philip lowe : buffers and options speech by mr philip lowe, governor of the reserve bank of australia, at the committee for economic development of australia ( ceda ) annual dinner, melbourne, 15 november 2016. * * * i would like to thank andrea brischetto for assistance in the preparation of this talk. it is an honour to be able to address ceda ’ s annual dinner. it became a tradition under the previous governor, glenn stevens, to speak at these dinners about prosperity : what it looks like and how australia might continue to secure it in the uncertain world in which we live. this is a tradition that i would like to continue. i could understand why you might not have guessed that looking at the title of my remarks this evening : ‘ buffers and options ’. you might have feared that this was going to be an esoteric talk about finance. but that is not what i have in mind. instead, i chose this title because it summarises the one element of securing prosperity that i want to focus on tonight. glenn spoke in detail about the various things that we can do to lift our average growth rate. rather than repeating these, i would like to focus on another element of the challenge. and that is managing risk and ensuring resilience. to provide some context i would like to begin with two observations. the first is that australia ’ s economic success over recent decades reflects both the underlying fundamentals and our ability to ride out various shocks. the fundamentals that have helped us are well known. they include our openness to trade and investment, our generally favourable demographics, our diverse and talented people, our abundance of natural resources, our ability to undertake structural reform to boost productivity and our links with the fast - growing asian region. but also important to our prosperity is the fact that over the past quarter of a century, our economy has not been seriously derailed by economic shocks. after all, nothing undermines prosperity like a severe recession in which large numbers of people lose their jobs and see their wealth decline. it is not as if there has been a shortage of shocks that could have derailed us. there was the asian crisis, the bust of the us tech boom and the global financial crisis. we also experienced a once in a century surge in our terms of trade and the subsequent decline. the point is that we have been able to ride out these and other shocks without too much difficulty. in part this is because of the flexibility of our exchange rate

the mining sector was particularly high. in the balance of payments, these reinvested earnings – essentially calculated as profits less dividends – are generally treated as being notionally distributed to foreign owners in the net income component of the current account. the foreign owners are then deemed to notionally reinvest back into the firm. these notional capital flows are recorded in the financial account. 3 the money does not necessarily flow in and out of the country, it is just recorded as such in the balance of payments. the net capital inflows to the mining sector during the investment phase reflected the combined effect of the mining sector ’ s high profitability ( and low dividend payout ratio ), its tendency to fund investment from internal sources and the very high degree of foreign ownership. 4 in recent years the net inflows to the mining sector have continued to be large despite the large decline in mining investment spending from 9½ per cent of gdp in 2012 to around 3½ per cent of gdp currently. the inflows have continued, even as mining profits have declined with the fall in commodity prices ( until very recently ). 5 the continued strength of capital inflows has been supported by ongoing investment related to large liquefied natural gas ( lng ) projects. lng projects have made up a larger share of resource investment during this period than previously and many of these projects have an even higher foreign ownership share than the overall sector. these lng projects have typically involved new joint ventures, where the majority of participants are foreign entities and are likely to have limited existing domestic operations with which to fund investment through profits. accordingly, these inflows have mostly been in the form of direct funding from offshore rather than reinvested earnings. in this context, it seems reasonable to expect net capital inflows to the mining sector to moderate 3 / 9 bis central bankers'speeches in the future, with capital flows to the mining sector in recent quarters already starting to taper. this follows the transition of a number of large lng projects from the investment phase into the production and export phase. while the increase in exports will support profits and, therefore, notional capital inflows to the mining sector, some of these profits are likely to be paid out to offshore owners as dividends rather than reinvested, an issue i will return to later when discussing the net income deficit. public sector turning to the public sector, foreigners have remained ongoing purchasers of australian government debt, with