Norwegian Blues: Pining for 4%

It being the Christmas season in many countries, and this being a blog on the economics of imperialism, please spare a thought for the problems of Norway’s Government Pension Fund Global (GPFG). I would ask you to fear not, and not to let mighty dread seize your troubled minds, since I am not asking you for any money. However, the GPFG is asking for a 4% return on its investments outside Norway, ie from approximately 99.93% of the world’s population. In these difficult days, I am prepared to make some allowances. After all, Norway’s capital city of Oslo supplies Trafalgar Square in London with a Christmas tree each year, and this country is also one of the homes of reindeer, the intrepid beasts of burden for Santa’s present-laden sleigh. Yet, surely 4% is a bit much?

In fact, Norway’s demand is for even more than 4%, since that number is its planned ‘real return’, ie a nominal return after inflation. While inflation has been close to 1-2% in many major countries, in Norway it has been more than 3%. So the average asset in which the Norwegian fund invests is meant to produce a return far above the 4% level. This is a problem for Norway’s position as one of the world’s biggest rentier states now that financial returns are much lower.

The worst outcome is for GPFG’s bond investments, which make up 36% of its total holdings. In 2015, the return on fixed income investments was a mere 0.33%, measured in the fund’s currency basket. The recent months’ rise in yields will have hit the value of its bond holdings, although yield levels – and the related coupon income – still remain well below 3% in all major bond markets. For example, 10-year government bonds yield 2.4% in the US, 1.5% in the UK, 0.4% in Germany and 0.1% in Japan. The fund also holds corporate bonds, which generally have higher yields, but the yield premium there is not significant. This problem of falling yields in 2011 led the fund to cut its holdings of bonds and to allocate some cash to foreign property assets, but these still only account for 3% of the total. The GPFG owns a portfolio stake in real estate in around a dozen European countries – including in Regent Street, London, and in Paris – and also in New York, Washington and Boston in the US.

GPFG’s equity investments – 61% of its assets – have performed better in recent years, given the boost to stock markets from central bank monetary policy. These assets are invested mainly in European and North American stock markets, with the largest holdings in big corporations like Apple, Alphabet (formerly Google), Microsoft, Nestle, Novartis, Roche and Royal Dutch Shell. Dividends from these investments boost its returns, together with any rise in the prices of the equities held. The fund tries to avoid the political problems associated with being a major investor by limiting its holdings to 10% of the equity of any company.

An important component on all the investment returns (measured in Norwegian kroner) in 2014 and 2015 came from the depreciation of the krone versus the US dollar. In 2014, the NOK value of the fund rose by 24.2% and by 15.5% in 2015, given that 37% of Norway’s equity holdings are in the US and 43% of bond holdings are in US dollar securities. However, in 2016 the krone’s exchange rate has strengthened on FX markets and the NOK value of the total fund fell by nearly 4% in the year to end-September 2016.

What these percentage change numbers should not hide is that the GPFG is the largest ‘sovereign wealth fund’ in the world. As of mid-December 2016, its value was NOK 7395bn or, in US dollar terms, about $875 billion. This is serious money for a country of just five million people, ie roughly an investment fund of $175,000 for each man, woman and child, built up within the GPFG from the late 1990s. The oil and gas revenues accruing to the Norwegian government fund the investments of GPFG, and these have grown dramatically in the past twenty years, accentuated by the accumulated revenues from the investments themselves. In turn, the GPFG funds the government’s spending: in 2015 the budget took NOK 179.6bn from it.

Norway has the highest percentage of foreign investment income to GDP in the world. At 6% in 2015 it was even higher than Switzerland’s, and was some NOK 36,200 per person! This is the scale of Norway’s appropriation of surplus value from the rest of the world economy through its foreign investments. Norway’s net foreign investment income to GDP has been comparable to that seen at the height of British imperialism’s economic power in the late 19th century! This is the economic reality underlying Norway’s benign international image as a liberal, although somewhat insular and unexciting social democratic nation, home of the Nobel Peace Prize.

The following chart shows Norway's net foreign investment income from 1990 to 2015. The figures are for the country as a whole, not just the GPFG, but the latter accounts for the bulk of the income.

Norway got lucky with the discovery of energy resources in the Norwegian waters of the North Sea from the late 1960s, just ahead of the sharp rise of energy prices in the 1970s. With large energy supplies and a small population, Norway became the ‘Saudi Arabia of Scandinavia’. Despite being Christian, rather than Wahhabi, Norway’s governments have also frowned upon alcohol, keeping prices very high via taxation. To be a drunk in Norway, you need your own private distillery, or a large income, or a big credit limit, or a decent supply of return tickets to Denmark. Other sales and income taxes also remain high in Norway, despite the largesse received by the government from the oil and gas revenues. This is because the state’s spending policy funds very extensive welfare payments to consolidate the conservative (social democratic) national consensus, a policy that is now even more dependent upon the revenues derived from the country’s energy-revenue-funded financial investments.

Tony Norfield, 13 December 2016