Norway’s central bank, Norges Bank, has confirmed it will become a net buyer of NOK as it executes transfers linked to the assets of the country’s giant sovereign wealth fund – Government Pension Fund Global – helping send the local currency higher on FX markets.
The policy is being introduced because of the fact that much of the output from the country’s oil and gas industry is priced in dollars on the world market, but the government receives payments from the industry in both dollars from the revenues generated by its own State Direct Financial Interest in the industry, but also in NOK via tax revenues. Meanwhile, the government is running a non-oil deficit in the budget that is priced in NOK, and which is covered by the diversion of a portion of total petroleum revenues. The transfers between the oil and gas industry, the government and the GPFG are governed by both fiscal rules and a so-called petroleum fund mechanism.
Norges Bank said in a statement that it “makes the transfers to the GPFG on behalf of the government. Transfers take place each month in foreign currency. Norges Bank primarily procures the necessary foreign exchange by purchasing foreign exchange from the SDFI (the State’s Direct Financial Interest). If additional foreign exchange is needed to cover the monthly transfers, Norges Bank purchases the remaining amount in the market. If foreign exchange from the SDFI exceeds the transfers to the GPFG, Norges Bank sells the surplus amount in the market.
Nordea Markets said in a note that: “Norges Bank announced that it will start selling foreign exchange in the market in October. Norges Bank will sell foreign exchange (buy NOK) by NOK 250m per day in October. That Norges Bank has to sell foreign exchange should be no surprise. Norges Bank has long warned that this most likely would be the case. Read why here.”