Cheap Debt Won’t Deter New South Wales Power Asset Sale

Australia’s most populous state will plough ahead with an electricity asset sale as it insulates its budget against revenue uncertainty while housing growth slows, New South Wales Treasurer Andrew Constance said.

Low borrowing costs and investor demand for infrastructure-related debt need to be balanced against volatility in property tax revenue and federal funding as the state government guards its AAA credit rating, Constance said yesterday in an interview at Bloomberg’s Sydney office.

Constance announced plans in June to end deficits and cut new borrowing, even as funding costs have continued to slide. The average yield on Australian state government bonds fell to an unprecedented 3.25 percent last week, Bank of America Merrill Lynch data show. Constance said the government is staking its political future on plans to raise A$20 billion ($19 billion) by selling part of the state’s power network to fund roads, trains and a new transport crossing for Sydney’s harbor.

“We have to ensure we are living within our means, we have to ensure that we are paying down debt and at the same time we want to make sure that we’re able to roll out the infrastructure program,” Constance said. “The state government is very exposed to the volatility in the property and the labor markets and at the same time, as we saw with the federal budget, very exposed to national partnership and national agreements.”

Lower Costs

Unprecedented monetary easing from the Reserve Bank of Australia and its developed-nation counterparts has helped to lower borrowing costs for New South Wales, whose economy is the biggest among Australia’s six states and two territories.

The state government’s May 2020 note, the biggest outstanding line, yielded 28 basis points more than similar-maturity sovereign debt today after the spread narrowed to 16 basis points on June 18, the least since it was sold in 2010, Australia & New Zealand Banking Group Ltd. prices show.

New South Wales’s bonds returned 6.2 percent this year through yesterday, in line with gains for a broad Bank of America Merrill Lynch index of state notes. The average yield on provincial securities was 3.27 percent, two basis points above the low reached on July 18, the data show. A basis point is 0.01 percentage point.

AAA Rating

New South Wales has about A$64 billion in outstanding borrowings, according to data compiled by Bloomberg. The state is one of only two in Australia that are rated AAA by both Moody’s Investors Service and Standard & Poor’s, although the latter gives it a negative outlook.

The Sydney-based government is predicting a deficit of A$283 million for the current financial year, with a return to surplus seen in 2015-16, according to the June 17 budget delivered by Constance.

In a statement the following day, New South Wales Treasury Corp. forecast it will borrow A$6.3 billion in long-term debt in the 12 months through June 30, 2015, having raised A$2.5 billion of the year’s funding requirement ahead of time. The state has about A$5.3 billion of bonds maturing during the financial year and about A$3.5 billion of new funding needs, down from A$3.8 billion in new borrowing the previous year, it said.

While preserving the state’s AAA rating restrains New South Wales’s borrowing capacity, the government is committed to retaining its top credit score to maintain budget flexibility and help the economy, Constance said.

Rating Impact

“One thing that you can’t ever underestimate is the importance of the credit rating to investment confidence and business confidence,” he said.

The government wants to use the money gained from asset sales to improve Sydney’s motorway and rail networks, as well as remove restrictions on freight movement across the state, Constance said.

Mike Baird, the state premier and Constance’s predecessor as Treasurer, said in June that a 49 percent stake in the state’s electricity network will be offered for lease should the government win a mandate at a March 28 election, with proceeds going to infrastructure spending. New South Wales has already raised money by selling long-term leases for port facilities in Sydney, Wollongong and Newcastle.

The federal government, which is leading a charge on global infrastructure investment through its presidency of the Group of 20 nations, is encouraging Australia’s state governments to sell off assets by giving them an additional 15 percent of whatever they raise.

Fiscal Strength

Constance said the state will take the electricity network sale to voters even as the plan is being stymied by parliamentary wrangling in Canberra. Uncertainty surrounding federal funding and housing-related revenue are two reasons the state needs to maintain a strong fiscal position, Constance said.

The susceptibility of the budget to the housing market is underscored by the difficulty in predicting stamp duty revenues. Duty on residential property transfers were estimated to have risen 35 percent in 2013-14, compared with a forecast of 20.5 percent, according to state budget papers.

“Some segments of the housing market do appear to have been calming down,” RBA Governor Glenn Stevens said on July 3. “Investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring,” he said.

Average home prices in the nation’s eight biggest cities dropped 1.9 percent in May, the biggest monthly decline since December 2008, according to the RP Data-Rismark Home Value index. Sydney prices fell 1.1 percent before rebounding 1.7 percent in June, the data showed.

“We are in a difficult position,” Constance said. “We have to maintain our discipline around debt.”

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