A fresh source of economic growth

Richard Gilbert

One of the major challenges for Australian policymakers over the next decade will be to further the development of sustainable industry and employment opportunities that underpin the economic security and stability of Australia for future generations.

On this front, the Investment andFinancial Services Association (IFSA) has released three important and highly credible studies in recent weeks that have all identified financial services exports as a fresh source of economic growth.

It is undeniable that the international trade in goods and services is vital to the Australian economy.

The Department of Foreign Affairs and Trade estimates that one-fifth of all jobs in Australia are either directly or indirectly linked to exports, which increases to a quarter in regional and rural Australia.

In the past 10 years, Australia’s export industries have created more than 250,000 jobs and currently provide approximately 20 per cent of Australia’s gross domestic product (GDP).

Third largest sector

As the third largest sector in Australia’s economy, the financial sector contributes 7.2 per cent ($68 billion) to GDP — almost as much as the agriculture, forestry, fishing and mining sectors combined.

The funds management sector is a significant asset to Australia’s economy and is already a significant exporter of its services. Many of our domestic companies have developed a substantial position in the Asian region and beyond.

Global financial services companies that have entered this market in the past two decades are also very comfortable using Australia as a platform for exporting funds management capability and services into the Asian region.

However, those companies that have already extended their market reach into the region feel that the rapid rate of growth in the region offers Australia more potential than has been realised.

Well positioned

It is IFSA’s view that Australia’s fund managers are well positioned to meet the growing demand for products, services and expertise coming from the Asian region and beyond, and that this represents a substantial additional export opportunity for the nation.

Importantly, any costs associated with exploiting these opportunities will be minimal, as much of the requisite infrastructure is already in place. This is not a ‘start-up’ industry initiative by any stretch of the imagination.

We must look beyond Australia’s traditional export of commodities to position the nation well for any abrupt or subtle changes in the global appetite for resources, or a change in pricing driven by competitive market pressure, the possibility of sustained periods of drought, or any further loss of competitiveness in the global agricultural products market due to continued subsidies and stalling of World Trade Organisation negotiations on agriculture.

A service-based economy

Australia now has a service-based economy, with Axiss Australia data showing that service industries account for 73 per cent of total gross value added and employ about 80 per cent of the workforce.

In contrast, services only make up 22 per cent of exports, according to data from the Australian Bureau of Statistics (ABS), falling far behind sectors such as agriculture and mining. By comparison, agriculture comprises around 2 per cent of GDP and 17 per cent of exports, mining comprises 5 per cent of GDP and approximately 40 per cent of exports.

In his speech in Singapore on September 17, 2006, the Federal Treasurer, Peter Costello, highlighted that the flow of international capital trebled between 1995 and 2005, demonstrating the ongoing integration of financial markets.

He remarked that such flows could “be a powerful force for the development and growth of economies. They provide resources, enhance access to technology and management skill and lower costs by improving competitiveness.”

IFSA believes that cross-border flows will continue to increase at a greater pace over the next decade, as emerging markets such as China and India display a greater appetite for capital and the encouragement of foreign investment opportunities.

Diversification and the global shift to a defined contribution pension policy will ensure that much of the cross-border flows will be via collective investment schemes or managed investment products.

At the end of 2006, data from the Investment Company Institute (ICI) in the US and country industry associations suggested that there was in excess of $1.9 trillion in funds under management within managed investment type products in Asia, excluding Australia.

Asia tipped to boom

It is estimated by global research house Cerulli Associates that the growth of the Asian market in this sector will continue at 14 per cent per annum, exceeding that of both Europe and North America.

With many countries within this region in varying stages of development, we are seeing them look to North America, Europe and Australia for leadership, know-how, human resources and support services.

Our industry is considered by most international financial services leaders as one of the most advanced in the world, with a high degree of integrity in our regulation and operational management.

Australian companies are innovative in fund and product design, for example in infrastructure funding, property trusts, financial planning, investment platforms, hedge funds and retirement savings.

Australia’s retail funds management market has been described by Cerulli as “the most sophisticated retail funds management marketplace outside of the US”.

A recent report by Boston Consulting Group (BCG) said Australia is home to the world’s fastest growing high-net-worth investor market.

Australia’s managed investment asset pool is the largest in Asia and the fourth largest in the world, as shown by Axiss Australia’s analysis.

Diversification and the search for returns mean Australian fund managers are experienced managers of global portfolios, with Chant West’s December 2006 Multi-Manager Survey showing that 38 per cent of our domestic funds are invested offshore.

A safe haven

Australia is politically stable with a sound and resilient economy and is often seen to be a safe haven, as well as a sensible strategic investment.

The workforce is highly skilled and educated, with more people working in the sector than in Hong Kong and Singapore combined.

More than 850,000 Australians speak an Asian language. Australian executives with financial credentials and experience are highly sought after in this region and around the world.

Australia is well positioned, due to experience, expertise, existing infrastructure and geography, to become the funds management hub for the Asian region.

Successfully positioning Australia in this way will deliver significant positive economic benefit to Australia.

To leverage this opportunity, IFSA would welcome a partnership approach between government and industry to develop policy, prioritise the actions needed and mitigate risks.

If appropriate, we would be delighted to commit IFSA and member company resources to facilitating a broad ranging inquiry to help Australia realise its potential and make the most of the assets we have.

The bottom line

Modelling undertaken for IFSA by Access Economics and Lateral Economics suggests that the potential impacts of increasing the level of exports from the finance sector are well worth pursuing as a policy initiative.

If exports were increased by 10 per cent, by 2010:

> exports in the sector would be $3.3 billion higher;

> GDP is estimated to be between $2 to $13 billion higher; and

> there would be an additional 25,000 jobs in the economy, including 3,500 in the finance sector.

I would encourage you to visit the new section on the home page of the IFSA website “Australia — A Financial Services Centre”, which is dedicated to increasing awareness about the need to boost exports. There is a wealth of new material there that will get you thinking about the possibilities and hopefully joining us in discussing about what we need to do to take full advantage of the opportunities that exist.

IFSA looks forward to working with government and other stakeholders in 2007 and beyond — and to watching Australia further develop into a leading funds management services hub for the Asian region.

Richard Gilbert is the chief executive of IFSA.