The Norwegian government said its economy has suffered its most severe setback ever seen in peacetime due to the COVID-19 pandemic. As a result, it plans to withdraw a record 381.8 billion kroner ($37.72 billion) from its $1.015 trillion Government Pension Fund Global (GPFG), and it will have to sell fund assets for the first time.
When Norway’s petroleum revenue exceeds the use of petroleum revenue in the fiscal budget, deposits are made into the fund. However, when the opposite occurs, as is the case now, withdrawals will be made.
“Increased spending has been a necessity in the current situation,” Minister of Finance Jan Tore Sanner said in a statement. “Both to avoid an even sharper downturn and to help healthy companies through the crisis so they can create jobs and growth when normal circumstances return.”
The government’s proposed 2020 revised budget calls for the use of 419.6 billion kroner in petroleum revenues, which represents 4.2% of the capital in the Government Pension Fund Global. The fiscal impulse, or the change in the government budget balance resulting from changes in government expenditure and tax policies, is estimated at 5.1% of Norway’s GDP.
Norway limits the amount it can withdraw from the fund to 3% of the fund’s value each year, but it is allowed to exceed this amount in times of dire economic conditions. The last time it withdrew more than the limit was during the financial crisis of 2008-2009.
During the first quarter of the year, the fund’s equity investments lost 21.1%, while the return on its fixed income investments was 1.3%, and the return on its investments in unlisted real estate was 0.4%. The coronavirus pandemic has resulted in a severe contraction of the Norwegian and global economy, and gross domestic product (GDP) is projected to fall by 4% this year.
According to Statistics Norway, the country’s national statistical institute, there was a 2.1% decline in mainland GDP during the first quarter and a 6.9% drop from February to March. When COVID-19 infection control measures were implemented in March, it dragged down first quarter growth by 2.3 percentage points.
Prime Minister Erna Solberg warned that “the time ahead will be difficult” as large number of Norwegians are without work, and many others are wondering if their jobs will still be there when the crisis ends.
“That is why we are proposing a number of measures to develop skills and encourage green restructuring for the future,” Solberg said in a statement. “We will create more jobs and integrate even more people into working life.”
However, Commerzbank analyst Melanie Fischinger wrote in a report Tuesday that a quick rebound for Norway is feasible because it brought public life to a halt relatively early compared with most other European countries.
“From the second half of 2020 onwards, Norway appears to be well placed to embark on a relatively dynamic recovery, thanks to the rapid response of the central bank and, above all, the abundant fiscal measures taken,” Fischinger said. “However, this is conditional on the lack of a second wave of infections, which would force a lockdown return.”