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Agenda Item No. 6(d)

 

THE VALE OF GLAMORGAN COUNCIL

 

COUNCIL: 7TH DECEMBER, 2011

 

REFERENCE FROM CABINET: 16TH NOVEMBER, 2011

 

 

C1508           TREASURY MANAGEMENT (L) (SCRUTINY - CORPORATE RESOURCES) -

 

Cabinet received an mid year report on the Authority’s treasury management operations for the period 1st April 2011 to 30th September 2011 which was required by the 2009 edition of the CIPFA Treasury Management in the Public Services: Code of Practice.

 

The Council had approved the 2011/12 Treasury Management Strategy at its meeting on 28th February 2011. 

 

The Council’s Investment Strategy was to secure the best return on its investments whilst having regard to security within the parameters laid down. 

 

As for the Council’s Borrowing Strategy, this estimated that the Council  borrow £4,669,000 of new external loans to support the Capital Programme for 2011/12. 

 

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

 

The Council’s Treasury Management advisors had provided the following information:

 

·       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 3.5% since their high during February 2011. 

·       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. 

·       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 had continued.

·       In the UK, the Government implemented its fiscal consolidation plan and despite low confidence and subdued domestic spending, inflation remained 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 and 0.5% resisting pressure to increase rates to bring inflation back to target more quickly.

·       Domestic spending was highly likely to remain subdued, as disposal income was eroded by higher inflation, taxes and energy prices, and low wage growth.  The Bank of England had since resumed its programme of quantitative easing to boost economic growth.

·       Financial markets did 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, was set out 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

 

The below table summarised the Treasury Management transactions undertaken by the Council during the first half of the current financial year.  All activities were in accordance with the Council’s approved strategy on Treasury Management.  The table set out the monies borrowed / repaid during that 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 were intended to assist Local Authorities in meeting their longer term borrowing requirements. The above loans were all fixed rates of interest.  The rate paid on each loan was largely dependent upon the original duration of the loan and date taken out.

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

·       Temporary loans represented those loans that were borrowed for a period of less than one year and were borrowed on seven day notice.

·       External interest at an average rate of 5.634% and amounting to £2,894,000 had been accrued on these loans for the fist six months of 2011/12.

·       The Council had made the following investments for the period 1st April 2011 to 30th September 2011 and these were 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

 

Interest, at an average rate of 0.27% and amounting to £139,400 had been earned from these investments for the first six months of 2011/12.

 

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

 

Matters relating to amendments to the Investment Strategy and Debt Management Strategy were detailed in the report.  As for Treasury Management Indictors, the Council measured its exposure to Treasury Management risks using the following indicators:

 

·       Interest Rate Exposure - this indicator was set to control the Council’s exposure to fixed and variable interest rates, expressed as an amount of net principal borrowed were:

 

 

Limit

Actual

Met

Upper limit on fixed rate exposures

      139m

96.88m

ü

Upper limit on variable rate exposures

+/- 144m

-107.84m

ü

 

·       Fixed Rate Investments and Borrowings were those were the rate of interest was fixed for the whole financial year.  Investments that either matured during the financial year or had a floating interest rate were classed as variable rate.

 

·       Maturity Structure of Borrowing - This indicator was set to control the Council’s exposure to refinancing risk.  The maturity date of borrowing was the earliest date on which the lender could 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%

ü

12 months and within 24 months

20%

0

4.6%

ü

24 months and within five years

30%

0

7.7%

ü

Five years and within 10 years

30%

0

6.8%

ü

10 years and above

100%

0

80.0%

ü

 

·       Principal Sums Invested for Periods Longer than 364 Days - This indicator was 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

ü

 

This matter was for Council decision.

 

RESOLVED -

 

(1)       T H A T Cabinet recommends to Council to approve the amendment to the Annual Investment Strategy, included in the Treasury Management and Investment Strategy 2011/12 by removing references to Fitch Credit Rating Agency’s individual ratings.

 

(2)       T H A T Cabinet recommends to Council to note the Treasury Management mid year report for the period 1st April 2011 to 30th September 2011.

 

(3)       T H A T Cabinet recommends to Council to note the latest Treasury Management Indicators.

 

Reasons for decisions

 

(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.”