4  BIS Review 145/2010  As I mentioned earlier, the Fund has become larger than we expected a decade or so ago as high oil prices have more than compensated for fairly low returns in international capital markets. Looking ahead, market prices suggest that interest rates are expected to remain low for many years. Real interest rates on long-term bonds have been depressed by central bank government bond purchases. Let us nonetheless assume an average nominal return on the Fund’s fixed income instruments of 3 per cent ahead. On the other hand, there are no signs that return requirements in equity markets are low. Dividend payments are high in relation to companies’ market value. Simple valuation models 9 indicate that shareholders require a rate of return between 8 and 10 per cent, a fairly normal level. This results in an overall nominal return of between 6 and 7 per cent. In addition, positive contributions to the return are expected from non-government bonds, active management and real estate. There is considerable uncertainty surrounding these estimates. Nevertheless, Norges Bank’s view is that it is still reasonable for the government to base its withdrawals from the Fund on an expected annual real rate of return of 4 per cent. The increase in the equity allocation from 40 per cent to 60 per cent does not provide a basis for higher withdrawals from the Fund, but reflects prospects for somewhat weaker returns in international markets today than was the case ten years ago.
Truman’s criteria were also included in the basis for the Santiago Principles which, facilitated by the IMF, were introduced in 2008 and implemented by a number of sovereign wealth funds. To quote Truman: “Sovereign wealth funds (SWFs), large pools of government-owned funds that are invested in whole or in part outside their home country, burst upon the policy consciousness only three years ago. Their explosive growth up until 2007 fanned widespread anxieties about shifts of global economic wealth and the roles of governments in managing that wealth. On the other hand, SWF investments helped some major Western financial institutions weather the recent financial crisis.” Chart: Truman’s ranking In Truman’s most recent study on the transparency of sovereign wealth funds, the Government Pension Fund Global was ranked in first place. The Fund has also improved its score since the 2009 survey. We note with satisfaction that such a young fund has come out ahead of established US and European funds 15 . 15  Edwin M. Truman (2010): “Sovereign Wealth Funds: Threat or Salvation?”, Peterson Institute of International Economics. 8  BIS Review 145/2010  As I mentioned by way of introduction, the economic literature points to two factors that can turn riches into rags. One is the risk of inducing interest groups and economic agents to engage in rent-seeking behaviour. It can safely be said that the framework for the Fund has fended off this risk. Chart: Relative wages in Norway The second is the risk of Dutch disease. Strictly speaking, the jury is still deliberating.