Punching above its weight

Bill Shorten was, until recently, Australia’s Minister for Financial Services and Superannuation — giving him governmental responsibility for one of the world’s most resilient banking sectors, and one of the largest pension fund systems worldwide. Here he explains the country’s challenges and strengths.

  • By Gerald Hayes
  • 04 Sep 2013
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EuroWeek: The superannuation industry, at over A$1.5tr ($1.38tr), is now one of the largest pension fund pools in the world despite Australia’s relatively small population. What’s the knock-on effect of that wealth on Australia’s financial services industry, and on the Australian capital markets’ relevance in global terms?

The large pool of relatively stable and unleveraged superannuation assets adds depth and liquidity to our financial services industry and provides a source of finance for other sectors in the economy. Superannuation funds have been an important source of capital to banks and other Australian companies over the period since the global financial crisis, when debt finance has become less readily available and leverage is perceived as more risky. 

Australia has the third largest pool of funds under management, behind the US and Luxembourg, overtaking France. The World Economic Forum’s Financial Development Report 2012 has ranked Australia fifth out of 62 of the world’s leading financial systems and capital markets. 

The size of Australia’s investment fund assets pool and its growth prospects have attracted global firms seeking to establish operations in Australia, helping to make it one of the most efficient and competitive financial sectors in the Asia Pacific region.

EuroWeek: As the super industry continues to grow, logically there will be a need for greater investment outside Australia. How do you expect that to evolve?

Superannuation funds are already investing outside of Australia. For example, as part of its overseas infrastructure investments, AustralianSuper invests in assets located in the UK, US, Germany, Chile, Brazil and Poland. The growing size of Australia’s superannuation industry will create additional investment opportunities across a diverse range of bothdomestic and international assets. I’d like to see superannuation funds build their capabilities to identify and manage international investments in more diversified assets and emerging markets, particularly in Asia.

EuroWeek: Australia’s banking industry came out of the financial crisis in exceptionally strong shape compared to almost any other developed world nation. How robust do you consider it to be today, and what challenges does it still face?

In November last year, the IMF again endorsed the strength of our financial system in our second Financial System Stability Assessment. Australia’s financial system has come through one of the most turbulent periods in the global economy in 80 years with flying colours. But it’s appropriate that after a global financial crisis, we find global solutions to the problems that caused it.

That’s why we’re working through the G20, the Basel Committee and the Financial Stability Board — with other like-minded nations like Canada and Korea — to get balanced outcomes on the new agenda for global financial reform. Australia is now well on track to implement its global reform obligations.

EuroWeek: What credit do Australia’s regulators deserve for the relative strength of the country’s financial services sector today?

It’s been said that in the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, Australia has some of the most highly regarded financial regulators in the world. 

The culture of sound risk management, prudent lending, and safer liquidity and capital management enforced by our regulators played a major role in the performance of our financial sector following the collapse of Lehman Brothers in late 2008, which held up very well in comparison to our peers. And this is a continuing strength for the Australian economy.

EuroWeek: Australia’s Commonwealth bond issuance, while considerably increased in recent years, is still far lower than government debt in many other developed world nations. Would you like to see either more issuance, or longer-duration issuance, from the Commonwealth (or states) in order to support the development of Australia’s capital markets?

The government has been clear in signalling its view that there is an ongoing role for a liquid Commonwealth bond market. Issuance will continue to be determined on the basis of financing needs and the Australian Office of Financial Management has responded to the opportunity to develop the market over the past few years by extending the nominal yield curve and increasing the average maturity of the bonds it has been issuing. This has responded to market conditions and has been with the policy consent of the government.

EuroWeek: Bankers in Australia tend to lament the relative weakness of the corporate bond markets in Australia — a lower-rated Australian corporate will still typically go to the US high yield markets for funds rather than attempt to raise capital domestically. What can be done to improve that market?

A vibrant retail corporate bond market will allow us to harness our national superannuation savings so we can domestically fund more productive investment in our economy and reduce our reliance on offshore wholesale funding markets.

Current government reforms, such as simplifying the offer of simple corporate bonds to retail investors and allowing the retail trading of Commonwealth Government Securities, will help to reduce the costs and provide the market with a more visible pricing benchmark for retail corporate bond issuance, as well as help further encourage retail investors to consider diversifying their savings through investments in fixed income products like government and corporate bonds.

These are important steps towards building a deep and liquid corporate bond market in Australia and we expect the Australian Parliament to pass the enabling legislation in the coming weeks.[At the time of publication, the legislation had passed Australia’s House of Representatives and was awaiting second reading in the Senate.]

EuroWeek: The AOFM has formally ended its support of residential mortgage-backed securitization (RMBS) in Australia, apparently a sign that the market has returned to good health. Has it?

The RMBS market is now functioning well and has actually had its best first quarter of issuance since 2007. Primary and secondary market pricing have converged, and investors have a renewed sense of confidence and appetite for the asset class. 

Of course, we all know that RMBS pricing is unlikely to ever return to pre-GFC levels because there’s been a structural shift in investor appetite. But pricing is now much better than for most of the last five years.

EuroWeek: What is being done to make Australia a regional centre for funds management — again, building on that huge pool of superannuation wealth?

The government is committed to promoting Australia as a financial services centre in the region. We want to lead a more competitive, efficient and internationally engaged financial industry and increase its cross border activities within the Asia Pacific region and beyond.  

The government is implementing an investment manager regime, a key recommendation of the Johnson report, which will make Australia more attractive as a destination for investment and encourage employment in the financial services sector.

We are also committed to phasing down the interest withholding tax paid by financial institutions in Australia on certain offshore borrowings from July 1, 2014, working through APEC channels to develop the proposal for an Asia Region Funds Passport; and introducing legislation to cut red tape for businesses issuing simple corporate bonds in order to promote a deep and liquid retail corporate bond market.

EuroWeek: Triple-A ratings are gradually disappearing around the world, such as the US, France and the UK all losing the status with at least one agency — but do you perceive any threat to Australia’s? Just how important is that rating and safe haven status?

Australia has a triple-A status for the first time ever and is one of only eight countries to hold a triple-A/stable credit rating with all the major ratings agencies. 

Australia’s triple-A rating is a solid endorsement of the government’s fiscal management and underlines the attractiveness of Australia as an investment destination.

EuroWeek: Can Australia tolerate the exceptional strength of the Australian dollar in the long term? (NB: the response came before the pull back in the Australian dollar discussed in greater detail in the chapter on economy.)

The current high level of the Australian dollar reflects high world prices for our mining exports, the strength of the Australian economy relative to other advanced economies and the relatively high returns on Australian assets that are associated with this. 

More broadly, the strength in the dollar should be seen in the context of the profound changes that are taking place in the global economy. Asia has for some decades been the region of the world enjoying the fastest rates of economic growth and this seems likely to continue for some considerable time to come. 

As well as generating huge and growing demand for energy and mineral commodities, this rapid economic growth is also delivering millions of people into burgeoning middle classes, in China, India and elsewhere in Asia. 

In the longer term, the increasing numbers of people in the Asian middle classes, with disposable incomes to match, will generate rising demand for a range of Australian goods and services — whether they be a range of foodstuffs, Australian tourist destinations, or educational, financial and other professional services in which Australia has a proven track record. 

EuroWeek: More and more central banks and sovereign funds worldwide appear to be looking at Australian dollar assets. What impact is that having? Is there a point at which inward capital flows begin to cause a potential problem, particularly if they flow out again?

There are a range of factors that have underpinned the dollar’s strength over recent years, only one of which is increased purchases by official reserve managers. A more important influence has likely been inflows of direct equity investment, much of which has been directed at expanding productive capacity in the resources sector. Because direct equity investment is typically made with long-term business objectives in mind, it is regarded as a relatively stable form of capital inflow. Moreover, it is also worth noting that official reserve managers are generally regarded as a more stable investor class than, for instance, foreign non-official investors.

Note: shortly before publication, Bill Shorten became Minister for Education and Workplace Relations.

Australia will hold a federal election on September 7.     

  • By Gerald Hayes
  • 04 Sep 2013

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1 Citi 9,255.41 27 13.59%
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1 Citi 3,402.03 8 20.98%
2 HSBC 2,253.75 3 13.90%
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4 Standard Chartered Bank 1,518.77 3 9.37%
5 JPMorgan 1,507.04 3 9.29%

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1 ING 3,668.64 29 9.07%
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2 JPMorgan 81.25 1 2.50%