2.3 Some central risk management already occurs
At present, the government does several things centrally to manage the Crown's exposure to risk. Some of them relate to the measurement of risk. For example, Economic and Fiscal Updates report ‘fiscal risks' (choices that could cause spending to rise or revenue to fall) and the sensitivity of certain fiscal outcomes to economic variables such as GDP. They also show fiscal scenarios other than the central forecast and projection. Similarly, the government's financial statements report how Crown net worth would change in response to changes in share prices, exchange rates, and interest rates (Table 1). These estimates do not purport to be comprehensive: they exclude all indirect effects and even the direct effect of interest rates on the estimated present value of the Crown’s non-financial liabilities, such as claims on the Accident Compensation Corporation. But they are a useful start.
| Change | Direct reduction in GAAP net worth ($ billion) |
|---|---|
| Increase of 1 percentage point in New Zealand–dollar interest rates | 0.4 |
| Increase of 10% in the exchange value of the New Zealand dollar | 0.3 |
| Decrease of 10% in share prices | 1.1 |
Source: Financial statements of the Government of New Zealand for the year ended 30 June 2009, note 33.
The Crown also directs its agencies in a way that amounts to central risk management. For example, the Public Finance Act states that the Minister of Finance must authorise all borrowing on behalf of the Crown, and there is only one debt-management office. Treasury guidelines require government departments to hedge all but small exposures to foreign-exchange risk created by imports and other transactions (New Zealand Treasury, 2003).
Most important, fiscal strategy is risk management. Among other things, that strategy has involved limiting gross debt and avoiding net foreign-currency sovereign borrowing.[3] Until recently, the strategy involved building up equities and other financial assets instead of further reducing gross debt, in part because the expected returns from holding those assets were considered attractive enough to outweigh the risks (Huther, 1998). By contrast, the recent temporary suspension of contributions to the NZSF reflected the Government's view that the value of the expected returns from further contributions, which would be funded by borrowing, were outweighed by the risks.
Notes
- [3]A preference for issuing long-term local-currency debt seems reasonable, is consistent with practice in many countries, and it is supported by the IMF and World Bank (2001). But there are contrary views, cited, for example, in Grimes (2001).
