Australia's exposure to regional economic disruption: Investment - Dr Jeffrey Wilson
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Australia’s exposure
to regional economic
disruption: Investment
Dr Jeffrey Wilson
VOL 5 INDO-PACIFIC ANALYSIS BRIEFS 2020INDO-PACIFIC ANALYSIS
BRIEFS 2020
The Perth USAsia Centre’s Indo-
Pacific Analysis Briefs seek to provide
perceptive and contemporary insights
from across the region. The series
features leading analysts from Asia,
Australia and the US to deliver up-to-
the-minute assessments on issues of
national and regional importance. This
series will shine a light on the issues
that remain critically important to
Australia and the Indo-Pacific at a time
when global events may otherwise
dominate the news cycle.
AUTHOR Dr Jeffrey Wilson
Research Director
Dr Jeffrey Wilson is the Research Director at the Perth USAsia Centre. He provides leadership and strategic
direction in developing the Centre’s research program across its publications, policy and dialogue activities.
Dr Wilson specialises in the regional economic integration of the Indo-Pacific. He has particular expertise in the
politics of trade agreements, regional economic institutions, and Australia’s economic ties with Asia. He has been
featured in local and international media outlets, contributed to a range of track two dialogues between Australia
and key regional partners, and supported policy development through consultancy, publication and advisory work.
A political scientist by training, Dr Wilson’s research has been recognised as a recipient of the University of Sydney
Medal (2006) and the Vice-Chancellor’s Excellence in Research Award (Murdoch, 2015). He was the inaugural winner
of the Australian Institute of International Affairs’ Boyer Prize (2012) for his work on the politics of China-Australia
mining investment. He holds a Bachelor of Economic and Social Sciences (Honours) from the University of Sydney,
and a PhD in International Relations from the Australian National University.KEY POINTS
→ The COVID-related recession will significantly dampen
international capital flows in 2020 3
→ Australia is a net capital importer which depends on
foreign investment for its economic performance
India’s economic dependence on China and Indo-Pacific integration
→ Australia’s investment exposure to the US and Europe
– the economies most adversely affected by COVID-19 – will
amplify this challenge
→ The resource, manufacturing and real estate sectors will
be among those most affected
→ Recent changes to FIRB processes will place additional
regulatory burdens on firms seeking foreign investment
Introduction
As COVID-19 batters countries around the world, Australia now faces its worst
economic shock in over a generation. Most of the economic policy debate in Australia
has focused on the domestic side: how can government best stimulate the economy
as public health measures close many parts of it down?
But the international side of the economic crisis is equally important. Australia is a
highly open economy, with deep links to global markets. Indeed, our strongest ties
are with partners in the Indo-Pacific, a region home to the countries first and worst
affected by COVID-19.
Foreign investment is a critical – but often unappreciated – mechanism connecting
Australia to the global economy. In 2018, there was $3.5 trillion of accumulated
foreign investment in Australia, while Australian companies held $2.5 trillion of
assets abroad. Together, these two-way investment stocks are equivalent to 3.2
percent of GDP.
While smaller in value than trade, foreign investment offers a combined package
of capital, technology and marketing channels that are essential for Australian
businesses participating in world markets.
Foreign investment also makes a material contribution to the Australian
macroeconomy. In the decade to 2018, Australia had net capital inflows of $548
billion, equivalent to 16 percent of all private investment.
But as COVID-19 forces country after country into recession, international capital
markets will be badly affected. Stock markets have posted record collapses1, banking
systems are under intense strain2, and business confidence is at an all-time low3.
As the economic crisis crimps international capital flows, how will the Australian
economy be affected?Australia’s investment partners are badly affected by COVID-19
There is a prominent geographic bias to Australia’s international investment relationships.
Of foreign investment stocks (both inwards and outwards), just under two-thirds are with
‘traditional’ partners: the US and EU. Regional partners in the Indo-Pacific (Japan, China and
ASEAN), even when combined together, come in at third place with only 15 percent.
While Australia is heavily trade-exposed4 to the Indo-Pacific region, its investment ties remains
decidedly ‘old world’.
Australian two-way investment partners, 2018 This means the economic impact of the
4 COVID-19 recession will affect Australia’s
6% Japan trade and investment relationships in
5% China/HK markedly different ways.
4% ASEAN
India’s economic dependence on China and Indo-Pacific integration
Trade partners in the Indo-Pacific – China,
32% Japan, Korea and Southeast Asia – were
EU
amongst the first countries hit by the
26% pandemic. However, their economies will
Others
also be some of the quickest to recover.
27% IMF forecasts suggest they will perform
US
comparatively well by international
standards in 2020, with positive growth
Source: Author’s calculations, from ABS International Investment rates in China and India.
Position, Australia: Supplementary Statistics (Cat. No. 5352.0)
By contrast, Australia’s investment partners are taking a later but deeper hit:
• At time of writing, the US has the world’s highest COVID-19 case count, with the next five
worst-affected the five largest European countries (Spain, Italy, Germany, France and UK).
• The IMF forecasts deep recessions of around -6 percent in these economies, significantly
worse than the -3 percent global average.
• Hong Kong – a critical hub for Asian investments into Australia – is also forecast to contract
by -4.8 percent.
Growth forecasts in Australia’s economic partners, 2020
2
Hong Kong
ASEAN-5
Germany
France
Japan
Korea
1
USA
UK
0
Real GDP growth, forecast 2020 (%)
China
India
-1
-2
Source: IMF, World Economic Outlook April 2020.
-3
-4
-5
-6
-7
-8
Investment Partners Trade Partners WorldThis will make it significantly harder for Australian companies to attract investment from
traditional partners.
As stock markets collapse and financial institutions come under strain, the supply of capital
from these economies has become extremely tight. Australia will suffer a dramatic fall in foreign
investment inflows, and may need to look to new investment partners in less-affected economies.
Concentrated sectoral impacts: Resources, manufacturing and real estate
Foreign investment in Australia is also concentrated in a narrow set of industries. In 2018, the
top five recipients were: 5
MINING AND FINANCE AND WHOLESALE AND
MANUFACTURING: REAL ESTATE:
QUARRYING: INSURANCE: RETAIL TRADE:
India’s economic dependence on China and Indo-Pacific integration
$366 billion of
accumulated $108 billion $108 billion $102 billion $57 billion
investment stocks
Together, these five sectors account for 77 percent of the foreign investment in Australia.
They will all be impacted by a downturn in the supply of foreign capital.
Despite accounting for half of Australia’ inward foreign investment, the effects on the resources
sector will be moderate. As mine sites have been classified as an essential service, the industry
has been less affected by public health measures than others. Its trade exposure to the better-
performing Chinese economy5 means it will be better placed to attract investment than others.
By contrast, the effects on the real estate industry will be more pronounced. As Australian foreign
investment policy deliberately channels real estate investment into new dwelling construction6,
most capital inflows support construction projects. With housing construction already under a
cloud due7 to depressed domestic conditions, a reduction in foreign investment will be a further
drag on a sector that employs over a million people8.
The manufacturing sector faces mixed fortunes. On one hand, interruptions to global value
chains9 has increased interest in developing Australian manufacturing capabilities, particularly
for medical technologies and other high-value critical equipment10. But on the other, the
technological and financial resources required to develop these manufacturing capabilities are
usually supplied through foreign investment packages. As US and European manufacturing
corporations face severe economic downturns at home, their ability to invest in projects in
Australia will be significantly constrained.
A balancing act for the FIRB?
Sustaining Australia’s international investment relationships will become even more challenging
due to recent changes to Australia’s foreign investment framework.
Australia is very open to foreign investment, with applications reviewed on a case-by-case basis
by the Foreign Investment Review Board (FIRB). The FIRB approves the overwhelming majority
of applications automatically, and only conducts reviews on major investments: such as in
sensitive sectors such as real estate11, from state-owned enterprises12, or those over specified
value thresholds13.
However, on 29 March the Treasurer announced temporary changes14 to this system, which
now require all foreign investments – irrespective of their value or sector – to obtain review
and approval.
Given the administrative workload this would require, the timeframe for FIRB reviews was also
extended from 30 days to six months.
These changes are designed to protect Australian companies from “fire-sale” acquisitions. With
the Australian stock market collapsing due to COVID-19, there are concerns that predatory
takeovers15 might be mounted against firms facing temporary distress.Importantly, the changes only require review of all investments, and do not indicate that
applications will necessarily be blocked. As the Treasurer explained16:
“This is not an investment freeze. Australia is open for business
and recognises investment at this time can be beneficial if in the
national interest.”
However, it will also add significant regulatory burdens for both foreign investors and their
Australian partners.
6 Many investments that previously only required notification – including those below $1.2 billion
from FTA partners – must now complete a full FIRB assessment process. Extended processing
times will also add uncertainty to the application process.
India’s economic dependence on China and Indo-Pacific integration
There are already reports that firms in the agriculture17, commercial real estate18 and finance19
sectors will struggle to secure investment as a result of the added regulatory complexity.
In times of economic distress, the normal Australian response has been to encourage, rather
than restrict, foreign investment. And while these are clearly not normal times, the COVID-
related recession makes the imperative towards attracting foreign investment ever more
important. In coming months, the FIRB will need to strike a very careful balance between these
competing imperatives.
Note: Unless otherwise indicated, all figures in this analysis brief are calculated from the Australian Bureau of Statistics’ International
Investment Position, Australia: Supplementary Statistics 2018. 20
Endnotes
1 Kylie-Anne Richards (2020), ‘This coronavirus share market crash is unlike those that have gone before it’, 16 March, The
Conversation, https://theconversation.com/this-coronavirus-share-market-crash-is-unlike-those-that-have-gone-before-it-133691.
2 The Economist (2020), ‘How sick might banks get?’, 8 April, https://www.economist.com/finance-and-economics/2020/04/08/how-
sick-might-banks-get.
3 Roy Morgan (2020), ‘Business Confidence hits a record low of 95.1 in March – declines accelerated throughout the month’, April 6,
http://www.roymorgan.com/findings/8368-roy-morgan-business-confidence-march-2020-202004060450.
4 Jeffrey Wilson (2020), ‘Australia’s exposure to regional trade disruption: Trade’, 2 April, https://perthusasia.edu.au/blog/
australia%E2%80%99s-exposure-to-regional-economic-disrupti.
5 SmallCaps (2020), ‘Outlook for key mining metals in 2020 after COVID-19 hit’, 26 March, https://smallcaps.com.au/outlook-mining-
metals-2020-covid-19-hit/.
6 Foreign Investment Review Board (2020), Residential real estate, https://firb.gov.au/residential-real-estate.
7 The Guardian (2020), ‘This article is more than 2 months old Australian housing market will hit the wall in coronavirus recession,
experts say’, 20 March, https://www.theguardian.com/australia-news/2020/mar/20/australian-housing-market-will-hit-the-wall-in-
coronavirus-recession-experts-say.
8 Australian Bureau of Statistics (2020), Labour Force, Australia, Detailed, Quarterly, Feb 2020, Cat No. 6291.0.55.003
9 Business Insider (2020), ‘The coronavirus outbreak is disrupting supply chains around the world’, 26 March. https://www.
businessinsider.com/covid-19-disrupting-global-supply-chains-how-companies-can-react-2020-3?r=AU&IR=T.
10 Financial Times (2020), ‘Coronavirus shortages prompt Australia to bring manufacturing home’, 14 April, medical technologies and
other high-value critical equipment.
11 Foreign Investment Review Board (2020), Residential real estate, https://firb.gov.au/residential-real-estate.
12 Foreign Investment Review Board (2020), Foreign government investors [GN23], https://firb.gov.au/guidance-resources/guidance-
notes/gn23.
13 Foreign Investment Review Board (2020), Business, https://firb.gov.au/investment/business.
14 Foreign Investment Review Board (2020), Temporary measures in response to the coronavirus [GN53], https://firb.gov.au/guidance-
resources/guidance-notes/gn53.
15 Sydney Morning Herald (2020), ‘Foreign buyers face scrutiny on every bid after sharemarket slupm, 30 March, https://www.smh.com.
au/politics/federal/foreign-buyers-face-scrutiny-on-every-bid-after-sharemarket-slump-20200329-p54f1s.html.
16 Josh Frydenberg (2020), ‘Changes to foreign investment framework’, 29 March, https://ministers.treasury.gov.au/ministers/josh-
frydenberg-2018/media-releases/changes-foreign-investment-framework.
17 ABC News (2020), ‘Foreign investment crackdown sparks financial worries for cash-strapped farmers’, 16 April, https://www.abc.
net.au/news/rural/2020-04-16/coronavirus-foreign-investment-crackdown-sparks-warning-farmers/12150292.
18 Commercial Real Estate (2020), ‘FIRB changes could give local buyers of commercial property a leg-up with vendors who need
a quick sale’, 31 March, https://www.commercialrealestate.com.au/news/firb-changes-could-give-local-buyers-of-commercial-
property-a-leg-up-with-vendors-who-need-a-quick-sale-945285/.
19 The Australian (2020), ‘New FIRB rule ‘risks $11bn of private equity’, 30 March, https://www.theaustralian.com.au/business/
financial-services/new-firb-rule-risks-11bn-of-private-equity/news-story/65cd841b29cecd0d314b53a52a2fddf2.
20 Australian Bureau of Statistics (2019), International Investment Position, Australia: Supplementary Statistics, 2018, Cat No. 5352.0.About the Perth USAsia Centre
The Perth USAsia Centre, located at The University of Western Australia, is a nonpartisan, not-
for-profit institution strengthening relationships and strategic thinking between Australia, the
Indo-Pacific and the USA. The Centre is a leading think tank focusing on geopolitical issues,
policy development and building a strategic affairs community across government, business
and academia. Since the Centre’s inception in 2013, the Centre has collaborated with over thirty 7
partners to convene more than four hundred events across sixteen cities in eight countries,
engaging a world-class community of more than 10,000 strategic thinkers and leaders.
India’s economic dependence on China and Indo-Pacific integration
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