Treasury Management Annual Report and Quarterly Monitoring for the period ended 31 March 2014

Transcription

1 Report title Treasury Management Annual Report and Quarterly Monitoring for the period ended 31 March 2014 Meeting Resources Committee Authority Date 22 July October 2014 Report by Document Number Director of Finance and Contractual Services FEP 2281 Public Summary This report is submitted under Financial Regulation 22 which requires the Director of Finance and Contractual Services to submit an Annual Report to those charged with governance on Treasury Management activities for the year ending 31 March As in previous years this has been combined with the fourth quarterly monitoring report in order to reduce the duplication of information submitted to Members. The report: (i) Outlines the economic background against which borrowing and investment activities were undertaken during the previous year, and; (ii)reports on those activities in order to assist the Authority in assessing the effectiveness of the Treasury Management function during that period. Recommendation That the report be noted.

2 Introduction/Background Treasury Management 2013/14 1. The Treasury Management Quarterly Monitoring report for the period ended 31 March 2014 and the Treasury Management Annual Report for 2013/14 are presented as a single combined report to members to reduce the overall number of reports submitted. The CIPFA (Chartered Institute of Public Finance and Accountancy) Code of Practice for Treasury Management recommends that members be updated on treasury management activities regularly (Quarterly, Annual and Mid year reports). This report therefore ensures this Authority is implementing best practice in accordance with the Code. 2. This report is submitted under that requirement and provides Members with a review of investment performance for 2013/14, together with a summary of Long-Term borrowing arrangements set in the context of the general economic conditions prevailing during the year. It also reviews specific Treasury Management prudential indicators defined by the Code. 3. The purpose of the Code is to: (a) (b) Support the quality and status of Treasury Management in local authorities, and; Provide guidance on the proper practices to be employed for Treasury Management. 4. Treasury Management is defined in the Code as: The management of the organisation s investments and cash flows, its banking, moneymarket and capital market transactions; the effective control of the risks associated with those activities and the pursuit of the optimum performance consistent with those risks. 5. To manage counterparty risk in terms of its investment activities, the Authority uses Capita Treasury Solutions (Capita) as advisors. Capita provides under licence financial ratings issued by the international ratings agencies Fitch, Moody s and Standard and Poor s and officers compile the Authority s Approved Counterparty Lending List by reference to such ratings. 6. The lending list has been constructed by reference to a listing produced by Capita (which is updated weekly) and which is compiled by allocating a weighted value to each of the Ratings Agencies individual institutions ratings and then by taking account of any activities in the Credit Default Swaps market for each institution. Capita use this information to produce a colour coded guide suggesting various time limits for deposits for each institution ranging from periods up to 3 months, then 6 months, 12 months and 24 months. Any institution failing to meet the required credit quality or where there is insufficient data to evaluate their position is shown as no Colour signifying that no deposits with that institution are recommended. 7. To make sure that it is up to date, and to meet the terms of Guidance on Local Authorities Investments issued by the Department for Communities and Local Government (CLG), the Approved Counterparty listing is reviewed by officers on a weekly basis using the Capita weekly Credit Update listings and updated as necessary to reflect any ratings changes. In addition an alert service is provided by Capita for any changes since the last formal update. If

3 a bulletin is issued notifying of a downward rating movement of a counterparty, which makes it an unacceptable risk, then that counterparty is suspended with immediate effect and no further deposits made until such time that the rating improves to an acceptable level. 8. New counterparties are only added to the Approved Lending List if their credit ratings shown in the weekly credit ratings update meet the Authority s requirements, there are no media or other concerns regarding on-going viability and the individual institution and its sovereign state are deemed to be acceptable in line with the Authority s approved investment strategy. Officers also monitor the financial media and counterparties are suspended or removed at any time if concerns arise through other sources about their financial wellbeing, even if the overall credit rating remains within the Authority s acceptable limit. Any recommendations as to where to deposit funds are also reviewed carefully by the treasury team in the light of daily, current financial intelligence. Investments 2013/14 9. The range of investment instruments available to the Authority and used during the year included: UK Government - HM Treasury Debt Management Office facility Local Authority Deposits Bank Deposits Building Society Deposits (Currently only Nationwide). 10. The UK Government and governmental agencies are considered to have the highest quality financial ratings and as such all available funds for deposit could be placed with these counterparties. Although as the returns paid tend to be the lowest in the market they would only be used as a safe haven if no other counterparty were available. Government issued Treasury Bills are also available, which are accessed by way of a weekly auction and whilst the rates paid on such deposits are subject to market demand they tend to pay a higher rate than those available from the Debt Management Office (DMO) facility. During 2013/14 the rate of return offered by both Treasury Bills and the DMO were much lower than officers were able to achieve through placing funds in the market through the GLA Group Investment Syndicate, therefore no deposits were placed with the DMO or in Treasury Bills. 11. Local authorities are considered to be risk free counterparties and in view of this up to 50% of funds available can be invested in this area of the market. Activity in this area tends to be cyclical with more activity towards the end of each financial year and as at the year end the Authority had 2.5m invested in local authority deposits through the Group Investment Syndicate, which accounts for 6% of all deposits. 12. Deposits with Banks and Building societies are subject to institutional limits of up to 15% of total sums available. The period limit is determined by the recommended duration limit published in the Capita Weekly Credit Update and would be for periods of 3,6 or 12 months with 12 months being the maximum term. The exception to this is deposits with the Authority s bankers, Royal Bank of Scotland where there is no limit. However, whilst this facility is in place to accommodate receipts of funds when it is too late in the day to place money elsewhere in the markets or to meet cash flow requirements it is not envisaged that all

4 Authority funds will never be lodged solely with Royal Bank of Scotland. The maximum sum placed on deposit with Royal Bank of Scotland during the financial year 2013/14 on any one day was 14.6m which represented some 12% of the total sums on deposit on that day across all investments. 13. The various limits on placing deposits are approved annually in advance by the Authority in March of each year for the forthcoming year. The 2013/14 policy was approved on 28 March 2013 (FEP 2035, March 2013 Treasury Management Strategy Statement and Minimum Revenue Provision Policy Statement 2013/14). 14. Deposits are placed to market through the GLA shared service arrangement either using the Group Investment Syndicate or by contact with individual financial institutions. Temporary Investments 15. Temporary principal lending outstanding as at 31 March 2014 was m as shown below in Table 1 Table 1 - Temporary Lending Outstanding as at 31 March 2014 Principal Amount Deposited Interest Rate Recommended Max Loan Duration Counterparties m s (months) GLA /GIS Variable rate Instant 12 Nat West Call Access A/C Variable rate Instant Access A/C 12 Total on Deposit All loans due for repayment during the year were repaid in accordance with the agreed terms. 17. Under the terms of the CLG Guidance for Treasury Management all counterparties must be categorised as Specified or Non Specified for deposits with Specified being the highest possible quality in terms of risk and Non Specified being a lesser quality with more stringent limits on investment levels and periods. In terms of the Authority s investments all are deemed to be Specified Investments (FEP March 2013, Treasury Management Strategy Statement and Minimum Revenue Provision Policy Statement 2013/14) and all deposits placed during the year were Specified Investments. Investment Review 18. Investment activity conformed to the Authority s Annual Investment Strategy and there were no liquidity difficulties during the year. 19. Table 2 below shows the movement in offered investment rates over the year and also shows the underlying Bank Rate.

5 02/04/13 22/04/13 12/05/13 01/06/13 21/06/13 11/07/13 31/07/13 20/08/13 09/09/13 29/09/13 19/10/13 08/11/13 28/11/13 18/12/13 07/01/14 27/01/14 16/02/14 08/03/14 28/03/14 Table 2 Movement in offered (LIBOR) investment rates and bank rate over the year Overnight 1 Week 1 Month 3 Month 6 Month 1 Year Bank Rate Overnight 1 Week 1 Month 20. The rates shown above were indicative rates published by one of the Authority s Money Market brokers and which they consider to have been available in the market on the day. These rates were those on offer across the spectrum of all banks in the market, many of which were not available to the Authority due to their Credit Rating or because of the counterparty s minimum deposit level or deposit period which typically were 10m for at least 3 months. 21. Table 3 below shows the difference between average interest rate on Authority deposits outstanding at the end of each quarter and the quarterly average of the three month London Interbank Bid rate (LIBID). Given the Authority s cash flow needs, three months is the average period for available funds to be invested. The three month LIBID rate is the rate that banks are willing to pay for borrowing from other banks and as such is considered to be a reasonable benchmark to assess return on investment performance. Table 3 - Comparison between interest rate receivable on investments outstanding at the end of each quarter and the average published 3 months LIBID rate Quarterly 2013/14 Actual Interest Performance Ave 3 Quarter Rate Achieved Against month ending on Deposits LIBID LIBID rate Jun % 0.39% +0.75% Sep % 0.39% +0.51% Dec % 0.40% +0.28% Mar % 0.40% +0.22% Annual Average 0.84% 0.40% +0.44% 22. The Table above shows that even though the Authority was following a very cautious approach to depositing funds, Authority investments have consistently outperformed the 3 month LIBID rate throughout the year with an overall average of 0.44% higher return for the year. The downward trend in investment rates available is set to continue, with RBS reducing their call account rates from a high of 0.90% in the first half of the year to a current

6 rate of 0.25%, which took effect from March This reflects the general market attitude to short term investments and the high cash holding position of most banks following support from the Bank of England. The reduction in investment return has been reflected in the Authority s budget. Temporary and Long-Term Borrowing 23. As at 31 March 2014 there were no temporary borrowings outstanding. 24. As at 31 March 2014 internal borrowing to fund capital expenditure stood at 26.3m. Internal borrowing is using Authority cash for capital expenditure that would otherwise be invested. The cost of internal borrowing is the interest foregone on investing the sum elsewhere. The average rate of internal borrowing for the year ending 31 March 2014 was 0.84%. This is a variable rate and reflects the rate of return on investments in the market. In the current economic climate internal borrowing is a cheaper option than external borrowing. However as the rate is variable internal borrowing is monitored against movements in interest rates on a daily basis and the risk of using cash in light of declining reserves is assessed regularly. Internal borrowing will be replaced by external borrowing or repayment using capital receipts as and when borrowing rates are favourable and funds are available. 25. The principal sum outstanding of external long-term Borrowing on 31 March 2014 amounted to m. Since the last reported position as at 31 December 2013 no further long-term borrowing was undertaken. New long-term borrowing and loan repayment activity during the year is summarised in Table 4 below. Table 4 Long-term borrowing- details of loan repayments and new loans taken during the year ended 31 March 2014 Loans taken in year Lender Loan m Interest Rate % Loan Period Years Start Date Maturity Date London Borough of /11/ /11/2016 Bromley Total Loans Repaid in year Lender Public Works Loan Board /3/ /4/2013 Public Works Loan Board /3/2004 1/4/2013 Public Works Loan Board /6/ /6/2013 Public Works Loan Board /8/ /8/2013 Public Works Loan Board /3/ /9/2013 Public Works Loan Board /9/ /9/2013 Public Works Loan Board /2/ /2/2014 Total Repaid 7.250

7 26. Table 5 below shows the actual level of borrowing throughout the year against overall borrowing limits. Both the Authority s Authorised Borrowing Limit and Operational Borrowing Limit were set at 232m (FEP March 2013). The Operational Limit provides for a level of borrowing to fund capital expenditure and any temporary cash flow need. Table 5 Actual Borrowing against Authority Prudential Limits Operational Limit Actual Borrowing Authorised Limit Actual Borrowing Trendline Long-Term Borrowing Rates 27. As at 1 April 2013 the average interest rate on outstanding long-term borrowing was 4.72%. Following the repayment of 7 maturing PWLB loans totalling 7.25m and new Local Authority borrowing taken during the year of 5m the average interest rate as at 31 March 2014 is 4.52%. The movement in the rate over the year is shown in the table 6 below; Table 6 Average Interest Rate on PWLB Long-Term Borrowing during 2013/ % Average Interest Rate on Long-Term Borrowing Outstanding during the year ended 31 March % 4.65% 4.60% 4.55% 4.50% 4.45% 4.40%

8 28. During the year ended 31 March 2014 officers considered, on a number of occasions, the benefits of undertaking a debt rescheduling exercise and discussed such opportunities with Capita in the course of review meetings. Given the prevailing interest rate structure, PWLB redemption rules, and lack of market interest due to the current economic climate there was no value for money benefit to be achieved in restructuring debt during the year. 29. In summary the reduction in interest rates that could be obtained as a result of repaying higher rate loans and replacing them with new lower rate loans would not be sufficient to offset the additional premium costs that would be incurred for early repayment even over a 50 year period. However the market is very changeable and opportunities to restructure debt can present themselves at very short notice. Officers continue to monitor debt opportunities with Capita and regularly appraise the Authority s debt position. Treasury Management Indicators 30. The specific treasury management indicators required by the Treasury Management Code are: o the Structure of Maturing Debt; o Total Principal Sums Invested; o Interest Rate Exposure. 31. Table 7 below shows the actual percentage of outstanding borrowing maturing within given timeframes, against approved Prudential limits, as reported throughout the year 2013/14. Table 7 Structure of Maturing Debt Maturing Structure of Borrowing TM Limits (%) 1 Apr Jun Sep Dec Mar 2014 Upper Lower Actual % Actual % Actual % Actual % Actual % < 12 Months Months years years >10 years Total Principal Sums Invested 32. This indicator is required to measure long-term investments and limit the risk of realising investments before their maturity date where there is potential for loss on the principal sum invested. The current policy is not to invest for periods beyond one year and therefore the limit is zero. During the period under review no investments have been placed for more than one year.

9 Interest Rate Exposure 33. Table 8 below shows the Authority s prudential upper fixed and variable rate exposures against actual exposures as at 30 June, 30 September, 31 December 2013 and 31 March This demonstrates that Interest Rate Exposure is being managed within Authority limits. Table 8 Interest Rate Exposure Interest Rate Exposure TM Limits (%) 30 Jun Sep Dec Mar 2014 Actual % Actual % Actual % Actual % Fixed Rate Variable Rate General Economic Background Table 9 below shows the movement across a range of instruments from the start of 2013/14 to year end. as at 31/3/13 As at 31/3/14 Movement in year Bank of England Bank Rate 0.50% 0.50% 0 7 days Notice Deposits 0.48% 0.48% 0 I Month Deposit Rate 0.50% 0.49% (0.01%) 3 Months Deposit Rate 0.51% 0.52% 0.01% 3 Months LIBID 0.38% 0.40% 0.02% The Economy and Interest Rates 34. The financial year 2013/14 continued the challenging investment environment of previous years, namely low investment returns and continuing heightened levels of counterparty risk. Economic Background provided by Capita Treasury solutions 35. After strong UK GDP growth of 0.7%, 0.8% and 0.7% in quarters 2, 3 and 4 respectively in 2013, it appears that strong growth will continue into 2014 as forward surveys are very encouraging. There are also positive indications that recovery is starting to broaden away from reliance on consumer spending and the housing market into construction, manufacturing, business investment and exporting. 36. Although inflation (the Bank of England s key policy reference) is expected to remain below its target for the foreseeable future, the Governor of the Bank of England s recent comments have tightened market expectations as to when the first Bank rate rise will occur. At present this is oscillating between the final quarter of 2014 and Q Although economists and market participants are a little confused as, according to May s Inflation Report, when using market rate expectations at the time, inflation was predicted to remain below target over a two and three year period. The economy has continued to improve, and while inflation did pick up in April, it fell back more than expected in May (CPI 1.5%) and remains some way below the Bank s 2% target rate. Both The Governor and the subsequent MPC minutes did continue to stress that any policy move will be data dependent, rather than on any predefined course. This could add to volatility in money market yields in the coming months.

10 37. The return to strong growth has also helped lower forecasts for the increase in Government debt by 73bn over the next five years, as announced in the Autumn Statement, and by an additional 24bn, as announced in the March 2014 Budget - which also forecast a return to a significant budget surplus, (of 5bn), in Through the start of 2014, emerging markets and more recently, geopolitical concerns, have also had a major bearing on market sentiment. While the global recovery may continue, the outlook is by no means certain and markets are likely to be hit with further bouts of volatility through the year ahead. 39. In the U.S the Federal Reserve has continued with its monthly $10bn reductions in asset purchases which started in December; asset purchases have now fallen from $85bn to $55bn and are expected to stop by the end of 2014, providing strong economic growth continues this year. Interest Rate Forecast 40. Since Capita s previous interest rate forecast, short Sterling rates (a good indicator for when financial markets expect the first increase in Bank Rate), have shifted significantly from indicating an early 2015 first increase to Q The one piece of guidance which appears to have emerged from recent Bank of England comments is that in the medium term increases in Bank Rate will be Limited and gradual. Also, rates would not get back to around 5% as before the financial crisis. 41. PWLB rates and bond yields are experiencing exceptional levels of volatility which are highly correlated to geo-political and sovereign debt crisis developments. The general expectation for an eventual trend of gently rising gilt yields and PWLB rates is expected to remain unchanged, as market fundamentals will focus on the sheer volume of UK gilt issuance (and also US Treasury issuance) and the price of those new debt issues. Negative (or positive) developments in the Euro Zone sovereign debt crisis could significantly impact safe-haven flows of investor money into UK, US and German bonds and produce shorter term movements away from Capita s central forecasts. 42. Capita s revised forecasts below are based on the PWLB Certainty Rate (Normal PWLB rate minus 20 bps) to which the Authority has access:

11 SUMMARY OUTLOOK provided by CAPITA 43. Until 2013, the economic recovery in the UK since 2008 had been the worst and slowest recovery in recent history. However, growth rebounded during 2013 to surpass all expectations, propelled by recovery in consumer spending and the housing market. Forward surveys are currently very positive in indicating that growth prospects are also strong for 2014, not only in the UK economy as a whole, but in all three main sectors, services, manufacturing and construction. This is very encouraging as there does need to be a significant rebalancing of the economy away from consumer spending to construction, manufacturing, business investment and exporting in order for this start to recovery to become more firmly established. 44. One drag on the economy was that wage inflation had been significantly below CPI inflation, so disposable income and living standards were being eroded, (although income tax cuts had ameliorated this to some extent). However, the recent fall in inflation has narrowed the gap between wage increases and inflation and this gap could narrow even more during this year, especially if there is also a recovery in growth in labour productivity (leading to significant increases in pay rates). With regard to the US, the main world economy, it faces similar debt problems to those of the UK, but thanks to reasonable growth, cuts in government expenditure and tax rises, the annual government deficit has been halved from its peak without appearing to do too much damage to growth, although labour force participation rates remain lower than ideal. 45. As for the Eurozone, concerns subsided considerably during However, sovereign debt difficulties have not gone away and major concerns could return in respect of any countries that do not dynamically address fundamental issues of low growth, international uncompetitiveness and the need for overdue reforms of the economy, (as Ireland has done). It is, therefore, possible over the next few years that levels of government debt to GDP ratios could continue to rise to levels that could result in a loss of investor confidence in the financial viability of such countries. This could mean that sovereign debt concerns have not disappeared but, rather, have only been postponed. Authority s Strategic Objectives 46. While the Treasury function is key and fundamental to all of the Authority s Strategic Objectives in ensuring cash liquidity to fund all Authority Activities it specifically relates to Strategic Objective 4 - Resources managing risk by using our resources flexibly, efficiently and effectively, continuously improving the way we use public money. Head of Legal and Democratic Services 47. The Director of Finance and Contractual Services has been appointed by the Authority as the officer who is responsible under section 127 of the Greater London Authority Act 1999 for the arrangements for the proper administration of its financial affairs. The management of the Authority s Treasury activities and the regular reporting on the function form part of those arrangements. Director of Finance and Contractual Services Comments 48. This report is presented by the Director of Finance and Contractual Services and there are no further comments.

12 Sustainability Implications 49. There are no direct environmental implications associated with the contents of this report. Staff Side Consultations Undertaken 50. No staff side consultations were undertaken in respect of this report. Equalities Implications 51. There are no direct equalities implications associated with the contents of this report. List of Appendices to this report: None LOCAL GOVERNMENT (ACCESS TO INFORMATION) ACT 1985 List of background documents Local Government Act 2003 The Prudential Code (Fully Revised Second Edition 2011) Local Authorities(Capital Finance and Accounting)(England) Regulations 2003 Authority Financial Regulations CIPFA Code of Practice for Treasury Management in Public Services and Cross-Sectoral Guidance Notes (Fully Revised Second Edition 2011) CIPFA Treasury Management - Guidance Notes for Local Authorities Including Police Authorities and Fire Authorities (Fully Revised Third Edition 2009) International Credit Ratings (Supplied by Capita Treasury Services) FEP 2035 Treasury Management Strategy Statement, Annual Investment Strategy and Minimum Revenue Provision Policy Statement 2013/14 28 March 2013 FEP 2136 Treasury Management Quarterly Monitoring Report 12 September2013 FEP 2152 Treasury Management Mid Year Report 11 November 2013 FEP 2226 Treasury Management Quarterly Monitoring Report 17 March 2014