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Looking ahead

The financial market outlook continues to be dominated by the potential for periods of extreme volatility. Although the last few years have attracted varied speculation about non-uniform global economic growth and inflation prospects, there is now heightened uncertainty about the global outlook with no clearly defined path for a recovery out of the COVID-19 pandemic situation. In addition, global trade tensions remain elevated as do a number of major geopolitical risks that could lead to the outbreak of regional conflicts. These, amongst other factors, remain relevant to the AOFM’s deliberations given how they could impact funding markets and investor preferences. The risk outlook for issuance remains heightened due to the potential for periods of extreme market volatility, and global funding markets will remain ‘crowded’ due to the large financing tasks many governments and businesses need to achieve. Furthermore, the prospect (for a range of reasons) of AGS yield differentials dissipating could reduce the relative attractiveness of AGS to offshore investors.

Much of the AOFM’s planning for risk events was tested and proved effective during the events of late February through until late April. While these were not events anyone would like to see repeated, they did provide a useful opportunity to test AOFM thinking on market access dynamics, including how funding markets recover from sharp and deep dislocations. Managing liquidity risk is something that has already attracted close attention from the AOFM. This, together with maintaining enhanced monitoring of funding markets for signs of stress will remain key amongst our tasks in the year ahead. Revisions to how the long‑term debt portfolio should be shaped to accommodate substantially higher issuance programs over the coming years than were forecast less than even a year ago will also be central to AOFM’s thinking. Furthermore, supporting investor diversity and market liquidity through issuance decisions do not diminish in importance.

Finally, the AOFM will need to continue its monitoring of securitisation markets in order to adjust its expectations about what implications may lie ahead for the smaller lending sector from the ongoing pandemic situation, and how that could translate into additional calls on the SFSF. The corollary to this is that with improved market conditions that would reduce future calls on the SFSF, this will trigger a re-commencement of the ABSF program that has been in abeyance since the onset of the financial market impacts of the pandemic. A key objective underpinning the AOFM’s expectation of success for this program will be the completion of work being undertaken with industry on a loan-level data template for SME lending that will facilitate credit agency ratings beyond the more traditional securitisation transactions; this will encourage/support a broader investor base. This project was initiated by the AOFM during 2019-20 and is being undertaken jointly with the Australian Securitisation Forum, rating agencies, and other industry representatives.

Rob Nicholl

Chief Executive Officer