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Download ITEM 9 Treasury Management Annual Report 2011_12
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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. 1 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 2 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 3 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. 4 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 6