Transcript for AGS Investor Update - Budget 2020-21 webcast
(Ian Clunies-Ross speaking)
Hello and welcome to AOFM’s Budget webcast for AGS wholesale investors. My name is Ian Clunies-Ross and I am the Head of Investor Relations at the AOFM.
The AOFM provides regular updates to investors on a range of issues, including the AOFM's funding task and planned issuance patterns. These have regularly followed
, annual budgets and associated mid-year economic and fiscal outlooks. This has usually been done via an investor chart pack released on our website, and direct engagement with investors via one on one meetings, and presentations at industry forums.
The AOFM is now looking to extend the format of its updates by including webcasts – such as this one. In this webcast the AOFM’s CEO, Mr Rob Nicholl will provide a 15 minute post-Budget update which will cover the AOFM’s issuance program for the remainder of 2020-21, data around investors and AGS holdings. The webcast is aimed at supplementing the full investor chart pack.
The full investor chart pack is currently available as usual, on the website by going to the ‘Investor’ tab on the home page and following the links through the ‘Wholesale Investor’ page.
I’ll now hand it over to Mr Rob Nicholl.
(Rob Nicholl speaking)
There are 4 key points I will cover in this overview:
- Australia’s underlying fiscal position, while having deteriorated materially to the forecasts from the 2019-20 Budget, is better than initially thought could be the case when the impacts of the pandemic began here back in March. The Government has adopted a fiscal strategy that will focus on continued stimulatory measures in the near term.
- The issuance program is proceeding smoothly and the AOFM is well positioned to meet the need for unanticipated changes – we are focused on supporting liquidity and introducing new maturities according to a clear strategy that will support debt portfolio and market efficiency aims;
- We are monitoring market developments closely and are taking into account as much information as is available to us in making issuance decisions and providing guidance to the market;
- Investors can continue to expect a familiar pattern of behaviour from the AOFM as it undertakes the remainder of the issuance program for this year – including that it will remain a regular issuer of Treasury Notes and will not be making any major changes unless these have been clearly signalled in advance.
Before running through some of the headline Budget forecasts it is important to understand the assumptions on which they are based. First, while contained, there will continue to be localised outbreaks of COVID-19 until a vaccination program is fully in place by late calendar 2021. In the interim a continuation of social distancing and related restrictions will remain in place, similar to what most of the Australia is currently experiencing.
Second, restrictions in Victoria, which has been materially impacted by an outbreak concentrated in Melbourne, will be gradually lifted throughout the remainder of calendar 2020.
Third, most border restrictions between Australian states will be lifted by the end of calendar 2020 with a gradual return of international student and permanent migration flows to commence in the latter part of calendar 2021. It is around this time that a gradual return of general in and outbound international travel is also assumed to recommence.
Fourth and on a related note, a recovery of international travel and labour markets will facilitate a recovery of net overseas migration from negative 72,000 persons by the end of fiscal 2021 to around 200,000 persons in fiscal 2024 (compared with 154,000 in fiscal 2020).
The Government’s fiscal measures to support the economy are having measurable impact. For example, analysis in the Budget papers indicates that those measures directed at supporting the labour market, which include the JobKeeper Payment scheme, are forecast to reduce the headline peak unemployment rate (which is expected to occur around March next year) by 5 per cent to just under 8 per cent. I will come to the specific fiscal forecasts shortly but before that let me give an overview of some of the key Budget macro indicators.
Gross debt is forecast to be 44.8 per cent of GDP by the end of this fiscal year and stabilise at around 55 per cent over the medium term (at which point net debt is projected to be around 40 per cent). Therefore, by international and comparative peer economy standards Australia will continue to stand out as having a relatively strong balance sheet.
The Government’s previous Fiscal Strategy was one of measured fiscal consolidation with the aim of generating sustained Budget surpluses of around 1-1.5 per cent of GDP against the backdrop of steady economic growth and supportive labour market conditions. With the impact of managing the pandemic there is a revised fiscal strategy with two phases – a COVID impact recovery phase and then (when unemployment is below 6 per cent) a 2nd phase whereby debt to GDP is stabilised and then reduced overtime.
Real GDP fell by 7.0 per cent in the June quarter 2020 after a modest contraction of 0.3 per cent in the March quarter, as travel restrictions and other pandemic containment measures affected consumer spending and business investment activities.
As virus outbreaks have been controlled here in Australia and the more severe control and containment measures have been eased, the labour market has already started to recover. Of an estimated 1.3 million people who either retrenched or were stood down on zero hours in April, almost 60 per cent or 760,000 of them have been reengaged.
Following the recent decline, economic activity is forecast to recover in the 2nd half of this fiscal year and this will be on the back of a further easing of containment measures, which is expected to generate improving business and consumer confidence.
The forecast for real GDP growth this fiscal year is a contraction of 1.5 per cent, but the recovery forecast for 2021-22 is for growth of 4.75 per cent.
As I mentioned, the unemployment rate is forecast to peak at around 8 per cent, before falling over the next few years. By the June quarter of 2022 it is expected to be 6½ per cent and will continue to decline over the forecast period.
Turning to the fiscal position and how that will impact issuance ahead I will summarise some of the key points but note that there is more detail included in the investor chart pack Ian pointed to on the AOFM website.
(Display slide titled: Australia’s budget balance)
- The forecast fiscal position for this year will be very much in line with the forecasts released by the Treasurer in his July Statement.
- The deficit outcome for last year while similar in scale relative to GDP as the early 1990s recession and at the global financial crisis (GFC) only reflects the last quarter impact of the pandemic – 2020-21 is therefore the first full-year impact and at 11% of GDP is a relatively strong outcome all things considered. It is forecast to improve to a deficit of around 3 per cent of GDP by 2023-24.
- The other thing that is obvious from this chart is that the Government was on‑track to having achieved its fiscal consolidation aim for last year prior to the impact of the pandemic.
- The forecast for the next two years indicate an underlying expectation that the Australian economy, while continuing to exhibit the impacts of the events of this year, will undergo progressive improvement as I highlighted in my summary macro related comments. It would be difficult to argue against the observation that at the macro level at least Australia has demonstrated a relatively strong ability to manage the health and economic impacts of the pandemic. Furthermore, there is no reason to expect a change to this stance given the experiences now available on which to manage the period ahead.
(Display slide titled: Issuance of Australian Government Securities – gross issuance)
- The planned issuance program for this year announced in my ABE speech of July remains at around $240 billion (by far the largest undertaken to date) – when we included this estimate in that guidance it already took into account the possibility for some deterioration up to the Budget announcement.
- Compared with last year the program for this year is about $100 billion higher and with around half of it having already been achieved we think that reflects very well on the ability of the AGS market to absorb these unprecedented volumes of issuance. It is also reassuring to see that very large syndication volumes have been issued in recent months without any obvious detriment to the functioning of the market.
- The underlying revenue forecasts remain relatively strong for the current circumstances and taking everything into account there was no need to adjust planned issuance. This does not mean adjustments are not possible between now and the end of the year but these would only be if there are material changes to the Budget estimates either at MYEFO or in the 2021-22 Budget. Based on the current outlook that appears unlikely.
- The Budget forecast for next year indicates an appreciably lower financing requirement than for this year but the program for next year will need to take account of the possibility for reintroducing regular buy-backs and/or beginning to term out some of the outstanding Treasury Note issuance we have relied on this calendar year. I will come back to the issue of Treasury Notes in particular shortly.
- The TIB program will remain static in terms of gross issuance at around $2-2.5 billion. There are no new maturities planned for this financial year and we continue to assess the state of the market in terms of making twice monthly issuance decisions but feel the supply intentions remain appropriate.
(Display slide titled: Treasury Bonds on issue)
- This chart shows that as predicted by past behaviour and earlier guidance we have provided that our issuance and new maturity focus remains concentrated around the futures baskets. Since March of this year we have established three new lines to support the 3-year basket and the forthcoming launch of a new 5-year futures contract. I made reference to the new contract being established by the ASX in the ABE speech of July and we remain very positive about the supportive impact that this will provide for the AGS market.
- It can also be seen that we have established two new 10-year basket maturities with a third announced but yet to be established 2032 line still to come in the second half of this fiscal year. The new 30-year benchmark line should confirm our commitment to maintain an internationally relevant benchmark yield curve and we will continue to look for every reasonable opportunity to be active in the long-end. This will include finding opportunities to undertake taps by smaller syndications (up to $6 billion) for established maturities longer than 15 years. The prospect of a new 2043 maturity remains part of our commitment to support the 20-year futures contract but as I advised in the ABE speech in July this will not be forthcoming until next fiscal year.
- We have flagged the idea of a introducing a third maturity in some years as a means of helping to manage the debt portfolio profile and we have now pretty much finalised our thinking on how this might be implemented but have undertaken to give clear guidance on this in January around the time that issuance operations resume following the summer break.
(Display slide titled: Issuance of Treasury Notes)
- There is no secret in the fact that we have leaned heavily on the Treasury Notes market. We have relied on this market in part for achieving the financing task but this will not signal a new long-term change for us.
- The amount of Notes outstanding has hovered around the $65 billion level for the past couple of months and our current expectation is that this will continue through to the end of the fiscal year.
- As we recently advised in our issuance update – we will remain a regular issuer of Treasury Notes with weekly tenders totalling $2-4 billion usually across several maturities. This is expected to continue through until the end of the fiscal year.
- We don’t at this point see any reason to maintain a large outstanding of Treasury Notes indefinitely because at some point we will return to the more traditional practice of relying fully on term issuance overt time to meet the financing tasks. That said, we are aware that the Notes market has an important role to play to the AOFM and has over the last year (and the last 5 months in particular) attracted a lot of new interest – with a lot of past interest having returned.
- Ahead of making firm decisions on the rate at which we will begin to term out Treasury Notes we will be giving careful thought to what the future role this market should play for us and we will be giving clear advanced notice of how any changes from the current situation will be managed.
(Display slide titled: Resident and non-resident holdings)
- Offshore investors continue to play a very important role in the AGS market (and this was highlighted by some recent long bond syndications – including the 2051).
- The offshore investor base brings a diversity to the market that has been important in helping to build resilience through a range of market conditions. We intend to continue facilitating this diversity to the extent we can influence it.
- While the rate of offshore buying has increased in response to the increased rate of issuance, the overall proportion of offshore ownership has declined recently – although we do not see this as the start of a new trend anything of particular note.
(Display slide titled: Resident and non-resident holdings of AGBs)
- We do know that the RBA now holds a reasonable proportion of outstanding Treasury Bonds (somewhere in the order of 8-9 per cent of the market) and that domestic investors have been very active since the market recovery following the events of March. This include the domestic bank balance sheets as we can see from this next slide.
- We look forward to engaging with a wide range of investors through our regular one-on-one updates and are not planning any further updates for this fiscal year until early January or around the time of MYEFO.
(Ian Clunies-Ross speaking)
Thank you, Rob.
While this is a recorded session and therefore doesn’t offer a Q&A opportunity, the AOFM will continue to engage with investors directly, on an ongoing basis, through the usual rounds of engagements either via teleconference or in person.
However should any specific questions have arisen from the webcast today, please feel free to email InvestorRelations@aofm.gov.au.
Thank you for listening to the webcast and we hope you found it informative and helpful.