Norway central bank chief wants change to SWF expectations

Øystein Olsen, governor of Norwegian central bank Norges Bank, has repeated a warning against assumptions of return from the country’s sovereign wealth fund – the so-called oil fund.

He used a briefing for journalists in Oslo today to repeat his view on reducing the proportion of the oil fund’s revenues that can be used for government spending.

This caused a rift last week with the country’s parliamentarians, particularly the government of prime minister Jens Stoltenberg, which rejected any change to the formula currently limiting such spending to 4% of the fund’s revenues. The formula was adopted in 2001.

Olsen believes that the 4% rule is too high because since 1998 return from the fund has averaged a significantly lower 2.8% annually. Instead he wants a rate of 3% to be adopted. If this does not happen, then there is a risk to future returns from the Pension Fund Global – the so-called oil fund that invests state revenues from the country’s hydrocarbon industry – as its capital base could be eroded by excessive central government spending.

Olsen suggested last week that the oil fund could be tapped for an additional NOK1trn (€132bn) over the next 20 years if the government did not reduce its reliance on the fund by agreeing to an adjustment in its formula, reported Dagens Næringsliv.

Olsen said that since 2001, the rate of risk-free return had dropped to about 1%. Coupled with rules requiring the fund to hold 40% of its assests in fixed income this implied that it would be offering an overall return of about 3%.

In other figures presented today, Olsen said that the central bank still predicts rising investment in the country’s oil and gas industry for 2012 and 2013. However, the country faces certain macroeconomic headwinds, such as the central projection for inflation rising to a rate of about 4% by 2015.

High levels of borrowing threaten to take the average debt burden beyond 200% of disposable income, with few signs of any significant downturn in house price inflation in the near term.

Norway’s oil fund is estimated to hold assets worth NOK3.4trn (€451bn) at current prices. Last year’s inflows remained fairly constant quarter on quarter thanks to a resilient global oil price. However, overall return dropped sharply in the third quarter of 2011 as the value of existing assets under management fell in line with the declines experienced on stock markets around the world. The fund is estimated to be the biggest single equity investor in Europe.


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