Scottish Local Authority Investment Balances reduce by 20%
Recent data from the Ministry of Housing, Communities and Local Government reveals significant shifts in local authority investment patterns across Scotland and the wider UK. The latest borrowing and investment figures highlight reduced liquidity in the “local to local market”, which is pushing up interest rates.
Investment Balances Fall Sharply in Scotland
Over the 12 months to September 2024, aggregate investment balances held by Scottish local authorities fell by 20%, declining from £3 billion to £2.4 billion. This reduction outpaces the UK-wide trend, where total local authority investments fell by £6 billion, representing an 11% drop.
The decline in balances includes substantial reductions in deposits with banks and building societies, local authority loans, and holdings in the Debt Management Account Deposit Facility (DMADF). However, money market funds bucked the trend, recording a 13% increase.
Why Are Balances Falling?
Several factors have contributed to the decline in investment balances:
Together, these factors have reduced liquidity, squeezing cash balances and altering investment strategies.
Impact on the Inter-Local Authority Market
The knock-on effects of these trends are particularly evident in the inter-local authority lending market. In Scotland, loans between local authorities fell by 41% year-on-year to £317 million, reflecting the broader liquidity challenges.
Reduced liquidity has tightened the market, pushing up rates and margins for borrowers. For instance, some short-term loans (six months) on iDealTrade.net are being quoted at 5.5%, significantly above the 4.75% Bank Rate. This dynamic is surprising given the market’s expectations of falling interest rates, and it underscores the current liquidity squeeze.
In Scotland, local authorities borrowed £1.9bn from peers in September 2024, 20 of the total 32 local authorities borrowed in this way, while 11 authorities held local authority deposits.
The UK Liquidity Cycle
The timing of these trends coincides with the cyclical nature of local authority finances. Cash reserves typically peak earlier in the financial year due to grant receipts and gradually diminish towards the end of the year. This seasonal decline is driven by:
Additionally, a high volume of PWLB loan refinancing expected in March 2024 could further pressure liquidity.
Strategic Responses to Rising Costs
With borrowing costs rising, many local authorities are exploring alternative funding sources. Although the PWLB remains an option, its minimum one-year term limits flexibility for some councils. As a result, many authorities are taking pre-emptive measures, including:
Opportunities for Investors
For investors, the tighter market presents opportunities. With higher rates offered by strong counterparties, local authority lending remains an attractive proposition. Even a financially weaker local authority benefits from the robust local government framework, often making it a safer credit risk than many commercial banks.
Conclusion
The dual pressures of rising expenditure and reduced liquidity are once again squeezing the rates in the “local to local” market, in Scotland and across the UK. While borrowing costs have increased, proactive management and strategic adjustments can help councils navigate these challenges. Meanwhile, higher rates provide a silver lining for investors.
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