Envy of the Western world: Australian government debt

Australian bankers and investors continue to use an expression to describe the local government bond market which has become unfashionable in Europe. Unlike sovereign bonds in a growing number of developed economies, Australian Commonwealth Government Securities (ACGS) continue to be seen as "risk-free", and will remain so for the foreseeable future.

  • 01 Aug 2012
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In large part, that is a reflection of a national debt that looks like a fleabite compared with the debt piles accumulated in much of Europe and in Japan. As Moody’s points out: "Even at its peak, Commonwealth government debt and general government debt (including state and local governments) remained low by global standards, and the budget forecasts a renewed downward trend in debt. As a result, the Commonwealth will continue to have one of the strongest financial positions among Aaa-rated governments."

While this may cause funding officials at European debt management offices to look enviously at their counterparts at the Australian Office of Financial Management (AOFM), running a debt programme that is minuscule by today’s standards brings its own challenges.

EuroWeek asked Rob Nicholl, AOFM chief executive, to share his thoughts on the opportunities and challenges ahead.

EUROWEEK: Assuming that Australia moves back into surplus as planned in 2012-13, what are your funding requirements for the next few years?

Nicholl, AOFM: Our financing requirements will diminish appreciably compared to the last couple of years, due to the government’s fiscal consolidation programme. First, tax revenues will rise in line with GDP growth. Second, the government has completed or withdrawn most of the fiscal stimulus measures triggered by the global financial crisis.

Our issuance programme for the last three years has risen from about A$57bn two years ago to A$58bn-A$59bn last year and to about A$60bn this year. Much of this was accounted for by net new issuance, so there was not a high proportion of funding maturing. Of the A$60bn that we’ll issue this year, about A$44bn is net new issuance.

For 2012-13, when the government is expecting to return to surplus, we have a programme of about A$37bn, of which A$35bn will be in nominal bonds and A$2bn in index-linked issues. Of that A$37bn, only about A$9bn will be net new issuance.

Most of the Australian government’s borrowing requirement over the last few years has been driven by the need to fund its budget deficits. As we move forward there will be a number of financing requirements that don’t impact the budget’s bottom line. For example, there is an equity injection of A$10bn over the next two years into the Green Energy Corporation that the government has set up as part of its carbon tax package. There is also some funding in the form of an equity contribution to the national broadband network company which is building a fibre-optic network across Australia.

These will create modest financing requirements, but the bulk of our issuance will be to refinance maturing bonds. This implies that the size of the market will plateau because net new issuance will fall substantially. So total debt outstanding will drift from about A$235bn today to around A$250bn or just under in two or three years time.

EUROWEEK: That’s a far cry from the cap of A$50bn that you had a few years ago, and gives the AOFM enough material to maintain a liquid market. Is liquidity a key challenge?

Nicholl, AOFM: Absolutely. Last year the government was conscious of the perceptions in the investor community about what might happen to the CGS market given that the budget was forecasting a return to surplus. One of the lessons learned from the global financial crisis was that ensuring access to the market is essential, so a policy decision was made last year committing us to maintaining a liquid market.

No specifics have been announced about how that will be achieved, but we are focusing on how we can influence liquidity, through regular supply together with transparency in the way we conduct our operations. We will also be moving away from having two maturities in a calendar year to one, which will mean we have bigger and more liquid lines.

EUROWEEK: You did your first 15 year syndicated offering last year. What are your plans for building a more comprehensive yield curve, and how would a longer dated risk-free benchmark help to develop a market for infrastructure-related bond issuance?

Nicholl, AOFM: This is something we’ve been thinking about over the last year. We think we need a year or so to consolidate the yield curve in 15 years, because it isn’t since the early 1980s that there have been CGS on issue with a maturity longer than 10 or 12 years. When we extended the curve to 15 years last year we recognised that it might take a year or two for investors to become familiar with longer dated paper in our market.

The 2027 issue we launched last year was a good transaction and has performed well in the secondary market. But we know that we will need to attract different investors to buy longer dated paper. We have a mix of investors at the moment, some of whom are constrained by 10 year benchmarks in the public sector, so we will need to expand the universe of investors not operating under that constraint.

We’re not actively thinking about a 20 or a 25 year bond, but it’s not completely off the table. We will monitor market conditions and if we think the opportunities for us to do so are good then we will consider it.

The duration of our portfolio has been declining over the last couple of years and we think there are good portfolio management reasons for us to arrest that decline. Having done so, we recognise that there are benefits to be derived for the corporate bond market and for the semis from having a 15 year government benchmark.

EUROWEEK: Is the strength of international demand for CGS starting to trickle through to the semis?

Nicholl, AOFM: Yes. We talk to a lot of investors interested in investing in semis. It depends where you go in the world as to whether investors have a solid understanding of the relationship between the Commonwealth and the state governments. As there is no explicit government guarantee, some investors question how this federal relationship works.

One in every 10 meetings I have with investors is about the relationship between the Commonwealth and the states, and what I usually say is that although there is no explicit guarantee, there is no need for one, because there is a high degree of fiscal integration between the Commonwealth and the states. About half of states’ revenues are raised through national taxes and the Commonwealth and the states work closely together in a number of policy forums. This gives the Commonwealth the opportunity to be given early warnings on the fiscal positions of the states.

There are also plenty of recent examples of the Commonwealth stepping in to help the states, as there was following the floods and cyclone damage in Queensland, for example.

EUROWEEK: Does that imply that spreads between CGS and semis are too wide at the moment?

Nicholl, AOFM: Part of the spread has to do with liquidity. The semi market is still fairly fragmented.

But the story is fairly simple. This is that by virtue of its constitutional powers, the Commonwealth raises most of the revenue at the national level, while the states have responsibility for much of the service delivery expenditure. That imbalance is dealt with by a transfer of revenues from the Commonwealth to the states. Because this gives the states access to a solid revenue base, investors should be asking questions about the performance of the Australian economy as a whole rather than individual states.

EUROWEEK: Is it a source of celebration that foreign investors now own more than 80% of the CGS market? Or is it a source of anxiety, given what might happen were offshore investors to turn negative on Australia?

Nicholl, AOFM: The foreign share of CGS was 76.5% at the end of March 2012 on a market value basis.

We don’t have a view on what the balance between domestic and foreign ownership should be. We certainly welcome the geographical diversity of our investor base, which is spread across the Americas, Europe and Asia. We don’t have exact data, but in terms of investor type, we’re confident that more than half of offshore holdings are in the hands of public sector investors, meaning central banks and sovereign wealth funds. The balance is held by pension funds, insurance companies and fund managers.

EUROWEEK: Are you confident about the outlook for Australia’s rating?

Nicholl, AOFM: The basis for our triple-A rating is a strong fiscal position and low debt. In the past ratings agencies have raised questions about the exposure of our local banking sector to short term and offshore funding and to the housing market. But in the last couple of years the banks have been able to increase their dependence on domestic deposits given that Australian households have become savers again.

The arrears in loans to the banking sector are low, and the housing market is going through a gradual adjustment.

EUROWEEK: Do the inflows reflect the fact that the Australian dollar is becoming a reserve currency?

Nicholl, AOFM: They reflect a number of things — primarily the objective of diversification among fund managers around the world. People talk about the Australian dollar becoming a reserve currency. I think it’s probably much too small for that, but it is now the world’s fifth most traded currency and the Australian dollar-US dollar is the fourth most active currency cross.

We don’t see any destabilisation resulting from heavy inflows of foreign investment into the market, for several reasons. One is that there is plenty of liquidity in the market. Another is that when investors come into the market they tend to do so gradually, rather than in large clips.

We’re engaged directly with a lot of our offshore investors, and we know from talking to them that they’re very conscious about the potential for big investors to move our market. We take comfort from knowing that they are generally rather conservative investors.

EUROWEEK: What are your plans for the inflation-linked market?

Nicholl, AOFM: This year we’ll issue about A$2bn in inflation-linked bonds, which is about 3.5% of the programme. Next year we plan to issue about the same absolute amount in a smaller programme, with a view to lifting the share of our portfolio in linkers to about 10%. That is in line with our announcement last year that we intended to maintain 10%-15% of our portfolio as linkers. It’s a small part of our market and one with a heavy domestic investor focus. The important point is that it helps to diversify our investor base, and we did attract a number of new investors to CGS when we started issuing linkers in 2009. So we will maintain a commitment to that market on a steady-as-she-goes basis.

  • 01 Aug 2012

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 12,908.95 107 8.20%
2 Citi 12,278.47 63 7.80%
3 JPMorgan 11,970.30 56 7.60%
4 Standard Chartered Bank 11,758.78 73 7.47%
5 Deutsche Bank 7,980.08 37 5.07%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 2,377.71 7 13.40%
2 JPMorgan 1,880.36 7 10.59%
3 Citi 1,812.95 8 10.21%
4 Morgan Stanley 1,595.10 4 8.99%
5 BNP Paribas 1,525.76 5 8.60%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Standard Chartered Bank 6,993.46 25 11.43%
2 JPMorgan 6,835.47 21 11.17%
3 Citi 6,584.25 23 10.76%
4 Deutsche Bank 4,540.26 7 7.42%
5 Credit Agricole CIB 4,257.87 13 6.96%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 176.16 1 31.83%
2 AXIS Bank 85.65 1 15.48%
3 UniCredit 56.53 1 10.21%
Subtotal 318.33 3 57.52%
Total 553.46 4 100.00%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 939.35 7 18.07%
2 Standard Chartered Bank 809.89 6 15.58%
3 JPMorgan 547.80 5 10.54%
4 Barclays 455.94 5 8.77%
5 Citi 451.68 4 8.69%