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* Annual speech by Norway’s central bank governor
* Says governments should depend less on wealth fund
* Climate change affects oil industry risk
By Terje Solsvik
OSLO, Feb 13 (Reuters) - Norway should reduce its dependence on income from its sovereign wealth fund and the petroleum revenue from which it was built, the country’s central bank governor said in his annual address to government and business leaders on Thursday.
While a half-century of oil and gas production has made Norway one of the world’s wealthiest nations, it is now time to make more room for other industries to grow, he added.
“The offshore industry paved the way for wealth gains no future generation is likely to experience,” Oeystein Olsen said in prepared remarks for his annual policy address.
“As long as the transition to a less oil-dependent economy is gradual, the business sector will have the chance to adapt,” the governor said.
Western Europe’s top oil and gas exporter will see rising output in the next few years before production starts to decline by the middle of this decade, government projections show.
The future level of oil demand is also coming into question as efforts to combat climate change increase, Olsen said.
“Businesses, banks and investors are paying more attention to this risk. The outlook for offshore activities on the Norwegian shelf has also become more uncertain,” he added.
At the same time, the country’s vast financial savings fund faces unique risks of its own.
Driven by ultra-low interest rates, booming stock markets and a weak crown, Norway’s sovereign fund has more than doubled in value since 2013 to 10.8 trillion Norwegian crowns ($1.17 trillion), making it the biggest of its kind.
Built by investing income from the oil and gas industry in foreign stocks, bonds and real estate since 1996, the fund is now worth twice as much as the country’s remaining petroleum reserves, the governor noted.
The government is allowed to spend the expected real return of the fund each year, amounting to 3% of its value, with provisions for extra spending to help steer the economy through rough patches.
Spending should similarly fall below 3% in boom years but cuts have rarely been made.
“Because the value of the fund has steadily risen, we have long been spared the more demanding tightening measures. This may not be the case in the years ahead,” Olsen said.
The long-running bull market in stocks has been driven by a fairly small number of companies, and investor assumptions of sustained profit growth have left the potential for a market correction, he added.
If stocks were to plunge as they did during the 2008 financial crisis, it could wipe almost 3 trillion crowns off the fund’s value, Olsen said.
He particularly warned Norwegian governments against spending returns that had resulted from a weaker crown currency.
“If the government uses a larger fund to expand the public sector, it will lead to displacement of private enterprise, and I’m warning against that,” Olsen said in a separate interview at his office in central Oslo on Thursday.
$1 = 9.2550 Norwegian crowns Editing by Gwladys Fouche, Kirsten Donovan