Western Australian Economic and Fiscal Update€¦ · ESTIMATED GLOBAL LITHIUM DEMAND 2018-26....
Transcript of Western Australian Economic and Fiscal Update€¦ · ESTIMATED GLOBAL LITHIUM DEMAND 2018-26....
Western Australian Economic and Fiscal Update
June 2019
Hon Ben Wyatt MLATreasurer
1
• Economic growth (GSP) in 2018-19 revised down from 3% to 2%– Mainly due to weaker than expected household consumption– In response, 2019-20 Budget minimises the increase in household fees
and charges• GSP growth forecast to lift to 3.5% in 2019-20
– Mainly due to rebound in business investment– Increased Government investment (particularly in roads and rail) also
contributing• Housing (both new construction and established) remains soft –
but lending commitments appear to have troughed– 2019-20 Budget includes a temporary relaxation of Keystart eligibility
criteria to stimulate activity
Key Points
Key Points Cont.
• Estimated operating surplus of $553m in 2018-19– $1.2b turnaround from $674m deficit forecast in the Mid-year Review
• March quarter results show we are on track– Expense growth of just 1.6% to end-March
• Operating surpluses forecast across entire forward estimates period– Including $1.5b surplus in 2019-20
• Net debt forecast to peak at 30 June 2020 and then gradually decline– WA the only State forecasting net debt to peak
2
WA Economy
3
Economy forecast to grow by 3.5% in 2019-20 and 3% p.a. out to 2022-23, underpinned by a strengthening domestic economy
-4
-2
0
2
4
6
8
10
12
2007-08 2010-11 2013-14 2016-17 2019-20 2022-23
%GROSS STATE PRODUCTWestern Australia, Annual Growth
Long-run average growth = 4.3%
Forecast
0
50
100
150
200
250
2007-08 2010-11 2013-14 2016-17 2019-20 2022-23
$ Billion
STATE FINAL DEMANDWestern Australia, Annual Levels
Forecast
Cautious Consumers – But Confidence Improving
• WA households have been cautious over the last decade –reflected in a high savings rate, well above the national average
• This has been acting as a drag on household consumption
• However, consumer confidence has been trending upwards since late 2017, and is expected to support a gradual increase in household spending in the medium term
4
-5
0
5
10
15
20
Jun-90 Jun-94 Jun-98 Jun-02 Jun-06 Jun-10 Jun-14 Jun-18
HOUSEHOLD SAVING RATIO
Western Australia
Australia
% of Income
-50
-30
-10
10
30
50
70
90
110
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19
No. of Building ApprovalsNo. of Lending Commitments to Owner Occupiers
%
-40
-30
-20
-10
0
10
20
30
40
50
60
Mar-07 Mar-10 Mar-13 Mar-16 Mar-19
Australia
Western Australia
%
• Housing finance affected by banks tightening access to credit nationally – but lending commitments appear to have troughed
• Keystart income limits have been temporarily increased (1 July to 31 Dec 2019)
HOUSING FINANCE (VALUE) WA BUILDING APPROVALS & LENDING(3-month sum, Year-ended growth)
5
Housing Sector
6
The rental vacancy rate has declined sharply, which has increased rents and is expected to support construction and prices as renters look to build
0
1
2
3
4
5
6
7
8
9
100
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Mar-11 Mar-13 Mar-15 Mar-17 Mar-19
RENTAL MARKETSupply and Vacancy Rate
Total Rental Listings (LHS)Vacancy Rate (RHS)
%, inverse
-20
-15
-10
-5
0
5
10
15
20
25
30
Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19
MEDIAN RENT – HOUSESPerth
Annual average
Year-on-year
%
Housing Sector Cont.
• The State’s resource production capacity has been significantly expanded since the early 2000s
• Business investment normalised as projects moved from construction to production
• Return to growth from 2019-20 supported by $16.3b in new and replacement iron ore and lithium mines
WESTERN AUSTRALIAN BUSINESS INVESTMENTAnnual Levels
7
0
10
20
30
40
50
60
70
80
90
1989-90 1997-98 2005-06 2013-14 2022-23
Potential InvestmentIron OreLithiumAll Other Major Project InvestmentMinor Project InvestmentOtherNon-mining
$ Billion
Forecast
Business Investment
ESTIMATED GLOBAL LITHIUM DEMAND2018-26
WESTERN AUSTRALIAN LITHIUM PRODUCTION2007-23
• Lithium mining and manufacturing is a promising emerging industry• Western Australia accounts for 65% of global lithium production, and demand is
expected to increase considerably over the next decade
8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jun-07 Jun-11 Jun-15 Jun-19 Jun-23
Lithium concentrate sales, WA
Forecast
Million tonnes, annual sum
234
777
1,009
1,634
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
low base high
2018 2026
Estimated Actual Roskill Forecast
Thousands of tonnes of LCE
Business Investment Cont.
9
Upturn in mine site employment across key commodities
0 0.4 0.8 1.2
Community Services &Development
CEO & General Management
Education & Training
Legal
Government & Defence
Healthcare & Medical
Mining, Resources & Energy
SEEK NEW JOB ADVERTISEMENTS, WAAnnual growth, April 2019
%0
20
40
60
80
100
120
140
Dec-02 Dec-06 Dec-10 Dec-14 Dec-18
MINE SITE EMPLOYMENTTotal Employment, Annual Average Levels
Other Iron Ore Gold Lithium, Tin & Tantalum
'000
Record Mine Site Employment as Projects Ramp Up
Outlook for WA’s Key Trading Partner
10
Demand conditions in China remain favourable
825
15
WA IRON ORE EXPORTScontained in Chinese exports to US
Total WA iron ore exports
Iron ore embodied in China's exports of steel to the US
million
milliontonnes
tonnes
-10
-5
0
5
10
15
20
25
-60
-10
40
90
140
Dec-10 Aug-12 Apr-14 Dec-15 Aug-17 Apr-19
% GrowthQrtly YoY
% GrowthQrtly YoY
CHINA ACTIVITY& Iron ore price
China secondary indicator, RHSIron ore price, LHS
General Government Revenue
11
Revenue has rebounded – but 2019-20 Budget predicated on modest revenue growth of 2.8% p.a, underpinned by conservative commodity price forecasts
4.8
-6
-4
-2
0
2
4
6
8
10
12
14
2007-08 2010-11 2013-14 2016-17 2019-20 2022-23
%
Decade average = 4% Underlying
growth
Average growth = 2.8%
Forecast
12
-10
-5
0
5
10
15
20
25
1997-98 2002-03 2007-08 2012-13 2017-18 2022-23
%PAYROLL TAX Annual Growth
Forecast
Long-run avg = 7.6%Forecast
avg = 6.5%
0
200
400
600
800
1,000
Apr-04 Apr-07 Apr-10 Apr-13 Apr-16 Apr-19
$m
PAYROLL TAX, LARGEST TAXPAYING INDUSTRIES
Rolling annual sum
MiningConstructionAdmin & supportProfessional servicesManufacturing
Payroll Tax Has Rebounded Supported by Hiring in the Resources Sector
Iron Ore Price
13
2019-20 Budget assumes an iron ore price of $US73.50/tonne in 2019-20 and $US63.70 by 2021-22 – upside risk
40
50
60
70
80
90
Jul-18 Jul-19 Jul-20 Jul-21 Jul-22 Jul-23
IRON ORE PRICE FORECASTS
Actual
Forward Contracts
Budget Approach
Consensus
MYR Approach
$US per tonne
2019-20: $US73.5
2022-23: $US63.7
2018-19 2019-20 2020-21 2021-22 2022-23
2020-21: $US65.6
2021-22: $US63.7
70
75
80
85
90
95
100
105
110
24-Jan 13-Feb 05-Mar 25-Mar 14-Apr 04-May 24-May
BENCHMARK IRON ORE PRICE
Initial responseto Vale disaster
$US/t
CycloneVeronica
Record China steeloutput; iron ore
inventories fall sharply
Budget cut-off date (8 Apr)
GST Reform
• WA’s GST share will never again fall below 70 cents in the dollar, up from 30 cents a few years ago
• Commonwealth to provide top-up payments totalling an estimated $5 billion to 2021-22
• From 2022-23, the 70% floor will be delivered through legislated increases to our GST grants
14
GST REFORM IMPACT
0%
10%
20%
30%
40%
50%
60%
70%
80%
2013-14 2016-17 2019-20 2022-23
Commonwealth-funded70% floor
GST grant gains fromreform
GST grants (pre-reform)
ForecastProportion of population share
GST Reform Cont.
• Under the pre-reform system, WA lost around 90% of additional iron ore royalty income (over time)
• Under the GST reforms, reduced GST grants from higher iron ore prices are fully offset by increased top-up grants (while WA’s GST relativity is below 70%)
• The new benchmark and floors provide insurance that, over the forward estimates, WA will retain all royalty increases from the higher iron ore price
15
0
1
2
3
4
5
6
7
$80US/t $100US/t $120US/t
$ Billion
GST grants (pre-reform)GST grant gains from reformCommonwealth-funded 70% floor
Higher than expected iron ore prices now have no impact on WA’s GST-related revenue
16
Budget strategy driven by the Government’s strong focus on expense management
2.4
0
2
4
6
8
10
12
14
2007-08 2010-11 2013-14 2016-17 2019-20 2022-23
%
Decadeaverage = 5.9%
Underlying growth
Average growth = 1.3%
Forecast
General Government Expenses
17
• Return to operating surplus in 2018-19, two years earlier than forecast in last year’s Budget
• Total public sector cash surplus forecast from 2020-21 – first since 2007-08
-5
-4
-3
-2
-1
-
1
2
3
4
2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22
General Government Operating BalanceTotal Public Sector Cash Surplus/Deficit
$ Billion
Forecast
Fiscal Position
Infrastructure Investment
18
Asset Investment Program totals $22.8b over next four years, with over one third of this on roads and rail
0
1
2
3
4
5
6
7
8
2013-14 2015-16 2017-18 2019-20 2021-22
METRONET Other roads and railHealth EducationElectricity Water CorporationAll other
$ Billion
ASSET INVESTMENT PROGRAMTotal Public Sector
Forecast
• Budget strategy is reducing net debt • WA is the only State where net debt is expected to decline
TOTAL PUBLIC SECTOR NET DEBT AT 30 JUNE
TOTAL PUBLIC SECTOR NET DEBT AS A SHARE OF GSP
19
0
2
4
6
8
10
12
14
16
2008 2010 2012 2014 2016 2018 2020 2022
Forecast
%
0
5
10
15
20
25
30
35
40
45
2008 2011 2014 2017 2020 2023
$ Billion
AASB 16 Impact Forecast
Net Debt
Financial Results to 31 March 2019
20
• Rebounding revenue• Continuation of historically low expense growth
4.8
8.1
0
1
2
3
4
5
6
7
8
9
Nine months to 31 Mar 2018 Nine months to 31 Mar 2019
%GENERAL GOVERNMENT REVENUE GROWTH
Decade average = 4.1%
1.4 1.6
0
1
2
3
4
5
6
7
8
9
Nine months to 31 Mar 2018 Nine months to 31 Mar 2019
%GENERAL GOVERNMENT EXPENSE GROWTH
Decade average = 6.2%
Financial Results to 31 March 2019 Cont.
21
March 2019 results show largest turnaround on record
-1400
-1200
-1000
-800
-600
-400
-200
0
200
Nine months to 31 Mar 2018 Nine months to 31 Mar 2019
$ MillionGENERAL GOVERNMENT NET OPERATING BALANCE
-3000
-2500
-2000
-1500
-1000
-500
0
Nine months to 31 Mar 2018 Nine months to 31 Mar 2019
$ MillionTOTAL PUBLIC SECTOR CASH SURPLUS/DEFICIT
Upside Risks
22
• Land Titles Registry– WA Government seeking a new operator to provide land titles services
and receive associated revenue over a period of up to 50 years, in return for upfront proceeds
– No legislation required• TAB
– Sale of the existing TAB business, with an exclusive licence to provide wagering services in WA
– Legislation introduced into Parliament in May 2019• Iron ore price (and interaction with GST reforms)• Likely underspend in 2018-19
WATC and Financial Markets
WATC Maturity Profile:
• Target optimal mix between floating and fixed rate exposure.
• Limit debt maturing within 12 months to less than 20% total borrowing at 30 June.
• Liquid assets covering 100% of debt maturing within 12 months at 30 June.
Maturity Profile by Financial Year end at 30 April 2019
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Millions
Maturity Profile by Financial Year end at 30 April 2019
STN
FRN
BOND
23
WATC Estimated Borrowing Program 2019-20 as at 10 May 2019Term Funding Requirement $B $B
New Money Program 1.1
Projected MaturitiesBenchmark Bond 3.7FRNs 2.9
Total Maturities 6.6
Total Term Funding Requirement 7.7
Note: 1 As at 10 May 2019. The sourcing of WATC’s funding is subject to conditions in the various market and the market
mix during the year may be amended as necessary to meet WATC’s pricing, liquidity, lending and capital usage targets.
FinancialYear
2018-19 State Budget$B
2019-20 State Budget$B
Variance$B
2019/20 $3.3 $1.1 -$2.2
2020/21 $0.9 $0.5 -$0.4
2021/22 $0.6 $0.4 -$0.2
2022/23 - $0.2 -
-$2.8
New Money Program 2019-20 to 2022-23
24
WATC and Financial Markets
Upside risks provide ongoing spread contraction opportunitiesSmall new money programs combined with conservative commodity price forecasts, ongoing expenditure restraint and selective asset sale proceeds provide the back drop potentially for further spread tightening to AAA and AA semi issuers
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
2Yr 3Yr 5Yr 7Yr 10Yr
WATC spread to Commonwealth, Par curves
CGS11/09/17 CGS17/05/19
25
WATC and Financial Markets
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
01-A
pr-
17
01-M
ay-1
7
01-J
un-1
7
01-J
ul-1
7
01-A
ug-
17
01-S
ep-1
7
01-O
ct-1
7
01-N
ov-
17
01-D
ec-1
7
01-J
an-1
8
01-F
eb-1
8
01-M
ar-1
8
01-A
pr-
18
01-M
ay-1
8
01-J
un-1
8
01-J
ul-1
8
01-A
ug-
18
01-S
ep-1
8
01-O
ct-1
8
01-N
ov-
18
01-D
ec-1
8
01-J
an-1
9
01-F
eb-1
9
01-M
ar-1
9
01-A
pr-
19
WATC 10yr Spreads to Peer Issuers
10YR QTC AA+ 10YR TCV AAA 10YR TCORP AAA
WATC debt continues to be a good value proposition for investors:• Western Australia has a strong credit rating, supported by strong institutional arrangements and excellent
liquidity• Improved government finances, driven by improving revenue and disciplined expenditure management• Economy recovering from post mining construction boom period• Diversified economic and revenue base• Strong fiscal management may further limit new funding program and tighten spreads to other semi issuers
26
WATC and Financial Markets summary
WATC website: www.watc.wa.gov.auDepartment of Treasury website: www.treasury.wa.gov.auPhotos courtesy of Tourism Western Australia
WarningAny opinions, judgements, conclusions, forecasts, predictions or estimations contained in this presentation are made in reliance on information provided toWestern 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 they must be carefully considered becausethey are provided only to assist you with any decisions which you make.
27
Thank you