Norway's SWF - A risky strategy that locks in low returns

This piece is the latest salvo in my on-going public debate with Norway's Ministry of Finance, that lays out the investment strategy for its $750bn sovereign wealth fund, now the biggest in the world. It appears in today's Aftenposten in response to comments by the Deputy Minister of Finance in the same newspaper.  

Norway’s future is intimately linked to how well the GPF - its $750bn sovereign wealth fund, already 150% of GDP and rising - is run. Under the 4% spending rule, as much as 15% of all government spending already comes from the GPF. Hence, returns on GPF investments and the final size of the GPF are probably more important for Norway’s economy than any other single policy.  Yet, there is little scrutiny of the merits of the GPF’s investment strategy, which is deeply flawed.

Secretary Singsaas is correct to say that GPF strategy should be based on evidence and my report provides exactly the kind of analytical basis that is necessary to improve the present approach. She agrees that there is a financial case for the GPF to make more investments in the green economy and in developing countries, but suggests incremental actions that are too little too late. The central recommendations of my report are not addressed.

Investing for the Future - Norway's SWF needs to change

Re-Define has launched a major new report on the Norwegian Sovereign Wealth Fund, the largest in the world.  The report can be found here and the press release here

I still remember that feeling of surprise when I first looked at Norway's Sovereign Wealth Fund (GPF), now the world's largest, in 2007. Having worked both in the financial industry and in public policy, I was struck by three observations in particular. They still make me uneasy.

The first was how the portfolio, in 2007, was comprised almost entirely of investments in liquid securities in the developed world. These still constitute more than 90% of the GPF. The second was how some of the largest investments of the GPF were in oil companies. Even today, three of the ten largest equity holdings of the GPF today are in oil majors and as much as 10%-15% of the overall portfolio is heavily exposed to oil, gas or coal. The third was the laid-back approach the GPF took to engaging on matters of governance, policy and ethical guidelines, which has not changed.

 

A Eurozone-wide IMF programme could save both

Note: This piece has been built on Re-Define's public call for an IMF programme for the Eurozone as published in the FT in 2012.

The IMF, historically the purveyor of crisis management for countries in financial trouble, is stuck in Europe. The IMF has, as today’s Charlemagne column in the Economist points out , become the junior partner in the ‘Troika’ arrangement and is often over-ruled, as was clear from the leaked IMF report on Greece. It was not always so.

The IMF is a body that is used to being in-charge. It has, over several decades, dictated policies to tens of countries that found themselves in a financial pickle. A visit from the IMF was an unpleasant experience and often involved a school-masterly dressing down of a country’s policy-making elite. For example, this image of the then IMF Managing Director Michel Camdessus standing, arms folded, over Suharto, appearing to dictate terms on the bailout during the Asian crisis is burned into the collective memory of Indonesians. It was even credited with helping hasten the end of the dictatorship.

Germany Must Embrace its Crown of Thorns

Note: This piece was originally published in the Economist as the opening piece in the Debate on Germany's role in Europe

Germany's pole position in the handling of the euro crisis is evident from the fact that everything is on hold until after the German elections, even as German red lines continue to define the contours of current policies in the euro area. Without Germany's economic might behind it, no solution to the euro area crisis is possible.

However, its influence on the political, intellectual and economic aspects of the handling of the euro crisis belies Germany's lack of leadership on these dimensions. The failure of intellectual leadership is perhaps the most pernicious of the three.

The absence of diversity and depth in the German debate on the euro crisis is striking. The inaccurate 'lazy southerner' narrative dominates public and private discussions, and the need for austerity is taken as a given, no matter what the evidence. 'Fuzzy' matters, such as the danger that sharp fiscal adjustment poses to social cohesion and political stability in crisis countries, get short shrift.

Eurocrisis Conversation with Peter Bofinger

Note: Peter Bofinger and Sony Kapoor wrote the original Growth Compact for the EU in late 2011, which was then adopted albeit in a very watered down format. Download as PDF.

Sony: Peter, the markets are quiet, but the Eurocrisis is still with us, No?

Peter:  Well, the crisis is continuing and the recession is getting worse, especially as it is affecting more and more counties. It has spread from the peripheral countries into the core of Europe.  It has affected France, which is in recession, and it has also affected Germany, which has seen a severe decline in output in the fourth quarter of last year and more or less stagnated in the first quarter of this year. 

Sony:  When we were talking earlier you mentioned that this may bring new realisation in Germany and may change the debate in Germany somehow.  Up until now the crisis has not actually been felt in Germany, it has just been on the TV.  But is there not a danger that this may make a solution harder?

Personally, I can see it going both ways.  On the one hand, Germans could realise that it is a systemic crisis and they are not immune, and therefore need to do something different. Or, on the other hand, ‘oh my God, we are in trouble ourselves and here are these countries asking us for help; we cannot actually afford to help them’. This could make it less likely that Germany does anything to help them.  Which way is it more likely to go?

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