RBA Sees Profit After Stevens Forced to Pay Swan DividendMichael Heath
Australia’s central bank projects it will have A$550 million ($578 million) available for distribution in the 12 months to June 30, a year after it was forced to hand the government almost half its earnings against Governor Glenn Stevens’s wishes, documents show.
Stevens urged Treasurer Wayne Swan to forgo a dividend from the Reserve Bank of Australia for the year to June 2012 to allow the governor to rebuild a buffer drained by the high currency. “This would be consistent with your earlier agreement to this approach to begin the process of restoring the balance of this Reserve,” Stevens wrote in a July 13, 2012, letter to Swan released today under a Freedom of Information Act request by Bloomberg News.
Swan rebuffed the request, and asked for a A$500 million dividend from the RBA, saying it was “appropriate” that taxpayers receive the payment. The conflicting claims reflect the impact a higher local currency is having on Treasury, where tax receipts are weakening, and the central bank, which has lost money on its international assets.
“The position of the Reserve Bank has been complicated by the strong Australian dollar and the fact that it keeps going higher and higher,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has about A$130 billion under management. “Paying the government a dividend isn’t a problem in normal times, but if difficult financial conditions fall on the economy it may restrict the central bank’s ability to provide assistance.”
A spokeswoman for Treasurer Swan said in an e-mailed statement today that the government doesn’t intend to take a dividend from the RBA this year. The government took steps in the last budget to ensure the central bank’s reserve fund is appropriately capitalized, the spokeswoman said.
In a Feb. 8, 2013 letter from the RBA to Treasury, the central bank said it projected earnings of A$863 million for the year to June 30, 2013, with A$550 million of that available for distribution as a dividend in the following financial year or to credit the Reserve Fund.
“Exchange rates, in particular, can fluctuate widely over time and may have a significant effect on the bank’s profits,” RBA Assistant Governor (Corporate Services) Frank Campbell wrote in the letter to Treasury. “Although the bank currently records unrealized gains so far in 2012/13, if the Australian dollar appreciated over the remainder of 2012/13 unrealized losses may be recorded.”
The Australian dollar traded at $1.0579 as of 6:41 p.m. in Sydney today, up from the $1.0353 level on Feb. 6 that was used by the RBA when making its projections for distributable earnings in fiscal 2013.
The forecast distribution available noted in the February letter was A$413 million higher than a September projection, Campbell wrote. He said the Reserve Fund’s “balance remains below a level consistent with the board’s policy for this Reserve, which is to target a balance of 10 percent of assets at risk.”
A 10 percent appreciation in Australia’s dollar could result in an unrealized loss of about A$3.43 billion, he wrote.
The Reserve Fund, which provides the capacity for the RBA to absorb losses, stood at A$1.9 billion in February, Stevens told a parliamentary panel in Canberra on Feb. 22. He said that when the central bank held between A$6 billion and A$7 billion “that was roughly at the target at the time.”
In Stevens’s July 13 letter to Swan, he wrote: “The board seeks your approval to transfer all of the bank’s distributable earnings in 2012 to the Reserve Bank Reserve Fund.”
In a reply dated Aug. 28 from Swan to the governor, the treasurer said “the government believes it is appropriate that tax payers receive a dividend from the Reserve Bank where circumstances permit.”
“However, I agree it is prudent that the Reserve Bank work towards replenishing the Reserve Bank Reserve Fund, and for this reason should retain a portion of its 2011-12 profits,” Swan wrote in the letter.
Swan in December was forced to abandon a pledge to return to a surplus this fiscal year as a stronger currency and weaker commodity prices curb tax receipts, damaging the government’s economic credibility. He will release a budget on May 14, four months before a national election that polls suggest the ruling Labor Party will lose.
Swan last week reappointed Stevens for a further three years, saying the governor had made “an enormous contribution to Australia’s economic performance and financial stability” since his appointment in 2006.
The Reserve Bank Act states that the central bank’s owner, the Australian government through the treasurer, determines how much of the earnings available for distribution will be taken as a dividend. After paying the dividend to Treasury, the RBA had A$596 million of its earnings in 2011-12 left to top up its Reserve Fund, according to its annual report published in September.
“My preference would be to keep all of it, frankly, until we rebuild the capital, but it is the treasurer’s prerogative to decide,” Stevens told lawmakers in Canberra on Feb. 22. “In the current situation he was quite amenable to us keeping more than half of the earnings available for the year, but he wished to take the 500 dividend. That is his prerogative, and he is perfectly entitled legally under the acts to do.”