Morgan Stanley just came out with a cracker. It reckons Australia could become a global gas superpower in a few years’ time, with LNG exports set to generate a current account surplus for the first time in 40 years.
We don’t doubt that LNG exports are set to increase massively in the years ahead. But to claim it will turn around a 40 year deficit smacks of a PR piece.
Firstly, consider that in 2012/13 Australia’s current account deficit was $54.9 billion, largely consisting of a $17.85 billion trade deficit and a $34.9 billion net income deficit. That’s with an iron ore price and volume boom.
So let’s be generous and say that the LNG export boom will bring us a trade surplus. We say it’s generous because it’s something the iron ore boom, despite all the hype, has been unable to provide.
Then you’ve still got a $35 billion income deficit to deal with. That’s the interest and dividends payed out after netting Australia’s assets abroad against foreigners’ assets here.
Foreigners have $854 billion in net assets in Australia (meaning Australia has a net foreign debt position of $854 billion) which means we have to pay dividends and interest on that capital each year. In 2012/13, the cost of borrowing this much money (thanks, housing boom) was nearly $35 billion.
While LNG exports might be massive in the coming years, you have to keep in mind that not all of the capital expenditure to build the infrastructure came from local investment. Foreign capital contributed too. So to the extent that these projects generate decent returns on capital (an uncertain prospect given the cost blowouts now occurring) some of those returns will flow out of the country, contributing to a current account deficit.
The reality is that if Australia does get back to a current account surplus, it will be a painful adjustment. That’s because a current account surplus signifies living within ones means. That’s something Australia hasn’t done in decades.
While LNG exports will no doubt assist in that adjustment, falling imports (from lower consumption?) will play the major part.
So is Morgan Stanley predicting an export boom and an import bust? We don’t know. But that’s about the only realistic way Australia is ever going to move into a structural current account surplus.
If that’s the case, you might want to have an investment strategy to prepare for the bust.
Tomorrow, we’ll look at another important piece of the pie for Australia, and explain why government deficits will be a feature of the economic landscape for years to come.
It’s really astounding to think about how badly our politicians have blown the boom. It’s a national disgrace, with no one held accountable. We’ll try to rectify that somewhat tomorrow.
for The Markets and Money Australia