IMF Survey: Norway's Oil Fund Shows the Way for Wealth Funds
IMF News, July 9, 2008
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- Authors: Delia Velculescu IMF European Department July
- Published: July 9, 2008
Overview
- The Norwegian Oil Fund, recently renamed "the Government Pension Fund-Global" (GPF), is cited as an exemplary sovereign wealth fund (SWF).
- SWFs' total assets are currently estimated at about $3 trillion.
- Experts expect SWF assets to increase rapidly to over $10 trillion in the next 5-10 years.
SWF trends, benefits, and risks
- Potential stabilizing features:
- Long horizons, lack of leverage, and absence of claims for imminent withdrawal of funds could help stabilize international financial markets by enhancing market liquidity and dampening asset price volatility.
- Potential risks:
- Sheer size, rapid growth, and the potential to abruptly change investment strategies.
- Lack of transparency and uncertainty surrounding investment purpose could exacerbate market uncertainty and increase volatility.
- Growing importance and active investment strategies are expected to affect the structure of international financial markets and asset pricing.
Voluntary code of conduct and IMF role
- The IMF has been given a new mandate to facilitate development of a set of voluntary principles for SWFs covering public governance, transparency, and accountability.
- An International Working Group of SWFs (IWG) was formed at end-April 2008 to begin work on the principles.
- Objectives for the principles:
- Help countries hosting SWFs strengthen domestic policy frameworks and institutions.
- Facilitate macroeconomic and financial interests of those countries.
- Ease concerns in countries receiving SWF investments and promote an open global monetary and financial system.
Lessons from Norway's Government Pension Fund-Global (GPF)
- Size and scale:
- Total assets amounting to $373 billion at end-2007, or close to 100 percent of Norway's GDP.
- Stated aim and fiscal role:
- The GPF's stated aim is to support government saving and promote an intergenerational transfer of resources; it facilitates long-term management of the government's petroleum revenues and pre-funds public pension expenditures given expected population aging.
- Functions as a fiscal policy tool: the fund's capital consists of revenues from petroleum activities and its expenditure is a transfer to the fiscal budget to finance the non-oil budget deficit.
- The fiscal guideline, introduced in 2001, calls for a limit on the non-oil structural central government deficit of around 4 percent of the assets of the GPF; since 4 percent is the estimated long-run real rate of return, this rule amounts to saving the real capital of the fund and spending only its return.
- Budget integration and transparency:
- The fund is fully integrated into the budget; the net allocation to the fund forms part of an integrated budgetary process that makes transparent the actual surplus of the fiscal budget and the state's use of petroleum revenues.
- The Ministry of Finance reports regularly on governance framework, goals, investment strategy and results, and ethical guidelines; the Central Bank publishes quarterly and annual reports including performance and an annual listing of all investments; detailed information on voting in shareholders' meetings is also published.
- Investment and diversification strategy:
- Assets are invested exclusively abroad to ensure risk diversification and good financial returns and to shield the non-oil economy from oil-sector shocks (so-called "Dutch disease" effects).
- The GPF has small ownership shares in over 7,000 individual companies worldwide; the average ownership stake at end-2007 was 0.6 percent, against a maximum allowed of 5 percent.
- Currently adjusting portfolio to a new strategic benchmark of 60 percent of assets in equities and 40 percent in fixed income; plans to move gradually into real estate to improve the risk-return tradeoff.
- The investment strategy has produced a healthy 4.3 percent average annual real return during the past decade.
- Ethical governance:
- Asset management is governed by a set of ethical guidelines established by the Ministry of Finance, based on UN and OECD principles.
- Two policy instruments to promote ethical commitments: exercising ownership rights to promote responsible conduct and avoiding investments in companies whose practices constitute an unacceptable risk of complicity in grossly unethical activities.
Norway's potential contribution to SWF principles and policy implications
- The GPF's role as a fiscal policy tool could guide other countries with nonrenewable resources in managing policies sustainably over the long run.
- The fund's highly transparent, competitive, and successful asset management strategy provides an example that open strategies can produce financial results, enhance market liquidity and financial resource allocation, and act as a stabilizing influence.
- Experience with ethical guidelines demonstrates that commitment to the common good is not necessarily antagonistic to high returns.
- Norwegian authorities support IMF work on SWFs and back equal treatment of investors; they do not believe SWF investment activities need to be more restricted than those of other investors and caution that restricting investments of oil-related SWFs may reduce extraction, with potential destabilizing effects on oil markets.
Source: IMF Survey — Norway's Oil Fund Shows the Way for Wealth Funds; Delia Velculescu; IMF European Department; July 9, 2008.