A weaker currency is necessary for the unwind of Australian Dutch Disease and in our view, there are two avenues through which this can occur.
1. Economic headwinds in the form of a slowing Chinese economy and a continuing slump in the domestic housing market will force the RBA to reduce interest rates further. Given the impact this would have on domestic banks' interest rate margins, the RBA would likely have to aid banks with liquidity and funding through LTRO-like operations akin to the ones seen at the ECB.
2. A classic balance-of-payments type crisis in which a continuing decline in the terms of trade exposes the vulnerability of the external position. The current account would widen, and Australian banks would find it difficult to secure international wholesale funding. In such a situation, the RBA could choose to invert the domestic yield curve to attract funding for the current account (essentially protecting the currency), but this is very unlikely in our view. Australia would in such a case benefit from a weaker currency and the path of least resistance would be for the RBA to support the banks directly through LTROs and thus replace the source of external funding.
The critical issue in the scenarios above is whether policymakers actively seek to weaken the currency before the market does. Given the current tone set by the RBA, option two seems most likely, but rates have already come down and the RBA is likely to continue to lower interest rates if the economy weakens further.
A caveat is that in any crisis-like situation, given the central role of the domestic banks and their reliance on external funding, interbank rates would likely rise much higher. In this case, buying bank bill futures would be inappropriate to profit from lower base rates as the analogue of the LIBOR-OIS spread fro Australia would widen significantly, as we saw in the US, UK, etc in the wake of the Lehman bankruptcy. However, as bank bill futures in Australia are physically delivered, as opposed to cash settled, spreads may not widen to such extreme levels.
On bonds, we have advised investors to go long Australian bonds as we called for the RBA to cut rates. Now we can add an additional impetus in the form of the continuing strong bid by foreigners.
The search for yield and essentially diversification out of sovereign debt markets in distress has led to a surge in the foreign holdings of Australian government bonds. According to the latest data from the Australian Office of Financial Management, the total foreign ownership of Australian government bonds now stands at 80% of the total outstanding debt, up from 60% in 2006.
Although this may sound high, government debt to GDP in Australia is low, at 30% (although is up from 16% in 2008). This low ratio is a result of running a budget surplus for most of the last 15 years. But, even though the situation looks good optically, the fact of the matter is Australia would have to backstop its banks in the event of a crisis, and this low number masks the real debt burden. Two countries that also had low debt burdens before banking crises were Spain and Ireland. They've both required bailouts, so Australian politicians and economists should not be complacent about their public debt levels.
We remain of the view that rates in Australia will converge to the lower bound currently set by the rest of major central banks. This process has been progressing for the last 6m-12m and in our view it will continue.
The Australian yield curve is considerably flatter than in the rest of the developed world. We think this will also reverse as short-term interest rates come down on the back of foreign buying and a dovish RBA.
The Australian dollar will not continue to defy fundamentals even if foreign central bank diversification means that the currency continues to see bids driven by structural as well as cyclical forces. We believe that the recent compression in the yield differential will weaken the AUD.
Australian banks will suffer. Indeed, Australian banks have recently outperformed their developed world peers but this is not sustainable given their vulnerability to external funding conditions and a slowing domestic market, putting a pressure on earnings.
Relative to their base value in 2007 we believe that Australian banks should trade much closer to their UK rather than their US counterparts. We like buying CDS on Australia's big four banks both as an outright trade, but also as a hedge against a long index exposure (on the basis of a long-term technical buy signal - see full report for details).
© Copyright 2012 by Variant Perception® LLC
Related Posts
. What next, after the boom ends?
. Corden on Dutch disease. The MRRT won't help
. Leigh on Australia so far. What to Eat After the Low-Hanging Fruit?
Wednesday, August 29, 2012
Behind the smoke: The corporate war on us
Wednesday column
It’s easy to laugh at big tobacco. Fresh from defeat at Australia’s High Court it has taken its fight against plain cigarette packets to New Zealand where British American Tobacco warns such legislation could expose the nation to legal challenges (no kidding) and to Hong Kong where Philip Morris moved the shares of its Australian subsidiary presumably to take advantage of an obscure 1993 Hong Kong-Australia investment treaty.
Philip Morris Australia, now known as Philip Morris Asia, will argue the treaty prevents Australia from depriving a Hong Kong entity of its investments or subjecting it to “measures having effect equivalent to such deprivation”. Which it does, with a caveat. As a party to the treaty Australia is permitted to deprive a Hong Kong company of its investments so long as it does so “under due process of law for a public purpose related to the internal needs of that party on a non-discriminatory basis”. So Australia ought to be in the clear.
But the almost comic attempt to get mileage out of the treaty (moving from Australia to Hong Kong in order to complain that it was being discriminated against because it was from Hong Kong) masks a broader more serious attempt to turn trade treaties into instruments that allow corporations to sue governments.
The World Trade Organisation allows no such thing. It’s disputes settlement procedure allows a nation to haul another nation before a disputes settlements panel, but not corporation to do so.
That could be why on Friday it will be the Ukraine which will ask the WTO to set up a panel to to hear its plain packaging dispute with Australia rather than a tobacco company. There’s a suspicion that the Ukraine is acting on behalf of a tobacco company, perhaps fuelled by its ranking on the Transparency International Corruption Perceptions Index (at the corrupt end of the scale, sandwiched between Russia and Zimbabwe) and by the fact that it has next to no tobacco trade with Australia...
The dispute will take four months to hear. With appeals it could take up to 14 months. But it won’t unduly trouble Australia. A member of the WTO rather than a corporation will be taking action, it will have to show clearly how Australia’s plain packs law offends against WTO rules (which allow non-discriminatory measures that benefit health) and because the Ukraine’s national interests are not at stake it is likely to run out of enthusiasm before Australia does.
Big tobacco, and fellow travellers in surprising places, want much more.
They want what is known as an Investor State Dispute Settlement Mechanism. They want it in order to allow them to drag Australia and other sovereign governments before specially constituted international courts.
They don’t usually put it that bluntly.
Here’s how Philip Morris International put it in a briefing note for the US trade representative negotiating the so-called Trans Pacific Partnership with eleven nations including Australia: “Philip Morris International considers the availability of an investor-state dispute settlement mechanism - including the right for investors to submit disputes to independent international tribunals - a vital aspect of protecting its foreign investments.”
It is clear what Philip Morris is getting at. Four of the 30 paragraphs in the briefing note seen by BusinessDay complain about Australia’s plain packaging law.
As it happens, the US trade representative is unable to do the bidding of Philip Morris. US law prevents federal agencies from promoting the sale of tobacco overseas. But the trade representative is willing to do the bidding of other corporations that would like to sue foreign governments in supranational courts.
In fact in all but one of the 13 free trade agreements negotiated by US, its representatives have managed to insert such a clause. The exception is the free trade agreement with Australia. Although criticised at the time for giving too much away to the United States in return for very little, on the question of an outside Investor State Dispute Settlement Mechanism the Howard government stood firm.
The Gillard government is standing firm too. The multinational nature of large Australian corporations means it would be effectively be giving our corporations (but not our citizens) an international right of appeal against laws approved by the High Court.
The US is unlikely to give up. It already has such a clause in its agreements with Canada, Chile, Mexico, Singapore and Peru - five of the nations that would form part of the Trans Pacific Partnership.
It’s best hope would be that a new Abbott government saw things differently. It would, if it succumed to lobbying from Australia’s own Chamber of Commerce and Industry.
ACCI is lobbying hard, putting out a statement this month headed crudely: “Australian Foreign Investment Requires Right to Sue Foreign Governments”.
It says its “campaign” is backed by the International Chamber of Commerce, which is hardly surprising but also hardly a sign the backers have Australia’s interests at heart.
Julia Gillard and trade minister Craig Emerson are standing up to them. Will Tony Abbott?
In today's Sydney Morning Herald and Age
Philip Morris International TPPA Stance
"Australian Foreign Investment Requires Right to Sue Foreign Governments
Statement by Peter Anderson, ACCI Chief Executive, August 9 2012
Australia’s largest and most representative business organisation, the Australian Chamber of Commerce and Industry (ACCI), together with leading business groups and some of Australia’s foremost legal experts on trade policy, have launched a campaign for trade agreements to include, on a case by case basis, provisions that allow private companies to sue foreign governments for breach of contract or property rights.
The business campaign seeks to restore Australian support for these rights, known as Investor-State dispute settlement (ISDS) provisions. Case-by-case support was withdrawn by the Gillard government in its 2011 policy statement ‘Trading our Way to More Jobs and Prosperity’.
The campaign features a joint letter signed last month by sixteen business organisations and legal experts, addressed and sent to the Prime Minister.
In launching the campaign’s public phase, ACCI Chief Executive said:
“If Australian companies are to fully grasp opportunities of the Asian century and emerging markets of Africa and the Indian Ocean Rim, trade agreements must provide investor certainty for private companies, not just governments. Investors are put off if they don’t have a secure legal frameworks with enforceable rights by courts or commercial arbitration.”
“Especially in developing countries where legal systems are ambiguous or suspect, Australian companies investing off-shore need confidence to take legal action and compel international arbitration against governments which infringe property and contractual rights.”
“The recent focus on in-bound foreign investment must not overshadow the prosperity flowing from Australian companies successfully investing in emerging markets.”
“ISDS provisions support Australian companies in their investments in foreign countries and provide an efficient mechanism for companies to seek to directly rectify any adverse situations” the joint letter says.
Since 2011, ACCI has tried to persuade the Gillard government to restore a case-by-case approach to ISDS in trade agreements, including Trans Pacific Partnership and Indian Ocean Rim negotiations.
As recently as 13th July in Brisbane, business organisations forming ACCI’s General Council resolved to support a public campaign given no-change in the government’s approach.
“The government’s refusal to consider inclusion of such provisions in current or future regional and bilateral free trade agreements is a flawed approach which reduces security for Australian firms seeking to invest internationally” the joint letter says.
Together with the International Chamber of Commerce, ACCI last week held seminars on international commercial dispute arbitration across five Australian capitals, including judge from the Supreme People’s Court of China.
“Those arbitration seminars starkly reminded businesspeople that investment is stymied and Australian businesses ripped-off if legal rights are not protected and enforceable on foreign shores.”
Aside from ten business groups, the co-signed letter, attached, includes support from the Chartered Institute of Arbitrators, leading barristers (including a former Commonwealth Solicitor General) and legal academics."
ACCI Lobbies for Investor-state Dispute Settlement Provisions
EXTRA READING
. An affront to the rule of law: international tribunals to decide on plain packaging, The Conversation
Related Posts
. Plain packs: The new lines of attack. Big tobacco tries the WTO and TPPA
. Plain Pack wars: The Dominican Republic takes on Australia!
. Emerson: I would rather not do trade deals, but...
Read more >>
It’s easy to laugh at big tobacco. Fresh from defeat at Australia’s High Court it has taken its fight against plain cigarette packets to New Zealand where British American Tobacco warns such legislation could expose the nation to legal challenges (no kidding) and to Hong Kong where Philip Morris moved the shares of its Australian subsidiary presumably to take advantage of an obscure 1993 Hong Kong-Australia investment treaty.Philip Morris Australia, now known as Philip Morris Asia, will argue the treaty prevents Australia from depriving a Hong Kong entity of its investments or subjecting it to “measures having effect equivalent to such deprivation”. Which it does, with a caveat. As a party to the treaty Australia is permitted to deprive a Hong Kong company of its investments so long as it does so “under due process of law for a public purpose related to the internal needs of that party on a non-discriminatory basis”. So Australia ought to be in the clear.
But the almost comic attempt to get mileage out of the treaty (moving from Australia to Hong Kong in order to complain that it was being discriminated against because it was from Hong Kong) masks a broader more serious attempt to turn trade treaties into instruments that allow corporations to sue governments.
The World Trade Organisation allows no such thing. It’s disputes settlement procedure allows a nation to haul another nation before a disputes settlements panel, but not corporation to do so.
That could be why on Friday it will be the Ukraine which will ask the WTO to set up a panel to to hear its plain packaging dispute with Australia rather than a tobacco company. There’s a suspicion that the Ukraine is acting on behalf of a tobacco company, perhaps fuelled by its ranking on the Transparency International Corruption Perceptions Index (at the corrupt end of the scale, sandwiched between Russia and Zimbabwe) and by the fact that it has next to no tobacco trade with Australia...
The dispute will take four months to hear. With appeals it could take up to 14 months. But it won’t unduly trouble Australia. A member of the WTO rather than a corporation will be taking action, it will have to show clearly how Australia’s plain packs law offends against WTO rules (which allow non-discriminatory measures that benefit health) and because the Ukraine’s national interests are not at stake it is likely to run out of enthusiasm before Australia does.
Big tobacco, and fellow travellers in surprising places, want much more.
They want what is known as an Investor State Dispute Settlement Mechanism. They want it in order to allow them to drag Australia and other sovereign governments before specially constituted international courts.
They don’t usually put it that bluntly.
Here’s how Philip Morris International put it in a briefing note for the US trade representative negotiating the so-called Trans Pacific Partnership with eleven nations including Australia: “Philip Morris International considers the availability of an investor-state dispute settlement mechanism - including the right for investors to submit disputes to independent international tribunals - a vital aspect of protecting its foreign investments.”
It is clear what Philip Morris is getting at. Four of the 30 paragraphs in the briefing note seen by BusinessDay complain about Australia’s plain packaging law.
As it happens, the US trade representative is unable to do the bidding of Philip Morris. US law prevents federal agencies from promoting the sale of tobacco overseas. But the trade representative is willing to do the bidding of other corporations that would like to sue foreign governments in supranational courts.
In fact in all but one of the 13 free trade agreements negotiated by US, its representatives have managed to insert such a clause. The exception is the free trade agreement with Australia. Although criticised at the time for giving too much away to the United States in return for very little, on the question of an outside Investor State Dispute Settlement Mechanism the Howard government stood firm.
The Gillard government is standing firm too. The multinational nature of large Australian corporations means it would be effectively be giving our corporations (but not our citizens) an international right of appeal against laws approved by the High Court.
The US is unlikely to give up. It already has such a clause in its agreements with Canada, Chile, Mexico, Singapore and Peru - five of the nations that would form part of the Trans Pacific Partnership.
It’s best hope would be that a new Abbott government saw things differently. It would, if it succumed to lobbying from Australia’s own Chamber of Commerce and Industry.
ACCI is lobbying hard, putting out a statement this month headed crudely: “Australian Foreign Investment Requires Right to Sue Foreign Governments”.
It says its “campaign” is backed by the International Chamber of Commerce, which is hardly surprising but also hardly a sign the backers have Australia’s interests at heart.
Julia Gillard and trade minister Craig Emerson are standing up to them. Will Tony Abbott?
In today's Sydney Morning Herald and Age
Philip Morris International TPPA Stance
"Australian Foreign Investment Requires Right to Sue Foreign Governments
Statement by Peter Anderson, ACCI Chief Executive, August 9 2012
Australia’s largest and most representative business organisation, the Australian Chamber of Commerce and Industry (ACCI), together with leading business groups and some of Australia’s foremost legal experts on trade policy, have launched a campaign for trade agreements to include, on a case by case basis, provisions that allow private companies to sue foreign governments for breach of contract or property rights.
The business campaign seeks to restore Australian support for these rights, known as Investor-State dispute settlement (ISDS) provisions. Case-by-case support was withdrawn by the Gillard government in its 2011 policy statement ‘Trading our Way to More Jobs and Prosperity’.
The campaign features a joint letter signed last month by sixteen business organisations and legal experts, addressed and sent to the Prime Minister.
In launching the campaign’s public phase, ACCI Chief Executive said:
“If Australian companies are to fully grasp opportunities of the Asian century and emerging markets of Africa and the Indian Ocean Rim, trade agreements must provide investor certainty for private companies, not just governments. Investors are put off if they don’t have a secure legal frameworks with enforceable rights by courts or commercial arbitration.”
“Especially in developing countries where legal systems are ambiguous or suspect, Australian companies investing off-shore need confidence to take legal action and compel international arbitration against governments which infringe property and contractual rights.”
“The recent focus on in-bound foreign investment must not overshadow the prosperity flowing from Australian companies successfully investing in emerging markets.”
“ISDS provisions support Australian companies in their investments in foreign countries and provide an efficient mechanism for companies to seek to directly rectify any adverse situations” the joint letter says.
Since 2011, ACCI has tried to persuade the Gillard government to restore a case-by-case approach to ISDS in trade agreements, including Trans Pacific Partnership and Indian Ocean Rim negotiations.
As recently as 13th July in Brisbane, business organisations forming ACCI’s General Council resolved to support a public campaign given no-change in the government’s approach.
“The government’s refusal to consider inclusion of such provisions in current or future regional and bilateral free trade agreements is a flawed approach which reduces security for Australian firms seeking to invest internationally” the joint letter says.
Together with the International Chamber of Commerce, ACCI last week held seminars on international commercial dispute arbitration across five Australian capitals, including judge from the Supreme People’s Court of China.
“Those arbitration seminars starkly reminded businesspeople that investment is stymied and Australian businesses ripped-off if legal rights are not protected and enforceable on foreign shores.”
Aside from ten business groups, the co-signed letter, attached, includes support from the Chartered Institute of Arbitrators, leading barristers (including a former Commonwealth Solicitor General) and legal academics."
ACCI Lobbies for Investor-state Dispute Settlement Provisions
EXTRA READING
. An affront to the rule of law: international tribunals to decide on plain packaging, The Conversation
Related Posts
. Plain packs: The new lines of attack. Big tobacco tries the WTO and TPPA
. Plain Pack wars: The Dominican Republic takes on Australia!
. Emerson: I would rather not do trade deals, but...
Revealed - the truth about Newstart they don't want you to hear:
Shocking previously-unpublished research commissioned for the government’s review of pensions finds one in ten Australians on the dole are unable get a substantial meal each day, one in eight are unable to buy prescribed medicines, and one in twenty cannot heat their homes.
Commissioned by the department of families, housing, community services and indigenous affairs for the 2008 Harmer Review of Pensions conducted by the then head of the department Jeff Harmer it finds that aged pensioners are much better off than unemployed Australians on Newstart.
Whereas 1.4 per cent of aged pensioners surveyed were unable to get medical treatment if needed, among Australians on Newstart the proportion was 22 per cent. Whereas only 0.7 per cent of aged pensioners were unable to get a substantial meal at least once a day among Australians on Newstart the proportion was 10.3 per cent.
Only 2.1 per cent of pensioners were unable to buy the medicines prescribed for them by doctors. Among unemployed Australians on Newstart the proportion was 16.7 per cent.
Although listed as a reference in Dr Harmer’s report the research itself has never been published, either by the department that commissioned it or by the researchers themselves, Peter Saunders and Melissa Wong from the Social Policy Research Centre at the University of NSW...
Asked by the department to examine the adequacy of the payments “to different groups, including aged pensioners” the research compares what it calls deprivation rates among seven groups, including low-wage workers, self-funded retirees, age pensioners and Australians on Newstart. It finds that on almost every criteria self-funded retirees are the best off and Australians on Newstart the worst off.
So well-off does the research find self-funded retirees that on most of the criteria they have no deprivation at all. An exception is dental care where 2.1 per cent say they can’t get access to treatment if needed. By contrast 13.7 per cent of age pensioners can’t get access to dental treatment if needed and 44.7 per cent of Australians on Newstart.
The research finds that “although the results do not necessarily imply anything about whether or not the age pension is adequate at current levels, it does appear to be the case that the age pension is more adequate than the existing payments made to people with a disability, parenting payments, and those whose eligibility for income support is a consequence of unemployment”.
Assisted by the previously unseen report the Harmer Review found pension rates should continue to be adjusted by average male earnings or the cost of living, whichever was the larger. It made no finding about Newstart - found to be far less adequate - because Newstart was outside of its terms of reference.
The $35 per day Newstart allowance continues to be adjusted by the much lower consumer price index. The most recent increases in March gave an extra $3.35 per week to pensioners but just $1.45 per week to NewStart recipients.
In today's Sydney Morning Herald and Age
Have fun, play with this Sydney Morning Herald interactive graphic:
Deprivation Draft Report Prepared for FaCSIA November 2008
Related Posts
. Newstart is so low we don't think we could live on it
. Newstart won't even pay the rent
. How bad are Australia's unemployment benefits? Bad and getting worse.
Sunday, August 26, 2012
The finest speech Nixon never gave. What if Armstrong had died on the moon?
July 18, 1969. William Safire prepared a speech:
HT: Gawker, via Boing Boing via Tim Watts
In the words of one commenter: I can imagine Safire writing this, privately pondering the etymological connections of lunar and lunacy. In a genre that requires weight and sober rhythm, it is beyond effective.
In the words of another: Did Bowie get an advance copy?
HIGHLY RECOMMENDED READING: The first man on the moon, Guardian July 2009
ALSO RECOMMENDED, AUSTRALIA'S EXCLUSIVE: An audience with Neil Armstrong
Related Posts
. July 20, 1969. Let's remember
. Space travel: The best newspaper correction ever
. I think it's going to be a long, long time... space shuttle edition
Saturday, August 25, 2012
What next, after the boom ends?
With Matt Wade, audio below
Australia's mining boom was never going to last forever.
Tucked away in the budget papers two years ago were estimates from Treasury and Geoscience Australia about how long each of the nation's minerals would last. Iron ore was set to run out in 70 years at the current rate of extraction, gold in just 30 years. Black coal would last longer - 90 years, meaning many very young Australians will still be alive when the last known lumps of black coal are dug from Australian soil and thrust into furnaces.
Treasury was careful to say its estimates weren't definitive. Higher prices could "encourage greater investment in exploration activities and new discoveries". But its message was clear: mining would be unable to power Australia's economy forever. Sooner or later - within one lifetime or maybe two - we would have to face up to the question of what comes next.
It's the sort of question Australia has faced in the past. Those who grew up in the 1950s were forever being told the nation rode on the sheep's back. Back then the farm sector accounted for one-quarter of Australia's production. Today it accounts for a little over 2 per cent.
For the most part that transition away from agriculture has been managed smoothly (although for a while woolgrowers tried to stare change in the face by legislating a floor price for wool, with disastrous consequences). The subsequent decline of manufacturing has been more painful, mainly because of the number of people employed. In the 1960s manufacturing provided jobs to one in every four Australian workers. Today it employs just one in 12.
On Thursday, the Resources Minister, Martin Ferguson, appeared to ring in the next change. Speaking to the ABC's AM program after BHP shelved plans to build what would have been the world's biggest uranium mine at Olympic Dam in South Australia's arid north he declared the boom over.
"It's about time Tony Abbott stopped talking down Australia both at home and internationally and recognised how well placed we are," he said.
"But you've got to understand, the resources boom is over. We've done well - $270 billion in investment, the envy of the world. It has got tougher in the last six to 12 months. Look at Europe, the state of the European and global economy. Think about the difficulties in China, with still strong growth. The next round was always going to be difficult and I must say Olympic Dam was always a very, very challenging project - its sheer size."
The Prime Minister rushed to reassure the public that Ferguson hadn't meant to say what it sounded as if he had...
"He has indicated that prices have come off a bit - or, if you like, that the commodity price boom has passed its peak," she told Parliament. "But there is a huge investment phase with still some way to run and the export boom in resources still has a very long way to run."
The simultaneous industrialisation of the world's two most populated nations - China and India - has decades to run. Another 1.1 billion Asians are expected to move to cities over the next 30 years and they will require housing and supporting infrastructure. The Reserve Bank has estimated a typical Chinese apartment requires about six tonnes of steel, while 10 kilometres of metropolitan subway requires about 75,000 tonnes. Each tonne of steel produced requires about 1.7 tonnes of iron ore and more than half a tonne of coking coal.
But the plummeting mining profits and shelved resource projects have underscored the need for Australia to prepare for a time when it must rely on a different mix of exports, mostly knowledge-based services.
Resources exports have forged deep economic ties between Australia and Asia. But the mining boom may just be the prelude to the main game of Asia's economic emergence. By the middle of this century, more than half of the world's economic activity will occur in Asia.
This landmark shift creates economic possibilities unimagined even a decade ago. As the region's middle class becomes richer, demand for a long and different menu of Australian exports including foodstuffs, tourism, education, financial services, business services, professional services and niche manufactures will steeple.
But the shift from selling Asian customers bulk commodities such as coal, iron ore and gas to the far more nuanced task of exporting a wide range of goods and services into diverse Asian markets won't be easy.
"It is one thing to sell a homogenous minerals commodity to a minerals-hungry industrialist in China, and another thing entirely to design and market a sophisticated personal service to someone living in that culture," the former Treasury secretary Ken Henry said in a speech to business this week.
Australians have become much more aware of Asia, especially through holiday travel. But experts warn our knowledge is superficial. Even though so many more of us are travelling to Indonesia and other south-east Asian destinations there are fewer students studying Indonesian now than in the 1970s.
A recent business survey found less than half of Australian businesses with dealings in Asia have any senior executives or board members with Asia experience or language ability.
Asia's middle-classes are emerging as the world's biggest consumer group but many of them won't speak English. They will also have business cultures and political systems very different from Australia's.
Henry, who is writing the government's white paper on preparing Australia for the Asian century, says the nation needs to build its "Asia-relevant capabilities".
It will be crucial that Australian students gain a much deeper understanding of the culture and languages of Asia.
Businesses will also need to think differently. Many firms that are defined as Australian will have to start looking at themselves as regional and be willing to move components of their business to Asia in order to survive.
The Prime Minister and the Resources Minister are both right. The resources boom has ended, but only in a limited sense, for now.
It was kicked off last decade by an explosion of urbanisation in China. The first impact was to ramp up prices. With Australia and suppliers in Brazil and India ill-prepared, the only way China could get the iron ore it needed to cater for its rapidly expanding cities was to bid up the price from a long-term average of about $US13 a tonne in 2002 to an extraordinary $US180 a tonne by 2011.
For Australian miners the undreamt of price was pure profit - they hadn't needed to spend an extra cent to get it, which is why Kevin Rudd and Wayne Swan wanted to tax some of it away as super profits.
The price boom begat the investment boom as resources companies scrambled to mine more of the stuff. The investment boom is boosting the economy in its own right, drawing in billions in overseas capital and employing more workers constructing mines than will eventually be employed operating them.
But as miners across the world have ramped up production, prices have eased.
A year ago iron ore was fetching about $US180 a tonne but yesterday the price slipped below $US100 for the first time since the global financial crisis.
Investment will turn down soon. The Reserve Bank governor, Glenn Stevens, told Parliament's economics committee yesterday he expects investment spending to peak "within the next year or two" although it will remain at an unusually high level for a long time.
Big investments in gas production means exports are set to quintuple by the end of this decade.
But Peter Coleman, the chief executive of Woodside Petroleum, Australia's biggest gas producer, says that as commodity prices fall miners are becoming more cautious about investments.
"We're just seeing a natural part of the cycle to be honest, it's kind of like that long wave that comes into the beach, it's starting to break, that's what commodity cycles do, and then we'll pick up another one here soon, it just depends on picking the right one."
But even if the resource price boom is over and the resource investment boom coming to an end, our resource income boom still has some way to run.
This payoff from the investment boom - the extra resources Australia is able to ship out of the country - will stay with us for decades.
After China will come India. China has just passed a historic milestone: one half of its population now live in cities. India's rate of urbanisation is just a third so it has a long way to go. In the past 15 years India has shot up from being the world's 10th-biggest steel producer to the fourth.
While India is blessed with vast reserves of its own high quality iron ore, it is desperately short of the coking coal traditionally used to turn it into steel. Australia, with its abundant stocks of coking coal, looks to be in the box seat once more. It already exports more coal to India than China.
Even so, a director at Deloitte Access, Chris Richardson, says there could be a "tricky phase" for the Australian economy as commodity prices fall and we wait for recent investment in mining capacity to come on line.
"In late 2014 going into 2015 we are going to have to change gears from construction as an economic driver to export earnings," he said. "There could be a pothole. We don't know how big it will be."
Some parts of the economy will benefit as the effects of the mining boom fade a little. The Australian dollar will probably fall providing a boost to important sectors that have been badly affected by the high exchange rate like tourism, education and parts of manufacturing and retail. The firms in those sectors that have weathered the effects of the soaring exchange rate are likely to thrive if the dollar pulls back.
Meanwhile, Henry says there is no room for complacency. Australia should waste no time adapting and reforming its policy settings to make the most of opportunities beyond the mining boom.
"It would be a mistake to think that geography and/or geology alone will get us where we want to go and allow Australia somehow to ride the wave of the Asian century around us," he said.
Published in today's Canberra Times, Sydney Morning Herald and Age
Me on ABC 702 mornings, Wednesday August 22
9 minutes, play or CLICK THEN CLICK AGAIN to download mp3
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. Your investment boom is about to end - Access
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Read more >>
Australia's mining boom was never going to last forever.Tucked away in the budget papers two years ago were estimates from Treasury and Geoscience Australia about how long each of the nation's minerals would last. Iron ore was set to run out in 70 years at the current rate of extraction, gold in just 30 years. Black coal would last longer - 90 years, meaning many very young Australians will still be alive when the last known lumps of black coal are dug from Australian soil and thrust into furnaces.
Treasury was careful to say its estimates weren't definitive. Higher prices could "encourage greater investment in exploration activities and new discoveries". But its message was clear: mining would be unable to power Australia's economy forever. Sooner or later - within one lifetime or maybe two - we would have to face up to the question of what comes next.
It's the sort of question Australia has faced in the past. Those who grew up in the 1950s were forever being told the nation rode on the sheep's back. Back then the farm sector accounted for one-quarter of Australia's production. Today it accounts for a little over 2 per cent.
For the most part that transition away from agriculture has been managed smoothly (although for a while woolgrowers tried to stare change in the face by legislating a floor price for wool, with disastrous consequences). The subsequent decline of manufacturing has been more painful, mainly because of the number of people employed. In the 1960s manufacturing provided jobs to one in every four Australian workers. Today it employs just one in 12.
On Thursday, the Resources Minister, Martin Ferguson, appeared to ring in the next change. Speaking to the ABC's AM program after BHP shelved plans to build what would have been the world's biggest uranium mine at Olympic Dam in South Australia's arid north he declared the boom over.
"It's about time Tony Abbott stopped talking down Australia both at home and internationally and recognised how well placed we are," he said.
"But you've got to understand, the resources boom is over. We've done well - $270 billion in investment, the envy of the world. It has got tougher in the last six to 12 months. Look at Europe, the state of the European and global economy. Think about the difficulties in China, with still strong growth. The next round was always going to be difficult and I must say Olympic Dam was always a very, very challenging project - its sheer size."
The Prime Minister rushed to reassure the public that Ferguson hadn't meant to say what it sounded as if he had...
"He has indicated that prices have come off a bit - or, if you like, that the commodity price boom has passed its peak," she told Parliament. "But there is a huge investment phase with still some way to run and the export boom in resources still has a very long way to run."
The simultaneous industrialisation of the world's two most populated nations - China and India - has decades to run. Another 1.1 billion Asians are expected to move to cities over the next 30 years and they will require housing and supporting infrastructure. The Reserve Bank has estimated a typical Chinese apartment requires about six tonnes of steel, while 10 kilometres of metropolitan subway requires about 75,000 tonnes. Each tonne of steel produced requires about 1.7 tonnes of iron ore and more than half a tonne of coking coal.
But the plummeting mining profits and shelved resource projects have underscored the need for Australia to prepare for a time when it must rely on a different mix of exports, mostly knowledge-based services.
Resources exports have forged deep economic ties between Australia and Asia. But the mining boom may just be the prelude to the main game of Asia's economic emergence. By the middle of this century, more than half of the world's economic activity will occur in Asia.
This landmark shift creates economic possibilities unimagined even a decade ago. As the region's middle class becomes richer, demand for a long and different menu of Australian exports including foodstuffs, tourism, education, financial services, business services, professional services and niche manufactures will steeple.
But the shift from selling Asian customers bulk commodities such as coal, iron ore and gas to the far more nuanced task of exporting a wide range of goods and services into diverse Asian markets won't be easy.
"It is one thing to sell a homogenous minerals commodity to a minerals-hungry industrialist in China, and another thing entirely to design and market a sophisticated personal service to someone living in that culture," the former Treasury secretary Ken Henry said in a speech to business this week.
Australians have become much more aware of Asia, especially through holiday travel. But experts warn our knowledge is superficial. Even though so many more of us are travelling to Indonesia and other south-east Asian destinations there are fewer students studying Indonesian now than in the 1970s.
A recent business survey found less than half of Australian businesses with dealings in Asia have any senior executives or board members with Asia experience or language ability.
Asia's middle-classes are emerging as the world's biggest consumer group but many of them won't speak English. They will also have business cultures and political systems very different from Australia's.
Henry, who is writing the government's white paper on preparing Australia for the Asian century, says the nation needs to build its "Asia-relevant capabilities".
It will be crucial that Australian students gain a much deeper understanding of the culture and languages of Asia.
Businesses will also need to think differently. Many firms that are defined as Australian will have to start looking at themselves as regional and be willing to move components of their business to Asia in order to survive.
The Prime Minister and the Resources Minister are both right. The resources boom has ended, but only in a limited sense, for now.
It was kicked off last decade by an explosion of urbanisation in China. The first impact was to ramp up prices. With Australia and suppliers in Brazil and India ill-prepared, the only way China could get the iron ore it needed to cater for its rapidly expanding cities was to bid up the price from a long-term average of about $US13 a tonne in 2002 to an extraordinary $US180 a tonne by 2011.
For Australian miners the undreamt of price was pure profit - they hadn't needed to spend an extra cent to get it, which is why Kevin Rudd and Wayne Swan wanted to tax some of it away as super profits.
The price boom begat the investment boom as resources companies scrambled to mine more of the stuff. The investment boom is boosting the economy in its own right, drawing in billions in overseas capital and employing more workers constructing mines than will eventually be employed operating them.
But as miners across the world have ramped up production, prices have eased.
A year ago iron ore was fetching about $US180 a tonne but yesterday the price slipped below $US100 for the first time since the global financial crisis.
Investment will turn down soon. The Reserve Bank governor, Glenn Stevens, told Parliament's economics committee yesterday he expects investment spending to peak "within the next year or two" although it will remain at an unusually high level for a long time.
Big investments in gas production means exports are set to quintuple by the end of this decade.
But Peter Coleman, the chief executive of Woodside Petroleum, Australia's biggest gas producer, says that as commodity prices fall miners are becoming more cautious about investments.
"We're just seeing a natural part of the cycle to be honest, it's kind of like that long wave that comes into the beach, it's starting to break, that's what commodity cycles do, and then we'll pick up another one here soon, it just depends on picking the right one."
But even if the resource price boom is over and the resource investment boom coming to an end, our resource income boom still has some way to run.
This payoff from the investment boom - the extra resources Australia is able to ship out of the country - will stay with us for decades.
After China will come India. China has just passed a historic milestone: one half of its population now live in cities. India's rate of urbanisation is just a third so it has a long way to go. In the past 15 years India has shot up from being the world's 10th-biggest steel producer to the fourth.
While India is blessed with vast reserves of its own high quality iron ore, it is desperately short of the coking coal traditionally used to turn it into steel. Australia, with its abundant stocks of coking coal, looks to be in the box seat once more. It already exports more coal to India than China.
Even so, a director at Deloitte Access, Chris Richardson, says there could be a "tricky phase" for the Australian economy as commodity prices fall and we wait for recent investment in mining capacity to come on line.
"In late 2014 going into 2015 we are going to have to change gears from construction as an economic driver to export earnings," he said. "There could be a pothole. We don't know how big it will be."
Some parts of the economy will benefit as the effects of the mining boom fade a little. The Australian dollar will probably fall providing a boost to important sectors that have been badly affected by the high exchange rate like tourism, education and parts of manufacturing and retail. The firms in those sectors that have weathered the effects of the soaring exchange rate are likely to thrive if the dollar pulls back.
Meanwhile, Henry says there is no room for complacency. Australia should waste no time adapting and reforming its policy settings to make the most of opportunities beyond the mining boom.
"It would be a mistake to think that geography and/or geology alone will get us where we want to go and allow Australia somehow to ride the wave of the Asian century around us," he said.
Published in today's Canberra Times, Sydney Morning Herald and Age
Me on ABC 702 mornings, Wednesday August 22
9 minutes, play or CLICK THEN CLICK AGAIN to download mp3
Related Posts
. Your investment boom is about to end - Access
. How big is Australia's LNG boom?
. Our coking coal. India's next
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