October 2018

As Sibos returns to Sydney for its 40th birthday, flow reflects on how an economy once based on sheep farming and wheat has delivered sustained growth and led the way in financial services innovation

When a group of 320 Santa Clauses on Bondi Beach paddled their way into the Guinness Book of Records for the world’s largest surfing lesson on 20 December 2015, this should have been no surprise. Australians do things big.

Celebrations afterwards no doubt included a few beers and something on the ‘barbie’. While sunshine and all that space have done much to contribute to a spirit of ‘G’day mate’ cheerfulness, it is the country’s comparative economic and political stability, sound regulatory framework, abundant natural resources, infrastructure and deep talent pool that have positioned it so well to gain from the liberalisation of the Asian market.

It seems fitting therefore, at a time when global financial services are on the brink of quite radical transformation (particularly in the payments space), that Sibos returns to Sydney for the third time – and for its 40th birthday. This article provides an overview of the host nation as a precursor to our cover story on National Australia Bank, from the perspective of a European bank that supports its multinational corporate clients in Australia. They come to Australia because it is a similar market to continental Europe and tends to have large operations focused in the growth sectors: resources, energy, mining, food, fibre and agriculture, financial services, education, tourism, and advanced manufacturing.

Rock-solid growth

With US$19.9trn of natural resources (it meets 14.3% of the world’s demand for gold), Australia comes eighth on a table dominated by Russia (US$75trn), and, despite being around 80% of the size of the US, with a population of 24.8 million,1 it has far fewer people to feed than America’s 325 million.

Australia’s output during the 19th century was dependent on primary production, with very little manufacturing. “Agriculture (predominantly wheat and wool) accounted for one-third of output, and the share of mining surged dramatically during the booms in the 1850s and late in the century”.2 By the 1950s manufacturing was firmly established, with its share of total employment having grown to 25%.

The country is, says Deutsche Bank’s Global Head of Structured Commodity Trade Finance, John MacNamara, “a huge exporter of commodities”. He explains that the sector represents nearly half of all Australian exports and around 80% of export value growth year-on-year. “This is very significant in global terms and Australian commodity production and exports just get stronger all the time,” he says. “Iron ore exports alone were A$63bn in 2017, and to stand on the docks at Port Hedland watching not one but six 250,000-tonne bulk iron ore carriers loading for China and Japan feels very much like looking down the throat of the real economy, but Australia also has very strong flows on soft commodities and fuels,” reflects MacNamara.

Mining giants BHP, Rio Tinto, Altura, Glencore and Barrick Gold are all highly sophisticated global operations using state-of-the-art technology to add as much value as possible to the extracted raw commodities. These companies make a fundamental contribution to Australia’s economy (see Key facts: Australia). “The way commodity production and export is practised in Australia is also a key indicator for the global commodities sector – it’s all very high tech. If you want to see the future of global commodity production, then go do a few site visits in Australia,” concludes MacNamara.

A particularly interesting aspect of the Australian energy sector is lithium mining, given it is the world’s top producer. Capacity and expertise developed to mine coal are now being redeployed. As the popularity of solar power, electric cars and portable electric tools expands, so does the demand for lithium. Around 40 Australian corporates work in the lithium sector, a number of which are mining giants more known for their coal and iron ire, such as Altura – now re-positioned as a lithium miner.3 Altura launched its Pilgangoora Lithium project in March 2017, and lined up two binding offtake agreements with Chinese energy corporates Shaanzi HR Optimum Energy Co and Lion Energy Limited to the tune of 1,000,000 tonnes of 6% lithium oxide concentrate for a period of five years.4

This bedrock of resources put the country in a strong position to withstand economic shocks such as the 1997 Asian financial crisis and the 2008 global financial crisis that rocked other regions, thanks to budget surpluses and the elimination of net debt (see Figure 1). By the first quarter of 2018, Australia had posted the strongest annual economic expansion in nearly two years, extending a 27-year run of recession-free growth.5

Shifting trade patterns

Australia’s goods and services exports account for around 20% of GDP and it has always had a large export sector. In Figure 2, the Australian Government’s Department for Foreign Affairs and Trade (DFAT) shows how, after the Korean War boom, both ratios declined as Australian Government policy concentrated on promoting domestic industry. Since the deregulation of the Australian economy in the 1980s, both ratios have trended upwards, to around 20% by 2014–15.6

Through the 1960s, export growth was fuelled by the post-war commodities boom and a reduction of trade barriers following four post-war negotiating rounds on the General Agreement on Tariffs and Trade, notes the DFAT.

The other big change over the period is the shifting of trade corridors. During the 1960s, the majority of Australia’s trade took place with Europe and North America, but now both export markets and import sources have shifted towards Asia, which now accounts for more than 60% of Australia’s two-way goods and services trade – China being by far its dominant trading partner at A$155bn.

Special relationship

The China-Australia Free Trade Agreement (ChAFTA) entered into force on 20 December 2015. Australia's Minister for Trade and Investment, Andrew Robb, signatory to ChAFTA, said at the time, “This historic agreement with our biggest trading partner will support future economic growth, job creation and higher living standards through increased goods and services trade, and investment. China, with its population of 1.4 billion people and rapidly rising middle class, presents enormous opportunities for Australian businesses well into the future.”7

As China’s urbanisation, ramp-up of manufacturing, and investment in infrastructure resulted in high demand for Australian thermal coal and iron ore, Australia enjoyed healthy trade surpluses. Yet now that Chinese demand is shifting away from raw materials (the demand for lithium is not replacing iron ore and coal revenues) as it moves from a consumption-driven economy to more complex goods and services, Australia needs a wider pool of trading partners.

In this case, the resource sector provides a unique advantage. “Few other countries had Australia’s huge supplies of iron ore, which were close to the sea and easily developed, and proximity to China for shipping minerals (of which transport costs are up to 10% of the value). But many developed countries have the education and technical expertise to meet China’s new demands,” noted Dr Anne Holmes from the Parliament of Australia in 2010.8

Financial services

Quite aside from its merchandise exports, Australia has earned its place as a world-class participant in global investment markets. For in-bound investors, its stable regulatory framework and long-term economic growth make it an attractive destination to deploy capital. Australian MNCs, unlike some of their “greenfield” Asian neighbours, are mature and cash rich/cash generative, with net earnings repatriated monthly.

27 years
Australia’s run of recession-free growth
(www.aba.gov.au)

Despite having a relatively small population, Australia has some of the deepest and most liquid markets in the world. It is the fourth largest pension fund market with US$1.6trn9 (and No. 1 within Asia), and the Australian dollar is the fifth most traded currency. “It’s a pivotal time for the country’s financial services sector, which is being shaped by new realities. Australia’s payments and securities market infrastructures are being revamped to meet the needs of a 24/7 digital economy. Banks are building exciting new products and services for their customers,” comments SWIFT on this year’s host country. So how has it stepped up to hub status?

Australian financial services regulation is split between the Reserve Bank of Australia, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA). The country’s banking market is relatively concentrated by international standards, so when APRA announced heightened capital requirements in 2017, the ‘Big Four’ (Westpac, National Australia Bank, Commonwealth Bank of Australia and Australia and New Zealand Banking Group) bore the brunt of these requirements, and became even stronger.10

New landscape

However, in 2017, the banking competitive landscape – in line with other parts of the world, such as the European Union with its second Payment Services Directive – was turned on its head when the Australian government opened consultation on the best approach for implementing an open banking framework.

The ensuing “Review into Open Banking: giving customers choice, convenience and confidence” was published in December 2017, setting out how the principles of customer focus, competition, opportunity creation and fairness will be implemented.11 Implementation is devolved to the Australian Competition and Consumer Commission (ACCC) and the Office of the Australian Information Commissioner.

At the same time, the government is providing a lighter touch regulatory environment for Australia’s 600 fintechs. Known as ‘sandboxing’, this is to allow additional flexibility while they are still at the stage of testing their ideas. First launched in December 2016, draft legislation is underway to make the scheme more attractive to fintech start-ups.12

According to the Scottish Pacific SME Growth Index, Australia’s 2.1 million SMEs are turning to fintechs for working capital solutions rather than banks. As banks focus on their digital agendas to avert disintermediation, they are prioritising strategic partnerships with fintechs.
Tim Dring, EY Oceania Banking and Capital Markets Leader, told Business Insider, “Australian banks have already made significant progress in this space and we are already seeing them make significant advancements in areas such as mobile payments platforms, fraud protection, biometric authentication and the use of robotic process automation.”13

New Payments Platform (NPP)

On 14 February 2017, SWIFT announced how, in response to the global regulatory drive for real-time payments, it had created the system that underpins the infrastructure of Australia’s forthcoming New Payments Platform (NPP) using ISO 20022 standards.

“For the first time ever, Australians will be able to make payments between individual or institutional accounts 24/7, and businesses will no longer need to wait several days to receive funds. This ‘always on’ capability will drive the weekend economy and reduce dependency on cash and cheques,” said NPP CEO Adrian Lovney at the time.

Twelve months later, NPP went live, with SWIFT stating in a press release that NPP is “a key component within SWIFT’s broader global instant payments strategy”. Alain Raes, CEO of SWIFT EMEA & APAC, said that the roll-out and the enablement of real-time payments “is the most significant development in the Australian payments industry in decades and could have a more revolutionary impact on the economy than any previous payments system innovation”.

And this is just for starters…

Key facts - Australia

  • GDP: US$1,339.1bn
  • GDP growth: 2.3%
  • Public debt % of GDP: 43%
  • Population: 23.8 million
  • Form of state: Federal Parliamentary Democracy (Commonwealth)
  • Largest trading partner: China (32% exports, 23% imports)
  • Largest exports: Metalliferrous ores; coal; coke; gas; gold; meat
  • Largest import: Road vehicles; petroleum; industry machinery; telecommunications; electrical machinery
  • Strengths: Large natural resource endowments; strong infrastructure and business environment; proximity to emerging Asia; low public debt; top tourist destination
  • Weaknesses: Dependence on Chinese demand and commodity prices; high household debt (more than 180% of disposable income)   

Source:
Euler Hermes (June 2017)

_________________________
Sources

1 See https://bit.ly/1oOLhTw at abs.gov.au
2
See https://bit.ly/2LJ2pQp at rba.gov.au
3 See https://bit.ly/2KmGgSp at alturamining.com
4
Altura Mining’s 2017 Annual Report can be read at https://bit.ly/2LKqWon

See https://reut.rs/2OAsfnn at reuters.com

6 See https://bit.ly/2OCPDAL at dfat.gov.au
7
See https://bit.ly/1QmLj5p at austrade.gov.au
8 See https://bit.ly/1NPedrO at aph.gov.au
9
See https://bit.ly/2O1dEQT at austrade.gov.au

10 See https://bit.ly/2LRsmfZ at apra.gov.au

11See https://bit.ly/2tPW78X at static.treasuring.gov.au
12
See summary from Clifford Chance at https://bit.ly/2n16Siy

13 See https://bit.ly/2LT7HrH at businessinsider.com

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