Norway’s oil fund topped 11 trillion Norwegian Kroner (NOK) ($1.214 trillion) for the first time today as a stock market rise driven by positive coronavirus vaccine news drove up the value of the world’s largest sovereign wealth fund.
The new record comes almost exactly one year after the value hit NOK 10 trillion ($1.1 trillion) for the first time.
With some of Norway’s wealthiest people taking a financial hit due to the pandemic, it may surprise many to see Norway’s savings account looking so healthy.
But the fund’s holdings are so diverse that it can ride out economic issues better than most. Substantial investments in real estate complement the holdings in more than 9,000 companies worldwide to ensure a constant flow of rental and dividend income into the fund.
Stock market rise benefits Norway
Because of the fund’s global footprint, news that causes a general lift in stock markets worldwide usually has a corresponding impact on the fund’s value. The recent promising vaccine news from Pfizer and Moderna saw global markets rise, which lifted the value of the fund to new heights.
When the scale of the pandemic became clear earlier this year, the fund’s value dipped to NOK 9.3 trillion ($1.02 trillion) as the world’s stock markets fell. But since then, the fund has been boosted by market recovery and a weakened Krone.
Why a weakened Krone matters
As the fund only makes investments outside of Norway, the vast majority of its holdings are denominated in foreign currencies, with the U.S. Dollar and Euro leading the pack. Even a small change in the value of the Krone can make a major impact on the estimated value of the fund in Krone.
In May 2011 the NOK/USD exchange rate stood at 0.190. The value of the Kroner steadily weakened over time to 0.109 today, although it did recover quickly from a coronavirus-related collapse to 0.084 in March.
Turning oil reserves into wealth
In 1969, one of the world’s largest oil fields was discovered off the coast of Norway. It was the first of many discoveries on the Norwegian continental shelf that would forever change the fortunes of the Scandinavian nation.
As exploration and exploitation grew, oil money quickly dominated the economy. To keep control and avoid imbalances in the economy, the government decided to exercise caution in the use of oil revenues. In 1990, they passed legislation to create what is now known as the Government Pension Fund Global. The first money was deposited in 1996.
“Oil revenue has been very important for Norway, but one day the oil will run out,” according to Norges Bank Investment Management. The fund is designed to promote long-term thinking and safeguard the future of the Norwegian economy.
As such, Norway’s government is limited to spending no more than approximately 3% of the fund’s value during the course of a year. Nevertheless, that amounts to as much as 20% of the annual government budget.
A warning from the top
Øystein Olsen, governor of Norway’s central bank warned earlier this year that the fund’s value won’t always increase. The fund has become more dependent on the stock markets over time, with the proportion of its total value increasing from 40% to 70%.
“Because the fund has constantly increased in value, Norway has long escaped demanding austerity measures. It may be different in the years ahead,” he said in his most recent annual speech.