Treasury management - 3rd Quarter 2008-09 update

Report: 6
Date: 16 March 2009
By: MPA Treasurer

Summary

This report invites members to review Treasury Management activity for the period 1 October 2008 to 31 December 2008.

A. Recommendations

That Members

1. Consider and note this report
2. Consider whether they would wish to amend the format and content of the monthly reports for future meetings, and
3. Consider whether they would wish to have specialist treasury management training to assist their scrutiny role.

B. Supporting information

1. In line with the key recommendations of the Chartered Institute of Public Finance and Accountancy’s (CIPFA) Code of Practice for Treasury Management in the Public Services the Finance and Resources Committee receive an annual strategy, six month review and annual outturn reports on treasury management. In order to enhance oversight of treasury management operations it has been agreed that quarterly reports be submitted on treasury management and performance to this sub-committee. Subsequent quarterly updates will be presented in accordance with this requirement.

2. This is the second meeting of the Resources Sub-Committee, and it has been difficult to align the first set of quarterly reports with the new sub-committee’s meeting dates. On this one occasion, the last full quarter’s monthly reports are available up to December, although the next quarter ends shortly at the end of the month. It is intended to harmonise the position by bringing the next set of quarterly reports to the April meeting and thereafter revert to a quarterly reporting cycle.

Training

3. Treasury Management is a sophisticated and fast moving activity. In order to provide high level scrutiny members may wish to avail themselves of specialist treasury management training. If this is supported appropriate arrangements will be made urgently.

Quarterly reports

4. The MPS Treasury Management Team produce monthly reports which cover investments (both cash received and performance), daily portfolio values, use of brokers, debt statistics, debt maturity profiles, and prudential code indicators. The quarterly reports October through December are contained at Exempt Appendices 1, 2 and 3. Members are invited to review them and are also invited to consider whether the format and amount of information is suitable for their scrutiny purposes.

Average balances

5. Average investment balances for the quarter were £292 million. This is slightly lower than the averages seen earlier in the year and reflects the £125 million purchase of NSY on 18 December 2008. This balance includes the £10 million deposit with Landsbanki Islands currently frozen by the Icelandic government. We continue to closely monitor cash balances and highlight future need for long-term borrowing.

Income on investments

6. Income on investments for the period is £3,248,468 at a return of 4.25%. The average rate of return has declined during the quarter and reflects the aggressive stance by the Bank of England regarding Base Rate cuts and our continued use of the Debt Management Office (DMO) facility, which tends to pay about 50 basis points lower than banks for short term deposits because of the government’s sovereign AAA credit rating. The average length of investments is at 10 days. The average length of investments had been kept short to reduce risk and cover short-term cash flow commitments.

7. The London Interbank Offered Rate (LIBOR) showed signs of easing during the quarter by coming more in line with Base Rate. The effect of Central Government intervention initially helped although there was a setback on 7 and 8 October when the Icelandic Government announced it was freezing all assets in its banks. The Authority agreed a new counterparty lend list at its meeting on 20 November 2008, and this is at Exempt Appendix 4. Early December saw the introduction of the DMO facility to the MPA Lending list of counterparties. Although this added another counterparty to the MPA Lendlist, at a time when banks are being removed due to rating downgrades and falling below the MPA minimum criteria, the rates offered by the DMO are poor. A further review of the lendlist has been made as part of the annual review of the Treasury Management Strategy, and will be presented to the Finance and Resources Committee on 19 March 2009. In particular the use of foreign banks has been tightened with a £20M individual bank limit and a foreign bank sector limit of £20M.

Interest rates

8. As a further part of central banks/government action to ease the banking crisis, interest rates were lowered globally. A reduction of 3% (5% to 2%) in Base Rate was seen between October and December. Short term (less than one year) money market rates have priced in these Base Rate cuts and average rates achieved by the MPA are currently 1.50% with major banks and 1% with the DMO. With gilt prices continually out performing all other markets we would not expect any improvement on these rates in the short-term.

9. Economic news remains depressing and it is now a case of how hard and for how long the UK will be in recession. Producer, consumer and retail price indexes were all lower over the period. There were also big increases in unemployment recorded here and in the USA. The Bank of England’s Quarterly Inflation Report indicated that new measures would be taken to stimulate the economy. On 1 December the Government lowered VAT to 15%, unfortunately this did not have the desired effect and early December retail spending was subdued. Many retailers suffered and as a result many around the country entered administration with the remainder all starting the seasonal sales well before the Christmas break. This tended to push retail sales up towards the end of December, but only assisted in cutting unwanted stock, as the lower prices did not stimulate profitability.

C. Race and equality impact

Consideration is given to the requirements of the Race Relations (Amendment) Act through the MPA/MPS Environmental Strategy and the developing Ethical Investment Policy whereby best practice standards are promoted.

D. Financial implications

Annual investment income has been revised down during the reporting period from £15 million to £12.5 million.

E. Background papers

• Monthly Treasury Management Reports for October, November and December 2008

F. Contact details

Report author: Paul Daly, Director of Exchequer Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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