Payment Of Interest, Insolvency Risks: Australian Economic Analysis

GDP of Australia, Inflation Rate, and Employment Status

Discuss About The Payment Of Interest Might Become Insolvent?

The Australian economy is growing and has enjoyed a success in the recent decades that reflects that the company has a strong macroeconomic policy, structural reform, and the long commodity boom. The economy of the country grew by 2 ½ percent over 2016. In the year 2016, the GDP of the country was 1204.62 billion US dollars (Reserve Bank of Australia, 2017). The GDP value of the country reflects 1.94% of the world economy (Trading Economics, 2018).

According to the trading economics, global macros models and analysts expectation, the inflation rate in Australia is expected to be 2.00 percent by the end of this quarter. Moreover, it is predicted that the inflation rate in Australia to stand at 2.20 in the following 12 months. Considering the econometric model, the inflations rate is projected to trend around 2.50% in 2020 (Trading Economics, 2018). 

The statistics of Australia’s employment is an important indicator of the socio-economic status. The level of the part-time employment, labor force, and unemployment specifies the strength of the social characteristics of the population. The below-given table reflects the employment status of the country for the year 2016 and 2011. The last column of the table reflects the change in the number from the year 2011 to 2016 (Australia Community, 2018).

Employment status is related to the number of the factor that includes age structure that can create an impact on the economic base and employment available in the particular area (.

The home loan statistics of Australia states that as of 2017, Australia’s housing stock numbers approximately 10 million homes with nearly 20,000 new dwellings approved every month. In this country buying a home is one of the expensive purchases which are done by the people due to which they have to rely on the home loan. In December 2017, the total value of the home loans written in Australia was $21.4 billion with the average loan size being $393,200. The average loan decreases to $334,700 for the first home buyers. In the country, New South Wales State has the highest average loan at $460,100 compared with any other state (Finder, 2018). Considering the data, it has been analyzed that the home loan falls in Australia than previous.

The business cycle refers to as the economy-wide fluctuation in production, general economic activity, and trade. This business cycle has four distinct phases which include expansion, peak, contraction and tough (Kent, 2014).

Home Loan Statistics of Australia

Currently, Australia is in expansion phase because of the following reasons: –

• Increase in employment: – Considering the analysis conducted it has been found that there is growth in the employment with the rise in the labor force that shows that expansion of the company brought a rise in the opportunities for candidates.
• Rise in prices: – there is a rise in the inflation of the country which shows that the prices of the products are increasing due to which the phase of the country is expansion.
• Economic growth: – Australia’s economy is growing year by year which shows that there are many new businesses are contributing to the growth of the economy of the country. Moreover, considering the current yield curve of the company it has been found there is rise. Current yield is a bond’s annual return based on its annual coupon payment and price. The Australia yield curve for 2018 is given below which support the expansion phase of the country (World Government Bonds (2018).

Australia Yield Curve- 2^nd April 2018 (Australian Government bonds)

The Australian dollar is the currency of Australia. The code of the currency for the dollars is AUD and the symbol is $. An Australian currency ranking shows that most of popular Australia Dollar exchange rate is the USD to AUD rate. There are two common measures which are used to measure the Australian dollar exchange rate that is bilateral exchange rate against US dollar and TWI (Trade-weighted index). The credit rating agency Standard and Poor’s had maintained Australia’s AAA credit rating with a stable outlook (Currency, 2018).

Australia’s net government debt as a percentage of GDP in the year 2016-17 budget was predicted at 18.9% that is approx. $326.0 billion which is much lower than the other developed countries. In the year 2016, the Australia public debt was 517,457 million dollars which have been increased since 2015 by 51,730 million. According to the latest data, in 2016, it was 21,447 dollars per inhabitant. The debt of the government is increasing because its continuing budget deficits and roll over the existing loans that are maturing (Country Economy, 2016).

There are mainly four stock exchanges with the name of Australian Securities Exchange, Bendigo Stock Exchange, National stock exchange of Australia and the Asia Pacific stock exchange. These companies offer the exchange of services including trading, clearing, settlement and many different assets. These stock exchanges include different listed companies and issuers across the world. The products of the exchanges include shares, bonds, Indices, hybrid securities, ETPs, managed finds, warrants and many others. The normal trading hours of the stock exchange takes place from 10:00 am to 4:00 pm, Sydney time.

The regulatory authorities in Australia include

• The reserve bank of Australia- RBA has the responsibility of licensed clearing and settlement facilities of the country.
• The Australian Securities and investments commission- ASIC is responsible for the supervision of the real-time trading of the country’s domestic market. Along with this, it provides the supervision to AFSL (ASX, 2018).
• Treasury- This department develops the economic policy so this regulator is responsible for the economic policies of Australia.
• The Australian Prudential Regulatory Authority – This regulator is responsible for the Australian financial services industry.
• Council of financial regulators- CFR is the coordinating body for Australia’s main financial regulatory agencies. This regulator is responsible for the smooth financial regulation and stability.

The size of the capital market of the country can be reflected with the help of the Market capitalization of the country that is 126.74 billion at present.

The Size of the money market of Australia in US$ is expected to be 139, 80,000. The money market of the industry has been volatile from the past five years but it has risen overall on the back of stronger government debt securities over the period. Moreover, the industry revenue is forecasted to rise at an annualized 2.5% over the 5 years (IBIS world, 2017).

The Australian OTC derivatives market is a comparatively small share of the global market with the activity that mainly focuses on the Australian-dollar denominated contracts. In Australia, most of the product class that is used include single-currency interest rate derivatives, cross-currency swaps and the FX derivate (Reserve Bank of Australia, 2012).

Business Cycle of Australia: Current Phase

A small corner store has decided to renovate and needs to borrow $20,000 to proceed with the renovations. The length of the loan is assumed as 36 months with the interest rate of 7%. The owner can repay the loan the monthly installments. Below given calculation reflects the monthly installment that the owner has to pay.

Loan Repayment
Principle	20,000	20,000
Rate	7%	0.07
length of loan	36 months	36
Monthly Payment = P*[r(*1+r)^n/[(1+r)^n-1)		1534.306

A bank needs to borrow $8,000,000 for a period of 48 hours to cover a short-term funding requirement. It has been assumed that the rate of interest is 4%. The calculation of the amount of interest is given below: –

Amount of interest
Principle	8,000,000	8,000,000
Rate	4%	0.04
Time	48 hours	0.0657
Amount= P*(1+r*t)		8021024
Amount of interest		21,024

The government needs to a fund a budget deficit at times when they find very crucial condition. In the budget deficit, the expenditure exceeds the revenue that is collected through taxes and non-tax revenue. At that point in time, the government can try to cut back on their expenditure or can increase the revenue of the country by generating business activities. In addition, the product can be borrowing the amount from the market or from the reserve bank of Australia. When the government borrows the amount then they have to pay the interest which means they have to again get involved in the expenditure.

A graduate engineer has $ 10,000 to invest and wants to keep adding $500 per month to the investment on a regular basis for a long-term but not happy to take the much investment risk. It has been assumed that the rate of return is 8% and the duration of the investment is 36 months. The calculation of the amount saved by the engineer at the specific time is given below: –

Calculation of the amount saved
Month	Opening	Add	Total	Interest	Closing
1	10000	500	10500	70	10570
2	10570	500	11070	73.8	11143.8
3	11143.8	500	11643.8	77.62533	11721.43
4	11721.43	500	12221.43	81.47617	12302.9
5	12302.9	500	12802.9	85.35268	12888.25
6	12888.25	500	13388.25	89.25503	13477.51
7	13477.51	500	13977.51	93.18339	14070.69
8	14070.69	500	14570.69	97.13795	14667.83
9	14667.83	500	15167.83	101.1189	15268.95
10	15268.95	500	15768.95	105.1263	15874.08
11	15874.08	500	16374.08	109.1605	16483.24
12	16483.24	500	16983.24	113.2216	17096.46
13	17096.46	500	17596.46	117.3097	17713.77
14	17713.77	500	18213.77	121.4251	18335.19
15	18335.19	500	18835.19	125.568	18960.76
16	18960.76	500	19460.76	129.7384	19590.5
17	19590.5	500	20090.5	133.9367	20224.44
18	20224.44	500	20724.44	138.1629	20862.6
19	20862.6	500	21362.6	142.4173	21505.02
20	21505.02	500	22005.02	146.7001	22151.72
21	22151.72	500	22651.72	151.0114	22802.73
22	22802.73	500	23302.73	155.3515	23458.08
23	23458.08	500	23958.08	159.7205	24117.8
24	24117.8	500	24617.8	164.1187	24781.92
25	24781.92	500	25281.92	168.5461	25450.46
26	25450.46	500	25950.46	173.0031	26123.47
27	26123.47	500	26623.47	177.4898	26800.96
28	26800.96	500	27300.96	182.0064	27482.96
29	27482.96	500	27982.96	186.5531	28169.52
30	28169.52	500	28669.52	191.1301	28860.65
31	28860.65	500	29360.65	195.7376	29556.38
32	29556.38	500	30056.38	200.3759	30256.76
33	30256.76	500	30756.76	205.0451	30961.81
34	30961.81	500	31461.81	209.7454	31671.55
35	31671.55	500	32171.55	214.477	32386.03
36	32386.03	500	32886.03	219.2402	33105.27

A portfolio manager is concerned that equities are not going to perform as well as they have in the past. The manager is not willing to sell the portfolio due to cost reasons. The three products which could be used at this time include fixed income, Debt, and Arbitrage Funds. Therefore, it is recommended to the manager to invest in these products for trading. These products are mainly used at the place of the equity for trading.

Note- It is not assumed that debt is not included in the portfolio. Therefore, debt is considered as one of the products in which the company should invest as the ideal ratio between equity and debt in the portfolio is 50:50.

Market risk and specific risk are the two different forms of the risk that can create an impact on the assets. The market risk is the option of an investor exercising losses because of the factors that can impact the overall performance of the financial market. On the other hand, the specific risk is the possibility of losing an investment due to industry or company specific hazard.

Stock Exchanges of Australia

In the Australian market, these risks are faced by many of the companies, investors, and other people. The Australian property investor faces the market risk many times while purchasing the properties. The investors might diversify the market risk to a partial extent when they find that the wider property market crashes as diversification is unlikely to assuage the market risk successfully. It is recommended that the property investors should additionally invest the amount in the other assets classes that tend to move in a non-correlated manner to real estate. Moreover, the property investors can also focus on longer investment time horizon that allows correcting markets greater opportunity to cover (Wargent, 2018).

The equity investors and fund manager discuss more the specific or business risk as these risks are related to the stock or security. Most of the business in the Australia who deals in the same industry faces the business risk. Issuers of stocks or bonds might not be able to make the payment of interest or might become insolvent. Specific risk for the investors of Australia is different and rather related to the risk of acquiring a loss-making property.

References

ASX (2018) Regulatory authorities in Australia [Online] Available from https://www.asx.com.au/regulation/regulatory-compliance/regulation-australia.htm [Accessed on 2^nd April 2018]

Australia Community (2018) Australia [Online] Available from:  https://profile.id.com.au/australia/employment-status [Accessed on 2^nd April 2018]

Country Economy (2016) The national debt increased in Australia [Online] Available from:  https://countryeconomy.com/national-debt/australia [Accessed on 2^nd April 2018]

Currency (2018) AUD – Australian Dollar [Online] Available from:  https://www.xe.com/currency/aud-australian-dollar [Accessed on 2^nd April 2018]

Finder (2018) Australian Home Loan Statistics [Online] Available from:  https://www.finder.com.au/australian-home-loan-statistics [Accessed on 2^nd April 2018]

IBIS world (2017) Money Market Dealers – Australia Market Research Report [Online] Available from: https://www.ibisworld.com.au/industry-trends/market-research-reports/financial-insurance-services/money-market-dealers.html [Accessed on 2^nd April 2018]

Kent, C. (2014) The Business Cycle in Australia [Online] Available from:  https://www.rba.gov.au/speeches/2014/sp-ag-131114.html [Accessed on 2^nd April 2018]

Reserve Bank of Australia (2012) Australian OTC Derivatives Market Activity [Online] Available from: https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/otc-deriviatives/reports/201210-otc-der-mkt-rep-au/australian-otc-derivatives-market-activity.html [Accessed on 2^nd April 2018]

Reserve Bank of Australia (2017) Domestic Economic Conditions [Online] Available from: https://www.rba.gov.au/publications/smp/2017/may/domestic-economic-conditions.html [Accessed on 2^nd April 2018]

Trading Economics (2018) Australia GDP [Online] Available from:  https://tradingeconomics.com/australia/gdp [Accessed on 2^nd April 2018]

Trading Economics (2018) Australia Inflation Rate – Forecast [Online] Available from https://tradingeconomics.com/australia/inflation-cpi/forecast [Accessed on 2^nd April 2018]

Wargent, P. (2018) The 10 Major Risks Faced By Australian Property Investors [Online] Available from: https://propertyupdate.com.au/the-10-major-risks-faced-by-australian-property-investors2014/[Accessed on 2^nd April 2018]

World Government Bonds (2018) Australia Government Bonds – Yields Curve [Online] Available from: https://www.worldgovernmentbonds.com/country/australia/ [Accessed on 2^nd April 2018]