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Norway & Brazil: Every boom has its bust

A drilling rig out on the South Atlantic Ocean not far from Rio de Janeiro might seem a strange place to run into the Norwegian energy minister, Ola Borten Moe.

But the rig, part of the new Peregrino field being operated by Norway’s government-controlled oil company Statoil with investment from China’s Sinochem, is an oddly appropriate place to discuss the thorny topic of what Brazil should do to avoid the so-called oil curse.

The minister, who was visiting for the official opening of the Peregrino field by Norway’s Crown Prince Haakon, declined to offer any specific lessons for Brazil. After all, he pointed out, the two countries could hardly be more different – Brazil is a tropical developing country with nearly 200m inhabitants while Norway is a European developed one with only 5m.

But he said Norway’s approach to the problem of what to do with oil wealth had on the whole worked well. The country set up a sovereign wealth fund in 1996 to help preserve some of its oil wealth for future generations.

The fund also serves another purpose. The huge oil wealth from Norway’s reserves – it presently produces about 2.3m barrels a day, about the same as Brazil’s Petrobras – threatened to flood the economy with dollars.

Lacking the capacity to absorb this money, Norway would face the prospect of runaway inflation if it brought all of it onshore. So it established a sovereign wealth fund designed to keep most of these dollars abroad while only repatriating the maximum amount possible without overheating the economy.

“It’s dangerous to pump too much money into the economy,” said the minister.

Norway has calculated that at an average of about 4 per cent of the sovereign wealth fund a year can be used in the state budget without running down the fund or causing inflation. In 2011, this translated to about NKr120bn ($21.6bn).

The programme has been a success. During the 2008/2009 financial crisis, like Brazil, the Norwegian government ramped up spending to help steer the economy through the turmoil. This was done by increasing the contribution to the budget from the sovereign wealth fund to above 4 per cent. Now, in responsible Nordic fashion, the government has reduced that to below the long-term average of 4 per cent.

Brazil, by contrast, is having trouble keeping inflation under control after over-spending last year. Consider the present state of the Norwegian economy from this extract from a Reuters story this month on the Norwegian budget:

In its mid-year budget revision, the government nudged up its forecast for non-oil GDP growth this year to 3.2 per cent from 3.1 per cent while assuming an unemployment rate of 3.2 per cent instead of 3.6 per cent.

It also slashed its 2011 core inflation forecast to 1.3 per cent from 1.9 per cent.

The government now sees its structural deficit before dipping into the oil fund at NKr112.9bn ($20.43bn ) instead of the NKr128.1bn projected in October.

That means Norway’s 4 per cent spending guideline for keeping inflation and the currency in check is back in force after being set aside in 2009, when the government opened the taps to stimulate the economy during the global financial crisis.

These are metrics that the Brazilian government would kill for – inflation at below 2 per cent while unemployment sits on a rock bottom 3.2 per cent. In Brazil, inflation is more than three times this level while unemployment is nearly double this amount. Yet, even at this high level, unemployment is still blamed for contributing to overheating in an economy that is booming on the back of commodity prices.

Of course, Brazil is not Norway and the comparisons are nonsensical after a certain point. And Norway’s economic model is not without its own problems. Norwegians complain that they have this huge pool of wealth sitting offshore yet roads can be bad in the Scandinavian nation and there are not enough facilities for the elderly. The sovereign wealth fund is also becoming almost embarrassing in terms of its rapidly growing size and influence in global markets.

“You could argue the size of the fund is rising faster than many of us anticipated,” said the minister.

But Norway’s record on responsibly managing its oil windfall is impressive. If Brazil could do the same, it could avoid the inflationary effects of massive inflows of dollars once its new oil fields in the so-called presalt discoveries off the coast of southeastern Brazil come onstream this decade.

Saving more money in a true sovereign wealth fund that invests wisely abroad would also provide Brazil with much-needed savings come the next rainy day.

And as much as many investors in sunny Brazil would like to forget, it is not a matter of if there will be another rainy day but when. Every boom has its bust.


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