source of internal funding, made possible by the historically high level of commodity prices throughout the period. table 1 funding of the australian resources investment boom ( a ) per cent of total to the extent that these companies have resorted to external sources of funding, this has been mainly in the form of bonds issued directly into capital markets. very little has been funded by borrowing from banks. the companies have tapped bond markets rather than banks in part because of the longer tenors available in the bond market which match the long investment horizons of these projects. another reason is that a number of these resources companies are able to access financial markets at a cheaper price than the banks themselves can. this absence of borrowing from the banking sector is one of the reasons why ( intermediated ) business credit in australia remains relatively subdued despite the around trend growth in the australian economy in recent years. it also means that unlike previous investment booms in australia ’ s history, this one has been associated with very little leverage. the other notable fact from table 1 is that the funding for the australian resources boom has been sourced extensively from overseas. at face value, given the share of foreign companies involved, the analysis implies that around half of the investment during the boom has been funded from offshore. however, the actual use of foreign sources of funds is much higher than that. this is because wherever companies are partly foreign owned, funding from internal sources is equivalent to partial funding from foreign sources. consequently, since the australian listed resources sector is around three - quarters foreign owned, the same large proportion of internal funding is attributable to foreign sources. for instance, the threequarters foreign ownership of bhp implies that three - quarters of bhp ’ s internal funding is recorded as foreign. taking all this together suggests that around four - fifths of the investment funding has been sourced from offshore. bis central bankers ’ speeches so while the focus of the effect of the resources sector on the balance of payments has been on its effect on imports of capital goods for the investment and on the export revenue generated, there has also been a material impact on the capital flows to australia, which i will now discuss. the effect on capital flows the impact of the above developments has been reflected in the australian balance of payments ( bop ) data, which indicate that foreign capital flows into the australian resources sector have grown from an average of around 1 per cent of annual gdp in 2007 to around 3½ per cent in 2012. 4 this constitutes a significant change in the composition of

capital flows in the australian economy ; one of three noteworthy changes in recent years. in the decade prior to the global financial crisis, around two - thirds of foreign capital flows into australia was directed to the financial sector, amounting to an average inflow of around 6½ per cent of gdp over this period. since 2007, as i have noted on other occasions, 5 inflows into the banking sector have declined considerably to the point where the banking sector has been a net repayer of offshore borrowing ( graph 4 ). graph 4 at the same time, foreign purchases of australian government debt have increased significantly, which has seen the foreign ownership share of commonwealth government securities increase from 50 per cent to around 70 per cent currently, even as the stock of issuance has risen fivefold. the abs began publishing an industry breakdown of capital flows data in september 2006. debelle g ( 2011 ), “ in defence of current account deficits ”, address at adbi / unisa workshop on growth and integration in asia, adelaide, 8 july. bis central bankers ’ speeches both of these two large changes in the composition of capital flows directly relate to the upheavals in global financial markets over the period. in contrast, the large increase in capital flows to the resources sector is not related to the financial crisis – being obviously a direct product of the resources boom, which is itself a function of the large increase in commodity demand from emerging markets. in thinking about the effect of capital flows on the value of the australian dollar, it is important to take account of all of these changes in capital flows. simply focusing on the developments in only one particular type of capital flow can give a partial picture of what is going on. moreover, i have not talked at all here about changes in the outward flows of capital. while these flows are also large, over the period in question here, changes in their size have not been so noteworthy. so in terms of the effect on the australian dollar, of the three major changes in capital flows we have seen over the past six years, two of them : the capital inflow to the resource sector to fund investment along with the increased purchases of government debt, have been putting upward pressure on the currency. but at the same time, the reduction in offshore borrowing by the banking system has been putting downward pressure on it. the net effect of all these flows however, is that the australian dollar is higher than one would expect, given fundamentals such as the terms of trade