Moreover, risks that operators seem to be managing well individually may prove to be a considerable strain on the financial system as a whole. As a response to this, a new macroprudential surveillance framework is now in the making. 4  BIS central bankers’ speeches  Norway, which is in a surplus and net asset position, faces some particular challenges. As investor and manager of the Government Pension Fund Global, we have seen that prices and yields can react strongly to uncertainty about the future. New steps in the management of financial wealth Norway invests a large proportion of its petroleum revenues in international equity, bond and real estate markets via the Government Pension Fund Global. The fund is fully integrated with the government budget, and the same priorities are imposed on spending from the Fund as on any other government spending. Today, the value of the Fund is around NOK 3.5 trillion, or about 170 percent of mainland GDP. Chart 5  The Fund should be invested with a view to maximising future purchasing power. At the same time, investments must be diversified in order to reduce the risk of losses also during periods when markets are shrouded in fear and uncertainty. BIS central bankers’ speeches  5  Chart 6  The world’s economic geography is changing. While growth in advanced economies has been weak and is slowing, growth is robust in Latin America and Asia. Several countries in Africa are now catching up. The Fund has considerable ownership interests in Europe.
Its average holding in European companies is today around three times as high as in the Americas and Asia. The chosen regional distribution is related to Norway’s import pattern and has been viewed as a form of currency hedging. But the result has been that a large proportion of the Fund is invested in a region that has experienced weak growth over the past decade. Analyses show that exchange rate risk in the Fund is relatively small and less than previously assumed. Based on these findings, the Norwegian Government has decided that the relative share of European investments should be reduced over time, so that the Fund’s geographical diversification is further improved. A more even distribution of the Fund’s ownership will provide us with the opportunity to take part in value creation in regions with strong growth. This implies a reduction in the allocation to European equities and an increase in the allocation to the Americas and emerging economies. High economic growth in Asia may provide sound returns on investments in that region, even though today’s equity prices already reflect expectations of higher growth in eastern than in western regions. A more even distribution will nonetheless improve the trade-off between risk and expected rewards. Petroleum revenue spending Norway as an oil nation stumbled at the start. The current account surplus at the end of the 1960s had reversed to a deficit of 12 percent of GDP by 1977. The deficit was three times as large as that recorded by Italy and Spain last year.