Inter-authority lending appetite remains buoyant despite low PWLB rates
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Twice as many councils predict an increase in borrowing from other councils next year as those forecasting a reduction, according to the 2019 Room 151 Treasury Investment Survey.
This year’s survey, which received responses from 148 senior investment figures working in local government, asked which types of investment councils expect to increase or decrease next year.
In response, 28.3% said that they would increase their investments with other councils, with 14.87% saying they would reduce their exposure to the sector.
In recent months, Room151 has reported on a number of local authorities which have taken advantage of cheap interest rates to swap short-term borrowing from other local authorities with longer term Public Works Loan Board debt.
Last month, Northamptonshire County Council borrowed £110m from the Public Works Loan Board to replace short-term borrowing.
The council took six loans during August at rates between 1.12% and 1.68% with maturity periods of between five and 50 years.
In March, a rise in borrowing from the PWLB was attributed to the low rates on offer.
Two of the biggest borrowers during the month – Woking Borough Council and Warrington Borough Council – told Room151 that they had used the money to push out the duration of portions of their debt.
However, the survey results show that appetite remains high among many councils for in the short-term LA-to-LA segment.
David Green, strategic director at treasury adviser Arlingclose, told Room151: “Local-to-local loans remain popular with borrowers, since interest rates remain cheaper than those offered by PWLB and are likely to fall in future.
“Lenders meanwhile like the security of investing within the sector rather than taking the risk of a bank failure, especially if the economy is slowing down.”
Among other significant trends in forecasts of council treasury staff, 18.9% said that they would be likely to increase investments in multi-asset funds.
Another 18.9% said that they would be increasing their investments in property or property funds during the next year.
More than a fifth of that number said saying they would be increasing property investments “significantly”.
Only 2.0% said they would be looking to reduce property investments.
Opinion was split on money market funds (MMF), with 20.1% saying they would increase their investments in this area, while 25% were looking to decrease their MMF portfolio.
The shift away from the low rates offered through banks and building societies also looks set to continue, with 29.0% saying they would reduce bank deposits and 16.2% saying they would reduce building society deposits.
However, another 14.2% said their authority would increase bank deposits and 6.08% are looking to put more money into building society deposits.
Perhaps unsurprisingly, given the pressure on local authority budgets and low interest ratees, only 6.8% of respondents said they expected to see their investment balance increase over the next five years.
Meanwhile, 62.8% expected to see falls, with 9.5% expecting a drop of more than 75%.
Speaking at Room 151’s Local Authority Treasurers Investment Forum this week, Peter Hugh Smith, chief executive of investment manager CCLA, said: “The majority of local authority assets – in excess of 75% – are in short term assets, which given where interest rates are, is giving a very minimal return.”
He also said that if a Brexit deal is reached with the European Union, interest rates could rise to 1.5% by 2021.
He said: “That is quite different from what the audience here expects as the most likely outcome.
“I am not saying it is the most likely outcome but we need to think about what we do if that happens.”
