Australian Government Investor Briefing

Dubai 17 – 20 March 2009

Neil HydenChief Executive Officer

The Australian economy

• Stable, culturally diverse, democratic society.

• Strong flexible economy with a skilled workforce.

• Track record of adaption to change.

• Sound financial institutions.

• Active policy response to external shocks.

GDP growthGDP growth has slowed after a long period of sustained growth.

-4.00

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-2.00

-1.00

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change on prior quarter

change on prior year

Per cent change

Sustained strong growth

• Average annual growth in real GDP of 3.4 per cent since 1990.

• Australia avoided recession during the Asian crisis, which dislocated many of our major trading partners.

• It also avoided recession following the collapse of the ‘dotcom bubble’.

• This reflects the economy’s capacity to adapt flexibly to changing circumstances.

Now impacted by external shocks

• The global economic and financial crisis is affecting the Australian economy, despite its inherent strength.

• In the December quarter 2008, GDP fell by 0.5% in Australia.

– A smaller fall than most other OECD countries experienced in the quarter.

Growth forecastsAustralian growth is forecast to be supported by continued strength in several of our major trading partners in Asia.

-5

0

5

10

15

Australia Japan China India Other East Asia United States Euro area

2007 2008 2009 2010

Per cent change

Strategic location

• Australia’s geographic location in the Asian region, matched with its natural resource endowment, is a strategic advantage that will contribute to prosperity for many decades.

• In 2007-08 over 58% of Australia’s merchandise exports were to East Asia.

Australia’s merchandise exports 2008

0

10,000

20,000

30,000

40,000

50,000

Japan China Korea United States New Zealand United Kingdom

$ million

Fiscal position

• Australia’s public finances are among the strongest of any developed country.

• Sustained budget surpluses over past years have reduced the stock of debt on issue and built up financial assets.

– The Government’s net debt is estimated to be -$16.2 billion (-1.3% of GDP) in 2008-09.

Fiscal stimulus

• The Government has acted quickly to provide fiscal stimulus to offset recent economic and financial shocks from overseas.

• Stimulus measures amounting to $72.2 billion (7% of GDP) have been announced since October 2008.

• These are temporary measures, consistent with a conservative medium term budget strategy.

Budget outcomesBudget underlying cash balance (% GDP)

-6

-5

-4

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-1

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3

1977

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2010

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2011

-12

Und

erly

ing

cash

bal

ance

(%

of

GD

P)

Outcome Forecast Projection

Fiscal position

• Australia’s net debt position remains strong.

• This provides scope for further flexibility in future fiscal policy, if needed.

Net debt forecastsAustralia’s net debt will remain relatively low.

-5.0

5.0

15.0

25.0

35.0

45.0

55.0

65.0

75.0

85.0

95.0

Australia Canada Euro area United Kingdom United States Japan

2008 2009 2010

Per cent of GDP

Balance of payments

• Australia has been a net importer of capital for over 200 years.

• This results from its rich resource endowment, productive economy and strong economic growth.

• Net imports of capital are reflected in persistent deficits on current account.

Current accountCurrent account on the balance of payments.

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`

Capital inflows

• Historically, capital inflows have been sustained by the strength of the Australian economy and the attractive yields generated by investments.

• A large part of capital inflows comprise borrowings by banks.

• Retained earnings of multinational companies contribute a further significant component.

InflationInflation has been low for the last 20 years, apart from

occasional short spikes.

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Per cent change over year

Monetary policy

• Monetary policy has reacted vigorously to changed conditions.

– The cash rate has been reduced by 400 bps since September 2008 and is currently 3.25%.

– These reductions have flowed quickly to households, as the majority of Australian housing mortgages use variable rates.

• Considerable flexibility remains available for monetary policy should it be required.

Cash ratesOfficial cash rates remain higher than in major economies.

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Australia UK Euro US Japan

Per cent

Financial sector

• Australia’s banks have strong balance sheets, adequate capital and a resilient economy behind them. – The tier 1 capital ratios of the major banks average

8.7%.

• Prudential regulation of banks has been rigorous and effective over recent years.

• Major banks in Australia have never relied on securitisation to a major degree.

Sub-prime loans

• Sub-prime loans represent less than 2% of mortgages outstanding in Australia.

Financial SectorMarket capitalisation of Australia’s top 4 banks is strong

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

US $ billion

Financial sectorReturn on shareholders’ equity for top 4 Australian banks remains robust

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Per cent

Government guarantees

• The Government is providing guarantees for wholesale funding by Australian authorised deposit taking institutions. – Issuers must apply in advance for coverage for

specific borrowings and a charge applies.

• This is to help Australian banks compete with international banks with similar guarantees from their governments.

Exchange rate

• Australia has a free-floating exchange rate.

– The Australian dollar is the sixth most traded currency in the world.

– Over past decades the rate has varied, including in

response to movements in global commodity prices.

– The central bank has not intervened in the exchange market other than in exceptional circumstances.

Recent movements

• The Australian dollar depreciated sharply against major currencies in December 2008 and January 2009.

– It has since settled somewhat at levels below longer term average rates.

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Exchange rate movementsAustralian Dollar / US Dollar

Australian Dollar / Japanese Yen

Australian Dollar / Euro

Debt issuance

• Over recent years the Australian Government has not needed to issue debt for budget funding.

– However it continued to issue a small volume of debt to maintain a functioning bond market.

– The stock of debt on issue was kept at around $60 billion (currently about 6% of GDP).

• The Government is now increasing its issuance to meet funding needs.

Past and projected debt issuanceDebt issuance will be higher over the next few years

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10

20

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19

79

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00

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Deb

t pr

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m

Actual Gross Forecast Projection

$ billion

Treasury Bond issuance

• We expect to issue around $32 billion in Treasury Bonds in 2008-09 and around $42 billion in 2009-10.

• Bonds are issued through auctions conducted twice a week, generally of around $500 to 700 million.

• Bonds are issued into the 10 existing bond lines, with maturities up to 12 years.

Treasury BondsCurrent Treasury Bonds by maturity date

0

1

2

3

4

5

6

7

8

9

10

7.5%15Sep09

5.25%15Aug10

5.75%15Jun11

5.75%15Apr12

6.5%15May13

6.25%15Jun14

6.25%15Apr15

6% 15Feb17

5.25%15Mar19

5.75%15May21

$ billion

Treasury notes

• In addition, Treasury Notes with maturities up to 6 months are issued weekly to support management of the Government’s cash balances.

– It is intended to develop a market of at least $10 billion in these Notes.

– Although the total stock on issue will be larger at some points during the year.

Other debt instruments

• At this stage the Government does not plan to issue longer maturity bonds, indexed bonds or debt denominated in foreign currencies.

Government yield curvesAustralian Government debt offers an attractive return.

0.0

0.5

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5.0

Feb 2009 Aug 2014 Feb 2020 Aug 2025 Jan 2031 Jul 2036 Jan 2042

Per cent

Commonwealth Government Securities

US Treasury Bonds and Notes

Germany € Government BFV Curve

AAA rating

• Standard and Poor’s recently (January 2009) affirmed Australia’s Sovereign AAA rating.

• Moody’s recent (February 2009) stress-testing of Aaa governments’ debt affordability placed Australia in the top group.

– Moody’s concluded that Australia’s debt challenges were ‘limited’ and its ‘adjustment capacity’ sizeable.

– It classified Australia in the highest of three groups of Aaa-rated

sovereign issuers, based on the strength of their balance sheets.

Further information

• More detailed information on Australian Government Treasury Bonds and Treasury Notes may be found on the web site of the Australian Office of Financial Management at www.aofm.gov.au (under Activities – Debt Issuance)