TIM HEXT: What investors should know about the outlook for State debt | Pendal Group
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TIM HEXT: What investors should know about the outlook for State debt

State government debt is becoming increasingly higher in yield against Commonwealth debt. Pendal’s Tim HEXT explains what that means for investors

AUSTRALIA is slowly re-emerging as a federation of states after the disunity of the past few years.

Governments such as Queensland and WA are running big ad campaigns to lure tourists back — barely months after they were threatening jail for interstate interlopers.

Though we are again a single nation, the financial status of the states has diverged in the post-pandemic world.

The recent round of State budgets revealed a number of things:

  1. Total State debt will net increase by $67 billion in FY22-23.  Commonwealth debt will likely net increase by $40 billion. Both have downside risks but the Commonwealth more so. There is now twice as much Commonwealth debt as semi-government debt outstanding and usually their programs are at least double. This will be the first time in over a decade that State issuance exceeds Commonwealth.
  2. WA (and to a lesser extent Queensland) are at or near a budget surplus courtesy of booming commodity prices and royalties. S&P this week upgraded WA to AAA, joining the ACT as the only AAA state or territory.
  3. NSW and Victoria are now the laggard states on debt — unlike most of the past decade. NSW will be borrowing about $24 billion of new money, Victoria $16 billion and Queensland only $8 billion. WA is flat.

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Pendal’s Income and Fixed Interest funds

NSW has an election next March… Hence a State budget that continued to act like NSW is an economy with excess capacity needing help from the government. Or as The Australian Financial Review described it — a “gobsmacking spendathon.”

NSW is the only State reporting more borrowing not less since the mid-year update, despite a better than forecast economy. Vouchers and handouts seem to be here to stay — not just as emergency measures.

NSW, and to a lesser extent Victoria, may cause the RBA to go harder than previously thought.

We are yet to see where the new federal government lands with its budget, but the whole point of rate hikes is to reduce demand in a supply-constrained economy.

State budgets are leaning the other way, adding to demand and therefore increasing inflation pressures.  And unlike the federal government, the States cannot print money to finance it all.

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This all leads to the fact that State government debt is becoming increasingly higher in yield against Commonwealth debt. 

As a fund manager we don’t worry about getting our money back from States. After all, the federal government has shown on numerous occasions it effectively stands behind the credit.

But we do have to worry about how that debt performs.

For now, the supply and demand dynamics suggest State debt will continue to underperform.


About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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