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Pre-election Economic & Fiscal Update 2011

Crown's Balance Sheet Outlook

Net worth is forecast to remain below current levels over the forecast period

Continuing the trend from the past year, the Crown's net worth is expected to fall to a low of $65.9 billion in 2013, before recovering slightly over the remainder of the forecast period. By 2016, net worth is forecast to be $77.2 billion, $3.7 billion below 2011 levels (Figure 2.7 and Table 2.6).

Figure 2.7 - Portfolio net values 2010, 2011 and 2016
Figure 2.7 - Portfolio net values 2010, 2011 and 2016.
Source: The Treasury

The forecast continuation of fiscal deficits in each of the next three years is the main factor behind this decline in net worth. Core Crown borrowings are forecast to grow from $76.8 billion to $94.9 billion over the period. This is expected to drive a fall in the value of the financial portfolio, the only portfolio to experience a decline in net value, from -$47.2 billion to -$64.9 billion.[5] The fall is sharper than previously forecast in the Budget Update owing to the run down of the NDF as a result of the upwards revision of EQC costs arising from the Canterbury earthquakes.The use of NZDMO assets built up to meet Government bond maturities in the 2012 and 2013 fiscal years further contributes to the decline in the value of the financial portfolio.

Meanwhile, the social and commercial portfolios are both forecast to experience small net growth over the next five years.

The social portfolio is forecast to grow consistently, from $97.3 billion to $108.5 billion, representing portfolio growth of 11.5%. This is largely unchanged from the previous forecasts. This net growth is driven by a $9.7 billion increase in assets from continued investment in physical assets in priority social areas, particularly health, education and state highways. Expected net growth in the student loan book also contributes.

The commercial portfolio is also forecast to experience consistent growth, driven by the reinvestment of positive operating returns offsetting growth in liabilities. Of the $11.2 billion increase in commercial liabilities, $7.7 billion is attributable to forecast growth in Kiwibank deposits. The Crown's net commercial interests are expected to increase from $30.8 billion to $33.7 billion by 2016, or by 9.4%. This growth takes no account of a possible reduction in the Crown's commercial ownership from the proposed extension of the Mixed Ownership Model.[6]

Commercial assets and liabilities across the forecasts are slightly higher than those in the Budget Update, reflecting the inclusion of AMI Insurance in the Crown's accounts and small upwards revisions across the portfolio.

Table 2.6 - Forecast portfolio assets and liabilities, 2011 to 2016
$billion 2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
Change between
2011 and 2016

Assets by Portfolio

Social 113.6 115.1 116.9 119.2 121.0 123.3 9.7
Commercial 58.1 60.7 63.1 66.3 69.4 72.1 14.1
Financial 73.5 69.8 62.0 67.5 66.0 72.0 -1.5
Total Assets 245.2 245.6 242.0 253.0 256.4 267.4 22.2

Liabilities by Portfolio

Social 16.4 17.7 15.9 15.6 14.9 14.8 -1.5
Commercial 27.2 29.6 31.8 34.1 36.5 38.4 11.2
Financial 120.7 130.0 128.4 135.8 133.5 136.9 16.2
Total Liabilities 164.3 177.3 176.0 185.5 184.9 190.2 25.9
Total Net Worth 80.9 68.3 65.9 67.5 71.5 77.2 -3.7

Note that numbers may not add exactly due to rounding

Source: The Treasury

However, there will still be significant asset growth across the balance sheet

While overall net worth is expected to remain below current levels by 2016, the Crown's assets are forecast to grow by gross $76.1 billion over the period to $267.4 billion after asset reductions (Table 2.7).

Table 2.7 shows that:

  • Of the $76.1 billion of gross asset growth, roughly half will occur in physical assets, known as “property, plant and equipment” (PPE). Including the companies currently being considered as candidates for the Mixed Ownership Model, SOEs are the largest source of this PPE investment, contributing 40.0%. Crown entities are forecast to be the next largest investors in PPE, driven largely by investments in the road network by the New Zealand Transport Agency (NZTA). Departments are expected to undertake 22.0% of gross PPE investment over the period.
  • Within non-PPE-related assets, growth in the asset portfolios held by the Crown Financial Institutions (CFIs) is the largest driver.[7] This arises from the projected value growth of existing assets and the reinvestment of returns, and contributes over a quarter of all gross asset growth. Growth in student loan advances is expected to remain largely steady across the forecasts, representing $8.2 billion by 2016.
  • $3.0 billion of new capital spending is expected over the forecast period. This reflects the assumption of a capital allowance of $900 million per Budget spread over five years. This expenditure has been included as a non-PPE addition as the exact nature of the investment is yet to be determined.
  • Gross asset growth will be offset by asset reductions and other changes of $53.9 billion. This is due mainly to depreciation, an unwinding of financial assets held by the NZDMO and the RBNZ, and a reduction in the EQC's assets as claims from the Canterbury earthquakes continue to be paid out. Repayments and revaluations of existing loans are expected to offset previously mentioned additions to the student loan book by $6.0 billion, resulting in a net increase in the student loan book of $2.2 billion.
  • The net increase in Crown assets over the next five years is forecast to be $22.2 billion.
Table 2.7 - Summary of forecast asset movements, 2011 to 2016
$billion 2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
5-Year
Total

Forecast Growth in Assets

PPE additions:
   

Departments

1.5 2.3 1.7 1.3 1.2 1.5 8.0
   

Crown entities

2.5 3.0 2.7 2.6 2.6 2.8 13.8
   

SOEs

2.7 3.4 2.9 3.0 2.7 2.6 14.5
   

Total PPE additions

6.6 8.7 7.3 6.8 6.6 6.9 36.3
Non-PPE additions:
   

Student loans additions

1.6 1.6 1.6 1.7 1.7 1.7 8.2
   

CFI asset investment growth

7.7 3.2 3.7 4.4 4.6 5.1 21.0
   

Kiwibank mortgages

1.1 1.5 1.5 1.6 1.6 1.6 7.7
   

Forecast new capital spending

0.0 0.2 0.5 0.7 0.8 0.9 3.0
   

Total non-PPE additions

10.4 6.4 7.3 8.3 8.6 9.2 39.8
Gross additions to assets 17.0 15.1 14.6 15.1 15.2 16.1 76.1

Forecast Reductions in Assets

PPE reductions:
   

Depreciation on PPE

(3.7) (4.0) (4.2) (4.3) (4.3) (4.4) (21.2)
   

Balance sheet funding for new capital

0.0 0.1 (0.1) (0.6) (0.8) (0.8) (2.3)
Non-PPE reductions:
   

RBNZ and NZDMO activity

5.6 (7.8) (9.9) 3.4 (5.5) 1.7 (18.0)
   

Student loans other changes

(0.9) (1.1) (1.1) (1.2) (1.2) (1.3) (6.0)
   

Reduction in EQC assets

3.3 (2.8) (2.7) (2.8) (1.0) 0.1 (9.1)
Other changes in assets 0.6 0.9 (0.3) 1.3 1.1 (0.3) 2.7
Net change in assets 21.9 0.4 (3.6) 11.0 3.4 11.1 22.2
Closing total Crown assets 245.2 245.6 242.0 253.0 256.4 267.4

Note that numbers may not add exactly due to rounding

Source: The Treasury

Notes

  • [5]The ‘social portfolio’ consists of the assets and liabilities held primarily to provide public services or to protect assets for future generations; the ‘financial portfolio’ reflects assets and liabilities held by the Crown to finance or pre-fund government expenditure; while the Crown’s ‘commercial portfolio’ consists of the portfolio of companies held with purely commercial objectives. For more details, see the Investment Statement of the Government of New Zealand 2010 www.treasury.govt.nz/budget/2010/is.
  • [6]The Government has announced its intention to offer partial ownership of certain State-owned enterprises to private investors if it is re-elected. This is often referred to as the “Mixed Ownership Model”. As there is insufficient information to forecast individual transactions, there are no estimates of sale proceeds, selling costs, foregone dividends or ownership changes in these forecasts.
  • [7]The ‘Crown Financial Institutions' consist of the NZS Fund, Accident Compensation Corporation (ACC), EQC, National Provident Fund and the Government Superannuation Fund.
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