World’s biggest wealth fund hits US$1 trillion as dollar sinks

By Mikael Holter in Oslo and Sveinung Sleire

OSLO — Norway’s sovereign wealth fund hit US$1 trillion for the first time on Tuesday, driven higher by climbing stock markets and a weaker U.S. dollar.

The milestone valuation was reached for the first time on Sept. 19 at 2:01 a.m. in Oslo, Norges Bank Investment Management said in a statement on Tuesday.

“I don’t think anyone expected the fund to ever reach US$1 trillion when the first transfer of oil revenue was made in May 1996,” Yngve Slyngstad, chief executive officer of the fund, said in the statement. “Reaching US$1 trillion is a milestone, and the growth in the fund’s market value has been stunning.”

But the extreme wealth, about equal to the gross domestic product of Mexico, isn’t unalloyed good news. 

The fund’s sheer size has made it a challenge to find markets big enough to invest in. Meanwhile, Norway’s politicians are finding it hard to resist the temptation to raid the world’s biggest state piggy bank, with the petro-dollar addiction threatening to overheat the US$400 billion economy.

Few rivals

It has few rivals in terms of size. Japan’s Government Pension Investment Fund was valued at 144.9 trillion yen (US$1.3 trillion at the current exchange rate) at the end of March. China, of course, has about US$3 trillion in currency reserves. There are also big cash-piles at money management firms such as BlackRock Inc.’s US$5.7 trillion and Vanguard Group’s US$4.4 trillion.

Slyngstad recently suggested it’s now largely fruitless for it to enter new asset classes such as infrastructure because that would be costly and only deliver a blip on overall returns. The investor is also retrenching its global bond portfolio, cutting 23 currencies down to just three — the dollar, the euro and the pound. The fund says it doesn’t make sense to have more diversification in a world in which prices and rates are converging.

Its huge size has also driven the fund to respond to problems with trading by devising elaborate strategies to hide its selling and buying from anyone seeking to front-run its activities. 

But being big has its advantages, especially for a lean organization like Norges Bank Investment Management. The fund only employs about 550 people in offices across the entire globe (Oslo, New York, London, Shanghai and Singapore). Management costs were equal to just 0.02 per cent of assets in the most recent quarter, down from 0.07 per cent five years ago.

The decline in costs comes despite the fund’s expansion into real estate. It’s snapped up prime properties in Times Square, the Champs Elysees and London’s Regent Street, among other locations. It owned 200 billion kroner (US$26 billion) in real estate at the end of June.

For now, there’s been little discussion about breaking the fund up into smaller, more nimble entities, though the government is pondering a proposal to shift it out of the central bank and strengthen oversight.


So what lies ahead? Norway expects the fund to keep growing through 2025, when it’s predicted to hit 10.5 trillion kroner (or US$1.3 trillion at today’s exchange rate). But such estimates are notoriously unreliable. Its current size already exceeds the milestone it wasn’t expected to reach until 2018.

With interest rates at record lows and returns hard to come by, the fund’s management is growing less optimistic. Central Bank Governor Oystein Olsen has warned the decline in oil prices means the fund may already have passed its peak.

Norway’s government last year made direct withdrawals from the fund for the first time in its history and is expected to take out about 70 billion kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 per cent from 4 per cent.  

The fund has been given permission to raise its stock holdings to 70 per cent from 60 per cent, with an equivalent cut in bonds. That could help it eke out higher returns, or at least maintain the 8 per cent annualized real return it’s had over the past five years.

But Slyngstad also recently said he sees fundamental issues with the global economic system and trade, which is being buffeted by increasing global political risk. And that’s not good for a fund that owns 1.3 per cent of global stocks.

–With assistance from Lukanyo Mnyanda


Ottawa says $17.8 billion deficit for year smaller than expected

OTTAWA — The federal Finance Department says the government ran a smaller deficit than it was expecting in the spring budget.

Ottawa ended its 2016-17 fiscal year with a deficit of $17.8 billion.

That compared with a $23-billion deficit that was forecast in the spring budget.

Government revenues were down $2.0 billion or 0.7 per cent compared with the previous year due to a drop in personal income tax revenue, employment insurance premium revenue and other revenues, offset in part by an increase in GST revenue.

Program spending rose by $16.2 billion or 6.0 per cent due to increases in major transfers to individuals, major transfers to other levels of government and other transfer payments. Public debt charges were down $1.3 billion or 5.2 per cent due to lower interest rates.

The federal debt was $631.9 billion at March 31, 2017, up from $616.0 billion a year earlier.

Ontario heading into ‘largely uncharted waters’ with $15 minimum wage, study warns

The war of minimum wage studies rages on in Canada, with the Fraser Institute the latest to predict unintended and uneven consequences that could arise from a proposed hike in Ontario.

The right-wing think-tank said in a report released Tuesday that Ontario’s plan to increase the province’s minimum wage to $15 per hour by 2019 could increase the chance that less skilled workers, especially young people, will be “priced out” of a tougher labour market.

The report cites the Kaitz index, which measures the ratio of the minimum wage to the median wage, and research that shows the higher that number is, the greater the risk of adverse employment effects.

The study warns that the province would become “badly out of step” among the U.S. rust-belt states, like Michigan, it battles with for manufacturing investment.

‘Unchartered waters’

“With the introduction of a $15 minimum wage, Ontario will enter into largely uncharted waters,” wrote authors Ben Eisen, Charles Lammam and David Watson. “However, there are good reasons to be concerned that this learning will come at a substantial cost to many Ontario residents, particularly to youth ages 15 to 24, who are likely to see significant adverse employment effects resulting from a minimum wage increase that will push the province far outside of Canadian, North American, and even international norms.”

Ontario is not the only province heading towards a $15 minimum wage. Alberta is instituting it for 2018, and the fledgling British Columbia government said it will appoint a special commission to “establish a pathway to a minimum wage of at least $15 per hour.”

But the $15 minimum wage would also make Ontario stick out from the crowd, the Fraser study says, because it will be implemented across an entire province, not just one city, as was done in Seattle.

The group said this is “potentially problematic,” as Ontario is a big province with labour markets that range from mega-city Toronto to smaller rural and northern towns, where average wage levels can be lower. 


“A dramatic and speedy escalation in the minimum wage may risk especially severe employment effects in these parts of the province as they are already struggling with weak labour market performance,” wrote the authors.

The Fraser study is just the latest salvo on what has become a contentious subject. Some on the anti-wage hike side have argued businesses, particularly smaller ones, will be unable to handle the rising labour costs. The pro-side, meanwhile, has maintained it will be a big boost for people struggling to make ends meet with the current minimum wage.

Ontario’s Financial Accountability Office — an independent, non-partisan office of the legislature — estimated last week that the province’s move to a $15 minimum wage from its current level of $11.40 could cause a net loss of 50,000 jobs.

However, Unifor, Canada’s largest private-sector union, said the FAO’s work was misleading.

“The reality is that 50,000 workers are not expected to lose their jobs,” said Unifor National President Jerry Dias in a release. “This figure is not a projection of actual lost jobs but rather a combination of estimates that includes potential, but not actual, future job creation and jobs lost to increased automation.”  

Unifor noted that the FAO had found the wage hike would actually benefit a massive amount of workers, nearly 1.6 million, or about 22 per cent of the province’s labour force.

Ontario Labour Minister Kevin Flynn has said the province won’t back down from its planned wage increase.
Twitter: @geoffzochodne

Bank of Canada deputy’s message today may signal ‘gradualist’ approach to more rate hikes

The Bank of Canada will be closely monitoring the recent surge in the Canadian dollar, given that its recent rate hikes were influenced by strength in exports and business investment, according to an official at the country’s central bank.

Deputy Governor Timothy Lane said the central bank has been raising interest rates in the “context” of stronger exports and business investment and policy makers will be “paying close attention” to how the economy responds to higher borrowing costs and a stronger Canadian dollar following rate increases in July and earlier this month.

“We will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar,” Lane said in the text of a speech he’s giving Monday in Saskatoon, Saskatchewan.

Nick Exarhos of CIBC Economics says Lane’s speech may signal “a gradualist approach to further tightening from here, with the loonie’s recent strength likely garnering more attention from the BoC.”

Exarhos points out in a note that the deputy governor stresses how a strong Canadian dollar had “battered” export industries over the past decade and commented specifically that manufacturing and service oriented industries need to “grow faster and export more.”

Governor Stephen Poloz is trying to strike a balance between bringing interest rates back to more normal levels amid the strongest growth spurt in more than a decade, without harming an economy that is only now beginning to fully recover from an almost decade-long downturn.

The Canadian dollar, which fell on Lane’s comments, has surged more than 10 per cent over the past four months on expectations the central bank will continue raising interest rates, potentially acting as a drag on exports and business spending.

“Growth in Canada is becoming more broadly based and self-sustaining” including exports, business investment and rising imports of machinery and equipment, Lane said. “It was in this context that the Bank of Canada decided, in July and again earlier this month, to raise our policy rate.”

Lane’s speech on international trade also said the outcome of North American Free Trade Agreement talks could have “important implications for the Canadian economy” that monetary policy may need to consider. A protectionism shift during the Nafta talks could lead to lower potential growth for the nation’s economy, he said.

The first speech since the central bank’s Sept. 6 interest-rate increase comes as investors and economists are split on whether the central bank will tighten for a third straight meeting in October. Canada’s currency weakened by 1 per cent after Lane’s remarks to $1.2318 per U.S. dollar at 2:23 p.m. Toronto time.

Most of the speech touted the benefits of free trade for Canada, and suggested the risks around rising global protectionism that could tighten the movement of goods. “The possibility of a material protectionist shift — particularly regarding the outcome of negotiations on possible changes to Nafta — is a key source of uncertainty for Canada’s economic outlook,” Lane said.

Over the long run, free trade has created jobs, Lane said, and new barriers could curb Canada’s exports and potential economic growth. While technological innovation and trade have meant some workers are “left behind,” Lane said, policy makers should support workers in transition rather than seek to “turn back the clock.”

Canadians looking for answers from the Bank of Canada after rate hike takes nation by surprise

OTTAWA — The next time we hear from Stephen Poloz, the Bank of Canada governor will be a long way from home, but still followed by a lot of questions on the economy.

Whether, in fact, Poloz actually delivers some specific answers in a speech Sept. 27 in St. John’s, N.L. or during a question period that follows his remarks is debatable and dependent on what he says and what he is asked.

Still, Canadians will be looking for at least some answers. Top among them: What justified the BoC’s decision on Sept. 6 to hike its key interest rate — the benchmark that sets the tone for commercial banks and, ultimately, household finances — when many private-sector economists had given that outcome a less-than 50-50 chance of happening?

The central bank’s reasoning for the move was that “recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly-based and self-sustaining,” according to the rate-decision statement.

“Consumer spending remains robust, underpinned by continued solid employment and income growth,” the bank said. “There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies.”

But don’t expect a lot of specifics on that front from Poloz in his speech in St. John’s — even though the governor, now more than ever, has the eyes and ears of millions of people across in the country.

Most likely, his address will stay clear of any major currency-sensitive issues — such is the pattern of these kinds of scripted events — and stick with the nuts-and-bolts theme of a strong economy. After all, the Bank of Canada had already begun tightening monetary policy in July, lifting its trendsetting lending rate by a quarter of a point to 0.75 per cent — the first upward move in seven years.

At the time, many observers had expected Poloz and his team to stand back and monitor the impact of that initial rate increase before again moving borrowing costs higher — most likely on Oct. 24 to coincide with the bank’s revised economic forecasts for its quarterly Monetary Policy Report and accompanied by an announcement on the level of the key interest rate.

Instead, Poloz jumped ahead of that practice — though not unheard of — and issued the standalone September hike in borrowing costs. That could mean the October MPR will come and go without any rate adjustment, doubtful but not undoable, depending on what the latest economic data reveals.

Any indication of how the central bank is leaning this time around is difficult to read, which — again — is a communications issue for policymakers, and the public.

“(But) look to governor Poloz to clarify that part of the climb in the Canadian dollar as being attributable to generalized U.S. dollar weakness against most major currencies, representing a drag on export growth and inflation ahead,” said Avery Shenfeld, chief economist at CIBC World Markets. “While the rest of the speech will reflect optimism on Canada’s outlook, any note of caution about the exchange rate would cool the market’s enthusiasm for taking the loonie even stronger,” he said.

Meanwhile, on Monday, Canadians will hear from another Bank of Canada policymaker.

Deputy governor Timothy Lane will speak to the Saskatoon Regional Economic Development Authority on the topic of “How Canada’s International Trade is Changing with the Times.”

But Poloz himself has no official public events scheduled ahead of the St. John’s speech.

In the interim, the BoC’s senior deputy Carolyn Wilkins offered to fill in some of the blanks in an effort to clarify the Sept. 6 rate-hike decision.

“With any central bank anywhere in the world … you’re going to find incidents where participants were surprised. That’s just the nature of forward-looking policy that relies on forecasts that are not like engineering exercises,” Wilkins told reporters following a monetary policy conference Thursday in Ottawa.

“What’s the usefulness of additional transparency? How can it avoid surprises that maybe could have been avoided? I think that’s very useful because there’s absolutely no disagreement that people need to understand how we think about the economy, what goes into our decisions … what factors do you take into account.”

Special to Financial Post

Canada flagged as hidden $14 trillion credit bubble stokes global crisis fears

The world’s top financial watchdog has uncovered US$14 trillion of global dollar debt hidden in derivatives and swap contracts, a startling sum that doubles the underlying levels of offshore dollar credit in the international system.

The scale of this lending greatly increases the risk of a future funding crisis if inflation ever forces the U.S. Federal Reserve to tighten in earnest and drain worldwide liquidity, potentially triggering a dollar surge.

A forensic study by the Bank for International Settlements (BIS) says enormous liabilities have accrued through FX swaps, currency swaps, and “forwards.” The data is tucked away in the “footnotes” of bank reports. “Contracts worth tens of trillions of dollars stand open and trillions change hands daily. Yet one cannot find these amounts on balance sheets. This debt is, in effect, missing,” said the BIS analysis, written by the team under Claudio Borio, the chief economist.

“These transactions are functionally equivalent to borrowing and lending in the cash market. Yet the corresponding debt is not shown on the balance sheet and thus remains obscured,” they wrote in the BIS’s quarterly report.

A breathtaking gap in global accounting rules means that the debt is booked as a notional derivative, “even though it is in effect a secured loan with principal to be repaid in full at maturity.” The hidden lending comes on top of US$10.7 trillion of recorded offshore dollar debt outside U.S. jurisdiction. It pushes the combined total to US$25 trillion, or a third of global GDP. While these contracts serve as a lubricant and hedging device for world commerce, they can be plagued by currency and maturity mismatches.

The dollar swaps serve as a “money market” for global finance. Investors often take out short-term contracts that must be rolled over every three months. The great majority have maturities of less than a year. Much of the money is used to make long-term investments in illiquid assets, the time-honoured cause of financial blow-ups. “Even sound institutional investors may face difficulties. If they have trouble rolling over their hedges, they could be forced into fire sales,” said the Swiss-based watchdog.

While the BIS is careful to talk in broad terms, it is known that Chinese developers have borrowed heavily in U.S. dollars through the FX swaps market. They do so because rates are lower and to dodge credit curbs. If funding suddenly dries up, Chinese regulators may be reluctant to bail them out for political reasons until the situation is very serious.

“A defining question for the global economy is how vulnerable balance sheets may be to higher interest rates,” said Borio, the high priest of the global banking fraternity.

Signs of excess are visible everywhere. “Corporate debt is now considerably higher than it was pre-crisis. Leverage indicators have reached levels reminiscent of those that prevailed during previous corporate credit booms. A growing share of firms face interest expenses exceeding earnings before interest and taxes,” said the report.

The BIS warned that margin debt used on equity markets exceeds the dotcom extreme in 2000. So-called ‘leveraged loans’ have surged to a record US$1 trillion, and the share with risky ‘covenant-lite’ terms have jumped to 75 per cent. Everything looks fine so long as low bond yields underpin the asset edifice, but they may not stay low. “Equity markets continue to be vulnerable to the risk of a snapback in bond markets,” it said.

The structure is deeply unhealthy. Central bankers dare not lift rates despite economic recovery because of what they might detonate. “There is a certain circularity that points to the risk of a debt trap,” said Borio.

The Achilles Heel is global dollar debt. It was a seizure of the offshore dollar capital markets in late 2008 that turned the Lehman and AIG bankruptcies into a global event, and came close to bringing down the European banking system. “The meltdown in dollar-denominated structured products caused funding markets to seize up and banks to scramble for dollars. Markets calmed only after coordinated central bank swap lines to supply dollars,” said the BIS.

The Fed effectively saved Europe from disaster. It is an open question whether the U.S. Treasury would authorize such a rescue under the Trump Administration.

The Sword of Damocles still hangs precariously a decade later. Global dependence on dollar liquidity has since become even more extreme. Over 90 per cent of all FX swaps and forwards worldwide today are in U.S. currency. The dollar is even used within Europe for most swaps involving the Polish zloty or the Swedish krona for example, a pattern that would probably astonish European politicians. “The dollar reigns supreme,” said the BIS.

What is odd is that Asian central banks and European multilateral bodies are huge players in this trade, effectively aiding and abetting a dangerous game.

The message from a string of BIS reports is that the U.S. dollar is both the barometer and agent of global risk appetite and credit leverage. Episodes of dollar weakness – such as this year – flush the world with liquidity and nourish asset booms. When the dollar strengthens, it becomes a headwind for stock markets and credit.

If the dollar spikes violently, it sets off global tremors and a credit squeeze in emerging markets. This is what could happen again if President Trump’s tax reform plans lead to a big fiscal expansion and a repatriation of trillions of U.S. corporate cash held overseas.

Currency analysts say it would be an emerging market bloodbath. While the “fragile five” – India, South Africa, Indonesia, Turkey, Brazil – have mostly cut their current account deficits and are in better shape than during the “taper tantrum” of 2013, the problem has rotated to oil producers. China’s corporate debt has soared to vertiginous levels.

Recorded dollar debt in emerging markets has doubled to US$3.4 trillion in a decade, without including the hidden swaps. Local currency borrowing has risen by leaps and bounds. They are no longer low-debt economies.

The BIS credit gap indicator of banking risk is flashing a red alert for Hong Kong, reaching 35 per cent of GDP. While it has dropped to 22.1 per cent in China, the country is still in the danger zone. Any sustained reading above 30 is a warning signal for a banking crisis three years later.

Canada is also vulnerable at 11.3. Turkey (9.7) and Thailand (9) are on the edge. Most would be in trouble if global borrowing rose by 250 basis points.

The U.K. is well-behaved on the credit gap metric. That is small comfort. There will be nowhere to hide if the world ever faces a dollar “margin call.”


Chilean startup ComparaOnline raises $14 million for its financial education tools for Latin America

 Venture investing in Latin America continues to pick up the pace, with new deals in financial technology services leading the way. One example of investors’ renewed interest in regional financial services companies is the $14 million in financing that ComparaOnline just wrapped up. The company, now backed by private equity firm Bamboo Capital Partners and the International Finance Corp.,… Read More

Doctors angry at opposition to planned tax changes urge Ottawa to forge ahead

TORONTO — Doctors across Canada who support Finance Minister Bill Morneau’s proposed tax reforms say they want their voices to be heard above the din of criticism from colleagues and medical societies.

To make their point, they have been putting signatures on a letter they plan to send to Morneau this week.

“We were really fed up with the narrative that our colleagues were putting forth and that our medical associations were putting forth as the only opinion out there,” said Dr. Sarah Giles. “We’ll probably have friends never talk to us again. People are ridiculously emotional about this.”

Among other things, Morneau wants to stop allowing some tax-saving mechanisms through incorporation that physicians say are essential given that they have no access to benefits other employees enjoy. Angry medical associations say doctors will leave Canada for the U.S., and female physicians will be disproportionately hurt.

The president of the Canadian Medical Association said in a recent statement that a delegation had told Morneau that doctors rely on the measures now in place for working capital needed for expanding their practices and, among other things, to deal with “unanticipated costs, sick or parental leave, staff turnover, and other business requirements.”

Signatories to the open letter, a copy of which was obtained by The Canadian Press, see it much differently. They argue that scrapping the current system will promote tax fairness and give the government more money to spend on health care.

“We need adequate tax revenues to fund social programs such as affordable housing, pharmacare, social assistance, legal aid, and the health-care system itself,” the letter states. “These programs directly impact the health of our patients, and we believe it is important for us to contribute to their sustainability through an adequate tax base.”

Giles, who does stints working with remote Indigenous communities and abroad with Doctors without Borders, said diverting dollars from doctors toward improved care would benefit her money-strapped patients far more than it would harm physicians.

“There’s a lot of catastrophising,” she said of those upset at Morneau’s plans. “Why are they hanging their hats on this issue? It feels very self-serving.”

Canadian Medical Association data suggest a large majority of physicians are incorporated. That means they can access various measures to reduce their taxes despite earning significantly more on average — upwards of $225,000 annually before taxes — than other Canadians.

“These benefits are advantageous mostly to certain incorporated doctors,” the letter states. “It also seems unfair that these benefits are not available to Canadians with similar incomes who cannot incorporate.”

The physicians do say in their letter the proposed changes should come with a transition plan for those affected and as part of a “comprehensive review” of tax policy.

Rita McCracken, a family doctor in Vancouver who said she was bombarded with advice on incorporating to save taxes even when she was in medical school, expressed disappointment at what she considers reactionary physician organizations who should be pushing for improvements to the health-care system. Any suggestion the proposed measures are “anti-feminist” is misguided, she said.

McCracken contacted colleagues with the aim of expressing a fact-based alternative view, leading to the letter to Morneau.

“It just seemed to us there was some motivation from very high earners who wanted to continue to be able to pay less tax,” McCracken said. “(But) people who make more money should pay more taxes.”

Lesley Barron, an incorporated general surgeon in Georgetown, Ont., said she supports the proposals even though her family’s bottom line will take a hit. Morneau’s approach will help make the tax system more fair, she said.

“I don’t believe it makes sense for physicians to fund retirement, benefits, and maternity leave through these tax loopholes,” Barron said.

Another letter signatory, Ritika Goel, a family doctor with an inner city practice in Toronto, said the din of criticism from many doctors makes it important an alternative perspective be heard. The current system isn’t the way to address issues Morneau critics are raising, she said. Goel, who is currently on leave to look after her baby, says maternity benefits are in fact available to doctors in Ontario.

“Beyond that, I’m in an income position that has allowed me to have savings to take maternity leave,” she said.