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Changing the Goalposts

The Global Economy

The global economy continued to lose momentum in Q2, with sentiment weighed

down by the escalation of the US-China trade war, the ongoing Brexit saga and rising tensions between Iran and the US and its regional allies. The mounting risks to the outlook sees the major global central banks on the verge of a fresh easing cycle.

Domestically, a change in the policy goalposts saw the RBA implement back-to-back 25 basis point cuts in June and July to push the cash rate to a fresh record low of 1.00 per cent. The catalyst for the cuts was a lowering of the RBA’s central estimate of the unemployment rate consistent with full employment (the non accelerating inflation rate of unemployment or NAIRU) to 4.5 per cent, from its previous estimate of 5.0 per cent. With unemployment at 5.2 per cent, the RBA sees this spare capacity in the labour market as a major impediment to the Bank meeting its policy goal of 2 to 3 per cent inflation.

In the US, sentiment at the Federal Reserve has turned more dovish with almost half of the participants on the FOMC, the body that sets policy, now expecting cuts this year. Traders

are fully pricing in a 25 basis point rate cut in July and another 50 points by the end of the year. The Fed is under fire from President Trump for keeping rates too high, with its position complicated by an unemployment rate hovering around the lowest levels since the 1960s and an equity market at record highs. However, stubbornly low US inflation is likely to be used as the major justification to cut rates. The promise of further easing has pushed the 10-year Treasury yield to 2.0 per cent, the lowest level since the 2016 presidential election.

Slowing European growth has seen ECB president, Mario Draghi, announce that the ECB is also ready to ease policy if the economy does not start to improve. Eurozone money market rates are already in negative territory, while the yields on German and several other European countries’ 10-year bonds are near zero or below.

Meanwhile, the risk that the UK will leave the EU on 31 October without a deal appears to be increasing. Prime Minister Theresa May has resigned and high profile Brexiteer Boris Johnson is favoured to win the Conservative Party ballot to take her place.

In This IssueThe Economy ..........................1

From the CEO’s Desk ..............1

CUA AFA2018 Exemption........4

Moody’s Upgrades Rating .......4

Curtin Subject Prize Winner ....4

Investor Marketing Strategy.....5

Investor Presentation...............5

AASB 16 Rates Database .......5

New Staff Appointments ..........6

Staff Movements in FX ............6

Economic Client Forum ...........7

Changes to EOFY Reporting ...7

About WATCWATC is the central financial services provider for the Western Australian public sector, and delivers the following efficient and cost-effective services for all government agencies:• funding and debt management• asset and investment

management• financial advisory services• financial risk management• treasury management services

and systems.

AddressLevel 12, St Georges Square225 St Georges TerracePERTH WA 6000

P: (+61) 8 9235 9100F: (+61) 8 9235 9199E: watc@watc.wa.gov.auW: www.watc.wa.gov.au

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Client NewsletterJune Quarter 2019

From the CEO’s Desk

Dear clients and staff

The June 2019 quarter can be characterised by a lot of change – thankfully most of it positive for Western Australia. The May release of the WA State Budget 2019-20 saw a continued trend in improving state finances, with an operating surplus now predicted for 2018/19 and net debt peaking at $39.5 billion at 30 June 2020. An updated 2019/20 borrowing program has been developed, reflecting a material reduction in new funding requirements between the 2018/19 and 2019/20 State Budgets.

These improvements in state finances, underpinned by conservative revenue assumptions, an expected pick-up in economic activity from 2019/20 and disciplined management of expenditures, resulted in an update from Moody’s Investors Service, from Aa2 with a positive outlook to Aa1 Stable.

“The level of unemployment consistent with full employment might be an invisible, but it is crucial. If Australia truly can have lower unemployment – sustainably – policy should be used to try to get there.”

RBA Assistant Governor Luci Ellis - The 2019 Freebairn Lecture on Public Policy 12 June 2019

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Closer to home, Japanese growth remains sluggish and inflation is less than half the Bank of Japan’s target. The Japanese 10-year bond yield has fallen to -0.16 per cent. The Bank of Japan has also indicated it is ready to loosen policy further to attain its goals.

The escalation in the US-China trade war appears to be weighing on the Chinese economy with industrial production and fixed asset investment growth falling to the lowest levels since the early 2000s. The Chinese government has already implemented policies to support growth and are likely to take whatever steps they view necessary to prevent growth from falling below the 6.0–6.5 per cent target.

The Australian Economy

Australian real GDP growth remains soft with a seasonally adjusted 0.4 per cent in Q1 2019, following 0.2 per cent growth in Q4 2018. Annual growth fell back to 1.8 per cent YoY, the slowest rate of growth since Q3 2009. Even that soft rate of expansion was driven by population growth with per capita real GDP virtually unchanged in the quarter, following declines in Q3 and Q4 2018, and was just 0.1 per cent higher than a year earlier.

Government spending and exports drove the economy forward in Q1, with real private demand growth negative for the second quarter in a row. The weakness in real activity was offset to some extent by another strong 3 per cent lift in the terms of trade that continues to boost national income.

Household consumption remained very soft with growth in current dollar terms slipping to 3.2 per cent YoY, the slowest since Q1 2009, weighed down by declining house prices, weak wage inflation and soft credit growth. RBA rate cuts and the impending tax cuts will boost household disposable income, however, to what extent this flows through to spending remains to be seen.

Consumption growth has been running well ahead of disposable income growth so it is possible that the increase in disposable income could flow through to higher saving, particularly if consumers become more concerned about the employment outlook.

Headline trend employment growth remains solid at 2.7 per cent over the year to May. However, much of the increase has been driven by public sector employment, which has continued to outpace private sector job creation. The seasonally adjusted unemployment rate has increased to 5.2 per cent in April and May from a low of 4.9 per cent in February. The leading indicators we follow continue to signal slowing employment growth as we move into the second half of 2019.

Inflation remains soft with the wage cost index rising just 2.3 per cent in the year to Q1 and headline CPI inflation falling further below the RBA’s 2 to 3 per cent target, at 1.3 per cent YoY in Q1. The various measures of underlying inflation also continue to run well below target.

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Against this positive backdrop, the Reserve Bank of Australia signalled concerns with the national economy and cut interest rates by 25 basis points at both its June and July meetings, with market expectations for another interest rate cut to follow in the second half of 2019.

The result of these changes has seen outright yields come in and WATC yields narrowing to other semi government issuers, resulting in interest savings to the State. The effort of the Financial Markets branch this quarter has been largely focussed on finalising year end borrowing requirements and our own balance sheet management ahead of large maturities in October and November 2019.

In late May, I accompanied the Treasurer, Hon Ben Wyatt, and Michael Court, Deputy Under Treasurer, to North Asia, visiting over 20 investors in Japan, South Korea and Hong Kong. In early June, the Treasurer, along with the Under Treasurer, Michael Barnes, and a number of senior WATC staff, hosted a post budget economic and fiscal update for approximately 80 financial markets participants in Sydney. Feedback from both marketing events was very positive, with investors commenting on the changes to the Western Australian fiscal outlook, as well as benefitting from the detail we were able to provide on how Western Australia was tracking relative to the broader Australian economy.

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-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Quarterly (RHS)

Year-on-year (LHS)

Australian Private Sector Real Final Demand Growth

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The Western Australian Economy

The Western Australian economy continues its transition following the mining construction boom. Western Australian real state final demand fell a seasonally adjusted 0.3 per cent in Q1 2019, to be down 1.4 per cent YoY. The quarterly decline was driven by falls in private and public fixed capital investment. However, solid growth in exports, combined with increasing business investment, is expected to see state final demand rebound into 2019/20.

Real household spending rose a 0.1 per cent in the quarter. The international trade environment remains supportive of state income, with Western Australia’s merchandise exports valued at $40 billion in the quarter (unadjusted). Trend employment growth was soft at 0.6 per cent YoY in May, though this is an improvement on the 0.3 per cent growth in the year to February, with the trend unemployment rate relatively steady at 6.2 per cent. While this is above the national average, higher labour force participation means the State’s trend employment to population ratio of 63.9 per cent is well above the national average of 62.5 per cent.

The Western Australian Department of Treasury is forecasting real gross state product growth to accelerate to 3.5 per cent in 2019/20, from an estimated 2.0 per cent in 2018/19, on the back of improved household consumption, and business and public sector fixed capital investment. Rising employment growth is expected to see the unemployment rate average 6.0 per cent in 2019/20.

Financial Markets

With central banks now signalling interest rate cuts rather than increases are on the cards, global bond yields have fallen sharply and equity markets have pushed higher, with the S&P 500 in the US hitting fresh record highs. Domestically, the ASX 200 has added 7 per cent in the quarter and is currently at the highest levels in over a decade.

With the RBA cutting the cash rate to a fresh record low of 1.00 per cent and the market expecting more cuts to come, Aussie Treasury bond yields have fallen to fresh record lows.

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The 3-year Australian Treasury bond yield has declined from 1.38 per cent at the end of Q1 2019 to a low of 0.89 per cent, before picking up a little to close the quarter at 0.96 per cent. The 10-year Australian Treasury bond yield has fallen from opening the quarter at 1.78 per cent to 1.34 per cent at quarter end. The spread between Australian and US Treasury yields has slipped to a fresh record low, with the Aussie 10-year yield currently 68 basis points below the 10-year US Treasury yield.

Restricted supply, due to the Brazilian mine closures and accelerating Chinese steel production, has pushed iron ore prices even higher in Q2. The price of the most active futures contract for 62 per cent Fe iron ore on the Singapore Exchange climbed from USD86.21/tonne at the end of March to a five-year high of USD112.87/tonne at quarter end.

The AUD started the quarter at USD0.7096 and fell to as low as USD0.6853 in June as the RBA cut the cash rate and signalled there are more cuts to come. The AUD is currently off its lows and closed the quarter at USD0.7020, though this was due to a weakening in the greenback rather than a recovery in the AUD.

The RBA cash rate cuts were in line with our long held view that, if the cash rate was moving anywhere, it was most likely to be down. In the absence of a sharp rise in the unemployment rate, we expect the RBA to now sit back and assess the impact of its back-to-back rate cuts before cutting the cash rate by a further 25 basis points to a fresh record low of 0.75 per cent in November.

With the cash rate likely to fall below 1.0 per cent this year, the RBA is fast running out of room for further rate cuts and some form of asset purchase program is looking increasingly likely, if further stimulus is required. Such a program could come in the form of infrastructure funding, given the RBA continues to press the desirability of public investment, not only as a means of supporting demand in the short term but of increasing productivity in the longer term.

Craig McGuinness Chief Economist

June 2019

WATC has been heavily engaged with our clients over the last three months, hosting a client forum on the State budget and related borrowing program in June, visiting Broome, Geraldton and Albany to meet with clients, and working on a number of new client engagements including contract renegotiations, refinancing options for projects, new business cases for funding requests and a large number of foreign exchange transactions.

Lastly, WATC is pleased to announce that we are partnering with the Department of Treasury for the Graduate Program 2020. Applications are sought from a diverse skill set including Accounting, Finance, Economics, Law, Business/Commerce, Mathematics, Statistics, Data Science, Political Science, Public Policy and Actuarial Studies to participate in the 18 month program, with the possibility of permanency at the end. Graduates will have the option of spending a rotation with WATC to gain exposure to our unique role and functions. Visit jobs.wa.gov.au for more information. Applications are open til 28 July 2019.

Kind regards,

Kaylene GulichChief Executive Officer

June 2019

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WATC Curtin University Subject Prize Winners

WATC is proud to be associated with Curtin University’s School

of Economics, Finance and Property through sponsorship of an annual prize for the student who achieves the highest mark in the third year subject INVE3001 Portfolio Management.

The 2019 WATC prize was shared between three students who all achieved the equal highest score in the Portfolio Management subject.

Congratulations to Ben Coldham, Wei Liang Tan and Daniel Alway on winning the WATC prize.

Common Use Agreement (CUA AFA2018) covers the procurement of audit services, financial advice and financial

assessment services.

As noted on page 2, you can access many of the financial advice services defined within the CUA from WATC through its Advisory Services and Client Foreign Exchange and Treasury Services teams without having to go through the competitive tender process (either through full RFP, or the faster quote process under the CUA):

“Services offered by the Western Australian Treasury Corporation (WATC) do not form part of this CUA; this means that Public Authorities can elect to engage the WATC to assist with their requirements.”

WATC offers a range of corporate finance, risk management and foreign exchange advisory services including:

• Asset and project financing

• Business case modelling

• Costing of capital and capital projects

• Excel model testing and quality assurance

• Financial risk modelling and simulation

• Debt structure analysis

• Asset-liability management modelling

• Development of risk management and investment policies

• Business valuation and financial sustainability

• Public-private partnership evaluation and refinancing

• Support for tender documentation and evaluation

• Assessment of procurement options

• Lease versus buy analysis and evaluation

• Identification, measure and manage foreign exchange exposure, in compliance with TI826.

These services can be provided as a single service or combined to provide a larger and more comprehensive offering. Many of the skills and expertise required to deliver these services are transferable to many modern business problems. WATC is keen to discuss how our skill set and expertise can assist you in new and innovative ways. More details are available on our website at www.watc.wa.gov.au/home/client-services.

If you would like to know more, please contact David Letts, Head of Advisory Services, on (08) 9235 9178 or dletts@watc.wa.gov.au or Lisa Brady, Head of Client Foreign Exchange and Treasury Services, on (08) 9235 9122 or lbrady@watc.wa.gov.au.

WATC Financial Advisory Services Exempt Under CUA AFA2018

Contract Number: CUA AFA2018 Last Updated: 28 May 2019

Document number: 02877255

Audit and Financial Advisory Services (CUA AFA2018) 1 July 2018 to 30 June 2021 (Plus two 12 months extension options)

About the contract How do I use this contract? What’s on offer? Who are the contractors? Buying rules Need more information?

Moody’s Upgrades Credit Rating for WAOn 6 June 2019, Moody’s Investors Service (Moody’s)

upgraded its long-term rating for Western Australia and WATC to Aa1 and revised its outlook to ‘Stable’, from the previous Aa2 rating and ‘Positive’ outlook.

As a client of WATC, if you would like a copy of Moody’s rating action statement, which outlines the rationale for the change, please contact your WATC Relationship Manager.

Daniel Alway with Kaylene Gulich

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AASB 16 – Incremental Borrowing Rates Database

The new Accounting Standard AASB 16 – Leases applies from

1 July 2019. WATC has assisted agencies in estimating their future exposure under the Standard for budget reporting in SIMS by providing ‘incremental borrowing rates’ to discount future lease cash flows where the implicit interest rate within the lease was unknown, which is typically the case for operating leases.

To assist with the introduction of the new standard for annual reporting, inputs to accounting systems and future budgeting, WATC has now made available a database service through our website.

This database provides access to incremental borrowing rates for all current and potential future lease valuation requirements and will be updated monthly. It will be referenced in all relevant circulars issued by WA’s Department of Treasury, who have responsibility for all accounting based issues in respect of AASB 16 implementation.

All queries about the application of AASB 16 should be directed to the Department of Treasury.

Overview of WATC’s Investor Marketing Strategy

The release of the WA State Budget 2019-20 continued the trend in improved State finances, with an earlier than

expected return to surplus, and resulting reductions in the 2018/19 to 2022/23 new borrowing program. Notwithstanding this, maturities of $29.3 billion to 2022/23 require refinancing and it is important that the economic and fiscal stories of the State are understood by existing and potential investors.

The main objectives of WATC’s investor marketing strategy are to:

• ensure ready access to funding from domestic and overseas investors to meet its borrowing program

• ensure that it is able to borrow at competitive margins to other State treasury corporations with similar sized borrowing programs and ratings

• diversify and grow its investor base by providing existing investors, panel banks, and new investors with updates to the

WA economic story, the State Governments financial outlook and informing them of WATC’s activities in financial markets

• learn directly from investors which factors drive their investment decisions.

In May 2019, WATC hosted the Treasurer, the Hon. Ben Wyatt MLA, and Deputy Under Treasurer, Michael Court, on a week-long North Asia investor tour, with Kaylene Gulich, WATC’s CEO. They visited Tokyo, Seoul and Hong Kong and met with over 20 existing or potential investors across central banks, pension funds, insurance companies and other asset managers. They presented on the current WA economy and the State Government’s fiscal position following the recent State budget.

Investors were highly engaged and interested in understanding WA’s story in relation to the rest of Australia and how we are performing in a global context.

In June 2019, WATC hosted over 80 investors and market intermediaries at

a presentation in Sydney, which covered the WA State Budget 2019-20, the WA economy and WATC’s future funding plans. Presenting at the update were the WA Treasurer, the Hon. Ben Wyatt MLA, the Under Treasurer and WATC’s Chair, Michael Barnes, and WATC’s CEO, Kaylene Gulich.

The presentation provided background on the continuing improvement of the State’s financial position and generated positive feedback, as well as a good question and answer session. A copy of the presentation can be viewed on our website.

WA’s Budget and Improving Economy Presented to Investors in Sydney

Ben Wyatt presenting to investors and market intermediaries in Sydney

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Vicky Litopoulos

Vicky has over ten years’ experience in the public sector,

holding various roles within the Department of the Premier and Cabinet and the Department of Treasury. Her most recent role was as Senior Project Officer within the Strategic Projects Business Unit at the Department of Finance. Vicky was responsible for reporting on the State’s major projects valued at $50 million and above, including cash flow reporting, financial analysis and

project progress. Vicky started with WATC in April as a Corporate Financial Advisor for the Advisory Services team.

New Appointments…WATC is pleased to introduce our new staff members to clients.

Christabelle Padmanabham

Christabelle joined WATC in April as a Risk Analyst in the

Risk Management team. She has 6 years’ experience in the financial services sector. Most recently, Christabelle worked as a Paraplanner at Macquarie Wealth Management. She has a Bachelor of Commerce and a Bachelor of Economics from the University of Western Australia, is Regulatory Guide 146 qualified and has a Diploma of Financial Planning. Outside of work, Christabelle enjoys going for long walks and spending time with her family and friends.

Cooper Young

Cooper recently graduated from the University of Western

Australia with a Master of Applied Finance, complementing his Bachelor of Commerce majoring in Economics and Natural Resource Management. While studying, he worked at Oak Advisory as a Financial Planning and Advisory Graduate. Cooper joined WATC in April as a Risk Analyst, within the Risk Management team. Outside of work, Cooper loves playing basketball, going hiking and is

currently learning Mandarin.

Neil Lai

Neil commenced with WATC in April as a Corporate Financial Advisor

in the Advisory Services team. He has held various commercial management roles in the banking industry spanning almost a decade, with duties ranging from corporate banking analyst to being responsible for relationship management of client portfolios in excess of $100 million. Neil studied at Curtin University, where he attained a Bachelor of Commerce (double majoring in Accounting and Finance) and subsequently obtained his Institute of Chartered Accountants Australia designation.

Staff Movements in our FX Team

Our Client Foreign Exchange and Treasury Services team has had a

few staff movements in recent weeks. We welcome back Bruce Whyatt from his 12-month secondment with the Department of Treasury as part of the GTE Reform Project. Bruce has stepped back into his role as Chief Foreign Exchange Advisor. Bruce can be reached on 9235 9119 or bwhyatt@watc.wa.gov.au. Michael Ehlers has moved to the WATC project team overseeing the implementation of WATC’s new treasury management system, replacing Ken Lee who recently left WATC. Mohamed Mohamed is still acting as a Foreign Exchange and Treasury Analyst and can be contacted on 9235 9137 or mmohamed@watc.wa.gov.au.

Providing a range of treasury management services, FX products and tools, the FX Team works closely with each client to understand their individual business requirements, assist them to identify and quantify their risks (including credit, interest rate and FX risks), design risk management strategies and ensure they have the necessary information to make the best decision for their organisation. Clients also have access to WATC’s considerable experience and expertise, together with the systems, pricing and oversight that comes with the scale of operations undertaken by WATC in both the domestic and offshore markets.

Vicky Litopoulos Corporate Financial

Advisor

Cooper Young Risk Analyst

Neil LaiCorporate Financial

Advisor

Christabelle PadmanabhamRisk Analyst

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DisclaimerAny opinions, judgements, conclusions, forecasts, predictions or estimations contained in this advice are made in reliance on information provided to Western Australian Treasury Corporation which Western Australian Treasury Corporation believes to be reliable. Western Australian Treasury Corporation, however, cannot guarantee the accuracy of that information. Thus, any recommendations are made in good faith but are provided only to assist you with any decisions which you make. These recommendations are not intended to be a substitute for professional advice on a particular matter. Before accepting or rejecting those recommendations you must discuss your particular needs and circumstances with Western Australian Treasury Corporation.

For information on any products or services, please contact one of the Business Unit Managers listed below:Richard McKenzie Head of Client Debt Finance & Investments (08) 9235 9127 rmckenzie@watc.wa.gov.auLisa Brady Head of Client Foreign Exchange & Treasury Services (08) 9235 9122 lbrady@watc.wa.gov.auDavid Letts Head of Advisory Services (08) 9235 9178 dletts@watc.wa.gov.au

For economic commentary or clarification, please contact:Craig McGuinness Chief Economist (08) 9235 9104 cmcguinness@watc.wa.gov.auPaula Gadsby Economist and Senior ALM Analyst (08) 9235 9110 pgadsby@watc.wa.gov.au

EOFY Reporting Through the Client Portal

End of financial year 2018/19 audit reports for Western Australian

Treasury Corporation’s lending and investment products will be available through WATC’s Client Portal.

Please note:• A specific report category has been

created on the Client Portal for the end of financial year audit reports.

• Clients can assign temporary Client Portal access to their auditors to view and download reports, if required.

This easy ‘self-help’ service represents an efficiency improvement for both WATC and agencies, as it removes the need for the previous manual process of official letter exchange.

If your agency has not yet obtained access to the Client Portal it is important to do so as soon as possible to ensure you continue to receive timely provision of EOFY reports.

If you have any queries on this new process please contact your Client Relationship Manager, or email csoperations@watc.wa.gov.au.

WATC recently held a client forum providing an overview and outline of the interconnection between state finances, the

economy, financial markets and client borrowing.

Michael Court, Deputy Under Treasurer and Deputy Chairperson of the WATC Board, provided an overview of the Western Australian economy and the key issues in the recently released WA State Budget 2019-20. This was followed by presentations from WATC staff on:

• The economic and interest rate outlook, with a focus on what will be driving the domestic and global economic environment in 2019/20

• Agency borrowing limits and debt management

• The outlook for financial markets and WATC’s borrowing program for 2019/20.

Clients’ feedback was positive, finding the forum very interesting and informative.

If you would like to learn more about the economic environment, the financial markets outlook or WATC’s borrowing program, please contact your Client Relationship Manager. If you are interested in attending future WATC client forums, please contact Chris Rinsma at crinsma@watc.wa.gov.au.

Client Forum on the State Budget, Economy and Financial Markets Outlook

Michael Court presenting an overview on the WA State Budget 2019-20