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Agenda Item No

 

The Vale of Glamorgan Council

 

Cabinet Meeting: 28 July, 2014

 

Report of the Leader

 

Treasury Management

 

Purpose of the Report

1.         To present to Cabinet the annual review report on Treasury Management 2013/14.

Recommendations

1.         That Cabinet accept the annual report on Treasury Management 2013/14 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 2013/14;

·               the strategy for  2013/14;

·               the borrowing outturn for 2013/14;

·               investment outturn for 2013/14;

·               compliance with treasury limits and Prudential Indicators;

 

The Economy / Interest Rates in 2013/14

 

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.         At the beginning of 2013-14 financial year markets were concerned about lacklustre growth in the Eurozone, the UK and Japan. Lack of growth in the UK economy, was a concern for the Bank of England’s Monetary Policy Committee.  Only two major economies – the US and Germany – had growth above pre financial crisis levels, albeit these were still below trend.

6.         The Bank of England unveiled forward guidance in August pledging to not consider raising interest rates until the International Labour Organisation (ILO) unemployment rate fell below the 7% threshold. In the Bank’s initial forecast, this level was only expected to be reached in 2016.  Although the Bank stressed that this level was a threshold for consideration of rate increase rather an automatic trigger, markets began pricing in a much earlier rise than was warranted and, as a result, gilt yields rose aggressively.  

7.         The recovery in the UK surprised with strong economic activity and growth. Q4 2014 Gross Domestic Product showed year-on-year growth of 2.7%. Much of the improvement was down to the dominant service sector and an increase in household consumption buoyed by the pick-up in housing transactions which were driven by higher consumer confidence, greater availability of credit and strengthening house prices.

8.         The Consumer Price Index (CPI) fell from 2.8% in March 2013 to 1.7% in February 2014, the lowest rate since October 2009, helped largely by the easing commodity prices and discounting by retailers, reducing the pressure on the Bank to raise rates.  The fall in unemployment (down from 7.8% in March 2013 to 7.2% in January 2014) was faster than the Bank of England had forecast. Importantly, average earnings growth remained muted and real wage growth (i.e. after inflation) was negative. The Bank also implied that when official interest rates were raised, the increases would be gradual – this helped underpin the ‘low for longer’ interest rate outlook despite the momentum in the economy. 

9.         The Office of Budget Responsibility’s 2.7% forecast for economic growth in 2014 forecast a quicker fall in public borrowing over the next few years.

10.      The Federal Reserve’s announcement in May that their Quantitative Easing (QE) programme may be ‘tapered’ caught markets by surprise. Investors began to factor in not just an end to QE but also rapid rises in interest rates.  ‘Tapering’ (a slowing in the rate of QE) began in December 2013. By March 2014 there was an expectation that QE would end by October 2014. This had particular implications for global markets which had hitherto benefited from, and got very accustomed to, the high levels of global liquidity afforded by QE.

11.      With the Eurozone struggling to show sustainable growth, the European Central Bank (ECB) cut main policy interest rates by 0.25% to 0.25% and the deposit rate to zero. Markets were disappointed by the lack of action by the ECB despite CPI inflation below 1% and a looming threat of deflation. 

12.      Gilt yields ended the year higher than the start in April. The peak in yields was during autumn 2013. The biggest increase was in 5-year gilt yields which increased by nearly 1.3% from 0.70% to 1.97%. 10-year gilt yields rose by nearly 1% ending the year at 2.73%.  The increase was less pronounced for longer dated gilts; 20-year yields rose from 2.74% to 3.37% and 50-year yields rose from 3.23% to 3.44%. 

13.      3-month, 6-month and 12-month Libid rates remained at levels below 1% through the year.

   

Treasury Management Strategy 2013/14

 

14.      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.

15.      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.

16.      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 2013/14 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 at this time.

17.      Council approved the Treasury Management Strategy for 2013/14 at its meeting on the 25th February 2013. 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 2013/14

 

18.      During 2013/14 £3,561,000 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 2013/14 were £5,422,865 and £5,501,363 respectively. An original estimate of 5.18% revised down to 4.92% had been included in the estimates for 2013/14. The actual rate was 4.73%.

19.      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 2.82%. The total charge for interest and principal for 2013/2014 on prudential borrowing was £130,612 & £167,993 respectively.

20.      The Council’s external debt as at the 31st March 2014 (excluding accrued interest) was £95.369 million (1st April 2013 £97.626 million). This can be summarised as follows:

 

 

Opening

Balance

01.04.2013 £’000

Received

 

£’000

 

Repaid

 

£’000

Closing

Balance

31.03.2014£’000

 

 

 

 

 

P.W.L.B.

91,524

0

(2,257)

89,267

 

 

 

 

 

Market Loans

6,000

0

               0

 

6,000

 

 

 

 

 

Bonds

2

0

0

 

2

 

 

 

 

 

Temporary Loans

100

0

0

100

 

 

 

 

 

Total

97,626

0

(2,257)

95,369

 

 

 

 

 

 

·               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 5.622% to 5.627%.

·               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.  There were no bond maturities 2013/14. 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 7 Day Rate". The interest rates payable on the Authority’s outstanding temporary loans ranged from 0.44% - 0.51% during 2013/14.

Investment Out-turn for 2013/14

 

21.      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 short term 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.   

 

 

22.      Investment movements for 2013/14 (excluding accrued interest) are summarised as follows:-

 

Opening

Balance

1.04.2013 £000

Invested

 

£’000

 

Repaid

 

£’000

Closing

Balance

31.03.2014£’000

 

 

 

 

 

Debt Management Account Deposit Facility

74,450

1,485,575

(1,488,475)

71,550

 

 

 

 

 

Local Authorities

16,000

45,700

(37,700)

24,000

Total

90,450

1,531,275

(1,526,175)

95,550

 

 

 

 

 

23.      The continuing market uncertainties resulted in the majority of available funds still being invested in the DMADF.

24.      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 £217,757 at a rate of 0.25% pa on these investments.      

25.      Local Authorities - During the year some deposits were placed with local authorities. The Authority made a return on these investments of £54,532 at a rate of 0.3718%

26.      The overall return on investments for 2013/14 was 0.2729%.

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

Treasury Limits and Prudential Indicators

28.      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)

29.      As set out in this report

Sustainability and Climate Change Implications

30.       There are no sustainability and climate change implications.

Legal Implications (to Include Human Rights Implications)

31.      As set out in this report

Crime and Disorder Implications

32.      There are no crime and disorder implications.

Equal Opportunities Implications (to include Welsh Language issues)

33.      There are no equal opportunity implications.

Corporate/Service Objectives

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

Policy Framework and Budget

35.      The report  will be forwarded to Council for approval

Consultation (including Ward Member Consultation)

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

Relevant Scrutiny Committee

37.      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:

Section 151 Officer (01446) 709254

 

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