NORWAY - The Government Pension Fund - Global is still on schedule to reach an estimated value of NOK2.3trn (€274.3bn) at the end of 2008 despite current market turmoil, the Ministry of Finance has claimed.
Details from the Norwegian National Budget for 2009 showed at the end of June 2008 the Government Pension Fund - Global stood at NOK1.99trn following an overall negative investment return of -7.4% as measured in foreign currency, or -9.8% in Norwegian kroner.
Despite the recent fall in value, the Ministry of Finance argued although the financial turmoil had resulted in poor returns for the 52% allocation to equities, fixed income returns had "held up better" while net inflow from petroleum revenues was higher than expected.
Kristin Halvorsen, minister of finance, said: "The estimate of the pension fund - global increasing to NOK2.3trn at the end of 2008 remains unchanged, as we predicted in the revised national budget in May. The fund's capital thus looks to be higher than ever at the year-end."
The minister claimed Norway's strategy of placing its petroleum wealth into financial assets worldwide has made the country "more diversified and less vulnerable", as the fund is invested in 7,000 equities and bonds from more than 1,600 issuers in 50 countries.
Halvorsen said: "It is the development in the aggregate equity and bond markets over several years that are the key drivers of the fund's returns and its ability to finance welfare for current and future generations."
The pension fund is currently in the process of increasing its equity allocation to 60%, while it is also continuing work on developing guidelines to allow it to invest 5% of its assets in real estate, as the main part of the investment will be through unlisted instruments so there is the need to establish designated return requirements, risk limits and reporting requirements.
In addition, the Ministry of Finance noted the capital of the Government Pension Fund - which includes the pension fund global and the pension fund Norway - is fully equity-funded and is not "earmarked for specific liabilities", which means there is a low risk that negative returns alone will require the fund to dispose of assets, as it is unlikely to have to meet large withdrawals in a short period of time.
Halvorsen added: "With a robust and long-term investment strategy, we remain confident that the fund over time will deliver good returns with moderate risk. Investments are made on the basis on what is best for the fund in the long-run, and recent developments have not lead us to review the strategy."
That said, the National Budget for 2009 showed Norway is proposing a structural non-oil budget deficit of NOK92bn, which represents a NOK14bn increase in spending between 2008 and 2009.
Norwegian fiscal policy guidelines state structural non-oil central government budget deficit should correspond to the expected real return - estimated at 4% - from the government pension fund - global, although the guidelines allow the policy to be used to counter fluctuations in economic activity.
The Ministry of Finance has proposed because the deficit has been below the 4% path for the last three years, it can now increase the budget deficit to allow for important policy measures.
The budget proposes a net transfer to the government pension fund - global of NOK 358.5bn - compared with NOK410.8bn in 2008 - which should help the government pension fund in its entirety reach an estimated market value of NOK2.915trn at the end of 2009, of which NOK2.794trn will be held within the pension fund - global.
However, the Budget noted despite this increase in value, "the capital of the fund will still be considerably lower than the old age pension obligations under the National Insurance Scheme".
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