Download ITEM 9 Treasury Management Annual Report 2011_12

AGENDA ITEM 9
Policy Committee – 10th July 2012
Treasury Management –
Annual Report 2011/12
Report of the Corporate Head (Financial Management)
Ward(s) affected: All
1.
Purpose of Report - To inform Members of the treasury activity undertaken
in the year.
2.
Recommendations - Members are recommended to:
 Note the Treasury Management Annual Report for 2011/12;
 Note the actual Treasury Management Indicators for 2011/12.
3.
Introduction
In January 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. This report is the annual report for 2011/12.
4.
Treasury Management Strategy
4.1
Council approved the 2011/12 Treasury Management Strategy at its meeting
on 6th April 2011. The Council’s stated investment strategy was to manage
investments with prudence while maximising investment opportunities within
the remit of Council policy. Investments would be structured to meet the
Council’s cashflow requirements while minimising the risks associated with
fixed term investments - viz. being tied-in to a low rate of return, or with a
volatile counterparty.
4.2
The Council’s stated borrowing strategy is to weigh the current cost of
borrowing against the short-term interest rates on investments. As investment
rates are currently much lower than long-term borrowing rates, it is likely to be
more cost effective in the short-term to not borrow and reduce the level of
investments held instead. However, with long-term rates forecast to rise in
the coming years, any such short-term savings will need to be balanced
against potential longer-term costs.
4.3
The Corporate Head (Financial Management) is pleased to report that all
treasury activity undertaken during the financial year complied with the
approved strategy.
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AGENDA ITEM 9
5.
Economic Review
The Eurozone debt crisis dominated the year’s economic news. The apparent
inability of leaders to either agree on remedial policies or implement fiscal
consolidation measures prompted frequent bouts of market volatility, as
investors positioned themselves for potential government defaults or even the
breakup of the Eurozone itself. Investor confidence in struggling Eurozone
nations, such as Greece, Italy and Spain, dived, prompting sharp upward
movements in government borrowing rates. Greece finally defaulted in March
by forcing private bondholders into a distressed debt exchange, in return for a
second bailout from the European Union and the International Monetary Fund.
Exposure to the Eurozone periphery, coupled with actions making future
government support less likely, placed downward pressure on the
creditworthiness of many European banks, prompting a raft of credit rating
downgrades and sharp rises in credit default swap spreads. This led to an
increase in funding costs as interbank lending rates rose sharply above official
interest rates. Dexia, a banking group based in Belgium, France and
Luxembourg was the main casualty, but was bailed out and broken up by the
respective governments. Two small Danish banks failed and imposed losses
on depositors, while Spain forced its regional banking sector to consolidate to
prevent similar occurrences.
In late December, the European Central Bank cut interest rates and flooded
the Eurozone banking sector with cheap three-year loans, immediately
reducing the near-term risk of a liquidity crisis and moderating Eurozone
wholesale interbank lending rates. Unfortunately, the central bank action
could not prevent the debt crisis causing a sharp decline in household and
business confidence, eventually pushing the Eurozone into recession.
The UK’s reliance on the Eurozone as a major trading partner was illustrated
when this country followed the Eurozone into recession over the last six
months of the financial year. Other factors responsible for the fall in economic
activity included the government’s deficit reduction programme and the
weakness in household and business spending. The decline in household
spending was the result of low confidence and the erosion of disposable
income by persistently elevated inflation, subdued wage growth, higher taxes
and rising unemployment. Businesses were in a similarly weak position, with
access to credit restricted or too expensive due to a risk-averse banking
sector, and limited domestic and foreign demand.
Weakening economic growth and signs of further deterioration in the
Eurozone prompted the Bank of England to loosen monetary policy in
October, despite above target inflation. With Bank Rate already at 0.5%, the
Monetary Policy Committee voted for a further £50bn of quantitative easing,
which combined with safe haven buying to push gilt yields to record lows over
the next few months. Policymakers justified the action because they were
confident inflation would fall quickly back to target during 2012. However,
although the annual Consumer Price Index rate has declined from the
September peak of 5.2%, a combination of higher crude oil and food prices
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AGENDA ITEM 9
caused the rate to rise slightly in March to 3.5%, leaving Bank of England
policymakers in the unenviable position of setting policy to battle both weak
growth and high inflation.
6.
Summary of Transactions
The following table summarises the treasury management transactions
undertaken during the 2011/12 financial year:
Principal
Amount
£000
Investments - as at 31st March 2011
- matured in year
- arranged in year
- Money Market Funds *
- as at 31st March 2012
Debt
- as at 31st March 2011
- matured/repaid in year
- arranged in year
- as at 31st March 2012
Net Debt at 31st March 2012
(d)
(d-b)
5,500
12,500
8,000
2,564
3,564
8,238
2,000
0
6,238
2,674
Net Debt at 31st March 2011
(c-a)
2,738
(a)
(b)
(c)
Average
Interest
Rate
%
1.71
1.28
1.06
0.65
0.94
4.81
4.81
* Balance held at the end of the year
7.
Performance Report
7.1
Fixed term investments fell to £1m as a consequence of maintaining the need
to observe security over liquidity over yield.
7.2
From May 2011, surplus short-term cash has been placed in AAA-rated
Money Market Funds giving instant access to meet cash outflow
requirements.
7.3
Debt remained constant with no requirement for short-term borrowing.
7.4
Interest on Treasury Activities:
Actual
£000
101
299
Investment Income
Interest Paid
3
Budget
£000
80
302
Variance
£000
21
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AGENDA ITEM 9
8.
Risk Management
8.1
As noted in the Treasury Management Policy Statement, the Council regards
the successful identification, monitoring and control of risk to be the prime
criteria by which the effectiveness of its treasury management activities will be
measured. The key treasury risks being managed are:
•
credit risk,
•
liquidity risk,
•
interest rate risk,
•
refinancing risk, and
•
operational risk.
8.2
The techniques employed to manage these risks are covered in detail in the
Council’s Treasury Management Practices, and include:
•
robust counterparty monitoring and selection criteria,
•
prudent cash flow forecasting,
•
a range of exposure limits and indicators, and
•
procedures designed to prevent fraud and error.
8.3
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. All of its surplus cash is therefore held as short-term
investments with the UK Government, local authorities, and highly credit-rated
banks, building societies and pooled funds.
8.4
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.
8.5
However, the combination of short-term investments and long-term debt
exposes the Council to the risk of falling investment income during periods of
low interest rates.
9.
Treasury Management Indicators
The Council is asked to note the following indicators as at 31st March 2012.
9.1
Security: Average credit rating
Fixed-term investments were held across a range of counterparties and the
average rating achieved, compared to a median target, was:
Median
BB+
Portfolio average credit rating
Actual
AA-
For the purpose of this indicator, unrated building societies are assigned an
indicative rating of BBB, and unrated local authorities are assumed to hold a
AA+ rating.
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AGENDA ITEM 9
9.2
Liquidity: cash available within three months
The Council has adopted a voluntary measure of its exposure to liquidity risk
by monitoring the amount of cash available to meet unexpected payments
within a rolling three month period.
The use of instant access accounts ensures cash is available on demand.
The average holding for the year was:
Target
£000
500
500
500
3,000
4,500
NatWest SIBA
Santander
Bank of Scotland
Money Market Funds
9.3
Actual
£000
303
493
179
2,203
3,178
Interest Rate Exposures
Fixed rate investments and borrowings are those where the rate of interest is
fixed for the whole financial year. Instruments that mature during the financial
year are classed as variable rate.
All of the Council’s investments are deemed to be variable rate while the
whole of its borrowing is at fixed rate.
The Council is, therefore, at the mercy of falling or low rate investment returns
while remaining tied-in to the cost of fixed term borrowing.
The upper limits on fixed rate exposures therefore match the Council’s fixed
rate borrowings, and the value of ‘Zero’ for variable rate exposures enables
variable rate borrowing only up to the value of variable rate investments.
Upper limit on fixed rate exposures
Upper limit on variable rate exposures
9.4
Limit
£000
6,238
0
Actual
£000
6,238
0
Maturity Structure of Borrowing
This indicator is set to control the Council’s exposure to refinancing risk. The
maturity structure of fixed rate borrowing at the 31st March 2012 is:
Target
Spread
0%
0%
20%
10%
10%
60%
Maturity Date of Borrowing
Under 12 months
12 months and within 24 months
24 months and within five years
Five years and within 10 years
10 years and within 25 years
Over 25 years
5
Actual
Spread
0%
0%
20%
0%
11%
69%
AGENDA ITEM 9
(Note: The maturity date of borrowing is the earliest date on which the lender can demand
repayment.)
The target spread is designed to ensure that not all the Council’s borrowings
become repayable at the same time.
An actual percentage greater than target is not necessarily detrimental, but
would need to be taken into consideration should further borrowing be
contemplated.
10.
Implications
10.1
Financial Implications
There are no financial implications associated with this report.
10.2
Legal Implications
There are no legal implications attached to this report..
11.
Contribution to Corporate Priorities
The Treasury Management function does not contribute directly to the
Council’s Corporate Priorities albeit the delivery of the Treasury Management
Strategy supports the Council’s budget strategy which in turn is a fundamental
element of the Council’s service and financial planning approach to
achievement of the Council Plan.
12.
Risk Management - There are no direct risk management implications arising
from this report. Regular review provides assurance that treasury
management activities are being managed in line with the Treasury
Management Strategy.
13.
Equalities Impact Assessment - Since this report is not seeking to set or
amend policy, the Council’s Equality Impact Assessment procedure has not
been followed.
14.
Consultations with Others - None
15.
Access to Information : Background Documents - Working papers held in
Financial Services.
16.
Author of the Report - Mary Kennedy, Principal Accountant
(Capital/Treasury), Tel: 01756 706282, Email: [email protected]
Note: Members are invited to contact the author in advance of the meeting with any
detailed queries or questions.
17.
Appendices - None
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