Chairperson and CEO’s Report
2018/19 has been a strong year for Western Australian public sector finances, and for WATC as the State’s central borrowing authority.
There have been clear signs of a turnaround in Western Australia’s fiscal position, reflecting a lift in commodity prices, GST reform and continuing expenditure restraint. When combined, these factors have led to an operating surplus outcome in 2018/19, the first since 2013/14 and two years earlier than forecast in the May 2018 State Budget. This resulted in WATC’s new money borrowing program, initially estimated at $2.7 billion in May 2018, being zero for the year. Significantly, clients repaid $485 million in 2018/19, the first reduction in client debt in more than 10 years.
These improvements in State finances, combined with an expected pick-up in economic activity from 2019/20 and disciplined management of expenditures, resulted in credit rating updates from Standard and Poor’s in October 2018 (AA+ from ‘negative’ to ‘stable’ outlook) and Moody’s Investors Service in June 2019 (from Aa2 with a positive outlook to Aa1 with a stable outlook).
However, despite these positive developments, Western Australia’s economic and fiscal position remains vulnerable to global and national economic and geopolitical factors. Emerging weakness in the global economy drove most central banks from a focus on interest rate increases to an easing bias. The Reserve Bank of Australia signalled concerns with the national economy, and cut the cash rate by 25 basis points at its June 2019 meeting, with market expectations for further interest rate cuts to follow in the second half of 2019.
Reflecting these global trends, interest rates have reduced materially during the year, as illustrated by the 10-year Australian Treasury Bond yield almost halving from 2.63 per cent at the end of 2017/18 to 1.32 per cent by the end of 2018/19. WATC has also enjoyed an improvement in our interest rate differential to other Australian States as the forecast improvements in the State’s economic and fiscal position were met and surpassed.
During 2018/19, WATC sourced borrowings of $8 billion, to meet the year’s refinancing commitments of $5 billion, refinance $2 billion of 2019/20 maturities, pre-fund 2019/20 client borrowings and build liquidity. The ongoing management of key balance sheet metrics saw debt maturing within 12 months of 18.7 per cent and liquid asset portfolio cover of 129.5 per cent. These were comfortably within WATC’s Board targets (less than 20 per cent and above 100 per cent respectively).
Net profit before tax was $41.7 million (up from $34.8 million in 2017/18), with WATC to pay $34.4 million in dividends and tax equivalent payments to the Consolidated Account.
The team at WATC have been heavily engaged supporting our clients over the year, hosting a number of client forums, successfully completing over 70 advisory engagements, managing investment of over $10 billion of the State’s assets, and supporting the management of foreign exchange risk. Providing financial solutions for the benefit of Western Australia remains our focus.
Work has been progressing well on the replacement treasury management system, a core system to support our operations. After a successful procurement process supported by the Department of Finance, we are now well advanced in system configuration and design, with implementation planned for completion in early 2020.
Jenny Seabrook completed her three year term as a WATC Director and Audit Committee member in September 2018. We would like to thank Jenny for the commitment and experience she brought to the role. Sue Murphy AO, former CEO of Water Corporation, joined the Board and Audit Committee in January 2019, and we look forward to benefitting from Sue’s considerable government and industry experience.
The other key departure during 2018/19 was John Collins, who retired in January 2019 after almost 10 years in the CEO role. John showed great leadership and dedication in successfully guiding WATC through the aftermath of the Global Financial Crisis, the large increase in our borrowing program and various credit rating downgrades. He always promoted WATC and Western Australia more generally with great passion and commitment, and has left the Corporation in a great position to meet the challenges and opportunities ahead.
Thanks to all our people, Board members, clients, auditors, investors, banks and other suppliers of goods and services to WATC who have contributed strongly to our successful year.
21 August 2019
Chief Executive Officer
21 August 2019