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Norwegian Ministry of Finance
Engelsk mal: Startside
Norwegian Ministry of Finance
Colin Forthun, Director General, Budget Department
Doha, 14 December 2015
The Norwegian Fiscal Framework and the
Management of Petroleum Wealth
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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2
Fiscal policy
The framework
The Government Pension Fund Global (GPFG)
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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The framework: GPFG is fully integrated with fiscal policy
Fund
Oil revenues
State Budget
Transfer to finance non-oil deficit
Fiscal rule
Over time spend Fund real return
(estimated at 4 percent)
Return on investments Oil revenues
Non-oil revenues
Expenditures
Petroleum revenues and fund mechanism
Fiscal rule
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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4
Fiscal rule
• Oil revenues should be phased into the economy on par with
the development in expected real return of the Fund
(estimated at 4 per cent)
• Considerable emphasis put on stabilizing the economy – Emphasis laid on a smooth and sustainable phasing in of petroleum revenues
– Automatic stabilizers are allowed to operate, focus on non-oil structural deficit
– Discretionary fiscal policy is not ruled out…
– …but fiscal policy should have a medium-term orientation
Fiscal policy in 2016
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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Fiscal policy in 2016
0
25
50
75
100
125
150
175
200
225
250
275
300
2001 2003 2005 2007 2009 2011 2013 2015
0
25
50
75
100
125
150
175
200
225
250
275
300
Structural non-oil deficit 4%-path
Spending (Structural non-oil deficit) and expected real return on the
GPFG.
NOK Billion, 2016 prices
Source: Ministry of Finance
• Spending (the structural non-oil
deficit) 80-90 billion NOK below 4%
path
• 2,8% withdrawal from the fund
• Strong automatic stabilizers
5 Spending decoupled from revenues
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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Spending of oil revenues is decoupled from current revenues
-5
0
5
10
15
20
25
-5
0
5
10
15
20
25
1970 2000 2030 2060
Net oil revenues
Spending: Structural non-oil
deficit Expected real return on the Fund
Per cent of trend-GDP Mainland Norway
The Fund
Norwegian Ministry of Finance
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The Government Pension Fund Global
Norwegian Ministry of Finance
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GPFG is among the largest funds in the world
6,897
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
220%
240%
260%
280%
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2Q2015
Fund size as share of GDP for Mainland
Norway (rha)
Sources: Norges Bank and Ministry of Finance
-Market value development 1996 -2Q 2015.
-NOK billion (lha) and per cent of GDP Mainland Norway (rha)
-2Q 2015 value: 880 bn US dollars
Fund performance
Fund performance
Norwegian Ministry of Finance
Fund performance
Sources: Norges Bank and Ministry of Finance
Key figures at June 30th, 2015
(annualised data in currency basket)
Last 12
months
Last 3
years
Last 5
years Last 10 years
Since
1.1.1998
Gross annual return (percent) 6.91 12.10 9.92 6.12 5.90
…of which relative return on equity- and
fixed income investments (percentage points) -0.04 0.31 0.30 0.14 0.28
Annual price inflation (percent) 0.35 1.32 1.82 1.97 1.83
Annual management costs (percent) 0.06 0.06 0.07 0.09 0.09
Annual net real return on fund (percent) 6.48 10.59 7.89 3.98 3.90
Annual net real return since January 1997 is 4.08 percent (month-end June 2015).
Fund performance
Fund strategy
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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The investment strategy
GPFG
Strategic Benchmark Index
Global Equities (excl. Norway)
«Market weights»
60 %
Global Fixed Income (excl. Norway)
70 % Gov. (GDP weights) 30 % Corporates (Market weights)
35-40 %
Global Real Estate (excl. Norway)
0-5 %
Investment strategy
Fund Investments
Norwegian Ministry of Finance
Broad geographical distribution of Fund investments Actual investments at yearend 2014
Source: Norges Bank
Investment strategy
Fund Governance
Norwegian Ministry of Finance
Governance structure marked by clear lines of responsibilities
Norwegian Parliament
Ministry of Finance
Central Bank of Norway (NBIM)
Operational manager of GPFG
Government Pension Fund Act
National Budget
Annual Report to the Parliament
Material changes presented to Parliament prior to implementation
Management mandate
Regulation on risk management and reporting Guidelines
for observation and exclusion
Quarterly and annual reports
Investment strategy advice
Governance
Governance Transparency
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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High degree of transparency in Fund
management
Important to ensure broad support for and
confidence in the management of Fund
Management mandate states; …greatest
possible degree of transparency within the
limits defined by a sound execution of the
management assignment
→Reporting
→Holding lists
→Voting records
Contributes to a robust investment strategy
→ Anchoring of risk profile with stakeholders
Governance
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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Summary
• Separate current oil revenues from spending…
• …but integrate oil revenues with fiscal policy and budget
• Establish a fund, invested abroad
• A simple fiscal rule foster political commitment
• Be open and transparent about framework and results
14
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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Back-up
Norwegian Ministry of Finance
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1998
40 % equities
2000
Some emerging
equity markets
2002
Non-government bonds
2004
More emerging markets
Ethical guidelines
2005
Inflation-linked bonds
2006 2007
High-yield bonds
Commodity derivaties
New risk management requirements
60 % equities
Small-cap
2008
Real estate
All emerging equity markets
The investment strategy of the Fund has evolved over time
Adjusted framework for responsible management
2011
First investment in
unlisted real estate
2012
New geographical distribution for the equity and
bond index
2014
Investment strategy
Investments
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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GPFG is a universal owner
Large, long-term owner of a globally diversified
portfolio.
Owns a share of the ”listed” economy.
Interests might in some cases differ from those of
individual companies or other investors.
Satisfactory long term return considered dependent
on a sustainable development
Responsible management
Norwegian Ministry of Finance
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Tools employed in responsible management of the GPFG
• Measures in day-to-day business:
Active ownership
Environment-related investments
International collaboration and contribution to the development of best practice
Research and investigation
• Measures of last resort:
Observation
Exclusion of companies
Responsible management 18
Norwegian Ministry of Finance
Framework for responsible management
Ministry of Finance
Norges Bank
(Central Bank)
Council on Ethics
General framework on
responsible management
Active ownership
Decisions on observation & exclusion Recommendations on
observation & exclusion
Reporting Reporting
Exchange of information
Recommendations
Management framework
& Guidelines Guidelines
Responsible management
Responsible management
Norwegian Ministry of Finance
Engelsk mal:Tekst med kulepunkter
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Exclusion and observation of companies
Product-based exclusion
→ produce weapons that violate fundamental humanitarian
principles in their normal use
→ produce tobacco
Conduct-based exclusion – serious or systematic violations of
fundamental ethical norms
→ human rights including child labour
→ individuals’ rights in situations of war or conflict
→ gross corruption
→ severe environmental damage
→ other particularly severe violations of fundamental ethical norms
Responsible management
Responsible management
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