Australian Government Investor Briefing
CEO Presentation at HSBC Issuer and Investor Summit, Dubai
17 - 20 March 2009
Australian Government Investor Briefing
17 – 20 March 2009
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 has slowed after a long period of sustained growth.
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.
Australian growth is forecast to be supported by continued strength in several of our major trading partners in Asia.
- 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
- 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.
- 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.
Budget underlying cash balance (% GDP)
- 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.
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.
Current account on the balance of payments.
- 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.
Inflation has been low for the last 20 years, apart from occasional short spikes.
- 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.
Official cash rates remain higher than in major economies.
- 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 represent less than 2% of mortgages outstanding in Australia.
Market capitalisation of Australia's top 4 banks is strong
Return on shareholders' equity for top 4 Australian banks remains robust
- 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.
- 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.
- 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
Australian Dollar / US Dollar
Australian Dollar / Japanese Yen
Australian Dollar / Euro
- 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.
Past and projected debt issuance
Debt issuance will be higher over the next few years
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.
Current Treasury Bonds by maturity date
- 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.
- 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.
- 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)