* Government advises fund should up equity stake to 70 pct
* Government advises cutting spending from fund to 3 pct of
* Central bank governor: risk of oil money dependence
(Adds reaction from the central bank, other political parties,
By Ole Petter Skonnord and Camilla Knudsen
OSLO, Feb 16 Norway's $900-billion sovereign
wealth fund, the world's largest, should shift more of its
investments into equities and away from bonds to counter the
effects of ultra-low interest rates, the government said on
And in a major shift in policy, Norway's minority right-wing
government recommended cutting how much of the fund it is
allowed to spend each year to 3 from 4 percent.
Norwegians have built up the fund from oil revenues and it
is regarded as an insurance policy for when oil and gas reserves
run out. Its value is the equivalent of $171,000 for every
Norwegian man, woman and child.
In recent years, the fund has diversified its investments
away from Europe, and into the United States and Asia, and begun
investing in real estate, raising its risk appetite in an
attempt to increase long-term returns.
Changing the country's fiscal spending rule, in place since
2001, is a major policy departure. Until very recently, any
suggestions of changing the rule have been rejected by
successive prime ministers.
But in October last year Prime Minister Erna Solberg raised
the possibility that the guideline should be changed, due to the
lower expected return of the fund.
Finance Minister Siv Jensen told Reuters on Thursday she had
consulted with parties outside government on the question ahead
of the announcement.
"We have been in a dialogue with other parties about this,"
she said in an interview, declining to say whether she believed
she had a majority in parliament for the proposals.
"My impression is that there is broad agreement for setting
a good framework for the management of the fund," she said.
The Liberal Party's finance spokesman told Reuters he
supported tightening the fund spending rule, giving the
government the majority it needs to pass that proposal. Another
party, the Christian Democrats, also said they supported that
Although any reallocation is expected to take several years,
if the proposed change from 60 percent to 70 percent in equities
was made today, the fund would move about $90 billion away from
government bonds, which are dragging on its performance.
At present the fund's overseas investments are limited to 60
percent stocks, 35 percent bonds and five percent real estate.
Under existing rules, governments can spend an average four
percent of the wealth fund per year, but ultra-low global
interest rates and other market conditions make it unlikely that
the fund can earn returns of this magnitude, economists say.
"All in all, the government considers an equity share of 70
per cent to carry acceptable risk. The downwards revision of the
return estimate underpins the long investment horizon of the
fund, a prerequisite for holding a high share of equities,"
Jensen said in a statement.
The governor of the central bank, which manages the wealth
fund, welcomed the announcement but said Norway still ran the
risk of becoming too dependent on oil money even after
tightening its spending.
"A further escalation of spending from today's levels would
be a daring move, even if the fund itself were to grow,"
Governor Oeystein Olsen said in response to the government's
"Fiscal policy must be decoupled from financial assets
subject to considerable volatility ... The period of rising
government spending of petroleum revenues should now be over,"
Governor Oeystein Olsen said.
The change in the fund's spending limit to 3 percent from 4
percent will constrain the current and future governments'
ability to increase government spending, and would amount to a
tightening compared to forecasts made by the central bank,
Nordea Markets economist Erik Bruce said.
"In other words it opens the room for more expansionary
monetary policy," he wrote in a research note, while adding that
in the current situation the central bank was still likely to
keep interest rates on hold.
Solberg's government plans a record budget deficit of 225
billion Norwegian crowns ($27 billion) in 2017, to be covered by
the fund and corresponding exactly to 3 percent of its value.
(Additional reporting by Gwladys Fouche and Terje Solsvik;
Writing by Gwladys Fouche; Editing by Alexander Smith, Greg