Norway now plans on dipping into the funds cash for the first time in 2016, at least 20 years ahead of schedule. In addition to tax cuts, the 2016 budget includes plans to spend $25.2 billion from its oil funds, or about 2.8% of the total fund value. This amounts to less than the fund’s 3.8% average annual growth rate. So at the moment, Norway is only spending the interest from its massive SWF.
Others Must Take Drastic Measures
Other major oil states don’t have the same luxury as Norway. Market conditions have forced them to sell barrels of crude at a loss.
One option to help soften the blow is to cut capital expenditure.
Fitch Ratings estimated that the fiscal breakeven point for Saudi Arabia would have been reduced by $31 per barrel if no capex had been spent in 2014. With a break-even point around $106 per barrel, this drastic measure still wouldn’t put Saudi’s budget on track.
Another option is to start dipping into their slush funds.
This may require liquidating some assets. With more than half the $7 trillion managed by SWFs tied directly to energy revenues, this could send shockwaves through global markets.
As state run entities, the details of SWF holdings are murky at best. Some funds are more transparent than others. A quick look at the guidelines for a few of these funds shows how intertwined SWFs are in global markets.
As of September 2015, Norway’s fund was invested 60% in equities (36% US), 37% fixed income and 3% real estate. The United Arab Emirates fund’s target benchmark range for its investments is between 35%–50% North American assets, 20%–35% Europe, 10–20% developed Asia, and 15–25% emerging markets.
Cheap oil is good for the consumer, but if SWFs are forced to start unloading assets as a result, the selling contagion could quickly spread around the world.
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Read the original article on Mauldin Economics. Copyright 2015.
