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Norway fund drops oil and gas production investments, holds onto Lanka assets
Investments in oil and gas exploration and production companies will be sold off over time by Norway’s sovereign wealth fund, which ensures the well-being of Norwegians for generations to come.
The fund has earned the world’s trust for its prudence and transparency and has a significant role in economic policy-making.
Norway Finance Minister, Siv Jensen, announced the decision to divest oil and gas exploration and production investments on Friday night. It has to be approved by parliament, the Storting.
The Government Pension Fund Global is the world’s largest sovereign wealth fund, with assets exceeding US$1 trillion (Rs 178.5 trillion) and it has invested US$98.29 million in 16 companies in Sri Lanka. The fund’s biggest investment is in Commercial Bank of Ceylon, a 2.81% interest worth US$16.72 million.
For the year to December 2018, Commercial Bank reported a profit of Rs 17.54 billion after tax, representing about Rs 3.3 million profit for every employee, the bank’s financials show. This was achieved amid below-par economic growth under the Ranil Wickremesinghe government, when the trade deficit blew out to US$ 7.9 billion in just nine months and the sinking rupee, which fell by 19% against the US dollar, and credit rating downgrades in November 2018. During this period, Colombo’s All Share Price Index, the broad market barometer, sank by 5% and the S&P Sri Lanka 20, which measures the performance of 20 of the largest companies, dived by 15%.
Norway’s Government Pension Fund Global, also invests in Access Engineering, Cargills Ceylon, Dialog Axiata, Distilleries Company of Sri Lanka,
Hatton National Bank, Hemas Holdings, John Keells Holdings, Lion Brewery, Nations Trust Bank, Nestle Lanka, People’s Leasing and Finance, Piramal Glass, the highly profitable Sampath Bank, Teejay Lanka, and Union Assurance. Sixteen companies in all.
Norway’s Norges Bank Investment Management, the central bank’s investment division, manages the wealth fund on behalf of the Ministry of Finance. The ministry sets the framework and risk limits.
The decision to exclude oil and gas exploration and production companies from the fund is aimed at making the government’s wealth less vulnerable to a permanent drop in crude oil prices, the central bank’s Deputy Governor Egil Matsen, says in a document.
About 1.2% of the fund’s investments are in 134 oil and gas exploration and production companies. The investments are valued at 66 billion kroner (US$7.54 billion) by the end of 2018, the fund’s data show. This is bigger than heavily-indebted Sri Lanka’s foreign exchange reserves, largely the result of migrant worker remittances, not exports. The heady borrowing binge also contributes to forex reserves.
The Norwegian fund’s largest share of investment is in the financial sector, accounting for 23.7%, well ahead of oil and gas, which makes up 5.9%. At 12.9%, industrial companies account for the second largest investments. And technology is third at 12.6%.
In its divestment decision, Progress Party, libertarian Finance Minister Siv Jensen, who is responsible for economic policy, says in her statement, not all oil companies will be excluded. “The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline,’’ she says. A permanent reduction in the oil price will have long-term implications for public finances, she explains. But, the oil price risk has been significantly reduced over time, because a large portion of the oil and gas resources has been extracted from the Norwegian continental shelf and converted into a broadly diversified financial wealth abroad, Ms Jensen, says.
The decision was based on advice from the highly respected, Norges Bank, the central bank of Norway.
“The oil industry will be an important and major industry in Norway for many years to come,’’ says Finance Minister Jensen.
Norway’s prudent politicians have engineered an enviable economic transformation, considering that in the 1970s, its garment and textile sector played a significant economic role. Solid economic management has meant that today, 80% percent of Norwegians own the house they live in, data show. In Norway, there is a strong commitment to financial stability, ensured in part, through the solid tax system. Ensuring financial stability is part of Norges Bank’s monetary policy mandate, as declared in March last year by the central bank.
In the 1980s, Norway even faced a banking crisis. Three of the largest banks collapsed.
And 30 years ago, Norway barely had any trade with China.