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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)