by Tyler Durden
Aug 30, 2016 5:00 AM
Saudi Arabia isn't the only oil-dependent nation struggling to make ends meet in the wake of weak oil prices. For the first time since its establishment in 1996, the Norwegian government is starting to withdraw money from its sovereign wealth fund to cover government expenses. In fact, in the first half of 2016 the government has withdrawn $5.4 billion. Moreover, withdrawals are expected to accelerate in 2H 2016 reaching nearly $20 billion, a run-rate that would have them exceeding the fiscal limits imposed on fund withdrawals of 4% of assets, or $36 billion. To put those withdrawals into perspective, Norway's economy is roughly $375 billion and federal spending accounts for roughly 60% or $225BN. Therefore, a $20BN withdrawal in 2H 2016 represents roughly 18% of total government spending.
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In an interview with Bloomberg, Egil Matsen, the Deputy Governor at Norway’s Central Bank, said the withdrawals are starting to impact the manner in which the fund manages its risk profile.
Matsen, among others, has also questioned whether the 4% fiscal limits on withdrawals are the right cap in the current return environment noting that “as the older bonds come to maturity and are reinvested, a big chunk of that will be reinvested in bonds with very low or even negative yields.”"Relevant for how we think about the risk-bearing capacity of the fund. Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?”
Matsen also noted that the economic landscape has "changed" since their last review in 2007. Well, that might just be the understatement of the year. In response to that changing economic landscape, Matsen said that fund managers are doing a lot of "internal analytical work" to figure out whether the "correlation structure between equities and bonds has changed since 2007." Seriously?
Well, we think you might be on to something with the "thesis" that the "correlation structure" between equities and bonds has shifted since 2007. The fact that equities and bonds are now both trading at all-time highs is a dead give away. In fact, we can save you some time with that "internal analytical work" because, per the chart below, everything is now perfectly correlated...so you can just buy whatever you want really...as long as you buy.“We’re doing a lot of internal analytical work now to assess how the economic landscape has changed since the last review of this in 2007,” he said. “It’s a different world. It’s way too early for me to give any preview of our advice, but that’s certainly a big and important decision.”
The fund is also looking at whether the “correlation structure” between equities and bonds has changed since 2007, Matsen said. “There may be data that suggests there’s a different pattern there than in 2007.”
But, certainly updating your view of the "economic landscape" once every 9 years or so is important. Better late than never.