6. Financial Sector
Capital Markets and Portfolio Investment
The Australian Government takes a favorable stance towards foreign portfolio investment with no restrictions on inward flows of debt or equity. Indeed, access to foreign capital markets is crucial to the Australian economy given its relatively small domestic fixed income markets. Australian capital markets are generally efficient and are able to provide financing options to businesses. While the Australian equity market is one of the largest and most liquid in the world, non-financial firms do face a number of barriers in accessing the corporate bond market. Large firms are more likely to use public equity and smaller firms more likely to use retained earnings and debt from banks and intermediaries. Australia’s corporate bond market is relatively small, driving many Australian companies to issue debt instruments in the U.S. market. Foreign investors are able to get credit from domestic institutions on market terms.
Money and Banking System
Australia’s banking system is robust, highly evolved, and international in focus. Bank profitability is strong and has been supported by further improvements in asset performance.
Total assets of the four largest banks is USD 2.6 trillion, 21 percent of the market value of all listed Australian companies. According to Australia’s central bank, the Reserve Bank of Australia or RBA, the ratio of non-performing assets to total loans was just under 1 percent at the end of 2017, having remained at around that level for the last four years after falling from highs of nearly 2 percent following the Global Financial Crisis. The RBA is responsible for monitoring and reporting on the stability of the financial sector, while the Australian Prudential Regulatory Authority (APRA) monitors individual institutions. Foreign banks are allowed to operate as a branch or a subsidiary in Australia. Australia has generally taken an open approach to allowing foreign companies to operate in the financial sector, largely to ensure sufficient competition in an otherwise small domestic market.
The RBA is responsible for monitoring and regulating payments systems in Australia. It has recently overseen the creation of the New Payments Platform that came on line in early 2018, allowing fast processing of low value transactions.
Foreign Exchange and Remittances
The Commonwealth Government formulates exchange control policies with the advice of the Reserve Bank of Australia (RBA) and the Treasury. The RBA, charged with protecting the national currency, has the authority to implement exchange controls, although there are currently none in place.
The Australian dollar is a fully convertible and floating currency. The Commonwealth Government does not maintain currency controls or limit remittances. Such payments are processed through standard commercial channels, without governmental interference or delay.
Australia does not limit investment remittances.
Sovereign Wealth Funds
Australia’s sovereign wealth fund, the Future Fund, is a financial asset investment fund owned by the Australian Government. The Fund’s objective is to enhance the ability of future Australian Governments to discharge unfunded superannuation (pension) liabilities expected after 2020, when an ageing population is likely to place significant pressures on Government finances. As a founding member of the International Forum of Sovereign Wealth Fund (IFSWF), the Future Fund’s structure, governance and investment approach is in full alignment with the Generally Accepted Principles and Practices for Sovereign Wealth Funds (the “Santiago principles”).
In addition to the Future Fund, the Australian government has a number of “nation-building funds”, the DisabilityCare Fund, and the Medical Research Future Fund. The Building Australia Fund enhances the Commonwealth’s ability to make payments towards the creation or development of transport, communications, energy, and water infrastructure and in relation to eligible national broadband matters. The Education Investment Fund makes payments towards the creation or development of higher education infrastructure, research infrastructure, vocational education and training infrastructure, and eligible education infrastructure. The DisablityCare Australia Fund aims to reimburse States, Territories and the Commonwealth for expenditure incurred in relation to the National Disability Insurance Scheme Act 2013 and to fund implementation of that Act in its initial period of operation. The Medical Research Future Fund provides grants of financial assistance to support medical research and medical innovation.
As of December 31, 2018, the value of the Future Fund totaled AUD 147 billion (USD 103 billion). The value of the Education Investment Fund totaled AUD 3.9 billion (USD 2.7 billion); the Building Australia Fund totaled AUD 3.9 billion (USD 2.7 billion); the DisabilityCare Australia Fund totaled AUD 14.4 billion (USD 10.1 billion), and the Medical Research Future Fund totaled AUD 9.4 billion (USD 6.6 billion).