Norway plans curb on sovereign fund withdrawals

Norwegian Prime Minister Erna Solberg told reporters that the backdrop for the downward adjustment is the prospect of lower returns on international financial markets.
Norwegian Prime Minister Erna Solberg told reporters that the backdrop for the downward adjustment is the prospect of lower returns on international financial markets.PHOTO: REUTERS

OSLO • Norway has proposed to curb the amount of money that it can withdraw from its sovereign wealth fund - the largest in the world - amid lower expected returns.

The minority right-wing government also recommended that the fund, worth 7.5 trillion kroner (S$1.28 trillion), increase the share of equity from 60 per cent to 70 per cent. At its current value, this would amount to buying close to €85 billion (S$128 billion) of shares.

The government lowered its expected real rate of return to 3 per cent of the fund's value a year, down from 4 per cent - which would, in practice, limit its room to manoeuvre. When tapping the fund to balance its budget, it cannot exceed the expected return.

Norwegian Prime Minister Erna Solberg told reporters: "The backdrop for this downward adjustment is the prospect of lower returns on international financial markets."

Set up in the 1990s, the public pension fund is intended to finance the future expenses of the welfare state by growing the country's oil wealth.

However, the state's oil revenues, which fuel the fund, have been hit by falling hydrocarbon prices since the middle of 2014. This has come on top of a decline in production since a peak in 2000.

Last year, the government - for the first time - took more money out of the fund than was put in.

Many economists have, for years, been calling for the ceiling of withdrawals to be lowered.

"The use of oil revenues must slow down," Norwegian central bank governor Oystein Olsen reiterated on Thursday.

Failing that, he warned, the country could run up a budget deficit equivalent to 8 per cent of so-called "continental" gross domestic product, which excludes the oil and shipping sectors.

This year, the government expects to withdraw around 226 billion kroner from the fund, which would be a new record and equivalent to 3 per cent of the total value - an amount which has been labelled excessive and untenable by some economists.

In addition to the 60 per cent in shares, rules require 35 per cent of the fund to be invested in bonds and 5 per cent in real estate - all of which must be outside Norway, to avoid overheating the national economy.

The announced proposals will be detailed in documents to be presented to Parliament on March 31. To get them passed, the minority government will need to secure the backing of other parties.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on February 18, 2017, with the headline 'Norway plans curb on sovereign fund withdrawals'. Print Edition | Subscribe