6 - Treasury Management Mid-Year Review 2022-23
Renfrewshire Council · 17 November 2022
Back to Finance, Resources and Customer Services Policy Board — 17 November 2022 and its agenda
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1 ___________________________________________________________________ To: Finance Resources and Customer Services Policy Board On: 17 November 2022 ___________________________________________________________________ Report by: Director of Finance and Resources ___________________________________________________________________ Heading: Treasury Management Mid-Year Review 2022/23 ___________________________________________________________________ 1. Summary 1.1 This mid-year report has been prepared in compliance with the Chartered Institute of Public Finance and Accountancy’s (CIPFA) Treasury Management in the Public Services Code of Practice. The report covers the following for 2022/23 to date: • a review of the Treasury Management Strategy Statement 2022/23, incorporating the annual investment strategy; • a review of the Council’s borrowing and investments; • a review of compliance with treasury management indicators; • an economic update and interest rate forecast (Appendix 3). ___________________________________________________________________ 2. Recommendations 2.1 It is recommended that Members note the treasury management activity for the period 1iApril 2022 to 14 October 2022. _________________________________________________________ 3. Treasury Management Strategy Statement and Annual Investment Strategy Update 3.1 The Treasury Management Strategy Statement for 2022/23 was approved by Council on 3 March 2022. It incorporates the Annual Investment Strategy, which sets out the Council’s investment priorities as follows: • the security of capital; and • the liquidity of its investments.
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2 3.2 The Council also aims to achieve the best return on its investments, along with the proper levels of security and liquidity. 3.3 Investments and borrowing during the first six months of the year have been in line with the strategy and there have been no changes to the policies set out in the Treasury Management Strategy Statement 2022/23. 3.4 In the current economic climate it is considered appropriate to keep investments short-term to cover cashflow needs, but also to seek improved returns in periods up to 12 months with high credit-rated financial institutions. The following sections in this report provide an update in light of the current economic position and any budgetary changes already approved. 4. Review of borrowing and investments over the period 1 April 2022 to 14 October 2022 4.1 The Council’s net borrowing position is calculated as total borrowing minus total investments. At 14 October 2022, this figure was a net investment position of £18.2m (see Appendix 1). 4.2 During the period 1 April to 14 October 2022 the Council’s total external borrowing increased from £253.2m to £278.2m, due to additional borrowing from the Public Works Loans Board (PWLB) of £25m in support of the approved capital programme. 4.3 In the same period, short-term investments have increased from £215.4m to £296.3m due to: • elements of the capital programme not having progressed as quickly as anticipated; and • the front-loading of revenue support grant income (this means that more cash is received in the earlier part of the year). 4.4 The Director of Finance and Resources confirms that, during the period 1 April to 14 October 2022, the approved limits set out within the annual investment strategy sections of the Treasury Management Strategy Statement 2022/23 were complied with, and the Council only invested with institutions listed in its approved lending list. Similarly, only permitted investment vehicles were used, mainly fixed-term deposits with other local authorities, the UK governments deposit facility (DMADF), call accounts and money market funds. 4.5 In accordance with CIPFA’s Treasury Management in the Public Services Code of Practice, it is the Council’s priority to ensure security of capital and liquidity, and to obtain an appropriate level of return that is consistent with the Council’s risk appetite.
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3 4.6 As shown by the interest rate forecasts in Appendix 3, rates have risen and are expected to rise further; however, investment rates on all short-term deposits have not increased at the same pace and therefore investment returns are expected to remain low. 4.7 The table below shows the average interest rate achieved by the Council on its investments during the period 1 April 2022 to 14 October 2022. The table also shows for comparison the benchmark comparator SONIA (the Sterling Overnight Index Average), which is administered by the Bank of England and reflects bank and building societies’ actual overnight funding rates in Sterling. The actual rate of return is lower because a number of investments have been locked into a fixed rate, and rates of return have since increased. 4.8 Opportunities for debt rescheduling (where high rate loans are repaid and lower rate loans taken out instead) are limited in the current economic climate and this is not expected to change over the short term. However, officers continue to liaise with the Council’s treasury advisors to monitor whether this situation may change. 5. Review of compliance with treasury management indicators for 2022/23 5.1. During the period 1 April 2022 to 14 October 2022, the Council complied with the approved treasury management indicators as set out in the Treasury Management Strategy Statement 2022/23. These indicators relate to: • interest rate exposure: the upper limit on the proportion of investments held with fixed interest rates and the upper limit on the proportion of investments held with variable interest rates; • the maturity structure of borrowing: the lower and upper limits on the proportion of investments that fall into each maturity band. 5.2. In addition to these treasury management indicators, there are two prudential indicators set out in the strategy, as follows: • authorised limit for external debt: this represents the limit beyond which borrowing is prohibited and needs to be set and revised by Members. It reflects the level of borrowing which, while not desired, Interest rates achieved on investments Average value of investments Actual rate of return Benchmark return (SONIA) Internally managed investments £253.57m 0.83% 1.31%
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4 could be afforded in the short-term, but is not sustainable in the longer term. • operational boundary for external debt: this is the expected debt level for the period being reported. 5.3. During the period 1 April 2022 to 14 October 2022 the Council operated within the operational boundary for external debt, and within the authorised limit for external debt. These indicators, along with the Council’s actual external debt, are shown in Appendix 2. 6. Foreign Exchange Cash Holding 6.1. As part of the contractual agreement for the Clyde Waterfront and Renfrew Riverside City Deal project, the Council is required to make a proportion of supplier payments in Euros over the next three years. This exposes the Council to a level of exchange rate movement risk over the period. The Council continues to mitigate this risk through approved tools such as advance purchase or forward contracts as appropriate; always providing that these tools are only used for risk mitigation and not speculative purposes. ___________________________________________________________________ Implications of the Report 1. Financial – As described in the report. The Treasury Management Strategy Statement and treasury management indicators assist in providing assurance that the Council’s treasury management activities and longer term spending plans are affordable, prudent and sustainable. 2. HR & Organisational Development – None arising directly from this report 3. Community Planning – None arising directly from this report 4. Legal – None arising directly from this report 5. Property/Assets – None arising directly from this report 6. Information Technology – None arising directly from this report 7. Equality & Human Rights – Recommendations contained within this report have been assessed in relation to their impact on equalities and human rights. No negative impacts on equality groups or potential for infringement of individuals’ human rights have been identified arising from the recommendations contained in the report because it is for noting only. If required following implementation, the actual impact of the recommendations
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5 and the mitigating actions will be reviewed and monitored, and the results of the assessment will be published on the Council’s website. 8. Health & Safety – None arising directly from this report 9. Procurement – None arising directly from this report 10. Risk – The Treasury Management Strategy Statement and treasury management indicators provide a framework to take forward the Council’s treasury activities in the context of the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks. This mid-year review report demonstrates that the treasury management activities carried out during the period 1 April 2022 to 14 October 2022 have been consistent with the Treasury Management Strategy Statement 2022/23 and have complied with the treasury management indicators set out in the Strategy Statement. 11. Privacy Impact – None arising directly from this report 12. COSLA Policy position – None arising directly from this report 13. Climate risk - None arising directly from this report _________________________________________________________ List of Background Papers: Treasury Management Strategy Statement 2022/23, Council, 3 March 2022. Author: Alastair MacArthur, Director of Finance and Resources
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6 Appendix 1 Balance at 1 April 2022 New Borrowing in 2022/23 Cash Movements Balance at 14 October 2022 Long-term borrowing PWLB – fixed rate 200,258,539.57 25,000,000.00 - 225,258,539.57 Market loans 52,916,000.00 - - 52,916,000.00 253,174,539.57 25,000,000.00 - 278,174,539.57 Short-term borrowing Temporary loans - - - - - - - - Total borrowing 253,174,539.57 25,000,000.00 - 278,174,539.57 Investments Fixed term deposits 182,500,000.00 - (39,000,000.00) 143,500,000.00 Call accounts 1,560,000.00 - 3,036,300.00 4,596,300.00 UK Government DMADF 6,000,000.00 - 103,070,000.00 109,070,000.00 Ultra-Short Dated Bond Funds 5,000,000.00 - - 5,000,000.00 Money market funds 20,300,000.00 - 13,875,200.00 34,175,200.00 Total investments 215,360,000.00 - 80,981,500.00 296,341,500.00 Net borrowing 37,814,539.57 25,000,000.00 (80,981,500.00) (18,166,960.43)
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7 Appendix 2 Treasury Management Indicators as at 14 October 2022 2022/23 Estimate 2022/23 Probable 2023/24 Estimate 2024/25 Estimate Authorised limit for external debt £506m £480m £628m £708m Operational boundary for external debt £486m £460m £601m £677m External debt* £436m £349.76m £551m £622m Upper limit for fixed interest rate exposure (borrowing) 100% n/a 100% 100% expressed as percentage of total net outstanding principal Upper limit for variable interest rate exposure (borrowing) 25% n/a 25% 25% expressed as percentage of total net outstanding principal New Borrowing in 2022/23 Total of all Borrowing Maturity structure of fixed rate borrowing Value Maturity structure Upper limit As at 14 October 2022 Less than 12 months 0 0% 15% 0.30% 12 months and within 24 months 0 0% 15% 0.30% 24 months and within 5 years 0 0% 45% 3.60% 5 years and within 10 years 0 0% 50% 0.01% 10 years and above £25,000,000 9% 100% 95.79% * The Probable figure here represents the actual level of debt at 14 October 2022 and includes finance lease and service concession liabilities, in line with the Authorised Limit and Operational Boundary values.
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8 Appendix 3: Economic Update and Interest Rate Forecast 1. Economic update 1.1. The UK economy grew by 0.2% quarter on quarter in Q1 2022/23. The volume of retail sales fell by 1.6% in August; the ninth fall in a ten-month period, leaving sales volumes in August just 0.5% above pre-COVID levels and 3.3% lower than at the start of the year. There are also signs that households are spending their excess savings in response to high prices. Indeed, cash in household bank accounts rose slower in August (£3.2bn) than previous months, and much slower than the 2019 average monthly rate of £4.6bn. 1.2. There are signs of higher energy prices creating persistent downward effects in economic activity. Both industrial production (-0.3%) and construction output (-0.8%) fell in July 2022 for the second month in a row, and it is notable that manufacturing output fell in some of the most energy intensive sectors (e.g., chemicals), pointing to signs of higher energy prices weighing on production. With the drag on real activity from high inflation having increased in recent months, Gross Domestic Product (GDP) is at risk of contracting through the autumn and winter months. 1.3. There is evidence that the weaker economy is leading to a cooling in labour demand. Labour Force Survey employment rose by 40,000 in the three months to July (the smallest rise since February); but data showed that inactivity rose by 354,000 in July itself and that there are now 904,000 more economically inactive people aged 16+ compared to before the pandemic in February 2020. The number of vacancies has started to level off from recent record highs but there have been few signs of slowing the upward momentum on wage growth; the 3-month rate of average earnings growth rose from 5.2% in June to 5.5% in July. 1.4. Inflation measured by the Consumer Price Index (CPI) eased from 10.1% in July to 9.9% in August, though it is widely assumed that it has not yet peaked. The decrease was mainly due to a decline in fuel prices, reducing fuel inflation from 43.7% to 32.1%. With the oil price now below $90 per barrel, the expectation is that fuel prices will fall further in the coming months. 1.5. However, utility price inflation is expected to add 0.7% to CPI inflation after the Ofgem unit price cap increases in October. At the time of writing, current market expectations are that CPI will peak close to 10.4% in November and, with the supply of workers set to remain unusually low, the tight labour
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9 market will keep underlying inflationary pressures strong until early next year. 1.6. There has been great volatility in bond markets, with 30-year gilt yields rising to 5.10% following the September ‘fiscal event’. At the same time the value of the pound against the dollar fell to a historic low ($1.035) amid announcements of significant tax cuts and increased borrowing. Recent changes in political leadership have calmed the markets somewhat, with earlier tax decisions reversed and a programme of spending cuts in scope. The value of the pound has now recovered to $1.16 (26th October). A full autumn statement is now expected to be announced on 17 November 2022. 1.7. The Monetary Policy Committee (MPC) has increased interest rates seven times in as many meetings in 2022 and has raised rates to their highest level since the Global Financial Crisis. Market expectations suggest the MPC will increase interest rates further and faster, from the current level of 2.25% to a peak of 5.00% in February 2023. 2. Interest Rate Forecast 2.1. The Council has appointed Link Group as its treasury advisors, and part of this service is to assist the Council to formulate a view on interest rates. The PWLB rate forecasts in the table below are based on the Certainty Rate (the standard rate minus 20 basis points), which has been accessible to most authorities since 1 November 2012. 2.2. The latest forecast (from 27 September) sets out a view that both short- and long-dated interest rates will be elevated for some time, as the Bank of England seeks to squeeze inflation out of the economy, whilst the government is providing a package of support to try and protect households and businesses from the impact of ultra-high wholesale gas and electricity prices. 2.3. The increase in PWLB rates reflects a broad sell-off in sovereign bonds internationally. To that end, the MPC has tightened short-term interest rates with a view to trying to slow the economy sufficiently to keep the secondary effects of inflation – as measured by wage rises – under control.
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11 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Interest rate forecast bank rate 5 yr PWLB 10 yr PWLB 25 yr PWLB 50 yr PWLB