China’s hunt for natural resources may have focused its attentions on Western Australia and the rugged outback may still capture the imaginations of most foreigners, but the real Australian story is in its dramatic financial services boom.
“People think Australia, they think mining and agriculture,” says Gary Johnston, executive manager of Axiss Australia. “But financial services accounts for 7.8% of gross domestic product – more than mining and agriculture combined. It’s the strongest performing sector in the Australian economy.”
And that is saying something. On the strength of high growth, low inflation, low unemployment and zero government debt, Australia is in its 16th year of economic expansion. The economy has grown at an average rate of 3.5% a year since 1998, outpacing that of the US and UK. The Organisation for Economic Co-operation and Development forecasts growth of 3.7% for Australia in 2007; the International Monetary Fund forecasts 3.5%.
In 2006, for the fifth year in a row, the World Competitiveness Yearbook ranked Australia as the world’s most resilient economy. The country was also ranked as the second most competitive large country in the Yearbook and the sixth most competitive overall. The World Economic Forum’s Global Competitiveness Report 2006-07, which places Australia 19th globally and fifth in Asia-Pacific, applauds its effective adoption of new technologies and the resulting productivity gains in the financial services market as well as in other services and in the production of goods.
It is a stark contrast from the early 1990s, when a deep recession scared off many of the foreign banks that had only recently entered the newly liberalised financial services market.
Today, financial services are not only the largest and best-performing sector in Australia’s booming economy but one that punches far above its weight internationally.
By 2015, Australia is expected to account for more than half, or roughly $1900bn, of all pension assets in Asia, according to Allianz Global Investors. The pool of mutual funds is the largest in Asia and the fourth largest in the world. Its international debt market overtook Japan’s in the first quarter of 2006 to become the largest in Asia-Pacific. The daily average foreign-exchange market turnover in Australia nearly doubled from 1998 to 2004. The country has also become a highly attractive cattle market for raising funds for real estate investment trusts.
In some ways, the financial services sector has been riding a wave of fortuitousness. “We had a period of very low interest rates, which increased the value of assets and encouraged much activity. As rates returned to normal, commodities boomed and as those prices fell, private equity has taken off,” says Brad Orgill, chairman and CEO, Australasia, at UBS Investment Bank.
However, the biggest impetus has been the government-mandated pension scheme, introduced in 1992, and the favourable tax treatment of superannuation, which has caused a swell in investment fund assets over the past several years. Total consolidated assets under management exceeded A$1000bn ($780bn) last year.
Most, though not all, of the financial services activity is concentrated in Sydney. “In New South Wales, the services sector has grown remarkably – it’s almost a metaphor for what’s happening in Australia as a whole, but with a lead time of 10-15 years,” says Loftus Harris, director-general of New South Wales’ Department of State and Regional Development. Services account for more than 80% of the New South Wales economy.
“And you don’t get to maintain all of that if you’re a nation of hamburger flippers,” he says, gesturing towards his office window and a sweeping view of Sydney’s stunning harbour. “It’s a lot to do with skills. Australians are great problem solvers by nature and innovative by history – it’s something we share with the US.”
One problem that the services boom has solved for Australia is its location at the far end of the earth. The “tyranny of distance”, as author Geoffrey Blaine once described it, has become “the good luck of longitude”, says Mr Harris. “Suddenly it’s possible to move truckloads of algorithms overnight. Now the time zone is a huge advantage and it is convenient to be where we are when the sun comes up.”
The Australian Stock Exchange, the third largest in Asia-Pacific, is the first major stock market to open for business each day. Sydney’s time zone spans the closing of the US market and the opening of Europe’s.
Fidelity Investments decided two years ago to make Sydney its Asia-Pacific regional services centre. Having reviewed locations around Asia-Pacific, it selected Australia’s largest city because of the availability of highly skilled multilingual staff, says Michael Ohlsson, CEO of Fidelity Investments Australia. “We want the right highly skilled people at the right cost. Staff costs are lower here than in Hong Kong and Tokyo – that was part of the equation,” he says. But also, India lacks the breadth of language skills while Singapore lacks depth.
Fidelity shifted finance jobs from Tokyo, Hong Kong, Seoul and Taipei to Sydney, which now provides accounting services for all of its Asia-Pacific offices. The early success of that reallocation led to the shifting of other functions, such as investment writing and request-for-proposal business, to Sydney, and more are due to follow. The company employs 98 people in Australia: 43 with Fidelity Investments Australia and 55 with Fidelity Asia Services.
German banking giant Deutsche has a well-established franchise in Australia, with nearly 1000 full-time employees covering mergers and acquisitions, equities, debt, asset management and private banking. A 200-strong operations centre supports activities in the region and the wider world, and a small team of 14 conducts half the foreign-exchange operations for Deutsche globally. (Deutsche is the largest foreign-exchange trader in the world, with 16% of global turnover, half of which is settled in Sydney.)
“We have been able to demonstrate that for some high-value transactions we should be considered a global centre to serve parts of bank,” says Chum Darvall, CEO of Deutsche Bank, Australia/New Zealand.
“Some products are commoditised, and those are moving to India, but [the Australian operations centre] is winning some roles for new products like credit derivatives,” he adds.
Swiss bank UBS employs 1500 people in Australia, up from 1000 four years ago, and it also has a 200-person centre providing global support from Sydney – in this case, IT support for UBS offices worldwide. UBS, like Fidelity, cites cost-effectiveness and language skills as the main reasons behind this location decision.
“Sydney was more cost-effective in the past than it is today, due to the strength of the Australian dollar, but that doesn’t change the merits of what we’re doing,” Mr Orgill says. “There are more people per capita learning Japanese in Australia than anywhere else in the world.”
It is, however, a job-seeker’s market, as the numerous recruitment ads in the Australian Financial Review suggest. There is a good pipeline of graduates currently coming through, Mr Orgill says, but recruits with three to six years of experience are harder to find, partly because universities took in fewer overseas students during the 2002 Sars respiratory disease crisis. “It’s cyclical,” he says.
Australians also go overseas in great numbers, and not just to party in Bali or bartend in London, as is often the stereotype. Australia is an exporter of financial services talent, especially in the highly advanced property and infrastructure finance niches.
This, too, is cyclical, on a per-person basis. Sooner or later, says Mr Harris, most emigrants eventually return home with their international experience and fresh perspectives.
Yet, for a visitor enjoying a mid-morning ferry cruise around a glistening Sydney Harbour or a sunset stroll along the broad sands of Queenscliff Beach, it is difficult to understand why they leave in the first place.
EGGS IN MANY BASKETS
“One of the secrets of the Australian economy is that it is so diverse,” Ian Macfarlane, Australia’s minister for industry, tourism and resources, tells fDi on a visit to his Canberra legislative office. “We have not fallen into the tech-wreck trap, putting all our eggs into the high-tech market. And we have not ignored resources, even when people were saying five or 10 years ago, ‘do not invest in resources, all you are doing is digging a hole and exploiting it’.”
The government does not have priority sectors as such, he says, but the country is especially keen to build on strengths in nanotechnology, biotechnology, electronic technology and other high-tech industries, as well as advanced manufacturing and medical devices. “All of the sectors in Australia are important to us because they all attract FDI,” he says.
In seeking FDI, Mr Macfarlane is well aware that Australia must compete with some of the world’s hottest investment zones. “If you were sitting in Europe or the US with a lazy billion and you wanted to invest it in this part of the world, I guess the first thing you would think about is the 1.3 billion people in China and the investment opportunities there. Of course, you have also got countries like Thailand and the growing significance of Vietnam, as well as Malaysia, Indonesia and India,” he says.
“That makes it difficult, but we have got advantages that some of those countries do not have, particularly if you talk about intellectual property retention and a legal system that is equal to the best in the world.”