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Australian Government Investor Briefing
Dubai
17 – 20 March 2009
Neil Hyden
Chief Executive Officer
The Australian economy
• Stable, culturally diverse, democratic society.
• Strong flexible economy with a skilled workforce.
• Track record of adaption to change.
• Sound financial institutions.
• Active policy response to external shocks.
GDP growth
GDP growth has slowed after a long period of sustained growth.
8.00
Per cent change
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
change on prior quarter
-3.00
change on prior year
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-97
Dec-95
Dec-93
Dec-91
Dec-89
Dec-87
Dec-85
Dec-83
Dec-81
Dec-79
Dec-77
-4.00
Sustained strong growth
• Average annual growth in real GDP of 3.4 per
cent since 1990.
• Australia avoided recession during the Asian
crisis, which dislocated many of our major
trading partners.
• It also avoided recession following the collapse
of the ‘dotcom bubble’.
• This reflects the economy’s capacity to adapt
flexibly to changing circumstances.
Now impacted by external shocks
• The global economic and financial crisis is
affecting the Australian economy, despite its
inherent strength.
• In the December quarter 2008, GDP fell by 0.5%
in Australia.
– A smaller fall than most other OECD countries
experienced in the quarter.
Growth forecasts
Australian growth is forecast to be supported by continued
strength in several of our major trading partners in Asia.
15
Per cent change
10
5
0
2007
2008
2009
2010
-5
Australia
Japan
China
India
Other East Asia
United States
Euro area
Strategic location
• Australia’s geographic location in the Asian
region, matched with its natural resource
endowment, is a strategic advantage that will
contribute to prosperity for many decades.
• In 2007-08 over 58% of Australia’s merchandise
exports were to East Asia.
Australia’s merchandise exports 2008
$ million
50,000
40,000
30,000
20,000
10,000
0
Japan
China
Korea
United States
New Zealand
United Kingdom
Fiscal position
• Australia’s public finances are among the
strongest of any developed country.
• Sustained budget surpluses over past years
have reduced the stock of debt on issue and
built up financial assets.
– The Government’s net debt is estimated to be -$16.2
billion (-1.3% of GDP) in 2008-09.
Fiscal stimulus
• The Government has acted quickly to provide
fiscal stimulus to offset recent economic and
financial shocks from overseas.
• Stimulus measures amounting to $72.2 billion
(7% of GDP) have been announced since
October 2008.
• These are temporary measures, consistent with
a conservative medium term budget strategy.
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
Forecast
1996-97
1995-96
1994-95
Outcome
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
1981-82
1980-81
1979-80
1978-79
1977-78
Underlying cash balance (% of GDP)
Budget outcomes
Budget underlying cash balance (% GDP)
3
2
1
0
-1
-2
-3
-4
-5
Projection
-6
Fiscal position
• Australia’s net debt position remains strong.
• This provides scope for further flexibility in future
fiscal policy, if needed.
Net debt forecasts
Australia’s net debt will remain relatively low.
95.0
Per cent of GDP
85.0
75.0
65.0
55.0
45.0
35.0
25.0
15.0
5.0
-5.0
Australia
Canada
Euro area
2008
United Kingdom
2009
2010
United States
Japan
Balance of payments
• Australia has been a net importer of capital for
over 200 years.
• This results from its rich resource endowment,
productive economy and strong economic
growth.
• Net imports of capital are reflected in persistent
deficits on current account.
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-97
Dec-95
Dec-93
Dec-91
Dec-89
Dec-87
Dec-85
Dec-83
Dec-81
Dec-79
Dec-77
Current Account Balance (% GDP)
Current account
Current account on the balance of payments.
0.00
-1.00
-2.00
-3.00
-4.00
`
-5.00
-6.00
-7.00
Capital inflows
• Historically, capital inflows have been sustained
by the strength of the Australian economy and
the attractive yields generated by investments.
• A large part of capital inflows comprise
borrowings by banks.
• Retained earnings of multinational companies
contribute a further significant component.
Dec 2008
Dec 2007
Dec 2006
Dec 2005
Dec 2004
Dec 2003
Dec 2002
Dec 2001
Dec 2000
Dec 1999
Dec 1998
Dec 1997
Dec 1996
Dec 1995
Dec 1994
Dec 1993
Dec 1992
Dec 1991
Dec 1990
Dec 1989
Dec 1988
Dec 1987
Dec 1986
Dec 1985
Dec 1984
Dec 1983
Dec 1982
Dec 1981
Dec 1980
14.0
Dec 1979
Dec 1978
Consumer Price Index
Inflation
Inflation has been low for the last 20 years, apart from
occasional short spikes.
Per cent change over year
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
Monetary policy
• Monetary policy has reacted vigorously to
changed conditions.
– The cash rate has been reduced by 400 bps since
September 2008 and is currently 3.25%.
– These reductions have flowed quickly to households,
as the majority of Australian housing mortgages use
variable rates.
• Considerable flexibility remains available for
monetary policy should it be required.
Australia
Euro
US
Japan
Feb 2009
Jan 2009
Dec 2008
Nov 2008
Oct 2008
Sep 2008
Aug 2008
UK
Jul 2008
Jun 2008
May 2008
Apr 2008
Mar 2008
Mar 2008
8
Jan 2008
Jan 2008
Consumer Price Index
Cash rates
Official cash rates remain higher than in major economies.
Per cent
7
6
5
4
3
2
1
0
Financial sector
• Australia’s banks have strong balance sheets,
adequate capital and a resilient economy behind
them.
– The tier 1 capital ratios of the major banks average
8.7%.
• Prudential regulation of banks has been rigorous
and effective over recent years.
• Major banks in Australia have never relied on
securitisation to a major degree.
Sub-prime loans
• Sub-prime loans represent less than 2% of
mortgages outstanding in Australia.
China Construction Bank
Bank of China
JP Morgan Chase
HSBC
Wells Fargo & Co
Banco Santander
Mitsubishi UFJ F
Royal Bank of Canada
Bank of Communications
BNP Paribas
Bank of America
Westpac
China Merchants Bank
Credit Suisse
Banco Itau
Comm Bank of Aust
Intesa SanPaolo
Toronto-Dominion Bank
Banco Bradesco
UBS AG
BBVA
Bank of Nova Scotia
China Citic Bank
US Bancorp
Sumitomo Mitsui
Standard Charter
National Aust Bank
Credit Agricole
Mizuho Financial Group
Banco Santander
ANZ
0
Ind & Comm Bank of China
Financial Sector
Market capitalisation of Australia’s top 4 banks is strong
300
US $ billion
250
200
150
100
50
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Financial sector
Return on shareholders’ equity for top 4 Australian banks remains robust
25
Per cent
20
15
10
5
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Government guarantees
• The Government is providing guarantees for
wholesale funding by Australian authorised
deposit taking institutions.
– Issuers must apply in advance for coverage for
specific borrowings and a charge applies.
• This is to help Australian banks compete with
international banks with similar guarantees from
their governments.
Exchange rate
• Australia has a free-floating exchange rate.
– The Australian dollar is the sixth most traded currency
in the world.
– Over past decades the rate has varied, including in
response to movements in global commodity prices.
– The central bank has not intervened in the exchange
market other than in exceptional circumstances.
Recent movements
• The Australian dollar depreciated sharply
against major currencies in December 2008 and
January 2009.
– It has since settled somewhat at levels below longer
term average rates.
Exchange rate movements
1
Australian Dollar / US Dollar
0.8
0.6
0.4
Australian Dollar / Japanese Yen
110
90
70
50
0.7
0.6
0.5
Nov-2007
Jun-2006
Feb-2005
Sep-2003
Apr-2002
Nov-2000
Jun-1999
0.4
Feb-1998
Australian Dollar / Euro
Debt issuance
• Over recent years the Australian Government
has not needed to issue debt for budget funding.
– However it continued to issue a small volume of debt
to maintain a functioning bond market.
– The stock of debt on issue was kept at around $60
billion (currently about 6% of GDP).
• The Government is now increasing its issuance
to meet funding needs.
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
Forecast
1998-99
1997-98
1996-97
1995-96
1994-95
Actual Gross
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
40
1986-87
1985-86
1984-85
1983-84
1982-83
1981-82
1980-81
1979-80
Debt program
Past and projected debt issuance
Debt issuance will be higher over the next few years
50
$ billion
Projection
30
20
10
0
Treasury Bond issuance
• We expect to issue around $32 billion in
Treasury Bonds in 2008-09 and around $42
billion in 2009-10.
• Bonds are issued through auctions conducted
twice a week, generally of around $500 to 700
million.
• Bonds are issued into the 10 existing bond lines,
with maturities up to 12 years.
Treasury Bonds
Current Treasury Bonds by maturity date
10
$ billion
9
8
7
6
5
4
3
2
1
0
7.5%
15Sep09
5.25%
15Aug10
5.75%
15Jun11
5.75%
15Apr12
6.5%
15May13
6.25%
15Jun14
6.25%
15Apr15
6%
15Feb17
5.25%
15Mar19
5.75%
15May21
Treasury notes
• In addition, Treasury Notes with maturities up to
6 months are issued weekly to support
management of the Government’s cash
balances.
– It is intended to develop a market of at least $10
billion in these Notes.
– Although the total stock on issue will be larger at
some points during the year.
Other debt instruments
• At this stage the Government does not plan to
issue longer maturity bonds, indexed bonds or
debt denominated in foreign currencies.
Government yield curves
Australian Government debt offers an attractive return.
5.0
Per cent
4.5
4.0
3.5
3.0
2.5
Commonwealth Government Securities
2.0
US Treasury Bonds and Notes
Germany € Government BFV Curve
1.5
1.0
0.5
0.0
Feb 2009
Aug 2014
Feb 2020
Aug 2025
Jan 2031
Jul 2036
Jan 2042
AAA rating
• Standard and Poor’s recently (January 2009) affirmed
Australia’s Sovereign AAA rating.
• Moody’s recent (February 2009) stress-testing of Aaa
governments’ debt affordability placed Australia in the top
group.
– Moody’s concluded that Australia’s debt challenges were ‘limited’
and its ‘adjustment capacity’ sizeable.
– It classified Australia in the highest of three groups of Aaa-rated
sovereign issuers, based on the strength of their balance sheets.
Further information
• More detailed information on Australian
Government Treasury Bonds and Treasury
Notes may be found on the web site of the
Australian Office of Financial Management at
www.aofm.gov.au (under Activities – Debt
Issuance)