Western Australian Treasury Corporation Mid-Year Review...WESTERN AUSTRALIAN ECONOMY Economy is recovering in line with expectations, underpinned by strong export growth-3-2-1 0 1

Western Australian Treasury Corporation Mid-Year Review

Michael Barnes Chairman

John CollinsChief Executive Officer

SUMMARY 2018-19 Mid-year Review shows a significant improvement in the

State’s financial position• Budget back in surplus from 2019-20 – one year earlier than previously

expected• GST top-up payments ($2.4b) allocated in full to debt reduction• Expense growth averaging just 1.3% p.a.

Clear signs of recovery in WA economy• GSP growth of 3% forecast for 2018-19, up from 1.9% in 2017-18 and a

contraction of 1.8% in 2016-17

S&P Global revised its outlook on the State’s AA+ rating from negative to stable in October 2018

2

WESTERN AUSTRALIAN ECONOMY Economy is recovering in line with expectations, underpinned by strong export growth

-3

-2

-1

0

1

2

3

4

5

6

2017-18 2018-19 2019-20 2020-21 2021-22

Balancing ItemDwelling InvestmentGovernment SpendingBusiness InvestmentHousehold ConsumptionNet Exports

PercentagePoints

GROSS STATE PRODUCTContributions to Growth

Forecast

50

100

150

200

250

300

350

1989-90 1997-98 2005-06 2013-14 2021-22

$Billion

State Final Demand

Gross State Product

Forecast

ECONOMIC GROWTH COMPONENTSWestern Australia, Annual Levels

3

Population growth has begun to recover after a rapid fall from the 2012-13 peak

-20

0

20

40

60

80

2012-13 2015-16 2018-19 2021-22

Natural IncreaseNet Interstate MigrationNet Overseas MigrationIntercensal DiscrepancyPopulation Change

Forecast

'000 People

POPULATION GROWTHWestern Australia, Annual Contributions

POPULATION GROWTH

4

-5

0

5

10

15

20

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

HOUSEHOLD NET SAVING RATIOAnnual

Western AustraliaAustralia

%

Households remain cautious, but sentiment is improving from recent lows

HOUSEHOLD CONSUMPTION

5

80859095

100105110115120125130

Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18

CONSUMER SENTIMENT WAMelbourne-Wespac Institute, Quarterly

Index

Recent spate of project approvals driving investment, jobs and revenue

Key Projects Est. Capex($m)Forecast start of

construction Expected FID

Iron OreRio Tinto - Koodaideri 3,500 2018-19 Approved

BHP - South Flank 4,500 2018-19 Approved

FMG - Eliwana 1,800 2018-19 Approved

LNG

Chevron - Gorgon Stage 2 5,000 2018-19 Approved

Lithium

Talison - Greenbushes lithium expansion phase 2 520 2018-19 Approved

Mineral Resources - Lithium hydroxide plant Stage 1 600 2019-20 2018-19

Albemarle - Lithium project phase 1 600 2019-20 Approved

Kidman Resources - Earl Grey Lithium project 600 2018-19 2018-19

Total 17,120

BUSINESS & INVESTMENT

6

LITHIUM DEMAND

Source: Pilbara Minerals & RoskillSource: DMIRS; WA Treasury (forecasts)

The State’s lithium industry is rapidly expanding in response to increases in global lithium demand

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011-12 2013-14 2015-16 2017-18 2019-20 2021-22

WA LITHIUM CONCENTRATEProduction volumesKilo-tonnes

Forecast

217

777

1,009

1,634

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

low base high

2017 2026

GLOBAL LITHIUM DEMANDScenarios

000' LCE equivalent

7

WA LITHIUM INDUSTRYWA is the world’s largest lithium producer, accounting for 41% of global production in 2017-18

Western Australia41%

Rest of World59%

WA LithiumProduction

$1.6b in 2017-18

8

The WA Government is supporting a pipeline of investment to establish WA as a world leader in battery minerals

LITHIUM PROCESSING

9

Employment growth has rebounded strongly since bottoming in early 2017, underpinned by full-time employment

EMPLOYMENT GROWTH

10

900

1,000

1,100

1,200

1,300

1,400

1,500

2001-02 2005-06 2009-10 2013-14 2017-18 2021-22

'000EMPLOYMENT

Annual levels, Western AustraliaForecast

-4

-2

0

2

4

6

Nov-08 Nov-10 Nov-12 Nov-14 Nov-16 Nov-18

EMPLOYMENTContribution to Annual Avg Growth

Full-time

Part-time

Total

pp

WAGE GROWTHWage growth remains soft – although some early signs of a pick-up in private sector wages

0

1

2

3

4

5

6

7

Sep-02 Sep-06 Sep-10 Sep-14 Sep-18

Private Sector WPI

Public Sector WPI

%WAGE PRICE INDEX

Western Australia, Annual Growth

11

6

8

10

12

14

16

1

2

3

4

5

6

Sep-02 Sep-06 Sep-10 Sep-14 Sep-18

Wage Price Index (LHS)

Annual Average Underutilisation Rate (RHS)

% % - InverseWAGES AND LABOUR UNDERUTILISATION

Western Australia

PAYROLL TAXPayroll tax collections have clearly bottomed, with mining and related industries the strongest contributors to growth

12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18

$bPAYROLL TAX

Levels, Rolling Annual Sum

0

200

400

600

800

1,000

Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18

$m

PAYROLL TAX, LARGEST TAXPAYING INDUSTRIES

Rolling Annual Sum

MiningConstructionAdmin & supportProfessional servicesManufacturing

HOUSING MARKETWeakening demand likely reflects a tightening credit environment Australia-wide

13

-30

-20

-10

0

10

20

30

40

50

60

-10

-5

0

5

10

15

20

Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18

Perth median house price (LHS)

Perth dwelling sales (RHS)

% %PERTH RESIDENTIAL PROPERTY MARKET

Annual Average Growth

0

20

40

60

80

100

120

140

160

180

Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18

UNDERLYING DUTYMonthly Collections, Rolling Annual Average$m

COMMODITY PRICES

After bottoming in 2016, commodity prices have continued to strengthen

14

0

40

80

120

160

200

Dec-00 Dec-06 Dec-12 Dec-18

$A Index

2016-17 = 100

COMMODITY PRICE INDEXWestern Australia

GLOBAL ECONOMIC OUTLOOK

-10

-8

-6

-4

-2

0

2

4

6

8

Sep-06 Sep-09 Sep-12 Sep-15 Sep-18

% GrowthQrtly YoY

GDP GROWTHMajor advanced economies

Euro area

US

Japan

-10

-5

0

5

10

15

20

25

Sep-08 Jan-12 May-15 Sep-18

%CHINA

Economic Activity GDP

China secondaryindicator

Global economic activity remains relatively favourable, however growth is less synchronised than it was last year

15

GLOBAL ECONOMIC OUTLOOK

WA not expected to be impacted substantially from US/China trade dispute

0

5

10

15

20

25

China US

$US TrillionEXPORT CONTRIBUTION

To GDP in 2017

Exports to each otherOther exportsRest of GDP

CHINESE STEEL PRODUCTION 2017

Domestic Consumption 92%

Total Exports 8%(includes 0.1% to US)

16

FISCAL OUTLOOK – BUDGET AGGREGATES

Budget expected to be in surplus from 2019-20 – first surplus since 2013-14 2017-18 2018-19 2019-20 2020-21 2021-22

Mid-year Forward Forward Forward Actual Estimate Estimate Estimate Estimate

GENERAL GOVERNMENT SECTORNet Operating Balance ($m) -618 -674 1,020 2,489 1,891 Revenue ($m) 29,332 30,010 32,127 33,443 33,459 Revenue Growth (%) 9.0 2.3 7.1 4.1 - Expenses ($m) 29,949 30,684 31,107 30,954 31,568 Expense Growth (%) 1.9 2.5 1.4 -0.5 2.0

TOTAL PUBLIC SECTORNet Debt at 30 June ($m) 34,606 37,203 37,919 36,711 35,997 Asset Investment Program ($m) 5,052 5,835 5,604 5,321 5,136 Cash Surplus/Deficit ($m) -3,007 -2,582 -511 1,315 814

17

FISCAL OUTLOOK – REVENUEGeneral government revenue revised up $3.3b since 2018-19 Budget –but forecast revenue growth (3.3% p.a.) remains below long-run average

Revenue improvement underpinned by: GST top-up payments

($2.4b over 2019-20 to 2021-22)− Allocated to Debt Reduction Account

Mining revenue (up $1.3b)− Reflects lower exchange rate and

slightly higher commodity prices

70% GST floor

$2,425m

GST grants-$270m

Other C'wealth grants

-$177m

Mining revenue$1,306m

Taxation -$135m

All other$107m

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000 $Million

Total Increase (2018-19 to 2021-22) = $3.3b

18

$2.4b over three years – ensures effective 70% GST floor from 2019-20

FISCAL OUTLOOK – GST TOP-UP FUNDING

997975

453

0

1,000

2,000

3,000

4,000

5,000

6,000

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

GST revenue

Top-up funding

$Million

70%70%

70%

56.1%57%

64.3%

19

-2

0

2

4

6

8

10

12

2011-12 2014-15 2017-18 2020-21

%

Forecast

Average growth = 1.3%

Decade average = 5.9%

FISCAL OUTLOOK – EXPENSE GROWTH

GENERAL GOVERNMENT EXPENSE GROWTH

Expense growth of 1.9% in 2017-18 was the lowest in 23 years; restraining expense growth remains a key focus

20

Disciplined Expenditure Review Committee process, including active reprioritisation of existing expenditure and identification of new funding sources

Reduction in number of Departments, from 41 to 25 On track to achieve 3,000 voluntary severances from the public sector

($578m in net savings) $1,000 wages policy successfully implemented (~$700m) Removal of indexation for non-salaries expenditure (~$470m) Moving electricity tariffs to full cost-reflectivity (and removal of associated

operating subsidy, which was $280m in 2016-17)

FISCAL OUTLOOK – EXPENSE MANAGEMENT

Range of factors driving low expense growth

21

0

5

10

15

20

2011 2013 2015 2017 2019 2021

Western Australia(TPS)

Australia (GG)

%

Forecast

NET DEBT AS A SHARE OF GSP/GDP

FISCAL OUTLOOK – NET DEBTImproved operating position is driving an improvement in net debt across the forward estimates

20

25

30

35

40

45

2018 2019 2020 2021 2022

2018-19 Budget 2018-19 Mid-year Review

$B

TOTAL PUBLIC SECTOR NET DEBTAt 30 June

$3.7b

22

Interest expenses revised down by $532m since 2018-19 Budget, reflecting lower borrowing requirement

FISCAL OUTLOOK – INTEREST COSTS

0

200

400

600

800

1,000

1,200

1,400

2008-09 2010-11 2012-13 2014-15 2016-17 2018-19 2020-21

2018-19 Budget

2018-19 Mid-year Review

Actuals

Forecast$M

$532m interest savings since Budget

23

Landgate partial commercialisation• WA Government seeking a new operator to provide land titles services and

receive associated revenue over a period of up to50 years, in return for upfront proceeds

• Invitation for Expressions of Interest released in January 2019

• Legislation not required

TAB (State-owned local wagering provider)• Sale of the existing TAB business, with an exclusive licence to provide retail

wagering services in Western Australia

• Subject to passage of enabling legislation (to be introduced into Parliament in first half of 2019)

FISCAL OUTLOOK – UPSIDE RISKWA Government proceeding with two asset sale transactions – upside risk to forward estimates

24

BORROWING PROGRAM – 2018/19WATC Estimated Borrowing Program1 – 2018/19 as at 21 December 2018

Note: (1) As at 21 December 2018. The sourcing of WATC’s funding is subject to conditions in the various markets and the market mix during the year may be amended as necessary to meet WATC’s pricing, liquidity, lending and capital usage targets.

NEW MONEY REQUIREMENTS – 2018/19 to 2021/22

Term Funding Requirement $B $B

New Money Program (est.) $1.4

Projected MaturitiesFRN 18/03/19 $0.7 Residual CP refinancing to Term $0.3 $1.0 Total Term Funding Requirement $2.4

Financial Year 2018/19 Budget Mid-Year Review Variance$B $B $B

2018/19 $2.7 $1.4 -$1.32019/20 $3.3 $1.5 -$1.82020/21 $0.9 $0.6 -$0.32021/22 $0.6 $1.3 $0.7

-$2.7

25

SIGNIFICANT IMPROVEMENT IN THE STATES FINANCESSignificant revisions to both net operating balance and net debt since the 2017-18 Budget

26

SEMI-GOVERNMENT BONDSHigh Yield/Low Risk

Source: Westpac

27

WATC BONDSHigh Yield/Low Risk

Source: WATC Source: Bloomberg

28

Thank you

29

Disclaimer: Any opinions, judgements, conclusions, forecasts, predictions or estimations contained in this presentation are made in reliance on informationprovided to Western Australian Treasury Corporation which Western Australian Treasury Corporation believes to be reliable. Western Australian TreasuryCorporation, however, cannot guarantee the accuracy of that information. Thus, statements are made in good faith but are provided only for your information.This information is not intended to be a substitute for professional advice on a particular matter which should be sought in relation to your particular needs andcircumstances.

Slide Number 1SUMMARY WESTERN AUSTRALIAN ECONOMY Slide Number 4Slide Number 5BUSINESS & INVESTMENTLITHIUM DEMANDWA LITHIUM INDUSTRYLITHIUM PROCESSINGEMPLOYMENT GROWTHWAGE GROWTHPAYROLL TAXHOUSING MARKETCOMMODITY PRICESGLOBAL ECONOMIC OUTLOOKGLOBAL ECONOMIC OUTLOOKFISCAL OUTLOOK – BUDGET AGGREGATESFISCAL OUTLOOK – REVENUESlide Number 19Slide Number 20Slide Number 21FISCAL OUTLOOK – NET DEBTFISCAL OUTLOOK – INTEREST COSTSFISCAL OUTLOOK – UPSIDE RISKBORROWING PROGRAM – 2018/19SIGNIFICANT IMPROVEMENT IN THE STATES FINANCESSEMI-GOVERNMENT BONDSWATC BONDSSlide Number 29