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Norway's Kroner Conundrum Deepens As Central Bank Buys Record Amount Of Currency
“The paradox of Norway’s oil exports is that lower foreign earnings translate into more, not less, demand for NOK.”
That’s from Deutsche Bank and it sums up the conundrum facing Norwegian officials as they attempt to cope with the sharp decline in crude prices that threatens to cripple the country’s economy.
Norway’s prime minister, finance minister and central bank governor held an extraordinary meeting last week to discuss the possibility of implementing emergency measures to shore up the economy in addition to record fiscal stimulus.It’s “not a crisis,” they concluded, an assessment that’s sharply at odds with comments made by Bente Nyland, director general of the Norwegian Petroleum Directorate earlier this month and sharply at odds with reality.
“Right now the economic policies that we presented in our October budget are working,” Finance Minister Siv Jensen said. “What we have said today is that we are prepared to act if needed.”
Compounding the problem for Norway is that while the country’s officials remain “ready to act”, central bankers the world over are already acting and that’s inhibiting the NOK’s ability to function as a counter cyclical buffer for the country’s economy.Even as the ECB, the SNB, the Nationalbank, and the Riksbank all stuck in NIRP, the Norges Bank is at 75 bps. Positive 75 bps.That means the NOK can’t fall as much as it needs to to help the economy absorb the blow from lower crude. As Bloomberg put it last year, the krone “just can’t get weak enough.”
Here's the rub. In order to fund the fiscal stimulus the economy needs to stay on its feet, Norway is tapping into its sovereign wealth fund. In short, expenditures are set to exceed revenues and so, it's time to tap the piggy bank which, at $830 billion, is the largest rainy day fund on the planet. The problem here is that oil proceeds must be converted to kroner before they can be used to cover budget needs. That means the Norges bank is a buyer of NOK. Here's how it works, via Deutsche:The amount of state petroleum revenues converted into NOK is a function of the non-oil budget deficit. Revenues in foreign currency from the SDFI are transferred daily to the Norges Bank’s petroleum buffer, before being distributed to the GPFG. By contrast, revenues from the Statoil dividend and oil tax are transferred to the government directly in krone, after companies have sold their foreign exchange revenues to pay the dividend and the tax.When krone revenues from the Statoil dividend and oil tax exceeds the non-oil budget deficit, the Norges Bank converts this surplus on behalf of the government into foreign exchange, depositing it in the petroleum buffer before transfer to the GPFG. The Norges Bank thus buys foreign exchange and sells krone on behalf of the government. Where krone revenues from the Statoil dividend and oil tax are insufficient to cover the non-oil budget deficit, no krone is converted back into FX by Norges Bank. Instead, SDFI revenues in the petroleum buffer are converted into krone. As a result the Norges bank sells FX and buys krone on behalf of the government.Simple enough. Here it is visually:
Here's a look at the history as well as a chart which depicts the convergence of oil revenues and the deficit:
So as you can see from the left pane above, the Norges Bank announced it was set to become a buyer of NOK at a clip of 250 million per day starting in October of 2014....MORE
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