Welcome to the Autumn 2019 Focus on Finance Newsletter, keeping our members informed on the current financial issues affecting Local Government.
The sole purpose of this newsletter is to provide information to members. The contents of the newsletter are limited to that purpose and should not be taken as advice on finance, management or the law. All material contained in the newsletter is subject to copyright of the various authors who contribute to it. Contents of this newsletter may be reproduced in whole or in part only with the prior permission of the South Australian Local Government Financial Management Group who will, where required, seek appropriate permissions from copyright owners or rights holders. The South Australian Local Government Financial Management Group accepts no liability or responsibility whatsoever for or in respect of any use of or reliance on the newsletter by any party. Information contained in this newsletter has partly been provided by third parties. The South Australian Local Government Financial Management Group does not guarantee the information. All interested parties should make their own enquiries to verify the information and to satisfy themselves in all respects.
I hope everyone had a beautiful summer break to recharge and reconnect with family and friends, as I am sure most of us are in the thick of the budget process already, and summer holidays seem like a distant memory! This is a hectic time of year, and with the council elections resulting in a high proportion of change in many chambers, supporting new elected members in contributing to the budget process will be a focus for many of us.
Our working groups are driving a range of activities, with the Asset Management Work Group issuing a survey to gather information to inform the work agenda over the coming year; the Financial Framework Group having completed their review of the draft 2018/19 Model Financial Statements, and are now commencing review of the LGA Financial Sustainability papers; and importantly the Membership and Communication Work Group keeps us connected and provide valuable information to support us in our roles and in managing changes in our sector. For a full update of our groups and their latest activities please refer to the "Projects / Work Groups Update" section of the newsletter.
In late November we held our annual two day Workshop and Conference "The Labyrinth" at Adelaide Oval, which was well attended and we have had a high level of positive feedback. The quality of our events is due in no small part to our sponsors that enable our events to be affordable for our members, Also, the personal contributions of so many of our presenters who volunteer their time and finally the efforts of the seminar committee which is so well supported by Patricia Coonan.
I look forward to seeing you at the upcoming conference “Great Expectations” on the 15 March 2019 to be held at the Adelaide Convention Centre, Registrations are now open – please click here.
SALGFMG Conference “Great Expectations”, Adelaide Convention Centre.
SALGFMG Executive Committee Meeting, 9.30 am, Town of Walkerville.
End of Fringe Benefit Tax year, ensure that log books, declarations and other required documentation are completed by employees.
Good Friday Public Holiday.
Easter Monday Public Holiday.
Anzac Day Public Holiday.
SALGFMG Executive Committee Meeting, 9.30 am, Mount Barker District Council.
Fringe Benefits Tax Lodgement Due.
SALGFMG Executive Committee Meeting, 9.30 am, City of Playford.
Earliest date a Council can adopt an Annual Business Plan and Budget for the ensuing financial year.
Queen’s Birthday Public Holiday.
SALGFMG Executive Committee Meeting, 9.30 am, Alexandrina Council.
End of Financial Year.
SALGFMG Executive Committee Meeting, 9.30 am, City of Burnside.
SALGFMG Annual General Meeting. Please keep an eye on our website for further information closer to the date.
Last date a Council can adopt an Annual Business Plan and Budget for that financial year.
Last date that financial statements, notes and other financial material must be prepared by a Council.
The Chief Executive Officer and Presiding Member of a Council audit committee to provide certificates of independence with the financial statements.
SALGFMG Executive Committee Meeting, 9.30 am, City of Salisbury.
30 September – 31 May
A Council must at least twice consider a report showing a revised forecast of its operating and capital investment activities for the relevant financial year compared with the estimates for those activities set out in the budget in a manner consistent with the note in the Model Financial Statements entitled Uniform Presentation of Finances.
Further information for many of the key dates can be sourced via the LGA website: www.lga.sa.gov.au. You will need a members login to access the key dates calendar.
As members of the public sector, you’re no doubt hearing the terms ‘smart’ and ‘intelligent’ more often these days — particularly when referencing government’s ability to deliver improved services in an increasingly digital world.
Although the phrases ‘Smart City’ and ‘Smart Community’ conjure up all manner of whiz-bang technologies that will present an intelligent and connected environment, many councils will plan steps toward a smarter future — some even conducting successful pilot programs — without fully understanding the foundational requirements.
Smart initiatives depend on the use of technologies that capture and analyse data from different sources. While the advent of the Internet of Things (IoT) is undeniably creating new opportunities to better serve the community, if the underlying structure to gather and process information is cumbersome or otherwise inefficient, that pathway to ‘smart’ may not be as smooth as envisaged.
Councils are complex organisations, providing manifold services that require interaction with a broad range of community members. With that complexity comes a range of disparate systems, which are used — to varying degrees of success — to meet the needs of the public and of the council itself.
Over the years, many Local Government departments will have invested heavily in hardware and software —often a multitude of point systems and standalone products —as well as dedicated in-house IT resources, pouring funds into infrastructure and solutions designed to streamline processes and workflows.
This scenario has probably served the needs of the internal environment and the wider community, so it is common to find an attitude of ‘if it ain’t broke, don’t fix it’, when it comes to making future plans.
This raises a crucial point, and one that many Local Government entities will fail to recognise; a smart city or smart community plan is a multi-year journey that is also an exercise in evolution and business transformation. Today’s actions will have a marked influence on the eventual success — or failure — of any potential ‘smart’ initiatives.
Running an assortment of standalone applications brings immediate challenges. It often means working with several vendors and, as each application incorporates its own technology and database, and requires specific skill sets (either deployed in-house or outsourced) to implement system modifications or improvements. You’ll also need those systems to talk to one another, most commonly achieved by creating an elaborate integration layer, usually with significant cost overhead.
In trying to simplify the system, this approach effectively adds a layer of complexity that requires additional resources to manage. Even when pilot tests appear outwardly successful, it can be difficult to replicate that success when scaling to a real-world scenario. To realise ’smart community’ ambitions, the underlying technology and architecture must be appropriate and enabling. As a result, the journey must start with digital transformation and a SaaS-enabled environment.
Smart councils realise this, appreciating that by simplifying their IT layer, they can remove the need for dedicated in-house resources, reduce capital expenditure and be free to focus on business outcomes.
The thing about planning for the future is you can never be entirely sure what it holds. IoT, augmented and virtual reality, wearables and a host of other technologies are poised to change the way we interact within our world…and who knows what other new transformative technologies are around the corner?
This makes a reliance on old, outdated technology even more problematic, as legacy systems are often closed and proprietary. Even with an integration layer built across the top, these applications are unlikely to meet tomorrow’s demands. Building on a ten-year-old system will quickly surpass the point of diminishing returns, making today’s ‘investment’ nothing more than a sunk cost. Implementing a solution that employs an open protocol architecture means there won’t be a requirement for complex re-engineering to support transformative technologies as they are developed in the years ahead.
The vision for a Smart City should be fundamentally constructed around the needs of a community and its residents. As individuals, people adapt to new ways of communicating and consuming relatively easy, but it generally takes a shift in our mindset to achieve this. Not so long ago, for example, we purchased CDs and DVDs and had physical confirmation that we ‘owned’ the music we listened to and movies we watched.
The advent of smart phones, tablets, the cloud and increasingly fast internet access has changed the landscape entirely. We stream movies, TV and music and no longer feel attached to a physical representation of something, because we have the world at our fingertips. We can access anything we need to, from any device, anywhere in the world.
This shift raises two key points for Local Governments with Smart City or Smart Community ambitions:
With digital transformation key to Local Governments realising their smart ambitions, councils are increasingly looking for a reliable and robust solution only a SaaS enabled environment can offer. TechnologyOne’s deep understanding of the Local Government sector has enabled it to develop a truly integrated OneCouncil solution specifically for councils. Its solution has empowered more than 300 councils across Australia to significantly reduce the time, cost and risk associated with large-scale enterprise-wide software implementations, setting them on the path to a smarter future.
If becoming a Smart Council is on your radar, the time to embrace your digital transformation has well and truly arrived. This eBook to help you devise effective strategies for realising smart future goals.
Work Group Updates
As a result of the Financial Indicators report September 2018 which reported 46 councils for which data on an asset sustainability ratio is available, 78 per cent of councils had a ratio higher than 60 per cent. This indicator is a measure of whether a council is accommodating asset renewal and replacement in an optimal and cost effective way from a timing perspective, relative to the risk it is prepared to accept and the service levels it wishes to maintain.
A survey has been designed by the Asset Management work group to gather information on how Councils currently use their IAMP and provide better understanding of any constraints and opportunities for improvements. This will inform discussions going forward regarding the use of IAMP and how the asset sustainability ratio is used including if it is an appropriate form of asset renewal measurement.
There was an excellent turnout and great feedback about the annual workshop and conference “The Labyrinth” held late November 2018, which featured Craig Reucassel from the Chaser and The War on Waste. Thank you to everyone who came along, and to the Events Group in making this such a successful event.
Friday 15 March we will be holding our one day conference, “Great Expectations”, at the Adelaide Convention Centre, with registrations open now. The program contains a good mix of technical topics, and broader local government considerations. Our key note speaker, Dr Fiona Kerr, will be speaking about how good leaders build adaptive organisation, and as we reshape our brains constantly what does this mean for us in developing our own leadership skills and behaviours.
The work group have also commenced preparing a draft program for the November conference, so it you have recently heard a great presenter or would like to hear about a particular topic, please contact me with your suggestion.
The annual review of the draft Model Financial Statements (MFS) 2019 as prepared by Coalface Software Solutions, commenced in February checking for changes or newly introduced – financial statements, AASBs’, appropriate presentation of disclosures, the Local Government Act 1999, other legislation and other requirements. We appreciate the comments and feedback we have received from our members to improve the usability and presentation of this model. The document is made available for South Australian users as a recommended format and presentation for the financial statements, notes and other information. It is intended use is a best practice model providing information on each of the required areas and for practical guidance includes some examples of the how, what, when, why and where.
The working group also review new and amended accounting standards, recently reviewing draft decision trees for inclusion in the draft MFS 2019, as provided by Coalface Software Solutions on AASB15, AASB16 & AASB1058.
During 2019 the LGA is embarking on a review of its Financial Sustainability Information Papers with the last review back in 2015, this working group will be actively involved providing input, suggestions for improvement and comments during this review process.
Work on the new LTFP lite model has been finalised and was presented at the November FMG Workshop.
The model has been well received with a number of Councils in the process of implementation. The model combines the best elements of the current LG Solutions LTFP Max model with a desire to keep things simple. The model provides flexibility at each income and expenditure category, which enables the user to add their own income and expense categories to a standard set. There is also the capacity to set global and discrete indexation for all income and expenditure items and to detail new initiatives and associated financial impacts. The model even converts cash deficit to a Cash Advance Debenture and calculates interest, which when working with other models can prove to be a time consuming step.
To support users of the model draft instructions have been developed which are near sign off.
Pricing of the model is detailed below:
*Note – Rollover is waived for Councils who purchase the Year End Templates (YET)
In 2017 the FMG Executive Committee launched the Buddy Program, an initiative developed to connect with Finance professionals in our rural and regional Councils. The concept is to connect two of the Executive Committee members with each rural Council, effectively allowing the finance professionals in the rural areas a ‘Buddy’ to contact to discuss any issues or ideas they may have.
As both Executive Committee members and rural finance professionals have changed since the launch, the work group is in the process of updating the Buddy list.
The program has had a varied level of success with some being in regular contact with each other, and others contacting their Buddy when the need arises. We would love to receive any feedback you have regarding the program.
With regard to the FMG website, we are continually updating the content to ensure the latest relevant information is available for our members. The presentations from the November conference ‘The Labyrinth’ are now on the website available for members to peruse.
Lessons from a fallen unicorn
Bentleys SA Pty Ltd
Elizabeth Holmes was Silicon Valley’s first female billionaire entrepreneur, controlling a company worth an estimated US $9 billion, on paper at least.
Holmes dropped out of Stanford College to pursue an idea to develop a revolutionary blood testing machine that could conduct sophisticated blood tests from just a finger prick. Her company, Theranos raised about US $700 million from well-known and successful venture capitalists, including Rupert Murdoch. Holmes was feted as the next Steve Jobs and her face adorned magazine covers.
However, the technology that Holmes was trying to develop did not work. Holmes would not budge from her idea that the machine should be small, portable and should only use blood obtained from a finger prick. These parameters proved impossible for engineering teams that were employed to create and test the machine. The tests were unreliable because the blood had to be diluted so much.
Holmes lied about the technology and the results of the blood tests. She lied to her employees, company board, investors, customers and regulators. It wasn’t until Wall Street Journalist, John Carreyrou, received a tip-off about the concerns from ex-employees when investigations started. Carreyrou’s task was made difficult due to Theranos hiring America’s top lawyers. Holmes even reached out to major investor, Rupert Murdoch, whose News Corp owned the Wall Street Journal, to stop the story.
However, Carreyou received the backing of his editor and employer, therefore the investigative story which questioned Theranos’ claims was published, and the web of lies that had been woven started to fall apart. By September 2018, Theranos was being wound up and federal prosecutors had filed criminal charges against Holmes.
If employees questioned the technology, they were fired immediately. Ex-employees raising concerns on social media received law suits and threatened. Holmes would not allow research teams to collaborate with one another, all teams communicated through Homes as the CEO.
Board members did not have the knowledge to understand the technology and question the results. If a director questioned or showed any doubt over the claimed progress, they were removed from the board and forced to sign a confidentiality agreement. Holmes was allowed to force through a resolution that gave her 100 votes for every share she owned, giving her 99 per cent of the voting rights.
Holmes and Theranos thrived during the years when there was an investor frenzy within Silicon Valley. Start-ups such as Uber and Spotify were raising significant private capital and Holmes convinced influential investors that Theranos was the next big thing.
Some believe entrepreneurs need freedom to follow their instinct and make quick decisions, without the need to burden them with a bureaucratic governance process. However, it was this “fake it until you make it” mentality that enabled Holmes to sell the story in the hope that technology would catch up. Truth is, you need to give entrepreneurs enough slack to be entrepreneurial, but a governance process that keeps them accountable.
Regulators did not act sufficiently on raised concerns. Health regulators did not follow up promised test results and eventually made concessions. It is unknown if there was any financial regulatory oversight or if there was a financial audit ever completed. The revenue and profit projections provided to potential investors were wildly exaggerated and should have raised doubts.
Lessons for entrepreneurs
‘The Labyrinth’ Workshop and Conference Review – 29 & 30 November 2018
Members of the South Australian Local Government Financial Management Group gathered at Adelaide Oval on the 29th & 30th November 2018 for its ‘Labyrinth’ conference and workshop. An excellent line up of speakers had been organised for the two-day event.
With Lisa McAskill again at the helm providing MC duties, day one commenced with our very own President Kate George giving members an update on the development of a new Long Term Financial Plan model for SA Councils, through funding received from the LGA Research and Development Scheme. Manuel Schuldt, LG Solutions, then gave a demonstration of the new model which gave members an overview of the capabilities of the model.
Corinne Garrett, UHY Haines Norton, and Ashay Prahbhu, Assetic, then presented on Asset Management Plans and Long Term Financial Plans, and how to best make the LTFP a ‘live’ document to assist with decision making. This presentation included case studies from Councils to show how up-to-date plans assist with day-to-day functionality.
Tim Muhlhausler, Galpins, Andrew Tickle, BDO and Samantha Creten, Dean Newbery & Partners, then joined forces on a panel to discuss the Model Financial Statements and fielded questions from the audience regarding Council audits.
David Papa and David Francis from Bentleys SA presented on new revenue standards AASB 15 and AASB 1058, their technical requirements, application dates and the type of information needed to collect.
Lincoln Smith, Norman Waterhouse Lawyers, provided an understanding of employees vs contractors and the consequences of getting it wrong. Lincoln provided some practical tips to ensure compliance of getting it right.
Adrian Hollins, Control Track, and Lida Cataldi, City of Unley, then showed the new Control Track application to conduct a risk based internal controls self-assessment.
Davin Lambert from the LGFA concluded the days presentations with a Use of Debt discussion, showing scenarios of how debt supports intergenerational equity and further discussing the responsible use of debt.
Following the conclusion of the presentations, the event sponsors provided a cocktail party for all attendees, before attention then turned to dinner with the entertainment led by hypnotist Isaac Lomman and some willing (and not-so-willing) audience participation. An excellent evening was enjoyed by all, but as President Kate said the next morning, what happens at dinner stays at dinner!!
Day two was opened by Paul Sutton, City of Charles Sturt, and Adrian Skull, City of Marion, discussing how their Councils, as well as the City of Port Adelaide Enfield, are working in close partnership to seek out opportunities to work collaboratively and gain efficiencies by eliminating duplication.
Unfortunately our next presenter was unable to attend, however Dr Joseph Drew from the University of Technology in Sydney stepped in at last minute via Skype to present an evidence based discussion on Rate Capping. The presentation discussed the reasoning of why rate capping exists, the arguments for and against, and evidence of its effectiveness.
Lisa Teburea from the LGA then presented an update of Local Government reforms currently on the agenda, what they mean for all Councils and how the sector is responding.
Adam Jones, Local Government Risk Services, highlighted a range of emerging risks that have affected Local Government is recent times, and provided case studies and identified programs available to help Councils work through their risk mitigation process.
Craig Reucassel of ‘The Chaser’ fame was our keynote speaker. Following from his series ‘The War on Waste’, Craig highlighted how Councils contribute significantly to dealing with the problems of waste and recycling, but about getting contributors further involved with taking responsibility.
Andrew Richardson and Andrew Corrigan, Auditor-General’s Department, discussed the role of the Auditor-General’s Department in examining the Local Government sector and the processes involved once a Council is selected for further examination.
The SALGFMG would like to sincerely thank all our sponsors for their continued support of the conferences, as once again it enabled a program full of high calibre speakers. Members can access their presentations on the SALGFMG website (login required for access).
The next Conference will be held on Friday 15th March 2019 at the Adelaide Convention Centre, please keep an eye on our website for more information.
I started working in Local Government at the City of Playford as Accounts Payable Officer in 1998. After 8 years of Accounts Payable, I was ready for a new challenge, and in 2006 I applied for a Finance Officer role in the Finance Department. This is when I decided to go to Uni to study a Bachelor of Commerce. I completed this while working full time in 2010 (I had no life during this time!). I commenced my CPA course after graduating.
In 2011, I moved to City of Prospect as a Senior Finance Officer. I really enjoyed working in a small Council environment and I learnt a lot from my Manager at the time. I then moved to City of Port Adelaide Enfield (PAE) in 2013 as a Financial Accountant and have been here ever since. Since starting at PAE, my role has changed a little in that I am now also the Team Leader of the Accounts Payable function, responsible for the Long Term Financial Plan, end of year Financial Statements, creating reports and many other tasks. PAE is a great organisation to work for and I really enjoy working with the Finance Team here.
I enjoy working in Local Government and find that I am always learning new things. Even though my work is a little repetitive, there are many things that pop up which involves problem solving and thinking of ways to do things differently and more efficiently. Councils also do so many different things for the community and its great knowing that even though I am not directly involved in providing these services, I am helping the officers that do provide them. Also, what I love about Local Government is that it doesn’t matter which council you work for, if you need advice or assistance, other councils are always there to help.
I became a member of FMG when I moved into Finance in 2006. In 2018 I joined as a committee member after my manager, who had been a committee member for many years, resigned from Council. I wanted to represent PAE on the committee as I saw a great benefit in being involved. I enjoy being on the committee as the topics discussed are issues that we may be dealing with at the time and it’s interesting hearing how other councils deal with them. I’m finding that I’m learning a lot being on the committee.
I like to spend my spare time with family and friends and really enjoy gardening.
Thanks to all SALGFMG Members and Board for so warmly welcoming Assetic into your fraternity. It is an exciting time in SA local government, as the effects of mandated asset management plans become a reality, and we have a very-real opportunity to shape our industry for the better.
As we embark on a new year, I wanted to reflect on this with you as members. So, let me ask you….
Australia is truly a leader in strategic asset management, which is something we should be very proud of. However, we have a further opportunity to progress beyond valuations and accounting and turn it into a true blend of Accounting and Engineering – Accountneering.
Our finance teams understand the need for demonstrating council’s financial sustainability for audit, yet struggle to balance the financial reporting requirements against actual engineering performance and planning. Our asset managers have all the data required for very solid asset management planning, yet get inefficiently bogged down for months trying to reconcile financial figures – and then stress out trying to satisfy audit.
I will be personally getting involved this year, meeting audit offices to collaborate in the science of audit… to ensure audits are meaningful, consistent and ask the real questions which impact councils’ futures – not just reconcile numbers.
At Assetic we will also continue to help our clients move forward with this philosophy of collaborating with the auditors prior to the final audit. Many did exactly that last year and the results were outstanding; year-end was satisfied with a lot less pain than in previous years.
The next FMG conference ‘Great Expectations’ will be held at the Adelaide Convention Centre on Friday 15 March 2019.
There will be many informative topics discussed, including what makes audit committees effective, GST and FBT updates and Council’s communicating through the media.
Dr Fiona Kerr is the keynote speaker, discussing the neuroscience of leading a resilient organisation. Dr Kerr has over 30 years’ experience in the areas of complex organisational strategy and transformation across the public, private and tertiary sectors and within various industries.
For more information please click here: http://www.salgfmg.com.au/index.php/great-expectations
I started in Local Government in 2011, having come from the retail automotive industry as a Dealership Financial Controller.
My first local government role was at the City of Marion – where I still am – as their Financial Accountant. My current role is Unit Manager of Statutory Finance and Payroll (a title so long even the Payroll system can’t cope with it), where I oversee financial reporting, asset accounting, payroll and accounts.
For me, the best part of working in Local Government is the variety of the work – there is always something new (sometimes it’s even exciting!!) – coming up.
I have been a member of the FMG since I started at Marion and was involved in the Internal Controls working group early on however this is my first year as a committee member. There is a lot of benefit in being involved in the working groups as you get to discuss different approaches and get fresh perspectives from the other members.
Outside of work I enjoy spending time camping with my family (my partner, son who just turned one and our dog), working on/driving/racing cars (space and time are the biggest issue for this), gardening (we have about 10 fruit trees and a variety of herbs and veggies), barbecue, renovating and many other things that are too numerous to list.
UHY Aspire Advisory,
consulting subsidiary of UHY Haines Norton
When I work with Councils and discuss Internal Financial Controls, the discussion inevitably gets around to DOCUMENTATION. Everyone thinks it is boring to do and easy to put off and you find you never get around to it.
I’m going to say once again; is that procedure documented? Do your staff have access to the documentation? And have they read and understood it?
So in case you need convincing or you need to convince someone else I thought I’d set out some basics.
Loss of knowledge: Councils in South Australia have had a 12% turnover of staff averaged over all Councils over the years 2012 to 2017. With a minimum of 0% and a maximum of 79%! Losing even a few staff in a small Council can result in considerable loss of knowledge in many procedures. Documentation can help a new staff member get on top of their new role, especially if the previous incumbent isn’t around anymore.
Consistency: Documentation assists in staff completing a procedure the same way each time, every time.
Prove it: In the case where there is a problem, it might help if you can prove that your staff did the task correctly and according to the procedure. If they didn’t, then you might really have a problem. So it is important to not only have the procedure documented, but train staff and ensure that they are following the documentation.
Not forgotten: Many procedures can be quite complex, documentation ensures that all tasks within a procedure are completed and not forgotten.
Internal Controls: An important part of controlling financial risks of error and fraud is to have documentation, that staff are trained in, that is kept up to date and checked.
A picture tells a thousand words: It is easier to start if you draw flowcharts of what has to happen, in what order. Then put in the descriptions.
Policies: Make sure that the procedures support and fit with the relevant policies.
Is it understandable: Can your staff read and understand the procedure, test it – maybe on someone new?
Calendars: If there are a group of procedures that relate together, include a calendar showing when each procedure is to be undertaken.
Checklists: Part of the ‘prove it’, a checklist of procedures can prove that the procedure is being undertaken and remind staff to do it.
Use it: Encourage staff to use the procedure, if something is not right – fix it. Some staff will continually ask how to do something – point them to the procedure. Memory is great, except when it’s wrong. Discourage ‘work arounds’ – fixing the procedure will save time in the long run.
Update it: If something changes, update the procedure, but also ensure key staff know that it has changed.
So have I convinced you? No excuse, it’s a new year after all, this could be your ‘late’ New Year’s resolution to get those procedures documented.
The public sector has historically always been a prime target for cyber-attacks, and over the past few years we have seen an escalation in both the number and severity of attacks, threats, and malicious actors targeting the industry.
The Q4 2018 BDO Cyber Threats Insights Report, released January 2019, examines the unique challenges and issues facing the public sector internationally, as well as key emerging trends around attacks, and potential mitigating factors. In addition, we analyse the cyber security practices of the public sector in four different countries - Australia, Germany, Israel and the United States.
> Read report
Financial markets remained volatile over the past month as the US Federal Government shutdown, the ongoing US-China trade dispute and issues around legislating Brexit created uncertainty around the globe.
The US Federal Government shutdown in January after the democrat-controlled congress failed to pass federal funding legislation because it contained funding for President Trump’s US-Mexico border wall. The issue remains unresolved and despite government workers not being paid during the shutdown many economists feel it made little difference to US economic output. There has been no resolution to the US China trade dispute and if a compromise is not reached by the 1st of March the US have threatened to raise tariffs on Chinese goods from 10% to 25%.
The UK parliament has not accepted the deal negotiated with the European Union by Prime Minister May. If no compromise is reached, the British could enact a no deal ‘hard’ Brexit on the 29th of May this year.
In January, global equity markets recovered some of the losses experienced in December with the US S&P 500 index rising 7.7%, the UK FTSE rising 3.5%, the German DAX index rising 5.6% and the Japanese Nikki index rising 6.2%.
Global bond yields did not experience the same volatility over the past month highlighted by the US 10-year Treasury bond yield which remained relatively steady closing the month 0.01% higher at 2.63%.
The Australian equity market also experienced a rebound in January with the ASX 200 index rising 5.5%. Australian unemployment fell from 5.1% to 5% in December to its lowest level since June 2011. Despite this strong data, falling housing prices and a sharp reduction to business conditions in December points to a challenging economic environment in 2019. The Australian dollar recovered some of the losses experienced in December and is currently trading at around $0.71 USD.
The Reserve Bank (RBA) met in early February and left the official cash rate unchanged at 1.5%. The statement remained relatively unchanged noting that the labour market remained strong while inflation remained low. In early February Governor Lowe spoke at the Nation Press Club in Canberra about the year ahead. During his speech he spoke about the accumulation of downside risk within the global economy and recent housing price declines, especially in Sydney and Melbourne. The governor also stated that future changes to monetary policy was more evenly balanced than what it was a few months ago and that the RBA has the flexibility to cut rates if required. The market took this as a more dovish tone and increased the probability of a cut to the official cash rate in the future.
Implied RBA Cash rate as at 31/01/2019:
PO Box 172 Smithfield SA 5114
Tel: 0408 801 026