Under the Act, all government revenues from the oil sector are to be transferred to the Fund, and the net budget surplus is to be invested in international markets. At the time, in the midst of a deep recession, many doubted that any petroleum revenues would ever be saved. Projections indicated that offshore petroleum production would peak in the early 1990s. However, during this decade, the government’s cash flow from the petroleum sector started to increase sharply. Slide 7: The fund mechanism and fiscal policy The policy guidelines were clarified in 2001. Rules governing the interaction between Norway’s petroleum wealth and fiscal policy were established. Under the fiscal rule, the government can only spend in the annual budget, on average over an economic cycle, the expected real return on the Fund – estimated at 4 per cent annually. At the same time, Norges Bank was charged with the task of keeping inflation low and stable. Thus, our traditional fixed exchange rate policy was abandoned. A clear division of responsibilities between monetary and fiscal policy had been put in place. 2  BIS central bankers’ speeches  After two decades of spending petroleum revenues more or less as they accrued, the fiscal rule enabled the government to save for future generations. At the same time, the rule made fiscal policy more robust: By decoupling spending from current petroleum revenues, the fiscal rule provides for a gradual and sustainable phasing-in of petroleum revenue spending. The fiscal rule is no straitjacket; it allows automatic stabilisers to work.
Our average ownership in listed European companies is almost three times our average holdings in Asia or the Americas. Slide 12: Changing regional allocation (starting point) At the start of this year, more than half of the Fund was invested in Europe. As the Fund has grown, we have come to realise that a more even distribution between regions will better enable the Fund to take part in global value creation. Slide 13: Changing regional allocation (target) Recently, a new principle for the regional allocation of the Fund’s assets has been approved. A consequence of this principle is that the relative allocation to Europe is reduced. The Fund’s relative holdings in the Americas, Asia and emerging economies will increase accordingly. For the Fund as a whole, a more even allocation across regions will improve the overall long-term trade-off between risk and expected return. In accordance with the new allocation of the Fund’s assets, new purchases will primarily be made outside of Europe, until the adjustment process is completed. As the Fund receives inflows of fresh capital on month-by-month basis, we are able to undertake the adjustment through new purchases. This will ensure a gradual process, and will not entail a large sell-off on our part. Instead, the effect will be merely a temporary drop in our purchases of European assets. Under the new principle, the Fund will still be overweight in European assets, compared to a market neutral position.