Norway is ‘not as rich as it thinks’

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Norway’s central bank chief made some economically sobering remarks in his closely watched annual address to the country’s elite Thursday evening. Even though the Norwegian economy remains strong, he stressed that trade deficits are rising, the country’s krone is historically weak, and politicians are leaning too heavily on Norway’s so-called Oil Fund meant to fund pensions for future generations.

The central bank chief’s annual address, called “Economic Perspectives,” always attracts a large and prominent audience of Norway’s political and economic elite. Afterwards they’re all invited to a banquet at Oslo’s Grand Hotel. PHOTO: Norges Bank

“Restructuring (of Norway’s economy away from oil dependency) takes time,” noted Øystein Olsen, governor of Norges Bank, as he spoke before the prime minister, the finance minister and other members of the country’s political and business power structure. “Companies now need to look for new markets, new businesses must be established and workers will need to move into new jobs.”

In short, the Norwegian economy needs more production outlets. Olsen began his speech by citing from one his predecessor’s annual addresses exactly 50 years ago. Norway’s oil age was just beginning then, and with oil trading at around two US dollars a barrel (USD 12 adjusted for inflation) few really foresaw the enormous financial wealth and muscle it would create for a country that had been relatively poor for centuries.

The central bank chief’s address delivered in February 1970 noted that Norway was moving into the end of an era that long had relied on locally exploited natural resources, not least energy sources from hydroelectric power at the time, and must “to a rising degree” start to rely on “production of goods in areas where we haven’t had nature’s advantages.”

‘Challenges’ ahead
Olsen noted that those words reflect current “challenges” for the Norwegian economy as well. While he cautioned against phasing out oil and instead urged making the best of Norway’s offshore resources for as long as possible, he stressed the need for the same sort of restructuring his predecessor Erik Brofoss called for 50 years ago.

That’s because if Norway’s oil earnings are removed from trade figures, the country has a huge trade deficit that’s increasing rapidly. Olsen told reporters after his address, as he welcomed his prominent guests to Norges Bank’s annual banquet at Oslo’s Grand Hotel, that while industries like tourism and seafood have been doing well, many others are not or are at risk, like the oil supply sector, and new industries are needed for economic diversification.

Øystein Olsen, governor of Norway’s central bank, delivering his annual address on Thursday. PHOTO: Norges Bank

“We can’t continue like this,” Olsen told newspaper Dagens Næringsliv (DN). A “considerable” amount of Norway’s goods and services are tied to Norway’s offshore activity. That will decline as oil activity slows down as it must if climate goals are to be met.

The economic shock of the oil price collapse in 2014 was actually good for Norway, he suggests, since it forced some restructuring and made the country less oil-dependent than it was then. At the same time, however, Olsen warned that Norway has become more reliant on the Oil Fund (set up in 2001 to save oil revenues for future generations) to fund needed or desired public projects and balance the state budget.

Prime Minister Erna Solberg, sitting in the front row as usual at Olsen’s annual address, defended how her Conservatives-led government coalition dipped deeper into the Oil Fund during and after the oil price shock. Her government has never exceeded limits set for spending Oil Fund money, though, and actually lowered the limits from 4- to 3 percent of total assets.

Fund’s returns most important
Olsen stressed that the most important goal for the Oil Fund that’s under the central bank’s management is simply for it to earn the highest returns possible at an acceptable level of risk. Since oil revenues are generated in US dollars, the huge fund’s balance can seem even higher than it is because of Norway’s weak krone. One US dollar now produces NOK 9.22 at current exchange rates, and Olsen warned about that, too: “As a nation, we don’t become richer when our currency falls in value.”

The weak krone, along with rising wage growth and inflation, has raised speculation that Olsen and his bank board will raise interest rates. He has to remain mum about that, though, while the official line remains that rates will remain low for the foreseeable future.

“It’s an illusion that we have more purchasing power” (even though a barrel of oil now generates more kroner that it has in years) because Norway also must import goods and services that are more expensive, Olsen cautioned. The dizzying size of the Oil Fund in terms of Norwegian kroner is also somewhat deceivingly inflated because of the weak exchange rate. If Norway’s currency was still trading at around NOK 6-7 to the dollar, which was a more standard level for many years, the fund’s balance would be less despite its investment gains and otherwise strong performance.

Olsen also warned against any political temptation to tap the Oil Fund for funding for “green investments” and economic restructuring. “We’ll have to adapt to the climate risk and take that into consideration regarding the fund’s investments,” Olsen said, “but using the fund actively as a means of doing something about global challenges is something else. The fund is not a suitable means for doing that.”

newsinenglish.no/Nina Berglund