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Trade Ill-Winds“Tariffs that save jobs in the steel industry mean higher steel prices, which in turn means fewer sales of American steel products around the world and losses of far more jobs than are saved.”

Thomas Sowell - American Economist8 February 2012

The Global economy

It’s early days, but the first quarter of 2018 sees the global upswing remaining on track,

though there remains considerable risks to the outlook. Concerns over Brexit have receded a little on news that UK and EU negotiators have moved closer to finalising a deal on the Brexit transition period, however, several US trade announcements over the past few weeks have raised the spectre of a possible trade war among the world’s major economies.

After fading a little in the second half of 2017, US employment growth has picked up again in the early part of 2018. With unemployment at a 17-year low of 4.1 per cent and tax cuts due to provide the economy with a fresh kick at such a late stage in the economic cycle, all eyes will be on the major US inflation indicators in the coming months for signs of rising inflation pressure. The Fed raised rates a further 25 basis points at the March FOMC meeting, with projections among meeting participants indicating a median expectation for a further two hikes before the end of the year, to take the fed funds rate from the current 1.50-1.75 per cent range to 2.0-2.25 per cent. This is in line with current market pricing. If the Fed is forced to raise rates at a faster rate than expected to tackle rising inflation, it could prove disruptive for financial markets.

Chinese data has been, on balance, better than expected in early 2018, with iron ore imports in the January–February period 5.2 per cent higher than the same period in 2017. The IMF is currently forecasting real GDP growth of 6.6 per cent in 2018, a little slower than the 6.8 per cent recorded for 2017 but still the envy of pretty much every other major economy.

Meanwhile, Japanese real GDP has expanded for eight consecutive quarters as of Q4 2017, the longest run of growth in 28 years.

The ausTralian economy

Australian real GDP growth eased to a seasonally adjusted 0.4 per cent in Q4 2017, following 0.7 per cent growth in Q3, with annual growth decelerating to 2.4 per cent YoY from 2.9 per cent YoY in Q3. Population growth has been a major source of expansion over the past year, with real GDP per capita unchanged in Q4 and up just 0.8 per cent YoY.

A strong rebound in household consumption and ongoing strength in public sector spending were the drivers behind growth in the quarter. Household spending was supported by rising disposable income, fuelled by ongoing strong employment growth, though growth in average employee compensation was flat.

In This IssueThe Economy ..........................1

From the CEO’s Desk ..............1

KangaNews .............................3

Reference Article Series ..........4

New Floating Rate Note ..........4

WATC Client Portal ..................4

New Staff Appointments ..........5

25 Years of Service Awards .....6

Economic Presentation............6

About WATCWATC is the central financial services provider for the Western Australian public sector, and delivers the following efficient and cost-effective services for all government agencies:• funding and debt management• asset and investment

management• financial advisory services• financial risk management• treasury management services

and systems.

AddressLevel 12, St Georges Square225 St Georges TerracePERTH WA 6000

P: (+61) 8 9235 9100F: (+61) 8 9235 9199E: watc@watc.wa.gov.auW: www.watc.wa.gov.au

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Client NewsletterMarch 2018

From the CEO’s Desk

Dear clients and staff

The third quarter of the 2017/18 financial year has been largely routine and business as usual from a WATC perspective.

That said, international economic and geo-political events remain dynamic, and are likely to continue this way for the foreseeable future. The US Fed Funds rate is projected to increase by about 75 basis points over the calendar year, and expectations that the Australian cash rate will be dragged 25 points higher over the next twelve months have been priced in.

For the first time in a while, US ten-year government bond rates are currently at 15-20 basis points higher than those in Australia and expected to increase. In the past, this has occurred only for brief periods of time, but markets are predicting a lengthier version now. The impact this could have on Australian debt markets is uncertain at this point, but it should have a downward impact

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The Westpac consumer sentiment index has picked up since mid-2017, while the NAB business conditions index hit a record high in February.

The terms of trade was virtually unchanged over the last half of 2017 and 1.0 per cent lower YoY. The unchanged terms of trade has seen growth in real gross domestic income (real GDP adjusted for the terms of trade) slow to 0.3 per cent in Q4. Annual growth is 2.1 per cent YoY, a substantial slowdown from 6.9% YoY growth in Q1 2017.

Inflation remained soft in Q4, with headline inflation of 1.9 per cent remaining below the Reserve Bank’s two to three per cent target band. The RBA expects inflation to slowly pick-up as the economy strengthens, though its latest central forecasts project benign inflation out to at least the middle of 2020. Wage inflation remains soft, however, ongoing employment strength will likely see wage inflation improve over time. Employment growth has been very strong over the past year or so, with total employment rising by around 420k or 3.5 per cent in the year to February, with most of the rise being in full-time jobs. The trend unemployment rate was 5.5 per cent in Febuary, still 0.5ppts above the RBA estimate of 5.0 per cent for the natural unemployment rate.

While the Western Australian economy continues to face challenges, there have also been signs that the economy may be past the worst of the downturn. The state labour market continues to perform remarkably well, with around 30k jobs added over the past year, and a trend unemployment rate of 6.0 per cent in February 2018, down from 6.3 per cent a year earlier. Despite headwinds, Western Australia boasts an employment to population ratio of 64.2 per cent in trend terms, well ahead of the national average of 62.1 per cent.

Real state final demand slipped a seasonally adjusted 0.2 per cent, mainly due to a 2.1 per cent drop in business fixed investment. Household spending rose 0.5 per cent in Q4, the fourth quarterly increase in a row. Real state final demand returned to growth in YoY terms over the last half of 2017, and was up 1.2 per cent YoY in Q4, having been down as much as 11.0 per cent YoY in Q3 2016.

At the end of last year, ongoing strength in the Aussie economic indicators, particularly employment, led us to remove the cash rate cut from our forecast. However, the high level of household debt and ongoing soft inflation means we are not yet confident that the next RBA move will be an increase. This reflects the upside, as well as the downside, risks to the outlook for monetary policy.

The RBA itself continues to signal its belief that while the next move in the cash rate is likely to be up, there is not a strong argument for a near-term hike. In our view, the RBA Board is

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Conditions Confidence

The NAB business conditions index hit a record high in February.

NAB Business Survey - Business Conditions v Confidence

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on the AUD all else being equal, with elevated commodity prices and investment flows providing an offset.

Continued progress on the borrowing program has been made, with approximately $2.6 billion in long term debt left to fund (half new borrowing and half refinancing of maturing debt), with less than four months in the financial year remaining. This compares to the $11 billion estimated originally. Prior to the release of the state budget, an estimated average of about $11.1 billion in term funding will be required in each of the next three years, with refinancing of maturing debt becoming a larger percentage of this amount each year.

During the quarter, a new five-year floating rate note was created in the amount of $1.0 billion. The pricing was favourable and had about 40 per cent more bids than required to fill the order. ANZ, NAB and Westpac were the Joint Lead Managers.

During a week in February, WATC visited 20 investors in North Asia to provide updates on the borrowing program, economy and government financial situation. In addition to talking about the then impending five year floating rate note, the possibility of a new 2028 fixed coupon bond, and perhaps a 2030 or 2032 bond, was discussed, to which investors appeared receptive.

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likely to want to see at least a couple of solid inflation reports before moving rates higher and, like us, is concerned about the high level of household debt.

As for financial markets, at the time of writing, cash rate futures pricing is carrying an implied probability of around 35 per cent for a 25 point cash rate increase by the end of 2018, and is fully pricing in a rate hike by June 2019.

The Australian Government yield curve is below the US curve for the first time since the year 2000. The 3-year Australian Government bond yield opened the year at 2.13 per cent, climbed to as high as 2.23 per cent in January, before dropping back as traders scaled back their expectations for an RBA cash rate hike, to be currently sitting at 2.08 per cent. The 10-year Australian Government bond yield, which is more heavily impacted by global news, peaked at a near one-year high of 2.94 per cent in early February and has since slipped to 2.67 per cent, at the time of writing, as the prospect of new US tariffs on steel and aluminium sent a scare through financial markets.

Iron ore prices have remained robust through most of Q1, before being dealt a blow by news that the US government will impose a 25 per cent tariff on steel imports. The price of the most active futures contract for 62 per cent Fe iron ore on the Singapore Exchange has averaged USD73.12/tonne so far in Q1, after averaging USD64.70 in Q4 2017. However, having peaked at USD78.67/tonne just ahead of the US tariff announcement, the contract price has since slipped to USD63.20/tonne.

Oil prices continued to rise in early Q1, with Brent crude hitting a high of USD70.42/bbl in January, its highest level since late 2014, before sliding. Oil prices have rallied back in March and Brent crude oil is currently trading at USD69.54/bbl, up from USD66.82/bbl at the end of 2017.

US equities climbed to a record high in January, with the S&P 500 peaking at 2,873 as US company tax cuts drove the market higher, before a sharp sell-off saw the US benchmark shed 10 per cent in just two weeks. The index recovered most of those losses before

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slumping again on concerns over a possible developing trade war and is currently trading at 2,765. The Aussie market joined the global equity party early in the piece as the ASX 200 hit a 10-year closing high of 6,135 on 9 January, before also dropping back, and is currently sitting at 5,824 at the time of writing.

The AUD has remained remarkably resilient in the face of the loss of the yield advantage with the USD. The currency closed 2017 at USD0.7809 and climbed as high as USD0.8110 on Australia Day, before edging lower again with the currency currently sitting at USD0.7754, which is close to fair value according to our simple model of the Aussie dollar, as elevated commodity prices have offset the impact of the negative spread to US yields.

Craig McGuinness Chief Economist

March 2018

WATC Featured in KangaNews

Western Australia and WATC recently featured in the

KangaNews 2018 High-Grade Issuer Yearbook magazine promoting Western Australia and WATC to domestic and international investors.

The KangaNews magazine included interviews with WATC’s Chief Executive Officer John Collins and Vince Cinquina, Head of Financial Markets, covering a range of topics including the Western Australian economy, the state budget and debt levels.

WATC has a number of copies of the KangaNews 2018 High-Grade Issuer Yearbook that are available to clients. If you would like a copy, please contact Chris Rinsma on (08) 9235 9152 or email crinsma@watc.wa.gov.au.

FEB/MAR 18 SUPPLEMENT_ VOL 13 ISSUE 105

www.kanganews.com

A U S T R A L A S I A N H I G H - G R A D E Y E A R B O O K

WATC staff recently participated in the Local Government Finance Professionals conference, providing an opportunity to discuss WATC’s financial products and advisory services on offer. This included promoting the benefits of our client portal – with transaction requests, confirmations and monthly reporting now available on-line. Please see your WATC relationship manager for more details, or any questions/suggestions regarding our service offerings and how they can benefit you.

I am pleased that WATC was recognised at the 33rd Annual WS Lonnie Awards on 22 March 2018. After receiving a commendation for the State Records Commission Award in 2017, WATC won this specialist award in 2018. Congratulations to the recordkeeping team for this accomplishment.

We were pleased to welcome several new employees during the quarter, as introduced in this publication.

John CollinsChief Executive Officer

27 March 2018

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WATC is committed to providing relevant information to clients

to assist them in making informed decisions on the use of debt finance and financial risk management. On this theme, WATC has recently published a series of informative reference articles on key financial concepts and financial markets operations, which describe in detail how they link to the products and services WATC provides.

The first article, released in February, is titled: ‘The Interest Rate Market and the Factors Affecting it – What WATC

Clients Need to Know’. This article provides an overview of key reference interest rates in the Australian market, the factors that

affect them and the relationship to the pricing of WATC debt products.

The second article, released in March, is titled ‘Understanding the Cost Implications for Early Repayment of WATC Loans’. This article describes how WATC calculates the repayment amount when a client is seeking to repay or refinance a loan before its maturity. It also explains how this will differ by loan type, and WATC’s approach compared to other financial institutions that often charge additional costs.

Both articles can be accessed on WATC’s website at: www.watc.wa.gov.au/client-services/debt-finance/reference-material/. If you would like to discuss any aspect of the articles, please contact Richard McKenzie on (08) 9235 9127 or rmckenzie@watc.wa.gov.au.

WATC Reference Article Series WATC Undertakes a Syndicated Launch of a New Floating Rate Note

On 8 March 2018, WATC issued, by syndication, a Floating Rate

Note (FRN) with an 8 March 2023 maturity. Prominent performers on WATC’s fixed interest panel, ANZ, NAB and Westpac, were appointed as Joint Lead Managers for the syndicated benchmark FRN issue.

The new issue garnered strong investor support, with total bids exceeding $1.40 billion from 30 bidders, with a final issue size of $1.00 billion being allocated to 25 institutions at the final clearing price. The FRN issuance format was well supported by domestic bank balance sheets and fund managers, while approximately seven percent went to offshore investors.

The investor term sheet can be viewed on the WATC website at: www.watc.wa.gov.au/investors/institutional-investors/institutional-investor-term-sheets/.

WATC Client Portal

With the WATC client portal going live in November 2017, over the past few months WATC has been busy

transitioning clients to the new online platform. There are now 23 clients with access to the client portal for transactions, confirmations and reports, with more clients signing up every week.

If you have any queries on the client portal, or would like to discuss how your organisation can gain access, please contact your Client Relationship Manager.

Contact WATC for

Access

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Sherly Rezky

Sherly graduated from Curtin University with a Bachelor of

Commerce majoring in Accounting. Prior to joining WATC, she worked at Bankwest and Commonwealth Bank of Australia (CBA) group for over eight years. At Bankwest, Sherly worked with various divisions as a Finance Analyst providing financial analysis, management reporting, budgeting and forecasting assistance to stakeholders. She then became a State Business Coordinator for

Western Australia for the CBA Wealth Management division.

Outside of work, Sherly enjoys cooking and loves travelling with her husband and two daughters.

New Appointments…WATC is pleased to introduce our new staff members to clients.

Hendrik Bothma

Hendrik brings his extensive experience in cash flow

modelling, financial analysis and credit risk management, as well as substantial knowledge of accounting principles and financial statements, to his role as Corporate Financial Advisor. Hendrik has worked in accounting, banking and private equity roles, including positions with Ernst and Young, Warrington Property and Macquarie Bank.

Hendrik holds a Bachelor of Commerce degree majoring in Accounting and Banking (Curtin University), is a fully qualified Fellow of the Chartered Accountants Institute and is RG146 qualified with a Diploma of Financial Planning.

Sherly Rezky Client Services Officer

Hendrik BothmaCorporate Finanical

Advisor

Dimitros Criticos

Dimitros has held significant financial modelling and banking roles across

Europe and the Middle East.

As a manager in the modelling team at KPMG UK, Dimitros specified, built and managed numerous financial models, including managing teams of modellers, in delivering business and financial models to clients across multiple sectors. His experience in modelling for financial institutions saw him move into banking roles in

the Middle East. Before joining WATC, Dimitros’ focus was in the small and medium enterprise sector where, in Qatar, he headed up the credit and business banking divisions of two banks.

Mohamed Mohamed

Mohamed joined WATC in February as a Risk Analyst within the

Risk Management branch. Prior to joining WATC, Mohamed had previously worked in the treasury team at Emeco Group.

Mohamed graduated from Curtin University with a Bachelor of Chemical Engineering (Honours) in 2011 and a Master of Finance in 2014.

Mohamed’s interests include keeping up with the latest in technology and gadgets, following his favourite football club AC Milan and travelling around the world.

Dimitros Criticos Senior Corporate Financial Advisor

Mohamed Mohamed Risk Analyst

Ross Moulton

Ross joined WATC in March as Chief Operating Officer.

He has over 30 years of experience in financial services, having worked in the banking sector and in advisory services.

Ross’ background includes time in financial markets, corporate and retail banking, and risk management. His most recent role was Executive Director Corporate Services at the Government owned home loan provider Keystart.

Ross is a keen sports follower, occasionally as an active participant, and he loves travelling with his family.

Ross Moulton Chief Operating Officer

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Disclaimer

Any opinions, judgements, conclusions, forecasts, predictions or estimations contained in this advice are made in reliance on information provided to Western 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 are provided only to assist you with any decisions which you make. These recommendations are not intended to be a substitute for professional advice on a particular matter. Before accepting or rejecting those recommendations you must discuss your particular needs and circumstances with Western Australian Treasury Corporation.

For information on any products or services, please contact one of the Business Unit Managers listed below:Richard McKenzie Head of Client Debt Finance & Investments (08) 9235 9127 rmckenzie@watc.wa.gov.auLisa Brady Head of Client Foreign Exchange & Treasury Services (08) 9235 9122 lbrady@watc.wa.gov.auDavid Letts Head of Advisory Services (08) 9235 9178 dletts@watc.wa.gov.au

For economic commentary or clarification, please contact:Craig McGuinness Chief Economist (08) 9235 9104 cmcguinness@watc.wa.gov.auPaula Gadsby Economist and Senior ALM Analyst (08) 9235 9110 pgadsby@watc.wa.gov.au

In 2017, Chief Executive Officer John Collins was delighted to acknowledge four staff who had achieved the milestone of

working 25 years for WATC. This marks 19 staff to have achieved this milestone since WATC was founded in 1986.

The ‘Fantastic Four’ are:

• Joanne Walling, Solutions Architect, Information and Communications Technology

• Peter Seeds, Head of Legal and Compliance

• Vince Cinquina, Head of Financial Markets

• Julia Tyzack, Chief Accountant, Finance, Administration and Treasury Operations

The ‘Fantastic Four’ were presented with certificates of appreciation and a gift from WATC to acknowledge this special achievement and their contribution to the organisation and its clients.

WATC Acknowledges 25 Years of Service

The ‘Fantastic Four’L-R: Peter Seeds, Joanne Walling, Julia Tyzack and Vince Cinquina.

Invitation to an Economic Presentation

WATC invites its clients to attend an economic presentation by

William (Bill) Evans, Managing Director and Global Head of Economics and Research with Westpac.

Bill will provide his views on interest rates, currencies, the federal budget and the Australian economy.

Date: Friday 18 May 2018

Time: Morning Tea at 9:30 am Presentation commences at 10:00 am and finishes at 11:00 am

Venue: The Atrium Theatrette 4th Floor, The Atrium 168 St Georges Terrace, Perth

As a client of WATC, if you would like to attend, please RSVP by Friday, 11 May 2018, to crinsma@watc.wa.gov.au or (08) 9235 9152.

Bill EvansManaging Director & Global Head of

Economics & Research, Westpac