Paul Keating

When superannuation was just a twinkle in the eye of Treasurer Paul Keating, in the years after the floating of the dollar, the Australian economy was vulnerable to sharp swings in global capital flows.

Australia’s traditional role as a net importer of capital made its economy vulnerable to the shifting sentiments of foreign investors prompting Keating’s famous warning of the country’s potential to become a “banana republic”. Fast forward to 2023, the role of the superannuation sector – now worth $3.5 trillion or 140 per cent of the country’s GDP – as a significant source of domestic capital, has been well recognised.

But as the sector continues to grow, its impact on Australia’s balance of payments, capital flows and net foreign debt is also being recognised.

In a speech to the CFA Societies Australian Investment Conference in Sydney this month, the head of the Reserve Bank’s international department, Penny Smith, noted the sharp fall in Australia’s net foreign liabilities in recent years. This has fallen from a peak of 63 per cent of GDP in 2016 to only 32 per cent today.

While Smith argued that “a net foreign liability or asset position is not necessarily good or bad”, the reality is that having less net foreign debt makes a country more economically secure and less vulnerable to external shocks than more.

Smith noted that Australia has shifted from being a capital importer, which it has been for most of its modern day period, to a capital exporter.

A key factor in the shift, she acknowledges, is the rise of the superannuation sector whose growth in recent years has accelerated with the move of the superannuation guarantee – which is now at 11 per cent – towards 12 per cent by 2025. This has allowed the development of a large pool of domestic capital which is now increasingly seeking a new home overseas.

“Australia’s superannuation guarantee has supported a trend increase in household saving over many years,” she said.

Thanks to superannuation, Australia’s net savings have been above net investments since 2019.

In a big departure from history, she noted, Australia now has current account surpluses and net capital outflows for the first time in over 40 years.

Big as the mining boom

Some of this is due to the end of the big inward investments made during the “mining boom”. But it is clear that super funds are playing a big role in Australia’s capital account and its financial interactions with the rest of the world.

Offshore investments by super funds have seen a continued increase in Australia’s net holding of foreign equities.

In the early nineties, Australia’s gross foreign equity holdings were around 10 per cent of GDP. These are now up to around 85 per cent, with Australia’s net foreign equity position moving from negative to positive over the period.