Daily Management Review

Central Bank of Norway fears embezzlement of reserve funds


02/20/2017


Around 50% of the Norway National Welfare Fund’s capital will be spent over next 10 years, said Head of Norway’s Central Bank Øystein Olsen.



He expressed concern about rising costs of funds derived from oil revenues, and added that it is necessary to protect assets of the largest sovereign wealth fund in the world worth $ 890 billion.

"Growing spending of funds derived from oil revenues poses a risk of lower volume of the fund's capital. This can happen if the global recession results in falling oil revenues and low or negative profitability of the fund's capital", - he said.

This year, the government’s withdrawal from the fund could grow by 25%, after reluctant first use of the fund in 2016 to cover budgetary needs and protect the economy.

While representatives of the fund managed by the central bank claim to be able to cope with the outflow without selling assets, Olsen tries to outline the most pessimistic scenarios.

For example, according to his calculations, there is a 1% - probability in the coming 10 years that the fund will lose 50%, if annual spending remains at the level of 3% of the fund’s volume. If the expenses exceed 4%, probability of such a development will grow by about 5%. If the fund increases investment in shares to 75% from the current 60%, the probability will increase even more: about 2% and 6%, respectively.

As previously reported, Government of Norway made a proposal to increase volume of the fund’s investment in stocks from 60% to 70% to grow profits.

The move is part of a Norway National Welfare Fund’s strategy to find a new way to earn money, given extremely low level of profitability of investments in government bonds in many developed countries and fall in oil prices from $ 100 per barrel to just over $ 50 per barrel at the beginning of 2016. 

Although the proposed changes are reasonable, it is important to consider them in terms of the percentage ratio to risk, Olsen said.

Olsen made a number of key messages about state of monetary policy, confirming that most of the "pessimistic scenario" as a result of falling oil prices have not been confirmed. Fiscal costs and monetary policy played a role in saving the economy, he said. 

source: bloomberg.com






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