Cash, debt and guarantee management
REPORT 2015
Flemish
Administration
Colophon
Legal deposit: D/2016/3241/110
Responsible editor: Birgitt Van Nerum,
acting Secretary-General of the Finance and Budget Department
Boulevard du roi Albert II 19, P.O. Box 6, 1000 Brussels
Date: May 2016
2015 CASH, DEBT AND GUARANTEE MANAGEMENT REPORT
TABLE OF CONTENTS
IINTRODUCTION
IIECONOMIC ENVIRONMENT
1International context
2Economic situation in Belgium and Flanders
3Interest market in 2015
4Interest rate outlook
IIICASH MANAGEMENT IN 2015
1Overview
2Net financing requirements
3Cash pools of the Flemish Administration
4Central Financing Unit (CFU)
5Investments
IVDEBT MANAGEMENT IN 2015
1Overview
2Direct debt
2.1Long-term debt instruments
2.2Short-term debt instruments
2.3Risk Management
2.4Refinancing requirements and new financing requirements in 2016
3Consolidated debt
3.1Consolidated debt: 2015 actual
3.2Development of the consolidated debt
3.3Summary
4Indirect debt
5Leasing debts
6Public-Private Partnerships
VGUARANTEE MANAGEMENT IN 2015
1Overview
2The risk is limited
2.1Executions and recoveries
3A few important components
3.1Guarantees to (local) authorities
3.2Social Housing
3.3VIPA
3.4Scholen van Morgen
3.5Guarantees to large, medium-sized and small companies
3.6Financing in 2016
VIRATING OF THE FLEMISH COMMUNITY/REGION
VIIAPPENDICES
1Glossary
2List of Websites
3List of figures
4List of tables
IINTRODUCTION
In implementation of Article21 of the Flemish Parliament Act of 7May 2004 on the provisions regarding the cash, debt and guarantee management of the Flemish Community and the Flemish Region (Belgian Official Journal of 16July 2004), this report gives an overview of the cash, debt and guarantee management of the Flemish Administration during 2015. This report was prepared in April 2016.
The highlights of this 2015 annual report include:
- In 2015, KBC repaid the remaining Flemish financial assistance (€2 billion capital + 50% penalty payment);
- In light of a significantly increased consolidation scope, consolidated debt rose slightly in 2015;
- In 2015, the Flemish Administration was able to retain its good ratings due to its sound financial management.
IIECONOMIC ENVIRONMENT
1International context
In 2015, the global economy experienced a gradual slowdown in growth. However, there was a considerable shift in the growth dynamics: from emerging economies to prosperous countries and from raw material exporters to raw material importers.
Domestic demand picked up further in prosperous countries due to decreasing unemployment, a sharp fall in the oil price, and a supportive monetary policy. Conversely, many emerging countries were faced with slowing or even contracting economic activity, driven by lower demand for raw materials, internal political problems, high debt accumulation, or a combination of these factors. These developments were mainly prompted by the slowdown and transition in Chinese growth. During the summer, financial problems arose in China and spread to other regions, resulting in increased volatility, stock market adjustments, and falling bond yields.
China continued to grapple with the consequences of the enormous wave of investment after the financial crisis, which has triggered overcapacity in the heavy industry and the construction sector and caused the debt level to rise sharply over just a few years. This misallocation not only puts pressure on economic growth, but also jeopardises financial stability. In 2015, Chinese policymakers found themselves in a thorny situation. In order to combat amarked slowdown in economic growth, there was repeated easing of monetary policy and an increase in public expenditure. The Chinese national bank also had to make massive use of its foreign exchange reserves to counter an already excessive weakening of the renminbi, caused by capital flight. It was adepreciation of the currency in August that unleashed the financial turbulence.
Figure 1: Growth dynamics shifted to prosperous countries (GDP growth %; source: IMF)
Other emerging countries also faced exceptionally large challenges in 2015. The Chinese slowdown (6.9% in 2015, after 7.3% in 2014) had a significant effect on raw material prices, and thus on countries that depend on the export of metals and energy. Brazil and Russia thus both entered a deep recession that was further complicated by their own series of problems, such as the corruption scandals within the Rousseff government and the war in Ukraine. India, the fourth BRIC country and a large importer of energy, saw its growth gain momentum.
In this context of weaker demand, the oil price fell further in the second half of the year to a low of USD 37 for a barrel of Brent oil. The strategy pursued by the OPEC countries to protect their market share against emerging, but more expensive variants, such as American shale oil, put the price under even further pressure. As a result, many oil producers, including Saudi Arabia, were forced to take drastic budgetary measures. More importantly, the oil price caused inflation to decrease worldwide.
Figure 2: Raw material prices continued to fall in 2015 (S&P GSCI (01/01/2015) = 100%; Source: Thomson Reuters Datastream)
During the first quarter, the euro area benefited strongly from the lower oil price, which even drove inflation into negative territory. Decreases in energy bills stimulated private consumption in particular.
Monetary policy, which had eased further during the course of the year (see below), also continued to support the economy. Due to an improved economic climate and better financing conditions, growth in net bank loans to the private sector picked up, after three years of credit contraction.
In short, domestic demand performed rather well during the entire year and helped to support economic growth (1.6%). However, this was neutralised in the second half of the year by a sharp deceleration in exports. Until then, European exporters had benefited from the strong depreciation of the euro since mid-2014, but the slowdown in the growth economies gained the upper hand. Various political problems also emerged, particularly on the periphery.
The first half of the year was characterised by the face-off between Greece and its creditors, while in autumn national elections organised in the Iberian peninsula led to a minority government in Portugal and a political stalemate in Spain.
Figure 3: Consumption performed well in the euro area (Source: Thomson Reuters Datastream)
In 2015, the economy seemed to reach cruising speed in the United States. GDP growth reached 2.4%, just as quickly as in 2014. However, the development of economic activity was rather volatile, with a weaker first quarter and slowdown towards year-end. Even so, the labour market performed strongly throughout the year. Some 2.7million jobs were created and the unemployment rate fell to below pre-crisis levels. This contributed towards the further expansion of private consumption. However, the oil price decrease was less positive for the economy as a whole, since the positive impact for consumers was neutralised by the sharp contraction of investments in the shale oil sector. Inflationary pressure gradually began to return by the end of the year, partly due to accelerated wage growth.
2Economic situation in Belgium and Flanders
Compared to 2014, the Belgian economy picked up slightly in 2015, from 1.3% to 1.4%, mostly because of robust growth at the start of the year. This moderate growth rate was mainly driven by internal demand, while foreign trade slowedsomewhat.
Household consumption, which increased by only 0.4% in 2014, grew by 1.3% in 2015, due especially to the sharp fall in oil prices. Household energy bills, for example, which make up around 10% of total family expenditure, decreased by 10% between the first quarters of 2014 and 2015 respectively, which automatically led to a rise in purchasing power.
Improved labour market conditions also contributed towards the growth in the disposable income of Belgian households. Some 43,000 net jobs were created in 2015, as a result of which the unemployment rate decreased over the year from 8.5% to 7.9%.
The improved labour market in Flanders has translated into a reduction of almost 7,000 in the number of unemployed job seekers, or 5.5%, between January 2015 and January 2016. According to the Labour Force Survey, the Flemish unemployment rate at the end of 2015 was 5.6%.
Because of the combined effect of decreased energy prices and job creation, households could thus increase their consumption, even in a context of continuous wage moderation. Domestic demand was also supported by corporate investments (2.2% in 2015), which had already risen sharply in 2014 (8.0%), due for the most part to non-recurring factors, particularly in the maritime sector.
Figure 4: The number of unemployed decreased quicker in Belgium than in Flanders (Growth in the number of unemployed job seekers (year-on-year; Source: Belgostat))
Foreign trade was however influenced by the slowdown in global trade in 2015. According to the CPB (Netherlands Bureau for Economic Policy Analysis) index of global export volumes, foreign trade grew by only 2.0% in 2015, compared to 3.1% in the previous year. As a result, Belgian exports increased by only 3.4% in 2015, after recording 5.4% growth in 2014. The growth was driven mainly by exports to EU countries outside the euro area and the US, while exports to the BRIC countries decreased because of the embargo on Russia.
Although 2015 confirmed the recovery of the Belgian and Flemish economy, one cannot refer to a vigorous growth rate. Economic activity was mainly inhibited by the vulnerable international economic climate.
3Interest market in 2015
In January, the European Central Bank (ECB) announced that it would begin to buy government bonds in an effort to get inflation, which was continuing to decrease, back on track towards its 2% target. In March, the ECB started buying €60 billion worth of debt notes, mostly government bonds, on a monthly basis. This caused the bond yields of the euro countries to drop sharply. Even the German ten-year yield bottomed out at an historic 0.05% in April. This was short-lived, however, partly because of improved economic figures and an increase in the oil price in the first half of the year, and was followed by an adjustment. By almost two months later, the Bund yield had returned to just under 1%.
By the end of the year, pressure mounted on the ECB to take additional action. After all, there was renewed unease about the global economy following the Chinese stock market crash. Bond yields therefore decreased again. In October, ECB President Draghi said he was concerned about the risks that emerging countries posed to European growth and inflation. This statement significantly raised expectations for a comprehensive package of monetary easing measures in December. The package was introduced: for the first time since September 2014, interest on deposits was reduced from -0.2% to -0.3% and the minimum term of the buy-back programme was extended from September 2016 to March 2017. Even though this, and surplus liquidity injected into the buy-back programme, drove down short-term interest rates further, the markets were disappointed.
Figure 5: Short-term interest rates in the euro area have fallen further (%; Source: Thomson Reuters Datastream)
Meanwhile, in the US, the entire year was spent waiting for the Federal Reserve (Fed) to announce the first interest rate hike since the financial crisis. Federal Reserve chair Yellen emphasised during the year that the labour market was still being underutilised and that this was keeping inflationary pressure low. In the second half of the year, problems in emerging countries prompted the Fed to adopt a cautious approach. However, since the labour market was resilient and inflationary pressure was gradually increasing, the FOMC, as the monetary policy body of the Fed, eventually raised the policy interest rate by 0.25% from 0.25% to 0.50%. Throughout the year, long-term rates in the US were first driven by contamination from Europe and then by global volatility. By the end of 2015, an increase was observed in the run-up to the Fed’s interest rate hike.
Figure 6: Long-term interest rates were more volatile than in 2014 (%; Source: Thomson Reuters Datastream)
4Interest rate outlook
In the euro area, the ECB seems to be ‘finished’ with monetary easing after the latest package of measures in March 2016. Interest rates were decreased again: interest on deposits to -0.4% and the refinancing rate to 0%. The central bank then stepped up its purchase of debt notes to €80billion a month and added corporate bonds to the buy-back programme. Lastly, four new targeted long-term refinancing operations (TLTROs) were announced. Both the amount that banks can borrow from the ECB and the interest rate will depend on how much credit they advance to the private sector. These measures drove short-term rates even deeper into negative territory and put further pressure on long-term rates.
As matters stand, current policy seems adequate to bring inflation back to 2% in the medium term. The oil price bottomed out in the first quarter of 2016, as aresult of which inflationary pressure should return during the year. Economic activity also continues to perform positively. However, just like the Fed in recent years, the ECB will be very cautious in withdrawing monetary assistance. Policy rates will therefore probably remain at current levels for at least two more years. As the end of the buy-back programme, scheduled for March 2017, approaches, long-term interest rates should begin to rise, implying a certain steepening of the yield curve. In absolute terms, however, interest on government bonds will remain low.
The question with regard to the Fed is when the next interest rate increase will happen. Just like the ECB, the American central bank seems very cautious, given the global risks and the still low inflationary pressure. Fed chair Yellen has repeatedly emphasised that keeping interest rates lower for longer is less risky than having to reverse a premature interest rate increase. For this reason, 2016 too will see only one interest rate increase of 0.25%. However, the risks for this purpose point upwards, since the economic figures have recently performed better.
IIICASH MANAGEMENT IN 2015
1Overview
Figures7 and8 give a first overview of the various types of revenues received by the Flemish Administration and an overview of the expenditures per policy area in 2015.
Figure 7: Overview of revenues in 2015[1]
The combined and shared taxes together represent the majority (60%) of the revenues of the Flemish Administration. The total revenues of the Flemish Administration for 2015 came to €37.6billion.
In 2015, income rose by around €10billion as a result of the Sixth State Reform. The above graph shows an increase in Flemish tax autonomy (from 19% to 34%). This includes firstly regional taxes and secondly regional surcharges, which are transferred from 2015 following the Sixth State Reform.
Figure 8: Overview of expenditures per policy area in 2015[2]
The policy areas of Education and Training (OV) and Welfare, Public Health and Family (WVG) together represent more than half (56%) of total expenditures in 2015. The total expenditures for 2015 come to €37.8billion.
In 2015, budget expenditure has increased by around €10billion as a result of the Sixth State Reform. The percentage share of the policy areas of Welfare, Public Health and Family (WVG) and Employment and Social Economy (WSE) has increased at the expense of the policy area Education and Training (OV).
More information on income and expenditure can be found in the General Presentation of the budget.
Table 1 provides the monthly development of net financing requirements (NFR), the direct debt and the evolution of the current account.
Table 1: Net financing requirements, cash and debt position in 2015 (in thousands of euros)
It is abundantly clear from the above table that the credit line was used in 2015 (see column (5)). The current account had a credit balance again at the end of December 2015, due to KBC’s repayment of €3billion (also see below).
2Net financing requirements
Figure 9 shows the monthly development for the 2012-2015 period of the accumulated net financing requirements (NFR). It presents the accumulated surplus/shortfall of the cash revenues against cash expenditures, with the initial position put back to zero each year for the sake of comparison.
Figure 9: NFR monthly development (in thousands of euros)
As already stated, the large increase in December 2015 can be explained by KBC’s repayment (€3billion).
The transfer of the tranches of grants to the municipalities from the Municipal Fund in January, April, July and October is clearly reflected in Figure9. NFR have traditionally been negative for these months because expenditures exceed revenue.
For the sake of completeness, more details are provided with respect to the (monthly) NFR figures for 2014-2015 in the table below.
Table 2: Monthly development of NFR in figures (in millions of euros)
As in previous years, the result of the treasury transactions involving the surcharges on property tax –on behalf of the municipalities and provinces– played a key role in the development of NFR in 2015 as well.
The treasury transactions involving the surcharges on withholding tax on property consist on the one hand of the revenue effectively realised from these surcharges and, on the other hand, of the transfer of the budgeted revenue to the municipalities and provinces. This takes place in accordance with a fixed calendar in six monthly and equal fixed tranches in the second semester.
Because the difference between the revenue that is budgeted and the actual revenue ends up being paid or withdrawn in the year after it is processed, the receipt of these surcharges on behalf of and their transfer to the local authorities have no effect on the treasury result of the Flemish Government over the long term. They do, however, have a considerable influence on the treasury result in the year when they are collected. After all, as a result of this procedure the Flemish Community has deliberately taken on the financing risk inherent in this collection, which it carries out on behalf of local authorities.