Key facts

Population:

23 million¹

GDP per capita 2013 (US dollars):

64,863²

GDP percent change 2013:

2.43²

Current account balance 2013 (US dollars/billions):

-44.217²

Inflation (average consumer prices) percent change:

(2013) 2.45²

Ease of doing business (2013) rank:

11 out of 189 globally¹

Corruption perceptions index (2013) rank:

9 out of 175 globally³

A little over 130 years after Captain James Cook’s taking possession of the east coast Australia in the name of Great Britain, six colonies that were created in the 18^th and 19^th centuries federated in 1901 and the Commonwealth of Australia was born. Australia quickly made the most of its natural resource wealth, developing its agricultural and manufacturing sectors, before becoming an internationally competitive, advanced market economy.

One of the most biologically diverse countries in the world, Australia is home to 10% of the world’s biodiversity. It is also the driest inhabited continent on earth, making it particularly vulnerable to the challenges of climate change.

Although it emerged from the 2007/2008 financial crisis less damaged than some other developed economies, Australia has recently been hit by a slowdown in exports, particularly in mineral and commodity exports, which is the country’s largest export sector. A Bureau of Resources and Energy Economics report published in September 2014 forecasted a 1.2% drop in resources and energy export earnings in the period 2014-2015, to A$192 billion (from A$195 billion the previous year).

Despite rising export volumes, the drop in overall exports has been fuelled by falling iron ore and coal prices, stagnating growth in China (a key export partner for Australia), and a weakened Australian dollar.

“The slowdown in exports has been more about prices than about volume,” Felicity Emmett, Senior Economist at ANZ tells Treasury Today Asia. “We have seen a very large fall in the iron ore price this year, from over US$135 at the beginning of the year to around US$80 now. Iron ore alone represents around 20% of Australia’s exports, so this fall in prices has had a material impact on overall export receipts and has seen the country’s trade deficit widen sharply in the last few months. Export volumes are still growing quite strongly and contributing to economic growth – net exports look set to make another solid contribution to growth in 2014.”

An economy in transition

Looking beyond this commodity export slump, the Australian economy is undergoing something of a transition. As the country’s mining boom tails off, the question is whether other areas will step in to fuel growth.

“This will be an important issue for the Australian economy over the next couple of years,” says ANZ’s Emmett. “Mining investment grew very strongly until recently, from 2% of GDP in 2005 to around 8% in late 2012. This increase was largely made up of a small number of very large, multi-billion dollar projects, especially in the liquefied natural gas sector. Now those projects are coming to completion, we will see mining investment step down very sharply over the next few years, which will act as a real headwind to growth.” The country’s current high export volumes reflect the end product of the mining investment, but other sectors will ultimately have to pick up some of the economic burden. “There will now be a transition from mining growth to non-mining growth – that’s why interest rates are quite low, and are expected to stay low for well into 2015,” adds Emmett.

Dale Luong, Group Treasurer at Australian Pharmaceutical Industries (API), is optimistic Australia’s economy can cope with the transition. “The mining investment boom has been the real impetus for economic growth in Australia over the last ten years, and we have seen continuous growth in the Australian economy during this time,” he says. “Even with the slowdown in exports, provided that slowdown is controlled, we shouldn’t see too much of an impact on the economy other than that of a normal transition between industries. As the mining sector cools down, the industrial and services part of the economy will take some of that slack.”

“There will now be a transition from mining growth to non-mining growth – that’s why interest rates are quite low, and are expected to stay low for well into 2015.”

Indeed, mining has shaped Australia’s economy in modern times, having both positive and negative effects. In an August 2014 research paper, Australia’s central bank, the Reserve Bank of Australia (RBA), said the mining boom had “substantially increased Australian living standards.” By 2013, “we estimate that it had raised real per capita household disposable income by 13%, raised real wages by 6% and lowered the unemployment rate by about 1¼ percentage points,” said the RBA. However, mining has also had negative impacts on the Australian economy. “The boom has led to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture,” explained the central bank. It also said the phenomenon known as the ‘Dutch disease’ – that is the deindustrialisation that sometimes accompanies resource booms – had not been strong in Australia’s case.

Australia has very close links with other countries in the Asia Pacific region, and is a member of the Asia Pacific Economic Cooperation (APEC). China is its main trading partner for both imports and exports by some distance. Its top export partners are China (29.5%), Japan (19.3%), South Korea (8%), and India (4.9%), while its leading import partners are China (18.4%), the US (11.7%), Japan (7.9%), and Singapore (6%). Its close trading relationship with China was given a boost in 2013 when an agreement with Beijing allowed direct convertibility between the AUD and the RMB.

Banking and payments

Australia has 21 domestic banks, eight subsidiaries of foreign banks, 41 branches of foreign banks and 15 representative offices of foreign banks. Furthermore, there are nine building societies and 85 credit unions operating in the country. The Australian banking system is highly concentrated and is dominated by the ‘Big Four’ of (in descending order of total assets) National Australia Bank (NAB), Commonwealth Bank of Australia, Australia and New Zealand Banking Group (ANZ), and Westpac. These four banks account for approximately two-thirds of the banking sector’s total assets. Regulation of the sector by the Australian Prudential Regulation Authority (APRA) is separate from the central bank, and this regulation stipulates that a merger of any of the four largest banks is not permitted.

Electronic credit transfers account for more than a quarter of all cashless payments in Australia and is the dominant cashless payment instrument in terms of value. Credit transfers accounted for 51.4% of the total value of cashless payments in 2013. Cash remains an important payment medium in Australia, particularly for low‑value retail transactions. Cheque usage has declined by approximately 64% over the past decade due to the increasing preference for electronic payments for both high-value and low-value transactions. The vast majority of cheques are now used for company-to-company transactions or personal transactions.

Direct debits are processed via BECS on a next-day basis and accounted for approximately 9.6% of all cashless payments in 2013 and 37.8% of the total value. In 2013, the volume and value of direct debits processed increased 9.4% and 0.7% respectively on 2012 figures, to 807.53 million transactions, with a total value of A$5,897.64 billion.

There were approximately 38.1 million debit cards and 15.6 million credit and charge cards in circulation in Australia the end of the first quarter of 2014. Debit and credit card transactions accounted for 40.2% and 23.01% respectively of all cashless payments in 2013.

There were approximately 38.1 million debit cards and 15.6 million credit and charge cards in circulation in Australia at the end of the first quarter of 2014. Debit and credit card transactions accounted for 40.2% and 23.01% respectively of all cashless payments in 2013. In value terms, however, they accounted for just 1.2% and 1.7% respectively. There are two debit card systems in Australia: The EFTPOS system accounts for approximately 85% of the country’s debit card transactions. EFTPOS Payments Australia, a company owned by its 14 founding members, has commercial responsibility for managing and promoting the national EFTPOS network (composed of seven proprietary networks). Australia’s national ATM network is composed of ten proprietary ATM networks; and the system operating under the Visa and MasterCard brands.

RITS (Reserve Bank Information and Transfer System), Australia’s national real‑time gross settlement (RTGS) system, is operated by the RBA. Final settlement of payment system obligations occurs through transactions on exchange settlement accounts (ESAs) at the RBA. More than 90% of interbank payments, by value, are settled on an RTGS basis.

Electronic payments are supported by Australia’s real-time gross settlement (RTGS) system supported by the central reserve bank. At the time of writing, more than 70% of daily transactions are processed through this system.

APCA (Australian Payments Clearing Association Ltd) is responsible for supervising and co-ordinating four different clearing systems:

• HVCS (High-Value Clearing System), an electronic high-value exchange and multilateral net settlement system.
• APCS (Australian Paper Clearing System), an interbank paper-based exchange and settlement system.
• BECS (Bulk Electronic Clearing System), an interbank bulk electronic exchange and settlement system.
• CECS (Consumer Electronic Clearing System), an exchange and settlement system for card-based EFTPOS and ATM transactions.

Plans are also in place to introduce a real-time payment system for retail payments in 2016.

RITS settles interbank obligations arising from participants’ transactions in Austraclear and the Australian Stock Exchange’s Clearing House Electronic Sub-register System (CHESS), both of which are securities settlement systems. In addition, RITS effects the final settlement of participants’ net balances originating from the country’s other clearing houses.

Cash management

API’s Luong says corporates in Australia can expect more or less the same suite of cash and liquidity management services from most banks as their counterparts in Europe or North America. “The Australian market is very well serviced not only by its local banks but also by branches or subsidiaries of foreign banks.”

Notional pooling is allowed between resident and non-resident companies, and cross-border notional pooling is permitted although not widely practised. Cash concentration is also allowed between resident and non-resident companies, and cross-border sweeping is permitted and offered by the larger commercial banks. Cross-border payments are routed via SWIFT and settled through accounts held with correspondent banks abroad.

Electronic banking is offered by Australia’s leading banks, and the Australian Bankers’ Association (ABA), with the aid of the banking community, has developed and established bank-independent electronic banking standards. These standards apply to EFTPOS terminals, ATMs, automated telephone banking and internet banking. Some of the services offered include balance and transaction reporting and domestic and cross-border payment initiation.

Despite its relatively sound banking system and developed payments infrastructure, few MNCs have chosen to establish an Asia Pacific treasury hub in Australia, largely for logistical reasons. “Although the payments system is very strong and robust, the location and time zone often don’t align well with a central treasury operation being based here,” says API’s Luong. “Corporates typically base their regional treasury centres in South East Asia for example, rather than Australia.”

The Australian dollar (AUD) has a free-floating exchange rate, and both domestic currency accounts and foreign exchange accounts can be held by Australian residents domestically and abroad; resident domestic currency accounts are freely convertible into foreign currency via licensed dealers. Non-resident bank accounts are permitted in foreign and domestic currencies, and non-resident domestic currency accounts are also freely convertible into foreign currency via licensed dealers.

Taxation is handled by the Australian Taxation Office (ATO), and only the federal government taxes corporate income – corporate tax is levied at a rate of 30%. There is no state or municipal tax on corporate income.

Attractive environment for business

The spectre of household debt that continues to blight many economies (such as the Eurozone) is not, for the moment at least, a threat to the nation’s economic growth. “Household debt as a proportion of income has been fairly steady at around 150% of household income, which is quite a high level in international terms,” says ANZ’s Emmett. “But many households have been paying off debt at a very rapid rate, and households are paying on average more than A$9,000 extra on their mortgage repayments each year. New housing finance has grown strongly over the past few years, but because people are still paying down debt, credit growth has remained relatively modest so we have not seen household debt as a proportion of incomes pick up at all.”

She adds that this modest level of household debt could in fact be overstated owing to the high proportion of households in Australia who have offset mortgages, which distorts the figure. However, house price inflation is a concern. “The central bank is certainly not concerned about the level of indebtedness of households, although they are starting to worry about house prices in Australia, particularly in the Sydney area, where prices went up around 18% over the last year. A lot of that was driven by investor activity, and the reserve bank is concerned about speculative elements in the housing market, although overall house price growth in an aggregate sense is not at a worrying level,” she says.

“There are certainly a lot of reasons why corporates would want to do business in Australia,” says API’s Luong. “We have a stable political environment, which is a key factor in encouraging business activity, and a fully unrestricted currency which is the fifth-most traded in the world.”

1. World Bank
2. IMF World Economic Outlook April 2014
3. Transparency International