WA reaps the benefit of improved position

Western Australia (WA)’s budget bottom line has been improving. Western Australian Treasury Corporation (WATC)’s Perth-based chief executive, Kaylene Gulich, and head of financial markets, Vince Cinquina, talk about how the issuer has accomplished this and WATC’s current borrowing programme.

WA’s fiscal position has improved over the last 18 months. What are the major drivers of this and how have investors responded?

GULICH There has been strong fiscal discipline by the government in the last 4-5 years, resulting in record low levels of recurrent expenditure growth.

At the same time, WA has benefited from strong revenue growth, with commodity prices above budget forecasts and top-ups from the Commonwealth government through goods and services tax (GST) reforms. The commercialisation of some assets has also strengthened the state’s fiscal position. All this has seen the state return to a budget surplus position from 2018/19.

We have been speaking with investors over a long period about the cyclical adjustment in the economy and they have been pleased to see these improvements.

Are investors keen to see the state’s fiscal position become more resilient to a commodity-price downturn and, if so, how can this be achieved?

GULICH I think investors would like to see less reliance on what can be volatile royalty-based revenue streams and to have a somewhat more diversified economy.

Recent federal GST top-ups, amendments to the GST distribution methodology, strong expenditure controls and improving state-based tax revenues have resulted in a much more stable and sustainable revenue base. This is further supported by more conservative commodity-price estimates across the forward-estimates period.

These factors have resulted in royalty income as a percentage of general-government revenue falling to an estimated 16.4 per cent by 2022/23 from 22 per cent in 2018/19.

We believe state royalty revenue is less volatile now than in previous cycles, due to the market share of our low-cost producers supporting volume, and the conservative commodity and exchange-rate assumptions in our budget.

Investors take much comfort from our current forecasts, the interplay between the exchange rate and commodity prices, and the fact that the upside in revenue is going to fiscal repair rather than expenditure growth.

How have improvements to the state’s budget from the better fiscal position affected WATC’s borrowing requirement?

GULICH Our borrowing requirement is down, which is good. We have had no new borrowing requirements in 2018/19 and 2019/20. Our focus has been on our maturity profile and how to manage reduced refinancing requirements.

CINQUINA We have issued a new 10-year benchmark bond each year for the last 3-4 years and currently have annual maturities out to 2029. Given the reduction in new borrowing requirements this year and across the forward estimates, generating sufficient volume for a new annual 10-year maturity becomes problematic.

Consequently, we signalled to markets after the WA mid-year update that, for the remainder of the 2019/20 financial year, we would look at issuing a new 2031 benchmark bond maturity rather than a straight 10-year, in addition to a new five-year floating-rate issue.

Activity across the forward-estimates period will probably follow a similar pattern: a new long bond every two years and the resulting maturity gaps being filled as they roll down the curve.

WATC has some large maturities coming in 2020, 2021 and 2022. What is the strategy for managing these?

CINQUINA Total term borrowing requirements have averaged around A$8 billion (US$5.4 billion) over the last five years and are forecast to remain the same over the forward-estimates period.

From this perspective, the volume of maturities across 2020-22 does not necessitate a change in approach, which would encompass buybacks, early refinancing, prefunding and some component of debt repayment.

WATC has a base lending product that has us naturally issuing more heavily into the mid curve, in floating-rate and swapped benchmark bond format, to get the required floating-rate funding. Even so, much of each maturing bond funds fixed-rate lending, which will be refinanced into the longer end of the curve.

We established an October 2034 bond line in late 2019 on what appeared to be good investor demand. Much of the early demand for other 2034 maturities appeared to have been from the offshore investor community. However, in the WATC transaction almost 90 per cent went to domestic investors. To date we have issued more than A$500 million into the 2034 bond.