DBRS Confirms Kingdom of Norway at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the long-term foreign and local currency issuer ratings of the Kingdom of Norway at AAA, and the short-term foreign and local currency issuer ratings at R-1 (high). The trend on all ratings is Stable.

The Norwegian economy has proven resilient in the face of a severe drop in energy prices. The mainland economy appears to have bottomed out in 2016, after suffering a significant slowdown in activity. 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. 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 since the start of 2016 is alleviating 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.

The robust balance sheet of the government is a key strength for the ratings. The government’s net asset position reached 284.5% of gross domestic product (GDP) in 2016, which is very strong compared with other AAA-rated sovereigns. This is largely explained by the sovereign wealth fund — the Government Pension Fund Global (GPFG or the Fund). Its market value was equivalent to 277% of mainland GDP in 2016. DBRS expects gross general government debt to hover around 33% of GDP in 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 oil-related proceeds supports the ratings. 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 isolates the government budget from volatility in petroleum revenues. However, given the size of the Fund, fluctuation in its value may become a larger source of volatility. In March 2017, the government proposed the revision of two important parameters of the fiscal framework: (1) lowering the expected real rate of return of the Fund to 3.0% from 4.0% and (2) increasing equity allocation to 70.0% of the Fund from 62.5%. Naturally, a lower real expected rate of return reduces the future value of the Fund relative to the previous assumption, ceteris paribus. However, this new assumption will also translate into a more conservative fiscal stance going forward.

Norway’s net external creditor position provides significant buffers to face shocks. Largely explained by public-sector savings that have been invested overseas through the GPFG, the country has accumulated 202.9% of GDP in net financial assets at the end of 2016. 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 well-established track record of consensus-driven politics are conducive to a stable and predictable policy framework.

Despite these significant strengths, Norway faces some challenges. Financial imbalances continue to build up. Household indebtedness is high on a comparative and historical basis at 218% of disposable income in Q3 2016, predominantly concentrated in mortgages, and continues to increase. At the same time, housing prices have increased significantly over time. The high level of households’ debt burden increases their vulnerability to shocks, such as a drop in income, an abrupt increase in interest rates and/or a sudden turnaround in the buoyant housing market. However, the banks’ ample buffers to absorb losses and a stricter macro-prudential framework mitigate the risks to financial stability.

The Norwegian petroleum sector is experiencing a slow structural decline. The slump in energy 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 petroleum industry will remain a significant part of the economy. The government faces the challenge of helping to sustain economic activity without hindering the structural adjustment of the country. Government efforts to improve competitiveness and inclusiveness will be crucial in raising potential output and sustaining high levels of welfare.

In the medium to long term, an aging population will increasingly put pressure on public finances. A sharp rise in age-related spending is anticipated to begin in 10 to 15 years, which is at the same time as the returns from the Fund are expected to drop. This trend is expected to worsen starting in 2030, with the government expecting a funding requirement (5.3% of mainland GDP between 2030 and 2060) to arise if no reforms are implemented in the meantime. Taking into account the expected increase in aging-population-related costs, the commission on the fiscal rule recommended a more gradual spending of the petroleum revenues.

RATING DRIVERS
The Stable trend reflects DBRS’s view that the downward risks to the rating are limited. A deterioration in Norway’s medium-term growth prospects, severe enough to materially affect its fiscal and debt dynamics, could have an adverse impact on the rating. Also, the ratings could face downward pressure if Norway’s commitment to prudent fiscal policy weakens significantly.

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, United Nations Development Programme, International Monetary Fund, Organization for Economic Cooperation and Development, Bank for International Settlements, Energy Information Administration, Real Estate Norway, Finn.no, Eiendomsverdi 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: Thomas R. Torgerson, Senior Vice President – Global Sovereign Ratings
Initial Rating Date: 21 March 2012
Last Rating Date: 11 November 2016

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