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Half Year Economic and Fiscal Update 2014

Total Crown Balance Sheet

Operating balance surpluses result in a stronger balance sheet...

Net worth attributable to the Crown is forecast to grow steadily in nominal terms across the forecast period largely owing to forecast operating balance surpluses. Beyond 2015, net worth attributable to the Crown is expected to grow by $22.8 billion to stand at $100.2 billion by 2018/19, increasing as a share of GDP to reach 35.0% by 2018/19, still below the peak of 56.0% of GDP in 2007/08 as shown in Figure 2.17.

Figure 2.17 - Net worth attributable to the Crown
Figure 2.17 - Net worth attributable to the Crown   .
Source:  The Treasury

...with assets increasing by $38 billion over the forecast period...

Total assets are forecast to grow by $37.7 billion over the forecast period, made up of additional investments in assets (both physical and financial) of $76.7 billion, partially offset by reductions (largely depreciation) of $39.0 billion.

The largest asset growth over the forecast period is in the social assets portfolio which increases by $16.1 billion (Figure 2.18) over the forecast period. This growth reflects increases in student loans and property, plant and equipment, including Canterbury rebuild assets, school property, hospitals and increases in the social housing portfolio.

Figure 2.18 - Total Crown assets
Figure 2.18 - Total Crown assets   .
Source:  The Treasury

The financial asset portfolio is expected to increase by $14.1 billion, reflecting the investment growth in entities with large investment portfolios such as those managed by NZS Fund and ACC.

The commercial asset portfolio is expected to increase by $7.5 billion over the forecast period, with growth coming from SOEs investing in additional physical assets and growth in Kiwibank mortgages.

Social housing

The Government has announced it is seeking to enlarge the role of non-Government providers of social housing. Housing New Zealand Corporation is currently the largest social housing provider in the country, owning just over 65,000 houses currently valued at $18.7 billion.

This valuation is based on the market value of individual houses in the residential market (the primary market for housing) and reflects the fact that these houses are predominantly held on a long-term basis to provide social housing capacity (and would therefore be replaced to maintain that capacity).

The form and timing of any divestment of social housing assets to other social housing providers is highly uncertain at this time and has therefore not been included in the fiscal forecasts. This potential divestment has therefore been included in the Specific Fiscal Risk chapter.

...and liabilities beginning to fall by the end of the forecast period

The Crown's liabilities are expected to increase by $12.9 billion (Figure 2.19) over the forecast period, largely driven by increased borrowing ($8.0 billion over the forecast period) before beginning to fall in 2017/18. Borrowings are mostly held by the Treasury's Debt Management Office, the Reserve Bank and Kiwibank, and are forecast to peak at $118.5 billion in 2016/17 before decreasing slightly to stand at $111.5 billion by 2018/19.

Figure 2.19 - Total Crown liabilities
Figure 2.19 - Total Crown liabilities   .
Source:  The Treasury

Borrowings in the financial portfolio are expected to increase by $8.1 billion to 2016/17 before reducing by $9.9 billion in the last two years of the forecast (refer to page 38 for discussion of the bond programme). The remainder of borrowing is primarily in the commercial portfolio, which is expected to grow by $7.9 billion. Approximately two-thirds relates to Kiwibank deposits, which continue to grow in line with Kiwibank's mortgages.

The Crown's balance sheet remains 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. 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 reflecting changes in the market and underlying assumptions.

Financial assets are the largest asset group on the Crown's balance sheet and have increased significantly in recent years. Entities with large investment portfolios (eg, NZS Fund and ACC) hold these investments to make financial returns, and those asset values are dependent on market prices, interest rates and exchange rates, which can all be volatile. For example, a 10% change in the NZ dollar exchange rate or share prices can impact the Crown’s operating balance by $1 billion to $2 billion.

In addition, the Crown has a number of significant long-term liabilities (eg, ACC claims and GSF retirement liability) which are actuarially valued based on estimated future cash flows more than 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). Even small changes in these assumptions can have significant impacts on the valuation because the cash flows are so large and over such long periods. For example, a 1% change in discount rates for ACC can impact insurance liabilities by $3 billion to $4 billion.

...and judgements and estimates will 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 in our forecasts, either because they are contingent on an uncertain future event occurring (eg, outcome of litigation) or the liability cannot be measured reliably. If these liabilities crystallise, there will be associated costs with a negative impact (or positive in the case of contingent assets) on the operating balance or net debt. Refer to page 79 for a list of the contingent liabilities at 31 October 2014.

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