Balance Sheet Risks
In addition to risks around revenue and expenditure, the Crown's financial position is exposed to risks from its balance sheet. While some are unavoidable, the Crown's general approach is to identify, avoid, or mitigate these risks where practicable.
The largest source of balance sheet risk is volatility in asset and liability values owing to movements in market variables such as interest rates, exchange rates, and equity prices. Of the Crown's aggregate financial risk, roughly a third is estimated to be attributed to this “market risk”.[13] Three areas of the balance sheet are particularly susceptible:
- Financial assets held by the Crown financial institutions (CFIs) are sensitive to financial-market volatility. While practices such as hedging are used where practicable, the Crown Ownership Monitoring Unit (COMU) estimates a 10% fall (rise) in the MSCI World Equity Index would lead to a 4.4% fall (rise) in the value of the Crown's financial portfolio.
- Insurance and retirement liabilities and provisions are prone to market volatility through their actuarial valuations, which are sensitive to assumptions around variables such as interest and inflation rates, and risk margins. For example, a 1% fall in the risk-free discount rate used is estimated to result in a $5.5 billion increase in the combined value of the Crown's liabilities from ACC, the Earthquake Commission, AMI and the Government Superannuation Fund.[14]
- Physical assets such as land, buildings, state highways, and military equipment are susceptible to market movements through their accounting valuations. Changes in property market conditions, interest rates and changes in the costs of construction will affect the recorded value of many Crown physical assets.
Business risks, relating to the broader commercial environment, may also affect the Crown's balance sheet. A number of entities owned by the Crown, including commercial and social entities, have their financial performance and valuations impacted by these external factors.
The Crown is also susceptible to “liquidity risk” with respect to its ability to raise cash to meet its obligations. This risk, however, is small given the New Zealand Debt Management Office's ongoing management of the core Crown's liquidity position, as well as the Government's commitment to maintaining prudent debt levels.
