Department of foreign affairs anD traDe MAY 2015 envoyiness · introducing a nation-wide negative list, expanding the scope of a proposed national security review mechanism, and closing

business envoy

From Wellington: Ripe conditions for Australian businessThe New Zealand economy grew 3.3 per cent in 2014—the strongest growth recorded since 2007. Construction remained the stand-out sector, driven by demand in Canterbury and Auckland. The Reserve Bank of New Zealand forecasts an average growth rate of three per cent over the next three years but voiced concerns about the ‘unjustifiably’ high New Zealand dollar. The NZD has risen to its highest levels relative to the Australian dollar since the currency was floated

in 1985. The high NZD, combined with export growth narrowly based on a few markets and commodities such as dairy, meat and forestry, creates risks for New Zealand exporters. However the strength of New Zealand’s domestic economy and the high exchange rate is an opportunity for Australian businesses—16,000 of our businesses conduct commerce with New Zealand and over 2,500 Australian firms have a physical presence in New Zealand. Australian imports and holidays are becoming cheaper for New Zealanders and Australia is a more attractive destination for New Zealand investors.

envoybusiness

MAY | 2015Department of foreign affairs anD traDe

in this issue

Australian investment: Views from abroad

Islamic finance

Australian Ambassador to Japan: Bruce Miller

Global perspectivesfrom Australia’s diplomatic network

Connecting DFAT’s diplomatic network to Australian business

Foreign investment has been, and will continue to be, a critical component of Australia’s economic development—improving productivity and supporting 23 years of uninterrupted growth. Australian investment overseas too has opened opportunities for expansion, diversification and growth. This edition of Business Envoy sheds light on current investment trends both into and out of Australia. Articles draw on reports and analysis from Australia’s diplomatic network around the world, including the views of investors overseas. For more information, contact us on [email protected]

From Tokyo: Plans to double FDI amid overseas investment surgeJapanese companies have undertaken a series of multi-billion dollar foreign mergers and acquisitions in recent months—over US$32 billion to March. The rush of buyouts appears to reflect easy credit, strong private sector balance sheets, and Japan’s perceived weak long-term growth prospects. Most mergers and acquisitions continue to take place in developed countries, reflecting a preference for stable political environments with sound accounting frameworks; qualities in which Australia is highly rated. Inbound foreign direct investment has traditionally been low in part because Japan has not required external credit and because of cultural and regulatory hurdles. But the Japanese government aims to change this and double FDI by 2020. The government will introduce several new measures including more foreign-language support, improved airport access for business jets, and the designation of government vice ministers as “investment advisors” to large foreign investors. But this alone is unlikely to make a substantive difference. Investors see the comparatively high corporate tax rate and slow pace of structural reform as bigger issues.

From Riyadh: Implications of declining oil prices on investment flowsSaudi Arabia’s real GDP growth in 2015 is forecast to be 3.0 per cent. This is one of the lowest rates since 2006 and largely reflects the decline in oil prices. Oil continues to generate the vast majority of revenue and attempts at diversification have had modest success. Despite lower revenues, its fiscal stance remains expansionary with forecast spending more than double the level in 2008. The government has also continued to encourage public and private investment overseas, particularly in agriculture assets to address food security. Through the King Abdullah Initiative for Agricultural Investment Abroad, the state-owned Agricultural Development Fund will fund private Saudi investments in the agribusiness sector. While there have been trial investments in the Americas, Africa and Europe, there is potential growth for investment in Australia. Budgetary

pressures may also eventually prompt the government to privatise assets or to seek ways to move running and maintenance expenses for its mega-projects off its books and create opportunities for Australian investors.

From Washington: Obama seeks to rescind Cuba’s State Sponsor of Terrorism designationIn April, President Obama notified Congress of his proposal to rescind Cuba’s designation as a State Sponsor of Terrorism. The rescission would lift US sanctions on defence exports, dual-use items, economic assistance, and some financial engagement. Most transactions between the US and Cuba or Cuban nationals would continue to be prohibited under a series of existing statutory sanctions commonly known as the embargo. The embargo includes most trade and travel between the US and Cuba and can only be overturned by legislation authorised by Congress. So it is likely to remain in effect for some time. Banking also remains a contentious issue. Many banks had not engaged with Cuba due to the reputational risk of working with a ‘terrorist state’. The rescission could see more engagement by US and foreign banks, however, any opening up will depend on Cuba’s willingness to make internal adjustments.

From Accra: Minister of Power facing a power crisisThe Ghanaian Minister of Power, Kwabena Donkor, has acknowledged Ghana’s grave power crisis. It is estimated that the shortage of adequate and reliable power contributed to a loss of between two and six per cent of GDP in 2013 and 2014. Minister Donkor attributed the power crisis to a collective under-investment in the sector over many years, reduced hydro-electric power from very low rainfall, and inefficiencies in the sector. In the short term, the Ministry of Power is negotiating with emergency power generator providers from Turkey and Italy. In the longer term, Minister Donkor envisages the establishment of clean coal-based power to help meet the 12 per cent increase in demand for power per annum. Ghana requires improved power capacity to transform its large iron ore deposits into a viable steel industry. As Ghana does not possess any

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Department of Foreign Affairs and Trade

coal reserves, there could be opportunities for Australian businesses to provide raw materials and services in design and operation for Ghana’s growing energy sector.

From Beijing: Australian businesses should prepare for a new foreign investment regimeChina’s Ministry of Commerce is developing a new foreign investment law. The law would replace the three existing laws that govern the way foreign investment is vetted, approved and monitored. The proposed changes include providing national treatment to foreign investors, introducing a nation-wide negative list, expanding the scope of a proposed national security review mechanism, and closing the legal loophole allowing foreign investors to invest in China through variable interest entities (VIEs). The new law would remove the government’s onerous approval process and the Ministry of Commerce would only be required to approve investments in sectors that fell under the negative list—investments in prohibited and restricted sectors. Australian businesses should be aware that, under the proposed foreign investment regime, it would be unlikely a Chinese company using a VIE ultimately controlled by a foreign entity or individual would be approved to operate in China.

From Lima: An overlooked marketPeru has made remarkable economic and social progress over the last decade. Peru has halved poverty and, with Colombia, regularly tops South America in the World Bank’s ‘Ease of Doing Business’ index. A key part of Peru’s success has been its adherence to orthodox economic policies to provide much-needed stability and certainty. It has signed 16 free trade agreements and is an active member of the Pacific Alliance and Trans-Pacific Partnership negotiations. This policy trajectory, coupled with 10 years of GDP growth over six per cent, has attracted significant foreign investment. The 88 Australian entities active in Peru have invested some $5 billion, mainly in mining, but increasingly in gas, tourism and education. People-to-people links are expanding with Australian visitors climbing

to over 40,000 in 2014 as they are drawn to Peru’s cultural treasures. We expect high-level engagement to increase ahead of Peru’s hosting of APEC 2016.

From Berlin: An economic giant looking for new opportunitiesGermany’s economy is a giant and it’s never been stronger. It makes up approximately one fifth of the European Union’s GDP. Germany’s large trade surplus reached €217 billion in 2014—about $319 billion—and unemployment was at a low of 5.0 per cent. This has produced a huge current account surplus and immense savings which need investment. But the slow Eurozone and the European Central Bank’s extraordinary monetary policy have left too few investment opportunities inside the Eurozone. This should push trillions of Euros abroad over the next five years. It’s already underway: €135 billion left the Eurozone in the fourth quarter of 2014, mostly to the United States, the United Kingdom and Canada. With nearly 500 German businesses employing 110,000 people in Australia and comparatively few Australian companies operating in Germany, greater business engagement can help secure future investment and trade with this economic giant.

From Ankara: Silk roads and Central Asian connectionsTurkey launched the “Silk Road and Caravanserai” initiative with Caspian and Central Asian countries to improve trade links and simplify customs procedures across Eurasia. The Kars-Tbilisi-Baku railway, as part of the initiative, will upgrade transport and improve border operations through Central Asia. It will connect new roll-on-roll-off ferry services across the Caspian Sea from Azerbaijan to Turkmenistan and Kazakhstan. Turkey’s initiative aligns with China’s silk road plans to promote investment in Central Asia and the Balkans. Developing a web of silk roads through the region serves the interests of both China and Turkey and will support trade flows from East Asia to the Middle East and Europe. As connectivity along the ‘silk road’ grows and countries look to become less reliant on traditional markets, Australia’s trade with this region is likely to grow, particularly in mining, agriculture, education and finance.

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From Kuala Lumpur: Logistics gateway to AsiaMalaysia is positioning itself to be ‘the preferred logistics gateway to Asia’. The government has launched a logistics and trade facilitation master plan and a blueprint for the services sector. The government blueprint includes plans to reform and move the services sector up the value chain. Currently 50 per cent of Malaysia’s economic value added comes from sectors with relatively low levels of productivity. The government plans to change this by internationalising service providers, introducing effective investment incentives, developing human capital, and implementing governance reform in the sector. Given that Malaysia is Australia’s tenth largest export market with exports in goods valued at $5.6 billion in 2013, Australian exporters stand to benefit from Malaysia’s trade facilitation efforts.

From Singapore: Koala diplomacy—the business caseMany have heard of ‘panda diplomacy’ where China dispatches pandas to international zoos, cementing ties and generating goodwill. However, few have heard of koala diplomacy. Not in Singapore. The recent loan of four furry envoys from Brisbane’s Lone Pine Sanctuary—part of Australia’s ‘50 Bridges’ program to celebrate Singapore’s 50th anniversary of statehood and 50 years of bilateral relations—has sent the city-state into a frenzy. With 50 works of street art, 50 public performances and 50 concurrent BBQs, ‘50 Bridges’ is possibly the biggest public diplomacy program seen in Singapore to date. Given Singapore’s status as a global centre for business, our diplomatic mission in Singapore is using ‘50 Bridges’ to showcase Australian businesses and products. Meat and Livestock Australia is providing the steaks for the BBQs, firms like NAB, Telstra and VISY have provided funding for 50 performances. Qantas not only flew the koalas but is delivering an ongoing consignment of fresh eucalyptus leaves twice a week. With major sponsorship from over 20 Australian corporates, 2015 promises to be an excellent year to raise Australia’s business profile in Singapore.

From Jakarta: Mixed efforts to develop Indonesia’s finance sectorThe Indonesian government wants to develop Indonesia’s finance sector, including through the consolidation of local banks and insurance companies. The assets of Indonesia’s financial sector are estimated at US$540 billion, 68 per cent of which is controlled by 32 conglomerates. But recent government statements welcoming foreign investment sit at odds with messages that support government intervention to restrict foreign involvement and protect local capacity. Fadel Muhammad, Chair of Indonesia’s parliamentary commission responsible for the finance sector, stated that he intended to push for a 40 per cent foreign equity cap and a ban on foreign-owned banks opening branches anywhere other than in large Indonesian cities by the end of 2015. At present, foreign investors can enter the insurance market through a joint venture but with an 80 per cent cap on foreign ownership, although this cap is also under review. While it is possible the government will apply grandfathering provisions to foreign ownership caps in Indonesia, these limits may curtail Australian companies yet to enter the market.

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TradecraftFree trade agreement negotiations update

North Asia (Korea, Japan & China)Australia’s free trade agreements (FTAs) with Korea (KAFTA) and Japan (JAEPA) are already providing benefits to Australian business, reducing costs and improving market access. A second round of tariff cuts on 1 January (Korea) and 1 April (Japan) this year further strengthened our trading position with these important partners.

Both governments are working towards the China-Australia FTA (ChAFTA) entering into force later in 2015. Australia will then have FTAs with our three largest export markets, which together represent 40 per cent of our total annual trade.

To help Australian businesses take advantage of these three agreements, DFAT, Austrade and other government partners are delivering a national series of FTA information seminars.

Seminars have already been held in metropolitan and regional areas across Australia including Queanbeyan (New South Wales) with Trade and Investment Minister Andrew Robb; Ararat (Victoria) with Small Business Minister Bruce Billson; and the Gold Coast (Queensland) and Adelaide (South Australia) with Parliamentary

Secretary to the Minister for Trade and Investment Steven Ciobo.

See www.austrade.gov.au/ftaseminars for upcoming dates and registrations.

IndiaTrade and Investment Minister Andrew Robb’s visit to India in April built further momentum towards the conclusion of an Australia-India Comprehensive Economic Partnership Agreement (CECA). His visit followed the seventh round of CECA negotiations in Canberra earlier that month. The round covered key issues including market access for goods, services and investment, rules of origin, customs procedures and trade facilitation. Negotiating parties underscored the high priority placed by both governments on concluding negotiations on a balanced and mutually beneficial agreement by the end of 2015.

We welcome submissions and views from business on current negotiations as well as agreements already in force.

See www.fta.gov.au for contact details and updates on all of Australia’s FTAs.

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AmBASSAdoR’S coRneR

//

Bruce Miller

Australian Ambassador to Japan

Mutual interest: Taking a fresh look at Japan

The Japan-Australia Economic Partnership Agreement (JAEPA) and recent initiatives undertaken by the Abe government have opened up a range of trade and investment opportunities in Australia and Japan. Now is the time for Australian businesses to take a fresh look at Japan, one of our longest-standing and most reliable partners, to take advantage of new commercial openings.

With a long and successful trade and investment relationship underpinning our bilateral links, it would be easy to become complacent about the influence and impact of Japanese capital on Australia’s prosperity. Did you know that Japan’s foreign direct investment in Australia has increased by over $25 billion in the last five years and that more is in the pipeline? Japan is also Australia’s second largest trading partner and largest investor in our region.

It is easy to understand why Japan’s investment portfolio is heavily overweighted in Australia.

Few countries are as stable, safe, reliable and friendly as Australia, or as able to provide securely energy, resources and food in large quantities. And Australia is a highly profitable place to do business—there have been years when some of Japan’s global trading companies have sourced over half of their global overseas profits from Australia.

But the relationship is not just transactional; it is based on shared interests. Both Japan and Australia have an interest in efficient and transparent markets that can adjust quickly to changed circumstances and external shocks. We have a shared interest in predictable, representative and rules-based global institutions. And we have a shared interest in a rules-based international framework to support these markets.

These shared interests mean the relationship has not only been incredibly fruitful but characterised by depth, reliability and trust.

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Japanese investment in AustraliaIt took great trust on the part of the Japanese and Australian business people that made the investments which created Western Australia’s iron ore industry in the Pilbara in the 1960s. Similarly, without Japan there would have been no coal or gas industries in Australia as we know them. There would have been no resources boom which has driven growth over the past twenty years. The deepening trust in the 1970s and 1980s allowed us to take advantage of the economic complementarities our countries share: we provided the raw materials necessary for Japan’s post-war industrial transformation and Japan provided us with cheap consumer goods.

This bilateral story is far from over. The global shift in economic weight currently underway will only increase Japan’s interest in securing a stable supply of energy and food resources. And as patterns of global supply and demand change even more rapidly owing to technological change and growth, both consumers and producers will seek greater stability and predictability. Australia offers this in spades.

As strong and important as Japanese investment in Australia already is, there is every reason to believe that, over the long term, it will grow even stronger. JAEPA provides an improved investment environment, including by raising the Foreign Investment Review Board screening threshold for Japanese investors. Just months after JAEPA came into force, Japan Post’s proposed acquisition of TOLL Holdings—worth $6.5 billion—is a landmark foreign investment deal that reflects Japan’s confidence in Australia’s high-quality services sector.

But Australia must remain competitive as an investment environment—we cannot just assume that Japan will continue to invest. We have to constantly be looking for ways to reduce costs, ease regulatory barriers and market our strengths.

Investing in JapanForeign direct investment in the other direction is modest. Australia’s FDI to Japan constituted only 0.1 per cent of Australia’s total global FDI output in 2014, consistent with Japan’s traditionally low inbound FDI from all countries. Prime Minister Abe’s government has recognised the need to reform Japan’s economy and attract more global capital and has proposed a number of reforms to

do this. The stakes are high and Australia has a huge interest in his success.

Commentators tend to focus on Japan’s demographic problems but we must not overlook the fact that Japan will remain a large, highly-affluent economy with over 120 million consumers willing to pay a premium for high-quality goods and services. As a reformer, Prime Minister Abe has already well surpassed most observers’ expectations.

His key reforms include:

ћ deregulating the electricity market

ћ lifting female and retiree workforce participation, and allowing foreign workers

ћ encouraging business to lift return on equity by hoarding less cash and seeking higher returns through the use of public-private partnerships to renew Japan’s infrastructure.

Japanese government plans to transfer large state-run assets to the private sector will create significant opportunities. For example, Australian firms are in the running to acquire the long-term lease to operate New Kansai and Osaka Itami International Airports.

Deregulation of Japan’s electricity market is arguably the most advanced area of reform. This represents the biggest post-war restructuring of the industry—separation of generation, transmission and distribution. The government is also considering deregulation of the gas market from 2022. These changes are already having a big impact on Japan’s overseas energy investments as well as the customers Australia sells its energy to. Japan’s largest and third-largest utilities (TEPCO and Chubu Electric) have announced a joint venture that will make them the largest liquefied natural gas buyer in the world.

Rapid expansion of Japanese companies into Asia, especially Southeast Asia, increases the opportunities for Australian companies to tap into global supply chains. Low tariffs under JAEPA increase Australia’s ability to meet Japan’s food and energy security needs. Japan’s hosting of the 2019 Rugby World Cup and 2020 Olympics also present valuable commercial opportunities in the areas of sporting events management and infrastructure development.

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AUSTRALIA & FoReIGn dIRecT InveSTmenT

AUSTRALIAn dIRecT

InveSTmenT ABRoAd:

$540.7 billion

* not published.All data 2014 figures.

Data source: DFAT and ABS.

FoReIGn dIRecT InveSTmenT In AUSTRALIA:

$688.4 billion

$ £¥ €

dIRecT InveSTmenT BY SecToR:

conSTRUcTIon

$18.9 billion $11.6 billion

TRAnSpoRT & SToRAGe


ReAL eSTATe


InFoRmATIon & commUnIcATIon


AGRIcULTURe, FoReSTRY & FIShInG

$1.3 billion NP*

oTheR SeRvIceS & UnALLocATed

$69.0 billion NP*

pRoFeSSIonAL, ScIenTIFIc & TechnIcAL

$3.8 billion $NP*

eLecTRIcITY, GAS, WATeR & WASTe


AccommodATIon & Food SeRvIce

$8.1 billion NP*

AdmInISTRATIve & SUppoRT

$1.5 billion $NP*

+hUmAn heALTh & SocIAL WoRK


mInInG & qUARRYInG


mAnUFAcTURInG


WhoLeSALe & ReTAIL TRAde


FInAncIAL & InSURAnce


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Australian investment: Views from abroad

Australia’s inward and outward investment flows are of great importance to Australia’s economic trajectory—more so in the context of declining commodity prices. For Australia, it raises a number of questions. How will Australia continue to attract foreign investment and promote economic growth and prosperity? What will enhance Australia’s attractiveness as an investment destination? And for Australian investors, what are the conditions in overseas markets that will affect investment opportunities?

Global investment flows are slowly picking up and advanced and emerging economies are vying to attract investment. This presents new opportunities for Australian investors but underscores the importance for Australia to remain competitive as an investment environment.

DFAT’s diplomatic missions are its eyes and ears on the ground for understanding the impacts

of changing global conditions on economic performance and the perceptions of foreign businesses and governments of the Australian business environment. This snapshot of Australia’s investment environment draws from assessments by our diplomatic missions overseas.

Global investment trendsGlobal investment flows are increasing on the back of strong growth in some economies and expansionary monetary policy in major economies. However, flows remain well below the peak achieved immediately prior to the Global Financial Crisis. Investors appear reluctant to undertake new capital expenditure (capex), particularly in advanced economies. Instead, they are favouring bank deposits or searching for higher yields on existing equity.

In line with global trends, Australia’s two-way foreign investment flows have picked up though they remain below pre-GFC levels. Foreign investment flows into Australia are under pressure partly because the peak of the resources boom—including the significant investment phase—has abated against the backdrop of softer commodity prices. Australia’s total capex for 2015-16 is expected to be lower than last year based on ABS capital expenditure data.

economIc ASSeSSmenT

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Investment & economics Branch

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Key global economic developments affecting investment decisions:

ћ Softening commodity prices in response to slowing global demand.

ћ The slowdown in the Chinese economy as it transitions to a more sustained growth path.

ћ The divergence in monetary policies in advanced economies, with the US having ended its quantitative easing program, while the Eurozone and Japan are currently undertaking their quantitative easing programs.

ћ The shifts in currency markets, with the US dollar strengthening, driven in part by the above factors.

Foreign investor views of AustraliaAustralia enjoys a largely positive image as an investment destination. Foreign investors view favourably Australia’s stable political

and legal environment and strong economic fundamentals—including its ‘open for business’ reputation and innovative business environment.

For these reasons and coupled with a familiar cultural and business environment, many European and North American investors see Australia as a ‘gateway to Asia’. Investors from Asia view Australia’s proximity and favourable time zones as an advantage for investment. Asian investment has grown in agriculture, mining and natural resources, food and beverage and medical and chemical products. Australia’s high-tech sector is starting to attract investment interest from several countries to access advanced technologies and expertise.

The growing links with Asia have been reinforced by the recent conclusion of free trade agreements with some of Australia’s largest trading partners in the region: Korea, Japan and China. These agreements have generated increased interest from foreign investors and opened trade and investment opportunities for Australian businesses abroad.

Australia’s high-tech sector is starting to attract investment interest from several countries to access advanced technologies and expertise.

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There are also some developments in other economies which underpin investment into Australia. The rising Asian middle class has driven Asian investment into Australia’s tourism sector. Quantitative easing in Japan and the Eurozone has increased institutional appetite for outward investment. Structural reforms can also underpin outward investment. For example, the Japanese Government Pension Investment Fund’s reforms include plans to increase foreign equity holdings.

However, foreign investors have expressed some concerns about the Australian business environment. Some investors perceive Australia as a high-cost market including labour and land. This concern comes despite downward pressures on costs with a lower Australian dollar, stable real wages over the past three years and lower input costs as commodity prices have fallen. Investors have also expressed at times concerns about the cost and complexity of business regulations in Australia. Investment partners want to see Australia adopt a ‘one-stop shop’ for all foreign investment that covers compliance for all jurisdictions.

Investment partners want to see Australia adopt a ‘one-stop shop’ for all foreign investment that covers compliance for all jurisdictions.

The Australian Government is addressing the complexity of regulation. Through the biannual regulation repeal days, the government has removed over 21,000 regulations and saved businesses over $2 billion in compliance costs per year. The ‘one-stop shop’ for environmental approvals eliminates duplication between jurisdictions and has saved business approximately $426 million per year. Federal

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project approval times have been slashed to below 200 days from an average of 470 days in 2012. Investors are also showing increasing interest in the government’s asset recycling program, which is creating new infrastructure opportunities.

Some investors also report uncertainty around Australia’s Foreign Investment Review Board. Australia’s investment framework is transparent and is nevertheless far more welcoming than many other countries within our region. In fact, FIRB has only rejected three investment proposals since 2001.

Australian investment abroadA number of partner countries are pursuing pro-market reforms which will increase opportunities for Australian investment. In Japan, this includes ‘Abenomics’ reforms to reduce corporate tax rates and create special economic zones with more liberal visa regulations and tax breaks. In China, this includes gradual foreign investment liberalisation in the Shanghai Free Trade Zone and the internationalisation of China’s financial sector. In India, the Modi government’s pro-business agenda seeks to streamline regulation and simplify the process for foreign investors.

...only nine per cent of Australian businesses are currently operating in Asia and only 12 per cent have any experience of doing business in Asia at all.

The rising Asian middle class and changes in the patterns of consumption of households, businesses and governments have generated a range of investment opportunities for Australian companies in areas such as financial services, architecture and urban design, health and

aged care, education, and e-commerce. Asian economies also provide Australian investors a foothold into global value chains—which now account for 80 per cent of world trade. Yet a 2014 PricewaterhouseCoopers report notes only nine per cent of Australian businesses are currently operating in Asia and only 12 per cent have any experience of doing business in Asia at all.

500

1000

1500

2000

2500

3000

Australian investment abroad

Foreign investment in Australia

20142013201220112010200920082007200620052004

$ billion

Chart: Foreign investment in Australia and Australian investment abroad: 2004-2014.

Australian businesses perceive a range of deterrents to investing abroad. Geopolitical tensions and political instability have affected the investment environment in some economies. Informal barriers also deter investment such as unfamiliar cultural, political, institutional and business frameworks. Regulatory restrictions on inward investment such as limits on foreign ownership and restrictions on skilled migration are hard barriers, as are discriminatory taxation arrangements. Uncertainty regarding institutions, regulations and legal systems can be an obstacle. Competition from well-connected state-owned enterprises deters market entry by both domestic and foreign firms. Where possible, the government is undertaking targeted programs, negotiations and advocacy to reduce those barriers.

Asian economic partners collectively accounted for 15 per cent of Australia’s outward investment in 2014. In contrast, 77 per cent of Australian exports were destined for Asian markets while 50 per cent of imports came from Asian markets. As investment has historically often followed trading patterns, this pattern suggests possibly untapped opportunities for investment in Asia by Australian firms.

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The Trans-Pacific Partnership Agreement and cross-border investmentTrans-Pacific Partnership Agreement (TPP) negotiations involving Australia and 11 other Asia-Pacific countries are close to conclusion. These countries account for 25.5 per cent of world trade and over 35 per cent of the world’s economy. For Australia, the 11 negotiating countries represent a third of our two-way trade. The stock of foreign investment in Australia from TPP countries increased by 6 per cent in 2014 to reach $1.1 trillion. The stock of Australian investment in other TPP countries rose by 16 per cent in 2014 to reach $868 billion (or 45 per cent of all Australian investment in other countries).

The TPP will provide opportunities to transform Australia’s trade and investment relationships with 11 other Asia-Pacific countries. The TPP will improve market access opportunities for investors in key sectors of Australian export interest, such as education, legal and financial services. The TPP will also promote a stable, predictable and transparent regulatory environment for investment in TPP countries, whilst preserving the Australian Government’s ability to regulate in the public interest.

In general terms, disciplines under negotiation in the TPP of benefit to Australian investors include:

ћ that Australian investors and investments may not be treated less favourably, in like circumstances, than other investors with respect to the establishment, acquisition, operation and sale of investments in TPP countries;

ћ that investments in TPP countries may not be expropriated or nationalised in the absence of prompt, adequate, and effective compensation;

ћ that investments in TPP countries must be treated in accordance with an internationally accepted minimum standard of treatment, which includes obligations of fair and equitable treatment and protection and security of investments; and

ћ investor-state dispute settlement provisions that promote investor confidence in TPP countries, while retaining the Australian Government’s ability to regulate in the public interest and pursue legitimate public welfare objectives in areas such as health, safety and the environment.

For more information visit www.dfat.gov.au/tpp

The Tpp coUnTRIeS RepReSenT

25.5% of world trade valued at US$12.0 trillion

$ 36.3% of the world economy

valued at US$28.0 trillion

11.2% of world population a market of 805 million people

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Islamic financeIslamic finance is one of the fastest growing segments of the global financial industry. Global Islamic finance assets increased from approximately US$200 billion in 2004 to US$1.8 trillion in 2013 and could reach US$3 trillion by 2020. This is fuelled by both population and income growth in Muslim communities and increased investment from non-Muslims who view Islamic finance as low risk and ethical. Some analysts argue that because sukuk (Islamic finance bonds) have to be based on underlying tangible assets, there is a lower risk of over-exposure, which allowed some Islamic finance products to outperform conventional finance products in the GFC.

There are strong indications that current demand for Islamic finance products outstrips supply. Banks in the Gulf Cooperation Council and Malaysia have become flush with Islamic deposits and are scouring for opportunities to deploy them in Islamic finance instruments to diversify risk and improve yields. In June 2014, the UK became the first non-Muslim

nation to raise money by issuing a sovereign Sukuk. The £200 million investment attracted strong demand—it was more than 10 times oversubscribed by investors based in the UK and major global Islamic finance hubs.

Australia is well positioned to meet this growing demand by offering suitable Islamic finance investments. Australia offers an attractive investment climate for foreign investors including its stable, low-risk political and economic environment, 23 years of continuous growth and its proximity to the growing demand for Islamic finance products in Asia.

Australia also has a competitive advantage in the finance sector with its focus on financial services innovation and exports; experience in financial engineering and product design; funds management experience and expertise; best in class securities exchange; the reputation of its regulatory and legal system; and the stability of its financial sector during the GFC.

ISLAMIC FINANCE PROHIBITS: ћ Payment of interest ћ Excessive uncertainty of payouts ћ Short sales ћ Financing activities considered harmful to society

TRANSACTIONS MUST BE UNDERPINNED BY AN IDENTIFIABLE TANGIBLE ASSET

FINANCIAL PRODUCTS MUST BE CERTIFIED BY AN ExPERT OR SCHOLAR IN ISLAMIC LAW

SUKUK IS A FINANCIAL CERTIFICATE THAT DOES NOT PAY OR CHARGE INTEREST BUT GRANTS THE HOLDER A SHARE IN AN UNDERLYING ASSET ALONG WITH COMMENSURATE PROFITS, CASH FLOW AND RISK

WhAT IS ISLAmIc FInAnce?Islamic finance is conventional finance re-engineered to comply with the tenets of Islamic law. Depositors in Islamic banking can be compared to investors or shareholders who earn dividends when the bank makes a profit and lose part of their savings if the bank posts a loss.

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Economic highlights ћ After china’s GDP in the first quarter grew by

7.0 per cent (yoy), the lowest rate since the first quarter of 2009, authorities reduced the reserve requirement ratio to shore up growth. Australia’s exports to China are expected to continue to grow, but at a slower pace.

ћ The US economy was unexpectedly sluggish in the first quarter of 2015, growing at an annual rate of 0.2 per cent, due in part to transitory factors such as severe weather and industrial action. Not unexpectedly, at its end-April meeting, the Federal Reserve kept its target interest rate unchanged. Its continuing cautious approach to interest rates supports a weaker Australian dollar which is beneficial for Australian exports.

ћ Japan’s unprecedented US$670 billion-a-year bond-buying program is a key part of the government’s plan to reinvigorate an economy which contracted by 0.1 per cent in 2014. The economy is expected to recover gradually, benefiting in part from a weakening currency and lower commodity prices. Australian exports should gain from the improvement in Japanese demand. Increased liquidity in Japan provides the means for greater Japanese investment in Australia.

ћ Greece is hoping to finalise a deal with its international creditors. Athens is waiting for a further €7.2 billion in rescue funds and, without that money, it seems unlikely the country can pay almost €1 billion due to the IMF in May. Failure to reach an agreement could unsettle global financial markets with possible impacts for the global and Australian economic outlook.

ћ In the lead-up to the May general elections, the United Kingdom’s economy slowed unexpectedly, growing by 0.3 per cent (qoq). This is the slowest quarterly growth in two years and has been variously attributed to uncertainty ahead of the elections, ongoing malaise in the eurozone, the slowdown in China and sluggish recovery in the United States.

Key statisticsTop expoRT & ImpoRT coUnTRIeS/ReGIonS

$ billion 2013-14

% Growth (YoY)

exportsChina $$ 107.5 $© 26.9Japan $$ 51.0 $© 4.8Republic of Korea $$ 22.5 $© 8.2United States $$ 17.0 $© 14.8New Zealand $$ 11.5 $© 6.4ASEAN $$ 37.1 $© 10.1EU28 $$ 21.8 $ª 10.1ImportsChina $$ 52.1 $© 12.4United States $$ 41.2 $© 2.9Japan $$ 21.2 $© 2.2Singapore $$ 18.6 $ª 2.8Germany $$ 13.9 $© 11.7ASEAN $$ 61.8 $© 5.8EU28 $$ 61.5 $© 8.0

AUSTRALIA’S TRAde BY BRoAd SecToR$ billion 2014

% Growth (YoY)

exports (total) $$ 326.7 $© 2.4Rural $$ 40.5 $© 6.9Minerals & fuels $$ 157.9 $© 0.4Manufactures $$ 42.7 $© 4.4Other goods $$ 12.2 $ª 2.2Gold $$ 14.2 $ª 5.2Services $$ 59.2 $© 6.8Imports (total) $$ 336.6 $© 2.2Two-way trade $$ 663.3 $© 2.3Balance of Trade $$ -9.9 $ª 4.2

Top expoRTS & ImpoRTS$ billion 2014

% Growth (YoY)

exportsIron ore and concentrates $$ 66.2 $ª 4.8Coal $$ 38.0 $ª 4.5Natural gas $$ 17.8 $© 22.0Education services $$ 16.7 $© 11.2Personal travel (ex education) $$ 14.2 $© 8.2ImportsPersonal travel (ex education) $$ 24.8 0.0Crude petroleum $$ 20.3 $© 0.3Refined petroleum $$ 18.7 $© 2.5Passenger motor vehicles $$ 17.6 $ª 3.9Telecom equipment & parts $$ 9.9 $© 8.6

AUSTRALIA’S InTeRnATIonAL InveSTmenT poSITIon (dIRecT InveSTmenT)

$ billion as at 2014

% Growth (YoY)

Foreign direct investment in Australia: 2014United States $$ 163.4 $© 12.8United Kingdom $$ 87.4 $ª 0.3Japan $$ 66.1 $© 2.7World $$ 688.4 $© 8.7ASEAN $$ 42.3 $© 14.2EU28 $$ 169.6 $© 13.9Australian direct investment abroad: 2014United States $$ 136.2 $© 8.7New Zealand $$ 61.6 $© 30.1United Kingdom $$ 55.2 $© 5.3World $$ 540.7 $© 6.5ASEAN $$ 29.1 $© 3.3EU28 $$ 83.5 $© 6.4

Source: ABS.

For more Australian trade and investment statistics see: www.dfat.gov.au/trade

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AcknowledgementsBusiness Envoy brings insights from Australia’s global diplomatic network to the Australian business community. It considers global geopolitical events and trends, their economic implications and what they might mean for Australian business.

Business Envoy is produced by the Economic Advocacy & Analysis Branch of the Department of Foreign Affairs and Trade (DFAT). Any views expressed within are those of DFAT officers and not the views of the Australian Government.

DFAT does not guarantee, and accepts no legal liability arising from or connected to, the accuracy, reliability, currency or completeness of any material contained in this publication. DFAT recommends that readers exercise their own skill and care with respect to their use of this publication and should obtain professional advice relevant to their particular circumstances.

With the exception of the Commonwealth Coat of Arms and where otherwise noted, all material presented in this publication is provided under a Creative Commons Attribution 3.0 Australia licence. Material in this publication can be shared or adapted for any purpose in accordance with the licence terms available on the Creative Commons website.

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