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Economic diplomacy brief: Summit budgets and mixed messages from Australia’s foreign investment

It’s easy to overlook an event that perhaps offers Turnbull his best shot at his own regional legacy this term – the summit of Southeast Asian leaders in Sydney next March.

An ASEAN Summit ceremony in April 2017. Australia will host ASEAN leaders in Sydney next year (Photo: Flickr/ASEAN Secretariat)
An ASEAN Summit ceremony in April 2017. Australia will host ASEAN leaders in Sydney next year (Photo: Flickr/ASEAN Secretariat)

Turnbull's regional legacy?

The spending contrasts between the softer and harder aspects of international policy in the 2017 Budget have underlined again how aid is being left behind by the military (see Alex Oliver's comments here and Jonathan Pryke's here).

But there's some significant spending on the softer side outside the Department of Foreign Affairs and Trade allocation that hasn't received much attention – that's the $56 million being spent on the summit of Southeast Asian leaders in Sydney next March.

Amid the foreign policy challenges emanating from Washington, Beijing and London, it's easy to overlook an event that perhaps offers Prime Minister Malcolm Turnbull his best shot at his own regional legacy this term (which could be his only term, judging by the opinion polls).

The budget allocated $37 million on top of the $18 million in last year's Mid-year Economic and Fiscal Outlook. That's about 10% of spending on the Group of 20 summit year in 2014, but still quite significant. This will be only the second time the Association of Southeast Asian Nations (ASEAN) leaders have met outside their own region for a dedicated summit, after former US President Barack Obama wooed them to California last year.

The G20 also came with a lot of built-in baggage, whereas the ASEAN summit offers Turnbull the opportunity to fashion a new relationship with Australia's closest Asian neighbours when the regional outlook is very uncertain.

That's not to say the ASEAN leaders won't bring their own baggage of inward-looking leadership and cautious decision-making. But those present at the annual ASEAN-Australia gathering in Laos last year say Turnbull did an engaging job of trying to draw together the strands of agreement from a diverse set of countries. While ASEAN gets scant attention and tends to be overshadowed by events within its individual members, the combined region is now Australia's third-largest two-way trading partner after China and the European Union (and that's pre-Brexit). Exports to this region are now larger than to the US and Europe (and close to overtaking Japan), but Australia still runs a trade deficit, suggesting ASEAN is an increasingly important part of the supply chain into Australia.

Apart from the Hong Kong negotiations launched this week, the region offers the best prospects for new trade deal openings for Australia, ranging from the individual negotiations with Indonesia to potential changes to the ASEAN-Australia-New Zealand arrangement (ANZFTA) and the Regional Comprehensive Economic Partnership, which is based on ASEAN.

While Australian companies are arguably missing opportunities in fast-growing Southeast Asia, with the latest investment figures (see below) showing New Zealand pulling ahead again as an investment destination, it is not well appreciated that the inward and outward ASEAN investment relationship is still larger than with China. It is also more balanced than Australia's investment relationship with most major countries, which is possibly a plus from a diplomatic perspective when Turnbull sits down to talk.

The other summit

If there's any concern over the cost of the ASEAN summit, the 2017 Budget has served the useful purpose of laying out how it will actually only be the second-most expensive meeting Australia will be paying for next year.

The winner is the Asia Pacific Economic Cooperation (APEC) group summit in Port Moresby, where the Budget sets out $58 million in police security assistance from Australia (though some of that is ​coming from existing overseas development aid and existing Australian Federal Police resources). The AFP drew a line in the sand this week over the scope of its assistance by ruling out firearms training.

In addition to the budget spending, there is unspecified defence and economic support from existing aid resources. This still seems short of the $100 million cost speculated earlier in the year, but given the uncertain political and economic environment in PNG we're still in early days.

It is also interesting to note that the latest International Monetary Fund staff report on PNG makes no reference to the cost of the APEC event, after the rather astonishing reference in the previous report that PNG planned to spend about three billion kina ($1.3 billion) preparing for the summit. The IMF was framing the situation from an economic stimulus point of view (for example taking in airport refurbishment) in an economy facing a sharp slowdown, rather than a ​fiscal prudence viewpoint, but got a furious rebuttal from Prime Minister Peter O'Neill.

This time it has simply observed that after this year's election spending and next year's APEC spending, the country won't have much stimulus firepower left in its economic arsenal.

Follow the money

The latest foreign investment numbers contain some mixed messages on how investors are shifting their money around amid the increasingly uncertain diplomatic landscape.

The basic message is that Australia is still proving an attractive destination for foreign investment, despite concerns about its post-resources boom economic settings. Inward foreign direct (or controlled) investment (FDI) increased slightly more than in the previous two years at 9%, to a total stock of $796 billion.

The standout new capital supplier to Australia is Canada, whose stock of FDI grew 17% to $29 billion, in line with recent annual growth that takes it close to overtaking Singapore. And with Canadian investors backing the controversial takeover of the Fairfax Media company, it may rise further.

China was the other strong performer, with investment increasing 16% to a stock of $42 billion (though this is much lower than the recent KPMG/Sydney University estimate of US$89 billion over ten years). On the other side of the ledger the Australian stock of direct investment in China declined slightly, despite the investment openings in the bilateral trade agreement. But there was a big increase in overall investment, suggesting greater interest in portfolio (or non-controlled) investment over more exposed direct investment.

As noted above, the popular benchmark for Asian business engagement established by the Passing Us By report two years ago (New Zealand vs ASEAN) went backwards. Australian investment into New Zealand (both total and direct) rose around 10%, while ASEAN investment growth was much lower. At the same time the watershed development in 2015 that saw total Australian investment in ASEAN (FDI plus portfolio) overtake New Zealand for the first time has now evaporated.

The other key Asian investment partner, Japan, remains the second largest direct investor after the US but its growth rate is only about half that of China. If the KPMG/Sydney figures are a better guide Japan is in danger of being overtaken by China. While Australians have always had very low direct investment in Japan (with no change in 2016), there was a big increase in overall investment in Japan suggesting fund managers may be showing more confidence in Abenomics.

Despite concerns about US President Donald Trump's victory, Australian investors have backed a US economic recovery, boosting the stock of FDI in the US by almost 10%. US investment into Australia also grew, but at slower rate.

And with Brexit underway and the Australian government weighing trade deals with both Britain and the European Union, it is interesting to see that last year the EU minus Britain had more direct investment in Australia than Britain, and that its direct investment was growing at a faster rate. On the other side of the ledger, Australians pulled direct investment out of both Britain and the EU - but out of Britain at a higher rate.

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