Rba Warns Australian Dollar Likely To Fall Further
May 20th, 2014
RESERVE Bank of Australia deputy governor Guy Debelle has warned a decline in capital inflows at the end of the investment phase of the mining boom could see the Australian dollar fall further.
Addressing the Financial Services Institute of Australia in Adelaide, Mr Debelle noted that as foreign investors played a key in the financing of the investment phase of the resource boom, which he said had peaked, the transition to the production phase of the boom should coincide with reduced capital inflows.
At the same time, he said, the increase in resource export volumes should increase the resources sector’s export revenue.
“The combination of higher revenues and lower capital expenditure outlays could be expected to lead to an increase in resources sector profits and, particularly, an increase in the share of these profits that are paid out as dividends to investors,” he said.
He warned, however, that as the resources sector is largely foreign-owned, this would be accompanied by an increase in dividend payments to foreign investors.
Mr Debelle said the transition from investment to production was likely to reduce net capital inflows to the resources sector, but said the effect on the Australian dollar was “more nuanced”.
“While capital inflows to the resources sector may be expected to fall — and thus reduce demand for Australian dollars — this will also be associated with declining imports to the sector, as resource investment has relied heavily on imported capital and labour.”
Mr Debelle flagged the possibility of reduced capital flows and reduced demand for Australian dollars as the resources sector moves into the production phase, particularly as resource firms’ revenues are primarily denominated in US dollars and their shareholder base chooses to be paid dividends denominated in US dollars.
“Only those flows needed to pay for the operations in Australia, to pay dividends to the Australian shareholder base and taxes to the Australian government will result in purchases of Australian dollars.”
Resources companies exposed to iron ore will also have to factor in the volatility of the commodity, which fell below the key $US100 a tonne threshold overnight.