Managing wealth – the Norwegian experience
23 M h 2011
Deputy Governor Jan F. Qvigstad, Norges Bank
23 March 2011
The 50-year crisis The 50 year crisis
A severe financial and economic crisis
Serious financial distress
Real economy deeply affected
Synchronised internationally
First decline in global output after the Second World War
Huge differences in the aftermath
Huge differences in the aftermath
What caused the crisis?
What caused the crisis?
1. Global imbalances 2. Banking regulation
3
Global imbalances
Current account. Per cent of global GDP
2 2
China
1 1
China
Asia excl China US
0 0
-1 -1
2000 2002 2004 2006 2008 2010
-2 -2
2000 2002 2004 2006 2008 2010
Source: IMF
New banking regulations New banking regulations
1. More and better capital 2. Macroprudential
3. Living wills
Real interest rates during two downturns
Real interest rate, Norway. Per cent
9 9
7 1987 - 1989 7
5 5
3 3
2008 - 2010
1 1 1
1 -1 -1
Keeping one’s house in order
Fiscal balance. Per cent of GDP
4 4
0 0
-4 -4
-8 -8 United Kingdom
-12 -12
1993 1997 2001 2005 2009
Sweden
1993 1997 2001 2005 2009
7 Source: OECD
4 per cent rule 4 per cent rule
Rule of thumb: 4 per cent Rule of thumb: 4 per cent
Fiscal deficit
Current account
Unemployment
Inflation
Banking assets: maximum 4 times GDP
Spanish regulations
Key figures
Per cent of GDP Per cent of GDP
Fiscal balance
Public debt
Current account
Banks’
assets (times GDP) 2007 2010 2007 2010 2007 2010 2007 2010 Greece -6.4 -9.6 105 140.2 -15.7 -10.6 1.9 2.4
Portugal -2.8 -7.3 62.7 82.8 -10.2 -10.7 2.6 3.1
Spain 1.9 -9.3 36.1 64.4 -10 -4.8 3.2 3.5
Italy -1.5 -5 103.6 118.9 -1.8 -3.2 2.2 2.5
Ireland 0 -32.3 25 97.4 -5.5 -1.1 7.1 8.2
Belgium -0.3 -4.8 84.2 98.6 3.9 1.7 3.9 3.4
9
Sources: EU Commission, national central banks and the ECB
Norway had its own crisis early 1990s Norway had its own crisis early 1990s
Unemployment sharply up Unemployment sharply up
Preceded by fiscal overspending y p g
Credit binge, followed by housing market bust g y g
All big banks nationalised
Lessons drawn from the crisis
“The experience of the last decade clearly indicates that a capital ratio in keeping with the minimum
standard set out in the statutory regulations is not sufficient to absorb losses on the scale
i d ” experienced.”
“The minimum requirement for pure equity was too The minimum requirement for pure equity was too low, subordinated debt capital qualified too easily for inclusion in the capital base, and there was a lack of rules on capital requirements on a consolidated
rules on capital requirements on a consolidated basis.”
Financial Supervisory Authority Annual Report 1993
11
Financial Supervisory Authority Annual Report 1993
Crises and structural reforms
First Fiscal
Huge increase discovery of
oil on Norwegian
shelf
Government Petroleum Fund
Act
rule and inflation
target Huge increase
in fiscal
expenditure Structural
reforms
1969 shelf
1996 1990
1986 2001
1975
Several
1992
B ki First
transfer Se e a
devaluations Banking
crisis
1990-2010: Two golden decades for Norway
Growth Norway EU-15
GDP 71 % 43 %
GDP 71 % 43 %
Crises as a window of opportunity Crises as a window of opportunity
Investing in reliability Investing in reliability
Politically costly in the short run
Profitable in the long run g
Midwife of structural reforms
Product markets
Wage formation re-established
Monetary policy
Budgetary reforms
13
The Fund mechanism and fiscal policy
Fiscal policy guideline
The Fund mechanism and fiscal policy
Spend expected average real return of Fund Return on
investments
Revenues from mainland Norway Petroleum
revenues investments mainland Norway
revenues
State Budget Fund
Annual transfer of 4 per cent of the Fund
Government expenditure per cent of the Fund
to finance non-oil deficit
Norges Bank as investment manager Norges Bank as investment manager
Clear mandate from political authorities p
Financial investor
No controlling stakes
Risk and expected return
Ethical guidelines
Universal investor
Universal investor
Focus areas
Corporate governance
15
Strategic asset allocation Strategic asset allocation
Equities (60%)
America and Africa
Fixed Income (35% to 40%)
Europe Asia and Oceania
America
and Africa Europe Asia and Oceania and Africa
35%
p
50% Oceania
15%
and Africa 35%
p
60% Oceania
5%
Limitations:
• No investments in Norway Exchange listing (for equities)
Real Estate (0% - 5%)
• Exchange listing (for equities)
• Maximum ownership: 10%
• Risk limit: 1% tracking error
Ownership interest in equity markets
Percentage of FTSE market cap
2,0 2,0
1,5 1,5
Europe Americas Asia Total
1,0 1,0
0,5 0,5
0,0 0,0
1998 2000 2002 2004 2006 2008 2010
17 Source: Norges Bank
Return on the
Government Pension Fund Global Government Pension Fund Global
Per cent
15 15
10 10
0 5 0
5
-5 -5
Quarterly return
-15 -10 -15
-10 Quarterly return
Accumulated annualised return
Source: Norges Bank
2000 2002 2004 2006 2008 2010
Management performance
Excess return, percentage points
2,5 2,5
1,5 1,5
0,5 0,5
1 5 -0,5 1 5
-0,5
Quarterly excess return
Accumulated annualised excess return
-2,5 -1,5 -2,5
-1,5 Accumulated annualised excess return
19 Source: Norges Bank
2000 2002 2004 2006 2008 2010
Investments in Spain Investments in Spain
Value (EUR millions)
Fixed income
millions)
Covered bonds 7,829 Government
bonds
3,171
Value (EUR millions)
Voting rights
bonds
millions)
Telefonica 1,287 1,7 %
Santander 1,127 1,7 %
Banco Bilbao 517 1 5 %
Equity:
EUR 5.6 bn
80 companies
Banco Bilbao 517 1,5 %Iberdrola 411 1,3 %
Repsol 376 1,5 %
Inditex 228 0,7 %
p
,
Transparency of government funds Transparency of government funds
Fund (origin) Points, 2010 (per cent) Change from 2008 (percentage points)
Government Pension Fund Global (Norway)
97 5
CalPERS (California) 95 8
Alaska Permanent Fund 92 0
ABP (Netherlands) 85 5
GIC (Singapore) 65 24
GIC (Singapore) 65 24
Abu Dhabi Investment Authority 11 3
21 Source: Edward Truman
