Such Good Friends, For Now

For years Americans, British and Australians have all been living far above their means. The end result is likely to be not just a period of penury but perhaps also an outburst of economic nationalism that could reverse the globalization trends of the past three decades.

The first signs are already showing in Australia, which has long broadcast its performance at or near the top of the OECD growth league. What has not been trumpeted is that the price of this growth has been a current account deficit averaging above 4 percent of GDP a year for the past decade. This has been financed partly through debt, only some of which is denominated in Australian dollars, and partly by the sale of assets to foreigners. The figures today are alarming. Net foreign debt has risen from A$320 billion to A$532 billion and net foreign equity ownership from A$410 billion to A$915 billion. The resulting deficit on this debt and equity mountain now stands at 4.5 percent of GDP.

The strength of the economy has been supported by the sale of an A-list of Australian mining assets to foreign bidders. Many of the power and other utility assets privatized by state governments over the past 15 years also have ended up in foreign hands.

Australians are only now beginning to notice and wonder about the consequences. A sign of a new awakening was a column on July 22 in The Age, Melbourne’s premier newspaper, by one Stephen Mayne, a former adviser to Jeff Kennett, the Liberal Party premier of Victoria in the early 1990s when large-scale privatization of state assets began.

Mayne noted that acceptance next month of a A$4.5 billion offer by Singapore Power for the power and gas distribution assets of Perth-based Alinta would bring the total of Australian assets controlled by the government of the tiny republic to around A$30 billion. At this point the Singapore government will, through its state entities including Temasek, Singapore Power, Singtel, CapitalLand, DBS holdings and others, own more commercial assets in Australia than the Australian Federal government.

Needless to say, no Australian company, let alone a government-run one, would likely be permitted to take control of similar Singaporean assets. While Temasek is selling some local assets, no one doubts the determination of the state to control the commanding heights of the Singapore domestic economy – while encouraging foreign companies to develop higher-technology export manufacturing and service industries.

Others of course have been buying up Australia. Europeans bought Mount Isa Mines, Americans, Normandy Mining, the British, a chunk of Qantas, and Hong Kong’s cash-rich monopoly electric utilities CLP Holdings and HK Electric have invested heavily in lower yielding but “safe” Australian assets. China has acquired interests in new mineral and gas developments to which few have objected because Australia wants to secure its position as a reliable resources partner for China.

But the Singapore state acquisitions may sooner or later stick in the Aussie gullet in the same way as Thais rebelled against Temasek acquiring their largest telecoms group, Shin Corp, from former Prime Minister Thaksin Shinawatra. The Australians have been insulted enough in the past by remarks such as Lee Kuan Yew calling them the “white trash of Asia” and Singapore’s regular parading of Chinese ethnic chauvinism under the guise of “Confucian values”. So it is perhaps not surprising that Mayne’s column asks whether Australians feel “uneasy about this phenomenon, especially given the secretive, autocratic and undemocratic tendencies of the Singapore government.”

State-owned vehicles such as Temasek are more vulnerable than private firms to changes in official attitudes and policies. For now Australia and Singapore are locked in an embrace over the “war on terror,” which both nations need to play up for domestic political reasons.

But this may not last. Australian history is also replete with bursts of nationalism and radicalism which could surprise a Singaporean bureaucracy unaccustomed to thinking outside the box. In the early 1970s it went through a period of economic nationalism when “buying back the farm” was a popular goal and the government intervened to prevent foreign takeovers even of not very important assets.

Of course no country with a deficit the size of Australia’s can blame anyone but itself for having to sell assets to foreigners to finance its lifestyle. What should be particularly alarming for Australia is that the deficits have continued despite an almost unprecedented rise in its terms of trade over the past decade. First, import prices fell in the wake of the Asian crisis and China’s rise as a low cost manufacturer. Then commodity prices began a new boom when prices bottomed out in 2002 and it is still going strong. The terms of trade index was 81 in 1997. Ten years on it is 119.

No one can tell how long the commodity boom will last. But these things always run in cycles which seldom last more than seven years from bottom to top. So let us assume this one has two years to run. Meanwhile export prices (judging from the latest US figures) from China and elsewhere in Asia are just beginning to pick up thanks to currency changes, rising wages and high raw material and energy prices.

So what beckons? A major recession? A sharp fall in the Aussie dollar, at least against Asian currencies? Despite its deficit, the Australian dollar has risen from ¥64 in 2002 to ¥106 today as Japanese savers and foreign hedge fund carry-trade practitioners have piled into high yielding Aussie dollars. Sooner or latter this will reverse dramatically.

The eventual Aussie currency collapse will of course hurt the Singaporeans and all the others who piled into Australian assets. That in itself will lower the effective cost of interest and dividends on asset sales made when the currency was strong. So they may not worry. On the other hand they just may decide that Singapore’s secretive, authoritarian ways justify some special local action, perhaps to re-nationalize the power companies at a knock-down price or impose restrictions on remittance of dividends. Or ban all foreign state ownership of all utilities, forcing Temasek etc to sell out under duress. Unlikely? Just wait.

Australians can be very naïve about the nature of Singapore. They seem to believe the tourist brochure image, the World Economic Forum nonsense about it being one of the world’s freest economies, its strategic links to the US and its role as a non-Muslim ally in a Malay sea. But perhaps Singapore can be equally naïve about Australia as a safe haven investment, a place to store the riches squeezed from Singaporeans by the Central Provident Fund depriving citizens of spending power to underwrite the over-spending of Australians. Perhaps Temasek should study how the Aussies play cricket. They can be masters at “sledging,” the practice of insulting one’s opponent in order to force an error. It is a lesson the Singaporeans may find rather offensive.

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