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Norway Examines $850 Billion Wealth Fund’s Return Measures

Western Europe's Biggest Oil And Gas Exporter
A visitor looks out towards a flare stack on the Oseberg A offshore gas platform operated by Statoil ASA in the North Sea 140kms from Bergen, Norway. Photographer: Kristian Helgesen/Bloomberg

March 18 (Bloomberg) -- Norway is examining new ways to calculate returns generated by the world’s biggest sovereign wealth fund in a move that could affect how much oil revenue the government uses in its budgets.

The Finance Ministry has ordered Statistics Norway to find out how different deflators, which adjust returns for inflation, will affect returns. The government is due next month release a white paper assessing the fund’s strategy and performance.

“Different deflators would affect what we would see as the real return and may or may not affect the fiscal rule,” said Torbjoern Haegeland, the statistics agency’s director of research, in a March 13 interview. “That is, how much we should spend today of petroleum revenue.”

Norway’s government, which took office in October, is reviewing the wealth fund’s mandates, including which assets it can buy. The potential overhaul of Europe’s biggest equity investor follows a decade during which the fund failed to live up to a return target of 4 percent, a level that also represents a cap on how much petroleum cash the government can use to prop up its budget.

The current deflator model shows that in order to reach its return goal in real terms, the fund needs to deliver a 6 percent nominal return. The fund now uses a deflator based on a weighted average of inflation in countries in its benchmark indexes for equities and fixed income, according to the investor.

Avoiding Overheating

“What we are looking at are alternative ways to calculate that deflator,” said Haegeland. Deflators could be based on investment weighting, on inflation in Norway or in the countries the fund invests in, he said.

Freedom of information requests by Bloomberg News to obtain the study and related documents were denied by the Finance Ministry. The study was commissioned last year by the previous government, according to public records.

“As part of its work with the management of the Government Pension Fund, the Ministry of Finance commissions several reports from external experts every year,” Paal Bjoernestad, the state secretary in charge of the white paper, said in an e-mail in response to questions about the deflator. “The fact that the ministry commissions a report doesn’t always imply that we are planning to change something.”

Spending Pressure

The fund, which received its first cash infusion in 1996, was created by Western Europe’s biggest oil and gas exporter to ensure its energy wealth doesn’t overheat Scandinavia’s richest economy. Norway last decade imposed a rule allowing the government to spend the real return of the fund, estimated at 4 percent.

Researching an alternative deflator “is obviously to try to squeeze as much as you can out of the fund for spending,” said Knut Anton Mork, chief economist at Svenska Handelsbanken AB. He said the research doesn’t indicate changes in how the fund is invested. While Mork doesn’t see the new government making any big changes to the fund, the research “is a great way to start a debate about how to spend Norwegian oil wealth.”

Pressure has since grown to reduce that spending limit, in part after the fund grew faster than first estimated, meaning the amount of money represented by 4 percent has increased. The fund almost doubled in size since 2010 and the government now predicts it will grow 41 percent to $1.2 trillion by 2020.

“As long as we stick to the 4 percent rule, then it won’t change the amount of money one can spend on the budget,” said Erik Bruce, senior economist at Nordea Bank AB. “But if those calculations mean that return has been actually lower, we might change the 4 percent rule -- that’s something that the governor of the central bank proposed in a speech which the politicians turned down.”

More Scope

The Finance Ministry plans to use 2.9 percent of the fund this year, staying within the 4 percent cap for a fifth year. Though the Conservative-led coalition has pledged to keep spending within the 4 percent rule, Finance Minister Siv Jensen said earlier this month there’s scope to use more oil money to promote growth.

The fund is mandated by the government to hold about 60 percent in stocks, 35 percent in bonds and 5 percent in real estate. While the investor mostly follows global indexes, it has some leeway to stray from those benchmarks.

To contact the reporter on this story: Saleha Mohsin in Oslo at

To contact the editors responsible for this story: Jonas Bergman at Tasneem Brogger

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