Western Australian Economic and Fiscal Update€¦ · ESTIMATED GLOBAL LITHIUM DEMAND 2018-26. WESTERN AUSTRALIAN LITHIUM PRODUCTION. 2007-23 • Lithium mining and manufacturing

Western Australian Economic and Fiscal Update

June 2019

Hon Ben Wyatt MLATreasurer

1

• Economic growth (GSP) in 2018-19 revised down from 3% to 2%– Mainly due to weaker than expected household consumption– In response, 2019-20 Budget minimises the increase in household fees

and charges• GSP growth forecast to lift to 3.5% in 2019-20

– Mainly due to rebound in business investment– Increased Government investment (particularly in roads and rail) also

contributing• Housing (both new construction and established) remains soft –

but lending commitments appear to have troughed– 2019-20 Budget includes a temporary relaxation of Keystart eligibility

criteria to stimulate activity

Key Points

Key Points Cont.

• Estimated operating surplus of $553m in 2018-19– $1.2b turnaround from $674m deficit forecast in the Mid-year Review

• March quarter results show we are on track– Expense growth of just 1.6% to end-March

• Operating surpluses forecast across entire forward estimates period– Including $1.5b surplus in 2019-20

• Net debt forecast to peak at 30 June 2020 and then gradually decline– WA the only State forecasting net debt to peak

2

WA Economy

3

Economy forecast to grow by 3.5% in 2019-20 and 3% p.a. out to 2022-23, underpinned by a strengthening domestic economy

-4

-2

0

2

4

6

8

10

12

2007-08 2010-11 2013-14 2016-17 2019-20 2022-23

%GROSS STATE PRODUCTWestern Australia, Annual Growth

Long-run average growth = 4.3%

Forecast

0

50

100

150

200

250

2007-08 2010-11 2013-14 2016-17 2019-20 2022-23

$ Billion

STATE FINAL DEMANDWestern Australia, Annual Levels

Forecast

Cautious Consumers – But Confidence Improving

• WA households have been cautious over the last decade –reflected in a high savings rate, well above the national average

• This has been acting as a drag on household consumption

• However, consumer confidence has been trending upwards since late 2017, and is expected to support a gradual increase in household spending in the medium term

4

-5

0

5

10

15

20

Jun-90 Jun-94 Jun-98 Jun-02 Jun-06 Jun-10 Jun-14 Jun-18

HOUSEHOLD SAVING RATIO

Western Australia

Australia

% of Income

-50

-30

-10

10

30

50

70

90

110

Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19

No. of Building ApprovalsNo. of Lending Commitments to Owner Occupiers

%

-40

-30

-20

-10

0

10

20

30

40

50

60

Mar-07 Mar-10 Mar-13 Mar-16 Mar-19

Australia

Western Australia

%

• Housing finance affected by banks tightening access to credit nationally – but lending commitments appear to have troughed

• Keystart income limits have been temporarily increased (1 July to 31 Dec 2019)

HOUSING FINANCE (VALUE) WA BUILDING APPROVALS & LENDING(3-month sum, Year-ended growth)

5

Housing Sector

6

The rental vacancy rate has declined sharply, which has increased rents and is expected to support construction and prices as renters look to build

0

1

2

3

4

5

6

7

8

9

100

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar-11 Mar-13 Mar-15 Mar-17 Mar-19

RENTAL MARKETSupply and Vacancy Rate

Total Rental Listings (LHS)Vacancy Rate (RHS)

%, inverse

-20

-15

-10

-5

0

5

10

15

20

25

30

Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19

MEDIAN RENT – HOUSESPerth

Annual average

Year-on-year

%

Housing Sector Cont.

• The State’s resource production capacity has been significantly expanded since the early 2000s

• Business investment normalised as projects moved from construction to production

• Return to growth from 2019-20 supported by $16.3b in new and replacement iron ore and lithium mines

WESTERN AUSTRALIAN BUSINESS INVESTMENTAnnual Levels

7

0

10

20

30

40

50

60

70

80

90

1989-90 1997-98 2005-06 2013-14 2022-23

Potential InvestmentIron OreLithiumAll Other Major Project InvestmentMinor Project InvestmentOtherNon-mining

$ Billion

Forecast

Business Investment

ESTIMATED GLOBAL LITHIUM DEMAND2018-26

WESTERN AUSTRALIAN LITHIUM PRODUCTION2007-23

• Lithium mining and manufacturing is a promising emerging industry• Western Australia accounts for 65% of global lithium production, and demand is

expected to increase considerably over the next decade

8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jun-07 Jun-11 Jun-15 Jun-19 Jun-23

Lithium concentrate sales, WA

Forecast

Million tonnes, annual sum

234

777

1,009

1,634

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

low base high

2018 2026

Estimated Actual Roskill Forecast

Thousands of tonnes of LCE

Business Investment Cont.

9

Upturn in mine site employment across key commodities

0 0.4 0.8 1.2

Community Services &Development

CEO & General Management

Education & Training

Legal

Government & Defence

Healthcare & Medical

Mining, Resources & Energy

SEEK NEW JOB ADVERTISEMENTS, WAAnnual growth, April 2019

%0

20

40

60

80

100

120

140

Dec-02 Dec-06 Dec-10 Dec-14 Dec-18

MINE SITE EMPLOYMENTTotal Employment, Annual Average Levels

Other Iron Ore Gold Lithium, Tin & Tantalum

'000

Record Mine Site Employment as Projects Ramp Up

Outlook for WA’s Key Trading Partner

10

Demand conditions in China remain favourable

825

15

WA IRON ORE EXPORTScontained in Chinese exports to US

Total WA iron ore exports

Iron ore embodied in China's exports of steel to the US

million

milliontonnes

tonnes

-10

-5

0

5

10

15

20

25

-60

-10

40

90

140

Dec-10 Aug-12 Apr-14 Dec-15 Aug-17 Apr-19

% GrowthQrtly YoY

% GrowthQrtly YoY

CHINA ACTIVITY& Iron ore price

China secondary indicator, RHSIron ore price, LHS

General Government Revenue

11

Revenue has rebounded – but 2019-20 Budget predicated on modest revenue growth of 2.8% p.a, underpinned by conservative commodity price forecasts

4.8

-6

-4

-2

0

2

4

6

8

10

12

14

2007-08 2010-11 2013-14 2016-17 2019-20 2022-23

%

Decade average = 4% Underlying

growth

Average growth = 2.8%

Forecast

12

-10

-5

0

5

10

15

20

25

1997-98 2002-03 2007-08 2012-13 2017-18 2022-23

%PAYROLL TAX Annual Growth

Forecast

Long-run avg = 7.6%Forecast

avg = 6.5%

0

200

400

600

800

1,000

Apr-04 Apr-07 Apr-10 Apr-13 Apr-16 Apr-19

$m

PAYROLL TAX, LARGEST TAXPAYING INDUSTRIES

Rolling annual sum

MiningConstructionAdmin & supportProfessional servicesManufacturing

Payroll Tax Has Rebounded Supported by Hiring in the Resources Sector

Iron Ore Price

13

2019-20 Budget assumes an iron ore price of $US73.50/tonne in 2019-20 and $US63.70 by 2021-22 – upside risk

40

50

60

70

80

90

Jul-18 Jul-19 Jul-20 Jul-21 Jul-22 Jul-23

IRON ORE PRICE FORECASTS

Actual

Forward Contracts

Budget Approach

Consensus

MYR Approach

$US per tonne

2019-20: $US73.5

2022-23: $US63.7

2018-19 2019-20 2020-21 2021-22 2022-23

2020-21: $US65.6

2021-22: $US63.7

70

75

80

85

90

95

100

105

110

24-Jan 13-Feb 05-Mar 25-Mar 14-Apr 04-May 24-May

BENCHMARK IRON ORE PRICE

Initial responseto Vale disaster

$US/t

CycloneVeronica

Record China steeloutput; iron ore

inventories fall sharply

Budget cut-off date (8 Apr)

GST Reform

• WA’s GST share will never again fall below 70 cents in the dollar, up from 30 cents a few years ago

• Commonwealth to provide top-up payments totalling an estimated $5 billion to 2021-22

• From 2022-23, the 70% floor will be delivered through legislated increases to our GST grants

14

GST REFORM IMPACT

0%

10%

20%

30%

40%

50%

60%

70%

80%

2013-14 2016-17 2019-20 2022-23

Commonwealth-funded70% floor

GST grant gains fromreform

GST grants (pre-reform)

ForecastProportion of population share

GST Reform Cont.

• Under the pre-reform system, WA lost around 90% of additional iron ore royalty income (over time)

• Under the GST reforms, reduced GST grants from higher iron ore prices are fully offset by increased top-up grants (while WA’s GST relativity is below 70%)

• The new benchmark and floors provide insurance that, over the forward estimates, WA will retain all royalty increases from the higher iron ore price

15

0

1

2

3

4

5

6

7

$80US/t $100US/t $120US/t

$ Billion

GST grants (pre-reform)GST grant gains from reformCommonwealth-funded 70% floor

Higher than expected iron ore prices now have no impact on WA’s GST-related revenue

16

Budget strategy driven by the Government’s strong focus on expense management

2.4

0

2

4

6

8

10

12

14

2007-08 2010-11 2013-14 2016-17 2019-20 2022-23

%

Decadeaverage = 5.9%

Underlying growth

Average growth = 1.3%

Forecast

General Government Expenses

17

• Return to operating surplus in 2018-19, two years earlier than forecast in last year’s Budget

• Total public sector cash surplus forecast from 2020-21 – first since 2007-08

-5

-4

-3

-2

-1

-

1

2

3

4

2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22

General Government Operating BalanceTotal Public Sector Cash Surplus/Deficit

$ Billion

Forecast

Fiscal Position

Infrastructure Investment

18

Asset Investment Program totals $22.8b over next four years, with over one third of this on roads and rail

0

1

2

3

4

5

6

7

8

2013-14 2015-16 2017-18 2019-20 2021-22

METRONET Other roads and railHealth EducationElectricity Water CorporationAll other

$ Billion

ASSET INVESTMENT PROGRAMTotal Public Sector

Forecast

• Budget strategy is reducing net debt • WA is the only State where net debt is expected to decline

TOTAL PUBLIC SECTOR NET DEBT AT 30 JUNE

TOTAL PUBLIC SECTOR NET DEBT AS A SHARE OF GSP

19

0

2

4

6

8

10

12

14

16

2008 2010 2012 2014 2016 2018 2020 2022

Forecast

%

0

5

10

15

20

25

30

35

40

45

2008 2011 2014 2017 2020 2023

$ Billion

AASB 16 Impact Forecast

Net Debt

Financial Results to 31 March 2019

20

• Rebounding revenue• Continuation of historically low expense growth

4.8

8.1

0

1

2

3

4

5

6

7

8

9

Nine months to 31 Mar 2018 Nine months to 31 Mar 2019

%GENERAL GOVERNMENT REVENUE GROWTH

Decade average = 4.1%

1.4 1.6

0

1

2

3

4

5

6

7

8

9

Nine months to 31 Mar 2018 Nine months to 31 Mar 2019

%GENERAL GOVERNMENT EXPENSE GROWTH

Decade average = 6.2%

Financial Results to 31 March 2019 Cont.

21

March 2019 results show largest turnaround on record

-1400

-1200

-1000

-800

-600

-400

-200

0

200

Nine months to 31 Mar 2018 Nine months to 31 Mar 2019

$ MillionGENERAL GOVERNMENT NET OPERATING BALANCE

-3000

-2500

-2000

-1500

-1000

-500

0

Nine months to 31 Mar 2018 Nine months to 31 Mar 2019

$ MillionTOTAL PUBLIC SECTOR CASH SURPLUS/DEFICIT

Upside Risks

22

• Land Titles Registry– WA Government seeking a new operator to provide land titles services

and receive associated revenue over a period of up to 50 years, in return for upfront proceeds

– No legislation required• TAB

– Sale of the existing TAB business, with an exclusive licence to provide wagering services in WA

– Legislation introduced into Parliament in May 2019• Iron ore price (and interaction with GST reforms)• Likely underspend in 2018-19

WATC and Financial Markets

WATC Maturity Profile:

• Target optimal mix between floating and fixed rate exposure.

• Limit debt maturing within 12 months to less than 20% total borrowing at 30 June.

• Liquid assets covering 100% of debt maturing within 12 months at 30 June.

Maturity Profile by Financial Year end at 30 April 2019

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Millions

Maturity Profile by Financial Year end at 30 April 2019

STN

FRN

BOND

23

WATC Estimated Borrowing Program 2019-20 as at 10 May 2019Term Funding Requirement $B $B

New Money Program 1.1

Projected MaturitiesBenchmark Bond 3.7FRNs 2.9

Total Maturities 6.6

Total Term Funding Requirement 7.7

Note: 1 As at 10 May 2019. The sourcing of WATC’s funding is subject to conditions in the various market and the market

mix during the year may be amended as necessary to meet WATC’s pricing, liquidity, lending and capital usage targets.

FinancialYear

2018-19 State Budget$B

2019-20 State Budget$B

Variance$B

2019/20 $3.3 $1.1 -$2.2

2020/21 $0.9 $0.5 -$0.4

2021/22 $0.6 $0.4 -$0.2

2022/23 - $0.2 -

-$2.8

New Money Program 2019-20 to 2022-23

24

WATC and Financial Markets

Upside risks provide ongoing spread contraction opportunitiesSmall new money programs combined with conservative commodity price forecasts, ongoing expenditure restraint and selective asset sale proceeds provide the back drop potentially for further spread tightening to AAA and AA semi issuers

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

2Yr 3Yr 5Yr 7Yr 10Yr

WATC spread to Commonwealth, Par curves

CGS11/09/17 CGS17/05/19

25

WATC and Financial Markets

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

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17

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7

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7

01-A

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17

01-S

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7

01-O

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7

01-N

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17

01-D

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7

01-J

an-1

8

01-F

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8

01-M

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8

01-A

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18

01-M

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8

01-J

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8

01-J

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8

01-A

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18

01-S

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8

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8

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18

01-D

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8

01-J

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9

01-F

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9

01-M

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9

01-A

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19

WATC 10yr Spreads to Peer Issuers

10YR QTC AA+ 10YR TCV AAA 10YR TCORP AAA

WATC debt continues to be a good value proposition for investors:• Western Australia has a strong credit rating, supported by strong institutional arrangements and excellent

liquidity• Improved government finances, driven by improving revenue and disciplined expenditure management• Economy recovering from post mining construction boom period• Diversified economic and revenue base• Strong fiscal management may further limit new funding program and tighten spreads to other semi issuers

26

WATC and Financial Markets summary

WATC website: www.watc.wa.gov.auDepartment of Treasury website: www.treasury.wa.gov.auPhotos courtesy of Tourism Western Australia

WarningAny opinions, judgements, conclusions, forecasts, predictions or estimations contained in this presentation are made in reliance on information provided toWestern Australian Treasury Corporation which Western Australian Treasury Corporation believes to be reliable. Western Australian Treasury Corporation,however, cannot guarantee the accuracy of that information. Thus, any recommendations are made in good faith but they must be carefully considered becausethey are provided only to assist you with any decisions which you make.

27

Thank you