❓ Question on the impact of WA's credit rating downgrade on the Future Fund's investment strategy and returns, specifically regarding risk tolerance and the initial analysis used to justify the fund. The Treasurer's response indicates no immediate changes to the fund's risk profile but acknowledges the need for long-term analysis.
AnsweredQoN 538Legislative Assembly
QuestionView source ↗
STATE FINANCES — AAA CREDIT RATING
538. Mrs M.H. ROBERTS to the Treasurer:
I refer the Treasurer to debate on the passage of the Western
Australian Future Fund legislation on 26 September 2012 and the discussion
around whether the rate of return of the fund would exceed the WA Treasury
Corporation cost of funds. The Treasurer advised the house that the rate of
return was based on an eight-year historical analysis and that in theory if we
had the future fund over the past eight years and it had been invested within
the parameters set out in this framework, it would have produced for future
generations a rate of return of five basis points higher than the cost of the
funds.
(1) As the analysis upon which the Treasurer
based his very small five-basis-point return on the future fund was conducted
during the time when WA actually had a AAA credit rating, will he now request a
further analysis on the basis of the downgraded credit rating?
(2) As the future fund investment framework
states that the desired risk tolerance of the fund is for 80 per cent
investment in Australian semi-government bonds, is he now looking to change
this framework in order to invest in higher-risk assets?
538. Mrs M.H. ROBERTS to the Treasurer:
I refer the Treasurer to debate on the passage of the Western
Australian Future Fund legislation on 26 September 2012 and the discussion
around whether the rate of return of the fund would exceed the WA Treasury
Corporation cost of funds. The Treasurer advised the house that the rate of
return was based on an eight-year historical analysis and that in theory if we
had the future fund over the past eight years and it had been invested within
the parameters set out in this framework, it would have produced for future
generations a rate of return of five basis points higher than the cost of the
funds.
(1) As the analysis upon which the Treasurer
based his very small five-basis-point return on the future fund was conducted
during the time when WA actually had a AAA credit rating, will he now request a
further analysis on the basis of the downgraded credit rating?
(2) As the future fund investment framework
states that the desired risk tolerance of the fund is for 80 per cent
investment in Australian semi-government bonds, is he now looking to change
this framework in order to invest in higher-risk assets?
AnswerView source ↗
(1)–(2) That is a good question, member for
Midland. I am sure the member does not know what it means!
Mrs M.H. Roberts : I absolutely know what it means! It means
that what you told the house needs revising. Answer the question!
Mr T.R. BUSWELL : Member for Midland, how many percentage
points of interest is a basis point?
Point of Order
Mrs M.H. ROBERTS : The Treasurer is asking a question back at
me. I am happy enough to respond to questions if that is your ruling, Mr
Speaker.
The SPEAKER : No; just sit down, please. We are not going to let you respond.
Treasurer, just speak through the Chair, please.
Questions without Notice Resumed
Mr T.R. BUSWELL : Thank you, font of knowledge.
The second part of the question related, in theory, to the risk profile
that sits around funds invested by the Western Australian Future Fund. The
response to that question is that there is no intent to alter the risk profile
of funds invested in the future fund on the back of yesterday's
announcement by Standard and Poor's.
The first part of the member's question relates to one of the
arguments that the opposition raised in opposing the future fund at the time,
which was that that differential between what we get on money we invest in the
future fund versus what we borrow does not justify making that investment. We
will have to wait and see what happens over time to the rates that we are
offered for our paper when we next go to the market following yesterday's
announcement. That has two aspects: firstly, the impact of yesterday's
announcement on the appetite for our paper; and, secondly, the impact of
yesterday's announcement, ultimately, on the pricing of our paper. In
the estimates hearing, one of the things we were informed of by Mr Collins from
Treasury Corporation—or it may have been Mr Marney, the chairman of the
Treasury Corporation board—was that so far the impact on our paper is
at the longer end of the paper. We will, of course, conduct that analysis. The
one thing members have to understand is that the future fund is, in and of its
nature, a long-term investment for future generations of Western Australians.
Over that long period of investment there may well be changes in relative rates
compared with what it earns versus the alternative cost of funds, but we have
to conduct that analysis over a long time. It should not happen as a kneejerk
reaction to an important announcement yesterday by Standard and Poor's.
Mr M. McGowan interjected
Mr T.R. BUSWELL : There will be no fire sale, Leader of the
Opposition. I have been talking about that for a long time—it may not
have filtered through to the Leader of the Opposition in his lofty office. We
have argued for a whole range of benefits that support the introduction of a
future fund, and these are over and above any differential in interest rates.
In closing, we have to have a long-term view of these things. There is no
desire by the government to rush out on the basis of yesterday's
announcement and send the future fund into riskier forms of investment—none
whatsoever. The future fund is a very sound decision to take some of the wealth
being generated by this state by royalties at the moment and set it aside for
future generations.
Midland. I am sure the member does not know what it means!
Mrs M.H. Roberts : I absolutely know what it means! It means
that what you told the house needs revising. Answer the question!
Mr T.R. BUSWELL : Member for Midland, how many percentage
points of interest is a basis point?
Point of Order
Mrs M.H. ROBERTS : The Treasurer is asking a question back at
me. I am happy enough to respond to questions if that is your ruling, Mr
Speaker.
The SPEAKER : No; just sit down, please. We are not going to let you respond.
Treasurer, just speak through the Chair, please.
Questions without Notice Resumed
Mr T.R. BUSWELL : Thank you, font of knowledge.
The second part of the question related, in theory, to the risk profile
that sits around funds invested by the Western Australian Future Fund. The
response to that question is that there is no intent to alter the risk profile
of funds invested in the future fund on the back of yesterday's
announcement by Standard and Poor's.
The first part of the member's question relates to one of the
arguments that the opposition raised in opposing the future fund at the time,
which was that that differential between what we get on money we invest in the
future fund versus what we borrow does not justify making that investment. We
will have to wait and see what happens over time to the rates that we are
offered for our paper when we next go to the market following yesterday's
announcement. That has two aspects: firstly, the impact of yesterday's
announcement on the appetite for our paper; and, secondly, the impact of
yesterday's announcement, ultimately, on the pricing of our paper. In
the estimates hearing, one of the things we were informed of by Mr Collins from
Treasury Corporation—or it may have been Mr Marney, the chairman of the
Treasury Corporation board—was that so far the impact on our paper is
at the longer end of the paper. We will, of course, conduct that analysis. The
one thing members have to understand is that the future fund is, in and of its
nature, a long-term investment for future generations of Western Australians.
Over that long period of investment there may well be changes in relative rates
compared with what it earns versus the alternative cost of funds, but we have
to conduct that analysis over a long time. It should not happen as a kneejerk
reaction to an important announcement yesterday by Standard and Poor's.
Mr M. McGowan interjected
Mr T.R. BUSWELL : There will be no fire sale, Leader of the
Opposition. I have been talking about that for a long time—it may not
have filtered through to the Leader of the Opposition in his lofty office. We
have argued for a whole range of benefits that support the introduction of a
future fund, and these are over and above any differential in interest rates.
In closing, we have to have a long-term view of these things. There is no
desire by the government to rush out on the basis of yesterday's
announcement and send the future fund into riskier forms of investment—none
whatsoever. The future fund is a very sound decision to take some of the wealth
being generated by this state by royalties at the moment and set it aside for
future generations.
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