Tag Archives: Svein Gjedrem

The Fight Against Currency War

G20 pledges to avoid weakening currencies to boost exports and to let markets increasingly set foreign exchange values, after the weekend summit. The risk of a of currency war seems to have abated somewhat, and the USD is now at a 15-year low.

“The terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.”

Camilla Viland

As expected, currencies were discussed at the G20 meeting over the weekend. The finance ministers of the group now pledges to avoid further weakening of currencies, to boost exports and to let markets increasingly set foreign exchange values. This could be interesting…

First of all; there was no decision on the US proposal for current account targets, and this debate will be continued at next months G20 meeting in Seoul.

And second; the terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.

“However, it is very positive that they have come up with a joint statement on currencies,” analyst Camilla Viland at DnB NOR Markets writes in Monday’s Morning Report.

Previously this has been avoided in fear of alienating China, she points out.

USD At 15-Year Low

The USD weakened after the G20 meeting, as the risk of tensions in the currency market has abated, according to DnB NOR Markets.

Camilla Viland

“The dollar has, among others, weakened versus Asian currencies on the prospect nations in the region will refrain from intervening in foreign exchange markets,” Ms. Viland  writes.

Expectations of the Federal Reserve announcing another round of quantitative easing next week also helps in bringing the dollar down.

Another currency which has weakened over the weekend is the Swiss franc.

“The currency is normally seen as a safe haven in the currency market and the weakening may be a result of lower risk of a currency war,” the Norwegian analyst says.


Biggest Strauss Kahn Statement – Ever?

Dominique Strauss Kahn

The G20 financial leaders also decided that Europe will surrender two seats in the IMF’s executive board to emerging nations, like China, India and Brazil with the intent to give these countries more power.

IMF-chief Dominique Strauss Kahn said that this was the “biggest IMF reform ever.”

Yeah, right!

Mr. Strauss Kahn is about to get a reputation for distributing pompous – and not very well founded – statements.

See also: In The Brigh Minds Of IMF


German Economy Still Flying

The German IFO index rose from 106.8 in September to 107.6 in October.

German Economy Recover

This is the highest outcome since May 2007, and better than consensus’ estimate of 106.5 and the outcome signals solid growth for the locomotive of European economy.

However, it is worth noting that this month’s improvement was not only due to better current conditions, but also due to a rise in business expectations.

“The latest developments in the German economy have been positive. However, we do not expect this to last. Due to sluggish international growth and a strong euro, growth will abate going forward. Fiscal tightening will also weigh on German growth,” Camilla Viland at DnB NOR Markets writes.

And Now; The US Housing Market

From the US, figures for existing home sales in September will be released Monday.

The Pending home sales index, which is an indicator for actual home sales, has risen over the last two months.

Mr. Housing Market

And we may see a rise in existing home sales this month, too. (Consensus expects 4.3 million houses to have been sold in September, up from 4.1 million sales in August.)

“Such an outcome is positive. Nevertheless, the levels of monthly house sales are very low seen in a historical context,” Camilla Viland notes.

And yet to come; the impact of the foreclosure scandal…

Scandic Updates

Here in Scandinavia several important events are on the agenda this week.

In the Norwegian, Norges Bank‘s interest rate meeting and the release of a new monetary policy report, will probably get most attention.

“Both we and consensus expect the interest rate to be left on hold at this meeting,” Ms. Viland writes.

In fact, a survey by the financial news agency, TDN Finans, shows that out of 17 participating analysts, no one expects the Norwegian Central Bank to rise its key rate.

(But wouldn’t it be fun if governor Svein Gjedrem pulled one last stunt before he retires in December?)

Anyway – the central banks new interest rate path (a prediction of the key rate level going forward) will probably be the most interesting thing for Mr. Gjedrem & Co.

The interest path rate has been lowered a few times already this year, and the interest rate is currently set to be raised around New Year.

“Given the latest developments we do not see this as likely. Foreign swap rates have fallen markedly since the previous report was released in June and inflation has been lower than anticipated. This indicates that the interest rate path will be lowered,” DnB NOR Markets says.

Adding: “We expect that the new interest rate path will indicate that the next rate hike will not be until March or May 2011.”

Also the Swedish Riksbank meets this week, holding their monetary policy meeting on Tuesday.

“The Swedish economy has performed strongly lately and this is one reason why the Riksbank has raises rates by 50 bps since the bottom. The Riksbank has signalled that more is to come and both we and consensus expect them to raise the interest rate by 25 basis points, to 1.00%, at tomorrows meeting,” the Norwegian money market specialist says.

More from DnB NOR Markets:

OSE Share recommendations. 25 – 29 October 2010.

Weekly FX Update.

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Norway At The End Of An Era

Norway’s glorious days as one of the worlds major oil producers are numbered. It will probably be over in about 10 years or so, governor Svein Gjedrem at Central Bank of Norway pointed out in a speech at a conference in the city of Stavanger, Tuesday. He warns about a painful process ahead, with substantial cost reductions and severe job losses.

“Norway’s cost level and low growth in Europe will bring pressure on jobs and businesses in the manufacturing communities. Entire manufacturing sectors may be lost.”

Svein Gjedrem

“Look what I found! shouted Askeladden in the Norwegian folktale “The Princess Who Always Had to Have the Last Word”. He found a dead magpie, a willow hank, a bit of broken saucer, two ram’s horns, a wedge and a worn-out shoe sole, which he managed to transform into a princess and half a kingdom.”

Governor Svein Gjedrem at Central Bank of Norway has made his “trademark” by using quotes from Norwegian literature in his speeches.

Today’s performance at the oil seminar in the city of Stavanger on the Norwegian west coast was no exception.

Here’s the rest of the fairy tail:

Askeladden (the Ash Lad) is often perceived as the embodiment of sound Norwegian values such as a sense of adventure, courage and helpfulness. Askeladden is nevertheless someone who succeeds by pure chance.

Like Askeladden, we also found wealth, but under the sea floor. We were lucky.

An abundance of natural resources is in principle of benefit to a country’s economy. The production of petroleum and other natural resources generate gains that exceed the normal return on invested capital, economic rent. But oil is also associated with challenges. As early as in 1974, the Storting deliberated the economic challenges relating to oil production.

We were able to learn from the experience of other countries. The concept Dutch disease stems from the negative effects on the Dutch economy of the spending of revenues from the substantial gas resources of the Groningen field. From the end of the 1960s, these revenues financed strong growth in public expenditure, which led to higher costs and a decline in manufacturing. The situation went too far, resulting in large balance of trade and government deficits which required tightening measures. This in turn led to a sharp rise in unemployment in the first half of the 1980’s.

But the Netherlands is not the first example of a nation that failed in this respect, and far from it. A very clear example is provided by Spain as early as in the 17th century when the colonization of South and Central America provided the country with access to vast natural resources and gold. The historian David Landes describes the effects on Spanish society in his book “The Wealth and Poverty of Nations” where he cites a happy Spaniard who proclaimed the following in 1675:

“Let London manufacture those fabrics of hers to her heart’s content; Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocades: Italy and Flanders their linen, so long as our capital can enjoy them. The only thing it proves is that all nations train journeymen for Madrid and that Madrid is the queen of Parliaments, for the world serves her and she serves nobody.”

From time to time, I meet representatives of the diplomatic corps in Norway. They seldom fail to mention the high cost level in Norway and their bewilderment over aspects of our way of life. A 17th century Moroccan ambassador was even more critical in his account of the wealthiest nation at that time:

“…the Spanish nation today possesses the greatest wealth and the largest income of all Christians. But the love of luxury and the comforts of civilization have overcome them, and you will rarely find one of this nation who engages in trade or travels abroad for commerce as do the other Christian nations […]. Similarly, the handicrafts practiced by the lower classes and common people are despised by this nation, which regards itself as superior to other Christian nations. Most of those who practice these crafts in Spain are Frenchmen [who] flock to Spain to look for work … [and] in a short time make great fortunes.”

The oil age in Norway has now spanned about 40 years and there are prospects that it will continue for some time ahead. We will most likely still be producing petroleum in 40 years’ time, but oil production has declined in recent years after peaking in 2000. Gas production is rising, but not at a pace sufficient to sustain overall petroleum production.

The idea of an oil fund was raised in the beginning of the 1980’s. It was intended to be a buffer fund to smooth variations in government oil revenues.

The Act relating to the Government Petroleum Fund was adopted in 1990 in the midst of the deepest economic downturn in Norway since the Second World War. Those at the Ministry of Finance working on the law at the time were probably in doubt as to whether any savings would ever be accumulated in the fund.

And initially the fund structure was only an exercise in accounting. Government petroleum revenues were deposited in the fund, but the entire amount was transferred back to the central government budget to cover some of the non-oil deficit. But the Norwegian economy rebounded.

It took a generation from the discovery of the first oil field in the North Sea until it became possible for the government to set aside a portion of the economic rent. The first net transfer to the fund of close to NOK 2 billion was made in 1996. Every year since then, as a savings plan, the government has let a substantial share of current income from oil and gas remain as deposits in the fund. At the end of the first quarter of this year, the fund’s market value stood at NOK 2 763 billion.

As the fund increased, the need for a plan for the phasing in of oil revenues became evident. In 2001, the Government and the Storting adopted the fiscal rule, which is based on the deposit of government petroleum revenues in the oil fund. An amount equivalent to the expected real return on the fund, or 4 per cent, as an annual average over time, is transferred back to the central government budget to cover current expenditure. The transfers increase as the fund rises in value.

Along the way, the name of the fund has been changed from the Government Petroleum Fund to the Government Pension fund Global.

There are prospects that new annual transfers to the fund may be made over the next 10 years or so. This implies further growth in the fund, perhaps up to twice the size of today’s fund, which corresponds to one and half to two times annual GDP for Norway. Public expenditure accounts for about half of GDP. Withdrawals from the fund at 4 per cent can therefore finance 15 per cent of public spending in 10 years’ time. This can continue on a permanent basis without reducing the capital in the fund. The fund will therefore lead to smaller cuts in government welfare spending than would have been the case without the fund as the costs related to the aging of the population have an impact on government budgets.

The actual building up of the fund may span a short generation.

A fund with investment abroad enables Norway to separate the revenues generated by oil and gas production from petroleum revenue spending. An alternative could have been to regulate the production rate, keeping our wealth under the sea bed for a longer period, as was attempted in the 1970’s when the production ceiling was set at 90 million standard cubic meters per year. Oil companies currently produce 240 million standard cubic meters per year.

The fund acts as a buffer between widely fluctuating oil revenues and domestic expenditure. The annual spending decision can be made independently of the size of the revenues. Thus, the fluctuations in government oil revenues do not have an automatic impact on the Norwegian economy. The fund also has a stabilizing effect on the krone exchange rate as capital outflows increase when Norway’s petroleum revenues rise.

As a savings plan, the fund enables petroleum revenues to be used by not only the current generation but also future generations. The fiscal rule ensures that this is the case.

International capital markets play an important role for Norway. We drew on borrowing opportunities abroad when the petroleum industry was under development. We did the same in order to expand welfare schemes and to finance the counter-cyclical policy of the mid-1970s and the early 1990s. In the past 15 years, international financial markets have enabled us to convert national oil and gas resources into foreign equities and bonds.

Since its establishment in 1998, the fund’s average annual real return after costs has been 2.9 per cent, or somewhat lower than the expected long-term return. This figure is marked by the challenging character of the financial crisis. The fund lost NOK 633 billion (4) in 2008, but a market reversal in 2009 has resulted in a positive return of NOK 716 billion over the past five quarters. So far, the fund seems to have fared relatively well through the most severe financial crisis for many decades.

We still consider a real return of 4 per cent as realistic over time. This is based on the assumption that investment in sound government securities in the market can provide a reliable real return of about 2½ per cent. At the same time, the fund can reap a return of 2 to 2½ per cent in the long term from the three-fifths equity portion, some gains on corporate bonds and returns from active management.

Substantial oil revenues are now being ploughed into the Norwegian economy. Since the turn of the millennium, annual petroleum revenue spending has increased by a good NOK 100 billion. According to uncertain forecasts in government documents, another NOK 40 billion or so will be phased in over the next ten years.

The cost level in Norway is a thermometer indicating how much the Norwegian economy can sustain without developing a serious case of Dutch disease. The temperature is now high. Measured against Norway’s trading partners, the cost level is now almost 20 per cent higher than the average for the oil age. Norwegian labor has never been as costly as today. Norwegian businesses will often lose contracts given the current high level of spare capacity in other countries. And it has never been more profitable to relocate activities abroad.

The economic geography of Norway will change over the next 10-15 years. Norway’s cost level and low growth in Europe will bring pressure to bear on jobs and businesses in manufacturing communities. Job losses will have the most severe effects in areas where manufacturing is the most important industry. Entire manufacturing sectors may be lost.

We can also ask whether investment in Norway could be an alternative to our investments in international financial markets. It is important to emphasize that the oil fund does not stand in the way of corporate investment. The government can choose the composition, required rate of return and risk profile for its investments without considering the funding requirements of Norwegian enterprises. By the same token, Norwegian companies can choose their debt and equity structure independently of the government’s financial investments. There is a capital market between the government as investor and corporate capital needs. The government’s foreign savings plans do not therefore affect Norwegian companies’ access to capital and required rate of return on their investments.

There are sound arguments for investing in infrastructure, better schools and state-of-the-art research. But this should be possible anyway given the increase in expenditure that is provided for by the fiscal rule.

The profitability of government investments is based on a discount rate of 4 per cent. This secures about the same required rate of return as the government can expect to achieve on its oil fund investments over time. A question that might be raised is whether there is a queue of sound and profitable projects that have to wait because of an excessively tight fiscal policy.

It is difficult to find support for this.

In the National Transport Plan for 2010-2019, which can perhaps be considered representative of government spending, spending on road investments is set at around NOK 140 billion. The profitability of about two-thirds of the investments has been evaluated. The calculations capture time saved and reduced costs related to accidents and the environment. Investment costs and future operating costs are deducted. The projects show a total loss of NOK 20 billion.

There seems to be few road projects that are economically profitable. A rare example is the Finnfast tunnel project that connects the mainland to the beautiful island group here in Ryfylke.

When projects cannot be expected to increase the future revenue base in society, it is important that the investments are financed from current government revenues within a long-term and sustainable framework. Alternatively, projects that involve a large number of users can be financed by user fees. A road, infrastructure or research reports for that matter can provide benefits and satisfaction over time, but they are not liquid and do not generate a flow of returns that can be used for spending. If the investments are made at the expense of the savings plan for the sovereign wealth fund, future generations will have to bear the cost.

Let me conclude.

The adventures of Askeladden are often tales of success. Askeladden embraces every challenge and always comes out ahead.

It is too early to draw conclusions as to how successful Norway has been in managing its oil wealth. In ten years or so, when petroleum production falls markedly and the oil fund is no longer increasing in size, the cost level in Norway will have to be reduced relative to other countries. This process may be painful, even though Norway has its own currency and a floating exchange rate. Our welfare state may also have become too large and the adjustment required here may also prove to be very demanding.

Nonetheless, there are aspects of our oil wealth management that have served us well.

Related by the Econotwist:

Norwegian Pensioners Enter Bear Market

Norway’s Central Bank Ready To Help E.U.

Here’s The REAL Norwegian PIIGS Exposure

Central Bank of Norway Raises Key Interest Rate Again

Norwegian Labor Costs At Record High

Norway’s GDP Growth Slows Down

Norwegian Oil Explorer Files For Bankruptcy

Consumer Confusion Index At Record High

Central Bank Of Norway Call For A New “Global Order”

Evaluation Of Norwegian Monetary Policy

Norway’s GDP Fall For First Time In 20 Years

Norway Economic Update – “Partly Grim”

Norway: A Mutated Dutch Disease

Final Words Of A Central Banker


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Central Bank of Norway Raises Key Interest Rate Again

As expected by most analysts, the Central Bank of Norway‘s Executive Board decided Wednesday to increase the key policy rate by 0.25 percentage point to 2 per cent. But it might be the last rate hike for a while.

“Developments in Europe may prove to be weaker than expected, which may also affect the outlook for the Norwegian economy.”

Norges Bank

“Inflation has moved in line with projections and growth in the Norwegian economy appears to have picked up as anticipated. This suggests that the interest rate should be raised further towards a more normal level,” Governor Svein Gjedrem says in a statement.

Underlying inflation is now around 2 per cent and is likely to edge down further in the period to summer.

“As the activity level increases and the effects of the krone appreciation unwind, inflation is expected to move up again” says the Governor.

The global economy is rebounding. Oil prices and other commodity prices have increased. A loan agreement between Greece, euro area countries and the IMF has been concluded, but government securities markets remain turbulent.

Developments in Europe may prove to be weaker than expected, which may also affect the outlook for the Norwegian economy.

“The Executive Board therefore considered the alternative of leaving the key policy rate unchanged at this meeting,” says Governor Svein Gjedrem.

Here’s the full statement in English

Additional charts and graphs

Related by the Econotwist:

Norway’s GDP Fall For First Time In 20 Years

Evaluation Of Norwegian Monetary Policy

Central Bank Of Norway Call For A New “Global Order”

Norway: A Mutated Dutch Disease

Norway’s GDP Growth Slows Down

Norway Put Interest Rates On Hold

Norwegian Labor Costs At Record High


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