"The Government Is Crushing The Piggy Bank" - Norway Boosts Withdrawals From Its Sovereign Wealth Fund

As it deals with the economic slowdown and a plunge in oil prices, Norway has turned to its massive sovereign wealth fund in order to cover 2016 budget deficits, in continuation of a trend noted here first last October. As Bloomberg reports, the country withdrew $898 million in March from the fund, putting the year-to-date total at roughly $3.1 billion, a run rate that is higher than the estimate the central bank governor gave just this past February.

As a reminder, the Norwegian Sovereign Wealth Fund, the biggest in the world, has been the beneficiary of soaring oil prices in the recent years, pushing its market value to a record high 7.5 trillion Kroner at the end of 2015, or just over $900 billion.

 

In an effort to stimulate the economy during the downturn, and also to shift away from its dependency on oil and gas revenues, Norway cut corporate and personal income taxes, and is introducing more government spending. To make up for the lost revenues and increased expenditures, the nation will continue to depend heavily on its wealth fund.

 

The good news is that as it promised last October when it was revealed that the SWF would have to be tapped for the first time, Norway won't have to sell assets as it can cover withdrawals using the dividend and interest payments of its holdings. Thus, while not adding to the fund, it won't have to sell any assets to cover budget gaps.

"We're well equipped for a situation like this, given the size of our current income, which includes interests, dividends, rental income, and so on, is almost equivalent to the budget deficit." Marthe Skaar, a spokesman for the fund was quoted as saying.

Recall how 6 months ago the government officials assured the population of now actual asset sales:

Government officials and economists contend that only investment returns from the fund will be used for the budget, meaning it will not actually shrink in size. By using interest and dividends to cover the deficit, “no one will ever need to break the piggy bank,” said Knut Anton Mork, senior economist at Svenska Handelsbanken AB in Oslo. Oeyvind Schanke, chief investment officer for asset strategies at the Oslo-based fund, said in an interview last month it will be able to use the cash it gets from dividends and bond interest payments to make shifts in the portfolio, rather than having to sell assets.

Not everyone believes that statement however: "the government is crushing the piggy bank for future generations" said Socialist Left party spokesman Snorre Valen.

While we doubt using income from the fund will crush anyone's piggy bank, what could actually dent it is the fact that according to Bloomberg, the budget was based on $53 a barrel in 2016. With oil prices well below that, the fund may indeed have to sell assets in the future in order to fund government initiatives.

To be sure, countries have been selling assets to perform fx intervention and make up for budget deficits already, but if the largest sovereign wealth fund in the world does it, these all time high's we're experiencing will have a difficult time holding.