Australia-Switzerland Analysis

Submitted to- Submitted by-

Prof. Biswajit Nag Akash Kumar 4B
Aman Gupta 5B
Deeksha Bhale 16B
Deepak Jain 17B
Govindu Ravitez 20B
 Australia : Current Account
The current account balance reflects the difference between
national savings and investment, and is measured as the sum of
the ‘trade balance’, ‘primary income balance’ and ‘secondary
income balance’. For simplicity, the primary income balance and
secondary income balance are often combined and referred to as
the ‘income balance’.

CAD Income Balance Balance of Trade

30,000.0
20,000.0
10,000.0
Australia has generally had a current account deficit,
0.0 reflecting attractive investment opportunities in the
5 6 7 8 9 0 1 2 3 4 5 6 7 8
-10,000.0200 200 200 200 200 201 201 201 201 201 201 201 201 201 economy.
-20,000.0
-30,000.0
-40,000.0
-50,000.0 Australia’s Current account deficit is largely dominated by
-60,000.0 negative income balance but changes in the size of the
-70,000.0 current account deficit have been largely driven by
developments in the trade balance, which tends to be
volatile from quarter to quarter, while the income balance
Source: International Financial Statistics has been more stable over time.
 Australia: Trade Balance
Australia’s Balance of Trade
30,000.0

20,000.0
Trade can be categorized into trade of As a result, the
10,000.0
goods trade of services. Balance of nation's trade
trade showed high fluctuation during 0.0
5 6 7 8 9 10 11 12 13 14 15 16 17 18 balance tends to
2005-2018, whereas Balance of -10,000.0 fluctuate alongside
services has been relatively stable. -20,000.0 changes in these
-30,000.0 commodity prices.
balance of goods balance of services

Source: International Financial Statistics

Australia has a comparative
advantage in the export of resource
and agricultural commodities.
Together these commodities account
for a relatively large share of
Australia’s exports and have more
volatile prices than those of the goods
and services Australia imports.
Changes in Australia's trade
balance have been influenced by
the types of the goods and
services Australia exports and
imports, as well as the prices that
are received or paid for these
goods and services.
 Did Australia gain any trade benefit due to
fluctuation of exchange rate?
BALANCE OF SERVICES
0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Service industries are more sensitive to fluctuations in exchange rate i.e.
-2,000.0
effects of exchange rate fluctuations can be observed very quickly.
-4,000.0

-6,000.0
We look at Balance of Services
-8,000.0
data in relation with Real
-10,000.0
weighted exchange rate of But as Australia’s currency
-12,000.0
Australia in last 15 years, we can started to depreciate post 2012,
-14,000.0
clearly see that appreciation of Australian Service industry
-16,000.0
Australia’s currency, making became competitive again in the
REAL WEIGHTED EXCHANGE RATE: Australian service industry less international market leading to
AUSTRALIA
120.00 competitive in international narrowing the gap between
100.00
market led to a sharp decrease in service export and import, which
80.00
Balance of services in period of led to rise in balance of services.
2006-2008 first then in period
60.00
2009 to 2013.
40.00

20.00
Slight increase in balance in 2008-2009 period was due to currency
depreciation due to Global financial crisis and fall in demand of Australia’s
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
exports.
Source: International Financial Statistics
 Import-Export Chart
300000000
Analyzing effect of exchange rate fluctuations on
250000000
trade in goods of Australia is bit more complex than
200000000
effect on services.
150000000

100000000

50000000
Where Australia’s import is reacting in line of
0
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 conventional wisdom i.e. appreciating currency making
Imports Exports foreign goods cheaper, leading to rise in imports,
To understand this unusual Exports are rising despite domestic goods becoming
phenomenon, we need to more expensive to foreigners.
understand why is Australian
currency appreciating in the first
place. Australian Exchange Rate Fluctuation
The Australian dollar was floated in December 1983, and is thus 120.00
determined by the forces of supply and demand for Australian currency in
the foreign exchange market. In recent years, the main reason for the
100.00

appreciation of the dollar is the increase in demand for Australian currency 80.00

associated with trade and financial flows. 60.00

The Australian dollar owes its strength in large part to the resources boom. 40.00

This has been the major cause of the appreciating exchange rate over the 20.00

past decade. 0.00

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Source: International Financial Statistics
 Historically, Australia’s economic prosperity has been derived from Australia's exports to Asia
160,000,000
exports of rural and mineral commodities. Extremely efficient in the 140,000,000
production of primary products, and endowed with abundant valuable 120,000,000

minerals. 100,000,000

80,000,000

60,000,000
With Asian countries like China growing rapidly during the late 1990s, 40,000,000

their efforts to transform their economy required ever-larger amounts of 20,000,000

raw materials for investment in infrastructure and export production. 0

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
This increase in demand for resources led to the dramatic rise in
commodity export prices in 2003, which peaked in early 2008.
Terms of Trade of Australia
250

This led to a dramatic rise is Australia’s term of trade from 200

100 in 2000 to 200 in 2011. 150

Mining Boom also saw a lot of FDI flowing in Mining Sector during this 100
period, leading to further appreciation of currency.
While the Global financial crisis was accompanied by a slide in 50

commodity prices and a steeper decline in the Australian currency, but 0

china’s speedy recovery led to resurgence of high commodity export 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
prices again.

We can safely say change in terms of trade during this period was the more important contributor in
Australia’s benefits from trade than fluctuations in exchange rate.
 AUSTRALIA: INCOME BALANCE
Australia's combined primary and secondary income balance has also
been in deficit for many decades.

Income Balance
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
The ‘financial investments’ component of the primary income
-10000
balance has historically driven the majority of the net income deficit.
-20000

-30000

This has reflected the fact that the stock of Australian liabilities held -40000
by foreign investors exceeds the stock of foreign assets held by
-50000
Australian residents. As a result, Australians must pay more interest to
the rest of world on these liabilities than it receives on its assets from -60000

abroad.
Source: International Financial Statistics

Australia’s mining industry is 86% foreign owned, Australia saw a

huge inflow of FDI during the mining boom. This results in part of the
income earned by these companies in Australia being paid to foreign
owners in the form of dividends.
 Australia: Capital and Financial account
The combined capital and
financial account records the
capital and financial transactions
between Australia and the rest of
the world.
The Australian economy has
generally been a net recipient of
capital inflows from the rest of the
world for more than a century. In
other words, the savings of the
domestic economy have been
supplemented with savings from
abroad in order to fund the
relatively high level of investment
in the economy.
100,000.0
80,000.0
60,000.0 Over the past decade, net capital
40,000.0 flows to the Australian banking
20,000.0 sector have declined to be around
0.0 zero as banks have funded more of
-20,000.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
their operations using domestic
-40,000.0
deposits.
net direct investment Net portfolio
Capital and financial account
Meanwhile, foreign investment
Prior to 2007, around two-thirds of
played an important role in
foreign capital flows into Australia
expanding the capacity of
was directed to the financial sector
Australia's resources sector in
as Australian banks funded a larger
order to meet growing global
share of their lending by
demand for Australian
borrowing in overseas markets.
commodities.
Exchange Rate Policy Followed by Switzerland
Switzerland is a landlocked country and virtually no mineral
resources. It relies heavily on international trade and also migrants
to fill job vacancies in manufacturing. This reliance on international
Exchange rate: CHF/EURO
trade means the value of the currency is very importing for
1.8
determining domestic demand, growth and unemployment 1.6
1.4

The Swiss National Bank has long followed a zero inflation policy; 1.2

this has combined with the country's political neutrality to make the 1
0.8
franc an exceptionally strong and stable currency 0.6
0.4
0.2
Switzerland produces sophisticated products, runs budget surpluses, 0
maintains low inflation, possesses a strong currency, and excels at 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

wealth management. These factors make it attractive to investors in

times of turmoil, and lead to safe-haven capital inflows

During the Global crisis and Euro Zone crisis, the real effective
exchange rate of Swiss Franc appreciated by 30% between the
fourth quarter of 2007 and the third quarter of 2011 making the
Swiss exports expensive
Exchange Rate Policy Followed by Switzerland
Fears of declining domestic demand have encouraged the Swiss authorities to peg the value of the Swiss Franc against
the Euro. In 2011, Switzerland pegged its currency of 1.20 to the euro.

To keep the Swiss Franc undervalued, the Swiss authorities have promised to buy unlimited quantities of foreign
currency. By selling Swiss Francs and buying foreign currency, the value of the Franc is kept low

The Central Bank pledged to keep interest rates at 0% as long as necessary – making it less attractive to save in Swiss
banks

In 2015, Switzerland scrapped its currency peg and Swiss Franc immediately skyrocketed 20%. This made Swiss
exporters and service providers finding difficulty to delver the profits, and many business vanished in the process.

In 2019, Switzerland is again facing an upward pressure on currency fuelled by high current account surplus. Now it is
upto Switzerland to let it currency appreciate which would have negative effect on exports or to intervene and make
America angry in the process.
 Switzerland : Current Account
100,000.0

80,000.0

60,000.0

40,000.0

20,000.0

0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-20,000.0

-40,000.0

-60,000.0

Current account Trade Balance Income Balance

Current account situation in Switzerland is completely

In 2018, the current account surplus stood at around 10.2%
opposite to Australia. Switzerland is enjoying current
of GDP or approx. 58000 million dollars.
account surplus since 1980s.

Switzerland recorded its highest ever trade surplus in 2019. Booming pharmaceuticals exports
increased the merchandise trade surplus by nearly a fifth to 37.3 billion Swiss francs ($38.55
billion).
 Switzerland : Trade Balance
Switzerland Exports and Imports
400,000.0 Swiss current account surplus has primarily been driven by positive
350,000.0 trade balance due to two industries: pharmaceuticals and merchanting. It
300,000.0
is notable that net exports for these two industries have increased
250,000.0
200,000.0
strongly over the last ten years despite the appreciation of the Swiss
150,000.0 franc.
100,000.0
50,000.0
0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Swiss exporting industries is built around production of

very specific items(like watches), which are particularly
valued for their brands or special characteristics and hence
face limited price competition. Additionally,
pharmaceutical products are often essential and covered by
employees’ health insurance. Thus, the price elasticity of
demand for these goods is low.

This stands in contrast to many industries (e.g. machinery and tourism), which are exchange rate-sensitive and have suffered
noticeably as a result of the strong franc. The decline in net exports for these industries has been largely offset by the positive
developments in pharmaceuticals and merchanting.
 Switzerland : Balance of services
Balance of services
35,000.0

30,000.0
Services on the other hand suffered the burn of appreciating currency, 25,000.0
As currency started appreciating, service sector of Switzerland 20,000.0
suffered a huge blow and service surplus dropped consequently. 15,000.0

10,000.0

5,000.0

0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14

Exchange rate: CHF/EURO

1.8
1.6
1.4
This forced Switzerland to put a cap on exchange rate at 1 euro= 1.2
franc in 2011, stabilizing euro between 2011 and 2015, before the cap
1.2
1
0.8
was removed, which led to sharp appreciation of currency, further
0.6 making balance of services situation worse.
0.4
0.2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: International Financial Statistics

SWITZERLAND; CAPITAL AND FINANCIAL
ACCOUNT
Until 2008, the financial account balance was dominated by net
acquisitions of financial assets/net incurrences of liabilities in direct
investment and portfolio investment. Since then, however, the direction
and size of all components of the financial account have shown significant
fluctuations.

In the past, other investment was dominated mainly by

Source: International Financial Statistics
commercial banks’ foreign lending and deposit business;
but since 2008, the SNB’s transactions have also played a key
role. Up to 2008, reserve assets did not influence the
financial account to any great extent. This changed in 2009
.
Since then, the SNB has been purchasing large amounts of
foreign currency, thereby making a major contribution to the
net acquisition of financial assets. Investment in reserve
assets peaked in 2012 when Switzerland pegged its currency
to euro which forced Swiss national bank to purchase high
amounts of foreign currency to maintain the exchange rate.