DBRS Assigns AAA Rating to Norway, Trend Stable

DBRS Ratings Limited (DBRS) has assigned issuer ratings to the Kingdom of Norway’s long-term foreign and local currency debt at AAA. The trend on both ratings is Stable. The ratings reflect Norway’s strong standing in nearly all categories of sovereign risk. Norway has the fourth highest income per capita in the world, exceptionally strong political institutions, sound macroeconomic management, and abundant natural resources.

Norway is a sizeable net creditor with substantial foreign assets and consistently runs high fiscal and current account surpluses, largely due to the fact that it is one of the world’s largest exporters of oil and gas. The government channels revenues from these resources into the country’s sovereign wealth fund, the Government Pension Fund Global (GPFG or the fund), which totaled NOK 3.3 trillion (EUR 425 billion), or 122% of GDP, as of end December 2011. Moreover, a prudent fiscal framework ensures that oil revenues are gradually phased into the economy in line with the expected real return from the GPFG, avoiding creating imbalances in the domestic economy and reducing the risk of “Dutch disease.”

DBRS notes, however, that in the long term, the government’s fiscal flexibility could be constrained in the absence of further reform of the pension, health-care and social security systems. DBRS also views the highly indebted private sector, particularly households, and elevated house prices as potential challenges for the rating. Household debt as a percentage of disposable income is estimated to reach 201% in 2012, which is substantially above the European average. In addition, the Norwegian banking sector is subject to some funding risks which are related to its significant reliance on foreign wholesale funds. This leaves the sector vulnerable to potential market disruptions should liquidity constraints in Euro zone capital markets intensify.

Norway was less affected by the global financial crisis than most European economies as the authorities used their abundant resources to implement a strong macroeconomic policy response. Monetary policy was significantly loosened – the Central Bank (Norges Bank) cut interest rates by 450 basis points between October 2008 and June 2009, increasing the supply of liquidity – and the government implemented a larger stimulus package than did other European governments (2.5% of GDP in 2009-2010 versus 1.1% in the Euro zone).

After a relatively mild recession in 2008-2009, the Norwegian economy recorded positive growth as of 2010 and is expected to gradually strengthen in the medium term, barring an intensification of the Euro zone sovereign debt crisis. The Norwegian central bank forecasts annual average real GDP growth of approximately 2% in 2011-2013, after relatively weak growth of 0.7% in 2010 and a contraction of 1.7% in 2009. Norway’s substantial sovereign oil wealth with net external assets of 92.2% of GDP in the third quarter of 2011 will continue to provide a significant buffer to cushion the economy in times of stress, and to better absorb the future costs of an aging population on public spending. Nevertheless, economic growth will be weaker than in the decade prior to the recession, also curtailed by a gradual decline in oil production.

The government’s fiscal position is extremely healthy by international standards as substantial revenues derived from the energy sector have led to fiscal surpluses averaging approximately 11% of GDP in 2009-2011. DBRS expects budget surpluses of this size to continue in 2011-2013 at close to 12% of GDP. In addition, the government’s negative net debt position of -150% of GDP further underpins one of the soundest fiscal positions among sovereigns.

The 2012 fiscal stance is set to be marginally expansionary with the general government budget surplus projected to remain at 12.3% of GDP, down from an estimated 12.5% of GDP in 2011. DBRS expects that as the economy recovers in 2013, fiscal policy will start to be steadily tightened, reducing the central government’s non-oil deficit and bringing it in line with the government’s fiscal rule. The rule states that 4% of real returns from the GPFG should be incorporated into the government’s annual budget.

The Stable trend on the Kingdom of Norway’s ratings reflects DBRS’s view that the ratings will be underpinned by the country’s sound track record of political stability, resilient economy, strong public finances and solid net external position. Despite substantial income derived from oil wealth, Norway faces fiscal challenges in the long term, given the demographic trends of an aging population. Completing the pension reform started in 2010 and reforming the social security system should help ease medium- to long-term spending pressures on pension entitlements.

Another source of concern arises from risks to Norwegian banks’ asset quality stemming from high household debt and high house prices, which pose a direct risk to the banking sector and, indirectly, to public finances. DBRS notes that these risks are partly mitigated by Norway’s robust fiscal position and sound domestic economy, with wealth levels among the highest in the world, high unemployment benefits and strong household assets compared with international standards.

Notes:
All figures are in Norwegian Kroner (NOK) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include Norges Bank, Ministry of Finance, EC 2011 Autumn Forecast, Statistics Norway, Eurostat, OECD, IMF and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 21 March 2012
Most Recent Rating Update: 21 March 2012

For additional information on this rating, please refer to the linking document under Related Research.