WATC reaping benefits of fiscal discipline

Western Australia (WA) emerged as Australia’s strongest-performing state economy in 2020, on the back of a surging iron-ore price and a growing track record of fiscal discipline from the state government. As a result, Western Australian Treasury Corporation (WATC)’s funding requirement has not increased in the wake of the COVID-19 crisis to anything like the same degree as many of its peers. Kaylene Gulich, WATC’s Perth-based chief executive, discusses the outlook.

WA’s management of COVID-19 and a surging iron-ore price have shielded it from the worst economic effects of the pandemic, resulting in a limited effect on WATC’s funding task. What is the outlook for the borrowing requirement?

At 31 December 2020, the borrowing programme for the remainder of the 2020/21 financial year stands at A$2.3 billion (US$1.8 billion), comprising approximately A$1.6 billion of new money and A$700 million of refinancing.

In addition, WATC has a benchmark-bond maturity of A$4.6 billion on 15 July 2021, refinancing of which will commence in the current financial year.

The last time the iron-ore price boomed to the extent it did in 2020, it was followed by a protracted recession in WA. What measures have been put in place to mitigate the possibility of this happening again?

The current situation of elevated commodity prices is very different from the experience around 2007, when the steep increase in global demand for iron ore drove a period of sustained higher prices and triggered significant business investment in the WA mining sector.

Over the decade to 2018/19, there was a record A$550 billion in private-sector investment in mining and related infrastructure. This supported record population and employment growth, elevated housing investment and strong household consumption.

The contraction in the WA domestic economy, as measured by state final demand, that followed this mining construction boom reflected the impact on key economic indicators as these large capital projects shifted from construction to production.

This resulted in a period of below-average population growth, unwinding business investment and minimal dwelling investment, while at the same time actual export tonnage reached a new record level.

The current high in the iron-ore price has not triggered the same level of business investment and has therefore not driven the same economic growth cycle of the last decade. While economic growth remains positive – the strongest of all states – it is still tracking below historical levels. This reflects the ongoing recovery of the WA economy. This has been compounded by the COVID-19 crisis.

The WA government’s strong expenditure discipline, combined with more sustainable revenue assumptions – including reforms to the national goods and services tax pool and conservative iron-ore revenue forecasts – mean the state’s balance sheet has the capacity to support ongoing government investment to ensure the domestic economy continues to rally.

How have WATC’s investors responded to the developments in the state economy over the last year?

The differences in outcomes for the WA state economy – including its strong fiscal position and, as a consequence, its debt-funding requirement compared with peer states – have been reflected in the trading relativities between the various state-government issuers.

In the last 12 months, investors have responded positively to the improved economic outlook and reduced issuance requirements, resulting in narrower relativities between WATC and peer issuers across the curve.

What are WATC’s priorities for debt-funding strategy in 2021 and beyond?

WATC expects to continue to fund the bulk of its fixed-rate new-money and refinancing requirement through its Australian dollar benchmark-bond programme, supported by opportunistic issuance into nonbenchmark lines in longer tenors.

WATC’s floating-rate note programme will generate the bulk of floating-rate funding requirements out to five years, with the shorter-tenor domestic and ECP programmes used for shorter liquidity requirements.

Given WATC’s funding requirement has not ballooned, is there still a focus on extending average tenor?

We will continue to consider opportunistic issuance into longer-dated and ultra-long nonbenchmark bonds where we can align borrower and investor demand. This was evidenced by our issuance into a new July 2041 line in mid-2020.