Australia’s $4 trillion superannuation industry is fundamentally reshaping the nation’s external accounts, setting the stage for a more sustainable current account surplus despite weaker commodity markets.
While superannuation funds have often been scrutinised for their potential to amplify risks within the financial system, fresh research said they could instead play a stabilising role by helping firm up Australia’s current account position.
In a paper published last week, ANZ economist Sophia Angala and senior rates strategist Jack Chambers said that while Australia consistently ran current account deficits for much of the past half century – largely due to significant interest and dividend payments to foreign holders of Australian assets – this trend is beginning to shift as the nation’s growing superannuation sector expands its offshore investments.
Today, around 30 per cent of super fund assets are allocated to foreign equities and the resulting income from these investments is bolstering Australia’s primary income balance.
Net portfolio equity flows turned positive in late 2024, meaning Australians are now earning more from overseas investments than they are paying out, driven by the continued growth in the assets of Australian superannuation funds in recent years.
Although Australia’s current account recorded a seventh consecutive deficit in the December quarter of 2024 – at 1.8 per cent of gross domestic product – Angala and Chambers said the underlying dynamics are evolving.
The trade surplus has narrowed amid weaker commodity prices, but increasing offshore income from superannuation funds is helping offset the deterioration.
“As superannuation funds continue to increase their allocation of offshore assets, this should support primary income inflows into the future,” Angala and Chambers said.
“In the long term, as superannuation fund assets are expected to grow at a faster pace than domestic investment opportunities, there should be an ongoing shift to offshore ownership. This should extend the extent to which Australia becomes a net exporter of equity ownership to the world.”
Looking ahead, the Reserve Bank of Australia expects superannuation assets to grow to $8.1 trillion by 2035.
With super funds projected to continue expanding their global equity portfolios, Australia could increasingly become a net exporter of capital, reversing its longstanding reliance on foreign funding.
The ANZ paper also said that while weaker commodity prices are expected to lower equity outflows – as Australian mining companies reduce their dividend payments to overseas investors – the continued investment of super funds into foreign equities will lift the level of portfolio equity inflows.
“While the trade balance is likely to decrease on falling export values, the structural change of super funds on equity income would flow through to the current account through lower primary income deficits over time,” the pair said.
“This will offset the impact of lower commodity prices on the goods and services balance in the current account deficit and may eventually mean that Australia shifts to a more sustainable current account surplus.”
Christopher Kent, assistant governor for financial markets at the RBA, briefly addressed Australia’s growing net foreign equity position in a speech on Tuesday, saying that funds have played a key role in shaping Australia’s capital flows, with their offshore asset allocation rising from one-third in 2013 to around half by 2024.
“Super funds now account for a substantial share of Australia’s capital outflows,” Kent said, adding that as a result, funds are now significant participants in foreign exchange hedging markets.
“Given the large increase in super funds’ offshore assets, the extent of foreign currency assets hedged has more than quadrupled since 2013,” the assistant governor said. “This has made the super funds natural counterparties to domestic banks, which are hedging their FX exposures arising from issuing debt offshore in foreign currency terms.”
As such, Kent stressed the importance of these large institutional investors adopting best practices in FX markets to manage associated risks effectively, ensuring financial stability and market integrity.
