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Petro-savings fund not the fuel in rise of Norway’s krone

A gas platform run by the Norwegian oil giant Statoil stands in the North Sea off the coast of Norway.


In another zombie myth that will not die, Bruce Campbell of the CCPA argues that Norway was prudently able, through the use of a sovereign wealth fund, to prevent its petro currency from appreciating.

"Norway's Petroleum Savings Fund has amassed over $664-billion in assets, all invested abroad, with only the return used for domestic spending. It not only ensures the future of social welfare benefits, but also helps to offset upward pressure on its currency and mitigate potential Dutch Disease effects."

In the last 10 years, Canada irresponsibly allowed its currency to appreciate by 60 per cent against the U.S. dollar, while smart, responsible Norway saw its currency, the krone, appreciate by 60 per cent against the U.S. dollar. No difference whatsoever. The two currencies track each other closely, as shown by the accompanying chart.

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To assume a sovereign wealth fund can reduce the value of a currency is to assume that you can fool the market. Government investing abroad will exert short-term downward pressure on the Norwegian krone. However, the dividend streams and capital gains from those investments will exert long-term upward pressure on the krone if those gains are repatriated. Markets realizing that the currency is set for a long-term appreciation start buying the currency today, causing the value of the krone to rise immediately.

The krone moves to where it would have been in the absence of a wealth fund since the downward and upward currency pressures balance out. Unless you can either fool the market into believing the long-run appreciation will not happen, or you can prevent foreign investors from buying your currency by using capital controls (as China does), your currency will rise even in the presence of a sovereign wealth fund.

There may be good reasons for a country to have a sovereign wealth fund, but currency management is not one of them. Despite the existence of a fund, Norway has seen the same currency appreciation as Canada.

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About the Author

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry. More


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