Sep 19, 2019 in Analysis

Australia Analysis

Australia has a strong economic freedom at a score of 81.4, which makes the country among the world freest economies in the 2015 economic index. In the Asian-pacific region, Australia is the fourth advanced economy with a strong framework of economic resilience and dynamism. Although the economic freedom of Australia has declined in the past few years, it still performs relatively well compared to other Asia-Pacific countries. The business regulatory efficiency is the most institutionalized in the region as well as having sustainable open market policies that enhances competitiveness, flexibility, investment and trade. In addition, Australia was the first developed country to repeal contentious carbon emissions tax in 2014. Generally, the tax rates for top corporations in the country are 30 percent while that for the individual at the upper realm of economic status is 45 percent. The country adopts a progressive taxation system for individuals to encourage income redistribution. Other taxes levied by the country include capital gains tax and value added taxes. In total, tax revenues account for approximately 27 percent of the national output. Public debt is below 30 percent of the gross domestic product while government expenditures are equivalent to 35.7 percent of national output. In 2015, the GDP is $ 999.6 billion with a growth rate of 2.4 percent and a $ 43,073 per capital income. Unemployment rates were approximately 5.6 percent, inflation rate of 2.5 percent and a foreign direct investment inflow of $ 49.8 percent.

Australian regulations related to international business are sound and are meant to facilitate investments in the country. Indeed, the Australian judiciary is independent and well-functioning to minimize corrupt practices in international business and ensure protection of property rights. Foreign companies that need to establish operations in Australia enjoy relative flexibility through regulatory protection and simplified procedures of business licensing. The Australian government has established flexible regulations on labor to enhance dynamic Labour force. Also, the government has set up approximately six free trade agreements in collaboration with other countries from across the world to encourage foreign direct investments. Given the country’s commitment to the World Trade Organization on export subsidies, tariffs and domestic support, the government has put favorable tariff quotas to facilitate business. Generally, goods originating from other countries are subjected to a 1.8 percent tariff rate. This has promoted export and import trade in the country. The Australian import regulations allow firms operating in the economy to import goods from other countries as part of their routine activities. Australia has a strong financial sector that offers diverse financial instruments, which has enabled an easy access of capital for international traders and firms.

Australia trades with several countries across the word which includes China, Japan, United States, Germany and Singapore. Other major trade partners include Malaysia, Thailand, Korea and the United Kingdom. Australia exports coal, iron ore and gold to China while the main exports to Japan include iron ore, coal and beef. In the United States, Australia exports beef, alcoholic beverages and spacecraft parts. In the European markets, Australia exports precious metal ores, god coin and oil seeds to Germany as well as lead, coal and gold to the United Kingdom. On the other hand, Australia obtains other products from its trading partners and includes automobile and electronic products from Japan and China.

Australian balance of payment account shows the economic transactions carried out between the country and the other nations of world. The current account shows the differences between the total savings and the gross national investments. It also shows the imports and exports of goods and services of the country. During the 2014 December quarter, the current account deficit declined by 21 percent from the previous September quarter of 2014. In the December quarter of 2014, the current account deficit was approximately $ 9.6 billion while the September quarter’s deficit was 12.1 billion. The decline in the current account deficits was contributed by a decline in the income deficit of $ 1 billion during the period.

The net change in the value of goods and services balances increased from a deficit of $ 3.9 billion during the September quarter of 2014 to a lesser deficit of $ 2.4 billion in December of the same year. This reflects a 6.9 percent rise in net services during the period. On the other hand, the net income deficit declined in the same period from $ 8.2 billion in September 2014 to $ 7.2 billion in December quarter. This illustrates an increase in incomes earned both domestically and abroad by Australian nationals. However, the deficits imply that the country needs to improve in its value of exports compared to exports.

The net investment positions as depicted by the balance of payments account shows an increment of 2.4 percent over the September and December quarters of 2014. This was caused by a rise in net foreign debts of $ 76.4 billion which was fairly offset by a decrease in net foreign equity of $ 48.1 billion. Generally, the balance of payments of Australia lowered in 2014 by 13.6 percent due to decline in the net income deficit during the year. The total amount of foreign reserves for Australia was $ 924 billion as at December 2014 which was contributed by the increased international investments.

The current exchange rate between the United States dollar and the Australian currency is 1.3083 Australian dollars for every I United States dollar buying rate. The selling rate is 1.309 Australian dollars per United States dollar. This was a slight decline from the previous year’s 2014 in which one United Sates dollar traded for 1.11 Australian dollars. Consequently, in 2013, the average exchange rate was 0.91 Australian dollars per every United States dollar. This suggests that the Australian dollar has been weakening over the years compared to the United States dollars in the period.

In the short run, the exchange rate of the Australian dollar is anticipated to weaken in relation to the United States dollar. This is due to the fact that Australia uses a floating exchange rate system that relates to the market demand and supply forces. In the short run, it is difficult for the central Bank of Australia to control the market forces and stabilize its own currency relative to the United States dollar. The Australian Central Bank plays major roles which include maintenance of stability of the exchange rate system and control of market forces that increase in inflation and interest rates which in turn affect the rate of exchange rate. Due to the lag effect of some of the monetary mediations taken by the central bank of Australia, it is very difficult to regulate the exchange rate of the Australian dollar to the United States dollar in the short run. Thus, the current exchange rate between the Australian versus the United States dollar is likely to weaken in favor of the United States dollar. In the long run, stability of the exchange rate will be attained if the monetary tools adopted by the central bank will prove effective. These include the ability of the central bank to control the market forces of currency demand and supply that affects the adopted flexible exchange rate system.

 

Australia has a national stock exchange referred to the Australian Stock Exchange (ASX). The stock exchange facilitates trading of securities for listed firms in Australia. It also ensures floatation of bonds for firms that needs to raise capital. The Australian Stock Exchange (ASX) has more than 2000 listed firms and the total approximated market capitalization is 1.2 trillion. This makes the stock exchange one of the largest in the world.

The large numbers of firms that trade in the Australian Stock Market means that the trading of stocks for listed companies is relatively less liquid. With the huge numbers of firms engaged in diverse business activities, it becomes difficult for the investors to break down the sectors into smaller units to enable the most viable firms to invest their funds. Also, it is relatively difficult to search for the firms listed leading to evasion of firms that are least known in the market. The most preferred sectors by the Investors in the Australian Stock markets include consumer staples, financials, telecommunication services and industrials. The main reason why these sectors are the most sought by the investors is due to the fact that they are a reserve for the most prominent and large corporations in Australia. This minimizes the search costs due to increased liquidity of their shares. The most liquid among the listed firms include the big banks such as the Australia and New Zealand bank as well as the Westpac Banking Corporation. Other newly listed and small firms are generally less liquid and are unknown by the investors. However, the small stock companies that are perceived as least liquid which are least considered by the investors can provide excellent returns. In fact, the least known and unpopular stocks can provide stock returns that are above the returns generated by the popular stocks.

If there is no stock exchange in Australia, it would be most appropriate to have one. This is due the fact that a stock exchange facilitates initial and subsequent listing of financial instruments and securities. The Australian Stock Exchange has played this role by enabling emerging corporations to list their shares to the public which has increased their accessibility to capital and growth. Also, other big firms have continued to subsequently list their shares, bonds and other financial instruments that have facilitated their growth. The huge number of firms operating in Australia demands for an organized stock exchange where firms can trade their shares. Also, a stock exchange in Australia could be needed to enhance investor protection which cannot be guaranteed in the open markets. If Australia operates without an organized stock exchange, then it would be difficult for potential investor to identify viable investable opportunities to put their funds. Also, trading shall be conducted in a haphazard way which can lead to significant loses to the investors and the firms.

A United State corporation considering doing business in Australia should be aware of various risks in order to find appropriate measures to contain the risks. These risks include terrorism threats, crime and risks relating to effects of climatic change. Terrorism risks relate to the fact that Australia is located in the Asian Pacific region which has escalating cases of terrorism from the Middle East. This poses a threat to Australia due to increased chances of attacks as well as the magnitude of attack. Terrorism risks in Australia and the general Asia economies could strongly affect the economy and lead to poor conduct of businesses. Additional costs will be incurred to protect the firm against unfavorable effects of terrorism. The firm will need to establish surveillance systems as well as insurance. This will lead to increased expenses of doing business by the United States firm. Additionally, Australia faces tremendous risks of global warming which may affect the annual production and affect firms that provide consumer goods. Climate change risks in Australian have been brought about by huge industrial growth in the country as well as the neighboring Asian countries. Climate change is likely to lead to water scarcities which are a great source of water for industrial production as well as production of power needed in industrial production. Also, the huge expansion of Australian urban centers may be a great source of water shortages and the increased crime activities within the country. The United States Corporation may be pressured by Australian regulations that demand for environmental for firms operating in the country.

In addition, Australia faces the risk of debt crises due to the huge amounts of foreign debt that the company has from international lending agencies. Debt crisis is a long term risk and thus there is the probability that the government may raise the amount of taxes levied on corporations in an attempt to settle the debt crisis. As a result, foreign firms may suffer handsomely due to subjectivities in tax treatment of local and foreign firms. Other risks relate to regulations prevalent in Australia. For example it is a vital consideration for the United States Corporation seeking to establish operations in Australia to consider intellectual property rights. The main intellectual property rights prevalent in Australia include patents, copyrights, trademarks and designs. Since these protections are safeguarded by the Australian laws, firms from other countries such as the United States may face the risk of violation of such property rights leading to lawsuits. Finally, it is vital to examine the effects of different forms of structured crimes in Australia. The organized crimes include in Australia include people smuggling, trafficking and drugs. For instance, criminals in major Australian cities abduct foreign expatriates and travelers and demand huge sums of money from them and their families. As a result it is necessary for the firm to ensure safety of its employees at all times to overcome this risk. Consequently, the firm should conduct research to identify ways in which it can mitigate these risks if it wants to establish its operations in Australia. These include reviewing the Australian laws to ensure that it complies with all regulatory mandates put in place by all bodies.

I would recommend various foreign direct Investments in Australia by the United States Corporation. Firstly, Australia has a wide range of firms listed at the Australian Stock Exchange, most of which are small scale enterprises. The United States firm can consider entering into mergers and acquisitions with such smaller firms to expand their market capitalization. Mergers and Acquisition will facilitate the consolidation of the small firms into big corporations that can compete effectively in the market. This strategy is appropriate to the United State firm since it will encourage synergies needed in competing effectively with other major firms in Australia that currently dominates the market. In terms of timing and industrial sectors to enter into mergers, the United State firm should consider entering into manufacturing industries such as mining, service and farming since these sectors form the core of the Australian economy. Australia has huge amounts of iron ore, coal and metals which are needed in the manufacturing sector. Other thriving sectors in the economy are service, finance and real estate. Also, the food and agriculture industries remains unused and Australia still exports semi-processed agronomic goods to other markets. Therefore, the United States firm should consider merging with other smaller firms in Australia to tap the potentials in each particular segment.

Another foreign direct investment strategy includes the establishment of subsidiaries in Australia. Indeed, there are limited manufacturers of automobiles and electronic products in Australia. The United States firm can tap into this potential by establishing a subsidiary in Australia to manufacture such products. The subsidiary shall be operating in a similar way to the parent company and all products shall be manufactured in the Australian market. The subsidiaries should be strategically located in populous cities and nearness to sources of raw materials. The United States firm can also license various stores and distribution agents in Australia to market its products. The agencies shall be independent of the firms and shall serve as ambassadors of goodwill of the United State corporations. Given the fact that the United States is major trade partner with Australia, export and import trade can also serve a major entry strategy.

Joint ventures can also serve as an important entry strategy especially where the industry requires a huge initial capital investment. Joint ventures allow sharing of resources and ideas on how to operate the business. For example, the United State firm should seek a joint venture when entering into large and unknown industries to minimize business risks exposure. Such industries include mining in which heavy capital investment is required and failure rates lead to huge financial loses.

My recommendation is to change United States dollar to the local currency on April 6, 2015. On May 29, 2015, the exchange rate was 1.308 Australian dollars per every United States Dollar. Consequently, the exchanged rate changed to 1.32 Australian Dollars per United State dollar on April 6 2015. This means that the United States dollar has appreciated against the Australian dollar on April 6 2015 compared to the exchange rate on 29th May 2015. Thus, exchanging the dollars for the Australian Dollars on April 6 shall lead to more units of the Australian currency compared to May 29, 2015. Generally, the changes in the exchange rates between the United States and the Australian dollars worked in favor of the United States dollar over the period.

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