Top

Top

 

Agenda Item No

 

The Vale of Glamorgan Council

 

Scrutiny Committee (Corporate Resources): 13th November 2012

 

Report of the Section 151 Officer

 

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 2012 to 30th September 2012 which is a requirement of the 2011 edition of the CIPFA Treasury Management in the Public Services :Code of Practice.

2.             To note the latest Treasury Management Indicators

Recommendations

1.             That the Treasury Management mid year report for the period 1st April 2012 to 30th September 2012 be noted, any comments being referred to the next Cabinet meeting.

2.             The latest Treasury Management Indicators be noted.

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.

Background

3.             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.

4.             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 2012/13

5.             Council approved the 2012/2013 treasury management strategy at its meeting on 7th March 2012.

6.             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.

7.             The Authority's borrowing strategy estimated that it will borrow £5,995,000 of new external loans to support the capital programme for 2012-2013. 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.

8.             The Head of Financial Services (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

9.             Information -  this section of the report has been provided by the Councils Treasury advisors and covers the period to September 2012:-

10.        The European Central Bank’s (ECB) Long-Term Refinancing Operations (LTRO), in which the central bank supplied cheap funding to the Eurozone banking system, initiated a calmer period of financial market activity in the first quarter of the year relative to recent times.  The calm was not to last.

11.        A number of events pushed the crisis back to the fore, such as signs that the Eurozone economy was experiencing a deeper downturn in economic activity than previously expected.  Risk appetite plummeted; the FTSE 100 dropped 3.4% over the three months to June (it was down 8.8% at the end of May), while yields on safe haven bonds, including UK gilts and German bunds, regularly dipped to new record lows.

12.        Perhaps more significantly, at its September meeting the ECB announced proposals for unlimited purchases of the short term sovereign debt of countries that applied to the Eurozone bailouts funds for financial assistance.  The highly anticipated pledge eased the fears of a short term collapse of the Eurozone.

13.        In the UK the recession continued into quarter two. However, as with the larger economies described above, the UK was not immune to the uncertainty emanating from the Eurozone, and data suggested that underlying business conditions had weakened.  Trade data indicated that goods exports to the Eurozone were declining, a particular problem for a manufacturing sector struggling with weak domestic demand.

14.        The banking sector and credit bottleneck were perceived to be an important factor holding back economic recovery, prompting HM Treasury and the Bank of England to announce two schemes in June to reduce bank funding costs and increase the availability of cheaper finance for businesses.  

15.        The August Inflation Report showed that the Bank expects little economic growth this year and a gradual recovery in 2013.  The weakness in demand and margin of spare capacity is projected to place downward pressure on inflation, maintaining it around target for the next few years.  The recent downward trend in the CPI inflation rate allied with the apparent synchronised global downturn led by the Eurozone has pushed market expectations for a rise in interest rates out to at least 2014. 

16.        The latest central forecast from the Council’s treasury management advisers, is shown below.  The risks to the forecast remain heavily to the downside, arising largely from the impact of the Eurozone sovereign debt crisis on UK business and household confidence.

 

Period

Bank Rate

3 month LIBOR

12 month LIBOR

25-year PWLB rate

Q3 2012

0.50

0.65

1.40

4.10

Q4 2012

0.50

0.65

1.20

4.15

Q1 2013

0.50

0.65

1.30

4.20

Q2 2013

0.50

0.70

1.40

4.25

Q3 2013

0.50

0.80

1.45

4.35

Q4 2013

0.75

0.95

1.50

4.50

H1 2014

1.00

1.20

1.80

4.85

H2 2014

1.50

1.70

2.30

5.10

H1 2015

2.00

2.20

2.80

5.25

H2 2015

2.50

2.75

3.30

5.50

 

Interim Report

17.        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

Received

Repaid

Closing Balance

 

01/04/2012

30/09/2012

 

£’000

£’000

£’000

£’000

 

PWLB

95,977

0

241

95,736

 

Other Long Term Loans

6,004

0

0

6,004

 

Temporary Loans

100

0

0

100

 

Totals

102,081

0

241

101,840

 

·         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.

·         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 £3,500 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. 

18.        External interest at an average rate of 5.62% and amounting to £2,803,462 has been accrued on these loans for the first 6 months of 2012/2013.

19.        The Authority has made the following investments for the period 1st April 2012 to 30th September 2012  as set out below:-  

Borrowing

Institution

Opening Balance

Invested

Returned

Closing Balance

 

01/04/2012

30/09/2012

 

£’000

£’000

£’000

£’000

 

Local Authorities

 

4,000

0

4,000

0

Debt Management Account Deposit Facility

100,000

645,900

630,200

115,700

 

Totals

104,000

645,900

634,200

115,700

 

20.        Interest, at an average rate of 0.25% and amounting to £125,917 has been earned from these investments for the first 6 months of 2012/2013.

Debt Management Strategy

21.        In light of the very low level of short term investment interest rates currently available, internal funds have been used to finance capital expenditure and no external loans have been borrowed to date this year. However this will be reviewed in the light of the Public Works Loan Board (PWLB) announcing a new PWLB rate, called the certainty rate, which is set 0.2 percentage points below current PWLB rates (currently 1.0% above the UK government bond yield).  The certainty rate is available from 1st November this year for local authorities that have met the requisite criteria of providing capital spending and borrowing forecasts to CLG.  The Authority has complied with the criteria and has access to the certainty rate from the above date.

Treasury Management Indicators

22.        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 2012.

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

      139m

95.98m

ü

Upper limit on variable rate exposures

+/- 144m

-117.45m

ü

 

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 2012 was:

 

 

Upper Limit

Lower Limit

Actual

Met

Under 12 months

20%

0

4.64%

ü

12 months and within 24 months

20%

0

2.35%

ü

24 months and within five years

30%

0

7.64%

ü

Five years and within 10 years

30%

0

10.68%

ü

10 years and above

100%

0

74.69%

ü

 

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:

 

 

2012/13

2013/14

2014/15

Limit on principal invested beyond year end

£30M

£30M

£30M

Actual principal invested beyond year end

0

0

0

Within limit?

ü

ü

ü

 

Resource Implications (Financial and Employment)

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

Sustainability and Climate Change Implications

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

Legal Implications (to Include Human Rights Implications)

25.        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

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

Equal Opportunities Implications (to include Welsh Language issues)

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

Corporate/Service Objectives

28.        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

29.        This report needs to be referred to Council.

Consultation (including Ward Member Consultation)

30.        None.

Background Papers

CIPFA’s  “Code of Practice for Treasury Management in the Public Services”,  “The Prudential Code” and WG proposed guidance on local authority investments

Contact Officer

Robert Ingram, Principal Accountant.

Tel (01446 709252)

Responsible Officer:

CLIVE TEAGUE

Section 151 Officer

Share on facebook Like us on Facebook