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Agenda Item No

 

The Vale of Glamorgan Council

 

Cabinet Meeting: 16th November 2011

 

Report of the Leader

 

Treasury Management

 

Purpose of the Report

1.             To amend the Annual Investment Strategy 2011/12.

2.             To provide a mid year report on the Authority's treasury management operations for the period 1st April 2011 to 30th September 2011 which is a requirement of the 2009 edition of the CIPFA Treasury Management in the Public Services :Code of Practice.

3.             To note the latest Treasury Management Indicators

Recommendations

1.             That the Annual Investment Strategy, included in the Treasury Management and Investment Strategy 2011/12 be amended by removing references to Fitch Credit Rating Agency's individual ratings.

2.             That the remainder of the Treasury Management mid year report for the period 1st April 2011 to 30th September 2011 be noted.

3.             The latest Treasury Management Indicators be noted.

Reasons for the Recommendations

1.             To amend the Annual Investment Strategy due to withdrawal of Fitch's individual rating.

2.             To present the Treasury Management mid year report as required by the CIPFA Treasury Management in the Public Services: Code of Practice.

3.             To present an update of the Treasury Management Indicators which are included in the treasury management strategy.

Background

4.             On 3rd March 2010, Council adopted the 2009 edition of the CIPFA Treasury Management in the Public Services: Code of Practice, which requires the Authority to approve a treasury management strategy before the start of each financial year, a mid year report and an annual report after the end of each financial year. This is the second mid-year report presented to Council under the terms of the CIPFA Code of Practice and covers the period 1st April to 30th September 2011.

5.             In addition, Welsh Government Guidance on Local Government Investments recommends that local authorities consider and amend where necessary their investment strategies in light of changing internal or external circumstances. This report therefore meets the requirements of both sets of guidance.

Treasury Management Strategy 2011/12

6.             Council approved the 2011/2012 treasury management strategy at its meeting on 28th February 2011.

7.             The Authority's investment strategy is to secure the best return on its investments whilst having regard to capital security within the parameters laid down.

8.             The Authority's borrowing strategy estimated that it will borrow £4,669,000 of new external loans to support the capital programme for 2011-2012. The council officers in conjunction with the treasury advisors have and will continually monitor the prevailing interest rates and the market forecasts and adopt a pragmatic approach to changing circumstances in respect of its borrowing needs.

9.             The Director of Finance, ICT and Property is pleased to report that all treasury management activity undertaken during the period complied with the approved strategy, the CIPFA Code of Practice, and the relevant legislative provisions.

Economic Review / Interest Rate Prospects

 

10.        Information- This section of the report has been provided by the Councils Treasury advisors

11.        The first half of the financial year was characterised by deteriorating expectations for global economic growth and continued concern about sovereign creditworthiness, causing financial market volatility in August and September, as investors fled riskier assets for safe havens.  Long-term gilt yields fell by a full percentage point to around 3.50% since their high in February.

12.        Many Western developed nations, including the UK, implemented fiscal tightening policies to reduce public budget deficits, which curbed domestic demand.  At the same time, many economies were suffering from high inflation due to stubbornly high commodity prices; this prompted the European Central Bank (ECB) to raise interest rates in April and July.

13.        The eurozone sovereign debt crisis proved the most significant influence on financial markets, with investors fearing the consequences of a sovereign default on the financial system.  Despite the bailouts of Greece, Ireland and Portugal, the crisis has rumbled on.  

14.        In the UK, the Government implemented its fiscal consolidation plan.  Despite low confidence and subdued domestic spending, inflation remains high due to the rise in VAT and higher food and petrol prices.  The Bank of England, however, was more concerned about the deteriorating economic outlook, and maintained Bank Rate at 0.5%, resisting pressure to increase rates to bring inflation back to target more quickly. 

15.        Domestic spending is highly likely to remain subdued, as disposable income is eroded by higher inflation, taxes and energy prices, and low wage growth.  The Bank has since resumed its programme of quantitative easing to boost economic growth.

16.         Financial markets do not expect the first rise in Bank Rate to be before 2013.  The latest forecast from the Council’s treasury management advisers, Sterling Consultancy Services is shown below:

Sterling Forecast

 

 

 

 

 

 

Market Forecast

 

 

Bank Rate

1 Month LIBOR

3 Month LIBOR

12  Month LIBOR

25 year PWLB

 

Bank Rate

3 Month LIBOR

Current

0.50

0.69

0.94

1.71

4.56

 

0.50

0.92

Q4 2011

0.50

0.70

0.95

1.75

4.75

 

0.50

0.92

Q1 2012

0.50

0.65

0.90

1.70

4.80

 

0.50

0.97

Q2 2012

0.50

0.65

0.85

1.65

4.80

 

0.50

0.88

Q3 2012

0.75

0.80

0.95

1.75

4.80

 

0.50

0.88

Q4 2012

0.75

0.85

1.05

1.80

4.90

 

0.50

0.92

H1 2013

1.25

1.35

1.50

2.25

5.00

 

0.50

1.05

H2 2013

1.75

1.85

2.0

2.75

5.10

 

 

1.31

H1 2014

2.25

2.35

2.5

3.25

5.20

 

 

1.61

 

Interim Report

17.        The following tables summarise the treasury management transactions undertaken by the Authority during the first half of this financial year. All activities were in accordance with the Authority’s approved strategy on Treasury Management. The following table sets out the monies borrowed / repaid during the period.

 

Loan Type

Opening Balance

Received

Repaid

Closing Balance

 

01/04/2011

30/09/2011

 

£’000

£’000

£’000

£’000

 

PWLB

96,878

0

(491)

96,387

 

Other Long Term Loans

6,010

0

0

6,010

 

Temporary Loans

100

0

0

100

 

Totals

       102,988

0

(491)

102,497

 

 

 

·               Loans borrowed from the PWLB are intended to assist Local Authorities in meeting their longer term borrowing requirements.  The above loans are all at fixed rates of interest. The rate paid on each loan is largely dependent upon the original duration of the loan and date taken out.

·               Other Long term loans represent those non-PWLB loans that are repayable at least 1 year or more from the date they are advanced.  The bulk of this debt is represented by two market loans of £2,000,000 and £4,000,000. The balance of this debt is local bonds. These total £9,800 and are made up of small individual sums that are invested with the Authority for a number of years by members of the public.  

·               Temporary Loans represent those loans that are borrowed for a period of less than 1 year. They are borrowed on 7 day notice. 

18.        External interest at an average rate of 5.634% and amounting to £2,894,000 has been accrued on these loans for the first 6 months of 2011/2012.

19.        The Authority has made the following investments for the period 1st April 2011 to 30th September 2011  as set out below:-  

 

Borrowing

Institution

Opening Balance

Invested

Returned

Closing Balance

 

01/04/2011

30/09/2011

 

£’000

£’000

£’000

£’000

 

Barclays Bank

 

 

6,564

264

0

6,828

Debt Management Account Deposit Facility

95,800

724,725

(713,402)

107,123

 

Totals

102,364

724,989

(713,402)

113,951

 

 

 

 

20.        Interest, at an average rate of 0.27% and amounting to £139,400 has been earned from these investments for the first 6 months of 2011/2012.

21.        There continue to be uncertainties and pressures in the financial markets. In particular, the credit rating agency Fitch has placed Barclays Bank on Rating Watch Negative, which has raised the possibility of the bank's credit rating being downgraded below the Authority's rating criteria. The Director of Finance ICT and Property has reviewed the investment the Authority has with the Bank and it was considered appropriate at this time to withdraw the investment at no cost to the Authority (leaving a small balance to keep the account open). The withdrawal took place on the 24th October 2011 and deposited with the Debt Management Account Deposit Facility.

 

Amendment to Investment Strategy

22.        The Authority currently requires certain investment counterparties to hold an individual rating from Fitch Ratings of 'B' or higher. However Fitch is withdrawing its individual ratings in December 2011. The Authority is therefore recommended to amend its counterparty selection criteria, removing the reference to individual ratings.

23.        The Director of Finance, ICT and Property will continue to monitor the position in respect of all of the Authority's investments

Debt Management Strategy

24.        In light of the very low level of short term investment interest rates currently available, internal funds have been used to finance capital expenditure and no external loans have been borrowed to date this year.

Treasury Management Indicators

25.        The Authority measures its exposure to treasury management risks using the following indicators. Council is asked to note the following indicators as at 30th September 2011.

Interest Rate Exposure

·               This indicator is set to control the Authority's exposure to interest rate risk. The exposures  to fixed and variable rate interest rates, expressed as an amount of net principal borrowed were:

 

Limit

Actual

Met

Upper limit on fixed rate exposures

      139m

96.88m

         YES

Upper limit on variable rate exposures

+/- 144m

-107.84m

          YES

 

Fixed rate investments and borrowings are those where the rate of interest is fixed for the whole financial year.  Instruments that either mature during the financial year or have a floating interest rate are classed as variable rate.

Maturity Structure of Borrowing

·               This indicator is set to control the Authority's exposure to refinancing risk. The maturity date of borrowing is the earliest date on which the lender can demand repayment. The maturity structure of fixed rate borrowing as at 30th September 2011 was:

 

 

Upper Limit

Lower Limit

Actual

Met

Under 12 months

20%

0

0.9%

YES

12 months and within 24 months

20%

0

4.6%

YES

24 months and within five years

30%

0

7.7%

YES

Five years and within 10 years

30%

0

6.8%

YES

10 years and above

100%

0

80.0%

YES

 

Principal Sums Invested for Periods Longer than 364 Days

·               This indicator is to control the Council’s exposure to the risk of incurring losses by seeking early repayment of its investments.  The total principal sums invested to final maturities beyond the period end were:

 

 

2011/12

2012/13

2013/14

Limit on principal invested beyond year end

£30M

£30M

£30M

Actual principal invested beyond year end

0

0

0

Within limit?

ü

ü

YES

 

Resource Implications (Financial and Employment and Climate Change if appropriate)

26.        Money is borrowed for capital purposes and interest is charged to revenue accounts.

Legal Implications (to Include Human Rights Implications)

27.        Compliance with the Local Government Act 2003 and CIPFA’s “Code of Practice for Treasury Management in the Public Services” is mandatory.  

Crime and Disorder Implications

28.        There are no crime and disorder implications resulting from this report

Equal Opportunities Implications (to include Welsh Language issues)

29.        There are no equality implications resulting from this report.

Corporate/Service Objectives

30.        This meets the objective to provide effective treasury management. This is linked to the corporate objectives generally in that any savings made can be used to assist other services in meeting their objectives

Policy Framework and Budget

31.        This report needs to be referred to Council.

Consultation (including Ward Member Consultation)

32.        None.

Relevant Scrutiny Committee

33.        Corporate Resources.

Background Papers

CIPFA’s  “Code of Practice for Treasury Management in the Public Services”,  “The Prudential Code” and WG proposed guidance on local authority investments

Contact Officer

Robert Ingram, Principal Accountant.

Tel (01446 709252)

 

Responsible Officer:

SIANDAVIES

Director of Finance ICT & Property

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