Australian Government Investor Briefing

17 March 2009

CEO Presentation at HSBC Issuer and Investor Summit, Dubai
17 – 20 March 2009

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Australian Government Investor Briefing

Dubai
17 – 20 March 2009

Neil Hyden
Chief Executive Officer

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The Australian economy

  • Stable, culturally diverse, democratic society.
  • Strong flexible economy with a skilled workforce.
  • Track record of adaption to change.
  • Sound financial institutions.
  • Active policy response to external shocks.

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GDP growth

GDP growth has slowed after a long period of sustained growth.

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Sustained strong growth

  • Average annual growth in real GDP of 3.4 per cent since 1990.
  • Australia avoided recession during the Asian crisis, which dislocated many of our major trading partners.
  • It also avoided recession following the collapse of the ‘dotcom bubble’.
  • This reflects the economy’s capacity to adapt flexibly to changing circumstances.

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Now impacted by external shocks

  • The global economic and financial crisis is affecting the Australian economy, despite its inherent strength.
  • In the December quarter 2008, GDP fell by 0.5% in Australia.
    – A smaller fall than most other OECD countries experienced in the quarter.

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Growth forecasts

Australian growth is forecast to be supported by continued strength in several of our major trading partners in Asia.

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Strategic location

  • Australia’s geographic location in the Asian region, matched with its natural resource endowment, is a strategic advantage that will contribute to prosperity for many decades.
  • In 2007-08 over 58% of Australia’s merchandise exports were to East Asia.

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Australia’s merchandise exports 2008

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Fiscal position

  • Australia’s public finances are among the strongest of any developed country.
  • Sustained budget surpluses over past years have reduced the stock of debt on issue and built up financial assets.
    – The Government’s net debt is estimated to be -$16.2 billion (-1.3% of GDP) in 2008-09.

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Fiscal stimulus

  • The Government has acted quickly to provide fiscal stimulus to offset recent economic and financial shocks from overseas.
  • Stimulus measures amounting to $72.2 billion (7% of GDP) have been announced since October 2008.
  • These are temporary measures, consistent with a conservative medium term budget strategy.

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Budget outcomes

Budget underlying cash balance (% GDP)

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Fiscal position

  • Australia’s net debt position remains strong.
  • This provides scope for further flexibility in future fiscal policy, if needed.

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Net debt forecasts

Australia’s net debt will remain relatively low.

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Balance of payments

  • Australia has been a net importer of capital for over 200 years.
  • This results from its rich resource endowment, productive economy and strong economic growth.
  • Net imports of capital are reflected in persistent deficits on current account.

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Current account

Current account on the balance of payments.

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Capital inflows

  • Historically, capital inflows have been sustained by the strength of the Australian economy and the attractive yields generated by investments.
  • A large part of capital inflows comprise borrowings by banks.
  • Retained earnings of multinational companies contribute a further significant component.

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Inflation

Inflation has been low for the last 20 years, apart from occasional short spikes.

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Monetary policy

  • Monetary policy has reacted vigorously to changed conditions.
    – The cash rate has been reduced by 400 bps since September 2008 and is currently 3.25%.
    – These reductions have flowed quickly to households, as the majority of Australian housing mortgages use variable rates.
  • Considerable flexibility remains available for monetary policy should it be required.

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Cash rates

Official cash rates remain higher than in major economies.

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Financial sector

  • Australia’s banks have strong balance sheets, adequate capital and a resilient economy behind them.
    – The tier 1 capital ratios of the major banks average 8.7%.
  • Prudential regulation of banks has been rigorous and effective over recent years.
  • Major banks in Australia have never relied on securitisation to a major degree.

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Sub-prime loans

  • Sub-prime loans represent less than 2% of mortgages outstanding in Australia.

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Financial Sector

Market capitalisation of Australia’s top 4 banks is strong

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Financial sector

Return on shareholders’ equity for top 4 Australian banks remains robust

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Government guarantees

  • The Government is providing guarantees for wholesale funding by Australian authorised deposit taking institutions.
    – Issuers must apply in advance for coverage for specific borrowings and a charge applies.
  • This is to help Australian banks compete with international banks with similar guarantees from their governments.

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Exchange rate

  • Australia has a free-floating exchange rate.
    – The Australian dollar is the sixth most traded currency in the world.
    – Over past decades the rate has varied, including in response to movements in global commodity prices.
    – The central bank has not intervened in the exchange market other than in exceptional circumstances.

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Recent movements

  • The Australian dollar depreciated sharply against major currencies in December 2008 and January 2009.
    – It has since settled somewhat at levels below longer term average rates.

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Exchange rate movements

Australian Dollar / US Dollar

Australian Dollar / Japanese Yen

Australian Dollar / Euro

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Debt issuance

  • Over recent years the Australian Government has not needed to issue debt for budget funding.
    – However it continued to issue a small volume of debt to maintain a functioning bond market.
    – The stock of debt on issue was kept at around $60 billion (currently about 6% of GDP).
  • The Government is now increasing its issuance to meet funding needs.

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Past and projected debt issuance

Debt issuance will be higher over the next few years

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Treasury Bond issuance

  • We expect to issue around $32 billion in Treasury Bonds in 2008-09 and around $42 billion in 2009-10.
  • Bonds are issued through auctions conducted twice a week, generally of around $500 to 700 million.
  • Bonds are issued into the 10 existing bond lines, with maturities up to 12 years.

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Treasury Bonds

Current Treasury Bonds by maturity date

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Treasury notes

  • In addition, Treasury Notes with maturities up to 6 months are issued weekly to support management of the Government’s cash balances.
    – It is intended to develop a market of at least $10 billion in these Notes.
    – Although the total stock on issue will be larger at some points during the year.

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Other debt instruments

  • At this stage the Government does not plan to issue longer maturity bonds, indexed bonds or debt denominated in foreign currencies.

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Government yield curves

Australian Government debt offers an attractive return.

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AAA rating

  • Standard and Poor’s recently (January 2009) affirmed Australia’s Sovereign AAA rating.
  • Moody’s recent (February 2009) stress-testing of Aaa governments’ debt affordability placed Australia in the top group.
    – Moody’s concluded that Australia’s debt challenges were ‘limited’ and its ‘adjustment capacity’ sizeable.
    – It classified Australia in the highest of three groups of Aaa-rated sovereign issuers, based on the strength of their balance sheets.

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Further information

  • More detailed information on Australian Government Treasury Bonds and Treasury Notes may be found on the web site of the Australian Office of Financial Management at www.aofm.gov.au (under Activities – Debt Issuance)

Last updated: 8 November 2013