Norway plans to raise spending of its $1.4 trillion sovereign wealth fund, citing the need to protect welfare services just as the country’s central bank struggles to tame soaring inflation.
(Bloomberg) — Norway plans to raise spending of its $1.4 trillion sovereign wealth fund, citing the need to protect welfare services just as the country’s central bank struggles to tame soaring inflation.
The Labor-led cabinet is widening its so-called structural non-oil fiscal deficit for 2023 to 373 billion kroner ($36 billion), compared with 317 billion kroner seen in October, according to revised budget figures published on Thursday. The withdrawals, as a share of the wealth fund, will rise to 3%, compared with the earlier estimate of 2.5% and the central bank’s projection of 2.8%.
The government has so far vowed to back Norges Bank’s efforts to rein in a growth in prices that has consistently wrong-footed the authorities over the past year, with underlying inflation unexpectedly accelerating last month in part due to the weaker-than-expected krone. The changes would boost the mainland economy by as much as 0.4 percentage points, likely adding pressure on policymakers to raise borrowing costs.
“The budget is marginally more expansive than what the Norges Bank has assumed,” Sara Midtgaard, senior economist with Svenska Handelsbanken AB, said in a note. She added Handelsbanken is still sticking to its forecast for the rate peak of 3.75%.
The krone strengthened following the news, trading 0.3% higher versus the euro at 11.5042 at 12:11 p.m. in Oslo. It has been the strongest performer in the G-10 group of major currencies over the latest 5 days after trailing peers on a 12-month basis.
The increased withdrawals from the fund will mainly be used to raise spending on social security and pensions to compensate for higher wage and price growth, to cover the shortfall from lower electricity revenue and boost expenditure on support for Ukraine and refugees, the government said.
“The government believes it would be irresponsible to plan for large expenditure cuts in the revised budget to cover these expenses, as this would affect public services in an unacceptable way or lead to strong and unforeseen increases in taxes and duties,” it said.
Mainland gross domestic product, which adjusts for Norway’s oil and offshore industry, is expected to grow 1% this year and next, the ministry said. While the 2023 estimate is largely in line with the central bank’s March forecast of 1.1% growth, Norges Bank merely expects a 0.5% expansion next year.
Under Norway’s so-called fiscal rule, the government’s spending of the fund is capped at 3% over time, or the expected real return of the fund. The central bank has cautioned the nation’s politicians that as the fund’s returns are expected to dwindle, the over-reliance on the fossil-fuel wealth should shrink.
“The budget is more likely to contribute to higher price pressure than dampen it,” Oddmund Berg, a senior economist at DNB, said in a note. The marginally more expansive budget supports DNB’s view that the policy rate will peak at 4% in September.
The ministry said it expects oil price of $75 a barrel this year and $71 next year, while it sees revenues from petroleum activities declining in 2023 by about 21% to 1 trillion kroner. The data indicates no marked reduction in the monthly krone sales that the central bank conducts on behalf of the government, a factor contributing to currency weakness, according to Kristoffer Kjaer Lomholt, head of FX and corporate research at Danske Bank A/S.
“We still think Norges Bank ultimately will end up selling too many kroner also in the coming months,” Lomholt said. “Subject to the global investment environment, this will continue to act as a krone headwind.” He added more clarity is needed regarding the oil tax payments in the second half — for which the first estimates are given in June-July — before “a sufficient adjustment lower” in krone sales.
Meanwhile, the central bank has attributed krone weakness mainly to a decline in oil prices, slower rate hikes than the Fed and ECB, and more wary investors, while Governor Ida Wolden Bache said last week these factors alone don’t explain the bigger-than-expected slide in krone in recent months.
The ministry also said it expects an 8.2% weakening in the import-weighted exchange rate of the krone this year, followed by a 0.9% slide next year.
Read More: Norges Bank Disappoints as Cut in Currency Purchases Falls Short
(Updates with detailed budget figures, analyst comments from sixth paragraph.)
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