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This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.

 

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In this age of instant gratification, it is harder than ever to consistently save for a rainy day and resist dipping into a growing savings pool to satisfy short-term pursuits. Norway — the largest petroleum liquid producer and holder of natural gas reserves in Europe — must be counting its blessings for having started saving early and staying on course two decades on, especially as the world economy and financial system face unprecedented volatility.

Next year, the Norwegian government is planning to dip into its massive oil wealth fund for the first time to cover shortfalls in its budget as well as stimulate slowing economic growth after a precipitous fall in crude oil prices over the past year that is hitting oil-related revenue and has seen over 25,000 job cuts.

Norway reportedly plans to spend NOK208 billion (US$25.2 billion) of its oil wealth next year. But after taking into account inflows and receipts, the implied withdrawal of NOK3.7 billion next year is a mere 0.05% of the fund’s current assets of over US$840 billion.

“We’re well equipped for a situation like this, given the size of our current income,” the fund’s spokesperson Marthe Skaar was quoted as saying by Bloomberg on Oct 6. “The current income, which includes interest, dividend, rental income and so on, is almost equivalent to the budget deficit. It is in the order of NOK200 billion.”

How did Norway build itself this huge safety net and stabilisation fund and can it be replicated?

Norway’s oil income in the first two decades went primarily into investments in the oil industry and developing the country. The idea to set up a Norwegian oil fund or the Government Petroleum Fund came to fruition more than 20 years after Norway first struck oil at its Ekofisk oilfield on Dec 23, 1969, as it became clear that oil revenue would be substantial.

The fund to safeguard the country’s oil wealth for future generations, now known as the Government Pension Fund Global (GPFG), is owned by all 5.17 million Norwegian people and managed by Norges Bank Investment Management (NBIM), a unit of the country’s central bank on behalf of the Ministry of Finance.

According to information on the NBIM website, the fund was established in 1990 but received its first capital transfer in 1996 and invests in equities, fixed-income securities and real estate outside the country. (Another government-owned fund, the Government Pension Fund Norway, invests domestically.) Thus, the expansion of the GPFG, in a way, converts non-renewable natural resources into savings that can be grown in global markets.

With assets worth NOK7.3 trillion (US$844.6 billion), the GPFG would make each Norwegian a millionaire if the money were to be distributed. Now that it has grown bigger than even the likes of 

CalPERS, one of the largest public pension funds in the US and the world, there are those who think the government should spend more of the petroleum revenue rather than save it for the future. There is also a debate on whether less money should be put into equities, given the market volatility, and whether there should be a greater push for ethical investments.

Whatever is decided, the fact that Norway has money to spend on its people and its economy already puts it in an enviable position as other countries struggle to manage a gaping budget deficit.

What’s also impressive is that Norway has managed to consistently grow the fund despite there having been several changes in government since 1996.

“Critics told us that it was naïve to believe that the democratic society and democratic system could manage such big cash flow in a sustainable and responsible way. But the experience in Norway so far is that we’ve been able to do exactly that,” Jens Stoltenberg, minister of finance from 1996 to 1997, prime minister from 2000 to 2001 and 2005 to 2013, and Nato secretary general, says in an introductory video on the fund.

Per-Kristian Foss, Norway’s minister of finance from 2001 to 2005, has this to add: “The fund was established based on broad political consensus in Norway. It is important to keep that consensus.”

In the same video, Kristin Halvorsen, minister of finance from 2005 to 2009, speaks of the important pillars in managing the fund: “That the fund is transparent, that investments are responsible and that we have ethical guidelines. It really makes a difference.”

Not only are there withdrawal caps on the fund to ensure discipline and growth but the fund’s performance in the various asset classes and where the money is invested is all clearly spelt out on the manager’s website for everyone to see. Little wonder then that it is ranked among the most transparently managed natural resource funds in the world, being marked between 94 and 100 points out of 100 for a range of measures on the Natural Resource Governance Index.

Other than transparent management, perhaps the winning formula is the manner in which the people managing the fund treat the country’s oil wealth. As current Minister of Finance Siv Jensen (since 2013) puts it: “The fund is people’s savings, which means that it needs to invest with a long-term perspective to make sure that we can benefit living generations and coming generations.”

In short, no matter who led the ministry of finance, they all agreed on the principles of the fund — that “it is the people’s money, owned by everyone, divided equally for generations to come”, narrates the video.

Sigbjorn Johnsen, minister of finance from 1990 to 1996 and 2009 to 2013, comments: “I think the size of the fund that we see today has exceeded all our expectations.”

That’s perhaps an understatement of the potential benefits of having the right checks and balances in place and adhering to them.

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