QTC announces lower-than-expected borrowing programme

Thursday, 06 June 2013

Updated

Following the state budget on June 4, the borrowing authority for Queensland has announced a funding programme of A$12.1 billion (US$11.5 billion) for the 2013/14 financial year. This is A$2 billion less than reported at the mid-year update in January. A$7.1 billion will be raised in term debt, with the remainder funded by short-term debt.

Queensland Treasury Corporation (QTC) also expects to need A$1 billion less than reported in January over the 2014/15 to 2015/16 period. In a statement released on June 6, QTC says the decrease in its borrowing requirement reflects the state government's commitment to fiscal repair, announced in the budget, which includes reducing expenditure and stabilising Queensland's level of debt - with a surplus forecast in the general government sector by 2015/16.

QTC's indicative borrowing programme (A$M)

Source: Queensland Treasury Corporation June 6 2013

State budget

Queensland is forecasting GSP growth of 3 per cent in 2013/14 and 2014/15, rising to 6 per cent in 2015/16 driven by an increase in LNG production, 23 per cent export growth and a stronger domestic sector. The budget is projected to be in fiscal deficit in 2013/14 and the following year, before moving back into surplus in 2015/16 - one year later than the projection given at the state's mid-year fiscal and economic review (MYFER) in December 2012. The state is projecting annual revenue growth of 6.4 per cent over the forward estimates, driven mainly by strong royalty growth.

In the wake of the budget Standard & Poor's (S&P) affirmed its AA+/A-1+ issuer credit ratings and stable outlook on the state of Queensland, despite the fact that the 2014 budget foreshadows weaker operating performance in fiscal 2014 than forecast in the government's MYFER. Conversely, says S&P, the estimated result for fiscal 2013 is better than forecast in the MYFER. The rating agency concludes: "The weaker performance budgeted in fiscal 2014 is due to increased disaster-recovery expenditure following flooding in early calendar 2013, as well as downward revisions in revenues including mining royalties and GST transfers across all budget years. A number of revenue measures have been taken in the budget to partly offset revenue pressures. Our ratings on Queensland already reflect our view of the state's very weak budgetary performance."

Moody's Investors Service (Moody's) points out in its comment on the Queensland budget that the projected budget gap for 2013/14 for the general government sector has widened to A$7.7 billion - or 17.2 per cent of revenues compared with the forecast a year ago of a lower A$3.7 billion, or 7.8 per cent of revenues. The rating agency says in part this negative trend reflects the cost of the clean-up and rebuilding following cyclone Oswald, while related natural disaster relief funding from the Commonwealth government is expected to be distributed one year later in 2014/15.

According to Moody's, the sharp improvement in financial performance projected for 2014/15 - with a projected deficit of only A$244 million or 0.5 per cent of revenues - assumes a large increase of 14.7 per cent in revenues, a rise of only 1.5 per cent in current expenditures, and a fall in capital expenditures.

The rating agency, as well as various bank analysts, points to the very low growth in expenditures achieved in 2012/13 as a positive indication of the government's commitment to fiscal redress. Westpac Institutional Bank analysts point out that "expenditure growth over the forward estimates is expected to average 2.6 per cent per year, significantly lower than the 8.9 per cent average annual growth rate over the decade to 2011/12. In 2012/13 general government expenses were A$1.7 billion lower than the MYFER estimate, which is a good sign that they are delivering on their expenditure plans and further budget cost savings appear achievable".

RBC Capital Markets analysts conclude that while downside risks remain to Queensland's overall fiscal position, the state government has shown a willingness to react to a deteriorating revenue base by introducing higher taxes, levies and duties. "Whilst unpopular, it does imply recognition that expense growth can be contained only so much, particularly given reasonable rates of population growth," write the analysts. "QTC spreads had nudged wider in anticipation of some poorer [budget] numbers; we see little in [the] budget to suggest this move will continue. We remain positive on QTC spreads and on semis as an asset class."

QTC's funding strategy

In terms of overall funding strategy, QTC says it will continue to issue regular benchmark AUD bonds as its principal source of funding, with the launch of one or more new long-dated AUD benchmark bond lines. With three new benchmark bond lines added during the past fiscal year, QTC now has bonds outstanding in each calendar year out to 2024.

Given its reduced funding requirements, QTC will also consider cancelling shorter-dated bonds to manage its refinancing task over the forward estimates. The treasury corporation also says it has now completed sufficient term debt issuance for 2012/13. QTC will revise its 2013/14 borrowing programme following the release of the Queensland government's mid-year fiscal and economic review.