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Treasury solutions
Treasury Management – Challenges for 2014
Society of District Council Treasurers
10th January 2014
Presented by
Cecilie Booth, Director
2014 Challenges:
•
Market Update
•
Capita Asset Services’ forecast
•
The Balance Sheet / Balance Sheet Review
•
Investment Opportunities
•
Debt Management
•
Potential areas for budget savings
January 2014
2
Economic Summary – UK
• The UK economy continued to show positive growth in Q3 2013 at 0.8%
• BoE’s November Inflation Report indicate CPI will drop below 2% by Q1 2015
• Debt as a percentage of GDP (currently 76.6%) to start falling from 2015/16
• Loss of the UK’s ‘AAA’ credit rating emphasised the performance in the economy.
• UK economy is still in danger of weak growth in the next two years.
• Consumers are likely to remain focused on paying down debt
• Coalition government - promoting growth vs. the need to tackle the budget deficit
• Little sign of private sector funding to finance major expansion of infrastructure
January 2014
3
GDP
GDP q/q
2
UK q/q
US q/q
EZ q/q
1.5
1
0.5
0
(%)
-0.5
-1
-1.5
-2
-2.5
-3
January 2014
4
U.K. Interest Rate Forecasts
Bank Rate
Capita Asset Services
UBS
Capital Economics
NOW
0.50%
0.50%
0.50%
Mar-14
0.50%
0.50%
0.50%
Jun-14
0.50%
0.50%
0.50%
Sep-14
0.50%
0.50%
0.50%
Dec-14
0.50%
0.50%
0.50%
Mar-15
0.50%
0.50%
0.50%
Jun-15
0.50%
0.50%
0.50%
Sep-15
0.50%
0.75%
0.50%
Dec-15
0.50%
1.00%
0.50%
Mar-16
0.50%
-
Jun-16
0.75%
-
Sep-16
1.00%
-
Dec-16
1.00%
-
Mar-17
1.25%
-
NOW
2.72%
2.72%
2.72%
Mar-14
2.50%
2.30%
Jun-14
2.60%
2.30%
Sep-14
2.70%
2.30%
Dec-14
2.70%
2.30%
Mar-15
2.80%
2.30%
Jun-15
2.80%
2.50%
Sep-15
2.90%
2.90%
Dec-15
3.00%
3.30%
Mar-16
3.10%
-
Jun-16
3.20%
-
Sep-16
3.30%
-
Dec-16
3.40%
-
Mar-17
3.40%
-
NOW
3.85%
3.85%
3.85%
Mar-14
3.60%
3.70%
3.55%
Jun-14
3.70%
3.80%
3.55%
Sep-14
3.80%
3.90%
3.55%
Dec-14
3.80%
4.10%
3.55%
Mar-15
3.90%
4.10%
3.55%
Jun-15
3.90%
4.30%
3.55%
Sep-15
4.00%
4.60%
3.55%
Dec-15
4.10%
4.60%
3.80%
Mar-16
4.20%
-
Jun-16
4.30%
-
Sep-16
4.30%
-
Dec-16
4.40%
-
Mar-17
4.50%
-
NOW
4.41%
4.41%
4.41%
Mar-14
4.40%
4.60%
4.25%
Jun-14
4.50%
4.60%
4.25%
Sep-14
4.50%
4.80%
4.25%
Dec-14
4.60%
4.80%
4.25%
Mar-15
4.60%
5.10%
4.25%
Jun-15
4.70%
5.10%
4.25%
Sep-15
4.80%
5.30%
4.25%
Dec-15
4.90%
5.30%
4.35%
Mar-16
5.00%
-
Jun-16
5.10%
-
Sep-16
5.10%
-
Dec-16
5.10%
-
Mar-17
5.10%
-
NOW
4.35%
4.35%
4.35%
Mar-14
4.40%
4.50%
4.40%
Jun-14
4.50%
4.50%
4.40%
Sep-14
4.50%
4.70%
4.40%
Dec-14
4.60%
4.70%
4.40%
Mar-15
4.70%
4.90%
4.40%
Jun-15
4.80%
4.90%
4.40%
Sep-15
4.90%
5.10%
4.40%
Dec-15
5.00%
5.10%
4.50%
Mar-16
5.10%
-
Jun-16
5.20%
-
Sep-16
5.20%
-
Dec-16
5.20%
-
Mar-17
5.20%
-
5yr PWLB Rate
Capita Asset Services
UBS
Capital Economics
10yr PWLB Rate
Capita Asset Services
UBS
Capital Economics
25yr PWLB Rate
Capita Asset Services
UBS
Capital Economics
50yr PWLB Rate
Capita Asset Services
UBS
Capital Economics
Please note – The current PWLB rates and forecast shown above have taken into account the 20 basis point certainty
Rate reduction effective as of the 1st November 2012
January 2014
5
The Balance Sheet
The Balance Sheet provides information as of the end of the year
It includes:• balances, reserves and cash investments
• Sets out capital (indebtedness) and treasury position (borrowings)
• working capital (debtors and creditors)
The Balance Sheet is also a powerful tool for forward planning
It identifies:-
•
•
•
•
under-borrowed positions
lower or higher cash / investment balances
potential for falling CFR’s
Reserve / Balance positions in the years ahead.
January 2014
6
Investments - Asset Yield Curves
3.00%
2.50%
Yield
2.00%
1.50%
1.00%
0.50%
0.00%
O/N
15 Day
1 Month
3 Month
6 Month
9 Month
1 Year
2 Years
3 Years
4 Years
5 Years
Fixed Deposit
Building Socs.
DMADF
T-Bill
Gilt
CD - Banks
CD - Building Socs.
MMF
EIB Bonds
Call Account (Instant)
Call Account (15 day)
Call Account (30 Days)
•
•
•
•
•
Given their same credit risk, T-Bills should be chosen over DMADF in the 6 month period.
Bank deposits give the best yield in all periods.
Overnight (call) bank deposits provide plenty of credit premium over DMADF overnight.
Call accounts, notice accounts and MMFs are offering competitive rates.
All rates are obtainable in the market by counterparties suggested by Capita Asset Services.
January 2014
7
Debt Management
• We expect short term rates to remain low in the near term
• Inter-authority borrowing is available in the region of 0.3% - 0.4%
• Long-term rates (25-50 years) are expected to stay at around 4.5% for a
year or so, but the Euro-zone & US developments mean some volatility
• These are only forecasts – not fact! Always keep an eye on managing the
refinancing risk and internal borrowing position
• Some market based options continue to provide an attractive option to
manage risk out of future dates
January 2014
8
Funding options
Borrow internally (partially) and draw down on cash balances:
• suits a low risk appetite authority with significant cash resources in the short
to medium term
• typical cost of this activity is 0.5% - 1%
Temporary borrowing up to 2 years, typically at:
• 1 year 0.3% - 0.5%
• 18 months 0.8%
• makes sense for internally borrowed and budget pressured authorities
January 2014
9
Other funding options
Fund forward
• tie back to your TMSS PIs and appetite for certainty
LA Bond (LGA initiative)
• an alternative to PWLB funding - just in case margins are increased
January 2014
10
Potential areas for savings / income generation
• Budget pressures and cash levels vary considerably
• Capital Programme modelling and forecasting
• MRP Policy
• Options Appraisals – Lease or Purchase
• Advance payment to the Pension Fund
• Passport – streamlining information and communication
• Staffing levels and technical support
• High Level Cash Flow Management, e.g. Balance Sheet Review and Cash Flow
model
January 2014
11
Potential areas for savings / income generation
• Alternative investment options – e.g. Property Funds
• Enhanced rates and access to good quality counterparties available from our
Agency Treasury Services
• Filling resource / skills gaps
• Benchmarking Security / Liquidity / Yield – improved performance and reduced risk
• Salary Sacrifice Car Scheme
• Help negotiate lease expiry terms – substantial savings identified
• Asset management on outsourced services
January 2014
12
Potential areas for savings / income generation
• Housing related schemes, e.g. LAMS, Self Build, Regeneration Grants / Loans
– different ways to raise funding
• Loans to RPs / Housing Associations
• Client Focus Group
January 2014
13