DBRS Confirms Kingdom of Norway at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the Kingdom of Norway’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA and Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

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. Norway faces some challenges, such as dealing with the accumulation of household debt, its reliance on the petroleum sector, and an ageing population. Nonetheless, Norway has substantial buffers to absorb shocks and is well positioned to deal with these challenges.

After a period of weak growth, the mainland activity has accelerated since the end of 2016 and could grow above trend in the next two years. 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. The recovery in oil prices from the lows in 2016 and the significant cost- cutting efforts have helped the petroleum sector’s recovery. On the other hand, a more severe and protracted housing market downturn coupled with highly indebted households, pose downside risks to the growth outlook. However, Norway’s current growth momentum alongside the government’s available policy room lessen the likelihood of a housing market slump translating into a severe macroeconomic downturn.

The robust balance sheet of the government is a key strength for DBRS’s ratings. The government’s net asset position reached 288.4% 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 290.1% of mainland GDP at the end of the first half of 2017. DBRS expects the gross general government debt ratio to hover around 33% 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 its 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. This year, the government has revised the expected annual real rate of return of the Fund to 3% from 4%, driven by expected lower international interest rates. This will translate into a more conservative fiscal stance going forward. Over the last ten years, the fiscal impulse averaged 0.5% of mainland trend GDP.

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 accumulated 202.8% of GDP in net financial assets at YE2016. Ownership of such a large stock of net financial assets reduces Norway’s dependence on foreign capital flows and provides a sizable 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 have built up, as housing prices and household debt have outpaced disposable income growth for a long time. The housing market is now cooling amid tighter regulation on new residential mortgage loans and strong housing investment. Household indebtedness is high on a comparative and historical basis and continues to increase. According to Statistics Norway, the seasonally adjusted household debt-to-disposable income ratio stood at 237.8% in Q2 2017 and was predominantly concentrated in mortgages. The high level of households’ debt burden exacerbates their vulnerability to shocks (i.e., income, interest or house prices). On the other hand, the overall strengths of the economy and the labour market mitigate the risk of a more severe housing market downturn. Also, the banks’ ample buffers to absorb losses alleviate threats to financial stability. Norway has used banking regulation and macro-prudential polices to contain these risks, although more measures may be needed in the future.

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, underscoring 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 contribute to raising potential output and sustaining high levels of welfare.

In the medium- to long-term, an ageing population will increasingly put pressure on public finances. A sharp rise in age-related spending is anticipated to begin in ten to 15 years, simultaneously when the returns from the Fund measured as a share of mainland GDP are expected to drop. The government expects a funding requirement (1.7% of mainland GDP per decade between 2030 and 2060) to arise if no reforms are implemented in the meantime. However, the government is already assessing potential measures that could be implemented to address this funding gap.

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

Notes:
All figures are in Norwegian krone (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, Norges Bank Investment Management, Norsk Forbund for Innkjop og Logistikk/Danske Bank, TNS Gallup, United Nations Development Programme, International Monetary Fund, Bank for International Settlements, Energy Information Administration, Real Estate Norway, 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 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 and US regulations only.

Lead Analyst: Javier Rouillet, Assistant Vice President – Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President – Global Sovereign Ratings
Initial Rating Date: 21 March 2012
Last Rating Date: 5 May 2017

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