ANZ - Australian States Chartbook (May 2013)

6 MAY 2013

CONTRIBUTORS

Cherelle Murphy Senior Economist +61 2 6198 5010 [email protected] Dylan Eades Economist +61 3 8655 9093 [email protected] Zoë McHugh Interest Rate Strategist +61 2 9227 1302 [email protected] Savita Singh Economic Analyst +61 2 9227 1500 [email protected]

AUSTRALIAN ECONOMICS STATES AND TERRITORIES CHARTBOOK

ANZ RESEARCH ANZ RESEARCH

• Australia’s states and territories have recorded very solid growth in a global context, particularly in Western Australia (WA), Queensland (Qld) and the Northern Territory (NT), where Australia’s major resource projects are concentrated. Those states are likely to remain the main drivers of growth over the coming five years as their export capacities rise following the mining investment boom.

• Overall, however, the outlook is now for softer growth across most states and territories in 2013-14 as the first round construction effects of the mining investment boom wane. We have already seen evidence of the non-mining sectors picking up in response to looser monetary policy but progress is slow against a still uncertain global outlook and a higher than expected AUD. New South Wales (NSW), Australia’s largest state, is improving most and this is likely to continue in part due to infrastruture spending. Victoria (Vic), the second largest state economy, is not participating as strongly, held back by a larger manufacturing sector and a somewhat desynchronised housing cycle and the end of a number of public works projects. Qld growth has been restrained by public sector cut backs and falling commodity prices and the high AUD. The smaller states of South Australia (SA) and Tasmania (Tas) continue to be impacted most harshly by ongoing structural changes worsened by the currency. The outlook for the Australian Capital Territory (ACT) is weak due to the potential change of Commonwealth Government on 14 September. Opinion polls currently predict the Liberal-National Coalition, which plans to cut the public service, will win Government from the Labor party. A change may induce more harmonious state-federal governmental relations however as all of the states and territories, except SA and ACT, are currently governed by Liberal and National parties.

• The states’ finances have been affected by one or more of a combination of global economic troubles, Commonwealth fiscal tightening, weakness in taxable consumption, and softer labour and property markets in recent years. It is likely that 2012-13 proves to be the worst year, although there are few stimulatory factors ahead. The 2013-14 budget releases begin tomorrow in Victoria. Australia’s most poorly rated state remains AA grade, with most AAA-rated and all implicitly supported by a AAA-rated Commonwealth Government. In the past six months since we last issued this report, only NT has had the outlook on its Aa1 credit rating outlook changed to negative from stable by Moody’s. While we do not rule out the possibility of further credit rating downgrades over the next two years, there appear to be some alleviating factors for state finances ahead.

• Spreads between semi government bonds and Commonwealth Government Securities (CGS) are particularly wide in the five-year sector, and are above long-term averages. We see scope for these to narrow over time. Liquidity demand for semis to swap should remain supportive.

ANZ STATE AND TERRITORY GROWTH FORECASTS

0.5

2.1

3.5

2.32.4

4.0

6.7

4.4

0.5

1.0

2.0 2.0

2.5

3.3

5.35.0

1.0

1.8

1.0

2.0

3.0 3.0

4.0 4.0

0

1

2

3

4

5

6

7

TAS SA ACT VIC NSW QLD WA NT

Per

cen

t

11-12 12-13f 13-14f 10 yr average

Share 1.7% 6.3% 2.2% 22.2% 30.7% 19.3% 16.3% 1.2%of Australianeconomy

STATE AND TERRITORY CREDIT RATINGS

State or territory

Standard & Poor's rating

Standard & Poor's outlook

Moody's rating

Moody's outlook

20113-14 Budget date

NSW AAA Negative Aaa Stable 18 June

Vic AAA Stable Aaa Stable 7 May

Qld AA+ Stable Aa1 Negative 4 June

WA AAA Negative Aaa Negative August

SA AA Stable Aa1 Stable 6 June

Tas AA+ Stable Aa1 Stable 23 May

ACT AAA Stable 4 June

NT Aa1 Negative 14 MayNot rated

Not rated

Sources: ANZ, ABS, Standard & Poor’s and Moody’s

States and Territories Chartbook / 6 May 2013 / 2 of 22

STATE ECONOMIES

• The economic outlooks for Australia’s states and territories have converged further over the six months since we last produced this report. The mining states are likely to grow at a slightly reduced pace, especially Qld owing to the cancellation and delay of a number of projects, which have been affected by lower (mainly coal) commodity prices and the persistently high AUD. At the same time, the larger non-mining states and especially NSW benefit from the easier stance of monetary policy, which has started to stimulate activity as the mining investment peak nears.

• Our major domestic concern remains whether there is strong enough momentum in the non-mining sectors of the economy to offset the impact of slower growth in the resources sector and to keep national GDP close to trend and unemployment from rising much further. As we said six months ago, we suspect not, which is why we forecast further monetary easing from the Reserve Bank of Australia (RBA).

• In NSW, which represents just under one third of the national economy, we expect that growth can be maintained above its trend rate and accelerate mildly over the coming two years with business investment and housing construction and sales activity picking up. NSW is the only state where we see growth rates rising over both 2012-13 and 2013-14. NSW has improved the most over the past six months.

• Vic’s prospects are meeker, with dwelling investment experiencing a milder than usual cyclical recovery, despite lower interest rates, as building has been running at cyclical highs in recent years. There are some bright spots but manufacturing continues to contract due to structural change and the high AUD and forward labour market indicators are soft. As a major port state and a supplier of professional services to the mining boom, Vic also will feel the impact of softer mining investment indirectly.

• The weakest states over the coming year are expected to continue to be SA and Tas, which have experienced negative effects from the mining boom. Parts of their working age populations have been attracted away and their international trade competiveness has been affected by the AUD. However, we do see mildly stronger growth for both state economies in 2013-14 as the interest-rate cuts assist activity and the population drain and AUDUSD eventually ease.

• WA’s growth outlook remains relatively healthy despite being downgraded a little due to some major project cancellations and the completion of other projects. Rising exports will help replace the boost from the mining construction boom and help lift activity as the major LNG and iron ore projects reach capacity. However, employment consequences of a switch to exports from capital expenditure means the very high and above trend rates of growth are unlikely to continue so demand conditions will soften.

• Qld’s outlook is for softer growth, to below trend rates over the coming two years, with some major projects being delayed or cancelled in response to declines in commodity prices (mainly coking and thermal coal) in conjunction with the high AUD. The outlook is brighter from 2014-15 as LNG boost exports though like WA, domestic demand will be less boosted. In the small NT economy, with the mega-Ichthys LNG project ramping up, prospects remain strong and we expect above trend growth to continue for some years.

• The ACT’s growth prospects remain highly dependent on the outcome of the 14 September Federal election. A change of government would likely lead to an estimated 4% cut in employment in the ACT with significant flow on effects to business and consumer sentiment.

STATE GROSS PRODUCT, RELATIVE PERFORMANCE

70

75

80

85

90

95

100

105

110

115

120

01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12

Index

, 2008-0

9=

100

NSW VIC QLD SA WA TAS NT ACT

UNEMPLOYMENT BY STATE

2

3

4

5

6

7

8

9

10

01 02 03 04 05 06 07 08 09 10 11 12 13 01 02 03 04 05 06 07 08 09 10 11 12 13

2

3

4

5

6

7

8

9

10

Unem

plo

ymen

t rate, % (tren

d)

AUS NSW VIC QLD SA WA TAS ACT NT

Unem

plo

ymen

t ra

te,

% (

tren

d)

Sources: ABS and ANZ


STATE GOVERNMENT FINANCES

• The relationship between economic performance and public sector revenue appears to have weakened in recent years as it has at the Federal level, with unique and one-off factors including lumpy Commonwealth payments, political tactics and swings in commodity prices proving more important for public sector revenue. Like the Commonwealth, the states have collectively suffered a shift lower in their revenues relative to nominal economic growth as illustrated below. This is despite – in the case of the mining states - their economic performances being stellar.

• Although the national economy is likely heading for a weaker year ahead, the factors that have been acting as a drag on the non-mining states’ revenues may start to ease. 2012-13 is expected to be the weakest year for state finances over the forward estimates. One of the main reasons is the impact of the Commonwealth’s decision to let its budget slip into deficit, which means a relaxation in the tightening of payments to states which had previously impacted the timing of many payments, pulling them into 2011-12 and out of 2013-14. The introduction of DisabilityCare also could lift net Commonwealth payments to the states, although the details have not been finalised. New funding for schools may also boost states funding, although states commensurate expenses will also rise as a result of the agreements that the states have so far reached with the Commonwealth.

• The GST revenue downgrades appear to have past. In nominal dollar terms, the very important GST pool is expected to be almost AUD3bn higher in 2013-14 than 2012-13. Some of the factors (such as the switch to imported GST-free goods) that held down taxable consumption growth in recent years have started to fade. Most states had projected conservative GST estimates in their own budget papers, suggesting there may be some mild upward revisions to come. Possible policy changes, such as capturing the GST from imports, may also help. Longer term, however, growth in the GST pool will be negatively impacted by an ageing population and projections of rising untaxed health expenditure relative to other consumption.

• The payroll tax outlook is mixed across the states as is the outlook for transfer or conveyancing duty. These are addressed individually below.

• The mining states of WA, Qld and to a lesser extent, NSW, will be revising down their royalty forecasts to reflect the unexpectedly high AUD and lower commodity prices. However, WA has already assumed very conservative levels and so the revisions are likely to be minor.

• With bold infrastructure plans in many states and recurrent expenditure deficits in all but Vic and WA, all states are forecasting mildly increasing net debt. All governments are looking for ways to improve their recurrent budgets, protect or improve their credit ratings and keep debt at manageable levels. Cost cutting in the public service has commonly been used, although this generates limited results. Assets sales are an increasingly attractive option for some governments. This is especially the case after the long-term lease of two NSW ports generated significantly greater proceeds for the Government than expected, reflecting global capital’s strong appetite for Australian assets. On the other hand, Qld has specifically ruled out the sale of its significant electricity transmission businesses likely due to the perceived political dangers of doing so in a market where energy prices are rising sharply. A number of other smaller asset sales are likely provided a mandate is received at the 2015 election. Tax increases (outside of some exceptions in the mining sector) also appear to be too politically unpalatable for governments and are largely off the table. Some states are continuing plans for tax cuts or even eliminations to enhance their competitiveness and long term structural advantage.

• There has been little ratings action since our last update but we would not rule out further negative pressures as the sector faces downside risks to revenue and political obstacles to asset sales. Positive actions for those rated below AAA are unlikely near term unless there are major asset sales planned, which as discussed above we see as unlikely.

CONSOLIDATED STATE AND TERRITORY GENERAL GOVERNMENT BUDGET BALANCES

-10

-5

0

5

10

2006-07 2008-09 2010-11 2012-13 2014-15

AU

D b

n

State and territory budget balances, consolidated as at 2012-13 budgets

State and territory budget balances, consolidated as at 2012-13 mid-year updates

CONSOLIDATED STATE AND TERRITORY GENERAL GOVERNMENT REVENUE VS NOMINAL GDP

90

100

110

120

130

140

150

160

170

180

190

200

210

2003-04 2006-07 2009-10 2012-13 2015-16

Inde

x 20

03- 0

4=

100

Nominal GDP with ANZ forecast

Consolidated state general government revenue

forecast

Sources: ABS, ANZ, and various state budget papers and mid-year budget updates.


COMMONWEALTH – STATE FINANCIAL RELATIONS

• The Commonwealth Government collects most taxes, including income tax, while the states deliver most services. This creates ‘vertical fiscal imbalance’ between the Commonwealth and state and territory governments in Australia.

• The states therefore receive significant financial transfers from the Commonwealth, mainly through the GST, which is levied at a rate of 10% on most goods and services. All of the state GST revenue is distributed to the states, with continuing differences of opinion among the states about the formula for deriving the shares. Other payments to the states are made for specific purposes. Together these transfers account for between 29% (in WA) and 76% (in the NT) of state and territory revenue. In the 2012-13 mid-year update, the Commonwealth projected the states would receive AUD89.7bn of transfers in total, with AUD40.2bn representing payments for specific purposes.

• GST revenue projections for 2012-13 were revised up by AUD50m to AUD48.25bn between May and October 2012. This was the first (albeit small) upgrade in GST revenue estimates in some time as these werer consistently downgraded through the post-GFC period. Taxable consumption growth proved to be softer than expected due to lower inflation, changed consumption patterns, spending overseas that avoids the GST and greater consumer caution.

COMMONWEALTH PAYMENTS TO STATES AND TERRITORIES 2012-13,TOTAL AUD89.7BN

15.8

13.3

11.2

48.3

1.2

National Specific Purpose Payments National Health Reform Funding National Partnership Payments (includes direct to local government) GSTOther general revenue assistance

COMMONWEALTH SPECIFIC PURPOSE PAYMENTS TO STATES 2012-13 – TOTAL POOL AUD40.2BN

15.1

13.5

1.7

2.2

1.8

3.61.60.10.6

Health Education Skills and Work Community Services Affordable Housing Infrastructure Environment ContingentOther (incl Local Government)

% OF STATE AND TERRITORY REVENUE FROM COMMONWEALTH 2012-13

0

10

20

30

40

50

60

70

80

WA ACT QLD VIC NSW SA TAS NT

%

GST component Total

SHARE OF GST POOL ALLOCATED TO EACH STATE OR TERRITORY, 2012-13, TOTAL POOL AUD48BN

14.8

9.6

2.9

4.5

1.7 1.0 2.7

11.1

NSW VIC QLD WA SA TAS ACT NT

PROPORTION OF EACH GST DOLLAR RAISED BY A STATE THAT IS RETURNED TO THE STATE OR TERRITORY*

-15%

10%

35%

60%

85%

110%

135%

160%

WA QLD VIC NSW ACT SA TAS

Relativity 2010-11 Relativity 2011-12

Relativity 2012-13 Relativity recommended for 2013-14

*excludes NT, where the proportion returned is over 500%

GST TOTAL POOL – REVISIONS

0

10

20

30

40

50

60

70

09-10Budget

09-10Mid-year

review

10-11Budget

10-11Mid-year

review

11-12Budget

11-12Mid-year

review

12-13Budget

12-13Mid-year

review

AU

Db

2011-12 2012-13 2013-14 2014-15 2015-16

Sources: ANZ, Commonwealth budget, State budgets and Commonwealth Grants Commission


DRIVERS OF STATE GOVERNMENT REVENUES

• GST is the single most important revenue source for state and territory governments, accounting for around one quarter of all revenues. Receipts tend to be more volatile than changes in taxable consumption and forecasts are for a mild improvement in growth rates following the post-GFC period of consistent downward revisions.

• The main sources of non-Commonwealth revenue are state or territory-collected payroll taxes, which in 2012-13 are expected to be around 9% of revenue, stamp duty (6%) and royalties (4%). Payroll tax collections are levied on employers at rates of between 4.75% (Qld) and 6.85% (ACT) of wages with different thresholds applying in each state and territory. Nationally, collections move broadly in line with compensation of employees (determined by wages and employment levels), which after slowing last year has stabilised. Stamp duty, which is levied on financial and capital transactions, follow changes in the value of property turnover, which is starting to recover with mild improvements in housing sales and house prices.

• Royalty collections vary dramatically between states. WA collects just under half of the nation’s royalties, dominated by iron ore. The other major mining state, Qld, collects around 30% of royalties and NSW just less than 20%. The remaining states collect little or no royalties. Collections have grown strongly in recent years due to record high commodity prices although outcomes for 2012-13 are likely to be below budget forecasts due to falling prices across most commodities and the persistently high AUD, which has lowered mining company profits.

REVENUE, AVERAGE COMPONENT % OF TOTAL, STATES AND TERRITORIES, 2012-13

19%

4%

3%

2%

2%

5%9%

2%3%51%

Cth grants and GST revenue Stamp Duties Payroll Tax Land Tax Taxes on Motor Vehicles Insurance Gambling and Betting Other Taxes and Levys RoyaltiesOther Revenue

GST AND TAXABLE CONSUMPTION

-10

-5

0

5

10

15

20

Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

y/y

% c

h

GST revenue Consumption subject to GST*

Treasury forecasts

*Derived from National Accounts under Treasury advice

PAYROLL TAX AND EMPLOYMENT LEVELS AND WAGES

-5

0

5

10

15

20

25

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

y/y

% c

h

-1

0

1

2

3

4

5

y/y

% ch

Payroll tax, lhs Compensation of employees, lhsNumber of employees, rhs

STAMP DUTY AND VALUE OF PROPERTY MARKET TURNOVER

-40

-20

0

20

40

60

Mar-00 Mar-04 Mar-08 Mar-12

y/y

% c

h

Taxes on financial and capital transactionsValue of property market turnover (forward 1 year)

forecasts

ROYALTY REVENUE AND COMMODITY PRICES

0

1

2

3

4

5

6

7

8

9

10

1997-98 2000-01 2003-04 2006-07 2009-10 2012-13

AU

D b

n

0

20

40

60

80

100

120

SD

R

State and local government rents on natural assets*, lhsRBA commodity price index, rhs (12-13 data point is average July 12 to April 13)

*State mining royalties make up approximately 96% of this series

ROYALTY REVENUE AND MINING PROFITS

-40

-20

0

20

40

60

80

100

1997-98 2000-01 2003-04 2006-07 2009-10 2012-13

y/y

% c

h

-40

-20

0

20

40

60

80

100

y/y % ch

State and local government rents on natural assets*

Mining company profits (forward 1 year) (13-14 data point reflects growth in year to H2 12)

Sources: ANZ, ABS, RBA, Commonwealth budget, Commonwealth Grants Commission, Residex, RP Data, State budgets.


STATE GOVERNMENT BORROWING • The expected call on bond markets from state governments is expected to total AUD50.5bn this financial year, which is

slightly larger than the Commonwealth’s expected issuance of AUD45bn. New state government borrowing this financial year will be around AUD30bn with the remainder the refinancing of maturities. Reflecting its significant budget deficit projections, Qld has the largest call on markets this financial year, at around AUD19bn. The borrowing program is well advanced but it is likely that the state will need to increase its borrowing program in future years, due to its deficit forecasts and the absence of electricity transmission asset sales. NSW, SA, NT and Tas have all completed their borrowing requirements for 2012-13. Qld and NSW have the largest semi-government bond markets at AUD78bn and AUD55bn respectively, in total outstanding.

• In calendar 2013, around AUD17.3bn of semi government bonds will mature. We would expect most, if not all, of these funds to be recycled back into the market. There is a relatively steady maturity of bonds across the states in coming years. There appears to be a general lengthening of the average maturity of new issues.

BORROWING PROGRAMS - ACTUAL AND PROJECTED

Gross NSW VIC QLD* WA SAFA NT TAS Total

2011-12 11.7 7.3 18.0 16.1 5.6 0.7 1.3 60.7

2012-13 9.9 7.2 18.7 9.1 3.9 0.7 1.0 50.5

New borrowing 6.8 5.4 12.5 3.4 1.7 0.4 0.2 30.4

Term debt 6.9 7.2 13.7 7.9 2.3 0.7 1.0 39.7

Bond Issuance since 1 July 7.6 6.0 11.0 4.8 3.9 0.7 1.0 35.0

2013-14 F 12.0 5.9 9.0 8.1 2.0 1.0 1.6 39.6

2014-15 F 12.0 3.8 11.5 8.4 2.4 1.0 1.3 40.4

2015-16 F 2.0 12.5 7.6

N o tes

Numbers for 2013-14 and 14-15 are guidance or ANZ estimates.

Semis Market Issuance (AUD bn)

Financial years are July 1 - June 30. Borrowing for FY12-13 as at M ay/June 2012 State Budgets, except for WA which is based on December mid-year review.

Assume Short-term borrowings @ AUD3.6bn for NSW, 6.0bn QTC, 6.0 for WA, VIC 2.0bn, SAFA 2.2bn (750m issued as FRN in July).

PROJECTION OF BONDS ON ISSUE, CTH AND STATES

0

100

200

300

400

500

600

00 02 04 06 08 10 12 14 16

AU

D (

b)

CGS on issue Semis on issue Total

Projections

BONDS ON ISSUE BY STATE

0

10

20

30

40

50

60

70

80

90

NSWTC VIC QTC WATC SAFA TAS NT ACT

AU

D (

b)

Global/Exchangeables

Inflation linked

State guaranteed

Government guaranteed

SEMI GOVERNMENT BOND MATURITIES (MONTHS)

0

5

10

15

20

25

May-13

Jun-13

Aug-13

Oct-13

Dec-13

Apr-14

Jun-14

Jul-14 Aug-14

Oct-14

Nov-14

Apr-15

Oct-15

AU

D (

b)

NSW QLD VIC WA SA NT TAS AUS

SEMI GOVERNMENT BOND MATURITIES (YEARS)

0

5

10

15

20

25

AU

D (

b)

NSW QLD VIC WA SA NT TAS ACT

Sources: ANZ and Bloomberg


SEMI GOVERNMENT BOND PRICING

• The differences in yields on bonds issued by state governments compared to the Commonwealth is considered relatively large given the solid financial framework governing the relationship between the two levels of government in Australia. Both semis and Commonwealth Government Securities (CGS) are viewed as Tier 1 capital by APRA under the Basel III bank liquidity framework. Spreads have been affected by strong sovereign and safe-haven flows into CGS that have not been duplicated to the same degree in the semi government bond market. The pace of investment flows into CGS looks to be mature, however, we expect foreign ownership to remain high. Foreign ownership of semis, which is well below CGS, is expected to rise given the attractiveness of outright and relative yields, both to CGS and on a global basis, and the sturdy credit profiles of the states.

• Spreads between semis and CGS are particularly wide in the five year sector, and are above long-term averages. We see scope for these spreads to narrow over time, although they are unlikely to return to 2008 levels. Liquidity demand for semis to swap should remain supportive. Longer-dated yields look particularly high. We think it unlikely Standard & Poor’s will act on the negative outlooks for NSW and WA in the near-term. Both states have a strong commitment to maintaining AAA ratings and pressures on NSW to meet its infrastructure plan without lifting debt have eased slightly following the recent leasing of the ports, which has freed up capital.

SEMI GOVERNMENT TO COMMONWEALTH BOND SPREADS

0

20

40

60

80

100

120

Jan-13 Oct-15 Jul-18 Apr-21 Jan-24 Oct-26

Bas

is p

oints

.

NSWTC (AAA) QTC (AA+)

TCV (AAA) WATC (AAA)

SAFA (AA) NTTC (AA-)

TAS (AA+)

SEMI GOVERNMENT BOND YIELD CURVES

2.5

3.0

3.5

4.0

4.5

5.0

Mar 13 Feb 15 Jan 17 Dec 18 Nov 20 Oct 22 Sep 24 Aug 26 Jul 28 Jun 30 May 32

Perc

ent

ACGB (AAA)NSWTC (AAA)QTC (AA+)TCV (AAA)WATC (AAA)SAFA (AA)NTTC (AA-)TAS (AA+)

CGS AND SEMIS, FOREIGN OWNERSHIP

0

10

20

30

40

50

60

70

80

90

0

50

100

150

200

250

300

350

00 02 04 06 08 10 12

PercentA

UD

bn

Semis outstanding (LHS)CGS outstanding (LHS)Overseas ownership CGS (RHS)Overseas ownership semis (RHS)

SEMIS OWNERSHIP BY TYPE

0

10

20

30

40

50

60

70

80

90

100

95 97 99 01 03 05 07 09 11

Per

cent

Banks RBA Other Domestic Holders Foreign Holders

QUEENSLAND SPREAD TO BOND

20

40

60

80

100

120

140

160

180

200

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13

Bas

is p

oints

.

QTC Jul-23 spread to bond

10-yr swap spread

QTC bond spread 3-yr moving average

NSW SPREAD TO BOND

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

07 08 09 10 11 12 13

Bas

is p

oint

s

NSW 5-year spread to ACGB NSW 10-year spread to ACGB

3-year average for 5s

Sources: ANZ, Bloomberg and Standard & Poor’s


NEW SOUTH WALES ECONOMY

• Economic activity in NSW has continued to improve and the state’s growth prospects are more upbeat than in recent years. Recently, GSP growth has been supported by a pick up in business investment. A robust investment pipeline of around AUD50bn is expected to support economic growth into 2016. Most of this planned expenditure comprises spending on large infrastructure projects by the state government and includes the North West metro-rail link and WestConnex road project, each estimated at around AUD10bn.

• The residential building investment outlook is also expected to improve in response to lower interest rates. While this is supportive of economic growth, it will also serve to alleviate high inner-city living costs. Limited residential construction activity and strong population growth over the past decade have led to a tight housing market: rental vacancy rates remain at historically low levels.

• There are good signs that households have begun to respond to lower interest rates. In Sydney, house prices have outperformed the national average and recent gains have reversed all of the weakness seen over 2010 and 2011. Retail sales grew strongly in January and February and motor vehicles sales have continued to trend higher, the latter largely due to lower prices. Consumer confidence in NSW is up 14% over the year, and is almost 7% higher than the decade average.

• Of the non-mining states, NSW is the only state with an unemployment rate below the national average. Job advertising in NSW has stabilised recently and may even be rising modestly. There are signs that labour demand in some key industries such as construction has picked up, consistent with the nascent improvements in housing activity.

CONTRIBUTION TO GROWTH - NSW

-6

-4

-2

0

2

4

6

8

05 06 07 08 09 10 11 12

Household consumption Dwelling investment Business investmentPublic final demand Net exports SFD+NE

Annual

% c

hange

MAJOR PROJECTS INVESTMENT PIPELINE - NSW

0

2

4

6

8

10

12

14

16

18

2011 2012 2013 2014 2015 2016

Under Construction Committed Under consideration Possible Cancelled/Indefinitely delayed

AU

Dbn

Investment pipeline excluding projects that have been either cancelled or indefinitely delayed since July 2012

UNEMPLOYMENT RATE

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

01 02 03 04 05 06 07 08 09 10 11 12 13

New South Wales

Australia (excluding - New South Wales)

Unem

plo

ymen

t Rate

(%

)

RETAIL SALES

-4

-2

0

2

4

6

8

10

12

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

New South WalesAustralia (excluding New South Wales)New South Wales (long term average)Australia (excluding New South Wales - long term average)

Annual

% C

han

ge

HOUSE PRICES

200

250

300

350

400

450

500

550

600

650

700

750

05 06 07 08 09 10 11 12

Sydney MelbourneBrisbane AdelaidePerth HobartDarwin Canberra

House

pri

ces

- 000's

(sa

)

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

Syd Melb Bris Adel Per Hob Dar Can

Peak to trough

Peak to current

% C

hange

RENTAL VACANCY RATES

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Sydney Melbourne Brisbane Adelaide Perth

Res

iden

tial

vac

ancy

rat

e (

%)

Fore

cast

s

Sources: ABS, ANZ, BREE, Deloitte, Company reports, NSW budget, Residex and RP Data.


NEW SOUTH WALES GOVERNMENT FINANCES

• The NSW Government’s successful lease of Port Botany and Port Kembla and the sale of smaller property assets will assist the state’s infrastructure plans and remove some of the risk that Standard & Poor’s will act on the negative outlook placed on the state’s AAA credit rating last year. The port leases raised AUD5.07bn and are expected to net AUD4.3bn for the state, well above the expected AUD3bn. These figures will be included in the 18 June budget.

• The state's power generators are also likely to be privatised and the Treasurer expects these to raise around AUD3bn. But the more lucrative "poles and wires" distribution and transmission networks are not on the market at the moment. The Government has said it will not sell these before seeking a mandate at the next election in 2015. Sale of these assets would have a positive impact on the State’s debt outlook as they reportedly would raise around AUD30bn.

• In the general government account there is likely to be a decline in estimated royalties (mainly coal) following price and volume output declines and the high AUD. This may be partly offset by stronger housing market activity given transfer duty is likely to strengthen (although the budget has already forecast a rise). NSW’s general government expenses will rise with recent agreements the state has made with the Commonwealth on education reforms and DisabilityCare. NSW has committed AUD1.76bn over six years for education funding but offset these with other policies including postponed business tax cuts. Revenues may be boosted by a greater amount than NSW expends given the Commonwealth will contribute significant funds to the state for DisabilityCare.

KEY GOVERNMENT FACTS

Government Liberal-National since 2011

Premier The Hon Barry O'Farrell MP

Leader of opposition Mr John Robertson MP

Treasurer The Hon Mike Baird MP

2013-14 budget 18 June 2013

Next election 28 March 2015

S&P's credit rating AAA (Negative)

Moody's credit rating Aaa (Stable)

NSW CASH BALANCE ESTIMATES

-1

0

1

2

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dbn

Budget, Sep 11 Budget review, Dec 11 Budget, Jun 12

fore

cast

s

NSW PROPERTY TURNOVER AND TRANSFER DUTY

30

40

50

60

70

80

90

100

2001 2003 2005 2007 2009 2011 2013 2015

AU

Dbn

3

4

5

6

7

8

9

AU

Dbn

NSW value of turnover (forward one year), lhsNSW transfer duty, rhs

PROCEEDS AND USES OF RECENT PORT LEASES

99 year lease of Port Botany AUD4.31bn

99 year lease of Port Kembla AUD750m

Total AUD5.07bn

Net proceeds AUD4.3

Proceeds to Restart NSW, including:

WestConnex toll road AUD 1.8bn

Pacific Highway upgrade AUD400m

Princes Highway AUD170m

NSW NET DEBT

0

10

20

30

40

50

60

70

2003 2006 2009 2012 2015

AU

Dbn

0

5

10

15

%

Net debt % GSP, non-financial public sector, rhs

Net debt, non-financial public sector, lhs

forecasts

SOURCES OF NSW GOVERNMENT REVENUE, 2012-13

44%

9%12%4%

4%

3%

3%

1%

3%17%


NSW GOVERNMENT EXPENDITURE, 2012-13

48%

23%

5%

20%4%

Employee related

Other operating

Depreciation and amortisation

Grants

Interest

Sources: ABS, ANZ, Newspoll, NSW budget, NSW Parliament, Standard & Poor’s, Moody’s, Residex and RP Data.


VICTORIAN ECONOMY

• We expect Vic to underperform the national economy in the near term, weighed down by weak construction activity and a relatively high exposure to manufacturing, which is negatively affected by the high AUD. After recording 2.3% growth in GSP in 2011-12, we expect Vic to continue at a below trend rate of around 2% this financial year and next.

• Residential construction activity had been running at high levels, but lead indicators have started to wane. Apartment approvals have declined sharply, having been at an elevated level. Previous interest rates cuts by the RBA have generated an improvement in housing market activity. House prices have risen from their lows and auction clearance rates have improved. This pick up is less likely to stimulate building activity in Vic than elsewhere, particularly NSW, where residential building activity has not been as strong in recent years. Non-residential building approvals across the retail, industrial and office sectors have been also trending downward over the past 12 months. The outlook for the office sector appears weak with net absorption declining, vacancy rates rising and net effective rents easing mildly.

• Employment growth in Vic has been weaker than the national average over the past 18 months, which is consistent with the softer economic conditions in the state. All employment growth since 2011 has been part-time employment, with the number of full-time workers declining since April 2011. This appears consistent with industry level data, which shows that retail along with the accommodation and food services sectors (which have high levels of part-time employment) have been the biggest employers over the past year.

STATE FINAL DEMAND (PLUS NET EXPORTS)

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Victoria Australia (excluding Victoria)

Annual

% c

han

ge

(tre

nd)

RESIDENTIAL BUILDING APPROVALS - VIC

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

01 02 03 04 05 06 07 08 09 10 11 12 13

Num

ber

of ap

pro

vals

(000's

)

Houses

Units/Apartments

CLEARANCE RATES MELBOURNE

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.540%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

2009 2010 2011 2012 2013

%

% o

f to

tal auct

ion r

esults

(tre

nd)

Melbourne

RBA target cash rate (inverted, rhs)

HOUSE PRICES

200

250

300

350

400

450

500

550

600

650

700

750

05 06 07 08 09 10 11 12 13

Sydney MelbourneBrisbane AdelaidePerth HobartDarwin Canberra

Hou

se p

rice

s -

000's

(sa

)

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

Syd Melb Bris Adel Per Hob Dar Can

Peak to trough

Peak to current

% C

han

ge

FULL-TIME VS. PART-TIME EMPLOYMENT - VIC

-10

0

10

20

30

40

50

70

80

90

100

110

120

130

07 08 09 10 11 12 13

Change in part-time employment (rhs)

Change in full-time employment (rhs)

Full-time (lhs)

Part-time (lhs)

Index

, Ja

n 2

007=

100

000s,

tre

nd

UNEMPLOYMENT RATE

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

01 02 03 04 05 06 07 08 09 10 11 12 13

Victoria Australia (excluding - Victoria)

Unem

plo

ymen

t Rat

e (%

)

Sources: ABS, ANZ, RBA, Residex and RP Data


VICTORIAN GOVERNMENT FINANCES

• New Victorian Premier Denis Napthine and Treasurer Michael O’Brien will release their first budget tomorrow in line with tradition, one week before the Commonwealth. The new leadership team has already started making some decisions to alter the policy mix. The Government has pre-announced a car parking levy, while removing the AUD7,000 universal first home owner’s grant and applying it at a rate of AUD10,000 only for newly constructed homes. This is similar to policy changes made on the first home owner’s grant in NSW, Qld and SA and suggests the Government is altering its policies to try and lift new housing construction and employment given the outlook for these are soft.

• Despite having a somewhat lacklustre economic outlook, weak payroll tax forecasts and downside risks to transfer duty due to a soft property market outlook, Vic budget projections remain for surpluses across the forecast horizon and a levelling out in net debt across the non-financial public sector. As recently as 15 March, when the mid-year accounts were published, Treasurer O’Brien said the Government remained on track to achieve its targeted surplus of more than AUD100m in 2013-14. Vic and the ACT are the only two governments with a AAA stable outlook from both major rating agencies and these do not appear to be under threat if the Treasurer can deliver on his forecasts.

• Vic has not yet agreed with the Commonwealth on Education or DisabilityCare funding and so it is unclear how these will be treated in the 2013-14 budget.



Premier The Hon Dr Denis Napthine MP

Leader of opposition The Hon Daniel Andrews MP

Treasurer The Hon Michael O'Brien MP

2013-14 budget 7 May 2013

Next election 29 November 2014

S&P's credit rating AAA (Stable)

Moody's credit rating Aaa (Stable)

VIC CASH BALANCE ESTIMATES

0

1

2

3

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dbn

Budget Update, Dec 11 Budget, May 12 Budget Update, Dec 12

forecasts

PAYROLL TAX AND THE LABOUR MARKET - VIC

RESIDENTIAL TURNOVER AND TRANSFER DUTY - VIC

0

10

20

30

40

50

60

70

2001 2003 2005 2007 2009 2011 2013 2015

AU

Dbn

0

1

2

3

4

5

AU

Dbn

VIC value of turnover (forward one year), lhsVIC transfer duty, rhs

VIC NET DEBT

0

10

20

30

40

50

2001 2004 2007 2010 2013 2016

AU

Dbn

0

4

8

12

%



SOURCES OF VIC GOVERNMENT REVENUE, 2012-13

46%

7%10%

3%

4%

3%4%

2%

21%0%Cth grants and GST revenue Stamp Duties Payroll Tax Land Tax Taxes on Motor Vehicles Insurance Gambling and Betting Other Taxes and Levys RoyaltiesOther Revenue

VIC GOVERNMENT EXPENDITURE, 2012-13

41%

5%17%4%

33% Employee related


Current grants and subsidies

Interest

Other operating

Sources: ABS, ANZ, Newspoll, Victorian budget, Victorian Treasury, Standard & Poor’s, Moody’s, Residex and RP Data.

-6

-4

-2

0

2

4

6

8

10

12

2001-02 2005-06 2009-10 2013-14

y/y

% c

h

-2

0

2

4

6

y/y

% ch

Payroll tax (lhs)Compensation of employees +1yr (lhs)Number of employees +1yr (rhs)

Victoria treasury forecast


QUEENSLAND ECONOMY

• Economic growth in Queensland has slowed in recent quarters reflecting the reduced contribution of resources investment to growth, as investment in this sector approaches its peak. Encouragingly, given the capital expenditure profile of the three mega-LNG projects currently under construction in Qld, we expect that investment in the resources sector will remain at a high level until the end of 2014, before declining over 2015. As investment wanes, growth will be supported by rising export volumes, particularly in the LNG sector from 2015 onwards. ANZ is forecasting GSP growth of 3.25% in 2012-13, 3.0% in 2013-14 and 4.0% in 2014-15.

• Outside of the mining sector, past interest-rate cuts by the RBA and the introduction of the first home owner construction grant by the state government appear to be gaining some traction in the residential housing sector, with building approvals showing some tentative signs of improvement.

• Labour market conditions have deteriorated which is consistent with job-shedding in the government sector and relatively subdued economic conditions. Cost cutting by resources companies has also resulted in job losses, particularly in the coal sector. Employment growth remains weak and the unemployment rate is 5.8% in trend terms, above the national average. Importantly, the unemployment rate would have risen more sharply if not for a sharp decline in the participation rate. Forward looking indicators of labour demand, such as Seek Job Ads, are also pointing to ongoing weakness. We anticipate that weaker labour market conditions will continue to weigh on income growth and household consumption going forward.

CONTRIBUTION TO GROWTH - QLD

-10

-5

0

5

10

15

05 06 07 08 09 10 11 12 13


Annual

% c

hange

QLD MAJOR PROJECT INVESTMENT BY STAGE

0

10

20

30

40

50

60

2011 2012 2013 2014 2015 2016

Under Construction Under consideration Possible Completed Cancelled/Indefinitely delayed

AU

Dbn

Investment pipeline excluding projects that have been either cancelled or indefinitely delayed since

July 2012

Investment pipeline for projects that are either under

construction or committed

BUILDING APPROVALS - QLD

60

80

100

120

140

160

180

200

220

240

01 02 03 04 05 06 07 08 09 10 11 12 13

Queensland

Australia (excluding - Queensland)

Index

, Ja

n 2

001 =

100 (

tren

d)

UNEMPLOYMENT RATE VS. PARTICIPATION RATE - QLD

63.5

64.0

64.5

65.0

65.5

66.0

66.5

67.0

67.5

68.0

68.53.0

4.0

5.0

6.0

7.0

8.0

9.0

01 02 03 04 05 06 07 08 09 10 11 12 13

Unemployment rate (lhs)Participation rate (rhs)

Unem

plo

ymen

t ra

te (

%)

Par

tici

pat

ion r

ate

(% -

inve

rted

)

EXPORT VOLUMES

5

15

25

35

45

55

65

75

85

100

200

300

400

500

600

700

800

900

00 02 04 06 08 10 12 14 16 18 01 03 05 07 09 11 13 15 17

mill

ion t

onnes

million

tonnes

Iron ore LNG

ANZ

BREE

ANZ/BREE

EXPORT VOLUMES

50

100

150

200

250

300

350

00 02 04 06 08 10 12 14 16 18 01 03 05 07 09 11 13 15 17

mill

ion t

onnes

ANZ

BREEThermal coal Coking coal

Sources: ABS, ANZ, BREE, Company reports, Deloitte and Queensland budget


QUEENSLAND STATE FINANCES

• Treasurer Nicholls reportedly said in April that Qld’s forecast for a AUD6.7bn deficit for 2012-13 (which is equivalent to the combined deficit forecasts of all the other states and territories) would increase further to around AUD8bn. Despite Qld’s relatively solid economic outlook, much built on strong investment, downgraded coal prices and volumes and a higher AUD are likely to lead to lower royalties (which represent around 7% of total revenue). Most recent forecasts in December have the AUD between USD0.03 and USD0.06 lower than ANZ expects to be realised. Qld’s coking coal forecasts are around 5-8% higher than ANZ’s and its thermal coal forecasts are 5-12% higher than ANZ’s over the coming two years. On the expenses side, natural disaster recovery is once again expected to temporarily lift spending.

• With a large deficit in 2012-13 and a sub-peer credit rating of AA+ from Standard & Poor’s, the Government plans to embark on a range of additional cost cutting measures in the public service and efficiency measures to reduce the involvement of the public sector in service delivery. It will also consider selling the Ports of Gladstone and Townsville and Qld Investment Corporation if it wins the 2015 election in response to advice from the Commission of Audit.

• The Government has ruled out a sale of the most valuable government-owned electricity transmission businesses: Energex, Ergon Energy and Powerlink in the current and next term of government. This makes it impossible, in the near-term, for the Government to fully pay down the AUD25bn of debt recommended by the Commission of Audit. As a result, Qld will be hard pushed to improve on its AA+ credit rating with a return to a AAA rating highly unlikely for many years.


Government Liberal National Party since 2012

Premier The Hon Campbell Newman MP

Leader of opposition The Hon Annastacia Palaszczuk MP

Treasurer The Hon Tim Nicholls MP

2013-14 budget 4 June 2013

Next election No later than June 2015

S&P's credit rating AA+ (Stable)

Moody's credit rating Aa1 (Negative)

QLD CASH BALANCE ESTIMATES

REVENUE AND EXPENDITURE - QLD

20

30

40

50

60

2006-07 2008-09 2010-11 2012-13 2014-15

AU

Dbn

Expenses, Jan 12 Revenue, Jan 12

Expenses, Dec 12 Revenue, Dec 12

forecast

COAL ROYALTIES – WITH REVISIONS

0

1

2

3

4

2005-06 2007-08 2009-10 2011-12 2013-14 2015-16

AU

Dbn

Mid Year, Jan 12 Less royality rate increase

Mid Year, Dec 12

forecasts

QLD NET DEBT

SOURCES OF QLD GOVERNMENT REVENUE, 2012-13

46%

5%9%2%

3%

22%

7%

1%2%

3%


QLD GOVERNMENT EXPENDITURE, 2012-13

48%

23%

5%

20%4%

Employee related

Other operating


Grants

Interest

Sources: ANZ, Newspoll, Queensland budget, Standard & Poor’s and Moody’s

-20

-10

0

10

20

30

40

50

60

70

80

2001 2004 2007 2010 2013 2016

AU

Dbn

-5

0

5

10

15

20

%



Feb 2009: QLD credit rating downgraded to AA+

Feb 2003: QLD credit rating upgraded to AAA

-9-8-7-6-5-4-3-2-1012345

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dbn

Queensland budget update, Dec 12All other states and territories, Dec 12-Feb 13

forecasts


WESTERN AUSTRALIAN ECONOMY

• Strong business investment has underpinned WA’s strong economic growth. While a strong mining investment pipeline will support near-term growth, capital expenditure is expected to be softer beyond mid-2013. Lower commodity prices along with the persistently high AUD have also caused some mining companies to re-think plans further out.

• Employment growth remains remarkably strong in WA but has moderated recently. As the mining boom transitions from investment-led to export-driven growth, mining and related construction employment conditions are likely to soften further. Wages growth is expected to follow a similar profile. More recent data suggest that compensation of employees is still increasing at a strong 12% y/y. Strong demand for labour has resulted in rapid population growth and a sharp pick-up in net overseas migration. WA now receives over 20% of immigrants into Australia.

• While conditions in the Perth housing construction market remain relatively soft, the recent pick up in housing finance and building approvals suggest that sentiment is improving. House prices have bottomed and are now clearly trending higher.

GROSS VALUE ADDED BY INDUSTRY

0 5 10 15 20 25 30

Arts and recreation services

Accommodation and food services

Agriculture

Other services

Rental, hiring and real estate services

Information media and telecommunications

Utilities

Administrative and support services

Public administration and safety

Education and training

Wholesale trade

Retail trade

Health care and social assistance

Financial and insurance services

Transport, postal and warehousing

Professional, scientific and technical services

Manufacturing

Ownership of dwellings

Construction

Mining

% of

WA MAJOR PROJECT INVESTMENT PIPELINE BY STAGES

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016Under Construction Committed Under consideration Possible Cancelled/Indefinitely delayed

AU

Dbn


UNEMPLOYMENT RATE

2

3

4

5

6

7

8

01 02 03 04 05 06 07 08 09 10 11 12 13

Western Australia Australia (excluding - Western Australia)

Unem

plo

ymen

t Rat

e (%

)

UNEMPLOYMENT RATE BY REGION - WA

1

2

3

4

5

6

7

07 08 09 10 11 12 13

Per

cent

WA Perth Central Metropolitan East Metropolitan North Metropolitan South West Metropolitan South East Metropolitan

HOUSEHOLD CONSUMPTION

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Australia (excluding Western Australia)Western AustraliaAustralia (excluding Western Australia - long term average)Western Australia (long term average)

Annual

% c

han

ge

HOUSING MARKET INDICATORS

0

50

100

150

200

250

300

350

400

450

01 02 03 04 05 06 07 08 09 10 11 12 13 01 02 03 04 05 06 07 08 09 10 11 12 13

Index

, Ja

nuar

y 2001 =

100

Western Australia Australia (excluding - Western Australia)

Building approvals Housing finance

Sources: ABS, ANZ, BREE, Company reports, Deloitte and Western Australian budget


WESTERN AUSTRALIAN GOVERNMENT FINANCES

• The WA budget position remains undoubtedly one of the strongest of the states. In the six months to December 2012, higher wages pushed up payroll tax collections and stronger housing market activity lifted transfer duties. Offsetting these, however, were lower GST and health funding grants from the Commonwealth. Volatility in the AUD and iron ore prices are continuing issues for WA as royalty income rises/falls AUD51m for each US1cent decreases/increase in the AUD and iron ore royalties rise AUD32m for each USD1 increase in the price of iron ore.

• The March election, which returned the Liberal and National parties to power, resulted in around AUD755m of new spending promises for the general government sector over the coming three years. There was also a AUD1.2bn increase in net debt projections for the whole of government by June 2016 due to new infrastructure investment plans. These remain in doubt as they depend on Commonwealth co-funding, which has not yet been approved.

• Very volatile iron ore prices during the last six months of 2012, resulted in a reduction in iron ore royalties compared to the year before although this was partly offset by higher iron ore production levels and the higher iron ore ‘fines’ royalty rate applying from this year. The WA Treasury has taken a conservative approach to ongoing iron ore revenue forecasts and so there should be minimal adjustment to these forecasts when they are updated in the August budget.



Premier The Hon Colin Barnett MLA

Leader of opposition The Hon Mark McGowan MLA

Treasurer The Hon Troy Buswell MLA

2013-14 budget August 2013


S&P's credit rating AAA (Negative)

Moody's credit rating Aaa (Negative)

WA BALANCE ESTIMATES WITH ELECTION POLICIES

-1

0

1

2

2010-11 2011-12 2012-13 2013-14 2014-15

AU

Dbn

Budget, May 12 Budget Update, Dec 12Pre-election statement, Feb 13 With Liberal election promises*, Mar 13

forecasts

IRON ORE ROYALTY FORECASTS

0

1

2

3

4

5

6

2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14 2015-16

AU

Dbn

Iron ore royalties, current WA Budget assumptions

Low scenario: Assuming iron ore of USD100/tonne in 2012-13 and 2013-14 andANZ forecasts of AUDUSD of 1.04 in 2012-13 and 2013-14 Mid scenario: Assuming iron ore of USD135/tonne in 2012-13 and USD135/tonne2013-14 and ANZ forecasts of AUDUSD of 1.04 in 2012-13 and 2013-14 High scenario: Assuming iron ore of USD150/tonne in 2012-13 and 2013-14 andANZ forecasts of AUDUSD of 1.04 in 2012-13 and 2013-14

forecasts

TOTAL WA PUBLIC SECTOR NET DEBT, WITH ELECTION POLICIES

0

5

10

15

20

25

30

1994 1997 2000 2003 2006 2009 2012 2015

AU

Dbn

0

5

10

15

%

Net debt % GSP, total public sector, Feb 13 Net debt % GSP, total public sector, Mar 13 (with Liberal costings*) Net debt, total public sector, Feb 12Net debt, total public sector, Mar 13 (with Liberal costings*)

forecasts

*Note these are indicative only and based on incomplete information

PAYROLL TAX AND THE LABOUR FORCE – WA

0

5

10

15

20

25

2002-03 2006-07 2010-11 2014-15

%

0

1

2

3

4

5

6

7

%

Payroll tax (lhs)Compensation of employees + 1 yr (lhs) Employment + 1 yr (rhs)

SOURCES OF WA GOVERNMENT REVENUE, 2012-13

36%

6%13%1%

2%

19%

15%

2%2%

4%


WA GOVERNMENT EXPENDITURE, 2012-13

46%

26%

4%

22%2%

Employee related

Other operating


Grants

Interest

Sources: ABS, ANZ, WA budget, WA Treasury, Standard & Poor’s and Moody’s


SOUTH AUSTRALIAN ECONOMY

• The SA economy is arguably the most exposed of any state to the elevated AUD. Over the last decade, the currency's impact has compounded other negative structural changes such as international competition in the auto sector, and led to a contraction in the share of manufacturing in the state’s economy to 10% from 15%. The indefinite delay of BHP’s AUD30bn Olympic Dam Project has had the most significant impact on the state’s investment profile and also weighed on business confidence. Not surprisingly, economic activity has been quite weak with our proxy measure for economic growth (state final demand plus net exports) contracting around 1% y/y in the year to December 2012.

• Labour market conditions remain weak. Employment contracted through 2012, with the most severe job losses occurring in the manufacturing and agricultural sectors. Weak economic conditions will likely put further upward pressure on the unemployment rate, which will continue to weigh on consumer sentiment and household consumption. Population growth has strengthened recently, but it remains well below the national average.

• The outlook for the SA economy remains subdued. While the economy will continue to receive some support in the near-term from the Adelaide Oval redevelopment and the construction of the Royal Adelaide Hospital, outside of government project activity, non-residential construction activity remains sparse. Furthermore, the significant decline in residential building approvals implies ongoing weakness in the residential construction sector, although there has been a slight improvement in approvals recently. ANZ is forecasting modest GSP growth of 0.5% and 1% in 2012-13 and 2013-14.

CONTRIBUTON TO STATE GROSS VALUE ADDED

0 2 4 6 8 10 12 14 16



Other services



Utilities


Wholesale trade



Mining


Retail trade


Agriculture

Construction




Manufacturing

SA June 2012 SA June 2002

% of gross value added

STATE FINAL DEMAND (PLUS NET EXPORTS)

-2

0

2

4

6

8

10

00 01 02 03 04 05 06 07 08 09 10 11 12 13

South Australia

Australia (excluding South Australia)

Annual %

chan

ge

(tre

nd)

MAJOR PROJECT INVESTMENT BY STAGE

0

2

4

6

8

10

12

2011 2012 2013 2014 2015 2016

Completed Under Construction Committed Under consideration Possible

AU

Dbn

Investment pipeline excluding projects that have been either cancelled or indefinitely

delayed since July 2012

Investment pipeline for projects that are either under

construction or committed

UNEMPLOYMENT RATE

4

5

6

7

8

01 02 03 04 05 06 07 08 09 10 11 12 13

South Australia

Australia (excluding - South Australia)

Unem

plo

ymen

t Rat

e (%

)

EMPLOYMENT BY INDUSTRY

-10

-5

0

5

10

15

20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Natural Increase

Net Interstate Migration

Net Overseas Migration

Annual Rolli

ng S

um

-000's

RESIDENTIAL BUILDING APPROVALS

80

100

120

140

160

180

200

220

240

01 02 03 04 05 06 07 08 09 10 11 12 13

South Australia

Australia (excluding - South Australia)

Index

, Ja

n 2

001 =

100 (

tren

d)

Sources: ABS, ANZ, BREE, Company reports, Deloitte and SA budget


SOUTH AUSTRALIAN GOVERNMENT FINANCES

• With a sluggish economic outlook and a Government that is propping up its ailing economy with public projects, there are few bright spots ahead for the SA balance sheet. At the last budget update in December, there were deficits on the horizon until 2015-16. In 2012-13, revenue dipped unusually below expenses, although this was in part due to the bringing forward of Commonwealth funding to the state into 2011-12. Labour market data are soft enough to raise concerns that the state’s payroll tax take will slow, while softness in the housing market does not bode well for transfer duty, which the budget currently assumes will rise quite solidly.

• SA is the only state or territory that projects a strong rise in the non-financial public sector’s net debt profile over the four year forward estimates period, in part due to the volume of government related infrastructure projects underway. SA is also the only state that holds a lower rating from S&P (AA) than Moody’s (Aa1). Both have a stable outlook on the state. Given this, the rising although still manageable net debt profile and the softness of the economic outlook, ANZ sees SA as the state closest to a change in its rating outlook from Moody’s. S&P is unlikely to make further changes in the near term, given two credit ratings downgrades last year.


Government Labor since 2002

Premier The Hon Jay Weatherill MP

Leader of opposition Mr Steven Marshall MP

Treasurer The Hon John Snelling MP

2013-14 budget 6 June 2013


S&P's credit rating AA (Stable)

Moody's credit rating Aa1 (Stable)

Fitch credit rating AA+ (Negative)

SA CASH BALANCE ESTIMATES

-1.25

-0.75

-0.25

0.25

0.75

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dbn

Budget Update, Dec 11 Budget, May 12 Budget Update, Dec 12

forecasts

REVENUE AND EXPENDITURE - SA

10

12

14

16

18

20

2006-07 2008-09 2010-11 2012-13 2014-15

AU

Dbn

Revenue Expenses

forecasts

SA PAYROLL TAX AND THE LABOUR MARKET

-4

-2

0

2

4

6

8

10

12

14

16

2000-01 2003-04 2006-07 2009-10 2012-13 2015-16

y/y

% c

h

-2

0

2

4

6

8

y/y

% ch

Payroll tax (lhs)Compensation of employees +1yr (lhs)Number of employees +1yr (rhs)

SA Treasury forecast

SA NET DEBT

SOURCES OF SA GOVERNMENT REVENUE, 2012-13

51%

5%7%4%

4%

3%

3%

2%

2%19% Cth grants and GST revenue

Stamp Duties Payroll Tax Land Tax Taxes on Motor Vehicles Insurance Gambling and Betting Other Taxes and Levys RoyaltiesOther Revenue

SA GOVERNMENT EXPENDITURE, 2012-13

50%

25%

5%

17% 3%Employee related

Other operating


Grants

Interest

Sources: ABS, ANZ, SA budget, Standard & Poor’s and Moody’s

0

2

4

6

8

10

12

14

2001 2004 2007 2010 2013 2016

AU

Dbn

0

5

10

15

%



forecast

May 2012: SA credit rating downgraded to AA+

Sep 2012: SA credit rating downgraded to AA

Sep 2004: SA credit rating upgraded to AAA


TASMANIA ECONOMY AND GOVERNMENT FINANCES

• Economic growth in Tasmania has been very soft. Over recent years, Tasmania’s export-oriented industries have been impacted harshly by the high AUD building on the structural decline in manufacturing and the forestry and forest products sectors, which are struggling to cope with global competition. With little mining activity and few major projects planned, Tasmania has few bright spots other than in health, aquaculture and parts of the dairy industry.

• Better mainland employment prospects in the mining states, have encouraged significant outward-migration and population growth has slowed markedly. The unemployment rate has risen to 7.1%, with full-time employment hit particularly hard. These factors have impacted on consumer confidence although retail sales and motor vehicles have increased tentatively in recent months.

• The Government has an increasingly difficult task, managing weak revenue growth while trying to avoid cutting already restrained expenditure growth further and adding to the economic malaise. The 2012-13 budget review projected a AUD327bn deficit in 2012-13, and a return to surplus in 2013-14 but we see downside risks to this forecast when the budget is released on 23 May. Due to its relatively low capacity to raise its own revenue, Tasmania is the state second most dependent on the Commonwealth, with 61% of its revenues from GST grants.

GROSS STATE PRODUCT GROWTH

90

100

110

120

130

140

150

00 01 02 03 04 05 06 07 08 09 10 11 12

TasmaniaAustralia (ex-Tasmania)

Index

, Ju

ne

2000=

100

MAJOR PROJECTS PIPELINE – TAS

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2011 2012 2013 2014 2015 2016Under Construction Committed Under consideration Possible Cancelled/Indefinitely delayed

AU

Dbn


POPULATION GROWTH - TAS

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Australia (excluding Tasmania)TasmaniaAustralia (excluding Tasmania - long term average)Tasmania (long term average)

Annual

% c

han

ge



Premier The Hon Lara Giddings MP

Leader of opposition Mr Will Hodgman MP

Treasurer The Hon Lara Giddings MP

2013-14 budget 23 May 2013

Next election Before March 2014

S&P's credit rating AA+ (Stable)

Moody's credit rating Aa1 (Stable)

TAS GOVERNMENT CASH BALANCE ESTIMATES

-300

-250

-200

-150

-100

-50

0

50

100

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dm

As at Budget Jun 11 As at mid-year review Feb 12 As at Budget May 12

fore

cast

s

SOURCES OF TAS GOVERNMENT REVENUE, 2012-13 - TAS

61%

4%

6%

2%

3%

2%

1%

2%19% Cth grants and GST revenue

Stamp Duties Payroll Tax Land Tax Taxes on Motor Vehicles Gambling and Betting Insurance Other Taxes and Levys Other State generated revenue

TAS GOVERNMENT EXPENDITURE, 2012-13

51%

22%

5%

22%0%

Employee related

Other operating


Grants

Interest

Sources: ABS, ANZ, BREE, Company reports, Deloitte, Tasmanian budget, Standard&Poor’s and Moody’s


NORTHERN TERRITORY ECONOMY AND GOVERNMENT FINANCES

• The outlook for the NT economy remains extremely bright with its performance underpinned by the development of the AUD34bn Ichthys LNG project. Indeed, business investment has increased around 170% y/y to December, contributing around 30ppts to growth. Consistent with the increase in business investment, population growth has reaccelerated and is being driven by a rise in both net overseas and net interstate migration. This has been reflected in dwelling commencements, which have more than doubled in the past year, while residential building approvals have risen over 60% in the past year.

• The sharp improvement in economic activity has not been mirrored in the performance of the labour market. Employment growth has eased, while the unemployment rate has remained relatively steady at 4.2%.

• A recent Cabinet reshuffle and a new Chief Minister have contributed to a decision to delay the publication of the 2013-14 budget to the same day as the Commonwealth budget’s release on May 14. Despite its economic strength, NT is by far the most dependent state on the Commonwealth, with around 80% of its revenues from this source. Its own tax collections per capita are below the national average. Moody’s changed its outlook on the NT to Aa1 negative on 28 March reflecting rising debt and the expected move into a more significant deficit position across the general government sector in coming years. The ratings agency also pointed to the deteriorating trends in the territory-owned Power and Water Corporation. The Government has for now ruled out selling this entity.

CONTRIBUTIONS TO GROWTH - NT

-20

-10

0

10

20

30

40

05 06 07 08 09 10 11 12 13


Annual

% c

han

ge

MAJOR PROJECT INVESTMENT PIPELINE - NT

0

2

4

6

8

10

12

14

16

2012 2013 2014 2015 2016Ichthys Other

AU

Dbn

AU

Dbn

PRE-MIX CONCRETE PRODUCTION

60

80

100

120

140

160

180

200

220

04 05 06 07 08 09 10 11 12 13

2004 =

100,

12m

ave

rage

Northern Territory Australia ex NT


Government Country Liberal Party since 2012

Chief minister The Hon Adam Giles MLA

Leader of opposition The Hon Delia Lawrie MLA

Treasurer The Hon David Tollner MLA

2013-14 budget 14 May 2013

Next election 27 August 2016

S&P's credit rating Not rated

Moody's credit rating Aa1 (Negative)

NT GOVERNMENT CASH BALANCE ESTIMATES

-200

-100

0

100

200

300

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dm

Budget, May 12 PEFO, Aug 12 Mini-budget, Dec 12

fore

cast

s

SOURCES OF NT GOVERNMENT REVENUE, 2012-13

81%

1%0% 1%10%

1%

4%2%

0%

Cth grants and GST revenue Stamp Duties Payroll Tax Land Tax Taxes on Motor Vehicles Gambling and Betting Insurance Other Taxes and Levys Other Territory generated revenue

NT GOVERNMENT EXPENDITURE, 2012-13

44%

29%

5%

18%4%

Employee related

Other operating


Grants

Interest

Sources: ABS, ANZ, NT budget, BREE, Company reports, Deloitte and Moody’s


AUSTRALIAN CAPITAL TERRITORY ECONOMY AND GOVERNMENT FINANCES

• The economic outlook for the ACT could be heavily negatively affected by the Commonwealth Opposition’s planned cuts to the public service if the Coalition wins Government on 14 September, as opinion polls currently predict. The Liberal-Nationals plan to cut around 20,000 jobs from the public service, a large proportion of which are likely to occur in Canberra as around 40% of the workforce is either directly involved in public administration or the services that consult to it. We estimate there could be a direct 4% cut to Canberra's workforce, which would have flow-on effects to other sectors in the ACT and nationally.

• With this looming contingency, there has already been an effect on the territory’s economy, with the housing market slowing and businesses and households acting cautiously. Retail sales are still running at a moderate annual growth rate of 3.6% however. In the 12 months to February, the unemployment rate rose by over 1ppt, the most of any jurisdiction, even though at 4.6% the rate remains below the national rate of 5.4%. Subdued housing construction likely reflects the surge in activity in 2010-11, which created an oversupply of housing, which is now being unwound against a weaker demand backdrop.

• The Government downgraded its expectation of growth to 1.5% in 2013-14 in its February budget update, from a previous budget estimate of 3%. We broadly agree, although see the risks as still to the downside.

ACT INDUSTRY SHARE OF GSP, JUNE 2012

0 5 10 15 20 25 30 35

Mining

Agriculture

Manufacturing

Wholesale trade




Utilities


Other services



Retail trade






Construction


% of GSP

AUSTRALIAN NATIONAL PUBLIC SERVICE EMPLOYMENT

HOUSING SUPPLY AND DEMAND – ACT

-4

-2

0

2

4

6

91 93 95 97 99 01 03 05 07 09 11 13

Num

ber

of h

ouse

hol

ds

('000s)

Completions

Underlying demand

Short

age

Surp

lus



Chief minister Ms Katy Gallagher MLA

Leader of opposition Mr Jeremy Hanson MLA

Treasurer The Hon Andrew Barr MLA

2013-14 budget 4 June 2013

Next election 15 October 2016

S&P's credit rating AAA (Stable)

Moody's credit rating Not rated

ACT GOVERNMENT CASH BALANCE ESTIMATES

-500

-400

-300

-200

-100

0

100

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

AU

Dm

Budget update, Feb 12 Budget, Jun 12 Budget update, Feb 13

fore

cast

s

SOURCES OF ACT GOVERNMENT REVENUE, 2012-13

7%8%10%

0%

28% 40%

1%1%

3%2%

Cth grants and GST revenue

Stamp Duties

Payroll Tax

Land Tax

Taxes on Motor Vehicles

Insurance

Gambling and Betting

Other Taxes and Levys

Royalties

Other Revenue ACT GOVERNMENT EXPENDITURE, 2012-13

47%

25%

7%

17%3%

Employee related

Other operating


Grants

Interest

Sources: ABS, ANZ, ACT budget, Liberal Party and Standard & Poor’s

100

110

120

130

140

150

160

170

180

1993 1997 2001 2005 2009 2013

000s

An Abbott Government's proposed APS employment target


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Documents

ANZ - Australian States Chartbook (May 2013)