Economic Environment

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ANNUAL REPORT 2019

The Economy

Rising exports remains the major driver of growth for the Western Australian economy, with real gross state product expected to expand by an estimated 2.0 per cent in 2018/19. Contributing over 40 per cent of the value of Australia’s merchandise goods exports in 2018/19, Western Australia remains an export powerhouse. Real gross state product growth is forecast to accelerate to 3.5 per cent in 2019/20 with further increases in export volumes again expected to play a leading role, as well as increasing business investment as spending on a new wave of resource sector projects gathers pace. The rise in investment is expected to improve labour market conditions, boosting confidence and household spending.
Despite these positives in the domestic Western Australian economy, significant national and global headwinds exist. The monetary policy outlook for the major global central banks has shifted from the expectation of interest rate increases to one where central banks are expected to cut rates in the second half of 2019. The change has been in response to deteriorating global economic conditions, as global growth began to slow in the second half of 2018 weighed down by higher interest rates in the United States and concern over the outlook for global trade as America moved to a more protectionist stance, highlighted by its trade war with China.

Impact on financial markets

Australian bond yields fell sharply over the course of 2018/19 as the outlook changed from one where the market expected the next move in the cash rate to be an increase to one where a rate cut was likely, with the Reserve Bank of Australia (RBA) cutting the cash rate by 25 basis points in June 2019 to a fresh record low of 1.25 per cent. The 3-year Australian Treasury Bond yield fell from 2.06 per cent at the end of 2017/18 to 0.96 per cent by the end of 2018/19 while the 10-year yield fell from 2.63 to 1.32 per cent. Money market interest rates also fell with the three-month BBSW rate falling from 2.11 to 1.20 per cent.

The sharper decline in Australian bond yields when compared to the United States yields has pulled the Australian dollar lower, with the AUD falling from USD0.7405 at the beginning of 2018/19 to USD0.7020 at the end of the financial year. The decline in the Australian dollar would likely have been greater if commodity prices had not remained elevated.

Regulatory Environment

The RBA made two adjustments to the committed liquidity facility (CLF) in June 2019 with the aim that it better reflects the changing dynamics of the Australian Sovereign and semi-government bond markets. An increase in the percentage of the total sovereign and semi-government bond outstandings that banks could hold, from 25 to 30 per cent in 1 per cent increases per year starting in 2020, combined with an increase in the fee payable on the CLF, from 15 to 20 basis points, is expected to increase demand for sovereign and semi-government bonds.

Global momentum is gathering around moves to replace interbank offered rates (IBORs), as reference rate benchmarks, with alternative risk-free rate (RFR) benchmarks. At this stage, it is expected that the Australian BBSW will be able to be retained, as it is robust with sufficient liquidity in the transactions underlying its calculation. However, global moves in the direction of RFR benchmarks requires us to be mindful of those developments, the use of RFRs in the Australian context and have appropriate contractual fall-back language in place should BBSW cease to exist in the future.

While not directly impacted by the Royal Commission into the Misconduct of the Banking, Superannuation and Financial Services Industry, WATC will be closely monitoring the Government and Regulator response to its findings and recommendations.

Maturity Profile by Financial Year end, at 30 June 2019

($ billion)

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