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The Vale of Glamorgan Council

Cabinet Report 16th November 2015

Report of the Leader

Treasury Management

Purpose of the Report

  1. To provide a mid year report on the Authority's treasury management operations for the period 1st April 2015 to 30th September 2015 which is a requirement of the 2011 edition of the CIPFA Treasury Management in the Public Services: Code of Practice.

Recommendations

  1. That the Treasury Management mid year report for the period 1st April 2015 to 30th September 2015 be noted.
  2. The latest Treasury Management Indicators are noted.
  3. That this report be forwarded to the next Scrutiny Committee (Corporate Resources) for information.

Reasons for the Recommendations

  1. To present the Treasury Management mid year report as required by the CIPFA Treasury Management in the Public Services: Code of Practice.
  2. To present an update of the Treasury Management Indicators which are included in the treasury management strategy.
  3. To present this report to the next Scrutiny Committee (Corporate Resources) for information.

Background

  1. On 7th March 2012, Council adopted the 2011 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.
  2. 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 2015-2016

  1. Council approved the 2015/2016 treasury management strategy at its meeting on 5th March 2015.
  2. 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.
  3. The Authority's existing borrowing strategy estimated that it will borrow £21,068,000 of new loans to support the capital programme for 2015-2016. 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.
  4. The Authority has borrowed an additional £63,155,896 to finance the Housing Revenue Account Subsidy (HRAS) buyout at a predetermined range of rates specified by HM Treasury, during 2015-2016.
  5. The Head of Finance (Section 151 Officer) 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

  1. This section of the report has been provided by the Councils Treasury advisors:-
  2. Economic data at the start of the year was largely overshadowed by events in Greece. The country's politicians and the representatives of its creditors - the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) struggled to come to an agreement. The European Central Bank froze liquidity assistance provided to Greek banks and capital controls within the country, severely restricted individuals' and corporates' access to cash. On 12th July, following a weekend European Union Summit, it was announced that the terms for a third bailout of Greece had been reached. Alexis Tsipras resigned from his post as Prime Minster of Greece after just eight months in office by calling a snap election, held on 20th September. Tsipras led his party to victory once again, although a coalition was needed for a slim parliamentary majority. That government must now continue with the task of guiding Greece through the continuing economic crisis.
  3. Chinese authorities intensified their intervention in the markets in an attempt to maintain market confidence. They surprised global markets in August when the People's Bank of China changed the way the yuan is fixed each day against the US dollar and allowed an aggressive devaluation of the currency. This impacted on currencies, equities, commodities, oil and metals throughout Asian, European and US markets. Chinese stocks have recovered marginally since and are trading around the same level as the start of the year. Concerns remain about slowing growth and potential deflationary effects.
  4. The UK Economy: has remained resilient over the last six months. Although economic growth slowed in Q1 year on year growth to March 2015 was relatively healthy, Q2 2015 Gross Domestic Product (GDP) growth bounced back with year on year growth showing slight signs of slowing. GDP has now increased for ten consecutive quarters, breaking a pattern of slow and erratic growth from 2009. The annual rate for consumer price inflation (CPI) briefly turned negative in April, before fluctuating between 0.0% and 0.1% over the next few months. In the August Quarterly Inflation Report, the Bank of England projected that GDP growth will continue. The Bank of England has projected inflation to gradually increase to around 2% over the next 18 months and then remain there in the near future. Further improvement in the labour market saw the International Labour Organisation unemployment rate to July, fall and average earnings excluding bonuses for the three months to July rise. The Monetary Policy Commission made no change to the Bank Rate of 0.5% and maintained asset purchases at £375 billion.
  5. The outcome of the UK general election saw some very big shifts in the political landscape and put the key issue of the UK's relationship with the EU at the heart of future politics.
  6. The US economy slowed to 0.6% in Q1 2015 due to bad weather, spending cuts by energy firms and the effects of a strong dollar. However, Q2 GDP showed a large improvement. This was largely due to a broad recovery in corporate investment alongside a stronger performance from consumer and government spending and construction and exports. The Federal Committee decided not to act at its September meeting as many had been anticipating but have signalled rates rising before the end of the year.

Interim Report

  1. 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

01/04/2015

£'000

Received

 

£'000

Repaid

 

£'000

Closing Balance

30/09/2015

£'000

 
 
         

PWLB

90,266

63,156

(694)

152,728

Other Long Term Loans

6,002

0

0

6,002

Temporary Loans

100

0

0

100

Totals

96,368

63,156

(694)

158,830

  • 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. The loans taken out for the HRAS buyout were at a predetermined range of rates specified by HM Treasury.
  • 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 £2,000 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.
  1. External interest at an average rate of 4.88% and amounting to £3,729,592 has been paid on these loans during the first 6 months of 2015/2016.
  2. The Authority has made the following investments for the period 1st April 2015 to 30th September 2015 as set out below:-

Borrowing

Institution

Opening Balance

01/04/2015

£'000

Invested

 

£'000

Returned

 

£'000

Closing Balance

30/09/2015

£'000

 
 

UK Local Authorities

30,000

42,000

(27,000)

45,000

Debt Management Office

51,125

765,905

(776,830)

40,200

Totals

81,125

807,905

(803,830)

85,200

  1. Interest, at an average rate of 0.33% and amounting to £115,755, has been received from these investments for the first 6 months of 2015/2016.

  Investment Strategy

  1. As can be seen from the table above the Authority has invested with the Debt Management Office (DMO) or UK Local Authorities. This strategy is considered prudent considering the continuing pressures in the financial markets. The Head of Finance (Section 151 Officer) will always have regard to the security and liquidity of the investments before seeking the highest rate of return, or yield.

Debt Management Strategy

  1. In light of the very low level of short term investment interest rates currently available, internal funds have continued to be used to finance capital expenditure to date. External funds have only been borrowed to finance the HRAS buy out earlier this year. Given the significant level of borrowing in the Capital Programme borrowing arrangements will need to be kept under review.

Treasury Management Indicators

  1. 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 2015.

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

251m

159m

Yes

Upper limit on variable rate exposures

+/- 146m

-91m

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 2015 was:
 

Upper Limit

Lower Limit

Actual

Met

Under 12 months

20%

0%

1.21%

Yes

12 months and within 24 months

20%

0%

1.36%

Yes

24 months and within five years

30%

0%

16.90%

Yes

Five years and within 10 years

40%

0%

20.78%

Yes

10 years and above

100%

0%

59.75%

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 long term investments. The total principal sums invested to final maturities beyond the period end were:
 

2015/16

2016/17

2017/18

Limit on principal invested beyond year end

£30M

£30M

£30M

Actual principal invested beyond year end

0

0

0

Within limit?

Yes

Yes

Yes

Resource Implications (Financial and Employment)

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

Sustainability and Climate Change Implications

  1. There are no direct implications arising from the report.

Legal Implications (to Include Human Rights Implications)

  1. 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

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

Equal Opportunities Implications (to include Welsh Language issues)

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

Corporate/Service Objectives

  1. 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

  1. This report needs to be referred to Council for approval.

Consultation (including Ward Member Consultation)

  1. None.

Background Papers

CIPFA's "Code of Practice for Treasury Management in the Public Services", "The Prudential Code" and WG guidance on local authority investments

Contact Officer

Gemma Jones, Principal Accountant.

Tel (01446 709152)

Responsible Officer:

Carys Lord

Section 151 Officer

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