DBRS Confirms Kingdom of Norway’s Rating 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). The trend on all ratings is Stable.

Despite a deceleration in GDP growth, the Norwegian mainland economy has been resilient to the significant oil shock. A strong counter-cyclical policy response and a weaker currency have helped to offset the recessionary effects arising from the petroleum sector downturn and have been successful in containing its second-round effects so far. Although activity and employment have been adversely affected in the oil-related sectors and regions, the mainland economy as a whole has held up. Moreover, the recovery of crude oil prices after bottoming out at the beginning of the year is alleviating the pressures on the petroleum sector.

Norway’s AAA ratings are underpinned by its high public sector wealth, prudent management of the oil-related windfalls, strong external position and sound institutional framework. As a consequence, Norway has substantial buffers to absorb shocks. Norway’s challenges are long-term in nature and the government has been active in promoting and implementing policies designed to address them.

The robust balance sheet of the government is a key strength for the ratings. The government’s net asset position is projected to reach approximately 274% of GDP in 2016, which is very strong compared with other AAA rated sovereigns. DBRS expects gross general government debt to grow in line with nominal GDP, and the debt ratio to remain stable at approximately 28% in the coming years. Given the fiscal guidelines and the government’s asset position, gross government debt is generally insulated from negative shocks.

The government’s prudent management of the oil-related proceeds supports the ratings. Since the mid-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). The fiscal rule specifies that over time only the expected real return of the Fund can be allocated to finance the non-oil deficit. The fiscal rule has been implemented under the assumption that the real return of the Fund was 4%, but this guidance may be revised downwards under the low interest rates environment. Moreover, given the 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.

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 financial assets reduces Norway’s dependence on foreign capital flows and provides a stable source of income. In addition, Norway’s sound institutional framework and its well-established track record of consensus-prone politics are conducive to a stable and predictable policy framework.

Despite these significant strengths, Norway faces some medium and long-term challenges. Financial imbalances continue to build up. Household indebtedness is high on a comparative and historical basis at 215% of disposable income in Q1 2016, predominantly mortgages. At the same time, housing prices have increased significantly over time. The high level of households’ debt burden increases their vulnerability to shocks: a drop in income, an abrupt increase in interest rates and/or a sudden turnaround in the buoyant housing market, for example. However, the banks’ ample buffers to absorb losses and a stricter macro-prudential framework mitigate the risks to financial stability.

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. Nonetheless, the loss in importance of the petroleum industry will be gradual. So far, the impact of lower oil prices has been more evident in the petroleum and 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 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 approximately 5% of GDP by 2060, according to the government. Against this background, Norway passed a pension reform in 2011 to improve incentives to work past early retirement 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. Moreover, these are long-term projections that are likely to be adjusted with any forthcoming changes to the fiscal framework.

RATING DRIVERS
The Stable trend reflects DBRS’s view that the risks to the ratings are broadly balanced. The government has significant room to manoeuvre to respond to shocks and to address its medium-term challenges. 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, having a material impact on its public finance dynamics. The ratings could also face downward pressure if Norway’s fiscal framework were to weaken meaningfully or if its commitment to credible macro-prudential policies that preserve financial stability were to wane.

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 Central Bank, Eurostat, European Commission, Statistical Office of the European Communities, UNDP, IMF, OECD, BIS, EIA, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be 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 no access to 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 historical default rates published by the European Securities and Markets Authority (“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
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 21 March 2012
Last Rating Date: 13 May 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.