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.

Norway’s AAA ratings are underpinned by its high public sector wealth, solid public finances, sound institutional framework and strong external position. These strengths have resulted from significant oil-related windfalls and prudent fiscal management. As a consequence, Norway has substantial buffers -in addition to its flexible exchange rate- to absorb shocks. This was demonstrated by the resiliency of the economy to the recent plunge in energy prices. Although activity and employment have been heavily impacted in the oil-related sectors and regions, the country is still expected to grow in coming years. DBRS expects monetary and fiscal policy to support domestic demand in the short-term and 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 Stable trend reflects DBRS’s view that the challenges faced by Norway are manageable and are being addressed proactively. 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 its fiscal framework were to weaken meaningfully or if its commitment to credible macro-prudential policies that preserve financial stability were to wane.

The sound institutional framework and prudent management of the oil-related proceeds support Norway’s AAA ratings. The country has consistently scored highly on governance indicators and has a well-established track record of consensus-based approach to macroeconomic policy. This is also reflected in the adoption of a fiscal rule that protects the budget from volatility in oil markets and spreads the benefits from the exploitation of non-renewable resources overtime. Since the mid-1990s, the government transfers 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 real 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, the government is reviewing how the fiscal rule should be applied under these circumstances.

The public sector balance sheet, with net debt expected to reach approximately -278% of GDP in 2015, is strong when compared to other AAA rating sovereigns. 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 nominal GDP, and the ratio to remain stable at around 28% in the coming years. Given the fiscal guidelines and the government’s asset position, gross government debt is generally insulated from negative shocks.

Norway’s net external creditor position provides significant buffers to face shocks. Largely explained by the public sector savings that have been invested overseas through the GPFG, the country has accumulated nearly 199% of GDP in net financial assets as of 2015. 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. Household sector indebtedness and housing market dynamics could pose risks to financial stability. After a period of rapid build-up, household debt as a percentage of disposable income stood at 216% in the last quarter of 2015. At the same time, price-to-rent and price-to-income ratios signal some 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. House price inflation decelerated in 2015 at the national level but with significant regional differences. Nevertheless, financial sector risks in the short-term remain manageable.

The sharp decline in oil prices has accelerated the ongoing structural adjustment of the Norwegian economy away from its reliance on the oil sector and underscores the need for greater economic diversification. So far, the impact of lower oil prices has been more evident in the petroleum sector and the oil-related sectors, with the slowdown in activity, employment and house prices largely concentrated in oil-producing regions. Nonetheless, the spill-over effects could permeate further to the broader economy and increase the pressure on public sector finances. The government faces the challenge of balancing its efforts to sustain economic activity without hindering the structural adjustment of the country. Government efforts to improve competitiveness and inclusiveness will be crucial to raise the potential output and sustain high levels of welfare.

Long-term age-related spending will increasingly put pressure on public finances. Preserving the current welfare level would result in a fiscal shortfall of about 5% of GDP by 2060, according to the government. Against this background, Norway passed a pension reform in 2011 to improve incentives for old age and link working age with life expectancy. The commission on the fiscal rule recommended a more gradual phase in of oil revenues taking into account the expected increase in ageing population related costs. 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, EIA, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had access to accounts, management and other relevant internal documents for the rated entity or a related third party.

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.

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: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 2 April 2012
Last Rating Date: 18 December 2015

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