Norway Heats Up as Wealth Fund Nears $1 Trillion: Nordic Credit

Norway’s incoming Prime Minister Erna Solberg will have no shortage of cash for her campaign promises. The question is: how much does she dare use?

The Labor government, which resigned yesterday, presented what it called a “cautious” budget, saying it would use 135 billion kroner ($22 billion) of Norway’s oil wealth to plug deficits next year, equal to 5.5 percent of mainland gross domestic product. That leaves Solberg’s administration with 54 billion kroner to spend before it breaches the nation’s fiscal policy rule.

“It actually leaves some room for extra spending, especially given the recent weakness in the Norwegian economy,” said Bernt Christian Brun, a chief strategist at Danske Bank A/S in Oslo. “You could even argue that a counter cyclical budget would be somewhat more expansionary.”

Solberg and her coalition partner, the Progress Party, have until early November to adjust the spending plan put forward by the outgoing administration. While she has promised to stick to the fiscal rule, which caps expenditure of Norway’s oil income at 4 percent of its wealth fund, the two parties have signaled they want to spend more on infrastructure, education and health care. Those measures will come on top of planned tax cuts.

Bond Spreads

The spread between Norway’s 10-year government note and benchmark German debt was little changed at 110 basis points today, 14 basis points off the average over the past six months. Norwegian bonds with maturities of more than a year have lost 1.5 percent this year, according to Bloomberg Sovereign Indexes. That makes Norway the best performer among non-euro European government bonds including Swiss, U.K. and Swedish debt. Denmark is the worst, with a 3.9 percent loss.

“I would like to look into the budget to see if there are enough investments in education, research and infrastructure. and also the framework for small and medium sized enterprises,” said Jan Tore Sanner, Conservative party finance spokesman. “We really need to have strong investments not only in the petroleum industry but also in the other sectors of the economy.”

The outgoing Labor government said it will use 2.9 percent of the wealth fund, staying within the 4 percent cap for a fifth year. While that may seem restrictive, actual spending will surge after the fund almost doubled in size since 2010. The oil fund will grow to $870 billion by the end of next year and reach $1.2 trillion by 2020, according to the government.

Clear Expectations

The Confederation of Norwegian Enterprise, the country’s largest business group, urged the new government to use the fiscal space afforded in the budget.

“The Norwegian economy is rapidly slowing and there is less risk of a rate increase,” the group said. “NHO therefore has clear expectations that the new government will focus more on investments in its addendum to the national budget.”

Norges Bank left its main rate at 1.5 percent last month and signaled faster tightening after efforts to fight back the krone’s appreciation paid off.

Trond Helleland, parliamentary leader for the Conservatives, yesterday told news agency NTB the new government could potentially shift as much as 20 billion kroner to achieve its goals, and also use more oil money.

Biggest Investor

Norway is western Europe’s largest oil and gas producer. It reaps revenue from taxes on oil and gas, ownership of petroleum fields as well as from its 67 percent stake in Statoil ASA. It wealth fund now holds on average about 1.2 percent of the world’s listed companies and invests abroad to avoid stoking domestic inflation.

While the fund is swelling with oil revenue, its returns haven’t lived up to the 4 percent target over the past years. Central bank governor Oeystein Olsen has recommended lowering the fiscal spending target to 3 percent to better safeguard wealth and avoid overheating the economy.

Though oil wealth has backstopped the economy in the aftermath of the financial and economic crises over the past few years, Norway isn’t immune to the slowdown. The mainland economy, which excludes income from oil, gas and shipping, will slow this year to 2.2 percent from 3.4 percent in 2012 and unemployment will rise to 3.4 percent from 3.2 percent, according to budget estimates.

While an increase in spending of as much as 10 billion kroner might be possible, history suggests that the new government’s ability to overhaul the budget is limited, according to Brun. “There’s not that much a new government can do with the budget when they come in at the tail end of a budget process,” he said.

That view is shared by DNB ASA, Norway’s largest bank, which also said that the new government would have to talk down the economy to make its case for more spending.

“To change the budget and spend more it would require that you change the assumption on the Norwegian economy and say that we are in a weaker situation than the current government estimates,” said Kjersti Haugland, an analyst at DNB in Oslo.

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