Successful Financial Management
WATC continues to be flexible and adaptable in supporting the financial requirements of the State.
In sourcing funds to meet client debt financing requirements, WATC borrows from both domestic and international capital markets. The evolving COVID-19 pandemic experienced during 2020–21 significantly impacted financial markets and the global economy. For WATC, these impacts are felt principally via increased volatility in financial markets. This uncertain market environment has required WATC to be more flexible in delivering the borrowing program.
Economic and Market Conditions
Following the short but very deep COVID-19 recession in the first half of 2020, both global and Australian economies saw a sharp rebound in 2020–21 on the back of unprecedented fiscal and monetary support. Domestically, the Reserve Bank of Australia (RBA) implemented a quantitative easing program, which consisted of weekly purchases of Commonwealth Government ($4 billion)
and state government ($1 billion) bonds, at its November 2020 board meeting. Among other measures, the RBA also cut its cash rate and three-year yield targets to a new record low of 0.10 per cent.
WATC is a key provider of debt funding to Western Power, which partners in renewable energy projects like the privately owned Yandin Wind Farm in Dandaragan. Opened in May 2021, Western Power provided critical infrastructure and building works. A new terminal station and 10 km of transmission line help to deliver cleaner energy for approximately 200,000 Western Australian homes.
Reserve Bank of Australia Becomes a Major Investor
Between the RBA’s November 2020 announcement and 30 June 2021, the RBA purchased $154 billion of Commonwealth and state government bonds under its quantitative easing program. Of this, $4.2 billion were WATC bonds, making the RBA a significant investor in WATC.
The RBA’s monetary easing has been complimented by an unprecedented peacetime fiscal stimulus, with the Commonwealth Government deficit amounting to a substantial 7.8 per cent of gross domestic product in 2020–21. Monetary and fiscal policy will continue to support the economy in the coming years, with the RBA continuing to indicate that the cash rate is unlikely to be increased before 2024 and, although Commonwealth Government budget deficits are forecast to ease, they will remain significant over the forward estimates.
The rapid economic recovery has pushed the Australian unemployment rate to a decade low of 4.9 per cent in June 2021. This remains above the RBA’s estimate of unemployment which it believes needs to be achieved to push inflation sustainably back to its target band. The RBA has said that it will not raise the cash rate until its inflation target has been met, and it does not expect this to occur before 2024.
While the economy has made a faster than expected recovery, the unprecedented nature of the COVID-19 crisis means there is still much uncertainty around the economic outlook.
Financial Market Activities
WATC successfully managed and delivered on our client borrowing and refinancing requirements during the financial year. Due to the unpredictable economic environment, the State’s budget position evolved considerably. Actual client new borrowings were $264.3 million for 2020–21, which is substantially less than the $2.3 billion estimated at the start of the year.
Funding for liquidity and short-term requirements was met through the Domestic Short-Term Note Program and offshore Euro Commercial Paper Program. Long-term fixed rate funding was generated through the domestic Benchmark Bond Program, with term floating rate funding generated through a combination of floating rate note and swapped benchmark bond issuance.
During the financial year, WATC issued approximately $7.9 billion in benchmark bonds and floating rate notes. Funds generated were used to fulfil new client borrowing requirements and refinance maturities in 2020–21 and the upcoming July 2021 bond maturity. WATC also undertook one tender of existing benchmark bonds and syndicated one new bond issue. The syndicated issue consisted of a new benchmark bond maturing in October 2030 and raised $1 billion at issue.
Investors in 2030 Benchmark Bond by Origin
Asia 28.1%
Europe, the Middle East and Africa 7.4%
North and South America 2.8%
In meeting our clients’ floating rate requirements, WATC also undertook the syndicated launch of a new floating rate note. In December 2020, a new 10 March 2026 floating rate note was issued, raising $1.5 billion.
WATC Maturity Profile by Financial Year End
Term Debt Year-on-Year Change by Bond and Floating Rate Note Line
Adapting Investor Marketing During COVID-19
With all offshore marketing suspended due to COVID-19 travel restrictions, WATC partnered with members of our Fixed Interest Dealer Panel to deliver updates virtually to a number of offshore investors.
Travel restrictions also impacted our marketing for onshore investors. Communications were delivered virtually, including our participation in fixed income conferences. In October 2020, we arranged an online post-budget economic and fiscal update, which was presented by the then State Treasurer to investors and market intermediaries.
Articulating the State’s Sustainability Credentials
An intra-government initiative was launched to develop an information pack detailing Western Australia’s environmental, social and governance (ESG) credentials for potential investors in the State’s bonds. Working in partnership with the departments of the Premier and Cabinet, Water and Environmental Regulation, and Treasury, WATC is consolidating and articulating how the State Government’s ESG objectives also align with the United Nations’ Sustainable Development Goals (SDGs) framework.
The initiative is a precursor to WATC coordinating participation across Western Australian government agencies to establish a Sustainability Bond Framework. In accordance with internationally established protocols, this framework will allow the State Government to consider using sustainability bonds to finance eligible projects with clear environmental and/or social outcome objectives.
Delivering on Client Borrowing Requirements During COVID-19
Against a background of a challenging economic environment and volatile financial market conditions, we were able to continue to meet client borrowing and refinancing requirements in a cost-effective manner. Our two key performance indicators – measuring our cost effectiveness and estimated savings to the State – were successfully achieved well within targets.
Looking Forward:
- The borrowing program for 2021–22 is estimated at $5.0 billion. It comprises $2.1 billion of new money and approximately $2.9 billion of refinancing (consisting of floating rate notes and short-term funding refinanced to long term).
| Term Funding Requirements | $b | $b |
|---|---|---|
| New Money Program | 2.1 | |
| Projected Maturities | ||
| Bond(15/07/2021) | 3.8 | |
| Less Pre-Funded Bond Maturity | -3.8 | |
| Floating Rate Note (03/03/2022) | 2.2 | |
| Total Maturities | 2.2 | |
| Other | ||
| Refinancing: Commercial Paper to Term Debt | 0.7 | |
| Total Term Funding | 5.0 |
- In 2021–22, we expect to issue a new floating rate note with an approximate five-year maturity. We may also explore opportunities to fill gaps in our bond maturity curve.
- We will continue to tap, tender and syndicate, when appropriate, our current outstanding bond and floating rate note lines to support market liquidity and to meet our clients’ needs.
- We will provide investors with consolidated information on the State’s ESG credentials.
- We will continue to monitor developments in changes to international interbank offered rates (IBORs) – including the London Interbank Offered Rate (LIBOR) – and risk free rates (RFRs).
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