December 2013

Realisation Ratios in the Capital Expenditure Survey

Australian Economy
Leon Berkelmans and Gareth Spence

The Australian Bureau of Statistics capital expenditure survey is one of the inputs into the Reserve Bank's forecasts for private business investment. This article considers several methods for interpreting the expectations data from this survey and evaluates these methods using out-of-sample forecasts. Forecasts based on long-run average realisation ratios are found to be the most accurate of the options considered, although the use of these forecasts for predicting investment in the national accounts yields mixed results.

business, business cycle, capital, forecasting, investment

Korea's Manufacturing Sector and Imports from Australia

Global Economy
Tom Cusbert, Jarkko Jääskelä and Nick Stenner

The Korean economy has grown rapidly over the past half century, driven in part by the development of an export-oriented manufacturing sector. While the electronics industry has expanded rapidly since the 1970s, there has also been a shift towards more steel-intensive industries, such as transport equipment and metal products. This shift, combined with Korea's reliance on resource imports, led Korea to become Australia's third largest export destination.

emerging markets, export, international, trade

New Measures of Australian Corporate Credit Spreads

Ivailo Arsov, Matthew Brooks and Mitch Kosev

Australian corporations access bond markets both domestically and offshore. Despite this, there is a lack of publicly available data on bond market conditions faced by non-financial corporations (NFCs). This gap in the data is particularly apparent at longer maturities where the low level of bond issuance, especially in the domestic market, makes it difficult to gauge the long-term credit spreads faced by resident issuers. To address this lack of data, the article presents a method for estimating aggregate credit spreads of Australian NFCs across maturities ranging from 1 to 10 years. The estimation method is simple, transparent and relatively robust in small samples. The Bank will commence publishing the estimated credit spreads monthly from December 2013.

bonds, business, credit, securities

A Model for Stress Testing Household Lending in Australia

Financial Stability
Tom Bilston and David Rodgers

Stress testing can be a useful tool for authorities to assess the resilience of their banking systems to various shocks, including those that result in more borrowers being unable to repay their debts. This article outlines a model that simulates household loan defaults and losses using data from a survey of Australian households. The model generates plausible results in response to shocks to interest rates, the unemployment rate and asset prices. It also provides a useful starting point for the Bank's development of a more holistic stress-testing framework for the Australian banking system.

banking, debt, households, risk and uncertainty

Recovery and Resolution of Central Counterparties

Matt Gibson

The increasing importance of central counterparties (CCPs) to financial stability has prompted regulators to take steps to ensure that critical CCP services can continue in circumstances of financial distress. These steps include ensuring that CCPs have robust plans for recovery to return them to viability, and that authorities have the ability to resolve a CCP if required. This article discusses the key components that are expected to form part of CCPs' recovery plans, including the power of a CCP to apply ‘haircuts’ to variation margin payments. The article also notes the potential elements that may form part of a resolution regime for CCPs.

financial markets, financial stability, risk and uncertainty

Foreign Currency Exposure and Hedging in Australia

Global Economy
Anthony Rush, Dena Sadeghian and Michelle Wright

The 2013 Australian Bureau of Statistics (ABS) Foreign Currency Exposure survey confirms that Australian entities' financial asset and liability positions remain well hedged against a depreciation of the Australian dollar, either through the use of foreign currency hedging derivatives or through offsetting foreign currency asset and liability positions. Even before taking into account the use of hedging derivatives, Australian entities as a whole have a net foreign currency asset position with the rest of the world. After accounting for hedging derivatives, this overall net foreign currency asset position increases slightly. This is primarily because the banking sector hedges all of its net foreign currency liability exposure, although this is partly offset by other financial corporations hedging part of their overall net foreign currency asset exposure. As a result of this net foreign currency asset position, the Australian economy's net overall foreign liability position would not in itself be a source of vulnerability in the event of a sudden depreciation of the Australian dollar.

banking, currency, exchange rate

Developments in Foreign Exchange and OTC Derivatives Markets

Matthew Brooks, Cameron Deans, Peter Wallis, Benjamin Watson and Mark Wyrzykowski

Global activity in foreign exchange and over-the-counter (OTC) derivatives markets continued to increase over the three years to April 2013. The increase in foreign exchange turnover was mostly driven by growth in the United Kingdom. Turnover in Australia declined slightly, even though global turnover of the Australian dollar increased markedly. Globally, the notional amount of OTC derivatives outstanding increased modestly over the three years to the end of June 2013, while the increase was more pronounced in the Australian market.

exchange rate, financial markets, global economy

The graphs in the Bulletin were generated using Mathematica.

ISSN 0725–0320 (Print)
ISSN 1837-7211 (Online)