Wednesday, 3 April 2013 - 13:47
Norway Oil Fund CEO: 4% Annual Yield is Uncertain
By Kjetil Malkenes Hovland
OSLO--The expected annual yield of 4% for Norway's $700 billion oil fund is uncertain in the long-term, the fund's Chief Executive Yngve Slyngstad told a parliamentary committee Wednesday.
"The estimated 4% real yield is uncertain, also for long time horizons," Mr. Slyngstad told the Standing Committee on Finance and Economic Affairs, which is holding hearings on the funding needs of the Norwegian welfare state as the population grows older.
Mr. Slyngstad was invited to comment on a government white paper outlining the long-term financing of the generous Nordic welfare state. Like many European countries, Norway has an aging population and welfare spending is set to grow faster than tax revenues.
The government said that by 2060, the gap between its revenues and spending was expected to be 6% of the country's mainland gross domestic product, which excludes the oil sector. The size of the funding gap depended on factors such as the oil price and its effect on government revenues, the oil fund's returns and how much Norwegians work, it said.
Norway's sovereign wealth fund, the Government Pension Fund Global, is a significant contributor to government spending. To avoid tapping the fund, the government has a self-imposed annual spending limit of 4% of the fund's value, equal to the fund's expected returns.
The fund's average real yields have only been 3.66% in the last decade, and 2.97% since Norges Bank Investment Management was established in 1998. Although the fund is expected to keep growing, its share of government spending will start to diminish in 15 to 20 years, the government said.
Mr. Slyngstad told the committee that the bond market would likely provide low yields for many years to come, and that the fund had to depend on positive developments in the equity markets to be able to deliver decent returns. The fund was in a process of shifting assets towards faster-growing regions, he said.
Norwegians should expect the fund's value to fluctuate, Mr. Slyngstad said, adding that another year similar to 2008 had the potential to reduce the fund's market value by as much as NOK1,000 billion ($172 billion) in the short term.
The Norwegian government said that if the oil fund's annual real yield fell by one percentage point, Norway's 2060 funding gap would rise to 8.4% of mainland GDP. If the fund's yields increased by one percentage point, the 2060 funding gap would be reduced to 4.1% of mainland GDP, it said.
Write to Kjetil Malkenes Hovland at email@example.com
(END) Dow Jones Newswires
April 03, 2013 07:47 ET (11:47 GMT)
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