This section provides an overview of the trend and pattern of each component of Australia’s foreign investment inflow. As shown in Table 5.1, the flow, measured in US
dollars, is a quarterly series, compiled by the IMF and made available on the International Investment Position Statistics database.26 Foreign inflows to Australia are divided broadly into total foreign equity flow and debt flow. As discussed in Chapter 4, the total equity inflow is further disaggregated into direct equity and portfolio equity inflows, while the
26
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total debt inflow is disaggregated into direct debt, portfolio debt, derivatives, loans, and other foreign debt.
In this section, we describe the various types of foreign investment flow to Australia and discuss the role played by public information in investment decision-making. The disaggregated series allows us to assess the effect of A-IFRS use on each variable and to determine whether this effect differs from one variable to another. Table 5.1 presents the stocks of various types of foreign investment and their definitions, which are similar to those described in the IMF’s Balance of Payments Manual.
Table 5. 1: Foreign investment inflows to Australia Variables Definitions
FPE Foreign portfolio equity is equity investments in Australian projects by foreign corporations, where the investment constitutes less than 10 % of the common shares.
FDE Foreign direct equity is equity investments, of non-residents in Australian corporations when there is ownership of 10 % or more of the common shares. FDD Foreign direct debt is short- and long-term borrowing from non-resident
(foreign) corporations and their affiliates by Australian residents.
FPD Foreign portfolio debt is short- and long-term debt of Australian residents owed to and by foreigners.
FL Foreign loans of Australian residents owed to non-residents. FDR Foreign derivatives owed by Australian residents.
OFD Other foreign debt is all other debt not mentioned above. TFE Total foreign equity (TFE): FDE + FPE.
TFD Total foreign debt (TFD): FDD + FPD +FDR + FL + OFD.
TFI Total foreign investment (TFI): TFE + TFD
Sources of data: Balance of Payment and International Investment Position Statistics (BOP/IIP). http://data.imf.org/?sk=7A51304B-6426-40C0-83DD-CA473CA1FD52.
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Total Foreign Investment
Figure 5.1 depicts Australia’s TFI and its disaggregated components, that is, TFD and TFE. For the period 1989–2015, it shows an increase in TFI, which reflects the dependence of the Australian economy on foreign investment to close the investment savings gap. This is a common feature of developed countries. It appears that the increase was more rapid from 2002 onwards. Likewise, both TFD and TFE show a general upward trend after 2002.
Figure 5. 1: Australia’s Total Foreign Investment (TFI) disaggregated as Total Debt (TFD) and Total Equity (TFE) in US$bn, 1989-2015
Source: calculated from IIP data.
Figure 5.2 indicates that, during the period examined in this study, total foreign debt (TFD) constituted the largest portion of foreign investment inflows (TFI) to Australia. During the Global Financial Liberalisation (GFL) period of 1993–1994, total equity (TFE) as a proportion of total investment increased by 5%. During the Asian Financial Crisis (AFC) of 1997–1999, total equity (TFE) and total debt (TFD) both decreased, as shown in Figure 5.1; however, TFE was affected to a lesser degree than TFD. This suggests that the latter
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was more vulnerable to the effects of the AFC, than the former, and these series only reverts to their long-term trend around 2001-2002, following the financial turmoil in the US markets. During the growth period, from 2002 to 2007, total debt (TFD) and total equity (TFE) remained stable at 59% and 41%, respectively, of total investment. This suggests that both were affected in a similar way.27 The period of growth was followed by a major but short-term decline, both in debt and equity flows, during the GFC of 2007– 2009, and by the very end of this period, equity was affected more than debt, by almost 10% of the total investment.
It is evident, from Figures 5.1 and 5.2, that focusing only on total foreign inflows masks the behaviour of the disaggregated series. Therefore, in order to gain an in-depth understanding of the effects of A-IFRS on foreign investment inflows, it is essential to analyse the disaggregated foreign investment inflows, as well.
27
Previous studies (e.g., Vermeulen & De Haan, 2014) use either a ratio, or net foreign investment to explain the behaviour of foreign capital flows. However, a comparison of Figures 5.1 and 5.2 reveals that the behaviour of TFE and TFD during the period 2002Q4 to 2007Q4 is obscured by netting one against the other. To avoid a loss of information, therefore, it is preferable to study the time sequences of the components, separately, as gross amounts.
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Figure 5. 2: Total Foreign Debt and Total Foreign Equity as a Percentage of Total Foreign Investment, and the Growth rate
Source: calculated from IIP data.
Equity Investment
The behaviour of total equity (TFE), and its components, portfolio equity (FPE) and direct equity (FDE) are shown in Figure 5.3. There is a notable fluctuation in the performance of both components, with considerable growth after 2002, followed by a dip in 2008, due to the GFC. Another decline in the equity series, especially of FDE, can be observed around 2012.28
28
This could be due to the decline in commodity-prices, after the boom of 2012 (see, https://www.rba.gov.au/speeches/2016/sp-ag-2016-09-13.html.
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Figure 5. 3: Total Foreign Equity (TFI) Disaggregated as Foreign Direct Equity (FDE) and Foreign Portfolio Equity (FPE) in US$bn, 1989-2015
Source: calculated from IIP data.
Debt Investment
In Figure 5.4, total foreign debt (TFD) is made up of five distinct components: (1) direct debt (FDD), (2) portfolio debt (FPD), (3) derivative (FDR), (4) loans (FL) and (5) other debt (OFD). FPD constitutes the largest portion of TFD. After 2002, all components increased slightly. During the GFC period, FPD appears to be affected more than any other component. However, this effect was only short-lived, around 2008, after which it experienced a rapid increase in inflows.
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Figure 5. 4: Total Foreign Debt (TFD) Disaggregated to Different Components in US$bn, 1989-2015
Source: Calculated from IIP data.
There is an interesting observation to be made from the above figures. As all the preceding figures are based on raw data, they can give a misleading impression of the growth of the various components of foreign investment inflow. This growth appears to be exponential, a basic feature of many economic time series. However, after the data is transformed into logs, the patterns of growth, in all the series appear to be nearly linear. For example, in Figure 5.5, the log-transformed data clearly depicts these patterns in TFI inflows as being almost linear.29 Another notable feature of Figure 5.5 is that, from the end of 2002 through to the beginning of 2008, TFI grows at a greater rate than its long-run trend, which is a feature common to most of the component variables. This is consistent with the expectation that Australia’s foreign investment inflows increased after the application of A-IFRS. The statistical tests, reported in Section 5.4 seek to confirm this expectation. However, because other contemporaneous events, such as the commodity-price boom,
29
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which are detailed in Figure 4.2, occurred close to the A-IFRS event window (in 2003), they may provide an alternative explanation for the increase in Australia’s foreign investment inflows at this time. In addition, as is evident in all figures, the financial crises that occurred during the period of the study also affected, to varying degrees, the behaviour of the individual components of foreign investment, an effect that, if ignored, could cause the results of the study to be biased.
Another interesting observation from the figures depicting raw and log data, is that after 2012, there is a significant change in the pattern of the time series. As this event is outside the period of interest to this thesis, and could potentially affect the outcome of the study, data from 2013 to 2015 are omitted from the tests.
It would seem that none of the time series under consideration are stationary in their raw form. However, Figure 5.5 suggests that the data fluctuate around a deterministic trend. Therefore, in the next section, in order to clarify the true behaviour of the data, application of a logarithm is followed by the traditional unit-root tests to determine whether the variables are stationary or non-stationary, with or without trend. This is a preliminary step to the empirical analysis of the structural break test.
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Figure 5. 5: Time Sequences of the Total Foreign Investment Inflow, US$ bn, in Natural Logs, 1989 – 2015.