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Agenda Item No

 

The Vale of Glamorgan Council

 

Cabinet Meeting 9th July 2012

 

Report of the Leader

 

Treasury Management

 

Purpose of the Report

1.             To present to Cabinet the annual review report on Treasury Management 2011/12.

Recommendations

1.             That Cabinet accept the report on Treasury Management 2011/12 and that the report be referred to Council for approval.

Reasons for the Recommendations

1.             To accept and refer the report to Council.

 

Background

2.             In March 2012 the Council adopted the 2011 edition of the CIPFA Treasury Management in the Public Services: Code of Practice, which requires the Council 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. 

3.             This annual treasury report has been prepared as required and covers:

·               the economy / interest rates in 2011/12;

·               the strategy for  2011/12;

·               the borrowing outturn for 2011/12;

·               investment outturn for 2011/12;

·               Prudential Indicators;

The Economy / Interest Rates in 2011/12

4.             The following information has been prepared by the Authority's Treasury Management adviser, it sets out the changing conditions under which Treasury Management operations were carried out.

5.             The Eurozone debt crisis dominated the financial year 2011/12.  The apparent inability of leaders to either agree on remedial policies or implement fiscal consolidation measures prompted frequent bouts of market volatility, exacerbated by multiple sovereign rating downgrades, as investors positioned themselves for potential government defaults or even the breakup of the Eurozone itself.  Investor confidence in struggling Eurozone nations decreased, prompting sharp upward movements in government borrowing rates. 

6.             Exposure to the Eurozone and new regulation reducing the probability of government support placed downward pressure on the creditworthiness of many European banks, prompting a raft of credit rating downgrades.

7.             The European Central Bank (ECB) pulled the Eurozone back from the brink in late December.  The central bank cut interest rates and flooded the Eurozone banking sector with cheap long-term loans, immediately reducing the near-term risk of a liquidity crisis and temporarily calming financial markets.  The action had a marked impact on Eurozone wholesale interbank lending rates; 3-month Euribor declined from 1.34% at the start of December to 0.77% at the end of March.  The decline in funding rates for UK banks was less significant, but 3-month LIBOR still fell from 1.08% to 1.03%.  Unfortunately, the ECB action could not prevent the debt crisis causing a sharp decline in household and business confidence, eventually pushing the Eurozone into recession.

8.             The UK’s reliance on the Eurozone as a major trading partner was illustrated when the country followed the Eurozone into recession over the last six months of the financial year. 

9.             Weakening economic growth and signs of further deterioration in the Eurozone prompted the Bank of England to loosen monetary policy in October, despite above target inflation.  With Bank Rate already at 0.5%, the Monetary Policy Committee (MPC) voted for a further £50bn of Quantitative Easing (QE), which, helped push gilt yields to record lows over the next few months. The action was justified as they were confident inflation would fall quickly back to target during 2012.  However, although the annual Consumer Price Index (CPI) rate declined from the September peak of 5.2%, the May 2012 CPI stands at 2.8%.

Key figures 2011/12

GDP growth (quarter-on-quarter):

Region

Q1

Q2

Q3

Q4

UK

-0.1%

0.6%

-0.3%

-0.2%

Eurozone

0.2%

0.2%

-0.3%

0.0%

US

0.3%

0.4%

0.7%

0.5%

 

CPI inflation rate (annual):

Region

April 11

September 11

March 12

UK

4.5%

5.2%

3.5%

Eurozone

2.8%

3.0%

2.7%

US

3.1%

3.9%

2.6%

 

Treasury Management Strategy 2011/12

10.        The Director of Finance, ICT and Property continued to adopt a cautious approach with respect to Treasury Management operations. The Council's primary objectives for the management of its investments are to give priority to the security and liquidity of its funds before seeking the best rate of return. This being the case the Authority continued to place the majority of its funds with the 'Debt Management Account Deposit Facility' (DMADF) as these deposits are guaranteed by the British Government, although the interest rate is lower than some commercial banks.

11.        Funds not placed in the DMADF were placed with Barclays Bank PLC in a ''Fixed Interest Bearing Current Account''. This investment attracted a slightly more favourable rate of return and had the benefit of instant access to funds deposited therefore security is compromised to the very minimum.

12.        The Council's primary objective for the management of its debt is to ensure its long term affordability. The majority of its loans have therefore been borrowed from the Public Works Loan Board at long term fixed rates of interest. In 2011/12 the Council continued to finance its capital expenditure from internal resources rather than borrow externally. The potential reduction of the Councils investments balances at times of elevated credit risk was considered the most prudent option available to the Authority.

13.        Council approved the Treasury Management Strategy for 2011/12 at its meeting on the 28th February 2011. The Director of Finance, ICT and Property advises that all treasury management activity undertaken during the financial year complied with the approved strategy, the CIPFA Code of Practice, and the relevant legislative provisions.

 

Borrowing Out-turn 2011/12

 

14.        During 2011/12 £4,620,000 of internal funds was used in the financing of capital expenditure. An average rate of interest was charged to reflect the use of capital resources. The total charges for interest and principal during the year 2011/12 were £5,857,522 and £4,613,953 respectively. An original estimate of 5.18% had been included in the estimates for 2011/12. The actual rate was 5.05%.

15.        The Council’s external debt as at the 31st March 2012 (excluding accrued interest) was £102.081 million (1st April 2011 £102.988 million). This can be summarised as follows:

 

 

Opening

Balance

01.04.2011 £’000

Received

£’000

Repaid

£’000

Closing

Balance

31.03.2012£’000

 

P.W.L.B.

96,878

0

(901)

95,977

 

Market Loans

6,000

0

0

6,000

 

Bonds

10

0

(6)

4

 

Temporary Loans

100

0

0

100

 

Total

102,988

0

(907)

102,081

 

 

·               Loans borrowed from the Public Works Loan Board (PWLB) are intended to assist Local Authorities in meeting their longer term borrowing requirements. The average interest rate on all the Authority’s outstanding PWLB debt has moved over the course of the year from 5.658% to 5.649%.

·               Market loans represent those non-PWLB loans that are repayable at least 1 year or more from the date they are advanced. The debt is a market loan, £2,000,000 of which will mature on the 8th November 2021 and £4,000,000 will mature on the 23rd February 2054. The average interest rate on the Authority’s outstanding market loans is 5.322%

·               Local bonds are issued to members of the public who wish to invest in the Authority. Two bonds were repaid on maturity during 2011/12. The average interest rate on the Authority’s outstanding local bond debt is 1.30%.

·               Temporary Loans represent loans that have no fixed maturity date. Current loans have been borrowed from The Vale of Glamorgan Welsh Church Act Fund. Interest is calculated on a monthly basis using the average of the "7 day local government offered rate". The interest rates on the Authority’s outstanding temporary loans ranged from 0.35% - 0.45% during 2011/12.

Investment Out-turn for 2011/12

16.        Internally Managed Investments – The Authority manages investments in-house and is able to invest with those institutions who as a minimum meet the credit rating criteria and therefore would be included in the approved lending list. The Authority can invest for a range of periods from overnight to 364 days, dependent on its cash flows, its interest rate view and the interest rates / periods on offer. 

17.        Investment movements for 2011/12 (excluding accrued interest) are summarised as follows:-

 

Opening

Balance

1.04.2011 £’000

Invested

£’000

Repaid

£’000

Closing

Balance

31.03.2012£’000

 

 

 

 

 

Banks and Building Societies

6,564

302

(6,866)

0

 

Debt Management Account Deposit Facility

95,800

1,467,825

(1,463,625)

100,000

 

Local Authorities

0

7,000

(3,000)

4,000

Total

102,364

1,475,127

(1,473,491)

104,000

 

18.        The continuing market uncertainties resulted in the majority of available funds still being re - invested in the DMADF for a period of overnight to a maximum of 6 months. Monies had been the invested with Barclays Bank PLC in a ''Fixed Interest Bearing Current Account''. This deposit attracted a slightly more favourable return while allowing instant access to funds. However October 2011 saw the reappraisal of the creditworthiness of the bank by the credit rating agencies, this resulted in the bank no longer satisfying the criteria required by the Authority for investment purposes and all funds were withdrawn. The Authority during the year placed a small number of deposits with Local Authorities.

19.        Debt Management Account Deposit Facility - The Authority placed the majority of all surplus funds in the DMADF, which is guaranteed by the British Government. The maturity dates of these investments ranged from overnight to a maximum of period of 6 months. The Authority made a return of £280,277at a rate of 0.25% pa on these investments.      

20.        Banks and Building Societies - Some funds were placed with Barclays Bank PLC in a ''Fixed Interest Bearing Current Account" but were withdrawn following the downgrading of its credit rating. The Authority made a return of £40,167 at a rate of 0.58% pa on this investment.

21.        Local Authorities - During the year a small number of deposits were placed with local authorities. The Authority made a return on these investments of £4,493 at a rate of 0.37%

22.        The overall return on investments for 20011/12 was 0.26%.

23.        The Director of Finance ICT and Property will continue to keep the borrowing / investment strategy under review.

Prudential Indicators

24.        The Council is asked to note the Prudential Indicators shown in appendix 1.

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

25.        As set out in this report

Legal Implications (to Include Human Rights Implications)

26.        As set out in this report

Crime and Disorder Implications

27.        There are no crime and disorder implications.

Equal Opportunities Implications (to include Welsh Language issues)

28.        There are no equal opportunity implications.

Corporate/Service Objectives

29.        Provide  sound  financial  and reliable advice in relation to all issues affecting the Council

Policy Framework and Budget

30.        The report  will be forwarded to Council for approval

Consultation (including Ward Member Consultation)

31.        The appropriate Chief Officers have been consulted on this report. This report does not require Ward Member consultation. 

Relevant Scrutiny Committee

32.        Corporate Resources

Background Papers

None

 

Contact Officer

Robert Ingram Principal Accountant (01446) 709252

 

Officers Consulted

All appropriate Chief Officers have been consulted on the contents of this report.

 

Responsible Officer:

Sian Davies Director of Finance ICT and Property (01446) 709202