The Norwegian fiscal framework and the management of petroleum wealth - Colin Forthun, Norway

Norwegian Ministry of Finance

Engelsk mal: Startside


Colin Forthun, Director General, Budget Department

Doha, 14 December 2015

The Norwegian Fiscal Framework and the

Management of Petroleum Wealth


Engelsk mal:Tekst med kulepunkter

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2

Fiscal policy

The framework

The Government Pension Fund Global (GPFG)



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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



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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



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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



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6

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



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7

The Government Pension Fund Global



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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


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



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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


Broad geographical distribution of Fund investments Actual investments at yearend 2014

Source: Norges Bank

Investment strategy

Fund Governance


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



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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



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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



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15

Back-up



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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



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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



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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


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





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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



Government & Nonprofit

The Norwegian fiscal framework and the management of petroleum wealth - Colin Forthun, Norway