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Agenda Item No

The Vale of Glamorgan Council

 

Cabinet Meeting: 29 July 2013

 

Report of the Leader

 

Treasury Management

 

Purpose of the Report

1.         To present to Cabinet the annual review report on Treasury Management 2012/13.

Recommendations

1.         That Cabinet accept the report on Treasury Management 2012/13 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 2012/13;

·               the strategy for  2012/13;

·               the borrowing outturn for 2012/13;

·               investment outturn for 2012/13;

·               compliance with treasury limits and Prudential Indicators;

 

The Economy / Interest Rates in 2012/13

 

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 global outlook stabilised mainly due to central banks maintaining low interest rates and expansionary monetary policy for an extended period. Equity market assets recovered sharply with the FTSE 100 registering a 9.1% increase over the year. This was despite economic growth in G-7 nations being either muted or disappointing.

6.         In the UK the economy shrank in the first, second and fourth quarters of calendar 2012.  It was the impressive 0.9% growth in the third quarter, aided by the summer Olympic Games, which allowed growth to register 0.2% over the calendar year 2012. The expected boost to net trade from the fall in the value of sterling did not materialise, but raised the price of imports, especially low margin goods such as food and energy. Avoiding another recession became contingent on upbeat services sector surveys translating into sufficient economic activity to overhaul contractions in the struggling manufacturing and construction sectors.  

7.         Household financial conditions and purchasing power were constrained as wage growth remained subdued at 1.2% and was outstripped by inflation. Annual CPI dipped below 3%, falling to 2.4% in June before ticking up to 2.8% in February 2013. Higher food and energy prices and higher transport costs were some of the principal contributors to inflation remaining above the Bank of England’s 2% CPI target.  

8.         The lack of growth and the fall in inflation were persuasive enough for the Bank of England to maintain the Bank Rate at 0.5% and also sanction additional £50 billion asset purchases (QE) in July, taking total QE to £375 billion. The possibility of a rate cut was discussed at some of Bank’s Monetary Policy Committee meetings, but was not implemented as the potential drawbacks outweighed the benefits of a reduction in the Bank Rate. In the March Budget the Bank’s policy was revised to include the 2% CPI inflation remit alongside the flexibility to commit to intermediate targets.

9.         The resilience of the labour market, with the ILO unemployment rate falling to 7.8%, was the main surprise given the challenging economic backdrop. Many of the gains in employment were through an increase in self-employment and part time working.

10.      The Chancellor largely stuck to his fiscal plans with the austerity drive extending into 2018. In March the Office for Budgetary Responsibility (OBR) halved its forecast growth in 2013 to 0.6% which then resulted in the lowering of the forecast for tax revenues and an increase in the budget deficit. The government is now expected to borrow an additional £146bn and sees gross debt rising above 100% of GDP by 2015-16. The fall in debt as a percentage of GDP, which the coalition had targeted for 2015-16, was pushed two years beyond this horizon. With the national debt metrics out of kilter with a triple-A rating, it was not surprising that the UK’s sovereign rating was downgraded by Moody’s to Aa1. The AAA status was maintained by Fitch and S&P, albeit with a Rating Watch Negative and with a Negative Outlook respectively.

11.      The government’s Funding for Lending (FLS) initiative commenced in August which gave banks access to cheaper funding on the basis that it would then result in them passing this advantage to the wider economy. There was an improvement in the flow of credit to mortgagees, but was still below expectation for SMEs. 

12.      The big four banks in the UK – Barclays, RBS, Lloyds and HSBC – and several other global institutions including JP Morgan, Citibank, Rabobank, UBS, Credit Suisse and Deutsche came under investigation in the Libor rigging scandal which led to fines by and settlements with UK and US regulators.  Banks’ share prices recovered after the initial setback when the news first hit the headlines.

13.      Europe: The Euro region suffered a further period of stress when Italian and Spanish government borrowing costs rose sharply and Spain was also forced to officially seek a bailout for its domestic banks. Markets were becalmed after the ECB’s declaration that it would do whatever it takes to stabilise the Eurozone and the central bank’s announcement in September of its Outright Monetary Transactions (OMT) facility, buying time for the necessary fiscal adjustments required. Neither the Italian elections which resulted in political gridlock nor the poorly-managed bailout of Cyprus which necessitated 'bailing-in’ non-guaranteed depositors proved sufficient for a market downturn.  Growth was hindered by the rebalancing processes under way in Euroland economies, most of which contracted in Q4 2012.

14.      US: The US Federal Reserve extended quantitative easing through 'Operation Twist’, in which it buys longer-dated bonds with the proceeds of shorter-dated US Treasuries. The Federal Reserve shifted policy to focus on the jobless rate with a pledge to keep rates low until unemployment falls below 6.5%. The country’s extended fiscal and debt ceiling negotiations remained unresolved.

15.      Gilt Yields and Money Market Rates: Gilt yields ended the year lower than the start in April. By September the 2-year gilt yield had fallen to 0.06%, raising the prospect that short-dated yields could turn negative. 10-year yields fell by nearly 0.5% ending the year at 1.72%. The reduction was less pronounced at the longer end; 30-year yields ended the year at 3.11%, around 25bp lower than in April. Despite the likelihood the DMO would revise up its gilt issuance for 2012/13, there were several gilt-supportive factors: the Bank of England’s continued purchases of gilts under an extended QE programme; purchases by banks, insurance companies and pension funds driven by capital requirements and the preference for safe harbour government bonds.  

16.      One direct consequence of the Funding for Lending Scheme was the sharp drop in rates at which banks borrowed from local government. 3-month, 6-month and 12-month Libid rates which were 1%, 1.33% and 1.84% at the beginning of the financial year fell to 0.44%, 0.51% and 0.75% respectively.  

 

Date

Bank Rate

O/N LIBID

7-day LIBID

1-month LIBID

3-month LIBID

6-month LIBID

12-month LIBID

2-yr SWAP Bid

3-yr SWAP Bid

5-yr SWAP Bid

01/04/2012

0.50

0.55

0.55

0.61

1.00

1.33

1.84

1.24

1.30

1.59

30/04/2012

0.50

0.50

0.65

0.60

0.99

1.32

1.84

1.35

1.43

1.68

31/05/2012

0.50

0.48

0.65

0.57

0.97

1.30

1.82

1.20

1.20

1.34

30/06/2012

0.50

0.50

0.50

0.55

0.83

1.13

1.65

0.96

0.99

1.25

31/07/2012

0.50

0.50

0.65

0.45

0.63

0.92

1.43

0.76

0.77

1.02

31/08/2012

0.50

0.50

0.52

0.40

0.57

0.81

1.23

0.75

0.78

1.01

30/09/2012

0.50

0.25

0.52

0.40

0.47

0.66

0.95

0.70

0.76

1.00

31/10/2012

0.50

0.25

0.44

0.40

0.44

0.55

0.82

0.69

0.77

1.05

30/11/2012

0.50

0.25

0.30

0.40

0.44

0.54

0.80

0.73

0.80

1.05

31/12/2012

0.50

0.25

0.43

0.40

0.44

0.54

0.80

0.69

0.76

1.00

31/01/2013

0.50

0.42

0.43

0.40

0.44

0.54

0.80

0.73

0.86

1.17

29/02/2013

0.50

0.41

0.42

0.40

0.44

0.54

0.80

0.59

0.69

1.05

31/03/2013

0.50

0.40

0.40

0.40

0.44

0.51

0.75

0.59

0.68

0.97

 

 

 

 

 

 

 

 

 

 

 

Minimum

0.50

0.25

0.30

0.40

0.44

0.51

0.75

0.55

0.65

0.90

Average

0.50

0.39

0.49

0.45

0.62

0.82

1.19

0.84

0.90

1.17

Maximum

0.50

0.55

0.65

0.61

1.00

1.33

1.84

1.38

1.45

1.72

Spread

--

 

 

 

 

 

 

 

 

 

Treasury Management Strategy 2012/13

17.      The Section 151 Officer 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.

18.      Funds not placed in the DMADF were placed with other Local Authorities. These investments attract a slightly more favourable rate of return but still give priority to the security of funds invested..

19.      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 2012/13 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.

20.      Council approved the Treasury Management Strategy for 2012/13 at its meeting on the 25th February 2012. The Section 151 Officer 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 2012/13

 

21.      During 2012/13 £4,325,000 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 2012/13 were £5,702,223 and £4,622,182 respectively. An original estimate of 5.09% had been included in the estimates for 2012/13. The actual rate was 4.93%.

22.      In addition the Authority internally financed prudential borrowing totalling £2,230,000. The loan was raised under the "Local Government Borrowing Initiative" which authorises funding for improving the road surfaces of the road network of the Authority. The interest rate on this loan was 3.21%.

23.      The Council’s external debt as at the 31st March 2013 (excluding accrued interest) was £97.626 million (1st April 2012 £102.081 million). This can be summarised as follows:

 

 

 

 

 

Opening

Balance

01.04.2012 £’000

Received

 

£’000

 

Repaid

 

£’000

Closing

Balance

31.03.2013£’000

 

 

 

 

 

P.W.L.B.

95,977

0

4,453

91,524

 

 

 

 

 

Market Loans

6,000

0

               0

 

6,000

 

 

 

 

 

Bonds

4

0

2

2

 

 

 

 

 

Temporary Loans

100

0

0

100

 

 

 

 

 

Total

102,081

0

4,455

97,626

 

 

 

 

 

·               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 5.649% to 5.622%.

·               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.  One bond was repaid on maturity during 2012/13. 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 0.31% - 0.35% during 2012/13.

Investment Out-turn for 2012/13

 

24.      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.   

25.      Investment movements for 2012/13 (excluding accrued interest) are summarised as follows:-

 

 

 

 

Opening

Balance

1.04.2012 £’000

Invested

 

£’000

 

Repaid

 

£’000

Closing

Balance

31.03.2013£’000

 

 

 

 

 

Debt Management Account Deposit Facility

100,000

1,343,400

1,368,950

74,450

 

 

 

 

 

Local Authorities

4,000

16,000

4,000

16,000

Total

104,000

1,359,400

1,372,950

90,450

 

 

 

 

 

26.      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

27.      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 £285,518 at a rate of 0.25% pa on these investments.      

28.      Local Authorities - During the year a small number of deposits were placed with local authorities. The Authority made a return on these investments of £6,463 at a rate of 0.3563%

29.      The overall return on investments for 2012/13 was 0.2517%.

30.      The Section 151 Officer will continue to keep the borrowing / investment strategy under review.

Treasury Limits and Prudential Indicators

31.      During the financial year the Authority operated within the treasury limits set out in the Council’s Treasury Policy Statement and annual Treasury Strategy Statement. The Council is asked to note the Prudential Indicators shown in appendix 1.

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

32.      As set out in this report

Legal Implications (to Include Human Rights Implications)

33.      As set out in this report

Crime and Disorder Implications

34.      There are no crime and disorder implications.

Equal Opportunities Implications (to include Welsh Language issues)

35.      There are no equal opportunity implications.

Corporate/Service Objectives

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

Policy Framework and Budget

37.      The report  will be forwarded to Council for approval.

Consultation (including Ward Member Consultation)

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

Relevant Scrutiny Committee

39.      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

 

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