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 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 ratings. 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 wane.

The AAA ratings on Norway are underpinned by the country’s elevated public sector wealth. This largely derives from the country’s position as the seventh largest oil exporter in the world, and it benefits from the prudent fiscal framework that since the early 2000s has regulated the transfer of oil revenues to the government’s budget. The government’s use of oil revenues is regulated by the fiscal rule that requires receipts from the sale of oil reserves and oil taxes to be entirely transferred to the country’s sovereign wealth fund, the Government Pension Fund Global (GPFG or the Fund).

Over time, 4% of the value of the Fund can be allocated to finance the government’s structural, non-oil deficit. For 2014, this is estimated at 4.4% of GDP and it is 0.1% higher than budgeted in autumn, as a result of some marginal revisions to the budget announced in May 2014. The transfer of funds from GPFG will amount to 2.8% of the value of the Fund of EUR610 billion in 1Q14 (166% of GDP). Thanks to a gradual phase-in of oil receipts into the economy, the government aims at isolating the mainland economy, which in 2013 accounted for 77% of GDP, from the volatility in oil prices.

Further underpinning the AAA ratings are Norway’s solid public finances. Between 2000 and 2013, annual government surpluses averaged 13.3% of GDP (10.8% in 2013) and led to an average gross debt equivalent to 39% of GDP, which is low in absolute and relative terms. Looking ahead, under the baseline scenario in which the government issues debt in order to reimburse the principal on maturing government debt and to finance capital transactions, Norway’s public debt is expected by the IMF to remain flat at 29.5% of GDP through 2019. Under a severe shock scenario, the debt ratio remains below 50% of GDP throughout the projection period. Moreover, the country benefits from a wealthy economy, with per capita income exceeding EUR77,000 in 2013. The economy is now approximately 6% larger than it was at the trough of the financial crisis, and annual GDP growth is estimated at just below 2% for both 2014 and 2015. The economy is running at close to full capacity, with the trend growth rate estimated at 2.1% over the medium term and a high employment rate at 75.9%. Finally, the sovereign’s creditworthiness is supported by the country’s high net international investment position (100% of GDP), which benefits from the financial investments of GPFG abroad. These contribute to reducing Norway’s dependence on foreign capital flows, while also providing 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, preserving the country’s current welfare levels is estimated by the government to generate a fiscal shortfall equivalent to 6% of GDP by 2060. Against this background, Norway passed a pension reform in 2011 that improved incentives to work in old age, and further progress is expected on linking working age with life expectancy. According to the government, increasing the number of working hours is the most significant factor that can improve the condition of public finances in the long run. Other challenges facing the country relate to the high commodity dependence of the economy, where the oil sector and related industry are estimated to account for 23% for GDP. As oil production declines, 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 external competitiveness has been held back by low productivity growth and rising labour costs. Productivity in 2013 was 7.0% lower than in 2005, while unit labour costs more than doubled in the period. This reflects declining productivity in the oil sector, while productivity in the mainland (i.e. non-oil) economy was up 0.7% in the period.

Finally, financial imbalances present medium-term challenges. House prices have recorded steady increases since 1993 and have gained 41% since the trough in 4Q08, worsening affordability and raising concerns over the possible emergence of a housing bubble. Towards the end of 2013, house prices declined, although they were again up in the first half of 2014 and sharp downward corrections are unlikely. In addition, largely as a result of less affordable housing and limited amortisation of mortgage debt, over the past decade household debt has risen at a higher pace than both income and assets, reaching 195% of disposable income in 2013. This exposes households to a decline in house prices. However, risks in the short-term remain limited, in DBRS’s view. Stress tests performed by Norges Bank indicate that a 30% decline in house prices, combined with a rise in interest rates, would increase the share of debt held by high-risk households from 2% to 6.5% of total debt. In order to mitigate financial stability risks, the country’s banks will accumulate additional capital from July 2015, when a countercyclical capital buffer equivalent to 1% of risk -weighted assets will become effective.

Notes:
All figures are in Euros (EUR) 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.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the Government of Norway, the Ministry of Finance of Norway, Norges Bank, Statistics Norway, the Financial Supervisory Authority of Norway, European Commission, Statistical Office of the European Communities, IMF, OECD, BIS, 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 credit 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, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

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

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: Claudio Columbano
Rating Committee Chair: Roger Lister
Initial Rating Date: 17 April 2012
Most Recent Rating Update: 31 January 2014

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