Thursday, September 21, 2017

Norway Proposes Spending Cap for $900 bln Oil Fund

Posted by February 16, 2017

Norway's $900-billion sovereign wealth fund, the world's largest, should shift more of its investments into equities and away from bonds to counter the effects of ultra-low interest rates, the government said on Thursday.

And in a major shift in policy, Norway's minority right-wing government recommended cutting the amount of money it is allowed to spend each year from the fund to three from four percent.

Norwegians have built up the fund from oil revenues and it is regarded as an insurance policy for when oil and gas reserves run out. Its value is the equivalent of $171,000 for every Norwegian man, woman and child.

In recent years, the fund has diversified its investments away from Europe, and into the United States and Asia, and begun investing in real estate, raising its risk appetite in an attempt to increase long-term returns.

Changing the country's fiscal spending rule, in place since 2001, is a major policy departure. Until very recently, any suggestions of changing the rule have been rejected by successive prime ministers.

But in October last year Prime Minister Erna Solberg raised the possibility that the guideline should be changed, due to the lower expected return of the fund.

Finance Minister Siv Jensen told Reuters on Thursday she had consulted with parties outside government on the question ahead of the announcement.

"We have been in a dialogue with other parties about this," she said in an interview, declining to say whether she believed she had a majority in parliament for the proposals.

"My impression is that there is broad agreement for setting a good framework for the management of the fund," she said.
 
Acceptable Risk
Although any reallocation is expected to take several years, if the proposed change from 60 percent to 70 percent in equities was made today, the fund would move about $90 billion away from government bonds, which are dragging on its performance.

At present the fund's overseas investments are limited to 60 percent stocks, 35 percent bonds and five percent real estate.

Under existing rules, governments can spend an average four percent of the wealth fund per year, but ultra-low global interest rates and other market conditions make it unlikely that the fund can earn returns of this magnitude, economists say.

"All in all, the government considers an equity share of 70 per cent to carry acceptable risk. The downwards revision of the return estimate underpins the long investment horizon of the fund, a prerequisite for holding a high share of equities," Jensen said in a statement.

The change to three percent from four percent will constrain the current and future governments' ability to increase annual spending, and would be a tightening compared to forecasts made by the central bank, Nordea Markets economist Erik Bruce said.

"In other words it opens the room for more expansionary monetary policy," he wrote in a research note, while adding that in the current situation the central bank was still likely to keep rates on hold.

Solberg's right-wing minority coalition government plans a record 2017 deficit of 225 billion Norwegian crowns ($27.03 billion) to be covered by the fund, corresponding to exactly three percent of the fund.
 
By Ole Petter Skonnord and Camilla Knudsen

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