It’s the kind of good news that Treasurer Joe Hockey would prefer to keep quiet: the Reserve Bank is heading for a profit this year of $6 billion or more. But don’t let anyone know, just in case people remember the circumstances in which Hockey gave an $8.8 billion handout last October.
Back then Hockey, in his first overseas trip as Treasurer, was sufficiently frightened by his exposure to the bigwigs of finance at the International Monetary Fund meeting in Washington that he decided the Reserve Bank needed a boost to its reserve fund, even though the central bank had not directly asked for it. Hockey’s tone back then was near-hysterical. The Australian Financial Review breathlessly reported: “Mr Hockey, who returned from Washington last week vowing to load up ‘both barrels’, said the Reserve Bank cash grant was needed because ‘we need all the ammunition in the guns for what’s before us’.” Hockey predicted another major clash between the Republicans and United States President Barack Obama early in the new year. “I don’t see a way forward out of that,” he said.
But since then much has happened, the recent shakeout in emerging markets notwithstanding. Since late October, the US economy has steadied (GDP grew at an annual rate of 4.1% in the third quarter and at an annual rate of 3.2% in the fourth quarter, according to the first estimate issued early today), the impact of the government closure and debt ceiling imbroglio in early October has had no lasting impact on GDP or employment, and the US Federal Reserve has chopped its quantitative easing by a total of $US20 billion — to $US65 billion — and it will be all gone by the third quarter this year.
In its meeting on Wednesday, the US Federal Reserve ignored what has been happening in emerging markets and upgraded its view of the health of the US economy, producing one of the more positive outcomes from a Fed meeting in a couple of years.
So, the reasons Hockey advanced last year for boosting the Reserve Bank’s reserve fund have been entirely contradicted by events since then. And the volatility in emerging markets is not going to hurt Australia, despite some silly reporting in the past fortnight. On top of all that, the Aussie dollar has fallen from around 95 US cents in mid-October to around 87 cents this week — a fall of roughly 9%, which in turn is a big positive for the wider economy. In fact, the dollar is now very close to the 85 US cent level targeted by RBA governor Glenn Stevens late last year.
That fall should, along with inflation creeping up a little, be a big positive for Joe’s budget in May.
On top of this, the European economy is improving faster than expected; the Japanese economy is more solid; and the Chinese economy has not slid into the widely expected disaster area that many Western investors still believe will happen (again, despite silly commentary on the flash reports on the country’s manufacturing sector that suggested China was contracting, rather than just growing at a slower rate). The IMF has now boosted its estimates for world economic growth for 2014 and 2015, starting with the US, reversing the cuts by the fund to its forecasts when our newbie Treasurer was in Washington.
And one thing we can be sure Hockey won’t mention is the favourable impact on the RBA’s finances from the sustained fall in the value of the Aussie dollar, especially against the greenback. A combination of the valuation effects of the dollar’s fall on the size of the RBA’s foreign currency holdings (which make up around a half of the reserve fund’s assets) and the value of its gold holdings has sharply boosted the value of the RBA’s official assets in the six months from the end of June to the end of December, according to the latest data released by the central bank earlier this month.
“You’re not allowed to play these sort of financial shell games in the private sector. In politics, however, it’s a different story.”
RBA data shows its holdings of foreign currencies were worth $47.978 billion at the end of December, up $6 billion from the end of June 2013. The bank’s gold holdings were valued at $3.447 billion, up from $3.3 billion at June 30. Since the end of last year, the total value of those holdings of foreign exchange, gold, special drawing rights and the reserve position in the IMF has risen even further to more than $60 billion as at January 22, from $59.4 billion at the end of December and $51.8 billion at the end of June 2013.
Because the fall in the value of the Aussie dollar exceeded the size of the fall in the gold price in the six months to December, the value of the RBA’s gold holdings actually rose (which partly reversed the very sharp fall in the value of the gold holding in the January-to-June period). Net effect: the bank’s assets have increased by $3 billion since Hockey’s hysterical announcement in October.
To raise the one-off $8.8 billion payment — Hockey has yet to produce legislation authorising the raising and the payment of the capital into the bank — the government will boost its debt by the same amount, instead of adding to the bank’s fund out of tax revenues over a period of years, which would have been a smarter and cheaper way of doing it. The extra debt could cost taxpayers over $400 million a year in extra interest costs.
Then again, the real purpose of the extra $8.8 billion was to paint the former ALP government in the worst possible light, an attempt that continued with the mid-year economic statement in mid-December.
In its 2012-13 annual report, the bank said “measured on the basis of accounting standards, which bring to profit and loss both realised and unrealised valuation changes, the Bank recorded a profit of $4.3 billion, the highest for four years”. The bank is heading for another big profit this year, particularly if the dollar falls further — some analysts suggest US80 cents. These unrealised gains are very important to the RBA because they play an important role in protecting the RBA’s financial position. According to the annual report, “unrealised valuation gains are not available for distribution, but are transferred to an unrealised profits reserve where they are retained to absorb future valuation losses or until the relevant assets are sold and the gains realised”. The unrealised profits reserve stood at $3.7 billion at June 30, 2013, down from the $4.3 billion the year before. The $6 billion in gains at December 31 would boost the reserve close to $10 billion if there’s no further change over the rest of the financial year.
On top of that, the rise in market rates on official government assets, such as US Treasuries, since May last year, will lift the income the RBA books from holding the reserves in these AAA-rated assets. In fact, the reserve fund could top $16 billion by the end of June, which at this rate might be around the time Hockey get his $8.8 billion legislation through Parliament. That holds out the absurd possibility that the RBA will give some of that $8.8 billion — say, $5 billion — back to Joe by way of a dividend straight away, to boost his 2014-15 budget outcome.
You’re not allowed to play these sort of financial shell games in the private sector. In politics, however, it’s a different story.