DBRS Confirms Norway at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the long-term, foreign and local currency issuer ratings of the Kingdom of Norway at AAA, with Stable trends. DBRS also confirmed the short-term, foreign and local currency ratings at R-1 (high) with Stable trends.

The ratings reflect Norway’s strong standing in nearly all categories of sovereign risk. In particular, the ratings reflect Norway’s strong fiscal position, wealthy economy, sound macroeconomic management and extremely solid external position. The confirmation of the Stable trend on all ratings is motivated by DBRS’s view that the challenges faced by the country are manageable and are being addressed proactively. Downside pressure on the ratings could arise as a result of an external shock resulting in a sharp and sustained decline in oil prices with negative economic repercussions and a sharp housing market correction with knock-on effects on the banking system, leading to a materially higher government debt stock.

Norway is a sizeable net creditor with substantial foreign assets and as one of the world’s largest exporters of oil and gas consistently runs high fiscal and current account surpluses. The government channels revenues from these resources into the country’s sovereign wealth fund, the Government Pension Fund Global (GPFG). The fund totalled NOK 4.1 trillion (EUR 528 billion), or 135% of GDP, as of March 2013. A prudent fiscal framework ensures that oil revenues are gradually phased into the economy in line with the expected real return from the GPFG, which avoids creating imbalances in the domestic economy by keeping spending of oil revenues on a sustainable path.

After a relatively mild recession in 2009, when the economy contracted 1.6%, Norway experienced a steady recovery with growth in mainland GDP (which excludes the contribution of oil, gas and shipping) averaging 3.0% in 2011 and 2012. Economic activity was underpinned by private consumption and investment, sustained by rising house prices, real wage growth, improving terms of trade and an accommodative monetary policy. The labour market performed well, as reflected in the lowest unemployment rate in Europe at 3.5% in April 2013. Supported by increases in oil investment and household consumption, average growth is expected to continue to outperform European peers in 2013 and 2014 at 3%.

Norway’s substantial sovereign oil wealth, with net external assets of 94% of GDP in 2011, will continue to provide a significant buffer to cushion the economy in times of stress, and will help absorb the future costs of an aging population on public spending. Nevertheless, economic growth remains heavily reliant on the oil and gas industry and is expected to 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 12.5% of GDP between 2009 and 2012. In addition, the government’s negative net debt position of -170% of GDP in 2012 further highlights one of the soundest fiscal positions among sovereigns. The 2013 fiscal stance is set to be moderately expansionary with the budget surplus projected to remain at 11% of GDP, down from 14.3% of GDP in 2012. DBRS expects that as the economy continues to grow in 2014, fiscal policy will start to be progressively tightened, reducing the central government’s non-oil deficit in line with the government’s fiscal rule. The rule states that only 4% of real returns from the GPFG should be incorporated into the government’s annual budget.

Despite these strengths, Norway faces some important challenges. In particular, the high level of household debt (equivalent to 183% of adjusted disposable income in 2012, versus an EU average of approximately 130%), and elevated house prices pose a direct risk to the banking sector and, indirectly, to public finances. High household debt is partly the result of low interest rates and comparatively soft lending criteria in the mortgage market. Home ownership is substantially financed by borrowing, which in combination with rapidly rising house prices has led to large mortgage debt levels. This debt burden exposes households to rising debt servicing costs, and the prolonged low-inflation and low-interest-rate environment could reduce borrowers’ incentives to deleverage.

Although the Norwegian banking sector is robust and well-capitalized, the effects of a sharp fall in oil prices and a large housing market correction on bank balance sheets could be significant. DBRS believes that these vulnerabilities are partly offset by the country’s strong economic fundamentals and the capacity of the government to offer additional fiscal stimulus if needed to support the banking system. Moreover, DBRS acknowledges the considerable effort made by Norwegian authorities in strengthening the country’s financial system by implementing a number of macro-prudential measures to reduce the risks stemming from the housing market. These include proposed measures to limit preferential tax treatment for residential investment, higher capital requirements for banks and plans to introduce counter cyclical capital buffers to bolster banks resilience to potential economic downturns. However, the banking sector remains subject to some funding risks which are related to its significant reliance on short-term foreign wholesale funds with banks also exposed to cyclical market segments such as shipping and commercial property.

Despite substantial income derived from oil wealth, Norway faces fiscal challenges from an aging population. DBRS believes, however, that Norway is better placed to cope with population ageing than most other countries due to the availability of oil reserves. Completing the pension reform introduced in 2011 and reforming the social security system should also help ease medium- to long-term spending pressures on pension entitlements.

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

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include the IMF, the European Commission, the European Central Bank, Eurostat, the Ministry of Finance of the Kingdom of Norway, Norges Bank, Statistics Norway (Statistisk Sentralbyra), Haver Analytics, DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

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

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Roger Lister
Initial Rating Date: 2 April 2012
Most Recent Rating Update: 16 November 2012

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