Good morning. It’s a pleasure to address the ‘Business across Borders’ conference today. Can I start by thanking the National Institute of Accountants for holding such a conference and for the way they advocate for the profession.
I would like to talk to you about the “bigger picture” of the regulatory framework for capital markets. Not only markets in Australia, but also the markets for other countries in our region.
In doing so, I will be focussing my remarks on the following key areas… the importance of strong cross-border relationships… the role Australia is playing in the region… and why continued confidence in the market is needed for “mum and dad investors”.
By way of introduction, let me provide you with a snapshot of my approach to working in this region at a Government level.
I strongly believe that interdependence is central to global harmony. Countries in our region possess unique characteristics. From the developing economy of Samoa to mineral-rich Papua New Guinea, our region is an intricate blend of cultures and economic drivers.
Across this broad spectrum, many nations in our region are excelling in areas of technological advancement. But at the other end of the scale, other countries in our region are trying to ensure their people have enough food to survive.
It is this paradigm that compels strong, developed and rich nations like Australia to stand up and help our neighbours.
Perhaps the greatest issue facing us in our region is poverty. It is widely reported that two-thirds of the world’s poor live in the Asia-Pacific region.
In my view, the best chance we have at breaking the poverty shackles is our capacity to help our friends in our region. We need to continue our commitment to help our neighbours develop the necessary infrastructure to generate wealth, provide employment and build a brighter future.
At the Australian Government level, we stand ready to work at bridging that divide by encouraging growth in developing countries, so they can provide opportunities for their people.
The principle of interdependence is equally applicable to other economic issues.
In the global marketplace of today, how can countries not depend on each other? How can their economies not be intertwined at a time when investors can — and do — move capital around the world with a few keystrokes on a computer?
Cross-border business benefits Australia
It almost goes without saying that cross-border business — particularly cross-border investment — is in the long-term interests of Australia.
Governments around the globe have long recognised the economic benefits of free trade across borders.
Cross-border trade
For many years, international bodies such as the World Trade Organization, the OECD and APEC have put reducing barriers to cross-border trade at the top of their agendas.
There are also many free trade agreements designed to achieve the same goal.
Australia is an active participant in several bilateral and regional trade agreements. This helps us to push ahead in areas where progress has been slow through the WTO.
We currently have free trade agreements with the United States, Singapore, Thailand and New Zealand.
We are now negotiating further free trade agreements with China, Malaysia and the United Arab Emirates. And a feasibility study is underway for a free trade agreement with Japan.
As well, together with New Zealand, we are negotiating a free trade agreement with the Association of South East Asian Nations, or ASEAN.
…But our real goal is multilateral liberalisation.
Free trade agreements will never replace the need for multilateral progress. This Government is strongly committed to continuing to work within the framework of the WTO.
Over the past 30 years, our region has experienced a phenomenal rate of economic growth. In fact, Asia-Oceania has experienced the highest growth of any region in the world.
Cross-border trade has played a vital role in this impressive economic expansion, particularly in South East Asia.
But we cannot continue to enjoy this rate of growth without continued and sustained investment — we need sufficient quantity and quality.
Cross-border capital markets
I can’t overstate the importance of facilitating cross-border investment in our region.
It is an important way for countries to complement policies for mobilising domestic resources to fulfil their capital requirements.
Cross-border investment is also critical to growing capital markets.
The key to sound economic performance is a well-developed capital market. One that offers a range of investment opportunities to both domestic and foreign investors.
This type of capital market offers a real incentive to save. And at the same time, it provides the funds for entrepreneurs to create new business opportunities.
Australia’s most important cross-border investment relationships are with the United Kingdom, the United States and Japan.
Of course, the US is the world’s largest capital market. We have undertaken significant steps to enhance our economic relationship with that nation. The Australian Government is working to further reduce duplication and regulatory complexity for cross-border transactions.
This applies both within and outside the framework of our free trade agreement with the US.
I have no doubt that our relationship with our traditional investment partners will continue to be strong, well into the future.
But it is also likely that the demand for capital will bring new and expanding opportunities for increased cross-border capital flows with other countries in our own region.
The need for strong and diverse capital markets in our region was exposed during the Asian financial crisis.
Although the causes of this crisis were complex, economists generally agree that affected countries were far too reliant on bank loans.
Since then, many of the countries involved have worked hard to develop their equity and bond markets — with some success.
There have also been many advances in the way markets function, particularly in relation to stock trades…
The internet has revolutionised virtually every aspect of our lives. And stock markets are no exception.
A far wider range of both international and domestic investors can now get real-time market information online.
But bond markets, on the other hand, have been much slower to grow in many of the developing countries in the region.
This is a significant problem because, as we saw during the Asian financial crisis, freeing up capital flows carries risks as well as benefits.
If foreign capital, in the form of bank lending, is suddenly withdrawn, both corporations and financial institutions will quickly face insolvency — unless there is an alternative source of finance.
This effect will be magnified if the loans are taken out in foreign currencies. Quality bond markets expressed in local currency are a sound preventative measure against this happening. So a great deal of effort is going into developing them.
Australia has healthy equity and bond markets which are able to attract foreign capital.
In fact, our equity and bond markets are another measure of Australia’s sound economic performance.
Between 1994 and 2004, our equity markets grew by about $990 billion. Around 60 per cent of that growth was due to growth in share prices. The remainder was produced by new equity issues.
One reason for our sound equity markets is Australia’s high level of share ownership. In fact, we have one of the highest levels of share ownership in the world. Last year, 55 per cent of adult Australians held shares, either directly or through a managed fund.
Australians, now, more than ever, are planning for their long-term futures. People in their 20s, and even younger, are getting advice about their financial affairs with a view to planning for their retirement.
This is a major leap forward and reinforces why strong, integrated and transparent markets are essential. There’s a lot at stake.
Another factor is that international investors, predominantly institutions, hold 42 per cent of Australian equity by value.
Despite our relatively small share of global equity, this puts Australia in the top ten destinations for foreign equity investment.
Our corporate bond market has also demonstrated a sterling performance, increasing by 55 per cent between 2002 and 2004.
These deep and growing markets are a key source of finance for Australian businesses. They are very effective at getting the capital from those who invest, to those who need to use it.
Those capital markets have contributed to the impressive degree of stability and resilience which characterises our economy.
During the Asian crisis, our economic growth hardly missed a beat, while other countries in the region suffered severe recessions.
This led the US economist Paul Krugman to dub Australia “a miracle economy”.
Of course, there is no magic recipe for developing a robust and resilient capital market. One that is capable of attracting domestic and foreign investors. Neither is there one formula that will suit all economies.
But there are some essential ingredients for attracting stable investment in significant volumes.
Regulatory framework
Firstly, there must be a sound legal and regulatory framework. This is essential for facilitating healthy cross-border capital markets.
The laws need to be clear and enforceable. The responsibilities and accountabilities of those charged with administering and judging these laws must be well established.
I’m on the public record as saying that the system should incorporate self-regulation and co-regulation as much as possible. It should allow market participants flexibility, so as not to stifle innovation. And at the same time, the system must encourage good practices.
The purpose of the regulatory framework for capital markets must not be allowed to creep toward loss prevention. The goal is not to ensure that everybody wins.
Rather, the goal is to give investors and potential investors confidence that the market is conducted with integrity and fairness… that corporations are properly governed… and that the information they receive about investments is timely and not misleading.
A regulatory framework with all these qualities not only encourages investment in the first place. It also promotes financial stability by preventing financial downturn from turning into a crisis due to widespread investor panic.
The qualities I have just mentioned all aptly describe the Australian regulatory framework.
Australia’s contribution to the region
In a recent speech, the former Prime Minister of Singapore, Mr Tong, said:
“I believe that Australia has a special role in the region. Australia is a developed country rich in natural resources, talented people and technology. Its political and cultural values are Western but the society has a rich Asian mix. Australia enjoys close ties with the US and Europe. Australia is therefore well-placed to serve as [a] nexus between the West and Asia.”
Without wanting to boast, I tend to agree with former Prime Minister Tong that we do, indeed, have a special role in our region.
For example, we are actively contributing to several initiatives to improve the regulatory framework for capital markets within our region and beyond. These initiatives will aim to promote transparency and assure financial stability.
For example, an officer from the Australian Treasury chaired the OECD Steering Committee on Corporate Governance which last year produced a revision to the OECD’s corporate governance principles.
In another initiative, Treasury proposed that the United Nations Commission on International Trade Law produce a legislative guide to insolvency laws. This was completed in 2004.
Together with other guidance on insolvency and creditor rights produced by the
World Bank, these two initiatives are now the recognised international standard
on insolvency.
Australia has also been actively promoting improvements in corporate governance and insolvency in our region by leading various APEC initiatives. In the lead-up to Australia’s host year, we are spearheading initiatives on improving insolvency systems in Asia, and a more general dialogue on financial reform in the region.
I should also point out that both the OECD corporate governance principles, and the insolvency guidance by UNCITRAL and the World Bank, are included in the 12 key standards designated by the Financial Stability Forum as vital preconditions for sound financial systems.
These standards also include international accounting standards.
These standards are particularly important in the context of encouraging cross-border capital flows. So I would like to spend some time focusing on them.
International Financial Reporting Standards
In talking about cross-border investment, I can’t overstate the importance of investor confidence. It is a vital ingredient in fostering cross-border investment and promoting the development of capital markets.
And effective financial reporting is fundamental to maintaining investor confidence.
Accurate financial reporting also promotes good corporate governance and accountability among our corporations.
This is why accounting standards are so important.
We can only achieve high quality financial reporting if we have a solid foundation of relevant and well-designed accounting standards.
But we need to do more than just this.
We also need international standardisation in accounting requirements.
As Paul Volcker, the Chairman of the International Accounting Standards Committee
Foundation Trustees, points out:
“In an age when capital flows freely across borders, it simply makes sense to account for economic transactions, whether they occur in the Americas, Asia or Europe, in the same manner.”
In Australia, the adoption of IFRS will make it easier for the financial statements of Australian companies to be accepted in overseas capital markets.
The standards will make it easier for our companies to compete on a level playing field in the global competition for capital.
And, with Australia representing about two per cent of global market capitalisation, the ability to compete offshore and attract international capital is essential to the continued growth and functioning of our markets.
As well, by making it easier for Australian companies to attract foreign capital, IFRS will help to reduce the cost of capital for Australian companies.
Consistent global accounting standards will also help businesses with their international operations by reducing the need for financial statement reconciliations and multiple sets of accounts.
We’re already starting to see this in action.
For example, the United States is considering eliminating financial statement reconciliations for companies using international standards that list on US capital markets.
And these benefits will also flow to Australian companies with subsidiaries located in other jurisdictions. Because those subsidiaries will no longer need to comply with different accounting requirements.
Adopting IFRS will also help investors making decisions on where to allocate capital in a global environment.
International investors will no longer need to understand multiple sets of accounting standards. And they will be able to more accurately compare the financial statements of companies in different jurisdictions.
In turn, this will lead to greater international diversification that benefits investors by reducing the risk of their portfolios.
Of course, the benefits of adopting IFRS in terms of promoting cross-border investment are not limited to Australian companies and investors.
The benefits of international standards extend well beyond our borders, helping to improve the transparency of financial reporting in the region.
Recognising this, many of our neighbours are either already using IFRS, or are amending their financial reporting framework to bring it into line with them.
The widespread adoption of the common standards should promote greater stability in our financial markets and encourage greater financial integration within the region.
These benefits have been acknowledged by several significant bodies. Both APEC and the Asian Bankers Association have endorsed the adoption of the international standards in the Asia-Pacific.
To help facilitate the implementation phase, the Australian and New Zealand Governments recently hosted a regional forum on International Financial Reporting Standards. The forum brought together accounting standard setters, professional bodies and government officials from 11 Asia-Pacific countries.
The primary objective of the forum was to create dialogue between relevant parties in the region on issues associated with the adoption of IFRS.
In my address to the forum, I emphasised the importance of cross-border cooperation, particularly at the regional level, as a means of realising the full benefits of the adoption of the standards.
I understand the forum has already produced some positive outcomes. The accounting standard setting bodies represented at the forum have taken steps to encourage greater communication among themselves on IFRS-related matters.
The transition will take some time to get used to. The Australian Government, primarily through the Financial Reporting Council, is continuing to monitor progress on implementation.
I am aware that there will be costs in transitioning, particularly in the areas of changing internal systems and training staff.
But I am confident that as users and preparers of financial statements in Australia and overseas adjust to the new system, these costs will become less apparent. And the benefits will become more so.
Conclusion
In concluding, I would like to say that raising capital across borders is an increasingly important and positive aspect of Australia’s commercial environment.
Adopting IFRS will help us to attract and keep cross-border investment here in Australia. And this will help to lower the cost of capital.
More broadly, as our neighbours also adopt the international standards as an important part of a broader platform of reform, this will promote transparency and integrity across our region.
Those reform programs have already gone a long way towards bringing investment flows back to pre-crisis levels in many affected economies.
As the various market participants — entrepreneurs, regulators and investors — become more accustomed to the reforms, market confidence will further improve. And investment rates, both domestic and foreign, will rise even higher.
Ultimately, this will produce more income for Australian investors. And more jobs for Australian workers.
These reforms foster greater transparency and confidence in the system. This will help to ensure that market downturns do not quickly spiral into mass withdrawal of capital from the markets.
The Government’s main focus is to ensure that Australia’s own capital markets remain healthy. To date, we have achieved this through sensible and principles-based regulation — regulation that balances the need for integrity and certainty against the need for flexibility.
Our regulatory system embraces self-regulation and co-regulation where appropriate. It relies on regulators and market participants who are skilled and work with the system in good faith.
On a range of fronts, we have engaged in open and effective dialogue with stakeholders in relation to key areas such as corporate governance… Financial Services Reform refinements… and insolvency reforms.
From my perspective, I remain committed to reviewing the operation of corporate law and regulation. This relies on input from the people who are operating under these provisions day in and day out.
This of course, relates to the impact that Australia’s alignment with other regimes has on consumers and industry.
We don’t slavishly follow overseas practices. We do adopt an outward-looking attitude that is mindful of the importance of aligning with other countries.
…And the work continues to keep our own system in order. We also need to look beyond our own backyard, as we increasingly operate in a multilateral, competitive and open marketplace.
Competition for capital from our neighbours is not something to be feared — but to be embraced.
We need to engage and cooperate with our neighbours to produce healthy, robust and stable capital markets throughout our region.
Dialogue on issues such as financial reporting standards is one way we are going about this.
Achieving this goal is a long term proposition, and not without its challenges.
But I can assure you — it is one that we will continue to pursue for the benefit of Australia…and for the benefit of our region. We owe it to the people of our respective countries to provide opportunities for those less fortunate than ourselves.
We must never lose sight of the bigger picture. We should all be committed to working hand-in-hand to build confidence and growth in our economies for the benefit of all concerned.
I would like to invite you to regather at some time in the future and recall the moment when we shifted our thinking beyond the realm of a market index and daily trades. Rather, we will reflect on how we have helped nations grow… reduced poverty… and ensured that the will, drive and capacity of the individual prevail for the benefit of all.
Thank you.