2018 REPORT ON THE MANAGEMENT OF CASH, DEBT AND GUARANTEES 1 Key figures Amount in million EUR per 31 December 2017 2018 Classification by debt type Consolidated debt 23,320.63 23,183.67 Direct debt 5,313.89 5,998.39 Debt instruments used (direct debt) Long term EMTN 4,836.50 5,631.50 Schuldschein 37.50 37.50 Bank loans (incl. municipal loans) 95.16 181.67 Other 82.46 70.80 Short term BCP 0.00 0.00 Current accounts 262.27 76.92 Characteristics of the Flemish Debt Rating awarded by the rating agency Moody’s Long-term rating Aa2 Aa2 Outlook Stable Stable Net financing requirements 82.43 538.63 Debt ratio 43.54% 43.62% Debt level 4.26% 4.16% Key figures of the direct debt portfolio Fixed interest rate 95% 99% Floating interest rate 5% 1% Average interest rate 1.57% 1.40% Average remaining term to maturity (in years) 12y 10m 15y 01m 2 Table of contents I. INTRODUCTION ........................................................................................................................... 5 II. THE INTEREST RATE MARKET IN 2018 AND PROSPECTS ............................................................. 6 1. Economic situation and the interest rate market in 2018 ................................ 6 2. Prospects .............................................................................................................................. 9 III. CASH MANAGEMENT IN 2018 ................................................................................................... 11 1. Overview ............................................................................................................................ 11 2. The Net Financing Requirements (NFR) ................................................................. 12 3. Cash pools of the Flemish government .................................................................. 15 4. Central Financing Unit (CFU) ...................................................................................... 16 5. Investments ...................................................................................................................... 18 IV. DEBT MANAGEMENT IN 2018 ................................................................................................... 20 1. Overview ............................................................................................................................ 20 2. Direct debt ......................................................................................................................... 21 2.1 Long-term debt instruments ...................................................................................... 25 2.2 Short-term debt instruments ..................................................................................... 32 2.3 Risk management ........................................................................................................... 34 2.4 Decree to optimise the financial assets management of the entities of the Government of Flanders ................................................................................................... 39 3. Consolidated debt ........................................................................................................... 41 3.1 Overview of consolidated debt 2016-2018 ............................................................... 41 3.2 Flemish Consolidated Gross Debt INR notification APR-18 ................................ 44 3.3 Evolution of the consolidated gross debt in 2019 .................................................. 47 4. Debt standard .................................................................................................................. 48 5. Public-Private Partnerships ......................................................................................... 49 V. GUARANTEE MANAGEMENT IN 2018 ....................................................................................... 50 1. Overview ............................................................................................................................ 50 2. Limited risk ........................................................................................................................ 53 2.1 Excussions and recoveries .......................................................................................... 54 3. A few important components ..................................................................................... 55 3.1 Guarantees to (local) authorities .............................................................................. 55 3.2 Social Housing .................................................................................................................. 55 3.3 VIPA ..................................................................................................................................... 56 3.4 Scholen van Morgen ...................................................................................................... 56 3 3.5 Guarantees to large, medium-sized and small companies ............................. 57 VI. RATING OF THE FLEMISH COMMUNITY/REGION ...................................................................... 58 VII. APPENDICES ............................................................................................................................... 59 1. Glossary .............................................................................................................................. 59 2. List of websites ................................................................................................................ 64 4 I. INTRODUCTION In implementation of article 21 of the Decree of 7 May 2004 establishing the provisions regarding the cash, debt and guarantee management of the Flemish Community and the Flemish Region (Belgian Official Gazette of 16 July 2004), this report provides an overview of the cash, debt and guarantee management of the Government of Flanders during 2018. This report was finalized in May 2019. The main highlights discussed in this 2018 annual report are: The Decree on the optimisation of the management of the financial assets of the entities of the Government of Flanders came into effect in the fall, with 9 Flemish entities investing 1.1 billion euros in the Flemish government; Flanders issued its first sustainability bond in 2018; In 2018, the Government of Flanders put 2 new benchmarks (BMs) on the international capital market: a regular bond of 750 million euros with a maturity of 20 years and a sustainability bond of 500 million euros with a maturity of 15 years; There was a slight decrease of the consolidated debt in spite of the issue of 2 bonds; There was a further reduction of the guaranteed debt; As part of a voluntary merger of municipalities, 220 municipal loans were taken over by the Government of Flanders for a total amount of 95.3 million euros; The Government of Flanders managed to retain its solid rating in 2018 thanks to its prudent financial and budget management; There was a continued focus on the direct financing by the Government of Flanders for the consolidated entities Vlaamse Maatschappij voor Sociaal Wonen - VMSW (Flemish Social Housing Company), Vlaams Woningfonds VWF (Flemish Housing Fund) and School Invest. 5 II. THE INTEREST RATE MARKET IN 2018 AND PROSPECTS1 1. Economic situation and the interest rate market in 2018 In the United States the economy was running at full throttle. The economy benefited from an expansive budget policy, with the country’s economic growth rate reaching 2.9% in 2018. The unemployment rate fell below 4% and even reached 3.7% in September and November, the lowest level since 1968 (see Figure 1). The first half of the year saw inflation rise, only to fall again during the second half. Wage growth, however, continued to accelerate throughout the year. The Fed implemented its plans to further tighten its monetary policy and raised its policy rate in each quarter of 2018, reaching 2.25%-2.50% at the end of the year. The US long-term interest rate rose sharply in January as a result of fears of rising inflation. In January 2018, it went up from approximately 2.4% to 2.9%. The long-term interest rate continued to hover around this level until the start of the fourth quarter, during which it went on to climb to reach 3.2%. The interest rate subsequently fell again to approximately 2.6% as a result of less upbeat signs on the economic activity. The strong level of activity and the increases in interest rates in the US caused the dollar’s exchange rate to go up. This in turn caused the market sentiment vis-à-vis emerging markets to tip, as some had accrued substantial debts in US dollar. Countries with substantial current account debts and short-term funding requirements such as Turkey and Argentina, were hit hardest. The trade war unfolded at various fronts, but the decisions with the biggest impact were those in respect of China,which makes the trade war one of the principal explanations for the deceleration seen in the Chinese economy. However, it is by no means the only cause. The Chinese government’s policy to stem credit growth also had a negative impact on the growth. 1 Source: ING 6 Figure 1: Unemployment reached its lowest Figure 2: In the Eurozone, confidence fell level since the late 1960s, which bolstered sharply (European Commission’s Economic consumption (unemployment rate, in %) Confidence Indicator, 100= long term average) 12 116 10 114 8 112 6 110 4 108 2 106 0 104 Source: Thomson Reuters Source: Thomson Reuters Growth in the Eurozone slowed