Norway’s Oil Fund just keeps growing

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Analysts and politicians weren’t expecting much, but Norway’s huge sovereign wealth fund known as the Oil Fund logged a good year last year. It ended up with a 6.9 percent return, much higher than the 2.7 percent logged in 2015, and grew in overall size by a dizzying NOK 447 billion (USD 54 billion).

Norway’s oil wealth continued to generate strong returns last year, as the country’s so-called “Oil Fund” grew again. PHOTO: Statoil/Harald Pettersen

Some analysts and media including newspaper Aftenposten had predicted returns of just 2-3 perent for 2016, and expected the fourth quarter to be poor. Instead it was strong, boosting the 4.6 percent average return through the first three quarters to the final 6.9 percent. The oil fund’s annual report released Tuesday showed that returns on the fund’s investment in publicly traded companies amounted to 8.7 percent, while returns on interest-bearing debt instruments averaged 4.3 percent.

“The board (of Norway’s central bank, which is reponsible for the fund) is satisfied that returns both in 2016 and over time have been good,” stated Øystein Olsen, who leads the board and is governor of the central bank, Norges Bank.

Yngve Slyngstad, the chief executive of the fund who has most direct responsibility for it, could also smile after two years of difficult markets, some criticism over how the fund is managed and recent proposals from the government to rein in use of the fund’s returns and change the composition of the fund’s assets. Slyngstad still had some words of caution, though.

Yngve Slyngstad was also satisfied with the Oil Fund’s performance, but had some words of caution as well. PHOTO: Berglund

“This year has gone better than we expect it will go in the future,” Slyngstad told state broadcaster NRK. He still predicted it will be difficult to realize as good returns because of unrest in both the interest rate- and currency exchange markets worldwide.

Slyngstad said the results of the fund (officially set up as the state’s pension fund for investments of oil revenues abroad) were plagued in 2016 by falling international interest rates in the first half and strong stock markets in the second half. He noted that the year started with market unrest and uncertainty around economic developments in China.

2016 was also the first year in which state government officials withdrew money from the fund for use in the state budget. That occurred when Finance Minister Siv Jensen pulled more money out of the fund than had ever had been tapped before, but it was still below the withdrawal limit set at 4 percent of the fund’s actual size, which in turn is based on average earnings over time.

Changes loom ahead
Now the government has proposed rolling back that 4 percent limit to just 3 percent, to enhance discipline in Norway’s use of its oil revenues. The goal is still to set the vast majority of them aside for future generations and not be tempted to dip into them when needs arise for infrastructure improvements or social welfate services. The government also wants the fund to invest 70 percent of its assets in international stock markets (up from 62.5 percent now). The rest of the fund’s assets are invested in bonds, other interest-bearing financial instruments and real estate that has made the fund one of the biggest foreign investors in Manhattan and cities like London and Paris. Slyngstad also plans to invest some of the fund’s assets in expanding markets in new countries.

That proposal looks likely to move forward despite the current rebound in the oil fund’s fortunes. Jensen and Prime Minister Erna Solberg think the state budget will still be well-served with 3 percent of the fund’s total assets, which grew from just over NOK 7,000 billion in March to NOK 7,510 billion by January 1.

Tuesday’s oil fund results were also good news for those who see Norway’s oil fund as the country’s single greatest asset, which even is being used this week to show how it can generate jobs in the US.  The oil fund has become big business in itself, which Norwegian officials want to maintain for many years to come. Berglund