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Debt composition

Least cost and risk core Crown debt

The composition of the core Crown debt portfolio impacts on its cost and risk, and the overall quality of balance sheet management. Like asset holdings, debt needs to be managed carefully to minimise its costs and risks.

A diversified portfolio of debt instruments can balance several risks. Floating-rate, short-maturity debt instruments and inflation indexed bonds help stabilise the impact of economic cycles on the fiscal position through their interest rates varying in an offsetting way to the revenue and expenditure changes. For example, during an economic upswing, increases in tax revenue offset higher interest expenses (Box 7.2 highlights these effects). Meanwhile, fixed-rate and long-term debt instruments help offset the impact of interest rate movements on the value of long-term assets on the Crown's balance sheet.

Box 7.2 - Core Crown debt serviceability

Core Crown debt imposes a financing cost in the form of an interest expense. While the traditional method of assessing the Crown's ability to meet its debt obligations is its debt-to-GDP ratio, an alternative approach is to measure debt serviceability. This can be achieved by examining gross interest costs relative to gross debt levels and Crown revenues. For these purposes, revenue includes core Crown tax, interest and dividend revenues, but excludes levies.

Figure - 7.2 - Costs of debt
Figure - 7.1 - Costs of debt   .
Source:  The Treasury

The relative cost of gross sovereign issued debt has improved since 2007, as lower interest rates have seen financing costs decrease from 7.2% of gross debt, to 4.2%. This means that while gross core Crown debt has been increasing, it has come at a lower average cost to the Crown.

Debt servicing costs as a proportion of revenue remained relatively constant at around 4% until 2011, when it started to increase. However, overall the increase in financing costs was proportionately smaller than that of the Crown's debt position.

Other types of debt

Not all debt on the Crown's balance sheet is core Crown debt. Around $30 billion in debt is raised by entities that are controlled by the Crown. This debt is serviced by those entities from their revenues and is legally separate from the Crown. As a result, unless the Crown guarantees payment, this type of debt is more expensive than sovereign-issued debt because of its higher credit risk.

The biggest borrower is Kiwibank with around $15 billion of debt. In normal circumstances, it is government policy for SOEs and MOM companies to borrow at commercial rates from the private sector to preserve competitive neutrality in the industries that they operate in. In contrast, most Crown entity debt (around $5 billion) is borrowed from the Crown at a range of rates depending on the policy circumstances.[59]

There are pros and cons of this approach. It is more expensive, but it has a number of policy and practical benefits - especially for the commercial organisations.


  • [59]This debt is eliminated on consolidation.
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