DBRS Confirms Kingdom of Norway’s Rating at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has 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). The trend on all ratings is Stable.

The Stable trend reflects DBRS’s view that the challenges faced by Norway are manageable and are being addressed proactively. Norway’s AAA ratings are underpinned by its high public sector wealth, solid public finances, and strong external position. These strengths have resulted from significant oil-related windfalls and prudent fiscal management. Though lower oil prices have impacted economic activity negatively in the short-term, DBRS expects the economic downturn to be mild and short-lived, and anticipates no material change in the country’s debt dynamics. Norway’s challenges are long-term in nature and the government has been active in promoting and implementing policies designed to address them.

The trend could be changed to Negative if severe external or financial sector shocks were to weaken Norway’s ability to deliver sustained growth over the medium-term, materially impacting its public finance dynamics. The ratings could also face downward pressure if fiscal rules were to weaken significantly or if the commitment to a credible macro-prudential framework that preserves financial stability were to wane.

The solid fiscal framework and prudent management of the oil-related proceeds support Norway’s AAA ratings. The country’s political institutions have an established track record for a consensus-based approach to macroeconomic policy. In order to prevent volatile oil-related receipts from inducing unbalanced economic growth and spread the benefits from the exploitation of non-renewable resources overtime, the Stoltenberg I government introduced the current fiscal policy guidelines in 2001. Since the early 1990s, the government has transferred the receipts from the sale of oil reserves and oil taxes to the sovereign wealth fund, the Government Pension Fund Global (GPFG or the Fund). In addition, the fiscal rule specifies that over time only the expected return of the Fund, estimated at 4%, can be allocated to finance the non-oil deficit. Given the current large size of the Fund and its fluctuation in value over time, a government commission has been established to consider how the fiscal rule should be applied under these circumstances.

The public sector balance sheet, with net debt expected to reach approximately -248% of GDP in 2015, is strong even compared to other AAA rating countries. On the back of steady and high fiscal surpluses, the public sector has accumulated significant assets. DBRS expects gross general government debt to grow in line with GDP growth, and the ratio to remain stable at around 30% in the following years. Given the fiscal guidelines and the government’s asset position, gross government debt is generally insulated from negative shocks. Even in a severe fiscal, growth, or contingent liabilities shock, the government would not necessarily need to issue debt beyond its own support for the financial system.

Norway’s net creditor position provides significant buffers to face external shocks. Largely explained by the public sector savings that has been invested overseas through the GPFG, the country has accumulated nearly 171% of GDP in net financial assets abroad as of 2014. Ownership of such a large stock of net assets reduces Norway’s dependence on foreign capital flows and provides a stable source of income.

Despite these significant strengths, Norway faces some medium- and long-term challenges. The household sector indebtedness and housing market dynamics could pose risks to financial stability. Households have accumulated debt at a significantly faster pace than income growth, and consequently, household debt as a percentage of disposable income increased from 143.6% in 2003 to 211% in 2015Q1. In addition, price-to-rent and price-to-income ratios signal a certain degree of overvaluation in house prices. Given household leverage, a sudden turnaround in the housing market would erode households’ net asset position, increase financial sector vulnerabilities, and could have adverse wealth effects on consumption. Nevertheless, financial sector risks in the short-term remain manageable.

The impact to the mainland economy from the rapid decline in oil prices underscores the slow deterioration of the Norwegian oil sector and highlights the need for greater economic diversification. Though still accounting for 24% of GDP, off-shore output is down from the 37% of GDP recorded in the early 2000s. The lower oil prices will permeate to the economy through several channels. Energy related capital formation is expected to drop markedly as well as demand for mainland goods and services from the offshore sector. Furthermore, a decline in confidence and negative income effects are expected to create a drag on economic growth. As oil production declines and if low oil prices persist, improving the external competitiveness of the non-oil tradable sector is integral for the economy to shift towards less commodity dependence.

Long-term age-related spending will increasingly put pressure on the public balance sheet. Preserving the current welfare level would result in a fiscal shortfall of about 5.2% of GDP by 2060. Against this background, Norway passed a pension reform in 2011 to improve incentives for old age and link working age with life expectancy. Also, these are long-term projections that are likely to adjust with any forthcoming changes to the fiscal framework.

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.

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: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Initial Rating Date: 21 March 2012
Rating Committee Chair: Alan G. Reid, Group Managing Director – Financial Institutions and Sovereign Group
Last Rating Date: 2 January 2015

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