Increasing Dependence on Asia

The IMF has just released its new Regional Economic Outlook: Asia and Pacific: Managing the Next Phase of Growth, April <http://www.imf.org/external/pubs/ft/reo/2011/APD/eng/areo0411.htm>. There is an interesting little section on "Spillovers from Emerging Asia to Australia and New Zealand" on p.6. 

The IMF notes that Australia is now much more dependent on "Emerging Asia's" (that's a category that includes China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, Thailand, and Vietnam) demand than it ever has been before. While this has been beneficial for Australia in recent years as Asia recovered quickly for the GFC and global recession, it also means that a slowdown in Asia will be felt brutally in Australia. As the IMF points out Australia’s exports to Asia have increased from 40 per cent of the total to 60 per cent between 2000 and 2010. Using a structural vector autoregressive (VAR) approach, the IMF concludes that over the past 10 years economic shocks from Asia are now considerably more important to the Australian business cycle than shocks from the United States.  

For the sample period 1991–2010, a 1 percent shock to U.S. GDP is found to move Australian growth by about 0.4 percent. In contrast, GDP shocks from emerging Asia have an almost negligible impact on Australian growth. This result changes dramatically when limiting the sample period to 2000–10, for which a 1 percent shock to emerging Asia’s growth is found to shift Australian growth by ⅓ percent, whereas the impact of U.S. GDP shocks on Australia is no longer statistically significant.

Commodity prices dominate the transmission of shocks from emerging Asia to Australia. The three transmission channels identified in the model—trade, commodity prices, and financial variables (including interest rates and equity prices)—account for most of the estimated spillovers to Australia. In particular, commodity prices alone explain half of the spillovers from emerging Asia to Australia.

This means that Australia that there has been a switch in business cycle dependence - Australia has "decoupled" from US growth over the past 10 years and "coupled up" with Asia over the same period. 

Note however that the jury is still out about whether Asia has decoupled from the United States over the longer-term. (Although it certainly appears that the decouplers are currently on top). The rest of Asia of course is increasingly tied into China's fortunes, making debates about China's inflation, housing bubble and debt increasingly important. 

The IMF, like most Australian economic bureaucrats is bullish about Australia's economic future: 

The long-term trend of continued strong growth in emerging Asia bodes well for Australia. The IMF’s Global Economy Model (GEM) can be used to assess emerging Asia’s impact on Australian long-term growth prospects. The model captures two main channels through which emerging Asia’s growth can affect Australia: trade integration and terms-of-trade gains. The simulation suggests that, should emerging Asia continue to grow notably faster than the world average, the impact on Australia will be even larger than in the past. This larger impact reflects both the increase in emerging Asia’s economic size and Australia’s growing integration with emerging Asia. Over the next 10 years, the model suggests that a 50 percent increase in emerging Asia’s real GDP, driven by tradable sector productivity growth, would raise Australian GDP by about 20 percent (figure). However, should emerging Asia’s economic growth become more balanced, with productivity growth in both tradable and nontradable sectors contributing equally, the growth dividend is roughly cut in half, owing to more modest improvements in the terms of trade of Australia.

A few other graphs also make interesting viewing about Australia's position in Asia. The first shows that Australia has relatively high real (after inflation) interest rates compared to a selection of other Asian economies and the second shows the significant real appreciation of the Australian dollar

De-coupling and Asia

I heard recently on the radio that the "de-coupling" debate had been settled in recent years - that Asian growth was no longer reliant on what happened in the rest of the world. While there is no doubt that Asia has managed to do well, despite the global financial crisis and recession, the question for the future is whether this is due to de-coupling or China's delaying of global economy effects through huge fiscal and monetary stimulus. In other words, the jury is still out. As many would no doubt be aware, the outcome of this debate will have important implications for Australia.

It's not simply a case of coupling bad, de-coupling good, however, because  China's delaying of world economy effects has had positive effects on the rest of the world, with Australia particularly benefitting. China's stimulus may work for long enough for the US and Europe to recover momentum and return as substantial contributors to global economic growth. But it's also possible that stagnation in Europe and the US will eventually cause problems for China and Asia generally (and Australia). Another scenario is that China's fiscal and monetary stimulus has led to a growing property bubble in China as well as rising inflation.

Those interested in the de-coupling debate would benefit from reading an Asian Development Bank paper by Prema-chandra Athukorala. He concludes:

A highly important recent development in the international fragmentation of production has been the rapid integration of the PRC into regional production networks. This development is an important counterpoint to the popular belief that the PRC‘s global integration would crowd out other countries' opportunities for international specialization. The PRC's imports of components from countries in ASEAN and other developing East Asia countries have grown rapidly, in line with the equally rapid expansion of manufacturing exports from the PRC to extraregional markets, mostly in North America and Europe. The migration of some production processes within vertically integrated high-tech industries to the PRC opens up opportunities for producing original, equipment-manufactured goods and back-to-office service operations in other countries. The PRC's emergence as a major trading power and an investment location has not been a zero-sum proposition from the perspective of the region. Rather, it seems to have added further dynamism to regionwide MNE operations. Global production sharing has certainly played a pivotal role in the continued dynamism of East Asia and its increasing intra-regional economic interdependence. This does not, however, mean that the process has contributed to lessening the region‘s dependence on the global economy. The high intra-regional trade shares reported in recent studies largely reflect rapidly expanding intra-regional trade in components. There is no evidence of rapid intra-regional trade integration in final products. In fact, the region's growth based on vertical specialization depends inexorably on its extra-regional trade in final goods, and this dependence has increased over the years. Extra-regional trade is likely to remain the engine of growth for the region in the foreseeable future. Put simply, growing trade in components has made the East Asian region increasingly reliant on extra-regional trade for its growth. This inference is basically consistent with the behaviour of trade flows following the onset of the global financial crisis. The remarkably synchronized nature of trade contraction across countries in the region is generally consistent with close trade ties among East Asian countries forged within regional production networks. In addition, the PRC failed to provide a cushion against this export contraction as postulated by the decoupling thesis.[1]

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[1]       Prema-chandra Athukorala (2010) “Production Networks and Trade Patterns in East Asia: Regionalization or Globalization?”, Working Paper Series on Regional Economic Integration, No. 56, August, Asian Development Bank <http://aric.adb.org/pdf/workingpaper/WP56_Trade_Patterns_in_East_Asia.pdf>.

Singapore's Attempted Takeover of the Australian Stock Exchange: Foreign Investment Bunkum

A lot of pap gets written in the mainstream media about the Foreign Investment Review Board (FIRB) in Australia. August organisations like the OECD and the WTO like to argue that Australia's investment regime is unduly restrictive simply because Australian governments (of both stripes) like to review major investments to see whether they are in the national interest.

The Foreign Investment Review Board (FIRB) was established in April 1976 to advise the government on foreign investment policy and to administer the Foreign Acquisitions and Takeovers Act 1975, which had been pushed through previously by the Whitlam Government.

The Hawke and Keating Governments further liberalised Australia’s foreign investment regulations. Facing vocal opposition from the Left in the party, Keating hectored the delegates of the 1984 ALP National Conference stressing that the abandonment of foreign investment restrictions in the banking sector was a strike against the existing banking oligopoly in Australia:

It really surprises me that some people in this Party think that we owe Westpac something, or the ANZ Bank, or the National. That really surprises me … So if you want to start talking about equity and fairness you better start with unemployment. But you can’t do it with a sick economy. Banking is the artery of the economy and we’ve had hardening of the arteries for too long in this country.

In February 1985, the government announced that there were to be 16 new banking licenses issued to foreign banks, overturning a policy of foreign restriction that had been in existence since 1945. Labor further liberalised foreign investment in Australia to encourage capital inflows to deal with the burgeoning current account deficit, but it resisted US pressure to abandon the foreign investment screening process through the FIRB and was generally equivocal about the moves that the World Trade Organization (WTO), the Organization for Economic Co-operation and Development (OECD) and the Asia Pacific Economic Co-operation (APEC) were making to extend liberalisation to investment issues.

After making much of the level of foreign debt in Australia during the 1996 election campaign, once in office the Howard Government aimed to keep a lid on popular concerns about increasing foreign investment and foreign debt. Howard mused in 1997, however, that there was merit in the idea of protecting ‘national champions’ from foreign takeovers. In relation to the restrictions on foreign media ownership, Howard argued that ‘there is some national benefit in having a powerful, fully Australian-based media company … If you are to have a presence in the region and a presence around the world then you need a very, very strong domestic base’. At the same time, the government emphatically rejected Pauline Hanson’s criticism of foreign investment. Costello argued ‘we are not going to walk down the isolationist path which tries to throw out foreign investment and job creation in this country’. Howard also backed foreign investment arguing that ‘[t]hose who deride and criticise foreign investment are doing Australia in the eye’. 

The Howard Government then resisted calls from the United States that it disband the FIRB. Policy-makers do not want to lose their discretionary powers over controversial foreign investment, such as the bid by Shell to take over Woodside Petroleum, which Costello rejected in 2001. The Australia-United States Free Trade Agreement, which began in 2005, further liberalised restrictions on investment for US investors, but retained a role for the FIRB.

The major test for foreign investment in Australia at the moment is Chinese state investment in the Australian mining industry. A major aim of China in negotiations for a free trade agreement is to get the same deal the United States got in its trade deal. The Australia United States Free Trade Agreement (AUSFTA) increased the limits on proposals that require scrutiny by the FIRB for US investors only. (see below for current limits)

Recent reviews of Chinese investment in the mining industry show the continuing importance of the FIRB and the decisions made by the Treasurer (who has responsibility for interpreting Australia’s national interest test for large scale foreign investment). Substantial restrictions still remain in airlines, telecommunications and the media. In 2008, with Chinese state investment as the focus, Treasurer Swan outlined several criteria for assessing foreign investment by foreign governments:

1.  Whether an investor’s operations are independent from the relevant foreign government.

2.  Whether an investor is subject to and adheres to the law and observes common standards of business behaviour.

3.  Whether an investment may hinder competition or lead to undue concentration or control in the industry or sectors concerned.

4.  Whether an investment may impact on Australian Government revenue or other policies.

5.  Whether an investment may impact on Australia’s national security.

6.  Whether an investment may impact on the operations and directions of an Australian business, as well as its contribution to the Australian economy and broader community.

In particular, the Treasurer expressed some concern about the extent to which ‘participation by a consumer of the resource increases to the point of control over pricing and production’. What this means is that the government does not think it is in Australia’s national interest to have a major buyer of Australia’s resources controlling the sale of those exact same resources. The national interest provisions of Australia’s foreign investment regulations – criticised by economic liberals as being too vague – rightly provide the potential for Australian governments to make decisions on foreign investment that provide wider benefits for Australians. 

The national interest test also provides flexibility for the government so it can think more strategically about major foreign investments, and therefore should be maintained.

The current framework is clearly laid out here.

Foreign Investment Review Framework

The Foreign Investment Policy and the Legislation

The Foreign Acquisitions and Takeovers Act 1975 (FATA) provides the legislative framework for our screening regime. The FATA allows the Treasurer or his delegate – usually the Assistant Treasurer – to review investment proposals to decide if they are contrary to Australia’s national interest.

The Treasurer can block proposals that are contrary to the national interest or apply conditions to the way proposals are implemented to ensure they are not contrary to the national interest. When making such decisions, the Treasurer relies on advice from FIRB.

The Policy provides guidance to foreign investors to assist understanding of the Government’s approach to administering the FATA. The Policy also identifies a number of investment proposals that need to be notified to the Government even if the FATA does not appear to apply.

Who Needs to Apply?

1.       Foreign Governments and their Related Entities

All foreign governments and their related entities[1] should notify the Government and get prior approval before making a direct investment in Australia, regardless of the value of the investment.

Foreign governments and their related entities also need to notify the Government and get prior approval to start a new business or to acquire an interest in Australian urban land (except when buying land for diplomatic or consular requirements).

Further guidance for foreign government investors is provided under Further Information for Business Acquisitions and, in particular, the section titled Foreign Governments and their
Related Entities.

2.       Privately-Owned Foreign Investors – Business Acquisitions

Foreign persons should notify the Government before acquiring an interest of 15 per cent or more in an Australian business or corporation that is valued above $231 million.[2] They also need to notify if they wish to acquire an interest in an offshore company whose Australian subsidiaries or gross assets are valued above $231 million.[3]

The exception is for ‘US investors’[4], where the $231 million threshold applies only for investments in prescribed sensitive sectors. A $1005 million[5] threshold applies to US investment in other sectors. To calculate the value of a business or corporation, you need to consider the value of the total issued shares of the corporation or its total gross assets, whichever is higher.

All foreign persons, including US investors, need to notify the Government and get prior approval to make investments of 5 per cent or more in the media sector, regardless of the value of the investment.

Foreign persons should also be aware that separate legislation includes other requirements and/or imposes limits on foreign investment in the following instances:

•               foreign investment in the banking sector must be consistent with the Banking Act 1959, the Financial Sector (Shareholdings) Act 1998 and banking policy;

•               total foreign investment in Australian international airlines (including Qantas)[6] is limited to 49 per cent;

•               the Airports Act 1996 limits foreign ownership of airports offered for sale by the Commonwealth to 49 per cent, with a 5 per cent airline ownership limit and cross ownership limits between Sydney airport (together with Sydney West) and Melbourne, Brisbane and Perth airports;

•               the Shipping Registration Act 1981 requires a ship to be majority Australian-owned if it is to be registered in Australia; and

•               aggregate foreign ownership of Telstra is limited to 35 per cent of the privatised equity and individual foreign investors are only allowed to own up to 5 per cent.

Foreign persons should also notify if they have any doubt as to whether an investment is notifiable.

Further guidance is provided under Further Information for Business Acquisitions.

3.       Privately-Owned Foreign Investors – Real Estate

Foreign persons should notify the Government and get prior approval to acquire an interest in certain types of real estate. An ‘interest’ includes buying real estate, obtaining or agreeing to enter into a lease, or financing or profit sharing arrangements.

Regardless of value, foreign persons generally need to notify the Government to take an interest in residential real estate, vacant land or to buy shares or units in Australian urban land corporations or trust estates.

Foreign persons also need to notify if they want to take an interest in developed commercial real estate that is valued at $50 million or more – unless the real estate is heritage listed, then a $5 million threshold applies. An exception for developed commercial real estate applies to US investors, where a $1005 million[7] threshold applies instead.

Foreign persons should also notify if they have any doubt as to whether an investment is notifiable.

The specific real estate rules are explained in further detail under Further Information About Buying Real Estate.

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[1]        Definitions are provided in the Annex.

[2]        The threshold is indexed annually on 1 January.

^[3]        The threshold is indexed annually on 1 January.

[4]        The FATA does not apply to investments by US investors in financial sector companies. Financial sector companies have the same meaning as in the Financial Sector (Shareholdings) Act 1998.

[5]        The threshold is indexed annually on 1 January.

[6]        Individual holdings in Qantas are also currently limited to 25 per cent and aggregate ownership by foreign airlines is limited to 35 per cent. However, the Government announced on 16 December 2009 that these two restrictions will be removed in the future.

[7]        The threshold is indexed annually on 1 January.

The latest issue is Wayne Swan's blocking of the Singapore Exchange taking over the Australian stock exchange.

After long and careful deliberations, I have today made an order under the Foreign Acquisitions and Takeovers Act 1975 (the Act) prohibiting the acquisition of ASX Limited (ASX) by Singapore Exchange Limited (SGX).

The proposed acquisition has been subject to an ongoing examination by the Foreign Investment Review Board (FIRB), the Government's independent advisory body, since it was announced on 25October 2010 and has been under formal consideration since the application was lodged on 11March 2011. The FIRB members also considered a further response provided by the SGX on 7April and have advised that this material does not cause them to change their advice.

The Australian Government's longstanding policy is to welcome foreign investment in Australia. Such investments are subject to review on a case-by-case basis under the Act, which allows the Treasurer to prohibit a particular acquisition on national interest grounds. It is important to emphasise that this occurs very rarely. However on this occasion I have decided that the proposal would not be in the national interest.

I have considered carefully the proposal's potential benefits and implications for Australian businesses, investors and the community. My broad assessment took into account the central role the ASX plays – as Australia's primary equities and derivatives exchange and sole clearing house for equities, derivatives and bonds – in our long-term economic wellbeing and development, including of our rich natural resource endowment. I took into account our high regulatory standards, social and economic stability and our objective to build Australia's reputation as a global financial services centre. I also had regard to the strategic implications of this proposed acquisition and other alternatives that might emerge in a fast-changing global exchange landscape.

I have considered the proposal as it stands and changes that might be made to it, and whether such changes would reliably and durably address possible national interest issues. However I consider that this proposal would need to be substantially and fundamentally altered in order for the national interest to be safeguarded.

My decision was based on unambiguous and unanimous advice from FIRB that the proposed transaction was contrary to the national interest. I have also drawn on a broad range of stakeholder perspectives in the five months since the transaction was publicly announced in October 2010.

It is in the national interest for Australia to maintain the ongoing strength and stability of our financial system, and ensure it is well placed to support the Australian economy into the future. It is important that we continue to build Australia's standing as a global financial services centre in Asia to take best advantage of the benefits of our superannuation savings system. I had strong concerns that the proposed acquisition would be contrary to these objectives.

I have been advised that many of the claimed benefits of this transaction are likely to be overstated. To diminish Australia's economic and regulatory sovereignty over the ASX could only be justified if there were very substantial benefits for our nation, such as greatly enhanced opportunities for Australian businesses and investors to access capital markets. Given the size and nature of the SGX –which is a smaller exchange with a smaller equities market than the ASX – the opportunities that were offered under the proposal were clearly not sufficient to justify this loss of sovereignty.

The ASX also operates infrastructure that is critically important for the orderly and stable operation of Australia's capital markets. Both the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC), carefully review the operations of the ASX on an ongoing basis and have been satisfied that it is meeting its obligations and remains a robust operation. However, FIRB's recommendation, which incorporated advice from ASIC, the RBA and the Australian Treasury, was that not having full regulatory sovereignty over the ASX-SGX holding company would present material risks and supervisory issues impacting on the effective regulation of the ASX's operations, particularly its clearing and settlement functions. Australia's financial regulators have advised me that reforms to strengthen our regulatory framework should be a condition of any foreign ownership of the ASX to remove these risks.

To address these issues, I have asked our Council of Financial Regulators to establish a working group to consider potential measures which could be introduced to ensure our regulators can continue protecting the interests of Australian issuers, investors and market participants. A key consideration would be preserving the integrity of our financial infrastructure and the strong ability of our supervisors to maintain robust oversight in all market conditions, including in the event of a future commercial arrangement between the ASX and another exchange.
Subject to regulatory reform, I do not in principle oppose commercial arrangements involving the ASX and a global exchange that would:

• Protect the integrity of Australia's financial architecture and regulatory framework;
• Build Australia's standing as a significant financial services centre in Asia;
• Increase Australia's integration into global capital markets and exchange networks;
• Meaningfully boost access to capital for Australian businesses;
• Support growth in high quality financial services jobs in Australia; and
• Be consistent with increased competition between financial exchanges in Australia.

I thank the parties, the SGX and the ASX, for their constructive engagement and cooperation throughout this process.
CANBERRA
8 April 2011

Glenn Dyer does a good review of the media's reaction and strikes the right tone about the hysterical nature of much of the business media's response.

The best article on the issue is Ian Verrender's piece in Fairfax, He rightly points out that:

Singapore's Finance Minister, Tharman Shanmugaratnam, who was also in Seoul for the summit, has always maintained the facade that Temasek, his government's investment company, is totally independent even though it is controlled by the Ministry of Finance and run by the Prime Minister's wife. Temasek, in turn, ''has no control or influence over the Singapore Stock Exchange'', even though it owns a 23.5 per cent stake in the SGX.

If you believe all that, you would have no trouble accepting the line there is no Singapore Inc, that Singapore's first family, the Lees, do not dominate the economy and that Tharman would have been as equally in the dark as Wayne.

But ask yourself this simple question: had the ASX announced a takeover of the Singapore Stock Exchange - rather than the other way around - what response would you expect from the Singapore government? A swift and furious condemnation from the government and Temasek, perhaps?

It is at this point that copious quantities of manure start raining down from on high about the damage this rejection will wreak on Australia's reputation.

Most of the criticism about the Treasurer's rejection, under the guise of ''national interest'', emanates from those with a deep ''personal interest'' in the transaction.

The ASX's Rob Elstone, who is planning to leave the company within months, would have seen all his options vest at a handsome premium, SGX's Magnus Bocker would have pulled off yet another stunning victory and the investment banks advising on the deal would have been paid enormous success fees. The ASX chairman, David Gonski, meanwhile, would have further cemented his long-standing links with the Singapore government's various investment arms.

Let's put a few facts on the table. There is virtually no benefit to accrue to Australia through the ''merger'', as it is currently structured.

Had it proceeded, control and ownership of a vital piece of Australia's financial architecture would have been consigned to a backwater, for that is what Singapore is. Australian companies have rarely sought listings there. Capital is almost never raised there. Local senior executives fly straight over the top or spend an hour in the transit lounge at Changi International on their way to real financial centres on their investor roadshows.

The other great furphy from those pushing the deal is the claim that Singapore is a gateway to Asian capital. That's just not the case. Singapore is a gateway to Malaysia. You can drive from the island state across the causeway to the mainland. But even the Malaysians are wary about their neighbour. As for the Thais and the Indonesians, it would be diplomatic to not mention Singapore if you intend doing business in those countries.

The real action these days is in China, not just in terms of sales, but in raising capital. It would make far more sense for the ASX to team up with Hong Kong if that really was the rationale. But what about this frantic drive for international stock exchange consolidation?
We're told Australia will be left behind in the rush, that we'll become irrelevant. That argument has more holes than a Swiss cheese.

The first wave of global amalgamations in 2004 and 2006 between European and North American exchanges was an unmitigated disaster for shareholders in the purchasing exchanges. Now it is on again. But the rush for amalgamations has nothing to do with promoting cross border activity and investment. It is all about cutting costs, about spreading stagnating revenue over a smaller cost base in the face of the imminent rise of internet-based trading systems.
Ever since stock exchanges demutualised and turned themselves into listed companies on their own exchanges, they have been forced to seek growth in revenue and profits, a feat that has become increasingly difficult.

Shacking up with a foreign operator can achieve that by getting rid of one of the exchange's back offices.

Share trading, however, remains largely a national pursuit. Australian institutions and retail shareholders invest through the ASX. Americans use the Nasdaq and the NYSE. The English use the LSE. The list goes on. And that's despite the recent amalgamations.

Wayne Swan was right to flag his intention to reject the Singapore takeover for it is a deal that offers Australia nothing except a potential loss. And at least he has been more courteous than those running the ASX and their advisers who failed to consult or notify the government of their intentions.

But he hasn't totally kyboshed the deal. He has left the door open for a rejig of the merger, for something Australians would find more acceptable. He's waiting for the bigger, more profitable, better equipped ASX to come back with a deal where it takes control of the SGX.
Apparently that's not an option. Go figure.

Expect to hear a whole lot of warnings from business leaders and curmudgeonly commentators that Australia will now lose its attractiveness as an investment location.

Don't believe a word of it.

Australia will remain an attractive location to invest, despite warnings about mining and carbon taxes and a Canberra supposedly hostile to foreign investment. The simple fact is that investment (both portfolio and direct, debt and equity) is pouring into this country at the moment. The Aussie dollar is at its highest level for nearly 30 years.

When the investment does slow down, it won't be because of the FIRB, it will be because the mining boom will have bust and mining companies will have over capitalised on their investments to try to capture supposedly never-ending demand from China and India.

What matters most for foreign investment is demand (whether in the country of investment or elsewhere as in the case of investment in Australia's mining industry). Australia also remains an attractive place to invest because of its stability. Where do you think a mining company would rather invest in Australia or Africa. While many African countries might not have a FIRB, this does not necessarily make them more attractive.

The Treasurer has made the correct decision rejecting this takeover, which WASN'T in the national interest (unless you're talking about Singapore's national interest and more to the point the interest of Singapore's 'first' family.)

Never say Never

I'm busy writing at the moment ... articles etc so my blogging has been limited of late. I'm most interested at the moment in understanding Australia-Asian relations in the context of potential great power conflict in the region, but I'm also working on the politcs of climate change policy.

I spend a lot of time filing newspaper and govt reports on a range of topics because going back through them can give you a very good sense of how events and opinions develop. I know it's old school but you can't get that feel by going through web searches.

Today I came across a file that made me realise that stories that purport to report "the end" are always more attractive than stories that say that the reality lies somewhere in the middle of two extreme views.

Anyway for your amusement, especially for those recently suffering from floods here is the story from 2008:

This Drought May Never Break

Richard Macey
January 4, 2008

IT MAY be time to stop describing south-eastern Australia as gripped by drought and instead accept the extreme dry as permanent, one of the nation's most senior weather experts warned yesterday.
"Perhaps we should call it our new climate," said the Bureau of Meteorology's head of climate analysis, David Jones.

He was speaking after the release of statistics showing that last year was the hottest on record in NSW, Victoria, South Australia and the ACT.

NSW's mean temperature was 1.13 degrees above average. "That is a very substantial anomaly," Dr Jones said. "It's equivalent to moving NSW 150 kilometres closer to the equator."

It was the 11th year in a row NSW and the Murray-Darling Basin had experienced above normal temperatures. Sydney's nights were its warmest since records were first kept 149 years ago.
"There is absolutely no debate that Australia is warming," said Dr Jones. "It is very easy to see … it is happening before our eyes."

The only uncertainty now was whether the changing pattern was "85 per cent, 95 per cent or 100 per cent the result of the enhanced greenhouse effect".

"There is a debate in the climate community, after … close to 12 years of drought, whether this is something permanent. Certainly, in terms of temperature, that seems to be our reality, and that there is no turning back.
"Last year climate change became very evident in south-eastern Australia, with South Australia, NSW, Victoria, the ACT and the Murray-Darling Basin all setting temperature records by a very large margin," he said.

Some areas were "getting closer to 1.5 to 2 degrees above what we were seeing during early parts of the 20th century."

Australia as a whole had a mean temperature 0.67 degrees above average last year, making it the nation's sixth-warmest year.

NSW and the Murray-Darling Basin experienced their seventh consecutive year of below-average rain. Dr Jones said the statewide rain statistics would have looked even worse had it not been for heavy falls along the coast.

Sydney had its wettest year since 1998, receiving 1499 millimetres, well above the long-term average of 1215. While much of it was coastal, rain that did fall across the state fell at the wrong time for farmers, soaked into drought-parched soils or evaporated during scorching days.

Widespread falls across NSW in June were followed by very dry spells in August, September and October.
"Very good rainfall in December across south-eastern Australia has been followed, since about Boxing Day, by quite extreme heat in Victoria, southern NSW and most of southern Western Australia," Dr Jones said.

Sydney had its stormiest year since 1963, with 33 thunderstorms, compared with the historic average of 28.
The highest temperature recorded in NSW last year was 46 degrees, at Ivanhoe on January 11. Charlotte Pass shivered through the state's coldest night when the mercury dipped to minus 11 on July 23.

Meanwhile, the weather bureau has warned that Sydney beaches may be closed again today and tomorrow, with heavy seas likely to pound the NSW coast.

The bureau's Rob Webb said a large low pressure system off south-east Queensland should produce waves up to four metres high in deep water.

"As they get closer to the shore they will become quite dangerous," he said.