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Half Year Economic and Fiscal Update 2013

Total Crown Balance Sheet

Operating balance surpluses result in increasing net worth...

Net worth attributable to the Crown increased in 2012/13 for the first time since the global financial crisis and the Canterbury earthquakes. At its height, net worth attributable to the Crown peaked at $105.1 billion in 2007/08.

Net worth attributable to the Crown is forecast to continue strengthening in nominal terms, largely owing to forecast operating balance surpluses (of which just under half is attributable to gains on the Crown's investment portfolio), and grow to $69.2 billion by the end of the current year. Net worth is expected to grow another $23.2 billion to stand at $92.4 billion by 2017/18, as shown in Figure 2.12. As a share of GDP this is 34.2%, still well below the peak of 56.6% of GDP in 2007/08.

Figure 2.12 - Net worth attributable to the Crown
Figure 2.12 - Net worth attributable to the Crown.
Source: The Treasury

...with assets increasing $35.5 billion over the forecast period...

Assets are forecast to increase by $35.5 billion, with the growth over the forecast period made up of investments in additional assets of $78.4 billion partially offset by reductions (largely depreciation) of $42.9 billion.

The largest asset growth over the forecast period is in the financial assets portfolio (Figure 2.13). This reflects investment growth in CFIs such as NZS Fund and ACC, with much of this growth recognised as gains in the Crown's operating balance with some growth in the asset base from reinvestment.

Figure 2.13 - Total Crown assets
Figure 2.13 - Total Crown assets   .
Source:  The Treasury

Commercial assets increase $9.5 billion over the forecast period, largely owing to continued growth in the Kiwibank mortgage assets (that grow as their deposits from customers grow) and as SOEs increase their investment in physical assets.

The social asset portfolio (eg, schools, hospitals and social housing) increases by $10.9 billion by the end of the forecast period as a result of new capital spending (funded by the Future Investment Fund, as detailed in the Government Share Offer Programme section on pages 36 to 41), and as existing assets are replaced.

...while liabilities increase at a slower rate

The Crown's liabilities are expected to increase by $7.2 billion over the forecast period, largely driven by increased borrowing. Borrowings are forecast to increase $12.2 billion to $112.3 billion by 2017/18.

As shown in Figure 2.14, borrowing is mostly held in the financial liability portfolio (by the Treasury's Debt Management Office, and the Reserve Bank). Borrowings in this portfolio increase $2.5 billion over the forecast period to meet the Crown's cash deficits (refer to pages 31 to 32 for discussion of the bond programme). The remainder of borrowing is in the commercial portfolio, and is largely made up of Kiwibank deposits, which grow in line with the bank's mortgage assets.

Figure 2.14 - Total Crown borrowings
Figure 2.14 - Total Crown borrowings   .
Source:  The Treasury
Figure 2.15 - Total Crown liabilities
Figure 2.15 - Total Crown liabilities   .
Source:  The Treasury

Partially offsetting the growth in borrowings are reductions in liabilities as a result of settling obligations related to the Canterbury earthquakes. The Crown's earthquake-related insurance liabilities held in the financial portfolio (EQC and Southern Response) are forecast to decrease $8.4 billion over the five-year forecast period as all claims are expected to be settled by 2017/18.

The Crown's balance sheet is sensitive to market movements...

Many of the assets and liabilities on the Crown's balance sheet are measured at “fair value” in order to disclose current estimates of what the Crown owns and owes. Fair value can be derived in a number of ways, traditionally based on market prices, but where these are not available, values can be best estimates based on certain assumptions. While the measurement at fair value is seen as the most appropriate value of these items, it can be volatile, resulting in fluctuations in the value of the assets and liabilities with changes in the underlying assumptions. Table 2.7 shows an example of some of the key sensitivities to the valuation of the Crown's major assets and liabilities and the impact these can have on the operating balance.

Table 2.7 - Financial instruments sensitivities
Financial assets
Impact on operating balance1
%change $millions
Interest rates +1 (532)
-1 592
Share prices +10 1,681
-10 (1,681)
NZD exchange rate +10 (1,029)
-10 1,160

1 Using 30 June 2013 sensitivities

Source: The Treasury

Financial assets are the largest asset group on the Crown's balance sheet and have increased significantly in recent years. CFIs (eg, NZS Fund and ACC) hold investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile.

The Crown has a number of significant long-term liabilities which are actuarially valued based on estimated future cash flows, over 50 years into the future. As part of the actuarial valuation, inflation rates are used to help estimate future cash flows while discount rates are used to obtain the value of those future cash flows in today's dollars (their present value). Changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods. Table 2.8 shows the impact that a 1% change in inflation and discount rates would have on the operating balance.

Table 2.8 - Long-term liability sensitivities
Impact on operating balance1
$millions
Discount rate Inflation rate
+1 % -1 % +1 % -1 %
ACC outstanding claims 3,628 (4,823) (4,966) 3,788
GSF retirement liability 1,587 (1,927) (1,508) 1,831
EQC outstanding claims 33 (33) (19) 43
  1. Using 30 June 2013 sensitivities.

Source: The Treasury

...and judgements and estimates also impact on the balance sheet...

Outside of market factors, valuations are subject to a number of judgements and estimates. In general, as time goes on, better information becomes available and initial estimates are updated to reflect current information. Some examples of this include: ACC rehabilitation costs, earthquake-related insurance liabilities and student wage growth.

...while other risks still remain

In addition to those items on the balance sheet there are a number of liabilities (and assets) that may arise in the future but are not yet included; either because they are dependent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these contingent liabilities crystallise, there will be associated costs with a negative impact on the operating balance. Refer to page 75 for a list of the contingent liabilities that the Crown was exposed to at 31 October 2013. Refer also to the Risks and Scenarios chapter for further discussion on balance sheet risks.

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