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Effective Lowe-r Bound

The Global Economy

The US-China trade conflict has continued to dominate global headlines in the final quarter

of 2019. The two sides are reportedly close to an agreement over a phase one trade deal, however, nothing has yet eventuated. Chinese demands that an agreement should include a timetable for the rollback of existing tariffs is reported to be one of the major sticking points.

The October edition of the IMF World Economic Outlook saw another downgrade to the global growth forecast, with expected real GDP growth for 2019 trimmed by 0.2 percentage points (ppts) to 3.0 per cent. If correct, this will be the weakest year for growth since the recession year of 2009. However, optimism over the prospect of a US-China trade deal, central bank rate cuts, a dash of quantitative easing in Europe and evidence that global manufacturing activity may be stabilising has seen traders become a little less bearish about the global outlook.

The slightly brighter mood has seen expectations for further central bank easing scaled back, pushing bond yields off

their extreme lows. The value of negative yielding global debt has fallen from a high of USD17 trillion in late August to under USD12 trillion in early December.

There are increasing calls that, with interest rates in many economies either negative or close to zero, monetary policy has not only reached the limits of its effectiveness but has also become counterproductive, and that fiscal policy needs to take some of the load. This is not the case in the US, where the Federal Reserve still has room to lower rates and cut the federal funds rate target band by 25 basis points to 1.50-1.75 per cent. With the unemployment rate at 50-year lows, traders are pricing in just one more interest rate cut in the cycle.

Closer to home, the weak international trade environment continues to weigh on the Japanese economy. In China, the trade war with the US has reinforced the structural slowdown already at play. Chinese economic growth has slowed to multi-decade lows, yet remains easily the fastest among the major economies.

In This Issue

The Economy ..........................1

From the CEO’s Desk ..............1

National PPP Forum ................4

Investor Marketing ...................4

LGPA State Conference ..........4

New Staff Appointments ..........5

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 NewsletterDecember Quarter 2019

From the CEO’s Desk

Dear clients and staff

The 2019-20 Mid-year Review (MYR), released 18 December 2019, has seen the estimated 2019-20 operating surplus for Western Australia grow from $1.5 billion at budget time to an estimated $2.6 billion. This improvement in the State’s finances is through higher than forecast commodity prices, and ongoing expenditure restraint in the general government sector. In October 2019, WATC revised down our 2019-20 new borrowing program, initially estimated at $1.1 billion for the year, to zero. The combined impact of lower outright interest rates and lower state borrowings has seen the MYR reduce state interest costs by $679 million over the next four years.

During the December quarter, WATC managed the maturity of the October 2019 benchmark bond ($2.3 billion outstanding at maturity date), and the November 2019 floating rate note with a face value of $1.2 billion.

“Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that.”

RBA Governor Philip Lowe, Address to Australian Business Economists Annual Dinner, Unconventional Monetary Policy: Some Lessons From Overseas

26 November 2019

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The Australian Economy

Concern over the outlook for the Aussie economy and persistently weak inflation saw the RBA cut the cash rate by a further 25 basis points to 0.75 per cent in October, the third rate cut this year.

In a major speech in late November, Governor Philip Lowe outlined the central bank’s policy options once the cash rate is cut to the effective lower bound, which the RBA considers to be 0.25 per cent.

Dr Lowe told his audience that it was “extraordinarily unlikely” that the cash rate would be lowered into negative territory and the RBA has “no appetite to undertake outright purchases of private sector assets as part of a QE program”. He said such a program would involve purchases of Commonwealth government bonds and indicated it may also include state government bonds (we would be very surprised if it didn’t).

Aussie real GDP growth remained sluggish in Q3, with the economy expanding a seasonally adjusted 0.4 per cent in the quarter and 1.7 per cent YoY.

Headline growth was again driven by net exports and government spending. Real private sector final demand fell 0.1 per cent in Q3, the third decline in the past four quarters, to be down 0.3 per cent over the year. Household consumption continues to grow at the weakest rate since early 2009, as households save rather than spend the extra disposable income from lower mortgage rates and tax refunds. Annual growth in private business capital investment has been negative for five quarters in a row and dwelling investment for the past three.

Annual inflation (unadjusted) remained stubbornly below the RBA’s 2 to 3 per cent target at 1.7 per cent in Q3. Wage price index inflation lost some momentum in the quarter, slowing to 2.2 per cent YoY.

The RBA sees excess capacity in the labour market as a major barrier to higher wages and inflation. The Bank estimates an unemployment rate of around 4.5 per cent would be consistent with full employment, well below the current unemployment rate of 5.3 per cent.

Unfortunately, with employment growth losing momentum and almost all of the major Australian economic data looking soft, the unemployment rate is likely to drift further away from the RBA’s ‘target’ in the months ahead.

The Western Australian Economy

Western Australian real GSP growth was 1.0 per cent in 2018-19, with net exports contributing 1.8 ppts to growth while a 1.2 per cent fall in real state final demand cut 0.9 ppts from the headline.

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We also undertook an inaugural reverse tender in November, where we bought back $850 million of the July 2020 benchmark bond as part of our broader balance sheet management.

Concern over the outlook for the Australian economy and weak global sentiment continues to weigh on key economic indicators, with the RBA cutting the cash rate to a new record low of 0.75 per cent at its October meeting. Governor Philip Lowe has indicated that the RBA is prepared to pursue unconventional monetary policy, such as buying government bonds, should the cash rate fall to a lower bound of 0.25 per cent.

Through the quarter the AUD has traded in a relatively narrow range of USD0.6704 to USD0.6909, continuing to be supported by relatively high commodity prices. The 3- and 10-year Australian Treasury bonds both dipped to record lows (0.59 per cent and 0.88 per cent respectively) during October, but have rallied somewhat during December on the back of markets deferring expectations for the next cut to the cash rate into 2020, as well as global expectations for a US-China trade deal.

A key focus of the December quarter has been investor engagement, in the promotion of WATC as a high quality investment option for domestic and international investors.

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Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value USD Trillion

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The Q3 national accounts showed real state final demand had fallen 0.2 per cent in Q3, largely as a result of a pullback in mining investment after a big jump in Q2. Real state final demand was down 0.1 per cent YoY.

Trend employment growth was 1.3 per cent YoY in October, the fastest pace of growth in 17 months, with the trend unemployment rate sliding to a 27-month low of 5.7 per cent. While this is above the national average, the State’s trend employment to population ratio of 64.5 per cent is well above the national average of 62.6 per cent.

The Perth annual inflation rate increased to 1.7 per cent in Q3 2019, while wage inflation remained soft and the Western Australian wage cost index was up just 1.6 per cent YoY.

Financial Markets

Optimism that the US and China will strike a trade deal has been a major factor pushing global equity markets higher over the past three months. The US and Australian benchmarks hit fresh record highs in late November before edging back in the first half of December.

Traders continue to price in further RBA rate cuts in 2020. The cash rate futures market is fully pricing in a 25 basis point cut to 0.50 per cent by April. A further cut, to 0.25 per cent by the end of the year, is around 40 per cent priced in.

The 3-year Australian Treasury bond yield declined from 0.735 per cent at the end of Q3 to a record low of 0.59 per cent in early October, reflecting a fall in global bond yields and the cash rate cut, but has since risen again to 0.68 per cent. The 10-year Australian Treasury bond yield slipped to a low of 0.88 per cent after opening the quarter at 1.02 per cent, and is currently trading at 1.11 per cent. Aussie Treasury yields continue to trade well below their US counterparts, with the Aussie 10-year bond yield currently 69 basis points under the 10-year US Treasury yield.

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With Chinese demand for iron ore remaining strong, prices have shown ongoing resilience despite the gradual return of Brazilian supply. The price of the most active Singapore futures contract for 62 per cent Fe iron ore is currently USD91.31/tonne, slightly lower than the end of Q3 close of USD91.91.

Gold continues to be supported by low interest rates and uncertainty over the global outlook with the yellow metal currently trading at USD1,464/oz after opening the quarter at USD1,472/oz.

The Brent crude futures price has risen to approximately USD64/bbl from USD61/bbl at the end of September, as the major oil exporting countries continue their efforts to prop up prices by capping production.

The AUD remains supported by relatively high commodity prices. The Aussie opened the quarter at USD0.6750 and tumbled to a post-GFC closing low of USD0.6704 against the big dollar as the RBA cut the cash rate on the 1 October, but has recovered to be currently trading at USD0.6809.

We continue to expect the RBA to cut the cash rate to a low of 0.25 per cent, most likely in the first half of 2020. It is becoming increasingly likely that once this effective lower bound has been reached that the RBA will embark on a QE program, possibly in the second half of 2020.

Craig McGuinness Chief Economist December 2019

*Economic data as at 10 December 2019.

The main objective of WATC’s investor marketing strategy is to ensure strong access to funding at competitive rates from domestic and overseas investors to meet our client’s borrowing requirements. Investor engagement looks to diversify and grow our investor base by providing existing investors, panel banks, and new investors’ updates to the Western Australian economic story, the State Government’s fiscal outlook and informing them of WATC’s activities in financial markets. Investor meetings are also a great opportunity to hear from other financial market participants on trends and emerging issues, such as market sentiment in response to global or Australian economic factors, increased investor focus on environmental and social issuance programs, and the timing and impact of emerging regulatory changes.

An estimated 25 per cent of WATC bonds on issue are held by offshore investors. Investor marketing tours to Southeast Asia, the United Kingdom and western Europe over the quarter saw WATC meeting with over 40 existing or potential investors.

During the quarter, WATC also participated in the annual Commonwealth Bank Global Markets Conference, exhibited at the Local Government Professionals WA Annual State Conference, presented at the 2019 National PPP Contract Managers

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Forum and attended the 2019 International Swaps and Derivatives Association Annual Australia Conference.

The past quarter saw WATC’s Chief Economist, Craig McGuiness, providing briefings on the economic and financial market environments to a number of clients, as well as participating in the Department of Treasury’s Public Sector Economic Forum. If you would like WATC to provide briefings or presentations at your office please contact your Client Relationship Manager.

Work is progressing well on our replacement Treasury Management System, with configuration and integration works now complete, and a detailed testing regime underway ahead of an early 2020 implementation. During the quarter, WATC undertook some large-scale ICT hardware replacements, as well as progressing our transition to GovNext and to an updated telephony facilities.

We wish you all a safe and Merry Christmas and look forward to working with you all in 2020.

Kind regards,

Kaylene GulichChief Executive Officer

December 2019

National PPP Forum

WATC was a trade partner at the recent Local Government Professionals WA Annual State Conference. The conference

continues to provide a great opportunity for WATC staff to meet with local government clients from metropolitan and regional areas and hear first-hand about contemporary issues relevant to them.

Overall, the conference was very successful and assisted WATC in enhancing relationships with its local government client base, especially regional clients.

LGPA 2019 Annual State Conference

Client Relationship Manager, Tamara Marsh, at the Local Government Professionals Australia WA Conference

Public-private partnerships (PPPs) involve collaboration between a government agency and private-sector companies

in order to finance, build, and operate large infrastructure projects such as public transportation networks, convention centers and entertainment venues.

In October 2019, David Letts, Richard McKenzie and Richard John represented WATC at the 2019 National PPP Contract Managers Forum, which was hosted in Sydney by NSW Treasury. The conference brought together contract managers from government departments across Australia and New Zealand in order to promote a learning and sharing of experiences relating to PPP investments. The speaker program combined state government PPP expertise and private sector specialists on public infrastructure development including PPP structuring, equity investing and operations.

Topics covered over the two-day conference included examination of key threads in guiding a PPP from project delivery through to operations, PPP refinancing, modelling best practice, end of term transitioning and responding to change over the project duration. WATC presented insights pertaining to financial and commercial issues that arise during change in control events (Richard John), and shared perspectives on lessons learned from the management of PPP contracts (David Letts).

As part of the WATC annual marketing plan, trips are undertaken domestically and to various regions across the

globe. These trips enable WATC to reconnect with established investors and meet with potential new investors to deliver a broad and diversified investor base for WATC debt issuance.

In September, Kaylene Gulich (CEO) and John Zuvich (Chief Dealer Debt Markets) undertook a four day investor marketing trip to the Southeast Asia region, visiting three countries. In addition, a trip to the United Kingdom and Europe was undertaken by the CEO and Vince Cinquina (Head of Financial Markets) in late November, visiting five countries. During both trips, a number of meetings were held involving a diverse range of investors covering Central Banks, Sovereign Wealth Funds, Insurers, Banks, Superannuation Fund Managers and Asset Managers.

In the domestic market, WATC participated in the 11th annual CBA Investor conference in Sydney in October, where the CEO presented to over 65 domestic and offshore investors.

These roadshows are an important opportunity to provide an update on the state of WA’s economy and fiscal position and WATC’s activities in capital markets for the remainder of the financial year.

Investor Marketing Update continued from page 3

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Brad Parry

Brad is WATC’s new Head of Strategy. He returned to WA in

November after 17 years in Canberra. Brad’s most recent role was as Head of Funding and Liquidity at the Australian Office of Financial Management, where he led the team responsible for undertaking the Commonwealth’s debt issuance program (which exceeded $100 billion in a year) and managing its cash balances. Brad has a Bachelor of Commerce (majoring in quantitative finance) from UWA and a Bachelor of Actuarial Studies (with honours) from the Australian National University. He is a Fellow of the Actuaries Institute. Brad is kept busy chasing after two young kids and trying to find a house to buy!

Brad Parry Head of Strategy

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.auFor economic commentary or clarification, please contact:Craig McGuinness Chief Economist(08) 9235 9104 cmcguinness@watc.wa.gov.auPatrycja Beniak Economist(08) 9235 9110 pbeniak@watc.wa.gov.au

Pauline Chin

Pauline joined WATC in November as a Corporate Finance Advisor

in the Advisory Services team. She has over six years of experience in corporate treasury advisory and operational roles. Most recently, Pauline worked as a Treasury Manager at NSW Land Registry Services, managing circa $2 billion of debt and was responsible for the company’s financial model. Prior to moving to WA, Pauline spent three months travelling and driving across Australia from Sydney to Perth.

Pauline Chin Corporate Financial

Advisor

Patrycja Beniak

Patrycja Beniak has over 10 years’ experience in the financial sector and

central banking. Prior to joining WATC, Patrycja was an adviser in one of the major emerging markets’ central banks, responsible for tasks such as monetary policy communication and monitoring of global financial markets. She has also worked in various positions for London-based financial sector entities.

Patrycja holds Master Degrees in Finance and Banking as well as

International Relations from Warsaw School of Economics. Her research interests include application of text mining techniques for monetary policy purposes, unconventional monetary policies and their international spillovers as well as currency digitalisation.

Patrycja Beniak Economist

On behalf of everyone at WATC, we wish our clients a Merry Christmas.

All the best for 2020 and thank you for your continued support during 2019.

WATC offices will be closed for the Christmas, Boxing Day and New Year’s Day public holidays, but will be open as usual on the business days over the Christmas and New Year period.

We look forward to continuing our successful partnership with you in 2020.

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.

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