Agenda Item No______11______
HALF YEARLY TREASURY MANAGEMENT REPORT FOR 2012/13
Summary:
This report provides information on the Treasury
Management activities undertaken in the first six months
of 2012/13.
Options considered:
It is a requirement of the Chartered Institute of Public
Finance & Accountancy’s (CIPFA) Code of Practice for
Treasury Management that this mid-year review is
prepared and presented to Full Council.
Conclusions:
That the treasury activities for the year have been
carried out in accordance with the CIPFA Code and the
Council’s Treasury Strategy.
Recommendations:
That the Council be asked to RESOLVE that the Half
Yearly Treasury Management Report for 2012/13 be
approved.
Reasons for
Recommendations:
The recommendation is being made in compliance with
the CIPFA Code.
LIST OF BACKGROUND PAPERS AS REQUIRED BY LAW
(Papers relied on the write the report and which do not contain exempt information)
Arlingclose Report Template – Semi-Annual Treasury Report 2012/13
Cabinet Member(s) Ward(s) affected
Cllr Wyndham
All
Northam
Contact Officer, telephone number and email:
Tony Brown
01263516126
tony.brown@north-norfolk.gov.uk
1.
Introduction
1.1
The Chartered Institute of Public Finance and Accountancy (CIPFA) defines
treasury management as “the management of the Council’s investments and
cash flows, its banking and its capital market transactions; the effective
control of the risks associated with those activities and the pursuit of optimum
performance consistent with those risks”.
1.2
The Council’s treasury management activities are undertaken in accordance
with the CIPFA Code of Practice on Treasury Management 2009, which
includes a requirement to prepare a strategy for the investment activities in
the forthcoming financial year. The Code also recommends that Members
are informed of treasury management activities at least twice a year. This
report therefore ensures that the Council is following Best Practice in
accordance with CIPFA’s recommendations.
2.
Economic Background
2.1
The UK economy contracted by 0.3% in the first calendar quarter of 2012 and
by 0.5% in second, reflecting the difficult economic conditions faced by
businesses and consumers, both domestically and globally. Wage growth
remained subdued and was, for much of the period, outstripped by inflation.
Much of the fall in the second quarter could probably be attributed to the
impact of the additional bank holiday for the Diamond Jubilee, and may be
recovered in the third quarter.
2.2
Inflation slowly began to fall during the period. In May, annual Consumer
Price inflation (CPI) fell below 3% for the first time in two and half years. In
June it fell to 2.4%, the lowest level since November 2009, increasing
marginally to 2.5% in August. Recent rises in commodity prices are a concern
for inflation, although increases in oil and food prices (due mainly to poor
weather-related yields) were well below the large increases experienced in
2010-11.
2.3
The lack of growth and fall in inflation prompted the Bank of England to
sanction a further £50 billion of asset purchases or Quantitative Easing (QE)
in July, taking the total since the programme began to £375 billion.
2.4
The possibility of a cut in base rate from the current level of 0.5% was
discussed at the Bank’s Monetary Policy Committee meetings in June and
July. However reference to it was subsequently dropped, suggesting that this
policy option will not be used in the immediate future. The government’s
Funding for Lending (FLS) initiative, intended to lower banks’ funding costs,
commenced in August. The Bank of England will assess its effects in easing
the flow of credit to business and households before committing to further
policy action.
2.5
In Greece, the formation of an alliance of pro-euro parties after a second
round of parliamentary elections prevented an immediate and disorderly exit
from the Euro. Unfortunately problems in the Eurozone continued as Italian
and Spanish government borrowing costs rose sharply, and Spain was also
forced to officially seek a bailout for its domestic banks. The European Central
Bank (ECB) responded with the announcement in September of its Outright
Monetary Transactions (OMT) facility which allows the ECB to buy unlimited
amounts of 1-3 year sovereign bonds. The sovereign must first asks for such
assistance, and adhere to strict conditions attached to such purchases.
2.6
Money market rates fell over the six month period by between 0.2% and 0.6%
for 1-12 month maturities.
3.
Debt Management
3.1
The Council has remained debt-free. Capital expenditure has been financed
by usable capital receipts, government grants and revenue contributions.
This has lowered the overall treasury risk by reducing the level of investments
and avoiding external debt, and continues to be the most cost effective way of
funding capital expenditure.
4
Investment Activity
4.1
The Guidance on Local Government Investments gives priority to security and
liquidity and the Council’s aim is to achieve an interest return commensurate
with these principles.
4.2
The table below gives Members an appreciation of the investment activity
undertaken in the first six months of 2012/13, showing the position at the start
and end of the period, together with the transactions during the period. The
percentages show the investment return achieved for each investment
category.
Balance
01/4/2012
Invested
Matured
£000s
£000s
£000s
Internally Managed
Balance
30/9/2012
£000s
%
19,110
55,335
(50,785)
23,660
0.90
1,000
0
0
1,000
0.82
20,110
55,335
(50,785)
24,660
0.90
(Term Deposits)
Bonds issued by
multilateral
development banks
(Nominal Value)
Total
4.3
Security of the capital sum remained the Council’s main investment objective.
This was maintained by following the Council’s investment counterparty policy
set out in its Treasury Management Strategy Statement for 2012/13. New
investments were made with the following institutions:
a. Deposits with UK Banks and Building Societies systemically important
to the UK Banking System and which have minimum long-term ratings
of ‘A-’ or equivalent from Fitch, Moody’s and S&P rating agencies.
b. AAA-rated Stable Net Asset value Money Market Funds
c. The Debt Management Office
4.4
Counterparty credit quality was assessed and monitored with reference to
Credit Ratings (the Council’s minimum long-term counterparty rating of A- (or
equivalent) across the rating agencies Fitch, S&P and Moody’s); credit default
swaps; GDP of the country in which the institution operates; the country’s net
debt as a percentage of GDP; sovereign support mechanisms and potential
support from a well-resourced parent institution; share price.
4.5
The base budget for 2012/13 anticipates that £269,900 will be earned in
interest from an average balance of £26m at 1.03%. In the first 6 months of
the financial year the average amount invested was £25m at an average rate
of interest of 0.9%, resulting in an overall interest return of £112,720.
5.
Credit Risk
5.1
The credit rating agency Moody’s downgraded a number of banks during the
period which are on the Council’s lending list. However, none of the long-term
ratings were downgraded to below the Council’s minimum A- (or equivalent)
credit rating threshold.
5.2
The table below and charts at Appendix D show that, compared to the
Arlingclose client base, the Council’s return on its investments on a value
weighted basis was marginally below the average, and on a time weighted
basis an average return was achieved.
Date
Value
Weighted
Average –
Credit Risk
Score
Value
Weighted
Average –
Credit
Rating
Time
Weighted
Average –
Credit Risk
Score
Time
Weighted
Average –
Credit
Rating
31/03/2012
A+
4.59
AA
3.39
30/06/2012
A+
4.61
AA
3.06
30/09/2012
AA-
4.49
AA
2.98
Scoring:
Value weighted average reflects the credit quality of investments according to
the size of the deposit
Time weighted average reflects the credit quality of investments according to
the maturity of the deposit
AAA = highest credit quality = 1
D = lowest credit quality = 15
Aim = A- or higher credit rating, with a score of 7 or lower, to reflect current
investment approach with main focus on security
5.3
The duration for investment counterparties (i.e. the maximum time a new
deposit should be made) was shortened in May, reflecting a deterioration in
credit conditions. The Council extended them again in late July on advice of
its treasury advisors as a result of their monitoring economic and political
developments in the UK, Europe and globally. The various measures used to
assess the creditworthiness of financial institutions had shown continued
signs of stabilisation, and in some cases, considerable improvement.
6.
Compliance with Prudential Indicators
6.1
The Council can confirm that it has complied with its Prudential Indicators in
the first six months of 2012/13. Details for both treasury management and
other indicators can be found in Appendix E
7.
Conclusion
In compliance with the requirements of the CIPFA Code of Practice this report
provides members with a summary of the treasury management activity
during the first 6 months of 2012/13. As indicated in this report none of the
Prudential Indicators have been breached and a prudent approach has been
taking in relation to investment activity with priority being given to security and
liquidity over yield.
8.
Implications and Risks
8.1
The treasury management activities in the first 6 months of 2012/13 have
been undertaken in accordance with the Treasury Management Strategy
Statement and Investment Strategy 2012/13 to 2014/15.
9.
Financial Implications and Risks
9.1
The financial implications and risks of treasury decisions have been
considered in the light of advice from the Council’s treasury advisor and this
report confirms that the Council considers that security and liquidity are the
primary objectives of its prudent investment policy.
10.
Sustainability
10.1
This report does not raise any issues relating to Sustainability
11.
Equality and Diversity
11.1
This report does not raise any issues relating to Equality and Diversity.
12.
Section 17 Crime and Disorder considerations
12.1
This report does not raise any issues relating to Crime and Disorder
considerations.
Appendix D
Credit Score Analysis
Long-Term
Credit Rating
Score
AAA
1
AA+
2
AA
3
AA-
4
A+
5
A
6
A-
7
BBB+
8
BBB
9
BBB-
10
Not rated
11
BB
12
CCC
13
C
14
D
15