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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2009-09-09 Daily Xml
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GLOBAL FINANCIAL CRISIS

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (14:07): I seek leave to make a ministerial statement.

Leave granted.

The Hon. K.O. FOLEY: I have risen to make a number of statements to the house on many occasions over the past 12 months in order to provide members with further information on economic indicators and financial results as the global financial crisis unfolds. Today I wish to do this again.

It is just three months since I handed down a tough state budget and warned of the financial challenges facing South Australia caused by the ongoing global financial crisis. In the budget the government took some difficult decisions in order to address the impact to the state's finances of projected sharp declines in GST grant revenue and state taxation revenue. Our response was to set out a pathway through these challenges—one that was endorsed by the international credit rating agencies, which almost immediately reaffirmed the state's AAA credit rating.

The government's prudent economic management continues to show every indication that South Australia may yet escape the worst extremes of the global financial crisis. Recently published indicators may give cause for cautious optimism in the long term. Just last week the Australian Bureau of Statistics published seasonally adjusted final demand for South Australia, showing an annual increase of 5.2 per cent. State final demand measures were spent by households, business and government on both consumption and capital investment.

South Australia's performance outstripped the rest of the nation and compared with a 2.5 per cent increase in Western Australia, 1.5 per cent in Victoria and 0.8 per cent in New South Wales. Queensland went backwards at negative 2.5 per cent. It demonstrates that South Australians have confidence in the way in which the state is being managed and where it is headed for the future. This confidence was further echoed in the recent BankSA State Monitor report. The report noted that confidence among South Australian consumers has dramatically rebounded in the past three months to reach the highest level in four years. The jump in optimism is the largest single increase in the 12 year history of the BankSA State Monitor and shows a return to optimism last seen in the housing boom of 2003 to 2005.

Business confidence also rose significantly. As BankSA Managing Director Rob Chapman states:

Business owners are confident about the economic outlook and are expecting to see immediate benefits for their own business.

But he warns:

Businesses remain cautious about making major investments in capital or staff. These worries are likely to disappear, if we see a period of sustained economic growth and a return in consumer spending.

However, he concludes:

The lift in both business and consumer confidence is promising for the state as it represents a strong platform for future sales growth and labour demand.

Also this week we have seen published the ANZ job advertisement analysis for August. It shows that the average number of weekly newspaper job advertisements has risen by 9.3 per cent in South Australia in seasonally adjusted terms. This is good news, but it needs to be taken in context. The average number of weekly advertisements is still 36 per cent lower than it was a year ago, and the ANZ warns that it is likely to be the middle of next year (2010) before national unemployment reaches its peak.

Whilst employers appear to be reluctant to shed workers, the number of hours worked has shown a very steep decline. This is not an unprecedented feature of a recession, but the sharp reduction in hours worked is certainly the most pronounced that we have seen for many decades.

Finally, in terms of state government revenues, including GST and payroll tax, the latter months of 2008-09 and the early part of 2009-10 have been closely tracking in line with budget expectations. There is no sign yet of stronger than expected revenue outcomes. That is a message that the opposition should understand; that at this stage there is no clear indication that revenues have increased beyond what was projected in the June budget.

Stamp duty revenues were somewhat above expectation at the turn of the financial year, but this was because of a stronger than anticipated surge in first home buyer activity, which is clearly unlikely to be sustained, and we would expect a regression back to the stamp duty forecast that we have in the budget.

Further to that, just today details of the Australian retail turnover have been published. In seasonally adjusted terms, Australian retail turnover fell 1 per cent in July, following a 0.8 per cent fall in June. The falls in the last two months followed strong growth in the previous three months. In South Australia, retail turnover fell 1.4 per cent seasonally adjusted in July following a 1.9 per cent fall in June. Annual retail growth is 5.2 nationally but, concerningly, in South Australia it is now sitting at some 1.7 per cent.

The Prime Minister said last week that, in spite of positive indicators showing the nation outperforming most of the world's developed economies, the international downturn continued to have an impact on Australia. Mr Rudd observed that the global economy is not out of the woods yet by a long stretch and that this economy—Australia's—is an integral part of the global economy. That is why I, too, sound a note of caution about the conditions in the South Australian economy.

South Australia's growth may have (and it has) outstripped the rest of the nation over the past 12 months and Australia may well, indeed, have avoided the worst of the global recession. However, we are a long way from being able to proclaim that the worst is behind us. The fact that the Australian and South Australian economies have fared better than the rest of the developed world is testament to the strong and decisive stimulus measures put in place by both federal and state governments. Much of the growth we have seen can be traced back to these decisions. However, as the Prime Minister observed, Australia is part of the global economy, and the rest of the world has not fared as well.

One area of concern is the decline in the value of our state's overseas exports—down 9.7 per cent, or nearly $1 billion, on the previous 12 months. The biggest declines were in mineral exports, which obviously is a result of the downturn in commodity demand—particularly iron, copper and lead—petroleum products, wine, wool and, of course, motor vehicles. That is evidenced by the fact that General Motors Holden, which had 50 per cent of its production exported to the United States and the Middle East, had seen that export almost dried to zero. In particular, key markets, such as the ASEAN nations, were down 20 per cent, the United States was down 15 per cent, the United Kingdom was down 25 per cent and the Middle East was down 28 per cent. No doubt the drought also had a very serious impact on the primary sector.

The international markets continue to recover slowly and fitfully from the lows they reached a few months ago. They may yet go down again, but the legacy of the collapse in the international markets is something that will be felt by investors for many years to come.

The state government's major investment funds are no different. Today, I am releasing the end of financial year results of Funds SA and the Motor Accident Commission Compulsory Third Party Fund. Decisions on these funds' investments are taken independent of government, and their performance is largely consistent with that of any number of other public and private investments over the past 12 months (and we would all be aware of this with our own private superannuation funds).

During 2008-09, the value of Funds SA's total assets under management fell by $1.6 billion, down 12.7 per cent from $14.2 billion to $12.6 billion. Cash was the only investment option to exceed its 2008-09 investment objective, with growth of 5.6 per cent. Funds SA balanced and growth multi-sector (tax exempt) funds, that represent around 78 per cent of Funds SA's total asset value, recorded negative returns of 15.3 per cent in the balanced fund and minus 17.5 per cent in the growth fund.

Funds SA positioned its portfolios more defensively during the year in response to the financial market developments, and continues to monitor developments closely. However, we would, of course, expect, with the equity market showing a significant rebound in recent months, that a large proportion of those losses would be recovered over time.

The Motor Accident Commission Compulsory Third Party Fund has been similarly affected as a result of the CTP Fund sustaining a loss of $208.5 million for the year ended 30 June 2009. It is important to note that, notwithstanding these losses, it has managed to retain the position where its assets continue to exceed its liabilities by $69.4 million.

The losses, however, have had a significant impact on the sufficient solvency target, a measure established by the government in December 2002 to protect the fund during difficult financial times. This measure, introduced by this government after being newly elected in 2002, ensured the scheme had a stronger balance sheet and a higher level of reserves than otherwise would have been the case. It has enabled the fund to withstand the extremes in the collapse of the market during the global financial crisis. As at 30 June 2009, the sufficient solvency target was $2,304 million, and in 2008 it was $2,060 million, which compares to the funds' assets of $2,103.5 million. (That seems like a bit too much information.) This equates, in an easier to read measure, to 91.3 per cent solvency against 2008 of 101.5 per cent of the required level of sufficient solvency.

Short-term fluctuations in the target can and will occur but, having easily met the target for a number of years, recent results recorded in the midst of the global financial crisis reaffirm the need to return to and maintain sufficient solvency. As a result, the Motor Accident Commission board (under the chairmanship of Roger Cook) also approved the new strategic plan earlier this year, aimed specifically at reducing claim costs, along with a range of other initiatives to improve the scheme's solvency.

The sufficient solvency target created a prudential reserve for MAC, which has effectively allowed it to weather the financial storm and still remain in a positive net asset position of $69.4 million. The sufficient solvency target has therefore fulfilled its role of underpinning the long-term viability of the CTP fund (bearing in mind the sufficient solvency target was not there under the reign of the former Liberal government).

It has been encouraging to see business investment, household spending, job ads and business and consumer confidence increase in recent months. However, as exporters, ordinary investors and, indeed, every superannuant knows, the legacy of the financial crisis has been severe and will be felt for many years to come. Therefore, the need for experienced, prudent management of our economy, the type of sound economic and financial management demonstrated by this government for more than seven years, has never been in greater need.

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