[PPT] - Western Australian Economic and Fiscal Update June 2019 Hon Ben PowerPoint Presentation

SLIDE 1

Western Australian Economic and Fiscal Update

June 2019

Hon Ben Wyatt MLA Treasurer

SLIDE 2

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

SLIDE 3

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

SLIDE 4

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

2 4 6 8 10 12 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 %

GROSS STATE PRODUCT

Western Australia, Annual Growth

Long-run average growth = 4.3% Forecast 50 100 150 200 250 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 $ Billion

STATE FINAL DEMAND

Western Australia, Annual Levels

Forecast

SLIDE 5

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

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

SLIDE 6

50
30
10

10 30 50 70 90 110 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19

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

%

40
30
20
10

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

SLIDE 7

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

1 2 3 4 5 6 7 8 9 10 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 MARKET Supply and Vacancy Rate

Total Rental Listings (LHS) Vacancy Rate (RHS) %, inverse

20
15
10
5

5 10 15 20 25 30 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19

MEDIAN RENT – HOUSES Perth

Annual average Year-on-year %

Housing Sector Cont.

SLIDE 8

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 INVESTMENT Annual Levels

7

10 20 30 40 50 60 70 80 90 1989-90 1997-98 2005-06 2013-14 2022-23 Potential Investment Iron Ore Lithium All Other Major Project Investment Minor Project Investment Other Non-mining $ Billion

Forecast

Business Investment

SLIDE 9

ESTIMATED GLOBAL LITHIUM DEMAND

2018-26

WESTERN AUSTRALIAN LITHIUM PRODUCTION

2007-23

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 1,634 200 400 600 800 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.

SLIDE 10

9

Upturn in mine site employment across key commodities

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, WA

Annual growth, April 2019 % 20 40 60 80 100 120 140 Dec-02 Dec-06 Dec-10 Dec-14 Dec-18

MINE SITE EMPLOYMENT Total Employment, Annual Average Levels

Other Iron Ore Gold Lithium, Tin & Tantalum

'000

Record Mine Site Employment as Projects Ramp Up

SLIDE 11

Outlook for WA’s Key Trading Partner

10

Demand conditions in China remain favourable

825 15

WA IRON ORE EXPORTS

contained in Chinese exports to US Total WA iron ore exports Iron ore embodied in China's exports of steel to the US million million tonnes tonnes

10
5

5 10 15 20 25

60
10

40 90 140 Dec-10 Aug-12 Apr-14 Dec-15 Aug-17 Apr-19 % Growth Qrtly YoY % Growth Qrtly YoY

CHINA ACTIVITY

& Iron ore price

China secondary indicator, RHS Iron ore price, LHS

SLIDE 12

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

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

SLIDE 13

12

10
5

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%

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

Mining Construction Admin & support Professional services Manufacturing

Payroll Tax Has Rebounded

Supported by Hiring in the Resources Sector

SLIDE 14

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 response to Vale disaster $US/t Cyclone Veronica Record China steel

utput; iron ore

inventories fall sharply Budget cut-off date (8 Apr)

SLIDE 15

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

Forecast Proportion of population share

SLIDE 16

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

re price

15

1 2 3 4 5 6 7 $80US/t $100US/t $120US/t $ Billion

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

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

SLIDE 17

16

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

2.4 2 4 6 8 10 12 14 2007-08 2010-11 2013-14 2016-17 2019-20 2022-23 % Decade average = 5.9% Underlying growth Average growth = 1.3% Forecast

General Government Expenses

SLIDE 18

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 Balance Total Public Sector Cash Surplus/Deficit $ Billion Forecast

Fiscal Position

SLIDE 19

Infrastructure Investment

18

Asset Investment Program totals $22.8b over next four years, with over one third

f this on roads and rail

1 2 3 4 5 6 7 8 2013-14 2015-16 2017-18 2019-20 2021-22

METRONET Other roads and rail Health Education Electricity Water Corporation All other

$ Billion

ASSET INVESTMENT PROGRAM

Total Public Sector

Forecast

SLIDE 20

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

2 4 6 8 10 12 14 16 2008 2010 2012 2014 2016 2018 2020 2022 Forecast % 5 10 15 20 25 30 35 40 45 2008 2011 2014 2017 2020 2023 $ Billion AASB 16 Impact Forecast

Net Debt

SLIDE 21

Financial Results to 31 March 2019

20

Rebounding revenue
Continuation of historically low expense growth

4.8 8.1 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 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%

SLIDE 22

Financial Results to 31 March 2019 Cont.

21

March 2019 results show largest turnaround on record

1400
1200
1000
800
600
400
200

200 Nine months to 31 Mar 2018 Nine months to 31 Mar 2019 $ Million

GENERAL GOVERNMENT NET OPERATING BALANCE

3000
2500
2000
1500
1000
500

Nine months to 31 Mar 2018 Nine months to 31 Mar 2019 $ Million

TOTAL PUBLIC SECTOR CASH SURPLUS/DEFICIT

SLIDE 23

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

SLIDE 24

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%
f 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

SLIDE 25

WATC Estimated Borrowing Program 2019-20 as at 10 May 2019

Term Funding Requirement $B $B New Money Program 1.1 Projected Maturities Benchmark Bond 3.7 FRNs 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.

Financial Year 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

SLIDE 26

Upside risks provide ongoing spread contraction opportunities

Small 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% 01-Apr-17 01-May-17 01-Jun-17 01-Jul-17 01-Aug-17 01-Sep-17 01-Oct-17 01-Nov-17 01-Dec-17 01-Jan-18 01-Feb-18 01-Mar-18 01-Apr-18 01-May-18 01-Jun-18 01-Jul-18 01-Aug-18 01-Sep-18 01-Oct-18 01-Nov-18 01-Dec-18 01-Jan-19 01-Feb-19 01-Mar-19 01-Apr-19

WATC 10yr Spreads to Peer Issuers

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

SLIDE 27

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

SLIDE 28

WATC website: www.watc.wa.gov.au Department of Treasury website: www.treasury.wa.gov.au Photos courtesy of Tourism Western Australia Warning Any opinions, judgements, conclusions, forecasts, predictions or estimations contained in this presentation 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 they must be carefully considered because they are provided only to assist you with any decisions which you make. 27