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Norway seen tapping its wealth fund to ward off oil slump risks

Norway's biggest bank sees recovery
Norway's biggest bank sees recovery

For Norway, the future may already be here.

The nation could as soon as next year start making withdrawals from its massive $830 billion sovereign wealth fund, which it has built over the past two decades as a nest egg for “future generations.” The minority government will reveal its budget plans on Wednesday and has flagged new spending measures and tax cuts.

Prime Minister Erna Solberg is trying to avoid a recession as a slump in the nation’s key commodity takes its toll on the $500 billion oil-reliant economy. Norway has already spent recent years using a growing chunk of its oil revenue to plug deficits while at the same time building the wealth fund. Now, with tax revenue from petroleum extraction down 42 percent on last year, budget spending in 2016 will probably outstrip income.

“We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow — that’s based on oil prices increasing slowly in the future,” said Kyrre Aamdal, senior economist at DNB ASA in Oslo. Tapping the fund’s returns marks a turning point that wasn’t expected to come for “several more years,” he said.

The government said in May its non-oil budget deficit, or spending in real terms, would be a record 180.9 billion kroner ($21.6 billion). With its crude output waning and prices falling, the government saw petroleum income dropping to 251.6 billion kroner this year, almost 30 percent lower than its October projections. Those estimates assumed oil at about $69 a barrel. Brent crude has averaged $56 so far this year.

The decline in oil prices has sent the krone down 13 percent over the past 12 months. Only the Brazilian real has performed worse.

Taxes collected on petroleum extraction reached 138 billion kroner in the first three quarters of the year, down from 238.2 billion kroner in the same period a year earlier, according to Statistics Norway.

Tapping the fund to cover budget needs comes at a time when the managers of the fund, set up to safeguard the wealth of future generations, warn that it also faces diminished returns ahead amid record-low interest rates.

Government officials and economists contend that only investment returns from the fund will be used for the budget, meaning it will not actually shrink in size. By using interest and dividends to cover the deficit, “no one will ever need to break the piggy bank,” said Knut Anton Mork, senior economist at Svenska Handelsbanken AB in Oslo.

Oeyvind Schanke, chief investment officer for asset strategies at the Oslo-based fund, said in an interview last month it will be able to use the cash it gets from dividends and bond interest payments to make shifts in the portfolio, rather than having to sell assets.

But capital coming into to the fund has already started to dwindle. Inflows were just 17 billion kroner in the first half of this year, compared with a quarterly average of 60 billion kroner over the past 10 years. Central bank Governor Oeystein Olsen, who oversees the fund as head of the bank’s board, said in February that oil around $60 would mean transfers to the fund “may come to a halt.”

The government on Wednesday is also scheduled to release a proposal for tax reforms and outline how the wealth fund should implement a ban on investing in coal companies, which goes into effect Jan. 1.

“There is room for more active fiscal policy to stimulate in downturns,” DNB’s Aamdal said. He sees the government’s structural non-oil deficit rising by 31 billion kroner from last year.

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