Cabinet
31 October 2011
Scrutiny
16 November 2011
Full Council
14 December 2011
Agenda Item No______7_______
HALF YEARLY TREASURY MANAGEMENT REPORT FOR 2011/12
Summary:
This report sets out the Treasury Management activities undertaken in
the first six months of 2011/12.
Conclusions:
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 2011/12 be approved.
Cabinet member(s):
Ward(s) affected:
All
All
Tony Brown 01263 516126
tony.brown@north-norfolk.gov.uk
Contact Officer, telephone number,
and e-mail:
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
Global growth prospects deteriorated considerably over the six months to September,
moving from an expectation of modest expansion to the risk of a double-dip recession.
In the UK, growth in Gross Domestic Product in the first calendar quarter of 2011 was
0.5%, and just 0.1% in the second quarter. Even the seemingly stronger economies such
as Germany suffered lower growth, registering just 0.1% in the second quarter.
2.2
Inflation remained stubbornly high with the annual Consumer Prices Index for August at
4.5%. This is above the Bank of England’s Monetary Policy Committees target of 2%,
and has been so for 20 consecutive months. The Bank believes the higher rate of
inflation reflected the temporary impact of several factors, including the increase in the
Cabinet
31 October 2011
Scrutiny
16 November 2011
Full Council
14 December 2011
VAT rate to 20% and past increases in global energy and import prices. Further
increases in energy prices are expected to push inflation to 5% before it falls back to
the 2% target in the medium term.
2.3
Unemployment has risen to 7.9%. Inflation is above the average earnings growth rate of
2.9% and the scarce availability of credit, together with stagnant house prices, all
combine to lower disposable incomes, limiting households spending power and leaving
consumer confidence fragile.
2.4
In America the lack of measures to address the high government debt burden led the
rating agency Standard & Poor’s (S&P) to downgrade the US Sovereign rating from AAA
to AA+. The country’s weak economic and fiscal situation (government expenditure and
taxation) and an unemployment rate of 9.1% led the US central bank, the Federal
Reserve, to commit to “exceptionally low” interest rates until mid 2013.
2.5
The European sovereign debt crisis deepened. The agreement in July to address
Greece’s fiscal problems and broaden the mandate for the European Financial Stability
Facility (set up by members of the Eurozone to raise the funds needed to provide loans
to Eurozone countries in financial difficulties, provide capital to banks and buy sovereign
debt) has only bought time for the Eurozone as market pressure increased on Italy and
Spain, but did little to address the burden of too much sovereign debt.
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 2011/12, 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.
Internally Managed
Balance
01/4/2011
Invested
Matured
Balance
30/9/2011
£000s
£000s
£000s
£000s
%
15,090
58,255
(53,145)
20,200
1.23
6,500
0
0
6,500
4.00
21,590
58,255
(53,145)
26,700
1.92
(Term Deposits)
Bonds issued by
multilateral development
banks (Nominal Value)
TOTAL
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31 October 2011
Scrutiny
16 November 2011
Full Council
14 December 2011
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 2011/12. This restricted new investments
to the following:
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. Deposits with select non-UK banks (Australia, Canada, Finland, France,
Germany, Netherlands, Spain, Switzerland and the US).
c. These countries, and the banks within them, have been selected after careful
monitoring of:
ƒ
Credit Ratings (minimum long-term counterparty rating of A+)
ƒ
Credit Default Swaps (an insurance policy on debt)
ƒ
GDP: Net debt as a percentage of GDP
ƒ
Sovereign Support Mechanisms and potential support from a well
resourced parent institution
ƒ
Share Price
d. AAA-rated Stable Net Asset value Money Market Funds
e. Bonds issued by Multilateral Development banks, such as the European
Investment Bank.
f.
The Debt Management Office
g. Other Local Authorities
h. Treasury Bills
i.
4.4
Pooled funds (collective investment schemes) meeting the criteria in SI 2004 No
534 and subsequent amendments.
Credit Risk
The table below and charts at Appendix A show that the Council continues to achieve an
above average return on its investments for a below average risk compared to the
Council’s treasury advisor (Arlingclose) client base on both a value weighted and time
weighted base.
Date
Value
Weighted
Average –
Credit Risk
Score
Value
Weighted
Average –
Credit Rating
Time
Weighted
Average –
Credit Risk
Score
Time
Weighted
Average –
Credit Rating
31/03/2011
AA
3.19
AA+
1.88
30/06/2011
AA
3.24
AA
2.69
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31 October 2011
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16 November 2011
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14 December 2011
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 5 or lower, to reflect current investment
approach with main focus on security
4.5
The lack of real progress in resolving the sovereign debt crisis in Europe began to affect
even the stronger Eurozone nations and their banking systems. Market volatility
increased sharply in August and banks’ share prices fell sharply. Having reviewed all
credit indicators the Council, advised by Arlingclose, believed that there were no
solvency issues with the banks on the recommended lending list. Nevertheless the
share price moves were too sharp to ignore and a prudent response to the tensions and
negative sentiment in the markets was required.
4.6
The Council responded to the growing stress by reducing maturity limits for new
investments as reported to Members within the Period 4 Budget Monitoring Report that
went to Cabinet on 20 September 2011. The limits for UK banks, Nationwide Building
Society and Australian, Canadian and US banks have now been temporarily reduced to
6 months (Santander UK plc to is restricted to 3 months), and for European banks to
1 month. French institutions have been suspended for new investments in response to
concerns over funding and their sovereign exposure to peripheral European nations
(such as Greece). On 28th September Clydesdale Bank was suspended from the lending
list following the bank’s downgrade to A2 by Moody’s, which falls below the Council’s
minimum criteria of A+ or equivalent, and funds which were invested on call account
were consequently repaid.
4.7
The ratings agency Moody’s has completed a review which began in May 2011 of a
number of UK institutions. The result is a number of downgrades to institutions on the
Council’s lending list. The implications of the downgrades, reduction in maturity limits,
and generally lower interest rates, for investment returns in the second half year of
2011/12 are set out in the budget monitoring report for period 6 included elsewhere on
this agenda.
4.8
The base budget for 2011/12 anticipates that £550,000 will be earned in interest from an
average balance of £22.8m at 2.42%. In the first 6 months of the financial year the
average amount invested was £26.0m at an average rate of interest of 1.92%, resulting
in an overall interest earned figure of £253,344.
4.9
The opportunity was taken to invest a proportion of the portfolio in longer-term
investments as a hedge against the possibility that interest rates would remain lower for
longer. On 18 April 2011 a £1m investment was made with Lloyds TSB Bank plc at
2.65% for 2 years, and on 6 May 2011 a further £1m was invested was invested at the
same rate for 14 months with the Bank of Scotland. These investments were made well
before the recent deterioration in the economy, financial markets and credit standing of
investment counterparties.
Cabinet
31 October 2011
Scrutiny
16 November 2011
Full Council
14 December 2011
5.
COMPLIANCE WITH PRUDENTIAL INDICATORS
5.1
The Council can confirm that it has complied with its Prudential Indicators in the first six
months of 2011/12. Details for both treasury management and other indicators can be
found in Appendix B.
6.
FINANCIAL IMPLICATIONS
6.1
The financial implications of treasury activity in the first six months of 2011/12 are set out
in this report.
7.
RISKS TO THE COUNCIL
7.1
This report confirms that the Council considers that security and liquidity are the primary
objectives of its prudent investment policy.