DBRS Confirms the Kingdom of Norway at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the long-term foreign and local currency ratings of the Kingdom of Norway (Norway or the country) at AAA, and the short-term foreign and local currency ratings at R-1 (high). All ratings have a Stable trend.

The Stable trend reflects DBRS’s assessment that the challenges faced by Norway are manageable and are being addressed proactively. As a result, DBRS does not anticipate downward pressures on the rating. The trend could be changed to Negative if one or more of the challenges faced by the country were to substantially impair Norway’s ability to deliver sustained growth over the medium term, or if shocks stemming from either the external or the private sector were to structurally modify the outlook for public finances. The ratings could also face downward pressure if fiscal rules were to be weakened significantly or if the authorities’ commitment to develop a credible macro-prudential framework to preserve financial stability in the country were to be lessened.

The ratings on Norway are underpinned by the country’s elevated stock of public sector wealth deriving from the country’s position as the 7th largest oil exporter in the world, combined with the prudent fiscal framework that has been put in place in order to manage the annual flow of oil receipts.

The Norwegian government abides by the fiscal rule that imposes receipts from the sale of oil reserves to be entirely transferred to the country’s sovereign wealth fund, the Government Pension Fund Global (GPFG or the Fund). In turn, a maximum of 4% of the value of the Fund can over time be rerouted to finance the government’s non-oil deficit each year. For 2014, structural deficit is estimated at NOK139 billion, or 4.3% of GDP and NOK56 billion less than the amount authorized by the fiscal rule. As a consequence, the transfer of funds from GPFG will amount to 2.9% of the value of the Fund (NOK 4,863 billion, or 161% of GDP in 2013). Via a gradual phase-in of oil receipts into the economy, the government aims at isolating the mainland economy, projected by the government to account for 77% of GDP in 2013, from the volatility in oil prices.

Several other factors underpin the ratings. First are the country’s solid public finances. Between 2000 and 2013, annual government surpluses averaged 13.4% of GDP and led to an average gross debt equivalent to 45.3% of GDP, which is low in absolute and relative terms. Norway’s stock of debt is expected to remain flat at 34% of GDP in the medium term, with regular issuance of bonds being primarily justified by the need to maintain a liquid market for sovereign securities and by cash management purposes. Second, the country benefits from a wealthy economy, as per capita income in 2013 was more than EUR70,000. Resilient income growth over the past decade has supported stable consumption and investment patterns and it has so far prevented sharp downturns in economic activity. In 2013, GDP was 4.9% higher than the trough level experienced during the crisis, and annual GDP growth is estimated at 2.3% for both 2014 and 2015. The employment rate is high at 75.9% and the long-term annual growth rate is estimated at 3% through 2030. Third, the high net international investment position, at 100% of GDP, is mainly driven by the holdings of GPFG abroad. It contributes to sheltering Norway from dependence on foreign capital flows and it provides a stable source of income, estimated at 0.9% of GDP between 2008 and 2013.

However, several long-term challenges confront the Norwegian economy. In particular, age-related spending pressures are projected to reach 11% of GDP in 2050, and the maintenance of current welfare levels is estimated by the government to generate a fiscal shortfall of about 6% of GDP by 2060. Against this background, Norway passed pension reform in 2011 that extended the working age to 62 and further progress is expected to be achieved on linking working age with life expectancy. According to the government, increasing the number of working hours is the most significant factor that can structurally improve the condition of public finances in the long run.

Other challenges facing the country relate to the concentration of the economy, where the oil sector and related industry account for 23% for GDP. As oil production and export decline, improving the external competitiveness of the non-oil tradable sector will be key to gradually moving towards a less commodity-based economy. So far, Norway’s competitiveness has been held back by low productivity growth and rising labour costs, which grew 4.8% on average between 2002 and 2013. Other challenges relate to the country’s banking industry, which is still in progress of adjusting funding profiles and building stronger capital levels to withstand the negative consequences of potential sudden decline in capital inflows in foreign currency.

Finally, the country’s large stock of debt accumulated in the private sector, at 179.3% of GDP in 2013, may exert pressure on the banking system, if Norway were to experience a severe downturn. The accumulation of household debt, which reached 200% of disposable income at end-2013, has been largely fuelled by rising house prices (up 40% since the trough hit during the crisis). A particular source of concern is that approximately one-third of households currently have debt-income ratios about 500%. However, DBRS believes that the risk of a sharp correction in the housing market in the immediate future remains low, as income and population growth appear to still be playing a major role in explaining house prices dynamics in Norway.

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 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 IMF, OECD, BIS, European Commission, European Central Bank, Statistical Office of the European Communities, Ministry of Finance of the Kingdom of Norway, Norges Bank, Statistisk Sentralbyra, Bloomberg, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com

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

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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.

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

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Roger Lister
Initial Rating Date: 21 March 2012
Most Recent Rating Update: 19 July 2013

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