The report said this high investment level has resulted in the country consistently running current account deficits and building up “one of the largest negative net international investment positions among advanced economies”.
“The large size of the negative net international investment position can be a vulnerability in times of global financial market stress,” it stated.
“Australia contrasts with some other current-account deficit countries in that it also has a relatively high saving rate, but the level of investment is even higher.”
Moody’s Investors Service said while the country’s net international investment position appears to have improved this was driven mainly by price and exchange rate effects.
“Holding the prices of financial instruments and the exchange rates constant, the net international investment position of Australia has actually weakened seven per cent, emphasizing the country’s reliance on foreign sources,” said the report.
The report said the rising geographic concentration of exports and higher merchandise concentration within the mining sector is also a risk.
“Combined, these two trends create conditions that increase the likelihood of a severe terms-of-trade shock, which may have an adverse impact on economic activity,” it stated.
The report did note, however, that the shock would be smaller than in most other resource-based economies due to Australia’s “floating exchange rate regime, ample fiscal space, strong banking system, high foreign ownership in the mining sector, and significant cost advantages of main exporting industries vis-à-vis their international competitors”.
Despite these risks, however, the report said Australia has “very high economic resiliency, very high government financial strength, and low susceptibility to event risk”.
“The diversity of the economy and the strength of the financial system lead to a low level of event risk,” the report said.
