RBA content to see the dollar fall

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By , 09/05/2019 15:35

The Reserve Bank appears to continue to talk down the Australian dollar to help stoke economic growth, while the latest board minutes released by the central bank suggests it is open to cutting the cash rate again.

Although the dollar had ”depreciated noticeably” against other currencies since its May cash rate cut, it ”remained at a high level considering the decline in export prices that had taken place over the past year-and-a-half”, the bank said in its June board minutes published on Tuesday.

”It was possible that the exchange rate would depreciate further over time as the terms of trade declined, which would help to foster a rebalancing of growth in the economy.”

The Australian dollar lost a quarter of a cent following the release of the minutes, falling to about US95.17¢ during the morning session. It was trading at US95.09¢ late on Tuesday.

RBS senior currency strategist Greg Gibbs said the RBA’s board members would have ”chosen their wording carefully in the hope that it might cause the currency to weaken”.

”Obviously it’s a very subtle attempt because the market doesn’t like overt pressure from central banks and normally rails against it … This is an example where they spoke in a way where they will welcome the currency’s fall but not rely on it.”

Citi economists Josh Williamson and Paul Brennan said the dollar was now more aligned with the terms of trade – a ratio that measures export prices to import prices.

Changes in the cyclical drivers of the currency, such as Asian currencies and risk sentiment, meant further falls in the terms of trade were more likely to be followed by weakness in the dollar, the economists said.

The Reserve Bank said while the US dollar was an ”important contributor” to the Australian currency’s recent depreciation, it also fell against most of its peers. It said this was a reflection of its May cut, falling commodity prices and concerns about China’s economy.

The board members noted that lower interest rates were having an effect on the economy, but that wage growth and business conditions remained subdued.

They said there was ”considerable uncertainty” about mining investment after it peaks and plateaus at a high level over the next year.

NAB currency strategist Ray Attrill said he expected the dollar to fall to US83¢ by the end of 2015. NAB also forecast the currency to fall to US93¢ by the end of this year and US87¢ by the end of next year.

However, Mr Attrill said, some of the recent falls could be reversed in the short term given the large amount of investors short on the dollar.

Financial markets were pricing in a 23 per cent chance of a July rate cut, according to Credit Suisse data. They were also pricing in at least one more cut by the end of the year.

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Time for plan B at Elders

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By , 09/05/2019 15:35

Elders is a bit like the rural services version of Billabong – an iconic brand with a business that strategically misstepped, bought the wrong assets, paid too much for them and is now lumbered with too much debt.

Both have spent the past year (or more in Billabong’s case) looking for a buyer. And neither could find one. Elders looks like it will find a home for its automotive division, but the centrepiece, the rural services business, has been left on the shelf.

The most obvious buyer walked away from the auction room on Tuesday. Ruralco had been hanging around for a year. Its first offer lobbed around September and was rejected. The most recent offer was even less generous. Needless to say Ruralco was shown the door.

Ruralco has Australian Competition and Consumer Commission clearance. It also has a 12 per cent stake in Elders and could thus meddle with any other party that was looking to make a bid.

The Ruralco offer was only for the Elders’ rural services business and neither side is prepared to reveal the exact amount. But neither is disputing speculation that $250 million was close enough to the mark. Elders is also in negotiations with a couple of parties to sell the automotive business, which is expected to fetch about $70 million.

To have accepted the Ruralco offer, the banking syndicate would have had to take a haircut on its $340 million of loans. The value of the equity and the $150 million of hybrid securities would be zero.

Brokers have placed values on the Elders rural services business of $320 million to $385 million – which in depressed conditions in the agricultural market look pretty optimistic, and these are certainly not being reflected in the share price, which is perched at 7.1¢.

Having decided to spare Elders an undertaker, the banks will now have to come up with a plan B, the company simply cannot be left in its current overgeared structure. One of the reasons will be that to date Elders has managed to pay its interest bills – even in the lean years.

Given the seasonal nature of the agricultural industry, next year could see a positive turnaround in earnings, but it could also see a deterioration. It has been a tough year for everyone, with hot, dry weather and plummeting livestock prices pushing earnings lower.

Ruralco’s earnings fell in the first half of the financial year by 50 per cent, even before taking into account the loss on its stake in Elders.

The banks would not want to be rolling the dice too often. It is now up to Elders chief Malcolm Jackman to get some cost out of what is a high working capital business. He has been in rescue mode since he first put his feet under the desk four years ago. But this won’t address the more fundamental problem of repairing the balance sheet.

Only two immediate solutions spring to mind. The first is to get a major equity injection from a third party – an avenue being investigated – most likely an offshore party, probably Asian. The second is to undertake some debt for equity swap with lenders. But banks traditionally have been loath to do this other than as a last resort.

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Investors back model to fund roads

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By , 09/05/2019 15:35

Institutional investors have given the thumbs up to the NSW government’s new model to fund large road projects but warned of a ”time bomb” if construction costs and traffic forecasts are not adequately assessed.

Former superannuation minister Nick Sherry also cautioned that super funds that opted to put money into infrastructure had to deliver returns that justified the investment, and stay divorced from political whims.

”Having been a politician, I know plenty of … colleagues who’ve got their favourite road projects and bridge projects, generally to nowhere, carrying very little traffic, who would love you to invest in their political backyard infrastructure project,” Mr Sherry said at a lunch in Melbourne on Tuesday.

After the failure of toll roads built under a private-public partnership model, the NSW government has been forced to adopt a new funding strategy for the $10 billion to $13 billion WestConnex road project in Sydney.

As outlined in the state budget on Tuesday, the government plans to fund the first stage of the 33-kilometre motorway as an equity investment rather than a capital grant. It then wants to fund the next stage by raising money from the private sector against the tolls on the roadway.

This model is expected to be closely studied by the Victorian government, which is committed to the yet-to-be funded $6 billion to $8 billion east-west link.

The NSW government emphasises that raising private capital once traffic volumes are known can significantly reduce the risk of forecasting usage by motorists. Toll roads such as Brisbane’s Airport Link and Sydney’s Lane Cove Tunnel failed because the traffic forecasts were radically overestimated.

White Funds Management managing director Angus Gluskie said retail and wholesale investors could be willing buyers of toll roads such as the WestConnex once traffic volumes were known, and the project had been ”de-risked” under the NSW government’s plan.

”Right at the moment we have infrastructure projects that have to be done, and we have an unwilling and gun-shy private sector – this gets around that road block,” he said.

”It is exactly the right thing the government should be doing. It really just means the government holds the risk on their books for a couple of years and then just passes it on.”

But he warned that future governments could be saddled with large liabilities if their predecessors underestimated the risk of construction and overstated the likely traffic volumes.

”If it is done irresponsibly, you can be creating a bit of a time bomb for future governments,” he said.

”It will be important for the government to make sure, as they cost it and construct it, that they still believe it makes longer-term financial sense. They have to make sure the forecasts make it stack up.”

Danielle Press, chief executive officer of the $6 billion Equipsuper, said infrastructure investments by super funds required the right return, the right risk structure and the right liquidity structure.

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Lenders slow to pass on rate cuts

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By , 09/05/2019 15:35

Big banks have passed on official interest rate rises to their customers in less than half the time it takes them to deliver rate cuts, new figures show.

Since the global financial crisis struck in 2008, banks have taken an average of 10 days to pass on cuts in the cash rate to their home loan customers, according to research published by Credit Suisse.

In contrast, lenders took about four days when raising rates.

The figures, obtained from broker 1300HomeLoan, show that all the big four banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank – engaged in the practice over the past five years.

Commonwealth Bank was quickest to pass on rate increases, with an average gap of 3.7 days between when the Reserve Bank raised rates and when the change took effect for customers.

Westpac-owned St George was the biggest laggard in lowering rates for customers, taking 15.5 days.

Credit Suisse analyst Jarrod Martin said the practice was of some help to bank profits, but it did not have a substantial impact. ”When there are 365 days in the year it’s not going to be significant in the scheme of things,” Mr Martin said.

The Australian Bankers’ Association chief executive, Steven Munchenberg, said the analysis only looked at one side of the banks’ balance sheets.

”Banks typically announce changes to deposit rates around the same time as changes to lending rates, so any delay in changing lending rates also means savers are not seeing their rates changed immediately,” Mr Munchenberg said.

”This also has a bearing on the implications of timing for banks’ interest margins. While the Reserve Bank’s cash rate is a significant influence on market rates, other influences come into play when banks set market interest rates, for example, banks’ funding costs and competition from other financial service providers in the marketplace – just to name a couple.”

Bank profits in the first half of this year have grown strongly despite weak demand for credit from households and business. Total earnings in the industry are tipped to hit $27 billion this year.

The practice of holding back on rate cuts has been estimated to make an extra $2 million a day for the Commonwealth Bank and Westpac, the nation’s two biggest mortgage lenders.

The finding was contained in a detailed report on mortgage trends.

With Glenda Kwek

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ASIC has far too much on its plate

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By , 09/05/2019 15:35

Since Greg Medcraft took the chair in May, 2011 the Australian Securities & Investments Commission has become more open about how it spends its limited budget on surveillance and enforcement.

However, what it is telling us may be an argument for change given recent revelations about CBA’s financial planning scandal.

After steadily expanding its areas of responsibility ASIC has arguably become too big to operate as efficiently as it could, and as it also makes clear in information sheets it has issued since Medcraft took over, it cuts its enforcement cloth to fit its budget. Dollars in hand are an important part of the cost-benefit equation that decides whether cases will be pursued, and if evidence exists, prosecuted or settled by way of an enforced undertaking that takes litigation financial risk off the table.

The risk is that money will be saved at the expense of taking the correct action, and on the strength of what my colleagues Adele Ferguson and Chris Vedelago have revealed in recent weeks about the misbehaviour of CBA advisers, ASIC let CBA off far too lightly by extracting only an enforceable undertaking in October 2011. It could have opted for tougher action that sent a message to the advisory industry that improper or illegal behaviour that enriches advisers at the expense of clients will attract significant penalties.

It was also slow to react, or at least from outside appears to have been. Almost a year-and-a-half passed between ASIC’s first contact with a CBA whistleblower and the final elevation of the matter to a serious investigation in March 2010.

There are several contributing factors. First, while ASIC is an earnest and well-intentioned organisation, it has also become a regulatory dumping ground. It began life simply, as the overseer of corporate and securities law. Now, it is also overseeing areas including insurance, superannuation, credit markets, margin lending and business names, and is directly supervising the sharemarkets, having inherited that role from a conflicted ASX.

It’s hard to think of much else that could be thrown at it, although Fairfax’s crack investigators Nick McKenzie and Richard Baker may have found something with their report this week that in 2011 the Australian Federal Police passed on to ASIC a reference it had received from US anti-corruption investigators about allegations that people working for BHP Billiton made improper payments to officials in China, Cambodia and Western Australia.

ASIC has no jurisdiction to investigate bribery, but could look at possible associated corporate offences. If it did, it took no further action. AFP halted its inquiry in September last year, but reopened it in February this year.

Under Medcraft ASIC reports more frequently and fully on its enforcement activities and sets out how it is performing against various benchmarks.

In its most recent report covering the 2011-12 June financial year it says, for example, that it conducted more than 700 high-intensity ”surveillances” during the year, and identified more than 20,000 market trading anomalies. It completed 179 enforcement actions with a success rate of 92 per cent, including 27 convictions and 22 enforceable undertakings, and fielded 12,516 reports of misconduct in the markets and industries it polices, finalising 72 per cent within 28 days, above its 70 per cent target.

It says it aims to satisfactorily answer all telephone queries on the spot, and in 2011-12 did so with 87 per cent of them, down from 91 per cent in 2010-11. It answered 91 per cent of its ”snail mail” inquiries initially within 14 days and in full within 28 days. Responses to email inquiries within two days fell from 96 per cent in 2010-11 to 73 per cent, but that probably reflected the fact that it took over business names registration from the states during 2011-12.

It’s noteworthy, however, that the regulator qualifies its 72 per cent success rate on responding quickly to reports of misconduct with the comment that reports that take longer than 28 days to resolve ”are generally complex ones or ones requiring considerable additional work”. Those are, of course, the ones that matter most.

It is also noteworthy that enforceable undertakings and, for that matter, banning orders for directors, stand with equal weight alongside wins in court in ASIC’s 92 per cent enforcement success rate statistic. Actions of different calibre are lumped together.

That leads to a question, about whether the 92 per cent success rate is actually too high. If ASIC pushed for more litigation and less enforceable undertakings, the success rate would be lower, but ASIC would arguably be signalling its determination to stamp out misbehaviour more clearly.

Underneath it all, of course, Medcraft is running a complicated business, and running it to a budget. His task would be easier if ASIC had less on its plate: a new government might consider that. It would also have easier enforcement choices if there was more money to spend: a new government won’t consider that.

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