Finance ministers from the G20 are this week being joined by Central Bank governors and officials from the World Bank, IMF and OECD in Bali.
This is the first time the annual meeting of these global financial institutions has been held in Indonesia and the first time since the Asian financial crisis that it has been held in an emerging Asian country.
At this meeting, Australia sits at the top table, providing us with an opportunity to shape outcomes, while taking the pulse of the global economy.
As a trade-exposed, capital importing nation with the fifth most traded currency in the world and the 13th largest economy, we are more than just an interested party.
Right now the global economy is strong. With GDP growth running at 3.7 per cent, the fastest rate since 2011, and global unemployment at a decade low, the worst of the 2008-09 financial crisis is behind us. However, challenges are emerging, with the most recent IMF World Economic Outlook saying ‘‘downside risk to global growth has risen in the past six months and the potential for upside surprises has receded’’.
These risks fall into three categories. First, the rising trade tensions between the United States and China. Australia exports and imports around $800 billion of goods and services each year, helping to sustain around one in five Australian jobs. China is our number one trading partner, with their share of Australian exports rising to 30 per cent in 2017. The US is our number one investor, as well as our fourth largest export market for goods and services. While to date, the tariffs the US and China have applied to each other’s goods only extend to 2 per cent of world trade, we cannot afford for these protectionist measures to intensify.
Australia is a great beneficiary of an open, free and rules-based trading system where disputes are negotiated through the World Trade Organisation. Free trade equals more jobs, more investment and more growth for Australia and the world and this is a clear message I am communicating here.
Second, debt. Global debt levels are at historic highs at $164 trillion, equivalent to 225 per cent of GDP. Not only has China increased its economic might, having grown from around 2 per cent of GDP in 1980 to 18 per cent today, but so too has its debt profile. Since the Global Financial Crisis, China has accounted for nearly three quarters of the increase in global debt, which has been primarily driven by state-owned enterprises and households.
Reserve Bank governor Philip Lowe has highlighted these developments saying ‘‘perhaps the single biggest risk to the Chinese economy at the moment lies in the financial sector and the big run-up in debt over the past decade’’. An issue here in Bali is the impact the rising debt levels, combined with historically low interest rates, would have on the international community’s ability to respond to an economic shock.
A repeat of the fiscal strategy which saw governments inject a $5 trillion stimulus package during the GFC would be all the more difficult today given the starting point.
Third, emerging markets. A number of economies are increasingly vulnerable as their currencies fall, their inflation rates increase and their level of indebtedness leaves them exposed to a higher interest bill as the US dollar has appreciated.
The Argentinian peso has halved in value this year, with inflation running at 35 per cent and their GDP shrinking 4 per cent in the last quarter. A $50 billion standby facility has been made available to Argentina by the IMF as concerns grow. Turkey’s lira has also lost half its value this year with inflation at 25 per cent and a current account deficit that has increased to over 5 per cent of GDP.
As monetary policy normalises across advanced economies and the US has lifted its interest rates eight times since December 2015, the impact on emerging economies is real. What is happening is twofold. Namely for those economies with US dollar denominated debt, debt servicing is more expensive. Secondly, capital is flowing out of emerging economies into the US, chasing higher bond yields. There is a risk that these pressures will intensify, causing economic and potentially political instability. Despite these global headwinds, the Australian economy has good momentum.
The IMF continues to forecast strong economic growth for Australia at 3.2 per cent this year and 2.8 per cent next year. Our AAA credit rating was reaffirmed and our budget deficit is now the lowest in a decade. There is no room for complacency. But the Morrison government’s economic plan is working.
This meeting in Bali is an opportunity to swap notes with our international counterparts and ensure we are working together to address recent developments.
Josh Frydenberg is the federal Treasurer.